Henry on Economics

From Edes’ sunday column:

Ask Sox owner John W. Henry for his thoughts on the economic landscape in baseball, and you will not get a sound bite in return. This was Henry’s response:

“It looks as if it was hard to make deals with everyone trying to unload contracts on one another. `Here, if you take this one we’ll also give you . . .’

“The current economic landscape you reference seems to be a desert. Will that continue? There are certain to be a few oases. If everyone is seeking flexibility — and maybe not everyone is right now — it’s exactly what you would expect after the salary-inflation bubble burst. People want to unload the contracts that were signed when GMs and team owners labored under the belief that player salaries and franchise values could never go down. That’s what happens at the end of every bubble. `This particular market cannot go down. We have to pay more now because it will only get more expensive.’

“This offseason, in the aftermath of the bubble, you have most people saying `Whoops.’ Nothing in what is happening is strange if you have even the slightest understanding of how markets work. There has never been a bull market in history in any sector, in any country that was not followed by a bear market with repercussions.

“Diamonds went up every year for decades (1980: `The DeBeers Cartel is so strong diamonds cannot go down’). Farmland, Toyko real estate increased steadily for decades (1975: `They’re not making any more land’). Bonds declined for 40 years (1982: `Who in their right mind would buy bonds?’). Stocks in real (inflation-adjusted) dollars fell for decades. And they all reversed mightily. Stocks finally went straight up, for what, 17 years? Diamonds went down. Land that soared into bubbles fell. Bonds rallied beyond anything seen in history.

“So player salary inflation went through the roof (very analogous to the way Tokyo real estate soared before it crashed). Now it is coming back to earth. There is nothing strange, nothing unnatural about that, but whenever a peak is reached in any market no one believes it for quite a while. Most people continue to think for some time it will make new highs in short order. Markets don’t work that way, however. Trees don’t grow to sky and keep growing. Revenues only support a certain payroll. Deficit spending for individual businesses in general stops when debt levels reach a certain proportion of equity.

“And what if owners, like players, began to demand a return from baseball as opposed to losses? That probably doesn’t matter though, because at some level of debt their bankers are going to demand enough return to service the debt and pay-down principal. How many team owners have received World Series rings in return for their mountains of debt? I may be overstating the case presently, but not by much. It’s still early in process of returning sanity to the economics of the game. People won’t forever hang on to the bubble myths of 1999-2000 such as `The economics of baseball will never make sense.’ “

Discuss amongst yourselves.

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