wabuffo

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

Have we learned anything over the past 4 months? Yes. What the Fed does matters to financial markets. FWIW - I don't think the Fed was/is responsible for the carnage this week in equities (and to a lesser extent in commodities). While there were a lot of Fed speakers sounding bearish, the Fed rate hike odds didn't change this week (they've been predicting 3 straight 50bp rate hikes in each of the May/June/July Fed meetings coming up for the last month or so). So there was no change in expectations as to the Fed from what I can see by markets. To find a possible reason for the upset, one must look to the US Treasury as we always have to for monetary goings-on. Fed tax receipts have been booming this year, but April (as the 2021 tax filing deadline) has been one for the record books. Here's a couple of charts: the first, tax receipts for the last few months, and the next one April US Treasury receipts vs expenditures for the last 25 years. The effect of this huge Federal tax receipt week (and large surplus) was to reduce US domestic bank sector reserves by $466b! This was a 12.3% reduction in bank reserves in one week!! You can see this in the comparison of the Fed's balance sheet between April 13 and April 20. Basically the Fed moved reserves from the banking sector to the US Treasury's general account. This was a huge reserve drain from the banking sector. To put it in perspective, the Fed has said that it wants to shrink its balance sheet by $100b a month (which also has the effect of removing bank reserves). So the US Treasury did in one week, what it will take the Federal Reserve to do (starting in May) in more than four and a half months. Another way to think about it is that in mid-Sept 2019, a relatively small corporate income tax draw (when bank reserves were at $1.5t) caused a much smaller reserve drain that sent short-term interest rates spiking and forced the Federal Reserve to come in with repo mop-up operations the next day. The private sector really felt this big withdrawal of liquidity - especially in the latter part of the week as the effects started to ripple into a strengthening of the US dollar (gold sank on Wed-Fri by over $60/oz because gold is inversely correlated to dollar strength and is very sensitive to changes in the supply of/demand for US dollars). So what does this possibly mean for the macro economy? I think in the short-term we'll feel it for another week or so but the tax haul is a one-timer and the budget should filp back into deficit mode. Longer-term, I'm still bullish on the US economy for this year and next, but I do think the US budget deficit is falling fast. That's healthy, but if it continues to fall over the next few years and gets as low as 2% of GDP - that might be too low for the US domestic & global economy and could create a very strong USD that could put deflationary pressures on the US and the world. Of course, just because the US economy is fine, equities will feel headwinds from rising rates. The economy and markets can go in different directions and often do. Bill

Mr. Market to Charlie Munger....

So, it seems to me the next big question is what happens to inflation if the treasury bond is paid off at maturity: a) using taxpayer dollars (specifically, using reserves offset by taxpayer dollars) Focusing on a treasury bond being paid off in isolation is the wrong frame, I think. Since the US Treasury needs to run a perpetual deficit, then all its doing is rolling over its bonds and increasing the net issuance. If it tries to run a sustained surplus (ie, paying down its US Treasury security balances outstanding, it unleashes monetary deflation (as it did in 1998-2001). b) using debt purchased by the private sector (specifically, using reserves offset by treasury bonds purchased and held by the private sector) Not sure what you mean here - but this sounds like a) above. c) using debt purchased by the Federal Reserve (specifically, using reserves offset by treasury bonds purchased from the private sector at artificially high prices to reduce interest rates, but ultimately held by the Federal Reserve)? Further, let's assume the market expects the Treasury to perpetually roll maturing Treasuries over into new Treasuries that will be purchased/held by the Federal Reserve. If the Fed keeps buying all of the US Treasuries issued, then interest rates will go negative, banks assets will be nearly 100% reserve assets and the economy becomes moribund. Not because of inflation (though that's possible if the US Treasury deficits are sustained over 10% for multiple years). More likely under normal deficits = 2-4% of GDP, this creates a moribund economy because consumption falls and banks stop lending. Bottom line - you (and that article) are focusing on the wrong thing - Treasury securities. IMHO, inflation appears if the US Treasury runs multi-year deficits of >10% of GDP. Its the spending, not the Treasury issuance that comes after the spending. Bill

Also, when you say it (the treasury) first creates reserves I'm assuming this is the act of manifesting money, right? Is converting reserves to currency or treasury securities part of ensuring the Treasury's account doesn't have a negative balance? The best way to visualize all of this is with an accounting ledger approach to all of these transactions. The blue side is the consolidated Fed govt (Treasury + Federal Reserve). The green side represents the private sector. The first payment flow is the US Treasury making a payment (i.e., issuing stimmie checks). The US Tsy gives the Fed a payment order and the Fed moves reserves (settlement balances) from the Tsy's Fed acct to JPM's Fed acct. This creates both a reserve asset and a deposit liability for JPM. The non-bank private sector gets a new financial asset in its deposit account (with no offsetting liability). That's why only US Treasury deficit spending creates new financial assets for the private sector. In the second payment flow, the US Treasury issues a bond. This removes the reserves and deposit from JPM and moves reserves at the Fed from JPM to the Treasury. Notice that this transaction does not change the net asset position of the private sector. It just substitutes one form of govt liability (reserve) for another (T-Bond). The last payment flow is the Fed buying a Treasury security. Of course it can also work the other way. But the key point is that the Fed buying (or selling) Treasuries does not add (or subtract) net financial assets from the private sector. It just changes the form of the asset. Hope this helps. Bill

2023 is when things could REALLY get interesting. What if inflation is still high single digit. And labour markets are still super tight. And the economy is still doing OK. And the Fed KEEPS TIGHTENING. Very likely - that's why I bought a ton of TLT Jan 2024 LEAP put options (also Jan 2023 LEAP puts too). We talked about this last summer in various Federal Reserve threads that long rates could rise a lot. And I'm not really a macro investor. Bill

Bill, what are you thoughts on the reliability of yield curve inversions and recessions? I think they are ok as indicators - though the original thesis by Cam Harvey in his 1980s paper was based on the 3mo-10yr differential. That's the one I watch. My own thoughts were that the chatter about the brief 2yr-10yr inversion is a head-fake as the long end of the yield curve will rise a lot over the rest of the year. That's bullish, BTW, for the US economy. Stock market, maybe not so bullish, who knows? Bill

a government is funded solely with newly created money. (Inflation becomes the de facto tax.) Close! The sovereign (ie, federal govt) needs to spend to obtain resources, so it imposes tax liabilities on its citizens to create the private sector demand for its money. It then mandates that its money is the only thing that the citizens can use to extinguish these sovereign tax liabilities. So it must run deficits (spending > taxes) to furnish its citizens with its money that they need. If it spends too much vs tax receipts it can create inflation. Keep in mind that the US, as reserve currency, must also provide its money to the foreign sector as well who also want to net export to us in order to get US dollars (trade deficit). This is because the rest of the world wants to save a portion of its rising wealth in US dollars and US dollar assets for safety. That's why the US govt can run a much larger deficit safely versus other countries. We have the world's reserve currency and the rest of the world wants/needs it. a government is funded solely by long term bonds nope - a sovereign govt is funded by three types of liabilities - currency, reserves and treasury securities (bonds/bills). It first creates reserves via its spending and then converts most of the reserves into either currency or treasury securities based on the proportions demanded by the private sector (by far they want treasury securities for earning a risk-free interest income). the bonds are purchased/held to maturity by a government-owned bank that can create money. The govt-owned bank (I presume here you mean the central bank) does not create money. Only the US Treasury does. The central bank runs the payment system between the banks and between the banks and the US Treasury. The central bank clears payments by using settlement balances (ie, reserves) on deposit at the central bank. These settlement balances never leave the central bank. Lately, the central bank has tried to influence long-term rates on Treasury securities by buying these securities in the open market and paying for them with new reserves deposited to the banking sector's reserve accounts at the Fed. Again these reserves circulate amongst the banking sector but never leave the Fed's payment system and never go into the private sector. There is no increase in private sector "liquidity", money or anything else. There is only a lowering of interest rates which the central bank hopes will increase economic activity. It seems to me Hoisington is banking on Scenario 4 long term, with government excess ultimately stifling private sector growth Monetary deflation only occurs if the sovereign govt does not provide enough growth in the supply of money to support the real economy's growing commercial activity. In today's monetary system with no link to gold, that happens if the Federal govt tries to run a budget surplus (like it did from 1998-2001). That unleashes monetary deflation which grinds down economic activity until tax revenues fall enough that the surplus slips back into deficit. That's what happened in 1998-2001 -- the deflation caused the US economy to go into a long recession from 2000-2002. Under the old US system, when the dollar was subordinated to gold (dollars could be exchanged to gold on demand), there were times when the average increase in the world's gold supply vs above-ground inventories of ~2% per year did not supply enough money to support fast economic growth. The private sector would then increase its borrowing/debt to maintain consumption/investment. The economy would then suffer a debt deflation/banking panic every decade or so. A good example of this was the post US Civil War period when dollars were convertible to gold, US banks issued their own money (backed by their gold reserves), and there was no Fed (ie an Austrian economist paradise) to support the interbank payment system. During that time period, the US suffered severe deflationary depressions in 1873, 1884, 1893 and 1907. The Fed was created soon after in 1913 because despite the Austrian economists, this boom/bust system was intolerable to the US citizenry. FWIW - I think this inflation will recede on its own (with or without the Fed) because the deficit is declining rapidly and supply will eventually catch up to demand. The US economy is fundamentally strong because the household, corporate and banking sectors have not all been in this good a shape from a balance sheet perspective in a long time. It is also benefiting from the mini-baby boom of the early 90s (millenial generation) currently populating the 25-34 year old age group, which is peak household/family formation. This is a huge tailwind for housing and general consumption for the US economy interrupted temporarily by the pandemic's forced suppression of consumption. I enjoy the questions/comments - please keep them coming as long as I'm not boring everyone. Bill