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Money markets matter.
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Peter Harrell - Visiting Scholar at Georgetown Law
If money is evil, then that building is hell.
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Ed Elson - Profit Markets Host
Welcome to profit markets. I'm Ed elson. It is July 22nd. Let's check in on yesterday's market vitals. The major indices climbed as chip stocks rallied. Intel popped nearly 9% after the company announced it is reducing headcount. Meanwhile, Brent crude climbed as strikes continued in the Middle east and President Trump dismissed the idea of immediate talks with Iran. The yield on 10 year treasuries rose to its highest level in two months. On inflation expectations on Kalshi, the odds of a rate hike before 2027 hit 62%. Okay, what else is happening? Just when you thought it was over. Tariff chaos is back with a vengeance. Trump announced that the US would be imposing 50 tariffs on most Canadian goods next month, claiming that Canada had discriminated against US Industries. Prime Minister Mark Carney said that he and Trump would accelerate trade talks before they take effect. Meanwhile, a 25% tariff on certain imports from Brazil takes effect today and on Friday. The 10% tariffs the Trump administration imposed in February are due to expire. U.S. trade Representative Jameson Greer said, quote, we expect to see some action soon as the administration prepares a new round of replacement tariffs. So lots of tariff news to get into here. Joining us to discuss this news, we are speaking with Peter Harrell, visiting scholar at the Institute of International Economic Law at Georgetown Law School. Peter, welcome back to the show. It's great to see you. Lots has happened here on the tower front, and it's a subject that we talked a lot about last year, stopped talking about for a while, I guess, because other stuff was happening. Now we're back to talking about it. What's happened with tariffs over the past six months?
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Peter Harrell - Visiting Scholar at Georgetown Law
Yeah, well, I think part of why we stopped talking about it was we all hoped that maybe although Trump would maintain high tariffs, he'd do so in a more orderly and disciplined fashion than he did last year. And as we're seeing this week, that's not really the case. And if you go back to February, Trump lost a case at the Supreme Court where the Supreme Court ruled that the legal basis he'd been using for many of his tariffs last year was illegal. And the Trump administration pivoted back in February to kind of a phased set of fallback tariff plans, with the idea being first they'd have what's called a Section 122 tariff, which would be in place from late February until Friday morning here in the east coast of the United States. And then they would have something called a 301 tariff that would come into place to kind of replace the 122 Friday morning as, as well. So they'd kind of pictured an orderly process. That's not where we are. Like, although they'd signaled there'd be order, what we in fact have seen is the 122 is going to expire Friday morning. They've not yet finalized the, the, the successor tariff, the 301 tariff. Maybe they'll do that today, maybe they'll do that tomorrow. If you are importing a product into the United States today from Asia or from Europe, you don't know what tariff rate you're going to pay on Friday at this point. So that's kind of chaotic data point number one. Chaotic data point number two is that Trump decided, as you said, Ed, yesterday, that he wanted to impose 50% tariffs on tens of billions of dollars of U.S. imports from Canada, which is sort of allegedly over Canadian discrimination against the United States, using literally a provision of the Smoot Hawley Tariff act that may or may not still be on the books. Obviously, a piece of this is that he's trying to negotiate with Canada over a trade deal and he wants to put pressure on Canada. But that's sort of chaotic piece number two. And then chaotic piece number three, as you say, is we have these tariffs on Brazil, which are kind of around the fact that Trump doesn't like Brazilian tech regulation and he also doesn't like their online payment platform. And so he's threatening is imposing tariffs on them as well. And, you know, probably more to come the way this is going.
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Ed Elson - Profit Markets Host
So just to dial into the Canada tariffs for a moment, I mean, there are all of these different laws and these different sections of the law that he's using to enact these tariffs. You mentioned section 122, which we had and expires, and then maybe they were going to use 301. The Canada tariff, from my understanding, is using 338. I don't know what that means. But I have a quote from Scott Linceum of the Cato Institute, who said that this is the, quote, nuclear option for Trump tariffs. Is that the right way to describe it? Like what, what is different about these tariffs versus the ones we've seen so far?
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Peter Harrell - Visiting Scholar at Georgetown Law
So it's called Section 338 because it was Section 338 of the Tariff act of 1930, better known as the Smoot Hawley Tariff Act. So he's literally using the Smoot Haulif Tariff act here. This is a proof provision of law that actually has probably does not appear to have ever been used to impose tariffs before Go. I mean, since 1930 has never actually been used. It was used in 1935 and probably in the 1940s to threaten tariffs, but were never, they were never actually imposed. So what Trump is doing here is dusting off this very old statute, which may or may not really be legally valid anymore. Because as Scott said, what Trump wants is a flexible authority. The problem Trump has had with the 122 tariffs and with the 301 tariffs is they all require either investigations or they have like a limit on rates or they have all these constraints on them. What Trump clearly likes, I think about 338, is that it is a, you know, again, assuming it's still lawful, a very flexible law that, you know, he thinks just lets him say Canada's discriminating against the United states up to 50% tariffs. So that's what he's reaching for, is something that gives him that kind of flexibility that he so enjoys to put tariffs on on short notice at very high rates, you know, sort of at
- [08:33]
Ed Elson - Profit Markets Host
his Whim, something I don't fully understand here. I mean, the Supreme Court literally said that the tariffs were illegal. That happened back in February. And since then, there have been a multitude of different ways that, by which Trump has continued to enact tariffs. And he's figured out multiple different loopholes or different sections of the law by which to do that. And here we are, I mean, several months later. It's been over a year since the initial Liberation Day. Tariffs are still in effect. And it seems as if he can just keep on doing this, I guess, keep on kicking the can down the road of just, oh, I'll use this section, I'll use this section. I'll use this section. And then I guess the Supreme Court has to play catch up. I mean, couldn't this go on for the next several years? Couldn't this just be the remainder of his presidency? Four years of tariffs? I mean, what is stopping him from continuing to do what he's doing?
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Peter Harrell - Visiting Scholar at Georgetown Law
Yeah, so I think you raise a very important point, Ed, which is that I think we are quite likely to see Trump continue to use lots of different tariff authorities, all of which have been and will be challenged in court. But his idea is to kind of run out the clock and kind of keep them going through throughout his term, and then, you know, somebody else can pick up the pieces afterwards if the courts, you know, much later rule all of these fallback tariffs unlawful as well. I mean, just to unpack that a little bit. So the first statute he used was this thing called ipa, which actually didn't have the word tariff or duty or anything in it. It was kind of an emergency powers statute. And that's the one that the Suprem Court ruled unlawful back in February. And so now, having lost the use of this emergency power statute that didn't have the word tariff or duty, now what he's doing is using different statutes that are definitely tariff statutes. You know, they contain the word tariff. You know, the President may impose tariffs, that kind of thing, but that he is, he is using them in a different way and much more aggressively than they've ever been used before. And so now we are seeing law, you know, as he uses these other tariff statutes now, but uses them in these, you know, potentially unlawful ways. What we're seeing is lawsuits come to challenge them. But our court system, you know, any lawsuit is going to take at least a year to go through the courts. And so he's just going to keep trying to play, play out the clock now. But this is where I find338. And what he's doing on Canada, kind of dangerous here, because one benefit that we had gotten from the Supreme Court decision in February is that Trump was not really turning tariffs off and on, on and off by whim. So he'd maintained a 10% tariff under 122. He has, you know, said that they're going to maintain that under 301. But actually you hadn't seen a lot of changes in tariffs. You know, you actually didn't see many changes in actual tariff rates between February and this and this week because these other laws had required some process or had some limits. What he's trying to do with 338 is not only maintain high rates under these, these other statutes, 301 and 122, but 338 is something that lets him kind of, you know, using his Sharpie, turn the tariffs off and on again and bring that chaos back. In addition to the high rates we've actually had, as we talked about at the beginning, Ed, you know, a couple of months without the chaos, even if the rates remained high.
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Ed Elson - Profit Markets Host
Something I don't understand, and maybe you can help me with it, or maybe not. We'll see. Why is he doing this? Because as we've seen through the multiple inflation reports that we've gotten over the past several months where the inflation number goes higher, we had 3.5%, which, sure, it was lower than 4.2%, but the target rate for the Federal Reserve is 2%. We were hovering around that number. Then we slapped the tariffs on, we added a full percentage point to inflation, inflation. Then we invaded Iran and we blocked up the Strait of Hormuz, added a full percentage point of inflation, possibly higher. Now we're hovering around 4%. And this is the biggest problem for American households right now, which is inflation and its effect on the affordability crisis. And this is what people are so upset with him about. So I cannot for the life of me understand why he would, after it was ruled illegal by the Supreme Court, doubled down. Not with 10%, with 50% on Canada. How do we even justify this?
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Peter Harrell - Visiting Scholar at Georgetown Law
Every independent study, at least I've seen, Ed, suggests that something like 85% to 95% of these tariffs are being paid by Americans, either in the form of cost passed through to customers or by companies temporarily eating some of the costs, planning to pass it through, you know, on a go forward basis. So it's not really that the foreigners are paying most of these tariffs. We are definitely paying these tariffs. And as you say, inflation is front of mind I think it's hard to explain this policy agenda other than the personality of Donald Trump. I think that there is, you know, a substantial amount of support both in his administration and, you know, among some quarters in Washington for, you know, targeted tariffs to protect, even fairly aggressively, some specific industries here in the United States. And I think you'd find broad support better or for worse. Not saying I like the economics of it, but for more tariffs to protect the steel making industry, which he has done, or more tariffs to protect maybe the auto industry. Again, I think what he's done has not actually been helpful to those industries. But there is support for that concept. There's very little support for the depth and breadth of tariffs and the kind of rates we're now seeing on Canada, other than that. Donald Trump has loved tariffs personally since the 1980s. And what you are seeing is a presidentially driven objective here that his administration is implementing. And I do think it is coming from him because, you know, one thing we saw after the Supreme Court ruled the tariffs illegal back in February and they started reimposing, they actually reimposed them at lower rates. Right. They had been an average rate of about 15% before the Supreme Court ruled them illegal. They brought back in 10% ish tariffs. So I think some of his administration kind of gets what you're saying, Ed, and would like to see a bit of a decline in rates. But, but Trump clearly just wants more tariffs. And I, I think that is what we're going to see going forward, kind of despite the economic costs.
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Ed Elson - Profit Markets Host
It seems as though this is kind of the blunt instrument he has found with which he can bludgeon people that he doesn't like, nations that he doesn't like, and in the process also bludgeon himself, or at least the seems to be what's happening. I mean, he said, I don't know what Canada's done wrong, but supposedly they have discriminated against the US and this is his response. I mean, you say you think this will continue. To what extent do you think this will continue? Is this move the first of many tariff moves against individual nations over the next few months? Is this kind of the canary in the coal mine? I guess.
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Peter Harrell - Visiting Scholar at Georgetown Law
Well, I am worried about that. I do think he likes the way he can bludgeon foreign governments. I also think we have to take seriously, Ed, that although every economist, we can sit here, we can read the studies that say the Americans are paying the tariffs, I think Trump may genuinely believe, just wrongly, that the foreigners pay the tariff. I think we have to kind of take seriously that he may just believe that although he's completely wrong on it and he is, as George W. Bush used to say, the decider. So here we are. Here we are. I worry this is going to be the beginning of future moves. As I said, I think we had seen some efforts after the Supreme Court loss by Jameson Greer as a U.S. trade Representative and some of the other folks in the administration to have a somewhat more disciplined, again, still kind of high rates but somewhat more disciplined tariff process that was kind of like, okay, we're just going to have have 10% on everybody. You might not like 10%, but it's kind of manageable. It's not higher than 10%. But Trump is clearly interested in getting back into the game of when he's mad at Europe because they won't support his Iran war. Tariff Europe, he's clearly, you know, mad at Canada because it's not giving him what he wants on USMCA. But more than that, it's not becoming the 51st state. So tariff Canada. And I am worried that this is a harbinger of more chaos to come, although I hope I am wrong on that.
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Ed Elson - Profit Markets Host
All right. Peter Harrell is visiting scholar at the Institute of International Economic Law at Georgetown Law School. Peter, thank you so much for joining us.
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Peter Harrell - Visiting Scholar at Georgetown Law
It's great to be on. Thank you.
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Ed Elson - Profit Markets Host
After the break, the Paramount Warner Brothers deal hits a snag. And for even more markets insights, you can subscribe to my weekly newsletter, Simply put@simply put. Prof.gmedia.com.
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Ed Elson - Profit Markets Host
We're back with Profty Markets. Paramount's bid for Warner Brothers just hit a major speed bump. On Monday, A judge paused Paramount's $110 billion takeover of Warner Brothers Discovery. The temporary restraining order was granted at the request of 12 state attorneys general, who sued to block the deal on antitrust ground. They argue it combines too much of the cable and movie business, meaning higher prices and fewer shows. The pause lasts 14 days, but it doesn't end there. On August 3rd, the judge will hear arguments for a longer freeze, one that could last months. And if the deal doesn't close by September 30th, Paramount owes WBD a ticking fee of more than $600 million a quarter. On the news, both Paramount and Warner Brothers discovery fell 3%. This develop development leaves investors asking a very important question. Is this deal ever going to close? To answer that question, we're speaking with Rohan Goswami, business reporter at semafor. Rohan, great to see you. Paramount, Warner Brothers, the deal that we've been talking about for months. Yet another roadblock. What's happening here? What do you make of it?
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Rohan Goswami - Business Reporter at Semafor
It's why Casa Lemonade and Contestant M and A is so fun. Because on one hand you've got Paramount, which has been quite resistant to the idea that they would be willing to spin off or sell any of These assets. And it is rapidly facing a reality that it might have to. Right. As you point out, the tro, the temporary restraining order is only for 14 days. Now, we could get a second one. It's another 14 days, but that's kind of a moot point. It brings us to this August 3rd showdown around this preliminary injunction. And that's really the whole battle, right? Because it's in that situation and in that hearing that the judge will decide whether the state's case has merit or whether it doesn't. Now, it should be clear here, right, whether or not the judge finds in favor or against Paramount or the states here. Right? We are in for a long slog here. The question now becomes, is Paramount going to decide that it wants to spin off or sell some assets and make an offer to the states? Hey, maybe we'll get rid of a studio. Maybe we'll get rid of cnn, we'll get rid of some of the cable assets. Or does it say, as it's intimated publicly and privately, that it's willing to take this fight to the Supreme Court? The Ellisons, of course, have a bottomless pocket, but even they don't want paying $600 million, maybe 1.2 billion if this stretches another quarter after this, if they can avoid it.
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Ed Elson - Profit Markets Host
Just looking at the list of IP that they would own, they would own. I mean, if this deal goes through, the Ellison's, Paramount, they would own hbo, cnn, tnt, tbs, they own all this ip, like Harry Potter and DC Comics, Game of Thrones. I mean, it's a lot of stuff. And it seems to be. That seems to be the problem, really, at least in the lawsuit, that it's too much stuff? I mean. I mean, how much merit is there to the antitrust argument in the lawsuit? And would it be enough to say, okay, we'll shed this asset and this asset and we'll take these other ones?
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Rohan Goswami - Business Reporter at Semafor
You know, if you'd asked me my personal opinion, and this is again based on conversations with rival media executives, with antitrust lawyers before the TRO was issued, I would have said not much. This is a political suit. Bonta has cobbled together an interesting coalition of Democrats that oppose this deal for different reasons. Whether it's David Ellison's ideology or they have a general hatred of monopolies and think all mergers are bad. This was a complicated group of people that came together to try to stop this lawsuit. Then came the judge's ruling on Monday around the tro, and she made an interesting series of points that seem to suggest she's not really buying Paramount's arguments. If you rewind the clock, you remember that the states made an argument that Paramount's deal would be anti competitive in three spots. So there's general theatrical release, that's all movies. Then there's blockbuster theatrical releases, which was a new category that sort of raised some eyebrows. How do you define a blockbuster? Are those really a thing anymore when like Hollywood can spend $200 million on a movie and it's a flop? And then cable news, cable TV I should say. Right. So these three categories are where Warner was, the Warner Paramount combination was supposed to be anti competitive. Didn't really buy that argument. The judge seems to have. And that's all that matters in the short term, Right. Paramount, if they get a negative decision here that rules against them, is going to appeal. They're going to take this to the Supreme Court. I mean, David Ellison is indefatigable here. He is not going to give this up, but it's going to cost. So then the question really becomes at what point? To go back to my previous point, at what point does Paramount try to cut their losses? Now, Rob Bonta has privately intimated, publicly denied intimating this, but has privately intimated, per puck, that CNN divestiture would be enough potentially to stave off further action. Again reinforcing this idea that this is really about politics, not antitrust.
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Ed Elson - Profit Markets Host
It is striking. You look at the states that have sued, all 12 of them, have a Democratic attorney general. It's hard to not see this based on that data point as at least somewhat politically inclined. And I'm not saying that that actually takes away from the merit of the lawsuit, but it does seem like that's a lot of what this is about. We know that the Ellisons have gotten closer and cozier with the president. We know that the president has said nice things about David Ellison and called him a great guy. He's called Larry a great guy too, his dad. So I mean, to what extent do you think this really is about politics? About the having something like cnn, another important cable asset, under the control of a guy who seems to be at least close with the president?
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Rohan Goswami - Business Reporter at Semafor
I mean, there's a terrible irony in the fact that David Ellison donated Joe Biden's reelection campaign, donated a huge amount of money. This is a guy who was historically a Democrat. Now, of course, I haven't asked him what his political ide he is today. And any number of observers can look at what he's done to CBS or the hires he's made and gone. Well, maybe he's not a Democrat anymore. But I would actually argue that the politics of the case really do matter. If you look at other situations where the states have intervened, thinking about Live Nation, right, to break up the ticketing giant, or in a situation where HP bought this company called Juniper, you actually had a bipartisan coalition of attorneys generals from the state sue to try and break up or stop those mergers. Here, where it becomes inherently political and problematic is in who and why they've brought this suit. Because, again, on the face of it, Bonta and Elizabeth Warren and Chris Murphy and others in this coalition have laid it out in no uncertain terms. Right? This is a fight between people who are aligned with Trump and not aligned with Trump. It is a very political situation. Does that have a bearing on the law? It shouldn't, but of course it will and it does.
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Ed Elson - Profit Markets Host
Just thinking about how the shareholders feel about all of this, not great.
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Rohan Goswami - Business Reporter at Semafor
Not great.
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Ed Elson - Profit Markets Host
So Paramount stock is down 25%. Warner Brothers discovery stock is down 5%. I mean, yeah. How do the shareholders feel about this? And do they have a say in what will be a transformative decision and moment for the company?
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Rohan Goswami - Business Reporter at Semafor
No. They are along for this ride, whether they like it or not. Now, Zaslav, David Zaslav, that's the CEO of Warner Brothers, of course, in remarks that employee town hall did say, you know, look, if this deal does get broken up, we'll go back to running our business and we'll figure out from then. Remember, before they started this process, Warner Brothers had been on the road to a split akin to what you and I talked about last time Comcast has done. The problem, of course, becomes. That's very little consolation for shareholders. This is not a stock that should trade at the levels that it has. It has been inflated by greed, by ego, by David Ellison's sort of limitless pockets and desire to build a media empire. Take that away and the stock stock will, of course, plummet. Investors will rotate out. This will very well become a dead man walking or a private equity ticket or what have you, Right? So shareholders have very limited recourse. Now, of course, what they can do, and you'll see this in contested situations, is put public pressure on the ags, whether that's hiring their own lobbyists, engaging their own consultants, launching grassroots campaigns. Again, these are sophisticated hedge funds that will use any and all tools at their disposal to get a deal done. But it's really gonna come down to, and we have no doubt that David Ellison will execute on this, Paramount's ability, their fiduciary duties under the merger agreement. Now, you'll recall there are multi billion dollar break fees associated with this merger. Those are not things that anyone wants to pay out of hand. So that's one motivator. The other motivator, as we know, is David Ellison really, really wants these assets. Really, really wants these assets. And so he is extremely motivated from conversations with people around him and around the company to get this done at any cost. Even if that means, as we reported last week, leaving California altogether. I mean, all options are on the table for this guy to get the deal across and to make it clear to the states, hey, don't mess with us here.
- [29:06]
Ed Elson - Profit Markets Host
Final question. And you know what's coming. Prediction.
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Ryan Reynolds - Mint Mobile Ad
Yeah.
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Ed Elson - Profit Markets Host
How does this all pan out? Do the Ellisons pull it off before September? What do you think?
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Rohan Goswami - Business Reporter at Semafor
I think they do before September.
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Guided Relaxation Voice
Mm.
- [29:20]
Ed Elson - Profit Markets Host
I think I'll back up then. Do they pull it off?
- [29:23]
Rohan Goswami - Business Reporter at Semafor
They pull it off. I don't know if it'll be by September. But look, I think never say never. They are at. We are never going to spin anything off or offer any concessions to the states. We're gonna fight this to the ground. We'll see how they feel when they're on their hook for $600 million. Right. That, that looks very different. I think they get this done whether it is through a structural remedy, right. Getting rid of the cable assets, getting rid of a studio, getting rid of cnn, or by litigating this all the way up to the Supreme Court, which make Candelabrahim the chief legal officer at Paramount. The former antitrust Chief under Trump 1.0 has said they are going to do so. My money is on the Ellisons and on Paramount. This is based not just on my opinion, but conversations I've had with other media CEOs, with bankers, with lawyers, with people around this. But it's going to be a long slog and it's not going to be fun for shareholders at all. So, you know, buckle up.
- [30:05]
Ed Elson - Profit Markets Host
Rohan Goswami is business reporter at SEM4. Rohan, thank you so much, Ed.
- [30:10]
Rohan Goswami - Business Reporter at Semafor
Always a pleasure.
- [30:16]
Ed Elson - Profit Markets Host
Oracle's very bad year just got worse. As you may already know, Oracle stock has gotten battered this year, down 35% year to date. It's even had its credit rating downgraded to triple B minus. That's just one rung away from junk status. But yesterday, the company got even more bad news. The State Authority of Wisconsin, where Oracle is looking to build a massive 1 gigawatt data center, just demanded that Oracle pay a collateral bill worth $7 billion. Why? Well, largely because of Oracle's shitty credit rating. Oracle borrowed $43 billion to build data centers over the past year. That's against its $67 billion in revenue. But revenue doesn't pay debt down. Free cash flow does. And Oracle's free cash flow is negative. It burned roughly $24 billion over the same period. So taking on record debt while running negative cash flows, well, that is a great recipe for a default. Which means that every time anyone agrees to loan Oracle money, they are now taking on an increased level of risk. Which means they must now charge Oracle higher interest rates to compensate for that risk. The result? Higher borrowing costs and a $7 billion collateral bill, which will cost Oracle more than $100 million a year. We have said it before, we will say it again. Bubbles aren't built with equity. They are built with debt. And increasingly, the AI buildout is becoming reliant on debt. Oracle is the company most obviously in the danger zone, and that's why the markets are now flashing red. But let's be clear, it isn't alone. An estimated $489 billion of AI related debt has been issued this year. And the hyperscalers, such as Oracle, account for only 40% of that number. In other words, there is a lot more risk lingering beneath the surface. Right now. The question is, where? Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is dan Shalon, Kristin O' Donoghue and Mace O'. Brien. And our social producer is Jake McPherson. Thank you for listening to Profg Markets from Proftug Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.
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Ed Elson - Profit Markets Host
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Ryan Reynolds - Mint Mobile Ad
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1-800-Contacts Ad Voice
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Wayfair Ad Voice
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