wabuffo

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

WTF? Is Elon Musk making a hostile bid for BRK?

I must be in the minority here on the new Dune movie. Sure - special effects are more impressive (how could they not be), but the original Lynch Dune is much better in terms of story and important plot points. Hard to believe given the total running time (I'm including the inevitable part 2 here). Style over substance. Just my 2-cents. wabuffo

The debt ceiling drama appears to be temporarily over - and you can see it in the last few US Treasury Daily Statements. From a low general account balance at the Fed of $46b, the US Treasury is quickly ramping it back up to $135b in just 2 days (Friday last week and Monday). It is doing this by rapidly issuing more US Treasury securities than it is redeeming over and above its normal deficit spending. Of course, another debt ceiling crisis may still unfold in December, but I think US Treasury yields are going to start running higher. The commentators on CNBC will be confused as to why and wondering if its due to inflation or bond market "vigilantes", etc. But the real reason will have been the weird dynamics in 2021 of the US TGA drawdown. I have put on all of my TLT LEAP put positions (last one of the batch was on Monday) and will just ignore the Fed and US Treasury from here on in. It's always possible there will be another mini run-down of the TGA balance if Congress again plays games of chicken - but they will eventually raise the limit again (and again....and again). With the Fed also likely to pull back its aggressive buying soon, this will be interesting to watch. Fun stuff for us monetary plumbing nerds. wabuffo

Sounds amazing. What does it cost? Call them and find out. I will say that an annual sub is not cheap - though a lot cheaper than the other heavyweights (Bloomberg/Factset/etc) Request a trial first. Also - they have how-to videos on YouTube that give tutorials on how to use the tools. Watch them to get a feel for the functions/features. https://www.youtube.com/c/Sentieo It's a price-value thing. It's feature-rich if you are doing heavy-duty security analysis of equities. It might not be for you if you don't do a lot of analysis and just trade or buy a few stocks a year. It's also less useful for OTC stocks that have de-registered from the SEC's reporting requirements. This tool feeds on SEC reports, conference calls and published quarterly financials - so if those things don't exist then the tools get a bit bare in terms of usefulness. wabuffo

I thought I remembered Wabuffo recommending a service he subscribes to but it must have been in another thread. Maybe he can share that service name again. Its not cheap - but you were paying for Bloomberg, so.... For basic equity research - I use Sentieo. https://sentieo.com/ It's intelligent search capability is amazing. - You can search keywords and it will run through SEC filings, Conference Call Transcripts, etc and bring up information relevant to your search (plus you can customize the search with some advanced features). I use it to find liquidations, buy-outs, spin-offs, etc. Or you can search "inflation" but only in conference calls for the last two months. Bingo! It will even do charts over time that show how many times inflation came up in a conference call. - It can perform redline comparisons between the same document and show differences. Eg. compare the risk sections of the same company's 10-K year-over-year and highlight changes. I use it to compare mostly proxy statements and 10-K risk sections to flag changes to companies I own or am watching. - it's ability to create customized financial tables with its TableX tool that pulls from company's financial filings saves me a pile of work. And after you're done you can throw the result into excel. - of course, it does screening and plotting against hundreds of company financial variables.... And that's just scratching the surface of what I can do with it. I use it every day, many times a day. wabuffo

But in light of our funds flow discussion here, I believe they are saying that if the deficit spending just piles up in the accounts of people who are content to save it, there will be no inflation, just like cash piling up on your corporate balance sheets wouldn't cause inflation. KJP - I've heard Wray make this very argument in his book "Understanding Modern Money" but I'm not sure I totally understand it either. On the lighter side - it's funny to watch the macro commentators heads explode trying to square this circle: 1) inflation is running high AND 2) the Fed seems like they are throat-clearing for tapering and rate hikes -- BUT 3) Long-term yields are heading lower tonight. Huh? That's not supposed to happen? wabuffo

Are you saying high taxes would ultimately result in less work and less output, thereby driving down demand for money? (I assume you also think this effect in non-linear and really kicks in at very high rates, not moving a marginal rate from 35% to 37%.) Or are you suggesting very high taxes would push people to black markets in which they use alternatives currencies and pay no taxes, and thus have no need for government money? Yes to all of the above. I think MMTers have this blindspot to the effect that the private sector are just sheep to be herded or sheared by government spending or taxing. This is the part where I marry MMT with Laffer Curve theory. I know the Laffer Curve gets ridiculed - but I do think it has some high level applicability (ie - you get zero tax revenue with either a 0% or 100% tax rate - so all we are arguing about is the shape of the curve between those two points - probably different curve shapes depending on the type of income). I think both the Laffer Curve and MMT were revolutionary economic concepts when they were first introduced (Laffer 1978?) and MMT (early 2000s). I think even today we are struggling to comprehend just how big the fiscal capacity of the world's largest and most productive economy truly is. wabuffo