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Queue With The Peasants

Some thoughts on markets.

I am flying to Los Angeles today, and excited to share the stage tonight with Armen Panossian, co-CEO of Oaktree Capital Management.

And we will talk about investment markets. But there are markets everywhere, and lessons from everyday life vastly more important than what investment professionals talk about.

A guiding concept for better understanding our world is that a market must work, otherwise it won't exist.

It means prices have to clear between willing buyers and sellers.

I arrived at the airport in Austin, TX, this morning, and waited in line at TSA precheck. I have always considered precheck to provide a quicker, less-stressful travel experience (of course, there is a reputation for precheckers to hold their head a little too high as they whisk passed non-precheckers).

And historically, most people, to my benefit as a frequent traveler, determined that they didn't fly enough to make it worth their hassle to schedule a TSA interview or pay the annual fee. So precheckers, admittedly some with excessive entitlement attitudes, waltzed through short lines.

But airline travel is exhausting, and eventually people found themselves waiting too long in the normal line. And that frustration justified the precheck interview hassle and fee, and they promised themselves that after this trip, they will definitely get precheck for next time! And eventually many (though, because we are endlessly human, not all) did. At $17/year (for a five year commitment), the precheck business works. It's also, let's just agree, not exactly a status symbol price point.

Eventually, credit card companies realized that their customers wanted TSA precheck, and were more likely to get the credit card, and pay that annual fee, if the credit card comped the TSA precheck fee. Because it feels free. So now high-end credit cards, who have aggressively increased their prices in recent years, "give away" TSA precheck as a tool to create stickier relationships and more profits. And for now, that business works for them, too.

However this morning, at 6:30AM on a Tuesday, the Austin airport "normal" TSA line was empty, and the snooty TSA precheckers were herding like cattle.

This is dynamics shifting, and markets working.

I could overhear high-hat precheckers discussing bailing to go to the normal line (could their pride handle taking their laptops out and queueing with the peasants?).

What is the market telling us? TSA precheck doesn't cost enough. Too much demand at the price point, and now a degraded customer experience.

It happens everywhere. If my experience this morning reflects broader reality, then the hassle and annual fee for TSA precheck were, previously, overly justified. Unfortunately for TSA's business, though, with too many customers, the product suffers and all the sudden the cost isn't justified anymore.

Normal TSA, no perks nor frills nor smirky travel egos, appears of increasing relative value to TSA precheck.

Why would precheckers wait in a line after having paid to not wait in a line? A pendulum swung too far.

Look, I don't know if this is the future reality of precheck. It's one experience in one airport at 6:30AM on a Tuesday. But it is a market. And there is information in markets because prices have to clear. $17 has to buy something that's worth at least $17.

And I will land in Los Angeles, and pull out Uber and Lyft to see which has better pricing for my ride up to Encino to see my dear friend Emma for coffee. And Uber/Lyft have to perfect and evolve their pricing model so that they can pursue profitability, or they won't last. And also must be mindful of their competition/pricing against each other. It's brutal out there, but markets have to clear.

And then I'll do the same to go downtown to the Westin, which costs $197.70 on my AAA discount. I pay $94/year for AAA, and I get wild hotel discounts and they come jumpstart my car for free any time my battery dies after I stupidly leave my trunk door open in the garage overnight after unloading groceries (3x in 2023!). How does AAA even make money with all these perks? Because not everyone leaves their trunk open overnight, and because AAA can make discounted deals with providers, they have additional business lines, etc. If it didn't work, they wouldn't be in business. Markets have to clear.

Uber and Lyft have to work. The Westin has to work. AAA has to work.

Make your default assumption that markets must clear between buyers and sellers. The world will make more sense. You will better understand and appreciate incentives.

If prices don't clear, then the price or product must change.

Of course business markets are slower to evolve than stock markets (where prices change every second). But companies charge customers as much as possible up to the point without overly stressing their business. Some companies will do this myopically and go bankrupt, while others with better strategy will make profits for long times.

When we see products delivering subpar experiences, we often assume the product stinks.

But most products are at least worth something.

It doesn't have to be the product's fault. It can be the price's fault.

TSA precheck is a good product that was too cheap and attracted too many people (btw, same can be said about airport lounges). But the Westin at $550/night, AAA at $1,300/year, or short Uber rides for $175 would have the opposite problem of being good products that are just too expensive. The market wouldn't clear.

I don't know, again assuming I'm extrapolating correctly, that the TSA business or pricing will necessarily change soon. But from what I saw this morning, something will eventually give.

If TSA doesn't change it, then their customers will change it for them.

If you can acknowledge the information embedded in market prices, there's a lot to glean about how the world actually works.



My blog posts are informational only and should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in my posts will come to pass. They are not intended to supply tax or legal advice and there is no solicitation to buy or sell securities or engage in a particular investment strategy.

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