SPACs Are This Year's Vanilla: Our Conversastion with the FT's Brooke Masters Part Two
SPACs Are This Year's Vanilla: Our Conversastion with the FT's Brooke Masters Part Two
Richard: Welcome to Bubble Trouble, conversations between the economist and author Will Page, and myself, independent analyst, Richard Kramer, where we lay out some inconvenient truths about how financial markets really work.
Today we're back to blowing bubbles with the second of a two episode conversation with Brooke Masters, the Financial Times' Chief Business Commentator and Associate Editor. More in a moment.
Welcome to Bubble Trouble. Will Page and I are delighted to host Brooke Masters, the Business Editor of the FT. now, several of the things you said in the first half really resonate with us on Bubble Trouble because, as you mentioned, the US is absolutely awash with capital, and that's typically when you start to see bubbles forming.
Now, you've also written a book on someone I really admired, Eliot Spitzer, and we talked a lot on this previous podcast about the sycophants and stenographers. The analysts who praise, not appraise, and Eliot Spitzer, I think, did more than anyone to get behind those analysts and their conflicts of interest.
Do you see those conflicts coming back? Do you see someone in US politics today who would have the spine to stand up to some of the market malfeasance that's pretty clearly still going on? Or do you think that we've moved on, and people have forgotten what Eliot Spitzer stood for and all those conflicts of interest that he, he raised back in the first Wall Street scandals?
Brooke: I think there's definitely malsefeasance going on. I mean, because, whenever there's that much money floating a-, people wanna get it, a grip on it. And it is clear that many, many, many companies are trading on extraordinary valuations that they cannot possibly support with future earnings.
I would be inclined to say that the troubles are less clearly in, say, the investment banks, that, back then what would happen is a company would come to market as an IPO and get pumped. The Henry Blodgets of the world would go on and say, like, "This is a brilliant company." And then, as Spitzer revealed with emails, say in their private emails, like, "This company is such a dog." That particular variation, I don't think is going on as much any more, just because it's a dumb idea.
But, I think the SPAC, it seems to me it has a very good chance of being this year's vanilla. And, what is SPAC, is a special purpose acquisition vehicle. A bunch of promoters who are often bi-, bankers, but they are also sometime basketball stars, and movie stars, get together and say, "We're raising money, and we'll go buy something with it." And so, what they do is, you give them your $10 per share, and then they'll go buy something with it, and they get a bunch of free shares, because they've arranged this deal. You get whatever the company is, which may or may not be worth it. And I think those banks, where the promoters get, get money no matter what the deal is, but you as the investor get whatever they happen to wanna buy is, it's just a recipe for disaster.
Some SPACs obviously buy good companies and it's a great deal. But we are we gonna fight, we have had the most extraordinary SPAC boom. And I think s-, that's where you, you should definitely be looking for bubbles.
And in terms of cracking down, Gary Gensler at the SEC is making big noises, and trying to do things. But he has a divided commission, where he has two very conservative Republicans, in addition to the two Democrats. So, every decision will be divided. And what, the bad side of that is they can still act, 'cause three can overrule two, but the conservatives can lay out all the problems with the rule, and why they think it's not valid. Which means that then, when they try to do something using this new rule, the target can sue and say, y-, uh, and ask the courts, like, "This was an unreasonable rule, look, the two republicans said it was a terrible rule." And so the whole thing gets delayed fro five years. And nothing happens.
Brooke: ... I mean, I like Gary, and I think Gary's, is trying. I'm not sure how much he can actually accomplish.
Brooke: Um, the other thing is, the courts are very, very conservative now. And so they may or may not support novel interpretations of the law. Which is some of what Spitzer did, is he took the, this 1920s [inaudible 00:04:11] that New York has, which nobody had really used for very much, and tried to reinterpret it and, and breathe life into it, and use it to go after people. And, that was a state law. But federally that, they, they would like to try and do that too, and that's hard.
Richard: So, a couple of things that you said I'll pick up on. First of all, I'm not sure I'd agree with you, because we can find lots of analysts in the market that cover 40 stocks, and guess what, they're all rated buy.
Richard: So I think that, sort of, promotional activity in the market is still very much widespread. You can look at many statistics which will show your roughly 80% of the recommendations in the market for any stock are buy, and then 15 or 20% hold, and very small number sell. So, analysts are, are really disincentivized to say bad things about companies.
And, what you said about SPACs, to me, it strikes me as the old phrase, heads I win, tails you lose. So, there is a moral hazard here that's inbuilt which sounds like you're convinced is going to be the next bubble, when all these people who've put money into SPACs realize that that SPAC may not find a, a sensible acquisition target. But, those executives have taken the money anyway.
Brooke: Oh, v-, a-, absolutely. If you look at where SPACs are trading, the ones that have found targets, many of them are trading below the price at which they bought this company.
There are also a number of SPACs that have failed to find targets. And they are legally required to give you the money back at that point, but they're gonna delay. They, they have two years, and they're gonna tr-, I assumed they will, most of them will hang onto the money as long as they can.
And, I worry, you know, uh, how many of them actually... uh, one hopes there are not a-, that many actual crooks who will not give the money back. But, let me tell me, they've had your money for two years.
Richard: Yep. Now, certainly the FT has a fantastic reputation for reputable journalism, but, you know, one of the points that's been clear is, if you look at the overall profession of journalism, which is near and dear to my heart, you've seen a tremendous decrease in the number of active investigative journalists. Yet, you've seen an explosion in PR firms, uh, led by, uh, many Silicon Valley VCs, among others, that will see their job as to get long and loud, or, or talk up their own book. We've talked about that in previous podcasts. And you have companies and governments, sort of, making policy, or announcing their next ventures by Tweets.
What space do you see as left for reasoned journalism, really? Because we see these fantastic individual examples, but yet, it feels to us like there's dozens more companies that ought to be investigated, but there, maybe there isn't the bandwidth to take them on.
Brooke: I think there is, uh, a problem. Uh, I would tend to see it less in, actually, financial journalism, where people will pay for good investigative journalism. And that, that is the difference. The real [inaudible 00:06:58], to me, is in local news, where there isn't anybody anymore, 'cause no one will pay for local news. And so, all kinds of corruption can happen, you know, in zoning laws, and in, you know, enforcement of workplace safety, and all of that. I think that, to me, is, is a complete disaster here.
The advantage that journalists how do financial things have is, there are a bunch of short sellers out there who make money when companies go down. So, you obviously do not get in league with the short sellers, 'cause you, we do not wanna, we don't have a dog in this fight, so we wanna [inaudible 00:07:29]. But, they will buy the newspapers. And they will, you know, validate, like, you know, Wirecard was interesting. You know, we spent three years writing about what a crook, crooked company it was. And every-, you know, got investigated by the Germans. Uh, you know, i-, it was a t-, it was a very, very difficult time for the FT. we got a lot of attacks for it, because the, it was a German, you know, DAX 40 company-
Richard: Mm-hmm [affirmative].
Brooke: ... and it was their big tech star.
Will: Mm-hmm [affirmative].
Brooke: And nobody wanted to believe-
Brooke: ... it was fraud.
But, on the other hand, there were definitely people who supported the idea. Like, oh, look, you know, every time we would report something really dramatic, the shares would go way down. So, there's validation, and I think, actually, that is less problematic... I actually, I think the real problem right now is, there's so much going on, there's so much money, and so many companies... it's a bit like dotcom, which... again, there, there are too many companies, it's like shooting fish in a barrel, but y-, you shoot one, but there are four more.
Will: [Laughs]. Brooke, you talked about exposing guilt through emails. And, if you look here in the UK, post-BREXIT Britain, we have a Competition Markets Authority, which appears to be getting teeth, and those teeth appear to be getting sharper. But what fascinates me as an economist is they also have a data science department, and a really, really strong data science department. The people that are starting up their, uh, world class [inaudible 00:08:45] space, from a world that you referred to as Spitzer, where it's all about finding that smoking gun email, to using data science, what do you see happening there in terms of how regulation's gonna change in the future?
Brooke: I think we're starting to see some of it now, in that they are using, you know, sort of, big data, and drilling down into it to, to look for misbehavior, for example, by finding connections. If this one guy keeps making the right, good trade, uh, even though if it's tiny, they're much more likely to spot that. So you s-, you see that kind of data science.
I think we also are starting to see, particularly with consumer harm, that it i-, it is so clear if, if you run tests [inaudible 00:09:23], the, how you cue someone determines the result. The, the FCA relatively recently made insurers stop, change from opt-out to opt-in on extra insurance. Oh, the, the o-, obvious one was, like, when you bought concert tickets, they made it opt-out to not buy the one pound insurance that you, in case you c-, caught... the-, these days-
Richard: Mm-hmm [affirmative].
Brooke: ... it makes more sense, in case you caught Covid. But, in, in case you caught Bubonic plague, literally was like, if you cau-, -atch Bubonic Plague, you can have your money back. And it was set so you automatically paid for it if you didn't pay attention and untick it. The FCCA said that's not fair. And, and it, that kind of data science where you can see that 80% of people don't even notice, and don't untick, that's clearly not fair.
So, I think that's where we see the data science departments is, you can look at outcomes, particularly, actually I think on rip-offs and misbehavior, where it's a small amount of money against a lot of people, because those are the hardest ones for people to catch... If you steal $10,000 from me, I will probably notice and complain. If you steal a dollar from 10,000 people, the chances that more than, like, five will notice are really small.
Will: The worst example of opt-out for me is the British Democratic system, because when you vote, you have to opt-out the electoral system giving your data to a third party, and nobody seems to notice. Don't know if you've seen that, it's a very small box at the bottom of your ballot slip. Not that anyone ever looks there, but, yeah [laughs]. The electoral system is up for sale.
Richard: Can I, can I just, I'll, I'll ask one more question on this, and hand it over to Will. But, how do you prevent the FT from getting captured by, hey, we've got an interview with the CEO, and of course the PR team, and the flunkies. Wanna make sure that-
Richard: ... you capture the right nuance of it, and, to get, y-, on to the lunch with FT a section for one of these, uh, masters of the universe bankers. They'll certainly want to make sure that you're grooming their image in the right way.
How do you make sure your not captured by those folks who are using you for exposure, for, to, to get their marketing messages across? Because, frankly, we know that the analysts, as stenographers, are writing down what the companies tell them, and asking the questions, uh, how should we think about these things?
Brooke: I think it's hard. I mean, honestly, th-, they have huge PR, uh, departments. I used to run the opinion section, so, you know, when y-, Ye Olde Great and Good CEO wants to write an op-ed, they pitch it to me. You know, it's the same as when the Prime Minister of XYZ country pitches it.
They very much have a point of view they're trying to get across, and, you know, at the FT, we area relatively empowered. We are fundamentally subscriber-funded. So, our subscribers have to believe in what we do. So, and we make mistakes too. I mean, we definitely get suckered. We, not as often, I think, as, sort of, and industry magazine.
You know, there's a famous story, back in the m-, late '90s, early 2000s. CFO Magazine, basically their CFO of the year who was the cover story, I think it's three out of five went to jail. We don't have that kind of record. And I, and I don't think-
Brooke: ... we ever would. But, that doesn't mean that we aren't captured by people.
the most dangerous people are the people who are successful early on. And so therefore they have some credibility. They're not some lunatic who just shows up and says, "I have an idea." It's somebody who did something really great, and then their later ideas perhaps are not as good. But, it takes a while for the glow to come off. I'm thinking, for example, of the asset manager Neil Woodford. He was an absolute-
Richard: Mm-hmm [affirmative].
Brooke: ... star in the early days of UK biotech and tech investing. He picked the right companies, he was really great.
But, when he went out on his own, he left the big, big a-, asset manager he was at, his next fund and the companies he backed were not so good. You know, the FT ultimately did a incredibly good job of absolutely documenting what a disaster his investments were. But, I was Companies Editor in the period when he was shifting, when he left, and he started his own fund. And when he left, we were, like, so excited, like, the guy who's the hero is starting his own fund. I don't think we acted as stenographers, but we took him at his word. He'd done a great job, he was gonna do it again, he was really cool.
And it took us some time to, like, look at, like, what has he put his money into?
Will: [Laughs]. And then Hargreaves Lansdown was sending physical literature to well-healed Britons saying, "He's still our number one pick," after the fund had imploded. That was the crazy bit, like, months after Hargreaves Lansdown was still promoting him to their customers.
Richard: But, I c-, what I observe, and I wonder how you take this as a series of inputs at the FT, is that the blogosphere, or the internet, or all those, the specialist writers in a specific field, are constantly churning out, effectively, doctored press releases from the companies.
So, one company that does a fantastic job of that, for example, is Apple. And they have a press kit when you write about their new products. And they, they want journalists to rigidly adhere to that press kit if you wanna get the early look at their products.
And so, h-, how do you get critical distance from these massive PR machines when the Facebooks, Googles, all the big tech companies, all the banks, they literally have hundreds of PR people, compared to a few dozen of you sitting the FT newsroom.
Brooke: I think it's hard. I mean, it definitely is, uh, Apple's really difficult to deal with. And, you're right, they very much want to 'here to the [inaudible 00:14:34] line. The number of times we will put a story up and they will call and complain and try and tweak it, and ask for changes, and... What's really hard is journalism is not a perfect science, and there are word choices that probably, you know, after the company complains you think, wow, that was kind of an unfortunate word choice. If I'd really thought about this, we would have used a different word. But, you know, you give one inch, and they'll take a mile. They'll want you to correct the whole story, they'll want you to take it down, rewrite the headline.
And, there are lots of companies that do that. They call all the time, and they ask for it. It is really difficult. Uh, these days I write an opinion column, so I have a lot more freedom to do what I want. Basically, opinion is, it's protected speech, as long as I don't make factual assertions that are untrue. And it's not unfair. Like, I, I can't accuse someone of something without saying, you know, they deny that they did it.
I actually have found it is, if you are robust, and, you know, I, I will routinely call the company and say, "Hi, I'm about to write that you guys suck," you know, "talk me out of it."
Brooke: And, because I think that's fair. I mean, they should have the right to talk me out of it. And so, we have a long conversation about why I'm wrong, and then I say, well, "Here's why I'm right, and I'm gonna write it. Have a nice day."
We'll be back in a moment with more of our conversation with Brooke Masters, the Financial Times Chief Business Commentator and Associate Editor.
Welcome back to part two of our second episode with Brooke Masters. Let's pick up with the talk on the state of financial journalism today. Brooke.
Brooke: I have been doing this for 30 years. And I have been yelled at by everybody. And it is really, really hard for younger journalists who are just starting out. You know, particularly when the full-court press starts, and, you know, it, it's also much hard running a blog, or don't have, you know, an institution behind them. Like, our young FT people can say in the end, you know, "Talk to my boss."
Again, when I was Companies Editor and I ran out corporate coverage, one of my jobs was to, to take that phone call at 8 o'clock at night when the PR was screaming. And, like, yes, y-, you hate Susie's coverage, that's nice, you know? Tell me what's wrong with that, tell me factually why it's wrong. Again, I'm a grown-up.
Bloggers who don't have an au-, natural audience, don't have a subscriber base that backs them, it's very hard for them. It's not that they mean to be corrupt, it's they just don't have the, you know, they don't have the bandwidth to look it up themselves, they don't have the confidence to withstand the company. Can I give you one of my pet peeves? Which is that, you know, Google's gotten better, is the search algorithms that don't favor legitimate journalism are what's killing all this. Is that, you know, if you search on Microsoft buys Activision, you ought to get legitimate news coverage. You should not get some crappy thing that's ripped of the press release.
Uh, and that is the problem we're having right now, and I, if the platform companies don't make that available to people, that's where the real problem is, I think. You know, everybody has the right to write whatever they want. But readers should be able to find the real stuff.
Richard: Indeed. And, one of the joys of, for me, of being an independent analyst is we are, are often in the same situation, where if we think that half the companies in the market underperform, half of our notes should say sell on them. Now, companies tend not to react well if you use that four letter word to describe their equity. You know, funnily enough, that's what we ought to be saying for half the companies in the market at any given time. Because those are the ones that aren't gonna perform.
I guess the other thing that, that really strikes me, especially as a devoted FT reader since, uh, the late '80s, is just how rich and vibrant some of the commentors on the FT can be. One of the interesting things about all of the stuff that's churning around in the blogosphere is it's not necessarily the traditional sources that are gonna be the most insightful, because oftentimes they need to hue to the view that keeps them in favor with the companies. They have to be onside, to some degree, and they can't make those wild assertions, where if you can find some of those other sources, or you read those dozens and dozens of very clever comments below to FT article, you often get super insightful points of view that you don't necessarily see in the traditional journalism.
Brooke: I think that's fair. Um, there are certainly competitors of mine who I would say practice what we all subtly refer to as access journalism. Which is, you give us access, we'll write whatever you want.
Famously, you know, companies used to, before it became illegal, if, the, the laws changed around this, used to pre-release their deals, and their results-
Richard: Yeah [laughing].
Brooke: ... to companies, on the condition that they don't call anyone for comment.
Brooke: So, the-, you know, so you can announce that we are buying this $3 billion deal, but you can't get anyone to say what a stupid waste of money and how much you're overpaying for it.
Richard: And, and, luckily, the FT has never been one to go down the route of what is called native advertising. Which was a whole trend in the last decade where reputable magazines in the US would publish, "Seven out of seven doctors say Tylenol will improve your health." And it happens to have been paid for by Tylenol, and look like a news story.
So, there is this whole category, uh, which is blurring the lines between advertising and journalism. And, presenting it as journalism, called native advertising, which I think is s-, still widely practiced, if I'm not mistaken.
Brooke: Yeah, they renamed it sponsored content. And there are, I mean, there are worse and better ways of doing it. One of the things the FT has, we have things that people can sponsor but, but we always keep it editorial control, the advertiser doesn't get to say, for example, they will know we are doing a report on management consulting, so the management consultants advertise. But they don't get to see what it's gonna say. And often it's not p-, I mean, it's definitely not [inaudible 00:20:09]. We often write about the woes of the industry in it.
Richard: Let me touch on one other thing before w-, before I had it over to Will to wrap up. Two things we talk about on Bubble Trouble, one is FOMO, which is obviously fear of missing out. Another phrase I've coined is FOFO, which is fear of finding out.
A lot of times people are happy to stay in a state of denial, in a state of blissful ignorance, and think a valuation of a company that would make no sense on any ordinary metric, they'll never generate the cash to pay me back, is fine as long as the company keeps putting out positive press releases.
How much do you think your job is to deliver an antidote to that FOFO? To that, that conscious suspicion of disbelief that happens in the markets every day? I-, or else we would never be able to trade in half the equities that are out there.
Brooke: I mean, journalists get a reputation for being doomsayers, you know? You know, they've predicted nine of the la-, last three recessions. And I think that is true, I mean, I, most good journalists don't get into the job because they wanna write happy things about happy people and say, look, keep doing a great job. I mean, there are profile writers and stuff, but other than that.
So, yes, I do think that it's a large part of our job. And, and, actually, it can be problematic. I have to say, I mean, I have, have been on the record that I have loathed Tesla from years. And I was wrong, I thought they'd be bust by now. And so, I think you do have to be careful that, that you don't become so negative that you lose credibility. When you say something terri-, if you always say it's terrible, that also is a terrible idea.
I, I do think journalists exist to punch, you know, to say the Emperor has no clothes, and to poke holes in it. But they also have to be careful that when somebody has succeeded, that you acknowledge that.
Brooke: And you explain why. Why is th-
Brooke: ... why did this one work? Because otherwise you lose credibility 'cause if all you do, I mean, oh, it's so-and-so, well they always hate the company. You know?
Brooke: Th-, that's not, nobody's gonna take you seriously. These big companies, they grew. They, they exist. I would certainly have the view that they have taken advantage of holes in the law to grow, and take ad-... but, they did grow. I mean, they're a trillion company. Those are, those are success stories.
Richard: Many of them are incredibly popular with the general public, and provide products and services that enhance our everyday lives.
Brooke: And, in fact, the journalists use every day, even as they complain about the companies.
Brooke: I mean, we use Gmail. I mean...
Will: Question here, Brooke, is, I wanna ask you, as somebody with 30 years of experience in the frontline of financial journalism, what you think about the surge of newsletters that are out there. Is it a threat, or a complement? Is it gin and tonic, or different brands of gin? And if you think back to last year, possibly the biggest story in tech was the Facebook rebrand to Meta. And the only person to get a interview was Ben Thompson from Stratechery. Now, you have overheads, you've got a building in the city of London, you've got buildings in New York and around the world. He's got a Macbook and a smartphone. And his newsletter is getting to, what, a quarter of a million people, and he got the Zuckerberg interview, no newspaper did.
And I'm interested to know whether you think that is going to, kind of, pull a rug from under the feet of the incumbent newspapers like yourself, or whether it's gonna be a, just another complementary layer of journalism creating interest in stories that would otherwise be overlooked?
Brooke: I think it's some of both. Uh, and I think it narrows the number of successful players in the traditional space. It squeezes the less profitable ones, the less good ones will be squeezed, and are squeezed.
Will: I agree there.
Brooke: I mean, I would say, you know, Axios, and Politico, and Business, uh, Insider have all eaten away bits and pieces of it.
On the other hand, I think the newsletters, at the moment, still do not have the sort of digital, or they don't have the advertising side down quite. I mean, they could take a sponsor, and they get one ad.
One thing that's very interesting is with the emphasis on privacy, it's actually could be helpful for the traditional media. Because, if you can no longer target people on social media through very detailed information about them without their permission, then if you wanna sell your Rolex watch, for example, what makes sense is to buy something in an environment where the people can promise, without any individual data, that their collective data is good. So, like, the FT knows a lot about our readers, and we don't have to share it with the advertiser, but we can say, you know, you're gonna get eight number [inaudible 00:24:23] people who already but Rolexes.
So, we are, tra-, digital advertising is doing better than we expected, for example. It-
Will: You're not exposed to the cookie armageddon?
So, I think, it's complicated. I mean, the newsletters definitely... they are, they are a risk. I mean, there's, there's a reason the FT produces any number of newsletters now, because that format is one that people like.
And I think, if they get too many of the scoops, and too much of it, that's a problem. On the other hand, like, a non-questioning tech dictation interview with Mark Zuckerberg announcing the rebrands is probably not the thing I would cry about missing.
Richard: Hmm. Fair enough.
Will: Love it.
Richard: We have a tradition on Bubble Trouble of winding up by either coming up with, or asking our guests about two smoke signals. Two things that they think are early warning signs of trouble.
You might have mentioned a few in our discussion already, but are there are a couple of things that spring to mind that just make yo go, "Uh oh", and think about bubble trouble, not the podcast, but in the wider market.
Brooke: I think anyone who has watched the Trump SPAC has to be saying, "Uh oh."
Brooke: They have no business model whatsoever. And the t-, so, uh, uh, which those investors, the ones who agreed to buy in. If you're one of them rich people buying into this thing, not the ordinary investors who bought... it's a, like, it's a license to print money. It is literally ripping people off, but telling them, like, "By the way, we're just gonna rip you off."
Wh-, any o-, the fact that that thing keeps going up, yes, that's a bubble. And then, let me think... the beginning to fall off of Beyond Meats is worrying. Because, you know, it was the big hope in y-, artificial meats. And, frankly, you know, my daughter is vegan. It's great that they're finding ways to produce things that might be eventually less, uh, demanding on the planet. But, I think the fact that people are losing hope in Beyond Meat, it's either a sign that the sector is maturing, and, and people are, think, oh, people will buy artificial meat, but there'll be lots of companies and Beyond Meat won't be the only one.
Which i-, which is okay. It's b-, a bummer if you bought Beyond Meat's shares at the top, but it's not trouble. But if it is actually, like, we've given up and we don't care about the planet anymore, we don't care about ESG, I think that's a really bad sign. Because, frankly, we have to all stop eating less meat.
Richard: Beyond Meat still has a $4 billion market cap, so I wouldn't cry about them just yet.
I wanna thank Brooke Masters, because this has been a fascinating conversation, and it sounds like she has an amazing job getting her ear bent by companies all the time that she hasn't wrutten flattering, fawning profiles of the Chief Executives. And, getting to express her own unique opinion in, uh, such a fantastic publication like the FT. And I say that as a, as a devoted reader for many years.
So, thank you very much, Brooke, and we look forward to having you back on Bubble Trouble some time when you get settled over in the States.
Brooke: I would love that. Thank you so much for having me.
Richard: If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced to Eric Nuzum, Jesse Baker, and Julia [Natt 00:27:44] at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time.