Jays From the Couch looks into a possible trend in the MLB free agent market; one that is not looking good for free agents
Scott Boras is widely considered to be a top agent who has done tremendous work in securing some of the largest free agent contracts in professional baseball history. In a sense, free agent contract economics have been in a “bull market” for the duration of Mr. Boras’ career. He has understandably been conditioned to remain patient and set his clients’ price at a certain level, and then wait until his “offer” is hit by seemingly endless appreciation in free agent prices. This winter may signal a clear end to the great free agent bull market.
Financial markets typically offer what is known as a liquidity premium, as asset owners like to know two important details: the price of an asset on demand at any time, and the confidence that the market will be deep enough for the owner to liquidate their position around that price. In contrast, things like real estate tend to be far less liquid and can suffer from major dislocations between what a seller is conditioned to believe the value of an asset is, and the actual clearing price of the market at any given time. When I look at the current seizing up of this off season’s free agent market, it reminds me of major inflection points in less liquid asset markets. These big inflection points are generational in nature, so it is normal for them to be a big surprise and largely unexpected by most.
A common occurrence as these sorts of market cycles unfold is for the “generals to be shot last.” Lower quality assets tend to drop off first, then mid quality, then high quality, and then finally the platinum quality assets. In recent years, we’ve begun to see this trend unfold in the free agent market, and we may be on the verge of the hop from mid quality to high quality, with next year’s class putting the platinum quality jump into play.
Remember last year when the market for power bats collapsed and shocked many – including the Blue Jays front office? That was preceded by a couple of years where “lower quality” aging veterans had already been relegated to 1 year deals or even minor league contracts. Last winter it was more middle of the road players which were hit hard, and higher quality players like Edwin Encarnacion and Jose Bautista were impacted. The contract Jay Bruce just signed (3 years and $39 million) continues this trend. Remember in early November when Jay Bruce’s agent appeared to be “demanding” 5 years and $80-$90 million? Kind of like a real estate agent setting the price of a home based upon recent comps regardless of where the market has actually moved. The result of such a mis-judgement of a market? Inventories pile up until prices drop to the point where the market clears, and/or sellers begin to panic and start making the dreaded “bid wanted” calls.
In financial markets, there are times when liquidity literally evaporates. There are legendary stories from the crashes of 1906, 1929, 1987 and even the relatively recent global financial crisis in 2008. Owners of assets need to sell due to financial obligations and/or panic, and there is a rush of people in search for buyers and liquidity. By definition, by the end of a long bull market, most market participants are already similarly extended and not in positions of strength to offer the required liquidity. This is a particular problem when asset prices are driven to levels well above actual value, as the combination of overvalued assets and low liquidity, means that prices can drop rapidly – like from the 5 years and $150 million that Bautista reportedly demanded prior to the 2016 season, to the 1 year $19 million deal he ended up with. There have been times when an asset owner makes a call to get a price on their asset (think mortgage bonds in 2008) and the price quoted is 50% below the last trade, or literally no one picks up the phone on the other side!
When I apply these concepts to the MLB marketplace, I see a confluence of factors that make me think many agents and players may be in for a nasty surprise.
- The seemingly endless upward march in media property fees may be ending. The era of oligopolists imposing never ending cable bill increases for sports properties on all their customers has probably ended. The competitive landscape has shifted massively.
- Front offices now know that the value of free agents in decline is well below what the “bubble” years offered. The linear projection that metrics like the price per win (presently discussed to be around $8-$9 million) will increase indefinitely may also come into question.
- What is effectively a salary cap has changed how the industry’s deepest pockets will spend.
- The analytical evolution has made the pricing of player value more efficient, but the compensation of that value is now horribly misaligned. Players’ most valuable years are dramatically undervalued based upon the CBA-this could be a huge problem as future CBA’s are negotiated and the players union likely wises up.
- Many agents and players are like home owners that are convinced their house is worth $1 million because their neighbor sold their house last year for that price. Their emotions are anchored in recency bias and reference dependence, and remain stuck in the idea of what they think their house is “worth.”
- Spring training and the regular season create a known deadline, which provides a built in catalyst for the market to clear, whether that be through well positioned buyers, or panicked sellers.
Of course, I could be wrong about material aspects of the narrative, or possibly everything I’ve discussed. But as we look forward to the next 6-10 weeks, and even to the vaunted 2019 free agent class, I expect there could be some dramatic surprises to the downside. Given the sheer volume of free agents available, it seems almost certain to me that a panic will ensue. Depending on how events unfold, it could setup next winter to be when the highest quality “generals” are impacted. If I were Josh Donaldson and the Blue Jays offered me a 4 year extension of $100 million or more, I would seriously consider hitting that bid.
*Featured Image Courtesy Of DaveMe Images. Prints Available For Purchase.
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