BIA/Kelsey Commentary: Wardak on the Money Supply and the Media Business

Last fall, a report from Sequoia Capital was widely circulated, strongly suggesting that companies sit on their capital and wait out what was sure to be a very slow and painful period. Now it’s gotten worse.

For the past several weeks, other analyst reports have been circulating. They suggest that we’ve entered a period of “deleveraging,” when debt ratios are eating parasitically into capital. This has led to deflation, and has made it all but impossible to spend, and to achieve growth.

For our BIA/Kelsey community of local media companies, the implications could be very significant. But what do the trends really mean? Is the government’s stimulus program, which is attempting to “jump-start” the economy by flooding in new dollars, going to make a difference? Should we bother going to work between the years 2009 and 2016?

We asked BIA Financial Analyst Omar Wardak to give his view on what is really important in the current environment. First, we can’t run away from the tide of bad news, says Wardak. “Bank lending has decreased dramatically, which has led to widespread deflation, decreases in investment and spending. Banks are simply not putting enough money into the economy.”

Media companies have definitely felt this in every aspect of their operations, notes Wardak — especially those that have recently acquired other properties at relatively high values. Their advertising revenues are falling short, and their debt ratio is beyond what they can sustain. That’s why we’ve seen a wave of newspaper and broadcast companies go bankrupt in the past several months, while several others are teetering. Yellow Pages companies are almost there as well.

But things are rosier than they might appear. What hasn’t been really appreciated, says Wardak, is that the money supply (as measured by M1) is now equal to the deposit base in banks. “This may imply that deleveraging is fundamentally over from a banking perspective, which would be great news. This might be the first signs of a bottom. Essentially the current debt in the market is the amount of debt that should be out in the market.”

So now the rest is all about psychology. People and companies have got to be convinced that they can safely spend. “The only way to address the issue is to jump-start the cycle,” says Wardak, “and the government has been very active in resuscitating the economy.”

Looking forward, Wardak notes that major challenges remain. If lending gets back to normal, “we might face high levels of inflation. But luckily, inflation has always been a friend to media companies. Inflation helps to induce ad spending and allows media companies to repay their debt with cheaper dollars.”

To be sure, media companies — essentially any company that gathers users for the sale of advertising — have their work cut out for them. And we say that without even taking into account the technologically oriented shifts in usage and spending that are occurring. Major sectors, such as finance, automotive, real estate and retail, are not in a position to spend on marketing.

But when the market begins to recover, and new markets emerge, media companies across every channel — Internet, broadcast, broadband, news and directional — will benefit while helping local businesses reach new customers.