Monetary Base

It’s time to start being concerned about an economic term called the monetary base. The size of the monetary base is controlled by a nation’s central bank. it consists of circulated currency and bank deposits — the most liquid form of currency. The Federal Reserve controls the monetary base through open market activities like buying and selling government bonds and by monetary policy.

The Federal Reserve raised interest rates for the ninth consecutive time in mid-December while also maintaining their policy of selling about $50 billion in securities per month. Here is a look at the four-week rate of change in Fed Reserves:


The Federal Reserve began decreasing the size of their balance sheet in December 2017 and slowly ramping up the decrease. By selling bonds, they are taking in currency which reduces the size of the monetary base.

Combine that with the increase in the Fed Funds target rate and the result is a double hit to the size of the monetary base. How much? The next graph shows the annual percent change in the monetary base:


The monetary base has been shrinking for most of 2018 and has been shrinking by more than 10% for a few weeks.

To consider the impact of this change, look at the opposite side of the graph in 2011 and 2013 when the monetary base was growing above 30% at an annual rate. Those were two very good years for the stock market and for real estate. Now, with the monetary base shrinking, it is logical to assume those two markets that had the most appreciation will now have the most depreciation.

My investment focus this year was already on the short-end of the bond market because of the flatness of the yield curve. Now it seems like avoiding equities and real estate are also a good move. I don’t think this should be a hard rule, but in this occasion, I expect some reflex in the markets.

Remember, I am not a financial advisor and I am writing this for my own thinking. Your mileage may vary. Be aware of what you do and understand why.


December 2018 52-Week Treasury Auction Results

This morning, the Department of the Treasury issued the auction results for the 52-week securities. Before I get to the results I want to show how we got here. The following graph shows the rate on the constant 52-week maturity since the results of the previous auction:


The left graph shows the rate on the 52-week constant maturity for the past fifteen years while the graph on the right shows the rate on the 52-week constant maturity since December 7th. The range in the left graph is almost zero percent to just above five percent. That makes the current value of 2.59% just about the mid-range. You can see the rate on the constant maturity has decreased by eleven basis points since December 7th. That’s not much of a change.

The auction resulted in a median rate of 2.51%. This next graph shows the median rate for each of the 52-week auctions since 2015.

1-Yr Median Rate.png

The result of the December 2018 auction is not at the peak, but it is close. The price of the bill is 97.426722. The discount will result in a yield to maturity of 2.631%.

The next item to look at is the bid-to-cover ratio:

1-Yr Bid to Cover

A bid-to-cover of 3.13 is low in the list of results over the last four years. I think the average in this period is about 3.4. There are some analysts who will talk about low demand during auctions. I think there is some value to that, but it has been decreasing in significance over the years. If I were to write about it, I would use a multi-decade comparison to see where the current auction result truly lies.

The next auction of securities maturing in 52 weeks is Thursday, January 24th. I’ll make plans to write about the auction announcement and the announcement of the results.

December 2018 52-Week T-Bill Auction Announcement

The 52-Week Treasury Bill auction was announced yesterday. The closing date is January 3rd and the interest rate will be announced then. For now, the size of $26 billion is in line with recent auctions. I have updated the graph of the recent auctions sizes:

Offering Amount

During 2015, the 52-week auctions were $25 billion and then there was a very large decrease in size. I seem to remember an announcement the Treasury was moving out the yield curve in order to capture low long-term interest rates. That worked for 2016 and 2017. With the increases during 2018, we are now at $26 billion.

For my portfolio, this will be the first month that I have invested part of the emergency cash into an illiquid security. I am still into grabbing yield where I can in a security where my principal is safe. I should not need access to the entirety of the emergency cash at any point and instead should need it on a recurring basis. This is a modest investment in the auction as my emergency cash fund is far below the target range of three to six months of expenses.

The auction closes on December 31st. I expect the results to be announced on January 2nd or 3rd.

Savings Plan for 2019

I have eleven days to think about and plan what I am going to do about my 2019 savings. I put some time into this because I really don’t like to change in the middle of the year. The purpose is to set a target, a plan to reach it, and a path to follow.

There are two objectives to obtain — determine the amount of savings required for the retirement plan and determine the mix of accounts to receive that savings amount.

The first goal is constructed with a spreadsheet and a long planning horizon. The amount  required within that spreadsheet does not take into account where I am along the path towards the level of retirement savings I think I need. Right now, I am a few years behind on the path. In general, I want to save enough so that it hurts. By that, I mean I want it to be difficult to consider buying a luxury item. I have plenty of food, clothing, and shelter and those are budgeted for in the cash account. I would rather save a little more than accumulate more stuff.

It seems like I can easily get to 120% just from my 401(k) plan at work plus the maximum amount I can save in my IRA. My goal is to get to 150%. At this point, I pivot to the account allocation. With the 401(k) and IRA, almost all of money is allocated towards equity investments. The remaining amount needs to be targeted towards other types of investments.

Because so much is put into the 401(k) and IRA, I am over-invested in equities. There are three other security types I want to look towards — fixed income, real estate, and cash. Fixed income is divided between an account at Lending Club and an account at Treasury Direct. Both are significantly under-funded so I will allocate 15% there. Real Estate is handled through Fundrise. It is also significantly under-funded and I will allocate 15% there. Cash is only slightly under-funded and I will hold the position for now.

The next step is to determine the path to achieve this plan. To begin, I convert the percentages into dollars and divide by the number of paychecks per year. I then create a budget for each paycheck and determine if I can afford those amounts based on historical spending patterns. In the past, I have almost always confirmed it was possible. Yet at the end of the year, it always seemed like such a struggle. After several years of experience, it seems to me that I never use the emergency fund for the purpose of smoothing out the expenses. The emergency fund has a range that I want to achieve. It is currently well above the minimum level. I continue to add to the account with each paycheck, yet I never pull back if there is an unexpected expense. Instead, I just charge the expense and work out a payment plan.

Pulling from the emergency fund for ordinary expenses is a bad idea, but forgoing the emergency fund to use the credit card is worse. I suppose this could be abused, so I will need to be vigilant and watch the expenses and the cycle of usage.

This is day one of the annual planning cycle. This is how I start. I expect at least two revisions over the next few days.

December 2018 Statistics

I mentioned in my previous post that I liked where the one-year Treasury rate is. Here is a graph of how we got here.

Median Rate

This is the median rate from each auction for the past two years. I had been complaining about the low rates for so long that I forgot to keep track of the impact of changes in the Federal Reserve policy. With today’s increase, there might be a little more boost in rates by next week when the next auction takes place.

There is another statistic that got a little notice early in fall but nothing now.

Offering Amount

The size of each auction has more than doubled in three years. This is an amazing increase. I’ll pass on talking about the Bid to Cover ratio. Suffice it to say for now, there is plenty of demand.

When the size of the auction is combined with the rate of interest, the amount of money being spent on quarterly interest payments must be increasing substantially. And this is only the 52-week auction. It is certainly possible this is happening across auctions for all maturities.

Investing Cash

I’ve been looking at my emergency cash balance and it has been slowly growing. It is sitting in a savings account which has not seen a meaningful increase in the interest rate for several years. I decided to start looking at certificates of deposit (CD) rates at one of my local credit unions.

Rates have increased quite a bit since I stopped buying CDs about two years ago. I created a plan where I open twelve, twelve-month CDs over a one-year period. This will allow access to some of the cash and a recurring amount each month in case of emergency.

Last night, I was reading an investment newsletter that had the subject of the yield curve and the likely Federal Reserve rate increase on December 19th. The 52-week Treasury bill is high relative to the rest of the yield curve. I looked up recent auction results and the current yield. Rates on these Treasury bills are quite a bit higher than the CDs I had been targeting.

My local credit union has a minimum investment of $500 while the Treasury has a minimum investment of $100. Both institutions have an increment level of $100. The Treasury investment looks to be better.

The credit union allows the creation of a CD on any day. The Treasury sells bills, notes, and bonds only during open auctions. Fortunately, it appears there are thirteen auctions of the 52-week bills each calendar year. This is based on the historical auction schedule and may not hold going forward. The Treasury has published a tentative upcoming schedule and there is an auction in December, January, February, and March. It looks like the Treasury option is still fitting with my plan.

With only a limited auction schedule, I’ll have to create calendar events and be vigilant in participating. I could open a CD if I miss an auction, but there is an opportunity cost to that investment versus the Treasury option. There is another problem where I do not know the interest rate before the auction ends. That means I could get an interest rate substantially below the current market rate.

That seems to be an acceptable risk and thus, I have created a new plan for the investable, emergency cash I have saved. This plan is subject to change as interest rates change. I am expecting the trend to be higher rates as the Federal Reserve continues the normalization of rates. I have complained in this space about the length of the low interest rate environment. Now it is time to start participating again.

Daily Workflow

I have created multiple Jupyter Notebooks and keeping track of the order creates an efficient workflow experience. There are two parts to every day due to availability of the previous day’s results.

The first part collects future days. The first step is to go to FantasyPros and collect the next three days starters who are owned in less than 20% of leagues.

The second part just uses the streaming pitchers from two days ahead and collects data in five separate areas.

First is information around ERA. Each previous start has an ERA calculation and, in aggregate, VPR and Volatility are calculated. A scorecard color is assigned based on a minimum number of innings pitched per start as well as the ratio of excellent starts to poor starts.

Second is information around WHIP. This will be slightly similar to ERA. Each previous start has a WHIP calculation and, in aggregate, VPR and Volatility are calculated. A scorecard color is assigned based on the ratio of excellent starts to poor starts. A minimum number of innings is not used since it has already been added in the ERA category.

Third is the calculation of luck. There are three measures that determine a pitcher’s luck and all three are available from Fangraphs. I don’t have scorecard colors for this measure because there is doubt on the resiliency of luck.

Fourth is information regarding the opponent’s ERA. This is complex to calculate since I need to calculate what the team did against each opposing starting pitcher. To do that I have to collect the result of every starting pitcher and who they faced. Then reverse the collection. A scorecard color is assigned based on the relative standing versus the other teams.

Fifth is information regarding the opponent’s WHIP. Using the data collected already, this calculation follows the same pattern. A scorecard color is assigned based on the relative standing versus the other teams.

The final output is an HTML file that has a little bit of CSS and a little bit of JavaScript. There is a large amount of data being displayed. To avoid a wall of text, the JavaScript only shows one of the five tables at a time. This is much easier to see and digest.

Later in the day, Baseball-Reference is updated with the previous day’s results. There is a six-step process I follow.

Step One collects the results from the previous day’s streamers.

Step Two runs a comparison between the selected streamer and all streamers. Eventually I look like to construct a grade based on the daily rank.

Step Three looks at the next three days of streamers and flags those who are missing their Baseball-Reference code or their Fangraphs code.

Step Four collects the team schedule from Fangraphs. I use this page because it includes the starting pitchers.

Step Five captures the results from all starting pitchers.

Step Six captures the results from all teams. This is a new step that I recently added because I want to analyze a team’s offense through the entire game. It seems that wOBA is the preferred measure and I am developing a view over a few time periods.

Yu can see there are quite a few steps and some are dependent on their predecessors. Having a published order makes everything work together smoothly and I can complete all of this in under fifteen minutes.