Surveillance: AT&T & Discovery with MoffettNathanson

Michael Nathanson of Moffitt Knightsinson, the founders and senior research analyst. Craig, it was just on Friday, I said, you and I don't get to talk enough, and here we are talking about the potential for a deal. Your reaction to this one. Look, I think it's it's inevitable. Um, it is a clear concession of defeat for a T and T. It just didn't work. Um, they paid too much. And by the way,

congratulations to Ed for some terrific reporting over the weekend. Um. But now I guess the question is, we know some cash has to come back to a T and T, but does enough cash come back to a T and T that it offsets the amount of debt that this company is supported for them so that they don't come out even more leveraged. Than they went in UM and

I'm I'm not sure they can do that. You know, you have to lever a T T S levered at four times, so they're going to have to lever the new entity at more than four times E but DOT or else, even spinning it off makes the leverage problem at the stub left behind even worse instead of better. Craig, We've got to talk about what on Earth went wrong, Kit before we get into the details, the nitty gritty of the future. What on Earth went wrong? Kit? Three

years ago? Any five billion for these assets? Well, so two things went wrong. First the strategy went wrong, and second the price went wrong. But on the strategy, this is a company that said they understood that the legacy media business was about to enter a period of secular secular decline. Well, why on earth do you buy assets that are about to end are a period of secular decline? That they said that about Direct TV, and then they

said that about Warner Media. So strategically it never made any sense, and then they made it worse by overpaying. So they came out of this business woefully over levered. And this is a company that is in the telecom business where there's a tremendous need for capital investment, and if you can't make the capital investment, your core business falls behind. And I think they're at least coming to terms with now they have to clean up the mess.

But it's it's incredible. They spent close to two hundred billion dollars on these two companies combined, a hundred seventy billion dollars on these two companies combined UM and and then now they're selling them. As I said, there won't be a real price on this exit UM but but it's clear that they've they've lost horrifically on both transactions. Michael Nathanson, is this the right way to clean up

the mess? I think it's good morning. By the way, I think it's the only way to clean up this mess, because you know, going through the potential other partners usually no one else. There's no one else. I'm surprised by its timing because you know, I think HBO Max has potential to create more value, but h T T couldn't wait. So I think this this is a really good outcome

for Discovery. That's my take on it. Well, but do you think that Discovery will be able Michael to charge the amount that would be necessary for subscription fees for streaming to compete with the likes of Netflix with this acquisition, or do you think that this also could be conviewed as just an ongoing mistake adding to the mess that was already created. Well least, you know, I was just looking at the market cap for Netflix and Disney and

h HBO Max. I'd say it in the same league long term as those asthlets like it haven't gotten there yet because they're not global. I think you have a call option. If you're John Malone, David's havevall you're looking at that says, look, we have a hundred whatever the valuation is, it's a call option getting HBO Max to that upper league. And they have Discovery Plus, which is a you know, it's a lower tier product that would be helped by CNN. So for them, like, why why not?

You know, this isn't expensive, I know they manage it well. Money is cheap, So you know, given where Disney has moved to on streaming hopes, why wouldn't you try this? Michael, I'll come back to in a second and ask you about the competition that would come from this particular tie up for Netflix, for the Walt Disney Company, for Amazon Prime too. But Craig t and say, what does the future look like now for you for this company? So so, they are a business that is now back to being

a telecom business. They have a wireless business. And by the way, in that they look a lot like Verizon. They're about uh, not quite as skewed wireless as eighteen

as Verizon, because they still have a meaningful wire line business. Um. But their their service revenue growth excluding the pass through selling of equipment is negative one per cent and there and their EPA dog growth rate in the last s quarter was negative five point seven um and uh, and they're levered at four times ibadah and the rating agencies have said that the downgrade threshold is three point seven times.

So um. So they are still facing an enormously steep uphill challenge, a massive challenge in the years ahead, and a massive challenge for the spinoff as well, Mike Gold compete with what already exists. Only last week we were talking about the pull forward, the challenges for the World Disneys, for the Netflix of this world, and now we're talking about a new entrant into the sphere at tie up

at least if something that already exists. Michael, just walk me through how you think this looks in a couple of years time, and whether we've got to that point where consumers are already looking around and saying I don't

need more than two Yeah. Well, Johnny, the bundle is going to keep loosing subscribers, right, so you have lest people scribing to the bundle, and you know, I think what the Story plus you're gonna have to do is take News CNN News and the turn of sports assets, put him into this very plus right and make it a low enough price subscription product with advertising that keeps it within a range of consideration. Right, that's what's going to have to happen, like a tender fricteen dollar product

supportable advertising as well. So you know, to us, which you know, in the near term, no doubt what we said last week still holds true. Pulled forward reopening, you can see the stowing subscriptions. You're seeing that right now. Longer term, as more people cut the cord, this is the only way after both of these companies, right, they have to do this, Greig. That is the long term perhaps a view for the streaming industry. For the telecom industry,

what is the long term view? We are moving away from a sort of media mixed model that we saw that both all of the major telecoms try. We're moving towards five G. We're moving towards the potential for infrastructure spending by the federal government. What's going to be the narrative that's driving the next ten years of telecom in the US? YEA, at least you're you're right. I guess the narrative right now will is whether five G will actually prove to UM to offer the opportunity for new revenues,

or whether it's just more of the same. You know, having done this for for longer than I'd care to admit, every time you go through one of these cycles, there is the hope and the dream that this particular cycle, whether it's two G, three G, four G, now five G, will have all these new revenues associated with it that the old cycles didn't have UM and therefore it will

get to be a fundamentally better business UM. And I think that's the hope this time around, that that with five G, whether it's that some of the buzzwords now of mobile edge, compute and all those kinds of things. Will those be new sources of revenue. M Let's hope so, because otherwise you're still in the business of just selling connectivity for a price. And unfortunately, the capital investment requirement goes higher and higher and higher each generation, and the

revenue historically has not. Michael, just before we got what do you think Bob J. Pecks thinking waking up this morning? Bob Shaves tingling up this morning? We probably need some more some more content, right, we probably need some more contents and even broadened out. Give me plus a bit. Do you think it? Take a look at No, No, no, this, I think Craig and I'm I'm gone for Craig for second.

I know you hate that when I do that, John, But I think if I'm you know, if I'm Comcast upon Brian Roberts, I wake up, is not concerned, like it's not his problem. Yeah, Brian Roberts, Right, Craig is going to have to think about what if you do now it's a It's a real problem for Comcast because they find themselves in the same position that Discovery was in before this steal, and that A. T and T was in before the Steel which is the streaming future

for them. It's Peacock is subscale to to really compete, and this is potentially the last bite at the apple to get the scale that you need to be a

serious player. So now what do you do if these two walk down the aisle and sign THENK Craig, do we get coverage A muffin Nights and sent absolutely and it will be Michael's coverage and then you won't have to wonder which the two well guys, guys, I finally get some more marketing camp the past three years given a Craig and viacom discover want to call Dr Phil seriously, Tom goes on leave and then here we have this dueling app We're gonna work it out exactly, Michael Craig,

It's gonna catch you out, Craig Moffett, Michael Nyson of Moffett, nice and sin. This is a joy, and this truly is a joy. Heather Boucher, a member of President Biden's Council of Economic Advisors, joining US now after the President did release an announcement talking about a child tax credit as part of the American Rescue Plan that would start going out very soon to families that qualify eight percent of children in the United States automatically do fall under

this provision. Heather, can you give us a sense of what this child attacks credit actually is and why you think it's important. Well, thank you, Lisa. You know, it's really exciting today that the President has announced that this new child tax credit will be directly deposited in most accounts for families with children starting July fift That will be about three dollars for children under the age of six and two fifty for families with children over the

age of six. That's up to those amounts. And so this has been an important part of the American Rescue Plan to help families, especially help families with children, which we know have these higher expenses than other families, but help them make ends meet. And um, it's very exciting that these payments instead of coming once a year with your tax refund, they'll actually be directly deposited or sent

out every month from starting in July. So this is part of the three eighty eight billion dollar American Rescue Plan, which is only funded for so long. Basically these will run out and it really raises a question how much is this a template for what the Biden and Mr Ration is trying to accomplish later in the year as it moves towards some of its Child and Families agenda. I think that that is a great way of thinking

about it. You know, we thought it was really important to do this this year, um, coming out of this crisis, when so many families have been struggling so much. But this is a really good policy in general. You know, a lot of other countries provide child allowances, and the Child tax Credit is a version of that. They can help families when they need that extra help the most, and it helps all kinds of families. UM. So any any child can can get this tax credit, so it

will be an important support for family budgets. Now, of course, as you mentioned, Li said, this needs to be extended, and it's included in the American Families Plan that the

President launched just a couple of weeks ago. So if this is used as a template, and just John Farrel has been talking about this a lot as far as what the cutoffs are, how categories are going to be defined by income in order to receive supplemental aid or perhaps higher taxes on the other side, and for the American rest you plan, it was a hundred and sixty thousand dollars for couples filing jointly in eighty thousands for individual Is that the annual salary that you expect to

be the basis of additional plans later this year from the Biden administration. Well, all of this is still work in progress. Um, we're just getting the program up and running, but certainly that is a starting place because that's what we're already doing. Um, these decisions will be negotiated in

the months to come. But I think it's really important to keep in mind that all kinds of families need help when they have little kids, and we know that families experience this extra burden, and so this is support that will help them. You know. One of the things that's actually most exciting about this particular proposal is that scholars estimate that it will have a significant reduction in child poverty, and particularly child poverty for black and Latino children.

And so I'm eager to see how that works in the months to come, to see the data come in. But I think it's a it's a really important policy that we can get out there for all of those families who need it. As somebody who has raised to boys, I understand, and with childcare, you know what a juggle that is and how challenging, frankly, how expensive it is.

There is a question when you say the data rolling in, what data are you going to be looking for to view this as a success to help push whatever additional programs Biden plans to outline in future plans. Well, in the years to come, we'll be able to see this

show up in the income statistics that the Census Bureau collects. Now, we won't get those numbers um for uh, you know, until far into two but so hopefully we will have passed the American Families Plan before then, but certainly we'll be watching that data as it comes in to see

what happens to child poverty in the United States. You know, the United States has tired child poverty than most other countries of our economic level, and this is an important step forward to really helping those families with children make ends meet. It's a noble goal and just sort of broadening out to the American Rescue Plan. There is a question of how well it's working at frankly, how much it might be hindering into actually some of the recovery.

And I'm thinking in particular about the unemployment benefits, the idea that the enhanced jobless benefits have some people argue kept people away from the workforce because they earned more staying at home than going back to work. How much you considering ramifications like that, how much do you buy that argument? Well, the rescue plan that was put in place at the beginning of the year was designed to help us get through the pandemic, and we're not out

of the woods yet. Almost six and ten adults have received at least one vaccine shot, and we know that only about a quarter of people in their twenties and about a third of folks in their thirties have received their vaccines. So as we're getting everybody the shots, getting folks back into the labor force, those unemployment benefits are an important lifeline for those folks who are not yet back at work. So we need to make sure that that we provide people what they need while they're out

of work, while they're searching for a job. Of course, we're still more than eight million jobs below where we were pre pandemic. Jobs are starting to come back, and we've had a lot of progress there, but we still have a long ways to go, and that's what unemployment benefits are for, to help people um while they're searching for work and to help folks during this pandemic Heather.

Just to sort of wrap up here, though, we got that retail sales report on Friday that was highly disappointing, and some people pointed to the fact that some of these jobs cannot be filled. They cannot find the workers to come back to fill those rules, and that is what is what's hampering some of the sales. Otherwise will be taking place to encourage commerce. I mean, how much do you weigh these factors as you do the way

the health considerations but also the economic ramifications. Well, here's the thing, we don't want to make too much about any one month's data point on the plus or the negative side. We know that this recovery is going to be a little bit bumpy. We turned off the economy really quickly in the spring of and we're turning it back on now and so giving ourselves the time for everyone to get their shots, to get back into the labor force, to to address the supply chain constraints that

we know are happening across the economy. This is what's happening right now. But um, you know, when we look at the at the trends and the you know, the larger you know, when you put all the data together, what you see is an economy that's moving in the right direction. Created over five thousand jobs per month over the past three months. That's more than the sixty per months in the three months prior. And um, you know, we're moving in the right direction. So I think that

it seems like the policies are working. It's helping families and businesses get up and running, and that was the goal. And now we just need to get those vaccines out and then make sure that we're connecting those workers back to employers. Heather Bouche, thank you so much for being with us and taking the time. Heather Bouchet, Council of Economic Advisors, a member for President Biden, joining us now

place to say. It's vince Reinhart Melon Chief Economists. Vince it is tough for economists right now to get a decent rate on this ECCO to me and come up with an estimate for what happens next. Let's just start there. How difficult it is to forecast this economy at the moment, Vince,

our inflection points are terrible. Remember g forces come into play when you're making a sharp turn, and we are definitely on the upside of the of the v for activity to the point that we have to worry about, you know, technical matters and things that macroeconomists just usually wave their hands over, importantly, bottlenecks. You opened it, well, just go back to Friday's data for the US industrial production good but a little disappointing because of bottlenecks in

the auto industry. Then we get the Michigan Inflation Expectations Survey with the eye popping increase in the one year ahead inflation expectations and five year ahead three point one percent. That sounds to me like above the setter reserves goal. We have higher prices, Vince. The question some people are asking, I'll ask it a few. Do you have any sympathy for the argument the higher prices now, whether they are driven by bottle bottlenecks, supply issues, et cetera, lay the

foundations for higher prices in the future. I think if that's the risk the FEDS bad, is that the effects of you know, the effects of base effects and bottlenecks will be a temporary uh increase in prices, but it doesn't change the trend. The thing you should worry about is there increases in prices of goods and services that are very salient to households. Just ask somebody about how much it cost to fill fill up the tank of gas, or how they're doing and get im plywood or is

their new car coming in? UH. Those pricing increases may lead them to increase inflation expectations and increases inflation expectations to use the feds favorite phrase is what anchors inflation? So if expectations go up, we'll get a re anchoring to something above the Fed's goal. Evince and just to see how this could play out. It leads to people demanding more in wages or holding out for a higher salary because otherwise they cannot afford the basic staples that

they go out and they buy every day. How much is that's? What? That what's happening? I mean people often say that it's people on the lowest tier of income UH that get hit the hardest when you get this kind of inflation. Is that still true this time around? Given some of the price increases the wage increases that we've seen, particularly on the lower end of the scale. Okay, so,

so generally inflation is thought to be very regressive. That was the lesson in the nineteen seventies because people with more income and more wealth can figure out ways to shield their assets from inflation of facts, and they probably have more pricing power to reset their own wages and salaries. Not so at the lower end, uh of the income spectrum, because low income people also just don't have a whole

lot of wealth. Uh So, inflation is is pretty prenacious in that regard and has a change No, not really incoming inequalities only gotten worse. So one would think that meant that the rising part has even more means to shield themselves from from inflation. Uh So, in fact, the inflation is going to be eating into the real wages

of low income households. Is inflation going to lead to this sort of virtuous cycle where people actually spend more of their money since it's probably going to be worth more now in goods and services than later, or is it going to lead to a dampening effect on the economy, like what we're seeing in the housing market, where you're seeing the actual sales slow due to the high prices. So those high prices probably reflect the inability to actually

get all the all those goods. Think about the empty auto lots that that are both slowing car production outright decline last month because they can't get the chips and auto sales but also reading to price increases for for use cars. Uh, that that's the bottleneck effect. There are two other effects when is timing. As you say, if you think prices are going to be higher next month, don't you want to buy the good or service this month? Um, households have a lot of wear with all to spend.

So you that what that may mean is the boom part of our rebound is even more vigorous. Then the last effect is the more permanent one, which is people just spend resources trying to avoid the effects of inflation. And that's just as economists say a dead weight loss. Vince always grit to catch up with you say on the story at the moment and send up as to common want you Vince Ryanan that Melon chief economist, Thank

you said. Let's bring a CHET and I more than Stanley chief Global economists Chet and arguably even a team with one of the biggest codes I think for economists in the last twelve months, just to be out there bold, constructive, confident, optimistic about the future where many people weren't. That call is played out most people on board. What's next, Charon, Well, John, I think the next one is that we're going to

see a big pickup in the capic cycle globally. Um that's in the US as well as the rest of the world. And in terms of the numbers that we are highlighting is that the CAPEX numbers globally will rise by about twenty one percent by end of twenty twenty two compared to pre COVID levels, and in the US it will rise by sixteen percent compared to pre COVID levels. And this is something that we have not seen in

the last five cycles. In fact, even in the nineties, which was known to be the last big capic cycle. We're going to do better than the nineties cycle as well. So yeah, looking forward to a strong pickup in CAPEX now going forward. That will be the key driver to

our global growth story, which still remains constructive as well. Jonathan, how much could this capital expenditure boot GDP globally for the years after the rebound that we're seeing currently, So Lisa, it will be it will depend upon the infrastructure spending more than the topics that were expecting to see pick

up in terms of business topics. UH. And together with this UH structural shift in infrastructure spending that is going to come up as well as the pickup in capex, we think the global GDP could be boosted about two tents on a structural basis. So that's the assumption. But really I think the biggest story is you know that this is going to be strong twelve months or eighteen months because of this pickup in campics, how will shareholders respond?

I mean, right now, just based on the A T and T and Discovery transaction, it seems like investors want to see bold moves. They reward them if they see the potential for market share creation. Do you get the sense that investors really want capital expenditures and are much more willing to to endure perhaps less of a cushion

of cash. Well, I think this is going to be an extremely different environment compared to what we had seen in two thousand tril to fifteen, when there was a global store down and there were secular stagnation type of risk looming in the backdrop. Now, what this means for investors is that the capex take up will need that you're going to be going through a stronger growth and higher inflation or call it higher pricing power, higher nominal returns.

So one has to think about it more from the perspective of the overall return profile in the economy that you're going to see for the corporate sector, and I think that's what will be looked at by investors. So if you are investing for growth and you are going to get that top line groad, I would think that the investors should be rewarding those companies when they take

up a capex in a big rate. It shouldn't. Being familiar with your research, you had said previously that you think these inflation pressures price pressures will persist in the next year. Is that still your view and how does it reconcile with this big capex cycle your ex necting, Yeah, Jonathan, So, I think in some ways the big pickup in caps

will put additional pressures on inflation. Outlook. The video to think about this is that this pickup in investment will drive demand for labor and it is coming in much faster than the previous cycle, and so you are going to see tighter labor markets with pickup in investment. And at the same time, we are going through some accelerated restructuring, which means that the natural rate of unemployment has moved higher.

And additionally, this cycle, as you know, we've seen a large amount of job losses in the low income segment, and therefore when the FED is looking at the headline and employment, it is going to overstay overestimate the underlying slack and pursue a easier monetary policy for longer. They are all looking for inclusive growth and want to have a high pressure economy which will bring back that low

income segment back into workforce. But that what that will mean is from a demand side you have a big pressure with job strong job growth, and on the supply side you have these v structuring aspects which will put wage pressures and therefore inflation will also come back much earlier. And just got at this point just to jumping because

you only have a couple of minutes left. There was a few assumptions there, and I want to pick up on one because I think it's got a lot of paper's attention to nirou What do you think that is? Some people question whether even had a three handle in the last cycle. Where do you think it is right now? Unemployment at six point? What are you even the thing calling for that to kick in? So we think that, you know, around four and a half five percent is

when you should see typically wage pressures building up. That's in all the previous cycle that we have seen that wage growth picking up. But in this cycle, because of this restructuring happening in an accelerated manner and we are hitting that low level of unemployment much earlier in the cycle. We think it should be assumed to be about sixty two and fifty basis point higher, depending upon how bad is the permanent job losses that I'm going to incur

in different sectors. So you know, call it around five and a half percent is when you should see wage pressure sticking up. Uh. And then it is uncertain about there's uncertainty around what is that you know, part of the workforce, which is which is really going to be you know, taking time to come back get retrained. So it will depend upon that range uh of time that it is taking to get back workers to work Chad and fascinating stuff. As always, the team coming together and

giving us some things to think about. Chad and I that Morkan Stanley, Chief Global Columnists. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomer