Don’t Stop us Now
Consumers have been having such a good time
Succinct Summary: Consumer spending has remained incredibly strong despite increasing worries about recession. This is typically a good thing; however, the Fed explicitly signals that it is concerned about overheated demand. The central bank raised interest rates by ¾ of a point last week and said that more rate increases are on the way. They seem unfazed by the decline in capital markets. In fact, Jerome Powell implied that the pullback is a sign that Fed policy is working. This all means that a soft landing is less likely, and even the Fed seems resigned to that possibility. Business leaders are preparing for a recession.
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Macro
Consumer spending and demand are surprisingly still strong
"The general consensus, I think, at the conference so far, is that so far, consumer demand is pretty resilient, pricing is being implemented reasonably successfully and is being accepted by retailers and consumers." - Colgate-Palmolive (CL) Equity Research Analyst at Deutsche Bank Steve Powers
"I would say the U.S. consumer has surprised me because if you look at pricing situation from our perspective, we priced already much more in the U.S. than in Europe. And the reaction has been very limited so far. So a lot of resiliency from the U.S. consumer." - Mondelez (MDLZ) CFO Luca Zaramella
"...at this point, the consumer is still spending pretty robustly -- we're still seeing very healthy balance sheets and healthy spending" - Bank of America (BAC) CFO Alastair Borthwick
"So consumer demand continues to be strong for us in our lineup. So we're not seeing we can -- our order bank is still very robust. We have over 300,000 orders across many of our vehicles. And so we're continuing to see strength there." - Ford (F) CFO John Lawler
Jerome Powell seems to agree but isn’t particularly happy with it
“There’s no sign of a broader slowdown that I can see in the economy -- And that desired effect is we’d like to see, you know, demand moderating. Demand is very hot, still, in the economy” – Federal Reserve Chair Jerome Powell
More interest rate increases are needed
“As shown in the SEP, the median projection for the appropriate level of the federal funds rate is 3.4% at the end of this year, a percentage point and a half higher than projected in March, and .9 percentage point above the median estimate of its longer-run value.” – Federal Reserve Chair Jerome Powell
“The FOMC has increased the rate’s level at the last three meetings and is poised to make further increases at coming meetings” - St. Louis Fed President James Bullard
They won’t stop until they see inflation receding and are wary of declaring victory too early
“Over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%. We anticipate that ongoing rate increases will be appropriate -- You know, frankly, we saw last year inflation came down over the course of the summer, and then turned right around and went back up. So I think we’re going to be careful about declaring victory.” – Federal Reserve Chair Jerome Powell
The worst thing they could do is fail to stop inflation
“I will say, the worst mistake we could make would be to fail, which it’s not an option. You know, we have to restore price stability. We really do, because everything—it’s the bedrock of the economy. If you don’t have price stability, the economy is really not going to work the way it’s supposed to.” – Federal Reserve Chair Jerome Powell
Political pressure is ramping up
"...the Fed is laser-focused on arresting the inflation problem and they’re not necessarily concerned with what’s happening to the stock market. And I think that has a lot to do with what happens as we go into November. So, Becky, I think between now and November, things are going to materially worsen." - Hayman Capital Management Founder & CIO Kyle Bass
They seem to be at peace with the possibility of a hard landing
“I don’t want to be the handicapper here. I just—that is our objective. I do think [a soft landing is] possible. Like I said, though, I think that events of the last few months have raised the degree of difficulty, and created great challenges. And again, the answer to the question can we still do it, there’s a much bigger chance now that it’ll depend on factors that we don’t control, which is, you know, fluctuations and spikes in commodity prices could wind up taking that option out of our hands.” – Federal Reserve Chair Jerome Powell
Markets are doing exactly what they want them to
“Frankly, I think this year has been a demonstration of how well it can work. You know, with us having really just done very little in the way of raising interest rates, financial conditions have tightened quite significantly through the expectations channel as we’ve made it clear what our plans are. So I think that’s been a very healthy thing to be happening.“ – Federal Reserve Chair Jerome Powell
Will consumer spending follow?
"Back to the earlier question when you talked about consumer weakness. Well, the question is, is the consumer going to weaken? The question is really from a CFO perspective, is the consumer demand going to weaken, and what will happen to commodity prices? Because presumably, if we take demand out of the system on a macro basis, we're going to see some normalization in input costs logistics, et cetera, that's the natural hedge that exists." - General Motors (GM) CFO Paul Jacobson
The politicians don’t think that a recession is inevitable
"They shouldn’t believe a warning. They should just say: “Let’s see. Let’s see, which is correct.” And from my perspective, you talked about a recession. First of all, it’s not inevitable." - US President Joe Biden
“It’s President Biden's top priority to bring it down and Chair Powell has said that his goal is to bring inflation down while maintaining a strong labor market. That's going to take skill and luck, but, I believe it's possible. I don't think a recession is inevitable." - US Treasury Secretary Janet Yellen
Business leaders don’t sound so confident though
"With May demand 17% below expectations, we don’t have enough work for our agents and support staff, and fewer sales leave us with less money for headquarters projects -- But mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales" - Redfin (RDFN) CEO Glenn Kelman
"We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter and could last for an extended period. In past crypto winters, trading revenue (our largest revenue source) has declined significantly." - Coinbase (COIN) CEO & Co-founder Brian Armstrong
"We've really put an emphasis on making sure that we scrutinize every new hire into the company, every new position to make sure that it's needed because you don't want to be growing your headcount significantly into the face of a big downturn." - General Motors (GM) EVP & CFO Paul Jacobson
"I think it’s eye-catching frankly or ear catching that everyone keeps talking about how wildly strong this economy is. I mean GDP was negative in the first quarter and GDP now from the Atlanta Fed for the second quarter is now at zero, and has been trending in a southward direction for the last few months. So, where’s the strong economy?" - DoubleLine Capital CEO Jeffrey Gundlach
"...sometimes I feel really like a roadrunner, where you've gone off the cliff and you're still running and you're just waiting to fall, but it hasn't quite happened yet." - Lazard (LAZ) CEO Kenneth Marc Jacobs
International
Emerging markets teach us that high inflation doesn’t have to be catastrophic
"I say that what we frequently don't realize because most of the people who do the assessment come from developed markets is that how resilient people are. For us here in Europe, having 5% or 10% inflation, it's life-changing. This was like 30, 40 years ago or a devaluation could be something that is critical. For people in Argentina or in Brazil or in other countries, it's something that they have experienced many, many times. So, it's not a catastrophe. It's another crisis before the next one that might come and people think about how they would cope with that. I was in São Paulo two weeks ago, inflation is high, the cost of living is high, but the city is buzzing. People are going on with their lives. And I think this fundamental element of the consumer psychology reflects the fact that emerging markets are sometimes more resilient than the developed markets where people have far more disposable income." - Colgate-Palmolive (CL) Group President, Europe & Developing Markets Panagiotis Tsourapas
There is no rapid recovery in China
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Europe’s economy is being hit much harder than the US
"Europe is differentiated a little bit by the fact that the economies are likely to slow down faster because of the high dependence on very expensive energy at the moment and also the fact that there's not as much of a stimulus cushion in Europe as there was in the U.S., where the consumer really has built up enormous savings. That was not the case in Europe. Also, the credit markets are not quite as deep in Europe in the following way -- the high-yield market is not deep a market. It's much more reliant on bank financing and private credit, which has been a bit of a ballast to activity in the U.S. over the last 6 months or so, is not as present in Europe as it is in the U.S. But still, it's a -- it's going to be -- it looks like it's going to be a little bit more challenging economic environment sooner than the U.S." - Lazard (LAZ) CEO Kenneth Marc Jacobs
Financials
There are a lot of people with capital looking for a deal
"Companies are still wanting to do things. As crazy as it sounds, financing levels are still okay -- there's a lot of reasons why companies want to actually get going on mergers -- Frankly, in a couple of Board meetings that I've been at recently, the Board has basically said, "We don't want to necessarily want to do anything right now, but we want to be ready to go the minute the market stabilizes.” -- I think levels are getting pretty low right now, and I think a lot of sponsors are really sharpening their pencils and they're looking at the things that they really like." - Evercore (EVR) CEO John S. Weinberg
But capital markets are frozen right now
"...we're in an environmental change. Who is bringing the company public now? How many people have the confidence to go to their Board and say "let's do this M&A deal” when you don't run particularly in certain sectors when you have no idea what the pricing will be in a week? So banking is going to be in a hole for a while, that's fine. It's just a late." - Morgan Stanley (MS) Chairman and CEO James Gorman
Strategic buyers are in a favorable position
"IPO market's shutdown, SPAC market's shut down and the private fundraising market is close to a shutdown. And so lots of good companies that have good technologies or good market positioning are finding themselves in a position where a strategic exit to a cash flushed strategic who needs technological advancement is probably their only exit." - Moelis & Co (MC) Co-Founder Navid Mahmoodzadegan
Some companies probably want to go back private
"Sometimes it takes a while for that to settle in on the sell-side. And I also think you have a whole host of companies that haven't gone public, either through traditional IPOs or SPACs. A lot of those stocks are off 50%, 60%, 70%. The whole thesis for being public, hey, it will make our employees happy, we'll be able to get some liquidity as founders and we'll have a currency to go do M&A. When your stock's off 60%, 70%, none of those theses hold true anymore. And so I do think going privates of those companies -- we're working on some of those already or corporates looking at some of those companies and potentially taking them out of their situation, I think will help the M&A market once we find this equilibrium you're talking about." - Moelis & Co (MC) Co-Founder Navid Mahmoodzadegan
There are still a lot of SPACs out there
"I think SPACs will go back to being a niche product. Longer-term, it will apply. It'd be helpful to certain kinds of companies who are looking to get sponsorship from a set of sponsors who have been in the business, have a track record, and have a following. What happens -- your question was what happens in the interim to these 400 or 500 names? I think there's a combination of some of them won't get deals done, they'll liquidate as you mentioned. Some will scratch together and claw together transactions. It will be interesting to see what those transactions look like." - Moelis & Co (MC) Co-Founder Navid Mahmoodzadegan
Bankers are getting excited about restructuring opportunities
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Consumer delinquency rates may be ticking up slightly
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Consumer
Consumers are accepting large price increases
"We are not seeing any significant trade down or trading across brands, due to pricing and it's been very rational. So our categories, all the competitors in those categories are all taking price move and we would expect the economics to be fairly similar in categories that are the same. What we're watching though is three rounds of pricing and the largest amount of pricing we've ever taken in a single year. And though our brands are very strong right now, and elastities are holding, we're going to watch that as we head into a very difficult time for the consumer." - Clorox (CLX) CEO Linda Rendle
Travel is remarkably strong
"...we've had a strong view really throughout the pandemic, the travel including business travel would absolutely come back to pre-pandemic levels. And I think if you look at every airline every hotel probably every speaker you've had at this conference Betsy travel has come back remarkably strong this year." - American Express (AXP) CFO Jeff Campbell
"The strongest revenue growth would be in areas like travel, leisure, entertainment, that is remarkably strong not just in the U.S. but even Europe. People are getting back out there." - Blackstone (BX) COO Jon Gray
“...if you’ve flown on a plane lately, planes are very full and plane tickets are very expensive.” – Federal Reserve Chair Jerome Powell
Airline execs struggling to raise capacity to match demand
"...what the airlines are struggling with right now is they can't overnight create enough capacity to actually match the demand and that has certainly had some pricing implications in the airline business." - American Express (AXP) CFO Jeff Campbell
Kroger is seeing some changes in consumer behavior
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Recessions historically have hit lower-income consumers much harder
“Unfortunately, the last 2 recessions have been pretty devastating to the consumer. But recessions before that really didn't impact the upper-middle class. Our target market very much. They're not the ones who lose their jobs, their home values didn't go down. Their savings didn't go down. It really affects people maybe in lower socioeconomic realms. So again, if we have a normal recession coming next, that's why we think we can continue to grow the business through it." - Marriott Vacations Worldwide (VAC) CFO Anthony E. Terry
Technology
No recession being felt in Oracle’s ERP business
"I'm not sure I'd call it countercyclical, but the cloud systems cost a lot less than the on-premise systems to run. So -- and they give you much better information. They allow you to control expenses better. They don't cost that much to implement because you pay for them over time. So we -- what we're seeing is a -- let's take a look at NetSuite, which is the low end of the market, and you think those would be the companies to be most affected by the recession. It's not JPMorgan Chase. They'll keep building -- they'll keep putting in new systems. But some smaller entrepreneur-led companies, you think that the recession we got them. They had -- we got the most revenue we ever got from NetSuite this past quarter. and the highest growth rate that we've ever gotten from NetSuite this past quarter. They are accelerating into the recession because we think the benefits are enormous and it equips the companies to compete more effectively. And again, we don't see that business slowing down. Quite the contrary, we see our ERP business both Fusion and NetSuite accelerating. This in spite of the macroeconomic situation" - Oracle (ORCL) CTO Lawrence Ellison
Facebook will have a hard time ever competing with TikTok for this reason
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Industrials and Transport
Inflation is eating into margins
"We've talked about $5 billion of cost pressure, so I don't think you can talk about a flat year-over-year performance without talking about that. I mean that really is the story of everything." - General Motors (GM) EVP & CFO Paul Jacobson
"We've talked publicly about $530 million of cost inflation in commodities and logistics. Now again, that's not all the inflation, but that's probably 75% to 80% of the inflation we're dealing with is in those two buckets. In a typical year for Clorox, we'd be looking at something closer to $50 million of inflation. So we're dealing with 10 times the level of inflation. And as a result of that, our margins are down this year." - Clorox (CLX) CFO Kevin Jacobsen
Supply chains are improving
"Supply chain is making great progress. Manufacturing is making great progress. You may see from time to time, plants coming down for a period of time as we continue to lean in and accelerate that journey. We're trying to manage that in the context of everything going on with chips, some logistics et cetera, but I think the team continues to do a great job." - General Motors (GM) EVP & CFO Paul Jacobson
"... improvements are clearly visible. So, I think it's a fair statement. They are by and large behind us" - Colgate-Palmolive (CL) Group President, Europe & Developing Markets Panagiotis Tsourapas
"... we are now seeing for 4 months in a row being able to finally build inventory. So our service levels that reach the bottom of the pandemic December last year. So throughout this whole year consistently, we have been taking this. We're still below the historical levels, but it's actually visible already how that's already alleviating -- I think the whole sector is probably experiencing the same" - Kraft Heinz (KHC) Global CFO Andre Maciel
But new issues are popping up
“I do think semis are better, but I think you're now starting to see other kinds of rocks that are being uncovered in the industry, and I think you'll start to see that until we get to kind of stability in the industry where we just haven't run at 92 million vehicles in a while. And so to get back to 92 million, it's not going to be a light switch that's flipped on. It's not like if semi cons are available, all of a sudden, there's going to be 92 million. I mean you still have port congestion. You still have a lack of truck drivers. You still have a tight labor market. You still have energy constraints in Europe. And so I think there will be other things that will challenge the industry to get back to 92 million outside the semi cons even." - Adient (ADNT) EVP of Americas Jerome J. Dorlack
"We are seeing some better signs of allocation of parts. But right now, what I think is a little bit more challenging is other issues relative to supply. If China shuts down the front end or back end processing, inventory levels are so short that it obviously creates a disruption within our customers. And so even though I think there's more clarity because the customers are more sophisticated with how they're allocating and looking at chip manufacturing and capacity, there are other issues that are creating problems within the chip supply and some other unrelated chip supply issues that we're struggling with, with what's going on in Europe and then the most recent shutdown in China. So although it's better, there are still some short-term challenges that we're facing." - Lear (LEA) CEO Raymond E. Scott
Inventory levels are still frighteningly low
“I do expect more inventory than what we have right now. It's frighteningly low in a lot of dealer lots if you drive by them. It's marginally better than where it was a year ago, but we still have a little ways to go from that standpoint. That being said, we don't obviously want to ramp up dealer inventories in the face of a weakening consumer. So we're also being mindful about production in that way as well." - General Motors (GM) EVP & CFO Paul Jacobson
Ferrari isn’t interested in self-driving cars
“No customer is going to spend money for the computer in the car to enjoy the drive. The value of the man, of the human at the center, is fundamental." - Ferrari (RACE) CEO John Elkann
Real Estate
Surging mortgage rates have been a shock to the housing market
"The sudden and dramatic surge in mortgage rates has been a shock to the system for housing. With inflation still at 40-year highs, mortgage rates are likely to stay elevated for a while, so the market will have to adjust to this new reality. The good news is that cheap debt is no longer fueling unsustainable home price growth, and existing homeowners are in a good position, holding record-high home equity with debt-financed at record low mortgage rates. Homebuyers however are facing mortgage rates near 6%, which means the housing-market slowdown will likely continue into the fall, but one silver lining is that homebuyers are facing less competition for the first time in two years” - Redfin (RDFN) Chief Economist Daryl Fairweather
Homebuyer budgets are declining
"Homebuyer budgets are essentially flat from last year, up just 0.3% year over year nationwide in the three months ending April 30, the slowest growth rate since June 2020. When mortgage rates go up, buyers’ budgets go down, And when buyers’ budgets go down, sellers have to meet buyers where they are. Budgets haven’t fallen from a year ago and we don’t expect home-sale prices to fall, either. But the fact that budget growth has slowed so significantly is one sign among many that home-price growth will continue to slow as the year goes on" - Redfin (RDFN) Deputy Chief Economist Taylor Marr
Nuggets of Wisdom
Think long-term
"If you were to look at a chart of volumes over the Amex network, beginning of the year 2000, look at what people expect for this year, draw straight line from those two points. It's remarkable when you take that long-term perspective how 9/11, which certainly caused a little bit of an economic slowdown, the great financial crisis, the pandemic, all of those events start to recede if you really think about the long-term growth projective we've been on and that we're focused on. So, I think that's the most underappreciated thing Betsy is that we believe our long-term growth objectives are the right ones" - American Express (AXP) CFO Jeff Campbell
We sent out some special quotes from a Seth Klarman Interview that happened last week. Here are our top picks of good quotes:
Think about the downside:
"Most investors at wall street are tilted to be bullish; almost all research reports are buy reports and not sell reports. Most individuals don't sell short, so there's a bias towards going long. There's nothing wrong with that, except that, at times, it means that people are not thinking about the downside at all. I would recommend a balanced approach -- When you focus on return at the exclusion of risk, you try to take more risk to get the return; you get the risk but may or may not get the return. If you focus first on the risk and mitigate or avoid or reduce the risk, then you've protected the downside, and then maybe you get the return."
Learning from mistakes via post-mortems:
"We spend a lot of time on post-mortems. I am a big fan of those because every investment at some point or another feels like a mistake that after you buy it goes down, after it goes up you didn't own enough and what could you have done differently. Not trying to be perfect but trying to pull what kernels of information you might have for next time