Inflation Still Raging
Inflation expectations remain persistent and high
Succinct Summary: Inflation is still flaring and, more importantly, inflation expectations remain persistent and high. Many are pointing out that interest rates should be much, much higher in order to fight inflation. The Fed’s misjudgment of the inflation situation has impacted its credibility. Even Larry Summers said that the Fed’s forecasts looked “delusional when issued, and -- even more ridiculous today.” This is a risk because it means that the Fed may have to act more aggressively to control market expectations.
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Macro
Inflation is still raging
“The all items index increased 8.6%for the 12 months ending May, the largest 12-month increase since the period ending December 1981 -- The increase was broad-based, with the indexes for shelter, gasoline, and food being the largest contributors.” - U.S. Bureau of Labor Statistic
"We currently face macroeconomic challenges, including unacceptable levels of inflation as well as the headwinds associated with the disruptions caused by the pandemic’s effect on supply chains, and the effects of supply-side disturbances to oil and food markets resulting from Russia’s war in Ukraine. We're seeing high inflation in almost all of the developed countries around the world" - US Treasury Secretary Janet Yellen
"We see inflation, of course, in every market. Chile being probably our highest, statistically, and China is our lowest --.As you heard again, we talked about the U.S. It's the same around the world. We're clearly concerned about inflation and some inflationary pressures for them." - Walmart (WMT) International CEO Judith McKenna
It could last a while
"...we hadn't seen inflation in the U.S. to speak of for a long time. But that acceleration started picking up in 2021 and then has just continued and that's a reflection of what happened with that strong demand and food in particular. I think it's going to last a while." - Walmart (WMT) CEO Doug McMillon
“The danger that above-average inflation and below-average growth will persist for several years – a phenomenon not seen since the 1970s – is considerable. With inflation now running at multi-decade highs in many countries, and supply expected to expand slowly, there is a risk that the rate of price growth will remain higher for longer than currently anticipated.” - World Bank President David Malpass
Interest rates may need to be much much higher
"It is monetary policy 101 that to defeat inflation, you need positive real interest rates in 1980 Volcker raised rates to 19% to combat 14% inflation. Greenspan raised rates in 1990 to 8.5% to fight 6% inflation. Even burns raised federal funds to 13 in 1974 to fight 11.5% inflation but retreated too quickly to get the job done. Today, we have real interest rates at the most negative level in the last 70 years. The idea that tightening a% or two from here will beat inflation is hardly credible" - Greenlight Capital President David Einhorn
"...well that's what history says it's there's an interesting historical fact which in fact I think is going to be violated but two undefeated records are number one once inflation gets above 5% it's never come down unless fed funds have gotten above the CPI well since the cpi is eight that would call for a fed funds rate of above eight frankly -- so if in fact fed funds ever got to eight% which by the way I don't think is going to happen the destruction would be quite material the other" - Duquesne Capital Founder Stanley Druckenmiller
The Fed’s credibility is coming into question
“It’s pretty clear that peak-inflation theory, like ‘transitory’ theory, is kind of wrong. The Fed’s forecast from March, saying that inflation would be coming down to the 2s by the end of the year was, frankly, delusional when issued, and looks even more ridiculous today -- Those mistakes mean that they don’t fundamentally have credibility. The debate has been between 25 and 50 basis point moves a couple of months from now. I think a more fruitful deliberation would be between 50 and 75 basis points." - US Treasury Former Secretary Larry Summers
“The Fed is bluffing. Inflation ain’t going away so fast. The Fed doesn’t really have the tools to stop the inflation..with inflation running at about 8% it's hard for us to understand why an interest rate of around 3% would be neutral if the fed were to continue using the balanced approach rule that it regularly cited under chair Yellen a neutral rate today would be about 7%" - Greenlight Capital’s David Einhorn at the 2022 Sohn Investment Conference on Thursday.“ - Greenlight Capital President David Einhorn
The probabilities “aggressively point to a hard landing"
“The probabilities of being a soft landing are pretty remote john historically I think we've only pulled off two or three in history the one I lived through I remember so well was the 94-95 one but we've never had a soft landing after inflation's gotten above 4.5% and the situation we face now is extraordinary -- you're so far behind the inflation rate and there's so much wood to chop and there's been such a broad asset bubble going into it it's very hard for me to say that the probabilities favor soft landing indeed I think they aggressively point to a hard landing anything's possible as I said earlier I've been wrong plenty of times in my career but betting on a soft landing to me is a real long shot. The other statistical fact is once inflation's got above 5%, to use your word, it's never been tamed without a recession so if you're predicting a soft landing you're going against decades of history could happen anything's possible but I don't think it's probable” - Duquesne Capital Founder Stanley Druckenmiller
“For many countries, a recession will be hard to avoid" - World Bank President David Malpass
On the positive side, consumer spending remains strong
“To make it very clear, we really don't see any signs of recession at this moment. Consumption continues to be very strong. Had a strong first quarter, continue April, May strong, April, and May from a consumption standpoint. But it can come, and we have to be ready for that." - Kraft Heinz (KHC) CEO Miguel Patricio
“...we're not economic forecasters. We definitely don't want to get into that business. Just based on the facts as they stand today, there's no evidence of any slowdown in consumer spending as of the 28th of May when we release those numbers…More broadly, as we look across our income groups, we're not seeing big differences between lower-income and high-income groups. If you look at the trends relative to 2019, not only were they stable between April and May, but they've been stable for quite a few months, in fact, for several quarters now” - Visa (V) CFO Vasant M. Prabhu
But consumer sentiment is trending downwards
"Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession. All components of the sentiment index fell this month, with the steepest decline in the year-ahead outlook in business conditions, down 24% from May. Consumers' assessments of their personal financial situation worsened by about 20%. 46% of consumers attributed their negative views to inflation, up from 38% in May; this share has only been exceeded once since 1981, during the Great Recession." - Surveys of Consumers Director Joanne Hsu
"When cash is a little bit tight, people just buy less per occasion than they normally do. That doesn’t mean they really stop, they just don’t pantry fill as much as they used to, so we’re seeing some of that behavior begin." - Casey's General Stores (CASY) CEO, Darren Rebelez
“Weaker consumer activity and also the confidence of the consumer and also weak demand could also weigh on revenue generation going forward” - S&P Global (SPGI) Xi Cheng
And consumer balance sheets may not stay strong for much longer
“I worry about what happens as those balance sheets of the consumer start to move down and if they continue spending at the rate they’re spending, they come back down, either at the end of this year or the beginning of next year to where they were. And so I think. I don’t think we should take a lot of solace in those numbers right now. I think there’s, you’ve got consumers have good strong balance sheets, but they’re coming down. And so I think we need to think about that going forward as well." - PayPal (PYPL) CEO Dan Schulman
A self-inflicted loss of consumer confidence?
“All the indications are that as we go into this period, which may be a self-inflicted loss of consumer confidence with everybody yelling at the top of their voices saying, be scared, everybody is telling you to be scared” - Visa (V) CFO Vasant M. Prabhu
International
Cross-border travel spending has surpassed pre-pandemic levels
"So our cross-border travel volumes surpassed pre-pandemic levels for the first time in March of this year, which is a very encouraging trend, I think sooner than, frankly, we anticipated as we were heading into this year -- travel bookings for both leisure and business travel are ahead of pre-pandemic levels for the first time, both on consumer and business. So the trends there are encouraging. We've seen a resumption of travel in all regions. It's been a little uneven. Asia is still a little bit trailing, given some of the restraints that have persisted, particularly in the northern parts of Asia. But the travel recovery has been a strong one and one that we're optimistic about its continuation." - Mastercard (MA) Chief Product Officer Craig Vosburg
China travel may be restricted for a while
"In terms of demand overall, China is really a wildcard. I don't see much happening there for months." - American Airlines (AAL) CEO Robert Isom
ECB planning to raise rates in June and September
"In the meantime, the Governing Council decided to leave the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25%, and -0.50% respectively. Looking further ahead, the Governing Council expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting." - European Central Bank
Financials
The mood is very grim for venture-backed companies
"Investors aren’t taking that on faith anymore- they want to see a real track record." - Barclays (BCS) Managing Director Fintech Banking Lucy Demery
"Within the investment community, the mood is very grim. People are now definitely moving much slower than they did a year ago. They’re being more cautious." - OpenPayd CEO Iana Dimitrova
"Companies which are not going to raise are going to either get consolidated or shut down" - Nium Co-founder & CEO Prajit Nanu
"Don’t worry about valuations, worry about fundamentals. But you definitely can’t do the 2021 pitch. It needs to be a new pitch, a 2022 pitch" - Stripe CEO Patrick Collison
Crypto is also struggling
"What we're seeing right now is Bitcoin is down roughly 50% since the November 2021 peak, and the one key difference that we have not seen before is the broader macro environment. So, this is the first broader macro change since crypto was adopted. And we now have high interest rates and higher inflation. And we do not know exactly how those will impact crypto” - Coinbase (COIN) CFO Alesia Haas
Apple enters Buy Now, Pay Later Space
“In addition to expanded acceptance, we're also enhancing Apple Pay to support new types of payments. So we are thrilled to announce Apple pay later. Apple pay later lets you split the cost of an Apple pay purchase into four equal payments spread over six weeks with zero interest and no fees of any kind” - Apple (AAPL) Senior Director of Wallet and Apple Pay Corey Fugman
“The Apple Pay Later announcement that they made as part of their Worldwide Developers Conference will leverage the Mastercard Installments program as the means through which it's delivered at the point-of-sale” - MasterCard (MA) Chief Product Officer Craig Vosburg
Consumer
Consumers have pivoted from goods back to services
"I think the third trend that we're hearing more and more about and seeing in the data is this pivot -- pre-pandemic, you heard lots of talk about younger generations focusing more on experiences than goods. That inverted a bit during the pandemic. Now I think we're seeing another inversion. You saw Target's numbers this morning, which were troubling, but I think they illustrate an obvious truth, which is a move by the consumer towards spending more of that disposable income on experiences rather than goods" - Marriott (MAR) CEO Anthony Capuano
Demand for summer travel and hotel bookings is strong
"We are seeing very strong summer demand emerging, and we are also seeing the airline return to historical utilization and productivity levels, as well as ex fuel CASK performance. We are operating a significantly higher capacity as we speak versus 2019." - Wizz Air (WIZZ) CEO József Váradi
"As we look forward, we anticipate a busy summer travel season ahead." - Hyatt Hotels (H) CEO Mark S. Hoplamazia
"The resilience of travel is really remarkable, and all the data that we look at continues to underscore just how resilient travel continues to be. If you look at where we were, to your point, a year ago, it was pretty murky what the pace of recovery might look like. You fast forward to today. In May -- or excuse me, April, global RevPAR was down only 7% to 2019" - Marriott (MAR) CEO Anthony Capuano
Corporate travel is coming back too
"...we see large corporates coming back in small and medium-sized businesses have been really off the charts for a number of months now. So we feel really good about the demand environment. And as you saw in our release today, that revenue is offsetting some real cost pressures out there." - American Airlines (AAL) CEO Robert Isom
Retailers are working through excess inventory and it might take them some time
"...we're about 20% up in inventory in total -- And some of the inventory that is here, we brought forward because of the long lead times we were seeing at the port. So we do have some of our late Q2 and Q3 inventory already here, which will help us over the long term. So we'll continue to work through this. But I think it's a couple of quarters." - Walmart (WMT) US President o John R. Furner
“While we've continued to see strong traffic and sales growth, since we reported our first-quarter results, we've watched as many competitors have reported elevated inventory levels. As such, we announced yesterday that we're taking a number of actions to further right size, our inventory position by taking additional markdowns, removing excess inventory, and canceling orders” - Target (T) CFO Michael Fiddelke
“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,”- Target (T) CEO Brian Cornell
Labor markets are less tight
"At one point in Walmart U.S., Alan, we had over 300,000 people out on COVID leave in January. And that, as you know, the curve was steep and when it came down on the backside, they all came back to work, but we had hired others to try and fill those gaps given that so many people were out. So I think we have moved to the point where finding people and hiring people and retaining people isn't the issue we're facing at the moment. But we do now have a higher wage rate." - Walmart (WMT) CEO Doug McMillon
Workers want more flexibility
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Waste disposal volumes are pretty stable
"So what we talk about is that our lens into the U.S. economy is multifaceted. There are parts of it that are leading indicators, and there are parts of it that will be lagging indicators. The leading parts of our business are things like solid waste volumes for special waste projects. It's construction and demolition work. Commercial volumes tend to be really good indicators. And as we said in the first quarter, all of those were even stronger than we would have predicted when we gave 2022 guidance. That being said, when we look at what's happened in April, May, June, none of that is softening, I would say, but what we are seeing is a moderation of the pace of growth." - Waste Management (WM) CFO Devina Rankin
Not much trade down
"I would say we're not seeing much in the way of trade down -- We're not seeing increases in private label market share really in our categories at this point." - Colgate-Palmolive (CL) IR Officer John Faucher
Technology
Tech company talent is feeling fatigued and uncertain with valuations falling
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Semiconductor company supply chain headwinds aren’t getting better
"For us, the other thing was, we had three kinds of headwinds coming into the quarter which we talked about. One was the match set issue where customers could not get enough components to build product – that was, we expected to impact demand. The second was inventory. We expected customers to reduce their inventory levels, which would impact their demand on us, and then there was the China, Shanghai closure and we expected that to open up in early May and take time to get back to normal, but you know get back to normal in a relatively quick fashion. I think in all three cases the circumstances at this point are much worse than what we had anticipated coming into the quarter. So that certainly is an impact to the business as well." - Intel (INTC) CFO David Zinsner
Enterprise demand is strong though likely to moderate
"...enterprise demand is strong and we've communicated, right, that we're expecting a moderation of that growth. We're mindful of all the macro headwinds. There's plenty and we want to be appropriately prudent with our guidance and that's what we believe we've done as, as we talked about in most recent earnings." - Dell Technologies (DELL) CFO Yvonne McGill
Recommender engines are powering e-commerce
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High awareness of the importance of cybersecurity is driving growth in IT security
"If you look 4 years ago, there was less awareness of cybersecurity, 4 years since, there's more awareness of cybersecurity. I get calls from CEOs who are undergoing ransomware, threats, or attacks. I get asked by security committees to come and tell them about whether they are secure or not. So let's just believe there is awareness in cybersecurity. Security is growing faster than technology from an industry high-level perspective. So the growth rate of the industry on security is higher than IT growth. We're in the high single-digit ITs and low single-digit, right? So more awareness, higher growth rate." - Palo Alto Networks (PANW) CEO Nikesh Arora
Healthcare
1 out of 5 who suffered covid-19 are suffering from depression
"The growth drivers for the US is the fact that there is acceptance of depression and a reduced stigma surrounding mental health issues broadly you can't turn on the TV. These days without hearing about mental health, whether it's the most vile talking about at the Olympics a lot of people are suffering from and it is now on the forefront. There is a significant number. Increase in patients who are suffering from depressive disorders for the first time since the pandemic I read an article yesterday that said since the pandemic and those who have suffered from COVID-19 or experience one out of five of them are suffering from depression." - Greenbrook TMS (GTMS) CEO Bill Leonard
Industrials and Transport
Supply chains are improving
"...there's no question that the supply chain is a challenge for the industry, not just our industry, but all the industries right now that we're seeing. Just go to the grocery store, you can see that. But I would say there's some reason for optimism. I'm seeing improvement this quarter versus last quarter. I don't know if the challenges have peaked yet or not. I do think that we're going to see more recovery in the back half of this year and as we go into 2023. But we are seeing more output from a supply base." - Honeywell International (HON) President & CEO of Aerospace Michael Madsen
Auto OEMs have a unique dynamic happening in inventory planning
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Honeywell says that the macro environment for aerospace has never been more attractive
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Materials and Energy
Biden says that Exxon isn’t drilling enough
"We're going to make sure everyone knows Exxon's profits. Exxon made more money than God last year -- Why aren't they drilling? Because they make more money not producing more oil -- They’re not drilling -- they’re buying back their own stocks & making no new investments. Exxon, start investing, start paying your taxes" - United States President Joe Biden
Energy prices are very high in Europe
"So to put it in perspective, there's around 5 million metric tons of capacity in Europe. We -- in that European number are including Norway and Iceland. We've seen around 800,000 tons of curtailments in Europe. Our view is that there's 1 million to 2 million metric tons of capacity that is still at risk in Europe. European energy prices are extremely high, and I'm sure many people follow them. But I was looking at the Spanish energy prices just the other day, and electricity in Spain is over EUR 200 per megawatt-hour. You can't run a smelter at EUR 200 a megawatt-hour. EUR 200 a megawatt-hour probably translates to $3,500 a ton just for the energy price. So we think there's probably 1 million, 2 million metric tons that's still at risk in Europe" - Alcoa (AA) CFO William Oplinger
Real Estate
Housing inventory is higher but still down a lot
"Active inventory continued to grow, rising 13% above one year ago. The turnaround in the number of homes for sale continues and year over year growth signals that this is more than just a seasonal improvement. Inventory was roughly on par with last year’s levels at the beginning of May and is now up 13% at the beginning of June. Nevertheless, our May Housing Trends Report showed that the active listings count remained nearly 50% below its level at the beginning of the pandemic. In other words, we’re starting to add more options, but home shoppers continue to see a relatively low number of homes for sale." - Realtor.com Weekly Housing Trends View
Homebuyers choosing to keep renting
"More people are opting to live alone, and rising mortgage interest rates are forcing would-be homebuyers to keep renting. These are among the demand-side pressures keeping rents sky-high. While renting has become more expensive, it is now more attractive than buying for many Americans this year as mortgage payments have surpassed rents on many homes. Although we expect rent-price growth to continue to slow in the coming months, it will likely remain high, causing ongoing affordability issues for renters." - Redfin (RDFN) Deputy Chief Economist Taylor Marr
There is a trend towards smaller houses
"We've actually seen that trend towards slightly smaller houses over the last couple of years. Our average square footage just in the mix of the homes we've been selling has been ticking down ever so slightly. I believe last quarter, it moved down another 1%" - D.R. Horton (DHI) CFO Bill Wheat
The luxury housing market is cooling
"Sales of luxury U.S. homes fell 17.8% year over year during the three months ending April 30, the largest drop since the onset of the coronavirus pandemic sent shockwaves through the housing market. By comparison, sales of non-luxury homes fell 5.4%." - Redfin (RDFN) Analysis
Nuggets of Wisdom
How Slack got built
"Me and some friends started a company to make a web-based game. That didn't work and it became Flickr. We got bought by Yahoo!. We spent a couple of years at Yahoo! And then we left and started to -- another company where the intention was to build a web-based massively multiplayer game, and that didn't work and that one ended up being Slack. But I think there's a real insight -- and this is an impossible thing to replicate. But because we weren't working on a version of Slack, we spent 3.5 years working on something else but, on the side, solving the communication problems that we had. We didn't have a name for the product. But it was only the things that were either so irritating that we couldn't stand them anymore or so obviously an improvement that we couldn't help but do it that actually got done. And if you remove the ego and the speculation from the software design process, it turns out that you end up with something really amazing. It's like don't think of an elephant. It's not a useful instruction to anyone because if you try not to pay attention to something, it will work out that way. But I think we realized shortly after we had done like 6 or 8 months of development work and starting to get some friends to start using it, that we had something that was going to be really big. And then I haven't kept off on everything since, but I think we're still the fastest SaaS company to $100 million in ARR and $200 million and $500 million and $1 billion." - Salesforce (CRM) Slack Technologies Co-Founder & CEO Daniel Stewart Butterfield
Stanley Druckenmiller's advice to young investors
“Well the first thing I tell them is if you're not really passionate if you don't love this stuff go do something else. And I've hired guys with IQs 50 or 60 points higher than me who stink in my business and by the way, they could be better off inventing or starting new companies that could do very well. I actually think the next four to five years are going to be tailored to the skill set that worked for me in the 80s and 90s which was all sorts of macro chaos. I would encourage them to learn all the asset categories and how how they integrate. Not easy… fundamentals are fundamental…The great thing about my original mentor Spiros Drelles in Pittsburgh was he made me focus on what moves the stock price. You can't just say, Stan, this is a great company and the earnings are great. Tell me how people are going to think differently in 18 or 24 months about the situation than they're thinking now. That would be my number one advice to young people. Do not invest in the present. The present is not what moves stock prices. Change moves them. I want you to try and envision a different world in a year and a half from now.d.” - Duquesne Capital Founder Stanley Druckenmiller