The Economy’s Weekly Recap

7/5/24 - 7/12/24

Raymond Lin

This Week’s Prominent Events

A $76 Billion Basketball Deal

• In an age of extreme competition among streaming platforms, content has become key to attracting and retaining customers. One major avenue of content that has yet to be fully tapped is sports. To realize this valuable source of content, many companies have signed agreements worth billions with organizations like the NFL. 

• One recent way this has materialized is with the finalization of the NBA’s media rights deal with 3 companies. These 3 companies are ESPN, NBC, and Amazon, and they have agreed to an 11 season deal worth $76 billion, a figure that is reached due to…

  • ESPN paying $2.6 billion annually.

  • NBC paying $2.5 billion annually.

  • Amazon paying $1.8 billion annually.

• One company that is notably missing is Turner Sports, which is owned by Warner Brothers, but negotiations for that deal could still be ongoing. 

Regulatory Scrutiny Towards AI

• Many of the burgeoning AI firms are heavily associated with other, often larger, tech companies, such as OpenAI and Microsoft as well as Anthropic and Amazon. While these new AI firms don’t exclusively work with their primary benefactors, the billions invested into these firms and the contracts signed create an obvious obligation to the larger firms, which some regulatory agencies have found concerning for antitrust reasons. 

• These agencies, which include the British CMA, the American FTC, and EU regulators, have begun investigations into the partnerships throughout the AI industry. These investigations and related antitrust sentiment drove Microsoft to terminate its board observer seat at OpenAI. 

• Microsoft obtained this observer seat when Sam Altman regained control of OpenAI after a coup in November. This seat enabled Microsoft to access confidential information and board meetings, creating a close relationship between the two firms. However, Microsoft now says it has “witnessed significant progress by the newly formed board and [is] confident in the company’s direction”. 

• Despite this flowery language, the most likely reason for terminating the board seat is to reduce the relationship between OpenAI and Microsoft so regulators are dissuaded from pursuing action. After all, the relationship between OpenAI and Microsoft is still very close and of concern to regulators for Microsoft has invested around $13 billion in OpenAI and powers OpenAI’s products and research. 

The End Of A Saga

• The owner of CBS, MTV, and Paramount Pictures, Paramount is a legacy media giant that has been struggling to catch up with the times as its streaming service Paramount+ performed poorly and its cable services slowly die, but its woes may soon be over. 

• After months of negotiation worthy of a movie that included the ousting of its CEO and a canceled last minute deal, the merger between Paramount and Skydance Media has finally been agreed upon.

• The deal will see Skydance Media, which was founded by Oracle scion David Ellison, acquire National Amusements for $2.4 billion and purchase $4.5 billion of Paramount shares along with adding $1.5 billion to Paramount’s balance sheet, creating a $28 billion company. Following this convoluted deal, Ellison shall become the new CEO. He has also announced plans to focus on streaming and recognize the firm to cut $2 billion in costs. 

Chinese-Mexican Steel Tariff

• As covered many times on Phi Fiscal, the US and China have an adversarial relationship, treating each other as geopolitical enemies. The result of this tension is economic warfare, where both sides restrict the economic activity of the other via sanctions, subsidies, tariffs, etc to protect or expand important industries like semiconductors, cars, or solar panels. However, despite efforts like May’s steel tariff increase, Chinese companies have often gotten around these economic restrictions by conducting activities in other countries. 

• To counter this, the Biden administration has announced a 25% tariff on Mexican imports that use Chinese steel and a 10% tariff on goods with Chinese aluminum, which was previously imported tariff free. This is intended to clamp down on Chinese evasion of US tariffs, which the US believes are necessary because Chinese unjustly subsidizes its industry to cut down competitors. This would help US politicians realize political aims and could result in domestic US suppliers benefitting. Additionally, if it succeeds, such measures could be used to target Chinese tariff evasion in other industries. 

• Despite the potential benefits though, it is unclear how much of an actual impact the tariff will have. Only around 13% of the 3.8 million tons of steel imported from Mexico and 6% of the 105,000 tons of aluminum are not Mexican, suggesting the true impact of the tariffs to be minor at best. Nevertheless, this new tariff is important to keep an eye on as it could be the first of many new tariffs, which will be a feature of both a future Biden or Trump presidency. 

• These tariffs, regardless of their political or economic benefit, are likely to hurt some companies and consumers since the cost of raw materials needed for many goods, such as cars, will increase. 

A Massive Cellular Hack

• Almost all AT&T customers have had the records of who they call or text and possibly their location stolen by hackers following a security breach in April that only came to light this week. The contents of the texts and calls as well as personal info like name and social security number were fortunately not accessed in the hack though. 

• Due to this, the hack isn’t as bad as it could be, but the stolen info can make someone a more vulnerable target for hackers, highlighting how easy it is for sensitive info to be stolen by hackers in the modern day.

• The way AT&T was hacked was by accessing a cloud platform with consumer data that was run by the cloud company Snowflake. Other companies have also been impacted by Snowflake's security breach, such as Live Nation, Advance Auto Parts, and Santander Bank. Through this, one can easily see how fraught the modern world is with cyber security risks, whether it be personal or enterprise related.

Future Events

June’s CPI Inflation(Or Rather Deflation)

• Inflation for June continued the trend of slowing inflation from earlier months as CPI inflation fell 0.1% from May and rose just 3% annually. Both figures beat expectations of an increase of 0.1% and a rise of 3.1%. Additionally, the monthly decline is the first in 4 years and annual inflation is at its slowest since early 2021.

• Similarly, core inflation, which excludes volatile goods like food and energy, rose 0.1% from May and 3.3% yearly, reaching a 3 year low. 

• A major component of the decline in inflation was housing costs. Housing costs rose just 0.2% and 5.2%, which is the slowest yearly growth since 2022. This slowing housing price growth is crucial to normal inflation because housing makes up almost ⅓ of the CPI. 

• This slowing inflation, while good for the economy, has come about thanks to slower growth in the economy caused by high interest rates. In fact, Federal Reserve Chairman Jerome Powell mentioned the possibility of “unduly [weakening] economic activity and employment” due to policy restraint during his testimony to Congress. This narrative coming directly from the horse’s mouth along with good inflation figures suggests that the hopes of a September interest rate cut are very possible if inflation continues to move downwards in the coming months. 

• However, inflation is a fickle beast that can betray expectations, as seen in the first quarter of this year. Contributing to this rationale of continued inflation is June’s PPI figures. Unlike CPI, which tracks consumer prices, PPI tracks the prices of goods for producers and gives a forecast of what future inflation may look like. Unfortunately, the PPI figures for June rose 0.2% from May and 2.6% annually, which was higher than expected. This hotter than expected figure suggests inflation could still be unfavorable and that an interest rate cut should be delayed.

Doubts About AI

• While AI is certainly an impressive tool, some have begun pondering whether the elevated valuation and aspirations associated with AI are sustainable. One group of people who recently announced their concern was Goldman Sachs strategists, who believe that hyperscalers like Amazon or Microsoft that plan on spending $357 billion on capital expenditure may experience valuation de-rating. 

• In their eyes, revenue and earnings must be generated that match the enormous sums being invested, but they believe some signs suggest this may not occur in the next few years. However, the strategists have said that AI spending is still below that of the mania of the Dot com bubble. 

• Others have an even harsher view, with Goldman global head of equity research Jim Covello saying he doesn’t think AI will be as transformative as the internet, cellphones, and laptops were. He also believes that AI isn’t designed to solve complex problems, making the cost of AI unjustified.

• While these claims may turn out to be wrong in the future, there is no doubt that they don’t speak to something true: excitement around AI is massive and could be inflating valuations or excusing financial mistakes. 

Deficit Concerns

• In the last few years, the federal deficit has reached astronomical highs of continually above $1 trillion that have somehow become normalized in the eyes of politicians and the public. This massive deficit, apparent with both Democrats and Republicans, leads to increased borrowing by the US and increased interest payments, which will hamper the ability of the US economy to grow and the US government to spend its tax revenue productively.

• While there have been some slight declines in deficit size, such as in 2022 and the 2% nominal decrease in the first 9 months of 2024, the problem lingers as the deficit remains much higher now than during the 2010s. 

• Unfortunately, the solution to the deficit is not as simple as changing political parties as the deficit has its roots in the social programs that become more costly as the US population ages and the high interest rate that the US has to pay on its treasuries.

• Other factors, such as the high levels of government spending and tax cuts of the Biden and Trump administrations, have likely worsened the deficit, but neither have taken steps to seriously address the issue, even in their 2024 campaign. One can only hope that the US’ fortunes turn or that serious fiscal consideration is taken by the major political parties.

Weekly Question

If you recall, Threads was launched as an X competitor around a year ago and has how many monthly active users?

• A: 30 million

• B: 3 million

• C: 65 million

• D: 175 million

Answer: D. Surprisingly, Threads has managed to stay relevant even as X became less disfigured and outrageous.