The Fed Speaks
The Fed seems to acknowledge that the economy is booming, labor markets are strong and that supply chain bottlenecks are leading to inflation
Welcome to this week’s edition of The Transcript. Note that parts of the quotes which appear in italics are only available to our paid subscribers.
Summary: The Fed met last week and seemed to acknowledge that the economy is booming, labor markets are strong and that supply chain bottlenecks are leading to inflation. Yet the FOMC also indicated that it would maintain a highly accommodative monetary policy into 2023 and beyond. If longer-term inflation expectations moved significantly higher, the Fed might change course, but this is not their base case.
Macro
Demand is very very strong
"The problem now is that demand is very, very strong. Incomes are high. People have money on there in the bank accounts. Demand for goods is extremely high, and it hasn’t come down. We’re seeing the service sector reopening, and so you’re seeing prices are moving back up off their lows there." - US Federal Reserve Chair Jerome Powell
And labor markets are tight
"…again, if you look at the forecast, we’re going to be in a very strong labor market pretty quickly here. There are still a big group of unemployed people, and we’re not going to forget about them. We’re going to do everything we can to get people back into work and give them the chance to work. But there’s every reason to think that we’ll be in a labor market with very attractive numbers, with low unemployment, high participation, and rising wages across the spectrum. So that’s a little bit how we’re looking at the labor market." - US Federal Reserve Chair Jerome Powell
"…there's imbalances right now with so many businesses looking for workers at the same time, at the same time that workers are coming back into the workforce." - Walmart (WMT) CFO Brett Biggs
"…certainly when you think workers in our factories and our distribution centers, that is challenging. It's also challenging for us getting people to work in our factories right now in New York, in Pennsylvania and in Milwaukee as well." - Harley-Davidson (HOG) CEO Jochen Zeitz
"I think the biggest challenge our industry faces, not just us, but the entire construction industry is labor." - Concrete Pumping (BBCP) CEO Bruce Young
Inflation may not be transitory
"Clients are very worried about whether this inflation is going to be transitory. The Fed seems confident… you know, economists always seem confident, they discover afterwards." - Man Group (MNGPF) CEO Luke Ellis
"We've seen a tremendous ramp-up that really started at the beginning of this calendar year. Our view is that this is not transitory. And so we're planning as if we're going to be operating in this environment for the better part of our fiscal year '22, which for us starts next month." - Clorox (CLX) CFO Kevin Jacobsen
“…it's somewhat disingenuous to say that inflation is transitory for them to say inflation is transitory because if we look at the past episodes where inflation has been transitory, it was with reaction function to a Federal Reserve Board with a completely different mandate, right? They had a dual mandate” - Investor Paul Tudor Jones
Banks expect rates to go up
"Rates are going to go up. Now I know I'm a hawk and I've said I think they go up a little sooner than what the Fed points would suggest. I don't know, maybe I'm wrong about that." - Morgan Stanley (MS) CEO James Gorman
"We have a lot of cash and capability and we're going to be very patient because I think you have a very good chance inflation will be more than transitory...we've actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates. I do expect to see higher rates and more inflation, and we're prepared for that." - JPMorgan Chase (JPM) CEO Jamie Dimon
"Where do interest rates go from here, where do inflation rates go from here and where their tax rates go from here. We believe all 3 are likely to trend higher into the back half of the year" - Wells Fargo Investment Institute
GDP growth could be 10% in Q2
"…I would add 1 more 10% to your number. There is a good chance the second-quarter GDP of this year and we see the number could be somewhere around 10% growth for the second quarter, which is eye-popping as well…From a macro perspective in our mid-year outlook…just this year alone 7% GDP growth for all of calendar year 2021" - Wells Fargo Investment Institute
But the Fed expects to remain highly accommodative for a long time
"With regard to interest rates, we continue to expect that it will be appropriate to maintain the current zero to one quarter percent target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time...More important than any forecast is the fact that whenever liftoff comes policy will remain highly accommodative. Reaching the conditions for liftoff will mainly signal that the recovery is strong and no longer requires holding rates near zero." - US Federal Reserve Chair Jerome Powell
Liftoff is well into the future
"I’ll say is rate increases are really not at all the focus of the committee. The focus of the committee is the current state of the economy. But in terms of our tools, it’s about asset purchases. That’s what we’re thinking about. Liftoff is well into the future. The conditions for liftoff, we’re very far from maximum employment, for example. It’s a consideration for the future. So the near term thing is really a discussion that will begin is really about the path of asset purchases." - US Federal Reserve Chair Jerome Powell
The Fed says that it would react if inflation expectations moved higher
"We don’t in any way dismiss the chance that it can work out that this goes on longer than expected, and the risk would be that over time, it does begin to affect inflation expectations. If we see inflation expectations or inflation moving up in a way that is really materially above what we would see as consistent with our goals and persistently so, we wouldn’t hesitate to use our tools to address that. Price stability is half of our mandate, and we would certainly do that....We do not expect that, though. That is not our base case" - US Federal Reserve Chair Jerome Powell
Take the dots with a grain of salt
"The dots are not a great forecaster of future rate moves. It’s just because it’s so highly uncertain. There is no great forecaster of future dot. So dots to be taken with a big grain of salt." - US Federal Reserve Chair Jerome Powell
International:
The global recovery is being led by the US and China
"When I look at this recovery, it's being led largely by the U.S. and China. And when I look at the U.S., in particular, things like the stimulus have proven to be key." - Citigroup (C) CFO Mark Mason
The recovery is slower in the rest of the world
"Volumes are looking good overall. There are some puts and takes, right. The U.S. looks stronger than not just we, but I suspect most of your guests have expected. Outside the U.S., the recovery probably is a little slower than we might have hoped on spending, but more or less balances out." - American Express (AXP) CFO Jeff Campbell
Financials:
Banks have an embarrassment of riches
"We've got CET1 above, I don't know, 16%, 17% now. We're sitting on 300 basis points above. So we have an embarrassment of riches." - Morgan Stanley (MS) CEO James Gorman
Employees are expecting more flexibility to work from home
"We don't have specific policies that we've actually outlined for our company yet, we will be more flexible, we will likely be at a more hybrid environment, we're not going to be all in the office, nor are we going to be completely remote. But exactly how we operate in that vein, is still to be determined. We're taking our time, because we don't want to try to declare, you know perfect knowledge. Now, when I think that no one exactly knows the best way in which is all going to play out. What we do know is that employees are going to expect more flexibility, there's going to be a war for talent. And we're going to want to continue to provide the flexibility that our employees demand so that we can continue to attract the best in the world." - Airbnb (ABNB) CFO Dave Stephenson
Top execs seem to want people in offices
"We do our work inside Morgan Stanley offices. And that's where we teach. That's where our interns learn, that's how we develop people, that's where you build all the soft cues that go with having a successful career that aren't just about Zoom presentations...If you can go to a restaurant in New York City, you can come into the office, and we want you in the office... there'll be more flexibility because we've learned that we can function with a little more flexibility...But Labor Day, I'll be very disappointed if people haven't found their way into the office, and then we'll have a different kind of conversation." - Morgan Stanley (MS) CEO James Gorman
“After Labor Day, our view is all the vaccinated teammates will be back and we’ll be able to operate fairly normally, and we’ll then start to make provisions for the other teammates as we move through the fall,” - Bank of America (BAC) CEO rian Moynihan
Consumer
Theme parks have strong demand
"Our forward-looking reservations are really strong at our domestic parks, and we're seeing also strong underlying demand at our Disney Cruise Line in terms of what we're seeing from consumers." - Walt Disney (DIS) CEO Bob Chapek
"The demand side of Orlando, we have virtually no international visitation yet, which normally, depending on the time of year is between 20% and 30% of our attendance. And yet without any of that attendance, we're already hitting our capacity and doing better, in some cases than in 2019, which is remarkable given how soon coming out of this we are. One of the things you'd expect actually is with less international and more domestic visitation, you'd expect forecasts to be lower, and we're actually not seeing that." - Comcast (CMCSA) NBCUniversal CEO Jeff Shell
Disney upfront TV advertising Revenue for coming fall season rose by double digits
“Well, this is our first year of consolidated sales across our entire enterprise into one ad sales group. And so for us, the results were really, really encouraging across our portfolio I should say. We had price increases versus '19, which is again, probably the best base year to evaluate it against, that were all significant. And our total upfront revenue was up by double-digits. And I think that sets sort of a nice headline if you will. But 40% of our sales this year were actually in streaming and digital, which I think speaks to the nature of how this business is rapidly changing, and obviously.” - Walt Disney (DIS) CEO Bob Chapek
Technology:
What is the metaverse?
"You’ve been talking about the metaverse for some time, and you’ve had interest in this area for a long time. I believe we’re right on the cusp of it. The metaverse, as you know, for all of you who are learning about it and hearing about it, it’s a virtual world that connects to the world that we live in. It’s a virtual world that is shared by a lot of people. It has real design. It has a real economy. You have a real avatar. That avatar belongs to you and is you. It could be a photoreal avatar of you, or a character. In these metaverses, you’ll spend time with your friends. You’ll communicate, for example. We could be, in the future, in a metaverse right now. It will be a communications metaverse. It won’t be flat. It’ll be 3D. We’ll be able to almost feel like we’re there with each other. It’s how we do time travel. It’s how we travel to far places at the speed of light. It could simulate the future. There will be many types of metaverses, and video games are one of them, for example. Fortnite will eventually evolve into a form of metaverse, or some derivative of it. World of Warcraft, you can imagine, will someday evolve into a form of metaverse. There will be video game versions." - Nvidia (NVDA) CEO Jensen Huang
Facebook sees Peloton-like subscription to VR
“Think about it like Peloton, where you have a subscription, but instead the device is VR and you put on your headset, and you’re in this amazing environment and you’re doing a boxing class with an instructor, or a dance class,” he said. “It’s quickly expanding beyond games into a bunch of other use cases, and we think that this is eventually going to be a big part of the next major computing platform after phones and after PCs. Compared to video conferences, I actually think that even with the state of virtual reality today, there are a lot of reasons it actually feels better to have meetings in virtual reality,” - Facebook (FB) CEO Mark Zuckerberg
Healthcare:
It may be premature to declare victory on the pandemic
"…you also saw in the United Kingdom, which has, I think, at least as high, if not higher vaccination rates, they’ve had an outbreak of the Delta variety. It’s causing them to have to react to that. So you’re not out of the woods at this point, and in my thinking, it would be premature to declare victory" - US Federal Reserve Chair Jerome Powell
Moderna and Pfizer never had the live virus on site
"…if you look at Moderna or Pfizer BioNTech, they've actually never had the live virus on their site, their entire vaccine development program, you know, that's helping power us out of this pandemic has been based on genomic data coming off Illumina sequencers." - Illumina (ILMN) CEO Francis deSouza
Industrials and Transport:
There are some signs that supply chain disruptions are healing
"I think, our supply chain, from a performance perspective is better today than probably what it was 8 or 10 months ago. So we're catching up, if you will. And it's not so much a Lowe's issue, it's actually our suppliers in the industry in totality is catching up, if you will." - Lowe's (LOW) CFO David Denton
"A lot of the OEMs...have said that the second quarter hopefully will be a bit of a trough for them in terms of some of the supply chain disruptions they see. But all in all, things have been very positive." - Sirius XM (SIRI) CFO Sean Sullivan
But things may not fully heal until 2022
"I think based on where levels are right now, I would expect this to probably be a headwind into the first half of '22. I actually believe that there will be some abatement in this. I've been saying that for months, and I've been wrong every day. But I think what we see here, especially around the logistics side of the business, is the global supply chain for moving things around and commodities was never really meant to stop. And I'm not just talking about us, I'm talking about industry in the aggregate. And we see a lot of growing pains when the restart. The fact is that as comfortable as we may be growing in a post-vaccinated U.S., we have to acknowledge that the world isn't there yet, and you see that playing out in Malaysia. So I think this is a little bit of a slower recovery in the supply chain but, certainly, one that we have adapted to." - General Motors (GM) CFO Paul Jacobson
"We certainly do expect the semiconductor issue to get better in the second half of the year. But as I also indicated in our earnings call -- our last earnings call that we expect the semiconductor issue will carry into the 2022 calendar year period of time." - American Axle & Manufacturing (AXL) CEO David Dauch
"We expect that the semiconductor challenges are going to continue into the second half....So we do expect the second half in terms of chip availability to be slightly better. But there are some fundamental pressures in the second half that I think are unique versus the run rate that we've seen in the first half that starts probably with commodity inflation." - General Motors (GM) CFO Paul Jacobson
We may just have to wait this out
"The real, probably, solution here [to the supply chain issues] is: Wait it out. No one likes to hear that,” - Flexport CEO Ryan Petersen
Nuggets of Wisdom:
Succession planning is very important
"I think my job description should be to manage Morgan Stanley as best as I possibly can with what we're dealing with, but also to position it for the next decade or 2. And I take succession planning really seriously. I did it from my very first Board meeting because you never know in this world, and you've got to be prepared. And we've got the luxury of some time here. I'm not leaving in the next few years. But we also need to formally start grooming people, giving them more experiences, more exposures. And we've got a terrific team. We've got 4 or 5 people at the top who could replace me." - Morgan Stanley (MS) Chairman & CEO James Gorman
Failing is part of life
“We do allow ourselves to fail. We try to fail internally, instead of externally, because we don’t want to involve customers into failure. But we develop things and subsequently decide not to ship. We begin going down a certain road and sometimes adjust significantly because of the discovery that we make in that process. Failing is a part of life, part of whether you’re a new company start-up or a company that’s been around for a while. If you’re not failing you’re not trying enough different things.” - Apple (AAPL) CEO Tim Cook
Full transcripts are available at Aiera, Seeking Alpha, and CNBC, among Others