CarnivirusFebruary 28, 2020
The worst thing about a cataclysmic weather event, or a single-stranded-RNA virus that wipes out the species is … it might impact the economy. Take my eyes, but don’t let the NASDAQ breach 8,000!
That’s how it feels, no? In a capitalist society, good or bad, the first words out of Lester Holt’s mouth tonight will be about the market plunge. The last 3 minutes of the show will be a touching story about a dog that helps wounded warriors make breakfast. National sacrifice and devastating injury are meaningful, but Apple dipping below $180 is profound. On Thursday, the markets registered their largest recorded one-day drop, plunging to levels not seen since … 4 months ago.
So, as I too opt to ignore the non-carbonated plague inspiring mayors of major cities to declare a state of emergency, I’m planning on visiting several hot zones tonight. I’ll have dinner at Indochine, then hit The Blond (a lounge where I feel old), and then another lounge called Casablanca, where I should feel really old, but will be 4 Maker’s & Gingers deep and will feel like I belong … right there, right now. In-between acts of arrested adolescence and suppressing the sum of all my fears, I distract myself by thinking about the markets.
Let’s be clear, the NASDAQ dropping is a bummer for old people, who own most of the market. But it’s an opportunity for young people, who would also someday like the chance to buy a home for less than $2,000/sq ft or shares in Amazon below 50x earnings. So where is the opportunity? Two ways to play it — defense and offense. I’ll talk about offense next week.
Defense: Find great companies on sale whose business, short term, may be significantly impacted, but whose fundamental value proposition is largely unchanged and will enjoy a disco-like recovery.
Example: Carnival Cruises.
I’ve never been on a cruise, and I’m planning on not taking a cruise every year for the rest of my life. But despite stories of cruisers being quarantined on a docked ship and images of people being removed on stretchers, I don’t see anything getting in the way of cruising. Btw, 3,700 people trapped in a contaminated box for 39 days (4 deaths so far) is terrifying. But it seems oddly normal that in the US we have half a million people in prison due to nonviolent drug offenses and another half million who haven’t been convicted or sentenced but just couldn’t make bail. But I digress.
There are neighborhoods in every city (the Marina District in SF, the Upper West Side in NYC, the Buckhead in Atlanta) where you live in the city, but don’t really live in the city. These are all one affluent neighborhood, divided among several cities. Cruises offer a similar opportunity to travel without really having to travel. Most cruise ships are the Radisson Chicago, minus the charm, roaming the Earth at a jogger’s pace.
The cruise industry is the fastest-growing segment in the leisure travel market with demand increasing 62% between 2005 and 2015. And cruisers just want to keep on cruising. 92% of cruisers will book a cruise as their next vacation.
Carnival has reported accelerating revenue growth for the last four years and 40% gross margins.
Sound travels 4 times faster through water than air. In general, cruise lines offer a similar ROI relative to other transportation firms. Peter Drucker said that all great businesses are powered by a demographic shift. The Queen Elizabeth 2 has two huge variable-pitch propellers, each with a diameter of 22 feet and weighing 43 tons. The propellers of the cruise industry are an aging population and consumers’ desire for less choice and frictionless leisure.
Rookie marketers make the mistake of thinking choice is a good thing. Choice is a tax on your time and attention. Consumers don’t want more choice, but more confidence in the choices presented. Customers want someone else to do the research and curate the options for them. You could try to merchandise a better itinerary on a boat through Southeast Asia (hotels, meals, activities, planes, trains, cars), or you could let someone else figure it out for you.
In addition, the largest transfer payment in the history of mankind has become one of the biggest corporate subsidies in history. Social Security is a transfer of wealth from the young to the old that costs more than the defense budgets of the US and Europe combined.
The $1 trillion we spend on Social Security each year takes senior poverty rates from 38% to 10% percent. So, is Social Security the most successful program in history, reflecting well on our society, or the meteor heading for our economy? The answer is yes. Social Security lifts 7% of Americans (28% of the elderly) out of poverty. Put another way, we spend $50,000 a year per person to lift 20 million people above the poverty line.
Twice that — 37.2 million people, including 18% of the nation’s children — live in food-insecure homes. Home instability in turn leads to double the cortisol levels of children in secure homes, which leads to poor academic performance, which leads to lower professional success. In contrast to Social Security, we don’t leave $400 of groceries every week on the porch of every household that has children. Why? Because kids don’t vote.
Why are we stealing time and work (i.e., money) from future generations? Because mostly old, mostly white people, mostly in Iowa, New Hampshire, and other predominantly white and old states, determine who is elected president and write the script for politicians’ narrative. The greatest threat facing our society is not income inequality or climate change, but generational inequality. We have legislated theft from young people, which leads to loss of faith in democracy, the rise of fascists and socialists, and defunds governments, who are our best hope to counter climate change and income inequality.
So in the spirit of CNBC displacing the front page of the NYT (money trumps humanity), let’s return to the all-important topic of how we make cabbage from this pandemic. For 70% of seniors Social Security isn’t the hand lifting them from poverty, but upgrading Nana and PopPop from Carnival to Princess. One of two people on a cruise are on a Carnival Inc. boat (they own Princess, Cunard, Aida, Costa, Holland America Line, P&O, and Seabourn). The stock has been understandably hit hard by fears about COVID-19. The firm trades at a single-digit p/e ratio and offers a 6% dividend.
The deepest pocket in the world has more people every day reaching into it and spending the Bisquick on cruises, including truffle hunting in Croatia (SeaDream Yacht Club), snorkeling with Sea Dragons (Holland America), or Braving the Elements with Penguins (Silversea Cruises). People believe that cruising is the domain of the old, as they have different preferences. No, it’s because people sub-40 don’t have the money to pay someone to carry their backpack up the Inca Trail.
Unregulated monopolies and firms subsidized by the deepest pocket in history — the US government — are the only companies young people should invest in. Millennials, celebrate tonight and hope the markets continue their rational decline. This might offer you a shadow of the opportunity that people swimming with sharks have enjoyed the last 50 years.
Life is so rich,