The Podcast
The Transcript Podcast Ep. 13: Cities Coming Back To Life
In this episode of The Transcript Podcast, we cover Banks Q1 2021 earnings, vaccination rates in Europe & US and the inflation discussion.
The Podcast is now available on Apple Podcast, Google Podcast, and Spotify among other platforms and channels. This podcast is based on this week’s newsletter which can be read here.
Show Notes:
00:00 – Introduction
00:17 – Institutional investors concerned about inflation
05:18 – Takeaways from banks’ earnings for Q1 2021
07:16 – Vaccination rates in Europe vs US
09:43 – Cities are opening up
11:51 – Is the hot US housing market a bubble?
Introduction
Scott: [00:00:00] Welcome everyone to another episode of the transcript podcast. We sent out a new newsletter yesterday and we’ll be discussing the insights from last week’s earnings calls. You’ve got me, Scott Krisilof, I’m editor of the transcript, along with Erick Mokaya, who is our lead author
Institutional investors more concerned about inflation
And last week earnings started to get underway for the first quarter of 2021. And as part of that, we got a lot of bank earnings, which are always a great insight into the state of the broader economy and we saw a continued picture of strength in the economy, we saw as vaccines rollout in the US really high economic activity, consumer spending, being extremely strong. And on top of that, you saw some interesting comments about inflationary activity, especially from some, from some big CEOs, Goldman Sachs, a CEO saying that there’s no question, given the monetary and fiscal actions, there’s an increasing risk of inflationary activity. And then BlackRock CEO, Larry Fink, talking about how conversations with clients, which will be some of the biggest institutions in the world. Inflation risk is far more dominant of a topic than the conversation about crypto. So there’s a lot of people who are concerned about inflation, people in some important economic seats, and that’s always something to pay a lot of attention to, even as as markets don’t seem to be too concerned with inflation at the moment. Any thoughts on that Eric?
Mokaya: [00:01:26] I like the juxtaposition he had between the institutional investors discussing more inflation and more deficits than crypto. Something else, we also saw that there’s a lot of liquidity. I think some of the numbers I saw there were pretty staggering for my perspective, like there’s our own savings, savings rates have doubled during the pandemic. And then you have households with around 15% of GDP in cash. And then you have companies with around two trillion in excess cash, in their balance sheets, according to JP Morgan, at least. So I think that gives you a little bit of perspective on how much money is in their accounts, which may also lead to spending. We already could see, like, Bank of America saying that the consumer spending is hitting new records, but then if people have this much cash at hand to spend, you’d expect that to be released at least to be used in consumer spending in the second half day. And maybe that’s why a lot of companies are very bullish on about the second half, and 2022 of course. Anything else that stood out for you?
Scott: [00:02:33] Yeah, I mean, I think on the inflation discussion, I think that what we’re seeing is the seeds of an inflationary, psychology being planted. And they may or may not sprout, but it is possible to activate a stance of being on guard against inflation more broadly within this economy, and that could filter towards the federal reserve as well.
So Goldman Sachs, the CEO talked about how there’s a general view at the moment that rates are going to be low for very long, but given the actions that are taken, you could see a scenario where that perspective would change very quickly. And I think that that’s the real risk that’s underlying here, is if people start to buy into. This is inflation that’s not just transient, it’s longer lived and going to be here with us for a longer time. Things would change very, very quickly. Markets could react very quickly to that turning point. And so we just, we kind of have a lot of dry brush around, I think with respect to inflation and that’s a growing risk.
Mokaya: [00:03:39] I looked at the latest Bank of America fund managers survey. I think the two biggest tail risks, which they are highlighting currently is actually inflation. Though the conversation around inflation, it’s a bit more prevalent with fund managers and more of the institutional investors. So are they, you could say that maybe they are preparing people that just in case we need to raise prices, then be prepared for it or not.
Scott: [00:04:06] Yeah. I mean, I think you’re asking the question of, will it happen? And I think the answer is it’s not will it happen? It’s the inflation is happening and has been happening for the last decade. And yet there’s this deflationary psychology that pretends that inflation hasn’t happened at all. And so the real question is not is inflation happening because it is, it’s will the psychology flip from a deflationary psychology to an inflationary psychology? And I think at this point we’re still in a deflationary psychology, even though you’re getting so much more conversation around inflation people, still fundamentally believe that we have a tendency towards the flesh and in this economy and the most important actor of the federal reserve believes that we have a deflationary tendency in the economy, which is why they feel justified in continuing to purchase assets in quantitative easing. But if that ever were to flip, it could flip very quickly because you’re talking about psychology not reality. Economic reality is already in the direction it is. And it’s trending towards inflation. We have had inflation, we have not had falling asset prices or falling consumer prices. We’ve had rising consumer prices. And so we are in inflation, but the psychology is deflation.
Takeaways from banks’ earnings for Q1 2021
Mokaya: [00:05:18] Okay. I mean, just to move on a bit from the inflation talk. I think it was a financials kind of week. There are usually the people who open up the earning season. And I think a statistic I have is banks had a year over year earnings growth of around 248%. So then that then of course you saw the fact that they are releasing reserves as the norm from the last quarter. And then also created losses very much better than expected delinquencies at extremely low levels, which is pretty good for now. But does it make you concerned a little bit or do you feel like we are at a point where we can actually be more comfortable with the fact that delinquency rates may actually not increase at all.
Scott: [00:06:06] Yeah. I think absent another economic shock, I don’t see why delinquency rates would go in any other direction. I think we’ve basically sailed through the pandemic without having nearly the credit losses that banks were modeling at this time last year. And so they’re able to release reserves and post some really strong profits. I actually think the most important quote from a bank perspective was from Jamie Diamond, talking about we’re buying back stock because quote, “our cup is running over”. Their profits are huge. I mean, their profits are very, very significant ,they’re not under capitalized by any means. And these stocks are still really cheap relative to the rest of the market.
Mokaya: [00:06:45] Yeah, that’s true. I mean, looking at it from the perspective that the banks’ are actually very well capitalized and actually that some of them had issues in the first quarter this year, to do with RK issue. So they could have posted actually even better return even better performances than what they actually revealed this quarter. So you, you can’t say that you’ve sailed through the pandemic. And actually we are at a point where we about to take off. Anything else that stood out for you?
Vaccination rates in Europe & US
Scott: [00:07:16] Yeah, I mean, changing topics a bit to vaccination pace in the healthcare section. We had a few different quotes on vaccinations. One was from a Dharna talking about how they’ve delivered 132 million doses, and the majority were delivered to US. It just shows what a large share of vaccination the US is getting right now and why we’re opening up faster than the rest of the world. And then also in that section, I thought it was really interesting that Delta said that 75% of their customers expect to be vaccinated by Memorial Day. I thought this was really interesting because they said that was based on their survey work. So they were asking their own customers when they expected to be vaccinated. And 75% said by Memorial Day, I thought it was really interesting because you would expect delta’s customers to be of a certain cohort within the economy that’s showing people who are actively engaged in high levels of economic activity. So generally speaking affluent people. And so affluent people I think are getting vaccinated at an even higher rate than the rest of the economy in the US and so this is an indicator that active participants in economic activity are getting vaccinated a very high rate and we’re quickly getting way past the tipping point of normalization from that perspective.
Mokaya: [00:08:35] You could say also in the consumer section we had one of the Macy’s actually commenting about luggage cells being strong, which more feels like people are really preparing to travel. And I think that was also the same thing delta airlines, kind of seconded, even removing the middle seat, I think is it for May this year. The bookings are higher. So you could say like a lot of people are expecting to travel at least by the summer. In the international section, you could, you notice that again, the discrepancy between the US and the rest of the world. Of course, Europe, I just noticed today that it is also ramping up their vaccine distribution from Q2, they’re actually going to increase the rate at which they disseminate the vaccine. So you’d expect also a little bit of more in the coming weeks, you can expect to ramp up on people getting vaccine. Sweden has a target of at least by August. Anyone who wants the vaccine should get it by then. So I think there is a change happening also around Europe. So perhaps we were a bit behind the cover of the U S but we may catch up a little bit sooner than I expected.
Cities are opening up
Scott: [00:09:43] One other really important quote, I think showing the structure of the reopening this week was in that first section about cities coming back to life. And this was from First Republic Bank, which is again, a bank that serves relatively affluent communities, urban communities talking about how New York, San Francisco, LA and Boston are all recovering incrementally and measurably. And then they go on to talk about how there has been some movement to Texas, Florida, Wyoming, et cetera.
But, and that will probably continue, but it’s not going to be the incremental element that changes San Francisco or New York in our opinion and observation. That’s really important because I think during the pandemic, there was a lot of population shift away from cities towards more rural and suburban areas. Some of those migration trends may be normalizing in the post COVID world. .
Mokaya: [00:10:33] I should add, like when I posted the Transcript today on our Twitter handle, which is @The Transcript_ a reader actually did highlight that from the perspective of New York city, they’re actually noticing the incremental reopening that is actually palpable. In their words it is actually mostly leisure and tourism, less office and commuter traffic seem to be like opening up also. So, I mean, generally you can feel the same, like the cities are opening up. I’m away from the US but I can actually feel people in the US are coming back to normal. So it gives us a lot of hope out there for the rest of the world. What would the expectation be in terms of rental prices, which at least took a hit during the pandemic, as people move back to the cities, would you see them coming off the lows ?
Scott: [00:11:17] Yeah, I mean, first Republic is, is indicating that they’re seeing lower prices, stimulating demand for real estate there. I think the last little piece of the puzzle that we’re missing is people returning to work from a work from home standpoint. Are people going to go back into offices? How often are they going to go back into offices? And you know, what will that do to the way that people have been living their lives? I think those are few outstanding questions that we’re still trying to figure out, as we reopen the economy.
Is the hot US housing market a bubble?
Mokaya: [00:11:51] I mean, in the meantime, then I think Home Depot had quite the quote, that they haven’t seen such a housing shortage since World War II. It feels like there was a lot of underinvestment, another building in for about 10 years, which is catching up right now. So demand is extremely higher than supply. Is that something you share?
Scott: [00:12:10] Yeah. I mean, it was an interesting quote. I’ve read the home builders, basically make that argument over and over again for the last five or six years. But this is the first time it felt real. This is the first time it really hit me and was like, Wow, maybe we really have been under building houses and we have this extreme housing shortage. Certainly supply is extremely low of houses here. But whether this is like a secular boom in housing or not still remains to be seen. I think it’s probably way more interest rate driven and also pandemic driven than home supply and demand driven like home building supply. I think it’s other factors driving this.
Mokaya: [00:12:54] I mean, the question I’ve seen a lot on Twitter, financial Twitter, a lot of discussions around is, is this a bubble? Is the housing market a bubble because the prices are up and demand is outstripping supply. I mean the general consensus I think is that it’s not a bubble.
Scott: [00:13:13] Yeah. I mean, I think there’s probably others of the economy better and more extreme about territory than housing. So if you’re going to pick on something for being a bubble, I’m not sure it’s housing. That said, I mean, with interest rates being really low monthly payments relative to incomes, aren’t that crazy. They’re pretty crazy, but they’re not that crazy. Yet you know, the full home price relative to incomes obviously is at a more extreme multiple.
Mokaya: [00:13:41] Maybe in closing mostly was Jeff Bezos signing off and with a nice quote also saying that you should create more than you consume and never ever let the universe smooth you into your surroundings it remains day one.
Scott: [00:13:58] I thought that was interesting. Bezos has been an incredible economic competitor, Hall of Famer. I don’t know if we’d call him the goat, but definitely Hall of Famer.
Mokaya: [00:14:10] So he did his mic drop this week. Anything else that stood out for you as we close?
Scott: [00:14:15] No, I think that’s a great place to stop.
Mokaya: [00:14:18] All right. Thank you so much for joining us this week. Once again, and see you next week as we continue covering the earning season as more companies report this coming week. Always send us your comments, feedback at [email protected] and we will always try to respond as soon as possible. Thank you for joining us this week.
Transcript by Boniface Oyunge
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