Anheuser-Busch (BUD) Ad Debacle - Risk of AI Campaigns?

As a long-term holder of BUD stock, I was stunned by the recent furor over Dylan Mulvaney and Bud Light. BUD's original "local dominance" and "scale" advantage grew because BUD was able to leverage its size into more general TV spend into more size. It was a perfect brew for an advertising compounding cycle in the era of a scarcity of media outlets. 

As cable TV and then the internet developed, a splintering in beer markets occurred - there were simply more opportunities for smaller players like Sam Adams and then lots of microbreweries to gain market share. BUD appeared to adjust by having a few large brands with specific following - Corona for parties, Amstel for dinners and Bud for kicking back after work. These were basically a one size for as many as possible approaches. Then BUD had regional leaders and even niche products - totaling to nearly 500 over all. 

BUD had so many brands that could be brought to support Dylan Mulvaney's journey, why would they have used one of their plain, vanilla "one-size fits all" brands? While it may be an attempt to make Bud Light more appealing, I simply can't see that passing the risk test to a major brand. It seems to me that some consultant armed with a statistical analysis made a compelling argument. If true, it does show the likely risks of future AI generated ad campaigns.

Balance Sheet Analysis: First or Worst?

In the old days of 30 years ago, the best starting point for financial analysis was the balance sheet. From the balance sheet it was fairly clear what the liquidation value was as a starting point. For example, when I initially looked at Home Depot in the 90s, I could figure out their property values and know that in a worst case scenario these properties could be liquidated as a basis for a "margin of safety." Further, the balance sheet would also provide an indication of what replacement costs might look like and the structural investment required to be in a business. Of course, famously the textile mills of Berkshire Hathaway demonstrated the fallacy of relying on balance sheets. Those huge asset values with high replacement costs simple ate capital.

Over time as the economy has morphed from "real" assets to "digital" assets, the balance sheet analysis has delivered less and less value. The software writing which is critical to creating the assets is often expensed. Further, when digital assets are capitalized, they are exceptionally difficult to amortize correctly. While manufacturing equipment was not easy, computing equipment with the rapidity of change is even more challenging. Instead, I think the first step is to establish is a company best analyzed with a balance sheet approach or a cash flow approach. Clearly, banks, mineral companies and insurance companies are balance sheet companies. All the others should likely follow the example of Jeff Bezos with an emphasis on cash flow.

Certainty vs Likelihood

Anxiety is a permanent condition that drives stress. Without anxiety, we might make significant errors of excess and with too much anxiety, we might make significant errors or caution. While these issues are challenging, they are not nearly as difficult as the related unconscious behaviors.

In the investing arena there are many uncertainties. I discovered during the Great Tech Bubble of 1999-2000 that clients wanted certainty. When my clients who were business savvy asked about stock market conditions, I provided the pros and cons of why I thought it was a dangerous environment but declared that it was not certain. Almost to a person, these people fired me. When my clients whom I did not perceive to be savvy asked about conditions, I told them to go back to their lives, that it was dangerous and we were taking care of their funds. Almost to a person, these people stayed.

As a reflected on this divergence, I thought about being a passenger on an airplane. If the pilot came on the intercom and told us that we were entering a storm system, that it was likely that we would emerge alive but yet there remained a small chance that the plane would crash, I would be panic stricken. I'm actually looking for the pilot to lie to me - to make that high likelihood of safety into a certainty of safety in order to calm my anxiety over flying 32,000 feet in the air in a small metal tube. I discovered that clients wanted me to make a likelihood into certainty. That's actually part of what they pay for.

The problem is that when you begin by lying to others, you end by lying to yourself. By indicating certainty to others, that behavior can gradually lead to a sense that certainty is achievable instead of degrees of likelihood. There is no certainty in any markets. However, this knowledge is only relevant as far as the research process allows. If the certainty bias against anxiety runs rampant, it will then create additional delusions of overconfidence and confirmation biases.

Reasoning is critical, but rationality is limited in markets where empiricism is a careful constraint.

Relying On The Kindness of Strangers? QT's fickle ways

As the famous play conveys, relying on the kindness of strangers is not a good strategy for living. However, during good times, such as Fed monetary easing coupled with Quantitative Easing, the kindness of strangers becomes almost compelling in its success. At times, borrowing or gambling yourself rich becomes a reality and "monkey see, monkey do" sets in.

As tightening becomes a reality, any strategy that relies on the kindness of strangers - such as the greater Fool approach or borrowed money - becomes dangerous. As a result, significant downturns have occurred in the housing and auto industry. At the same time, crypto and SPACs have taken significant hits. As the phase 1 of tightening turns to phase 2 of pausing, more problems in these kindnesses are likely to surface.

Who's gigging whom?

In Texas, the fans of Texas A&M are well-known for their sports yell of "Gig 'em Aggies!" The term is borrowed from the world of hunting frogs or fish as a form of spearing the prey with a "gig." But the term's usage is increasingly heard as we discuss the "gig economy," meaning a series of short-term jobs or engagements.

When I first learned about Uber and noticed the price and experience advantage over taxicabs, I went home and began the process of selling my cars. The economics made sense. Since I drove my car less than 5% of the time, ride share made sense. Further, there was labor as people between jobs or who needed additional income or flexibility could earn money. It all confirmed the beauty of capitalism's decentralized usage of excess capacity.

Recognizing that no clear competitive moats existed, I avoided any investments in Uber or its competitor Lyft. Then, as usual, the California government entered the space to save the poor labor market. Rather than address the bad business behaviors (such as not forwarding tips to the drivers - which was a major issue), California's legislators focused on creating full-time jobs. Another example of needed governance being misapplied. 

The result is chaotic. Without going into all of the details, the companies are now forced to some bizarre pricing models. When I looked at pricing to ride to DFW this morning, Uber was at $35 and Lyft was over $80. Two weeks again, it was the exact opposite. Of course, if the prices were similar, these companies would be accused of price fixing. Worse yet unsustainable losses at the parent level are occurring

Uber posted a $1.3 billion loss over the first nine months of the year, bringing the firm’s loss to $30.3 billion going back to 2015. Though Uber shares are down 40% since their spring 2019 IPO, the company remains valued at $54 billion. Lyft has similarly ugly results. The markets are pricing that a way to allow rational platform and labor competition will develop. Short of smart regulation or Lyft collapsing, I don't see it.

How Quickly is the Recession on the Way?

If it's not already here, a recession is clearly on the way. A recession is at least two consecutive quarters of a drop in GDP. Of course, GDP is composed of volume and price. It appears to me that volume is already in decline, but price is increasing at a rate that disguises the underlying recessionary trend.

The Fed's commitment here is strong, but the journey is nearly impossible in the short run. Consumer balance sheets are so strong and desires to consume so high that I seriously doubt that 10% interest rates would stop them. So, the slowing must come from somewhere else. Perhaps it will simply take the reverse effect of what kept the economy going during the pandemic - a wealth effect. 

By driving rates higher, stock and bond markets have immediately responded with the worst combined drop since 1932. However, the other more important asset has yet to drop - real estate. Real estate is a backward looking asset class. As a result, it only drops when enough people are forced to sell and the lack of buyers reveals a new set of appraised values. With the lock in long term rates at such low levels, it is unlikely that the recent purchasers are going to be selling. 

So, if the reverse of the wealth effect - call it the poverty effect - needs to occur before the economy really slows down, the Fed will be in hiking mode for some time here - barring a "break" like occurred recently the British pension schemes.

This Time Is Different?

"This time is different" are reputed to be the most dangerous four words for investors. Yet, the past three years have certainly made an argument for their usage. 

One of the many remarkable patterns that I see currently is the attempt for the Fed to slow down the economy while consumers have strong balance sheets. In the past, the Fed has attempted to slow things down (e.g. 1999 and 2007) when spending and speculating have been running hot with a consumer whose balance sheet was weakened with debt. By "tightening," the Fed has been able to slow the economy dramatically due to the drop in asset values, the loss of cyclical jobs and a drop in consumer demand. But this time looks different.

For example, in reviewing AutoNation's (AN) financials, I have been amazed to see how AN has fared. In the midst of this tightening, the volume of cars sold has dropped by roughly 20%, but the price increases have offset this loss. These price increases have occurred even as AN is selling cars with missing chips. Even more, these price increases are based on financing with rising interest rates. At this point in a "tightening" cycle, AN would be marking down cars to clear them from the lot as consumers would step back. It appears that no amount of pressure is reducing this demand.

From where I sit, the "this time is different" dynamic is rooted in delayed gratification. People who have suppressed shopping and traveling desires for three years are simply responding differently. During the pandemic, it appears that people not only missed hanging out with friends and family, but they also missed the joys of new stuff, of new vistas and of new experiences. If that is so, the Fed is fighting a demand drive with more psychological force than previously experienced. In fact, the closest analogy may be the euphoria of post-war spending.