Bold Moves

I thought they were booing. They were chanting “Louuuuuuuuuu, Louuuuuuuu, Louuuu” as Sweet Lou Whitaker strode to the plate to lead off the game. I was 9 and it was my first baseball game in person. And I was hooked. In the summer of 1981, my dad took me to Tiger Stadium for my first Major League game.

In that particular game, catcher Lance Parrish and all of his 6’3” and 225 lbs hit two triples. I was in awe watching this huge man sprint the bases. And Aurelio Lopez, the Tigers’ relief pitcher came in to finish the game. Me and everyone else knew him as Señor Smoke. What a great nickname! (never mind that that nickname probably wouldn’t be allowed today 😊). It helped that the Tigers were really good in that era.  Cincinnati baseball fans will recall that they were led by Sparky Anderson of Big Red Machine fame. I watched or listened to every game that I possibly could.

We went to Detroit about once a season. We generally sat far away from the field (here comes the Jared’s frugal upbringing story). We got to the stadium and parked a few blocks away to get cheap parking. My dad then hunted down the scalpers and tried to swing a deal. It was always a crap shoot on where we would end up sitting. Put it this way, binoculars made the trip in case we were so far from the field that we couldn’t make out the players on the field. It’s absolutely stunning, then, that in 1989 this happened…. we went to see the Tigers play the Royals. I read that George Brett (the Royals star) was a fan favorite because he would sign memorabilia. I took a couple of his baseball cards along for the trip. Somehow by an act of God, our scalped seats were in right field where the seats went all the way down to the field. We arrived early and Brett was shagging fly balls in right field. My sister Sephora went down to the field and called his name. He walked over and started talking to her (I was hanging behind on her shoulder). Next thing I know, he’s making small talk with Sephora about her willingness to help her big brother. AND, he’s signing my cards! I will never forget it.

My memories as a baseball fan run deep. And yet, as I write this, baseball is dead to me. Haven’t watched or listened to a Reds game in 2 years. Over 40 years, baseball management and ownership have been asleep at the wheel. Steroids, small market teams disadvantaged by the economics of the game and, most recently, the ever-increasing length of the game have all put stains on the game.

This year Commissioner Rob Manfred finally acted. Interest in baseball has dropped dramatically. Younger people stay away. So Manfred made bold moves in the offseason. The most notable change was a pitch clock to speed up the game. Only time will tell whether they’ve hit a home run, struck out or somewhere in between.

For the past 15 years, since the great financial crisis of 2007-2008, the Federal Reserve and government have been on a mission to stimulate the economy. They provided liquidity to the financial system defined as “quantitative easing”. They lowered interest rates all the way to 0%. And they sent stimulus checks and PPP money. As we all know, inflation blew up. Enter: the bold move. Like in baseball, the Fed’s Commissioner (aka Chairman Jerome Powell) decided to take bold action. So he started raising rates and pulling liquidity.

As we’ve talked on these pages, Powell waited too long. Waited until inflation was rampant. And now, in the course of a year, he’s raised rates from 0% to 4.75-5%.

At the same time, the Federal Reserve finally pulled back on the money supply, ending “Quantitative Easing”.

The pundits on TV kept saying something had to break. Something did break. The 2nd biggest bank failure in US history occurred in March along with two other banks. As we’ve also talked on these pages, Powell’s interest rate hikes moved short-term interest rates up to almost 5% while long-term rates – 10 to 30 year rates – were stuck well below that. This “inversion” in the yield curve, where short term rates are higher than long-term rates, makes a mess for banks. Usually banks take in deposits and pay a little short-term interest. They turn around and lend that money back out at higher interest rates for longer term car and home loans. With short-term Treasuries yielding 4+%, clients pulled deposits from the banks to put it at brokerage houses. This created a liquidity crunch for these banks, making it hard for them to raise the cash for large withdrawals.

Powell and Treasury Secretary Yellen got together and committed to insure all deposits at the failed banks (effectively offering unlimited FDIC insurance) while also providing a way for these banks to borrow funds from the government to pay out any deposits.

I’m not here to be the doomsday guy. And I’m pleased Powell took decisive action both to raise rates to squash inflation as well as his effort in March to stop a bank panic in its tracks. He’s in a tricky spot. He has to walk the line between raising rates to give us all relief from higher prices while maintaining stability in the system. But he and his predecessors (Yellen and Bernanke), have been asleep at the wheel. The tricky spot is of their own making with the excesses in both directions a result of their decisions.

There are signs inflation is dropping quickly, suggesting the interest rate increases have made an impact:

So where does this put us? Inflation is coming down. But the interest rate moves have created a bumpiness in the stock market. The S&P 500 is as flat as a pancake in the past 2 years - March 29, 2021 to March 29, 2023. And while the headlines are that tech stocks are up in the past 3 months (they are), zooming out to the 2 year look, their returns are also flat.

I suspect in the short-term we will see the market move up. Every time the Fed intervenes to prop up an industry, it tends to have a positive impact on the markets. And if rates stabilize and even drop some, it’s usually good for tech stocks. In the meantime, we continue to view Treasuries as a good place to safely park cash for 4+% returns for the bond portion of our portfolios.

Both baseball and our Fed Chairman have made bold moves that promise significant repercussions in their respective “game”. Time will tell the impact of those moves. I’m rooting for Powell to pull off driving inflation to the grave while maintaining a stable economy. I’ll say this though, I don’t plan to ask for his autograph anytime soon.

Jared

What’s Your Financial Story?

Brian Kellett, brian@kellettschaffner.com. Phone 513-312-6067

Dave Bodnar, david@kellettschaffner.com. Phone 513-258-6973

Jared Kline, jared@kellettschaffner.com. Phone 513-768-2238

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