Metallica and Market Timing
The end of a wild summer in the financial markets coincided with a music industry release that tipped its hat to another feverish era: 1999.
On August 28, the legendary rock band Metallica released the highly anticipated recording of their 20-year anniversary concert with the San Francisco Symphony: “S&M 2”. The original 1999 performance (“S&M”), then seen as risky genre-bending, was done at the very peak of the industry: US recorded music revenues declined annually from $15bn in 1999 to $7bn in 2014. Metallica was the first prominent music group to sue Napster in April 2000, recognizing the damage to come. Coincidentally, the financial markets topped out that March.
The veteran rockers seemed to have shrewdly timed the trough as well. In November 2012, less than 5% from the industry bottom, Metallica took back ownership of its entire catalog after 28 years with Warner Music and formed their own Blackened Recordings. The same year, (all-time low in long-term interest rates), in a historic policy shift, the Federal Reserve adopted a 2% inflation target.
Now, in late 2020, as that inflation target gets uncapped by the Fed and asset prices across many markets seem to defy analysis, could Metallica’s “S&M 2” once again coincide with an inflection point in our small corner of the world?
We’ve previously warned of the risk in assuming illiquid music royalties are uncorrelated even at prices that imply yields close to or lower than liquid income-generating investments. That siren song has not aged well. “On-the-run” securities continue to provide a lackluster yield, while the relative stability of royalty cash flows has attracted more capital into the sector, pushing prices higher.
We are not qualified to predict timing of macro events or fund flows, but can’t help notice the accelerating polarization in the forecasts of inputs to pricing liquid, yield-generating investments (inflation, yield curve slope, default rates, etc). Ignoring potential surprises in any of these benchmarks by investors who are convinced that niche markets are fully “decoupled” at any price can prove dangerous.
