wabuffo

Does this mean treasury will keep running this balance down to $150 bn next month? In that case, rate spike is likely postponed after August 1st? No, I don't think so. I think the governor on the US Treasury general account becomes (a) the debt limit and (b) zero balance. IMHO, they will spend and tax and then try to settle the difference by issuing bonds to keep their balance level or as high as they can without issuing so much new, net debt that they bump up against the debt ceiling. wabuffo

As of July 27th it says "Federal Reserve Account" closing balance today is projected to be 564 Bn. Is this number supposed to run down to 150 bn by July 31st? That seems like a long way to go isn't it? I think so. But the Treasury estimated it would only get to $450b by the end of this month in a recent forecast. Perhaps Yellen has some leeway by claiming that daily receipts and expenditures are hard to predict. Who knows? Like all of us, I am a bit of a tourist here in Fedland! wabuffo

I think the FT article is mixing up what I consider to be two separate issues: 1) the debt ceiling snap-back on August 1st 2) excess reserves in the system - leading to overflows into O/N RRP. In the absence of an agreement in Congress toggles back in the on-position after being in the off-position since August 1, 2019. It would bring two requirements for the US Treasury would be my understanding: - it would be limited to whatever debt it has already issued as of July 31st, 2021 - it must be back to the level of TGA balance it was on August 1st, 2019. If I read those two rules literally - it would be limited to total gross debt of $28.5t (as of yesterday's daily statement) and around $180b balance in its TGA account. I don't know how much wiggle room, Tsy Sec'y Yellen would be allowed vs those two requirements. The O/N RRP is strictly a function of all the excess reserves in the system. It's back to my bathtub overflow drain metaphor. The TGA drawdown might've accelerated that a bit - but the need for the O/N RRP would be there with or without the debt ceiling drama. Of course, I could be wrong about it all. wabuffo

Do you think this new repo would impact your prediction about the interest rate rise in August? The current facility is an ad-hoc "temporary" facility for reverse repo. This announcement just makes it a standing (ie not ad-hoc), permanent reverse repo facility. In terms of day-to-day, nothing's going to change - even the limit is the same. The reverse repo is helping the Fed prevent short-term rates from going negative - especially at Money Market Funds that have access to the Fed's reverse repo facility. But I don't think it changes anything in terms of the TGA balance decline. It is really hard to understand what this is. Think of reverse repo being like the overflow drain at the top the tub. Last March, the Fed (and the US Treasury) put a stopper in the main drain of the tub and then started to fill the tub with "water" as a response to the pandemic. (liquidity, get it? LOL!) They decided we (the private sector) needed more "water". In fact, gallons of it (litres for you Europeans ). But they keep filling and filling. That's where the reverse repo facility comes into play. It is the overflow drain. A couple of months ago, the "water" level in our tub got to the point where the participants went to the overflow drain to keep the tub from overflowing with "water". As the Fed and the US Treasury continue to pour more "water" into the tub, every day more and more "water" goes out the overflow drain (via the reverse repo facility). Negative rates are basically our tub overflowing with "water" and spilling all over the bathroom. wabuffo

Home stretch run this week. TGA must come down - did come down last week (and even redeemed more Treasury securities than new issues). Checks long-term US Treasury yields.....good, good....all going according to plan! https://www.cnbc.com/bonds/ wabuffo

I was curious if he bought anymore Alibaba, but I didn't see a change. It will be interesting to see if Munger continues to sell BYD. Won't know til the 10-Q comes out and even then we will have to calculate it from the change in portfolio value. wabuffo

the TLT calls were an 8-bagger. wabuffo

Bought more AIM.TO at $4.52 CAD

Bill, What are you thoughts on this? This seems related to the (same?) thing you've been talking about lately but perhaps I'm wrong. PS, Zoltan has probably forgotten more about the US monetary system than I could possibly ever know and understand. So first of all you don't mess with the Zoltan! The way I understand his argument is that he is picking on specifically the Fed's decision to expand the overnight reverse repo and to pay (in his opinion) too rich an interest rate on it (5bp). He thinks this will cause a giant rotation between MMFs, corporate treasurers and banks that due to the large flows involved could cause a problem somewhere in some corner of the monetary system. He describes this move as the Fed "sterlizing" the massive growth in bank reserves/TGA drawdown due to the pandemic. His thesis is that MMFs are going to shed T-Bills as they mature and plow into the o/n reverse repo facility because they can get 5bp and barbell their maturity profile. This will, in turn, take deposits out of the banking sector as corporate cash holders go into T-Bills (better yields than banks or MMFs offer). The result will be trillions of deposits moving out of the banking sector and reserves circulating back to the Fed via the o/n reverse repo. I'm not sure why this rotation poses risks - but Zoltan thinks it might, at the margin. wabuffo

Hey wabuffo - thanks for all your educational posts on this. gfp -- I'm really happy my ramblings are adding some value here.... wabuffo

CB - I always respond to your posts because they are thoughtful and we both are striving to learn more about this stuff. wabuffo

and a mere 2% in the late 1970s. When interest rates hit 18%! because so much of their wealth consists of unrealized gains in stocks... Eureka! Raise interest rates back up to 18% to solve the problem of unrealized gains in stocks!

Let's see if the following concept helps. In typical times, most or all of the Treasury spending (to the private sector) is matched by taxation revenue (from the private sector). The rest applies to deficit spending. When the Treasury spends money it does not have, it behaves like a bank (sort of) that act as an intermediate between a private actor that lends its cash (instead of consuming, investing or whatever) to another private actor (to consume, invest or whatever) through the Treasury. So the Treasury acting like a bank (sort of) can effectively be involved in money creation, through some kind of loan-deposit cycle, with a difference that the Treasury holds the expanded balance sheet in an inter-temporal way. i would say the Fed has exploited this temporal loophole while the MMT crowd simply want to never have to deal with it. The Rubicon hasn't been crossed but.. Huh? wabuffo

Apart from the usual money creation from loan growth at banking institutions (...), the government has put its shoulder to the wheel but government issues are not pure money printing, at least for now, as the cash injected into the system has been offset by government bonds held (ultimately) by someone. So, the unusual increase in the money (cash) supply has been offset by an equivalent increase in the total pool of bond securities... This is a close description - but not quite right, I think. New deposits in the US commercial banking system come from two sources: a) bank credit -- a new bank loan simultaneously creates a deposit. (new deposit asset + new loan liability but no increase in aggregate private sector net worth) b) US Treasury deficit spending -- spending creates a new deposit asset and an increase in aggregate private sector net worth. Thus, only US Treasury deficit spending creates net new financial assets for the private sector. Bank lending, OTOH, does not create net financial assets because of the matching asset and liability being simultaneously created. Since everybody already owns everything - the flows of new assets can only originate from US Treasury spending which has been massive since the pandemic. It is slowing down now as we wait to see what comes out of Congress for the remainder of the year. Everything else is an asset swap where a buyer enters and a seller leaves.... but everybody continues to own everything! wabuffo

I am unsure if this last season has a part 2 to it. This season (Season 7) is officially the last season of Bosch on Prime. Rumor is that a spin-off show is in the offing on something called IMDB TV. Perhaps explains the ending to Bosch Season 7. wabuffo

Interesting the treasury's cash balance has been going up (mostly due to taxes received and treasury's issued) not down as contemplated. it doesn't seem like they want to draw this down. Now at $852B. Good catch Spek! It went below $600b in mid-June and looked like it was on track. Then Yellen started going public about the looming debt ceiling at the beginning of August. I believe something has been worked out as part of the infrastructure deal with the Republicans. Because the US Treasury isn't just raising it due to less spending, their issuance of US Treasury securities has really ramped up since mid-June. We'll see - and worth monitoring in July. But something tells me a deal will be announced soon. That means the downward pressure on yields might relax a bit (though yields never compressed as much as they should have if the TGA continued to slide down towards $150b. wabuffo

Charlie did a lot of talking during the show. Too much talking.... QUICK: What about what they’ve done to Jack Ma? He’s kind of disappeared as-- MUNGER: Well, yes, but Jack Ma is one of the swingers. So, they just cut his, they said, “To hell with you.” He basically gave a speech when he said to a, to a one-party state, “Well, you guys are a buncha jerks, don’t know what you’re doing. And I know what I’m doing, and I’m gonna do it better.” And he was gonna wade into banking and no rules and just do whatever he pleased. QUICK: He also brought-- MUNGER: The Chinese, the Chinese-- QUICK: Banking to a lot of people— MUNGER: Communists did the right thing. They just called in Jack Ma and say, “You aren’t gonna do it, sonny.” And, and I wish we had a, I don’t want the, all of the Chinese system, but I certainly would like to have the financial part of it in my own country. wabuffo

https://buffett.cnbc.com/video/2020/05/04/berkshire-hathaway-annual-meeting-qa---may-02-2020.html BECKY QUICK: All right, this next question comes from Jason (Plawner) in New Jersey. “As both a Berkshire and Occidental shareholder I was encouraged to see your investment in the company, but with passing weeks, it became evident that your investment facilitated Occidental management’s ability to avoid a shareholder vote on the Anadarko acquisition, a very shareholder unfriendly outcome. “This deal proved to be irresponsible and expensive from an OXY perspective, and ultimately, very value destructive for OXY shareholders. In my view, it also permanently hurt Berkshire’s reputation in the marketplace. “Please comment on this unfortunate outcome and tell me why OXY shareholders and other market observers shouldn’t feel this way.” WARREN BUFFETT: Yeah. And these are not — it’s not like they’re super-high return thing. But they’re decent returns over time. And we’re almost uniquely situated to deploy the capital, as opposed — I mean, you could have government entities do it too —but in terms of a private enterprise — and they take a long time. They earn decent returns. I’ve always said about the energy business, it’s not a way to get real rich, but it’s a way to stay real rich, and — We will deploy a lot — a lot of money at decent returns — not super returns, you shouldn’t earn super returns on that sort of thing, I mean — it does — you are getting rights to do certain things that governmental authorities are authorizing. And they should protect consumers and — but they also should protect people that put up the capital. And — You know, it’s worked now for 20 years, and it’s got a long runway ahead. ------------------------------------------------- I think it's very telling that Buffett avoids the crux of the actual question asked (probably because he has no defense after complaining about the Kraft-Cadbury situation…. ) Tsk, tsk Warren... wabuffo

Q: Why was OXY anxious to get that preferred from Buffett? A: To shift the cash-vs-stock portion of the takeover offer such that the OXY CEO could get the amount of OXY common stock to be issued in the deal under the NYSE’s 20% rule. That rule forces a shareholder vote if the secondary issuance is greater than 20% of the shares outstanding. The OXY CEO knew her acquisition was unpopular and she would lose the vote so she denied her owners a vote with Buffett’s help. Q: Why is this hypocritical of Buffett? A: Because he went on CNBC and whined loudly when the Kraft CEO did the same thing to him. Buffett was a large holder of Kraft stock (this was before the Heinz 3G deal) and was going public with his displeasure at the dilution he was going to suffer in Kraft’s acquisition of Cadbury (the secondary was greater than the NYSE’s 20% rule). The Kraft CEO sensing she was going to lose the vote w/o Buffett’s support quickly sold the DiGornio pizza biz to Nestle for cash in a lousy deal vs that division’s true value and used that cash to increase cash/reduce stock in the Cadbury deal and avoid the 20% NYSE shareholder vote. Buffett howled like a stuck pig and sold all his Kraft stock soon after. I love the guy but his actions here were hypocritical and anti-OXY shareholder. One would think that with his Kraft experience he would not enable this kind of CEO behaviour towards her shareholders for whom she is a fiduciary and an employee. I remember someone asked a question along these lines at the 2020 AGM and he dodged the question by going off tangent about falling oil prices or some such… wabuffo

I mean the OXY spotting was dead-on. It was still hypocritical behavior on Buffett's part to finance this deal. Demonstrated some situational ethics, IMHO. wabuffo

he makes some data-backed arguments that we're pretty much in year 2000 territory again I only take these arguments seriously when the presenter adjusts for tax rate and discount rate. Back in 2000, the corporate federal tax rate was 35% and the 30-year Treasury was at 6% Therefore $1 of pre-tax corporate earnings would be worth ($1 x (1-35%))/.067 = 9.7x pre-tax EPS. Today, the corporate federal tax rate is 21% (for now) and the 30-year is at 2.2% - so $1 of pre-tax corporate earnings would be worth 35.9x pre-tax EPS. Even if the corporate rate goes to 28% and the 30-year to 4% - its still 18x pre-tax earnings. Without any growth in underlying earning power, $1 of pre-tax earnings is worth double what it was in 2000. I have trouble with folks like Bloomstran who use historical benchmarks without making any necessary adjustments. wabuffo

I think this was the E-Trade commercial that epitomizes the excesses of that time. Aired in early 2000 during the Super Bowl - right before the bubble burst. wabuffo

For me, one big difference was that the Dotcom Bubble was really a two-tiered market. While there were obvious frothy and overvalued tech stocks, there were also many severely undervalued stocks trading alongside that market. And it wasn’t just BRK trading at book value per share, it was numerous opportunities in obviously undervalued stocks. There’s a reason why many famous value investors had a superb record in the 2000-2004 period. i don’t see a similar two-tiered market today. FWIW. I would also say the macro environment was different too. The US was experiencing deflation due to consecutive Federal budget surpluses from 1998-2001 that was acting like a blanket slowly compressing asset prices everywhere. Today, we have, uhhh, the opposite of that. wabuffo

it's a good reminder of how little I know, and how far outside my circle the macro world is. Me too.... still learning. wabuffo

Had a massive homerun in WR Grace - buying it below $1 in chapter 11, and riding it out until over $50+. This is all from memory - however, I know this topic was covered extensively here in the past That's correct - GRA was almost 50% of Peninsula Capital's (Weschler's fund) when he wound it up at the end of 2011. He probably was even more concentrated in it in his personal funds. GRA and USG both entered Chapter 11 in the early 2000s to settle their legacy asbestos liabilities. USG is more famous because Buffett invested in it before it entered bankruptcy. But W.R. Grace was probably an even better business. Both businesses hit their lows in Oct 2002. USG at $3 and change and GRA at sub-$1. USG exited in 2006 at over $100, did a rights offering, and purchased a business/expanded right into the teeth of the housing crash. The USG stock price collapsed after that. I owned USG back then (mainly because of Buffett) and if there is a way to break-even on an investment that went from $3 to $100 by buying and selling at all the wrong times - it me! The reason I remember GRA - is because much of the liability estimation for USG came from experts and benchmarks out of GRA's Chapter 11 case and I would review it in the PACER filings to try to estimate USG's final asbestos liability/capital structure. GRA exited and went to $50 - so a 50 bagger and a heavily-concentrated position for Weschler by the end of 2011. Of course, unlike USG, it kept right on going to $100 by 2015. I'm pretty much convinced that this one investment probably accounts for most of Weschler's outperformance. It did a 45%+ CAGR from 2002 to 2014-ish and he probably had over 50% of his IRA in it by the end due its monstrous CAGR. But he also made money on DVA, DTV and even Dillards coming out of the housing crash and I'm sure they were featured in his personal portfolio as well. wabuffo