A Businessman's Only Certainty: Change; More Bankruptcies, Receiverships Coming

In Thursday's Daily, I noted that the cause of the Gundlach Bundschu bankruptcy was a result of two things: borrowing more than current sales can support and rising interest rates.

It's easy to wag a moralistic finger at the Bundschus and Signorellos, whose winery is in the midst of a foreclosure. The truth of the matter is that yes, they overextended themselves, and banks were more than willing accomplices.

The San Francisco Chronicle's senior wine reporter in an excellent piece yesterday notes that anu California winery with significant debt – especially debt that extends beyond their winery's current value, quotes Mike Fisher, founder of Global Wine Partners, as saying, "It's a new world now. I don't think anybody has aa idea when this whole thing is going to get better."

This whole situation reminds me of the start of the Great Depression, which is said to have started with the crash of the stock market over four days at the end of October 95 years ago. Then, as now, there was a new technology. Today it's artificial intelligence and a whole bunch of internet-based technologies; then it was radio, automobiles, talking pictures and medical advances, principally the development of insulin and penicillin.

And then there's real estate. Many students of the Great Depression believe it began in 1926 with the collapse of the Florida land boom. While the factual situation between Florida and the current crisis are very different we are once again in an era where real-estate related businesses are finding themselves in financial straits.

• It's not just wine; it's also Uncle Nearest Distillery;
• Florida real estate, where nearly 8% of homeowners owe more on their mortgage than their homes are worth;
• Texas, where builder's incentives exceed 17% in certain markets. It goes on and on –
• Hot markets such as North and South Carolina have seen sales volumes stall while home inventory is climbing by double digit percentages.
• In Tennessee, Nashville is showing nearly 30% more listing than a year earlier and Alabama is seeing an 18% decline in transactions.

As T.Rowe Price, the Baltimore investment sage, observed in the 1960s, "change is the businessman's only certainty." At its root, the real estate problem in the bev/al world today is simply many people forgot the wisdom of Price's adage.

Pre-Covid, it seemed as though the wine boom would go on forever. In 2018, Rob McMillan, evp and founder of Silicon Valley Bank's Wine Division, wrote, "2018 was a good year for wine. Total wine sales for the year set a record, restaurant sales of wine were higher and premium wine sales were up as well. Strong consumer confidence and a healthy US economy contributed to the improved performance."

In such an environment, it's easy to get swept up in what Alan Greenspan, the former Federal Reserve chairman, called "irrational exuberance." That's all too easy to do, as Charles McKay demonstrated in Extraordinqary Popular Delusion and the Madness of Crowds. First published in 1841, the book explains how entire societies can be swept up irrational beliefs, speculative frenzies and dangerous superstitions.

I am not suggesting that we're on the verge of another Great Depression, although I do think many circumstances today are uncomfortably familiar. Nor am I suggesting the wineries, distilleries or brewpubs facing difficulties today did anything wrong; they probably simply got swept up in the good times of five years ago.

But I am suggesting this is time for execs in and out of the alcoholic beverage business to (1) be more cautious than normal, and (2) remember this won't last forever.