Random Thoughts – After the Crisis, Opportunity

After the Crisis, Opportunity

The pandemic has created the opportunity for an economic and social reset. The question is whether politicians will grasp it. Are we too focused on repairing yesterday’s world rather than building tomorrow? The biggest danger is being short on effective action. The risk is not on the left or the right —  it’s inaction.

The Pandemic

Covid-19 has changed the trajectory of three big forces that are shaping the modern world. Globalization took a hit. The digital revolution has been radically accelerated. And the geopolitical rivalry between America and China has intensified.

The pandemic has compressed years’ worth of transformation into months, bringing with it a dramatic shake-up in how people live, what they buy and where they work. Fortunately the Internet we have is just good enough to make it happen. It’s not perfect, it’s not great, but just good enough to make it work. I don’t think we could have handled it as well five or ten years ago. With everyone on Zoom and Netflix at the same time, the whole world would have broken.

China

The Sino-American rivalry will continue. I don’t think Biden is in a rush to removed the tariffs imposed by the previous administration. The United-States and the world is suspicious of China. Despite for all its “vaccine diplomacy”, China inspire fear and suspicion. That means once again America will have disproportionate ability to shape the post-pandemic world. The world is splitting in two parts. One American led, the other Chinese dominated. The digital world and supply chain is designed by these two countries.
How should the US approach China? First, through diplomacy. The US need to strike a bargain with Europe (+Canada and Oceania) and form a new global alliance, binding Asian democracies into the Western coalition to counter China. Second, the U.S. and China need to send their top three diplomats on an island and workout a deal.

What’s next?

All these predictions about what the world would like post-Covid, as usual, is all nonsense. It’s just filler material. Nobody really knows. Some say we will return, eventually, to what we were before. Others say no way, we are not going back into offices and stores. But the truth will be somewhere in between. 

Vaccine

The good news: We will have many more vaccines in the next six months to complement the successful candidate from Pfizer-BioNTech. That is the testament to the power of scientific collaboration. Vaccines used to take 10-20 years to create, but today there are more than 320 projects, including dozens in advanced clinical trials. As teams attack the virus from different angles the work yield considerable advances in vaccine research.

The bad news: The distribution is an absolute mess. We can’t get it to people. For a world that desperately needs to be vaccinated, looking into this is a frustration trigger. 

I don’t pretend to know all the answers but I can point in the right direction: Israel. From the start they administered over 150,000 shots a day, multiple more than any other countries on earth. Let’s take what they do right and apply it.

A big difference is in their approach and attitude. Israel is in a constant war state. Their government in collaboration with the military are drilled in getting things done. Because they are surrounded by people that wants them dead for the last 70 years, they have a constant war mentality mindset. We should adapt a similar approach. Getting things done. Let’s make vaccination a giant national effort project. Let’s pool our resources in getting this done. Vaccinate day and night, weekends, including Valentine’s day, like thousand of lives depend on that effort. Our economy will come back and so are jobs. It can’t be worse than how it’s done now.
Covid-19 will not disappear but it will start to fade in the background. I’m optimistic that we will get through. Most likely a muddle through. That means getting through many obstacles but we will get there. 

Stock Market

The biggest question I get is: Are we in a bubble? Well actually no ask me anymore, they just tell me we are one. There are a lot of evidences that is pointing to bubble activity (SPACs, GME, Bitcoin, Robinhoodies, Tesla, real estate etc…) So sure they are certain sectors that are absolutely mad crazy. If a 20-30-40% correction happened tomorrow I wouldn’t be surprised. Anything could trigger that. Nobody is saying it’s a good idea to buy GameStop at $150 a share.
But overall, you could argue that we are not in a bubble. Sure stocks and assets are not cheap but some stuff looks reasonable. Look at it this way. Interest rates are almost at zero. Real interest rates are negative. Central banks have indicated they are not going anywhere anytime soon. There is no where else to put your money. And on the top of that, you have the world governments going full gun blazing on the money printing press. There is so much money in the system and more is coming. It’s pointing one way: up.

Inflation

Will inflation start to kick in?

We have been lucky not to have a lot of inflation in the last thirty years (~2% official numbers). With all the money printing you would expect higher inflation and eventually higher interest rates. Anyway that’s the conventional textbook thinking. But we have been printing money for a long time without having signification inflation. Commodity prices are on the rise as the table above demonstrate. 
It seems that inflation via excess money creation is coming our way. It doesn’t mean it will, but there are credible reasons to believe it will. Will it go up long term? Or is this just a short-term bump?

The best paper and book I’ve read on inflation and prices is not from an economist, but from two historians, Paul Schmelzing and David Hackett Fisher. Paul Schmelzing looked at eight centuries of interest rate in his paper: Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018 and David Hackett Fisher with his book The Great Wave: Price Revolutions and the Rhythm of History Their work puts the present day in a historical perspective encompassing many centuries.
We normally look at the demand side, but there is a supply side too. Events, like war, famine, and epidemics destroy capital and led to inflation. Human capital is the most important. Now we have a pandemic but we also have mass money flooding the system. We are currently writing the book on how this will work out. Maybe understanding the past can teach us to avoid disaster. 

Bitcoin and Cryptocurrencies

Bitcoin is becoming more accepted. Bitcoin is not the most technology sound currency, but it’s the one most people believe in. A lot of professional investors have changed their tunes on Bitcoin and cryptos in the last couple of years. It’s becoming more widely accepted. I took a crypto deep dive during the 2017 bubble. I get it. It’s not simple but there’s something there but we are not there yet. The technology/infrastructure/legal framework to support crypto currencies as mainstream currencies is not there yet. I think in the future there will be higher crypto currency penetration in the economy. I guess we are all waiting for that “killer” app to force adaption. Nobody knows where it will come from or which currency will win (doesn’t have to be just one). My prediction: Cryptocurrency adoption through mass teenagers on some kind of wallet app with a closed system (where the app keeps the money instead of sending it to the bank) where they can cryptocurrency among themselves outside the banking system.. The catalyst could be a game like Fortnite where all the kids hangout and want to trade stuff.

My Crypto Fail Story

I got into crypto trading during the 2017 bubble. I was fascinated by the space and to really learn about cryptos you really need to get your hands dirty. So I opened an account (complicated back then) and invested speculated a little bit of money just to see what would happen. 

I opened an account with Coinbase at first. It was the most accessible in Canada but it had drawbacks. Fees were expensive and you didn’t have access to most cryptos. There was Bitcoin and another one back then. I’m sure it’s different now. I made a little bit of money with Bitcoin and then transferred to an exchange called QuadrigaCX. It was highly recommended in Canada. Fees were lower, better relations with bank, and access to many different type of cryptos. I sold Bitcoin and bought some Ethereum and triple my money in a month. And that’s the last good part of that story because it all south from here.

I eventually got bored and moved on to other stuff. Then the bubble burst and I lost 75% of my value. Mistake #1: when you are up in gambling take you gains. Mistake #2: because my Ethereum were basically worthless at the time I didn’t care much and left them on the exchange instead of having it on a drive. The exchange, QuadrigaCX, bankrupted and the founder allegedly die in India. He used the company/money/crypto as a personal expense vehicle and was living it up. His wife says that everything was on his laptop and she doesn’t have the password. And without a key you don’t have access to the cryptos. The whole story is very controversial and is still under investigation.

The kick a guy when he’s down part: Ethereum is about 10x when where I bough it and I can’t have them. Coinbase is still around and filing for an IPO soon.
Anyway if somebody sees the QuadrigaCX founder please let me know, I would like a chat.

Super Bowl LV

Is this going to be the greatest Super Bowl ever? The expectations are going to be high. As Super Bowl matchups go, it doesn’t get much better than Tom Brady vs. Patrick Mahomes. The GOAT vs the Kid. One is 43 and the other is 25 years old. That’s a 18 year gap. That’s like 6 average NFL career. It’s also weird that the Patriots are not there. 
I’m going with the Chiefs. The line is 3 points and Chiefs are favorite. The over/under is 56.5.

Tom Brady

This is Tom Brady’s 10th Super Bowl appearance and this time on a different team at 43 years old. Just writing that was weird. The guy still competes at the highest level. It seems like he’s getting better. How is the even possible? I mean aren’t you tired of getting sacked by monsters? He should be broken. 

NHL

Hockey is back and Canada has its own division, the North. Montreal Canadiens will grab the top spot. 

Cheers,

Brian

Re: Ça se présente mal pour le retour du hockey à Québec

The following post is in French. It’s my response to the following article in the journal Les Affaires. M. René Vezina, a great journalist that is known for offering a different angle on many topics,  suggested that the reason why the NHL is not back to Quebec City is because Videotron is a publicly traded company and it’s financial disclosure would reveal too much. We know the NHL is secretive about it finance and having public data would provide the player’s association with more leverage when it comes to future negotiations. My response argue that it’s not the case. I argue that the reason why Quebec City doesn’t have a hockey team is for financial reasons.

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Bonjour M. Vézina,

Je suis un fidèle lecteur du journal Les Affaires. Je vous encourage à continuer votre bon travail. Votre dernier article sur le retour du hockey à Québec est intéressant. Vous proposez un angle que je n’avais pas entendu sur les raisons pourquoi que la LNH n’est pas de retour à Québec. Vous avez suggéré que Québecor n’était pas assez opaque comme raison. Mais je ne crois pas que le fait que Québecor ne soit pas assez opaque est une des raisons principale pourquoi qu’il n’y pas d’équipe à Québec.

Taxes and Stamkos

*Update: 35 minutes after posting its reported that Steven Stamkos resigned with the Tampa Bay Lightnings.

I written two pieces in the past on professional athletes and money, The Montreal Tax and Broke Athletes.

My brother, Hugh, sent me this great article from TSN on the possibility on Steven Stamkos signing with the Toronto Maple Leafs. You need to listen to Bob McKenzie’s analysis of the situation, he’s one of the best. Toronto fans are getting all excited since he’s a kid from the Toronto area (Markham) and signing this elite player would change the faith of the franchise. That’s the team that finished last and the proof of their last Stanley Cup conquest are black and white pictures.

Steven Stamkos is the biggest NHL free agent to hit the market in years. Mr. Stamkos is likely to command one of the highest salary in the NHL. While there are many factors that go into this decision we don’t exactly know what exactly is driving Stamkos’ decision. It’s actually pretty hard to read. If it was purely money, he would have resign with the Tampa Bay Lightnings. If it was team success, he would have also resigned with the Tampa Bay Lightnings since the team is one of the best in the league. From what I heard, and that again are purely rumors, he was offered the same contract than Patrick Kane and Jonathan Toews. I believe the contracts are worth $10.5 million each per season for eight years. Another theory is that he’s waiting to see what the others team are offering to have TB match the terms. This is the first time and maybe the last time (big money years anyway) that Stamkos gets to be an unrestricted free agent and test the market.

Talking about dollars, we love to speculate on how much money one player makes but one area we often overlook is after tax dollar that is left. We don’t talk about it because it’s not sexy and complicated but taxes play a huge role in the decision a player has to make when it comes to picking a city. The Canadian cities are clearly at a disadvantaged when it comes to attracting top talent. Let’s face it, $10 million in Toronto is not same as $10 million in Tampa Bay. According to the article, if he was paid $10 million (U.S.) a season by the Maple Leafs, he’d only take home about $3.8 million annually, compared to about $5 million if he re-signed with Tampa Bay according to estimates provided to TSN by the Gavin Management Group. These amounts also include deductions for agent fees and an 18% escrow.  Florida also doesn’t have a state income tax while Canadian teams need to offer more money to compensate for the high taxes. And with a salary cap environment that plays against you.

The Tampa Bay Times did an analysis on how an $8.5M Lightning contract keeping Steven Stamkos in Tampa is better than $10.5M to leave (see table below). The article states that if Stamkos takes $8.5 million with the Lightning, it would net almost the same annually as $10 million in New York, presuming he’d be a New York City resident. He’d net roughly $500,000 less annually than $10 million deals in St. Louis or Detroit, due to city and state taxes, but take in more money over the length of his contract. In Toronto, Stamkos’ hometown, there’s a proposed 53.53 percent federal/provincial tax if he’s a Canadian resident. So even if the Maple Leafs offer $10 million annually, Stamkos would net $7 million less total over the length of the deal compared one at $8.5 million annually in Tampa Bay, partly thanks to an eighth year.

One money advantage that Toronto offers is more endorsement opportunities. But then again you lose a lot of that revenues to taxes of course. If Stamkos wants to play the hometown hero, then Toronto is the place but he will be giving up a lot of money. If he’s after money, he should stay in the sunshine state.

Source: Tampa Bay Times

The Montreal Canadiens Just Cross the $1 Billion dollar Valuation

The Forbes’ list of the 2014 NHL team value is out. The top three spots remain the same: Toronto, NY, and Montreal. A combination of new national lucrative TV licensing deals, labor peace, and growing popularity helped push the value of the teams upward.

Here’s a few observations, the valuation of the:

• 1- Toronto Maple Leafs is up to $1.3 billion, +13%
• 2- New-York Rangers is up to $1.1 billion, + 29%
• 3- Montreal Canadiens is up to $1.1 billion, + 29%

The recent sale of LA Clippers helped fueled higher valuation to all the professional teams. I’m pretty sure in a private transaction, except for maybe the Florida Panthers, any of the NHL teams could fetch more. Unlike a traditional asset, owning a sport professional team is similar to owning a luxury piece of art. Factors other than income, such as ownership prestige and status, help drive prices up.

At the bottom of the list you have the

• 30- Florida Panthers – $190 million, down 21% this year and the only team that lost value. I believe the Panthers don’t own the BB&T Center either, so you are pretty much buying a team with 20 guys wearing the Panthers’ jersey. If the Panthers, the Coyotes, and the Hurricanes were traditional private businesses, they would be close. But sports team are a different breed of business. You can be cash flow negative for many years and the league will bail you out or some bored rich guy will buy the team of you eventually at some insane metrics.
• 25- I’m surprised to see the St-Louis Blues holding the 25th spot with a $235 million valuation. I am surprised that I expected them to be worth more. The good news is that they are trending upward. They were 30th in 2012 and 28th last year. The team was bought in 2012 for $130 million, that’s an 80% return already. With the team’s recent success and long history in the league I expect team to be valued higher.

This article on the Montreal Gazette, George Gillett Jr. helped turn Canadiens into a billion-dollar team, motivated me to write this post. As a valuation guy and sports fan, this topic highly interesting to me. The story goes that Mr. Gillett bought 80% of the Habs for $185 million in 2001. This was a dark period for the Montreal Canadiens, they just missed the playoffs for three straight years and your main offensive star was Richard Zednik. At the time nobody wanted to buy that “toxic” asset.

The lesson here is that you get the best price when the outlook is the most miserable. George understood this and took advantage of the fire sale. Eight years later George flipped the team for a nice $575 million. That’s $575 million on the top of the estimated $50 million he withdrew in dividends each year. The circumstances surrounding the transaction were much different in 2009. That time, instead of a dark outlook, the weather was sunny and everybody wanted a piece of the action. You had one seller and many buyers pushing the price higher and higher. I’m sure that if the Habs were on the market today, their would be a bidding war to own this prestigious team.

It took a long time for the NHL to get on par with the other big 3 sports (NFL, NBA, MLB). In the 80s the NHL apparently rejected a national TV right deal because the setting up cameras would have eliminated seats, therefore less revenues. That decision turned out to be costly since it left the sport behind and their first national TV right didn’t come around until the 90s with Fox. Fox had the opportunity to put “modernize” hockey and to make it a first class sport like the other big three. As we know, first impressions are huge. But viewers were complaining they couldn’t follow the puck action. The geniuses at Fox came up with a great solution: Let’s add a glowing puck, laser beam sound effect, and a glowing red tail after a shot. Fox made hockey look like an absolute joke, a cross between roller-derby on ice and American Gladiators. The experiment was a disaster and was eventually dropped. It took many years after that to get a decent TV deal and the respect it deserves.

 

NHL Finance Update – A New Fat Credit Facility

One of the investment that I follow, Citigroup, had a quick quiet small press release this morning at 8:00 am:
Citi Extends $1.4 billion Credit Facility to NHL

Certainly not splashing news but I know the that NHL is pretty secretive about its finance. We know or heard through various reports that only a few teams are generating the bulk of money for the NHL. One of the stat you hear the most is that the Toronto Maple Leafs, Montreal Canadiens, and the NY Rangers are responsible for 80% of the league’s revenue. I haven’t verified or can’t confirm the accuracy of this stat, but it does pass the common sense test.

What’s interesting about this new line of credit, orchestrated by Citi Sports Finance & Advisory, is that by reading the press release it provides you with some hint about the league’s finance.

First let’s break it down. Thanks to a new long-term labor agreement and a fat Canadian TV deal, the NHL can guarantee a certain future revenue stream. This minimize uncertainty. Fourteen teams have access to the credit line and they get $100 million each. But the press release doesn’t say much other than feel good stuff from the NHL.
Does this indicate that there’s only fourteen that are profitable?
Or these are the teams profitable enough to cover the interest payment?
We don’t know what the terms are and the rate they are paying.

We don’t have the name of the teams that have access to the credit line, but I’m pretty sure it’s the half that makes money vs the teams on life support such as Pheonix or Florida. What banker would loan money to these two teams.

“This is a state-of-the-art facility, well-structured, and attractively priced — leading to exceptionally high interest by all of our investors, including strong participation from both the bank and bond market,” said Craig Harnett, NHL Senior Executive Vice President and Chief Financial Officer.

Other than this press release there’s no comments from either side. Is it one rate for all fourteen teams? It would make sense that having the stamp of 14 teams and the NHL on the contract that you would get better terms than what an individual team would get at its local bank. Professional sports leagues create loan pools by using collateral such as national broadcast contracts to secure credit at better terms than most teams could individually.

But Bloomberg News has more on the topic with this article: NHL Said to More Than Double Credit to $1.4 Billion

According to anonymous sources, 11 teams have access to the credit facility and there’s 3 spots available. The LA Kings, the Chicago Blackhawks, and the NJ Devils are the two teams listed to have taped the credit line. So this indicates that it’s not only teams with healthy finance have access to credit since the Devils have been flirting with bankruptcy speculations. The Devils had problem covering interest payments on their loan, so it’s a good thing that the credit line is backed by TV rights revenue.

How does this compare to other leagues? According to the SportsBusiness Journal, the NFL has the largest credit facility with access to “only” $3.5 billion. Again I don’t have the terms and this is an estimate. It looks relatively small compared to the NHL, but one can make the argument that the NFL doesn’t need to borrow as much money. It’s TV rights deal are the largest in sports and is more than enough to cover yearly payrolls. According to ESPN, from 2014 to 2022, the same networks will pay $39.6 billion for the same broadcast rights. We know that the amount of the credit facility are largely based on the TV rights contract, so I assume that if the NFL wanted a bigger one, they wouldn’t have any problem finding a lender.

What would it look like if sports teams in major cities combined their logos?

Here is another great find by Hugh Langis. This is a follow up to an earlier post on the rebranding of some NFL Logos. I’m reblogging a reblogged. It has been picked up by CBS sports and it has apparently been floating around the net for a while.

It’s not clear who I should give the credits to for this awesome image. According to Ashley Burns the With Leather blog a commentator named “Firefly” on Chris Creamer’s blog is responsible for the image. I’m not sure if he did all of them.

What would it look like if sports teams in major cities combined their logos? Here are some samples. Visit the websites mentioned above for more.

NFL Logos Rebranding

A little background:
The Buffalo Bills were named after Buffalo Bill Cody. Bill Cody earned his nickname by killing 4,280 buffalo in 8 months. Knowing that, I always thought it was funny that the Bills used a live buffalo as their logo and mascot. Wouldn’t a buffalo skull make a bit more sense?

My brother found this link from Fast Company’s Co.Design.
The rest of the logos at the bottom of the blog.

The logos are from designer Matt Mcinerney. He hasn’t completed all the teams yet but he is on the right track. You can find the full original article here. By the way the logos are unofficial and fake. Here is Matt’s podcast, On The Grid Here is the project page with more logos.

My favorite clip from the article. A statement that I agree with 200%.

The best sports logos, he says, are ones that are “simple, unique, and have the potential to be timeless.” One example he gave me is the logo for the since-renamed hockey team, the Hartford Whalers. The logo comprises a green “W” and a blue whale’s tail–clever but nothing too memorable. But McInerney pointed out something I had never noticed: a Hartford “H” in the mark’s negative space. That touch gives it a “new level of ownability,” the designer says, and it proves how visually efficient some of these existing logos really are.

Yes, a logo has to be simple. So simple that a 5 year old fan can draw it on his notebook at school. That should be the ultimate test.

Winners:

Failure: