Cut Through The Noise

By Matthew Gutierrez, Shawn O'Malley, and Weronika Pycek · September 06, 2023

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“The US economy has been looking so solid lately that Federal Reserve officials will probably need to double their projection for growth in 2023.”

If you’d told anyone in March 2022, when the Fed first started raising rates to combat inflation, the above would be the first sentence of a frontpage Bloomberg article in September 2023, they’d have said you were out of your mind ??

?? Well, here we are. Economics isn’t a hard science, making economic theories particularly vulnerable to being proven wrong over time — textbooks may soon need to be rewritten.

— Weronika, Shawn, and Matthew

Here’s the rundown:

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

• A revamp for the music streaming industry
• Rising rents hit the American suburbs
• The U.S. and China continue to clash over computer chips

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

POP QUIZ

What percentage of economists in mid-2022 anticipated a recession over the next year? (Read on to find out!)

CHART OF THE DAY

IN THE NEWS

?? The Music Streaming Business is Getting Revamped (FT)

It’s never a bad time to be a famous musical artist, but it’s about to get even better.

Universal Music has negotiated a deal that will “reshape the economics of music streaming,” according to the Financial Times.

It’ll partner with the French streaming service Deezer, which is expected to raise payouts for professional artists by 10%, representing the “first big shift in the music streaming business model” since Spotify hit the scene 15 years ago.

How it works: Under the new approach, professional artists who generate at least 1,000 monthly listens will be given a higher weight when calculating royalty payments than tracks from non-professionals (those generating less than 1,000 monthly listens.)

• See, when calculating royalties, bigger artists like Harry Styles don’t earn a higher percentage than anyone else. As Deezer’s CEO explains, “We have 90 million tracks and many of them are just noise, like literally noise, the sound of a washing machine and rain.”
• While big artists obviously have a greater volume of streams, they earn as much per stream as anyone else. Or at least, they did.

Payday: Deezer plans to reward professional musicians even further, granting them higher royalties when users actively search for their profile or specific songs. So, if you search for Taylor Swift on Deezer and listen to a song, that single stream would be counted as four streams for royalty calculation purposes.

• The hope is to minimize money going to amateurs, bots, and white noise tracks and, instead, redirect those funds to further rewarding established artists.

Why it matters:

Of course, Universal — the world’s largest record company — loves the idea, as the new model rakes in more money for it and its artists.

The way big streaming services pay out royalties has remained the same for a decade, but labels and artists are hoping Deezer’s new approach is replicated across the industry.

Lots of money at stake: Goldman Sachs estimates that the music streaming market will earn $38 billion in revenue this year.

• On 1,000 streams, artists typically earn around $5. But fraud and clutter have taken money out of legitimate artists’ pockets — some 120,000 tracks are uploaded daily to Spotify (compared with 20,000 in 2018.)

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??Rising Rents Hit American Suburbs (WSJ)

Few places have been spared by the soaring cost of living, from groceries to car payments to housing.

According to a new study, suburban rent growth is rising faster than most metro areas, as many white-collar workers who left city apartments during the pandemic are renting in the suburbs longer than they otherwise would have because of — you guessed it — higher interest rates.

• In other words, the higher rates (roughly 7.6% today) keep many people from buying. The new data also indicates that America’s migration from major cities to the suburbs is shaping into a longer-term trend, not just a temporary result of the pandemic restrictions in 2020 and 2021.
• Several factors drive the trend: high mortgage rates, high home prices, and a rise in crime and homelessness in some big cities. As a result, some towns have already grappled with rental affordability as white-collar workers drive rental prices up.

The numbers: Rents in suburbs climbed 26% from March 2020 through July, 8 percentage points higher than the gain in cities. “In 2019, we were talking about a decade of urbanization,” said Apartment List’s chief economist. “That is no longer the case.”

• The widest gap: Portland, Oregon, where rents in the ‘burbs are up 23% since 2020, compared with just 2% in the center city.

Why it matters:

The trend comes as the number of existing home sales in July fell to its lowest level since the summer of 2010. Yet home prices remain at or near record highs in many parts of the U.S.

Moving out: Metro areas lost nearly 1 million residents from 2020-2022, according to the Wall Street Journal’s analysis, as many suburbs gained residents at the expense of downtown. But even before the pandemic, most apartment investors (89%) bought buildings mostly outside central business districts.

• Some municipalities have issued rent-stabilization laws that limit annual rent increases to deal with the housing affordability crisis.

There are outliers: Rent prices in the “urban core” of Tampa and New York City are outpacing the suburbs, and the gap could close soon as the supply of suburban rental units increases this decade.

Even still, suburban apartment rents are approaching the cost of renting an entire home.

• “The spread between renting a home and renting an apartment is becoming narrower and narrower,” noted one multifamily building broker. “At some point when they match, you’ll see more people renting homes.”

MORE HEADLINES

?? Disney’s battle with Charter could expose an existential threat to cable bundles

??? Maui’s message to tourists: Don’t stay away after wildfires

?? The maker of Wegovy and Ozempic is now Europe’s most valuable company

?? Mortgage demand drops to 27-year low

??? Oil prices jump past $90 a barrel for the first time this year

??U.S. Investigates Made-in-China Huawei Chip (Bloomberg)

Blink if you’ve heard this before: The U.S. and China are clashing again over tech.

Tech cold war: The latest smartphone from the Chinese firm, Huawei, boasts advanced capabilities from a semiconductor (computer chip) firm on the U.S. blacklist — hailed by Chinese media as a cutting-edge tech achievement.

• This has fueled nationalist sentiment in China and raised questions about the impact of U.S. restrictions on the country's expansive tech industry.

On Tuesday, U.S. National Security Advisor Jake Sullivan said the government wanted to investigate Huawei's Mate 60 Pro processor to assess the sanctioned company’s progress in semiconductor technology.

• Chinese media on Wednesday praised the release as a landmark achievement in decreasing dependency on U.S. technology.
• Bloomberg reporters found that the chip, manufactured by the U.S.-blacklisted Semiconductor Manufacturing International Corp (SMIC), is only a few years behind leading technology.

Why it matters:

Huawei and SMIC are both under U.S. sanctions that restrict their access to state-of-the-art chip manufacturing technology due to concerns over potential contributions to China's military capabilities.

• The Mate 60 Pro indicates some early strides in China's goal to bootstrap its own semiconductor industry, rivaling the U.S. and its allies, which sit at the forefront.

On Wednesday, some analysts suggested that if Huawei can mass-produce the Mate 60 Pro, it could threaten Apple's iPhone market share in China, reducing Apple's next-gen iPhone sales in China by up to 38%.

Market response: The Huawei phone's release sparked a surge in stocks of Chinese chip manufacturers and a search for companies connected to Huawei that could gain from its domestically produced processor.

Some experts warn that the U.S.-led effort to limit China's access to advanced technologies could weaken if violations go unaddressed.

• “Huawei is testing the U.S. red line now. If the U.S. doesn’t take any action, Huawei will think there’s nothing to be afraid of, its other suppliers will start to emulate what SMIC does, and U.S. sanctions will crumble,” noted one professor at National Taiwan University.

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TRIVIA ANSWER

According to a Bloomberg survey of economists in July 2022, over 47% expected a recession over the next 12 months, which hasn’t come to fruition. That number was up from 30% in June of 2022.

SEE YOU NEXT TIME!

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