Hello, and welcome to it. Jeez, my voice is totally shot.
Oh my gosh, I know.
Sorry my voice.
Yeah, oh boy.
So maybe I'll just let Tracy do all the talking.
I'm glad we're doing a baseball episode on the day that you've lost your voice.
I did a deadlift one two, Jimmy. Okay, uh barges. This isn't after school special, except.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.
Where's the best in posta?
These are the important question? Is it robots taking over the world?
No.
I think that, like in a couple of years, the AI will do a really good job of making the odd launch podcast and people to say, I don't really need to listen to Joe and Tracy anymore.
We do have the.
Until then, this is lots more a weekly.
Chat about whatever is on our mind.
And we really do have the perfect guests.
H Tracy, I'm sorry my voice sounds so terrible today.
It's okay. It's not like it's a problem for a professional podcaster to lose their voice.
It's not like my entire career in profession is entirely premised on my ability to speak.
How was the show?
Our band had our first show last night Skinny Dennis and Whisburg.
It was very good.
I guess I sang a little bit too hard, but I was for our first time.
You know, Taylor Swift was doing this three hours a night.
Well that's what I did, wondering, like, seriously, you need to do vocal exercises. Your voice is a muscle Joe. You have to practice.
How the hell did she do that? I've felt about this and like, how did she look? Avoid like getting a flu? You know, it's like a whole year you get like sick, and like like it's it's honestly like the fact that she did that to her like blows my mind.
Show. It sounds so painful listening to you. I hope you're okay.
Well, how do you She almost didn't get to meet Travis Kelce because the first time he came to her concert, she was like, I can't meet at talk to anybody beforehand.
Because I'm resting my voice. Do you think they just stared at each other from like across the room.
As our producer Dash, I think for the well Dash has been on he's been on and we're also speaking to our friend in a Bloomberg opinion contributor and a fed watcher and sports watcher Connorson.
Can I just say there's a supreme irony that the day we're talking about baseball, Joe has lost his voice. So apologies and advance to listeners. If I am forced to carry this episode, and I honestly know nothing about the topic, but I will do my best.
But Tracy, you may not know much about baseball, but you understand that if a baseball player sends a seven hundred million dollar contract that stipulates that for like the first nine years they get paid two million dollars a year, and then for the next ten years or something, they get paid sixty eight million dollars a year, that's at least a financially interesting conversation.
Yeah. I agree. The other thing I would like to say is before this week, and before this contract was signed, I had never heard of this particular player, which perhaps says something about the state of Major League baseball.
I feel like you can sort of talk about this topic without having anything to do with baseball, which is what makes it kind of fun. It's like a seven hundred million dollar contract with weird money being deferred, and it's just a fun thing to talk about.
But TRACE's point is really interesting, which is it's kind of wild to hear a seven hundred million dollar contract.
For someone A lot of people haven't heard of.
It, and in an industry that by many people's accounts, as like on scular to climents clearly not is like in the media in the public consciousness is NBA clear nothing like NFL? Where's this money coming from to pay someone seven hundred million dollars?
TV dart rights deals, local TV money, season ticket money. There's a belief that he'll be a marketing machine for the Dodgers, and so they know when you're looking to sign a big contract, you can come up with ways to justify it, just like tech companies can come up with their tams and whatnot. People just come up with a way to do it.
Wait, so we haven't actually said his name yet. It's shohe Atani who plays for the Dodgers. And Okay, so one basic question I have is I've I ask someone one of our colleagues, Dave Lika, before we started recording the show, like who is this guy and why should I care? And he started comparing him to Babe Ruth, and I at least know who Babe Ruth was, so like,
what is the big deal about this guy? Like why is he ostensibly worth seven hundred million dollars even if it's being paid out on a deferred basis.
He's arguably better than Babe Ruth. Like it's the sort of thing that for people my age, you like baseball's kids, you would dream about. Wouldn't it be cool if there was a Babe Ruth? But he's like better than Babe Ruth because there was a time the summer when he was basically leading baseball in home runs and also almost leading as a pitcher in strikeouts, and it was just like,
how is he doing this? Because it's not like there are other players who hit and pitch and they're kind of okay at both, Like he's the only one doing this and he was like the best at both parts, and it just doesn't make any sense.
Tracy, I, No, you don't really pay that much attention to baseball, but that fact that he is like dominant on both sides, Like, were you familiar with how rare that is in baseball?
Yeah, so I'm familiar with In baseball, people tend to do like one thing. Well, yeah, I watched Moneyball as well, so I kind of get it there. But yeah, okay, it's unusual to be able to hit a bunch of home runs, which I take it that's like what baseball audiences want nowadays, and be able to pitch really well, yeah.
There's nobody else who does this. It's yeah, what.
Is the net present value of otanious contract? Like, how do you like if you're like thinking about, okay, what is a contract worth that pays you know this? And what does it say about his own personal inflation expectations? And why does it structure this way? Just sort of give us like, wait, don't.
The Dodgers get the interest because it's deferred?
Yeah, just to walk the math as you've as you've modeled it out.
Yeah, Like I had to obviously google this to prepare for the podcast. And it's funny because there are different discount rates applied depending on the way that it's being used.
So baseball has this competitive balance tax, which is basically like every team as if they spend more than two hundred and forty million dollars, every additional payroll dollar above that is taxed and redistributed, and so for the purpose of that luxury tax, that discount being applied is four point four to three percent, which is based on some IRS code and the sort of bond yields as of October twenty three.
But for the is there like a specific IRS baseball player clause or something.
Oh my gosh, well it's for it's the the federal midterm rate as defined in Section twelve seventy four, Part D of the IRS.
Please tell me you had to look this up before this conversation, right, like you didn't just know this? Okay.
I think trade was a little show that a baseball topic would be good for on laws, but this is no weird now square down the middle.
We're in the game. Yeah, So for the purpose of the luxury tax, it's worth forty six million dollars a year, okay. But I guess for the purpose of MLB regular payrolls there's a ten percent discount rate being applied, although I don't really know what it's like. Okay, who cares? Like, what does that mean? And the Dodgers have to set aside the money every year even though they're only paying in two million years they do have to set it aside, so you don't have to have any counterparty risk.
I was wondering about that. So Otani does not need to be like buying credit default swaps against the Dodgers to protect against Like he's not facing any counterparty risk exactly. Okay, I was wondering about exactly this.
Will he have to pay taxes on this in twenty thirty four. I don't know the answer to that. I'm sure lawyers will fight over it in the US or the state of California will try to get their money. But I don't know why he would agree to this, and that actually feels like a very Japanese thing to do. Not that you want to kind of dive into cultural tropes, but I just can't imagine any kind of American born person agreeing to this.
I mean, it's still seven hundred million dollars. I guess it's how much is it in the interim? It's like two million a.
Year two million a year, So he's getting twenty million dollars over the next ten years, which for baseball is not that much, and then he'll get six hundred and eighty million dollars in the following ten years.
I mean, I do think a lot of people would be satisfied getting seven hundred million dollars overall, even if it was paid out on a sort of ten year basis. But I take the point that it's kind of structured weird. What did the Dodgers get out of this? So my understanding is that similar to football or soccer in Europe, there's like a cap on the amount of money that
they can spend on players. And so presumably if they're not paying out hundreds of millions of dollars on a yearly basis to a star player, they have additional money that they can spend on other people.
Right, so the headline number is seventy million, but for the purpose of that competitive balance tax, it's only forty six million, So it frees up twenty four million that they can spend on other players.
So he was on the Angels before, and the Angels might understand and he has like had amazing players, but we're somehow just terrible and not competitive. He presumably wants to win a World Series. How much more is this sort of like create the opportunity that the Doggers can spend enough to build a championship caliber team. Around him.
Well, in theory, So the way that people think about, well, how much money should you spend on free agents is there's this baseball stat called wins above replacement or war And you know, obviously past performance is not indicative of a future, but in general, the thought is people will pay eight million dollars per war per year. That's sort of like the going rate for an expected win above replacement.
So if you're saving twenty four million off the tax in theory that lets you buy three extra wins somewhere else, it's not that much, yeah, but it's it's small margins in baseball.
Right, just on the deferred aspect of all of this. So, I mean, could you get to could you get to a state where like lots of baseball teams just start doing this and like start building up I guess, like their deferred liabilities in order to do these future deals or did you say the money is held in trust? I can't remember.
It is held in trust. So I think for the purpose of the competitive balance tax you could do it. But yeah, from a team accounting standpoint, the money is still has to be set aside for him. They can't just kind of ride on that. Maybe they're earning interest, though I don't know if I think they are.
I think the interest accrues to the Dodgers. But is there any future in which like this kind of contract could be replicated by other teams? Or is this such a one off, given you know, Otani's unusual abilities, and given just how weird the structure is and your point about like, who else would accept this in professional sports?
Well, baseball obviously has a union, and there's nothing restricting this sort of deal in the current union deal. It's something that the players could revisit in the next deal. But yeah, right now, there's nothing stopping even a three hundred million dollar deal from being structure this way if the player and team agreed to it.
So I mentioned obviously you know Otani thinks the dollar is going to be worth something, or you know that inflation isn't going to destroy the value of that when in ten years when the big balloon paymented. So, speaking of inflation, big week for the Fed. You sorry, that sound terrible. You've been on team March for a while now, and now the street is coming around to your view, it looks like.
Yeah, so it's really interesting because I feel like and I talked to Neil dud and Tim Dewey. We have a little kind of group chat that we've been working on this for a while, and it's been very obvious to us that this is what was going to happen, But obviously the Street disagreed. And I don't feel like we have access to any data that nobody else does.
And so I'm curious, from your perspective, why is it that something that seems so obvious to us was being fought by the Street and bank economists and people like that.
Why was it so obvious to you in the first place?
Just because the FED had talked about this view of as realized inflation came down, that means that real interest rates were going up, and so policy was getting more restrictive and eventually would make sense to make an adjustment to account for that. And to me, it was just this is what they told us they would do. But I felt like other people were coming up with their own views of what the FED should do rather than just listening to the stated fed reaction function from the Fed.
I mean, I think that's that's basically what happened. The other thing, the other thing that I saw on Twitter, which was kind of shocking to me was a bunch of people talking about loose financial conditions and how because stocks are up so much, crypto is up, the FED has to cut and they weren't joking, I know, like Fed's got to cut has been a joke in the past, but that that always seems super weird to me, given that I know, we had old Cashcari on the show
last year and he did push back against the rally in stocks at that particular time. But this is a totally different environment where inflation is falling and to Connor's point, like real rates are going up, So that just seemed like very strange to me that anyone would try to mount that particular argument.
And I think people were holding on to FED speak from twelve eighteen months ago, which, to your point, reflected a very different environment. And yeah, like if it were August twenty twenty two, they weren't happy. But inflation has come down and it's not quite it too yet by some of their measures. But it's sort of in a way, it's like there was some reason for like loosening in FED speak just because inflation wasn't at five anymore, it had come down.
Just to push back a little bit though, on this like idea of like real rates going up. I mean, it feels to me like there's sort of academic macro and then maybe real world macro. So what we're talking about here is real world macro. Oh, inflation is going down,
rates starting the same, Therefore policy is getting tighter. Whereas my sense that academic macro looks more forward expectations of inflation rather than past and they say, well, look, we already knew that inflation was forecasted to be x. It's already taken into account. Therefore we're not getting implicitly tighter. Do you sense that's sort of like that being the divide.
I think so, And like to be clear, I don't necessarily agree with the framework they're using, but it's sort of like my job is to figure out what framework are they using? Right, this is what they've told us they're going to do, and so it's our job to figure it out.
Were you surprised at all by how dubvish the meeting actually was, because I mean I guess consensus, well, consensus was like very one way going into this, but I think it's still kind of surprised on the dubbish side, and for what it's worth, I thought I thought they would lean slightly more hawkish.
But I thought the statement and the SEP would be more hawkish just because it's more of a bureaucratic sort of deliverable that everybody has to sign off on. There's probably some lags in that, but the PAL would use the press conference to kind of reorient people into this, you know, maybe cut in march type framework, but the fact that you know, the median dot for twenty twenty
four suggested three cuts. And then they had adjusted their core PC forecast for twenty twenty three to a number that you really have to be in the nitty gritty and focused on it almost day by day to get there, suggested that you know, the committee got there a lot sooner than than certainly I expected.
The NASDAK is now forty one percent on the year, which is pretty wild. That's a consane year, five hundred up nearly twenty three percent. Dow Jones at all time highs. Like, I don't know, cliche is as good as it gets, but like what is the upside from here? Is usually like you know, what are you what are you looking for for the next putting on your investor cap what do you what?
What do you?
What are you watching for in twenty twenty four?
Yeah, So I'm actually working out a column on this right now, because it's like the stock market's expecting this boom driven by right sensitive cyclical things, and then the bond markets expecting six cuts in twenty twenty four, and
it's like, is that an internally consistent dynamic? And my gut is no, But it's sort of like it kind of makes sense today, but when you put yourself in the shoes of how will things feel in the middle of the next year when they've already maybe cut a few times and housings taking off, well, they still want to cut three more times with more to come in
twenty twenty five. I don't know if that'll be the conclusion, but it's sort of people are off side, and so they have to buy bonds and buy stocks, and it's mid December and everyone's just kind of running around with their heads cut off for now.
Tracy Kri Regional Bank ETF up thirty eighties. Yeah, since October twenty fifth.
Yeah, and contrast that with what was going on in March, right, like so many things have happened this year that I think we kind of forget about the banking crisis in
March now. But Connor, you mentioned the bond market and what it's forecasting, and I always come back to this idea that like, maybe maybe the economic information that you can pull out of the bond market isn't as useful or as accurate as it used to be, because there are all these different reasons that people hold bonds now, especially big players like banks, you know, they have to hold bonds for regulatory capital, reasons, for liquidity buffers and
things like that, and I often wonder if that's sort of skewing the data.
And I think in March, like you know, there was that moment where Powell was sort of suggesting they could hike fifty basis points at one meeting and then maybe fifty at the next, and people were positioned for that, and then Silicon Valley bank field failed, and it's like everybody who had made those bets on the hikes had to cover just because from a risk management standpoint, and
so flexively just push shields way way down. And then people like us who are trying to say, well, the bond market's now pricing cuts in August, well sort of, but it's also just people had to make this positioning move and then once the positions were clear, then the data could take over again. And I almost wonder if we're doing that right now.
Yeah, speaking of we're in one of those environments where like you just look at charts and you say, like, oh, we're so back. Vornado the realty Trust of one hundred and sixty percent since and this is like New York real estate, so you know, talking about New York office real estate of one hundred and sixty percent since May twelfth, and up another eight percent today. So every chart we pull up is just like, we are so back.
You know. How I know that we're back. I heard a trader slash investor that I know last weekend went to not just one, but two gentlemen's clubs to celebrate twenty twenty.
Two gentlemen's clubs, which is.
Like a blast from maybe like two thousand seven.
Yeah, wow, we really are we We've really put the zerpiera bon.
But I also think one of the weird things about this week in particular and the FED meeting is it's kind of like a rorshock test for people's previously held opinions, right, and so you have people who are celebrating an ostensible soft lending, so inflation's coming down without unemployment going up massively.
And then you also have people who are looking at the forward pricing of rate cuts and going, oh see, there is going to be a recession next year, and so it kind of feels it's a weird environment at the moment.
Something else interesting about this environment is that usually when you're about to get rate cuts, it's like at the end of this big investment cycle, so in two thousand with tech stuff, but we've had this, like you know, housing in the good sector have been in a recession really for eighteen months because of the rate cuts, and so arguably you're easing at a time when these sectors are poised to rebound, which is I think next year is going to be another one when traditional patterns don't
work so well because people are going to be looking for the rate cut playbook and it might not work out the way that the past two or recycles.
Have You mentioned that you don't necessarily agree with the FITS framework, Like your job is, you know, your job is to pay attention to it and to know what they're seeing and to listen closely, not to you know,
say what they should do. And that being said, do you think there is a risk of reacceleration of inflation given loosening financial conditions, surging stocks, people probably wanting to buy homes and buy furniture for the homes again when they see you know, headlines about oh, sub seven percent mortgage rates, et cetera. Like, is there some risk here that they get off sides?
Again, I think so, And I think it's more of like home depot. I could see, say they're seeing price pressures in qs who of next year as demand comes back. But the core PCEE data, which is, you know, it's an index that's constructed based on stuff like that's probably going to be pretty soft through at least the middle of next year as a lot of sort of accumulated
disinflation works its way into the data. And so I think there could be a period where if you're following corporate earnings and looking at the stuff that I look at, it looks like inflation is coming back, but the actual data that we get once a month is still going to show that inflation is not a problem. And so I don't know what the bond market will do with that, But that's something I'm thinking about.
Just going back to baseball for a second. Joe, I know you like minor league games, specifically going out to Coney Island and Connor. It sounds like you're you're a fan as well, But have either of you ever been to a Japanese baseball game?
Oh my god, no, I want to.
They are so much fun. That sounds so fun, yes, And like because the crowd is so intense and everything is kind of coordinated, Like all the chants and stuff are very coordinated. So there's like, you know, let's go Sacamo and like clapping and stuff. It's amazing. It's so much fun.
Now, that's definitely like a bucket list thing is to ye, go to some go to see baseball games in Japan. Absolute budget list.
My hope is that since sports broadcast rights seemed to moving to streaming, it's like maybe Apple and Amazon and Google will have all the global rights in ten years that like the Asian audience actually will matter to Major League baseball, and so they're going to look for more ways to integrate the leagues.
That would be really cool. I mean, like maybe we can get I mean, I was gonna say, maybe like the way US sports fans have become fans of like F one and European soccer over the last decade for various reasons. But I guess those are like sports that we didn't really already have here. But yes, I want more aware, I want I just really want to go to a Japanese baseball game.
Well, if we ever make it out to Tokyo for something, we should definitely go.
Let's do it.
There's a chance, Connor, you should come to Absolutely.
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