The Newsletter
The Transcript 04.19.21: So. Much. Liquidity.
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Succinct Summary: The economy is booming and companies are expecting robust growth in the second half of 2021 and 2022. Travel is starting to rebound and cities are coming back to life. Stimulus has left consumers with a tremendous amount of liquidity and we are spending. Institutional investors are increasingly concerned about inflationary pressures.
Macro Outlook:
Companies are expecting robust growth in 2H 2021 and 2022
“I’d state quite clearly, and I said in the prepared remarks, that we think that we’re going to have very, very robust economic growth in the second half of 2021 into 2022 as vaccines continue to accelerate, as we come out of the pandemic, as we move forward. There’s no question that there is meaningful consumer pent-up demand.” – Goldman Sachs (GS) CEO David Solomon
“…a significant acceleration of economic activity is anticipated, despite the consistently high numbers of cases around the world and now the introduction of many new variants.” – BlackRock (BLK) CEO Laurence Fink
“Certainly, there’s enormous pent-up demand. Consumers have built up a lot of wealth over the pandemic, people have really lost the connection that they look to recreate and get back together, whether that’s for leisure, purpose, or business.” – Delta Air Lines (DAL) CEO Ed Bastian
“On the commercial side, what we are seeing is that pipelines are getting stronger really across most areas in most geography. In addition, when we think about the stimulus that’s been put into the system, there’s going to be a lot of consumer spend, especially as the second half of the year develops.” – U.S. Bancorp (USB) CFO Terry Dolan
Consumer spending is hitting new records
“The first quarter was a record dollar amount of money moved by Bank of America consumers. The trend is fully on track, even though the economy is not yet fully reopened. March was a record month of spending by Bank of America consumers and led to the highest ever quarter of consumer spending.” – Bank of America (BAC) CEO Brian Moynihan
Cities are coming back to life
“What we’re experiencing, almost daily is a regeneration of the cities. New York, San Francisco, LA, Boston are all recovering incrementally and measurably, almost every day. Companies are beginning to announce return to office programs that are actually a little more robust, I would say, than we expected. The housing demand in the cities is now back. The prices are lower, which is a quite stimulating demand, which is good and rentals are down. And that’s pulling people back in as well. There is some movement to Texas, Florida, Wyoming, etcetera, driven probably by tax policy, but also by opportunity. And that hints kind of continue. But it’s not going to be the incremental element that changes a San Francisco or New York in our opinion and observation.” – First Republic Bank (FRC) CEO Jim Herbert
Stimulus has led to so. much. liquidity.
“One of the things that I pointed out the savings rate doubled with the national average. We’ve got 15% — and households are holding 15% of GDP in cash. They’re either going to spend it, invest it or just let it lose value sitting in cash.” – The Bank of New York Mellon (BK) CEO Thomas Gibbons
“We think [companies] have something like $2 trillion of excess cash in balance sheets. When they raise money in public markets, they can pay down loans to banks. This is not bad news about loan demand, this is actually good news.” – JPMorgan Chase (JPM) CEO Jamie Dimon
There’s no question that there’s increasing risk of inflationary activity
“There’s no question, given the monetary and fiscal actions, that there’s an increasing risk of inflationary activity. We all are watching very carefully comments from central banks around the world as we look forward. I think in my opinion, there is no question that we will see an increase in inflation. The question is how much, how quickly, and how we respond to that. And I think it’s early — it’s very early to speculate. But there is a scenario in the distribution where it would accelerate more quickly, and actions would have to be taken that would create more headwinds for our business. I don’t see that as obvious on the near-term horizon as we look through this year and we continue to come out of the pandemic. But I do think it’s a risk issue for markets that we’ll have to continue to watch very closely.” – Goldman Sachs (GS) CEO David Solomon
“I mean, I think, the way we described it was simply an environment where you are seeing an increase in costs around transportation. You are seeing it in steel. You are seeing it in fuel and that ultimately goes through plastics. So, I think, in general, we are seeing an inflationary environment and I suspect that that doesn’t surprise anybody. It also shouldn’t surprise anybody, I believe, that we are going to react to that a number of ways, but a part of that is going to involve pricing behavior.” – Fastenal (FAST) CFO Holden Lewis
“I would say the narrative around the question of inflation deficits are becoming a very prominent part of our conversations. Obviously, many questions related to equity valuations. The rotation from growth to value is that overdone at this moment, especially if the vaccinations take longer and other questions on that. And so, those were probably the dominant conversations. But if anything, Dan is, we said some of the prepared remarks, there is incredible pools of cash on the sidelines. I would say overall our clients are still sitting with big pools of money. Overall, they’re still under invested.” – BlackRock (BLK) CEO Laurence Fink
Institutional investors are more focused on inflation than crypto
“The conversations about our deficits and … on inflation risk is far more dominant with our clients worldwide than the whole conversation about crypto.” – BlackRock [BLK] CEO Larry Fink
You can imagine a world where the perspective on rates changes quickly
“I do think over time, we’ll be having discussions about the increase in government debt and government spending around the world. There will be consequence to that. That can obviously have an impact over time. There’s a general view at the moment that rates are going to be low for very, very long. Certainly, given some of the actions that are taken, you could see a scenario where the perspective on that would change and could change quickly. And that would certainly create headwinds to growth and headwinds to activity.” – Goldman Sachs (GS) CEO David Solomon
International:
Consumer trends are positive in China
“So feeling good about China and feeling good about the balance of the year in that country. The growth expectations of the economy are positive as was recently laid out by the government, and we are seeing that in the consumption. Obviously, China is a very dynamic market and what we are seeing is massive changes in channels of consumption. So, there are a lot of new channels of consumption developing, social channels and new kind of entertainment, e-commerce type of channels that are driving changes in the consumer and the way companies need to adapt in their supply chain and their marketing spend” – PepsiCo (PEP) CEO Ramon Laguarta
International travel probably won’t pick back up until later this year
“International travel remains muted with long haul international bookings volumes at only 15% to 25% recovered. …We do not anticipate meaningful international demand improvement until later in the year when borders reopen.” – Delta Air Lines (DAL) President Glen Hauenstein
Financials:
Credit losses were significantly better than expectations with delinquencies at record lows
“Our net charge-off ratio in the first quarter declined to 24 basis points, the lowest it’s been in a number of years and down 14 basis points from a year ago. Our losses have trended significantly better than our expectations due to the impact of forbearance programs and the unprecedented amounts of government stimulus.” – Wells Fargo (WFC) CFO Michael Santomassimo
“…early stage delinquencies are at or near historic lows, suggesting low levels of card charge-offs again next year – next quarter, excuse me.” – Bank of America (BAC) CEO Brian Moynihan
“…there are no signs in the delinquency bucket to suggest that we’re going to see big increases in our NCLs. And in fact, in North America, what you heard me say is that we likely would not see that until late in 2022…we’re not likely to see a pop in NCL certainly in 2021.” – Citigroup (C) CFO Mark Mason
Banks have more than enough capital and are returning excess profits
“We’re buying back stock because our cup run is over. We have 13.6% capital to risk weighted, advanced risk weighted assets. We’re earning a tremendous sum of money, and we really have no option right now.” – JPMorgan Chase (JPM) CEO Jamie Dimon
SPAC activity has slowed from peak of where it was
“With respect to underwriting activity, there’s no question that it has slowed from the peak of where it was. I think there’s a little indigestion in the context of that. You’ve obviously seen returns and some of the shells kind of slowed at this point. my guess is in this quarter, you’ll see less new issuance than what we saw in the first quarter. And you’ll see a continued progress that people try to find M&A targets to destack. All of that should be constructive for our business.” – Goldman Sachs (GS) CEO David Solomon
Retail volumes are very elevated still
“So I think client engagement is very, very strong at 1.6 million average trades, that’s on top of a 1.1 million average trade in the fourth quarter, which was a record, it was less than a million over the course of last year. So we’re clearly at elevated levels. So I think we go back to the 200,000 or 300,000 trades they were doing in ’19, no. But can we sustain this level? No one’s got a crystal ball. But right now, clients are extraordinarily engaged. And we’ll have to see how this plays out over time.” – Morgan Stanley (MS) CFO Jonathan Pruzan
Deal activity is very strong
“The environment for PE and VC, both fundraising, deal activity and exits continues to be very strong. The fundraising is robust, even when done virtually as cash rich investors are looking for returns.” – First Republic Bank (FRC) President Gaye Erkan
Investing in ESG continues
“…climate is a long game, obviously. And we’re investing a lot of effort in our ESG initiatives, not only because they have a positive impact on society and communities, but because they’re also important to our clients, customers and our shareholders. So we don’t exactly think about it that way, Mike.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
““The amount of conversation we’re having on climate risk and how they should navigate portfolios is a major component of the conversation” – BlackRock [BLK] CEO Larry Fink
Consumer:
Vaccinated consumers are ready to travel again
“And what we’re seeing is when people are vaccinated, they’re traveling again. So to give you a sense, seniors, people over the age of 60 on Airbnb, searches for summer travel and Memorial Day Weekend are up 60% just between February and March. So we’re starting to see people wanna travel. It’s the out of door, out of home activity they miss the most. When they can travel, they do. And the other thing we’re seeing is people aren’t going to the same places they used. Airbnb, we’re very much known to be an urban brand. You use Airbnb to stay in cities. Well now, a lot of our growth is in rural areas, small towns and even entry points at national parks.” – Airbnb (ABNB) Co-Founder & CEO Brian Chesky
Retailers say that they are seeing consumers coming back to stores
“We’re really confident in the future of physical retail. And the reason we’re confident is we continue to both see in as we’ve emerged out of COVID and see behaviors that our guests are coming back in the store. But all of our research continues to suggest that while digital and e-commerce will play a bigger and bigger role” – Ulta Beauty (ULTA) CEO David Kimbell
Luggage sales are strong
“One of the biggest improvements is luggage. And so really dormant in 2020, and you just feel customers are getting ready to travel. And you see that about the activities that they’re most, they’re not international travel, they get into a car, or they get into a plane and they’re going somewhere, they’re visiting relatives that they haven’t seen in a year and a half, and we’re seeing that in our luggage business.” – Macy’s (M) CEO Jeffrey Gennette
Technology:
TSMC is spending 100B in Capex over the next three years
“To address the structural increase in the long-term demand profile, we are working closely with our customers and investing to support their demand. We have acquired land and equipment and started the construction of new facilities. We are hiring thousand of employees and expanding our capacity at multiple sites. TSMC expect to invest about USD 100 billion through the next 3 years to increase capacity, to support the manufacturing and R&D of leading-edge and specialty technologies.” – Taiwan Semiconductor (TSM) CEO C.C. Wei
Semiconductor capacity is likely to remain tight throughout the year, maybe a couple of years
“Looking ahead to the second-half of the year, we expect our capacity to remain tight throughout the year supported by strong demand for our industry-leading advanced and special technology.” – Taiwan Semiconductor (TSM) CFO Wendell Huang
“We do believe we have the ability to help…I think this is a couple of years until you are totally able to address it…It just takes a couple of years to build capacity.” – Intel (INTC) CEO Pat Gelsinger
The semiconductor supply chain is unique for automobiles
“The automotive market has been soft since 2018. Entering 2020, COVID-19 further impact the automotive market. The automotive supply chain was affected throughout the year, and our customers continued to reduce their demand throughout the third quarter of 2020. We only began to see sudden recovery in the fourth quarter of 2020. However, the automotive supply chain is long and complex with its own inventory management practices. From chip production to car production, it takes at least 6 months with several tiers of suppliers in between.” – Taiwan Semiconductor (TSM) CEO C.C. Wei
JPMorgan is investing in AI
“We’ll probably have 1k AI projects in five years”we already have 115 major AI projects. But my guess is in five years, it’ll be 1,000 AI projects. So we’re going as fast as we can to do a great job for customers. And obviously, FinTech is — it will be a challenge; there’s a lot of money there. They’re very smart people. I want to be clear, we’re not wishing regulations on them like I’m not, and I think they are to be bad for America. But we are wishing for a level playing field when it comes around certain products and certain services.” – JPMorgan Chase (JPM) CEO Jamie Dimon
Healthcare:
Moderna has delivered 132 million vaccine doses globally
“So to-date — as of a couple of days ago, we delivered globally now 132 million doses. The majority to the U.S. in the first quarter, out of that 132 million some 102 million doses were delivered in the first quarter, including 88 million in the U.S. and obviously we’ve continued to deliver, and we continue to ramp as we’ve moved into the second quarter.” – Moderna (MRNA) CFO David Meline
75% of Delta’s customers will be vaccinated by Labor Day
“Based on our survey work, 75% of our customers expect to be vaccinated by Memorial Day…the number one dependency is the vaccination rate and getting to herd immunity in our country. And all the experts we talked to, including our own doctors tell us that early summer, is when we should expect our country to be in some form of early herd immunity and that will continue to inspire additional travel.” – Delta Air Lines (DAL) CEO Ed Bastian
Moderna antibody durability is at least 6 months
“…if you look at the results of the Phase 3 study…after a six-month median follow-up from the second dose…we were pleased to report that we’re seeing greater than 90% efficacy against cases of COVID-19 and greater than 95% efficacy against severe cases….so we’re pretty pleased with the initial indication of durability.” – Moderna (MRNA) CFO David Meline
Fastenal is taking a write down on facemark inventory
“Additional item in the quarter, we wrote down about $8 million worth of 3-ply masks…what we did as a supply chain partner in the marketplace is we went out last spring and locked up supply. We were willing to spend dollars to buy a sizable amount of inventory. We knew it was a risky venture going into it. But we felt it was the right thing to do for our customers, for our employees, and quite frankly, being in a strong position, we felt would also serve society quite well.” – Fastenal (FAST) CEO Dan Florness
Industrials and Transport:
Delta is re-opening the middle seat
“In response to these developments and the reduction of COVID-19 cases, as well as accelerating vaccination rates, we will sunset our middle seat block as of May 1st. That provides us with a very powerful lever to add capacity in a cost efficient way and generate meaningful margin tailwind.” – Delta Air Lines (DAL) President Glen Hauenstein
Corporate travel recovering slowly
“The corporate travel recovery has been slow but steady. Corporate volumes in March were nearly 20% recovered, up from 15% at the end of 2020. Small and medium enterprises continue to outperform other corporates by about five points.” – Delta Air Lines (DAL) President Glen Hauenstein
Companies are pushing out their inventory restocking windows
“What we are really seeing in changes is and I mentioned it to our own employees on an internal video. Historically, our supply chain team might be pinging branches with reorder points that are 90 days out, 100 days out, 110 days out. What our supply chain teams are doing, we are going out even further. We are going out into August and September and we are pinging folks and saying, hey, we might want to order this now. We might want to do some things now, get it in motion now because there are some disruptions. We want to be in queue for product.” – Fastenal (FAST) CFO Holden Lewis
The ports are still clogged
“We also mentioned in the release that we are seeing increasing supply chain pressure. I don’t think that should come as a surprise to anybody. I suspect everybody regardless of where you live on the planet, saw that ship in the Suez Canal sitting cockeyed for about five days, six days — I think almost five days. That’s merely a very visual thing that we are seeing in ports around North America. We are seeing in ports around the world and there’s a lot of constraint. And constraint and rising activity create one thing and that is inflationary pressures and we are seeing that.” – Fastenal (FAST) CEO Dan Florness
Trucking companies are having trouble finding drivers
“While we have faced driver hiring issues at varying degrees of difficulty during previous tightening cycles, we see the current pressure being meaningfully more pronounced and likely prolonged.” – J.B. Hunt (JBHT) CEO John Roberts
Pepsi isn’t seeing labor inflation
“We haven’t seen a lot of labor inflation and we are able to get employees reasonably well right now. So how that’s going to play going forward remains to be seen as the economy picks up. But at least, as for right now, we are doing fine on that front.” – PepsiCo (PEP) CFO Hugh Johnston
Energy:
There was 134 GW of solar installation last year
“In 2020, the performance of the global solar market exceeded expectations, with newly added installations worldwide of approximately 134 gigawatt, an increase of 22% year-over-year compared with 2019.” – JinkoSolar (JKS) CEO Xiande Li
Real Estate:
Office continues to perform
“Though, clearly, there are negative demand trends in many office markets, the office portfolio continued to perform well, and we’re not seeing any widespread stress in the portfolio as of now.” – Wells Fargo (WFC) CFO Michael Santomassimo
We have a housing shortage unlike any since WW2
“I’d say the things that we’re watching are the fact that there’s a housing shortage today. It’s unlike any we’ve seen post World War 2. The question will be the persistence of that housing shortage. The Wall Street Journal, and I think it was Freddie Mac this morning came out with a number that showed that, in essence, we have a housing deficit of about 3.8 million units just in the United States. So that will most likely provide support for home price appreciation as demand outstrip supply. We saw the household formation dynamic in 2020 grow at a different trajectory than we had in many years. So we’ve been underbuilt for about 10 years. We’ve been underbuilding for 10 years.” – The Home Depot (HD) CFO Richard McPhail
Miscellaneous Nuggets of Wisdom:
Jeff Bezos signs off
“To all of you: be kind, be original, create more than you consume, and never, never, never let the universe smooth you into your surroundings. It remains Day 1.” – Amazon (AMZN) Former CEO Jeff Bezos
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