wabuffo

Well that was a lot of rambling without probably answering your specific question... I forgot to add another important point. The problem of uninsured deposits can't be solved (at least in aggregate) for the private sector. There isn't enough FDIC insurance nor enough T-Bills. Someone, somewhere, will always have to deal with where to put cash & cash equivalents while taking some counter-party risk (where the counter-party is neither the Fed nor the US Treasury). The reason for this is just math: 1) The US banking sector has (round numbers) 17 trillion in deposits - of which $9 trillion are FDIC-insured. That leaves $8 trillion of uninsured deposits. Given that this is cash that someone has to hold - the alternative if one wants a zero-risk counterparty is T-Bills. 2) Total US Treasury bills outstanding is around $4 trillion. The Fed holds about $1 trillion of them & isn't including them in its QT (the Fed prefers to let mature its longer-duration notes/bonds while continually rolling over its T-Bills). That leaves around $3 trillion of T-bills circulating in private sector hands. Adding it up, I get $11 trillion of private sector cash & cash equivalents total (8 trillion of non-FDIC insured + $3 trillion of T-Bills) vs $3 trillion of T-Bills available. Reverse repo solves a bit of that problem ($2 trillion) - but it is an issue that $6 trillion in cash can't find a "safe" place to park itself. My math and analysis could be wrong here - so please feel free to critique my theories here. Bill

i woundn't mind if wabuffo would contribute here (to tear apart my perspective). In the old days (ie, pre-GFC), the monetary plumbing was simple. The Fed ran with a small balance sheet (tiny amount of total reserves in the banking system). The US Treasury also ran with a small balance in its TGA (so that its spending matched its security issuance). Deposits grew in line with bank lending. This makes sense because bank lending creates deposits. The deposit may move from the lending bank to another bank, but the deposit just created stays in the aggregate banking system. But notice the two lines (deposits - red, bank loans - blue) start to separate after 2008. This is also around the time that traditional monetary measures like M2 & velocity of money start to break down & emit weird results (confusing their adherents). The reason is that the monetary regime changed. The Fed began to expand its balance sheet with numerous rounds of QE and the US Treasury also started to run with large, but highly volatile TGA balances. This is a long way around of saying that deposit balances now also reflect things like QE, QT and times when the US Treasury is flushing its TGA due to smacking up to its debt ceiling (like in 2021 and today). I would add that the Fed has expanded its balance sheet to such an immense size that the banking sector can no longer handle the deposit creation of QE and so The Fed had to open a second liability funding source via overnight RRPs. If the Fed hadn't done that in 2021, we would have gone negative rates in the US. So what's happening today? Well - the principal driver of deposit reduction in the banking sector in 2022 was QT. QE/QT change the composition of private sector holdings from Treasury securities to reserves/deposits and vice versa. But I think the recent double-whammy of the Fed's response to the SVB FUBAR is that it is once again flooding the zone with reserves at the same time that the US Treasury is drawing down its TGA. Both of these will have a tendency to stop the deposit decline & start to increase it again, IMHO, for the short-term. At least until both the banking crisis and the debt ceiling issues are solved. Well that was a lot of rambling without probably answering your specific question... Bill

then its as was mentioned above a maybe 0.2% negative carry that provides a lot of liquidity support to banks. It can even turn into positive carry if the loan term is locked in for the year at the current BTFP rate but the Fed keeps raising the rate it pays on reserves. Sweet! Bill

it’s cash that’s being drawn down as a liquidity comfort blanket…..it’s a destroyer of NIM’s But is it a "destroyer of NIMs"? Leaving aside the FHLB's, lending from the Fed delivers reserve balances as an asset to the bank (along with a loan from the discount window as a matching liability). So its not really cash in the way you and I think about cash. Take the BTFP as an example. Current interest rate on a BTFP loan is 4.85% for a period of up to a one-year term. https://www.frbdiscountwindow.org/ But the bank that is using the program receives reserves from the Fed that currently earn 4.83%. It's not such a bad deal - 2bps net while getting par value (instead of the lower fair market value of the underlying collateral) while pledging some Treasury securities or Agency MBS. And if rates move against the bank, they can cancel the loan at anytime without penalty. Bill

Interesting. I appreciate your digging into the regulatory filings. Its funny because Zions is classified as one of the domestic US SIFI banks - so I am totally confused now. Bill

You might be right Spek - it seems regulatory rules were loosened in 2019 for banks with under $10b in assets which includes this opt-out rule for AFS. I'm reading up on these new rules now. It doesn't apply to bigger banks (>$10b in assets). Bill

For regulatory capital purposes, both AFS and HTM get treated the same though and they do not take a hit to regulatory capital if they put it in AFS or the HTM bucket. Regulatory capital is what should matter here. I think AFS securities (if they have shifts in values) do affect the measurement of regulatory capital. https://libertystreeteconomics.newyorkfed.org/2018/10/what-happens-when-regulatory-capital-is-marked-to-market/ Bill

AFS mark-to-market losses are taken to AOCI & shareholder equity as well as regulatory equity as they happen. It is the HTM losses that are not. It is these mark-to-market losses that created the issue for SVB & other banks. SVB faced the issue that they would have to begin to sell their HTM securities to meet deposit flight but which would unlock the losses and immediately flow them to regulatory equity rendering the bank insolvent. Bill

Its not just the buybacks. They used their (likely) overvalued stock during the pandemic to help finance their largest acquisition - Hargray Communications at over $2B. They issued stock but also issued almost $1B of 0% & 1.125% convertible notes (the convert price = $2275.83 lol). Overall, $1.57b of debt termed out to 2026-2030 at an average interest rate of 1.9%. I mean this is just super-smart management of the capital allocation function here. Bill

But does this assume the debt ceiling is raised? It will get raised but not before they go right to the wire, I'm afraid. It's such a silly exercise. Bill

$31T in federal debt is going to cost... It's not $31T -- you have to subtract $6.8t of intragovt holdings & $5.3t held at the Fed. That's left-pocket-right-pocket-the-govt-owing-itself stuff. The net amount held by the private sector (along with the foreign sector) is "only" $19.3t. And a sovereign issuer that issues debt in its own currency can never default on its own debt. Bill

Well - its official. Munger's other mystery foreign stock in DJCO's marketable securities portfolio is TenCent Holdings (0700.HK). https://i.ibb.co/svsC7CC/TenCent.jpg Bill

We definitely were creating those conditions in Q2 with the huge surplus. I think we are going to avoid those conditions now with September coming in at a small deficit (I was expecting a medium surplus). The fiscal situation is in full reflation mode now (not inflation - just removing the deflationary pressures). Dollar should come back to earth & US economy quite likely avoids recession. Current GDP in real terms is running close to 3% (7-8% nominal) and employment income in real-time seems to still be strong. I think the Fed has really painted itself in a corner with its stupid open-mouth operations. What happens in 2023 if CPI bumps along at 3-3.5%. Will they accept that and allow themselves to pause as economy continues to grow? Or will they worry about their previous comments about 2% being their target and continue to raise? I blame Bernanke for all of this. I much preferred a Fed that kept its mouth shut and only talked about general goals about sound money & full employment while running a tiny balance sheet. Bureaucrats gotta expand their scope, I guess, especially if they pay no personal price for failure. Bill

CB - I don't care about the politics of central bank "independence". What I care about is how the US monetary plumbing works. In order to do that, one has to view it from the angle of a consolidated sovereign fiat currency issuer. That means that the Treasury and the central bank are part of the sovereign's money creation apparatus with each playing a role in that process. Too much attention is paid to the central bank in an outsized manner relative to its limited role (mainly as inter-bank payment clearing system manager). Unfortunately, this also applies to central bankers who actually believe that they play an outsized role in the management of the economy. The only central banker in my lifetime who understood this was Greenspan. Volcker and Bernanke did not. Bill

The 430B is the estimated future value of receipts tied to those loans that were expected in the future lol. Bill

Page 5 of attached- September shows $487 B receipts, $917 B outlays; deficit = $429 B. What am I missing? Sorry - made a math error. Still a deficit, but a very small one = $56b. I always focus on cash (ie, US Treasury's reserve acct at the Fed = TGA). Reduction of operating cash = $34b for the month. Now some of that is due to debt redemption/issuance so we need to back that out. Borrowing from the Public added a net $22b. IOW, the TGA would've been lower by that $22b without the net issuance so that amount has to be added back. $34b + $22b = $56b operating deficit for the month of Sept (not $429b). Where's the difference? See that "By Other Means" section at $373b? That's an "accounting charge" guesstimate by the US Treasury for the Student Loan forgiveness program. Its "non-cash" and is instead a writedown of assets. How do we know? Let's go to the Appendices of the monthly Treasury report for Sept.... <flip, flip....flip>. Ah - here we go. I've highlighted it. Federal Direct Student Loans in the month were written down by $373b. Note that the accounting here is a "net reduction of asset accounts". See - this cash was spent from the TGA years ago when the Student Loans were originated/purchased by the US Treasury. That money already went to the institutions of higher learning probably under the Obama years. It never was treated as an expense that went through the deficit accounting rules because it was a purchase of an "asset". LOL! Hope this helps! Bill (your green eye shade deficit accountant)

September was a surplus. Bill

What's your take on gold's slide, given your framework ( gold as a signal of USD scarcity/surplus)? Fiscal deficit has been too small for most of 2022. Q2 had a huge surplus in April due to record tax receipts. September has also been a surplus, though a lot smaller. Overall its causing a shortage of USD both domestically & internationally and is reflected in USD's surge vs gold & other major currencies. Those currencies aren't really weakening (if you compare them to gold) - its that the USD is uniquely strong. Will it last into 2023. No idea. It will depend on whether tax receipts stay strong, IMHO as there won't be much extra on the spending side. Bill

Charlie has also been selling part of the BYD holdings that DJCO owns for the past year or so. Bill

1 yr inflation expectations falls below 2.3%. The Prices Paid component of all 5 regional Fed surveys declined in August, and all but one (Richmond) is at its lowest level since at least January 2021. I agree with Spek - the Fed's rates (IOER, o/n RRP) are meaningless. What's important is the yield on 10-yr & 30-yr Treasury securities. 30-year fixed rate mortgages are based on the 10-year Tsy rate and it has flattened out. Meanwhile the historical spread between 10-yr Tsy & 30-yr mortgage has blown out well above its historical 170bp spread & mortgage rates have begun to fall. Equity risk premiums for DCFs are priced off of the 30-year Treasury yield & it too has stopped rising. Meanwhile high-yield credit spreads have collapsed and losses on all sorts of consumer loans are at 30-40 year lows. Employment income is booming in the US. Can we talk ourselves into an economic contraction. I don't think so but we sure are trying with all the bear porn.... FWIW, Bill

I don't believe the current consensus is for 75+75+50. More likely 50+25+25 and finished. The funny thing is that this same CME Fedwatch has the Fed cutting from 325-350bp in Dec, 2022 down to 275-300bp by July 2023 (i.e., a 50bp cut sometime in first half of 2023). So maybe not quite finished in December. Bill

In the past I believe you said you stated a surplus caused the 2000 bear market. When did surplus become a deficit? Any relation to that and the bottom of the market in 2002? Yeah - surplus lasted from 1998-2001. By 2002, the recession created by the surplus flipped the budget back over to deficit. Market bottomed in October, 2002. By 2003, the US Treasury was back into full deficit mode and equity markets had one of their best years ever in 2003. Bill

What's the history of deficits and surpluses from 2000-2003 and from 2007-2009? Does that match with the drawdowns witnessed? I know you've said in the past that there was a surplus in 2000 which led to the recession. What I'm curious if there was a deficit near the bottom of bear market or any surpluses in 2007 era. I'm not sure I understand your question here - can you rephrase and simplify it? Thanks. Bill

Do you have a view on the scale of deficit spend in 2020/2021 relative to the actual economic shortfall of the the COVID/lockdowns? Clearly we over did it or did we?....do you have rough math in your head......did we do twice as much as was needed / three times? Like I said I think we need 6% of GDP per year. I think if you do the math for 2020-2021-2022, its quite possible that the surplus of 2022 (and maybe 2023) is coming close to covering the 6% per year needed for 2020-2023. So in my opinion, any monetary reasons for inflation will have completely subsided by the end of this year, early next year. Finally do you have your own personal feeling on whats driving the inflation numbers and to what extent its supply chains, US aggregate productive capacity being reduced due to great resignation/boomers/fall off in immigration in addition to deficit spending/money printing (or classic Friedman inflation)? Trillion dollar questions I know I still believe two-thirds of the inflation we are seeing is the supply issues related to shutting down the global economy & wrecking all kinds of supply chains. I think this is what is still left in the forward looking (not CPI) inflation outlook. FWIW, Bill