Big League Jawboning
- NVestor
- Aug 11, 2023
- 3 min read
We recently took a train to the Bronx after a long week’s work in Manhattan. Baseball isn’t a sport any of us follow closely but we appreciate the passion with which New Yorkers support the Yankees. While enjoying buckets of deep-fried chicken and hot dogs the players were getting stuck into something far less filling – chewing gum. Mouths opening and closing repetitively. Central bankers do it too – it’s called “Big League Jawboning” – which is a sophisticated game played with market participants whereby they open and close their mouths to steer interest rate expectations over time.
Policymakers have communicated their resolve to fight inflation with the narrative that they will, if necessary, hike and hold interest rates higher for longer. This has seen short term interest rates move much higher than long term rates. Meaning – the market is expecting future short term interest rates to fall considerably – either, because inflation will collapse quickly, or because a recession is around the corner (which will cause inflation to collapse as demand gets crushed). Markets are hoping for the former, which would be a goldilocks scenario whereby economic activity is neither too strong nor too weak. Too strong, could see inflation remain elevated, whereas too weak could result in a recession.
“Founded by former left-handed pitcher Rob “Nellie” Nelson, Big League Chew started from humble beginnings in the Portland Mavericks bullpen in 1977. For more than 40 years, the iconic pouches packed with shredded, flavorful bubble gum have become the preferred chewing gum for all ages having sold more than 1 billion pouches to date.”
Markets are forward-looking pricing mechanisms and judging by equity market performance over the first half of the year, goldilocks is most certainly in the house. Central bankers (and investors) are hoping to surf down the yield curve quickly enough to avoid a high interest rate tsunami hitting, amongst other asset classes, the housing and commercial real estate markets.
Big wave surfing is an adrenalin rush – ask Sebastian Steudtner, the German who holds the world record for the biggest wave ever surfed. You need extraordinary balance and nerves of steel to navigate your way out of the path of an 86-foot wall of water. Nowadays these surfers wear technologically advanced life-vests which are packed with CO2 canisters, used to create buoyancy in case of a bad fall. Emergency crews in helicopters and jet skis are relied on to spot and drag surfers out of the danger zone. These safety measures are however considered by some as dangerous. Grant Washburn, one of the world’s best big wave surfers says in The Big Wave Safety Paradox[1],
“It’s the nature of big-wave surfers to take risks,” he says. “They push it as far as they think they can based on the available safety. In the beginning, that wasn’t much, so the risks they took were somewhat reasonable. Now, the safety has seemingly eliminated most of the consequences. You can wipeout, inflate, get picked up by the ski and go right back to the lineup.”
He should have a word with Wallstreet….
This thinking, which relies on a perceived level of safety, looks to have infiltrated the minds of investors the world over. The only problem is that very few of them have ever surfed yield-curve waves, not to mention very big ones. Despite this, boarders have paddled out and are lining up for a memorable time. At this stage, our best advice is to at least wear a life vest. Either that – or hope the helicopters flying overhead are about to offload cash again.
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