A Hurricane is Coming!
The financial sector is sending alarm bells about the economy
Succinct Summary: The financial sector is sending alarm bells about the economy with Jamie Dimon seeing a hurricane approaching and venture capitalists saying that we’re seeing the end of an era of unprofitable growth. On the other hand, economic activity at the moment is still relatively “sunny.” Consumer spending is showing no signs of abating and supply chains may finally be starting to heal. Still, the Fed is not ready to reverse course and so rising interest rates are likely to put pressure on capital markets and, therefore, the economy.
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Macro
Jamie Dimon sees a hurricane approaching
“...look, I'm an optimist. I said there's storm clouds, they're big storm clouds, they're -- it's a hurricane It's, we -- right now it's kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or -- yes, Sandy or Andrew, or something like that." - JPMorgan Chase (JPM) CEO Jamie Dimon
So far though things have been relatively orderly
"So I'm going to try not to use any weather analogies, but I would say the following. I think this is among, if not the most complex dynamic environment I've ever seen in my career. We've obviously been through lots of cycles. But the confluence of the number of shocks to the system, to me, is unprecedented--we're seeing it actually relatively orderly so far. So while it's painful to watch and investors are not performing as well as they would like to perform for sure, it actually has been relatively orderly so far." - Goldman Sachs (GS) President & COO John E. Waldron
"It's a bit of a very high-wire act that they have to do. And at the moment, things seem to be holding up. In the future, they should change a bit to the downside." - Blackstone (BX) CEO Stephen Schwarzman
But macro conditions seem to be worsening
“Macro conditions worsened since we provided our guidance in early March which resulted in our sales being slightly lower than our expectations. Those trends have continued into Q2 and, as a result, we are revising our sales and profitability expectations for the year.” - Best Buy (BBY) CEO Corie Barry
“The early survey data for May indicate that the recent economic growth spurt has lost further momentum. Growth has slowed since peaking in March, most notably in the service sector, as pent-up demand following the reopening of the economy after the Omicron wave shows signs of waning. Companies report that demand is coming under pressure from concerns over the cost of living, higher interest rates, and a broader economic slowdown" - S&P Global Market Intelligence Chief Business Economist Chris Williamson
"Well, the macroeconomic environment has definitely deteriorated further and faster than we expected when we issued our guidance for the second quarter. So even though our revenue continues to grow year-over-year in the second quarter, it’s likely that revenue and EBITDA will come in below the low end of our guidance range." - Snap (SNAP) CEO Evan Spiegel
There are signs that employment is slowing
"It's been really expensive to retain people, to hire people over the last 12 months. And I think you will see some cooling, and that should help us. You've seen a number of our competitors implement hiring freezes and really talk down their hiring expectations--And so those things should help us on the cost side, I think, in the back half of the year, if not in the first part of 2023. And so we haven't had that environment for a while, and some return to a bit more of a kind of goldilocks environment, if we can get there, would be really helpful." - Match Group (MTCH) COO Gary Swidler
“The job growth rate of hiring has tempered across all industries, while small businesses remain a source of concern as they struggle to keep up with larger firms that have been booming as of late."- ADP chief economist Nela Richardson,
“So while we are changing some of the pacing of our hiring, for example, this is certainly going to continue to be a period of significant investment for the business." - Snap (SNAP) CEO Evan Spiegel
“Two weeks ago, we paused hiring while we took time to reprioritize our hiring needs against our highest-priority business goals. As these discussions have evolved, it’s become evident that we need to take more stringent measures to slow our headcount growth” - Coinbase (COIN) Chief People Officer L.J Brock
"I mean when the mortgage market is down the way it is, there's no getting around that your volumes fall dramatically, and we have to do our best to adjust our infrastructure to support that -- that means that we'll have less people and we're doing what's necessary for that to happen." - Wells Fargo (WFC) CEO Charles W. Scharf
The Fed is not ready to pause
"Right now, it’s very hard to see the case for a pause--We’ve still got a lot of work to do to get inflation down to our 2% target. We’re certainly going to do what is necessary to bring inflation back down. That’s our No. 1 challenge right now." - US Federal Reserve Vice Chair Lael Brainard
“I support tightening policy by another 50 basis points for several meetings. In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target” - Fed Member Christopher J. Waller
They don’t really have a choice
"...they have to do QT. They do not have a choice because there's so much liquidity in the system; they have to remove some of the liquidity to stop the speculation, to reduce home prices, stuff like that. And you've never been through QT--I don't know what the effect of that is. I'm prepared for -- and you're talking about minimum huge volatility." - JPMorgan Chase (JPM) CEO Jamie Dimon
Consumer spending is still hot
"And if you look at the numbers, I think what you would see -- so we reported numbers yesterday all the way through the 28th of May. So essentially April and May. The new news there is, since our last call, which was towards the end of April. And if you look at the numbers, essentially, there was no change in trend between April and May--I know there's a lot of talk of slowdowns and so on, and we certainly are not going to be economic prognosticators. But if you look at the data, at least through the 28th of May, the consumer was essentially spending at the same level as they were in April and actually prior to April because the trend has been in that range for quite a while." - Visa (V) CFO Vasant Prabhu
"We're seeing pretty healthy trends with consumers, a lot of demand, still pent-up demand. Overall spending levels are healthy. Our -- again, our Mastercard Economics Institute released our latest spending pulse report in April. In the month of April, we saw a little more than a 7% increase year-on-year in overall retail spending. That's -- the difference versus the year before was roughly twice that 15%. So pretty consistent growth in overall levels of retail spending. Obviously, some increasing pressures on certain segments of society and inflationary pressures are going to probably drive some reallocations of spending. But at the overall level, the consumer balance sheet is pretty strong. The consumer appetite to spend is strong--.so far, we're seeing pretty healthy trends among consumers." - Mastercard (MA) Chief Product Officer Craig Vosburg
"...so on debit and credit card spending, just debit and credit card spending and that's about 20-odd percent, 25% of the way consumer spends money. For the month of May, the dollar volume is up 9% to 10%, the transaction up 7% to 8%--Memorial Day weekend was a record. It was -- it's 30% over Memorial Day in '19 to give you a sense and so up year-over-year double digits, et cetera. So the spending on debit credit cards was strong through the end of the month. - Bank of America (BAC) CEO Brian Moynihan
A soft landing will be extremely difficult
"I think we are just very much believe that there's a reality that the economy has to slow. The Fed has been very clear about what its intentions are. And the scenario of a soft landing is very difficult to achieve and I think extremely difficult to achieve in the environment that we're in today. But a slowing of the economy and if there is a short recession, that's not all that deep. With the conviction that they have to get there and all the different tools, I think we're comfortable that at this point for everything that we see, including the strength of the consumer and the business going into this, that while there will be some pain as you go through it, overall, everyone will be just fine coming out of it." - Wells Fargo (WFC) CEO Charles W. Scharf
Policymakers don’t have a great track record with this sort of stuff
"...I think I was wrong then about the path that inflation would take--there have been unanticipated and large shocks to the economy--that have affected our economy badly that I, at the time, didn't fully understand, but we recognize that now" - US Treasury Secretary Janet Yellen
"Janet Yellen finally did come out and say I was wrong. I mean, everybody is giving her all this credit for the Mea culpa like what took so long? Like how clear did it have to be to kind of admit you were wrong, right? Like how long ago did inflation go from 2% to 4%, 4% to 7.4%, and then 8.5%. And you have to ask yourself like, where is inflation really today?" - RH (RH) CEO Gary Friedman
“The current U.S. macroeconomic situation is straining the Fed’s credibility with respect to its inflation target. In the 1970s, inflation expectations became unmoored, and it took years for the Fed to bring inflation back to lower levels. The real economy was also volatile during this process.” - St. Louis Fed President James Bullard
International
Shanghai is reopening
"We're seeing good signs right now. You're seeing Shanghai reopen. We have a significant footprint in and around Shanghai. And it's how fast do we recover near term and through the year will probably depend on a couple of factors." - 3M (MMM) CEO Michael Roman
The European consumer is stressed
"I think the European consumer is much more stressed about what's going on in the world. They're talking about mid-teens inflation kind of numbers hitting there. They're talking -- they've got a war going on in their backyard. They've got Russia threatening to cut off their gas supply. Energy price is up tenfold. And so there's much more kind of anxiety and stress there, and it changes in behavior. There is changes where people are trading down to private label. In some cases, we were there last week, and we actually heard, in some cases, people are skipping the meal to try and figure out how to economize. That's a very different place than we are here." - Hain Celestial Group (HAIN) CEO Mark Schiller
Financials
VCs see that an era is ending
"The era of being rewarded for hypergrowth at any costs is quickly coming to an end--With the cost of capital (both debt and equity) rising, the market is signaling a strong preference for companies who can generate cash today" - Sequoia Capital
There is no swift V-shaped recovery coming
“We do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery like we saw at the outset of the pandemic. We expect the market downturn to impact consumer behavior, labor markets, supply chains, and more. It will be a longer recovery, and while we can't predict how long, we can advise you on ways to prepare and get through to the other side.” - Sequoia Capital
“In the same way tech led the excess on the way up, you’ll see it on the way down. It feels like the summer of 2000, where you had speculative excess that will get squeezed out.” - Lux Capital Partner Josh Wolfe
SPACs are in regulatory purgatory
"The SPAC market is definitely in a regulatory purgatory until the SEC rules are finalized. We've had many good conversations, I think. We'll see how these end up. It's easy for the bulge just to make pronouncements that they're out. We're not out of the business. We're actually still advising on SPAC back ends, and we're still doing business there." - Cowen (COWN) CEO Jeffrey Solomon
Debt issuance volumes are extraordinarily weak YTD
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The strong USD is impacting earnings
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Accounting changes have made bank earnings more volatile
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Consumer
Consumers are not trading down
"I mean, we're seeing a lot of traffic. We're not seeing a lot of – we're not seeing trade down really. We're seeing a little bit of shift in where people are spending their money. Last year, there was more stuff for the home and that – and this year, it's more sales in tickets and restaurants and travel and tires and gas and things of that nature" - Costco (COST) SVP, Finance & IR Bob Nelson
“Some people say, well, because of inflation, people may cut back on discretionary spending. Well, on a year-over-year basis, the categories growing the fastest are what you might call discretionary categories, like travel, restaurants, and entertainment because they're in a recovery mode, right? So maybe that's masking -- maybe they would have grown even faster, I don't know. It's hard to know. But if you look at our growth rate, you'd say there's no evidence of a pullback. So it's hard to know what it might have been” - Visa (V) CFO Vasant M. Prabhu
Best Buy sounds cautious though
"We are revising our full-year financial guidance to reflect our best estimate of how the year will play out based on the trends we have been seeing over the past several weeks and our forecast for the back half of the year at this point in time--As it relates specifically to Q2 FY23, we anticipate that our comparable sales and the year-over-year decline in our non-GAAP operating income rate will both be very similar to our first-quarter results." - Best Buy (BBY) CFO Matt Bilunas
Airlines and travel demand are very strong
"So right now, it certainly appears that the demand for travel is strong. I said quarters ago, that summer -- we expected summer would be gangbusters. Nothing to indicate otherwise yet." - Expedia (EXPE) CEO Peter Kern
"With everybody pent up for two years and not traveling, yeah, that business has taken off like mad. So there's a lot of discussion and talk about a recession coming, but if you look in our buildings and you look at -- if you've been on an airplane lately, you'd never notice it." - Costco (COST) SVP, Finance & IR Bob Nelson
No pushback yet on higher prices
"No, we haven't seen it. I mean, furniture is our biggest growth vehicle. Furniture has been very, very good for us. So, you would think that if there was a problem with big ticket or higher prices or things like that, we'd see that coming down, and we have not. Furniture has been very strong for us." - Williams-Sonoma (WSM) CFO Julie Whalen
Peloton is handling a hangover. Good thing they have stopped drinking
"Well, I guess, what I'd like you to know is we're mostly we're managing a hangover, but we stopped drinking. So there was the expectation that COVID was the new normal, and they were selling everything they could land in the country, and they ordered more. And the world changed, and we needed less. But it takes a while for less to find its way into the supply chain. So the good news is, and I think it's very good news, inventory has a long life. It's not like it has diminished value because it's sitting on the balance sheet. It's a pain in the a** to deal with because we spend a lot of money to store a lot of bikes and treads. And -- but the good news is, once we sell them out of inventory, all those storage costs we're paying become a source of P&L savings and operating leverage for us. So the path to get to the other side is pretty clear. It just takes time to get there, but we'll get there." - Peloton (PTON) CEO W. Barry McCarthy
Technology
Datacenter and gaming demand is strong
"We delivered a strong quarter driven by record revenue in both Data Center and Gaming with strong fundamentals and execution against a challenging macro backdrop--The gaming industry has grown tremendously with 100 million new PC gamers added in the past two years according to Newzoo." - NVIDIA (NVDA) CFO Colette Kress
YouTube may start competing with Amazon
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Social media companies may never be able to fully recover from IDFA changes
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Cybersecurity is not discretionary spending
"...fiscal 2023 is off to a fantastic start. --The demand environment we see is more robust today than this time last year as cybersecurity is not discretionary--when you look at some of the e-crime impact and taking out business, it is not a discretionary spend. It’s -- in the hierarchy of corporate needs, it’s probably shelter. So, we see that continuing." - CrowdStrike (CRWD) CEO George Kurtz
Industrials and Transport
Supply chains are improving
“Manufacturers in particular also report that capacity continues to be constrained by supply shortages, though these bottlenecks showed further encouraging signs of easing" - S&P Global Market Intelligence Chief Business Economist Chris Williamson
"...we're pretty much across the board, improving everywhere slightly from where we were. It's not really in any one particular category. It's -- I think part of that is there's 40 or 50 ships in LA now instead of 100 or 120, and the fact that we've been able to utilize our own ships to kind of help get product over here. I think it's just improved a little bit across the board in all -- in everything that we're purchasing." - Costco (COST) SVP, Finance & IR Bob Nelson
"April and May have been pretty good months for our factory. I think we've seen better supply of components than we maybe anticipated 5, 6 weeks ago. I would say that that's across the board. So in the U.S. and Europe, we've been able to increase build rates as we hoped for. I haven't seen any significant shutdown days as could have happened with some of the supply challenges. So I would say it's across the board. People in the factories have done an amazing job, together with our purchasing teams, to get the components in, to get better chips, redesign the chips, find alternative chips in cases where that was needed." - Paccar (PCAR) CFO Harrie Schippers
Inventory is normalizing
"Channel inventory has nearly normalized and we expect it to remain around these levels in Q2--Our Data Center demand is strong and remains strong. Hyperscale and cloud computing revenues, as you mentioned, has grown significantly. It's doubled year-over-year. --We're delighted to see the supply improve. And it's starting to normalize" - NVIDIA (NVDA) CEO Jensen Huang
There is excess capacity at Amazon warehouses
"We have effectively lowered our cost structure before and I have high confidence that we’ll get back on track as we work through these incredibly unusual past two years--We have a number of steps we’re taking right now. We’re trying to defer building activity on properties where we just don’t need the capacity yet and we’re going to let some leases expire as well. But I’m also quite confident we’ll grow into this footprint--Cost is the number one focus for us right now--I am confident we will return to healthy profitability in the consumer business" - Amazon (AMZN) CEO Andy Jassy
It’s still not clear how WFH/WFO dynamics will ultimately settle out
“Anyone who wishes to do remote work must be in the office for a minimum (and I mean minimum) of 40 hours per week or depart Tesla," - Tesla (TSLA) CEO Elon Musk
“...we also are now three days a week which actually like I don't know how we did five days a week - - like I think we all readjusted to just the three days or we've adjusted to being at home" - YouTube CEO Susan Wojcicki
Materials & Energy
Oil is a real challenge
"Oil, a little bit of knock-on impact of what's happening in Ukraine has become a challenge from a supply standpoint--The oil issue that I talked about is a real challenge for us right now." - General Mills (GIS) Management
Energy security or Energy transition?
"Right now it is time to decide between energy security and energy transition" - Korea Gas Corporation CEO Hee-Bong Chae
Real Estate
The era of housing frenzy has come to an end
"The housing market is sending clearer signals that the pandemic-driven housing frenzy is coming to an end. Nearly one in five (19.1%) home sellers dropped their price during the four week period ending May 22—the highest level since October 2019--The picture of a softening housing market is becoming more clear, especially to home sellers who are increasingly turning to price drops as buyers become more cost-conscious under higher mortgage rates.” - Redfin (RDFN) Chief Economist Daryl Fairweather.
“While demand is still solid, over the past month, it has moderated from the unprecedented pace of the past 2 years as buyers adapt to higher mortgage rates and other macroeconomic conditions. The substantial rise in home prices, the steep increase in mortgage rates since January, inflation concerns, and stock market volatility are all having an impact on buyer sentiment, and we anticipate that some buyers may remain cautious through seasonally slower summer months” - Toll Brothers (TOL) CEO Douglas Yearley
Rising interest rates are a headwind
"Mortgage rates have quickly gone from being a massive tailwind to the housing market to a massive headwind," - Moody’s (MCO) Chief Economist Mark Zandi
"...those rising mortgage interest rates will put pressure on potential homebuyers on affordability and that will knock some people out of the market, we can already see that a little bit. Searches on Google for homes for sale were down year over year over the last couple of weeks by 10% plus so it already seems like, from a homebuyer standpoint, some of that cooling has probably started to happen. But then there is this other dynamic that we see. Feel and see quite clearly and that's just that there's not enough housing stock in the U S for the number of people who want to own a home and so inventory levels remain very low at this point homes are selling quickly off the market and as a result of home prices are up year over year." - Redfin (RDFN) CFO Chris Nielsen
“I mean when the mortgage market is down the way it is, there's no getting around that your volumes fall dramatically, and we have to do our best to adjust our infrastructure to support that…And in this kind of environment, that means that we'll have less people and we're doing what's necessary for that to happen. And from a production side, make sure that we're again properly staffed to process the business but not beyond what's necessary in this environment." - Wells Fargo (WFC) CEO Charles W. Scharf
Tight inventory still provides some support
"Industry volumes are probably flat or down as the year goes on just because of this pressure on homebuyers. But the tight inventory probably provides a lot of good support for home prices along the way. So that should give buyers confidence that the purchase that they are making is going to hold up here." - Redfin (RDFN) CFO Chris Nielsen
Nuggets of Wisdom
Lessons are learned by building
"Twenty years ago we began this journey with a vision of transforming a nearly bankrupt business with a $20 million market cap and a box of Oxydol laundry detergent on the cover of the catalog into the leading luxury home brand in the world. The lessons and learnings, the passion and persistence, the courage required, and the scar tissue developed by getting knocked down ten times and getting up eleven leads to the development of the mental and moral strength that builds character in individuals and forms cultures in organizations. Lessons that can’t be learned in a classroom, or by managing a business, they must be earned by building one. Or, by reaching the top of the mountain" - RH (RH) CEO Gary Friedman
Think for yourself
“I suggested buying YouTube. It wasn't necessarily a popular point of view. Somebody published, Mark Cuban actually, the week beforehand saying 'only a moron would buy Youtube'. So when I think about it, it's really important to be able to think for yourself” - YouTube (GOOG)CEO Susan Wojcicki
Investing for the long term
"Long-term wealth creation is about investing in great businesses with great people and compounding over the long term. So, despite wars, pandemics, explosions, recessions, and all the other things you just mentioned, over the past 30 years, we’ve just continued to buy great businesses, keep compounding and the returns have been excellent. And so, I guess I’d just say everyone just has to stay invested, not get too excited about the market gyrations that happen every day, and just keep with it. And that’s the secret to success in investing” - Brookfield Asset Management (BAM) CEO Bruce Flatt