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Bailout Culture Spreads…to Basketball?

Dennis Gartman had a memorable quote in today’s Gartman Letter:  ”All economic information of any importance is initially anecdotal.”  He uses random factoids as diverse as Japanese dog food sales to the rental rate for homes on the Augusta golf course during the Masters as leading indicators for bigger-pictures stories to come.  We could not agree more with Mr. Gartman.  We at HS Dent have been using anecdotes to make our basic points about the effects of demographics on the economy for years.   Harry Dent has long used sales of Harley Davidson motorcycles as an example of the “male midlife crisis” in action in his public speeches.  Likewise, “Big Joe” Clark, a board member of the HS Dent Advisors Network, has used the downfall of Interstate Bakeries (maker of the iconic Twinkie) as a powerful example in his presentations.   So, what interesting anecdotes do we see today?  There are plenty to choose from, but this one really spoke the loudest to us:

“NBA to Borrow $175 Million to Aid 15 Teams”  SportsBusiness Journal reports that the NBA plans to borrow $175 million to distribute to teams in need of additional cash.  The deal comes at a time when teams are laying off staff and cutting ticket prices.

The professional sports industries were certainly not immune to the excesses of the 1990s and 2000s construction boom.  Scarcely a large city in America failed to build a new state-of-the-art stadium for the home team, often with taxpayer support and nearly always with corporate naming rights.  No expense was spared and no luxury too over the top.  Hot dogs and beer were so “low class” in this new, gentrified world of sports.  New stadiums would have been incomplete without the Starbucks logo prominently displayed.

Of course, no extravagance can compare with the salary that A-Rod (A-Roid?) managed to pull down.

All of this had to be paid for, of course.   Recent years saw such pricing innovations as the “private seat licence” as well as old standbys like raising the price of parking to astronomical levels.

These excesses, in retrospect, should have been a contrarian signal that trouble was coming.  Professional basketball, baseball, and football have always been entertainment for the Everyman, but recent years saw price inflation that made the sports unaffordable to the average American family.  The sports managed to price themselves out of range. What goes up must come down, and deflation is always, without fail, the result of  a bubble.  Professional sports are not immune.

With demand at current prices sagging, prices will have to fall if the teams want to fill their seats.  The problem is, the biggest expense for most teams is labor in the form of exorbidant player salaries.  Most players are under long-term contract, and any attempt to lower salaries will likely result in a costly strike.  Furthermore, those first-class stadiums have to be paid for, and the corporate buyers of skyboxes are a lot less likely to throw money at such frivolous luxuries these days.

We are not at all surprised to see the NBA bailout out 15 teams.  We expect to see a lot more of this in the months and years ahead.  We might be entering the first real “depression” in professional sports.   It will only be a matter of time before the pleas for government aid hit Washington.

Charles Sizemore

Note:  Please feel free to comment below on the most ridiculous excesses you have witnessed; in sports, entertainment, or in any other area of life in recent years.