wabuffo
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Posts posted by wabuffo
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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
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... 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
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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
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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
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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
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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
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The Fed can only buy "safe assets" because it is mandated by Congress to never take losses on its lending programs.
The Federal Reserve has total assets of $6.9t against "equity capital" of $48b - so it is "levered" 144-to-1. Usually the Fed only buys US Treasury debt and the MBS of Federal agencies (with implicit Fed govt credit guarantees) and thus credit risk on these assets is effectively zero.
While the US Treasury has stepped in to provide an additional "cushion" for some of the Fed's new asset programs - it is still only $114b of additional buffer and the Fed is still "levered" 43-to-1. So even 2% losses would make the Fed "insolvent".
This would create an unacceptable technical risk that the Fed could not cover 100% of the liabilities it has created (mostly bank reserves and currency in circulation). It could result in a payment failing to clear in the inter-bank settlement markets that the Fed could not cover with an overdraft or discount window loan. Rule #1 for the Fed is "never allow a payment failure to occur in the inter-bank clearing market (Fedwire)".
Of course, the Fed could get new equity from the US Treasury via Congress (which can print unlimited dollars) but it would cause a financial crisis as Congress deliberated over it.
The "dodgy" stuff must be supported by acts of Congress via the US Treasury (eg. airline loans), because it exposes the US taxpayer to potential losses.
wabuffo
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Technically speaking though the money created by Fed is not borrowed money.
When the Fed buys Treasury debt in the open market, it swaps new bank reserves in exchange for them. These bank reserves are assets of the commercial banks BUT liabilities of the Federal Reserve. The Fed even pays interest on those reserve liabilities.
When looking at the Federal government from the point of view of the private sector, one has to consolidate the Federal Reserve and US Treasury. So whether its Treasury bonds, bank reserves on deposit at the Fed, or even currency in circulation - these are all liabilities of the Federal government.
wabuffo
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My own view is that Mr. Market is starting to clip BRK because of a likely increase in the US Federal tax rate from 21 to 28%. This affects BRK two ways:
1) It clips book value due to the increase in deferred cap gains taxes (reducing book value)
2) It reduces the after-tax earnings of both the operating subs (like BNSF) as well as the look-through earnings of some of its stock holdings (eg banks).
This was a big factor on the way up in 2017-2018 as the tax rate fell from 35% to 21%. While at this point, its not a certainty that the Federal tax rate will increase, its becoming a higher probability (and thus a headwind to BRK).
wabuffo
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Also did this with PG - got Duracell business in tax-free return for BRK’s PG common shares. Buffett has done this a few times. In the WaPo tax-free exchange, BRK also received a Miami TV station.
wabuffo
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Hi benchmark - I just saw your questions. Perhaps we should set up a new topic on this one. I'll do that now.
https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pdli-(pdl-biopharma-inc)/#new
wabuffo
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What's the PDLI liquidation play? simple google didn't yield anything
You got some reading to do. Cop a squint at the sections entitled:
"general information about the dissolution and plan of dissolution."
"Proposal #3"
wabuffo
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PDLI’s Management mentioned something about benefiting from Cares tax changes, which can be substantially, since it is replied retroactively. Do you have any idea what sums we are talking about.
Spek - the only comments I've seen PDLI mgmt make are from the recent 10-Q in May:
Income tax benefit from continuing operations for the three months ended March 31, 2020 and 2019, was $14.5 million and $0.8 million, respectively, which resulted primarily from anticipated use of Net Operating Loss carrybacks as allowed by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.and from the conference call for Q1:
So, 2020 Cares Act provides the opportunity to carry certain losses incurred in the 2019 and 2020 tax years back five years. PDL, had significant taxable income and paid cash taxes in eligible carryback years.I can't tell from the 10-Q, if the tax benefit they quote is equal to the expected cash refund they expect to receive. It's also unclear if they have factored any tax refunds in their original liquidation estimate of $3-$6 per share (including the common shares of EVFM that have since been distributed to PDLI shareholders).
PDLI has 116.3m common shares o/s, IIRC.
wabuffo
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bought more PDLI (a liquidation special situation) and some BRK.B at the lows at the end of the day (couldn't help myself - even though I already own some).
wabuffo
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One thing to keep in mind is that if the Democrats sweep the executive and legislative branches of US government in the fall (as seems likely at this time, though that may change), Biden has already indicated that he is raising the federal corporate tax rate to 28% - which he will be able to do if the Democrats have majorities in the House and the Senate.
BRK was a huge beneficiary of the corporate tax rate cut in 2017 and will consequently get hurt if/when it is raised. It will get hurt two ways - large US subsidiaries like BNSF would see lower operating earnings and cash flows. But the after-tax values of the equity portfolio would fall as well. Not as big an effect as it was going from 35% down to 21% - but our partner, Uncle Sam is raising his stake from 21% to 28% without paying us for the larger ownership stake in all future pre-tax earnings.
wabuffo
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PDLI @ $2.87
wabuffo
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Starter in MSGS
Interesting - rationale?
wabuffo
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Dudley writes in a clear manner about the Fed's monetary operations. Here's another article he wrote in January after people were claiming the Fed's resuming repo operations and expanding its balance sheet was leading to a stock bubble at the end of 2019.
“…when the Fed buys T-bills and increases the amount of reserves in the banking system, that liquidity can’t go elsewhere. It can move from bank to bank as households and businesses shift where they hold their bank balances. The only exception is if bank customers decide to increase their holdings of currency. But if they do that, that reduces the amount of excess reserves in the banking system.If one always remembers the quote above from Dudley every time some TV talking head blames the Fed's growing balance for one problem or another, one will experience less confusion about monetary policy.
wabuffo
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As I wrote in an earlier post, the effect on stocks after a strong force of deflation is stopped is always like this.
In 2000-2002 there was a strong multi-year deflation/economic contraction, but starting at the end of Oct 2002 til end of 2003 reflation starts, and the median, non-S&P 500 stock was up +114%.
In late 2008 we saw another great deflation due to the mortgage crisis, but starting in March 2009 til the end of 2009, the actions of the Fed and US Treasury stop the debt deflation/bank crisis, and the median, non-S&P 500 stock was up +117%.
This year, the Fed and US Treasury acted much more quickly and basically stopped the economic contraction/deflation that started in early March by March 23rd. So its not a surprise that stocks are rising quickly. And as has been shown before, the lower-quality, more indebted companies recover faster and higher because they fell the most.
Twas ever thus. We are seeing the same effect now and probably for the rest of the year.
The cast of characters may change - but we are seeing the same underlying effect except the ducks that think they are great swimmers because of the huge rise in water levels in the lake are on social media these days and crowing about their swimming skills.
Just my 2-cents. FWIW.
wabuffo
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I find it fascinating that every time we have a big crisis, people start worrying about inflation and deflation at the same time....
I am a little surprised that people are a lot more intellectually interested in papers and theory....
It is weird that when people are handed very valid solutions to their problems, Laacz, they kind of ignore it and instead try to go on some sort of philosophical search....
I have noticed this kind of indifference both on this message board and elsewhere. It's puzzling to me....
What I am saying is that if you want inflation protection, if that's precisely what you want, then it is one of the best instruments to protect you.
From 9/1/2008 - start of GFC thru next 4 years (using the deficit-to-gdp as the key indicator) GLD vs LAACZ.
From 9/1/2008 - to today (though in fairness, I switched out of GLD in 2014 after deficit-to-gdp ratio fell under 4%).
Look - I always prefer to own businesses than a shiny metal so not a fair comparison. And people should only invest in things with which they are comfortable.
Inflation protection to me means protection from currency debasement. So right now, for the cash portion of my portfolio, I prefer GLD to cash. Reasonable people can disagree on this, of course, but still respect the opinion of others because there are many paths to investment success/capital preservation.
wabuffo
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Recently, numbers have indeed been huge as the Fed has been absorbing (indirectly...) what the Treasury has been issuing. The % is now above 20%.
It's not really above 20%. One must net out the intra-governmental asset/liability accounts, IMHO. It's like intra-company receivable/payable accounts between a holdco/opco structure. (ie, the Fed is a 'subsidiary' of the US Treasury). More importantly, both sit on the opposite side of the private sector.
As at June 10th, 2020,
....The Treasury owes the Fed $4.15t (because the Fed holds its debt - an asset of the Fed),
....but the Fed also owes the US Treasury $1.5t (because the Treasury has a large deposit in its account at the Fed - this is a liability of the Fed).
In the good ol' days, one could ignore the US Treasury's deposit account which typically maxed out at $5B. But today it sits at $1.5T (an expansion of 300X!).
Here's an updated chart (vs the FRED chart that I posted that goes til Q3, 2019). Still way below the historical average despite the Fed owning over $4t of Treasury debt.
Again - my point isn't to dismiss what's going with the US Treasury's spending and debt issuance. It's only to place the Fed properly in its context as a disinterested spectator rather than active participant. In fact, the very large balance in the Treasury general account is causing havoc with the Fed's balance sheet and future bank reserve forecasts.
wabuffo
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It seems to me that if the Fed buys a bunch of bonds and the Treasury puts that money in the economy,
Congress expressly forbids the US Treasury from selling its debt directly to the Federal Reserve - it must always sell its debt to private markets. The way it works is:
1) The US Treasury sells bills/bonds to the private sector.
2) The Federal Reserve as part of its monetary operations swaps bank reserves for Treasuries.
The argument you hear is that the Fed is increasingly "monetizing" the Treasury's debt by buying ever larger amounts.
If debt monetization by the Fed was truly happening, I would expect to see the Fed's share percentage increasing -- but it isn't. I think people just like to throw around big numbers without context.
Now - one could argue about the size of current US Treasury spending. But that is a separate issue and doesn't involve the Federal Reserve and its monetary operations/asset-based lending.
wabuffo
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Do you see inflation as a result of current Fed actions? Or future Fed/Treasury actions?
Definitely tipped to inflation and solely because of the US Treasury because of its net spending -- which creates new private sector deposits. The Fed controls the price of money but not the supply since it can only do asset swaps (Treasuries in exchange for bank reserves, for example).
Here's a long run chart of gold vs deficit-to-gdp ratios. You can see that the price of gold is a measuring stick that is sensitive to currency debasement when deficits become large vs gdp.
wabuffo
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I should clarify that I actually agree that there is a risk of currency debasement - but not because of the Fed.
It will be a function of US Treasury stimulus spending.
wabuffo
Hoisington Management
in General Discussion
Posted
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