Paramount’s New Co-CEOs & Why Treasury Yields Hit 24-Year Highs

0:00JPMorgan has teams to support you at every stage of your growth. As former founders who have worked in local markets themselves, the bankers at JPMorgan bring deep sector knowledge and lived experience to their clients. JPMorgan can help you navigate complexity with confidence, backed by real world insights and an entrepreneurial perspective. Get what your startup needs now at jpmorgan.com slash grow without limits. JPMorgan is the bank of the Innovation Economy. Stay goodbye to the Dolan Discount as the mix and rangers are spun out from Madison Square Garden. The economy is booming, but Americans absolutely hate it. For Thursday, October 1st, it's Broom Marcus Daley. I'm John Crittell. And I'm Hannah Horvath. Let's get moving and grooving. Hannah, it is absolutely great to have you in the studio here on a Thursday. It's always a great opportunity for a macro conversation. Can you really do make these high concepts very approachable? So I'm happy to have you here.

1:01Also a little later in the show, we're going to explore the latest details coming out of the Paramount merger and ask ourselves what the new companies should be called. But first, Hannah, tell us what you're seeing. Yeah, so yesterday we did a bit of a macro data dump. We had inflation and GDP and consumer spending numbers. And I'm not going to make everybody relive the PCE report two days in a row. But I do want to zoom out because taken together, all of those numbers yesterday on paper told us that the economy is holding up pretty well right now. And yet, Americans absolutely hate it. The conference board's consumer confidence index was released this week. And it fell again in September to its lowest level since 2014. A click deeper on this, the consumer assessment of the economy right now got worse and their expectations for the future got worse. So we might be in right now what Axiose is calling America's hated economic boom. The hated economic boom. All right, so how can these things all be true at the same time? If GDP is growing, consumers are spending and unemployment is low. Why is this prevailing negative feeling about the comedy?

2:02Yeah, so the thing is people's perceptions of the economy are shaped by their lived experience. IE, what is directly affecting them? So the economy can look relatively stable from 30,000 feet. Well, the parts of it that are directly affecting your bank account can feel very different. So I want to start at that 30,000 foot level. Let's talk about where some of this economic growth is coming from. We have talked endlessly on the show about the AI build out on the corporate side, data centers, power demand, hundreds of billions of dollars of catbacks. And that spending is big enough right now to move the actual US economy, but it doesn't necessarily make the average household feel any richer. Right. So for example, metaconspend tens of billions of dollars building that AI infrastructure and make GDP look great, but that does not make your grocery build any cheaper. Yeah. And this week's household data really underlined that divide. Inflation adjusted disposable income. So basically how much purchasing power households actually have after taxes did not grow it all in August. And yet consumers are still spending as we talked about yesterday, inflation adjusted consumer spending rose 0.6%. So how are we spending more if purchasing power isn't really growing?

3:04Yeah, there's a bunch of things happening here at once. But the main thing is that there's no single American consumer that can sum up all the lived experiences of everybody in this country. So some of it is the wealth effect. You know, the AI fueled stock quality has created enormous financial gains, which disproportionately have benefited higher income households who own assets, a larger share of the stock market, and are driving a majority of that consumer spending. Second, there is a gap between how people feel about the economy and what they're actually doing. Like we're not robots for humans. So yes, you can complain dinner is so expensive, everything's so expensive and still go by dinner. Right. I do that all the time. I do also do that all the time. And the third thing is that some households are really stretching their budgets right now. The personal savings rate fell to 4.1% in August down from 4.6% in July and 5.2% a year ago. So part of the resilience we might be seeing is being financed by people saving less and for some households leaving more on credit. So when we call the American consumer resilient, you know, that's kind of a blanket statement. I think some distinction matters here because continuing to spend is not necessarily the same thing

4:06as feeling financially secure. And the national spending number is obviously averaging together very different households, as you mentioned, someone spending stock market gains and someone dipping into their savings to cover their normal lifestyle, both just show up as consumer spending. We mentioned yesterday the price of gas is still going up and folks have to pay it if they want to get to their office. Yeah. And I want to go and click deeper on that. Kind of look at the parts of the economy that people are actually experiencing every month. For example, mortgage rates are back up. You know, we have high energy costs and grocery costs. So chances are the average consumer day to day is thinking more about gas prices and grocery prices and their monthly mortgage payment than they are about quarterly GDP numbers. And then there's the job market, which I actually want to spend a little bit more time talking about because again, this week's headline sounded pretty good. ADP said private employers added 90,000 jobs in September. And that's more than double August revision. Yeah. And that sounds pretty solid, but we have to kind of look a little bit underneath these reports because again, they're giving that top level view. And I would describe the job market right now as the economic equivalent of being stuck in rush hour traffic.

5:07It is technically moving just not very much. Yeah. And the latest Joltz report, which tracks job openings, hiring, quits, layoffs, basically the turn of the labor market showed openings fell about about 256,000 in August, roughly 7.1 million. They're now just 1.01 jobs for every unemployed worker. And back in 2022, during the self-reclined great resignation, they were roughly two. So you have weak hiring. People aren't quitting as much, but companies aren't firing as much. Layoffs actually fell to a 17 month low in August. So low hire, low fire. That stat is so interesting. The 1.01 open jobs for each unemployed person. All right. So the question for me is, is frozen actually bad or is this just stability after several years of chaos? This might just be what a soft landing looks like, even though it's perhaps far less fun than we imagined. Yeah. The job market is seen as bad, depending where you kind of land on that divide, right? You know, obviously a labor market where you can keep your job is better than where everybody is losing their jobs, right?

6:07But low-turn does have consequences. You know, if you're happier current job, this market might feel fine. But if you've just graduated or you want to switch industries or negotiate a better salary or just leave a job that you hate, good luck, honestly. You know, and job switching has historically been one of the easiest ways to get a meaningful raise. So when the job switching machine freezes, workers are losing a lot of that leverage. Amen. Every meaningful bump I've had in my career has been from leaving a place where my growth there had stalled out. So we talked about ADP's job report earlier this week. Tomorrow we get the official government jobs report. What are we looking for there? Yeah. Economists currently expect roughly 90,000 new payrolls with unemployment holding at 4.1%. Again, we should kind of take this as a top level barometer for how the Fed is might be responding in the coming months. So if we get something close to expectations, it basically reinforces the story that the labor market is slowing, but not collapsing. A much weaker number, especially with higher unemployment, would suggest that this freeze is starting to become something more concerning, which would be a problem for the Fed. All right. So bottom line, that feels like the story of the entire economy right now.

7:10It's proving pretty resilient, but households are dealing with stagnant purchasing power, fewer career opportunities, and these high borrowing costs. Exactly. And speaking of high borrowing costs, investors are dumping government bonds around the world, and the US tenure treasury actually just hit its highest level in 24 years. That is our story next. But first, this episode was bought to you by Charles Schwab. Great could recency bias be skewing your potential stockpicks. Do you feel attribution bias might be messing with your retirement plan? Sometimes overconfidence ends up overestimating our own abilities or loss of version kicks in, and losing that dollar hurts way more than gaining one. Financial decoder, an original podcast from Charles Schwab explains how these cognitive and emotional biases can affect the decisions you make about your financial life. Postmark Reepy, head of the Schwab Center for Financial Research and his guests, offer actionable insights on how to guard against decision-making biases. Download the latest episode and follow at Schwab.com slash financial decoder, or wherever you get your podcasts, that's Schwab.com slash financial decoder.

8:11So John, on to our second story, going back to yesterday, where investors got what should have been comforting inflation news. PC inflation came in below expectations, as you said before, and investors lowered their expectations for an October rate hike. So you might reasonably assume that this would calm the bond market, and yet that was very much not the case. Right. I would assume that, but it was quite the opposite. The yield on the 10-year US treasury hit 5.34% this morning, which is the highest level since 2002. And this has been a huge move. The 10-year jumped more than 85 basis points just in the third quarter, one of the biggest quarterly increases in decades. So my question again, what is going on here? Yeah. So I'm going to start with a very quick bond market refresher. So when investors sell bonds, bond prices fall and yields rise. So right now, investors are selling off longer term government bonds and demanding a higher return to hold on to them. The 10-year yield is just also a big one in our economy. It's one of those benchmarks used to price borrowing across so many different aspects of our economy. So when it rises, it tends to put upward pressure on mortgage rates, corporate debt, and all

9:14kinds of other loans. So basically, the bond market is saying right now, if you want to borrow my money for a long time, you are going to have to pay me a lot more than you did a few months ago. All right. So the first question is, why are investors demanding that much more? Especially after yesterday, inflation surprised at the downside. Markets became less convinced that the Fed will hike again immediately. That sounds again like the opposite of a setup for a bond sale. Yeah. But for somebody buying something like a 10-year bond, one inflation report is just like a little blip on the radar. And I think yesterday's inflation report mostly changed the conversation about what the Fed might do in the coming months. But the 10-year-trigger yield reflects what investors think the next several years are going to look like. If I am lending the government money, for example, into until 2036, I care about things like if inflation is staying elevated, how strong the economy is going to be, and increasingly, how much new debt is going to be competing for my money. And right now, all three are giving investors reasons to demand a higher return. All right. That was the clearest answer yet. Let's take those one at a time. Let's start with the economy because we just spent the last segment talking about how

10:17surprisingly strong it looks on paper. Yes, on paper is the opposite word there. But that strength does matter a lot for bonds. Consumer spending is still growing. Business investment has been very strong. Incorporate profits have surged. And so you put that all together, and there just is not a lot of evidence, at least right now, that these high borrowing costs are bringing the broader economy to a halt. And that reduces the pressure for interest rates to come down quickly. If, for example, households suddenly started cutting spending, companies started pulling back on investment and unemployment started rising, bottom investors would have a stronger reason to think that today's high rates are not going to last. Instead, the economy has continued to grow with the tenure above 5%. OK, so basically, the economy has shown it can survive expensive money longer than investors had expected, which means bond investors have less reason to assume cheaper money is right around the corner. Exactly. And then you factor in the inflation of it all. You know, yesterday's number came in better than expected, but inflation is still running above the Fed's target. And energy prices specifically are hot. You know, oil has jumped roughly 40% during the third quarter of this year.

11:20And Brent has been training around $100 a barrel. And the thing about high energy prices, as I've said many times in the show, is that it can work its way through the economy in a million different ways, gasoline, diesel, shipping, manufacturer, airfare, all the above. So if you are buying a 10-year bond, that creates a kind of simple problem, I'll say. You know, your bond pays you a fixed amount of money. If inflation stays higher than you expected, those future dollars buy less. So you say, OK, fine, I'll take that risk. But I want a higher yield to compensate me for it. Absolutely. You know, we talk about this all the time in retirement. It's like, oh, I'll save a million dollars for retirement. And it's like, well, what's a million dollars going to get you 10, 20, 30, 40 years from now? Exactly. OK, so that explains the economy and the inflation side. What's the second piece? Yeah, second piece is supply. There is an extraordinary amount of debt being issued right now, starting with our lovely government. US federal debt has passed $40 trillion. And the treasury has to continuously sell enormous amounts of bonds to finance existing debt and new deficits. Because the thing is, the bond market is still a market.

12:22So the government wants to sell more and more debt. Someone has to be willing to buy it. And so again, eventually those buyers can say, OK, I'll lend you the money, but you're going to have to make it worth my while. Again, higher yields. And governments aren't even the only ones flooding the market with debt right now. Yes, because corporate America is also borrowing very heavily, including to fund that AI build out. Every day on this show, just to reiterate context, tech companies are spending huge amounts of money on data centers, chips, power infrastructure. And a lot of that expansion is increasingly being finance with debt. And that adds another large pool of borrowers competing for investor dollars at the same time. Governments are also borrowing heavily. And what is interesting to me about all this is that the AI investment boom is one of the things that is making economic growth look so strong on paper. And that strong growth makes markets think interest rates stay higher. And financing that same investment boom is that even more debt supply to capital markets. OK, so AI is helping create the economic resilience that is ironically making money more expensive. All right, so when does this all calm down? Are we just going to get used to living with a 5% plus 10 year or no?

13:23I mean, if I had a crystal ball, I would be rich by now. I mean, I definitely wouldn't put a number of timeline on it, but we do know what would start to take some of that pressure off. For example, inflation cooling, oil prices falling, economic growth slowing enough that investors start expecting lower rates ahead. And we don't have a ton of evidence that that is going to happen anytime soon. However, there are natural limits to all of this. You know, the higher yields go, the more those boring costs start slowing the same economy that allow rates to get this high in the first place. So eventually, those higher borrowing costs themselves start taking demand out of the economy. OK, we're going to take a quick break. But when we come back, we are going from Wall Street drama to Hollywood drama. Have you heard of the pod by 8-sleep? It's not just any pod. What's pod 6? 8-sleep's latest innovation to the smart mattress cover that goes on top of your existing mattress is now 50% smaller than the previous generation, has 9 times more sensors and more powerful active heating and cooling. All summer long, I was drifting off to sleep at the perfect temperature.

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15:25All right, welcome back Hannah. The country has been gripped for over a year by the Hollywood drama that is the Paramount Sky Dance acquisition of Warner Bros Discovery. This week we got some very interesting updates. The deal was approved. The company is going to have co-CEOs, and very importantly, what should the combined company be called? But let's start with the approval. Last week we discussed Paramount settling with 12 states attorney generals to advance the deal. The new company has to distribute a minimum number of movies each year for five years and other commitments over a five-year time period. But generally Paramount retained a lot of flexibility. They kept CNN. The company headquarters does not have to stay in California. And California's attorney general Rob Bonta, who was heading the case, said the settlement, quote, is not a blessing on the merger. And yesterday the judge called it a compromise that saves everyone a trial and approved the consent decree. The deal is expected to close next Tuesday. And just minutes after the judge's shine, Paramount started making moves announcing that

16:27David Ellison will stay as chairman in CEO, but he's taking on a co-CEO, you know, on creeds who had until yesterday been the CEO of Mattel. That's right. They poached the CEO of Mattel because he was known as turning the Barbie and Hot Wheels Maker into an entertainment company, most notably with the 2023 Barbie movie, which was the number one film in the world. And I looked this up as the Hot Wheels Maker. There is still a Hot Wheels movie in production or in development, I should say, with J.J. Abrams attached, it's going to be live action. Creeds has been consulting for Ellison, but I don't know if anyone expected him to be co-CEO Hannah. What's the plan over there? So here's how Paramount says it will work. Ellison will continue to oversee strategy, creative technology, talent relationships, partnerships, and capital allocation, lots of hats. Creeds will run the day-to-day business and the integration of the two companies. The businesses report jointly to both men. Ellison called it a division of labor built on our complementary strengths with clear reporting

17:30lines. Okay, so everyone's reporting jointly to both folks. And Ellison has the vision. Creeds makes it happen. Sounds like Creeds is a COO with a better title, but they'll figure that out. It does beg the question, why does Ellison want a co-CEO and will it work? Last year when Ellison was first courting warners, he offered its CEO, David Zadzloff, the role of co-CEO and co-chairman at the time that offer fell apart when Zadzloff signed a deal with Netflix, not with Paramount. So Zadzloff will be exiting after this deal is finalized, but don't feel bad. He is leaving Warner Brothers with more than half a billion dollars as a payment. Oh my God, what a deal. When we were actually talking about this morning, my first reaction is that two CEOs that sound unusual, who is actually going to be in charge here? And I looked it up, so far this century, fewer than 100 companies in the major US indices have co-CEO, so it's not very common. But there is a current media example out there right now that has been working Netflix.

18:31Redacings and Ted Surando started sharing the title in 2020, and they did a good if mixed run. Hacings has since stepped away and now its Randos and Greg Peters. Teran does covers the content and creative, and Peters has product tech and advertising. And that has been working. And undoubtedly, Ellison had his eye on Netflix's structure as he battled the company for control of Warner's. But also has it been working. Netflix stock is down 40% year over year. And which one of them is responsible for turning that around? Is it the content problem? Is it an execution problem? Where does the buck stop over at Netflix? Maybe David Ellison was inspired by Netflix or maybe by his own father. Yeah, you might have heard of his father in 2014. David's father Larry stepped down as a CEO of Oracle, but stayed on as chairman running engineering. Safra Katz and Mark Hurd ran the company as co CEOs. Katz had finance legal and manufacturing, herd headsales and services. Since then, there has been succession at Oracle, but the company still has co CEOs today. Although share price there has been down 50% year over year.

19:32Right. So is it working or is it not working? We're not sure about these companies. It makes sense that there are two lanes, the creative, the enforcer. But when one of the two is also the chairman, like will be the case at Paramount SkyDance, and that person also is part of the family that controls the company, it may not be equal. Now one decision that has to be made, and this is a little silly, but what do you name the combined company? Through a bunch of mergers, as it stands right now, we are dealing with Paramount SkyDance Warner Brothers Discovery, which is a mouthful. I've actually seen some fun coverage over the last year calling the new company Warner Mount or Parabro, that's my favorite. Parabro is the best. So this is just my speculation. I think Ellison will lead with his original company, which is SkyDance Media. And after all the antitrust lawsuits that they've been going through over the last several months, I think he's going to avoid it sounding like a big conglomerate. With apologies to the offspring, you got to keep them separated. I bet in the future you will see two names in movie trailers, which is worthy of things

20:34matter. Paramount, a SkyDance company, or if the movie comes out of Warner Brothers, Warner Brothers, a SkyDance company. One, I don't think you're going to see discovery anywhere in there in the future. But this has been the move in Hollywood for decades. When Amazon bought MGM Studios in 2022, they kept the Amazon Studios brand separate from the legacy studio, calling it MGM, an Amazon company. And my favorite example is Universal Pictures, which has been sold and resold many times over the years. When you watch a movie from the 70s or 80s, it says Universal Pictures, an MCA company. It's got that weird globe. Nowadays, Universal is a Comcast company. I'd like to see this Hannah taken over to other conglomerates like in the food space. You could say, Kareg, a Dr. Pepper company, or Hines, a craft company. Of course, there are more important issues facing SkyDance than the name, bringing it back to your earlier story about the ubiquity of debt that is for sale. Just last night, Paramount SkyDance raised nearly $52 billion of new debt, bringing the

21:37total owned by the combined companies to roughly $80 billion, along with the promise to cut that down by finding $6 billion in merger efficiencies, which of course means impending layoffs. Shares in Paramount SkyDance, that pesky PSKY, we're down 6%. It is 4pm on the east coast. The markets have wrapped up for the day, kicking it back over to John for the numbers. Stocks kicked off October with some volatility, recovering from this morning's losses. The S&P 500 finished the day up to 10th of a percent. The Dow and the NASDAQ both finishing the day near flat. And one quick headline shares in Madison Square Garden Sports Corp. Ticker MSGS fell nearly 6% today. After the company announced it is spinning out the New York Knicks and New York Rangers into two independently publicly traded companies with the transaction expected to close later this month. On completion, MSGS Sports will be renamed MSG Nicarbocker's Corporation and will include

22:38the NBA's New York Knicks and the Westchester Knicks. Then, a newly created entity, MSG Rangers Corp will house the NIH-Ls, New York Rangers, the Hartford Wolf Pack and the MSG Training Center. We've talked many times on the show about the Dolan discount that the MSGS stock trades lower than the value of all its individual assets. Now, on the heels of a Knicks NBA victory, controlling owner James Dolan can unlock the full value of the team. And John, actually tomorrow on the show, we'll be talking about Madison Square Garden and the rise of the superfan economy. Those Knicks tickets were not cheap. Alright, and that's the final thoughts. Ticking with Sports earnings out of Nike are coming out right now as we're wrapping up this recording. The company's woes have been well documented on this show. But one bright spot. Earlier today, Nike's Caitlin Ones, the first signature sneaker for Indiana Fever, basketball star Caitlin Clark sold out less than two hours after their release. Actually, nearly sold out. This is true. There are still some size 15s left.

23:40Either way, this will give Nike something positive to highlight on their call. That's right. For now, that's all for today's Brew Marcus Daily. Brew Marcus Daily is hosted by John Grito and Hannah Horvath, produced by John Grito, Tarket Delatif, Ivan Lure and Emily Miller, technical direction by Uchena Waogu. Brittany Tato is our audio engineer. Check out the Brew Marcus newsletter and tune in tomorrow morning to see Neil and Toby on the Morning Brew Daily podcast. We'll see you back here tomorrow. This episode is brought to you by Born in Roma fragrances by Valentino Beauty, the iconic fragrance duo. Donna Born in Roma, O. Depart Fum is a feminine fragrance featuring juicy black current, central Jasmine, Woody Cashmurren and warm vanilla. Its masculine counterpart, Womow Born in Roma, O. Depart has notes of fresh violet leaf, aromatic sage, green vetiver, spicy ginger and mineral salt. Shop at Macy's.com.