wabuffo

And which team are you on, Bill? Team Transitory. I hope. But I'm not dogmatic about it. Still have my TLT LEAP puts on as insurance if long rates really spike. Last year I thought that BBB would pass by a hair, spending would ramp up & Fed taxes would be raised. I also though the end of the debt ceiling meant everything was setting up for a big jump in rates & inflation. But BBB didn't pass & the US has kept the 2017 tax cuts in place. Many of the pandemic spending programs were one-timers & with the freak-out over inflation, Congress won't pass anything, perhaps until the end of Biden's 1-term presidency. So guess what, the economy is booming already, Fed tax receipts are booming (+46% Dec 2021 vs Dec 2019, +28% in Jan 2022 vs Jan 20). Once all the pandemic restrictions are completely lifted, I think the US economy roars. ...and that huge deficit? Its already turning into a short-term surplus before the likely big tax receipt months of March, June and April (the really big one). The macro is setting up as a bit of a whipsaw, but its coming... and it will surprise everyone who thinks rates will rise, deficits will increase & monetary inflation will continue. By the end of the summer this year, we could have an inverted yield curve & slight deflation (bad for gold & long rates, good for ending inflation). Bill

Mr. Equity Market & Mr. Bond Market (as well as Mr. Gold Market) are all on Team Transitory, FWIW. The Fed will just invert the yield curve with their hikes. Watching the Fed is like watching a 1-year old in diapers carrying an expensive Ming vase high over their head while wobbling around a room with lots of obstacles in their path. It only ends one way. Bill

CB - thanks for that chart. I am always happy that you are one of the posters here who loves macro stuff almost as much as I do. A few observations (I could be repeating myself here, so sorry in advance for that). - US Treasury debt is really just US Treasury securities held by the public sector (I don't really consider this debt - any more than currency in circulation or bank reserves are debt. They are just one of three forms of private sector assets created by US Treasury deficit spending). If not for the debt ceiling + the TGA balance not allowed to go negative, the US Treasury doesn't have to issue US Treasury securities at all. As we've seen in a weird monetary plumbing experiment in 2021 (where the TGA balance started at $1.8t and ended the year near $100b), when the US Treasury does not issue securities to remove the reserves that its spending creates, reserves flood the system and rates start to fall. The only thing that prevented them from going negative in the second half of 2021 was the Fed stepping in and lending from its inventory of US Treasury securities (via reverse repo) to provide the US Treasury securities that the private sector needed. - starting in 1998 and lasting until mid-2002, the US Treasury went into a multi-year surplus (ie more Federal taxes going in than Federal spending going out). As you've heard me say often - "for the public sector (ie Fed govt) to run a surplus, the private sector needs to run a deficit (ie borrow to maintain its consumption). So it's not a coincidence, that the drop in US Treasury securities during this period triggered a large increase in private sector (mainly household borrowing via the mortgage market). In fact, the domestic private sector (US households) competes with the foreign sector's desire to net save US dollar and US dollar assets via the trade deficit. So in addition to the US Federal govt not providing enough of a deficit (and running a surplus instead), the admission of China into the WTO in 2001 really expanded the US trade deficit and combined with the US Federal surplus squeezed the US household sector really, really hard. Obviously, this trend has completely reversed now with large Federal deficits, smaller trade deficits equaling....surprise, surprise... astronomical levels of household savings and rock-solid balance sheets (in terms of debt) vs the early aughts. - I view business debt as a proxy for business investment and this brings in another axiom I'm fond of -- private sector (business) investment equals private sector (household) savings. Of course this is with a closed economy and no federal govt. If the household sector wants to save more than the business sector wants to invest, then household income falls until balance is achieved. This is where the Federal govt comes in. The new equation becomes: business investment + govt deficit = household savings. My contrarian view (despite the recent doom-mongering in the business press) is that the failure of Biden's BBB spending & taxing agenda plus a potential Republican sweep in next year's midterms would push the US Congress to the sidelines. The large deficit spending is rapidly declining to more reasonable levels (Federal tax receipts are booming! while some spending programs are falling off as one-timers end) and we get to retain all the benefits of the very stimulative-to-investment Trump tax cuts (low tax Federal corporate tax rates, accelerated depreciation, etc). Growth could really boom here for the next few years once the pandemic stuff recedes. Just my 2-cents and I could be wrong. Bill

Let's check in on US household debt to US GDP.... near decade's lows.... good, good. Even when GDP contracted at Depression-levels temporarily during the start of the pandemic.... Of course, US household debt is growing (cue scary music....) Bill

I was looking at a company that had total borrowings of $2.5B at the end of 1999 -- but those borrowings had ballooned astronomically to $116.9b by the end of 2020! That's 47x !!! What's even worse, it that this company has other contractual commitments that are even larger than its long-term debt! And those have been growing exponentially as well. When will the music stop for this highly leveraged company? Gotta be soon, right? Should be an easy short! The name of this company? Berkshire Hathaway! An example of the unintended irony of this thread's title. Bill

could be closing of his very successful shorts on the name as he rode it down from $317 to where it is today. The reason they appear as long position, is because the shorts were initiated against HK 9988, so you don't see it as they are not need to be disclosed by SEC, but in grand scheme of things they are offsetting each other, with the net between them left as profit. Hmm - I see disclosures of losses from the BABA long, and gains from holding three banks + BYD but no mention of these "gains" in MTM from shorts (even though they would be material to DJCO -- greater than $20m as at 9/30/21 10-K). It's also curious that the FMV of the total portfolio matches the exact closing MTMs of all six stocks (incl BABA) -- leaving no room for a short position MTM. Here's my working theory. Munger bought BABA and has suffered large M-T-M losses to-date on all three buys. The investment may work out, or it may not. Such is life. Bill

doubled DJCO's position size in BABA w/ another 300k share purchase during Q4, 2021. per new 13F-HR filed. Bill

Parsad - you got a lot of reading to do. Forget the Fed - its the "little man behind the curtain". Tries to sound important but actions do very little to the macro economy. The real 800-lb gorilla is the US Treasury. But of course, they are quiet and maintain a low profile while the Fed does all the talking. The real thing to focus on is earnings growth, long-term risk-free yields (ie 30-year Treasury yields) and Federal corporate tax rates. If you can predict the trend of those three things, that's all you need. Of course, no one can predict them. Bill

I won't try to explain this chart - except to say that the "Total Assets of Fed" has little to do with equity values. So right off the bat, inserting that line makes me question the meaningfulness of these charts. I would add that if the value of equities is the DCF of future cash flows, then $1 of pre-tax earnings is much more valuable to shareholders than back in the 1990s. That's because Federal tax rate on corporate income has fallen from 35% to 21% and the discount rate as measured by the yield on 30 year Treasuries has fallen from 6% down to 2%. So that same $1 of pre-tax earnings is worth 3.6x more (even with no growth in pre-tax earnings). Bill

Hmm, exactly one year later another strong rotation towards value. Must be the time of the year... Last year, long rates rose fast during Jan-Feb but then the TGA started draining and yields fell back again. This time it might be more of a longer-term effect. As posted boringly by me in a number of Fed-related threads littering CoB&F, the December passage of the US Congress of a new, much higher debt limit is reversing (slowly) the huge "shortage" of US Treasury securities available to the private sector. (blue line = actual, orange line = required to match deposits creating by deficit spending. graph starts before pandemic on Jan 1, 2020) Add to that a possible "pause" by the Fed in its buying activities, and the shortage will be slowly relieved. The DCFs of high-growth, no-present-cash-flow companies which rely on a very low discount rate (= 10-year or even 30-year Treasury yield) to discount those, ahem, cash flows to the present are going to get re-rated lower pretty hard. Its just math. Bill

I'm just gonna update this chart since a more "permanent" raise to the debt limit was just approved in Congress (and signed by the President into law). Unlike the first relief package in October which was limited and quickly reached by US Treasury security issuance, this latest relief is much larger ($31.4T gross vs $29.8T current limit). As I've speculated before, US Treasury yields have been severely suppressed by the lack of US Treasury issuance vs what it should've been if the Treasury kept a constant TGA balance. While Fed buying has also been a factor - I reckon that the impact of the US Treasury running down its TGA balance has had 3-4 times the effect that Fed buying has had in 2021. Of course, many macroeconomic factors affect Treasury yields - not just supply. But this was a very large one-time "monetary plumbing" factor. Combine this coming (a) reversal in supply (Yellen has said she wants to take the TGA back up to a $1 trillion dollar balance -- it's currently at $197b) with (b) the Fed stepping back from its purchases and we could see a very rapid surge in the amount of US Treasury securities held in private hands in the first half of 2022. (We've already started to see a reduction in daily reverse repo amounts since the debt ceiling unlock -- which makes sense as more Treasury securities are issued). I also think the Fed is starting to worry about inflation and will be hiking rates late in 2022 as well. There seems to be a convergence of factors here that will push yields higher (perhaps much higher) over the 2022-2023 time frame. Will that be a headwind for equities? Possibly. I was more certain that equities were going to face a tougher go because US corporate tax rates were also going to go higher in 2022. But the BBB plan is now DOA so the status quo remains in place. Equity values are governed by pre-tax income & growth in income, tax rates and discount rates (as measured by Treasury yields). If the economy continues its recovery perhaps equities can overcome the drag of higher rates. We shall see, I guess. Happy holidays y'all! Bill

Rick Hermmann - HireQuest - TBD, but it is fun to try to spot them before it becomes a 10 bagger Totally agree. Bill

These are flawed metrics b/c the US Treasury was also running down its TGA balance from a starting level of $1.7t to just $79b today. Not Herodotus

I believe if real interest rates ( net of inflation) turn positive and become significant- let's say 3% - then hard assets like real estate will fall. Right now, we have interest rates of 1.5% (10 year treasury) and inflation of ~7%, so the real interest rate is -5.5%. that's pretty much an ideal environment for real estate. Spek - it looks like US Govt is set to approve a $2.5t increase to the debt ceiling (currently locked at $28.9t gross). I think Yellen wants to take the TGA back up to $1t pretty quickly (currently at $133b). The Fed will begin to at least taper and set the stage for stopping its buying sometime in 2022. That means some very heavy Treasury security issuance (with little to no Fed buying) is coming. Add in the Fed starting to act on inflation worries and this sets the stage for some Treasury interest rate whiplash in 2022. I think one should become cautious with growth-y equities (especially with little to no profits) because of the DCF effect of rising benchmark rates. Bill

Why has Japan had little to no inflation for the past 25 years despite running a meaningful deficit during that period? I don't know how Japan's monetary system works and haven't studied it closely, but.... there are a couple of things I would look closer at. 1) The Bank of Japan has bought most of the outstanding Japanese central government Treasury securities and replaced them with reserves frozen with the Japanese banking sector. In effect, the Japanese private sector holds very little Japanese Govt Bonds (JGBs) - in fact, very few trade every day. So the deficits go into the private sector as spending, the Japanese govt issues JGBs to replace those financial deposits with JGBs, then the BOJ buys all the JGBs and replaces them with reserves in the Japanese banking system. Reserves are stuck at the BOJ and don't circulate and that may be having an effect. 2) Unlike the US, Japan runs a large trade surplus instead of deficit. So to replace those reserves (which are frozen), it net saves in US dollars and US dollar assets by trading goods for them. It's a weird composition for the private sector in Japan as it holds more US Treasuries instead of JGBs. Its hard to inflate in a foreign currency you don't control, I would think. Those are my thoughts and I could be very wrong. I haven't studied Japan's monetary system. Bill

The inflation of the 1970s was due to the US devaluing the dollar after Nixon severed the peg in August 1971. The effects of currency debasement pre-dated 1971 and were bottled up through the 1960s and finally unleashed by the peg breaking. Sudden devaluations do that - they lead to inflation. We are in a different monetary system now - there is no peg. Volcker gets a lot of misplaced credit and in my solitary view is very over-rated. He frankly didn't know what he was doing by chasing monetary aggregates and his interest rate hikes were costly and unproductive in stopping inflation. This goes with my belief that the Fed can't stop inflation. The 1970s Inflation was broken by the Reagan tax cuts (the top Federal tax rate in the US was 70% at the beginning of Reagan's presidency in 1980 - its was 28% when he left in 1988). These marginal rate tax cuts unleashed the potential of the US economy and with that also significantly increased demand for US dollars and US dollar assets. After all - inflation is a too many dollars chasing too few goods. The Reagan tax cuts solved the too few goods problem as the US added the GDP-equivalent of West Germany's entire economy over those eight years. Just as the 1970s were the end of one monetary era (the dollar pegged to gold), we will see if the 2020s are the end of another or just the extension of it (the 10%+ deficit to gdp ratios end or continue through the 2020s leading to more inflation and the discrediting of the MMT belief in unlimited US Federal spending as a cure-all for everything). Bill

Can you elaborate? Because we just had 10+ years of massive and unprecedented deficits...and still didn't get massive inflation outside of asset markets. We did not. We had a big deficit splurge in 2008-2009 and then quickly got back to deficits that were 3-4% of GDP. The numbers are large but as a % of GDP they aren't big. Now 2020-2021 was much larger and it was more in the form of direct payments to individuals (stimmie round 1, 2 & 3) and businesses (PPP forgiveable loans). I think the key question is: Are these big deficits behind us and one-time in nature or is this the beginning of more deficit spending under this administration that will average much larger percentages of GDP? I don't know. But what I do know is that the Fed is a minor player in all of this action. The big gorilla is the US Treasury. Bill

Can you elaborate on this please? Its simple - the Federal government offers to us (the private sector) three types of liabilities that exhibit "moneyness": a) currency in circulation b) bank reserves c) treasury securities (I compare this to a bank offering you: a) cash b) demand deposit or c) time deposit.) There are three types of transactions that the consolidated Federal govt (US Treasury + Fed) does with the private sector that affects these three types of Federal government "moneyness" liabilities: 1) US Treasury deficit spending (net of taxes and fees received) 2) Federal Reserve buying/selling US Treasuries. 3) US Treasury issuing new treasury securities. Of these three, the only transaction that increases money supply for the private sector is deficit spending. The other two types of transactions with the private sector are asset swaps and change one form of Federal government liability for another and thus do not added to the total amount of Fed govt liability to the private sector. Some say bank lending also increases the amount of money supply - but I say that this is a private sector transaction that adds an asset but also a liability - and thus does not increase total private sector net assets. So the headline is - watch US Treasury deficit spending. Its the only thing that matters when it comes to money supply increases. Bill

The Fed can't stop monetary inflation (i.e., currency debasement) with interest rate hikes - let alone tapering. Bill

Definitely buggy lately....

What would need to happen for this not to get resolved in 2022? US Treasury security supply needs to increase. It would be helpful if the debt ceiling is resolved and the maximum is set at 3 trillion higher than where it is right now ($29T gross). Here's a way to picture it graphically. This is illustrative and not meant to be predictive. Normally, the US Treasury's net issuance of securities matches its net spending. (i.e., its account balance at the Fed stays constant). This has been true pre-GFC when the US Treasury used to keep a minimal balance (~$4B or so) This meant that the US Treasury's cumulative deficit spending over its long history = the amount of US Treasury securities outstanding in private sector hands. In 2021, the US Treasury started the year with a very large balance (~$1.8T) in its account but faced a deadline at the end of July because the debt ceiling was toggling back on (after a two-year) suspension. The US Treasury had to draw it down to $100b (where it was before the suspension - i.e., this was a control put in place by Congress to prevent the US Treasury doing what it did which was to run up its balance during the suspension). This chart show what the amount of US Treasury securities would be outstanding if net issuance matched the huge 2021 deficit spending of the US Treasury (orange line) vs the actual inventory of US Treasury securities in private hands (blue line). See what starts happening in an around the end of February? That's the "oh shit! moment" for Janet Yellen. She realizes she has six months to bring down the TGA. So net issuance falls while spending goes on - and the TGA starts to draw down. A huge gap opens up by the summer. This is the reason the Fed started doing its reverse repo lending (ie lending out US Treasury securities overnight which has now reached over $1.4t rolling over daily.) You can also see the point in late Sept/early October when a small relief was allowed in the debt ceiling. Net issuance surged but has now once again hit the short-term revised debt cap. Meanwhile spending continues. The US Treasury continues to create new deposits (and reserves) in the banking system - but cannot withdraw those deposits/reserves with new net Treasury securities. BTW - I think this little real-life experiment proves that US Treasury security issuance isn't really borrowing. Its not "financing the deficit". The US Treasury security issuance is an interest rate control mechanism. It removes the reserves that the spending creates. If there is no borrowing, but the spending continues, rates fall (and not rise as some of the macro dogma says). If the Fed had not begun its aggressive reverse repo operations, we would be drowning in negative rates. I think when the debt ceiling is raised (depending on how high), there will be a pretty rapid amount of Treasury security net issuance. The US Treasury has said that they would like to get the TGA back up to $750b - $1T. Add to that the Fed pulling back (and possibly letting its holdings go into run-off) and there could be a pretty good snap-back. But as the chart shows, there is a very large gap that needs to be closed - so it could take all of 2022 to close it. Bill

As it becomes clear inflation is NOT transitory how do bond yields stay low? We've talked about this ad nauseum. Technical issues this year with the monetary plumbing. Hard as it is to believe - there are not enough treasury securities in circulation for the private sector that wants them due to the TGA drawdown + debt ceiling blockage. Should get resolved during 2022. wabuffo

Biden = Carter, Powell = G. William Miller (GIK!). Disco must be making a comeback next. wabuffo

it wouldn't be at current rates without Uncle Sam's purchases. The real story in 2021 is the relative lack of Treasury security issuance (reduced supply) - which I calculate is 3-4x the factor that Fed open-market buying is. As I've documented here and elsewhere is all due to the US Treasury drastically running down its account balance at the Fed. That's gonna change in 2022 - maybe bigly. wabuffo

Going out to 2024 - 110 and 120 strikes. They're not cheap and I basically don't know what I am doing with options so don't follow me in this. wabuffo