No Painless Way to do This
A likely rise in unemployment doesn’t seem to phase the Fed
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Succinct Summary: The Federal Reserve raised rates again last week by 75 bps. They also signaled continued increases ahead. The FOMC sees that the Fed Funds rate should rise by another 125 bps, above 4% by the end of the year. The Fed sees this as a restrictive monetary policy, intended to slow economic growth and bring inflation back down to 2%. It will likely mean a rise in unemployment, but that doesn’t seem to phase the Fed. There’s no painless way to do this.
Macro
The Federal Reserve is strongly resolved to bring down inflation
“I want to start here today by saying that my main message has not changed at all since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done. So the way we’re thinking about this is the overarching focus of the committee is getting inflation back down to 2%” - Federal Reserve Chair Jerome Powell
There’s no painless way to do that
"We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t. So what we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation, and that’s what we’re doing. And we certainly don’t hope – we certainly haven’t given up the idea that we can have a relatively modest increase in unemployment. Nonetheless, we need to complete this task” - Federal Reserve Chair Jerome Powell
The Fed is gearing up for a restrictive policy stance
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. As shown in the SEP, the median projection for the appropriate level of the federal funds rate is 4.4% at the end of this year, one percentage point higher than projected in June.” - Federal Reserve Chair Jerome Powell
We’ve only just started to reach restrictive levels
“We’re – you know, we’re just – we’ve just moved, I think, probably into the very lowest level of what might be restrictive and, certainly, in my view and the view of the committee there’s a ways to go.” - Federal Reserve Chair Jerome Powell
Real rates should be positive across the yield curve
“You want to be at a place where real rates are positive across the entire yield curve.” - Federal Reserve Chair Jerome Powell
But no one really knows how high rates will need to go
"No one, myself included, and certainly Powell knows how high rates have to go to stem this inflation" - Omega Advisors CEO Leon Cooperman
Economic growth has slowed down
“The U.S. economy has slowed from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. Recent indicators point to modest growth of spending and production. Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened significantly, in large part reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment, while weaker economic growth abroad is restraining exports” - Federal Reserve Chair Jerome Powell
"During the first quarter, manufacturing, global trade and consumer spending decelerated, particularly late in the quarter and certainly more than we anticipated. As a result, our first quarter volumes were lower than we forecasted. Our current expectations for 2022 U.S. GDP growth and U.S. industrial production forecasts have declined by about 100 basis points since June. Data shows that U.S. consumer spending has slowed as inflation remains a challenge." - FedEx (FDX 0.00%↑) Co-CEO of FedEx Services Brie A. Carere
"You’re starting to see all the classic early signs (of a recession). We are right now very close to a 0% growth year. I think it’s going to get worse into 2023 and then 2024, which has implications for elections" - Bridgewater Associates Founder Ray Dalio
"The impact of higher rates that are required to try to tame the inflation is likely to be moderating growth in America and around the world" - Citigroup (C 0.00%↑) CEO Jane Fraser
The housing market has been considerably impacted
"In addition to the well-documented supply chain constraints and limited workforce slowing production, housing has now been considerably impacted by the more than doubling of mortgage rates over the past months and therefore, the doubling of monthly payment costs and reduction of housing affordability. The housing market has continued to weaken, as expected, in response to the Fed’s too late, but now very rapid and aggressive reaction to inflation. Home building finds itself, once again at the forefront of all that is happening in the economy, and the Fed's use of its interest rate tool to curtail inflation is certainly having the desired effect on the for-sale housing market. The market is now adjusting. The interest rate movements were very sudden and adjusted very quickly, and that suddenness has always led to a pullback in housing demand. Part of the pullback is driven by simple affordability, and part of the pullback is driven by the psychology of the sudden and aggressive interest rate hike, causing either monthly payment sticker shock or a sense of having missed the boat." - Lennar (LEN 0.00%↑) Executive Chairman Stuart Miller
But the consumer is still in good shape
"US consumer is actually still in good shape -- have a good balance sheet, their debt balances are low, confidence levels are going up, jobs are plentiful" - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon
"We're fortunate to have the consumer in good shape entering into this" - Citigroup (C 0.00%↑) CEO Jane Fraser
There may be a light at the end of the tunnel for inflation
"We've seen minor improvement in a few areas. But all in, pressures from higher commodity prices, higher wages and higher transportation costs and supply chain disruptions. They're still present, but we are seeing just a little light at the end of the tunnel. And if you recall in the third quarter, we indicated that price inflation overall was about 7% plus for us. For the fourth quarter and talking with our merchants, the estimated price inflation overall was about 8%, a little higher on the food and sundries side, a little lower on fresh foods, and both higher and lower on the nonfood side. We're seeing commodities -- some commodities prices coming down, such as gas, steel, beef, relative to a year ago, even some small cost changes in plastics. We're seeing some relief on container pricing. Wages are still the higher thing when we talk to our suppliers. And as we all know, wages still seem to be the one thing that's still relatively higher. But overall, some beginnings of some light at the end of that tunnel. And of course, that could change each week." - Costco (COST 0.00%↑) CFO Richard Galanti
"We believe inflation is stabilizing. We are seeing transportation costs begin to moderate after reaching historic levels, but we are not seeing product cost deflation yet nor are we seeing any signs that labor wage growth is slowing" - AutoZone (AZO 0.00%↑) CEO Bill Rhodes
International
The international community is scared about energy markets
"People are scared s---less about energy outside of America. They are so scared about the macro-political conditions that no one wants to talk about them. Their enterprises are built for a static and unified world of peace. The balance sheets obviously are often not prepared for what's going to happen, which I think is going to be pretty bad in the next couple of years politically and economically." - Palantir (PLTR 0.00%↑) CEO Alex Karp
China travel picking up
"In the second quarter of 2022, the China domestic travel industry was largely impacted by the resurgence of the pandemic in multiple regions in China. Despite all the challenges, we are delighted to see that the fundamental demand for travel remained solid. Travel activities in the region that are less affected by COVID have recovered much faster. Hotel bookings in Southern China and the Western part of the country have surpassed 2019 levels since mid-May. Our total domestic hotel bookings has fully recovered and has surpassed the 2019 level in late June. Same city staycation hotel reservation in this quarter grew more than 30% versus 2019." - Trip.com (TCOM 0.00%↑) CEO Jie Sun
Financials
Net-charge offs are still low
"I think what Brian and I are trying to remind people is we just don't see it yet. We got a pretty good read on charge-offs from our 90 days past due credit card portfolio and our 30 to 60 bucket and our 5-day bucket. And at this point, we don't see anything alarming in there. And on the commercial side, whether it's the United States or whether it is international, we don't see anything to alarm us there either at this stage -- the underlying core portfolio and the core performance at this point on both consumer and commercial, it's in terrific shape." - Bank of America (BAC 0.00%↑) CFO Alastair Borthwick
Non-banks have taken a larger share of the mortgage market
"The mortgage market has changed dramatically. If you were to turn the clock back probably 10 or 15 years, you find most of the banks up here as the largest mortgage lenders in the country. That’s not even close to true today. It's not because we have purposely deemphasized the business. Regulations are inconsistent between banks and nonbanks, and cost structures are different. The nonbanks have taken an increasingly larger share of the market" - Wells Fargo (WFC 0.00%↑) CEO Charles W. Scharf
“When you think about the economy and where it goes to create risk versus leverage, honestly, there's more of that outside the banking system than inside. The amount of private credit, not only in mortgages but every single asset class, more than half of it's sitting outside our industry” - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
“It is riskier because the smaller companies cannot finance and advance funds to securitizations when there's a crisis. We could. We do need to reform it for the sake of the industry so that people can get mortgages at all times” - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon
Debt markets are opening up
“And there, as rates rise and as spreads become more volatile, we earn more in fixed income financing. So that should be beneficial to us. Equally, when rates rise, you see in primary activity a period of adjustment and then secondary activity increased volume. And so you're seeing that in the decline in primary activity on the investment banking side. Although in the last few weeks, the debt capital markets have been a little more active and we are a big shop in debt capital markets” - Barclays (BCS 0.00%↑) CEO Coimbatore Sundararajan Venkatakrishnan
Consumer
Stitch Fix says its customers are feeling more cash constrained
"I will say that consumers are telling us they are feeling more cash constrained." - Stitch Fix (SFIX 0.00%↑) CEO Elizabeth Spaulding
There's a continued shift back to workwear
"...we've definitely seen that continued shift back to workwear, both with our men's and our women's segments. Blazers are back to pre-COVID levels, and men's polos have been a strong trend. In women's, we also saw a 30% increase in seasonal heels. Clearly, people are going back into the work environment even if it's hybrid work, things like dresses have continued to be strong, particular types of dresses like medium maxi.” - Stitch Fix (SFIX 0.00%↑)CEO Elizabeth Spaulding
Consumers are spending less on pets
"What has changed is that when the people were locked down and had no possibility to travel, go on vacation, fly and things like that, they were really focused on their pets and their family. It was getting people closer, and they were much more inclined to spend money to go to the clinic and vet. And they have now so many of the other expenses we normally have. And so it was much easier for them to spend on their dogs. Now, they go on vacation, they travel, they move much more, they go out. And so we see that there is clearly less time to dedicate to the visit to the clinic, and there is probably less money to dedicate on the spending of the dog and cat, especially when we see the impact on the fuel, on gas and all the things, the energy costs are very expensive, and people today have to make priorities." - Virbac ($VIRP) Chairman Sebastian Huron
Viva Las Vegas
"So let's talk a little bit about what we're seeing in our markets. First of all, in the Las Vegas strip, business has really never been stronger in Las Vegas than it is right now. In the second quarter, we set all-time records in our Las Vegas properties -- Very strong also across virtually all customer segments. In the second quarter, we saw groups beginning to come back and now in the third quarter and looking into the fourth quarter." - MGM Resorts (MGM 0.00%↑) CFO Jonathan Halkyard
Spotify gets into audiobooks
"We’ve always believed that the potential for audio is limitless, and we’ve been saying for a while now that our ambition is to be the complete package for everyone’s listening needs. Audiobooks are next to come into the picture because we see a substantial untapped market: While audiobooks represent just a 6%–7% share of the wider book market, the category is growing by 20% year over year -- Starting today, users in the U.S. can easily find audiobooks on Spotify alongside music and podcasts as a section in their library, in search, and in their curated recommendations on Home." - Spotify (SPOT 0.00%↑) Newsroom
Hermes won't do NFTs
"Blockchain technology allows you to track your supply chain and add data in a faithful way, which is interesting. NFTs as a product for sale in their own right is a trickier question. We are craftsmen, and we’re not just selling an image. But in 10 years if our clients require NFTs to accompany physical products, so they can have an avatar dressed as they are, we can think about it. I’m not sure we’d ever sell an NFT without a physical product, but in a way, it won’t be up to us to decide. It will be the client." - Hermès CEO Axel Dumas
Office attendance is about 65% of where it was pre-pandemic
"All the global heads of real estate that we talk to, outside the U.S., people are much more in the office. Why? I think it's because there aren't unemployment rates in those countries is much higher. I think that's fundamentally what's going on. And then in the United States, we've got an increasing dichotomy here that the East Coast is more in than the West Coast in a general sense, and that's because of the technology trend primarily. Okay. So what has been our experience? These charts represent BXP's badge swipes. And by the way, we only really have good data on 10 buildings that are in Boston and New York. But what is this saying? It's saying that we are achieving post-pandemic highs in terms of people coming back to the office post-Labor Day. So we're hitting those right now. And that's not surprising for those of us that commute on trains or experience our cities. That's what it feels like. We're at about -- on a peak day, we're about 60% to 65% of where we were before the pandemic. And then the other thing is and I've talked about it is what's the work pattern during the week. So if you look at this chart on the top, by the way, it's not to scale on the y-axis. But what this tells you is Tuesday is the peak day, Wednesday and Thursday or close, Monday is 30% down from Tuesday, and Friday is 60% down from Tuesday. And that's the work pattern that we're seeing in our offices. Okay." - Boston Properties (BXP 0.00%↑) CEO Owen David Thomas
Companies are battling a productivity paradox
"Leaders think their employees are not productive, whereas employees think they are being productive and in many cases even feel burnt out. One of the most important things for us in this new world of work and hybrid work is to bridge this paradox." - Microsoft (MSFT 0.00%↑) CEO Satya Nadella
Hiring remains tough in many segments of the market
"Construction labor remains very tight as industry-wide high levels of volume for second half deliveries move through the various stages of construction. We expect to start seeing some easing in labor as the overall industry reduces the level of construction starts. This easing should start to first occur in the fourth quarter with front-end trades and in the first quarter with finished trades." - Lennar (LEN 0.00%↑) Co-CEO Jon Jaffe
"The most challenging job, though, to hire has been the driver job in the Pizza Hut business. And I think it's because there are so many other options for drivers now in the gig economy, being a rideshare driver -- We had this insight that if it takes longer than about 4 minutes to apply for a job, people drop out of the process because that's how long it takes in the other options." - Yum! Brands (YUM 0.00%↑) Christopher Turner
Technology
Big tech is slowing down hiring
"We are going to be more deliberate -- taking the same medicine, which is doing more with less. We have many businesses that are really doing super well and will continue to grow, but we will also be looking at what the macroeconomic situation is." - Microsoft (MSFT 0.00%↑) CEO Satya Nadella
The car is now connected to the cloud
"The car is now connected to the cloud. And we said that many times. Once you connect the car to the cloud, everything changes. The car becomes a center for services, distribution of content, for new applications. And that is very connected to not only how the car becomes a platform for new services and a new opportunity for the car companies." - Qualcomm (QCOM 0.00%↑) CEO Cristiano Amon
Industrials and Transport
Ocean and air freight rates are slowing down
"Our lower demand is consistent with the broader market, with ocean and air freight rates under pressure in recent weeks. A good indicator of how quickly the market changed in Asia is to review the spot rates coming out of Hong Kong and Shanghai. In June and July, spot rates were between 20% and 40% higher year-over-year, respectively. In early August, these rates fell to single digits, and by the end of the month, Shanghai had plummeted to a 10% decline year-over-year, while Hong Kong rates were flat." - FedEx (FDX 0.00%↑) Co-CEO of FedEx Services Brie A. Carere
Commodities are not continuing their downward slide, but have flattened
"So I think on the cost side, we saw significant downward pressure on things like steel, copper and aluminum. So actually feels like some of that may be bottomed and is inching upward again, but not any -- not relative to where it was, just sort of maybe flattening, let's say, rather than on a continued downward slide. feels to us like those costs are going to be lower as we roll forward and think about '23." - Hubbell (HUBB 0.00%↑) CFO William Sperry
There are still supply chain inconsistencies
"You're probably sick of hearing us whine about all this stuff, but the labor in consistency is still not smoothed out. Components, chips, are not readily available. And so there are still inefficiencies in the operating side." - Hubbell (HUBB 0.00%↑) CFO William Sperry
Traditional automakers lack leverage in EV that they had with internal combustion engines
"The battery technology resides with the battery makers. A lot of that is Korean and Japanese and more and more Chinese. The OEMs [carmakers] want more influence on that, and they’d actually love to control it. The OEMs made a living out of controlling the internal combustion engine technology with an iron fist and that’s their history. They don’t like that their suppliers know more about batteries than they do. Every conversation I have with either battery or OEM customers, they’re always asking ‘when can I have more and where can I get it? And they’re pounding the table around that, and we’re trying to respond to that." - Albemarle (ALB 0.00%↑) CEO Kent Masters
Materials & Energy
JPM is not afraid to fund oil and gas projects
"Absolutely not [we do not have a policy against funding new oil and gas products] and that would be the road to hell for America. We aren't getting this one right. The world needs 100 million barrels effectively of oil and gas every day. And we need it for 10 years. To do that, we need proper investing in the oil and gas complex. Investing in the oil and gas complex is good for reducing CO2. We've all seen, because of the high price of oil and gas — particularly for the rest of the world — you've seen everyone going back to coal." - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon
Real Estate
Buyers have moved out of the housing market
"Although the long-term outlook remains positive, many prospective buyers have paused and moved to the sidelines amid higher mortgage rates, along with ongoing inflation and a range of macroeconomic and geopolitical concerns." - KB Home (KBH 0.00%↑) CEO Jeff Mezger
Land costs are adjusting downwards
"And as the market recalibrates, land costs will have to adjust as well. Accordingly, we are reviewing and re-underwriting every land deal in our pipeline to the current market conditions. In time, new land deals will have different pricing that will be properly sized to the home sales prices." - Lennar (LEN 0.00%↑ ) Executive Chairman Stuart Miller
Homebuilders are walking away from sites that no longer meet their underwriting criteria
"...we will walk away from programs that we have or land that we have under contract that no longer meet the underwriting criteria and where we have the ability to walk away at an attractive cost. We're just not going to go forward on deals that no longer meet the underwriting criteria -- we've probably walked away from something in the nature of 10,000 home sites just over this past quarter." - Lennar (LEN 0.00%↑) Executive Chairman Stuart Miller
“...in some cases, the land sellers are sticky, and they're not willing to reduce price, and they're not extending because they think they've got other people in the wings that will come in and take your position -- We're doing everything and anything to preserve these positions. But if it doesn't make sense, we are prepared to walk” - KB Home (KBH 0.00%↑) CEO Jeff Mezger
There are still tailwinds for the housing market though
"While demand has cooled at once high pricing levels, demand for shelter still exists, where price intersects with current interest rates to produce an affordable monthly payment. There is still a housing shortage across the country, especially workforce housing and household formation has continued to rise. There's still very limited inventory and there's very little exposure to traditional inventory overhangs like foreclosures and speculators. Additionally, buyers are still seeking shelter from inflationary pressures on rentals as scarce rentals and increased demand from those who would otherwise purchase, drive and keep rents higher." - Lennar (LEN 0.00%↑ ) Executive Chairman Stuart Miller
Nuggets of Wisdom
Look ahead 18-24 months
“I learned this way back in the 70s from my mentor Drelles. I was a chemical analyst. When should you buy chemical companies? Traditional Wall Street is when earnings are great. Well, you don't want to buy them when earnings are great, because what are they doing? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. You always have to sort of imagine the world the way it's going to be in 18 to 24 months. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.” - Duquesne Capital Founder Stanley Druckenmiller
Fun does not equate to making money
"I remember when Google was small and scrappy. Fun didn’t always — we shouldn’t always equate fun with money. I think you can walk into a hard-working startup and people may be having fun and it shouldn’t always equate to money. I do understand some of the travel restrictions at a time like this and RTO and people wanting to see each other, definitely is not ideal. - - If you haven’t seen your team in a while and it’ll help your work by getting together in person, I think you can do that. I think that’s why we are not saying no to travel, we are giving discretion to teams." - Google (GOOG 0.00%↑) CEO Sundar Pichai
Make sure everybody is winning
"I think one of the core lessons of building a platform is you have to look in every direction and make sure everybody is winning. It’s really hard to do. But that is the definition of winning, right? The definition of success is like- Everybody wins; nobody has to lose. - - It’s a good framework for evaluating if a company is going to succeed at the end of the day. Is one of the stakeholders really losing? Is everybody benefiting from this? You can apply that to a lot of companies to figure out, “Does this have staying power or do they need to really invest in their compliance, their government relations, their neighborhood?” It’s like Airbnb. Everybody wins in Airbnb except for the neighbors. It’s like, “Okay, what are we doing about that?” They spend a lot of time saying, “Hey, no parties allowed. No this or that,” to try to solve that kind of flaw in the model." - Flexport CEO Ryan Petersen
Experiencing Volcker the maniac
“Volcker had just come in. All of Wall Street was talking about inflation going to 25%. Bonds, I think, yielded like 14%. Nobody wanted anything to do with bonds. I watched this guy give a talk. And I said, Oh, my God, this guy is a maniac. He's gonna do whatever it takes to break inflation. And he raised rates to like 20%. And I think inflation was 12, or 13. In my mind, he was going to crush the economy, he was going to crush inflation. So I put 50% of our money into 30-year bonds and the rest in cash. I own no equities, which was heresy. And we went into a terrible recession, the bonds never traded there again. It was the luck of the draw. Trust me, David, if I had started in a different moment, I would have had a bad year and I probably would have gone out of business. But it was a rocket ship, particularly relative to what else was out there” - Duquesne Capital Founder Stanley Druckenmiller
Love your guys succinct recaps of important things said in earnings, events, etc.