Lebron James' Mega-Deal Shows Why Globalization Is Here To StaySubmitted by Silverlight Asset Management, LLC on July 8th, 2018
America celebrated Independence Day this week, while Lebron James celebrated a new $154 million-dollar contract with the Los Angeles Lakers.
Whether you’re a “King James” fan, hater, or don’t even know who he is, he's the American Dream personified.
His ability to fulfill his version of the American Dream can be traced to an NBA contract signed 30 years ago, a revolt against a King 242 years ago, and the spread of globalization.
The Freedom of Free Agency
Prior to 1988, NBA players were essentially held hostage by their original teams. “There was no such thing as free agency,” recalls Tom Chambers, basketball’s first high-profile free agent. “If a team had you, then you had to sign with that team, unless they traded you. You really couldn’t move. There was no movement at all. Therefore, contracts were kind of locked into what you could make.”
Chambers was fortunate. The year his contract was up, the players’ union successfully negotiated unrestricted free agency.
As was the case in other sports leagues, free agency improved NBA players' marketability, and salaries have since skyrocketed.
By the end of Lebron’s deal with the Lakers, his career on-court earnings will likely approach $400 million, the most in NBA history.
Modern sports stars’ reach extends beyond the arenas they fill, and country borders. Like multi-national corporations, top athletes are building global brands.
In 2015, Lebron signed a lifetime endorsement deal with Nike, likely to pay him over $1 billion by the time he's 64. The unprecedented deal shows Lebron has become much more than just a basketball player. The boy from Akron has become an economic miracle.
Mobility is Leverage
Since the 1980’s, both labor and capital have become progressively more mobile. As Lebron James’ contract illustrates, mobility is leverage.
A few years ago, Lebron famously “took his talents to South Beach,” because he wanted to win his first NBA championship.
In the corporate sphere, firms are attracted to areas with skilled labor pools and low taxes.
Similar to NBA teams that must now pay higher sums to secure the best players, countries have to maintain low enough tax rates to attract and retain the best talent. The Tax Foundation’s chart below illustrates how worldwide corporate taxes have trended lower in recent decades.
Tariffs create trade barriers, and function as a tax because they raise prices at the cash register.
With the U.S. implementing tariffs against China this week, and China vowing retaliatory measures, there’s a lot of anxiety overhanging capital markets. It has to do with fear the multi-decade globalization trend may be ending. Both countries are effectively raising taxes and disrupting trade.
All any of us can do is guess how things will play out. That said, I’d be really surprised to see globalization reverse.
I just don't think politicians can put the mobility genie back in the bottle for long. It's a form of financial alchemy that makes the world wealthier. And at a fundamental level, most people want to be free to pursue prosperity.
When you stop to think about it, it’s easy to see why mobility is a tax depressant. John Tamny summed it up in his book, Popular Economics, stating, “Taxes are the price we charge people to work, and that price affects where they work and whether they work at all.”
After British tax rates exceeded 80% for the highest bracket in the 1970s, Rolling Stones guitarist Keith Richards described it in his autobiography as “being told to leave the country.” And leave they did—the band relocated to France. Meanwhile, they kept selling plenty of albums.
If Lebron wanted to, he could sign a deal tomorrow to play ball overseas. His individual talent is mobile, and his reach is global.
Companies are similar. Today, approximately 40% of the S&P 500’s revenues are derived abroad. This makes many multi-national firms independent free agents.
If a big trade war erupts, it would mean several things: (i) a regressive tax on consumers in the form of higher prices for everyday goods, (ii) a recession, (iii) less corporate dollars flowing to the coffers of politicians deemed responsible, and (iv) angry voters.
The system self-corrects.
What that means for investors, in my view, is there’s likely a reasonable cap on how far this tit for tat tariff game goes.
The long, steady march toward expanded freedom and mobility has led to unprecedented prosperity in the U.S.—in both absolute and relative terms. The magnitude of U.S. outperformance during that march is plainly evident in the chart below, courtesy of Credit Suisse.
Remembering What the Fourth of July Celebrates
Transportation efficiency is only going to keep improving. So will mobile connectivity. Governments must adapt. They can’t swim counter-stream for long before the prevailing trend—in place for hundreds of years—likely reasserts itself.
The perspective I’m offering relates to a very long-tail trend, which stretches all the way back to the founding of America.
The Tea Act, passed in 1773, allowed the British East India Company to sell tea to the colonies duty-free, but still tax the tea once it reached colonial ports.
The act’s main purpose was not to raise revenue from the colonies but to bail out the floundering East India Company, a key actor in the British economy. The British government granted the company a monopoly on the importation and sale of tea in the colonies.
The colonists had never accepted the constitutionality of the duty on tea, and the Tea Act rekindled their opposition to it. Their resistance culminated in the Boston Tea Party on December 16, 1773, in which colonists boarded East India Company ships and dumped their loads of tea overboard” (source: History.com).
Whether it’s tea or steel, tariffs and other trade gimmicks have not proven to be lasting solutions. After the Boston Tea Party, tea smugglers found ways to get Americans their tea, the East India Company teetered on bankruptcy, and Britain lost control of the colonies.
Investor sentiment is fickle in the short-term. Anything can happen any day in the stock market.
That said, I believe long-term investors should avoid letting gloomy trade war headlines dictate their investment strategy. The degree of negative sentiment surrounding the trade issue probably exceeds the true risk. With sectors and stocks, pick your spots carefully. Just don't lean too bearishly overall.
Exports matter, but they're only 8% of U.S. GDP. Plenty of other factors also influence business cycles, including corporate earnings, interest rates, and currencies.
Finally, I want to mention a downside aspect of modern mobility. Today, most people carry a mobile phone, and live constantly connected to the Internet. That means it's on us, as individuals, to risk-manage overexposure to hyperbolic headlines. Fear produces clicks. But the truth is, there’s never been a better time to be alive.
Wherever the free market has been permitted to operate, wherever anything approaching equality of opportunity has existed, the ordinary man has been able to attain levels of living never dreamed of before. " - Milton Friedman, Free to Choose: A Personal Statement
Originally published by Forbes. Reprinted with permission.
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