In this episode, we discuss our key takeaways from the Q4 2022 earnings calls.
The episode is based on yesterday's newsletter which is available on Substack.
A transcript of this podcast, with relevant images and quotes, is available for all subscribers after the show notes below. Our podcast is available on Apple Podcasts, Spotify, Google Podcasts, YouTube, and Amazon Music.
Show Notes
00:00:00 Introduction
00:00:07 The Banking Crisis
00:02:55 Consumers Are Still Spending
00:04:22 The Era of AI
00:08:40 Earnings Season Begins Soon
00:10:11 Conclusion
Introduction
[00:00:00] Scott: Welcome everyone to a new episode of The Transcript podcast. You've got me, Scott Krisiloff, I'm editor of The Transcript, along with Erick Mokaya, who's our lead author.
The Banking Crisis
We sent out our quarterly letter last week, so each quarter we like to do a letter where we synthesize the things that we've been reading throughout the last three months and think about where we are relative to the economy and catalysts, and then also look forward to the things that we're looking for in the next earning season, which is coming up soon. And so we wrote this letter. I think the biggest takeaway from me in the macro section is just the uncertainty that was created by the financial stress that happened around SVB and First Republic and Credit Suisse, et cetera in the last few weeks. And then the way that impacted the Fed. The uncertainty makes it so that we don't have as much visibility into what the Fed is planning to do from an interest rate standpoint which could affect financial markets. So I think everybody's in a bit of a wait-and-see mode which is what the Fed also talked about at their last meeting. Erick, any thoughts or new things that have come to you in the last week?
[00:01:05] Mokaya: I think we are where we were last week. Nothing much in terms of new data. I mean as we're doing this quarterly letter, I go back until January to date, just see where we are in terms of how the newsletter has developed over time, looking at the quotes and stuff, and this is very interesting to see how much stuff we covered at The Transcript and how themes have developed from January to February to March. So in January, everybody was worried about how high inflation is. In February, still a bit of inflation, but it was coming down. But then suddenly in March, the bank situation heightened the whole conversation shifted to ‘Have we raised rates a bit too much to break the system?’. I think you captured it well. They're still waiting for more data. I think this earning season that starts with banks next week will be very key in terms of seeing where some of the banks are in terms of what happened in the last bits of the quarter. So I think that's my key picking that we still don't have enough data to see which side now is more overwhelming. Is it the inflation side or the banking stress side and what the Fed is going to do about it? So I think that's something I picked up. Any other thoughts from the newsletter at least?
[00:02:15] Scott: Yeah, it certainly doesn't feel like the banking stress is as prevalent now as it was a couple of weeks ago. It feels like it was a hurricane that kind of blew through and passed through. I think that people still remember Bear Stearns in 2008 was just the beginning of the financial cascade, not the end of it. And while it feels like things are a lot better now, there's certainly the chance that we could get a second wave of financial stress. It's not clear to me what the catalyst would really be in order to create that financial stress in the system or perpetuate a second wave of banking stock declines or anything like that.
Consumers Are Still Spending
And so really it's relative to that, it's what's the underlying inflation trends, and that goes back to what we were observing at the beginning of the year where you had goods inflation coming down. You have services inflation that was still persisting. But you have some cooling trends in the economy. You have labor markets that weren't quite as tight as they had been, and so that may make it so that inflationary pressures are starting to come off. So I think the other thing that we wrote about in the letter is that consumer spending has stayed really strong throughout the year.
[00:03:31] Mokaya: On consumer spending, I think it's the same thing I noticed also. I think there's a quote there, which you referenced JP Morgan talking about cash buffers, at least for the lower-income consumers starting to fall back to the pandemic levels by Q3 this year. I think what we're seeing so far in terms of reading through from January to March is that the consumer is still spending. They're still tapping into these cash savings that they have saved during the pandemic. They're still spending, especially on services still, things to do with travel and entertainment. They are a bit pressed. I think we've seen a couple of retailers mention that but they're still spending nonetheless. The banking stress has so far, and as you say, maybe it blew up too quickly. The consumer didn't even notice or feel it especially since depositors were met whole. So I think generally consumers are still spending and spending well, so generally, I think that's key picking from the consumer side.
“...recent data suggest that consumer spending isn't slowing that much, that the labor market continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought." - US Federal Reserve Governor Christopher Waller [March 6th: Waiting for More Data]
The Era of AI
I think one of the things that also came up in looking at the last three months of our earnings calls transcripts is the pick up in terms of the language in AI in terms of the large language models and how they're being applied to search, to various products around the world in terms of companies like Microsoft and Google picking up a fight. So I think AI is one key term that has come up in the past two or three months and is expected at least to be one of the highlights in terms of discussion points in this earnings season. Do you agree with that? I think you're very close and you're very excited about this too. So maybe you have more points to add to that.
[00:05:01] Scott: Yeah, I'm honestly finding it a little bit difficult to focus on macroeconomic trends outside of AI. I know that we're in this really choppy economic environment where we may be headed towards a recession and there's dynamics in monetary policy and financial stress and all that. But all of it seems somewhat unimportant compared to what's going on in AI right now and the impacts that could have on the economy. Much more positive than negative to me, I think. But it's mostly just displacement in terms of opportunities. If these large language models just get marginally better, honestly, even where they are right now they can be very helpful in understanding pretty much most things that you require learning. Things that you don't understand right now that you need to understand better. I was doing a research project last week and the first place I went to was chatGPT and started asking questions about this particular subject that I needed to have a better understanding of. And it got me up the curve much faster and much more tailored than Google would've done if I would've done that in the past. And chatGPT for most of us is still not even connected to the internet. Like most people don't have access to the plugins yet. And once you have the plugins and you're connecting to the internet and you're able to interface with this large language model that's chatting with you it can really suck the gravity out of certain things that touch the internet, historically, up until six months ago the parts of the economy that were the premier parts of the economy. What happens to Facebook in a world where you're mostly interfacing with a large language model? What happens to Google? What happens to Amazon? These companies are fundamentally web browser companies. What happens if the way that we interact with the world changes away from the web browser, changes towards some sort of more natural language interface? There's massive displacement and economic value that can come from that.
[00:06:58] Mokaya: Definitely, and I think every company for the last two or three months, ever since chatGPT was launched and then Bing launched its chatGPT-powered new Bing, what you've seen is that every company is taking time to actually analyze what does chatGPT and AI and GPT4 mean for me as a company? What parts of our company can we make more efficient? I've been spending a bit of time also in chatGPT Plus myself the past couple of weeks, and I was just testing it and it wrote up an entire piece of code on Python for something I wanted to do. I imagine that would've taken me a lot of time back and forth in terms of writing the script, going online, searching for a small solution to a really particular problem that you have for yourself. But now by interacting just with chatGPT, I was able to create an entire code and plug it into Python and I'm done with all the work that I needed to do at the end of the day. So I think that kind of efficiency, that's what you're looking at a lot of companies doing. One of the other gleanings that you get from reading the transcripts is that companies are investing more in AI. Even tech companies, even though they're cutting every other aspect of their growth, one area they're not cutting on is the investments in AI and especially investments in the kind of things they need to be able to work out AI. And I think that's one of the things that you noted there is that one of the winners in the public markets appears to be Nvidia, and Nvidia is actually the best-performing stock in Q1 2023 so far. Very interesting development and one that we'll definitely be watching this earning season. But beyond AI, and I'm sure that you want to discuss more on AI, is there anything else that you are tracking as we start the earning season, especially for banks? Anything that you're watching?
"Believe me, I’ve been at it for 20 years, and I’ve been waiting for it. But look, at the end of the day, they’re the 800-pound gorilla in this. That is what they are. And I hope that, with our innovation, they will definitely want to come out and show that they can dance." - Microsoft (MSFT 0.38%↑) CEO Satya Nadella [Feb 13th: Let’s dance]
“...we're on the verge of launching a number of LLM-based products and services, you can think of it as a portfolio." - Alphabet (GOOGL 1.55%↑) CFO Ruth Porat [March 20th: Run on the Bank]
Earnings Season Begins Soon
[00:08:40] Scott: Yeah, I think it's what you mentioned earlier on the banks, it's seeing to what extent the hurricane that blew through the financial system ended up impacting them and the quarterly numbers. What happened to the deposits at a bank like First Republic, for instance? I think it was well understood which banks were under attack, so to speak, but how it leaves their balance sheets looking and what sort of impairment and whether or not there would be further surprises for equity markets in terms of how impacted they were, those are the key things that we're looking for in earnings calls over the next couple of weeks. And then what's going on with the consumer? Is the consumer starting to spend less? Then they were as judged by whatever the credit card companies are seeing. Those would be big data points for me. How about you?
[00:09:26] Mokaya: Same. I think this quarter you expect investors to pay more attention to available for sale and held-to-maturity securities more than usual. I think they have become the lingua franca now, the common talk in earning calls now. So you expect more questions in that regard. Of course, you also want to see how supply chains are developing so far. I think they've been easing, so I think a bit of a continuation of that. In the international markets, of course, the deglobalization, seeing how companies are adjusting to that in terms of where they're placing their factories and all. So a couple of things to watch here and there. And of course, how the labor markets are developing in different pockets of the economy. Any thoughts on that?
[00:10:05] Scott: No.
Conclusion
[00:10:11] Mokaya: It's ok. On that note, I think we can close there for this week. Thank you so much for joining us. It's Easter this weekend. So we'll have a newsletter next week on Tuesday and our podcast again on Wednesday. So thank you so much for joining us. See you again when the season starts and we are pumped up for this one because it's a very exciting one ahead.
Reviewing Q4 22