Andy Kessler

WSJ: Let Bosnia’s Scars Be a Reminder

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https://www.wsj.com/articles/let-bosnias-scars-be-a-reminder-11575838155

The most dangerous concert you didn’t attend happened 25 years ago this Saturday. The venue was a small community center in Sarajevo, Bosnia, a city under siege from 1992-96 during the Yugoslav Wars. Serbs controlled the hills that surround most of the city. United Nations peacekeeping troops controlled the airport and did, well, not much. And yes, this was the conflict during which Hillary Clinton falsely remembered “landing under sniper fire.”

Someone from the U.N. thought a concert would lift spirits in Sarajevo and asked the Rolling Stones to perform. When they passed, a heavy-metal fan in the U.N., Maj. Martin Morris, booked Motörhead, who abruptly canceled. Mr. Morris then contacted Bruce Dickinson, lead singer for Iron Maiden, (of the classic “Run to the Hills”) who was then touring as a solo act, along with a few backup players. Mr. Dickinson immediately answered, “Yeah, why not.” This is all covered in an excellent documentary, “Scream for Me Sarajevo.” It’s worth watching even if your musical tastes run toward show tunes. (By the way, U2 also played in Sarajevo, but in 1997, after the siege had ended.)

When the helicopter Mr. Dickinson planned to take from Split, Croatia, was attacked shortly before the trip, the band instead loaded into a delivery truck painted with a Road Runner cartoon. Armed with beer and vodka, they drove up Mount Igman, crossing near Serbian lines in the middle of the night to get to a U.N. checkpoint, then transferred to armed personnel carriers for the short ride into Sarajevo.

The city buzzed with anticipation. Even though two mortar rounds hit the venue’s entrance earlier in the day, the Dec. 14 show was a huge success. “The gig was immense, intense and probably the biggest show in the world at that moment for the audience and for us,” Mr. Dickinson recalled. “That the world didn’t really know didn’t matter. It changed the way I viewed life, death and other human beings.”

The bass player, Chris Dale, remembers being asked by a local soldier if they brought any drugs with them. Mr. Dale told him no, drugs are bad for you. The local responded that his life expectancy was pretty short already. Such was the desperation in a city under siege.

Read the rest here.

WSJ: The Five Traits of True Tech

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https://www.wsj.com/articles/the-five-traits-of-true-tech-11575229527

It seems everyone wants to be a technology company these days. But not every company is worth 40 times earnings and 15 times sales in the stock market. How can you tell which growing companies might sustain that valuation? Put more broadly, in the wake of WeWork’s woes, what qualifies a company as highly valued tech?

Any company can call itself tech. Heck, Long Island Iced Tea Corp. changed its name in 2017 to Long Blockchain Corp. and the stock popped 400% to $13 (it’s now $0.16). But can companies that sell razors, glasses or mattresses be high tech? Exercise bikes? Insurance? Or even ads?

I came up with a list of five attributes of real high tech that investors should study. Let’s call it the GRuMPS™: Growth, Research and development, Margins, Productivity and Spending. Score one point for each—get enough, win valuable prizes. Collect all five and you’ll have a company that might trade at a high earnings multiple for a long time, not just the day of the IPO.

High growth: Two friends writing code to automate a lemonade stand is not high tech. Growth is key. The growth I’m enamored with usually comes from scale, meaning technology lowers the cost of a business model for which customers are clamoring. Intel lowered the cost of computing. Facebook lowered the cost of reaching consumers. Salesforce lowered the cost of using software. Even though prices go down, units go up faster so you get rapid and sustainable growth. Beware of fake growth like market-share growth: If you sell seat cushions for a 50,000-seat stadium, you can double sales every year but eventually you’ll run out of seats. Instead look for giant markets.

High R&D: Technology is never static. Hot products today are obsolete within a year. Huge R&D spending is critical to stay ahead. Look for intellectual property that scales. Companies often boost earnings by starving research, a serious red flag.

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WSJ: Man Bites Dog? That’s a Mistake

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https://www.wsj.com/articles/man-bites-dog-thats-a-mistake-11574634718

A short business week provides time to think. Here’s what I’ve figured out so far:

Why I don’t eat hot dogs. My wife had an uncle in the vending/food-service business. A friend of his asked him to bid on a contract to provide hot dogs for their corporate cafeteria. He bid 75 cents a hot dog. A competitor bid 50 cents and won the contract.

Months later the uncle ran into his friend, who apologized but said: “I don’t understand. We’ve known each other for a lot of years, and I thought you would cut me a good price, but the other guy came in so much lower, I didn’t have a choice.” My wife’s uncle responded, “I don’t normally bid on hot dogs. You tell me how much you’re willing to pay, and I’ll provide them at that price.” He meant he could supply hot dogs at almost any price point by varying the ratio of meat to byproducts.

The U.S. Department of Agriculture says hot dogs can have beef, pork, chicken and turkey from “raw skeletal muscle meat” and meat derived from “advanced meat/bone separation machines.” Do hoofs have muscles? It also allows “mechanically separated meat,” which is basically paste from a high-pressure machine that removes meat without grinding the bone—a source of calcium nonetheless. And don’t forget those “meat byproducts” like heart, kidney or liver. Mmm mmm good.

I used to enjoy what we called “dirty water dogs” at ballparks—the kind that come out of the mysterious hot-water tank and get slapped onto a bun at your seat. No more. And I’m certainly wary of “dollar dog night” anywhere. Final word: I don’t normally quote Snoop Dogg, but here we agree: “Every time I see a mother— at a barbecue with a plate with a hot dog on it, I’m knockin’ that [expletive] out his hands.”

Why I stop for cars that honk at me. While in grad school in cosmopolitan Champaign, Ill., I met someone from St. Louis who shared my fanatical fandom of Cardinals baseball. On a beautiful spring day, we drove down for a game. He knew where to park free, and on the walk to Busch Stadium we stopped at every location that sold glasses of cold Anheuser-Busch products.

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WSJ: Old Age Will Put China to Rest

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https://www.wsj.com/articles/old-age-will-put-china-to-rest-11574018820

The trade tiff with China lingers on—let’s just cut a deal for zero tariffs and move on. Then we can tackle the next question: Is there any real chance that China—with gross domestic product per capita lower than Mexico’s—could soon pass the U.S. in size and strength? The prospect is daunting, but we’ve been here before. Does anyone remember books like “Trading Places: How We Are Giving Our Future To Japan”? Me neither. The reality is that for every country, demographics is destination.

I recently attended the Sohn Conference in San Francisco, which raises money for charity by having hedge-fund managers pitch their best investment idea. Most talks were about broken stocks or esoteric cloud software companies hoping to double in value in three years. But Adam Fisher from Commonwealth Asset Management talked about decadeslong trends in China. (I didn’t talk to Mr. Fisher directly: Silly securities laws prohibit funds from marketing broadly while they’re raising money. So my notes will have to do.)

It turns out that China’s work-age population has peaked or is close to peaking—that pesky one-child policy worked. Even worse for Beijing, according to projections by the United Nations Development Program, China’s 65-and-over population is expected to grow by more than 150%, from 135 million in 2015 to 340 million by 2040, which will be 21% of the population. That’s a lot of retirees. By the way, the current retirement age in China is 60 for men, 55 for women, though both are set to increase gradually.

By comparison, Japan’s 65-and-older population reached 26% by 2015. But as the saying goes, Japan got rich before it got old. What about China?

According to the political economist Nicholas Eberstadt, less than 65% of Chinese workers are covered by any retirement benefits. That share drops to 35% for urban migrants. That’s many mouths to feed in old age.

And here’s where it gets dicey.

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WSJ: Warren Is the WeWork Candidate

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https://www.wsj.com/articles/warren-is-the-wework-candidate-11573411997

Are presidential candidate Elizabeth Warren and WeWork founder Adam Neumann the same person? I mean, they have different hairstyles and all, but their philosophies are more alike than not.

They both claim, falsely, to be capitalists. Ms. Warren told the New England Council last year, “I am a capitalist to my bones.” She then told CNBC, “I am a capitalist. Come on. I believe in markets.” It was almost as if she didn’t believe it herself. Then came the caveat: “But only fair markets, markets with rules. Markets without rules is about the rich take it all, it’s about the powerful get all of it. And that’s what’s gone wrong in America.” She clearly doesn’t understand capitalism.

Neither does Mr. Neumann, who said of WeWork, “We are making a capitalist kibbutz.” Talk about mixed metaphors. In Israel, a kibbutz is often defined as “a collective community, traditionally based in agriculture.” WeWork’s prospectus for its initial public offering mentioned the word “community” 150 times. Yet one little secret of kibbutzim is that many of them hired outsiders to do menial jobs that the “community” wouldn’t do, similar to migrant workers on U.S. farms. A capitalist kibbutz is a plain old farm, much like a WeWork building is plain old shared office space. Big deal.

Ms. Warren wants to reshape capitalism, while Mr. Neumann wants to “revolutionize your workspace.” Meanwhile, the Vision Fund, with capital from SoftBank and Saudi Arabia’s Public Investment Fund, has thrown good money after bad, writing off $9.2 billion in its quest toward this WeWork revolution. The same mismatch between communitarian vision and market realities would doom Ms. Warren’s economic reshaping. It’s hard to repeal good old capitalism.

The commonalities go on. Last year, Ms. Warren proposed the Accountable Capitalism Act. If it became law, large companies would have to obtain a federal charter that “obligates company directors to consider the interests of all corporate stakeholders,” or dare I say, community. For each company, Ms. Warren insists that “40% of its directors are selected by the corporation’s employees.” Back to the kibbutz?

In six months in 2019, WeWork lost $1.4 billion on $1.5 billion in revenue. Impressive!

WSJ: Follow Michael Crichton’s Rule

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https://www.wsj.com/articles/follow-michael-crichtons-rule-11572814056

“Jurassic Park” and “Westworld,” from the brilliant mind of Michael Crichton, aren’t real. But neither are a lot of things that pass for arguments these days. Crichton, who died in 2008, gave a lecture at Caltech in 2003 titled “Aliens Cause Global Warming.” In his words, it was about the “uneasy relationship between hard science and public policy” but I took away a lot more. Relax, this column isn’t about climate change.

His first example was nuclear winter. In 1975 the National Academy of Sciences stated that even with multiple nuclear detonations, the effect from dust would be minor. In 1979 Congress’s Office of Technology Assessment said the science was poorly understood and it wasn’t possible to estimate damage. Yet by 1982 the Swedish Academy of Sciences speculated that smoke would cover the Northern Hemisphere, blocking the sun and disabling photosynthesis—nuclear winter.

Within five years, famed astronomer Carl “Billions and Billions” Sagan figured a 5,000-megaton nuclear exchange would cause temperatures to drop below freezing for three months. Of course, there was no empirical study to back any of this. But what amazed me was the observation that no one could take the other side of the argument. Physicist Freeman Dyson said, “It’s an absolutely atrocious piece of science, but who wants to be accused of being in favor of nuclear war?” Argument over.

Same for secondhand smoke. In 1994 the Environmental Protection Agency found that 11 studies of the link between smoke in restaurants or offices and cancer were not conclusive, but nonetheless labeled secondhand smoke a Group A carcinogen. The World Health Organization also began to warn against secondhand smoke despite inconclusive studies of its own. Since then, study after study has found no statistically significant relationship between cancer and being near indoor smoking. Yet no one takes the other side of the argument. Except for smokers, no one likes the smell of tar and nicotine while they’re eating or working. Yuck. No one, including me, is actually for secondhand smoke.

Crichton observed: “Once you abandon strict adherence to what science tells us, once you start arranging the truth in a press conference, then anything is possible.” That includes children at the United Nations yelling, “How dare you.” It’s knee-jerk analysis. I call it the Crichton Conundrum: “I’m against it, so these theories must be right—even though the science is most likely bunk.” Shallow, but sadly a reality.

The conundrum is everywhere. Take the $15 minimum wage, a so-called living wage—who could be against that?

WSJ: The Gig’s Up for Freelancers

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https://www.wsj.com/articles/the-gigs-up-for-freelancers-11572208945

I’ll give up my keyboard when you pry it from my cold, dead hands. Didn’t Charlton Heston say that? Don’t tell anyone, but this weekly column may be illegal next year—all because of the latest self-wounding law from the statehouse in Sacramento.

California is so stupid. It was kind of funny when San Francisco’s airport banned plastic water bottles, prompting travelers to guzzle Gatorade instead. It was annoying when supermarkets were forced to charge for plastic bags—and a few folks may catch dysentery from bacteria festering on unwashed reusable burlap bags. Ditto for Berkeley’s ordinance banning natural-gas hookups to eliminate carbon emissions by 2045. It’s Berkeley: They’ll enjoy eating avocado toast while they shiver.

Yet Golden State legislators outdid themselves by passing Assembly Bill 5, signed last month by Gov. Gavin Newsom. Effective Jan. 1, the law reclassifies most independent contractors as full-time employees. This codifies the state Supreme Court’s 2018 Dynamex decision about “misclassified” freelancers.

The new law was pitched as a simple measure to provide contract workers with benefits like sick leave and health care. Yet as the dust clears, many ugly details are emerging. There were lots of carve-outs: for doctors, lawyers, accountants, psychologists, insurance agents like Jake from State Farm. But here’s something weird: Freelance journalists are limited to 35 submissions a year per “putative” employer. Wait, what?

The author of the law is a former labor organizer, Assemblywoman Lorena Gonzalez, who you can bet had union help in writing the thing—it’s easier to organize employees than freelancers. Ms. Gonzalez told the Hollywood Reporter her goal is “to protect and preserve good jobs. We’re trying to create new good jobs and a livable, sustainable-wage job.”

And the 35 number?

WSJ: Tech Treadmill Wears Firms Out

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https://www.wsj.com/articles/tech-treadmill-wears-firms-out-11571599552

Does technology provide a competitive advantage? Companies are counting on it. In March McDonald’s spent $300 million buying an Israeli artificial-intelligence startup to personalize menus based on weather and trending items. Now they’re considering license-plate recognition systems for drive-through lanes. Based on your history they might offer to supersize your order, or just hand you your usual Happy Meal. CEO Steve Easterbrook says, “Technology is a critical element of our Velocity Growth Plan.”

The problem is that adopting a useful technology doesn’t mean your advantage will last. I’ve long been amused by a succession of Harvard Business Review pieces that demonstrate this point. In 1985 Michael E. Porter wrote “How Information Gives You Competitive Advantage,” then in 1990 came Max Hopper’s “Rattling SABRE—New Ways to Compete on Information,” and finally in 2013 we got Rita Gunther McGrath’s “The End of Competitive Advantage.” Each of these takes describes a different stage in the life cycle of corporate tech.

Hopper was, as Harvard professor James Cash noted, “the first person who really defined the marketing leverage that could come from using technology.” In the late 1950s Hopper helped build Sabre, an automated flight-reservation system, and in 1981 he helped design the first major frequent-flier program to give American Airlines a competitive “AAdvantage.” Yet by 1990 he worried that the game was over, suggesting that technology was “table stakes for competition.” Hopper noted that “SABRE’s real importance to American Airlines was that it prevented an erosion of market share.”

That insight comes to mind watching the Streaming War of 2019. Netflix and Amazon have a huge lead in streaming video. But eventually everyone uses the same technology.

Tim Cook wants in, so Apple TV+ launches Nov. 1 with (probably overpaid) Jennifer Aniston and Reese Witherspoon. Robert Iger wants in, and Disney paid (probably too much) for control of BAMTech, the streaming-video technology developed by Major League Baseball, which it is deploying for streaming services Disney+, ESPN+ and Hulu + Live TV. AT&T wants in and paid (again likely too much) for Time Warner to create HBO Max. NBCUniversal wants in too. See the trend? Google ought to rename its streaming service YouTube TV Max+.

Yet when a company adopts a new technology, it can’t set it and forget it.

WSJ: What’s a Wealth Tax Worth?

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https://www.wsj.com/articles/whats-a-wealth-tax-worth-11570995598

Why do liberals think rich people have money just lying around, like Scrooge McDuck swimming in a giant pool of gold coins? That’s the myth behind plans to tax Americans’ wealth, as Sens. Elizabeth Warren and Bernie Sanders both propose.

Ms. Warren wants an annual asset tax of 2% on households worth more than $50 million, and 3% if you’re worth more than $1 billion. Mr. Sanders would tax “extreme wealth” starting at 1% on households worth $32 million and topping out at 8% on those worth $10 billion or more. Whereas the Soviets confiscated wealth virtually overnight, at least Bernie will take a dozen or so years to pilfer most of your savings.

University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman estimate that Mr. Sanders’s tax would raise $4.35 trillion over 10 years, while Ms. Warren’s would raise $2.75 trillion. But something seems fishy—oh, Messrs. Saez and Zucman advise both campaigns on their wealth-tax plans. I doubt they account properly for how levies on wealth would shrink the tax base. Can we get some outside audits please?

Even setting comical revenue projections aside, the wealth-tax idea doesn’t stand up to scrutiny. Never mind that it’s likely unconstitutional. Or that a wealth tax is triple taxation, heaped on top of a 21% corporate tax plus 20% capital-gains tax when someone sells shares to pay it. (I concede that it definitely would provide lifetime employment for tax lawyers.)

The most preposterous part of the wealth-tax plans is their supporters’ insistence that they would be good for the economy. Only in an upside-down world could anyone think “a wealth tax is pro-growth,” as a New York Times columnist has claimed.

Start with the spending side.

WSJ: An Investment Tip From Mr. ZIP

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https://www.wsj.com/articles/an-investment-tip-from-mr-zip-11570393678

Here’s an enduring lesson about investment. In the mid-1990s, well before streaming (2007) or Blu-ray (2003) or even DVRs (1999), I was convinced that every television would someday have an attachment to record and play back shows digitally. Digital videodiscs were available and personal computers had only expensive read-only drives. But I figured drives that also let users burn DVDs would soon take off, so my partner, Fred, and I started scouring Silicon Valley for technology that would benefit.

In the small city of Milpitas—ZIP Code 95035—we stumbled upon a company named Elantec Semiconductor, which had gone public in 1995 at $7 a share. Cowen Inc. and Hambrecht & Quist were the underwriters, for those who remember those days. Don Valentine of Sequoia Capital and Apple Computer fame was the (pedigreed) chairman. It had $30 million or so in revenue but wasn’t really growing. When Fred and I found it, the stock was broken, trading around $3. It had 10 million shares, so it was trading at a lowly one times sales.

We started visiting the company, meeting the CEO and CFO once a month. They told us they had developed a little $2 laser-diode driver that could allow a compact-disc drive to burn data onto a blank disc. Lights flashed in my mind when I heard this: Could their laser driver do the same thing for DVD drives? Someday, I was told, but it would be really expensive. Even so-called CD-R drives for PCs were still $500. Gut check—time to move on? Nah.

We weren’t discouraged. Everything that comes out of Silicon Valley starts out expensive, then sells like hot cakes as costs decline. We were long-term investors—patience was our middle name. So we started buying stock at $3. It started ticking up: $3.13, $3.25, $3.50. We were geniuses! Then we got too busy to buy more shares for a few days and the stock slid back to $3. Turned out we were the ones driving up the thinly traded stock!

So we slowly kept buying shares and continued to visit the company for updates. Elantec’s only competitor for laser-diode drivers was Toshiba, and because Toshiba also sold CD drives, every other Japanese CD company bought from Elantec.

Around the same time, music was becoming available online through MP3 downloads, which Napster had made easy.