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

I really, really enjoy your posts on this. Thanks - I'm a buzzkill at cocktail parties with my macroeconomic ramblings, I'm afraid.... I'm just curious but how are you currently positioned? Not really looking for names but more of allocation. With my small grubstake, I try to be fully invested at all times - but these days its tough to be a value investor ... (though I do have a position in GLD) wabuffo

the typical American worker has harvested very little (if anything, vs real wage growth) from the corporate adjustment. So, contrary to what's implied in your post, the trickle-down has not occurred after the 2017 Tax Act. This macroeconomics thread is getting dangerously close to skirting the line with the politics thread. There's much I respectfully don't agree with in your post about using NIPA profits that is too long and wonky to get into here (perhaps after I've had my coffee we can go over to the IRS's data on corporate income tax filings which is a much better source - though only current to 2013, unfortunately). But I wanted to highlight your assertion up above in bold. There is no doubt in my mind that the American worker benefited greatly from the 2017 Tax Act. To prove it, let's roll the film. One way to test this hypothesis is to look at Federal FICA taxes - particularly Social Security taxes. These are paid by both the employer and employee (self-employed pay both ends) for annual employment income up to ~$137k. The salary cap helps to make it a good indicator of general employment levels because it is not skewed by the 1% getting large bonuses in "good years" the way employment income taxes withheld at the source are. Once again, let's ignore 2018 which was a bridge year (due to federal govt year-end being Sept 2018). YEAR TOTAL SS Taxes 2019: $773,220 M 2017: $690,709 M 2016: $668 372 M 2015: $660 956 M For reference 2018 was $693 831 M (though the new corporate tax rate was in effect partially that year). Social security tax collections jumped 11.4% from 2017 to 2019, almost all of it once the full effect of the corporate tax cuts kicked in. It really is too bad that the virus has wrecked the economy because job creation (by this measure continued to be strong in 2020. If I take y-t-d numbers through Feb, 2020 (from Oct 2019 start of Fed govt new fiscal year), social security tax collections jumped again another 9.5% vs the same period in the 2019 fiscal year (Oct 2018-Feb 2019). Let's face it, employment income was booming - that's a fact. And it is all due to the 2017 Tax Act and the cut to the Federal Corporate Tax Rate. wabuffo

... but the last tax rate reductions seems to have done little for growth and much for wealth inequity. Time to try something else, I think. The US government runs on a Sept year-end fiscal calendar. The last full year under the old 35% rate was 2017 (Oct 2016-Sep 2017). The first full year under the new 21% rate was 2019 (Oct 2018- Sept 2019). Per the US Treasury's monthly budget reports: https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0919.pdf Total Federal Corporate Income Taxes paid 2019 at 21% = $230.2b -- Corporate Taxable Income = $1,096.2b ($230.2/.21) https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0917.pdf Total Federal Corporate Income Taxes paid 2017 at 35% = $297.0b -- Corporate Taxable Income = $ 848.6b ($297.0/.35) That's 29% income growth over a 2 year time period. Think that's a fluke? Let's keep going to the wayback machine. Total Federal Corporate Income Taxes paid 2016 at 35% = $299.6b -- Corporate Taxable Income = $ 856.0b ($299.6/.35) Total Federal Corporate Income Taxes paid 2015 at 35% = $343.8b -- Corporate Taxable Income = $ 982.3b ($343.8/.35) Total Federal Corporate Income Taxes paid 2014 at 35% = $320.7b -- Corporate Taxable Income = $ 916.3b ($320.7/.35) Total Federal Corporate Income Taxes paid 2013 at 35% = $273.5b -- Corporate Taxable Income = $ 781.4b ($273.5/.35) If you want more of something, tax it less. If you want less of something, tax it more. For me, giving up a bit of tax ($67b) to increase private sector incomes (corporate taxable income) and wealth (market value of public companies) seems like a good trade to make. It seems to me that the government doesn't need the $67b of revenue but the domestic US sector really needs the income and wealth. I worry high rates will destroy income and wealth and then the federal govt will have to redistribute more than $67b to fix the damage that raising corporate rates will inflict. wabuffo

Didn't gold triple during the Great Depression when cumulative deflation was ~25%? The USD was convertible to gold throughout the Great Depression. FDR devalued the USD by changing the exchange ratio from $20.67 to $35 per oz (where it stayed til 1971 when Nixon ended the convertibility by closing the gold "window") in 1934. The Depression was a prolonged economic contraction. The original cause was the growing tariffs to trade, but it was made worse by Hoover's tax rate hikes in 1932 (top marginal rates went from 25% to 63%) and FDR's 40% dollar devaluation in 1934. wabuffo

Do any of you have thoughts on how this plays out differently? I think perhaps there is confusion between the terms contraction and deflation. I may have posted this model before, so forgive me if I'm repeating myself. Think of four quadrants with an X-Axis and Y-Axis. X-Axis: Economic Growth (contraction is -ve, growth is +ve) Y-Axis: Monetary Growth (deflation is -ve, inflation is +ve). So I like to think of it as four quadrants and I try to place the state of the economy in one of the four boxes. Initially, as the economy was put into a forced shutdown starting in mid-March, we had a contraction AND deflation for about 10 days (til March 23rd or so). The economy was in the lower left quadrant. Today, we are still in contraction (though perhaps not as severe as initially in March but still pretty bad in terms of GDP decline) but monetary policy is inflationary. So we are probably in a stagflation sort of scenario. I think the US federal government will continue to spend to support incomes and the US Treasury has accumulated $1.6t on deposit at the Fed ready to flow into the banking sector as deposits of one sort or another depending on the programs that will be carried out in July- September. There is absolutely no monetary deflation - you just have to look at the price of gold (gold supply increases ~1.8% per year and is very stable as an indicator). If we had deflation, gold would be falling, not rising. You can see deflation if you look at a chart of the spot price of gold for March - there is a severe break in its price and then rebound as both the Fed and the US Treasury stepped into the breach. Just my 2-cents. wabuffo

Can't the Fed print money by simply crediting accounts of the depositing banks? The Fed is a lender and always requires collateral to be posted - either at the discount window or in a repo operation when it deals with a bank. Both transactions create new settlement balances in an account at the Fed for the banking sector but only after the bank posts collateral with the Fed. The Fed can also buy assets in the open market - Treasuries, MBS, BRK bonds - but here too, the Fed is buying these assets by creating a new settlement balance in an account at the Fed for the banking sector. Sometimes people say, that by creating new bank reserves, the Fed indirectly increases money supply, by expanding the capacity of the banking sector to lend more. But this isn't really true because banks have never been reserve constrained. And they certainly are not now when they have $2.8t in reserves (over 15% of all US commercial banking assets are on deposit at the Fed!). wabuffo

To inject money into the economy. How does trading bank reserves for a BRK bond that now sits in an account at the Fed inject money into the economy? Bank reserves are settlement balances that remain on deposit at the Fed and never leave it. At the margin, I suppose it removes a few bonds from the market and tightens supply/lowers yields - but I'm not sure that is a huge macroeconomic benefit. The flip side is that the private sector has lost a liquid asset (BRK bond) and gained an illiquid one (settlement balance at the Fed). wabuffo