🎙️ The Great Inversion

What would you do with $27 million? 💰

Well, one 31-year-old heiress is giving away all of it, and she’s asking citizens how best to redistribute the wealth.

She says, “I have inherited a fortune…without having done anything for it.”

🎉 In other news, we’re popping champagne from 2021 this weekend — the S&P 500 just hit a new all-time high for the first time in over two years.

While market indexes have largely gone sideways since then, at least we (mostly) left NFTs in the past.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Traders bet on a normalizing yield curve

• How billionaires tried and failed to save the news industry

• The real reason you’re paying for so many subscriptions

All this, and more, in just 5 minutes to read.

Chart of the Day

In The News

👉 Yield Curve Nears Normalization

Tom Cruise may have been inverted in Top Gun, but the Treasury yield curve probably won’t be for much longer.

Bond traders are increasingly expecting the Treasury yield curve — a depiction of interest rates on government bonds maturing at different points in the future, from three months to 30 years — to “normalize.”

• A normal yield curve chart should slope upwards, with interest rates increasing from left to right, reflecting a premium for borrowing money for longer (aka the “time cost of money” in Finance 101 classes.)

Quick recap: The yield curve has been “inverted” for a long time now; Wall Street lingo for saying that bonds maturing sooner have higher yields than bonds coming due later.

• Specifically, last July, two-year Treasuries offered an entire percentage point more yield than 10-year Treasuries, meaning it was cheaper for the government to borrow money for a decade than for two years.
  

• That was one of the deepest inversions since the 1980s.

Typically, inversions are seen as a recession indicator. When the yield curve first inverted in October 2022, many thought the Fed would raise short-term interest rates too much and cause a recession, forcing them to cut interest rates down the road (extremely simplified, but higher rates now + lower expected rates in the future = inversion.)

• With the Fed expected to drop short-term interest rates this year, bond market veterans like Bill Gross and Harley Bassman are calling for the yield curve to un-invert.

Why it matters:

Where you land on the yield curve inversion debate reflects your outlook on inflation, economic growth, and the Fed’s response to both.

Rate cuts this year in response to a weaker economy and tepid inflation should normalize the yield curve. A strong economy, though, especially if inflation reemerges, could push the Fed to keep rates “higher for longer,” which would presumably keep the curve inverted.

But there are a wide range of possible outcomes. Important factors are the timing of rate cuts and by how much.

• Despite some progress in normalization, two-year yields still roughly match those on 30-year bonds (4.4%). Meanwhile, 3-month Treasuries offer almost 5.4%.

Read more

Together With The Bay Area Times

📰 Billionaires Tried and Failed to Save the News Industry

American newspapers printed profits for decades thanks to thick margins and an efficient print advertising business. Back then, it seemed virtually everyone read the paper at home, on the train, and at work — newspapers were almost as ubiquitous as cell phones.

The industry attracted investors like Warren Buffett, a Washington Post shareholder for roughly 40 years. 

• But Buffett sounded the alarm in 2018 after years of declining revenue for an industry devastated by the rise of the internet, saying that even he was surprised at how drastically the industry fell apart. 

Here they come: Several billionaires have tried to save newspapers by acquiring them, including Jeff Bezos (Washington Post — $250 million), Marc Benioff (Time Magazine — $190 million), and Dr. Patrick Soon-Shiong (Los Angeles Times — $500 million).

Yet each publication still loses money, affirming one popular news business phrase: “If you want to make a small fortune, start with a large one.”

• Many believed billionaires’ deep pockets would save the publications. But they’ve struggled like everyone else, with only a few profitable exceptions: The New York Times, the Wall Street Journal, the Boston Globe, and the Atlantic, which produce high-quality stories and rely mostly on digital subscriptions rather than advertising revenue. 
  

• “Wealth doesn’t insulate an owner from the serious challenges plaguing many media companies, and it turns out being a billionaire isn’t a predictor for solving those problems,” one analyst observed. 

It’s not just newspapers: Cable news, radio news, and magazines have also struggled to break even. On Friday, Sports Illustrated — once an iconic magazine in American culture — laid off nearly all of its staff, signaling the end of an era.

Why it matters:

Newspapers were once a fixture of the U.S. 

Freedom of the Press is in the First Amendment. The “press” has been known as the fourth estate, referencing the watchdog role of newspapers, which many believe is vital to a healthy democracy (holding power to account).

• Yet places like the Washington Post have struggled to hold on to the momentum they built during the 2020 election. Maybe this year’s election will provide a similar jolt.
  

• Most newspapers operate on a two-part business model: subscriptions and advertising.
  

• Last year, the Post lost about $100 million and eliminated 240 of its 2,500 jobs, mostly through buyouts. Time lost $20 million last year. The Los Angeles Times lost around $40 million.

As one analyst put it, “these vitally important news publications still find themselves ‘transitioning’ from print to digital — with major ongoing legacy business costs — as they build brick by brick a mainly digital future.”

Read more

More Headlines

🏈 The Detroit Lions’ NFL playoff run is jolting the city’s local economy

🏙️ Delinquencies spike on loans tied to offices

🥤 Coca-Cola plans to “seize the moment” by investing $1 billion per year in India

👀 The invite-only social media app raising cash to rival Instagram

🌊 Largest deep-sea coral reef mapped by scientists off Atlantic coast

🚒 Fire truck boom highlights divide in U.S manufacturing

🤑 The Reason You’re Paying for So Many Subscriptions

A quick glance at the credit card statement might tell you a lot about inflation, but it also says something else: Many of us spend quite a bit on recurring subscriptions, whether we use the services or not. 

There’s streaming, newspapers, cable, music, audiobooks, food, razors, toothbrushes, your dinner, and your dog’s dinner. Heck, we might need a subscription service or two to manage our subscriptions. 

• The booming subscription economy includes billions spent on subscriptions like Costco, Spotify, Netflix, and food delivery services.
  

• One survey found the average American spends $273 per month on subscriptions. Some families spend over $800.

But amid rising costs, many Americans have gotten smarter about their subscriptions by pausing or canceling them. Nearly 25% of U.S. subscribers to streamers such as Apple TV+, Disney+, Hulu, Max, Netflix, and Peacock have canceled at least three services in the past two years. 

• There might be relief for consumers after the Federal Trade Commission (FTC) recently proposed a rule requiring companies to provide annual subscription reminders. 

Why it matters:

Companies like Costco and newspapers (see above) have long made money on subscriptions. But the subscription economy has taken off over the past decade because businesses love the idea of recurring, steady revenue that is more predictable than other streams. 

Retention is the goal: Interestingly, a National Bureau of Economic Research paper on subscriptions reveals a few truths. Economists studied millions of transactions and found that when a credit card is expired and replaced, there’s “a sharp, abnormal drop” in subscription retention. 

On average, major subscription services lost 2% of their customers per month. But after card replacements, they lost 8%. 

• In the words of WSJ: “The goal of any good subscription service is to be sticky enough that it becomes a habit. You shouldn’t forget that you’re a subscriber. You should have a reason to remember every day.”

Watch more on how everything became a subscription

Quick Poll

Yesterday, we asked: If interest rates fall this year, would that push you to allocate more of your cash to the stock market?

— Added a No voter, “I'm DCAing regardless of rates and keep an emergency savings for unknowns. Other than that, I'm of the belief time in the market beats timing the market, so I invest as capital is available.”

— Wrote another, “I have locked a good bit of my liquid cash into CDs, so I will decide what to do once they come to maturity.”

— This reader says it depends, “I might be interested in purchasing a house. If rates fall, I may be more inclined to use that money on a house rather than the stock market.”

See you next time!

That's it for today on We Study Markets!

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