Murdoch’s wager

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MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: It’s time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. 

Good morning to you, David! 

DAVID BAHNSEN: Well, good morning, Nick. Good to be with you.

EICHER: Well, David, we have talked about being stuck in an economic data purgatory—seeing a combination of bad data and mixed signals. And that has made it difficult to tell what direction the economy is headed. But I figured I would use the opportunity of a couple new reports that came out: a new jobs report for April from the Labor Department … the labor statistics office … BLS … and then a week ago from the Commerce Department—we didn’t talk about it then—but first-quarter GDP is now out, not to mention the equity markets have put up some record highs on Wall Street. 

Do you think that we are getting out of the purgatory? Are we seeing any clearer?

BAHNSEN: Yeah, I think it’s a little early to say, but I do think that I feel a little bit more optimistic about the direction than I did a few months ago. I think there is a long way to go, I mean, nobody should get carried away with the data being optimistic.

But what does appear to be the case is that it isn’t worsening. And it very well could have. The vulnerability of that kind of slowing of new-job hiring very often is going to lead to an increase in terminations and firings, that obviously are higher unemployment. And you’re not seeing that.

And so while the hiring rate evidenced in the new BLS report wasn’t dramatic, it was positive, it was higher than expectation. Those weekly jobless claims have continued to be low. That’s a good sign, Nick.

But the purgatory element of kind of no hirings and no firings—that’s still the predominant theme we see in the labor data. So the optimistic part is that it isn’t worsening. There’s a modest bias towards things being a bit better.

The job revisions in this week’s report for the month of April—the April report did not have worse revisions for March and February. They were, I think, down 16,000, and I was worried it could be down 50 to 100,000. 

So I think those things are positive, and yet, I still recommend looking at the data month by month, not jumping to any forward conclusions at this time.

EICHER: Well David, we knew that this was coming because of rulings in the courts striking down some of the Trump tariffs, but The Wall Street Journal couple days ago had a piece on companies that are beginning to receive their tariff refunds. The story said that businesses plan to use the refunds to pay suppliers, and rebuild inventory, and pay down debt, and stabilize cash flow. Is that kind of what you wanted to see?

BAHNSEN: Well, that’s an all-of-the-above thing there, so there’s not a whole lot more they could do with it.

The issue of rebuilding inventories and of doing other capital expenditures is a very good sign. But let’s be really clear about what that means: if companies are going to use tariff refunds to go invest in their business, that means that the tariffs have been taking away from business investment. And to the extent that there still exists a couple hundred billion dollars of additional tariffs, that means that we are able to better identify what the source is of this vastly diminished capital expenditures that, outside of AI spending right now, is negative.

But it is a positive thing to see that we’re seeing some of these declarations come to companies. Certain businesses that we’re invested in have gotten notice now that they’re receiving their tariff refunds. We weren’t sure how long the red tape was going to last to process some of these. And I don’t believe a lot of companies have received the cash yet. But once you get the notice that the cash is coming, the cash is coming.

And so it is a positive, and I think at the same time it gives us a really clear market signal that some of the depressed capital investment is a byproduct of the cost of import tariffs.

EICHER: Well David, we did talk about the fact that the tariffs were pushing up consumer inflation, because we know ultimately who pays tariffs: the consumer buying the product tariffed.

So, will this bring some relief that way?

BAHNSEN: As a matter of just economic clarity, I want to say that I believe tariffs push prices higher, which is different than saying that they cause inflation, because I believe inflation is a monetary phenomena.

Tariffs cause the thing being tariffed to go higher, but they don’t create new money supply, which would be lasting inflation.

Now, for all practical purposes, people don’t really care about the difference between what I just said. If a price has gone higher, then that’s the issue that folks are dealing with.

To me, I think there is a chance that you will see some downward revision. But there is a stickiness in certain prices, and I also would argue that the higher cost in the supply chain is not merely on the direct cost of a tariff that now might be coming off, but also in the uncertainty premium that there is a higher price that gets baked in around not knowing what to expect.

And we’ve seen this in shipping cost as well, even well before the Iran war started and Strait of Hormuz issues.

So no, I don’t think it’s going to be deflationary, but I do hope it could be disinflationary to some degree.

But you’re still talking about $200 billion of new tariff cost this year versus what existed two years ago. That’s less than 300 billion, but it’s a lot more than 30 billion. So there's a number of uncertain factors out there still.

EICHER: David, I'd like to turn to your Dividend Cafe this week. It takes an interesting look back at the Disney-Fox deal from a couple of years ago—not so much as a media story or a political story, but as a business-model story. 

You argue in the Dividend Cafe that Murdoch was correct in identifying which parts of the media business were becoming more vulnerable to disruption and which parts of the media business were not so vulnerable to disruption. 

What did he see that now looks so prescient?

BAHNSEN: I think what he saw was the fact that sports programming and news programming are real-time events that get delivered the way they get delivered, where the creation of entertainment content and scripted content, in the moment of the streaming disruption, was wildly changing, was becoming incredibly expensive. And the factors that were pushing prices higher were in early innings. 

They were going to make the creation of content even more expensive, while the cable model that he had, of course, accumulated a lot of wealth from and built an unbelievable business in the ’80s and ’90s from, was being totally disrupted.

And so his decision to move that Fox entertainment content to Disney for a wild premium—that was made even wilder because Comcast came in and bid for it, so it pushed prices up. And Disney was never one to be a cheap bidder, they were always willing to come in quite high, and they did.

I think it was a prescient move. And I think, as I point out in Dividend Cafe, Nick, this is true of a lot of us in our businesses. Sometimes the best decisions are in the things that we sell, but they’re also in the things that we don’t sell. And in keeping the Fox sports programming and in keeping Fox News, he held on to the elements that were least likely to be disrupted by streaming, and sold off the things that were most likely.

And almost immediately he was vindicated, that what happened was a massive price war, huge amounts of competition. The streaming companies continue to have a lot of success in building new scripted content, but then they have to put out a lot of other shows that don’t succeed to get to the ones who do. And that model is incredibly capital intensive. 

And we’re living in a time where that capital intensity is not being rewarded in markets. It creates a lot of uncertainty. And you put a lot of money into an investment and you say, "okay, well, it’s capital intense now, but it pays off down the line." Well, that could very well be true in a lot of cases, but what it also does is expose your investment to whatever changes come along the way. The more time that goes by, the more things that can come up and disrupt that thesis.

So as I studied this transaction, it occurred to me that so many people talked about it because they don’t like Rupert Murdoch and they don’t like Fox News and they don’t like conservative media, and they focused on it in that framework as opposed to the business element, where Disney made a big decision that has not been rewarded and, in fact, looks right now to be very unlikely to ever be rewarded.

They’re going to be okay. They’re going to get through it, and they did buy some real trophy assets with Avatar and Marvel and some of these things. But at the end of the day, I found it to be an instructive business lesson for all of us in one way or the other.

And Murdoch—look, he’s a polarizing figure. You can say good things and bad things, personal life, business life, whatever. But this was a fascinating transaction, and so I enjoyed studying it a bit further.

EICHER: David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. 

David, I hope you have a great week, we'll see you next time! 

BAHNSEN: Thanks so much, Nick.

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