wabuffo

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

there also lots of wonky central bank/ treasury money supply nuance going on in that figure too that it would be great if @wabuffo might explain for us? I tend to ignore M2. I think you can too. There is one school of economic thought that bank deposits are the most important form of money. Since banks create deposits when they create a loan, this school of thought thinks that banks acts as agents of the Federal Reserve and thus are licensed to "print money" through their lending. IOW - total bank lending = total bank deposits. And that appears to be largely true. If one goes to the Fed's H8 report which lists the total assets & liabilities of the US banking system, you'll see that total bank credit = $17.2t while total bank deposits = $18t. But my counter-culture view is that this form of deposit creation is not money creation because it is not creating net financial assets in the private sector. Basically if a $100 loan is created which in turn creates a $100 deposit - the private sector has no new net equity, in aggregate (just more leverage). My point of view, FWIW - is that the only form of money creation is when the US Treasury deficit spends. Here are four examples of commonly perceived forms of "money creation" -- Treasury spending, Treasury bond issuance, Bank lending, and Fed doing QE. Notice that only the first payment flow (US Treasury spending) actually creates net equity for the private sector (bank + individual/business). My view is that what counts is the size of the US Treasury's deficit as a % of GDP. The US ran a $3t deficit in 2020 & a $2.7t deficit in 2021. So far in 2022, the deficit thru July month-to-date has shrunk to just $390b (much of that in Jan-March, we've run a surplus since April). The issue is that the US needs to supply enough money via its deficits not just for the US domestic economy's growth, but for the rest of the world's need for US dollars & US dollar assets (which the rest of the world gathers by net exporting to the US via the trade deficit). So, IMHO, that means the US has to run an annual deficit of ~6% of US GDP ( or ~1.5% of world GDP). With the US starting to run a surplus or too-small deficit, we are starting to unleash a mild deflationary shock since April 2022. This has manifested itself in the strength of the USD and its compressing effects on gold, oil, commodities, forex, equities and, lately, long-term US Treasury yields. We'll see if that continues (which will depend on whether the US Treasury deficit continues to stay small or begins to widen again). FWIW. Bill

IMHO, the Fed is and has been largely irrelevant in this cycle. They've raised to 158% bps on IOER & really haven't done any QT yet. That's pretty small beer, IMHO. The real macro force is that since late February/early March, the US Treasury has slipped into surplus (and not deficit). This is the most powerful deflationary force one can see. And its not over yet. Gold tells you that as it is the most sensitive monetary commodity & offers a real-time price indicator on the USD's increasing "scarcity". I think this will force a contraction of economic growth (maybe recession, maybe not) until the compression reduces tax receipts due to unemployment & greater spending due to countercyclical Federal programs that kick in until we are back to a normal sized deficit. That might not be until early 2023.... So please stow your tray tables and return your seats to their upright positions. FWIW, Bill

No idea. Maybe the ownership stake percentages are pre-conversion by Buffett. I use the 15.6% to calculate the total B-share equivalents which wouldn't matter whether its pre- or post-conversion. Also of note is that the 15.6% could be anywhere from 15.57% (zero reduction) to 15.64% (9.9m share reduction). We really don't know the exact share count - but the good news is that the repurchases have been activated again. I hope Buffett is really firing the big gun at current prices. Bill

Based on Buffett's 13D related to his annual charitable giving, we can infer BRK's up-to-the-minute share count. https://sec.gov/Archives/edgar/data/0001067983/000119312522174841/d352507dsc13da.htm After pausing in April when the B-shares went above $350 per share, at recent prices, looks like 4.2m B-equivalent shares were repurchased. Bill

This is a good indicator, but the YoY figures for the month are worrying, no? Don't forget that the 2021 tax filing deadline was moved to May from April - so that skews comparability. I think the Y-T-D numbers are the best measure. Also remember that the Federal govt's fiscal year ends on Sep 30 - so y-t-d numbers represent almost two-thirds of the fiscal year. The other thing to note is that year-over-year spending is down quite a bit too. That's not too surprising since many big pandemic spending programs were one-timers in 2021. The deficit has come down so much that it may now be too small and may cause deflationary pressures to emerge. Yeah - you heard that correctly. Bill

where do you find these special situations? I set up certain types of search terms & SEC document types which help me flag them. Also google news alerts based on those same types of search terms. You have to cast a wide net that most of the time comes back empty - but occasionally it catches something. Bill

Fedguy12 and Maroon Macro are very knowledgeable and informative to listen to....but I find they are too Fed-centric and stuff they can't explain via a specific Fed action, they then create explanations for these market reactions that make no sense ("market front-runs the Fed", etc). I think this is because they ignore the actions of the US Treasury - or don't have a model to integrate the actions of the US Treasury into the real-time data of rates and supply/demand for things like Treasury securities and how all this interacts with the Fed's balance sheet. FWIW, Bill

In the past, I would make sure that 25-40% of my portfolio was in market-neutral special situations like liquidations, Ch.11s where the equity was money-good, etc. It also helped that during economic contractions/bear market panics more of these types of situations would become available. To me that's the secret to outperformance - do better than the broad indices during bear markets because its tough to outperform during bull markets. FWIW, Bill

Any tea leaves your seeing. The average stock (based on the Wilshire 5000 Equal Weight Index) is already down ~30% since the top last summer. How much lower can things go? The worst drawdowns in the past were 40-50% - so we're getting closer to the bottom, I think. I know I am getting very bullish on stocks to buy at the moment. As for the US economy, I think inflation is already receding. The Fed's QT program is going to be a nothingburger since the US Treasury has already superseded it with its huge recent surplus. US household balance sheets entered this period in much better shape than either 2000 or 2008 - so I would guess, the falling US budget deficit turns inflation into disinflation into slight deflation. In addition, rising rates are helpful because the US household sector is helped more by rising interest income (time deposits, MMFs) than hurt by rising interest expense (95%+ of residential mortages are 30-year fixed and consumer debt is also fixed in the short term - credit cards, car loans, etc). While the residential market will slow down due to rising mortgage rates, it actually needs more inventory for sale so a prolonged period of rising rates will help create a better supply situation for buyers. In addition, US demographics are wildly bullish for the residential market. So overall, my advice is: - ignore the Fed narratives (QT is irrelevant and rising rates are helpful) - focus on the shrinking US budget deficit which is falling very fast - US economy will weather the blows just fine so don't let the bear porn affect what is in front of you as value returns to the stock market. Bill

Alright man...what do you think will happen (in your opinion of course)??? I dunno - slow grind downward for the US economy until recession back half of 2023? Odds of that probably > 50%. Bill

Thanks for spoiling all the fun and letting us know in advance. Oops - went back and corrected it. LOL. Bill

Sounds similar to 2000-2002 type of situation then? That's what I think too. That was a big equity bust, followed by a grinding down of the economy until recession hit in Q4, 2001 - Q1, 2002. Equities didn't bottom until October 2002. History may not repeat here, though. Bill

Any idea on why this is happening? Economy is still running hot - wages are increasing. Labor shortage is real and getting worse. This is why the Fed is worried. Economy & stock market are going in opposite directions which is creating a confusing narrative. This is what I call cake-onomics. Inflation was a cake that went into the oven 12- 18 months ago and just came out early in 2022. But a new cake went into the oven in April - a deflationary cake. A growing economy needs more of the govt’s money - but the govt is actually going the other way & removing it right now. Think of the economy as you exercising in a closed room while the oxygen is very slowly being sucked out. That’s monetary deflation - the private sector will have to consume savings and/or increase debt to maintain consumption. Bill

Will those surpluses continue, or will Treasury return to deficits now that peak tax season is over? May is typically a "deficit month", but so far it is also running as a surplus (thru first 6 days). The key story is that tax revenues are still running hot (most receipts for the US Treasury come from Federal payroll taxes) and expenditures are down from the prior couple of years as all the one-timers do not repeat. I think the deficit will shrink to a very low level as a % of GDP - too low to prevent deflationary pressures from grinding down the economy over the next 12-18 months. No one is focusing on this story right now but its pretty important, I think. FWIW, Bill

On the other hand you have some pretty massive twin deficits... 1) Federal budget deficit is shrinking fast and is currently in surplus mode. A shrinking deficit that is too small is deflationary is actually causing the USD to strengthen against gold, commodities & other currencies. 2) The trade deficit is how the rest of the world acquires dollars (they net export to the US in order to get them). Trade deficit is exploding which is another indication that there may be a shortage of dollars right now. FWIW, Bill

So far despite all the dramatics the overall index is only down 15% or so from a market top I think its a lot worse than that. The average stock is probably down 25-30% since the middle of last year to today. Bill

BRK Q1 2022 10-Q is out: https://www.berkshirehathaway.com/qtrly/links1stqtr22.html BRK buybacks: Bill

Pushing us down the inflation cliff. Then why is gold falling for the last four days? That signals deflation (rather than inflation). Something else is going on as the US dollar is on a rampage since the beginning of last week. Bill