Baseball and Business: Playing ball in today’s new capital markets
Founder and CEO
Play ball! April is one of my favorite months of the year, as it ushers in a new baseball season. April marks a season of renewal and hope of a successful march toward a World Series victory later this year. This timing coincides with the beginning of the “heart of the year” where businesses hit their stride to grind through the rest of the year to ensure success.
This year, Major League Baseball has introduced a new set of rules designed to shorten game times, increase fan appeal, and ensure long-term stability by using pitching clocks, batting clocks and larger bases. These rule changes may be the most significant since the designated hitter was introduced in the American League in 1973.
The new rules give teams the opportunity to design new strategies that haven’t been considered before. The pitch clock will create new pressures on pitchers and hitters that will cause some historically successful players to struggle, and unknown players to emerge and dominate. Since 1973, baseball purists have lamented that introducing the DH “ruined the game,” but the MLB has continued to thrive as America’s pastime for over a century. We don’t know how these new 2023 rules will impact the game, but we’re going to find out—if you want to win, you must play and not lament the passage of the “good old days.”
Today’s “new economic rules” characterized by stubborn inflation, rapidly rising interest rates, historically low unemployment, continuing global supply chain issues and growing geopolitical disruption make this one of the most difficult and uncertain times in at least 15 years for designing and executing a winning strategy. The Federal Reserve has thrown several needed brushback pitches increasing rates over 4.5%, drastically changing the overall environment for market participants. Like the MLB, the Fed is trying to create longer term stability for our economy by bringing inflation down to 2%.
We believe that with the lowest unemployment rate in over 50 years, spiraling wage growth, strong consumer demand for goods and services, and sticky housing costs, the Fed will continue to increase interest rates in 2023—more brushback pitches. Capital availability is decreasing, and capital costs are increasing, creating risk for capital intensive industries, especially for those who are saddled with unhedged floating rate debt. It is likely that debt providers will see credit losses mount as borrowers struggle to keep up with debt service despite decent underlying business fundamentals. As expectations of a recession rise, these macroeconomic factors make it very challenging for business leaders to have conviction about which strategy is the likely to be most effective.
Despite this uncertainty (curve balls?) and “new rules,” market participants can still play offense and rally with new winning strategies. Historically successful market players may stumble and new players with new strategies may thrive. Well capitalized companies will likely have opportunities to provide rescue credit, purchase private ownership interests in the secondaries markets and acquire companies at lower multiples reset by this higher interest rate environment. Fundamental research, disciplined capital markets strategies and opportunistic investing will reward those who embrace the new reality, while those who run the same old plays in a new economic environment may struggle. Dig into the batter’s box and take your swings—when you put the ball and hustle around the bases you have a chance to score and mount rallies.
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