Yogi Berra Memorial - Chatham Financial

Last Tuesday, the world lost a treasure. Yogi Berra was an outstanding human being, volunteering for the Navy at age eighteen and seeing action on D-Day, being married to his beloved Carmen sixty-five years until she passed in 2014, and devoting his later years to charitable ventures promoting respect, sportsmanship, and excellence. Berra was also a tremendous baseball player, with a record 10 World Series championships, 358 home runs coupled with an astonishingly low strike-out to at-bat ratio of 5%, and brilliant pitch-calling as a catcher (including the only no-hitter in World Series history, Don Larsen’s 1956 perfect game).

Yet in a period known for its intense rivalry between Berra’s New York Yankees and the Brooklyn Trolley Dodgers, Yogi was almost universally beloved. In addition to his compelling rise from humble beginnings to stardom, he produced what Bruce Weber called “a seemingly limitless supply of unwittingly witty epigrams” on all subjects. Yogi’s legendary collection of attributed aphorisms included saying “cut my pizza in four slices; I couldn’t eat six,” “always go to people’s funerals; otherwise, when you die they won’t come to yours,” “we’re lost, but we’re making good time,” and “nobody goes there anymore; it’s too crowded.” And while some sayings were doubtless attributed apocryphally – in fact, Berra’s biography was entitled I Really Didn’t Say Everything I Said – his font of meaningful malapropisms never seemed to run dry.

As huge Yogi Berra fans, we often quote his legendary statements and are guided by his homespun wisdom. So in honor of this legendary wearer of the number 8, we offer 8 Yogi-isms, along with a potential explanation of what he might have meant:

(1) You can observe a lot just by watching. Remember how the Fed’s decision not to raise rates last week was expected by the market, and predicted by a majority of surveyed economists? So when the decision was announced, why did Treasuries rally on the news and LIBOR drop the next day after generally rising all year? Since Fed funds implied probabilities augured otherwise, why did the market react? Perhaps we’ll observe a lot just by watching the October and December rates as the FOMC meeting approaches.

(2) They give you cash, which is just as good as money. Swap counterparties required to trade on exchanges by Dodd-Frank have the alternative to post different types of collateral, from cash and US Treasuries to gold and ETFs. Of course, whereas cash may be posted with no haircut to its notional value, the haircuts on Treasuries range from 0.5% to 6% depending on maturity, and ETFs face a 30% haircut to their market value. As such, the counterparties must decide whether to post well over the amount due in assets, or cash, which is just as good as money.

(3) The future ain’t what it used to be. We’ve written before about the inadequacy of economic forecasts to predict moves from the status quo. In particular, economic forecasters can easily envision a future that’s very similar to the present, but statistically almost never anticipate the speed of large adjustments. But because inter-connected markets can deteriorate much more rapidly than median predictions about them, the future ain’t what it used to be.

(4) If the people don’t want to come out to the ballpark, nobody’s going to stop them. Numerous financial commentators have written recently about the drop in bond market liquidity, with countless explanations being offered. Some note that extremely low-yielding bonds must be held too long to be profitable, causing some traders to opt out. Others point to regulations that prevent banks from holding more bonds on their balance sheets. Whatever the cause, if market participants don’t want to trade bonds, nobody’s going to stop them.

(5) I always thought that record would stand until it was broken. Andrew Haldane, Chief Economist of the Bank of England, gave a speech in June where he demonstrated that we are experiencing the lowest rates in 5,000 years of recorded finance! The longer we stay at zero-percent interest rates, the more extreme our already extreme position becomes, as we extend the record for a few more months. Perhaps that record will last for another 5,000 years, or at least it will stand until it is broken.

(6) It’s like déjà vu all over again. Subprime auto loan balances have doubled since 2010, to $175 billion, with many of these loans at terms longer than six years and with rates above 15%. Investors are flocking to securities backed by these loans, given the paucity of yield-generating options in a zero-percent interest rate environment. Time will tell if this time will be different for these high-risk securitized loans, or if it will end up like déjà vu all over again.

(7) Baseball is 90% mental. The other half is physical. Yogi was a sagacious game manager, trusted by his pitchers implicitly; during Don Larsen’s 1956 World Series perfect game, he never shook off a Yogi pitch call once! He was also incredibly fast, rarely striking out because his bat speed enabled him to hit “a ball that was [already] past him out of the park.” If we were modifying this statement for risk management, we’d probably say, “Hedging is 90 percent strategic. The other half is tactical.” To hedge optimally requires careful analysis of balance sheet and income statement exposures, cross-correlated exposure netting, and hedge accounting application. However, it also requires lining up counterparty banks, negotiating ISDAs, complying with various regulations, and obtaining best pricing at execution. Strategy and tactics are both indispensable to the process.

(8) It ain’t over ‘til it’s over. This has been a year of surprise de-pegging and sharp devaluations; just this week, the Brazilian Real weakened to its worst-ever rate against the dollar! Many of these moves caught the market completely by surprise, and not all companies were hedged against severe weakening in overseas revenue sources. However, there is still time in 2015 to analyze risks, determine exposures, and hedge against what happens next. After all, it ain’t over ‘til it’s over.

We’ll miss you, Yogi! You always went to other people’s funerals, and we’re sure now they’ll definitely flock to yours. And we agree with what you said, “Love is the most important thing in the world, but baseball is pretty good, too.”