You thought Stan Kroenke wanted a team in Los Angeles? I don’t think so. I think Stan is playing a long con. And I think it’s a brilliant strategy.
Los Angeles is a terrible market for football teams, but it’s a fantastic market for the NFL. It would be a perfect place to build a permanent home for the Super Bowl. Los Angeles has fantastic weather, great attractions, and a huge pool of football fans, fans of every team in the NFL. Except the Rams.
And you might think I’m crazy, but you’ll want to bookmark this post for later reference. It could make you look very smart some day.
Let’s look at what we know about Kroenke, the Rams, and the NFL.
Kroenke is a real estate investor who happens to own a few professional sports teams. He made his billions building strip malls that he rented to Walmart and other retailers. (The Walmart plaza by my house is a Kroenke Properties mall.) His first love is real estate deals, and he’s shady.
Many people who’ve done business with Kroenke were financially ruined. Kroenke always sets up the deals so he can take everything when he wants. Just ask St. Louis.
The NFL is about money and only about money. Just ask any of the former NFL players who have to beg for money from their wheelchairs like Conrad Dobler.
Stan Kroenke wanted the Rams to play numerous games in London while they were in St. Louis, but the team’s contract with the city of St. Louis prohibited it. Kroenke didn’t like that.
Kroenke learned that cities will throw money at an NFL franchise to entice the owners to move to their city.
Kroenke plans to build an NFL palace in Inglewood, California. Not a Rams palace, an NFL palace.
Support for the Rams in Los Angeles faded quickly after an initial surge at the start of the 2016 season.
Support for Los Angeles NFL home teams was weak throughout the late 1980s and 1990s.
Here’s my prediction: Stan Kroenke will build the NFL palace in Los Angeles, then move the Rams to London. The stadium in LA will become the permanent home of the Super Bowl, plus the site of marquee match-ups throughout the season. Los Angeles will be happy because they’ll get to see more of their favorite teams in these marquee games, the NFL will have a destination-city address, and Stan will sell the Rams to London investor after getting a sweet deal to move the team to the UK.
This was Stan’s long con. He’ll get a lot of help from other owners to build the LA complex. He’ll get the NFL to sign a contract for use of the facilities that will cover his investment. It’s what he does, and he’s better at it than anyone else in the NFL. Then he’ll get a similar deal in London, move the team, and dump it. He’ll hold onto the properties and adjacent properties. He’ll clean up.
This is pure speculation, but Kroenke could make more money my way than by keeping the Rams in LA.
I’m not sure when this will play out, but it will be after the new stadium opens and before the Rams become a contender. (Okay, just about everything will happen before the Rams become a contender.)
When you see news stories about Stan Kroenke buying land in the UK, get ready. Until then, you can tell people this scenario is your idea and you’ll look like a genius when it unfolds. And if it doesn’t, no one will remember a thing. That’s the great thing about predictions like this one: there’s no way to lose and several ways to win.
Even before they have played their first game in LA, the Rams are seizing opportunities to spread themselves around the world. Because they are playing in a temporary stadium – the Los Angeles Coliseum – until their new home opens in 2019, they are subject to an NFL rule requiring them to play an overseas game in each of the next three seasons. While some teams might balk at giving up home games in three straight seasons, the Rams embraced the mandate, agreeing to honor an already-scheduled game in London this fall and to play a 2018 regular season game in China.
“This is philosophical, I think. There are people who will view change as a challenge and there are people who view change as an opportunity,” said Mark Waller, the NFL’s executive vice president of international. “In the Rams point of view this is an opportunity. This is a chance to re-frame how they view their franchise for the future.”
Expect that re-frame to end when the Rams move across the Atlantic.
You really can’t over-estimate what suckers business people are.
I’m not talking about people who create things or improve things. Guys like Steve Jobs and Donald Trump built great businesses. But they weren’t business people. They were builders. Running a business was a necessary evil that allowed them the freedom to build what they wanted to build. They were great businessmen because they cared about the work their companies did. Just like every small business owner who has the courage to strike out and build a business.
Most business executives, though, are not builders. They’re managers. They don’t really care what their companies do or how their products improve (or hurt) people’s lives. They care about quarterly reports and resource utilization targets. Put another way, Jobs and Trump saw the numbers as the result of their great work; managers see the work as a necessary evil to achieve the numbers.
Big Data was a buzzword for about six years. At first, it was a way for Silicon Valley types to get funding for their startups. Then, it was a way for corporate IT geeks to get funding for internal projects. IT sold Big Data as a way for their companies to “differentiate.” Then it became a corporate strategic initiative at every company in America when IT convinced managers that “we are the ONLY company that DOESN’T have a Big Data strategy.”
Then Big Data predicted Hillary Clinton’s landslide win with 98% confidence. And Big Data went the way of the Iomega Zip Drive. (I know of very senior executive at a very large beverage company who, in 1996, shifted his entire portfolio, 100%, to Iomega stock.)
In 2012, I attended an innovation symposium. One topic was Big Data. The speaker breathlessly warned that “Big Data Is Coming!” like the Red Coats. As if Big Data were a thing. (In case you’re wondering, “Big Data” means “lots of data” usually about people and their behavior.) He said “Big Data” at least 100 times in a 25-minute presentation. Since I’m a former geek, a lot of people asked me afterwards, “That was such a great talk, but did you understand what we should do about it?” I wasn’t sure. Neither was the speaker. Except “invest” in it. Or invest to stop it. I can’t remember which.
Corporate IT folks are masters at creating urgent needs for funding. They invented the Y2K bug. (I profited handsomely from that panic from 1997 to 1999.) No one knew exactly what the Y2K bug was, but gullible managers forked over billions and billions of dollars to fix it.
The Big Data invasion was another Y2K bug, only more mysterious. So it needed even more funding. When the election was called for Trump around 2:00 a.m. on November 9, it was like midnight January 1, 2000, all over again. The great IT emergency was dead.
Now, the IT folks have a new emergency that requires billions and billions of funding. IT professionals are A/B testing whether to call it AI (artificial intelligence) or “machine learning.” Both AI and machine learning are real things, but they’ve become buzzwords to seduce money from gullible business executives. That means IT folks are busy finding out what their executives’ greatest fears are, then creating pitch decks that “prove” AI/machine learning is exactly the thing to kill that bogeyman. (I’m watching this A/B testing happen, and it’s amazing to see. When the business execs reject AI for one reason or another, IT simply does a search and replace of “AI” with “machine learning,” pitches the exact same deck a month later, and gets the funding. You can’t make this up.)
What the executives don’t know is that AI and machine learning are both overhyped exaggerations, just like Iomega, Y2K, and Big Data. Says Andrew Orlowski of the Register (via ZeroHedge):
As with the most cynical (or deranged) internet hypesters, the current “AI” hype has a grain of truth underpinning it. Today neural nets can process more data, faster. Researchers no longer habitually tweak their models. Speech recognition is a good example: it has been quietly improving for three decades. But the gains nowhere match the hype: they’re specialised and very limited in use. So not entirely useless, just vastly overhyped. As such, it more closely resembles “IoT”, where boring things happen quietly for years, rather than “Digital Transformation”, which means nothing at all.
The more honest researchers acknowledge as much to me, at least off the record.
The bad news for most people: AI/machine learning will cost a lot of non-techies their jobs over the next few years. IT leaders have gotten really good at bilking gullible managers out of money for buzzwords like Y2K and Big Data. And business people ain’t getting any smarter. The AI bubble will burst after some catastrophe caused by a crappy algorithm—a catastrophe that a hydrocephalic 4-year-old could have anticipated and averted. By then, IT will have a new bogeyman.
But until then, I say do a shot every time you hear “AI” or “machine learning.” That’s what buzzwords are for.
And that, my friends, could be very bad news for the economy in 2016.
Social psychologists and usability experts both know that people’s words often conflict with their actions. This is especially true when asking people to predict their own behavior in a hypothetical.
For example, one study asked people to predict whether they would buy flowers for a charity. Eight-three percent of respondents said, “yes I would,” but only 43 percent actually did.
The play The Visit by Friedrich Dürrenmatt offers a great study in expectant behavior vs. self-prediction. In the play, a woman, Claire, returns to her economically depressed hometown after inheriting billions from her late husband. Before she arrives, the town prepares to ask her to bail them out.
And she does offer to save the town. But her money comes with a string attached.
Claire offers a large donation to the town and an equal amount to be divided evenly by all citizens. To earn the gift, someone must murder the town’s leading citizen and Claire’s ex-boyfriend, Anton.
The townspeople express their outrage at the request. From the mayor on down, people go out of their way to stop by Anton’s store and tell him they will have nothing to do with her evil scheme.
But Anton starts to notice something disconcerting. The people who come in to his shop to tell him they think Claire’s offer is horrible and offensive are suddenly spending a lot of money. On credit.
Walking around town, he notices more signs of expected affluence: kids with new toys and shoes, women in the latest fashions, men driving brand new cars, appliance and furniture deliveries on every street. For years, people of the town had made-do. Now it looked like they’d all won the lottery.
It’s pretty clear what’s going on: while the townspeople say “I would never kill Anton for money,” they’re also thinking, “but surely someone will.”
Expectations Drive Borrowing
When we borrow money, we assume we will earn more in the future than we do today.
When a company borrows money for a new machine, it does so in the belief that the machine will allow the firm to sell more products at a profit in the future.
These are both examples of borrowing on positive expectations.
Both individuals and companies also borrow when they expect very bad times to come.
Individuals who know they’re going to file for bankruptcy tend to stop paying their bills and start borrowing to their full capacity.
Business who know they’re going to face bankruptcy or failure borrow to drain the firm of assets.
Increasingly over the last 5 years, companies have been borrowing billions of dollars to drain their firms assets. Take a look at this chart depicting how companies have used loans:
Hidden in the M&A and Debt Refinancing column is another sinister activity: share buybacks. Let’s look at share buybacks since 2000:
Notice that buybacks were pretty flat from 2000 through about 2006. Notice, too, that 2006 was when the housing market started flashing warning signs.
Expecting bad times ahead, companies began buying back their own stock to inflate the price so insiders could get out at the (artificial) top and managers could earn huge bonuses tied to stock prices.
After the crash of 2007 and 2008, stock buybacks and dividends returned briefly to historical norms. But only briefly.
Executives soon realized that the debt bomb that triggered the 2007 and 2008 crash had not detonated. It actually became more powerful. The government and business did not fix the problem of trillions in bad debt–they simply kicked the can down the road.
These CEOs and CFOs are smart people. Smart enough to realize that trillions of dollars in bad debt–debt with no underlying value–must be settled at some point. Realizing this late in 2010 or early 2011, managers began borrowing money and removing it from the firm. Capital expenditures–new plant and equipment and research and development–dried up. Companies did not borrow to invest in the future; they borrowed to get their money out while they still could.
According to a study by Alleasing:
Capital expenditure (capex) budgets for the new financial year are being impacted by a lack of confidence in the economy. Seven in ten firms will leave their budget unchanged and a further one in ten will decrease spend in FY16, with an average intended reduction of 5%.
These are some of the findings from the latest Alleasing Equipment Demand Index, and they come despite six in ten firms being detrimentally impacted by a back-log of unproductive equipment. This figure has risen steadily over four rounds of research, up 6% over that period. For smaller businesses (micro firms and SMEs) the rise has been greater at 10% and 7% respectively. Seventy one per cent of micro firms and 73% of SMEs are indicating their operation is suffering because of unproductive assets.
You might be tempted to say, “But, Bill, why should we trust this survey? You just said people are bad at predicting their own behavior.”
Good point. But there’s a difference between predicting what we expect ourselves to do in a hypothetical scenario versus reporting what we have written in our plans. The Alleasing survey asks what’s written in your 2016 capex plan, not “what would you do if you suddenly found an extra billion dollars in your bank account?” In other words, this isn’t a hypothetical but an actual reading of 2016 budgets.
And look at the quote in bold. Despite record borrowing, companies are not replacing equipment that they know to be hurting their productivity and profitability. Companies have little faith in the future, so they’re borrowing money and handing it out as bonuses to managers and stockholders.
If my analysis is right, expect to see more stories like this ZeroHedge story on the downfall of Bed Bath & Beyond:
We have been following the slow at first, and now very fast-moving disaster that is Bed Bath And Beyond with close interest for years, at first with detached amusement (Bed, Bath & Beyond Buybacks Authorizes Another $2 Billion In Stock Repuchases) and increasingly with amazement, as the company launched an unprecedented stock buyback spree to mask the relentless deterioration in its underlying business.
Last September when looking at the chart showing BBBY’s buybacks vs its capex expenditures, shortly after Q1 BBBY issued $1.5 billion in senior unsecured Notes promptly using $1 billion of this to buyback its own shares, we presented the following three questions:
Is the entire management team about to quit, but not before cashing out of their equity-linked securities first?
Reading between the lines, what we asked was “what glaring business weakness is the management team covering up so earnestly with this constant stream of buybacks?”
Last week, BBBY announced disastrous same-store sales combined with failure to invest in capex meant future pain. Plus, the company has taken on billions in debt to finance stock buybacks.
Or, in return terms, since the start of 2011, BBBY’s management spent $6.5 billion to repurchase its own stock, while leverng up to the hilt. It has so far generated paper losses of $1.7 billion: a return which would have gotten any trader or hedge manager not only fired but expelled from the industry for ever.
Putting these numbers in context, BBBY repurchased 80% of its current market cap, which as of this moment is $8.1 billion. One wonders where the stock price would be without this Fed-enabled feat of financial engineering…
And BBBY is only one company that’s been borrowing money to spend on stock buybacks, executive bonuses, and dividends. The only thing these companies have in common is a degree in confidence that the business will fail in the near future.
The sad thing is that if (or when) BBBY fails, its executives and insiders will make a fortune while its employees, suppliers, and retail investors will get stuck cleaning up their lives.
It would be nice if business people believed and behaved as if creating a customer was the purpose of business, not financial engineering.
When companies borrow money, they’re telling you what they expect of the future. If they use the loans to invest in people, equipment, and new products, they expect growth. If they use the loans to line their pockets, they expect to go the way of Bear Stearns and Lehman Brothers. Think about that looking that chart of dividends and share buybacks:
I realize that not all buybacks are mere financial engineering. For example, Apple has been borrowing to buy back stock in order to reduce future costs of dividends. That’s a sound move, especially for a company like Apple that’s continuously innovating and improving. But Apple seems to be a rare exception among the buyback crowd which is why the example is so easy to spot.
Companies investing in people, equipment, and products expect a future that’s brighter than their present. Companies “investing” primarily in dividends and share buybacks expect to be headed for bankruptcy or bailouts.
Since then, crony capitalism has only grown. Obamacare and Medicaid Expansion. Quantitative Easing. The government takeover of General Motors and Chrysler. State and local tax subsidies for businesses, like China Hub here in Missouri.
At least part of the reason we’ve failed to separate corporation and state is a conservative economics fallacy first articulated by our favorite economist, Milton Friedman.
Milton Friedman’s Error
In 1970, Friedman wrote a New York Times op-ed titled: The Social Responsibility of Business Is To Increase Its Profits.
Conservatives love the simple brashness of Friedman’s statement:
There is one and only one social responsibility of business— to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.
On the surface, it makes sense, and business academics took it to heart. In 1976, two business professors, Michael Jensen and William Meckling of Simon School of Business, took Friedman’s theory one step further: the sole purpose of a business is to maximize shareholder value.
The Downfall Of Business Ethics
As Steve Denning wrote in Forbes last year, this is “The Dumbest Idea in the World.” The results of maximizing shareholder value have led to a popular mistrust of business. And it’s led leading proponents of so-called agency theory to question the idea that all’s fair in pursuit of profits.
In 2011, I had a chance to sit down to dinner with Harvard Business School legend Paul Lawrence just months before he passed away. Dr. Lawrence spent the last decade of his life undoing a lot of the damage he felt he’d done at Harvard.
“I watched a news program about corporate scandals around the time of Enron,” he said. “I realized that most of the men who were on trial for cheating and lying were former students of mine. I had to correct the thinking that led us here. I had been part of the problem.”
In the long arc of history, no human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism. It is unquestionably the greatest system for innovation and social cooperation that has ever existed. This system has afforded billions of us the opportunity to join in the great enterprise of earning our sustenance and finding meaning by creating value for each other. In a mere two hundred years, business and capitalism have transformed the face of the planet and the complexion of daily life for the vast majority of people.
And he gives us a remarkable litany of free-enterprise capitalism’s higher purpose:
This is what we know to be true: business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity.
The idea that business is good, ethical, noble, and heroic is breathtaking. I promise you, they don’t teach those ideals in most business schools today. They teach profit maximization and meeting Wall Street analysts quarterly expectations instead.
But people are human, not machine. We all want to serve a higher purpose, save for the five percent who are true psychopaths.
Mackey’s vision of business as good, ethical, noble, and heroic would lead the most idealistic person toward the pursuit, while the idea of maximum profits invites the selfish and the greedy.
The Evil Twins of Crony Capitalism and Regulation
The flip side of Conscious Capitalism is Crony Capitalism and government regulation. On these points, John Mackey sounds like our speakers at the first tea party protests:
Crony capitalists and governments have become locked in an unholy embrace, elevating the narrow, self-serving interests of the few over the well-being of the many. They use the coercive power of government to secure advantages not enjoyed by others: regulations that favor them but hinder competitors, laws that prevent market entry, and government-sanctioned cartels. 16
Since the financial collapse in the 2008, crony capitalists and government have conspired to increase the wealth disparity in America to its highest levels ever. Obama’s rhetoric about level playing fields were hollow. His two most ambitious legislative victories—Obamacare and Dodd-Frank—all but competition and free enterprise from healthcare and banking. Obama didn’t reduce income inequality—he made it worse.
And he did so with a lot of help from big business and big banks. Dodd-Frank, you’ll remember, changed a lot because of testimony and lobbying from the finance and banking worlds. Same for Obamacare and healthcare and insurance corporations.
The corporate lobbyists did not push ideas that would keep you free and prosperous; they added provisions to put taxpayer dollars into their own pockets.
There’s way too much great stuff in Conscious Capitalism for me to cover here. Whether you’re a business leader, entrepreneur, or concerned consumer, you’ll benefit from the ideas Mackey puts forward.
In the end, Mackey shows us two worlds. In the first, corporations use the coercive power of government to extract wealth from customers, employees, vendors, and taxpayers. In the second, businesses exist to create massive value that inspires people to buy from, work for, and trade with companies.
Which one would you trust? Which one won’t embarrass you? Which one would you happily defend?
If you believe in fair, open, and voluntary exchange, you’ll love Mackey’s book. If you don’t believe in those things, you need Mackey’s book.
Truth is, not all companies, not all business ideas, can make it on their own.
It’s easy to say that a good idea will automatically lead to a successful business. But it’s a lie.
Apple did not become Apple without investors. Sure, there are some examples of businesses that flourished without financial help. But not many. We’ll never know the wonderful ideas that died in their owner’s garage for lack of financing.
Markkula offered to guarantee a line of credit of up to $250,000 in return for being made a one-third equity participant. Apple would incorporate, and he along with Jobs and Wozniak would each own 26% of the stock. The rest would be reserved to attract future investors. The three met in the cabana by Markkula’s swimming pool and sealed the deal. “I thought it was unlikely that Mike would ever see that $250,000 again, and I was impressed that he was willing to risk it,” Jobs recalled.
Isaacson, Walter (2011-10-24). Steve Jobs (p. 77). Simon & Schuster, Inc.. Kindle Edition.
A lot of people with ideas turn to government for investments. Why a business person with an idea would go to government for funding is obvious: poor scrutiny, below market interest rates, and (seemingly) unlimited funds. Ideas requiring big investments and heavy risks tend to seek out government help. (See Aerotropolis.)
But the private sector has its own method of bringing great, but risky, ideas to market: venture capitalists and private equity.
Venture capital and private equity firms pool their money together and invest in start-ups or small businesses seeking to grow, or salvage existing companies that suffer from bad management. These firms employ experts and risk-takers who help push ideas over the top.
Most importantly, private equity firms are like Bailey’s Building & Loan—they give us an alternative to the Mr. Potter of government.
It’s absurd to criticize Bain Capital for its practice of salvaging failing businesses. It’s absurd and silly to criticize Mitt Romney for laying off people from dying companies. Even some Democrats get this:
Should bad, poorly-managed companies be allowed to destroy value? Should fast-growing, innovative businesses receive capital and support to accelerate their growth? And should hard-working pensioners and retirees be allowed to invest their savings in an asset class that outperforms nearly every other one available? Private equity has an important role and should be lauded, not lambasted. The WSJ does a nice job of making this case here.
I am a strong proponent of business considering all stakeholders, not just shareholders, as vital corporate interests. I’ve written about Creating Shared Value in the past. I believe that mass layoffs shouldn’t happen simply to boost quarterly or annual numbers.
When Bain Capital bought a business, the damage had already been done. Bain didn’t buy thriving companies and gut them; it bought failing businesses and saved them.
Sometimes layoffs are necessary to avoid outright closure. That’s why business leaders get paid big dollars—because we rely on them to save as many jobs as possible by making brilliant strategic decisions.
While I have a lot of difference with Mitt Romney and with business executives who treat employees like pawns in their personal empowerment games, I believe that Romney’s actions at Bain were necessary and compassionate, not callous and self-serving.
Were it not for private equity firms like Bain and venture capitalists in general, ideas like the Apple II would die in Steve Jobs’s garage. Entrepreneurs, inventors, and troubled companies would have nowhere to turn except government.
Newt Gingrich made a big mistake attacking Romney’s role in saving failing companies. In fact, his error was so big it might have sealed the nomination for Romney.
David Brooks—the former conservative—skewered the University of Missouri St. Louis yesterday. Brooks wasn’t aware, and UMSL administrators don’t read. But some of us caught it.
Brooks wrote of The Missing Fifth.Did you know that 20 percent of American men in their primes don’t work?
Americans should be especially alert to signs that the country is becoming less vital and industrious. One of those signs comes to us from the labor market. As my colleague David Leonhardt pointed out recently, in 1954, about 96 percent of American men between the ages of 25 and 54 worked. Today that number is around 80 percent. One-fifth of all men in their prime working ages are not getting up and going to work. [Emphasis added.]
How sad. How embarrassing. I’d say “how shameful” except the Supreme Court ruled shame unconstitutional, or so it seems. We’ve had that feeling, shame, removed from our souls.
Men who do nothing are deadbeats, much more so than people who try to pay their bills and can’t. We’re talking about able-bodied men who simply choose to sit on their asses and sponge of others—off of foolish women, in many cases.
Brooks errs in his proposed solution, of course. Brooks thinks American education the solution. He hasn’t been paying attention. I have some other ideas.
Higher education isn’t the solution to our problem; education is the problem.
The University of Missouri’s wing schools, UMKC and UMSL, offer the course “Introduction to Labor Studies.” This course is why 20 percent of men believe that sitting on their brains is their right—nay, their duty—as young, able-bodied American men.
Think about this: the state of Missouri uses tax dollars to teach Missouri students how to rip off employers. Knowing that, why would you hire someone who went to a public university in Missouri? Why would you open an office or business in the state? What could be more foolish than to expect Missouri to encourage business?
Here’s a solution. It’s a tiny, tiny step, but it’s a step in the right direction: Shut down the damn Labor Studies course in the University of Missouri system.
An alternative solution if that’s too radical for our legislature: rename the course “Introduction to Deadbeat Studies.”
But do something before "Men at Work" becomes nothing more than a trivia question.