May 25, 2021 • 12M

The Transcript Podcast

Episode 18: The Economy is booming, travel is picking up and ransomware attacks are rising

 
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Welcome to Episode 18 of the Transcript Podcast.


Episode Summary:

In this episode, we cover the booming US economy, the increased rates of ransomware attacks, and observations on travel in the US and in Europe. 

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The episode is based on yesterdays’ newsletter which is available on Substack. A transcript for this podcast is available for Subscribers only and includes relevant quotes and pictures here.


Show Notes:

00:00 Introduction

00:15 The economy is booming

02:45 The labor markets are very tight

03:58 Transitory inflation is also felt inflation

05:28 In-store traffic driving strong comps by retailers

06:23 Home improvement still strong

08:01 Travel in Europe and the US

10:41 The increased rate of ransomware attacks


Introduction

Scott: [00:00:00] Welcome everyone to another episode of The Transcript podcast. You've got me, Scott Krisiloff along with Eric Mokaya. I am editor of The Transcript and Eric is our lead author. We sent out a new issue of The Transcript yesterday.

The Economy is Booming

What we saw was a continuing booming of the economy, basically the same themes that we've been seeing for several weeks now. High capacity utilization and tightness in labor markets and other markets leading to some inflationary pressures. And we took about five quotes from companies in different areas talking about inflation. So we're seeing a lot of inflation in different areas - significant and broad-based - was what General Mills CEO said about the inflation that they're seeing. So, anything to add to that, Eric?

So the inflation pressure we're seeing, first of all, it's significant. The second would be that it's very broad-based. It's broad-based by geography. It's also a broad-based across input - General Mills (GIS) CEO Jeffrey Harmening

Mokaya: [00:00:47] Yeah, I think inflation keeps being a very hot topic in the earnings calls, so, that's something that you can see a lot of CEOs are addressing, but something that also has been striking me and I wanted to ask you a question about was the labor markets being extremely tight. So if you read some of the quotes are about companies finding really hard to find people to hire. So you can see like around three companies that we picked up there, all of them saying that the labor market is pretty tight. Is it something that you've seen yourself or at least in the US heard about it? Or is it something that's pretty unique to some parts of the industry, especially the truck drivers, which we constantly keep hearing about for the last couple of weeks?

…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

Scott: [00:01:29] Yeah. I mean, I think transports are clearly tight because we have so much e-commerce going on and just parcels being delivered. There was a quote later in this issue about 726 billion packages will be delivered by the year 2030, which is just a staggering number. You know, I guess that's a hundred packages per person per year worldwide, which is crazy. But yeah, I mean, to answer your question about what I'm seeing from labor markets. At least, at restaurants, it's really noticeable. I think when you go out, sometimes you're seeing short staff and you're hearing owners talking about that and talking about how hard it is to fully staff restaurants. So, that's one area where I'm seeing tightness of labor in addition to all the quotes that we're picking up.

Mokaya: [00:02:16] It was pretty interesting because I saw research this week that said that I think the lower-income workers need a higher amount of wages. I think it's because maybe they are now comparing it to the stimulus they're getting. So I think that's kind of like setting the minimum salary expectation for someone to come back to an actual job. So, there could be because I've seen that explanation pop up within the earnings calls that we read. Any thoughts on that?

Labor Markets are Very Tight

Scott: [00:02:45] Yeah. I mean, that is an explanation that we're hearing for it. No doubt the stimulus is impacting labor markets and impacting the economy still today. And, you know, that's fiscal stimulus and also monetary stimulus. And probably the most interesting quote that we picked up this week was from General Mills talking about inflation and saying that inflation is transitory when it's not happening to you. And he was specifically calling out the Federal Reserve there and he actually mentions chairman Powell in talking about transitory inflation and saying, I don't know how long this is going to last this inflationary pressure. And so, yeah, the Fed is seeing a different economy than the CEOs that make up The Transcript and what we're reading even in newspaper headlines and stuff like that. So there's a bit of a disconnect here.

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

Mokaya: [00:03:35] I would agree with you because that was the most interesting… The most interesting aspect of it was he compared it directly to the 1970s, which is a period you've mentioned before. And I think he says that while it's going on you don't know how long it's going to last. And it's very painful when you're going through this supposedly transitory inflation. So transitory doesn't mean that it's not going to pain at the end of the day.

Transitory inflation is also felt inflation

Scott: [00:03:58] That's a good point because small inflation is transitory, right? Like you have inflationary periods and then you have periods where the inflation stops when prices have reached theoretical equilibriums. You know another interesting and important quote was one of the companies talking about automobile prices probably being structurally high level going forward. And that's really, that's what inflation is. Prices stabilizing at higher levels and they never go back to what they were.

Mokaya: [00:04:26] Something else maybe that I picked up in the financials also is a  Jamie Dimon was on a couple of conferences last week. And I think he repeatedly says that there's an economic boom coming. I mean, you told me that he's America's foremost banker so when he keeps saying something, you need to take note a little bit. So I think the word he uses most commonly is boom.

Source: Macrops

I think one of the things he highlighted was that credit losses are shockingly low in terms of, I think the stimulus came and then some of the research I've seen most of the money went into people repaying debt, and then that debt, of course, reflects in terms of higher repayment, which means lower credit losses. So we are in a period where companies are having significantly low credit losses. And I mean he says the middle market companies where he expected to see a little bit of softening I see is basically zero credit losses, which is pretty significant as we look ahead into like Q2 and banks reporting and all. Anything else that stood out for you also?

In-Store Traffic driving strong Comps by Retailers

Scott: [00:05:28] Yeah stronger earnings out of retailers like Target and Walmart and Lowe's and Home Depot, you know, housing driven retailers. And one of the things that stood out is they were talking about a return of shopping at brick and mortar sites people coming in to store and that driving comps. So again, another indicator of life returning to normal after the pandemic and people coming into brick and mortar locations, which I was skeptical that people would come back. But I guess people are just re-engaging with normal life. Any thoughts on that, Eric?

Mokaya: [00:06:01] I mean, it was pretty impressive. Like most of the comps are being driven now by not because I, from some of the companies that I could tell like online shopping has kind of gone down in terms of the rates of growth. And what has really picked up this past quarter was actually in-store shopping. So I think that has been outstanding for me.

Home improvement still strong

And I think something else that was also outstanding was that home spending has not actually gone down, but people actually spending money on home improvement and all this kind of things like the home continues to deliver strong growth across textile and furniture. That's what Macy's says. So I think it's pretty impressive that these two trends are appearing a bit more sticky, and especially also like people are going back to the store to shop. I haven't been there much myself. I don't know if you have had the experience yourself of being back in the store and had some observations? Not yet?

Scott: [00:06:53] I don't think I've set foot in a retail store in over 18 months.

Mokaya: [00:06:58] I think for the sake of The Transcript, you need to go there and see and have actual observations.

Scott: [00:07:03] Yeah. I need to, I need to get some feet on the ground and see what's going on in my local Target. But yeah, I mean, for me at least, I can't imagine going back to a retailer. But maybe, maybe that's its own indicator of my demographic. One other comment that goes back to the inflation stuff that just really stood out to me from the Home Depot call was they actually talked about the price of lumber for them. And last year versus this year, and he said last year, a sheet of seven-sixteenths OSB was approximately $9.55. And now it's $39.76. So, quadrupled in price, more than quadrupled in price, which is just crazy.

I mean, there's, there's certainly supply chain effects in terms of bottlenecks in lumber, but it's also a story of demand and the same inflation that we're seeing in the rest of the economy. That just really stood out to me. It's a mind-boggling jump in price.

Travel in Europe and the US

One other thing I wanted to ask you about actually was, there was another quote that was blacked out only for paid subscribers about traveling in Europe recovering, and I wanted to check in with you and get your thoughts on what you're seeing in terms of recovery in Europe right now.

Mokaya: [00:08:15] What I can sense around is that people really are looking forward to the summer to travel a little bit more. So the vaccination rates around Europe are not as high as the US but they're rising up fast. I think the last time I checked they're on track to actually match the US in terms of vaccination speed and rates. So that means that a lot of these countries which rely a lot on tourism, especially Southern Europe, they're really racing to try and open up so that people can come back. And so that the economy can be boosted up. So I would say that definitely, that travel is peaking slightly. Countries are opening up slowly.

Another quote that we also saw down there, which we’d blacked out for only paid subscribers about airlines actually last year in Europe, most of them, like a lot of them went under, Norwegian air being one of them. So I think that may actually be that when this demand bounces back only a few, like Ryanair which are available to actually help travelers move around. So I think, and maybe the era of low-cost airlines may actually be behind us in terms of, I don't know, I'm not so sure about that, but like, there is, there's no sense that when demand bounces back to supply may not be there to meet them on that. And that would mean that people have to pay up to travel around.

Scott: [00:09:30] It's worth mentioning that I've spoken to probably four or five people who are traveling for work again and they're also talking about their experience traveling around the US, and the planes are packed now is what I've heard from multiple people, and so, airline traffic is coming back to normal, it sounds like. And I spoke to somebody who traveled internationally. He was saying that the international flights are still really really light. But I would expect that to be changing soon too, so.

Mokaya: [00:09:57] It kind of gives you a picture then going forward, at least once, maybe later this year, early next year, that will tell you there will be a lot of demand for travel. I mean, something else that I picked up was road traffic is up. Congestions are actually starting to become an issue in some cities. Is there anything else or should we end this for this week? Life is slowly coming back to normal in some cities.

Scott: [00:10:19] Yeah. I will say I went to three birthday parties this weekend. So gatherings of like 15 plus people and the traffic was pretty crazy in Los Angeles this weekend. Like on a Saturday, it was taking us 20 minutes to get across town during the pandemic. And on Saturday this week, it took 45 minutes. So people are out and about.

Increased Ransomware Attacks

One thing that I think is worth talking about that we've covered in a couple of recent posts is on cybersecurity and the increase in ransomware attacks. This is something that the world doesn't seem particularly well-prepared for. If there were some sort of mass cybersecurity event, it seems like this is the same sort of thing as a pandemic where people are warning about it for a long time, and then it can come to fruition sometime in the next five or 10 years. But it definitely seems like there's increased sophistication. On the part of the attackers and there is not a similar pace of adoption of security.

Source: Palo Alto Q1 Earnings

Mokaya: [00:11:19] Yeah, I think, I actually popped in a little bit to check out the Shell and company. They were having their Annual General meeting this week and one of the questions was about how protected are you against cyber attacks? Of course, given the pipeline incident in the US.  The response of the CEO was that we are all vulnerable to these kinds of attacks. And I think that's the general sense in which you get, especially when you see Palo Alto saying that the highest demand being now around USD 50m, that's a lot of money up from 30 million in 2020.

Question: What precautions does the company have in place to protect computer-controlled systems that might be susceptible to hacking by unfriendly agencies?

Answer: Unfortunately, most companies and individuals are susceptible to hacking. It is a key priority for the Board as well as the Executive Committee.
It's a topic that gets special attention in both forums.[Royal Dutch Shell CFO Jessica R. Uhl]

Source: Palo Alto Unit 42

Mokaya: [00:11:56] Yeah. I think that's a good spot to end for this week. Thank you so much for joining us once again on The Transcript. You can always subscribe to a newsletter and become a paid subscriber and get some of the blocked quotes. And then you can enjoy them a little bit more. We are available https://thetranscript.substack.com/ That's where you can find us now and drop us an email at admin@theweeklytranscript.com. Thank you for this week. Thank you.


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