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That Time of Year Again – Bobby Bonilla Day!

It’s already my favorite day of the year again! Forgot why? It’s a day when you can see the power of compounding and time value of money. The day Bobby Bonilla gets paid $1.19mm even though he hasn’t played baseball in over 20 years!

Bobby Bonilla was one of the killer B’s when I was a kid on the Pirates with Barry Bonds. He then eventually played for the Mets.

In 2000, the Met’s bought out Bobby’s contract. Instead of paying him $5.9 million in 2000, they agreed to pay him $1.19 million per year for 25 years starting July 1, 2011. The interest rate? 8%.

How does the math work? Well, $5.9 million grew by 8% with no payouts for 10 years. So the Met’s owed him $12.74 million in 2011 when the payouts started. 25 Payments of $12.74 still earning 8% interest is… $1.19 million. Here you can visually see the payouts.

Bobby Bonilla’s Payout Structure

The interesting part of this story is the Mets were happy to agree to this interest rate and payout structure because of the amazing returns they were getting from … Bernie Madoff.

I noted today a lot more news about the day. I’m sure everyone will catch on by 2035.

By Christopher Schwarz, ago

Your Mouth is Smiling, but Your Eyes are All Sad. Why?

Last week, the Fed met. They said interest rates would remain at zero. They would continue asset purchases. They still view inflation as transitory. But there were *HUGE* shifts in the market. Why? Due to the “dot plot.” Let’s review.

In the graph below, I have four lines: The Fed’s expectations for interest rates prior to the meeting and their new expectations now. These are the averages from the “dot plots” release by the Fed. I also include the market expectations before and after the meeting.

Prior to the meeting, the Fed didn’t even have a date when they would likely raise rates. After? The date changed to Mid-2022, which is “only” a year away. This is a HUGE change in expectations.

In fact, the Fed now agrees with the market. Except the market now beleves we’ll have 2 rate hikes in 2022, another 2 in 2023, one in 2024, and one in 2025. In short, short-terms rates will be rising MUCH quicker than previously anticipated.

This is a really big change in expectations give the Fed statement read like it was the same ol’ same ol’.

The impact on the markets is easy to see:

  • 10-year yield down 0.10%
  • 5-year inflation expectations down 0.20% per year
  • 10-year inflation expectations down 0.20% per year
  • 10-year minus 2-year is down 0.2%

What does all of this mean? The market is expecting the Fed to raise rates sooner, which means less inflation AND less growth.

We’ll see soon whether or not the Fed is trying to “talk” the market down or if they will start to act. The Fed will need to taper bond purchases before they can even think about raising rates.

(Movie quote from “Get Him to the Greek.” The meaning is you are saying one thing and thinking another. Here the Fed is saying nothing changes, but the box plot has a huge shift.)

By Christopher Schwarz, ago