May 27, 2019
OK so it’s the holiday and I hope you’re enjoying it. But as you (at long last) bust out your seasonal whites, allow me to offer one piece of advice: don’t do it. It’s a bad idea.
Pitching past the W that is.
But maybe I should clarify. The concept is as ancient as our days, taking the general form admonishing us to back off once we’ve accomplished our objective. It has many, perhaps the most ubiquitous of which is that once you’ve made a sale, it’s time to stop selling. In my own personal experience, I’ve lived through both positive and negative examples of this, and I think I’ve learned my lesson. For the most part, once I’ve cut the deal, I no longer expound upon its merits to my opposite number.
Another way of describing this, in baseball terms, is Pitching Past the W. If you’re a pitcher who has the game in hand, don’t try to mow down hitters with your dazzling fastball. Serve them up some junk. Throw some strikes, yes, but keep the ball low. Make ‘em hit it on the ground. Of course, it’s possible to still lose under these circumstances, but at least you’ve minimized the odds of doing so.
Of course, not only does the analogue apply to portfolio management, I’d go so far as to suggest that it is a basic tenet of risk management. Consider, if you will, the example of a PM group that bought a troubled stock near its lows, thinking it could maybe double. When the price hits, say, >90% of the specified target, it’s time for them to consider unloading some of it. They may still think it can go higher, but that’s not the point. If they wish to play for further upside, they should either liquidate and then re- establish the position, or at least go through the exercise of re-underwriting it, with new targets and downside exit points.
But many don’t adopt this strategy, and thus find themselves having pitched past the W. More often than I care to remember, they have squandered the fruits of what was, in its formation, a great trade. The stock drops and they defend it; maybe even double down. And when all is said and done, what was a magnificent two-bagger morphs into a gnarly loss.
And, beyond the grubby realms of seeking returns through active investment, it strikes me that Pitching Past the W is a problem for the entire global political/capital economy. It may even be that the whole world may have committed our titular sin. If so, I myself have a problem. Specifically, across all forms of global economic activity, I’m having a great deal of trouble determining just where the W is. And if I can’t find the W, then how am I to advise my minions as to what point they should not pitch past?
Because as this long-awaited, well-earned start to the Summer Season has arrived, I have very little clarity as to what may happen – particularly in the near term. The global markets open up today and the U.S. takes off tomorrow. I really don’t know where it’s going. The China thing is still humongous enough to blot out the sun, and I’m sure I’m not alone in finding these intermediate crosswind communication breadcrumbs beyond maddening. We’re making progress, we’re being deceived, something will get done, we’re prepared to gird our loins for a long battle. Just do us all a favor and shut up already!
And in terms of nearly everything else, there’s no W that we can easily identify. Lots of problems out there. Iran, of course. May’s departure, stage middle, from 10 Downing (and a palpable fear of who takes center stage after her). The Nationalists swept the EU elections. Macron got embarrassed by Le Pen.
There of course are also escalating tensions between the White House and Capitol Hill, with the promise of more of the same to come, and it does appear that both sides are trying to sneak a big fat slider past the dub. Trump walked away from any substantive negotiations with the Dems this past week, in ultimatum against their continued efforts to remove him. This was somewhat of a bold move on his part, and (while I thought it a silly stunt when it I first heard of it) I now think Pelosi is right. 45 is begging, or at least taunting, the Dems into impeaching his @$$. My guess he has more in mind than simply acting, in Clinton/’98, redux, in expectation that the electorate will punish the impeachers politically). Specifically, I suspect that he’s itching for a trial in which his lawyers can put a whole cadre of operatives: Comey, McCabe, Clapper, Brennan, Lynch, Rice, Powers, and maybe even Big Dog 44 on the stand, and let them state, under oath and cross, how a counterintelligence investigation landed in his HQ, without him being even given the courtesy of notification. If the saga plays out in this fashion, it will be quite a show.
But one side or the other will surely pitch past the W, and will live to suffer the consequences.
Maybe even both will. And in some ways, that’s not the worst outcome for the rest of us. The initiatives Trump says he’s forgoing are both pretty stupid ones, says I. We simply don’t have $2 Tril hanging around and waiting to be infra-structured away. Gotta be a better way to fix roads, bridges and grids. Plus, though not an opinion shared by everyone, as a free market economist, I am against government intervention into drug pricing. The costs are too high, and yes there are folks getting rich as maharajas gaming the system (Pharmacy Benefits Managers in particular), but c’mon, do you really think that we’ll get better outcomes, that there will be less chicanery, if the federales step in? Think again.
But there’s other potential past-W pitchers out there, and my next, perhaps my favorite candidate, is the global central banking complex and its now-decade-long strategy of giving away money. While it’s been a rocky outing for equity hurlers over the past month, the starters and relievers on the global bond squad have been shutting them down like Koufax or Ryan in their primes. As our favorite stock indices have been swinging, missing, or, at best, fouling off pitches, long end government bonds continue to crush it, as, with little fanfare, the US yield curve became, for the first time in years, unambiguously inverted:
Now, those who want to adopt a “pitcher half full” viewpoint on this will take comfort in the awareness that if one goes out to maturities in the year 2031 and beyond, it remains possible to secure a rate higher than that of 3-month T-bills. But this, at best, is thin gruel.
And the thing of it is that the United States Treasury Complex appears, by comparison, to have the healthiest and most rational yield configuration among all of the major economic powers of this forlorn world.
However, if we have indeed used QE to pitch past the W, we did so a long time ago. While tt will take many more decades to determine the full impacts (positive and negative), I’d say that up to this moment, the program has earned an addition to the left digit of its record. Whether you realize it or not, in 2008, we were hurtling towards a full-on Depression. The banks were on the verge of failure. The entire global credit system was verging towards collapse. There would’ve been massive unemployment, insolvency and myriad forms of human toll. It might’ve been as bad as the ‘30s. Or worse. And remember, it took the biggest war in history (the heroic efforts of those who forged victory are some of what celebrate today) to pull us out of that economic slump.
Let’s just agree that it was a show well worth our avoiding a second screening.
So the Central Banks, led by the Fed, sought to avoid disaster by flooding the system with liquidity, drowning it in the stuff. And for at least a decade, the results have been miraculous. You can quibble if you will, but the hard fact is that instead of depression, we’ve had more than ten solid years of a growing economy and all of its fruits: breathtaking technological innovation, abundance of employment, and, of course, the mammon that us filthy lucre seekers pursue most ardently: historic investment returns. While it hasn’t always seemed like a raging bull tape, the reality is that over the 10 years (and a partial quarter), the Gallant 500 has more than quadrupled, matching the performance from the waning period of the Carter years through Regan and Bush the First.
So yes it’s been a big fat W, but there was and remains every possibility that we would, at some point, have pitched past it. We may have done so already. It is beyond dispute that the suppression of core rates to zero or below has visited myriad plagues upon us. Companies that have no business surviving as going concerns are being unwisely sustained by easy financing. Capital is being misallocated. Savers are being gutted like fish. And once a country’s 10 year notes hit the inflection point of zero, they have a devil of a time getting out of this rabbit hole. If you doubt this, just check the prices on the paper issued by our former Axis enemies: Japan and Germany. Especially Japan.
Most troubling of all, the debt burden just keeps on expanding – to record levels. As my esteemed acquaintance Jim (no relation) Grant points out this week, the aggregate value of negatively yielding global debt is now in excess of $10 Trillion. Chew on that, if you will, for a moment.
And I feel it a near certainty that the global capital economy will eventually blow this W by pitching past it. But I don’t know if it has happened yet, and, gun to my head, I kind of doubt that it has.
I still feel that securities are in short, growing shorter, supply. Prices in the real economy are, if anything, falling. The government measures of inflation are said to overstate the metric, and, while trying to confirm that would be attempting to corroborate the unobservable, I believe that the assertion is probably correct. Much of this is due to the economic impacts of modern technology, which has taken both consumer and commercial price discovery to a point of near-perfection. My daughter will indeed get another crib for my darling grandchildren, but only after weighing 20 options that are at their fingertips. Companies may be hiring, but given the portability of labor, the competing dynamics of automation, and the ability to perform perfect wage cost due diligence, they ain’t paying a penny over what they have to in order to secure their work force. In my own business, with technology-enabled risk solutions multiplying like hobgoblins, I am unable to contemplated raising fees. Ever.
And on balance, with the free money still flowing, no inflation and basic economic stability, I feel we have not yet reached the point where we have pitched past the W.
But I’m going to keep watching -- with a wary eye. Markets will probably be in high motion for the rest of the quarter and beyond, but in general I think the bid is still there. But I’d close where I began, by begging you to keep risks tight and avoid pitching past the W.
And, given that I’ve ground my baseball analogies into the dust) combined with the fact that the St. Louis Blues are currently facing the Boston Bruins in the Stanley Cup Finals) I will finish by stating that if you follow this advice, you may indeed be able to slip one past the goalie.