Inflation Running Hot
But employment is more important to the economy than inflation
Succinct Summary:
Inflation is high, but employment is more important to the economy than inflation. And for the moment employment is strong. Consumer balance sheets are healthy, and so it would take a pretty strong recession to impact consumer demand. Consumers don't appear deterred by inflation yet. This could lead to more inflation.
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Macro:
Inflation is high and broad
"U.S. inflation hit a 40 year high. Inflation is high and broad and one need not look any further than the corner gas station to see it." - Cintas (CTAS) CEO Todd Schneider
“I think it's fair to say. We expect the inflation to be significant” - General Mills (GIS) CEO Jeff Harmening
But employment is more important than inflation
"I mean the way I talk about it is 10% growth in gas prices is nowhere near as impactful as 100% of your wages. And so employment matters more, and I think that market continues -- that indicator continues to be very positive for the consumer. And that certainly shows up in our data right now. It doesn't mean it won't happen. I'm not saying that folks are wrong. I'm saying that it just hasn't shown up yet given the strong labor market, and I don't know that it will. I do know that we are monitoring the business in anticipation of something happening. Again, it's important for us to react quickly, but we haven't seen anything yet." - Affirm (AFRM) CFO Michael Linford
And employment is strong
"...there's so many open jobs today. And when you think about what really causes a recession, it's employment. And as things slow down a little bit, it's just -- it's not -- I just don't see companies, especially where the supply chains have been somewhat broken and inventories levels are low, I don't see us getting to a higher -- a significantly higher unemployment level anytime in the near term, barring something really happens bad with what's going on overseas. And so I just think this one is different, because of where employment is. It's not like we've perfectly matched everybody that's willing to work with a number of open jobs. We have so many open jobs today. And I look at our shop here and say, 'Boy, if we had to come in and cut some more overhead, it would be almost impossible to do because we have a fair number of open jobs here.' So that's the one variable that I think is so different in this environment." - Darden Restaurants (DRI) CEO Gene Lee
Consumers' balance sheets are strong
"I think that it's going to take a fairly solid recession to really have some impact on the consumer. I think the consumer balance sheet is stronger than it has been previously -- what we're seeing today is that consumer demand remains fairly strong. And as this environment seems to be very different than a lot of other environments we've operated in the past, where we’ve got a lot of headwinds impacting the consumer, but wages are increasing rapidly and especially more so on the lower end." - Darden Restaurants (DRI) CEO Gene Lee
Inflation isn't impacting demand yet
"...it's a pretty benign elasticity environment right now, which is not to say there's no elasticity. Certainly, as prices go up, there will be some level of elasticity, but it's also important to note that it's not in line with historical elasticities given this current environment." - General Mills (GIS) CEO Jeff Harmening
Which could lead to continued inflation
"...our current view is that inflation in Q2 will be the highest inflation quarter we've had, and that's mostly driven by Ukraine. So we do a lot of forward look and we get really good visibility a quarter ahead, and there's a lot of shortages, there's a lot of downstream effects from commodity materials that will impact this year in the quarter. So our perspective is up a lot from where we were in Q1, mostly driven by the shortages in Ukraine, and it's why we have this big increase that we're putting in place here in Q2, the big price increase" - H.B. Fuller (FUL) CEO Jim Owens
International:
Is the era of globalization over?
"...the Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades -- The magnitude of Russia’s actions will play out for decades to come and mark a turning point in the world order of geopolitics, macro-economic trends, and capital markets." - BlackRock (BLK) CEO Larry Fink
"The recognition of these negative aspects of globalization has now caused the pendulum to swing back toward local sourcing. Rather than the cheapest, easiest and greenest sources, there’ll probably be more of a premium put on the safest and surest -- If the pendulum continues to move for a while in the direction I foresee, there will be ramifications for investors " - Oaktree Capital Management (OAK-A) Co-Founder & Co-Chairman Howard Marks
"Well, we do have to and this is not just because of the Russia Ukraine situation, but this became evident in the pandemic that may be American businesses have focused on efficiency and organizing supply chains in ways that lower costs but impair resilience, and resilience of supply chains is a high priority for the administration. And so, to an extent, that, that will lead to some reallocation of where production is placed." - United States Treasury Secretary Janet Yellen
China may not shut down over COVID
"...by now, close to 90% of China's total population are fully vacated. With two shots, over 45% of the total population has received the booster shot. With the current health care measures, and importantly, lower mortality rate, we are finally seeing the coronavirus becoming a, hopefully, more manageable threat." - Trip.com (TCOM) Co-Founder & Executive Chairman James Liang
Consumer:
Higher rates have not impacted buying home buying behavior
"...rates have moved. But so far, we're not seeing any evidence of a shift in product type. We're not seeing any stress on the borrowers' ability to qualify for a loan." - KB Home (KBH) Jeffrey Mezger
Restaurant traffic has normalized since Omicron
"...as COVID cases declined and the operating environment normalized, sales improved throughout fiscal February, and we had strong results that exceeded our internal expectations. Sales strength has continued into March. Quarter-to-date, our average weekly sales are slightly ahead of our February actuals" - Darden Restaurants (DRI) CEO Gene Lee
You can now stream full seasons of TV for free on YouTube
"...according to Nielsen, YouTube reached over 135 million people on connected TVs in the U.S. in December 2021.1 YouTube is at the forefront of the consumer shift to CTV viewership as the top ad-supported streaming platform with the content people enjoy and the creators they love. And now US viewers for the first time will be able to watch full seasons of TV shows on YouTube for free with ads. Now you can stream nearly 4,000 episodes of your favorite TV shows, including Hell’s Kitchen, Andromeda, Heartland, and more. YouTube also has over 1,500 movies from Disney Media & Entertainment Distribution, Warner Bros., Paramount Pictures, Lionsgate, FilmRise, and more. New titles in March include Gone in Sixty Seconds, Runaway Bride, and Legally Blonde, which are now available to stream for free with ads." - YouTube
Amazon’s ad business is almost as big as YouTube
“We know that Amazon now does $40 billion of advertising revenues, which is as big as YouTube. So marketplaces have begun media machines, right? And if you extrapolate in the case of Amazon, it's roughly 5% of their GMV” - Farfetch (FTCH) Founder, Chairman & CEO José Ferreira Neves
Nike is shrinking its wholesale channels
"Over the past 4 years, we have reduced the number of wholesale accounts worldwide by more than 50% while delivering strong revenue growth through NIKE Direct and our remaining wholesale partners." - NIKE (NKE) CFO Matt Friend
Building a two-sided marketplace is hard to do
"On the very first day, you decide you want to be a marketplace that a buyer shows up and if there are no sellers, that buyer goes away. Conversely, the very first day, a seller shows up, if there's no buyer, that seller goes away. So building a two-sided marketplace is hard to do. And there aren't that many successful ones." - Etsy (ETSY) CFO Rachel Glaser
Technology:
Data centers are AI factories
"Data centers are becoming AI factories -- processing and refining mountains of data to produce intelligence. NVIDIA H100 is the engine of the world's AI infrastructure that enterprises use to accelerate their AI-driven businesses -- if you look at the computers that we announced today, it has incredible size. For example, 80 billion transistors. We have eight of those chips in one system. And then we take 32 of those systems, and we put it together into one giant GPU. They work like one giant GPU. So instead of just 80 billion transistors, now look at the scalability we get…” - Nvidia (NVDA) CEO Jensen Huang
Gaming is huge and growing
"Gaming is huge. The industry is on fire. The number of gamers, eSports, athletes, creators and broadcasters engaged in new shared experiences is exploding. With 3 billion gamers, no one is asking if gaming is growing. The question is, how big will it get? And you can start by looking at Generation Z. By most measures, it's the largest generation ever. When surveyed, 80% of Gen Z are gamers and gaming is their favorite activity twice as high as music, watching TV, movies or social media." - Nvidia (NVDA) EVP Jeffrey D. Fisher
“[Our] Gaming revenue has grown at a 4-year 23% compound annual growth rate with both units and ASPs contributing -- here are 3 billion gamers globally growing every year" - Nvidia (NVDA) EVP & CFO Colette M. Kress
NVIDIA may manufacture GPUs at Intel foundries
"They're interested in us using their foundries, and we're very interested in exploring it.I am encouraged by the work that is done at Intel, I think this is a direction they have to go, and we're interested in looking at their process technology. Our relationship with Intel is quite long; we work with them across a whole lot of different areas, every single PC, every single laptop, every single PC, supercomputer, we collaborate." - Nvidia (NVDA) CEO Jensen Huang
Technology is one tool to fight inflation
"...pricing is a component of our strategy, but it is -- by no means is it the only strategy to combat pricing -- or excuse me, to combat inflation. So we're taking other steps and they almost all involve technology. And these were all initiatives that we have been working on. However, due to the inflation subject, we decided to pull them forward and go faster with them." - Cintas (CTAS) CEO Todd Schneider
Okta & Microsoft suffered cyber security lapses
“Our understanding is that during January 2022, hackers outside Okta had access to an Okta support employee’s account and were able to take actions as if they were that employee. In a screenshot shared on social media, a Cloudflare employee’s email address was visible, along with a popup indicating the hacker was posing as an Okta employee and could have initiated a password reset” - Cloudflare (NET)
“This week, the actor made public claims that they had gained access to Microsoft and exfiltrated portions of source code. No customer code or data was involved in the observed activities. Our investigation has found a single account had been compromised, granting limited access. Our cybersecurity response teams quickly engaged to remediate the compromised account and prevent further activity. Microsoft does not rely on the secrecy of code as a security measure and viewing source code does not lead to an elevation of risk. The tactics DEV-0537 used in this intrusion reflect the tactics and techniques discussed in this blog” - Microsoft (MSFT)
Healthcare:
Only 10% of viruses have vaccines
"...there are around 220-ish viruses that are known today to infect humans around the world. And what is remarkable is since 1980, in the last 40 years, more than 18 new viruses have been identified -- And if you look at the data of actually how many vaccines are available against those viruses, it's actually quite a low number. It's around 10% on the entire population, around kind of 25 vaccines have been made available" - Moderna (MRNA) CEO Stephane Bancel
COVID could drive healthcare costs for decades
"So COVID, as we unfortunately know, in the pandemic setting, has caused over six million deaths globally. And the global population of older adults is only expected to increase. In fact, it is going to double between now and 2050. If you just look at the projected deaths, mortality rate, and disability-adjusted life-years associated with respiratory infections in 2016 and extrapolate into that larger population, it will become one of the larger dramatic drivers of cost and disability globally over the next few decades." - Moderna (MRNA) CEO Stephen Hoge
Industrials and Transport:
Are supply chains improving?
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Labor shortages appear to be getting better
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Transports may be improving too
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Materials & Energy:
Energy security is a top global priority
"As companies recalibrate their global supply chains, and as Western allies reduce their dependence on Russian commodities, the energy sector will be meaningfully impacted. Consumers are facing higher energy costs as we saw the price of oil cross $100 a barrel earlier this year for the first time since 2014. As a result, energy security has joined the energy transition as a top global priority." - BlackRock (BLK) Chairman Larry Fink
"...energy is one of the aspects worth pondering. The desire to punish Russia for its unconscionable behavior is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs; Russia supplies roughly one-third of Europe’s oil, 45% of its imported gas, and nearly half its coal. Since it can be hard to arrange for alternative sources of energy on short notice, sanctioning Russia by prohibiting energy exports would cause significant dislocation in Europe’s energy supply. Curtailing this supply would be difficult at any time, but particularly so at this time of year, when people need to heat their homes. That means Russia’s biggest export – and largest source of hard currency ($20 billion a month is the figure I see) – is the hardest one to sanction, as doing so would cause serious hardship for our allies. Thus, the sanctions on Russia include an exception for sales of energy commodities. This greatly complicates the process of bringing economic and social pressure to bear on Vladimir Putin" - Oaktree Capital Management (OAK-A) Co-Founder & Co-Chairman Howard Marks
In the long term, there will be more renewables
"We ultimately do want to move towards a clean energy future and that should be more true today than ever, not only for climate reasons, but we’re seeing today as President Putin, a huge producer of oil invaded Ukraine, the price of oil went up. So moving to a clean energy solution is not only good for climate change. It should also be a national security priority for our country." - United States Deputy Treasury Secretary Wally Adeyemo
But natural gas investment remains a necessity
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It's harder to replace gas than oil
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Real Estate:
Office occupancy turned positive for the first time since 2020
"...according to CBRE data, the US office real estate market recorded the first positive net absorption since the start of the pandemic. This means more space was occupied than vacated during the fourth quarter of the calendar year 2021." - Steelcase (SCS) CEO Sara Armbruster
Companies expect to maintain office space
"...because companies are most likely to see peak attendance in the middle of the week, they do not believe there is much of an opportunity to shrink their footprints. Across respondents, the estimated decrease in office space needs is only 1%." - Steelcase (SCS) CEO Sara Armbruster
Nuggets of Wisdom:
Build inspirational things
"The next one is a new one that we added that we call Build Awesome Things. And the idea here is that— I actually think that there’s a pretty big difference between things that are valuable and things that are awe-inspiring and amazing -- I actually think that there’s this balance where you need to do both. You can’t do things that are just all inspiration and no substance. But I also think you can go too far in the other direction of just doing things that are useful, but I think a lot of what the world needs right now is inspiration. There are a lot of things in our lives in modern-day that work pretty well, but a lot of what we sort of lack is a positive vision for the future. A lot of the metaverse work to me has that level of inspiration and that’s partially why I find it super exciting." - Meta (FB) CEO Mark Zuckerberg
Manage your energy
"It’s the external stuff that doesn’t bother me that much. People can criticize us. If they’re people I respect, I care a lot about that and want to make sure we do better, but it doesn’t make me not sleep at night. When our stock price goes down, that doesn’t make me not sleep at night. When there’s a new competitor, that doesn’t make me not sleep at night. If there’s an issue on my team and there isn’t good cohesion, then I’m not sleeping well until I resolve that. It goes back to the very first thing we were talking about with fencing. It’s intellectual, and you’re managing your energy. But I think in order to get through these things and build big, long-term things, you need to take care of yourself and you need to take care of your core team. And basically, in doing so, you can, I think, lead a pretty large organization through some pretty difficult times to do some pretty awesome stuff. But I think that it’s intellectual, it’s energy, and it’s about kind of training yourself to be uncomfortable." - Meta (FB) CEO Mark Zuckerberg
Trust beats paranoia
"It turns out that paranoia is just paranoia. There is nothing to be paranoid about. It turns out that people want to win, but nobody's trying to 'get ya.' So we try to take the not-paranoid approach when we work with partners. We try to rely on them, let them know we are relying on them, trust them, and let them know we trust them. So far it is working pretty well” - Nvidia (NVDA) CEO Jensen Huang