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

Can you expand on this? "Common sense" would seem to say that higher taxes would decrease inflation since it reduces the money supply. I'm out of my element here so your insight is much appreciated (as always). There is a difference between tax RATES and tax REVENUES. Economists (and the Fed) always seem to assume that a higher tax rate will lead mechanically to higher tax revenues - thereby reducing the deficit and vice versa. It just ain't so. Here's a chart of US Federal Receipts as a % of GDP (since we measure deficits on the same basis as a % of GDP). In the 1950s and early 60's the top US tax rate was 91% (!!) During the late 80's the top rate was down to 28%. Other than recessions which always reduce tax revenues, Federal tax revenues always seem to bob around 16-17% of US GDP - whether rates are high (90%) or low (20%). However, I believe that the high rates of the 1950s-1960s created inflation. It was masked at first by the US peg to gold but inflation exploded out into the open after the peg was severed in August 1971. The great inflation of the 1970s was tamed, not by Volcker (I am in a minority in this as I believe Volcker was ineffective as a Fed Chairman as well as I’m a big skeptic on how much power the Fed actually exerts on inflation) but by the huge tax cuts of the Reagan administration. The top rate was 70% when Reagan began his Presidency in 1980 and was down to 28% when he left in 1988. After Clinton cut the capital gains tax rate too in 1997 to 20% (and significantly relaxed the tax on gains from selling one's house) - these additional tax cuts actually led to deflation as the budget deficit slipped into surplus from 1998-2001. This one-two of 1) increasing the after-tax equity value of the nation's housing stock - plus 2) causing deflation -- sowed some of the seeds for the housing crisis to come. But that's another story..... wabuffo

Could you explain why you think higher taxes are inflationary? Pretty simple. Inflation is driven by both the supply and DEMAND for fiat. High tax rates reduce demand. wabuffo

https://seekingalpha.com/news/3709624-hershey-gains-on-berkshire-hathaway-takeover-speculation Hershey corporate jet spotted in Omaha. Leads to speculation about the Old Fool buying HSY. Of course, the Hershey Trust would have to approve - but perhaps they would like to do a swap for BRK stock... Also in the news.... https://apnews.com/article/ne-state-wire-health-coronavirus-pandemic-business-144420903ce861113de38af2edc87b71 Buffett and Munger sit-down interview on CNBC next Tues. 7pm on CNBC. wabuffo

New 13-D by Buffett. https://sec.gov/Archives/edgar/data/315090/000119312521197258/d174483dsc13da.htm He owns 238,624 A-Shares and 2,412 B-Shares = 15.8% economic interest at of June 21st. That's a reduction since Q1 of 23.05m B-equivalent shares. At an average price of $285 per B-share, that's $6.6b in buybacks in Q2 so far. If yes, that's huge buying even at prices people might've thought would mean he would stop/slow down the share repurchases. wabuffo

Cash: In high-inflation scenario, cash does well also, and that too with high certainty to give opportunity to buy indexes. In low inflation scenario, loss is bound with high certainty. Actually - what you want in a high-inflation is negative cash (ie, fixed-rate long-term debt - preferably taken out at low rates before the high inflation starts). In real-terms, part of your principal gets paid down by inflation. Of course, none of this is a prediction that high inflation is probable or even possible as a scenario. My comment is just a what-if observation. wabuffo

Also, on average, the price for crude will be determined by marginal cost of production of crude needed. Since inflation is a monetary issue - that is, dealing with the supply/demand curve of fiat money, I think what one is looking for in an inflation hedge is stability. In other words, something that is more stable in its supply/demand curve than money. Something that can act like a ruler or measuring stick vs fiat. So the best "thing" that defines this measuring stick is not, IMHO, marginal cost of production. Its is a very low production/inventory ratio. Oil doesn't have this characteristic - annual production is many factors bigger than above ground inventory which makes oil much more volatile than fiat currency. Sure the outlook for the price for oil may look promising (in terms of higher future prices) - but I think that has more to do with oil's demand and supply curve than anything monetary in nature. A price increase does not necessarily mean inflation. It could just be a price increase. Think of it this way. Every commodity price signal is basically telling you about two demand/supply curves - first about the supply/demand of the commodity and second about the supply/demand of money. Thus, the price of oil = (demand for oil/supply for oil) x (supply of $/demand for $). If demand for oil is going up just as the supply is going down - the oil price will go up. But if the supply of $ is going down while the demand for dollars is going up - that will drive all things down in price. So things like oil with very high production/low inventory at any given time will tend to fluctuate a lot based on the first factor and less about the second. Oil may indeed be going up - but its probably not due to inflation. Now gold is different. It is incredibly stable. Marginal cost of production for gold isn't a factor here. The main factor is that annual production vs above ground inventory of gold is around 1.5% or so. That makes the supply/demand curve for gold almost perfectly stable. If all global mine production was shutdown for a year - it wouldn't matter much to the price of gold. But if global oil production were shut down for a year - it would matter a whole lot to the price of oil. So back to the two factors that determine the price of a thing. In gold's case - very little about its price is determined by its supply demand curve (first factor) and thus in reality gold's price is mostly about the real-time supply/demand curve of $. This makes gold a sort of measuring stick. This is what bitcoin is trying to do - ape gold by growing the number of bitcoins at 2% a year until a max number is reached. So why gold now? In my view its all about the outlook for future US Treasury spending as a % of GDP as well as the possibility of both higher interest rates and taxes (both inflationary - the Fed is irrelevant, IMHO). In my view, its insurance in case we've crossed the Rubicon. Like all forms of insurance, its a cost that one pays hoping one never actually has to use the "product". wabuffo

Both GLD and GLDM are backed by physical gold itself. Oh sorry about that. There are quite a few gold bullion ETFs. PHYS, IAU, SGOL, BAR, GLDM, OUNZ, AAAU. Never looked at any others except for GLD - perhaps I should look at all of them to see if they might be a better fit for what I'm trying to do. It would also be helpful if they have listed LEAP Call options. Thanks, wabuffo