tag:blogger.com,1999:blog-6704573462403312459.post7633635091609848138..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: What if Apple pegged its stock price at $1?JP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-6704573462403312459.post-22884075085240970292016-04-11T22:55:16.535-04:002016-04-11T22:55:16.535-04:00I'm having trouble understanding the meaning o...I'm having trouble understanding the meaning of a dollar peg, or what it implies in practical terms. When we invest in Apple, we care about the total value of our equity, and the dollar is our numeraire. Shares are useful as an accounting unit, but we could dispense with that. Let's say that I pay $5M to buy 1% of Apple. Then I get 1% of all dividends as well as the liquidation value if it is ever wound down. I'm not sure how pegging accounting units would change these numbers.<br /><br />On the other hand, if Apple borrows a fixed amount (like $1) then this creates an information-insensitive liability, and while we don't use corporate debt as money, it is used as collateral which is a way of converting it into money via a hierarchical structure.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-78836870524338375822015-11-05T21:29:47.423-05:002015-11-05T21:29:47.423-05:00Right now, the fed's assets are unconnected wi...Right now, the fed's assets are unconnected with the base money liabilities - there's no deliverable to the liability. Just as apple floats, and buys and sells shares to keep the peg, the fed should float the (unused and moot) asset side of its balance sheet as units that give the right to receive base money. Just as apples earnings grow, so will the demand for base money grow. The market will determine how many Apple shares are outstanding as Apple creates or absorbs shares, so ought the fed simply create or absorb base money as the marketplace demands, to maintain a 1:1 peg between its assets and liabilities. <br /><br />The fed could hold a "rusty nail bag" spv (or just call it maiden lane) as its main asset. Assets are entirely moot. The main value of the fed is its monopoly on base money creation. That's quite an asset to own, eh? Float that asset, peg circulating base money to that floating asset value. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-24440860947514776482015-11-03T23:04:03.220-05:002015-11-03T23:04:03.220-05:00"Much better to just apply the $1 peg to the ..."Much better to just apply the $1 peg to the Fed."<br /><br />I'm not quite following. What does the Fed peg the dollar to? You can't peg the dollar to the dollar.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-44076225781360327412015-11-03T09:42:51.119-05:002015-11-03T09:42:51.119-05:00Yeah, but the transaction is in terms of dollars, ...Yeah, but the transaction is in terms of dollars, not shares. The share price doesn't matter. In fact some fund complexes allow check writing on regular bond funds.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-10736568261957013282015-11-02T00:36:38.058-05:002015-11-02T00:36:38.058-05:00JP, great points and I like the approach, but we m...JP, great points and I like the approach, but we miss when we use Apple for illustration. Much better to just apply the $1 peg to the Fed. We could make the Fed into an ETF, really, with a few rules. Instead of Treasurys on the balance sheet, swap the Fed’s notional assets 1:1 dollars for shares — float the entire asset side of the Fed’s balance sheet into a special purpose vehicle, on the exchange, that pays holders weekly in (new monetary base) new currency or reserves per share. (retire/annul the Treasury debt and make base money provision market-driven.) <br /><br />Think money market ETF, Fed operates the SPV to keep NAV steady — issuing or redeeming new shares, and is essentially pay-in-kind — with NEW shares accompanied by 1:1 NEW base money to holders. On average, long run new monetary base creation “yield” would be about 6%. (You buy the SPV shares to get base money issuance.) Float the Fed’s capital on the liability side while we’re at it, to monitor and price their counterparty risk and arb (its only other liabilities being base money currency and reserves). <br /><br />Require banks to hold some proportion of of assets % NGDP in the SPV. If they lend more — or otherwise desperately need reserves — they buy the SPV to gain more base money, the NAV goes up, and the Fed supplies the shares/reserves. On the flip side, if NGDP is sluggish — likely below 6% — then other buyers would boost the NAV premium of the SPV and lower its yield (just like you or I buy bonds). The Fed then enters and provides the new shares to bring 1:1 NAV back — the economy grows, so most of the action will be on the positive NAV side. <br /><br />But if NGDP overheats, then investors pass over the SPV return and buy elsewhere, and NAV premium falls (just like you or I sell bonds — yield rises). This (more rare) negative NAV scenario — here’s the ETF part — banks and people redeem reserves/currency back to the Fed SPV to bring NAV back into line, and get a note/option enabling future share buying at that discounted price. <br /><br />Apple is a small potato. The big cheese money market peg is the Fed. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-49453768248133378502015-11-01T06:44:06.698-05:002015-11-01T06:44:06.698-05:00MMF shares haven't displaced dollars as a unit...MMF shares haven't displaced dollars as a unit of account, but surely they've displaced notes and deposits as a medium of exchange. MMF shares can be transferred by cheque and debit card.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-89967001362501724782015-10-31T14:34:55.258-04:002015-10-31T14:34:55.258-04:00I wonder if this post was inspired by the conventi...I wonder if this post was inspired by the convention of money market funds maintaining a $1 share price. This hasn't resulted in MMF shares displacing dollars as a unit of account. It's more an aesthetic choice than anything.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-71966317672364304512015-10-31T10:13:23.298-04:002015-10-31T10:13:23.298-04:00Apple's Open Market Desk --- I like that. ;)
...Apple's Open Market Desk --- I like that. ;)<br /><br />You're right that it would be difficult. They might have to supplement the stock dividend tool and its reverse equivalent with short term tools, say using its stash of cash to support the peg or stock sales from treasury to relieve upward pressure.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-21015379108906342522015-10-30T22:58:46.572-04:002015-10-30T22:58:46.572-04:00Ahh. OK. I'm willing to grant this as a theore...Ahh. OK. I'm willing to grant this as a theoretical proposition. I can't help getting caught up in the practical difficulties of managers dealing with intraday share issues, etc. (The image in my head right now is an Open Market Desk at Apple doing its best to get its repo policy just right.)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-39710560248255304092015-10-30T20:30:07.760-04:002015-10-30T20:30:07.760-04:00"Markets may be a very bad way of determining..."Markets may be a very bad way of determining prices, but it's not clear that there are better alternatives."<br /><br />Are you saying that a scheme with fixed prices and floating quantities is not a market-driven solution? If so, I'd disagree. As long as management is faithful to the $1 peg, the market determines the number of shares outstanding, and therefore the total market cap of Apple.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-66305884727486565182015-10-30T15:30:04.629-04:002015-10-30T15:30:04.629-04:00Why "a floating stock price and a fixed quant...Why "a floating stock price and a fixed quantity of shares? Why not let the quantity float and the price stay fixed?"<br /><br />Presumably it's because we don't expect the (far from monolithic) management of a company to know its value. For better or for worse, we rely on markets to determine the value of the company's shares -- which often does not vary proportionately to earnings. The problem with your formulation is that the company's management will either (i) fail to keep up sufficiently quickly with the actual market value of the shares, (ii) engage in behavior driven by principal-agent type frictions or mostly likely both. <br /><br />Markets may be a very bad way of determining prices, but it's not clear that there are better alternatives.Anonymousnoreply@blogger.com