wabuffo

CB - I love your feedback (and criticism) The tax issue is interesting. Yeah - I think its a big deal. I am in the process of bringing my little model to present day and will use a 12.15x multiple on pre-tax earnings at a 21% federal corporate tax rate (instead of 10x at 35%). That way the implied value on the after-tax earnings are on the same basis. You seem to assume that the fixed income part is non-interest bearing and will always be. Well - who really knows. I think that, whether we like it or not, MMT concepts are beginning to take hold as the non-MMTers running the Federal government learn through trial and error that the fiscal capacity of the US Treasury is much larger than anyone previously thought. Therefore, I think that the Federal government will essentially stop paying any interest at all. In fact, as we discussed on the other macro thread about banks - the Federal government doesn't really have to issue debt at all. It only does so because (a) its General Account at the Fed can't be overdrawn by statute, and (b) bank reserves at the Fed would grow too large - so it will do the next best thing and just pay close to zero rates on Treasuries (while still holding to constraints a) and b)). You seem to rule out the possibility that the "coverage" of liquid investments to float moves away from 1 (below 1). There is a possibility that this ratio could come to 0.8 or even lower going forward, given the right circumstances. You could very well be right and there's some evidence that Buffett takes the ratio down to 80% coverage temporarily in order to accomodate large acquisitions (see PCP). But he quickly restores it to 100% via operating cash flow from what I can see. As I said in the earlier post, I was always aware of brooklyninvestor's 100% float coverage data, but ignored those findings because I attributed them to BRK's immense capital base and a lack of actionable investment possiblities. I assumed that when Buffett was younger and more of a swinger, there's no way he would hold so much cash. Blue Chip Stamps (BCS) would've been a better example of his "float management" principles given that it was the 1970s and Buffett was quoted by Forbes as feeling like he was an oversexed man in a ....well, you know the quote 8). I thought - for sure, Buffett would've deployed all or most of BCS's investment assets into Sees, Wesco and the Buffalo News even as he maintained the liability for the trading stamps because he had "more ideas than capital". Remember this is a period with three savage bear markets - 1973-74, 77-78 and 81-82. But when I looked at the financials after I got them last month, that's not what he did. He borrowed against the pseudo-equity of the stamp liability and maintained the investment assets to cover the potential trading stamp redemption requirements. Sure it occasionally dipped down to 80% as BCS took some hits to its portfolio in 1977 just as Buffett/Munger were buying the Buffalo News - but it quickly rebounded to 100%. This even as by the early 80s, it was clear that the vast majority of the trading stamps liability was never going to be redeemed (you can see this as revenues plummeted while the liability for redemption didn't change at all). Here's the quickie-table I drew up comparing Blue Chip Stamps investment assets vs trading stamp liabilities: I think perhaps we've always underestimated how much of an extreme-safety stance Buffett takes when it comes to float. Like I said earlier, this changes everything. It essentially makes all this $130B in insurance float worthless (especially in this environment of zero rates 4ever). And the idea of bagging a $100B+ "elephant" becomes a total fantasy (unless Buffett wants to get hyper-aggressive with debt). Even if we take 80% (instead of 100%) of investment float as conscripting cash and fixed income securities into being non-working assets, it becomes clear that all the two-column models out there (Tilson's, Semper Augustus, etc) are a mite too optimistic in their intrinsic value read-outs. That's not a terrible outcome. BRK doesn't go from always being undervalued to Tesla-crazy overvaluation. For the most part, its central value drifts a lot closer to Mr. Market's valuation - though still a tad under that daily quotation on most days. The key is to watch what Buffett does (and not what he says). wabuffo

Hi Wabuffo - very interested to see your fair value estimate for BRK under those assumptions. Sure thing - always happy to share. I haven't updated my model in a while so these are annual numbers for 2010-2017. This helps keep everything consistent because I use a pre-tax multiple on operating earnings and this period had a consistent Federal corporate tax rate of 35%. If I update, I will have to think about how to handle the change to a 21% tax rate. Anyhoo - just some quick background. Value of Operating Businesses: To the pre-tax earnings of the operating businesses, I add a long-term expected underwriting profit on insurance float that is in-line with the last 10-15 years performance (ie, 0.5% for BRK Re/Gen Re, 6% for GEICO and 5% for Other Primary). Excluded are all investment gains/losses and derivative gains/losses. I then use a 10x multiple on pre-tax earnings. Value of Investments: After-tax value of all investments (I subtract capital gains taxes). This is where I subtract the non-working part of the insurance investment assets. I typically used 20% of float (based on what Buffett says) - but I also show a second model with 100% (based on what Buffett does). [Click on image for full-screen view.] As I said in the earlier post - this was an a-ha moment for me. (apologies for missing the discussion from that 2015 thread - better late than never) I guess the key insight is that if the assumption that Buffett really does maintain 100% coverage for float via cash/fixed income securities, then BRK goes from perpetually undervalued (67%-88% of the model's central value for BRK-B) to closer to always fairly-valued (82-107%). As always - criticism and feedback always welcome. FWIW, wabuffo

I think someone on this board (gfp?) mentioned before that a business division has to be one party of the exchange to get the tax break. You (and gfp) are correct! The actual relevant part of the tax code is Sections 355(a), 355©, 361(a) and 361©. Basically a new corporate structure has to be created by one of the two swappers who will own 100% of the new wholly-owned subsidiary (let's call it NewSub). The owner of NewSub throws in their assets and then NewSub makes the exchange with the other party to the asset swap. The most important element to qualifying for Sec. 355 is that the IRS must agree that NewSub's acquired assets have a maximum of 67% of total assets being investment assets. In other words, someone has to throw in an operating biz that the IRS will recognize as having 33% or more of the total NewSub asset value. Otherwise, NewSub becomes a disqualified investment corporation and does not qualify for the tax-free exchange. Cash is classified as an investment asset and doesn't help. In the BRK-Washington Post exchange, the Miami TV station was valued at ~33.33% of NewSub's assets. In the BRK-PG tax-free exchange, Duracell tipped it over the 33% line. So we must find an operating business that AAPL can throw into the NewSub (Or AAPL sets up the NewSub and BRK must throw in an operating biz. It's gonna have to be a big'un since we're talking 34% of $125B in total assets being exchanged here ::) ). wabuffo

i don't see why BRK would not become a leveraged play again, given the right circumstances. Is it possible we have gotten the idea of insurance float all wrong? Despite Buffett's denial, brooklyninvestor highlights powerful evidence that BRK typically holds cash and fixed income amounts roughly equal to total insurance float, year-in and year-out. In my BRK valuation models (variation of 2-column method), I've always deducted 20% of total float as non-working capital from total after-tax value of investments per share) to get my fair value estimate. But what if it is really 100%? Then my fair values have been overstated (and so have everyone else's). When I try this adjustment (20% to 100%), my fair value estimates go from BRK being perpetually undervalued to BRK being mostly fair-valued with just a few periods of slight undervaluation (eg. 2015-16). This approach would be consistent with Buffett's methodology going all way back to Blue Chip Stamps. I always assumed that Buffett redeployed BCS's cash and fixed income investments into an investment in See's Candy - but that's not what actually happened when I got my hands on the annual reports. Instead, Buffett used the unredeemed stamp liability as pseudo-equity and levered up the balance sheet to buy Sees. He didn't really touch BCS's investment portfolio - other than tinkering with some of the fixed income investments for a bit of higher yield. It was only many years down the road, when it was clear the redemption liability was wildly overstated (and in fact the IRS began prodding BRK to take profits (and pay income taxes) on the "breakage" that Buffett really began to redeploy/shrink the investment portfolio. It is a bit of an a-ha! moment for me given the blog's reminder and my recent acquisition of the old BCS financials. I'm gonna have to go back and re-tool my BRK valuation models. wabuffo

Sell the AAPL and buyback an equivalent amount of BRK. How about: 1) AAPL uses its large cash hoard to buy ~$125B of BRK common stock, 2) Wait two years, 3) AAPL then swaps its holdings of BRK common stock with BRK for BRK's holdings of AAPL common stock in a tax-free exchange, 4) Both companies then retire their newly-acquired own shares (in effect, equivalent to a major stock buyback). 8) wabuffo

As expected every airline share is gone. plus OXY shares Sold financials: 85.6m shares of WFC 35.5m shares of JPM 8.3m shares of PNC 4.8m shares of BNY 0.8m shares of MTB 0.5m shares of USB all GS shares did not sell any AXP or BAC sold 82.4m shares of Sirius XM wabuffo

BRK 13F-HR is out. https://www.sec.gov/Archives/edgar/data/1067983/000095012320009058/xslForm13F_X01/960.xml wabuffo

As we know, Buffett didn't do any repurchases in April. But if one adds May, June, July together - its a 3 month stretch where he repurchased 41.8m B-share equivalents for ~$7.5B (depending on avg price of July purchases). If the share price rises from here, that pace will likely slow down - but that's a $30B annualized rate. Perhaps, Buffett is going to be a steady repurchaser of shares from here on in -- unless BRK gets too overvalued 8) . wabuffo

One of the things about currency debasement is that most folks (even educated PhD Economist folks) get confused about is that they think what's going on now with the USD and gold is a reflection of the US's monetary policy and the US Dollar's role in the world. They look at the forex value of the USD vs the Euro, the Yen, the Canadian dollar and talk about a slight "weakness" of the dollar - as if the other currencies are stable. The analogy I make is that forex rates are like riding a carousel and looking across the carousel to another seat or to the seat in front of you only -- and not sensing much relative movement. But pick a stationary object off in the distance and you realize, you are all spinning. That's what gold is. Leaving aside all the emotion, gold supply is INCREDIBLY STABLE - all the gold ever mined is still in above ground stocks (in some form) and so it has the most stable supply/inventory ratio of just about anything mankind can know. Mining supply grows the total global amount of gold inventory by 1.8% per year, every year. So that's what the gold price is telling you (over the medium and long run). If it is rising in price, it really means there are too many dollars being created by the US Treasury vs the amount of gold being discovered. Back to other currencies, then. Guess what, they are all weakening vs gold - every single one. They look stable to us when viewed from a forex POV (just like if they are riding the same carousel with the USD). But they are all weakening much like the USD is. This is a global phenomenon. Here's the Canadian dollar vs gold (over the same time frame - 2020 ytd): Now the Euro: and the Japanese Yen: finally, here's the British Pound: Don't these charts all show the same trend? I think its because all central banks (and sovereign governments) follow the same advice from the same economics textbooks. We'll see how this all turns out - but the Fed is hinting at a major September policy announcement. I think they will leave the short-term rate they control at close to zero for a long time. They are saying that they will leave it there even if inflation overshoots and goes to 4% (their thinking is like a hedge fund manager who's underperformed their target - they will take risks to get their CAGR back to their 2% cumulative CAGR target over the recent past that they undershot). They will also probably make some attempt at yield curve control - which means they will try to buy enough long-term Treasury bonds to create a shortage. The Fed's balance sheet will grow and thus bank reserves will grow to a high level. The huge Fed balance sheet will smother the US commercial banking sector's balance sheets with an extremely high percentage of bank total assets in cash stuck on deposit at the Fed. None of this will work, won't affect inflation, and will be a drag on economic growth (the opposite of what the Fed claims is its goal). The only thing that stokes inflation is what the US Treasury is doing in its very high deficit spending. And no - the Fed buying Treasuries doesn't help the US Treasury with their massive debt issuance at all - its a non-event. wabuffo

You keep harping on the Fed but it's getting confusing as i had understood that it was the Fed-Treasury Industrial Complex I meant in the context of not raising interest rates - the only job the Fed can do. They may also execute a more aggressive attempt at Treasury yield curve control by swapping more reserves for US Treasury debt. To the extent that the yield curve provides the input for the risk-free rate to apply to the terminal values of go-go stocks... wabuffo

I think the parallel for today's market is the late 60s go-go markets (and the rise of the Nifty Fifty vs today's FAANG) which were then crushed in the early 1970s by a dollar crisis (and currency debasement) both in nominal and real terms. This market could be setting up for a crushing whipsaw (though the timing could still be a ways off). Low rates are encouraging high multiples and very large terminal values in DCFs. The Fed has already said that they will run through all inflation stop signs because they want higher inflation. When the day comes that Mr. Market realizes that he/she has been driven into a dead end by false long-term discount rates, the reversal will be nasty. This outcome is not a certainty, but as gold keeps rising, the probabilities associated with this outcome are also rising. "Gold bugs" and their warnings are so discredited for crying wolf, that the warnings aren't being heeded now. If you believe gold is a measure of the real value of the dollar, then S&P Total return year-to-date is down 31% (vs gold) in real terms instead of being up 4% nominal. wabuffo

Was wondering if you have any books or resources you recommend to become better versed in this area? You clearly have spent a lot of time on this topic. Castanza - I'm largely self-taught. No one book really puts it all together, IMHO. But I would recommend the following two books. There are parts in each one that are good and parts that aren't as relevant. But if you take the best of both, you could get some good insights. Understanding Modern Money by L. Randall Wray. Its a bit dated now - but you might be able to find a used copy. Also - there are good chapters where he explains the monetary system from both a central bank as well as a fiat-issuing sovereign government perspective. But also feel free to ignore the prescriptive portions like the job guarantee. https://www.amazon.com/Understanding-Modern-Money-Employment-Stability-dp-1845429419/dp/1845429419/ref=mt_other?_encoding=UTF8&me=&qid=1596574827 Pragmatic Capitalism by Cullen Roche. Roche is not a MMT-believer but he does a very good job explaining how the Fed works. This book covers other topics but its chapters on monetary operations are well done and easy to understand. https://www.amazon.com/Pragmatic-Capitalism-Every-Investor-Finance/dp/1137279311/ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=1596575676&sr=1-1 wabuffo

KJP - at the risk of extending a topic that seems to be petering out in terms of interest-levels... And if the Fed can buy Treasury debt directly, does that cross the Rubicon into pure money-printing? You are assuming that these direct-buys of Treasuries are the Fed helping the US Treasury. But what if history has shown that in the rare cases where they happen, it is the other way around? What if it is the Federal Reserve that is actually the structurally weaker institution and needs occasional propping up by the US Treasury? Go back to Sept 2008, as the mushroom clouds were going off around the financial sector. There was this rather brief announcement by the US Treasury on Sept 17, 2008: https://www.treasury.gov/press-center/press-releases/Pages/hp1144.aspx Back then, there was a real fear that the Fed was going to run out of Treasuries as it was acting as a direct lender to financial firms that were desperate to exchange bad collateral for good (US Treasuries). At the time, the program was euphemistically known as "Treasuries for trash". Thus this announcement was declaring that the US Treasury was issuing $585b of T-Bills directly to the Fed and in return the Fed was crediting the US Treasury with $585b in settlement balances in its General account. The US Treasury did this to give the Fed more "ammunition". We've seen this again in this crisis, where the US Treasury has added $114b in "equity" to absorb first losses from some of the new Fed lending programs that could expose the Fed to losses. If the Treasury's Fed account can go negative, that constraint is eliminated and the Treasury may spend an infinite amount of dollars without any revenue. Even though the US left the gold standard in 1971, I think the old concepts when the US dollar was subordinated to gold have refused to die - even if they are no longer applicable. Through trial and error, we are finding that since severing the link to gold, the US Treasury has more fiscal capacity than we previously thought. Dick Cheney turned out to be an armchair Nobel economist when he said "deficits don't matter" - even if his utterance may have been a cynical exhortation to Congress to pass the Bush tax cuts in the early aughts. The reality is if you look at the Fed and the US Treasury on a consolidated basis - their three forms of private sector financial assets are all debts in that they are liabilities of their consolidated balance sheet (currency in circulation, bank reserves, Treasury debt). What is cash? It is a Federal Government IOU. In fact, here is a UK 20 pound note. These banknotes have a smiling Queen Elizabeth saying "I promise to pay bearer on demand the sum of twenty pounds". It sure sounds like some form of IOU. It seems like one could present a 20 pound note to the Queen, and she will give you a ...hmm...uhh... a shiny and new 20 pound note in exchange. 8) If one accepts that currency and banknotes are IOUs, then why is US Treasury Debt the only one of the three forms of Federal government liabilities that we consider debt? We think of money as a unit of account but what if it is really government debt? Why are they IOUs? Because banknotes are basically scrip that the private sector must obtain in order to extinguish its Federal tax (and fee) obligations that are imposed on the private sector by the government. The Federal government must operate in a deficit with the private sector so as to allow the private sector to accumulate the government's money to pay its taxes. Once the cycle starts, it becomes a flywheel that almost makes the original premise secondary (i.e., that the government's money is really a sort of "tax anticipation note payable"). Recently when States like California and Illinois got into financial trouble they would issue IOUs to suppliers. These IOUs were accepted locally because attached to these IOUs was a provision where the IOUs could be used to extinguish State govt tax and fee liabilities. Thus, not only were they accepted, but they also achieved some limited local circulation in commercial transactions with banks, for example. There are other historical examples. During the War of 1812, a cash-strapped (and gold-strapped) US government issued short-term US Treasury debt that paid a low nominal interest rate (but could also be used to extinguish tax liabilities). These notes circulated widely and some even continued to circulate well past their redemption date (and thus no longer paid any interest). They continued to circulate because they became a form of banknote (money) as they could be presented to the Federal government for payment of taxes or tariffs owed. I think this forms the basis of MMT's theoretical framework and I am generally sympathetic to it. My problem with MMT is that it has been embraced largely by the left and thus it is hard to separate its explanatory features from its prescriptive (Green New Deal, Guaranteed Employment, etc). It also refuses to reconcile the opposing forces of fiscal capacity expansion versus currency debasement or give a nod to the economic benefits of low taxes and sound money. MMT-adherents tend to ignore the currency debasement part even when the evidence piles up (eg., gold). wabuffo

How will the Fed react? 1) CB - unfortunately, the PhD's at the Fed have talked themselves into letting inflation run hot. They are talking about needing to make up for years of no inflation - sort of needing a big CAGR this year to make up for a string of zero CAGR years. So initially, I fully expect the Fed to do...nothing. 2) even if the Fed reacts, what would they do? Raise rates? And that solves inflation, how? I have no faith in the Fed being able to do anything about inflation, because as we've said currency debasement is fiscally created and, therefore, needs a fiscal response. wabuffo

How do assets (i.e., the account that's debited at Step 1 of your MetaBank example) get into the U.S. Treasury's Fed account to begin with? If I understand your point later in the post, the issuance of debt by the Treasury reverses the flow and ends up crediting that Treasury account. So why isn't that debt issuance "funding" Treasury spending? KJP - I know this gets a bit "chicken-or-the-egg-y..." but bear with me. The US Treasury (and the Fed) must adhere to policy decisions that are set by Congress (as it should be since they both are using "the public purse"). But these rules are political, and not economic or physical constraints. If all it takes to create a deposit at MetaBank is for the US Treasury to tell the Fed to do it electronically, there's is also no reason why the US Treasury can't overdraw (go into a negative balance) at its account at the Federal Reserve. In fact, why does it even need an account balance? Pre-GFC, the US banking system, in aggregate and individually, could overdraw its reserve accounts so long as the system and individual banks cleared these overdrafts by sundown. Today the banks aren't allowed to do that anymore. It was a "rule" change, nothing more. Another rule change was that the debt ceiling was removed last July (until 2021), so the US Treasury is no longer constrained by an upper limit on debt outstanding. These are examples that show that many of the behaviors of the US Treasury and the Federal Reserves are due to rules. For example, the Fed can't buy US Treasury direct and must do it from the private sector after it has been issued. Imagine you are the Prez and one day, the US Treasury hits its debt limit as mandated by Congress, but also on that day, the US Treasury is down to its last $1 in the Treasury general account: Payments on Social Security checks will fail unless you take action, because: 1) The US Treasury can't overdraw its General Account, and is down to a zero balance. 2) The US Treasury can't issue any T-bills or T-bonds because it has hit its debt limit, so it can't replenish its account at the Fed. 3) As President, you can't order the US Treasury to levy new taxes or fees, because that takes an Act of Congress. 4) Cutting other spending won't help, because the US Treasury is already at a zero balance. What do you do? It's a ridiculous example, but I make it to show that in reality the US Treasury can spend and never issue another bond (if it were allowed to overdraw its account). The Fed would clear payments from the US Treasury and its balance sheet would be whole because the negative balance of the US Treasury account would be offset by a very large positive balance of bank reserves being created from the Treasury spending. Thus, the change in the Federal Reserve's liabilities would still leave it at a zero net change to its balance sheet. In appearance it looks like the US Treasury issues debt to fund itself. I'm telling you it doesn't need to. It issues debt because if it didn't, bank reserves would grow to $20.5t instead of the $2.7t they are now. That's why I think Treasury debt issuance is the same as reserve maintenance. In effect, if you look at the US Treasury and the Fed together, the Federal government is offering the private sector a choice for its financial assets: 1) demand deposit at the Fed (bank reserves), or 2) time deposit elsewhere at the Fed (tie up your money for 30 days up to 30 years for a higher interest rate). If Congress can repeal the US Treasury's upper limit (debt ceiling), it could also repeal its lower limit (TGA balance can't be less than zero). Even if both rules were repealed, I'm saying that the US Treasury would still issue debt for managing the bank reserves (and not to fund its spending). wabuffo

Does this mean that the main risk to inflation comes from US government spending... Yes - this is my working theory. In fact, inflation (and the political ramifications of that) are the only constraint to US government spending (so long as it is USDs). wabuffo

I wanted to revisit this thread to outline a recent simple real-world example that illustrates how US monetary operations work. It took place during Q2, 2020 and involves MetaBank (ticker: CASH) and the recent spending by the US Treasury under the CARES Act – specifically, the Economic Impact Payment (EIP) program. This program sent money directly to all US individuals who qualified either via direct deposit, check, or in some cases, pre-paid debit cards. The US Treasury engaged MetaBank (a US leader in prepaid debit cards) in the debit card creation and distribution part of the program. Specifically, the US Treasury transferred to MetaBank $6.42B so they can create and issue 3.6 million prepaid debit cards to individuals across the US. MetaBank is a small bank with only $5.8B in total assets and $4.0B in deposits – so adding $6.4B to that asset and deposit base really expands its balance sheet. What would be a rounding error to JPMorgan Chase or Bank of America is a “pig in a python” to MetaBank. You can see it in the quickie table I drew up based on quarter-end balance sheet data from MetaBank’s regulatory filings (Quarterly Call Reports) for March and June quarter-ends. Of note, look at what happened to MetaBank's cash assets - almost all of which are bank reserves ("Balances due from Federal Reserve (F.R.) Banks"). These quarter-end amounts understate how much MetaBank’s balance sheet probably expanded at the exact moment the total funds were transferred. If one adds the entire $6.42B to the total asset balance at the end of March, MetaBank's total assets would’ve reached $12.3B at that point in time. Now let’s follow this funds flow through the US Monetary System via the Federal Reserve’s payment system (click on table below to expand to full size view - amounts are in $000s USD). Step 1, the US Treasury issues a payment order to its “bank” (the Federal Reserve) to deposit $6.42B at MetaBank. The next step (Step 2) is that the Federal Reserve shifts reserve balances from the US Treasury’s General Account to MetaBank’s reserve account. This transfer of reserves at the Fed creates both a new asset for MetaBank and a new deposit liability electronically in Step 3. The final step 4 is for MetaBank to issue the 3.6m prepaid debit cards to individuals, thus creating new financial assets for all of these debit card holders. Of course, as these debit card holders spend their balances, the banks that represent merchants who are receiving those funds settle with MetaBank and the Federal Reserve starts shifting funds from MetaBank's reserve account to the other banks' reserve accounts (eg, JPM, BAC, WFC, USB, Citi, etc...). MetaBank's reserve balance at the Fed is then reduced by those amounts presented for payment at the Fed by the other banks. There are some important observations to make here: 1) MetaBank’s cash asset on its balance sheet is really an amount on deposit in a “checking account” at the Fed. The reality is that this “cash asset” is a settlement balance and Meta can never withdraw it from the Fed.1 It can only use the balance in this account at the Fed to settle payments with other banks (as prepaid cards get spent) or with the US Treasury. 2) US Treasury deficit spending creates new private sector financial assets. Look at the debit and credits at the bottom of each organization’s balance sheet. The Fed and MetaBank end up at zero change to their net asset position. It is the debit card holders that have new financial assets. 3) If the US Treasury is constantly net deficit spending (spending exceeding tax receipts), then why aren’t bank reserves, in aggregate, for the entire US banking sector continuously growing to astronomical sums? That’s because the US Treasury issues debt. When it issues a bond, the process flow goes into reverse. Reserve balances move from the banks to the US Treasury’s general account and the private sector receives a new asset. This asset (unlike bank reserves) ends up in the hands of the private sector and thus is a more liquid asset and more marketable. Thus, debt issuance by the US Treasury is a reserve maintenance activity, and not a funding activity for the Federal government. (This fact is not well understood and tends to blow people's minds.) 4) Similarly, the Federal Reserve through its payment clearing and lending does not create new financial assets in the private sector (contrary to much of the economic commentary). It manages the payments between banks and between the US Treasury and banks. The Fed can also buy assets from/sell assets to the private sector. But it always exchanges reserves for those assets when it does so. This last point is important to remember when we think about the Fed. Currently, the Fed is talking about moving to a new program of yield curve control. This program would attempt to “pin down” long-term Treasury yields by having the Fed buy enormous amounts of US Treasury debt (possibly a majority of what's outstanding). Right now, the Fed owns on its balance sheet approximately 20% of the total amount of US Treasury debt issued to the private sector (which is a normal amount for the Fed’s history going back forty years or so). If the Fed wants to own a majority of US Treasury debt (say 65%), it would have to increase bank reserves by another $9T or so. This is because it would buy a Treasury bond and exchange it for a bank reserve balance. But unlike Treasury spending, this asset swap doesn’t increase the size of US commercial bank’s total assets, it would just convert more and more of their total assets into deposits held at the Fed (and no increase in their deposit liabilities - unlike US Treasury spending). As we’ve seen in the MetaBank example this would really distort the aggregate balance sheet of the US commercial banking sector ($11T+ of cash at the Fed vs $20T of total assets if the Fed moved to 65% from 20% ownership of US Treasury debt o/s). Anyhoo - just thought the MetaBank real-life example was interesting and illustrative (and probably too Fed-geeky). wabuffo 1 - technically, a bank can exchange reserves for bank notes and currency.

If y'all are enjoying this book and are financial data geeks like me, I have found just the thing that will complement your enjoyment. I know old letters of the Buffett Partnership Ltd/BRK annual reports from the 1960s and 70s have been floating around the internet for awhile now. But what about the donut hole in the middle? It's been impossible to find annual reports/10Ks from Blue Chip Stamps (ok, there's been some BCS letters but not detailed financials) or Diversified Retailing.... until now! https://theoraclesclassroom.com/archives/ I found this site (The Oracle's Classroom) after reading the book and trying once again to use my google-fu to find something, ...anything on Blue Chip Stamps financials. And then I found this site. (I hope the COB&F moderator is ok with a link to another website - but it is Berkshire-related) Now, I don't know if the author of the book co-ordinated with the owner of this website, but almost every footnote in the book referencing an old annual report, 10-K or even Moody's report from the old Berkshire network (Blue Chip, Diversified, etc) is available on this site. Plus many more - I mean, old Scott Fetzer annual reports! Need I say more? I am really enjoying reading (and analyzing) these old reports. And I'm finding some new insights. For example, I've always assumed that Buffett/Munger used the float of Blue Chip Stamps (via their investment assets in bonds, etc) and liquidated those assets to buy Sees Candy, Buffalo News, etc. But instead, it appears they treated the stamp liability as pseudo-equity (instead of "debt") and leveraged up the balance sheet to buy Sees Candy using 100% debt (because the BCS capital structure had more 'equity' due to the stamp liability than GAAP portrayed). Then they used the additional cash flows to pay down the debt quickly. Its a subtle nuance, but I found it helpful in understanding how Buffett thinks about float and he operationalizes the use of it. A big thank you to the owner of "The Oracle's Classroom" website and archives. The site truly lives up to its name. wabuffo

But I don't recall having such a sharp effect when the tax rates went down. rb - you need to sharpen your memory. Since the market is a discounting mechanism, it begins reworking valuation as soon as a tax cut is deemed highly probable. So you can't measure from when the tax cut was enacted (Trump signed it on Dec. 22, 2017 and it went into effect Jan. 1, 2018). The tax cut wasn't a "surprise" when it was enacted to Mr. Market, Mr. Market was expecting it all the way through 2017! With Republicans controlling the House and the Senate, the tax cut was a go even before inauguration. The only question was how far was the federal tax rate going to get cut (early reports were talking as far down as 15% instead of 21%). The market was starting to value it as early as Dec 2016. Here's a typical thread where investors weren't debating whether it was going to happen, but whether it would have any effect on BRK at all (despite the vehement arguments that it would from an intrepid poster!). https://boards.fool.com/trump39s-cut-32510442.aspx?sort=whole#32510589 The B-shares were trading at around $158 when the Trump Tax cut came into focus at the time of these posts and people were trying to figure out the impact to BRK. After the Trump Tax Cut finally passed, they were at $210-$215. By February they plateaued into the $220s and have gone sideways since (until the virus affected everything in 2020). That's a big jump of over 35% in a little over a year. Some of that may be operating performance, but I would reckon that's maybe 10%-15% of the change. I think at least 20%+ was the change in the Federal tax rate increasingly becoming a reality as 2017 progressed. So yeah - I think it was a big deal and had a big effect. Will a change from 21% to 28% be as big. I don't think so - maybe a 9-10% hit to valuation, if the tax rate changes. wabuffo

In all fairness that will be a consideration for every company's valuation of its common equity. Yes - but its a double-whammy for BRK. They are a little different due to their large deferred tax liabilities (in addition to the tax on operating earnings which affect US domiciled public companies). wabuffo

i wonder if tax considerations should be a primary concern for holding BRK. They will be for the valuation of BRK common equity if the Federal corporate tax rate is increased from 21% to 28%. wabuffo

I would like to hear how US based COBF members, would expect a financing of this size to play out Per the US Treasury Daily Statements, since the first of March this year thru July 16th (basically 4-1/2 months), the US Treasury has spent $1.68t MORE than it has taken in in taxes, fees, etc. However, also, since the first of March, the US Treasury has issued $2.93t in bonds and bills. As of July 16th, the US Treasury has $1.8t on deposit in its account at the Federal Reserve. In theory, the US Treasury could spend this down to zero without issuing another bond or bill. I don't think its gonna be a problem. Now, states and cities are in a world of hurt and, (unlike, the Federal government which spends and issues debt in a sovereign currency that it controls) have to balance their budgets eventually, somehow. That's where the big problems will be - and I think we'll see a few states getting in big trouble. wabuffo

cool - let me know what you guys think. wabuffo

https://www.amazon.com/Capital-Allocation-Financials-England-Textile/dp/B088B96JRK/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr= Books about Warren Buffett are usually a dime a dozen. Despite the long title, this is a Buffett book that I heartily recommend. A warning, though, this book is for the wonkish, financial analysis types like me who enjoy poring over balance sheets and sources/uses of funds tables rather than hearing heartwarming stories about Buffett and Munger via their pithy "words of wisdom". Instead, this is what I call a "meat and potatoes" kind of book about the blocking and tackling that traces the path from the textile business into the modern day BRK colossus that starts to appear in the late 70s in the form we recognize today. In Buffett's life's work, I've always felt there is a "donut hole" between the end of the Buffett Partnership (BPL) in 1969 and the "birth" of the modern Berkshire Hathaway in and around 1977. This is a time when Buffett was mostly silent in terms of writing to his shareholders. This was largely due to the fact that he did not have a unitary vehicle during this period (like BPL or BRK-only) through which he could speak to his shareholders in a comprehensive but focused way. His investment structure during much of this time was a tangle of Berkshire Hathaway, Diversified Retailing, and Blue Chip Stamps as he exited BPL but before he consolidated his corporate structure into a single entity (BRK). In fact, it is this tangled series of structures and cross-ownership that got him (and Munger) in trouble with SEC (back when people feared the SEC, LOL) for possible fraud in their actions that might have caused the failure of a Wesco-Financial Corp of Santa Barbara merger in 1975. As an outcome after that legal near-miss, Buffett went about cleaning up the spaghetti-chart corporate structure and the "modern" Berkshire Hathaway was born. With that done, starting in 1977, the BRK "Chairman's Letter" started giving Buffett back his voice in a format that hasn't changed much since. In addition, by the late 80s, the AGMs started to draw investors to hear him and publications like OID began printing transcripts. But during most of the 1970s none of this existed. I like this book because the author uses financial sources (annual reports, 10-Ks, insurance industry regulatory filings) to trace a path through the capital re-allocation that occurred from the original BRK textile business control position to the National Indemnity purchase through to his other investments into Illinois National Bank, Diversified Retailing and Blue Chip Stamps. It fills out for me, which structure purchased which investments and really breaks down how funding capital was created from, say, the textile business, to buy the insurance business. It also goes into great financial details about investments in this period that not much was written about like Pinkertons, Detroit International Bridge, etc because they fell into the "donut hole" of the Warren Buffett experience. It also becomes much clearer why Buffett shut down the BPL fund, at least for me. While his reasons of an overvalued market are a factor, I think this book shows the other factors. For one, in 1967, he had found a large source of permanent capital via the float of National Indemnity. Also, equally important, he was starting to buy common stock investments outside of his Buffett Partnership. I hadn't realized that by the late 60s, BPL no longer owned 100% of his marketable securities. He owned DIS in 1966 via the BRK textile biz b/s (and not BPL). In 1968, he had added to his AXP position on the BRK textile biz b/s (among many other stocks). His investment focus was probably fragmenting plus he no longer needed the "hot" capital of his investors anymore - so perhaps that created the impetus to wind down BPL. One also realizes, that far from the success it is today, the insurance business was a slog for Buffett during this period as he tried to expand into it. There are many failures (Home and Auto, Cypress Insurance) as well as struggles growing the reinsurance business from whole cloth organically during its first decade or so. Anyway, I'm only half-way through the book. Its definitely got a lot of numbers (and no cute Buffett cornball sayings) - and for those who already understand some terms like insurance float, there will be some pages that are less interesting. But overall, its a big thumbs up from me and it will definitely occupy a space on my bookshelf next to the very best books about Buffett. wabuffo

CB - you are a gentleman and a scholar! I always enjoy the conversations with you. wabuffo