I harbor the theory that so-called “glamour industries” are useful in understanding market activities because they are subject to similar psychologies borne of “champagne wishes and caviar dreams.” I still remember the mid-1970s when I came back from chasing an ex-girlfriend in Europe and settled down into my Upper West Side digs in The Big Town that turned out to be my home for the next 26 years. The economy was a mess; New York was still reeling from bankruptcy and mismanagement, garbage lined both sides of the street in piles several feet high. The subways presaged the current penchant for dystopian cinematic themes by at least 35 years, only there was nothing even remotely intriguing or charming about it. But gosh darn it, it was still “the greatest city in the world,” or so we were reminded and, with Watergate and the Nixon resignation fresh in our consciousness, this eager college grad now seasoned by cosmopolitan experience was going to be the next Carl Bernstein.

Well, it didn’t quite work out that way. Back then I was a little disappointed by that. Forty-two years later, somewhat past the midfield stripe of life and informed by the late Nora Ephron’s heartburn, maybe I’m a little wiser and a little less disappointed. I did become an editor in the publishing industry, but I wasn’t the prime mover of The Washington Post’s city desk—not by a long shot. I put together a little trade publication called Hosiery and Underwear Magazine, which covered both the retailing and manufacturing aspects of that racket. What started off as a little embarrassing was actually to become a very solid foundational element of my business education over the years, including observing how this prime element of the once great U.S. textile industry, at one time a New England economic pillar, migrated first southward, then overseas. Today the coup de grace of this segment is being completed as Amazon maintains its assault on bricks and mortar retail the high end of which once literally made a home for truly luxurious silk stocking merchandising. Back in my youth they still called the Upper East Side the Silk Stocking District, and it was no misnomer. Bobby Short played the Carlyle Hotel; the mayonnaise they served there with fresh Alaskan King Crab was hand made, and the mink coats and stoles (no, not a reference to the actress from Baltimore) stacked up under the aegis of the hat check girl rose to heights previously known only by John Jacob Astor in the early nineteenth century.

The enduring memory of this incubation period of my adult life was the excruciatingly low pay. I soon learned the deft colloquialism of my superiors in why it was necessary for me to experience abject poverty in order to report on such lavish consumer experiences: “Reid, this is a glamour industry.”

“Oh,” I replied, further reflecting on the matter during the then-35-cent ride on the IRT Seventh Avenue line home, amidst copious graffiti and dirt, breathing labored by 90-degree-plus August temperatures and no air conditioning underground.

Interestingly (I think), in those days some folklore circulated about the general business of ground-floor merchandising in department and specialty stores. Retailing the old fashioned way has always been about real estate; that is, the rents paid by merchandisers for the space occupied by the goods they sell and the people who sell them. It’s a fascinating if now rapidly obsoleting model. Quantitatively, it comes down to gross profit margin turns per square foot. Fascinating because if you can find something with high margins that moves fast and doesn’t take up much space, you’ve got a winner. That’s why the street floors of department stores featured the hosiery, accessories, ties, perfumery and other goods with major price points, popularity and compactness. The really high-margin stuff, such as cosmetics, was so profitable that the big manufacturers paid their share of the rent and populated the stores with their own personnel; these were the origins of what are known as percentage leases in retail space. The department-store model was also used in other industries, such as outfitting whaling ships for their voyages in the era made famous by Herman Melville. After all, those expeditions required a lot of different things; what whaling ventures and consumers of postwar America had in common was the desire for convenient, quality one-stop shopping, whether anchors to lines to hooks for the ships, or cuff links to silk stockings to ties for the retail shopper. These are the real roots of B2B and B2C parallels.

Yeah, and about that folklore, I brought up. Did you know that going back as far as the “roaring twenties” leading up to the Great Crash of 1929 (and its even unhappier successor, the Great Depression), the newspaper industry’s most sophisticated financial writers devoted prime space and attention to discussing the correlation between rising and falling hemlines and rising and falling stock prices? No joke. This was as invariable a truth as “gentlemen always wear hats.” And, “it is inconceivable that a gentleman would put on a dress shirt without an undershirt.” I guarantee you the underwear manufacturers and retailers loved that bit of wisdom. But then along came Clark Gable, and later Jack Kennedy, and those traditions gradually faded. Danbury, Connecticut, is still known by old-timers as The Hat City, but I doubt many hats are made there today. At one time the expression “mad as a hatter” (if you have even heard that phrase) was a reference to the occupational hazards of being a felter, exposed to breathing those particulates that when matted and “blocked” become hats.

Then along came something called L’eggs, which was the mass manufactured and discounted version of newfangled “pantyhose,” and the luxury trade for women’s stockings migrated to drug stores and grocery stores, and department store and specialty store hosiery sales began a long decline. And today we are seeing the wholesale (pun intended) dismantling of bricks and mortar all around, and overall it’s just a lot of hosiery and underwear stories put together as Jeff Bezos displaces R. H. Macy.

But we still have a few glamour industries, and one of them is Hollywood.

The thing that makes a glamour industry a glamour industry is that it conveys the impression that it’s “bigger than life.”  Tour the Hollywood Hills with its palatial residences and luxury trappings of everything imaginable from Bentleys to thoroughbreds to gardens and greenhouses with rare flowers and orchids, swimming pools that are larger than several Manhattan apartments renting for four grand a month put together, kitchen staff, security people, and a thousand other things animate and inanimate, and you will get a taste of what is rightfully referred to as the lifestyles of the rich and famous. These folks make big bucks but frequently live beyond their means. The demographic skew of this lot invented one percent vs. ninety-nine percent long before that became the vocabulary of Bernie Sanders and his Bern-feelers. Today we supposedly have an overall unemployment rate around four percent; yes, we all know that’s a lot of bunk. But in the film industry, the performing arts in general whether film or stage or television, that’s the long-term employment rate. And that’s how you can explain that those Hills denizens enjoy a nice living while everyone else in the business lives from hand to mouth. I usually stifle my political urges in business/financial chronicles but in this case it’s irresistible. The folks who show up for Hillary rallies (or host six-figure-per-plate fundraisers) enjoy the most conspicuous opulence in America, and do so on the backs of people who are never permanently employed, who rarely have savings and are generally destitute; i.e., the little people these champion thespians allegedly care about.

The California economy is now a world-class two-and-one-half-trillion-dollar titan.

“California has a large productive economy. The state now ranks as the sixth largest economy in the world, behind The U.S., China, Japan, Germany and the United Kingdom. The U.S. Bureau of Economic Analysis reported that California’s GDP was $2.5 trillion in 2015, up 4.1 percent from a year earlier.” (See: [15]). Thank you, Wikipedia!

Now, where does the motion-picture business figure in that California colossus?

Well, the above pie chart knocked off from 2015 vintage data courtesy of the Bureau of Economic Analysis over at the U.S. Department of Commerce does, in fact, add up to 100%. (I always check things like that, because if you don’t like the employment experience of an aspiring Hollywood actor, it’s a good habit to get into.) I don’t see anything related to motion pictures. Here are the dollars associated with those percentages extended from California’s gross GDP of $2.5 trillion for 2015:

Even California’s smallest sector, agriculture, and mining dwarfs the motion picture business. And agriculture and mining in California is only two percent of California GDP, or $50 billion. A huge industry to be sure. Bigger than most countries’ GDPs. It feeds 325 million mouths in our country and many millions more beyond our borders and shores. But it’s last on the list in terms of sector size above.

Nevertheless, ag. and mining in California is still substantially more than four times the size of total domestic box office receipts at motion picture theaters in the U.S. for 2016, and it took 735 films to generate that ~$11.4 billion in gross domestic box-office movie theatre revenue for that year for those film productions. And fear not. Matrimonial controversies notwithstanding, Johnny Depp maintained his $400-million net worth. So did George Clooney at $250 million. Put those two numbers together, and right there you have nigh to 6% of the entire industry’s top line for 2016. Not a bad day at the office.

Now let’s take a more granular view of “Hollywood the rounding error,” because it is an interesting tale in its numbers of what it reveals about not only the state of one segment of our economy that despite its low pecking order in the general scheme of things economic gets a whole lot of attention, but on top of that reveals some trends that are all too familiar in the generally deteriorating fundamentals of much of the American economic landscape brought on by many things that are making it tougher and tougher to make a buck and stay alive, despite all those Porsches you see on the Boulevard of Broken Dreams.

Back in 1980 and 1981, you couldn’t miss.

Three hundred thirty-four major releases in those two years brought in more than a billion bucks in each of those two years, and The Empire Strikes Back and Raiders of the Lost Ark, the respective top grossers of 1980 and 1981, each cleared the $200-million mark in gross domestic theatre sales in each of those years. Can you believe that the production budgets for each of those films was $18 million? That’s why the returns on capital based on those numbers are nearly 12:1 in both cases. That was a great moment in Hollywood history—emphasis on the word history. Which is a way of saying that the economics of the film industry today are far more difficult, and those days are long gone.

Now let’s look at a more complete historical picture:

What you’re looking at is a mighty big squeeze, and the worst aspect of it is that it extends over many years—a so-called “secular” trend. In that respect, it resembles the same kinds of things that have brought down hosiery, underwear, hats and department stores and specialty stores. Specifically, over the past more than three decades, theatre receipts domestically have experienced something close to a four-percent CAGR. That’s not horrible taken by itself, although it doesn’t set your pants on fire either. Also, note the trend of the big productions. Their growth rate is slightly more than half the growth rate for the industry as a whole.

But the expenses? Watch out! Production costs have experienced nearly a 6% CAGR over the time frame. And the nominal gross margin is growing at a paltry 1.55%. Consequently, the domestic box office taken as a function of production costs expressed in terms of return on capital is in a long-term sinking mode, or -3.39% CAGR for the period beginning in 1980.

It didn’t get huge play outside the Los Angeles metropolitan area, which is the “company town” for such concerns, but early this year Sony Pictures took a billion-dollar write-down related to these pressures. The parent entity is selling off interests in biotech and other segments to fill the gap. You’ll also notice that you see your favorite stars out hawking their films a lot more than they used to. That’s another “new normal” of the day, and it’s not just a fashion. It’s contractual. And a lot more of what the screen icons earn comes from sweat and other equity vs. the old days of signing for a $25-million payday and then being a badass in a nicely outfitted trailer for a couple of weeks. Big paychecks mean the films must be profitable; the bigger the profits, the bigger the paychecks. Actors are now producers—if they want to eat, that is. It’s skin in, or shove off.

During this whole stretch we’ve been discussing, the average film doesn’t take in any more in domestic theater receipts for the year it is released than it did back in 1980. That’s around $15 million and that ain’t much compared with typical production expenses now north of $100 million. So producers are really rolling the dice these days; hence, the Sony results. They don’t even disclose production budgets anymore for the past 14 years. It’s too ugly. If you think algorithms are confined to Citadel’s HFT shop, think again. Outfits like Relativity Media, new guys on the block who have had their shares of both ups and downs, are applying similar technologies in the attempt to increase their odds given the increasing mismatch between what is spent to get what is taken in. You have to have a modicum of blockbuster results to pay for a normal experience for most films that is cash-burning and dismal.

And, as folks in the clothing industry once noted the correlation between hemlines and stock prices, there are similar coincidences today between motion pictures and equity valuations. Here are some observations I’ve put together:

What you are looking at above is an adjusted ratio of the same box-office quantities used above divided by the year-end close of the S&P 500. In both 1999 and 2006, this quantity registered significant troughs that “presaged” selloffs. This quantity for year-end 2016 is almost identical to year-end 1999.

In this case, the computations comprise a much simpler notion of equity values amortized over the quantity of films produced. The trend over the long term is analyzed to identify an optimal periodicity to align a correlation in inflection points with corresponding noteworthy historic highs and lows in the stock market. Again, the indication is that computations applied to current data resemble stock-price data for both the dot-com and mortgage-meltdown pre-crash peaks. Philosophically, this would vaguely correspond to the idea that, in strategic planning terms, the willingness to apply restraint on confidence in prospective returns—i.e., a major studio plunking down $200 million in the belief they have the next Avatar—is loosened by something in the realm of a general wealth effect euphoria related to equity valuations. That is, giddiness leads to risk-on reasoning and judgments.

(U.S. film industry sources: boxofficemojo.com and RLH calculations and projections)