Colorado: The New Bull Market

Over the weekend, Ireland became the second Eurozone country to get a significant bailout from its neighbors in order to head off a large scale financial collapse. Yesterday, the President issued a two year wage freeze for all federal employees as a response to the continuing weakness in the economy. Unemployment has shown few signs of recovery, and the housing market continues to struggle. After some years of free spending, the world is now focused on deficits and debt reduction.

The Colorado Rockies, however, think everything is going to be just fine. That’s really the only conclusion you can draw from the decision to extend Troy Tulowitzki’s contract through 2020. This contract isn’t really about the player, as much as it is a bet on significant inflation returning to baseball salaries.

The Rockies already had Tulowitzki signed for the next four years at a total cost of about $39 million, assuming that his 2014 option would have been exercised. This extension doesn’t alter those payments at all, so this was not a case of the Rockies adjusting Tulowitzki’s pay to reflect his strong performance. Instead, they simply guaranteed the option year and then added a six year extension to the end, totaling $119 million in new money.

$20 million a year for Tulowitzki’s age 30-35 seasons doesn’t sound too bad, given his broad base of skills and overall ability. Carl Crawford is going to get a similar contract this winter for approximately the same time frame of his career, and while they’re not the same player, they are both quality hitters who get a lot of their value from their defensive abilities. The difference, of course, is that we have far more information about what Crawford was at this age than we do about what Tulowitzki will be in four more years.

The Rockies have taken on a substantial amount of long term risk for the right to sign Tulowitzki to a deal that is close to current fair market value. The only way it makes sense to do that deal now is if we’re about to enter a four year period of significant inflation.

For instance, if we see 10 percent salary inflation over each of the next four winters, $20 million per year now would be equivalent to $29 million per year in 2015. Over a six year contract, this deal would be a $45 million savings over what they would have to pay Tulowitzki in that market, given that he had aged normally and was still perceived in exactly the same way.

10 percent yearly salary inflation is pretty aggressive, though – that is the kind of annual raise we saw during the dot com and housing bubbles, where spending exceeded rationality. If we lower than rate to 5 percent, then $20 million now is equivalent to $24 million in four years, and the Rockies would only be saving $24 million over a six year deal handed out when Tulowitzki became a free agent.

Given the timing of the contract, I have to think the Rockies are betting on annual inflation closer to 10 percent, because otherwise they’re simply inheriting a massive of risk without the necessary reward. Saving $4 or $5 million per season on a long term deal for Tulowitzki is nice, but it wouldn’t be enough to justify accepting the problems that could arise between now and 2014.

Are the Rockies right about inflation? Maybe, but based on what I know about projecting economic futures, they don’t have any way of knowing. This is essentially an expensive guess about where the market is going in a time when no one really knows where the markets are going.

Given that this is the same organization now suffering under the weight of an extension given to Todd Helton with a similar premise, and the team that had to pay a huge chunk of Mike Hampton’s contract to unload him two years into an eight year contract, you would think a little more long term risk aversion would be in order. From where I sit, the Rockies just took on too much needless risk. This seems like a deal they should have sat on for another year at least.

We hoped you liked reading Colorado: The New Bull Market by Dave Cameron!

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CircleChange11
Guest
CircleChange11

Not sure I understand the risk.

He had a contract through 2014. He did not accept significantly less money per year for the extension. The extension basically signs a 26yo through his age 35 season … at a premium defensive position.

Don;t get me wrong. I have no problem paying Tulo 20M/y. I just don;t get the 6-year extension while he already has 3 years on his current contract.

Doesn’t seem like the benefit warrants the risk. This seems like one of those “if everything goes right” plans … where it almost never does.

Tomcat
Guest
Tomcat

Did all of Cal Ripkens value to the Orioles come on the field? If not you understand why committing to a consistent product on the field can mean a lot to a fan base

Steve
Guest
Steve

Right, and this comment would be appropriate if the Rockies gave Tulo this deal on the eve of free agency.

But based on the current reality, they could have struck this deal in December of 2013 and gotten the same type of currency with their fanbase.

He wasn’t going anywhere until 2015. At the earliest.

Tomcat
Guest
Tomcat

true that he wasn’t going anywhere for sure but what if he has an MVP caliber year(the way we know he is capable of) there is no way this deal gets done. He would have signed for a lot more than 6/120 on the open market, there is not a doubt in my mind.

CircleChange11
Guest
CircleChange11

If he has an MVP year, how much MORE over 20M/y would that add?

What if he misses a whole year due to injury? How much should that take off?

As I said already, Tulo got premium money for premium security with FOUR years left on his current deal?

They could have made the same deal in 2013 or 2014. If he won an MVP or 2, maybe the price goes up to 25M/y … but so what, his performance would have improved, and is worth that money, and you’d gladly pay it.

To me, there’s just too much that can happen over then next 4 years, let alone over the next 10.

I’m reminded of Eric Chavez, Ken Griffey, and countless other “will be awesome for years” guys where one injury, followed by another, broke them down.

Matt
Guest
Matt

“but what if he has an MVP caliber year”

That could happen, and that could lead to it being worth it for the Rockies. But what is more likely: He has an MVP year in 2014, or he breaks his wrist again tomorrow, or the next day, or the day after that, or the day after that, or the day after that… or one of the 1400+ days after that.

Travis
Guest
Travis

I am 100% on board with your statement that “committing to a consistent product on the field can mean a lot to a fan base.” However, I come to a different conclusion from the Tulo trade: that it was harmful to the Rockies’ ability to keep a consistent product on the field. With Tulo’s injury risk (he’s missed significant time each of the last 2 years), I think that the team could end up being hamstrung a la Helton by committing so much to one player.

To me, one of the most crucial elements in being consistent on the field is payroll flexibility. The Rockies’ payroll flex just took a big hit.

neuter_your_dogma
Guest
neuter_your_dogma

“what if he has an MVP caliber year?” Ryan Howard?