The Podcast

The Transcript Podcast Ep. 14: US “Very, Very Strong”

In this episode of The Transcript Podcast, we cover the increasing discussions around inflation in earnings calls, interesting quotes from Netflix  Q1 earnings call, and how companies are responding to shortages in the semiconductor industry. 

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
00:14 – The US is “Very, Very Strong”
01:30 – Many companies are discussing inflation
06:01 – Netflix still worth betting on
07:56 – Semiconductors demand and new dynamics
11:48 – Bubble-like behavior in real estate
12:16 – Emerging markets are struggling


Scott: [00:00:00]  Welcome everyone to another episode of the transcript podcast. You’ve got me, Scott Krisilof, I’m the editor of The Transcript, along with Erick Mokaya, who is our lead author. We sent out another issue of The Transcript, and there was a lot of good stuff in there.

The US is “Very, Very Strong”

It was a busy week for earnings and what we were seeing was a continued boom in the economy. That the US economy is “very, very strong”. And they’re also “phenomenal”  in terms of the demand in the US economy right now, driven by healthy consumer balance sheets and vaccinations. And we’re seeing some rising inflation pressures as part of that as well. So overall a very strong economy with some inflation in there, but really strong. Mokaya, any thoughts?

Mokaya: [00:00:44] Yes. I mean the kind of metaphors they were using, like an economic dam that is bursting. That caught my eye because it reminds me a lot of, I’ve grown up in the Highlands in Kenya where there’s a lot of rain upstream. And then, you know, when it rains upstream sometimes like if you’re downstream it hasn’t rained, but suddenly the waters just come flooding down. And then they cause a lot of damage downstream because of that. I had a feeling like that’s what the earnings call was about like Blackstone CEO saying that the economic dam is really starting to burst, and it’s going to be widespread in terms of an increase in economic activity revenues across most businesses. So a lot of the businesses which were affected during the pandemic are set to benefit, at least as the economy opens up.

A lot of Companies Discussing Inflation

I mean that, and also inflation pressures around, a lot of the companies are really talking about it. I mean, if I were to pick one word which is consistently across a lot of companies, especially consumer facing companies is that they’re going to increase prices. Maybe not this year, but most likely next year. So I’m sure that that could be an area to look out for. I saw one survey that said 87% of Americans are worried about inflation, which is 10% up from March. That tells you a lot about where mindsets are in terms of inflation. It’s about the economy reopening, it’s enthusiasm around the spending by consumers who have very healthy balance sheets going forward. So, I mean, that’s what I picked up a lot. Any comments on that yourself?

Scott: [00:02:21] Yeah, I think in addition to what we’re picking up in the earnings calls, I am seeing more conversation that I’m having just with friends and family touching on inflation, talking about things that people are seeing inflation, like even in collectibles, you know, baseball card values going up, people talking about lumber prices. I was talking to somebody this week who had purchased some lumber at Home Depot a week and a half ago, and then took it back because he realized he didn’t need that much, and they actually gave him a credit for more than he paid for it because the price of lumber had already gone up in the last week and a half. So again, those sorts of anecdotes are exactly the types of things that people experienced in the 1970s when we had true, extreme inflation. And you know, back then we would have had interest rates, 6, 7, 8% already at this point where we are in the cycle. And you know, the Fed’s on hold though…

Mokaya: [00:03:18]…I have a question for you on that, because it’s a conversation I’ve been having with friends also. Inflation striking is almost picking up, I would say, it’s picking up across their narratives, we’re picking from the executives in terms of the comments they’re making. What do you think? I mean, we are not forecasters in any way, but do you feel like the Fed’s hand may be pushed in terms of rates also?

Scott: [00:03:40] Yeah, it’s a really weird thing that I’m seeing go on because, again, you’re seeing anecdotal talk about inflation. People definitely are seeing that inflation is happening and it’s like with one half of the brain, it’s like, okay, of course there’s inflation going on. But with the other half of the brain, it’s almost like we’re stuck in this deflationary psychology. It’s just hard to believe that we’re going to be going into inflation because we’ve been in deflation for so long. And so I think that part of the brain is where the Fed is finding cover right now.

And you know, the Fed has incentives to keep interest rates low. They don’t want to see the economy go back into recession, especially starting from 6% unemployment or wherever we are. So I have to believe the Fed is having these conversations behind closed doors, but they still seem very intent on not saying anything about it publicly I think. Because they don’t want to rattle financial markets. So…

Mokaya: [00:04:34] The next Fed meeting is this week. So it will be interesting to see if there is any change in terms of the talk. I would not expect any, but this is getting pretty serious when you see like almost half the CEOs that we are covering are talking about price increases. I did a casual search on some of the companies that we’re following. And I can tell you a lot of the companies, at least those we covered this week, talk about price increases, inflation. Generally there’s a sense in which like companies are really talking about it.

Scott: [00:05:01] Yeah, I mean, there is no shortage of data in our weekly posts from CEOs in many different industries across the economy, across the world who are talking about inflation. And so, you know, the fact that inflation is on people’s minds, splice that with a one and a half percent interest rate they’re not congruent. And then, you know, the Fed’s thesis or what the Fed talks about is a weak economy that’s still recovering from the pandemic. And that may be true to an extent, but again, that’s not the data at all that we’re pulling out of earnings calls. We’re pulling out people talking about economic dams bursting in terms of the flood of demand that’s coming, very, very strong, phenomenal US economy. Either the Fed is saying it’s data-driven and not looking at the data or, there’s other conversations going on behind closed doors. And I think it’s the latter probably. I’d be pretty scared if it’s the former.

Netflix still worth betting on

Mokaya: [00:05:57] Oh, I would say so. So, is there anything else you’ve picked up beyond the inflation talk? I mean, Netflix did miss their subscriber numbers. So I don’t know at this point in time, shouldn’t Netflix be more of a value company? It’s 24 years since formation, but at this point in time, it’s still going down 8% when it reports subscriber growth of 4 million versus a forecast of 6 million when it has 200 million plus subscribers. I mean, it’s pretty interesting, but they themselves see like internationally, that’s where they have room for growth. And they’re saying also like a lot of the content that is hitting in the international markets has to be local. Any thoughts on Netflix yourself ?

Scott: [00:06:39] Yeah, I mean, I have consistently underestimated how many subscribers Netflix could get to. I would never fathom 5, 10 years ago that Netflix could have 200 million subscribers. And so actually the things on the Netflix corridor that really stood out to me were the quote, you actually pulled that from Reed saying that cable pay TV subscriptions peaked at 800 million worldwide. So, you know, that’s interesting just pegging that number, putting that number out there and saying, you know, well, there’s no reason we can’t have 800 million subscribers and at this point, I don’t know why I would bet a bet against Reed Hastings and Netflix. 

Mokaya: [00:07:19] One of the questions they got asked was that subscribers in some markets are willing to pay up to $50 per month for some of the content, especially the US but in other markets, they can’t pay maybe $5. And so they were asking if they will also adjust the pricing in the various markets to reflect the dynamics and the willingness to pay.  The response was also something in line with that, that they are actually considering that a bit more. In this kind of a race, you’d bet more with both Disney and Netflix. Netflix is learning a lot from Disney and Disney is also learning a lot from Netflix. Anything else that you might have picked yourself?

Demand for semiconductors persists

Scott: [00:07:56] Yeah, I think it’s also worth talking today a little bit about the supply chain and what’s going on with dynamics there. Obviously we’ve covered it in depth over the last several weeks, had some good quotes in the semiconductor space talking about how long it would take to bring capacity online being two to three years to be able to build new plants for more semiconductor capacity. And then I thought one quote that was really interesting was from ASML talking about how governments want to have local production of semi-conductors. It’s interesting that semi-conductors are here because 30 years ago, 50 years ago now I guess, were realizations that people had about automobiles and automobile manufacturing. Basically, I mean the auto companies around the world, they’re kind of like the government-sponsored entities or were in their histories. And so if you have national semiconductor companies, kind of starts to feel like the structure of the auto industry in some ways to me.

Mokaya: [00:08:55] So something surprising I found out this week, there is actually a semi-conductor company in the Nordics called Nordic Semiconductor Company. So that was pretty interesting because I found out it’s cashflow positive. It’s actually growing very rapidly. They also depend on TSMC, but they also have very high top-line growth in that regard. So, I mean, then it struck me considering that in line with the fact that kind of governments are realizing how important the semiconducter industry is, especially given the supply chain constraints that we’re having. Something that you said a couple of weeks ago is that we may end up actually having a huge oversupply of semiconductors in three years, as a lot of this supply comes online. And also at the same time, as we create a lot of inefficiencies, as governments try to protect their tuff in terms of this so they don’t have to rely on other countries for their semiconducter supply.

Scott: [00:09:49] Yeah, I will say I personally actually don’t know where this surge in demand for semiconductors is coming from. That’s still a little bit opaque to me. Like what about the pandemic caused a step function change in semiconductor demand? I don’t know. But yeah, to your point. I think you can pencil in oversupply of semiconductors in 2024, 2025, somewhere like that. We’ll probably be having these conversations and it’ll be the total flip side of the curve. One thing I was actually looking to mention about Nordic Semiconductor that I thought was really interesting was the quote, “we are totally dependent on TSMC putting new capacity in place”. And anytime as an investor, a long-term investor that you read those words of totally dependent on a supplier, a flag should go up as you know, something that one, a company should never be totally dependent on a supplier, but if you’re that supplier that the company is totally dependent on, that’s a pretty good position to be in, because that means higher prices, higher margins especially when you’re capacity constrained.

Mokaya: [00:10:53] When you kind of draw the network node for semi-conductors, TSMC is at the center of it. It’s at the finger pulse of everything that happens around the semiconductor industry. But that was pretty interesting that you picked up. Anything else that struck you this week?

Bubble-like behaviour in real estate

Scott: [00:11:09] Yeah, there’s actually two things that I think are really important to mention, one in the oil section. A lot of companies talking about rebalance of demand in oil under investment in new capacity. These are always things that the oil industry talks about, but I actually do believe them this time that we are getting to balance in the oil industry. And especially with inflationary headwinds going on in the rest of the economy, I would not at all, be surprised to see some of that starting to make its way into the energy space which will be very hard to ignore if that’s the case. And those oil stocks are obviously priced, they are priced kind of for death. So you know, you could see big spikes in oil stocks.
And then the other thing that I thought was really important to point out was in the real estate section. D.R. Horton talking about seeing erratic behavior in land acquisition from home builders. And that’s one of the first times that I’ve seen indication that real estate housing, home building is starting to get into bubble like behavior. So those are two things that should be on everybody’s radar, as you’re thinking through investments.

Emerging Markets still struggling with Covid-19

Mokaya: [00:12:16] Maybe something else that I wanted to highlight for me, as we finish up is about the emerging markets. They’re struggling. That was Proctor and Gamble that noted that. India is really doing very badly. And even as a lot of the other countries are slowly reopening up, especially in the US and all, it’s good to remember that Europe is slow and some emerging markets are struggling really badly with the pandemic still. So it may take a while before the rest of the world kind of opens up. Yeah.

Scott: [00:12:47] I think that’s really good to point out though. It’s so easy to forget, especially in the US which is opening up rapidly and has had a rich experience with vaccines, that there are places in the world that are really struggling with COVID still.

Mokaya: [00:13:01] We’ll close at that. This coming week there’s a flood of earnings on 180 S&P 500 companies, which is almost a third of the index actually reporting. So we’ll be here at The Transcript, keeping track of all these companies. So see you next week. Send us your comments and feedback. We saw some emails and some comments on Twitter. Thank you for that. So keep them coming at [email protected] and also on Twitter @thetranscript_. Thank you so much and see you next week.

Scott: [00:13:31] Thank you.

Transcript by Wanjiku Njuguna

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