Welcome to Episode 61 of The Transcript Podcast
Episode Summary:
In this episode, we discuss the recession fears amidst the strong consumer spending, the signs of moderation on housing, and our tweet that got a response from Mark Cuban.
The episode is based on yesterday's newsletter which is available on Substack.
This week, we have made available a transcript of this podcast, with relevant images and quotes, for ALL subscribers. Find it after the show notes below.
Show Notes
00:00:00 Introduction
00:00:15 Jamie Sees a Hurricane Coming
00:01:14 Worsening Macro, Strong Consumer
00:04:05 Confessions of Janet Yellen
00:06:03 A Strong US is Hurting Earnings
00:07:27 The End of an Era
00:08:26 That Response from Mark Cuban
00:11:05 Conclusion
Episode Transcript
Introduction
[00:00:00] Scott: Welcome everyone to a new episode of The Transcript podcast. You've got me Scott Krisiloff, I'm editor of The Transcript, along with Erick Mokaya who’s our lead author. We sent out a new issue of the newsletter yesterday. It was our first one in a couple of weeks because we took Memorial day off.
Jamie Sees a Hurricane Coming
“...look, I'm an optimist. I said there's storm clouds, they're big storm clouds, they're -- it's a hurricane It's, we -- right now it's kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or -- yes, Sandy or Andrew, or something like that." - JPMorgan Chase (JPM) CEO Jamie Dimon
There were a lot of quotes in there over the last two weeks. The most provocative quote of the week was from Jamie Dimon, who was basically giving a hurricane warning to the economy, saying that things look sunny right now, but there's clearly some storm clouds gathering that are hurricane strikes off the coast so to speak and that the hurricane may blow through the economy.
This is what we picked up in other quotes, not just Jamie Dimon. I think people who are focused on financial capital markets, the financial sector is very concerned right now about the storm clouds that are brewing. But people who are more focused on the real economy, especially consumer spending, are seeing that the signals are still very positive.
Worsening Macro, Strong Consumer
“Macro conditions worsened since we provided our guidance in early March which resulted in our sales being slightly lower than our expectations. Those trends have continued into Q2 and, as a result, we are revising our sales and profitability expectations for the year.” - Best Buy (BBY) CEO Corie Barry
But if you look at the data, at least through the 28th of May, the consumer was essentially spending at the same level as they were in April and actually prior to April because the trend has been in that range for quite a while." - Visa (V) CFO Vasant Prabhu
So consumers are still spending very rapidly, very strong spending from consumers, but financial capital markets are weak. In particular, venture capitalists seem to be some of the most negative of anybody that we're seeing commentary from anywhere. Erick, any thoughts on it?
[00:01:14] Mokaya: Actually mine is more of a curious question. How do you reconcile that? Because one part of the earnings calls that we read last week, some are extremely negative, especially in the financial market aspects of it, or at least social media like Snapchat. Those ones are a bit negative in terms of macroeconomic conditions worsening for them. But then the other aspect of where they're doing quite well, especially in consumer spend, I'm actually very surprised that it's still holding up very strongly this far into the inflation season that we are having right now. Three quotes there from Visa, MasterCard, and Bank of America all saying that consumer spend is strong throughout the month of May. Anyway, you can reconcile those in terms of there's a hurricane approaching, but then right now, things seem to be a little bit calm, especially in the consumer aspect of it?
"We're in North Carolina. You've got hurricanes that come every year. So we're always prepared for if we don't have a choice." - Bank of America (BAC) CEO Brian Moynihan
[00:02:07] Scott: Yeah. Dimon’s analogy was apt in that the data that you're seeing coincidentally looked sunny, but the storm clouds are off the coast and they're coming through. I think from an economic perspective where that usually plays out is just leading versus lagging indicators. Capital markets are historically the most forward-looking part of the economy. They're the ones who are forecasting what's coming down in the not too distant future and capital markets are sending a very clear signal about a potential recession here. The storm isn't completely blowing through yet, but I think the people who are watching the leading indicators are most concerned. The flip side to me on this, though, where we may be able to avoid recession is that the Federal Reserve, I mean, the inflation data that we've been tracking, which is really the reason behind this, the Federal Reserve is tightening up obviously. At the margins, it's starting to get a little bit better. We did pick up a big thing which was that supply chains are starting to heal and inventories are starting to get better. Also, the fact that you are seeing China open back up, these are things that should help the supply chains and should help put negative pressure on inflation.
"Right now, it’s very hard to see the case for a pause--We’ve still got a lot of work to do to get inflation down to our 2% target. We’re certainly going to do what is necessary to bring inflation back down. That’s our No. 1 challenge right now." - US Federal Reserve Vice Chair Lael Brainard
“I support tightening policy by another 50 basis points for several meetings. In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target” - Fed Member Christopher J. Waller
And this may allow the Fed’s step back from tightening quite as much as it had been. That said last week, there were quotes from the Federal Reserve saying that they're not ready to step back from tightening. The political pressure on the Fed is very clear at this point. We're going to the midterm elections in the United States and inflation is the number one issue that people are voting based off of. And so the politicians are talking about inflation. The Fed is feeling that pressure. And so it'll be pretty difficult for the Fed to change course, probably through the fall, as long as we have those elections going on. And so that is just one more element of the storm clouds though. And the Fed happens to be the biggest driver of cost capital and for directions of securities markets generally.
Confessions of Janet Yellen
"...I think I was wrong then about the path that inflation would take--there have been unanticipated and large shocks to the economy--that have affected our economy badly that I, at the time, didn't fully understand, but we recognize that now" - US Treasury Secretary Janet Yellen
"Janet Yellen finally did come out and say I was wrong. I mean, everybody is giving her all this credit for the Mea culpa like what took so long? Like how clear did it have to be to kind of admit you were wrong, right? Like how long ago did inflation go from 2% to 4%, 4% to 7.4%, and then 8.5%. And you have to ask yourself like, where is inflation really today?" - RH (RH) CEO Gary Friedman
[00:04:05] Mokaya: The only problem though, is that this past week also Janet Yellen came out and said that they made a mistake. I think they say they were wrong about the path that the inflation would take. I still keep hoping that the Fed should really be subscribers to The Transcript at the end of the day so that they can be more data-driven than they claim to be. Because these are things that we were highlighting from very early on, and it does dent a little bit of their credibility. And I think it's RH CEO, Gary Friedman who was talking about what took them so long. Like clearly did you have to wait until 8.5% for you to actually say that we are wrong. So there've been steps along the way that they've missed out on. So I really do hope whoever is listening and is close to the Fed can tell them to subscribe as much as possible.
[00:04:49] Scott: Yeah, I mean, I think our data is supporting that the Fed probably could get to a more neutral rhetoric. They're in a pretty tight rhetoric position right now. Obviously, the rate itself is very far from neutral. It's extremely accommodative, but they could potentially go to a more neutral rhetoric. Still, they just produce so much extra liquidity during the pandemic and have stimulated so much interest rates still so low for the past 15 years, that there's still a lot of inflationary pressure and the economy so it's a tough job. Everybody's saying it's a tough job. They have not made it easier on themselves.
"I think the European consumer is much more stressed about what's going on in the world. They're talking about mid-teens inflation kind of numbers hitting there. They're talking -- they've got a war going on in their backyard. They've got Russia threatening to cut off their gas supply. Energy price is up tenfold. And so there's much more kind of anxiety and stress there, and it changes in behavior. There is changes where people are trading down to private label." - Hain Celestial Group (HAIN) CEO Mark Schiller
[00:05:26] Mokaya: If you think they're Fed a tough job, you should see what the ECB is up to. They have a tougher job because inflation is running into the tens and twenties in some of the countries in Europe. The difference between here and the US is it's hard to coordinate the actions of central banks across Europe. I think it was Hind Celesta Group CEO who said that the European consumer is much more stressed about inflation. Europe is very close to Ukraine and Russia, where all these triggers of some of the inflationary aspects that you're seeing are coming from. So I think that's something that we should pay attention to.
A Strong US is hurting Earnings
"I'd say if you saw the 8-K today, it was purely a currency fluctuating in strength. The continued strength of the dollar essentially is what we talked about in that filing. And we're obviously incredibly bullish on just about everything else that we have." - Microsoft (MSFT) CMO Christopher Capossela
But something else I came across, Microsoft reporting the strong USD is actually impacting their earnings. And it's very rare for Microsoft to actually - - it’s one of the companies that people watch very closely during the earning season. The demand is okay. The aspect of it that they are most worried about is the USD.
"Debt issuance volumes have been extraordinarily weak year-to-date….And May is normally, from a seasonality perspective, a very important month for issuance. And looking at that weak month of May and particularly hardly any activity in the below-investment-grade and leveraged loan space, we realized that the guidance we gave a couple of weeks ago was not applicable" - S&P Global (SPGI) CFO Ewout Lucien Steenbergen
And the second thing of course was about debt issuance, volumes are weak. Very very weak. I think for S&P to come across and say that May is usually the strongest month, or at least it's an indicator of the rest of the year and that May was really bad. So I think they are expecting a really bad year going forward. And of course, Jamie Dimon was not mincing his words about the provisions aspect of it, especially in tough times and releasing and the accounting aspects of it. So that was a bit of an interesting quote. Any thoughts on any of those aspects?
[00:06:51] Scott: Yeah, I mean, I think the strong dollar aspect will certainly be a hit to earnings for the index. In general, I've never seen that really translate through to significant change in securities prices. Usually, investors tend to look through that sort of thing, but it is noteworthy and could contribute to some missed earnings results next quarter as we were looking at it. It is also, though, should be noted as another marginal headwind to inflation.
The End of an Era
"The era of being rewarded for hypergrowth at any costs is quickly coming to an end--With the cost of capital (both debt and equity) rising, the market is signaling a strong preference for companies who can generate cash today" - Sequoia Capital
So I think two quotes that stood out to me for the week both said, end of the era. One was for the VCs’ end of the era of unprofitable growth and people thinking this was from Sequoia talking about how companies need to focus on cash flows in the near term.
"The housing market is sending clearer signals that the pandemic-driven housing frenzy is coming to an end” - Redfin (RDFN) Chief Economist Daryl Fairweather.
And then the other was the end of the era for the housing frenzy that we had seen throughout the pandemic. And this one is a really interesting one, just because it's, again, as we've been tracking this long marketing cycle, especially of housing. It was such a hot place during the pandemic. And we're really starting to put some distance between where we are now and where the pandemic mindset was. And so, especially as interest rates are rising, you're having headwinds on the mortgage side in terms of affordability of housing. You're seeing that you're kind of closing a chapter on the economy there, but you still have a very low amount of inventory. And so home prices have some support on that side.
That Response from Mark Cuban
YouTube CEO: "I suggested buying YouTube. It wasn't necessarily a popular point of view. Somebody published, Mark Cuban actually, the week beforehand saying 'only a moron would buy Youtube'. So when I think about it, it's really important to be able to think for yourself" $GOOGL
[00:08:26] Mokaya: So for me though, to maybe finish up the week, I would really urge anyone who has time to really listen to the YouTube CEO Susan Wojcicki, I can’t pronounce the second name very well, but she had a really long talk. I've never really heard the story of YouTube from the very beginning. And one of the quotes I put out was talking about how Mark Cuban responded to the first time they were making the position to buy YouTube. She made a proposition to Google to buy YouTube for, I think 1.26 billion or something. And then the response from Mark Cuban back then was that only a moron would buy YouTube. So I posted this on Twitter and surprisingly, Mark Cuban himself responded to the tweet, and it is pretty interesting to see Mark Cuban respond to a small tweet from The Transcript, but it seems like it touched a bit of a raw nerve somewhere. What are you thinking back then when Google bought YouTube?
[00:09:30] Scott: I wish I could say that I saw the potential for YouTube to grow into what YouTube has been. And obviously, that has been fairly broad. That YouTube is one of the most incredible businesses in its own right that exists in the country today. And you know, the foresight that it's Google to purchase YouTube, and the fact that Google has not only number one in search, but then also. YouTube is something just as unfathomably great about the company to me. The assets of that company really are spectacular. So yeah, it was funny to see Mark Cuban get called out for that. I think that there's a lot of things that a lot of people say that probably don't age so well. And we live in an era where the internet can remind us of all the dumb things that we said at any given point in our lives. So Mark, thanks for being gracious, but don’t take it too personally, hopefully.
[00:10:27] Mokaya: I hope so too, but it's a great interview all in all. I mean, one of the things that YouTube is trying to do is actually, they're trying to tone it down by I think the end product is trying to compete with Amazon. That's a very interesting aspect because I've never known Google to have ambitions in terms of moving into the retail business. But I mean, they have the capacity, they have the data and they can easily compete with Amazon if they wanted. It's incredible growth from spending $1.7 billion in acquiring it and now generating around $7 billion in revenues per quarter. It's an incredible piece of business so to speak so we can all get it wrong sometimes.
Conclusion
So thanks to Mark for also responding to that. So I think we'll finish up there for this week. Thank you for joining us this week for The Transcript podcast and continue being a subscriber and supporting our content. Bye.
Mark Cuban Responds