Three Things I Think I Think – Cramer, The Economics of Home Runs & The Bear Market

Here are some things I think I am thinking about:

1) The Jim Cramer ETFs. A firm has launched a set of inverse and long Jim Cramer ETFs. The basic gist of the funds is to be able to piggyback on the view that Jim Cramer is a great investor or a good contrarian indicator.

I don’t know what I actually think I think about this. Part of me hates these gimmicky style funds that prey on people’s emotions. And another part of me says that people should be allowed to buy whatever they want and if there’s demand for a fund like this then there should be a market for it. But we should be clear about one thing – Jim Cramer isn’t giving planning based and prudent financial advice on TV. He’s offering opinions (often well informed I might add) for entertainment purposes. I respect Cramer’s knowledge immensely.

On the other hand, I also understand that he couldn’t possibly be serving the best interests of viewers because he doesn’t know his viewers. Therefore, anything other than very broad views should be taken with grain of salt. So you have an inherent conflict of sorts here where Cramer needs to be entertaining every day in front of an audience he couldn’t know. And look, that’s fine. Some people want to day trade or swing trade or whatever. That’s what makes a market, but you should also be honest with yourself about what’s going on here. It’s not financial advice and there are a million disclaimers on financial TV specifically because they know it’s not financial advice.

2) The economics of the home run king. When I was a kid I was obsessed with baseball and home runs. Roger Maris was like a God to me. The allure of home runs and the economics of it all is fascinating. Studies have found that slugging percentage (how many bases you average per at bat) is not nearly as important as on base percentage and WHIP (walks/hits per inning pitched). Basically, if you want to win you really need to keep guys off base and get guys on base. I know, sounds basic, but the point is that you don’t need lots of home runs.

But the exact opposite is true from an economics perspective. The guys with a high slugging percentage put people in the seats and earn big bucks because people love power hitters. Which all makes the operations of baseball that much more interesting. Do you operate a baseball team to win or do you operate a baseball team to make money? Because let’s be honest – at the end of the day baseball is a game designed to entertain people. And of course winning is great, but 97% of the teams lose every single year. So from an economics perspective it actually makes sense to operate a team to entertain rather than win.

Anyhow, what I am really getting at is that home runs don’t actually matter that much if you want to win, but they matter a lot if you’re looking at the bottom line.¹

3) Secular bear or cyclical bear market? There’s a raging debate right now in financial circles – are we in the midst of a prolonged secular bear market or is this a short-term cyclical bear?

The basic way I think of this topic is as follows – a cyclical bear is a market where the stock market starts to get a whiff of an underlying economic problem and then realizes that was wrong. The market essentially tests lower prices to see if there’s real confirmation of a problem. But a secular bear market is when the market tests those lower prices only to discover that there is a real problem in the underlying system. Sometimes those tests keep getting confirmed and so the market keeps sinking lower.

The basic difference between a secular bear and a cyclical bear is that the secular bear is confirmed by a real underlying economic issue that persists and hurts corporate performance for a sustained period of time.

As it pertains to today – well, no one really knows and I’ve constructed my entire approach to asset allocation around the idea that the stock market is a 17.75 year instrument. So the things that happen inside of 17.75 months aren’t that consequential. But it’s important, especially from a behavioral finance perspective, to have some clarity on the short-term even if the short-term is inherently unclear. And in my opinion, this looks more like a secular bear market. I was clear about this risk in my annual outlook and the main reason why is because this is predominantly a real estate slowdown. And real estate tends to be a big slow moving sector. So the odds of a getting clarity in the short-term are not very high because the real estate market is going to take a long time to digest these very high and surging mortgage rates.

Of course, I could be totally wrong. My bearish view has been right so far this year and I think the Fed is going to keep the pedal to the metal until something breaks, but circling back to point #1 – don’t let the short-term dictate your whole portfolio to the point where it starts to look more like a gambling account than a prudent asset allocation account.

1- To be clear, I think that Aaron Judge is the home run king. But I also think Barry Bonds should be in the Hall of Fame. I think it’s easy to look at the steroid era and call them all cheaters, but I also think MLB was complicit in the whole thing and created an environment that they made a lot of money from and therefore made it very hard for the players to ignore. If you create an environment where you can’t or won’t enforce the rules then I don’t think we should be surprised to see widespread cheating when the livelihood of the participants becomes contingent on whether the other guys are cheating….