Bob Dylan, Capitalist?

 Bob Dylan, Capitalist?

As reported in the Wall Street Journal yesterday, Bob Dylan sold his entire music catalog to Universal Music Publishing Group. This comes on the heels of Stevie Nicks selling her publishing catalog last month for $100 million. Mr. Dylan's deal is likely closer to a billion dollars based on higher-end royalty metrics, historical significance, and artist premium.

While the actual deal value has not been revealed, the timing is impeccable. With the Biden administration poised to sack the Trump Tax Cuts on day one, there has been a flurry of deals and IPOs (428 to date, not including the largest of them all, the upcoming Airbnb offering expected to hit the tape tomorrow.) It's no coincidence Mr. Dylan pulled the trigger when he did.

The savings of monetizing in 2020 are vast. Consider in Mr. Dylan's case, he'll likely pay ~24% in a one-time capital gains tax for his catalog (plus state taxes) versus the recurring ~37% (plus state taxes) on the annual income his music catalog generates. It is a savvy move, especially since a decent portion of his music right are *probably* slipping through his fingers via social media apps using his music without paying the vig (TikTok, anyone?)

Universal brings corporate muscle to the catalog, and the ability to further monetize new technology as well as expanding the innate Americana Dylan brings to the table with perhaps more mainstream television adverting in big market events (think Super Bowl.) Mr. Dylan's iconic status and vast potential of licensing deals arguably justifies whatever premium Universal paid to acquire the entire music catalog that spans decades.

All of this talk about monetization, however, leaves many music aficionados wondering if they have been left blowin' in the wind. It smells like capitalism, something Mr. Dylan has railed against his entire career. It begs the question, can a champion of progressive liberalism morally be...gasp...a fiscal conservative with this own money?

 

Pappyland

Pappyland

Wright Thompson's "Pappyland" is a swishing, swirling epic of family, fine bourbon, and the things that last. It is also my 2020 Top Pick holiday book recommendation. Thompson details the commitment it takes to become a master of a craft. Family legacy, horse-racing, and of course bourbon all play a central role in this tale. Branding and marketing is done over decades via the creation and sustainment of a family's legacy. One part Horatio Alger, one part Southern hospitality, but 100% Americana. Complex, nuanced, and long on the finish. A delightful tumbler. You sip these words and you want more of them.

 

Double Dip Anyone?

 Double Dip Anyone?

Double-dipping is a really bad idea in the time of Covid and equally painful in economic terms as well. In the culturally-definitive series Seinfeld, George is caught at a funeral double-dipping (dipping a chip that has already been dipped and eaten) in the sour cream. My elite friends at Harvard have taken the trouble of analyzing the danger of this possibility in detail. You can read their analysis here: "Double Dipping" Dangerous or just...icky?

Although a fervent Seinfeld fan, my interest is more along the economic terms. In particular, I'm wondering if we're setting up for a double-dip recession that will put a nail in the coffin of American small business owners (and the middle class.) Historically, a double-dipper has been defined as a recession that begins prior to the previous one ending. If we were to see a fall in GDP over two consecutive quarters that would qualify as the first (check that box), but it seems like GDP is recovering, right? Well...if you believe the "science" (and shut-up if you don't, a la Andrew Ross Sorken debating Rick Santelli) the 3Q GDP accelerated and we're out of the woods.

But look around the woods. Do you see a lot of small businesses open? Or people starting up new businesses? Any new coffee shops open up in your neighborhood? Or just the long, long lines at the Starbucks drive-thru? Is your local handyman killing it or is he hanging out at the full Home Depot parking lot? How about those local mom-and-pop retail stores? You remember them, right? If you can get past the traffic jam of UPS, FedEx, and Amazon delivery vehicles their shops are all boarded up on Main Street. 

We're in the midst of a Dickensian recovery; in particular a Tale of Two Economies...one economy is bust. They were previously small business owners who owned restaurants and hardware stores and retail shops in your town's shopping areas. They've either been Covid-slammed or looted or both. The other economy, however, is a booming. Large capitalization companies are killing it; their infrastructure, logistics, capital, and political contacts have not only allowed them to survive, it has almost single-handedly allowed them to thrive. 

So when we talk about a double-dip recession, it is important to realize that there are two distinct economies at work right now; the small-business, family-owned company that has suffered greatly during Covid and the recent political chaos, the other is the monopolistic business with strong balance sheets that has cannibalized the consumer's buying power.

So in answer to the original question of whether we will experience a double-dip recession, my answer is that it is almost impossible that we don't; the dry powder typically used to bail out the middle class has largely been spent, ie the Fed Funds rate is already at 0%. The only thing keeping the economy afloat right now are sky-high real estate prices and a stock market at all-time highs. But these factors bedevil the fact that the U.S. Dollar has pretty much collapsed in terms of buying power. Anything of value, whether it be education, health care, or housing are at highs. Money is flowing into physical goods.

I suspect the end-game will be further erosion of the middle class and more dependance on government programs. The billionaire class will be the net winners. Raising taxes, punishing work, and increasing bureaucracy is not going to be helpful, unless the goal in an anemic recovery similar to 2009-2016 numbers. But that's what I think will be served for dinner; cold burgers and flat soda with a paper straw. The appetizer bowl of salsa with a bunch of chips floating on the surface will be the least of our problems.

The Legend of Poopy Britches

The Legend of Poopy Britches

Occasionally a story is so bizarre, so outrageous, so unreal that it obviously MUST be true...hence is the case with Poopy Britches. Dubbed "the most significant fraud on taxpayer funds in California history," (which is actually really, really saying something), California has paid in excess of $1,000,000,000 in fraudulent unemployment claims to prison and jail inmates.

For some unknown reason, there doesn't exist a system to cross-check whether a citizen is in jail prior to paying out unemployment benefits. There are cameras at every street corner in LA to fine motorists. There are elaborate sting operations to catch people with more than 3 households for Thanksgiving. A surfer was arrested for...surfing. But things are so bad at the EDD (Employment Development Department) that not only are funds being dispersed to criminals currently in jail, but debit cards were issued to such outrageous names as Poopy Britches without any sanity checks.

Politicians are poor stewards of taxpayer funds because there is no incentive for them to be good stewards. Has there been any bigger victim to the largesse of government than the taxpayer? If ever there was a concrete reason to dismantle a complicated taxation system, this is it. Any time money is laundered through the government for benefit programs, inevitably there is "leakage." Why not change the policy to reward work? Eliminating the payroll tax benefits everyone, yet billions in PPP loans were issued with massive amounts of fraud, waste, and abuse.

Poppy Britches should teach us all that rather than launching payment programs funded by taxpayer funds, we should rather eliminate or reduce existing taxes and laws. Streamlining efficiency should be the goal, work should be rewarded, and ultimately bureaucracy that is not a good steward of taxpayer funds needs to be eliminated tout de suite.

 

House of Cards

 House of Cards

As Covid rages across the world, a house of cards has been revealed; commercial office space concentrated in costly urban areas. Changes in behaviors have resulted in massive shifts in commercial office space. Literally hundreds of billions of dollars in "value" in this sector has been destroyed. Commercial office space has experienced its own Chicxulub Impact Event.

It has taken a global pandemic of epic proportions to reveal something many office workers (especially the younger generations) have know for years; save for some special situations, workers can achieve more productivity and teamwork outside the office than in it. The office has almost always been a "round-up" corral for mid-level management to practice management techniques on their employees or bring in management consultants to do the same. Work in many office environments was a kabuki dance of office politics and fleeting attempts of productivity in-between endless meetings, training, and continuing education. But alas, Covid has demonstrated that productivity does not collapse and the right hires who have had the opportunity to embrace the corporate ethos do just fine.

What next? Changes in work behavior has significant secondary and tertiary effects. From an urban perspective, many people living in a city also work in that city. There has been a significant urban exodus into the suburbs and interestingly the exurbs. People with traditional office jobs are fleeing (or have fled) and many aren't coming back; if they can execute their job functions or run their small businesses remotely they will.

The impact of an urban exodus to local restaurants, that were already teetering on the edge, will be fatal. Same for entertainment venues. Retail shopping. The list is long. Malls in urban areas might survive, but it's hard to see how (or why.) The one lynchpin keeping the urban communities together for the most part was education, either in public or private schools. As that has become severely disrupted and other avenues of learning emerged, that may have been the last straw for many families who have the ability to leave cities and put their roots down in communities with lower student to teacher ratios, quality clinics rather than emergency rooms and leverage the ability to perform job functions via technology.

Technology has helped the United States and many developed counties weather the Covid storm; by one measure, between February and October this year savings account balances have increased by $2 trillion. So toilet paper isn't the only paper we're hoarding. There are literally tons of cash sitting on the sidelines! Yes our Federal deficit has soared by tens of trillions of dollars, but there is no doubt that as a country we have significant dry powder right now.

If the stay-at-home economy is here to stay then as a society we should embrace a strong hub-and-spoke philosophy in terms of...well...everything...work, education, medicine, farming, manufacturing, all of it. Think Amazon, but in terms of society and that's where I think we're going. The emphasis going forward should be on strengthening the spokes, while ensuring the hubs survive. We have too much office space, but not enough residential space. That solution seems pretty obvious. The answer to the excess in high-rent urban office space is pretty simple: convert stunning corporate offices in the heart of major urban areas into housing. What to do with all these mid-level managers and consultants? Hub-and-spoke farms seem like a great solution. Farming is an honorable profession and keeps this country alive. Viva the farm!

Buy Then Build

 Buy Then Build

Occasionally a book is so profoundly simple in its premise a reader is taken aback as to why he hasn't thought of this idea before; such is the case with Walker Deibel's "Buy Then Build"

Many of my friends and clients are always on the prowl for a side hustle or a retirement job and usually the path has been the well-trodden and well-marketed push toward converting either a hobby into a business or...gulp...starting a business from scratch. Theoretically either of this two methods can and do work, but for every Uber, Airbnb, or Slack there are literally tens of thousands of expensive failures. Put another way, there is only one Ferrari in California with the license plate "EPICWIN" 

Not to beleaguer the point, but for those readers who haven't had the pleasure of a very public start-up failure, it is unpleasant from many aspects; typically you lose (lots of) money, (lots of) time, and even friends or colleagues. So with that in mind, Walker Deibel's approach makes perfect sense.

They say a picture is worth a thousand words, and the major takeaway is clear as day on page 32:

Feel free to zoom in on that image. Deibel illustrates the "Odds of Success" comparing a startup, VC-backed startup, and the acquisition of a going concern. This is the proverbial money shot of why those interested in either starting a new career or adding a business to their existing schedule should strongly consider buying an existing business and building on it from there. Your odds of success increase exponentially when you buy an existing business and build it out.

Using Buy Then Build as a roadmap and having a handle on your time commitments as well as a potential budget, two resources I have found to be extremely helpful include: BizBuySell and Flippa. Perusing all the listings on both sites is really intriguing as to what is out there and also the different methods and techniques business owners have built their companies over the years. 

Hopefully this post acts as an entrepreneurial lightning rod and helps those readers interested in running a business or side hustle or both the value of approaching the startup cycle from the position of an acquisition then building on the existing customer base, infrastructure, and cash flow. 

Opportunity Magnets

 Opportunity Magnets

     Why do people move? Generally people move for one of two reasons; they are either fleeing from something or moving toward something better. But what this really means is that people ultimately move because of an opportunity...the opportunity may simply be safety/security in its base form of Maslow's Hierarchy of Needs or it may be an innate matrix including safety/security, economic options, religious freedom, constitutional rights and natural beauty, to name a few.

     The United States is unique in the disparity of rights, freedoms, and economic opportunity amongst its various states. The sociopolitical factors and demographics of each state are vastly different; consider only 5 states have direct access to the Pacific Ocean, 18 states have direct access to either the Atlantic Ocean or Gulf of Mexico, which means the majority states are landlocked. A handful of states produce the vast majority of grains, fruit, and nuts. Minerals abundant in some states are virtually absent from others. 

     In addition to their vast physical differences, states are increasingly different in the opportunities they offer their respective citizens. Some states have become proverbial magnets for new citizens. Others are losing citizens in droves. Why? It boils down to opportunity. People generally act in their own best self-interest, which isn't to say they act against someone else, but rather voting with their feet means they are pursuing what they think is the best opportunity for them and their family.

     I recently started an amazing book called Nomad Capitalist by Andrew Henderson. It has a simple premise: Go where you're treated best. As humans, we're wired from birth in a Darwinian way for fight or flight in the face of danger in our environment. Henderson argues that rather than trying to influence politicians or "make change" people are far better off moving, either physically or their assets, to where they are treated best. So whether it is better housing, safety for your family, better economic opportunities, asset protection, or a combination of these factors Henderson makes an excellent point about voting with your feet.

     The problem arises when citizens settle into a new area, or maintain their existing homestead, in their chosen state and that state experiences drastic political changes. Voting with your feet can be expensive in terms of moving cost, professional relationships, and access to medical, education, and housing for example. Usually these political changes do not happen overnight, but rather are a process of political creep.

     Ultimately over time many citizens who loved where they lived become political hostages to a state government they do not support, and more importantly, does not represent them; rather their tax dollars are funding projects, services, and politicians that do not represent their values or interests. But pay they must. True danger is when a supermajority is reached, in terms of total single-party control, and at that point citizens contribute to a state that operates for its own self-interest. In America today, we are already there in many states. The question arises, will citizens move to where they're treated best?

Betting on Human Behavior

 Betting on Human Behavior

My ears perk up whenever I see or hear about changes in human behavior because experience has taught me whenever human behavior changes, and that change is sustained, a lot of dollars are behind it. There are many ways to make money in this world, and one of my favorites is to bet on human behavior.

Almost always, changes in human behavior are subtle at first, then big and obvious. The German philosopher Arthur Schopenhauer described truth, an accurate corollary to human behavior, as passing through three stages: "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. To that end, I want to spot behavioral change early and act on it.

Big tech likes to capture large data across multiple clouds to run predictive analytics. Visualizing data in this context is important because it allows companies to find sustaining trends. Although their resources are virtually limitless, big tech still depends upon someone, doing something, to change some human behavior. It may be just a nudge to an existing behavior, or it could be something truly disruptive, but the litmus test is spotting a trend based on evidence of human behavior change.

Trendspotting changes in human behavior early is valuable because changing human behavior at scale is capital intensive. People don't just line up to pay $5 for a cup of coffee; that behavior was nudged to where it is today. A lot of marketing, brand creation, construction, and products coupled with decades of advertising needed to occur to make that human behavior change happen. Many attempts at behavior modification fail. Hence, usually by the time a change in human behavior is noticeable, the seed has taken root and is growing. These are the seeds big tech is looking for and the ones investors should be cognizant of as well. Lao Tzu said it well, "To see things in the seed, that is genius."

Human behavior is often a leading indicator of where the profits will flow, especially if a company succeeds in turning a commodity into a brand. What do consumers ask for? Carmel-colored cola? Athletic sports shoes? Electric-powered cars? A video conference call? No. Consumers ask for the brands. Branding typically results from repeated nudges from marketing or praise from fellow consumers who have tried the brand. From there, if successful, human behavior grows tap roots and the brand becomes sustainable. Investors can reap significant gains in owning companies with high margin/high volume products and services typified by strong brands. There is, however, a sly danger to this success.

Danger arises when the human behavior changed becomes so successful that the brand reverts back to a commodity. Success breeds copycats. A niche without moats, such as superior technology or intense consumer loyalty, is usually exploited by competitors. Rarely have I seen a consumer ask for a branded gasoline or a branded wireless carrier for example, at some point a highly successful product or service reverts back to commodity status unless it innovates by changing human behavior and renewing the innovation cycle.

We're at that very crossroads today. With multiple crises engulfing our society, a whole new wave of companies are being formed as you read this blog and many will be coming to the market soon, if not hitting the tape already. Human ingenuity is a powerful force, the desire to survive is strong, and unleashing animal spirits creates opportunity. One change in human behavior that has caught my attention is in sports.

The reopening of sports leagues across the country has temporarily satiated the hunger for the proverbial "Bread & Circus" that runs deep in our collective psyche. Competitive physical human sports have been with us from the dawn of time. But along with the reopening of sports something else has occurred, or I should say reemerged, and it is a powerful, instinctive, human behavior.

The way many viewers increasingly enjoy sporting events now is directly tied to wagering on them, legally. Sports betting now has the umbrella support of the 2018 PASPA ruling, which changed everything. PASPA legalized sports betting at the federal level, and states like New Jersey jumped on the bandwagon early. Residents in these early-adopter states didn't waste time either; they've unleashed a proverbial tsunami of bets.

Sports betting has arisen as probably one of the most exciting new economic sectors in recent memory. The initial revenue numbers are staggering. Hungry for tax revenue, states are trying to pass legislation as fast as the quill can write. Twenty-two states and the District of Columbia have legalized sports wagering since the 2018 ruling.

As expected with a behavioral change at scale, there are all types of derivative jobs arising from this new (legal) sector. From payment processors to software developers to accountants, the potential spectrum of new jobs created is vast. New sectors typically have long runways and spawn secondary and often tertiary industries. All of this is a result of human behavior change. 

Prior to the PASPA ruling, sports betting was obviously still happening. But legal sports betting was primarily restricted to Nevada, and wagers had to be placed in person at a casino's respective sportsbook. Bettor's were issued a physical ticket. A confluence of events coupled with technology has radically changed the dynamics of betting in the pandemic stricken post-PASPA world; now every living room is a potential sportsbook.