The Transcript 05.24.21: Boom Time

Economy booming, optimism high

May 24, 2021

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Succinct Summary: The economy is booming and optimism is high. People are going out to events again as the world normalizes. But capacity utilization is also high and there is significant and broad-based inflation. The Fed expects this to be transitory but some CEOs seem to disagree.

Macro

The economy is booming

"…we are going to enter a booming economy. It's happening as we speak….I have little doubt that excess savings, new stainless savings, huge deficit spending, more quantitative e.g., a new potential infrastructure bill, a successful vaccine, and before now the end of the pandemic, that the U.S. economy will lightly boom, and this boom run to 2023 because all of the spending could extend well into 2023.” - JP Morgan Chase (JPM) CEO Jamie Dimon

Optimism is higher than at the beginning of the year

"…overall, my optimism is higher than it was at the beginning of the year" - Walmart (WMT) CEO Doug McMillon

People are going out to events again

"As the weather warms up and vaccines are more readily available, customers are feeling increasingly confident to get dressed up and venture outside. They're also starting to attend events again. Accordingly, we're seeing an improvement in dresses, both special occasion like prom, mother of the bride and casual...Denim is another area that is improving across styles and price points." - Macy's (M) CEO Jeffrey Gennette

"…the additional acceleration really came out of apparel, and that was also very broad-based as the customer kind of came from just bring activewear, moving into more real, what I would call, real apparel or even those casual, but still broader classifications of products” - Ross Stores (ROST) CEO Barbara Rentler

Capacity utilization is high

"I mean our capacity utilization is high. we don't have a lot of excess capacity internally." - General Mills (GIS) CEO Jeffrey Harmening

Labor markets remain extremely tight

"…labor markets are extremely tight, delaying efforts to ramp up. To date, we have experienced frequent disruptions." - Deere & Co (DE) President of Production and Precision Ag Cory Reed

“I think one of the biggest challenges on the supply side is labor, and it's at our suppliers, but it's also in the logistics channel, whether it's warehousing or truck drivers or port labor. All of those things are a challenge.” - Deere & Co (DE) IR Director Josh Jepsen

“So I think our clients are struggling with the tight labor market. They're struggling with the ability to access inventories” - Fifth Third Bancorp (FITB) President Timothy N. Spence

Companies are managing through significant and broad-based inflation

"…would just go by saying the inflation pressure we're seeing is significant. ███ ████ ██████ ████ █████ ████ ██ ███ ████ ██████ █████ ████ ████████ ██████ ████ █████ ████ ██ ███ ████ ███████ ██ ███ █████████ ████████ █████ ███████ █████ ██ ████ ████ ████████████ ███ ██████ █████ ██ ████ ████ ████ ████████████ ████ ███████████ ██ ██████████ ████ ████ █ ███████████ ██████ ██████ ██ ███████ ████ ██ ██████████████ ██ █████████ ██ █████ █████ ████ ████ ████ ████ ████ █ ████ █████ ███████ █ ███████ █████ █████ ███ ███████ █████████

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Inflation is transitory when it's not happening to you

"I hear Chairman Powell talked about transitory inflation. I mean I think transitory is what you use when it's not happening to you. And you could say the OPEC was transitory in the 1970s, but didn't feel very good while it was going on. So how long is the inflationary pressure going to last? I don't know. But it feels to me that certainly for the next 12 months, we're going to feel inflationary pressure across a broad part of our portfolio." - General Mills (GIS) CEO Jeffrey Harmening

International:

The whole world is recovering.

"…we're in a period of economic recovery and growth in almost every place around the world. Some countries are still dealing with the grips of the pandemic, but others are seeing meaningful economic growth and recovery." - Moody's (MCO) CEO Robert Fauber

Worldwide demand is growing very, very quickly

"…coming into 2021, we seem to be firing on all engines. So you look at the demand and you look at it sort of on an instantaneous basis, if you look at for the remainder of this year, the demand in China and demand in the rest of the world is really just growing very, very quickly." - Alcoa (AA) CEO Roy Harvey

“…gasoline demand has increased as COVID-19 lockdowns either end or ease worldwide, in particular, Chinese demand has risen above the 2019 average…Recovery in the U.S. gasoline demand from Q2 of this year due to stronger driving activity will push demand close to 2019 consumption levels by the end of 2021. Traffic congestion is near pre-COVID levels across Asia, Europe and the U.S. Global jet fuel demand is forecast to increase substantially as the summer holidays approach.” - Navios Maritime (NNA) Navios Corporation Vice Chairman Ted C. Petrone

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Financials:

Credit losses have been shockingly low

"I would have thought more middle-market companies would have really softened in COVID. They didn't. So even middle-market companies, losses are basically 0. Like there are a couple of oil -- smaller oil companies had suffered, but really shockingly low losses" - JPMorgan Chase (JPM) CEO James Dimon

“The payment rates has really been the anomaly over the recent past. I mean, they're historically high…It's worth noting that the flip side of those high payments is this amazingly strong credit performance…the other thing I'd say is credit, where over the last year, we've seen credit card loss rates be roughly half of what they have been historically…the credit metrics..have been and continue to be just quite remarkable. We keep calling it strikingly good.” - Capital One Financial (COF) CFO Andrew Young

Sustainable investing is seeing extraordinary flows

"…we're getting enormous traction in ESG. So wealth management firms and even within wealth management firms, the more retail-oriented firms as well because their clients or their users starting -- are starting to care about ESG." - MSCI (MCSI) CFO Andrew Wiechmann

“So if we look at Europe…, 2020 was a record year for fund flows into sustainable products. It was twice the fund flows in '20 versus 2019. And in fact, in Europe, we saw almost 5x the fund flows last year versus 3 years earlier. ...Again, record flows into sustainable funds in the United States in 2020, double the assets we saw flowing in again a year before that and 10x the asset flows in 2018." - Morningstar (MORN) Sustainalytics CEO Michael Jantzi

Consumer:

Retail comps are very strong

"…outstanding performance continued this quarter with total company comparable sales growth of 25.9%. Our U.S. comps were 24.4% with broad based growth across all geographic regions and divisions." - Lowe's (LOW) CEO Marvin Ellison

"The results we delivered in Q1 are nothing short of outstanding. Comparable sales grew by nearly 23%, making it our fourth consecutive quarter in which comp sales grew more than 20%. Maintaining that pace this quarter was especially notable, given that we were comping over double-digit growth a year ago. Over the last 2 years, comp sales have grown about 36% and total sales expanded by $6.5 billion in the first quarter alone.” - Target (TGT) CEO Brian Cornell

“Walmart U.S. comp sales were stronger than expected up 6% in the quarter and up 16% on a two-year stack. Sam's Club grew comp sales nearly 11%, excluding fuel and tobacco.” - Walmart (WMT) CFO Brett Biggs

“32-plus percent comps in the first quarter, that was not something we were anticipating” - Home Depot (HD) CEO Craig Menear

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Home spending has remained hot

"…many of the categories fueled by the pandemic haven't slowed down. Our home store continues to deliver growth across textiles and furniture” - Macy's (M) CEO Jeffrey Gennette

"Although all of us are looking forward to a post-COVID world, our research tells us that the importance of the home will remain elevated for many years to come.” - Lowe's (LOW) CEO Marvin Ellison

“…clearly, over the last year, as customers have spent more time in their homes, they've told us that their home is never more important than it is today. And many of those customers, like myself, we got to see a whole lot of things that needed to be done around the home, and they've been going after that” - Home Depot (HD) CEO Craig Menear

Technology:

Semiconductor demand continues to be strong

"Looking at the overall market, demand for semiconductors is very strong. While some of the near-term demand can be attributed to segments such as automotive, catching up after a year of COVID slowing, there is an undeniable new wave of growth on the horizon as every vertical market demands machine learning chips to harvest their big data for their specific needs. In other words, the early technical successes of machine learning in the cloud are now moving to the edge" - Synopsys (SNPS) Chairman AArt de Geus

“When we think about the general consensus from third-party research, you're at about $1 trillion of semiconductor revenues by 2030. The demand driving that is broad-based. You're seeing a handoff from consumer-oriented devices to something that's far larger and more substantive around this fourth wave of compute, the data economy. By 2025, machines will generate 99% of the data. Humans will generate 1%. You're seeing a decoupling of semiconductor demand for the first time in the industry's history from population and population growth in consumer behavior.” - Applied Materials (AMAT) CFO Daniel J. Durn

“Demand for semiconductor facilities is exploding both in the U.S. and overseas. W&W is currently building 2 Intel fabs, 1 in the U.S. and 1 in Israel, with fabrication for 2 new Intel facilities to start soon. W&W is also building the large TSMC fab near Phoenix” - Alleghany Capital (Y) CEO David Van Geyzel

Just in time supply chains may not work for semiconductors

"Current capacity shortfalls in some areas of the market show the highly efficient, just-in-time supply chains that have served the semiconductor industry well for the past 2 decades may not be the most effective strategy going forward. There's a clear desire for the chip industry to build more resilient and flexible supply, including more regionally distributed capacity as the strategic importance of the semiconductor supply chain is increasingly acknowledged at a national level." - Applied Materials (AMAT) CEO Gary Dickerson

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5G to be a great driver of revenues for some this year

"…we're expecting a really healthy environment, you know, 5G, being one of the big drivers, and also for us, you know, with 5G comes content growth, you know, in it – in a 4G phone, DRAM, there's 3 gigs to 4 gigs of DRAM in a 5G phone to get the 5G experience. A minimum of 6 gigs, and we've seen skews at 8, 10, or 12, at even 16 gigs." - Micron (MU) CFO David Zinsner

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Industrials and Transport:

Supply chains are still disrupted by Covid

"Despite progress in the U.S. with respect to the pandemic, COVID remains a challenge as we face disruptions to some of our foreign operations and supply base with India as the most recent example." - Deere & Co (DE) President of Production and Precision Ag Cory Reed

Inventory shortfalls could persist into 2022

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Rail traffic is up

"…we continue to be encouraged by the increasingly positive trends we are seeing across the industry with railcars and storage declining, and rail traffic increasing. Order activity is starting to move in the right direction, and we are seeing continued positive dynamics in our conversion business." - FreightCar America (RAIL) CEO James Meyer

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Materials & Energy:

The mining industry benefitting from a strong recovery

"In preparing for today, I was reflecting on how the world looked 12 months ago when this conference was last held. At the time, we were in the middle of the first wave of the pandemic trying to deal with the human catastrophe. The macroeconomic outlook at the time was comparable to the depression of the service and commodity prices were generally depressed. Since then, a remarkable recovery has happened in the global economy, driven by a very strong recovery in China. The mining industry is currently benefiting from this strong recovery. I read predictions about a new supercycle for the next decade. But quite frankly, the last 12 months have told us to be really cautious." - Rio Tinto (RIO) CEO Jakob Stausholm

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Juan Pablo Albán

May 28, 2021

During a time when real wages have been stagnant or declining for everyone but the wealthiest of income earners for several decades, I find it disgusting to read about multimillionaire/billionaire CEOs and CFOs complaining about a tight labor market. How about, raise their friggin’ wages. Then I’ll bet their labor markets will open up really fast. Cut their own damned bonuses and reduce the massive profits that have flowed to capital over those same decades, if you don’t want wage inflation to lead to more generalized CPI inflation. Otherwise wage inflation on balance today is a good thing for the overall economy. I’d argue it’s even a desperately needed thing.

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