Jan. 24, 2022

Smoking Out Signals in 2022

Today we're going to take a break from blowing bubbles and instead go smoking…and look at the smoke signals we should, and importantly, shouldn't be looking out for in 2022.


Today we're going to take a break from blowing bubbles and instead go smoking…and look at the smoke signals we should, and importantly, shouldn't be looking out for in 2022.

Transcript

Will Page: Welcome back to Bubble Trouble and a happy new year to all of our listeners. You're with myself Will Page and analyst, Richard Kramer, where we lay out some inconvenient truths on how the financial markets really work. Now, today we're gonna take a break from blowing bubbles and instead go smoking and look at the smoke signals we should, and importantly, shouldn't be looking out for in 2022. More in a moment.

Richard Kramer: Welcome back to Bubble Trouble and Will and I wanted to reflect on what we learned and some of the feedback we've gotten from our first year Bubble Trouble. And I wanted to put Will Page on the stand a little bit and cross-examine some of the smoke signals that he thinks we should and shouldn't worry about in this coming turbulent year. So will let's kick off a first one. I know you've spent an enormous amount of time looking into the economics of the music industry. And certainly, we've seen some very high profile deals, buying song rights for the likes of David Bowie and Bruce Springsteen and many, many others. So can you talk us through that first issue of music and whether that's a smoke signal we should or shouldn't be worried about. Is that a Canary in the coal mine, of what we're looking at in Bubble Trouble in 2022?

Will Page: On this one, this is a smoke signal, which I think we should be worried about. And you may wanna dismiss it, because it's music rights. It's a drop in the ocean compared to the company's you analyze, Richard. But I think it, it's an example of what I call vanity assets. Now, in the past year, you've talked a lot about how there's all this free money slashing around and it's finding itself in unusual places NFTs, R et cetera. I think the music copyright is a microcosm for, for this and we are seeing catalogs go for astronomical valuations. Now, how do you buy a music catalog? In a typical world, I might be the publisher of Richard Kramer songs, Richard Kramer is the writer of Richard Kramer songs. When a dollar comes in for his songs, the publisher keeps 20 cents and passes on the writer, 80 cents, an 80/20 split. And if you sell the catalog, you're selling the 20 cents share in that dollar, you're selling the net publisher share the NPS is what people are buying.

And that's, that's fairly easy to explain, but often misunderstood when you read about these stories and the headlines. And I look at what's going on with music catalogs right now, where people are not paying 8 to 10 to 12 valuations. That's 8 to 10 to 12 times the 20 cents That song was generating every year. They're paying 18 to 20 to 22 times valuations. Valuations have essentially doubled.

And I just wanted to explain why I think this is a smoke signal we should be worrying about. One of the reasons why we're seeing such huge checks being handed over for David Barry's catalog, for Bruce Springsteen's catalog, for Christie Heinz catalog is, you're buying the entire dollar, not just the 20 cents. And it stands the reason if you're buying all the rights, not just the publishers share those rights, you should pay more. And I'm struggling, Richard, to understand, why has nobody actually thought about this? Except me, now you, and our listeners at Bubble Trouble. If you're buying the extension to a house, that will cost one valuation. If you're buying the entire house that will cost another. What's happening today is, you know, the acquirers of music catalogs are buying the entire house, not just the publishers share of that house.

Richard Kramer: But doesn't that mean that, ultimately, you're willing to pay a lot more, because you're getting the 20 and the 80 together in one package.

Will Page: Right. So that's why we see headline valuations of Bruce Springsteen's catalog goes for X hundred million is, because he's essentially done a pension draw down. He's traded up all of his work and just handed it over to an investor. And by the way, one of the interesting things which explains this, as it explains so much in life, is taxation. Capital gains tax, as broadly speaking, 20%. Higher rate of income tax is broadly speaking, 45, 50%

Richard Kramer: Mm-hmm [affirmative].

Will Page: So if you can get a high enough multiple, then take your chips to the casino desk and cash them all in, pay 20% on the income as opposed to 45% of the income. But it's causing bubbles, because we hear these huge high numbers. We don't understand what's being valued. Like you say, the entire dollar, not just the 20 cents in the dollar. And I think that's driving confusion in the market for what we're paying.

And that's the Bubble Trouble issue right there. People are assuming that the way, let's say Bruce Springsteen, the boss catalog has performed in the past 10 years, is gonna be the way that it'll perform in the next 10 years, only music's gonna be bigger. And it's like applying a ruler in a Northeastern gradient and saying, "That's our projection. The world just carries on as normal." You can't say that the last decade is gonna be a great predictor of the next decade. So much is changing. TikTok could be the default music platform, not Spotify for the next 10 years.

Richard Kramer: And Will, I guess, on that last point, you know, one of the questions about extrapolating the pan us into the future, the famous paraprosdokian about, it's difficult to make predictions, especially about the future. But we've talked in past Bubble Troubles about, I think you said, 70,000 songs get uploaded every hour or some metric like that. With all of that new content entering the ecosystem, what's the risk that last decades hits or hits from decades ago, get crowded out by the new stuff?

Will Page: Right? So it's 75, 75,000 songs every day are on being onboarded. And it's the competition that we've discussed in this podcast, Richard, in the past year. Competition from podcasts, from TV shows, from gaming, which are gonna be competing for that scarce time as well.

Richard Kramer: Mm-hmm [affirmative].

Will Page: But it's on demand. So I think people are taking this mindset of, "I can control the top 40 and dictate what gets played on radio. And therefore these evergreen hits will continue to stay evergreen." Well, maybe they were over watered in the past-

Richard Kramer: Mm-hmm [affirmative].

Will Page: ... and that's what make them evergreen.

Richard Kramer: Mm.

Will Page: Today it's the consumer decides if I wanna listen to Bruce Springsteen or one of the other 75,000 songs that's released today as well. And I, I just think people have forgotten the fact that we're in an on demand world, which empowers the consumer and the market mechanism for controlling these valuations in the past, has essentially fallen apart. So I'm deeply worried about the smoke signal, because music is my passion that these music rights are overvalued, we're in La La land. I think it's a microcosm for the other vanity assets. Uh, if you look at the NFT world is that, again, being driven by similar vanity projects, it'd be nice to say you owned an expensive NFT. And I think that comes back to a point you've hammered home for the past year, which is it's just too much free money slashing around, essentially.

Richard Kramer: Indeed. And that moves us on to another smoke signal that you don't think we should be worried about, but to me, I find a lot of concerns around, which is inflation. Now, economists seem blind to this question of inflation.

Will Page: [laughs]

Richard Kramer: I was just over visiting, uh, with, with our producer, Eric in the States and I can tell you that the prices that I last remember seem to have gone up a heck of a lot in the last two years. And isn't some of the valuations that you're referencing with respect to music catalogs, just yet another example of how inflation is everywhere around us, that the things that we expected would cost X five years ago, 10 years ago, are now costing two X, three X or 10 X.

Will Page: Well, you blamed economists for being blind and you're speaking to one who's partially cited, so I'll take that one on the nose, but, yeah. I think that area around inflation is misplaced.

Richard Kramer: Okay.

Will Page: I think that we will not be discussing inflation when we come back to doing this particular podcast this time next year, I think this one's gonna pass. And let me unpack my reasoning as to why that might be the case, but let's just remember how you measure inflation. It is just a basket of goods, assembled at a discretion of the statistician. You know, in 2015, I worked on taking CDs out of the British inflation basket and putting Spotify in. Interesting coffee table conversation, but you know, what did we do? CDs didn't disappear off the face of the there's still 200 million pounds spent on CDs a year in this country. We just decided they didn't contribute to the measure of inflation. And Spotify did.

That discretion is a weird thing for me. And you have to go back to, you know, when financial market analysts, like yourself, discuss inflation, we are discussing a basket of goods, remind ourselves how we assemble that basket of goods. The actual basket of goods that affects Richard Kramer's life, which is running shoes and fine wine, is gonna be very different from the actual basket of goods, which affect my life, which is largely vinyl, vinyl, and more vinyl records. So we all have different baskets of goods. I just think you gotta remind people about what this 2.4%, 3.8% metric that we panic about actually is.

And then we gotta think about how does it change? What are the weights of these basket of goods items? And what's that weighted contribution to change? You know, if the price of a camera goes up, but my smartphone does better photographs of my camera, well, I'm not buying cameras anymore, so that shouldn't be affecting the rate of inflation. If I'm driving less and Petrol's going up, I'm consuming less petrol. How do you adjust for that in the weight of inflation? So when people get excited about the word inflation, I just say, go back street level and think about how do these statisticians in these towers assemble this metric. And think about the discretion applied from the statistician end and the discretion you should apply when you interpreted their outputs.

Richard Kramer: Okay. I fully get that, but I'm gonna completely throw that back in your face.

Will Page: Ouch.

Richard Kramer: And I'm gonna do it on three to four different metrics. First of all, it is indisputable that we have seen across the board, wage inflation. I see it in my business. You see it in the minimum wage, going up in the US, and the UK, and many other markets. It is indisputable that we are now seeing, globally, a massive spike in energy prices, which are a key input, however, you wanna weigh it in the basket, but it's something, unless we decide we're all gonna live without heat this winter.

So we see some of these inputs causing enough disquiet among populations, that they're out in the street protesting that they can't make ends meet because of that inflation. So I completely accept that this is at the discretion of economists, who may or may not have assembled a real world basket, which is why I started off complaining that the economists seem often to be somewhat blind to the real world of consumer prices and the consumer price index is composed of a lot of things that don't map onto everyone's lives equally. But some of those key inputs are clearly going up. And again, what I was struck by when I went to the States, was just how much the cost of basic things that I bought two years ago and bought again in a deli or, or in a coffee shop, or what have you, how much those prices seem to go up.

Will Page: But you say some of those costs have clearly gone up. Other costs have gone down and there are other costs which have gone up, but get useless. I mean, for your average Brit, I think there's one thing that will cost more than your monthly mortgage payments, is your monthly train ticket, if you're commuting into London from, let's say 150 miles out of town. Now, if the cost of a train ticket exceeds inflation, which is set to do to go up 5% compared to the 2% target, we have a contributing fact to inflation, but if you're working from home, you ain't paying for a train ticket and you've just had a huge saving. So there's a lot of fuzziness out there. Let me just tackle a couple other points you through at the, the, the partially cited economists, which is one, wages.

Wages are going up. Should I worry? Because, for the past 10 years, there's been a lot of wage stagnation, especially in the public sector. So maybe that's just an element of catch up that needs to work its way through the economy. I was always fond of arguing that if we're gonna have quantity feasing in the financial economy, we should raise the minimum wage in the real economy to pull the money through. And maybe that's, what's beginning to happen. Finally, we're getting money from finance to street level, real economic impacts. You mentioned oil. I mean, oil's gone up, but it's nowhere near where it was. And it's nowhere near where it was way back in the days of Jimmy Carter and OPEC price hikes. Yet you still see commentators referring to OPEC when they're discussing inflation.

And you also, I can just go a little deeper on this one, still see economists talking about expectations. Uh, we discussed this with Daryl in our earlier podcast, you know, the idea of rational expectations. And that being called into question, if I see wages going up, do I raise interest rates to curb inflation? Or what happens if wages can go up, but it doesn't feed into inflation? 'Cause we're not spending that money anyway, we're investing in markets. What happens if I raise interest rates, which then moves mortgage rates, which is an unavoidable cost and that actually causes inflation? The point being, when we think about the traditional logic of rational expectations and how inflation works, it could be the other way. I just think the whole theoretical underpinnings of how inflation works is open to question as well, but I do not think we'll be discussing inflation this time next year.

Richard Kramer: We will be coming back to that question in a year's time, because we have a very exciting year ahead of Bubble Trouble planned. But we'll also be coming back in the second half where Mr. Page is gonna put me on the stand over a few things and start off the year with a few smoke signals to watch out for, from my perspective. Back in a minute.

Will Page: Welcome back to Bubble Trouble, where we're smoking signals, not looking at Bubble Troubles. Uh, we're looking at 2022 and working out the smoke signals we need to be careful of and those which people are getting excited about, that we should really kind of say, "Uh, nah, it's not really gonna affect us so much." I've given you my two in the first half. You know, I believe that the vanity assets of NFTs and music copyright catalogs, we should be worried about, because it's where there's free money's washing you up and we shouldn't be worried about inflation. And then there we put Richard on the stand, and we're gonna ask him about the smoke signals that he's perhaps concerned about. So let's go to the, where you are nervous, Richard, and tell us what we should be smoking on for 2022.

Richard Kramer: Well, well, I think, it will come as no surprise, because it was the genesis of the Bubble Trouble podcast, to begin with. I'm always concerned with the misdirection plays that take the form of market communication. And again, whether it's the meme stocks that we saw in the early part of 2021, that all of a sudden people who had no idea what GameStop or AMC or these sort of names actually did, were busy trading them on, on Robinhood to today's equivalent of meme stocks, which are things like NFTs, crypto assets and, and, and so forth, which many people will profess that they don't understand, but they feel a powerful, a fear of missing out, or simply not wanting to admit their ignorance of not understanding something as complicated as blockchain, decentralized finance, cryptocurrencies, and so forth.

And I think when you look at all the debate right now around the creator economy, how much have you heard about that in the past year or two years, we're all moving into a creator economy. We're all individually get paid by tips in a patreon jar or some other subscription service.

Will Page: [laughs] Every day that ends in a letter Y, Richard? That's what is how often I hear about this.

Richard Kramer: Exactly. Every day. And to me, that's just the next extension of the gig economy that we heard about in years past, that we were all going to be happy, not having any job security whatsoever and, of course, that means no one's gotta pay your health insurance or, or pay you sick leave or anything else, but that gig economy was a great way, for a whole whole series of companies, to come up with business models, that meant they didn't pay the externalities, the social costs, around their employee base. And at the same time, of course, all of them would have HR departments, professing that people are our greatest asset and we wanna invest in

Will Page: [laughs]

Richard Kramer: But now, the next wave of the creator economy goes back to those 75,000 songs you're uploading every hour onto Spotify and other music services saying, "We can all be creators." James Cridland's newsletter pointed out that something like one out of eight people in the UK planned to start a podcast this year. Good luck to them.

Will Page: [laughs] Yeah, I saw that this morning.

Richard Kramer: We're all gonna be part of the creator economy, but no, one's really figured out what that means we lose. What we lose is those connections to long term meaningful work, to our fellow creators, to the communities that we need to en- engage with, and to all the support structures that those communities bring. Like, the people who work for my company all are expecting gainful employment, and health insurance, and the various benefits that come along with having a real job. And I am worried that, just like this easy embrace of the gig economy, before we then thought through what was lost because of it, this next wave of the creator economy is going to enrich a very small number of creators and leave a lot of very creative people, wondering what they missed out on.

Will Page: I got a ton of questions on this, but we don't have ton of time. If I think about the biggest gig economy employer of them all, in my opinion, and I'm gonna have to use them as soon as this podcast is done, where will Uber be this time next year?

Richard Kramer: Well, look, let's just talk more broadly about gig economy companies, because I'm not sure that Uber is the biggest gig economy company in the world. I think there are thousands of companies who have emulated Uber's business model by effectively having a, a very open-ended low commitment workforce.

Will Page: Mm-hmm [affirmative].

Richard Kramer: And I think there is a clear trend now of governments finally realizing that this has been somewhat of a regulatory and labor law arbitrage play and that they're left holding the bag for the healthcare cost, for example, or the sick pay or the unemployment insurance that those, uh, gig economy companies weren't willing to, to stomach those costs.

Will Page: That's interesting. I hadn't thought about it that way.

Richard Kramer: And when you ally that to the fact that many of these companies in the gig economy are still money losing and/or they've established themselves with some sort of an offshore tax base, then these are not companies that are contributing back to the community the way that you'd expect normal employers to do.

There was recently a Supreme court ruling in the UK, which clearly closed off the last of loopholes for Uber drivers in, in the UK, being classified as somehow independent contractors, because Uber sets the price of the journey that they take and tells them where to go from A to B, so the notion that they're somehow an independent contractor, who can have agency in that process, well, that was chucked out and if they're not gonna be independent contractors, but they're actually gonna be employees, well, they should have those employee rights, which are still enshrined in legislation. I think there has been a major change among governments in slowly coming to realize the downsides or costs of these gig or creator economies and understanding that that's not something that they can afford to subsidize on behalf of these new economy companies, as much as they want a flexible and empowered labor force.

Will Page: So gig economy bubbles are set to become regulatory troubles. Is that what you're saying?

Richard Kramer: Yeah. And I think the gig economy has morphed into a gentler phrase, which is the creator economy and the notion that, "Because we all have the tools to create in our bedrooms, we can become part of that creator economy." But that the spoils are still largely going to a very small slice of those creators and you've left a lot of others with very little to fall back on.

Will Page: So I wanna get to smoke signal number two, but before I do, economists like to think in charts and it might help our audience illustrate this in their minds. Do you see a chart here when you talked about misdirection earlier. You see a chart where what you're investing in and what understand begin to diverge, that is you might understand 80% of your portfolio and take a gamble on 20, but now it's 20% of what your, your portfolio is, what you understand and you're completely crap shooting the other 80.

Richard Kramer: There is absolutely a, a divergence from the old Maxim, and I think it came from Warren buffet, invest in companies where you would have developed your own investment thesis, based on personal observation or experience. Now, I'm not saying every time you have a lousy customer service interaction with a company, that you should short their stock, but if you notice yourself and all your friends around you seem to be very excited about a particular brand or you notice a particular food stuff is doing extremely well, then you think, "Well, maybe I should look at ways to invest in that." And certainly anyone investing in the market has to take the basic test of, "Do I understand enough about what I'm investing in, to feel comfortable if a change in fortune or a change in the market led the stock to fall by 50%? Would I still want to own that company if I lost half my money in it."

Because, I believe somehow that their prospects, as I understand them, are sufficiently good, that they'll regain that value. Certainly, anybody looking to invest across a variety of companies can't be an expert in all of them, but the basics have to include some understanding of the companies you're investing in or some basic investment thesis, grounded in personal observation or expectation about how a market or a company might develop.

Will Page: Got it. Now, you've explained that incredibly well, I'm grateful for that as will be our listeners. And the idea that this gig economy bubble is gonna find itself in regulatory trouble, has me on the edge of my seat, thinking about my investments, get me to sit back in my seat for a second. What's the smoke signal that you see a lot of people worrying about that you think, "Meh. It's not really such a big deal. It'll pass. It'll come out in the wash?" What, what's your smoke signal for 2022 there?

Richard Kramer: My smoke signal for '22 that I feel will blow over, is this notion that technology is inherently volatile. And in that, I think, it underestimate it's the secular impact that technology has had in all of our lives. I come at this from two specific directions. One is, the behavior change that we all, whether we suffer through it or embrace it, we all go to sleep with our technology next to us and wake up with it. We all have it throughout our daily lives. That secular impact of technology on everything we do, isn't going away. And in that sense, there is some logic to seeing 40% of the S&P 500 market value, be reflected in technology. Because, like it or not, nearly every company in the market is a technology company now. One of the critical executives that every company needs to hire, retain, and support is their chief information officer, chief data officer, chief technology officer.

And that goes as much for retailers or utilities or consumer, food and, and package goods companies. All of them are relying on technology in the way they go to market with their products, in the way they manage their supply chains. Every company is a technology company now.

Will Page: That's what gives you the edge.

Richard Kramer: It's what separates the wheat from the chaff in companies and how they manage and implement technologies, i- it's ripe in my mind, because I've had such a terrible customer service experience with one particular company and I could just see that their online virtual assistant call centers, that I've had to interact with, none of them are joined up. And, of course, it means that I will never wanna do business with this company again. And it just shows that the secular impact of technology across all our lives is something that's, that's not gonna blow away. It's here to stay and, while the governments of the world are trying to get to grips with just how powerful some of the larger technology companies have become, there certainly can't be in denial about the importance of technology in the lives of all their citizens.

Will Page: Well, I know we were both double, triple vaxxed to the max, and we've both been on our travels and even to the biggest cynic of technology, the biggest Google hater that's out there, I'd say how many people wish that Google designed the passenger locator form process-

Richard Kramer: [laughs]

Will Page: ... or the two day testing form process, compared to the 19 pages I had to fill out to get back from Spain on boxing day last year.

Richard Kramer: I'll give you one brilliant example of how technology can make things better. About five years ago, there was a very clever guy inside the UK government who realized that instead of each individual department, department of trade depart- home office, department of motor vehicles and licensing, you name it, instead of all of them having their own separate websites, that there should be one standard look and feel, for every UK government website. One backend and one front end. And every single UK government department, every ministry has the same website now. It not only saved a crap ton of money, it made it much easier for users to navigate, 'cause when you go onto any of those websites right now, they all have the same look and feel and same basic navigation. So having that simple use of technology and having the will to apply it across the board, if we could get all of the governments of the world to agree on one simple form that we had to fill out to travel, how easy would that be?

Will Page: So before we get to the end, I just want to have a sort of buzzword trade off here, um, mean words, you could call them. Words that'll be catching on, in the forthcoming 12 months. You, you look ahead, is there gonna be one word that you're gonna hear buzzing around in the months to come?

Richard Kramer: Well, uh, I guess, I don't have a single word I would, I would say. My term for 2022 is sort of reality bites. Whether it's stocks growing into their valuations, the world returning to whatever we call normality, we have to face up to the realities of what's taken place in the past 3 or 5 or 8 or 10 or 20 or 30 years, whether it's on climate, the political dysfunctionalities-

Will Page: Mm-hmm [affirmative], mm-hmm [affirmative].

Richard Kramer: ... we see the massive new debts that have been created.

Will Page: Mm-hmm [affirmative].

Richard Kramer: I think you're gonna be getting to a point where those realities are gonna start to bite.

Will Page: You can't brush them under the carpet.

Richard Kramer: You can't brush them under the carpet anymore. And we're not going to stay in a perpetual state of vacillating between freedom and lockdown or restrictions and, and lifting of restrictions. I think we'll have to get on to a new normal and that will be the normal. And then we'll have to deal with the mountain of government debt that we've got piled up, the, the money printing that happened, the political dysfunctionality that was sewn in the wake of all the COVID crisis, the realities of climate, which are undeniable, all of these issues will start to become unavoidable. And the same way as valuations will clearly get stress tested by the market, as you go through a very volatile 2022.

Will Page: You're talking about the mother of all hangovers.

Richard Kramer: No. I'm just talking about the willingness to suspend disbelief, not being something that can last into perpetuity. Now Will, you've put me on the spot here for long enough, I need to hear from you, what's your term or your buzzword or your, your big smoke signal, fear factor for 2022.

Will Page: All right. So this word is a little strange, because we haven't had to hear it since 1936 when it was outlawed in United States of America, but it's wash trades. Wash trades are essentially, where you manipulate a market by buying and selling on both sides. Trying to sell a house and wondering, like, "Could you, you use the stagents to wash trade up the value of your house, by making phony offers and phony rejections, uh, making the market look like it's harder than it is.

And I, I do think, and we seem to have agreement that there's one smoke signal to worry about in the future, it's NFTs., Which also makes me think that we should get Brian Eno on the podcast. He's been very outspoken critique of the NFTs, plus my musical hero. But I think NFTs are wrapped up in wash trades. We don't actually know how the bidding processes working, it's the regulatory wild west, nobody's in control. I think, come July, August, you're gonna get a few scandals hit in the market that wash trades were behind these crazy valuations. Wash trades outlawed in 1936 are set for a comeback in 2022. That's my mean stock word for the year.

Richard Kramer: And on that issue of wash trades and NFTs, non fungible tokens, for those who don't know what they are, the thing that concerns me simply is that you're creating assets out of nothing. There's no intrinsic value underneath those assets. There's no cash flow you can hang your hat on. There's no land of value. There's nothing that's an observable input. So these are all what you would call an accounting parlance, level 3 assets. Unobservable inputs or unobservable values. There are simply worth what someone is willing to pay. And there is no, uh, intrinsic value you that you can retreat into to say, right, there's basic commodities that go into making up your house that if you tore the thing down and sold them all off, there'd be some value there.

Will Page: So maybe we should bring this episode of Bubble Trouble to close with our second word of [inaudible 00:32:00] royalties today. Uh, when Warren famously said, "When tide goes out, you can see who's swimming naked." Right. I do believe that in 2022, the tide will go out and we'll see an awful lot of people find themselves butt stark naked, in the beach. This has been Bubble Trouble, smoking out signals for 2022. You've been with myself Will Page and the analyst, Richard Kramer, and we will see you next time.

Richard Kramer: If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Newsom, Jesse Baker and Julia Nat at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will page and I will see you next time.