Don’t Doubt the Fed
Powell unfazed by the decline in equity markets
Succinct Summary: Jerome Powell spoke last week and was the most hawkish that we’ve seen a Fed Chair in a very long time. Powell said that “no one should doubt” the Fed’s resolve and that the Central Bank will keep pushing until inflation comes down. He also reiterated that the Fed believes that the economy is strong enough to withstand less accommodative policy. He seemed unfazed by the decline in equity markets. All of this means that for the first time in over a decade, the Fed may not be so quick to rush to rescue investors from declining stock prices. Even private markets are now spooked, but the consumer remains resilient.
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Macro
No one should doubt the Fed’s resolve in fighting inflation
"Financial conditions overall have tightened significantly. I think you are seeing that. That is what we need -- we know this is a time for us to be focused on getting inflation down to 2%. We know how people are suffering from high inflation. We have the tools and the resolve to get inflation back down. No one should doubt our resolve in doing that. I think if you look at how quickly we have moved in the last few months, you will see that it has tightened a bit. We need to see inflation coming down in a clear and convincing way. We are going to keep pushing until we see that." - US Federal Reserve Chairman Jerome Powell
They see the economy as very strong, and well-positioned for less accommodative policy
"The underlying strength of the U.S. economy is really good right now. U.S. economy is strong, the labor market is extremely strong. It is still at very healthy levels. Retail sales numbers, the economy is strong. Consumer balance sheets are healthy. Businesses are healthy. The banks are well-capitalized. This is a strong economy. We think it is well-positioned to withstand less accommodative monetary policy, tighter monetary policy." - US Federal Reserve Chairman Jerome Powell
Equity markets are doing exactly what the Fed thinks they should be doing
"...the markets are orderly, they are functioning. I think they are processing the way we are thinking. And I think the idea is financial conditions will be tightened to the point where it can still be positive, but muttering to the support -- to the point where supply and demand to be in alignment, and get inflation back down to 2%." - US Federal Reserve Chairman Jerome Powell
“It’s been a rough week in the equity markets -- [our policy] is not aimed at the equity markets in particular but I think it is one of the avenues through which tighter financial conditions will emerge" - Kansas City Federal Reserve President Esther George
They’re not going to stop until they see inflation coming down
"As a policymaker, the way I’m thinking about it is right now, we are raising rates expeditiously to what we have been seeing to a more normal level, which is something that we will reach may in the fourth quarter. But it is not a stopping point. It is not a looking-around point. We don’t know with any confidence where neutral is. We don’t know where tightening is -- Honestly, we will go until we feel like we are at a place where we can say yes, financial conditions are at an appropriate place, and we see inflation coming down. We will go to that point and there will not be any hesitation about that" - US Federal Reserve Chairman Jerome Powell
They feel they should have probably raised rates sooner
"If you look and have 2020 hindsight, it probably would have been better to raise interest rates earlier." - US Federal Reserve Chairman Jerome Powell
There are some signs that the pace of price increases is slowing
"When I say stabilize, what we see is smaller increases than the increases we've seen at the beginning of the fiscal year, for example. So it's certainly reaching the top, hopefully of the commodity levels. At this point in time, it's hard to know, we see small increases week-over-week. But it's significantly less than what we have seen early on and the buckets change, right. I mean, diesel cost, for example, is at an all-time high, which, you know, now the freight to – the driver to freight ratio is improving a little bit. So that's the offset on the transportation side." - Procter & Gamble (PG) CFO Andre Schulten
There are also rising concerns about a recession
“You have to think about the fact that there’s a reasonable chance at some point that we have a recession or we have, you know, very, very slow, sluggish growth -- If you’re running a significant enterprise, you have to be looking through a lens with a little bit more caution right now than you might have been when we were sitting here a year ago." - Goldman Sachs (GS) CEO David Solomon
“CEO confidence weakened further in the second quarter, as executives contended with rising prices and supply chain challenges, which the war in Ukraine and renewed COVID restrictions in China exacerbated,” - The Conference Board Chief Economist Dana M. Peterson
"As we explained on earnings, our slowing revenue growth means we are also having to slow our cost growth as a company. So sadly, we are letting around 150 employees go today, mostly US-based" - Netflix (NFLX) SpokesPerson
International
China is getting COVID under control
"The good news is that while it's taken a period of time for the COVID to be brought under control in Shanghai, it was brought under control very quickly in Shenzhen. So there is a precedent in the very recent past for successfully bringing COVID under control." - Tencent (TCEHY) Chief Strategy Officer James Mitchell
Shanghai is planning to re-open on June 1st
"Shanghai now is saying they're going to open up June 1. We don't know exactly what that means when that implies that we would start getting any supply out. And correspondingly, we believe when they open up and when they do allow transportation and logistics to start, we believe there's going to be a high degree of congestion. We believe that there's going to be lots of competition for ports capacity and airport capacity. And we just believe that that, combined with the inbound efforts, trying to get raw materials back into the country, et cetera, we just believe that it's going to be impossible for us to catch up on this issue in Q4, which is what led to the guidance in Q4." - Cisco Systems (CSCO) Chairman & CEO Charles Robbins
Don’t expect a rapid bounce back
"The view that I expect from China is anecdotal. It's from reports that I got from friends of mine in China. Entrepreneurs and people who are plugged into the society, the Chinese friends really cautioned me against making the assumption that post the economy opening up or the lockdown stopping that we'll see the same bounce back as before in China and in the United States as in Europe and in Japan. It's not doom and gloom, it just said don't look for triple-digit growth. I don't think it's going to be like we have in the United States at the moment. We stated in a different -- they're in different period of the cycle, really -- China's growth rate has slowed down -- So I just wanted to caution you not to put in your projections China opening and it goes up again." - Compagnie Financiere Richemont SA (CFRO) Founder & Executive Chairman Johann Peter Rupert
Financials
The decline in public markets is now hitting private markets
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Investors are pulling back
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And sounding the alarms to portfolio companies
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The end of an era?
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Consumer
The consumer remains strong
"..what we see on our network as just very strong, robust spending, both domestically and cross-border. So there is clearly a lot of talk and fear of recession around the world. But in terms of what we see actually day in and day out on our network, the consumer remains very strong in the U.S. and around the world and spending remains robust." - Visa (V) President Ryan M. McInerney
"...inflation is definitely higher than we thought -- But our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected." - Home Depot (HD) CEO Ted Decker
"A guest might be telling us that they're worried about inflation and rising gas prices but they're also looking to splurge on new shoes or some accent pillows for their home. Many guests are sharing their uncertainty of the overall state of the economy, but are feeling more positive about their personal finances." - Target (TGT) Chief Growth Officer Christina Hennington
But retail comp growth has slowed significantly
"We saw a rapid slowdown in the year-over-year sales trend at the beginning of March when we began to annualize the impact of last year's stimulus payments -- First quarter comparable sales grew by 3.3%, on top of 23% growth a year ago." - Target (TGT) CEO Brian Cornell
"Our total company comparable sales declined 4% with the U.S. comps down 3.8%. Excluding our seasonal category, sales were in line with our expectations for the first quarter" - Lowe's (LOW) CEO Marvin Ellison
"...sales started strong with a positive low single-digits comp through late March. Sales then considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment, which resulted in a 5% decrease in net sales to last year." - Kohl's (KSS) CFO Jill Timm
"Fiscal 2022 is off to a strong start. Sales for the first quarter were $38.9 billion, up 3.8% from the same period last year. Comp sales were up 2.2% from the same period last year, and our U.S. stores had positive comps of 1.7%." - Home Depot (HD) CEO Ted Decker
And inventories have ballooned
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Consumers have rapidly shifted spend away from goods to services
“While we anticipated a post-stimulus slowdown in these categories and we expect the consumer to continue refocusing their spending away from goods and into services, we didn't anticipate the magnitude of that shift.” - Target (TGT) CEO Brian Cornell
Travel demand is robust
"As I said, our domestic parks were a standout. They continue to fire on all cylinders, powered by strong demand, coupled with customized and personalized guest experience enhancements that grew per capita spending by more than 40% versus 2019." - Walt Disney (DIS) CEO Bob Chapek
"So we believe that consumer savings are really high and that there is a lot of pent-up demand. You've been stuck in your houses for two years without a lot of travel. Last summer Europe was not what we had hoped it to be. This summer, it will be. We are growing by about 25%. So we feel pretty bullish that this can continue for quite some time." - United Airlines (UAL) EVP & Chief Commercial Officer Andrew Nocella
“So we're seeing people booking way into the future. And now we're seeing very, very strong bookings, very close in. And so in time, if there is a gap between the long and the relatively short. It's going to start to fill in. And again another green shoot, as the summer rolls around the top prime cruising season, it's going to continue to get better. So again I preface it no more Black Swan events, the industry is going to progressively get stronger, better going back to normalcy, reaching the normal high occupancies that we've always enjoyed." - Norwegian Cruise Line (NCLH) CEO Frank Del Rio.
Technology
China may be winning the AI war
"I think it's arguable that we are at war with China as it relates to AI. Right now, there might be a sense amongst a number of people in charge that China is winning that war. If you haven't read this book, AI Superpowers by Kai-Fu Lee, I recommend it. And so there's kind of people in Washington, D.C. are getting very attentive. So we expect that to be a -- and this is existential. If they don't get this right, we all need to learn to speak Mandarin." - C3.ai (AI) CEO Thomas M. Siebel
Whatsapp is pushing deeper into customer service
"The best business experiences meet people where they are. Already more than 1 billion users connect with a business account across our messaging services every week. They’re reaching out for help, to find products and services, and to buy anything from big-ticket items to everyday goods. And today, I am excited to announce that we’re opening WhatsApp to any business of any size around the world with WhatsApp Cloud API. In just a few minutes, any business or developer can easily access our service build directly on top of WhatsApp to customize their experience and speed up their response time to customers by using our secure WhatsApp cloud API, hosted by Metta." - Meta (FB) CEO Mark Zuckerberg
Industrials and Transport
Freight costs are the biggest supply chain challenge
"A separate challenge our team has been facing, which became more acute in the back half of 2021, is driven by capacity constraints in both the global and domestic freight markets. These issues continue to make it more difficult and more expensive to move inventory where we need it to be." - Target (TGT) COO John Mulligan
"Touching on the ocean freight question, they will remain elevated throughout the balance of 2022. But as we anniversary that spike that we had in the second half of last year, they remain elevated, but improve through the balance of the year. And on the domestic freight side, as Michael commented, fuel costs are higher than our expectations at the beginning of the year." - Ross Stores (ROST) EVP & CFO Adam Orvos
Are supply chains easing slightly?
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Seems like a whack-a-mole supply chain
"With respect to the supply chain, we are seeing issues be fairly broad-based. Our supply management team would describe it as whack-a-mole. Certainly, chips are an issue and will probably continue to be an issue as we work through the year. I would say, so far, we've managed that and have been able to keep that from having a material impact on mix of any kind. But as we look to the back half of the year, I would expect us not to single out any particular area of the supply base just due to its broad-based nature. I mean we're seeing challenges with castings and wire harnesses and hydraulics and pumps and tires. And it really just depends on the day in terms of what's causing challenges for us." - Deere & Company (DE) Head of Investor Relations Brent Norwood
Materials
The World is in need of supply of key materials for decarbonization
"...the world needs to find the bridge to expected supply caps in key materials needed to make decarbonization a reality. From the 3 million tonnes of lithium needed by 2030 for up to 65 million electrical vehicles to the extra copper needed for electrical vehicles, wind turbines, solar and grid electrification, we need to demonstrate why mining is part of the solution and essential to the world's low carbon future." - Rio Tinto Group (RIO) CEO Jakob Stausholm
The demand for nickel is huge
"It's becoming increasingly obvious that automakers and other metal consumers are very worried about availability, sustainability, and price of battery metals. Last month, Tesla CEO, Elon Musk tweeted that Tesla might actually have to go into mining and refining directly at scale unless costs improve. In a recent letter to shareholders, GM's CEO, Mary Barra, expressed confidence in their supplies of lithium, rare earth, and cobalt. The exception was, 'GM is still working to secure adequate nickel supplies.' And Ford CEO, Jim Farley, was recently asked about what keeps him up at night. His response was batteries, the raw materials that go into them, and localizing that raw material supply chain in the U.S. So U.S. automakers are clearly recognizing that. On the raw materials question, it's not just about how much, but also where is it located and who controls it? TMC not only has the largest nickel project in the world but the top 2 largest nickel projects in the world, according to a mining.com ranking from March of this year. Importantly, we believe we are the only needle-moving future nickel source, that isn't already controlled by Russia or China, the latter of which is winning the battery arms race, through deliberate investments over several decades, in locations such as Indonesia and the DRC." - TMC (TMC) CEO Gerard Barron
Real Estate
The housing industry is still bullish despite higher interest rates
"From what we have seen across the thousands of customers and homesites that we serve, I can affirm that this industry remains strong, underbuilt, and resilient. I believe the homebuilding industry will continue to grow this year and that we will outperform our peers as our platform delivers for our customers and our shareholders -- We continue to believe that the U.S. housing market is significantly underbuilt. And while I acknowledge higher mortgage rates will likely represent a near-term headwind to satisfying that demand, we continue to see tremendous momentum and long-term growth for the industry." - BMC Stock Holdings (BLDR) CEO David E. Flitman
"Rising mortgage rates have taken a notable bite out of demand - - But still, homebuyers who remain in the market are facing stiff competition, especially for the most desirable homes. Given the lack of homes for sale, it would take a much larger drop in demand for buyers to really feel like the market has truly turned in their favor." - Redfin (RDFN) Chief Economist Daryl Fairweather
The office seems to be dead
"Nobody is excited to go back to the office five days a week. They do, however, want a sense of connection and belonging." - Twilio (TWLO) CEO Jeff Lawson
"I think that the office as we know it is over. We can’t try to hold on to 2019 any more than 1950. We have to move forward. If the office didn’t exist, I like to ask, would we invent it? And if we invented it, what would it be invented for? Obviously, people are going to still go to hospitals and work, people are going to still go to coffee shops and work — those spaces make complete sense. But I think that for somebody whose job is on a laptop, the question is, well, what is an office meant to do? People will still go to offices, but it’ll be for different purposes, for collaboration spaces. My prediction is three days a week becomes two days a week, and two days a week becomes one day a week, and pretty soon are you really in a hybrid world, or are you mostly a remote world? - - People don’t realize this two, three days a week thing is not super sustainable. People are going to realize, ‘OK, let’s be more intentional about when people gather. And let’s gather for a week or two at a time. Working at the office is now a relic of the past" - Airbnb (ABNB) CEO Brian Chesky
Nuggets of Wisdom
Down cycles bring opportunities
"This moment feels similar to late 2008 when we started Airbnb. Lots of important companies were started during down cycles. Your conviction will be tested. Those that survive will be stronger. Obv this is not exactly like 2008. But I remember when we started, it felt like we somehow missed the moment -- but there’s always the next moment if what you’re building is important enough" - Airbnb (ABNB) CEO Brian Chesky
“Through market uncertainty and downturns, it’s important to remember that markets are cyclical and downturns come with a silver lining. Some of the strongest businesses are forged in the toughest times, and often, those that survive when the market turns are rewarded with increased market share and leaner, more efficient operations” - A16z Partners Justin Kahl and David George
“Having dry powder and deep-pocketed partners helps us help others and find and fund what we expect to be historic opportunities with heightened expected returns at previously unavailable prices." - Lux Capital Co-founder Josh Wolfe
Learn the fastest
"We don't have to be the smartest and that's really what we believe, but we have to learn the fastest. And I think it's this humility and this ambition for patient, but this humility on the science, that really is part of a secret source of a company" - Moderna (MRNA) CEO Stéphane Bancel