Today, a slow news day, I want to go off on a tangent for a bit. I will talk briefly about the market, but then I want to divert and talk about the airlines in front of a big holiday weekend, and also look at the evolution of TV streaming.
I’ll start with the market. Last week was nice, but it appears that the bear market rally is over, at least for now. Don’t ask me why a market that was up almost 1% soon after it opened finished down more than a percent. I don’t know, but as I have been suggesting often, this simply isn’t the time for a bear market bottom, whether or not a recession is going to happen. The Fed is early in its fight against inflation. The Fed Funds rate is less than half of what it will likely be by year end. The Fed hasn’t begun to let maturing bonds roll off its balance sheet. If you read my letters with any regularity, you know I think that is a bad idea anyway. Markets are illiquid enough without the Fed reducing its holdings. Whatever needs to be done can be accomplished via rate hikes anyway. It is important that Treasury and the Fed keep money supply growing. With bank deposits starting to roll over, that will be a difficult task.
Let me shift and give a simple example. Let’s suppose you have $100,000 to spend. In normal times, you spend $50,000 on necessities and $50,000 on discretionary items, but thanks to inflation, the $50,000 for necessities now becomes $55,000. That leaves $45,000 for things that make you happy, like new clothes or a vacation. That’s 10% less. You’re spending the same but you feel worse. That’s the world we live in today. It feels like a recession because you might have less to spend on the pleasurable items, but you still spend the same total amount.
That doesn’t make today’s situation good. When forced to pinch pennies, the guy selling you something loses pricing power. He still has to absorb the increased costs, but he just can’t pass them on to you so easily. Thus, we get toward the dreaded stagflation, at least in the short term. Higher costs squeeze margins. We make more money because wages go up due to inflationary pressures, but in terms of real goods and services, we can’t buy more. Prices rise and we go nowhere. That’s stagflation.
True stagflation isn’t just a situation for a few months. The hope today, at least in the Fed’s eyes, is that it can dampen demand fairly quickly. Lower demand leads to lower prices. Inflation decelerates and we leave stagflation behind. At least that’s the game plan. It’s too soon to tell whether that can work. While some commodity and house prices are starting to fall, wages aren’t and neither are rents. Wages and shelter costs are by far the biggest inputs to inflation. This isn’t going to be a battle that will end soon, but by this Fall we may have some idea of the degree of progress. Markets are not likely to hit bottom until profit expectations are adjusted and we can see the end point for future increases in the Fed Funds rate. That is probably this Fall or later.
Now let me turn to the airlines. We all see the mess they have created. Demand is surging and the industry is understaffed to meet the demand. One line of thunderstorms brings chaos. It’s worse on holiday weekends. The airlines didn’t create this situation on their own, but in their desire to seek maximum profits they have put too many flights on their schedules. It certainly doesn’t help that the Federal Government didn’t hire air traffic controllers for two years during Covid. If the number of cancellations and delays skyrockets this coming weekend, Americans, already furious at the present level of chaos, are going to scream to their Representatives and Senators to do something. This is an election year. They will. No airline will be fined for cancelling flights due to weather or mechanical problems, but they could well be served with robust penalties if their excuse is personnel shortages. In today’s world, balancing supply and demand is a larger-than- normal problem, but any business that fails to do what’s right risks losing customers. People that used to fly to avoid a 4-hour road trip now readily drive for 5-6 hours or more. Perhaps when peak Summer travel ends, that will revert to past practices. Then again, with airlines providing worse service and charging a lot more, perhaps a lot of those using alternative travel means will stay away for longer. Poor service has its costs.
Now to streaming. Netflix started a revolution. Hundreds have followed. The menu of choices today is too large. The choices are too narrow as well. Am I willing to pay $15 to watch one new series or a few mediocre movies I never heard of? Netflix can probably still use that formula internationally, but the model has reached all it could in this country. The company expects to respond with cheaper ad-supported alternatives and crack down on users who “borrow” the passwords of others. It probably will expand its offerings by bidding on sports. Other streaming networks like Disney+, Peacock and Warner Brothers Discovery offer multiple channels under one umbrella fee, or are at least proposing to do so. Warner Brother Discovery is a consolidation of various Discovery channels, the Turner networks, CNN, HBO, and Warner Brother film library. When I look at that package it starts to strangely resemble an old-fashioned TV network like NBC, CBS or ABC. A few movies, some original programing, news, sports, etc. At least that is what the networks used to be until they stopped spending on original programming and resorted instead to stuff like variants of American Idol, Survivor, and celebrity game shows.
So where is this going to lead? Consolidation for sure. For now, everything has a plus sign. Paramount+, Disney+, Apple+, and that’s in addition to the networks that already exist. None offer local options unless you find a consolidator like Roku or the cable networks. Heck, weren’t all the streaming alternatives meant to get us all away from cable in the first place?
It seems to me that the real villain is the cable box. We get charged $5-10 for each box. If we live in a home with 3 or 4 TVs, that is $20-40 plus fees, plus a broadband connection, plus each service we buy. In today’s technological world, that makes less and less sense. Soon there will be one central box, a network gear that will receive everything, and they will distribute it out to smart TVs throughout the home. You could buy all those plus services yourself and run them individually through your broadband connection, or you can pay a consolidator (like Roku or a cable company) to do it for you. Remember decades ago, buying a car and choosing from dozens of options? Imagine today trying to decide whether to include AM or FM radio, Sirius, CD capability, etc. No, the car companies figured out long ago what most everyone bought. They put all those things into the standard price and now offer only a few option packages. So now you have to buy the package. If you want the safety package, you have to buy the whole bundle.
In the old world of linear TV, you didn’t get to choose NBC, ABC or CBS. You got them all. Soon all the streaming services will consolidate to less than a half dozen which will dominate 80%+ of total streaming revenues. Just doing movies and serials won’t be enough. If gaming, sports, etc. are to be added, programming costs will be costly. Just as PBS is a niche player on linear TV, perhaps a few specialty channels can remain independent in the streaming world. But not many.
Of course, programming isn’t very useful if you can’t deliver it to customers. Today there are only a few ways to do that. There are still some who only get classic TV using antennae, but only a few. The rest use either cable, broadband or cellular. All three will have their niches. The carrier networks are more mature. There are two major U.S. cable companies which also provide broadband, and there are three major phone companies that dominate cellular service. They too will compete in broadband. Given economic barriers to entry, there are not likely going to be major new players in the near term. Perhaps satellites will compete somewhere down the road.
Thus, disruptive technologies fractured an industry, but in the process created their own level of chaos that now needs to be sorted out. What we collectively want to see and do, watch movies, sports and entertainment, mixed with games and perhaps some meta-something in the future, won’t really change. How we see and do all of the above will continually evolve. As the world changes there are always new winners and losers. In the streaming world, the sorting out process is just beginning. It will be interesting to see how it ends up.
Today, actor Gary Busey, perhaps best known for his starring role in “The Buddy Holly Story”, turns 78. Before he became an actor he was a drummer for such country singers as Willie Nelson.
James M. Meyer, CFA 610-260-2220