LearningMachine

Thanks rb for your perspective. To understand deeper what you mean, what do you mean by "it"? Demand dynamics and inflation. What you've described in your posts: housing, autos, finance, investment is a huge part of the economy. You can't have weakness in a huge part of the economy and a raging economic orgy in another. Weakness in housing, autos, finance and investment equates to a really bad recession (think 2008) which is not an inflationary event. I think you might be mixing up mine and LongHaul's posts. Are you saying we cannot have a 1970s style inflation-triggered stagflation, where inflation leads to higher interest rates and in-turn lower stock prices?

Thanks rb for your perspective. To understand deeper what you mean, what do you mean by "it"?

You can have strong demand and inflation in things that are not financed, while higher interest rates can result in lower prices in things that are financed. Imagine telling buyers who were ok with paying half of their monthly income for a mortgage that they have to now pay a mortgage of more than their monthly income. Buyers would be willing to buy if the price of the asset is dropped enough for them to be able to keep the monthly payment affordable given their increased wages (6% higher than before). If the interest rate on a new mortgage goes up from 3% to 6%, how much do you think the asset price has to drop to keep the monthly payment only 6% higher than before?

I think it is in the realm of possibilities. M2 Money growth has been very high with crazy high government spending. https://fred.stlouisfed.org/series/M2SL I actually don't want to debate whether it's likely - just the effects. If inflation goes up significantly I think interest rates go way up and: 1. Housing demand decreases 2. Car demand declines (especially more expensive cars) as people can afford less. 3. More bankruptcies of highly levered companies. 4. Huge long term bond losses of whoever owns them. LongHaul, I agree with you. Stocks: High probability that stock investors will finally start doing their valuations using much higher interest rates. This will very likely cause drop in S&P 500 PE from 39.12 today and S&P 500 Shiller PE from 34.79 today. CRE: Investors with short-term loans will have to renew at higher interest rates, causing some to foreclose. CRE investors looking to acquire will have to acquire at higher interest rates. This will cause CRE cap rates to lift up by amounts not expected by a lot of CRE investors today. Pricing Power:Companies with pricing power and price-insensitive customers will raise prices. However, because it takes 12 years to double prices at 6% inflation, the effect on earnings, borrowing costs, discount rate for valuation, and stock price will vary even across companies with such power. Higher inflation: Unlike 1970s, this time, there is also a possibility that Fed may not want to raise Federal funds rate and might continue to try to buy treasuries to try to keep rates lower, causing more inflation. I understand some have the perspective that buying treasuries can't cause inflation because money is locked inside Federal reserve. I disagree with that perspective because even if banks in total have to keep extra money at Federal Reserve, banks can still use those reserves to enable transactions at higher prices. Yes, they cannot create new loans with that money, but they can still use money parked with Federal Reserve to enable transactions at higher prices.

Wondering if folks noticed how he thinks about businesses from customer perspective: "customer's experience" "non-essential customer product": Looks like he distinguishes businesses based on whether they are selling an essential or a non-essential customer product, and that is input into determining how much power does the business have, e.g. to raise prices "customer is the boss" "satisfied customers are a store's best salespeople": Looks like he might have been handicapping NPS maybe even long before NPS measurements were started Also, interesting how he described BNSF: "Your railroad carries about 15% of all non-local ton-miles (a ton of freight moved one mile) of goods that move in the United States, whether by rail, truck, pipeline, barge or aircraft. By a significant margin, BNSF’s loads top those of any other carrier...Railroading is an outdoor sport, featuring mile-long trains obliged to reliably operate in both extreme cold and heat" You could almost use his quoted words to describe his investment in Verizon in a future letter, e.g.: "Your wireless data carrier carries about x% of all local wireless data traffic in highly dense areas. By a significant margin, Verizon's loads top those of any other wireless carrier in dense areas. With highest ownership of high-band spectrum in dense areas, even though what Verizon provides has become an essential customer product similar to a utility, Verizon hasn't forgotten that customer experience and network reliability is what leads to satisfied customers that are a carrier's best salespeople."

VZ, MRK

Looks like your perspective is that it is proof that groupthinking is focused on inflation. On the other hand, my perspective is based on what groupthinking has been doing, i.e. trading treasuries around all-time low yields and trading stocks around all-time low earnings yields, not taking into account risk of inflation showing up. Two different perspectives. I'm not saying inflation will show up in what CPI measures for sure or will not show up for sure. I'm saying we need to pay attention to both probabilities with a cool head instead of getting fixated on one extreme.

Well said. As Mr. Buffett says, “Investing is not an issue of a high IQ. If you are in the investment business and have an IQ of 150, sell 30 points to someone else. Most wealthy people I know are exceptionally intelligent, but intelligence is not the key to their success. Rather it is their ability to approach investment decisions with a cool head and a steady hand.” Source:http://silverheights.com/downloads/the-world-of-money/The%20Five%20Traits%20of%20Highly%20Successful%20Investors%20-%20Globe%20and%20Mail%20(1-29-2013).pdf

Thank wabuffo, we are on the same page that the Fed is more than just a Recorder. I had added more functions beyond Recording with the analogy at https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/m2-money-supply-growing-at-28-4/msg445679/#msg445679. We are also on the same page that you and I can't have accounts at Fed Reserve (:-)) and only banks can have accounts at Fed Reserve. Is my understanding correct that your perspective is that we don't need to worry about inflation because "reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve"?

Wabuffo, my apologies for not providing full context here. I think we had this conversation happening in the thread here: https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/m2-money-supply-growing-at-28-4/msg445679/#msg445679. On that thread, you agreed it is a correct understanding of your perspective that the Federal Reserve is like a Recorder's office where money is locked up and all that can happen is money can move around but you can't take money out of the Federal Reserve. Would love to hear your thoughts on that thread to make sure I understand deeper your perspective.

Groupthinking has been thinking that the current inflation and interest rates at around the lowest level in decades will stay this low forever. That is still the real risk. It is amazing that folks will sometimes worry about events that have less than 5% probability, but they will ignore the possibility of something having much higher probability, i.e. higher inflation/rates because they feel so convicted that inflation/interest rates will stay this low. They will invent all kinds of complex arguments around money being locked up in the Federal Reserve, even though all Federal Reserve is doing is recording the transactions. This is similar to saying all real estate is locked up inside the County Recorder's office and no real estate can leave the county recorder's office. All you can do is move real estate around within the County Recorder's office, but that doesn't prevent it from being recorded at higher and higher valuations. It seems bifurcated to me. Every year since 2010, I've been told rates can't go any lower and the only rate is up and that Fed printing leads to inflation. None of that happens, but suggests the predominant bias is to rates being higher. But I've also been told 20-25x P/Es on indices is ok because rates are low and will remain so, thus elevated multiples make sense. Which seems to suggest the predominant narrative is that rates are low and will remain so. I imagine you could find many people who would agree with both concepts in separate conversations where it isn't immediately clear they're contradicting themselves. For me? Low rates =\= high multiples, but I do think low rates are here for a little while longer. I deserve the right to change my mind if the Treasury keeps at it though, because then that's a whole new ballgame. I agree we need to be prepared for both probabilities: Probability that inflation/interest rates rise to reflect the increase in minimum wage & total money deposited in people's accounts Probability that interest rates stay lower than inflation we are seeing around us for goods/services we consume today

Groupthinking has been thinking that the current inflation and interest rates at around the lowest level in decades will stay this low forever. That is still the real risk. It is amazing that folks will sometimes worry about events that have less than 5% probability, but they will ignore the possibility of something having much higher probability, i.e. higher inflation/rates because they feel so convicted that inflation/interest rates will stay this low. They will invent all kinds of complex arguments around money being locked up in the Federal Reserve, even though all Federal Reserve is doing is recording the transactions. This is similar to saying all real estate is locked up inside the County Recorder's office and no real estate can leave the county recorder's office. All you can do is move real estate around within the County Recorder's office, but that doesn't prevent it from being recorded at higher and higher valuations.

Sir I beg to differ. I bought a very average honda suv for $26k, including added after market self driving. If we go back in time to 1990, how much would such a car be worth? I mean it can almost drive itself on hwy. Based on the inflation calculator prices have doubled from 1990 to now. So can I buy a smiilar car for $13k then? I wouldn't think so, so there..... in terms of suvs the price real costs have gone down. In terms of computers, I can buy a minimalist non-laptop computer with a basic monitor for about $200. In 1990, that computer would cost 2-3k? Cell-phones? they didn't exist. Jeans, I remember I had to work hard to save $50 to pay a decent pair of jeans, now? $20! I was a kid and we weren't wealthy and I wanted a chess clock (the type you see on the Queen's Gambit on neflix), those cost $50-80, I had to deliver papers to save up to pay for it. Now? we got the digital chess clocks that are much better, and they are $35, so now I can get a better quality product for less than 1/2 price. Travelling by airlines was a luxury, now it is so common it is like taking a bus. I feel we all just too easily fall into groupthink and don't challenge the complaints and negativity in the media. Inflation index calculates the average living expenses and for the most part I feel it is an accurate reflection but the cost of really long term assets like land and money generating assets, have gone to absurd levels..... cough cough hmmmm tesla cough hmmmmm. How much money did you spend in 1990 on Apple iPhone, Mobile cellphone plan, Pharma medications (through insurance), college education, etc.? CPI is still measuring the things people used to consume decades ago, and is not measuring what is soaking up the money supply today. Inflation comes from people competing with each other to spend the extra money supply on the same limited items that have pricing power, and that is happening. Those who have pricing power are soaking up the extra money supply. It is just that CPI is not measuring some of those things people are competing with each other to spend the extra printed dollars on. In 1970s, it happened to be oil that was soaking up the extra money supply. Today, some companies have pricing power and soaking it up because they can.

Well said :-). Just look at what happened in 1970s despite the Fed obviously not desiring it. History repeats.

Borrowing words from 3rd Circuit Judge Stephanos Bibas, saying it so "does not make it so" :-). I am just a stickler for accuracy in my point of view because I truly don't make investments based on figuring out how I can pay a higher coupon. I feel it is very important to be accurate in our statements especially if we are putting words in other people's mouths.

If I look at page 109 of their annual report, I get about 55% of debt due within 10 years and a weighted maturity of 13.29 years. Please see https://s23.q4cdn.com/611156738/files/annual/716f1951-3453-912b-2656-5c75ca7f5fa0.PDF.

Castanza, I found the maturity schedule in their annual report, page 109: https://s23.q4cdn.com/611156738/files/annual/716f1951-3453-912b-2656-5c75ca7f5fa0.PDF. In today's environment of low interest rates, utilities should be able to have much longer term maturity at low interest rates to protect the shareholders.

This is not a fully accurate statement of my view. A more accurate statement would be that I would like to make sure I'm covered for the probability that inflation/interest-rates will sneak up on us by making sure debt maturities are much longer term. If the probability doesn't come through, it should still be a reasonable investment. If probability comes through, it should be a reasonable investment then also.

Beyond that, their debt maturity schedule is not protected against the inflation/high-interest rate scenario. They have also been printing shares. I haven't looked far back, but assuming company DNA has been consistent, these issues were probably there in the past too. I understand these two issues don't matter to a lot of folks but just wanted to share my perspective. Also, Seattle recently banned use of natural gas for new commercial and apartment buildings taller than three stories and replacement heating systems in older buildings: https://www.seattletimes.com/seattle-news/seattle-city-council-passes-measure-to-end-most-natural-gas-use-in-commercial-buildings-and-some-apartments/ I wouldn't be surprised if Oregon and Washington states or other NW cities follow with some type of restriction.

https://www.cbsnews.com/news/south-africa-covid-strain-resistance-antibodies-coronavirus-vaccine-latest-research/ Researcher at a biohazards lab in Johannesburg seems to be claiming that new strain is 10x more resistant to the vaccine and possibly "knockout" the immunity from vaccine totally.

The Rockefeller researchers got blood samples from 20 people who had received either the Moderna or Pfizer vaccine and tested their antibodies against various virus mutations in the lab. With some [mutations], the antibodies didn’t work as well against the virus — activity was one-to-threefold less, depending on the mutation, said the study leader, Rockefeller’s Dr. Michel Nussenzweig. Source:https://www.marketwatch.com/story/some-covid-19-variants-may-reduce-effectiveness-of-vaccines-01611184451?mod=home-page#

Thanks wabuffo for being gracious with your time in helping everyone reach a deeper understanding on this. To help understand deeper your perspective, I wanted to go further with the analogy of Fed Reserve as the Recorder's Office, which keeps a record of who owns each property. ... Your idea of a closed-loop system is a good one especially for the loop related to the central bank's expanding balance sheet. For the other loop (regular banks making loans and taking deposits), you have to think of it also as a closed loop (there is some hoarding and the international flows murk the issues) and you want to integrate a flow component (the velocity part). For the longest time, it was thought that money supply was strongly linked (or should be?) to underlying real economic activity and it seems this link has been breaking down (it is suggested by some that the elastic can be stretched much further, even to the MMT extent but that remains to be seen). This is a fascinating topic with many layers and many perspectives but i wonder about the real value of the discussions although the interest may have nominal value under certain circumstances. Thanks Cigarbutt, interest rate is the key reason why I'm interested in this topic. I am of the opinion that a sudden inflation/interest rate tsunami will hit us and it will catch those who are unprepared by surprise just like it did in 1974. If I can put a more accurate probability and time-range on that conviction, it will be very useful. I've an insight to share based on my post above to wabuffo, but would like to see first if wabuffo or someone else can get to the same revelation without me having to say it as that will result in better collective understanding.

Thanks wabuffo for being gracious with your time in helping everyone reach a deeper understanding on this. To help understand deeper your perspective, I wanted to go further with the analogy of Fed Reserve as the Recorder's Office, which keeps a record of who owns each property. Imagine there is an island nation in the Pacific Ocean. The currency of that nation is developed sqft. Anything can be bought and sold using those sqft. Any transfers of property containing developed sqft are recorded by the nation's Recorder's Office. We make sure not to get confused about assets and liabilities, i.e. who is the grantor and who is the grantee in a given recording. Treasuries in this nation are long term contracts for delivery of developed sqft in the future. Similar to our Federal Reserve, the Recorder's Office expands its role to also buy long term contracts for delivery of developed sqft in the future in return for developed sqft now. However, nothing can leave the Recorder's Office, i.e. all recordings of developed sqft happen in the Recorder's office. All developed sqft are locked into the Recorder's Office because you can only assign your developed sqft to someone else within the Recorder's Office. Am I understanding you correctly so far?

Thanks wabuffo, looks like you are saying that think of the Fed Reserve as the county Recorder's Office, which keeps a record of who owns each property. Any transfers of property that happen in the economy just translate into a recording of what moved, the grantor and grantee. Similarly, the Federal Reserve keeps a record of which bank owns the cash. Any money transfers that happen in the economy just translate into a recording at the Federal Reserve that it moved from Bank A's account to Bank B's account. Do I understand you correctly?

Thanks wabuffo for sharing your thoughts and the diagrams. Are you saying that each bank has two types of accounts with the Federal Reserve: (1) that they cannot withdraw from because it is funded by asset sales to the Fed, and (2) that they can withdraw because they funded it voluntarily with customers' cash? Here is an excerpt from a Bank of America earnings call, where they are saying that they have a choice on what to do with incoming cash from customer deposits to either (a) park incoming cash from customer deposits at 10 bps with the Fed Reserve or (b) buy securities. Are you saying that if they pick (a), they cannot take that cash out to start funding riskier loans later? Federal reserve interest rate of 10 bps to banks on required and excess reserves: https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm