The Flexibility to be Aggressive
Some happenings in the Macro section are giving the Fed the flexibility to be aggressive in our fight against inflation
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Succinct Summary: Concerns about recession still hang over the economy, but for now consumer spending has been relatively stable. The Fed seems to want to see more of a slowdown in demand. Several members of the central bank spoke hawkishly last week. They seem to set the stage for another large increase in interest rates. Typically this sort of dynamic ends in a recession.
Macro
The Fed stepped up its aggressive rhetoric last week
"It is very much our view, and my view, that we need to act now forthrightly, strongly, as we have been doing, and we need to keep at it until the job is done" - US Federal Reserve Chair Jerome Powell
"First, inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward -- The second takeaway is that the fears of a recession starting in the first half of this year have faded away and the robust U.S. labor market is giving us the flexibility to be aggressive in our fight against inflation. For that reason, I support continued increases in the FOMC's policy rate and, based on what I know today, I support a significant increase at our next meeting on September 20 and 21 to get the policy rate to a setting that is clearly restricting demand.” - US Federal Reserve Governor Christopher Waller
“We are in this for as long as it takes to get inflation down -- So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.” - US Federal Reserve Vice Chair Lael Brainard
Aggressive tightening usually ends in a recession
"I mean you have to look at what's going on when the policy in the U.S., and it seems to be elsewhere, is to slow the -- slow economic growth, one could come to the conclusion, well, Jim, if they're doing everything in their power to slow economic growth. What do you think is it going to be slower economic growth, I would say, yes, well, probably, they're putting every kind of pressure they can to slow things down to get inflation under control." - CSX (CSX 0.00%↑) CEO James Foote
"4 out of 5 times the Federal Reserve raises interest rates, we have a recession. That's just the math. It's not my opinion. 4 out of 5 times the Federal Reserve raises interest rates, the U.S. goes into a recession." - RH (RH 0.00%↑) CEO Gary Friedman
In fact, we may already be in a recession
"I mean it's so funny because we're -- I don't know, people keep saying, are we going to be in a recession? We're in a recession. Anybody who thinks we're not in a recession is crazy. The housing market is in a recession, and it's just getting started. So it's probably going to be a difficult 12 to 18 months in our industry. But these are the times where you can really capitalize." - RH (RH 0.00%↑) CEO Gary Friedman
This is what the Fed wants
"...there are signs of moderation in economic activity, which is what the FOMC is trying to achieve by tightening monetary policy." - US Federal Reserve Governor Christopher Waller
But if we are in a recession, consumers don’t know it
"In terms of spending across income levels, affluent spend is still very strong. You see that in restaurants. You see that in credit. You see that in travel, high-end hotels, high-end restaurants, and so on. And the lower-income spender is also holding up well. Maybe they're spending in somewhat different areas. For example, food and drug is holding up very well, maybe helped a little bit by inflation there and so on because we only see the nominal growth. But there's no evidence of a slowdown in spend across income cohorts nor is there any -- when you look at early bookings of travel, they seem to be holding up pretty well so far -- But when you put them together, effectively, between July and August quarter-to-date, we're indexing at about 146% to 2019." - Visa (V 0.00%↑) CFO Vasant Prabhu
"The question that continues to be debated broadly in the market is whether we are headed for a recession or a soft landing. Our most recent Business Spend Index provides some interesting insights into this topic with respect to macroeconomic data, unemployment, and inflation. Just as an example, we have seen significant increases in airfare prices. Yet despite the uptick in prices, demand has not fallen. But rather has increased as businesses progress towards returning to pre-pandemic levels of travel. The net effect of the underlying data shows some signs of projected growth in certain areas and signs of potential contraction in others." - Coupa Software (COUP 0.00%↑) CEO Rob Bernshteyn
"As you look at the metrics that we're monitoring, one of the ones that we monitor most closely is buy rate, which is the number of trips that consumer makes to a retail outlet, times the dollar spend per trip. And the good news is that the consumer continues to be very resilient. If you look at high-end beer, and you look at the Hispanic consumer in beer, you’re seeing an increase in both the number of trips and in the dollar spend. So again, it’s pretty resilient" - Constellation Brands (STZ 0.00%↑) CFO Garth Hankinson
"What I see in the data so far is that the consumer did struggle a bit a few months ago when gas prices kind of were a shock and some of the other commodity prices were a shock. And we did see a little effect on a la carte purchases and some caution in the consumer especially in the developed markets, the U.S., and Western Europe. My sense looking at the data today is that has kind of stabilized. We're not seeing further deterioration driven by macroeconomic factors. And so what that tells me, I know I'm the first to say I'm not an economist, but what that tells me is the consumer has kind of adjusted. They made some adjustments over the last few months and they've sort of reached some level of stability." - Match Group (MTCH 0.00%↑) COO & CFO Gary Swidler
International
Cross-border business continues to recover
"Cross-border business is also continuing to recover. We told you that we'd see some moderation of the recovery; the cross-border recovery has been a step kind of thing. So, last year, borders first really opened up in October, we saw a big step up in cross-border travel and then it sort of stabilized at Omicron and even went down a bit. And then we had some more restrictions being removed in the spring and we saw a big step up in May and June. And now once again, sort of, we're in sort of, a steady recovery mode. The next leg up we think will be when channels open, which we don't think is happening anytime soon. But we're indexing at about 115% on travel, which is slightly better than the third quarter." - Visa (V 0.00%↑) CFO Vasant Prabhu
United Airlines is seeing strong demand in Europe and Asia
"Europe has recovered. Demand is very strong in Europe. And so you see that -- you've seen it in our results, you are seeing in our results. Flipping to Asia Pacific. Look, we see robust demand. Whenever countries reduce the entry requirements or eliminate entry requirements, we see really, really robust demand. And I think there's almost a tale of 2 Asias. There's like China, and Japan, which is a bit more metered and a bit more cautious. And then there's everything else, from Korea to Singapore through the South Pacific. And it's all coming in incredibly strong. And we're very proud of the yield, we're very happy with the margins. And Asia Pacific is just -- it's actually our strongest entity." - United Airlines (UAL 0.00%↑) SVP of International Network & Alliances Patrick Quayle
Financials
Merchants are not interested in getting paid in crypto
"We generally see less of a demand on the merchant side. Merchants are interested not in getting paid in crypto. They're more interested in accessing consumer spend power. And that is best done through the cards that we have." - Mastercard (MA 0.00%↑) EVP Blockchain and Digital Currency Expert Raj Dhamodharan
The Fed’s financial stability watchdog thinks that stablecoins deserve tighter regulation
"History shows that in the absence of appropriate regulation, private money is subject to destabilizing runs, financial instability, and the potential for widespread economic harm. In the nineteenth and early twentieth centuries, before the advent of prudential bank regulation and deposit insurance and before action was taken to ensure private money creation by banks was appropriately regulated, repeated crises did substantial damage to the U.S. economy. I believe Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter. I look forward to continued partnership with other regulatory agencies and Congress to address the risks of stablecoins." - US Federal Reserve Vice Chair for Supervision Michael Barr
Consumer
Lower-income households are trading down
"Our data would tell us that customers are making some decisions to trade down, particularly those in lower-income households. This is not across all categories. But for example, in the television category, customers are moving more into our lower price point exclusive brands products. We're also seeing more interest in sales events, such as Prime Day, tax-free events, and other events geared at exceptional value." - Best Buy (BBY 0.00%↑) Corie Barry
Businesses are still having a lot of trouble hiring and retaining talent
"So the issue of hiring, getting people through the door is not a problem, right? So we're getting people hired. What we are seeing is that they're not staying, that there is higher than normal turnover, and there's significant absenteeism. And we do think that partly driven by the labor market that we've had, the ability to find many jobs elsewhere. So to your point, is that as the labor market potentially tightens, does that lead to lower turnover, the ability to keep people longer and then build that experience and that training? Absolutely. So it's not getting people hired, it's not a labor rate, it is just keeping the turnover down so that we can build the experience within our facility." - Hormel Foods (CEO 0.00%↑) James Snee
“...we've worked and we've worked and we've worked. Are we behind? Obviously, where I thought we would be, even a year ago, if normal trends had persisted, we would have been able to staff up quickly and keep things moving and return to normal very quickly. But in terms of where we are today versus, say, what we said early in the year, getting back to our headcount of 2019 of 7,000 employees, and that's active people working, available to work, not just people in training, but available to work. We said we'd get back to 7,000. We're over 6,800 today with another quarter to go.” - CSX (CSX 0.00%↑) CEO James Foote
Apparel consumption is seeing a big shift towards workwear
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We may never get back to pre-pandemic levels of people working in the office
"And even though the work-from-home phenomenon is subsiding somewhat in certain sectors, I don't think any of us believe they will ever get back to pre-pandemic levels of people working in the office and not using their existing residence for home offices." - Lowe's Companies (LOW 0.00%↑) CEO Marvin Ellison
There’s been significant over-investment in e-commerce
“So it's probably true that there was overinvestment in e-commerce for the past, pick your number, 5 years, 10 years. We've been saying for a very long time, I think it's exceptionally unlikely that there's going to be tens of thousands of standalone e-commerce brands out there. It just doesn't make sense because people can't remember 10,000 brands. So almost all of those brands have to be downstream of Google or Facebook, and that's where then all of the rent is going to go, right? They can only remember a handful of brands. I think we're going to see a reckoning." - ETSY (ETSY 0.00%↑) CEO Joshua Silverman
"Near end, what we're seeing is, we saw the acceleration in e-commerce that happened in 2020 and 2021, given COVID, it shot up. Everyone thought we had reset the curve three to five years out, and that's proven not to be true. It's come back in -- it's -- e-commerce is still slightly above the pre-COVID trend line. It's just growing at a more normalized pace now, but still plenty of runway ahead." - Shopify (SHOP 0.00%↑) CFO Jeff Hoffmeister
Netflix’s decision to partner with Microsoft has important implications for the digital advertising industry
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Parcel volume is declining because consumers are buying fewer goods
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Technology
Samsung cautions about slowing demand for chips in 2022
"The general perception earlier this year was that the second half would be better than the first half, but from April to May, it changed drastically. The world is changing so quickly" - Samsung ($SSNLF) Head of Device Solutions Division Kyung Kyehyun
There are still shortages in auto semis
"I'd say the short version is it's getting a little bit better, but you probably still have to wait a long time for ordering a new car, which is loaded with electronics. So, we have across the industry, a couple of very persistent shortages, which I also estimate to carry forward easily through next year-- overall, especially in the famous mature nodes, so say in the 16 to 90-nanometer space, there is persistent shortages" - NXP Semiconductors N.V. (NXPI 0.00%↑) CEO Kurt Sievers
The IT deal cycle has lengthened some
"And just as a reminder, most of our deals actually closed within 90 days whereas the larger deals, of course, can take longer. And those are the ones that we're seeing are being subject to increased scrutiny or maybe higher levels of diligence or where the deals are still there, but it's just the process of prioritization of that work is changing. So we're seeing a little bit of that, and we factored that into the view that we've taken from a top-line perspective." - PagerDuty (PD 0.00%↑) CFO Owen Howard Wilson
Tiktok is a disruptive force to be reckoned with
“The reason why this has been so challenging for companies to respond to in the United States, but also around the world, is the scale of TikTok's investment. What nobody had anticipated in the United States was the level of investment that ByteDance made into the U.S. market, and of course in Europe, because it was just something that was unimaginable -- no startup could afford to invest billions and billions and billions of dollars in user acquisition like that around the world. It was a totally different strategy than any technology company had expected before because it wasn't an innovation-led strategy; it was really about subsidizing large-scale user acquisition. TikTok got this great lead early on by really aggressively expanding, spending a huge amount of money to do that, so that people can train the algorithm and ultimately end up with a much more personalized feed that's harder to get on a new service" - Snap (SNAP 0.00%↑) CEO Evan Spiegel
“Being in tech, competition comes from nowhere. You know, none of us were talking about TikTok three years ago. I mean, you’re now talking about multiple companies, and there are very good companies like Trade Desk and so on. So it shows how vibrant this market is. It looks nothing like it looked a few years ago. I have always held the view that you tend to go wrong by focusing too much on competition. Big companies particularly fail because they stumble internally.” - Google (GOOG 0.00%↑) CEO Sundar Pichai
"We never put out the phone for somebody to endlessly, mindlessly scroll on a feed." - Apple (AAPL 0.00%↑) CEO Tim Cook
"TikTok should be banned in every democracy. I think it’s silly not to do that. We cannot enter China -- with Facebook, with Google, with Amazon, with other platforms — why would we allow them to play such a dominant role in our free market economy?” - Axel Springer ($AXELF) CEO Mathias Döpfner
Healthcare
Procedure volume still strong
"Really what we see, especially in the U.S., is just a large backlog. So if you have a 1 fit procedure, a WATCHMAN procedure, it could be -- in many cases, 3 to 6 months or 3 months to 4 months. So the demand side is quite high. And even in a recessionary environment, even if that has some impact, we still think demand is very strong, which would offset some of those headwinds. But clearly, you still see some pockets of COVID, like in Australia and Japan and pockets in China. So there still could be more utilization at the pure COVID was to go away. But overall, we're quite pleased with the volume." - Boston Scientific (BSX 0.00%↑) CEO Michael Mahoney
Industrials and Transport
Airlines are seeing a really strong September
"What I would say is we're seeing a really strong September, and it doesn't -- it does not appear that summer has come to an end. It's that strong. We look at Mexico, you look at the Caribbean, you look at Europe, kids are back in school, but the demand for our product in those places is the same as it was during the summer-- it's a premium leisure demand ultimately that's driving this strength." - United Airlines (UAL 0.00%↑) SVP of International Network & Alliances Patrick Quayle
"I will tell you this, as we get past Labor Day, our leisure bookings remain strong. I'm very pleased with that. That is something that -- there was some question about whether that would hold? Our business bookings remain strong. And as we look to the future in the fall, I anticipate being able to build from here." - American Airlines (AAL 0.00%↑) CEO Robert Isom
“I mean, we talked about this on the earnings call. It's not a -- demand is there. Demand is strong. There's a lot of demand. It's the supply that we would like to increase. Just it's -- we have built the airline to fly more, right? And so what we want to do is make sure that we get those aircraft back up in the air. The 78s are now going to go back up in the air." - American Airlines (AAL 0.00%↑) CFO Derek Kerr
The supply chain is still more of a burden than price
"You asked earlier about how our conversation with retailers is going. Everyone assumes that the first thing we talk about with our retail customers is pricing. That's actually not true. The very first thing we talk about is supply. I would tell you that most of our retail customers are more concerned about can they get product and can they get it delivered on time all the time, then they are about pricing." - General Mills (GIS 0.00%↑) CEO Jeffrey Harmening
Automobile demand has remained strong
"It used to be auto sales were going to be impacted by higher interest rates, right? Well, there's such a pent-up demand because of the problems with the ships over the last couple of years. I don't think anybody is looking down for a slow year in autos." - CSX (CSX 0.00%↑) CEO James Foote
“So not to be contrary or disappoint you, folks, but we're actually seeing demand in auto and industrial continue to be stronger than our ability to supply. If you remember back a couple of weeks ago, on our earnings call, we talked about derisking our backlog. And to be real clear, derisking our backlog is more art than science” - NXP Semiconductors N.V. (NXPI 0.00%↑) VP of IR Jeff Palmer
“Auto and industrial demand continue to be solid because those investments are driven by large inflections, such as electric vehicles and industrial automation. In these areas, chip makers are securing long-term capacity agreements that underpin their capital spending plans” - Applied Materials (AMAT 0.00%↑) CEO Gary E. Dickerson
But used vehicle prices are falling
"Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 4.0% in August from July. The Manheim Used Vehicle Value Index declined to 210.8 but is up 8.4% from a year ago." - The Mainheim Used Vehicle Value Index
EVs cross 6.5% share of total vehicles sold
"As you can see on this slide, in North America, in the United States, EVs crossed 6.5% share of total vehicles sold. That's a record number. That's up threefold from where it was just 18 months earlier. So we're really at the moment where EVs are going mainstream. And by the way, this is in a supply-constrained market that you're seeing this kind of growth." - General Motors (GM 0.00%↑) CEO of BrightDrop Travis Katz
Materials & Energy
Europe is facing an energy crisis
"We are deeply concerned that the winter ahead could deliver a decisive blow to many of our operations, and we call on EU and Member State leaders to take emergency action to preserve their strategic electricity-intensive industries and prevent permanent job losses. 50% of the EU’s aluminum and zinc capacity has already been forced offline due to the power crisis, as well as significant curtailments in silicon and ferroalloys production and further impacts felt across copper and nickel sectors. In the last month, several companies have had to announce indefinite closures and many more are on the brink ahead of a life-or-death winter for many operations. Producers face electricity and gas costs over ten times higher than last year, far exceeding the sales price for their products. We know from experience that once a plant is closed it very often becomes a permanent situation, as re-opening implies significant uncertainty and cost -- all metal production needs affordable and available electricity and gas, whether aluminum and zinc today or lithium and cobalt tomorrow. We are deeply concerned that Europe faces a critical situation for the foreseeable future, with a perfect storm of sky-high electricity prices, no energy market liquidity due to insecure gas supplies, a continued nuclear and coal-phase out, and the remaining power sources being insufficient to cover market needs. Europe cannot have a successful energy and raw materials strategy if its power and gas prices stay at today’s levels for a sustained period without relief." - Eurometaux (European Metals Association) Director General Guy Thiran
Companies are loading up on inventory in Europe to prep for gas shortages in winter
"...we have identified about 5% of our global industrial footprint, which is potentially at risk. And this account -- this means around 15, 16 plants, predominantly in Europe and predominantly in Germany and Switzerland. So we have set up a contingency plan and business continuity plans. There are 2 main things that we can do. The first one is to convert whatever possible the source of energy from gas to oil. And oil is widely available today, so not an issue. Whenever it's not possible, we will pile up inventory ahead of the winter. So we can start piling up inventory now to make sure that we can supply our customers" - Nestle ($NSRGY) CFO François-Xavier Roger
Nuclear reactors are quite expensive to build
"In my opinion, if somebody wants to build a new nuclear power plant, the answer will probably be no. The investment price is huge and the uncertainty about the returns over 40 or 50 years is not very exciting. I’m not sure my shareholders, including my Australian ones, will approve me putting a lot of money – $7 billion for a nuclear power plant – for a megawatt when I can build the same thing as offshore wind for half this price) - Iberdrola ($IBDSF) CEO & Chairman Ignacio Galán
Real Estate
Higher interest rates may further restrict home supply
"...if you think about interest rates for a second, 90% of our customers have a fixed interest rate. So even though the Fed has taken quite a bit of action, our homeowners and our customers are not impacted directly by higher mortgage payments because they are in a fixed interest rate environment and most of their interest rates are sub 3%. So if you consider the impact of a customer deciding to stay in their existing home because of a low-interest rate for – on a fixed rate, and because of the fact that we estimate, yes anywhere from 1.5 million to 2 million homes that are short versus the demand that’s currently in the marketplace, it incentivizes customers to actually stay in their existing home and invest in that home." - Lowe's Companies (LOW 0.00%↑) CEO Marvin Ellison
Nuggets of Wisdom
Why Disney never bought Twitter
"We were intent on going into the streaming business. We needed a technology solution. We have all this great IP. We weren’t a technology company. How do we get that IP to consumers around the world? And we were kicking tires left and right. We thought about developing ourselves. Five years, $500 million. It wasn’t the money, it was the time because the world was changing fast. And at the same time, we heard that Twitter was contemplating a sale. We enter the process immediately, looking at Twitter as the solution: a global distribution platform. It was viewed as sort of a social network. We were viewing it as something completely different. We could put news, sports, entertainment, [and] reach the world. And frankly, it would have been a phenomenal solution, distribution-wise. Then, after we sold the whole concept to the Disney board and the Twitter board, and we’re really ready to execute — the negotiation was just about done — I went home, contemplated it for a weekend, and thought, ‘I’m not looking at this as carefully as I need to look at it.’ Yes, it’s a great solution from a distribution perspective. But it would come with so many other challenges and complexities that as a manager of a great global brand, I was not prepared to take on a major distraction and having to manage circumstances that weren’t even close to anything that we had faced before. Interestingly enough, because I read the news these days, we did look very carefully at all of the Twitter users -guess they’re called users?- and we at that point estimated with some of Twitter’s help that a substantial portion, not a majority, were not real. I don’t remember the number but we discounted the value heavily. But that was built into our economics. Actually, the deal that we had was pretty cheap. Then you have to look, of course, at all the hate speech and the potential to do as much harm as good. We’re in the business of manufacturing fun at Disney, of doing nothing but good, even though there are others today that criticize Disney for the opposite, which is wrong. This was just something that we were not ready to take on and I was not ready to take on as the CEO of a company and I thought it would have been irresponsible" - Disney (DIS 0.00%↑) Former CEO Bob Iger
A good investor must be rigid and flexible at the same time
"...to be a good investor you have to be confident because you have to back things that are iffy and stay with them if they go bad, and if you’re in the public securities market you have to maybe buy more of them when they decline. But not so confident that you’re pig-headed and keep throwing bad money after good. You have to concentrate your holdings enough so that the few good ideas you get in your lifetime really make a big difference but you have to diversify to protect against the unforeseen." - Oaktree Capital Management Co-founder Howard Marks
There is a low incentive to be vulnerable and tell the truth
"...there is a low incentive for a business or a person to be vulnerable and honest as the consequences can often be as negative as the truth. It is usually a rational risk to bluff to keep up appearances even if it means they end up going ‘over the bluff’, leading to the surprise shutdown and stepdown announcements we have already occasionally seen from companies and people and will likely see more often in the coming quarters. On companies or people down on their luck: the naive may pray; knaves (and predators) may prey; but the brave (and practical) will parley––and constructively help those in need and do it both profitably and as trusted partners." - Lux Capital Co-founder Josh Wolfe