Let Them Play Munis
History suggests that rising rates lead to recessions
Succinct Summary:
Prices are going up everywhere and consumers have come to expect inflation. The Fed recognizes that inflation is running far too high and that an inflationary psychology has taken hold but still plans to take a measured approach to interest rate increases. History suggests that rising rates lead to recessions.
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Macro:
Prices are going up everywhere
“...you have this kind of impact from freight and raw materials and price increases from suppliers and so on and so forth, I mean, you can say, oh, we're big. We're – we can absorb it. That's kind of BS on what's happening in the world today, like prices are going up everywhere. And if they're not, earnings are going to go down." - RH (RH) CEO Gary Friedman
"The environment is all of us are experiencing as consumers and they are both ourselves and our families is definitely one of high inflation and we're experiencing the highest inflation in fact in the last 40 years, and who would have who would have ever thought of that." - McCormick (MKC) CEO Lawrence Kurzius
Companies are being forced to raise prices or reduce the quality
"It's everybody. So either people are going to do stupid things like take quality down to make their goods like -- look like it's better value or they're going to not -- they're going to have to take prices up and where they won't take prices up and they'll hurt their margin profile is going to change. But it's not just us. It's everybody I know in every industry -- we're probably better positioned to take prices up than others because we've been taking prices up for years" - RH (RH) CEO Gary Friedman
Customers have come to expect inflation
"Every customer right now understands when you come to them and talk about the need for a price increase. Everyone gets it. However, our customers are getting squeezed. And the call out, the cry for help is greater now than ever for saying - - Look, if you're going to come in with a price increase, help me offset it." - MSC Industrial Direct (MSM) CEO Erik Gershwind
“...it's very hard to raise prices. In this cycle, we found that raising prices was not easy, but it was understood. So it may appear to be a headwind is actually possibly either no wind or tailwind on that area” - Flexible Solutions International (FSI) President & CEO Daniel B. O’Brien
Some executives think that the Fed is out of touch with reality
"I just wonder if anybody the Fed has picked up the phone and called a business person and said, hey, what do you think is happening with inflation? How's ocean rates? How is this? How is that? I mean, I think, I don't think anybody really understands what's coming from an inflation point of view, because either businesses are going to make a lot less money, or they're going to raise their prices. And I don't think anybody really understands how high prices are going to go everywhere, in restaurants, in cars and everything. It's -- and I think it's going to outrun the consumer. And I think we're going to be in some tricky space." - RH (RH) CEO Gary Friedman
But rising golf club dues have put the Fed on high alert
"Inflation is running far too high, and I am acutely concerned about this. The bottom line is that generous fiscal policies, supply-chain disruptions and accommodative monetary policy have pushed inflation far higher than I—and my colleagues on the FOMC—are comfortable with. I’m also worried that inflation expectations could become unmoored -- One of our contacts, for instance, mentioned whopping membership fee increases at his golf club, suggesting this summer may be a good time to play at your local muni instead” - Federal Reserve Bank of Philadelphia President Patrick Harker
The Fed may move faster, but still methodically
"I am very open to going faster. Given the level of uncertainty that we are facing in this economy, I wouldn’t take 50 basis points off the table for the next meeting. I am not committing to that right now..I expect a series of deliberate, methodical hikes as the year continues and the data evolve” - Federal Reserve Bank of Philadelphia President Patrick Harker
History shows that if the Fed raises rates 4-5 times we will have a recession
“...it's clear now to everyone that inflation isn't going back to 2% even though Janet Yellen, not too many weeks ago, when it was 4% or 5%, said it was going to 2%. And two weeks later, it went to 7.5%, and now it's 7.9%. And we've got Jerome Powell saying that they waited too long. And now we're going to have two years of interest rate increase -- rising interest rates -- How aggressive is the Fed going to be? Not sure. There are things we know, and I don't mean to be a pessimist, but history would tell us four to five times the Fed raises interest rates over a sustained period, we have a recession. And I don't need to tell you guys that math. It's just a fact. So look, we tend to -- as I like to say, pray for peace and plan for war." - RH (RH) CEO Gary Friedman
There are some anecdotes of softening
"Looking at current trends, we have seen a deceleration in sell-through at retail over the last several weeks coinciding with these growing pressures on the consumer and are assuming a continuation of these trends in our 2022 revenue guidance. These dynamics will disproportionately impact first quarter revenue growth, which is our strongest growth quarter last year." - Traeger (COOK) CFO Dominic Blosil
"While first quarter sales and margin trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed" - RH (RH) CEO Gary Friedman
"So as I said in the earnings that we sent out this morning is that, we don't expect that the number of shipments will continue as they have. There might be some demand destruction due to these increased prices, we have just got a new container line rates with significant increases from the container shipping lines, which we then need to push on through to our customers. But some of those customers are not able to pay for that, just the value of the product is – we can’t justify those kind of logistical cost" - Stolt-Nielsen (SOIEF) CEO Niels Stolt-Nielsen
But others still see robust demand
"Turning now to the external landscape. The story remains largely unchanged: strong underlying demand, tight supply chain constraints, even tighter labor constraints and rapid inflation. All of this is evidenced in public indices such as IP readings, which remain at mid-single-digit growth levels, sentiment surveys like the MBI and feedback from our customers. With some very limited exceptions like automotive, the order backlog and outlook for most customer segments remains robust." - MSC Industrial Direct (MSM) CEO Erik Gershwind
It’s been a long time since we were in an environment like this one
"How old was everybody in this call in 1980 when the federal funds rate was 20%? I'm not trying to scare anybody. But almost everybody on this call, look, in 1980, like I was a kid, I didn't know what I was doing. I didn't have wisdom then. I just don't think there's a lot of people in business today, except for Warren Buffett and Charlie Munger and I don't know, George Soros and there's a handful -- I just think a lot of people haven't seen this." - RH (RH) CEO Gary Friedman
Financials:
Mortgage volumes are expected to decline in 2022
“With rapid changes in U.S. interest rates, rising inflation and associated reductions in 2022 loan industry forecasts that commenced in the fourth quarter of last year and has continued into this year, loan originators are now dealing with razor-thin margins and trying to adapt to a new normal. In particular, mortgage volume is projected to be down approximately 35% in 2022. And refinance volume is projected to be down 60% to 70% in 2022 as compared to 2021” - Blend Labs (BLND) President & Director Timothy J. Mayopoulos
The current stock market benefits companies that 1) have cash flows and 2) are well capitalized
"I'll just state the obvious that this kind of market environment favors 2 groups, those that are of companies, those that are cash flow positive, which we are not yet and those that are well capitalized. And we are well capitalized. That gives us a powerful strategic advantage over the coming months, which we plan to use to our advantage." - Ginkgo Bioworks (DNA) CEO Jason Kelly
Munger is no longer Chairman at Daily journal
“Daily Journal Corporation is pleased to announce that Steven Myhill-Jones has been selected as the company’s new Chairman and Interim Chief Executive Officer effective today. Mr. Myhill-Jones will succeed Gerald Salzman as CEO. Mr. Salzman is retiring after more than 44 years of dedicated and multi-faceted service to the company. Charles Munger will relinquish the chairman title, but will continue serving as a director, and as such will continue to pay particular attention to matters with which he has been involved in the past, including the company’s securities portfolio.” - Daily Journal (DJCO)
Consumer:
Consumers say that they’re cooking more at home
"...88% of consumers say they're going to cook as much at home or as much or more at home than they did during the pandemic. To the extent there's economic pressure on us from a recession, that also reinforces the whole cook at home. And we know, in particular, our categories and our brands performed well during processionary periods during both of the last 2 recessions." - McCormick (MKC) CEO Lawrence Kurzius
The internet runs on recommendation engines
"When you watch TV on Netflix, you're using recommendation engines. When you walk buying things on Amazon, you're using recommendations. Obviously, this is the page personalized for me, who does it like good, live saver. When you listen to music on Spotify, you're using recommendation engines. When you're just bored and you open TikTok using recommendation engines -- The average person consumes 8 hours of digital media every day. That's a lot. That's thousands of moments. But some of those moments happen to Walled Garden.” - Taboola.com (TBLA) Founder, CEO & Director Adam Singolda
“We now have the ability to write software, we now have the ability to partner with computers to write software, that can solve many types of intelligence, make many types of predictions at scales and at levels that no humans can. For example, we know that there are a trillion things on the Internet and the number things on the Internet is large and expanding incredibly fast and yet we have this little tiny personal computer called a phone, how do we possibly figure out of the trillion things in the internet what we want to see on our little tiny phone? Well, there needs to be a filter in between, what people call the personalized internet, but basically an AI, a recommender system. A recommender that figures out based on the nature of the content, the characteristics of the content, the features of the content, based on your implicit and your explicit and implicit preferences, find a way through all of that to predict what you would like to see. I mean, that’s a miracle! That’s really quite a miracle to be able to do that at scale for everything from movies and books and music and news and videos and you name it, products and things like that. To be able to predict what Ben would want to see, predict what you would want to click on, predict what is useful to you” - Nvidia (NVDA) CEO Jensen Huang
SVOD subscription growth is slowing and churn is rising
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But there is still room for growth in ad supported content. An underfollowed microcap company could be a beneficiary
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Direct to consumer commerce has taken over
"Another big trend is direct-to-consumer. Nike, for example, now recently showed that 40% of their revenues are generated from direct-to-consumer commerce. And this is a big trend because a direct relationship with customers means a more loyal relationship, often a better relationship, more understanding so you can personalize the offering to your customer. But again, people that shop with you online, in-store, they tend to spend more -- So what this means is that the relationship between brand and consumer becomes more and more important, but also companies want to really control the value chain themselves. And again, having your own direct relationship with a customer that really helps. In research that we do with our customers, it shows that 7 out of 10 consumers really want these new online commerce journeys to stay." - Adyen NV (ADYEN) Company Representative
“ I foresee more and more manufacturers coming to Market, looking to adopt a new D2C, direct-to-consumer strategy to increase margins and profitability” - Verb Technology Company (VERB) CEO Rory J. Cutaia Founder,
“Quick commerce” is a growing trend
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Technology:
The Ukraine-Russia war is impacting semiconductor supply chains
"The global semiconductor supply chain is experiencing pressure due to impact of Russia's invasion of Ukraine. The region is an important source for the global supply of noble gases and other critical minerals that are used in semiconductor manufacturing. We have strategically diversified our supply chain over the last several years and maintained appropriate inventories of materials and noble gases. We currently do not expect any negative impact to our near-term production volumes because of the Russia-Ukraine war, but we do expect an increase in our costs as we secure supply of certain raw materials that could be at risk." - Micron (MU) CEO Sanjay Mehrotra
Will AI replace truck drivers or investor relations first?
"I think I joke around with people sometimes I think Jim wants to have a chatbot for IR. So, get rid of me and have you guys kind of talk to a chatbot. But I don't know we will ever get to that point, hopefully not for my sake. But as far as automation look, I think you're right. At some point in time, will it be automated garbage trucks? I'm not sure. But I do think you'll still have a person inside that truck might not be driving it for the most part. But it'll be -- you'll have people in there just be a different type of job at that point in time. We're not looking to get rid of employees in any stretch of the imagination. We just want to make sure that those high turnover positions were able to serve our customers the most efficient way." - Waste Management (WM) Director of IR Ed Egl
"You’ll see in late June an enormous effort towards autonomous trucks that move over the highway. Not in the city, where we think our drivers are better for the pickup and delivery of the long-distance vehicles. We are a long way down the road to doing that. But we’re not going to get rid of our drivers. They’ll do the pick up and delivery and the dredge, if you will, and over time, I’m very confident autonomous trucks are on the way,” - FedEx (FDX) CEO Frederick Smith
Industrials and Transport:
Supply chains are not getting better
"...everybody thinks supply chains are getting better. I don't think we've gotten better at all. I mean it is what it is. I mean, product is on the water for a long time, getting ships into port. It's taken a long time. We've got generally about five extra weeks in our supply chain right now. That's a lot of time. It's a lot of money. And that's the average -- we're in a world that is -- it's just -- I've never seen it so chaotic, honestly, from an execution point of view, whether it's construction, sourcing, manufacturing, shifting the supply chains, freight. Everything is a little out of sync in the world right now. So -- but everybody is dealing with it." - RH (RH) CEO Gary Friedman
“Since the beginning of 2022, the container shipping market has overall continued the high level trend in 2021, and the demand was still elastic with pressure on the supply of effective fleet capacity caused by the continuous port congestion globally. Little improvement is anticipated in the tense market situation of supply and demand in the first half of 2022, and the market prospect is still cautiously optimistic in the short term. However, the repeated COVID-19 waves, global inflation, geopolitical tension and other events will bring uncertainties to the long-term performance of the market, and it is even more difficult to predict the future trend” - COSCO Shipping (CICOF)
Auto semiconductor production is still below demand
"Auto unit production remains below demand constrained by numerous supply chain challenges, including logic and analog semiconductor component shortages. The Russian invasion of Ukraine has also impacted auto builds." - Micron (MU) CEO Sanjay Mehrotra
There’s shrinking supply of belly capacity for air freight
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Travel prices are rising but demand is still robust
"If you’re planning to take a summer trip, right now prices are going up. I don’t think it’s going to turn around at all -- When you have two years of people not traveling the way they want to travel and you have a lot of savings built up in that time period, prices can be really high and people are saying, ’I don’t care. I just want to travel. I want to go somewhere" - Booking (BKNG) CEO Glenn Fogel
Energy and Materials:
Overcapacity is driving low returns in wind energy space
“...the ongoing war in Ukraine brings the energy security topic, right at the top of the political agenda, combined with one of the lowest cost of energy, demand for wind could experience significant tailwinds on top of the previous momentum. But the market environment in the short term continues to be challenging..I would say the sector in our assessment is running with overcapacity and thus in our assessment, one of the reasons for the low profitability of the sector. So I assume that capacity is not going to be a bottleneck, not an issue. It's going to be more permitting. And if permitting gets accelerated, we, as a sector, in my humble opinion, we need to be very careful to not rush in creating capacity before the demand is there because the end result is always the same, low profits” - Nordex SE (NRDXF) Chairman of Management Board & CEO Jose Luis Blanco Diéguez
Nuggets of Wisdom:
Ex-Google CEO Eric Schmidt’s biggest mistake he made as CEO was failure of Google to execute well in social media
"[When I started at Google] I didn’t understand the scale of the company, and I had no idea what was possible. I would have been suspicious if you told me [how big Google would get]. In hindsight, I wouldn’t change a thing — but we made many mistakes along the way.I think the biggest mistake I made as CEO was about social media: Google was early in social media, but didn’t really execute it very well. The timing of the entry into these about-to-explode platform markets is incredibly important. Even being a few months early makes a huge difference with the right product." - Ex-Google CEO Eric Schmidt
It takes 50 years to gain wisdom
“you kind of get into your years of wisdom in your '50s and start to get wise. I look back and go, in my '30s, I really didn't do anything. I just like worked really hard. In my 40s, I was got better. I could get shit done and kind of see a bigger picture. In my 50s, I started seeing a much bigger picture. And my late 50s and 60s, I think I've kind of gained a lot of wisdom, and I can see a much bigger playing field than I could. If somebody with 50 years old in 1980, they're 90 years old today.” – Restoration Hardware CEO Gary Friedman
Experiment more
“You need to have a higher tolerance for failure and experimentation. You have to admit that it’s challenging to communicate across different cultures and it’s always difficult to find good leaders.. You cannot build a global company sitting in your comfort zone” - UiPath (PATH) CEO Daniel Dines