You Are Not Shohei Ohtani. (Or Bobby Bonilla.)

I mean of course you aren’t Shohei Ohtani, unless you are, in which case, hi, big fan. But for the rest of you, is it just me, or is there an entire cottage industry within personal finance dedicated to slicing and dicing the incoming Los Angeles Dodger’s funky contract in hopes of determining a) whether it is better for the slugger or the Dodgers and b) whether it is worth anywhere close to the headline $700 million. Maybe the industry is full of mad^[i] baseball fans like me. And maybe everyone is on to something, because there actually are some weird investment implications for us normies, just not the ones you are reading about.

First, for the uninitiated, Ohtani spent the past few years winning hearts and blowing minds as a starting pitcher and designated hitter for the California Los Angeles Angels of Anaheim. His contract ended after the 2023 season, vaulting him into free agency and a high likelihood of signing the biggest Major League Baseball contract of all time, partly because he will remain one-of-a-kind awesome if his recent elbow ligament replacement doesn’t kill his pitching career, and partly because of inflation. He did just that, hopping up the 405 and east on the 10 to join the Dodgers for the next decade.^[ii] The headline contract value is $700 million, but the vast majority of this is deferred, because Ohtani wants to win. So instead of being an albatross that prevents the Dodgers from signing other big names in the here and now, he is taking $2 million a year while he is playing, followed by $68 million in each of the next 10 years after that. $20 million plus $680 million equals $700 million, math done, jaws dropped.

For many, this brought to mind former Pirates star and Mets disappointment Bobby Bonilla, who had a few ok years in blue and orange before being released in 2000 with $5.9 million and one season left on his contract. Like the Dodgers now, the Mets wanted some payroll flexibility. They also had money invested with one Bernard Madoff, who like totally promised he would get them steady investment returns with no downside ever. So instead of paying out that final $5.9 million in 2000, they agreed to defer it with 8% interest until 2011, then pay it out in equal annual installments from 2011 through 2035. Despite the infamous collapse of Madoff’s Ponzi scheme and all the money lost, the Mets were true to their word. By 2011, an 8% annual return had grown the $5.9 million to $29.8 million. Divide it by 25, and you get Bobby Bonilla cashing a cool $1.19 million every July 1. In baseball circles, it is a national holiday, Bobby Bonilla Day.

But deferral aside, A is nothing like B. Bonilla made a rational financial decision banked on the power of compound growth.^[iii] No market volatility to think about for the first 11 years, no 2000 – 2002 or 2007 – 2009 bear markets to navigate, just a cool, steady 8%. I did the math once, and if you presume he invests his entire gross paycheck every July 1 (in my fantasy math land there are no taxes) in the S&P 500 and compare that to a hypothetical investment of $5.9 million in January 2000, he made the right choice. Yet this is not an argument for dollar cost averaging—just a reminder that compound interest adds up bigtime.

Anyway, Ohtani is sort of doing the opposite? He is just getting paid for 10 years of service across the next 20 years and taking most of the cash on the back end, with no interest. So, as many have pointed out, he is actually going to lose purchasing power to inflation. Some analysis, using a 3% inflation rate, argues that once you adjust for this, the contract value is more in the neighborhood of $460 million in present dollars.^[iv] Where Bonilla reaped compound interest, Ohtani is basically giving the Dodgers an interest-free loan. As an Astros fan, I don’t see why one would ever give the Dodgers such courtesy, but I guess if you think it will win ballgames?

The interesting thing about all of this is that if you do a date-range Google search for Bobby Bonilla and inflation in 2000 and 2011, you get barely anyone discussing the potential for inflation to start eating the purchasing power of those fixed annual payments once they begin. And eat them it has: July 2023’s payout was worth $880,000 in July 2011 dollars, a -26% reduction. (Good thing he had that up-front compound growth to counteract that.) But now, with Ohtani, the inflation argument is everywhere, alongside a bunch of speculating about California’s future tax rates and the potential sunsetting of 2017’s federal income tax cuts. Point being that if taxes eat well over half Ohtani’s future payments and inflation eats another chunk, this is probably a very bad deal. (To say nothing of the slow-motion demise of regional sports networks’ potentially torpedoing MLB revenues and forcing teams to revalue contracts in the long term.)

And on paper, maybe it would be for you or me, workaday folks whose best road to financial security is investing for the long haul. Getting paid now, investing it and letting the market do the heavy lifting—with lower capital gains tax rates applying to future gains—would probably be better than parking my salary for a decade-plus and hoping future inflation and governments don’t eat it. But I am not Shohei Ohtani. I did not make over $40 million playing baseball last year. I don’t have tens of millions of dollars’ worth of annual endorsements to pay the bills. My pro/con list doesn’t have “Win World Series?” on one side and “Inflation and Taxes” on the other. I have my own financial situation, goals and needs, and what is right for me is right for me.

Mostly, I just see all of this as a sign of sentiment and how much damage inflation has done to the national psyche. Looking back 10, 20 years ago, no one saw these things through an inflation lens. Now everyone does. Investors are fighting the last war, as they always do, fixating on a key sour story from the last bear market and looking for a repeat around every corner. Read any of the Ohtani inflation-adjustment analyses, and you will see that while they penciled in the long-term average inflation rate, they also speculated about a return of hot inflation eroding it even further. It is just like when everyone obsessed over new COVID variants and restrictions in late 2020 and 2021, or the hunt for “the next subprime” in Dubai, muni debt and Southern Europe after the 2007 – 2009 global financial crisis.

To me, this is good news—well, for investors, maybe not for fans of teams opposing the Dodgers. One, it means there is still some fear baked into markets, which means plenty of positive surprise potential. Two, it means sentiment is running its normal early bull market course, reminding us that things aren’t so different this time and are really never different.