Succinct Summary: The consumer is ending 2021 in a very strong position and demand continues to be very robust. Omicron doesn’t seem to be causing much change in behavior. Inflation is still a concern though and while the supply chain is improving some it is still a mess. If we are entering a tightening cycle, it could have a dampening effect on markets and the economy.
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Macro:
Global and US economic outlook seems positive heading into 2022
"So my view on the economy, U.S. and global, is definitely positive. So when you look at the level of growth that we are experiencing in the United States, over 5% this year, over 3% next year globally, 6% plus, and close to 5% next year. So overall, all this stimulus that is being injected into the economy is essentially filling the purpose. And the economies are doing well, and the business environment is very positive. I have a relatively positive view on it in the sense that obviously, the level of inflation at the moment is quite elevated." - JPMorgan Chase (JPM) Co-President Daniel Eduardo Pinto
"Generally speaking, absent the variant going into 2022, the macroeconomic environment, at least for where we operate, which is in the United States and Europe primarily, is quite constructive. We're seeing a lot of -- there's a lot of activity, broadly speaking, in the economy. We're seeing supply chains loosen a little bit. They're getting a little bit better. We're seeing -- yes, we're seeing inflation, but there's more and more signs that this is going to be something that resolves itself in '22. It looks more like what everybody's been wishing for, which is an environment of 2% to 3% inflation may, in fact, be the case, not something that spikes up at 4 or 5." - Lazard (LAZ) CEO Kenneth Marc Jacobs
Importantly, people are not overreacting to Omicron
"I don't see any impact yet. And if you go out to a restaurant, I don't see people change their behavior. The TSA numbers, you can see bounce around a little bit...but the reality is it seems like the vaccines continue to work, and we'll see what that plays out. I'm not the scientist, but it's got time and the data will get better, but we're not seeing any behavior change here." - Bank of America Corporation (BAC) CEO Brian Moynihan
"The more the traveler customer and the market at large gets used to the bumps in the road, they don't overreact, they don't say, "Oh, my god, the sky is falling. We have to cancel everything.” The more of these we get, we will desensitize ourselves to unnecessary volatility...so far, (inaudible), the severity has been pretty mild. And if that holds up, I think people will go back to what they were doing." - Expedia (EXPE) CEO Peter Maxwell Kern
Consumer and CEOs confidence and consumer spending remain strong
"when you look at consumer confidence, it's very high, which is looking at our own credit card numbers. And at the moment, when you look at expenses -- the amount of money [spending] through credit cards is around 17% higher than it was pre-pandemic. And it's across all items except airlines, which is a bit lower. So the consumers have a great balance sheet. They have accumulated savings over this time." - JPMorgan Chase (JPM) Co-President Daniel Eduardo Pinto
“When I think about the corporate clients and the consumer clients that we have and that we serve, I would say they, too, have demonstrated, I think, a pretty meaningful pace through the recovery. When I look at the corporate client base, the balance sheets are very strong. We have very good pipelines in terms of transactions and activities. We have a very rich dialogue with the corporate client base. They're looking at M&A activity. They're looking at putting more CapEx to work. They're looking at investing in digital capabilities, all of those things are at before. There's lots of liquidity in both the corporate and the consumer side” - CitiGroup (C) CFO Mark A.L. Mason
“. So people still have a lot of money in their accounts. They're well employed, wages are rising and they're spending money, which I think in a day of a consumer-led economy in the United States, I think that's the unique thing I could add to it as they're spending and they're doing, that's just -- that bodes well for the U.S. economy” - Bank of America (BAC) CEO Brian Moynihan
“ if you think about consumer retail spending around the globe, which is probably the best corollary we have to holiday spending, which I know a lot of people are focused about, that is up about 30% versus 2019 quarter to date. And if you were to look at the most recent weeks, that all those trends on consumer retail spending continue to look very consistent with those kinds of numbers, including in both the online world and the off-line world….from what we see, it looks very, very strong” - American Express (AXP) CFO Jeffrey Campbell
But we still have some headwinds
"we’re still not completely out of the pandemic. There’s uncertainty that comes from that and that uncertainty is going to affect economic activity and we’re going to have to deal with that in some way. Against that, we clearly have real inflation in the economy. We’ve got a variety of problems, headwinds, issues that have occurred because we went into a pandemic, we shut the economy down, and we’re now, we’re turning it back on. That’s really unprecedented. And, you know, on top of that, we have shifts going on in fiscal and monetary policy to try to balance that. And so there’s no, there’s no question that this has been an unprecedented period and so it’s very hard to predict how we’re going to come out of this." - Goldman Sachs (GS) Chairman & CEO David Solomon
Labor issues will persist into the new year
"And you can see all the reasons for that is people are gradually coming back into the workforce, but it's happening at a slow pace. The demand for jobs and people to do jobs is very high. The participation rate in the labor force has been -- is correcting, but it's very unlikely to get to the levels where it was pre-pandemic. So the labor shortage that is going to probably take the employment rate towards 3.5% at the end of next year and a bit lower at the end of '23 is an issue.." - JPMorgan Chase (JPM) Co-President Daniel Eduardo Pinto
“I mean the job market really is a tale of 2 sides right now, where employers are showing a rabid appetite for talent, and they are trying to hire almost desperately, and you're seeing them raise wages, you're seeing them increased benefits. You're seeing them offer numerous perks…still they're unable to fill these jobs because there is a shortage in labor supply that is a compounding set of variables that have led to this reality that we exist in, but you're about somewhere between 4 and 6 million people short of participation in the labor market of what it needs in order to get back to sort of a normal healthy job market..the story in the country is one of like across every skill level, every duration of experience, every salary level in every geography, you're seeing a shortage of labor.” - ZipRecruiter (ZIP) CEO Ian H. Siegel
"41% of people that we survey are considering leaving their current employers, and a similar percentage are just thinking about doing something different. And so there's just a massive talent war that's going on." - Microsoft (MSFT) COO Kirk Koenigsbauer
CEOs are very concerned about inflation
“We are in an environment with accelerated and unprecedented inflation. And while we've taken significant pricing actions across the portfolio, there's a lag impacting margins” - Tyson Food (TSN) President of Prepared Foods Noelle O’Mara Group
"I'm personally not nervous about the moving too quickly. I think that there's certainly a case to be made that they should be moving faster than they've been moving. Inflation is very, very real. The whole debate about the word transitory and what it means and what it implies, it's just -- it's -- I don't think it's really all that relevant. What's really relevant is as we sit here today and prices are significantly higher for inputs across most industries." - Wells Fargo (WFC) CEO Charles Scharf
"I’m not even sure price changes are over yet...everywhere it’s happening. Restaurants’ crazy price increases and a lot of the input costs...We all sit here and go, what’s going to happen? And yes, who knows like how long everybody is going to print money for, how long prices are going to go up. What’s going to happen with inflation. Hopefully, you’ve got a dovish point of view on interest rates in the Fed. I think everybody’s pretty happy. Powell is reelected. And so, so far, so good. I would have thought a lot of things would have gone wrong by now. But again, we’ve never seen this one. The world has never seen it. So I think price increases are going to probably be here for a while." - RH (RH) CEO Gary Friedman
We may have above-trend inflation for a while
"And I remember and I know historically, I’ve been around doing this, you know, since the 1980s, I remember when we had a very, very different environment and we could have a different environment again. And so, I do think that while we’ve had inflation below trend for quite a significant period of time, there’s a reasonable chance that we’re going to have inflation above trend for a period of time. Doesn’t mean it has to be like the 1970s, could be, doesn’t have to be, but when you think about periods where there’s inflation, inflation hurts asset prices, and it slows down your ability to make money with almost any asset. From 1970 to 1980, there was almost nothing you could own where you made money. Basically, during that 10-year period, oil and gold, cash you lost money. If you owned US equities during that 10-year period, you lost nearly 50% of the value of your holdings. So, people forget the historical perspective. It wasn’t too long ago in 2004 to 2006 I think it was June 2004 to June 2006, that as the Fed normalized rates, they hiked 17 times in that two-year period. Now I’m not saying that’s going to happen, but I think we’re living in a world where people are forgetting the history and this might be, you know, a period that’s different. We could go back to another period that looks materially different from this." - Goldman Sachs (GS) Chairman & CEO David Solomon
The Fed may have to act more quickly
"I think my guess is now with a little bit more of an understanding of who's going to have what role at the Fed that there'll be a quicker path towards the appropriate actions." - Wells Fargo CEO Charles W. Scharf
“It's getting to the point where they've got to start to change their posture. So our view is interest rates will rise next year multiple times and beginning sort of midyear, even maybe a little bit earlier, the tension would be how much earlier that could happen. But they have to sort of normalize the environment given everything going on” - Bank of America Corporation (BAC) CEO Brian Moynihan
International:
Important data point on supply chain normalization. Subscribe to Read
Financials:
Strong year for US M&A volumes driven by midsize deals, less large-sized deals
"if you think about the M&A environment, what I would kind of describe the U.S. M&A environment is one that's being driven by midsize, I mean, $1 billion to $10 billion deals. Yes, strategic in that landscape and also highly active for the sponsors in that landscape. There's not -- we're not seeing the level of very large deal activity that we saw in the period '14 to '18. And the reason for that is, I think, regulatory. I think it's antitrust, it's concerned around antitrust and it's also probably the valuations as well.." - Lazard (LAZ) CEO Kenneth Marc Jacobs
Also, record leveraged loans issuance this year
"So we expect market conditions to remain favorable going into next year. The record issuance for leveraged loans this year, which we expect to be up approximately 100% versus 2020, will create a tough comparable for next year. " - Moody's Corp (MCO) CFO Mark Bradley Kaye
Retail participation in alternative investments is very low
“There's $80 trillion at retail. Total financial assets in the world of about, I think it's $350 trillion and alternatives are just $7 trillion. So we really haven't scratched the surface. And for us, retail, in particular, is really underpenetrated. So if you look at the different categories of investors, of endowments, which are relatively small but very high performing, they're up around 50% alternatives. Pension funds have somewhere between 25% and 30% and retail is 5% or below” - Blackstone (BX) CEO Stephen Schwarzman
Thoughts on the future of work from home
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Consumer:
Costco's scale is a huge edge
"The biggest thing that impacts margins many often is not only on the buying power side, and arguably, I can't think of any company that has the buying power per item that we do, because we do roughly $200 billion in sales with 4,000 ish items versus anybody else that's doing it with hundreds of thousands of items, or 50,000 items. But I think that having higher levels of sales productivity, particularly in things like fresh foods, helps your margin. We'll keep some of that and we'll use it to be even more competitive and hopefully, build a bigger model a little bit. But I think that some of it is probably structurally there." - Costco (COST) CFO Richard A. Galanti
The housing market very strong going into 2022
"Our ability to continue raising prices illustrates the deep strength of this housing market as well as the advantages we enjoy as America's luxury homebuilder. This week, we raised prices again in all of our markets nationwide. The housing market is being driven by solid fundamentals, including favorable demographics, pent-up demand from over a decade of underproduction of new homes, low mortgage rates, and a tight resale market. According to a Redfin report from last week, in the last full week of November, the number of homes for sale nationwide is at an all-time low, and 1/3 of homes sold in 1 week or less during the month of November…This is a very strong market nationwide…we sit today in a very strong housing market." - Toll Brothers (TOLL) CEO Douglas C. Yearley
"Homebuying demand seems to be returning to a slowdown trend that we'd typically expect to see in the last few weeks of the year. The latest research on the Omicron variant seems to be easing consumers' worst fears, but a lot of uncertainty remains in the economy—from inflation, jobs, and wages to how the Fed reacts to those factors. Amid all that economic uncertainty, the notion that home prices will continue to grow in the near-term feels relatively certain” - Redfin (RDFN) Chief Economist Daryl Fairweather.
Making online content is getting much harder
"The difference between being like excellent, excellent content written by excellent people and being excellent content for the Internet in 2021 is steep. And this is where I think our investment is going to help. So it take like a blueberry pie, 3 years ago, 4 years ago, you could have a blueberry pie recipe written by some really great person. Have the recipe, step-by-step ingredients, picture of it, and it would do great online. And it looks really good. It's photographed well. And it's written by a chef or pastry chef or whatever. But today, what you need is something different. Today, you need those ingredients. You need a video of somebody making it. You need step-by-step photos. You need links to the knife skills you need to make it. You need nutrition information. You need a vegan option. You need it made and tested by a chef. You need all these things that we've built processes and systems to do. And when you can combine the general high quality of their content with all the stuff that you have to have to make content great, that's what we're most excited about. That's going to take the longest because it doesn't happen overnight. But we are -- that has already begun day 1." - IAC/InterActiveCorp (IAC) CEO of Dotdash Media Neil I. Vogel
Technology:
The massive potential in the gaming industry
"I think what's so great about this sector is that it is a dynamic growing industry. It started out -- when I joined, it was a very much a hobbyist type thing. It wasn't that broad-based. It wasn't that international. Now it's bigger than movies and music combined. It's the largest entertainment form in the world. It's growing and proliferating across the world, across so many different devices and new markets. It's the unique blend of entertainment and technology…one of the most profound changes that I've seen over this -- over these decades has been the advent of mobile. Mobile as a platform is now the largest gaming platform period. It's bigger than PC and consoles combined. In 2018, it was $63 billion big. This year, it's $93 billion and it's forecasted to grow almost to $120 billion in just the next several years. There's over 2.8 billion gamers in the world right now, playing mobile games. It's going to be north of 3 really quick." - Zynga (ZNGA) CEO Frank D. Gibeau
$NFLX catalyst. Subscribe to Read
Cybercrime is a $6 Trillion problem
"This is a huge deal for every organization that we talk to. Cybercrime is something like a $6 trillion sort of cost to the economy. And if you sort of think about that for a second, that would actually make it -- if it were a country, it would be the third-largest country in the world after China and the United States. So this is a huge, huge deal for every single CEO, CIO, CSO, for sure. And the challenges they face today are things like fragmentation. They've got 50-plus systems. No joke, 50-plus systems for different types of security or compliance workloads in their company. And that creates just a ton of complexity, and it also creates risk in terms of how these are integrated together and are they interoperating as the way that they should." - Microsoft (MSFT) COO Kirk Koenigsbauer
“Cybercrime is now a global industry and will be a $6 trillion problem in 2021 according to industry reports. These evolving market dynamics, in addition to the digital acceleration caused by the pandemic, are providing opportunities and driving demand for our Cyber & Intelligence business” - Mastercard (MA) President of Cyber & Intelligence Solutions Ajay Bhalla
“Typically. from a seasonality perspective, Q4 is the busiest quarter of the year in cybersecurity in terms of purchases, especially at the higher end of the market” - SentinelOne (S) COO Nick Warner
$DISH catalyst. Subscribe to Read
Industrials and Transport:
The supply chain is still a mess
"Let’s start with supply chain and everything. It’s a mess, okay. It’s the worst we’ve ever seen. So it’s – it’s a time to improvise, adapt overcome. It’s time to collaborate more deeply than you have ever collaborated with your partners, whether it’s on the manufacturing side, the freight side, what you are doing to the parts, what we are doing with just line haul, everything, right. There is execution issues everywhere. There is cost inflation everywhere." - RH (RH) CEO Gary Friedman
"In our fourth quarter, we saw average cycle times increase by about 2 weeks compared to the third quarter. On average, it is now taking us about 6 to 8 weeks longer to deliver a home than it took 1 year ago. We do not anticipate these labor and supply chain conditions will improve in the near term." - Toll Brothers (TOLL) CEO Douglas C. Yearley
The situation getting slightly better though
"It's incrementally improving and we'll keep going at it. But I haven't quantified the unmet demand, Tim. I know you asked directly. I'm not ready to tell you that right now. But I will tell you, it's getting incrementally better...And when I talk to my peers and our suppliers and just generally listen to people talk, yes, it feels like it's getting incrementally better but there's still a lot of work left to go, I think." - Lam Research Corporation (LRCX) CFO Douglas R. Bettinger
“supply chain disruptions. Maybe minor improvement primarily on the logistics side, but we're seeing trucking tighten up again around the holiday” - Sonoco (SON) CEO Robert Howard Coker
It will take a little while to fix everything
if you talk to people in the shipping industry, it's not a fix overnight. It takes a while because it's not just the ships, it's all the components of the process. So I think that will be a constraint and that, in fact, is why our team has probably taken our economic projection for next year from five to four over the course of the last few months is really those constraints, but they pushed out some of the growth further out because the idea is it will be delayed." - Bank of America Corporation (BAC) CEO Brian Moynihan
There’s a lot of demand for EVs
"We have unprecedented demand for Mustang Mach-E and we are going to scale production quickly to meet demand. We are now planning to utilize the entire Cuautitlan plant for production of Mach-E. We will increase production starting in 2022 and expect to reach 200,000+ units per year by 2023. Our goal is to become the clear No. 2 electric vehicle maker in North America within the next couple of years and then challenge for no. 1 as the huge investments we are making in EV and battery manufacturing come onstream and we rapidly expand our EV lineup...We're completely oversubscribed with our battery-electric vehicles, Lightning especially" - Ford (F) Spokesperson Emma Bergg
Nuggets of Wisdom:
It’s hard to maintain culture as you scale
"Where we're more vulnerable is if we can't keep this special culture going. So first, we talk about it almost every week to the whole firm. I've gone around and visited every group at the firm because we've got very substantial hiring stuff we're doing and saying, "You can only do this if we can preserve our culture. And so let's figure out, given the level of growth, how we're going to do that." So I have a meeting today at 2:15 with a thick document because we're growing at such a rate that you can't just mentor or take onboard what you did before. And so we're involving other layers of the firm besides just simple onboarding. But how you make the firm fun and minimal. And we're trying to codify this so that all new people get to be surveyed, in effect, every 2 months to see how they're doing. We have assignments for everybody at the firm and what we want them to do to make sure people are comfortable and we're passing on culture. So we've set up a unique culture and we are dedicated to protecting it." - Blackstone (BX) CEO Stephen Schwarzman
“Culture eats strategy for breakfast because, without the right culture, strategy means nothing. And focusing on culture will drive performance. We know that culture drives performance and financial value. A PwC study showed that 65% of employees say culture is more important to performance than strategy. It has proven that companies that succeed in aligning culture and strategy will yield 60% higher shareholder returns. And the 2019 study showed that purpose-driven companies are 30% more innovative and have 40% higher levels of workforce retention than competitors” - Laurentian Bank of Canada (LB) CEO Rania Llewelly
There’s nothing worse than disappointing your customers
"All the times I’ve gotten into the line at Disneyland it says when it says 45 minutes, and they are always 45 minutes. That’s where they put the sign up. ...you always get on the ride somewhere around 39 to 43 minutes. So they never make you wait longer than 45 minutes. And what we’re trying to do is be Disneyland. Don’t say 4 weeks if it’s going to be 5, if there is a risk of 5. If there is a risk of 5, say, 6. And if we lose a little demand that might happen, but there is nothing worse than disappointing consumers" - RH (RH) CEO Gary Friedman