This is a story about baseball and big money, but not in the traditional sense that Major League teams spending the most money on salaries tend to win championships and those that try to get by on the cheap mostly are destined merely to fill out the regular-season field.
Instead, we endeavor to draw a parallel between how baseball teams and the real big money show – financial markets — both can exhibit uncanny periods of out-performance, followed by crashes back to the norm.
That connection between big spending and success is an immutable truth about modern baseball. But baseball proves other realities about money, such as many big spending organizations still find ways to fail, current examples being the New York Mets and San Diego Padres, among others.
Also, even when free-spending does produce titles, the success seems to be unsustainable. Witness no repeat World Series winners in the sport since the New York Yankees won three straight from 1998-2000.
But all that is long-term thinking. In the short term, almost anything can happen. Recall that mere months ago the Pittsburgh Pirates were the darlings of 2023 MLB, going 20-9 in April and leading the NL Central Division.
Fast-forward to today and the Pirates have collapsed into the basement of their division, a 41-54 team sitting 11 games behind division-leading Milwaukee.
And I can’t help but think that the Pirates are the personification of the financial world in general, which is experiencing outsized, largely inexplicable gains flying in the face of investing’s immutable truths.
Some of those truths:
Long periods of yield curve inversion in debt instruments (long-term interest rates lower than short-term rates) such as we have been in for the past year or so, produce recessions.
Periods of dramatic interest rate increases by the Federal Reserve, such as we are in now, produce recessions.
Rampant indebtedness, both public and private, as we are witnessing now, leads to economic slowdowns when credit demand no longer can be met.
Bank failures, and we’ve seen three of the four largest in U.S. history since March, are the sort of thing that speaks of stress in the financial system and economic dislocation.
And yet all is thought to be well in the investment world.
Long-deceased British economist John Maynard Keynes, patron saint of government deficit spending to produce economic vitality in the moment with nary a worry about long-term repayment problems (his pithy quote on same: “In the long run, we are all dead.”) would be rubbing his hands in glee at the current state of the world.
The United Nations reported recently that 52 countries worldwide are approaching debt default, unable to pay their mounting debt obligations with their current level of economic productivity.
The United States stayed off the list courtesy of yet another bump of the federal debt ceiling. But it’s long been noted that the United States would find itself on that list of default risks were it not for our dollar being the dominant world reserve currency. Along that line, nations such as China and Russia are said to be collaborating on a gold-backed currency to challenge the dollar on the world stage.
Yet investment markets seem to be able to ignore interest rate increases, mammoth debt levels, yield curve inversions and a raft of other traditionally negative markers as they race ever higher.
Speculative investment bubbles are mob mentality at its finest, with cautious voices being shouted down and marginalized.
Just last evening a daily show on CNBC, Fast Money, had a guest panel largely composed of bears (those expecting market declines) and they were called upon to account for themselves.
One additional guest, Sheila Bair, was yet another investment bear. This former head of the Federal Deposit Insurance Corporation (FDIC), which guarantees bank deposits of small account holders ($250,000 per depositer per insured bank), has her worries about the future, too.
These doubters are not unlike those of us who earlier in the baseball season were confident the Pirates would sink in the standings, that baseball’s laws of economic reality had not been repealed.
Similarly, it would do the populace well to consider that economic reality in general also remains lurking behind the current mania.
It would not be wise to put a firm expiration date on what we are witnessing in the investment world. Keynes also weighed in on this sort of thing by stating, “Markets can stay irrational longer than you can remain solvent.”
But, eventually, the irrational gives way to the rational. The Pirates don’t win the division, but instead plumb its depths. Financial markets thought to be on their way ever upward, find themselves making like Humpty Dumpty, he of the great fall.
Sam Ross Jr's site 