Lots More on Shohei Ohtani's $700 Million Contract

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1:05Hello and welcome to... Oh, jeez. My voice is totally shot. Whoa. Oh, my gosh. I know. Sorry. My voice is totally shot. Yeah. Oh, boy. So maybe I'll just let Tracy do all the talking. I'm glad we're doing a baseball episode on the day that you've lost your voice. I did a deadlift. One, two, three. Hegemony. Hegemony. Okay, go. What two? Hegemony. and Jeff Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid ink pasta? These are the important questions.

1:43Is it robots taking over the world? No, I think that in a couple of years, the AI will do a really good job of making the Odd Lods podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have the perfect guest. Until then, this is lots more. A weekly chat about whatever's on our mind. And we really do have the perfect guest.

2:11Tracy, I'm sorry my voice sounds so terrible today. It's okay. It's not like it's a problem for a professional podcaster to lose their voice. It's not like my entire career and profession is entirely premised on my ability to speak. How was the show? Our band had our first show last night, Skinny Dennis and Williamsburg. It was very good. I guess I sang a little bit too hard, but for our first time. You know, Taylor Swift was doing this three hours a night. Well, that's what I've been wondering. Like, seriously. You need to do vocal exercises. Your voice is a muscle, Joe. You have to practice.

2:43How the hell did she do that? I've thought about this. And, like, how did she, like, avoid, like, getting a flu? You know, it's like a whole year you get, like, sick. And like, like it's it's honestly like the fact that she did that to her, like blows my mind. Joe, it sounds so painful listening to you. I hope you're OK. Well, I was going to say she almost didn't get to meet Travis Kelsey because the first time he came to her concert, she was like, I can't meet at talk to anybody beforehand because I'm resting my voice. Do you think they just stared at each other from like across the room? As our producer, Dash, who I think for the well.

3:18Dash has been on. He's been on. And we're also speaking to our friend and a Bloomberg opinion contributor and a Fed watcher and sports watcher, Connorson. Can I just say there's a supreme irony that the day we're talking about baseball, Joe has lost his voice. So apologies in advance to listeners if I am forced to carry this episode. And I honestly know nothing about the topic, but I will do my best. But Tracy, you may not know much about baseball, but you understand that if a baseball player sends a$700 million contract that stipulates that for like the first nine years, they get paid$2 million a year.

3:56And then for the next 10 years or something, they get paid$68 million a year. That's at least a financially interesting conversation. Yeah, I agree. Wait, the other thing I would like to say is before this week and before this contract was signed, I had never heard of this particular player, which perhaps says something about the state of Major League Baseball. I feel like you can sort of talk about this topic without having anything to do with baseball, which is what makes it kind of fun. It's like a$700 million contract with weird money being deferred. And it's just a fun thing to talk about.

4:26But Tracy's point is really interesting, which is it's kind of wild to hear a$700 million contract in an industry. For someone a lot of people haven't heard of. And in an industry that, by many people's accounts, is like on secular declines, clearly not as like in the media, in the public consciousness as NBA. Nothing like NFL. Where's this money coming from to pay someone$700 million? TV rights deals, local TV money, season ticket money. There's a belief that he'll be a marketing machine for the Dodgers. And so when you're looking to sign a big contract, you can come up with ways to justify it, just like tech companies can come up with their TAMs and whatnot.

5:08People just come up with a way to do it. Wait, so we haven't actually said his name yet. It's Shohei Itani, who plays for the Dodgers. And OK, so one basic question I have is I asked someone, one of our colleagues, Dave Litka, before we started recording the show, like, who is this guy and why should I care? And he started comparing him to Babe Ruth. And I at least know who Babe Ruth was. So like, what is the big deal about this guy? Like, why is he ostensibly worth$700 million, even if it's being paid out on a deferred basis? He's arguably better than Babe Ruth. Like, it's the sort of thing that for people my age who like baseball as kids, you would dream about, wouldn't it be cool if there was a Babe Ruth?

5:49But he's like better than Babe Ruth because there was a time this summer when he was basically leading baseball in home runs and also almost leading as a pitcher in strikeouts. And it was just like, how is he doing this? Because it's not like there are other players who hit and pitch and they're kind of OK at both. Like, he's the only one doing this. And he was like the best at both parts. And it just doesn't make any sense. Tracy, I know you don't really pay that much attention to baseball, but that fact that he is like dominant on both sides, like, were you familiar with how rare that is in baseball?

6:20Yes. So I'm familiar with in baseball, people tend to do like one thing. well. I watched Moneyball as well, so I kind of get it. But yeah, OK, it's unusual to be able to hit a bunch of home runs, which I take it that's like what baseball audiences want nowadays and be able to pitch really well. Yeah, there's nobody else who does this. It's yeah. What is the net present value of Otani's contract? Like, how do you like if you're like thinking about, OK, what is the contract worth that pays, you know, this and what does it say about his own personal inflation expectations and why does it structure it this way?

7:00Just sort of give us like. Wait, don't the Dodgers get the interest because it's deferred? Yeah, just sort of walk us through the math as you've modeled it out. Yeah, like I had to obviously Google this to prepare for the podcast. And it's funny because there are different discount rates applied depending on the way that it's being used. So baseball has this competitive balance tax, which is basically like every team has if they spend more than$240 million, every additional payroll dollar above that is taxed and redistributed. And so for the purpose of that luxury tax, the discount being applied is 4.43%, which is based on some IRS code and the sort of bond yields as of October 23.

7:40But for the purpose of - Wait, is there like a specific IRS baseball player clause or something? Oh my gosh. Well, it's for, it's the federal midterm rate as defined in section 1274, part D of the IRS. Please tell me you had to look this up before this conversation, right? Like you didn't just know this. Okay. I think Tracy was a little skeptical that a baseball topic would be good for odd laws, but this is now, we are now squared down the middle. We're in the game. Yeah. So for the purpose of the luxury tax, it's worth$46 million a year. Okay. Okay. And, but I guess for the purpose of MLB regular payrolls, there's a 10 % discount rate being applied.

8:20Although I don't really know what it's like, okay, who cares? Like, what does that mean? And, um, the Dodgers have to set aside the money every year, even though they're only paying in 2 million a year, they do have to set it aside. So you don't have to have any counterparty risk. I was wondering about that. So Otani does not need to be like buying credit default swaps against the Dodgers to protect against like, he's not facing any counterparty risk. Exactly. Okay, I was wondering about exactly this. Will he have to pay taxes on this in 2034? I don't know the answer to that. I'm sure lawyers will fight over it in the U.S.

8:50The state of California will try to get their money. But I don't know why he would agree to this. And this actually feels like a very Japanese thing to do. Not that you want to kind of dive into cultural tropes, but I just can't imagine any kind of American-born person agreeing to this. I mean, it's still$700 million. I guess it's—how much is it in the interim? It's like$2 million a year? $2 million a year. So he's getting$20 million over the next 10 years, which for baseball is not that much. And then he'll get$680 million in the following 10 years. I mean, I do think a lot of people would be satisfied getting$700 million overall, even if it was paid out on a sort of 10-year basis.

9:28But I take the point that it's kind of structured weird. What did the Dodgers get out of this? So my understanding is that similar to football or soccer in Europe, there's like a cap on the amount of money that they can spend on players. And so presumably, if they're not paying out hundreds of millions of dollars on a yearly basis to a star player, they have additional money that they can spend on other people. Right. So the headline number is 70 million. But for the purpose of that competitive balance tax, it's only 46 million. So it frees up 24 million that they can spend on other players. So he was on the Angels before.

10:04And the Angels, my understanding is like had amazing players, but were somehow just terrible and not competitive. He presumably wants to win a World Series. How much more is this sort of like create the opportunity that the Dodgers can spend enough to build a championship caliber team around him? Well, in theory, so the way that people think about, well, how much money should you spend on free agents is there's this baseball stat called wins above replacement or war. And, you know, obviously past performance is not indicative of future, But in general, the thought is people will pay$8 million per war per year.

10:41That's sort of like the going rate for an expected win above replacement. So if you're saving$24 million off the tax, in theory, that lets you buy three extra wins somewhere else. It's not that much. Yeah, but it's small margins in baseball. Right. Just on the deferred aspect of all of this. So, I mean, could you get to a state where like lots of baseball teams just start doing this? And like start building up, I guess, like their deferred liabilities in order to do these future deals. Or did you say the money is held in trust? I can't remember. It is held in trust. So I think for the purpose of the competitive balance tax, you could do it.

11:20But yeah, from a team accounting standpoint, the money is still has to be set aside for him. They can't just kind of ride on that. Maybe they're earning interest, though. I don't know if I think they are. I think the interest accrues to the Dodgers. But is there any future in which like this kind of contract could be replicated by other teams? Or is this such a one off given, you know, Otani's unusual abilities and given just how weird the structure is and your point about like who else would accept this in professional sports? Well, baseball obviously has a union and there's nothing restricting this sort of deal in the current union deal.

11:57It's something that the players could revisit and in the next deal. But yeah, right now there's nothing stopping even a$300 million deal from being structured this way if the player and team agreed to it.

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14:19so i mentioned obviously you know otani thinks the dollar is going to be worth something or you know that inflation isn't going to destroy the value of that one in 10 years when the big balloon payment so speaking of inflation big week for the fed you sorry i sound terrible um you've been on team merch for a while now and now the street is coming around to your view it looks like yeah so it's it's really interesting because i feel like and i talked to neil dudden tim dewey we have a little kind of group chat that we've been working on this for a while and it's been very obvious to us that this is what was going to happen but obviously the street disagreed and i don't feel like we have access to any data that nobody else does and so i'm curious from your perspective, why is it that something that seems so obvious to us was being fought by the street and bank economists and people like that?

15:12Well, why was it so obvious to you in the first place? Just because the Fed had talked about this view of as real-life inflation came down, that means that real interest rates were going up. And so policy was getting more restrictive and eventually would make sense to make an adjustment to account for that. And to me, it was just this is what they told us they would do. But I felt like other people were coming up with their own views of what the Fed should do rather than just listening to the stated Fed reaction function from the Fed. I mean, I think that's that's basically what happened. The other thing, the other thing that I saw on Twitter, which was kind of shocking to me, it was a bunch of people talking about loose financial conditions and how because stocks are up so much, crypto is up, the Fed has to cut and they weren't joking.

15:55I know like Fed's got a cut has been a joke in the past. But that that That always seems super weird to me, given that I know we had Neil Kashkari on the show last year, and he did push back against the rally in stocks at that particular time. But this is a totally different environment where inflation is falling. And to Connor's point, like real rates are going up. So that just seemed like very strange to me that anyone would try to mount that particular argument. And I think people were holding on to Fed speak from 12, 18 months ago, which, to your point reflected a very different environment.

16:31And yeah, like if it were August 2022, they weren't happy, but inflation has come down and it's not quite at two yet by some of their measures, but it's sort of, in a way it's like there was some reason for like loosening on Fed speak just because inflation wasn't at five anymore. It had come down. Just to push back a little bit though, on this like idea of like real rates going up. I mean, It feels to me like there's sort of academic macro and then maybe real world macro. So what we're talking about here is real world macro. Oh, inflation is going down, rates starting the same, therefore policy is getting tighter.

17:07Whereas my sense is that academic macro looks more at forward expectations of inflation rather than past. And they say, well, look, we already knew that inflation was forecasted to be X. This is already taken into account. Therefore, we're not getting implicitly tighter. Do you sense that sort of like that being the divide? I think so. And like, to be clear, I don't necessarily agree with the framework they're using, but it's sort of like my job is to figure out what framework are they using? Right. This is what they've told us they're going to do. And so it's our job to figure it out. Were you surprised at all by how dovish the meeting actually was?

17:46Because I mean, I guess consensus, well, consensus was like very one way going into this, but I think it's still kind of surprised on the dovish side. And for what it's worth, I thought they would lean slightly more hawkish. I thought the statement and the SEP would be more hawkish just because it's more of a bureaucratic sort of deliverable that everybody has to sign off on. There's probably some lags in that. But that Powell would use the press conference to kind of reorient people into this, you know, maybe cut in March type framework. But the fact that, you know, the median dot for 2024 suggested three cuts And then they had adjusted their core PCE forecast for 2023 to a number that you really have to be in the nitty gritty and focused on it almost day by day to get there.

18:28Suggested that, you know, the committee got there a lot sooner than certainly I expected. The NASDAQ is now 41 % on the year, which is pretty wild. That's a new insane year. S &P 500 up nearly 23%. Dow Jones at all time highs. Like, I don't know, cliche is good as it gets. But like, what is the upside from here? As you say, like, you know, what are you looking for for the next putting on your investor cap? What are you watching for in 2024? Yeah, so I'm actually working on a column on this right now because it's like the stock market's expecting this boom driven by rate sensitive cyclical things.

19:09And then the bond market's expecting six cuts in 2024. And it's like, is that an internally consistent dynamic? And my gut is no, but it's sort of like, it kind of makes sense today. But when you put yourself in the shoes of how will things feel in the middle of the next year when they've already maybe cut a few times and housing is taking off, will they still want to cut three more times with more to come in 2025? I don't know if that will be the conclusion, but it's sort of people are off sides. And so they have to buy bonds and buy stocks. And it's mid-December and everyone's just kind of running around with their heads cut off for now.

19:42Tracy, KRE, regional bank ETF, up 38 % since October 25th. Yeah, and contrast that with what was going on in March, right? So many things have happened this year that I think we kind of forget about the banking crisis in March now. But, Connor, you mentioned the bond market and what it's forecasting. And I always come back to this idea that maybe the economic information that you can pull out of the bond market isn't as useful or as accurate as it used to be because there are all these different reasons that people hold bonds now, especially big players like banks. They have to hold bonds for regulatory capital reasons, for liquidity buffers and things like that.

20:27And I often wonder if that's sort of skewing the data. And I think in March, there was that moment where Powell was sort of suggesting they could hike 50 basis points at one meeting and then maybe 50 at the next. And people were positioned for that. And then Silicon Valley Bank failed. And it's like everybody who had made those bets on the hikes had to cover just because from a risk management standpoint. And so reflexively, it just pushed yields way, way down. And then people like us who are trying to say, well, the bond market's now pricing cuts in August. Well, sort of, but it's also just people had to make this positioning move.

20:59And then once the positions were clear, then the data could take over again. And I almost wonder if we're doing that right now. Yeah. Speaking of, we're in one of those environments where like you just look at charts and you say like, oh, we're so back. Vornado, the realty trust, up 160 % since, and this is like New York real estate. So, you know, talk about New York office real estate, up 160 % since May 12th and up another 8 % today. So every chart we pull up is just like, we are so back. You know how I know that we're back? I heard a trader slash investor that I know last weekend went to not just one, but two gentlemen's clubs to celebrate 2023.

21:40Two gentlemen's clubs. Which is like a blast from maybe like 2006. 2007. Yeah. Wow. We really are. We've really put the Zerp era behind us. I also think one of the weird things about this week in particular and the Fed meeting is it's kind of like a Rorschach test for people's previously held opinions. Right. And so you have people who are celebrating an ostensible soft landing. So inflation is coming down without unemployment going up massively. And then you also have people who are looking at the forward pricing of rate cuts and going, oh, see, there is going to be a recession next year. And so it kind of feels it's a weird environment at the moment.

22:21Something else interesting about this environment is that usually when you're about to get rate cuts, it's like at the end of this big investment cycle. So in 2000 with tech stuff and but we've had this like, you know, housing in the good sector have been in a recession really for 18 months because of the rate cuts. And so arguably you're easing at a time when these sectors are poised to rebound, which is I think next year is going to be another one when traditional patterns don't work so well because people are going to be looking for the rate cut playbook and it might not work out the way that the past two or three cycles have.

22:51You mentioned that you don't necessarily agree with the Fed's framework. Like your job is, you know, your job is to pay attention to it and to know what they're saying and to listen closely, not to say what they should do. That being said, do you think there is a risk of reacceleration of inflation given loosening financial conditions, surging stocks, people probably wanting to buy homes and buy furniture for their homes again when they see headlines about sub-7 % mortgage rates, etc.? Is there some risk here that they get offsides again? I think so. I think it's more of like Home Depot. I could say they're seeing price pressures in Q2 of next year as demand comes back.

23:32But the core PCE data, which is, you know, it's an index that's constructed based on stuff like that's probably going to be pretty soft through at least the middle of next year as a lot of sort of accumulated disinflation works its way into the data. And so I think there could be a period where if you're following corporate earnings and looking at the stuff that I look at, it looks like inflation is coming back. But the actual data that we get once a month is still going to show that inflation is not a problem. And so I don't know what the bond market will do with that, but that's something I'm thinking about.

24:11Just going back to baseball for a second, Joe, I know you like minor league games. I do. Specifically going out to Coney Island. And Connor, it sounds like you're a fan as well. But have either of you ever been to a Japanese baseball game? Oh my God, no, I want to so much. They are so much fun. That sounds so fun. Yes, and because the crowd is so intense and everything is kind of coordinated. Like all the chants and stuff are very coordinated. So there's like, you know, let's go Sakamo and like clapping and stuff. It's amazing. It's so much fun. Now that's definitely like a bucket list thing is to go to some, go to see baseball games in Japan.