Steam is building behind the idea that a bubble in player valuations, specifically those of the English variety, now exists and is growing. The cause? Owners with too much money and too little sense. The evidence? The recent transfers of young Englishmen Andy Carroll (£35m), Phil Jones (19.3m) and Jordan Henderson (18m) as well as others. But the recent English love in is not the result of managers backed by reckless billionaire playboys, it is just a reflection of the new, more expensive English transfer market.
A bubble exists when prices in a market are significantly out of touch with the value of the goods or services being traded. Identifying a bubble therefore requires a method for determining what constitute ‘reasonable values’ in the market. In the stock market, companies are considered overvalued if their stock prices are higher than conservative valuation methods, like Discounted Cash Flow or Capital Asset Pricing Model, suggest they are worth. These are models which take into account the economic benefit of owning an asset versus some estimation of its risk. When Groupon commands a price in excess of $20bn, generates no income and depends on outsize growth projections for profitability it is reasonable to say that it is overvalued.
The key difference between stocks and soccer players is that there is no objective way to value a soccer player. We all know that Lionel Messi is a great player and that he is more valuable than many other players, but how much more? Soccer players do not produce cash flows, they do not trade in liquid markets and their skills are nearly inseperable from the performance of a group; there is no easy way to carve out the economic value they add to a club. Clubs may know that Stewart Downing reliably produces fantastic crosses but there is no rational way to price his talent, so his price is set by the amount of money available to be thrown at him. Player values cannot be ‘crazy’ because there is no ‘normal’ against which to compare them; they are not bond prices, they are the highest bid for Picassos and Warhols.
The other force driving the English premium is a regulatory shift. Imagine that the SEC declared a rule whereby every mutual fund, hedge fund, etc. had to invest at least $1m in shares of companies headquartered in Idaho. Share prices of Idaho-based companies are going to go up considering the large amount of money that is going to be chasing the very limited supply of shares. The companies did not magically become more profitable overnight, but their price has been artificially driven up by the SEC because of the rule change. Investors who want to participate in the market simply have to pay the premium as a cost of doing business in the US. Substitute “The Football Association” for “SEC” and “English” for “Idaho” and you get the picture; large amounts of money are chasing a very limited pool of players.
There are now 160 spots in Premier League clubs which need to be filled with English or Welsh trained players, the Top 4 clubs alone require 32 players who are homegrown and skillful enough to be more than ballast. Needless to say if there were 32 world class English players to choose from England supporters would have little to agonize about at international tournaments. The supply of quality English players is limited and the amount of money chasing their signatures is immense, the result is naturally transfer price inflation. But even Andy Carroll’s transfer, the most expensive English transfer of the year, is not out of line with historical transfers of English footballers when they are adjusted for inflation.
If the homegrown initiative works as hoped and new cycles of talented English youngsters start to get churned out perhaps prices will fall, but until then don’t expect any player with even half an arm in a Three Lions shirt to get any cheaper.