In this one I summarize the last post’s conclusions (part 1), expand further from there, look at some data on TAM price inflation, and then draw what I believe to be a very important conclusion re: how best to use allocation money for clubs in an inflationary environment (TAM-related).
Quickly revisiting Pt 1 plus some knock-ons
In the last post I wandered through some scenarios in an attempt to understand the best and worst uses of the league’s complex fiat currencies: General Allocation Money (GAM) and Targeted Allocation Money (TAM).
I ultimately concluded that GAM and TAM are best used via the action that destroys them forever: the buying down of player salaries via centralized league funds and/or the buying down of a transfer fee for an imported player via centralized league funds. Essentially, every dollar of GAM or TAM in your possession is a way to increase your team’s competitive position relative to the rest of the league (by carrying a higher wage bill than is otherwise allowed under the league’s complex roster rules). So any transaction that sends GAM or TAM to another team within MLS rather than the aforementioned transactions which destroys/uses the GAM/TAM is a transaction that lowers your team’s potential wages relative to the rest of the league’s potential wages (all things equal). As an example, and as a first order, trading GAM/TAM assets to another MLS team in exchange for a player’s current contract with said team is at face value an inefficient way to optimize your team’s competitive position, in that you are increasing the other team’s total potential wages and decreasing your own team’s potential total wages. In the last article I posited that the only scenario in which a trade might make sense would be if the player’s current contract is “favorable” (e.g. player is good enough to make $250K/year, but is making $100K/year and has time remaining left on the contract). But ultimately, I concluded that because the market for MLS caliber players is much larger than just the sum of all current MLS players, it follows that the GAM/TAM that is sent in this scenario to acquire a favorable player contract from another MLS team could just as easy be used to “buy down” a portion of a “market value” contract for a player transferring in from overseas to where the net effect might be the same hit to the salary budget charge, with the added bonus of not increasing your opponents’ total potential wages relative to your own.
Some things I did not mention in the last article but that I think are worth mentioning:
- The argument that the total pool of MLS caliber players is much larger than the current MLS player pool is dependent upon a team’s availability to information on players in this larger pool. Information on MLS players is naturally more available to a team than it is for foreign players in other leagues. As such, the total pool of MLS caliber players is only significantly larger to a team than the current MLS player pool if the team is willing to spend real money on scouting and analytics, things which close the information gap for MLS players vs import players. It follows that the decision point between trading GAM/TAM to another MLS team in exchange for a player you have easily available information on versus using GAM/TAM to sign a similar player from another league might come down to a tradeoff between 1) spending league money (no incremental cost to owner) accompanied by lowering your team’s wage bill relative to other teams to acquire a player and 2) spending real money (incremental cost to owner) on scouting and analytics so that the team can maintain a higher wage bill relative to other teams to acquire a player. Ultimately, this suggests club ambition and owner finances come into play as it relates to which strategy a club pursues.
- Further, stocking one’s team with more international players than other teams have on their rosters comes at a nominal cost: a trade with another team to acquire an additional international slot (above the baseline 8). Historically these slots trade on the “open market” for somewhere in the range of $50K-$70K of allocation money but draft picks can also be used. So it should also follow that trading GAM/TAM assets to another team in exchange for additional international slots might be acceptable in that it frees a team up to not send even more GAM/TAM to other teams in exchange for players. But importantly, it might be more efficient to trade Super Draft picks instead, given the level of uncertainty involved in SuperDraft picks.
- Additionally, MLS has some strange rules around player discovery which require a nominal amount of allocation money to exchange hands whenever a player is signed by one club but the player has been identified as a discovery player by another club. So allocation money has trade value in these situations.
Other Prickly elements of fiat currency (and thus GAM & TAM): Inflation
Because GAM and TAM are fiat currency, created out of thin air by the central MLS governing body (backed solely by the League itself for the ultimate use of increasing a team’s wage bill above preset limits), the fair market value of a dollar of TAM or GAM has the potential to act erratically, fluctuating based of the actions of the governing MLS body – principally its ability to increase or decrease the supply of TAM or GAM. This may or may not be manifesting itself at the present moment as we witnessed deal after deal at the close of the most recent MLS transfer window involve higher amounts of allocation money than we would’ve previously seen (had these amounts been as transparently reported by the league as they are today). The word on the street is that there is another round of TAM injection coming into the league, and perhaps in addition to this, an added optional TAM purchase options for clubs (spend incremental owner real dollars to acquire incremental TAM dollars used to increase team wage bill legally). And perhaps, what is only speculation by folks like me is confirmed behind closed doors by various MLS owners. If in fact, a new injection of TAM is on the horizon, and importantly, one that is larger than we’ve seen in the past, than we would expect to see some inflation in the going rate of player contracts or other MLS assets as priced in TAM.
Note: Sam Stejskal released this very good piece on TAM inflation as I was writing this piece. He tackles some really interesting wrinkles I did not pick up on, related to wages right around the max charge and inefficiencies in the market there.
Player contracts are messy and hard to value for many reasons, the least of which being we don’t have full access to the number of years left on any given deal. More significantly the fair wage valuation of a player is very subjective. But we do have some theoretically easy to value assets we can look at, to see if inflation is creeping up on allocation money.
Study: Inflation in the GAM/TAM exchange rate for International Slots / Spots
If we look at the market for International Spots, we can see an increasing trend within this season. It’s possible that this is demand-side inflation as teams MUST comply with the roster requirements as the transfer window begins to shut, but I don’t have a mental model to think through it… seems to me like unused IS spots should decline in value as the transfer window comes to an end, just as the teams who need IS spots start to really, really need them…in my mind there’s an equilibrium here, but I may not have it right. Anyhow, assuming that demand-side inflation is minimal, I thought we’d look at the available data of pure play International Spot deals to see if there’s some supply side inflation as the season has progressed. By my count there have been 15 trades involving international spots since the league started disclosing the general terms of trades between its members this year. From December 2016 until now only 7 of these have been straight swaps of international spots for allocation monies. Here they are:
For deals done in the summer months I’ve multiplied the price of the GAM/TAM by two since the team acquiring the international spot is basically only acquiring half a season (or less) worth of it. What we find is that the price of international spots has risen as the season has kicked on. With smaller subleases going for full annual prices this summer, reflected above as increased prices in the chart. It’s a small sample size but I think it’s something. Notably, with the exception of one deal between Atlanta and NYC, these are all GAM deals, which tells us that the inflation is not due to the expiry of the assets themselves (TAM assets which have a shelf life would theoretically lose value as they approach their expiration dates (remember, they die after 4 full transfer windows and so one would expect unused TAM that’s about to expire to be given away freely at the close of a transfer window).
Again, it’s possible this is a natural demand-side phenomenon with teams *needing* to comply with the roster rules in a timely manner and the teams with unused spots sitting back and laughing at them…but again, unused Intl Slots are worth $0, so it’s difficult to prove.
What of it? The Perhaps Very Important Stuff
I suppose the next question though is, what if there’s some inflation in TAM or in GAM due to teams expecting a fresh injection of funds into the league in the coming years? Does it change the conclusions we’ve already reached regarding “good” and “bad” ways to use allocation moneys? What are the broad market impacts of said inflation?
I may have to get into this deeper next time, but I see the impact being completely different for the non-international player market compared to the international player market. There is a basically finite supply of MLS caliber non international players in MLS. Each year some of them retire, some come up through academies or through the SuperDraft — others drop to lower leagues. So my gut is that an increase in TAM injections would be highly inflationary as it relates to non-international player wages (and yes trade fees, if you want to call them that), when we talk about the final use of TAM – which is the paying down of wages and transfer fees to meet cap rules. For the international player market, I think it’s completely different. Remember, TAM & GAM aren’t ever traded outside the league – they don’t exist. They are traded within the league, or they are USED (dead). Will teams looking to buy foreign have more funds to play with (and still comply with roster rules)? Yes. But will this have a huge impact in the global market for footballers? I don’t really think so. The supply is vast. To my eye the implications of this disparity for front offices in MLS is massive. If the price in allocation moneys for a non-international player is inflating but the price in allocation moneys for paying down an international players wages is NOT, it seems obvious that there’s a market inefficiency here that can be translated into a big competitive advantage.
Columbus Crew Vacuuming Up Minnesota United’s Pennies
Let’s take one of these recent trades and use it as an example. The opening assumption here is subjective, which is that Minnesota has overpaid the Columbus Crew for Ethan Finley. Don’t get too hung up on whether you disagree with that. Let’s just follow the math. Minnesota got Finlay (on a salary of $290K a year – is he worth more than that?) in exchange for $425K of total allocation monies ($100K TAM in 2017, $250K TAM in 2018, $75K GAM in 2018) paid to Columbus. If this price reflects the inflation of non-international players denominated in TAM assets because of a looming $2M TAM injection in 2018 — and I believe it does), just think what Columbus can do with these fiat funds on the international market. Because while there’s a finite supply of mid 20s American wingers (and thus his price in TAM is inflated), for that money they can replace him with an international player on $100K more wages per year (if they get him on a free), or they can use allocation money to buy down a transfer fee for a player on similar wages. Put another way, they can sell their asset (Finlay’s player contract) in an inflated fiat currency (TAM) and purchase a better one with a stable global currency ($USD) and then use the TAM to pay down the player’s wages $ for $ (without the inflation). This seems like a bit of arbitrage to me, but please let me know if I’m missing something.
In short, in this new environment of domestic TAM inflation, not only does it continue to make sense for the most ambitiously competitive teams to spend real $ on scouting & analytics and in doing so, maximize their GAM/TAM via *using* it to pay down player salaries rather than trading GAM/TAM, but in addition, it also makes sense to SELL domestic at inflated TAM rates, to then turn around and BUY international and USE TAM to buy down the international players purchased at normal rates.
Bullet points for my working MLS front office manual for a highly ambitious club.
- Spend GAM/TAM primarily to buy down player wages/foreign transfer fees below roster caps.
- Do not trade GAM/TAM in exchange for MLS player contracts (lowers overall competitive ability due to relative wages)
- To achieve the above two bullet points, real investment in scouting and analytics / recruitment departments is important to close the information gap for international player market compared to current MLS player market.
- In inflationary TAM environment, selling non-internationals (fixed supply) for TAM makes sense to then buy internationals, using the TAM you received to buy down their wages/transfer fees below the caps. (sell high, buy low)
- Acquiring future international slots now at nominal rates might make sense to achieve the above strategy of exploiting the two separate player markets. If you can trade draft picks to acquire these international spots, do that.