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URL:  https://boards.fool.com/okay-since-someone-partly-figured-out-the-33000509.aspx

Subject:  Re: MyCo Date:  3/1/2018  12:02 PM
Author:  howardroark Number:  26044 of 26242

Okay, since someone partly figured out the metaphor (nicely done), this seems like a good time to explain what the hell I'm trying to do here. The point of this was not a guessing game charade, but to try to lay out a framework for thinking that I've actually found useful. I thought a few other people might, too. I appreciate you guys playing along. So here is what I'm trying to say with this parable.

If MyCo had a title it would be "Monetary Macro for Investors." The MyCo board is not the central bank (that's the Flair CEO), it's the government. MyCo common A shares are base money: currency and reserves (and U shares are actual voting rights). There are more parallels to draw, but let me stick with the bigger picture for a bit. This is not an attempt to take any particular viewpoint about what matters most in monetary macro or why money has value or even what determines the price level. Instead, it's just a way to think about those things and a lot more on turf that's familiar to investors.

And let me state the obvious that I am far from the first person to suggest thinking of money as stock. As one example, you can read John Cochrane's paper conveniently titled "Money as Stock."

https://faculty.chicagobooth.edu/john.cochrane/research/pape...

But Cochrane, and everyone I've seen trying to use this idea, really only applies this metaphor to focus on a particular, somewhat narrow angle about money and the price level. As a result, it isn't developed into a very useful go-to monetary template, more like a very specialized tool. But I think it has as ton of potential as a kind of grand metaphor. I use it so commonly now that when I read almost anything about monetary policy my brain automatically does the MyCo translation (weird, yeah). Here is a very abbreviated list of pitfalls I've seen myself and others (especially, but hardly exclusively, investors who are not monetary macro experts) fall into when thinking about this stuff that I think this metaphor can help avoid.

-It's just hard in general to think about the nature of money and prices, and even harder to integrate the never ending parade of twists like QE and IOR and how fiscal policy affects inflation into a coherent whole, so it's useful to have a centralized metaphor where they can all play together in a familiar environment (for investors). It's fairly easy to map almost any monetary twist onto this model with very high fidelity and try to think through the ramifications. For example, you don't need a separate model to think about Fiscal Theory of the Price Level here. We can easily a imagine a situation where markets start to believe that MyCo cannot or will not pay off its enterprise value, i.e. it has breached the ceiling of its maximum future profits, and dilution will follow. In that case, the Flair CEO loses almost all her power (because there is not nearly enough Flair value she can create to make up for it) and the stock price crashes. Zimbabwe. But in the same model, we can imagine how the Flair CEO is more commonly proximately responsible for the price level, as long as the overall entity has plenty of room between the EV and maximum future profits and the MYCO CEO is focused on other things than micromanaging the stock price.

-It's understandably common to think about money primarily through the lens of interest rates, but it's usually a bad idea that leads to all kinds of unintentional inconsistency. You can use this model to think about interest rates, but at first pass it is not a rate-centric approach.

-There's a temptation to act as if the mechanical things happening in the monetary world, like any given Federal Reserve rate action, can be analyzed separately from the more ethereal background, which is the never-ending coordination equilibrium between what people and markets expect and what the Fed/Government might contingently do as the world changes. But ethereal or not, those things are always and everywhere intertwined. I think using this metaphor helps keep the hydraulics attached to their environment. It's obvious that MyCo has a ton of power as to the value of its A Shares in many (but not all) circumstances, and so it matters a lot not just what it's doing with open market operations and IOR and revenues/expenses right now, but why it's doing what it's going and what people think it might do in various possible futures.

-It hammers home the importance of interaction between what the Government is targeting and where the price level happens to be right now. In this example the current stock price was very important. The reason it was important, in part, is because the Significant Amount target requiring LSD declines every year was implicitly based off wherever current stock price happened to sit, much like a standard inflation target. We can imagine other types of targets that change this equation. For example, maybe the bylaws instead had a level target, mandating a multi-decade CAGR of -2% rather than -2% in any given year, such that the Company had to make up for its misses. Then the recent stock price wouldn't be nearly as important. You'd want the starting (or ending) point. This can be really important in thinking about monetary policy and how weird it is that the so called nominal anchor might just be a random point in nominal history.

So anyway here are some of the mappings in the story for the small percentage of you who actually like this idea and want to think through it the same way I do.

MyCo A shares: Base Money, currency and Central Bank reserves

The price of A shares: This is the Price Level and in real life it is not actually observable as a single price

Flair: This is the convenience yield of base money. People willingly hold currency that pays zero interest even though very short term treasuries or bank deposits are available that pay (typically) higher interest. So they are getting some other benefit, call it convenience for short.

Flair CEO: Central Bank.

Board/MYCO CEO: The federal government elected/appointed.

MyCo PIK Converts: US Treasuries, which are only payable in money (A shares).

Flair CEO buybacks/repurchases: Conventional Fed open market operations. Recently, the Fed has been conducting policy by paying interest on reserves instead of trying to increase the value of money's convenience yield (Flair) by reducing supply. IOR requires a very different method by the Flair CEO and would look like paying a stock dividend on MyCO A shares.

MyCO P&L: This is the federal budget.

Significant Amount: The overall government's inflation target, whether explicit or implicit.

Mandatorily Convertible PIKs: These are Treasuries, which of course are payable only in base money (A shares).
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