Above-Trend Inflation
Will the Fed act?
Succinct Summary:
Companies are reporting being aggressive on price increases. So far, the consumer seems unaffected with demand holding up well. The key question going forward is if this will continue to be the case and what the Fed will do about all this.
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Macro:
Consumers still have lots of money and are spending it
"So we went out a week or so ago and said January is up nearly 15 to 20%. We’re seeing that continue into February. And despite what you just said, restaurant spending is up, which as it starts to normalize, so we’re seeing consumers spend across the board. So number one, consumers are spending. The money moving out of their accounts, which is a lot of money at Bank of America over the course of the year – $3.5, $4 trillion is growing at 15% in February so far. It grew faster than that in January. The good news is that transaction volumes are up, so this isn’t all inflation-driven, which might be the question. The second thing is that consumers have more money in their accounts. So the month of January, their accounts grew again, especially for consumers that carry lower balances. That sort of belies the question of well, when stimulus runs out people are going to drain their accounts. They haven’t yet. They’ve gone up for the last six or seven months. So that’s good for the economy. But also that means that the economy is very strong." - Bank of America (BAC) Chairman & CEO Brian Moynihan
"Consumer demand during the quarter was strong." - Walmart (WMT) CEO Doug McMillon
Companies are aggressively pursuing price increases as we move into an above-trend inflation environment
"Looking at price versus cost, we continue to experience high inflationary impacts for material cost, labor, and freight. The pricing that we put in place last year is currently lagging inflation. That coupled with productivity challenges is a major contributor to margin declines in Q4. We implemented additional price increases during the fourth quarter and have already announced another price increase for Q1 2022 that goes into effect this month. We are aggressively pursuing price across all products and in all channels to offset unprecedented inflation and expect price to exceed inflation in 2022." - Allegion (ALLE) CEO Dave Petratis
“...the environment that we're shifting into, given we're moving into an environment with probably above-trend inflation for a period of time, actually is going to force companies to think about their strategic positioning differently. I think that's the biggest thing that shifted at a high level is we're moving from an environment of very, very easy money and below-trend inflation, which really has been a long-term trend to an environment of tighter money at above-trend inflation.” - Goldman Sachs (GS) CEO David Solomon
Price increases aren’t affecting demand yet
"Inflationary pressures continue but have yet to curtail demand, so we remain optimistic about the underlying strength of the industry. we've really not seen any decline and rather pools are getting fancier, they're not into value engineering…An $80,000 pool doesn't buy you as much as it did a few years ago, but it really has yet to curtail demand." - Pool (POOL) CEO Peter Arvan
“...quite frankly, I think the consumer and with the general nature of the inflation in the economy and the amount of money they have is a good indicator that they're willing to take those higher prices, not only with Wingstop but with many other retail and other occasions." - Wingstop (WING) CEO Charles R. Morrison
Will consumers eventually start to take notice?
"When there are other entertainment opportunities for disposable income, will people all of a sudden look at restaurant prices and say, "This is crazy" because honestly, they are crazy in many instances. So we're increasing prices modestly." - Ark Restaurants (ARKR) CEO Michael Weinstein
“Inflation has the risk of being a real headwind to growth” - Goldman Sachs (GS) CEO David Solomon
Companies can’t find people
"We have labor problems everywhere. We can't find people. Our labor costs are going up significantly, well beyond minimum wage for certain functions that used to be minimum wage - - We just can't find people. The people we find if we find them are not trained to the extent we would like them to be trained. And they may work 2 or 3 weeks and leave. It's very, very hard to find competent people." - Ark Restaurants (ARKR) CEO Michael Weinstein
"We see labor constraints as continuing to be one of the biggest limiting factors on pool construction and remodeling growth, but again, are encouraged by signs of our contractor customers line to expand the size of their crews in many areas. Labor will continue to be a limiting factor on how fast the industry can grow whether we're talking about new construction or remodeling their service, skilled labor is required and there's a war for talent. This war also affects our suppliers and their suppliers, which is continuing to impact the product availability for the coming season." - Pool (POOL) CEO Peter Arvan
"With our current oil sand demand and low-cost provider status, we could gain another 10% to 15% in our oil sands business by increasing fleet available. This is because our availability is limited by the available maintenance workforce. Maintenance labor, specifically heavy equipment technicians are in high demand. And in some areas such as the Fort McMurray area are an extremely low supply. This labor supply issue affects anyone working in that area. Supply of additional field mechanics into our workforce, through our union or even support from our OEM vendors, is minimal if not nonexistent." - North American Construction Group (NOA) CEO Joe Lambert
The Fed’s actions from here are important
“I think one of the uncertainties that no one can know is how are we going to navigate from a monetary policy perspective to kind of navigate and rebalance on inflation. That's an unknown. If we really screw it up, I don't mean we, if the world really screws it up, it's going to be a headwind to growth and there'll be a consequence to that. I mean, I'm a great student of the '70s, and I'm not saying we're going back to the 1970s, but everybody is used to asset appreciation in everything that we do, we might have a period of time where there's less asset appreciation. If you own equities during the 1970s, from 1970 to 1980, you owned U.S. equities. The U.S. equity is worth 50% less in 1980 than they were in 1970. Nobody remembers that. Now I'm not saying we're going back to that. But how we navigate those policy decisions from here will have an impact on the environment” - Goldman Sachs (GS) CEO David Solomon
"So they are going to bring the balance sheet down. You got to remember it really only got down to about 4 trillion if I remember right, you know, in ’19 and so it doesn’t come down back to the 700 billion it was before the financial crisis, because the economy is a lot bigger and the different things that go through it are a lot bigger. So there’s a sort of a fundamental stopping point. They’ll run it down" - Bank of America (BAC) Chairman & CEO Brian Moynihan
International:
Munger loves investing in China
"Well, of course, only the future knows who's going to be right. But China is a big modern nation. It's got this huge population and this huge modernity that's come in the last 30 years. And we invested some money in China because we can get more value in terms of the strength of the enterprise and the price of the security than we could get in the United States. Other people, including Sequoia, the leading venture capital firm in the United States, have made the same decision we have. But I'm sympathetic to Gundlach. He's nervous. He doesn't have to join us. Different folks have different opinions. I feel about Russia the way he feels about China. I don't invest in Russia. So I can't criticize Gundlach's point of view. It's just I reached a different conclusion. In China, the companies we invest in are stronger relative to their competition and priced lower. That's why we're in China." - Berkshire Hathaway (BRK.B) Vice Chairman Charlie Munger
The Middle East and Africa are doing well in terms of travel and bookings
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Financials:
Charlie Munger is not a fan of crypto
"Well, I certainly didn't invest in crypto. I'm proud of the fact I've avoided it. It's like some venereal disease or something. I just regard it as beneath contempt. Some people think it's modernity and they welcome a currency that's so useful in extortions and kidnappings and so on and so on, tax evasion. And of course, the envy, everybody has to create his own new currency. And I think that's crazy, too. So I'm not having -- I wish it had been banned immediately. And I admire the Chinese for banning it. I think they were right, and we've been wrong to allow it." - Berkshire Hathaway (BRK.B) Vice Chairman Charlie Munger
Technology is leading to fewer jobs at Bank of America
"When I became CEO, you know, now 12 plus years ago, we had 280,000 people. We went up to 305,000. We’re right about 208,000 people and that is by just applying technology over and over and getting more and more effective and efficient across all those timeframes." - Bank of America (BAC) Chairman & CEO Brian Moynihan
Consumer:
Housing inventory is still very low
"I think the supply challenges are so much bigger than what we just talked about around months of inventory. This is at a very municipal-level zoning and an implementation level to really course correct and be able to create ease of supply to come into the marketplace. So we would expect home prices to generally stay elevated given that interest rates are, by and large, still really low even though they're going to creep up. If you look at it on a relative basis, when I bought my first home in 2003, I was paying 6%. Today, that rate is somewhere in the high 3s." - Invitation Homes (INVH) CEO Dallas Tanner
“New construction activity had a robust year in 2021 and would have been even stronger if unimpeded by labor availability and supply chain inefficiencies. -- with all-time record low existing housing inventory in the U.S., inventory is turning over nearly as fast as it is becoming available. There are simply not enough homes to purchase” - Fortune Brands Home & Security (FBHS) CEO & Director Nicholas Ian Fink
Redfin expects the problem to ease some in the spring
"Of the listings that debuted in the middle of January, 58% went off the market in under 2 weeks, an all-time high. We thought the market was wild in mid-January last year when that number was 51%. The problem is with individual homeowners, not builders. Despite builders’ supply chain problems, more than 1/3 of the single-family homes for sale in December were new, a record. The year prior, it was 25%, also a then record -- in the bubble years before the great financial crisis, new construction never accounted for more than 20% of U.S. home sales. And it's not just the sellers who are increasingly institutions. It's also the buyers Investors accounted for 18% of fourth-quarter U.S. home purchases, yet another record. Prior to the housing market's decade-long bull run, investors really accounted for more than 10% of home purchases. With inventory scarce and sellers eager for the certainty of cash offers, retail homebuyers have been struggling to compete with investors. We expect inventory to ease in the spring. The housing market has become more seasonal almost every year over the past decade with a lower proportion of the year's listings in the winter and a higher proportion in the summer...we believe that the inventory crunch will ease in the summer as rates rise, but may not go away in 2022. We're well aware of the economic pressures on home buyers but so many people are still so desperate to move that sales, for now, are still mostly constrained by inventory, not prices or even mortgage rates." - Redfin (RDFN) CEO Glenn Kelman
Wingstop is growing its ghost kitchen locations
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There’s still a lot of room to move advertising budgets to streaming
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Subscription fatigue is setting in. More consumers will seek ad-supported content
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Technology:
Tech companies are focused on privacy
"So in order to understand that, though, of course, you just have to acknowledge that Google is getting hit from all sides as it relates to antitrust scrutiny as well as privacy scrutiny. So this move by Google is not a surprise. It's not like Android could just sit around and be the only platform not to pull back on implicit data sharing. But they've created an amazing transition period, which I think is very good for the industry and something that they've learned from, I would say, Apple's mistake on this. And the rhetoric is really focused on improving the Internet. And a lot of things that they are saying now are different than things as they've said in the past." - Trade Desk (TTD) CEO Jeffrey Green
Google is phasing out cross-app ad tracking on Android devices following in the footsteps of Apple
"Today, we’re announcing a multi-year initiative to build the Privacy Sandbox on Android, with the goal of introducing new, more private advertising solutions. Specifically, these solutions will limit sharing of user data with third parties and operate without cross-app identifiers, including advertising ID...The Privacy Sandbox on Android is an important part of our mission to raise the bar for user privacy while giving developers and businesses the tools they need to succeed on mobile. We look forward to working with the industry on this journey." - Alphabet (GOOG) VP, Product Management, Android Security & Privacy Anthony Chavez
Nvidia terminated its efforts to purchase ARM
"Last week, we terminated our efforts to purchase Arm….For over a year, we worked closely with SoftBank and Arm to explain our vision for Arm and reassure regulators that NVIDIA would be a worthy steward of the Arm ecosystem. We gave it our best shot, but the headwinds were too strong, and we could not give regulators the comfort they needed to approve our deal." - NVIDIA (NVDA) CEO Jensen Huang
Industrials and Transport:
Walmart noted some improvements in the supply chain
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Governments are realizing that supply chains are a geopolitical asset
"...over the last 30 years, we saw that we went from 80% of semiconductor manufacturing in the West in U.S. and Europe to 80% in Asia, right? And all of a sudden, we realized that we had the drifting of our entire supply chain for something more important to humanity, where the oil reserves are now highly concentrated and not in any way resilient. My moonshot is that by the end of this decade, the U.S. would have gone from 12% to 30%, Europe from 9% to 20%. It will have gone from 80% to 20% to 50% by the end of this decade and we've seen extraordinary tailwinds to help to reestablish this geographically balanced, more resilient supply chains for the future. A bet on Intel is a hedge against geopolitical instability in the world. And government leaders are recognizing how vital semiconductors have become to every aspect of the economy, every aspect of national security. The world has woken up. And both the chips and the COMPETES Act in the U.S. are now headed to conference process to finish and enable this $52 billion incentive of fuel to drive the semiconductor industry. Just last week, the EU issued their Chips Act, which is moving quickly." - Intel (INTC) Pat Gelsinger
Container costs are 4x higher than they were at the start of 2021
“For perspective, in Q1 2021, our global blended inbound cost of container was in the $3,500 to $4,500 range. Today, we are paying between $14,000 and $16,000 on average per container, a year-over-year cost escalation of 3x to 4x…We are not expecting conditions to normalize during this fiscal year” - Weber (WEBR) CFO William J. Horton
There are signs of continued healing in travel demand after Omicron
"Group cancellations ticked up late last year and early this year due to Omicron mostly for arrival dates in January and February, but those cancellations have slowed more recently. New group bookings have also been gaining momentum, especially in the year for the year." - Marriott International (MAR) CEO Tony Capuano
"Bookings for March and onward continue to grow at a strong pace. In fact, gross new group bookings in January for events that will be held this year were up 14% versus the same comparable period in 2019" - Hyatt Hotels (H) CEO Mark Hoplamazian
Driving activity has rebounded but rush hour has changed
"Driving activity continues to rebound as measured across a number of different dimensions, including simply vehicle miles driven as measured by the U.S. Department of Transportation and the UK Department of Transport Statistics and gasoline consumption and a host of other statistics as well. We note, however, that the character of driving has evolved as well. With downtown office occupancy remaining quite low, driving is less focused at rush hour and more distributed over the course of the day. There are a number of other phenomena that have emerged with COVID-19 with nuanced outcomes like that one." - Copart (CPRT) President Jeff Liaw
H2 2022 might see the world being more open
"...my own view as we get to the second half of the year, I think you're in an entirely different environment across the globe, meaning in the first half of the year, you're going to see things evolving at a slightly different pace. But I think when you get to the second half of the year, every -- the whole world broadly is going to be a lot more open than anything we've seen in 2 years." - Hilton (HLT) Chris Nassetta
Energy & Materials:
Coal demand could be stronger than people expect
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Iron ore demand was high in 2021
“Iron ore trade expanded by 1.6% during 2021 and is projected to expand by 1.3% during 2022. China steel production decreased by 2.2% during 2021 as the government imposed strict production curves during the second half that is expected to last until the end of the Winter Olympics. Steel production from the rest of the world increased by 13.5% during 2021, leading to tighter iron ore supplies and record-high prices. Brazil's iron ore exports continue to recover from the 2019 disaster and increased by 5.1% during 2021. The Chinese government announced last week that the deadline for the steel sector to hit peak emissions has been delayed by 5 years to 2030. This is a positive development for iron ore trade prospects during the next 5 years” - Star Bulk Carriers (SBLK) Founder, CEO & Director Petros Alexandros Pappas
European energy prices have risen steeply
“While the second half ended with unprecedented energy inflation in Europe and significant raw material price increases that adversely impacted all 3 segments. As we closed out the fourth quarter, continued escalation in energy prices in Europe, raw material inflation, supply chain disruptions, and pockets of pandemic-driven labor constraints negatively affected our financial results” - P. H. Glatfelter (GLT) Chairman, CEO & President Dante C. Parrini
"I’m sure that most of our listeners are aware of the steep rise in European energy prices over the last few quarters…Further, we believe that the conditions that are giving rise to the current power prices are not likely to abate in the near term. Germany remains on pace to decommission its remaining nuclear power plants and the perceived natural gas supply threat amidst tension between Russia and the Westbound [ph] do not seem to offer an opportunity for a quick retreat of power prices." - Mercer International (MERC) CEO David Gandossi
Nuggets of Wisdom:
Managing expectations is key to a balanced life
“Well, I always say the same thing, realistic expectations which is low expectations. If you have unreasonable demands on life, you're almost -- you're like a bird that's trying to destroy himself by batching his wings on the edge of the cage and you really can't get out of the cage. It's stupid. You want to have reasonable expectations and take life's results good and bad as they happen with a certain amount of stoicism. There'll never be any shortage of good people in the world. All you got to do is seek them out and get as many of them as possible into your life and keep the rest the hell out” - Berkshire Hathaway (BRK.B) Vice Chairman Charlie Munger
“Last year, I was talking to our board and I was like, I see this as clear as day: this thing is going to be one of the few $1tn companies in 15 years, And they said, ‘Don’t say that again. It makes you sound like an idiot.” - Peloton (PTON) CEO Barry McCarthy
We like to win
"I'm here because I want to win, I don't need to be here for a paycheck, I have enough money, but like anything I'm here to make money and make more money and I'm going to make more money for everybody that's on this call. So we're going to take the USD33 and we're going to get to USD100 and we're not going to stop until we get there. And then we get to USD100 then we'll align our goals but that's where I sort of feel the opportunity is here and where we want to go." - GFL Environmental (GFL) CEO Patrick Dovigi