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

GLDM seems to have lower expenses at 0.18% vs. GLD's 0.40%. Yes -but what about the underlying SG&A expenses of the companies in the miners index? I view the gold miners index as a bad compromise - its a mix of buying a basket of businesses and sort of getting exposure to gold. And the businesses are mining businesses of course - which I probably would never invest in on their own. I want near-pure exposure to the yellow metal (which is what I'm looking for). I'm sure there are great management teams among the gold miners - but again, if I want to invest in a business, I can do that myself across all kinds of industries at better returns. So I separate the two - gold vs investing in businesses. wabuffo

GLDM seems to have lower expenses at 0.18% vs. GLD's 0.40%. Yes -but what about the underlying SG&A expenses of the companies in the miners index. You are basically buying a bunch of mining companies who waste capex and pay themselves well. Its a business (and a bad one) vs near-pure exposure to the yellow metal (which is what I'm looking for). I'm sure there are great management teams among the gold miners - but again, if I want to invest in a business, I can do that myself across all kinds of industries. wabuffo

The move from zero is the biggest move. I was surprised the Fed did it. Actually - I will go further. I think this was a big mistake by the Fed. It didn't need to raise the IOER. This will create a big mess that the Fed will have to come back in and clean-up. It may not seem like much but it creates a huge swirl-whirl and will suck deposits out of the banking system unless the Fed corrects their mistake. The cycle will go like this: 1) MMFs will dump short-term T-bills which yield a few bps to get 5bp in a swap with the safest counterparty in the world (Fed). 2) The T-bills will be bought by corporate treasurers whose alternative was uninsured deposits at a big bank earning zero or MMFs earning zero. Now they can get a few bips from holding s-t T-Bills. 3) the losers - banks who will lose a trillion or more in deposits. It already started yesterday with the huge jump in O/N RRP. This will turn into a crisis created by the Fed who will have to come back in and lower their IOER to zero or maybe 1 bip. Yet another unforced error by the dum-dums at the Fed who can't just sit quietly in their offices and do as little as possible. wabuffo

curious what makes you more comfortable about gold etfs over other ideas for inflation protection? Speaking of gold ETFs, have you considered GLDM? GLD maintains a peg - it acts like a central bank that issues/redeems Trust units and buys/sells gold to maintain its peg of 10-to-1 to the price of gold (ex the Trust's expenses). Miners never interested me because I would be getting much further away from the actual peg that I'm trying to achieve. I was buying more GLD LEAP calls yesterday. If 5bps valve turn could have such a big impact, could Fed turn these valves in the future also, making it hard to predict TLT/GLD/GLDM prices AND their timing? The move from zero is the biggest move. I was surprised the Fed did it. They must've been getting a lot of calls from the money market funds (MMFs). MMFs that have O/N RRP accounts at the Fed are the main users of reverse repo and were probably threatening to impose fees on their holders (by convention, they can't "break the buck" and the last time they did they nearly brought down financial system.) This is getting very interesting now. The IRS tax deadline (June 15th) plus some very large issuance by the Treasury has unexpectedly increased the TGA balance this week. That means there will be a pretty large compression in a shorter period of time over the next 3-6 weeks. Even JPow made reference to the TGA in his press conference: wabuffo

Bond market is even LESS convinced of inflation after the Fed meeting acknowledging it and suggesting they'll accelerate rate hikes from prior projections. You are ascribing motivation when all that's happening is due to the plumbing. The Fed turned on a valve ever so slightly (5bp) and of course the fluid dynamics took over. Reverse repo jumped over $230b a few minutes ago (to a record $755.8b). All while the US Treasury is reducing its net issuance of securities temporarily. The Fed should've stood pat on IOER. wabuffo

David Rosenberg has a very different take on inflation & interest rates. He thinks rates will continue to go down & the current inflation is temporary. https://www.zerohedge.com/markets/economist-david-rosenberg-says-bond-market-has-inflation-right I think Rosenberg is one of the many macroeconomists getting faked out by the bond market right now. His will be one of the exploding macroeconomists' heads come the fall. Of course, I have no idea whether inflation is transitory or not (I'm not sure) - but I believe his rate prediction will be proven wrong (at least after August 1st-ish). wabuffo

Y'all shouldn't try to speculate on this stuff. That is all. wabuffo

Hypothetically? I went long GLD Leap Calls @$150 in mid-April. I'd wait until the Treasury general acct at the Fed gets down to $100b-$200b (or end of July) - whichever comes first and look to short something like TLT (so maybe TLT puts - medium duration of some sort). Others have suggested shorting high-yield ETFs (not my expertise) since they would see a double-whammy of both rising Treasury rates and rising HY credit spreads. If I'm feeling adventuresome - I'd short the junkiest of tech ETFs since their share prices should fall with rising discount rates (since any cash earnings, if there are any, would be way out in the future) when the TLT puts go on. Maybe even short the Russell via puts. But none of this is anything I might actually do since I'm a big chicken when it comes to both options and shorting. I am comfortable with GLD and GLD calls since I think I understand that one well enough. DO NOT DO ANYTHING THAT I AM DESCRIBING HERE - YOU WOULD BE A DEGENERATE GAMBLER IF YOU DID and BEN GRAHAM WOULD REVOKE ANY VALUE INVESTOR CREDENTIALS YOU MIGHT HAVE ... (I PROBABLY MAY NOT DO ANYTHING I'M DESCRIBING HERE - x GLD) wabuffo

Hmmm - I wonder whatever could be causing this..... https://www.wsj.com/articles/banks-to-companies-no-more-deposits-please-11623238200

Could it have been because it might have been harder to provide in increased quantities something that was "bottlenecked" or "limited in supply" to people with increased money supply, which had been happening already with increased wages? The world had negotiated terms of trade between debtors/creditors and purchasers/suppliers based on a certain peg of gold to the USD with all other world currencies pegging to the dollar. The peg snapped and turmoil followed. Over the following decade, the whole world had to renegotiate its terms of trade between debtors vs creditors and purchasers vs suppliers. This "renegotiation" re-set prices in the typical business income statement based on how long the contracts were - first commodities, then purchased items with lead times, then labor contracts, then long-term debt, etc.. Of course, government made things worse by wading into the mess it had made with monetary policy trying to "fix" things. If you were in the Middle East - you were used to 1 oz of gold buying 12 barrels of petroleum without fail for the last thirty years. Now your old price quoted in dollars was requiring you to supply you 24 barrels of petroleum for that same 1 oz of gold. So the Middle East re-set the price for petroleum back to 1oz = 12 barrels. But that doubled the price of oil in USD. Of course, governments reacted to rising prices with price controls. Price controls always lead to shortages because the market can't clear and thus you could only buy gas on alternate days in the 1970s depending on the license plate number on your car (odd/even days). It had nothing to do with supply or demand. It had to do with pegging, sudden devaluation and the follow-on price controls. My point is that currency debasement goes on all the time. But with a peg its a bit like pressure building from colliding tectonic plates that stops the currency debasement temporarily. Then a devaluation happens and its like an earthquake as the pressure is released suddenly and explosively. That's what the 1970s were after the 1971 devaluation. Today there is no peg and so we debase little by little everyday and no one feels the shifting ground underneath them anymore. But we look at the Pacific Ocean one day, and there's Vancouver Island sitting on the horizon as one looks out from the Port of Los Angeles (stretching my tectonic plate metaphor too far). This gets me to my favorite home-made chart. This is a long-run run chart of the gold price in USD. It just continues to amaze me that folks don't appreciate Alan Greenspan more when you put his tenure in the middle of that chart. wabuffo

Similar to how before the 1973-1974 oil "bottlenecks", money supply had already started going up in terms of wage increases in the hands of people The inflation of the 1970s was entirely due to the "surprise" devaluation of the US dollar on August 15, 1971. wabuffo

We're hitting a critical point where the Fed keeps buying in the open market while, simultaneously, the US Treasury is emptying its TGA account. The rate of new deposits/reserve creation is outpacing the issuance of new Treasury securities to soak up these reserves. The US Treasury is not really doing its job 1 - which is to issue treasury securities as a reserve withdrawal function because it must go to the sidelines for the next couple of months. Money-market fund flows are increasing and having to crowd into O/N RPP at ever increasing amounts but not getting any yield. They also can't break the buck. So their next move will be gating. That will force corporate treasurers to have to pay to either deposit funds into MMFs or buy T-bills outright. Meanwhile the Fed has exhausted its supply of short-term T-bills (15-90 days) being lent into the O/N RRP market, it looks like to me. I'm not sure how it works but lending longer-duration Tsy securities introduces a small amount of mark-to-market risk if there is a sudden move in rates. The Fed is doing over $480b in reverse repo (i.e., lending short-term T-bills) but only has $379b of 90-day or less Treasury securities to lend. O/N RRP should continue to increase due to the factors mentioned above - so the Fed may have to come into the open-market and put more of its buying at the short-end further exacerbating the shortage. By the end of June, early July, the US will start to see negative T-bill rates. That is something the Fed has said it does not want to see happen but I don't think they will be able to stop it. This will be temporary through the summer because after the TGA hits target, the US Treasury will resume its normal Treasury security issuance. That will be a relief valve that should pump the yield curve back up. It will be interesting to see what kind of reaction negative short-term rates get from the Fed and the equity markets. wabuffo

LM - I can't really answer your tax question - especially when it's a speculation on what tax policy may or may not be. But I did want to pivot to an earlier upthread critique of my "method". That criticism was that you can't time the move to trashy $hitcos because one doesn't know the timing of the "all-clear" signal. In my commentary, I kept referring over-and-over to a deflationary scenario but never really explained exactly what I meant. So I'm going to add this dimension to this commentary now. Over the last twenty years or so - there have been three major "deflationary" events. The definition of these involves a shortage of the govt's money (ie, Treasuries). There have been three: 1999-2002, 2008-2009, 2020 (March). Each of these may have had different causes - but they were all defined by the market rushing to the US dollar and US dollar assets like Treasuries and that demand exceeding supply. In my opinion the single-best real-time indicator of a deflationary liquidity squeeze is the real-time price of gold. When there's a crisis, I watch the price of gold closely. If even gold is falling relative to the US dollar and US dollar assets - a deflationary squeeze is on. Now that is different from a speculative run-up in gold that then breaks (like 2012 - or even late 2020, early 2021) when there is clearly no underlying liquidity issues from the US Treasury's fiscal response and thus gold is just falling from a speculative run-up. So you need both conditions: a) an underlying lack of USDs due to inadequate fiscal liquidity, and b) gold reacting to that. Ok - so here's the three charts for each of these events. I've circled in red the deflationary squeeze and in green the relief from the deflationary squeeze (when the price of gold goes back to its pre-squeeze price. The other thing that's interesting is the increasing speed of the US fiscal response. In 1999-2002, the US Federal govt ran a surplus and the economy ground down for three years until the drop of tax revenues flipped the US Federal govt's surplus back into a more "normal" deficit. In 2008, the govt reacted faster but still much slower than the blinding speed of the March 2020 response. Anyhoo - the green circle represents the "all-clear" signal to run into microcap $hitcos. 1999-2002: 2008-2009: 2020 (March): There you go - fundamental analysis you'll see nowhere else. I feel like I have finally fully answered ukvalue investment's original question from the depths of last year's pandemic market meltdown. You are now armed with knowledge and ready for the next banking panic/deflationary crisis, LOL. wabuffo

I would like to discuss how the most money was made from the depths of the last crisis. The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is -- buy the trashiest micro-caps you can and buy a bunch. Their share prices go up the highest. I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names). Here's some data. 2003: S&P 500 Tot. Return: +28.7% 4500 Equal-Weight: +97.5% 2009: S&P 500 Tot. Return: +26.5% 4500 Equal-Weight: +88.0% --------------------------------------------------------- We can now update this thru the end of May 2021 (from the end of March 2020 - around the time this question was posed): 2020: S&P 500 Tot. Return: + 65.8% 4500 Equal-Weight: +150.01% The S&P had a great comeback - but once again, the trashiest micro-caps outperformed by two-and-a-quarter times the S&P 500 total return index.

saw this in the F-T today: https://www.ft.com/content/9b32906b-210e-4402-9e3c-0e70f96728f0?segmentid=acee4131-99c2-09d3-a635-873e61754ec6 wabuffo

So are you saying you still think there will be a rough patch from here until year end? I think that there will be a big headfake on Treasury yields (first lower, then snapback higher). Whether that affects equities, I'm not sure... it all depends on whether the economy is growing quickly well into year end, I guess. If growth slows and Mr. Market becomes more convinced that big tax increases are coming, then yeah - I think a rough patch might be coming. If taxes are pushed off due to a stalemate in Congress and the economy continues to rip, maybe not. I am often wrong though... wabuffo

Over a third of the April CPI print was due to used car price inflation. That feels.....uhhh....transitory. The rest is due to y-o-y comparisons to the bombed-out energy sector (which had a negative price per bbl, last year IIRC -- LOL). Of course - more CPI freak-out may be coming as used car prices continued to ramp in May. (hmm - maybe time to add a bit of NICK to the portfolio?) wabuffo

Are you sure $120b by July is correct? I see you cited a Bloomberg article early in this thread that quotes that number, but others are saying the target may be higher and the deadline later, e.g. $500b, $750b. There is no doubt that the US Treasury is operating under a temporary suspension of the Debt Limit. Its noted at the bottom of every Daily report. The legislation was passed by Congress and includes a provision that mandates that the US Treasury's account balance at the Fed must remain at the same level as it was just prior to the suspension. This is to prevent exactly the US Treasury "running up its balance" while the suspension of the Debt Ceiling is in effect. Here's the balance as of the August 1, 2019 Treasury Daily Statement: I'm not sure if its the August 1st balance ($117b) or the July 31st balance ($176b) that holds here - but its still a big drop from the current level. Where you are probably hearing about other balances is from the US Treasury's quarterly refunding forecast documents. Here's the latest one: https://home.treasury.gov/news/press-releases/jy0158 But these quarterly forecasts have been very unreliable in the past and its clear they don't mean much. And, in any case, there's a footnote/qualifier attached to the estimate. That's unlikely to happen. It requires agreement from both the House and the Senate to do this. Could it happen? Perhaps. That's why I qualify my forecast. But I think its a low probability between now and the end of July. Still - not an expert on this stuff so I could be wrong. wabuffo