Volume 76: The great fattening.

1. The great fattening.

tl:dr: Clothing retail booms as waistlines expand.

I suppose it was inevitable that after 18 months of being holed up in our houses and not going out anywhere very often that a lot of us would end up looking less like the people we were and more like Turkeys fattened up and ready for Thanksgiving slaughter. After all, alcohol and snack sales went through the roof as we sat at home binging on Disney+ and Netflix. And while some binged on Peloton classes instead, that clearly wasn’t the norm.

So, while the exact statistics on the subject seem to vary, it now seems that a lot of us have seen our waistlines expand considerably, which means we’re now looking for new clothes, which in turn greatly benefits clothing brands and retailers.

Take Levi’s, a great American brand that’s seen a Phoenix-from-the-ashes-like turnaround in recent years. On a recent earnings call, the CEO stated that 35% of Americans had seen their waistlines change (up and down) in the past 18 months (I think that figure is low), driving a resurgence in the denim cycle as baggier fit “1990s” jeans are now in vogue again.

As an aside, I once did a project for a premium denim brand. It was quite amusing to interview merchants and buyers for high-end stores around the county as they marveled at the rise of LuLuLemon, bemoaned how terribly unflattering yoga pants make most women look, and prayed for denim to once again have its day, as now appears to be the case.

Anyway, Levi’s aren’t alone, as other retail and clothing brands are also seeing a post-pandemic resurgence that’s only likely to increase further once more people start returning to in-person work.

But, I can’t help but wonder. While the 1990s was a truly wonderful decade to enter your 20s in, as I did, do we really want to see a resurgence of its fashion when there are so many vastly superior things the 90s gave us? Like its music?

2. Arbitrage kings light up fast fashion, wreck people, the planet.

tl;dr: If you haven’t heard of Shein, ask your kids.

This past week, Chinese fast-fashion powerhouse Shein hit the headlines by knocking Amazon off of its 152-week perch as the most downloaded shopping app in the United States. I don’t blame you if you haven’t heard of it. I hadn’t either. But I guarantee your teenage kids will have.

Very quickly, Shein is an ultra low priced Chinese direct to consumer fast-fashion retailer ($2 tops anyone?), with an ultra-large catalog (they can add upwards of 6,000 new SKUs per day, but more commonly add around 500), that’s become a darling of teenagers everywhere as they seek to stretch small allowances to keep up with the social pressures of Instagram.

Weirdly, the success of Shein is partially the result of the trade war between the US and China. Basically, tit-for-tat moves by the Chinese government combined with a 2016 elimination of import duties on small packages coming into the US, means that for the past three years, Shein has been able to ship its goods across the world without paying any duties, allowing them to price way below the competition and at a level too low for people to resist, which proves out the old adage that fast and cheap will always find a market if you’re able to pull it off.

But the hidden costs of Shein’s ultra-low prices are almost impossible to calculate because there’s a literal black hole when it comes to trying to figure out where and how it manufactures its garments and sources its materials. By pricing the way it does, it would be fair to speculate that in addition to tax arbitrage, Shein is almost certainly heavily dependent on wage arbitrage, which likely means poverty wages and at least some degree of forced and child labor. And while they claim to obey all laws, there is zero independent auditing to prove whether or not this is true, and even if there was, there are loopholes a mile wide with such statements. (It’s perfectly legal in Bangladesh, for example, for children as young as 14 to work in low-wage factories, often under terrible conditions).

This brings me neatly to the destructive power of fashion in general. While it might look cool, fashion is also the second most polluting industry on earth behind only oil, and fast fashion brands like Shein are right at the tip of that spear. Add a toxic mix of child and forced labor, greenhouse gas emissions, IP theft, and offensive products, and we quickly find ourselves in a place where you wonder how something as obviously bad as Shein can be quite so successful. And the answer, as is so often the case, lies in the separation between what we say and what we actually do as consumers. 2/3 of us say we want to buy products that are good, but we actually buy products that are mostly bad instead. You see, we can’t resist ultra-cheap clothes wrapped in a beautiful and aspirational veneer of aesthetics that can be shipped to us quickly.

The secret of Shein isn’t that it’s cheap and bad; it’s that it’s cheap and bad but has been made to look so, so good. Like others before it, Shein has realized that to win the battle for people’s wallets, aesthetics and aspiration matter way more than a higher-order purpose (As much as you or I may deeply wish that were not the case).

And while a little disappointed, I can’t really blame the teenagers. After all, they have small budgets and Instagram-worthy lives they’re under pressure to fashion. And they probably don’t even realize how bad Shein really is because they never got past the “social responsibility” propaganda page, if they even looked that far at all.

No, the real question here is about what we as a society value and are willing to accept in the name of looking good.

3. SPAC me up.

tl;dr: SPAC rapidly becoming an anti-brand in the financial markets.

In 2020, governments around the world poured trillions of dollars into the global economy to shore it up in the face of an unprecedented and potentially permanently destructive pandemic crisis. As a result, all sorts of extraordinary and unintended bubbles happened. Like cryptocurrencies exploding in value (even those designed to parody other cryptocurrencies that were themselves created as nothing more than a joke), a stock market boom, and a housing market, the likes of which we may never have seen before.

But, strangest of all has been the rise of the SPAC from an obscure, niche financial vehicle. To put the rise in context, by early May this year, 315 SPACs had been listed in the US in 2021, with $100.4bn raised, which accounted for 41% of all IPOs.

For anyone who doesn’t know what a SPAC is, it stands for Special Purpose Acquisition Company. In essence, this is a public company formed expressly to go and acquire private companies to take them public without the need for an IPO and associated regulatory disclosures and compliance rules. As a result, it has capital but no product or service of its own and only a skeleton crew of staff and consultants. It works by raising money from investors that it promises to use by buying a privately held company (or two, or three) and taking it public. This is why they’re often labeled “blank check” companies; investors are handing over no-questions-asked money on the promise that a deal will be made. And, in a peculiar twist, SPACs have a time limit: They have to make a deal and use their money within two years, or the SPAC is liquidated and the money handed back. So what could possibly go wrong?

Well, quite a lot, as it turns out. And it’ll probably get worse before it gets better. You see, while a SPAC can, under the right circumstances, be an efficient vehicle for a company to go public, it can also be abused terribly through corporate governance loopholes, which is exactly what appears to be happening.

Why comes down to a simple observation: Too much capital chasing too few good companies, which means SPAC capital is now being used to buy less good, sometimes very terrible companies instead. (Some of the worst-performing SPAC acquisitions are down 70% from their February highs) And because of the way SPAC deals are structured, it doesn’t matter. Well, it doesn’t matter if you’re one of the sponsors creating the SPAC anyway because sponsor status entitles you to 20-30% of the stock for free, so even if it drops hard, you’ll still be in the black. If you’re an investor, however, it might just matter a lot. You see, the sponsors behind the SPACs, often exploiting their celebrity brand image to raise funds, are walking away with millions for doing deals irrespective of how bad the companies turn out to be. So, yeah, you guessed it, if you’re a sponsor, it pretty much doesn’t matter how terrible the company is that’s being bought as long as you buy one.

Now, while SPAC fundraising has dropped precipitously as the businesses SPACs have been buying have underperformed in the public markets, this doesn’t mean any of us are out of the woods yet. You see, there are now hundreds of SPACs out there that haven’t used their capital yet, and the proverbial time-bomb is ticking. The boom started around this time last year, a SPAC acquisition takes around 3-4 months to come to fruition, and we’re already a year in. That means there’s going to be a load of truly terrible deal-making done in the next 8-10 months as SPAC sponsors become increasingly desperate to do a deal, any deal, so they can rake in their millions and avoid having to liquidate the asset for no return.

This has all the makings of a corporate governance disaster where shareholders get hosed, and sponsors hope to keep walking away without incurring the wrath of investors, litigators, or regulators.

Which, is why SPAC status is rapidly turning companies into anti-brands in the minds of investors. You see, with poor returns and more bad deals than good, the very fact you choose to go public via SPAC rather than a more traditional IPO or direct listing now says something about your company and not something good.

So, yeah. First, the SPACs boomed in 2020 and then rapidly transformed into an investor anti-brand by 2021. Yet another weird change to accelerate during this pandemic.