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The Transcript 05.10.21: Pent-up Demand

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Succinct Summary: The economy is booming and everyone should enjoy it. The American economy is benefitting from tremendous amounts of pent-up demand and in some of the hardest-hit industries’ activity is beginning to tick back up above 2019 levels. Along with that boom, there are clear signs of inflation and concerns about overheating. Even Janet Yellen seemed concerned for a few hours last week.

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Macro Outlook:

The boom is good

“The boom is good. Employment is good. Growth is good. Everyone should enjoy it” – JPMorgan Chase (JPM) CEO Jamie Dimon

Americans are ready to party like it’s 1929

“Having said that the summer is going to be a free for all, you’ve seen the stats, 73% of Americans are planning a trip and the highest in history was 37. So it’s going to — America is going to party the summer like 19 — like it’s 1929.” – Starwood Property Trust (STWD) CEO Barry Sternlicht

People want to see family and friends

“As vaccination rates arise, infections fall and restrictions lift, people quickly breathe sigh of relief and start moving again. There’s pent-up demand to see family and friends. Offices, restaurants and bars are reopening, and even airports are seeing improved traffic” – Uber (UBER) CEO Dara Khosrowshahi

“I hope everybody stays healthy and positive during these times and look forward to a summer where hopefully, people can open up a little bit more and start together with loved ones and friends.” – Barings BDC (BBDC) CEO Eric J. Lloyd

There’s huge pent up demand for travel and entertainment

“There’s enormous pent-up consumer demand and with the combination of government stimulus and vaccines, that will add yet more fuel to this fire in the economy, this growth in the economy.” – Loews (L) CEO Jim Tisch
“…the booking window is very, very compressed. But again, speaking to the pent-up demand, it’s filling up quickly.” – Norwegian Cruise Line (NCLH) CEO Frank Del Rio

“I guess if you’re going to model that out, you’d probably — you’d be thrilled that your first data point is the biggest demand in history….Alongside these trends, we are seeing the effects of significant pent-up demand as fans are buying tickets and events are selling out faster than ever. In the US, Bonnaroo, Electric Daisy and Rolling Loud festivals all sold out in record times at full capacity.” – Live Nation (LYV) CEO Michael Rapino

Concerts are back

“Turning to Live Nation,you may have seen in today’s earnings release from them. Concerts are back and a high demand for dates in 2021. In fact, we have booked twice as many shows in ’21 as we did in ’19.” – Liberty Media Corporation (LSXMK) CEO Greg Maffei

“sales for our Live Nation festivals and concerts have been strong, demonstrating the tremendous pent-up demand for our shows, with many festivals selling out in record time and a number of tours substantially overperforming relative to their historical levels” – Live Nation (LYV) CEO Michael Rapino

Should we worry about overheating?

“Listen, every client call I’m on including the one I just finished … is talking about overheating” – BlackRock (BLK) Chief Investment Officer Rick Rieder

The inflationary environment is real

“So what I’d say is we’ve talked about the inflationary environment, which is real. I think cost for inflation, no question, it’s accelerated. I think we’re now looking at it being in the high end of the mid-single-digit rate for 2021.” – Kellogg (K) CEO Steven Cahillane

“So what I can foresee are double-digit increases in GDP, driven by consumer demand, but I can also see significant inflation coming from two very distinct sources. The first source is cost-push inflation. …The second part of the inflation story, in my mind, comes from the demand-pull inflation.” – Loews (L) CEO Jim Tisch

“Since we spoke last, of course, now in the last three months, material prices have gone up further to, I would say, unprecedented levels. I think all basic materials, copper, nickel, zinc, aluminum, they’re all very high double-digit up. I think the most extreme is steel. And the most extreme is steel in the US. If you see, again, steel in the US today is – material indexes is 100% up compared to a year ago. It’s on an extreme high level.” – ASSA ABLOY (ASAZF) CEO Nico Delvaux

Stimulus may be distorting the unemployment picture

“…there’s going to be wage pressure, wage inflation…in theory, on September, whatever, 6th, the federal top-up expires. I guess it could be extended. My impression is it will not be. My hope is it will not be, not because I don’t care about the people. I think there’s just enough jobs.” – Hilton (HLT) CEO Christopher Nasseta

Even politicians may be noticing the risk of overheating

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” – US Treasury Secretary Janet Yellen

Or maybe not

“I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it” – US Treasury Secretary Janet Yellen

International:

Europe and Asia are lagging

“…we are very encouraged with the improvement in our business though Europe and Asia are lagging the recovery, and international travel to the U.S continues to be hampered.” – Marriott Vacations (VAC) CEO Steve Weisz

But China is strong

“So China is very strong, and in our opinion will continue a very strong trend.” – Estée Lauder (EL) CEO Fabrizio Freda

“So strong demand in China, and that continues” – Minerals Technologies (MTX) Group President of Specialty Minerals & Refractories D. J. Monagle

“From a regional perspective, China stands out, now clearly above pre-COVID levels for industrial output.” – Siemens Aktiengesellschaft (SIE) CEO Roland Busch

Financials:

Countries around the world are considering digitized currencies

“But there isn’t one country around the world in which we’ve engaged in, where I don’t think that they’re envisioning a future that isn’t one of a digitized Fiat currency. I think, obviously, there’s a lot of synergy with digital wallets. There’s a lot of interesting things as you think about next-generation technology that can add utility to payments, that can take down perhaps cost, the elimination of unnecessary intermediaries and certainly can speed the time in which somebody can access their money.” – PayPal (PYPL) CEO Dan Schulman

There is “zero demand” among merchants to accept crypto currency

“So I would say, certainly, it may be a commentary on the merchants that make up our business and the merchants we’re targeting, there’s really 0 demand amongst our merchant base to accept crypto. Obviously, over time, things can evolve, if you have more central banks developing their own crypto currencies have really just become a digital form of their domestic currencies, then obviously that environment can change today. But I think as it relates to utilizing cryptocurrency for the sake of effectuating commerce amongst merchants in our businesses around the globe, there’s really no demand for that today.” – Global Payments (GPN) COO Cameron Bready

Jamie Dimon is tired of Zoom

“We want people back to work, and my view is that sometime in September, October it will look just like it did before…I’m about to cancel all my Zoom meetings. I’m done with it.” – JPMorgan Chase (JPM) CEO Jamie Dimon

“So the best news I saw in the last months was when Jamie Dimon told the world he was canceling all his Zoom calls. And in addition, he said that he was telling his clients that if they lose business, it’s because somebody else visited them, and because JPMorgan did not. And that’s great. We want people to travel. So I think that, that’s perhaps going to start to set the tone here for corporate travel recovery” – Azul SA (AZUL) Chief Revenue Officer Abhi Manoj Shah

Employers want people back in the office

“…we are definitely seeing an uptick in tours, an uptick in activity, and more and more as we speak with folks, plans are actually being put in place similar to the plans that we have in place to return to the office. We believe that by the end of the summer, certainly in September, that there’ll be a significant increase in the number of people that are back in offices and companies that are back operationally in that…people are realizing that the return is on the way, the vaccine is rolled out, and people are more comfortable returning back to the office. And the employers believe the office environment is going to be here, and is necessary.” – Newmark (NMRK) CRO Luis Alvarado

But employees expect to be working from home at least part of the week

“Even as infection rates ease, workers have felt less tethered to their office. In May 2020 42% of redfin.com visitors plan to work from home at least part of the week, compared to 60% in April 2021. Prices have increased almost without impunity, in part because so many of the people moving out of California or New York, are still spending less on housing.” – Redfin (RDFN) Head of Investor Relations Meg Nunnally

Consumer:

Comps are getting harder for e-commerce companies

“…year-over-year comps in 2021 are expected to get steeper as we go through the year. That fact combined with the other factors I just outlined, possible deceleration in e-commerce growth, absence of stimulus tailwinds and potential future impact from business reopenings implies that year-over-year growth rates may decelerate as we progressed from here.” – Etsy (ETSY) CFO Rachel Glaser

There’s even pent up demand for brick and mortar shopping

“I think there’s a huge appetite for consumers to come in the store. And that is what we see when we open up, particularly in countries where the stores have been closed for two or three, four or five months, there’s a huge appetite to go and look upon products or purchase products…I would not over interpret the short term, I would say maybe slow down on online and pick up on offline because it’s really the medium term, that’s the most relevant one. And that’s simply just the pent-up demand in social activity.” – adidas (ADDYY) CEO Kasper Rorsted

“I think that I don’t see it really cannibalizing it. I think people have been talking about the death of brick-and-mortar forever, and it just doesn’t seem to happen. A ton of studies show millennials like going to stores. Retail mall traffic had been down, but is around that 20% range, occurring to have Wall Street article that came out, but is already coming back up.” – Intellicheck (IDN) CEO Bryan Lewis

Median home prices are up 17% y/y

“Everyone at Redfin is working hard to catch up to the housing market, which is breaking records left and right. The U.S. median home price hit a record high of $353,000 in March up 17% from a year earlier, which is itself a record rate of growth. The number of homes for sale hit a record low dropping 29% from last year, which is a record size drop. Mortgage applications for second homes are double their pre-pandemic levels” – Redfin (RDFN) CEO Glenn Kelman

A downtick in home improvement?

“…people are clearly leaving their homes returning to some element of normality and transitioning away from some of the work they were getting done in outdoor tasks. So we’re seeing a softness in terms of outdoor tasks as everyone moves away from getting their backyard and deck and new firepit put in to more indoor tasks.” – InterActiveCorp (IAC) CEO Joseph Levin

“One of the things we did a fair amount of research over the last couple of months with American consumers and try to understand what of percentage of population that we surveyed was actually recommitting to DIY on a more permanent basis…it came out that it was a very significant percentage, something like 75% of the population who had done at least 1 DIY project and rediscovered, in some cases, DIY. But we also know that there is a tremendous tailwind building in the housing and both new homes and existing homes.” – Stanley Black & Decker (SWK) CEO James M. Loree

8 million existing homeowners may be planning to move

“Our research team recently published a survey based mover report…the report indicates that the pandemic has indeed caused people to rethink where they live, and concludes that approximately 8 million existing homeowner households that have been on the sidelines may enter a real estate market already be set by unrelenting demand. Additionally, 8.9% of consumers plan to purchase a home in the next six months near a 20 year high per the conference board’s April consumer confidence survey.” – Zillow (Z) CEO Rich Barton

Technology:

The most acute shortage in semiconductor supply chains in 40 years

“In my 40 years in the semiconductor industry, I cannot recall a time when the imbalance between the supply and demand has been more acute. While our capacity will continue to grow every quarter, we also believe that wafer fab, as well as assembly and test constraints, will persist through 2021 and quite likely into 2022…the imbalance has been so large that the instantaneous response from foundry has been difficult.” – Microchip (MCHP) CEO Ganesh Moorthy

“there’s been a lot of news recently about the inability of semiconductor chip manufacturers to increase production to meet demand…it will take several months for the supply chain to overcome this shortage” – Fluor (FLR) CEO David Edward Constable

Auto companies have been hit by capacity issues at a few specific semiconductor plants

“What we’re currently facing and what in quarter 2 is hitting us and our peers is the incidences we have seen in Japan, in the Renesas plant, which went off-line basically for 4 or 5 weeks. And then the winter storms in America, where we had a shutdown of 3 semiconductor plants for more than 3, partially for 4 weeks. Two of those plants, I’ve been mentioning are dedicated 100% to automotive, and that is what we’re going to see in quarter 2.” – Volkswagen (VLKAF) Group CEO Herbert Diess

” the worldwide shortage of semiconductors impacting the auto industry continues to limit near-term production visibility. Based on discussions with our customers and suppliers, we expect supply chain disruptions to remain volatile in the second quarter given the additional impact of the Naka fire and the Texas weather events…we don’t expect the supply/demand imbalance to fully recover to normalized levels until 2022″ – Aptiv (APTV) CFO Joseph Massaro 

“Recent global shortages in semiconductors and microchips have really disrupted the automotive production and kept dealer inventories exceptionally lean. In fact, Ford, one of our largest accounts, has recently warned that 50% its output in Q2 is going to be cut back, which is going to lead to a loss of production of 1.1 million vehicles in 2021. And General Motors, another one of our largest accounts, has been echoing similar sentiments and quite frankly, halting production at various plants at various times. LMC Automotive, which is a respected consultancy and prognosticator in the automotive industry, they expect the chip shortage to curtail North American automotive production by almost 550,000 vehicles in the first half of 2021, with not even 1/3 of this volume loss predicted to recovery before  2022. So this will be something that we’re going to have to deal with as an industry for quite some time” – Autoweb (AUTO) CEO Jared R. Rowe

The semiconductor cycle will end eventually

“When the cycle ends on the other cycle, when there is a lot of capacity available, customers may not be willing to make a year-long commitment that is non-changeable. So that’s what the customers would be thinking, but the environments go come back and forth…All cycles eventually come to an end as the participants in the battlefield work on how they adjust to where the situation is. In prior cycles, the semiconductor companies put in the additional capacity in place and began to get closer in closer in their self-interest to be able to grow. ” – Microchip (MCHP) Board Chairman Stephen Sanghi

Healthcare:

Even if you waive patents on vaccines, you probably won’t create much additional supply

“So, on the IP, what does it mean? I believe it doesn’t change anything for Moderna…This is a new technology. You cannot go hire people who know how to make mRNA. Those people don’t exist. And then even if all those things were available, whoever wants to do mRNA vaccines will have to buy the machine, invent the manufacturing process, invest purification processes, analytical processes and then they will have to go run the clinical trial, get the data, get the product approved and scale manufacturing. These doesn’t happen in six or 12 or 18 months. We have been working at this for years. And as you know, there are some smaller mRNA companies that are still in the clinic trying to get the products to a finish line. And so, we saw the news last night and I didn’t lose a minute of sleep of the news during the night.” – Moderna (MRNA) CEO Stéphane Bancel

Moderna has pulled off an amazing feat

“In the first quarter alone, 102 million doses have been shipped and many tens of millions of people have been fully vaccinated or received their first dose. 12 months ago, in Q1 2020, Moderna had never run a Phase 3 clinical study, never gotten a product authorized by regulator and never made 100 million doses in a single quarter, not even 10 million, not even 1 million doses.” – Moderna (MRNA) CEO Stéphane Bancel

Industrials and Transport:

Some travel statistics are back above 2019 levels

“…we are on pace to see record leisure demand in the U.S. over the summer months with April bookings for the summer exceeding 2019 peak levels by nearly 10%.” – Hilton (HLT) CEO Christopher Nasseta

“The fundamental drivers of our operating businesses improved during the first quarter. Based on data reported by the FAA, flight activity nationwide was up 8% in the first quarter versus the first quarter in 2020 and just 3% below the level recorded in 2019. Activity levels for the month of March exceeded those in March of 2019 by 7%.” – Macquarie Infrastructure (MIC) CEO Christopher Frost

“Online destination searches by owners are more than double that of January 2019. We are also seeing very high levels of engagement on our social media pages, reflecting excitement around travel. Google searches for resorts and hotels in the U.S are at their highest levels in nearly 10 years.” – Marriott Vacations (VAC) CEO Steve Weisz

“I would say and many have reported already, but the summer looks strong, particularly in the U.S. and in other markets where vaccinations are well along the way. We are already seeing booking trends well above 2019 levels for leisure destinations, beach, mountains, et cetera. And that goes for not only vacation rentals, but also for conventional lodging.” – Expedia (EXPE) CEO Peter Kern

“For the first half of 2022, our load factor is meaningfully ahead of 2019 with pricing higher when excluding the dilutive impact of future cruise credits” – Norwegian Cruise Line (NCLH) CEO Frank Del Rio

Business travel is still down but recovering

“…business travel volumes already 75% of what they were in ’19 in those markets. So I think it is — even though not fully through it, not fully open anywhere, I think it is really good evidence that as people get back to work, as kids in the fall go back to school, which at this point, I think, is very highly likely, you’re going to see a step change into the third and fourth quarter in business transient.” – Hilton (HLT) CEO Christopher Nasseta

“we’ve seen places like in Greater China, where the virus is basically under control, business travel isn’t back to normal, but it’s definitely trending in that direction, and we’re now seeing an increased demand in business travel. So we think it will accelerate in the second half of this year and into 2022 and then begin to return to normal in the coming years, too.” – InterContinental Hotels Group (IHG) CEO Keith Barr

In-Person group meetings are coming back

“Near-term group bookings continue to be driven largely by social events and smaller meetings, but we are seeing a slow shift back to a more normal mix of business with corporate group leads up more than 70% for future periods. Associations and trade shows have also started opening up housing and registration sites for events later this year. Further signs of moving forward with in-person group meetings. As we look out to next year, our group position is roughly 85% of peak 2019 levels with rate increases versus 2019.” – Hilton (HLT) CEO Christopher Nasseta

Supply chain challenges continue

“We’re facing a variety of challenges in the supply chain and manufacturing environment. Component availability and pricing, logistics hurdles as well as some matters around labor such as availability, cost and worker safety are all top of mind for us. We expect increasing cost impacts as we progress through Q2…The supply chain challenges are very volatile and uncertain right now, right? So I mean, it’s not like we have it all measured because it is changing week-to-week…it hasn’t, I’ll call it, shut us down in meaningful ways anywhere. But each day and the list gets longer, it gets a little bit harder.” – The Middleby (MIDD) CFO Bryan Mittelman

“While we do not provide quarterly guidance, I would expect the second quarter impact related to semiconductors to be greater than the first quarter based on recent customer announcements and supply chain challenges” – American Axle & Manufacturing Holdings (AXL) CFO Christopher John May

“One is the supply chain challenges. So freight rates are already up significantly and might see further increases given the container shortages that we have seen. And of course, the Suez Canal situation didn’t help there either.” – Adidas (ADS) CFO Harm Ohlmeyer

Materials & Energy:

Glencore says that there’s a shortage of copper as prices hit decade-high levels

“You will need $15,000 copper to encourage a lot of this more difficult investment. People are not going to go to those more difficult parts of the world unless they’re certain. We need another two Glencores. That’s the scale we’re talking about . . . I don’t know how we’ll find that much copper to fill that gap…” –  Glencore (GLCNF) CEO Ivan Glasenberg

“We always say necessity is the mother of invention . . . but in copper, it’s not like the oil industry where there was a new source of supply coming from the shale production…All the easy projects have been done.” – Freeport-McMoRan (FCX) CFO Kathleen Quirk

” Copper prices remain at near decade-high levels driven by the tremendous demand for copper from the reopening of the world’s economies and the insatiable appetite for renewable and green initiatives around the world. While copper remains a foundational building block for many mainstream items in our lives, it is a critical component for the energy transition, in particular wind and solar technology, energy storage, and electric vehicles. To provide some additional color, if you look at the amount of copper in a traditional internal combustion engine vehicle, it would require roughly 48 pounds of copper, while an electric vehicle requires approximately 3.8x the amount of copper, or up to 180 pounds per vehicle.” – Genesis Energy (GEL) CEO Grant E. Sims

“we hardly talk about it because you wouldn’t see significant swings in base metal prices like we’ve seen. I don’t recall seeing such a swing over the past 10 years in copper prices.” – Sierra Metals (SMTS) CFO Edmundo Gontardo Guimaraes

Lumber prices up 200%

“Lumber prices rose to 200% in one year, which is probably one reason why when I ventured into the mountains here in my home state of Washington, vast tracts of forests have recently been cleared.” – Redfin (RDFN) CEO Glenn Kelman

“across the North American market, residential and commercial treating outlook remains strong, with ongoing pent-up home improvement demand driving lumber prices to record levels.
Big-box retailers have mostly built up their inventory during first quarter, and independent dealers have now decided to jump into the market, despite the higher lumber prices, to get ready for the anticipated spring rush.” – Koppers Holdings (KOP) CEO Leroy M. Ball

“Many of the commodity inputs to a new home are way up in price. Look at lumber, it’s tripled in price, plus labor shortages abound. So affordability is going to be challenged and the cost to build a new home has risen significantly.” – Ellington Financial (EFC) Co-CIO Mark Ira Tecotzky

Miscellaneous Nuggets of Wisdom:

Running a company is like flying a plane

“Back in 2010, right before Cloudflare’s first Board meeting and our launch, I got some advice from one of our early investors. He said running a company is a bit like flying an airplane. You want to make sure it’s well maintained at all times. And that when you’re flying, you keep the wheel steady and the nose 10 degrees about the horizon. That’s stuck with me, and we’ve designed Cloudflare for consistent and disciplined execution. That shows in quarters like the one we just had.” – Cloudflare (NET) CEO Matthew Prince


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