In Ernest Hemingway’s 1926 novel “The Sun Also Rises” one of the characters, Bill, asks his friend Mike how he went bankrupt. His friend’s now-famous reply is simple yet telling: “Two ways,” Mike says. “Gradually and then suddenly.”
Hemingway’s novel was written post-World War I but pre-Great Depression. The story highlights the challenges of growing up during what was a tumultuous time, fraught with a combination of economic exuberance (the markets were way up and had been climbing steadily for years) and greater equality between the sexes (the 19th Amendment had been passed in 1920 giving women the vote in national politics), but there was also an increasing sense of apprehension in both the United States and beyond.
In the U.S., Prohibition had become enforceable in 1920, the Ku Klux Klan was on the rise, and Congress had passed the Immigration Law of 1924, establishing a quota system that discriminated against many groups — especially Asians, Jews and Catholics — but that favored northern and western Europeans.
And then there was the infamous 1925 “Scopes Monkey Trial” in which the state of Tennessee convicted a substitute high school science teacher, John T. Scopes, for presenting Darwinian theories of evolution to his class.
In 1926 the broader world was also going through its own dramatic changes: The Russian Revolution of 1917 had laid the groundwork for establishing the Union of Soviet Socialist Republics. “Red Scare” had spread across nearly all pro-Western countries and suspicion had grown that any labor unions or worldwide workers-rights movements were actually the instruments of Moscow.
There was a growing power struggle in China between the increasingly dominant Communist Party of China and a collection of the then-ruling regional warlords, whereas the Middle East was in turmoil after World War I had sparked numerous wars in independence movements, such as the Egyptian Revolution of 1919, the Turkish War of Independence between 1919 and 1923, the beginnings of the Iraqi-Kurdish conflict, the Great Syrian Revolt and many other wars or skirmishes between groups and factions all vying for increasingly valuable oil fields that had first been found in the region in 1908 by British Petroleum in Persia (now Iran).
Like many of Hemingway’s novels, “The Sun Also Rises” includes a lot of drinking and hanging out in bars. The story follows a group of 20-year-old American and British expatriates as they travel from Paris to Spain, where they intend to witness the running of the bulls at Pamplona.
The themes of the book center on a subtle defending of the younger generation who, at the time, were considered decadent and dissolute and who had been traumatized by witnessing the first war that used radio, poison gas, airplanes and submarines. But it was photography and film that may have been the most troubling, bringing death and the horror of war to the masses for the first time in history.
OK Tim, but how the heck are you going to tie this together with the wine industry?
O, Ye of little faith! Hold on a minute and I’ll get there.
First let me tell you that a “unicorn wine” is one that is rare and highly sought-after.
In the early 2000s these rare wines were only known to a select few within the world of often-expensive wines. Sommeliers would whisper to one another about an obscure Domaine de la Romanée-Conti Burgundy they tried or they might brag about having tasted one of the few remaining bottles of the 1992 Screaming Eagle Cabernet Sauvignon made by Heidi Barrett.
But then the masses and PR agencies figured out that the term “unicorn” might be applied to any wine to generate interest and buzz. Soon the hashtag #unicornwine was trending on sites such as Twitter and wine-focused social media sites like Delectable. What had been special was turned into a marketing tool that gained attention but was quickly sussed out as prone to false claims and self-serving hyperbole.
Next piece of info for you to consider: The term “ gray rhino” is being used now to describe big problems that are ignored until they start moving fast.
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Most recently this phrase has been used in reference to a few Chinese companies that have employed various forms of shaky financing to snap up businesses and properties over the last 15 years, helping to fuel global growth.
But because nearly everything that is built on an unstable foundation eventually collapses, these companies, too, are starting to crumble and the Chinese government is beginning to crack down, recently resorting to taking over at least one of these gray rhinos in mid-February 2018 — Anbang Insurance Group, which had spent billions buying properties and businesses around the world, including famous ones like the Waldorf Astoria Hotel in New York.
And Anbang is likely only the tip of the iceberg (HNA, Dalian Wanda, Fosun and others), with many other such companies finding themselves “overleveraged,” as the pre-bankrupt often like to say.
These gray rhinos are not limited to China and can be found throughout the world (Toys “R” Us, the Limited and Payless Shoes, etc.), but what makes these Chinese examples so important for the world of wine is twofold: 1) Many of those high-flying executives consumed a lot of unicorn-level wine (real and not so real) and 2) the Chinese government is now pulling back on their purchasing of debt at the exact moment when the United States is issuing more bonds into the market to help pay for recent tax cuts and added spending initiatives.
Bond yields on the increase
To attract more investors to the bond market, the yield of new bonds must increase. Anything over about 3 percent for the 10-year Treasury note is when you start to see a real shift from stocks to bonds.
But as inflation pressures increase, investors become skittish because inflation erodes the purchasing power of households, businesses and governments and so reduces the value of any investment, including both stocks and bonds.
The result? Investors invest less in either if they believe the inflation rate will increase, especially on long-term investments like bonds.
And so here you have conflicting trends: more bonds being issued at the exact moment there is less demand for them, a troubling development that is only exacerbated by China’s recent desire to bring its debt down for both itself and its companies, like the gray rhinos.
One more piece to bring it all together for wine: In the recent 2018 Silicon Valley Bank’s wine report, all the data suggest that the baby boomers are drinking less wine while the millennials are not making up the difference in consumption, often choosing wines that are less expensive or switching to alternatives such as spirits and pot.
Beyond their consumptive habits, these two generations, although on opposite ends of their life cycles, have one central thing in common at this very moment — they have less tolerance for risk than ever before.
The baby-boomer investor has no time to make up for wild swings in the marketplace, and the millennials, many of whom have only seen a rising market and low inflation, will find it difficult to stomach many more extravagant swings in the market. Both groups are poised to exit and sit on any gains they might have acquired over the last few years.
In 1926 the generation of Ernest Hemingway’s novel was feeling apprehensive and vulnerable — America was changing as the world was changing. Political protectionism, market instability and gender politics had created an environment that was ripe for what became the Great Depression.
What America had back then was a very long runway, which now it does not. There are similarities between 1926 and now, but there are differences, too. For one, unlike then, we don’t have to move to Paris to enjoy a glass of wine. But today we might not be joined at the bar by bulls. Instead we are likely to be surrounded by unicorns and gray rhinos.