The Podcast
The Transcript Podcast Ep. 15: Inflation getting real
In this episode of The Transcript Podcast, we cover continuing strength in the US economy, the high pent up demand for things like entertainment, and how companies are coping with chip shortages
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
00:10 – Continuing strength in the US economy
00:49 – Inflationary and labor pressures
03:52 – Credit quality is high among consumers
05:25 – Big Techs still growing at startup pace
08:21 – Semiconductor shortage persists
10:12 – Nuggets from the Berkshire Annual Meeting
Introduction
Scott: [00:00:00] Okay, everybody. Welcome to The Transcript podcast. We sent out a new issue of the newsletter yesterday and it had a lot of good stuff in it.
Continuing strength in the US economy
It was a busy week for earnings. This was the peak week of earnings reports for this season. It included a lot of stuff from tech companies which I’m sure we will touch on in a bit as well as The Fed had a press conference last week which I’m sure everyone was paying attention to in addition to us. From a high level, what we saw was continuing strength in the US economy, we heard that the economy was surging and that the consumer is very, very strong. Domestic spending, returning to pre-pandemic levels and that life is getting back to normal, people going out to bars and restaurants and events selling out and things like that.
Also inflation continues to be a hot topic. Pulled out a number of quotes from companies talking about inflationary pressures and also labor pressures that people are having trouble finding staffing even in the restaurant, especially in the restaurant and leisure industries. So we saw that from the economy, from companies operating within the economy and then we spliced that against the fact that the Federal Reserve seems to be seeing a very different picture of the economy than the companies who are operating, talking about that we’re a long way from their goals of inflation and employment.
Obviously, unemployment is still high, but the Fed looking to not even talk about tapering until we get to maximum employment and inflation above 2% now and it has to prove that it’s not going to be transitory for 2%. So the Feds on hold continuing to be pretty easy for the foreseeable future is what it looks like despite a strong economy. Mokaya, any thoughts?
Mokaya: [00:01:45] I mean two thoughts. One was about life getting back to normal once again. One of the things about the MGM Resorts, they say that they put out the McGregor UFC fight, at least tickets are sold out in 22 minutes. 20,000 tickets. I mean, that pretty much sums up the kind of pent up demand that you can see out there, especially for travel. People will really want to be out and about this summer enjoying all the things that the pandemic has stopped them from enjoying for two years.
So you can also see that the consumer is very, very strong and able to spend looking forward to spending, especially in the summer. That’s the mood that you can read from a lot of the transcript we read last week and also like there’s a lot of worries about inflation. You can see that very clear in a lot of the quotes, we had like six, seven quotes that all had to touch with the inflation. And the most striking one also was from Warren Buffett who actually said the costs are just up and they kind of is super red, hot, and people are raising prices for them and they’re raising prices for the other people. So I would tend to think that those are the key things that we keep seeing in the past three weeks, three or four weeks. And they seem to be able to continue in the next couple of weeks or so.
Scott: [00:02:52] Yeah. I mean, I think to me it’s the picture that we’re seeing from the companies themselves, and then comparing that to the picture that the Federal Reserve is seeing. And I think we talked about this last week, a little bit about you know, the conversation that the Fed is having in public versus the conversation that the Fed might be having behind closed doors. And Jerome Powell gave some indication that the conversation is different behind closed doors I think when he was talking about capital markets being a bit frothy and saying, ‘I won’t say it has nothing to do with monetary policy’. So obviously they’re aware that their actions are having an impact on capital markets specifically, but they seem intent on holding the course here. You know, but the inflation comments are tough to ignore. And it’s really hard to see how we maintain a deflationary psychology, which has been the underpinning of the last decade and a half. It’s hard to see how that happens with them continuing to print money into a really hot economy. So…
Credit quality is high among consumers
Mokaya: [00:03:52] Yeah. And then also looking beyond that, something else that I picked up was in the financials which also struck me is that throughout the past couple of weeks that we’ve been reading the various earnings calls of various companies, especially the banks, you could sense that credit quality is very high among the consumers and the customers that they’re having. And as such, they’ve been able to reduce their provisions for all these. But strikingly Capital One says that these could actually be a setup for poor credit quality going forward, or at least a groundwork for credit worsening down the road. I find it very striking in the sense that this is actually an unusual period in terms of consumers having a lot of cash, we could actually be projecting people’s credit quality to be higher than where it usually should be. Any thoughts on that yourself?
Scott: [00:04:39] Yeah. In some ways I actually think that this comment from the banking sector is a bit of a red herring because I think in this cycle ever since the financial crisis, really, the risk seeking behavior in the economy has moved almost completely off of bank balance sheets to the extent that it shouldn’t be very surprising that credit quality has remained so strong at banks. They’re just not seeking really risky deals and all of the risk seeking capital has moved more onto the equity side of the economy in terms of funding companies that have extremely high valuation. So where you see risk seeking behavior is really outside of the banking industry. Yeah, this doesn’t worry me that much, I guess.
Big Techs still showing startup growth rates
Mokaya: [00:05:25] Moving over to the Tech companies this week. I mean, they had blowout quarters, which is getting too common now. But in terms of the numbers though, like you see Facebook having sales up 48%, you have I think YouTube ad revenues up around 49%. I mean, if you look at most of the tech companies that I checked I htink five or six of them, they had an average around 30 to 40% revenues jump. It’s pretty shocking seeing some of these numbers, this deep into the pandemic and at the same time trying to reflect that these are companies which are sort of, some of them are trillion dollar companies. I mean, they’re growing at the pace of startups yet they’re really, really big.
Scott: [00:06:06] It really is a pretty amazing growth rate for these companies off of very large basis. I mean, for Google and Facebook, it obviously shows that the ad dollars are moving over to digital in really significant amounts. I mean, budgets are moving from what was formerly two thirds television, one third digital, just flipping completely on their heads, where companies are spending more and more on digital. So that’s really interesting to see, and then it’s still just in large part occurring to those two companies, Facebook and Google. And then Apple was really amazing as well. You know, just showed revenue growth of 54% in a non holiday quarter.
And I think with Apple interesting note, you know, one would think it might be stimulus driven in the United States but the growth is actually really significant in China which goes to show that the Chinese economy is doing well. And also that the Chinese consumer is becoming more of a powerhouse internationally and could continue to drive significant growth for a company like Apple going forward. So I think that is actually the unseen story of Apple’s quarter, at least.
Mokaya: [00:07:14] I mean focusing on Amazon, AWS alone is a 54 billion now ARR business, which is pretty stunning given how fast it’s grown over the couple of years and also the depth of the growth it’s had during the pandemic. And then also something else that struck me about Amazon was the fact that they are really intent on investing a lot in last mile logistics. So I think they want to control the pace at which people receive their products. They feel like it’s easier for them to track end to end from their warehouse to where the consumer gets the products. I think they are going to invest in that a lot more going forward. So I think this would be a bit of a bearish note on companies like UPS, who are now being seen as main competitors to Amazon who are pretty good at driving down costs of this kind of like moving products to the consumer. So I think that was really striking for me from my end. Any thoughts on that yourself?
Scott: [00:08:10] Yeah. I mean, the numbers of AWS being a $50 billion business, just drive home what an important part of Amazon’s business that it has become. So yeah, pretty amazing.
Semiconductor shortage persists
Mokaya: [00:08:21] I mean, continuing on the Tech section also, something we’ve been covering for the past couple of weeks, which continues also to be still a persistent pain is actually the semiconductors shortage. I think the striking thing is that a company like Ford was forced to cut production by 17% this quarter, because of the shortages out there. But then there are companies also on the other side, like Apple and Sony who are asking what shortage, because they actually have enough at least to cover them for a little while longer into Q2. So for most companies that I’ve read about who are OEMs like Ford, I think what you’ve heard from them is that Q2 is going to be the toughest quarter for them to actually meet their production and actually meet the demand that is out there for the cars. So…
Scott: [00:09:08] Yeah, it’s interesting. You say that this seems not to be affecting all industries equally. So the auto industry seems to be hardest hit by the semiconductor shortage. But consumer electronics and Sony and Apple seem to be doing okay.
Mokaya: [00:09:24] Could be because maybe the consumers have been around for a while, like dealing with the chips. And I think these other like auto companies are new to this business so I’d guess they are finding it harder. Anything else that struck you?
Scott: [00:09:39] I think last note, in the Energy section, just seeing supply and demand coming into balance for oil and those stocks really still being priced at a very different set of circumstances then having oil markets come back, coming back into balance. So that continues to be a potential area of investment returns that people should have on their radars. Besides that you did a nice rundown on Twitter for us of the Berkshire annual meeting. Want to talk a little bit about some of the things that you saw there?
Nuggets from the Berkshire Annual Meeting
Mokaya: [00:10:12] Yeah, a lot of things. I mean, it was my first time to listen end to end the Berkshire meeting. It was pretty impressive. I asked Tren Griffin to actually select his best quote from there. His best quote also was very nice, like “interest rates are to the value of assets what gravity is to matter”. What he meant there, Warren Buffett was like, interest rates are very low so that kind of justifies the valuations which are out there. But then, some of those valuations are being seen because you’re reducing the pull of gravity, which is the interest rates on the valuations of these assets. He’s pretty worried himself a lot about the valuations that are out there, the prices that people are paying it’s a pretty hot market. He wishes he could deploy a lot of the cash which he has. You can check out more of the selected around 20 quotes from what he talked about on various aspects from inflation to valuation of assets, to cryptocurrency where Charlie Munger had very strong words on that. You can check them out on our Twitter page and I think like them and share them with your friends also. Is there anything else that you’d want to discuss yourself?
Scott: [00:11:17] No, I think that was a good rundown of the week.
Mokaya: [00:11:19] Yeah. We may have some good news next week about Substack right, Scott?
Scott: [00:11:25] That’s right. Yeah. Stay tuned on that.
Mokaya: [00:11:27] Yeah. Next week. So join us next week on Tuesday, once again for the podcast and also on Monday again for the newsletter. Always leave us a message at [email protected] and we will be ready to hear your comments and feedback on this. Thank you so much for this week.
Transcript by Wanjiku Njuguna
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