Oh boy, it’s the bi-annual “Shaun does the Rumblings” post today, which means we are in for some stuff you aren’t into. But first, let’s talk about the Royals.
ICYMI: the Royals wrapped up their 2019 draft yesterday and they took mostly more college guys.
The Royals’ 41 picks included 35 college or junior college players, six high school players, 26 pitchers (13 left-handed, 13 right-handed), two catchers, nine infielders and four outfielders.
One of the many things that have been and will continue to be written about the Royals 2nd overall pick Bobby Witt Jr, on making his own mark
I have really no idea what was going through me,” Witt Jr. said Tuesday afternoon. “I felt like I was dreaming yesterday, then I woke up this morning and looked at my phone and it’s still true. I’m just happy to be a Royal.”
Less than 24 hours after Witt Jr. received the life-changing phone call from Royals scouting director Lonnie Goldberg, sat on the couch and watched his name appear on the television, the nation’s top high school player and recent graduate of Colleyville Heritage High School sat in the same spot for an interview with The Star.
Kiley McDaniel and Eric Longenhagen at FanGraphs recap the Royals draft in their podcast, starting at the 30:25 mark
Rustin Dodd at The Athletic runs down the Royals draft class with some behind the scenes info:
“For us, we’re open to anything,” Goldberg said. “You guys know that. We’ve selected a ton of high school players at times. The last two years, obviously, in the top 10 rounds, I think we’ve selected two, which is not true to what we’ve been doing in the past.
“But I can tell you, we don’t go in by design, and that’s how it works. A lot of it is how it falls and how it plays out. And we line the board up and try to take the best player that’s available when we pick. It just seems the last couple years, it’s been the college route.”
Also at FanGraphs, Ben Clemens wonders: what if the season started May 1st?
It doesn’t sound like Ben Zobrist is coming back to baseball any time soon. The Cubs placed him on the restricted list in early-May and because of that he has forfeited his salary
Speaking of the Cubs, they’ve signed Craig Kimbrel for 3/$45M
Craig Kimbrel's deal with the Chicago Cubs is for three years and $43 million and includes a fourth-year option, sources tell ESPN. He'll receive $10 million this season and $16 million in 2020 and 2021. There is a $1 million buyout on a club/vesting option for the fourth year.— Jeff Passan (@JeffPassan) June 6, 2019
Vladito hit two more balls at high exit velocity last night. Since May 10th he has 11 batted balls of 111+ MPH. The Royals as a team have four.
Mohamed Aly El-Erian says “ask not what the Fed will do, but whether or not it will work?”
Given the remarks this week of Fed officials, it seems no longer a question of whether the Fed will cut rates but rather when and by how much. But there is a deeper two-part question that remains unanswered, and it’s much more consequential: Would such cuts even lead to sustainably and substantially higher consumption and investment; and, if not, how long can markets maintain increasingly elevated asset prices that are decoupled from the underlying economic and corporate fundamentals?
Lagarde warns of trade war’s “self-inflicted wounds”
The International Monetary Fund chief said the group’s economists believe the recently-imposed tariffs by the US and China would cut global growth by 0.3 per cent next year. When earlier tariffs are added, the IMF sees a 0.5 per cent hit to growth — or about $455bn, “larger than the size of South Africa’s economy”.
Asset managers everywhere, particularly the large scale providers who have their own ETF products, have been racing towards zero fees. That’s fundamentally good for investors and anyone with a 401k or retirement account.
Fidelity Investments on Wednesday announced a 14 percent fee reduction to a collection of passive target-date funds. The firm said that on June 1 net expenses for the Fidelity Freedom Index Funds dropped to 0.12 percent, from 0.14 percent, for the entry-level investor share class. The institutional premium share class for these multi-asset funds, designed to become more conservative as investors near a targeted retirement date, will remain at an “industry leading” 0.8 percent, according to the statement.
In the pension world there is a thing called funded status. It’s the difference between the money they are expect to owe at some point (projected benefit obligation) and the money they currently have (plan assets). If plan assets > PBO, they are overfunded (which is good). If PBO > plan assets, they are underfunded (which isn’t bad but it’s not good). There aren’t a lot of ways you can manipulate the plan assets anymore than you can manipulate the money in your bank account. Pensions though can manipulate the money they expect to owe. For instance, if they decide “all our employees are going to die sooner” then their expected obligation goes down. If they also say “we think our plan assets will make 20% a year” or “we are going to use a 20% discount rate instead of 5%” then their status changes. They can’t just say “we now have 20% more money in our fund” because, well, they can’t. But they can play with that projected number.
In 2008, state pension plans were ~83% funded (meaning they were 17% short of what they projected to owe). Today, that funded status has dropped to 72% (meaning they are now 28% underfunded). Part of that is because pension plans have gotten a bit smarter. They’ve lengthened their calculations on how long their employees are going to live for and also lowered their expected return. This doesn’t change the money they currently have, it just changed the money their are expected to owe. It’s an accounting change rather than an tangible change, if that makes sense. Owing more money future today than what you expected to yesterday increases your liability (and PBO is essentially a liability).
As an example, Conning cited the Texas Employees Retirement System. Decreasing the plan’s assumed rate of return from 5.36 percent to 4.36 percent — a single percentage point — would inflate liabilities by a whopping 30.3 percent. In contrast, a one percentage point increase in expected returns would cut liabilities for Texas’s largest pension fund by 26.9 percent.
So while on the surface a drop of ~11% in funded status over a decade sounds bad, it’s a cause of something GOOD (more realistic expectations). Some pension funds have taken the band aid approach, knowing that using more realistic numbers is going to wreck their funded status but if they do it now, they’ll save a lot of future headache.
The thing about pensions is that the people making investing and accounting decisions today won’t even be around when those decisions really come into play. If the CIO or CAO of a pension says “let’s lower the discount rate and shorten the actuarial table” and takes their funded status from majorly underfunded (a liability) to majorly overfunded (an asset), they can make their balance sheet look good, get a nice hefty bonus, and retire in 10 years. The issue is that in 30 years from now when people go to retire, the pension plan says “oops we don’t have enough money to pay you your retirement” and the government has to step in (oh and by the way guess who runs that federal program...Trump appointed Gordon Hartogensis...the brother-in-law of Mitch McConnell).
What is even worse is that the states that have the largest underfunded status have also been contributing the least to their plan assets. The exact opposite of what they should be doing. What’s even more scary is that the market has generally been going strong for a decade now, and the funded status of plans has gotten worse. This is either because they aren’t contributed enough, their assets weren’t invested right, or they had bad assumptions.
A lot of big institutional investors have flocked to what is called the Yale Model.
Decades ago endowments and pensions were basically just a mix of stocks and bonds. Then David Swenson of the Yale Endowment came along and changed everything. Instead just two asset classes, he invested in 6+ asset classes and reduced exposure to stocks significantly and bonds almost completely. In times of crisis, the correlation between stocks and bonds go up typically, which is the exact opposite reason why people own both together. The Yale Model combines several uncorrelated asset classes into one portfolio, reducing exposure to any one or two asset classes that may be correlated to another. The price of your house doesn’t drop if stocks fall. The price of lumber or wheat doesn’t change when Company A buys Company B.
Tying this back to pension plans, the Yale Model...didn’t work for some. But this wasn’t an issue with the model, it was an issue with their implementation of the model. I can do 10,000 hours of research, speak to industry experts, and run simulations until my computer explodes, and I can say “100% allocation to stocks is the perfect plan for you!” Notice though I’m missing a key point here. I didn’t tell you which stocks to buy. You could go and buy an index fund and get access to 3,000 stocks in one ETF, but you can’t really do that with alternative investments. There isn’t an ETF that invests in local small businesses or goes and manages futures contracts specifically tailored to your liquidity needs and investment horizon. Pension funds could follow the Yale Model but that’s only the first step. The second step is hiring the right managers, and well... many of them didn’t.
According to the report, public pension funds tripled their alternative investments from 10 percent of their portfolios to approximately 30 percent between 2001 and 2016, driven by a desire for better returns. The pension funds that got manager selection and other decisions right significantly outperformed their peers, with the top quartile of pension fund performers delivering an average annualized return of 6.3 percent over the 15-year time period. Funds in the bottom quartile of performers had increased their alternatives allocations even more, from 7 percent of their portfolios in 2001 to 33 percent in 2016. These funds earned annualized returns of 4.6 percent on average over the time period, according to data gathered by Kroll.
And that’s the fundamental flaw with any approach, be it investing or baseball. Just because you study Warren Buffett, read all his annual reports, and spend $4.57M to go to lunch with him doesn’t mean you can invest like Warren Buffett. Just as you could study Barry Bonds mechanics and perfectly match his swing, doesn’t mean you can hit like Barry Bonds. Only Barry Bonds can hit like Barry Bonds. Only Warren Buffett can invest like Warren Buffett.
Your songs of the day are one upbeat and one moodier
Restorations - “St.” from album LP5000
Citizen - “Numb Yourself” from the album Everybody is Going to Heaven
Some of Citizen’s stuff is hit-or-miss but when they are on they are the perfect throwback to 90’s grunge with some early-2000s punk. And for my money, the last two minutes or so of “Numb Yourself” is one of the best two minutes of music I’ve heard.