The Transcripts

The Transcript 05.02.21: No time to taper?

Click here to receive The Transcript every Monday Editor’s Request: This weekly newsletter is made possible by donations from our readers. If you like what you are reading, click here to donate (Our suggested donation: $10 per month). Help us keep The Transcript going. Succinct Summary: The US economy is surging and life is returning to normal. Consumers have healthy balance sheets and inflation is a hot topic. Companies in hard-hit industries are even talking about having a difficult time finding staff. The Fed seems to be seeing a different picture of the economy though and has no intention of tapering pandemic era stimulus until it’s clear that the economy has returned to maximum employment and inflation is running above 2%.

Macro Outlook:

The US economy is surging

“The U.S. economy will likely continue to surge given the financial health of most industry sectors, the significant federal fiscal stimulus provided to individuals and small business, accommodative monetary policy and pent-up consumption sparked by the pandemic reopening.” – Boston Properties (BXP) CEO Owen Thomas

The consumer is very strong

“As it relates to the consumer, obviously, they’re very strong. When you look at savings rates, when you look at all the metrics related to…we do see a consumer that’s very strong…we’re very happy with the strength of the consumer” – Travel + Leisure (TNL) CFO Michael Hug

“…consumer demand for vehicles in the U.S. remains extremely strong and hit an even higher year in March. It is true that sales have and will be hampered to a certain degree by low inventory levels. But this continues to support above-average margin levels.” – Group 1 Automotive (GPI) CEO Earl Hesterberg

“…consumers in the US still are fairly healthy, it’s certainly helpful for us obviously when they’ve got money in their pockets and stimulus definitely helped in the first quarter…I don’t think we have a big concern right now about consumer ability to be able to spend.” – McDonald’s (MCD) CFO Kevin Ozan

Domestic spending has returned to pre-pandemic levels

“We’re encouraged by the return of domestic spending levels to pre-pandemic trends…U.S. retail sales were up 11.8% versus a year ago ex-auto ex-gas. This reflects the impact of fiscal stimulus and the lapping of the start of the pandemic.” – Mastercard (MA) CEO Michael Miebach

“The most notable sign of a domestic recovery was card presence spent growing 4%, which is up 3% over 2019 and 8 point acceleration from the first quarter led by retail and restaurant spending. Improving card presence spending did not slow e-commerce indicating that e-commerce trend is likely to continue even as card presence spent recovers.” – Visa (V) CFO Vasant Prabhu

Life is getting back to normal

“…you see people standing at the outside bar on your way home on a Friday night because the bar that I passed on the way home is packed. And there’s nobody with a mask, not a one, not in sight. And it’s outside and everybody is allegedly — I’d say, apparently, there’s no COVID at that bar.” – Brown & Brown (BRO) CEO Powell Brown

“…driving and commuting in the first quarter was still only 80% of pre-COVID levels, but in recent weeks has climbed to 90% of pre-COVID levels, a positive sign that people are getting back to normal life.” – Sirius XM (SIRI) CEO Jennifer Witz

“In July, T-Mobile Arena is set to host the McGregor fight – McGregor UFC fight, and you can’t get tickets for this event. We sold 20,000 tickets in 22 minutes. This is just one of the many examples of the clear demand for entertainment and we’re excited to see a path to delivering these differentiating offerings to our customers.” – MGM Resorts (MGM) CEO Bill Hornbuckle

“Consumer confidence is back, hotels are selling out again and our busy summer season is upon us. A period over the next six months where the U.S. Travel Association is reporting that nearly 9 out of every 10 Americans surveyed are planning to take a trip.” – Wyndham Hotels & Resorts (WH) CEO Geoff Ballotti

Inflation is a hot topic

“Let’s just start on what the hot topic is now on inflation, is I actually think that’s a net positive for us. When you look at the nature of our product, people are locking in their future vacations at today’s prices.” – Travel + Leisure (TNL) CEO Michael Brown

“We’re seeing substantial inflation. We’re raising prices, people are raising prices to us. And it’s being accepted. We really do a lot of housing. The costs are just up, up, up…It’s an economy – really, it’s red hot. And we weren’t expecting it” – Berkshire Hathaway (BRK) CEO Warren Bufettt

“I would tell you the inflationary pressure people see and the headlines that they have on it and all our competitors are feeling is unlike anything I’ve seen, because it’s just not in commodities. It’s sort of across the board. And better stated, it’s just not raw copper, steel and aluminum. It’s across the board because everyone sort of has what I would call a COVID surcharge of inefficiencies that they’re trying to pass on.” – Lennox (LII) CEO Todd Bluedorn

“…there continues to be significant cost pressures, ongoing logistics delays and various capacity constraints in several areas across the supply chain.” – Generac (GNRC) CFO York Ragen

“…there is higher inflation in the marketplace and if you look even at this quarter, the composition of pricing and volume, pricing is a little bit more pronounced than it has been historically. So we are pricing more and we are pricing away inflation.” – Mondelez (MDLZ) EVP & CFO Luca Zaramella

“We’re clearly seeing some price pressure, not unlike what you’ve heard about elsewhere, resins, certain metals.” – General Electric (GE) CEO Larry Culp

Companies are having trouble staffing

“Now the final thing I’d like to acknowledge is we close out the discussion on our Q1 results in the US is the very difficult staffing environment that we are in today. The combination of COVID, strong sales, the broader economy reopening and the high level of government stimulus is creating one of the most difficult staffing environments that we’ve seen in a long time.” – Domino’s (DPZ) CEO Ritch Allison

“It’s safe to say that most people are having to work extra hard to bring in our frontline associates and things like housekeeping and marketing associates and front desk staff. They’re the frontline of the hospitality industry…I do anticipate employment to be a challenge through the summertime, not an obstacle, but just it’s — we’re going to have to work a little bit harder…there could be an inflection in September, where the labor market eats us to a certain degree.” – Travel + Leisure (TNL) CEO Michael Brown

“…we are seeing this impacts more the downstream, trucker shortages. And so that, in terms of personnel, we’re seeing that I think that’s in part, the Amazon effect and all the delivery UPS and the rest, pulling a lot of truckers off. So we think that will work itself out.” – Chevron (CVX) VP & CFO Pierre Breber

“…if you want to get a contractor, everywhere around the country seems to be…off the hook. So homebuilders and all kinds of stuff and the cost of wood and all that other stuff.” – Brown & Brown (BRO) CEO Powell Brown

But the economy is a long way from the Fed’s goals

“The economy is a long way from our goals and it is likely to take some time for substantial, further progress to be achieved.” – US Federal Reserve Chair Jerome Powell

Stimulus will remain appropriate until we reach maximum employment

“With regard to interest rates, we continue to expect it will be appropriate to maintain the current zero to 1/4% target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment, and inflation has risen to 2% and is on track to moderately exceed 2% for some time. I would note that a transitory rise in inflation above 2% this year would not meet this standard. In addition, we will continue to increase our holdings of treasury securities by at least $80 billion per month, and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward our maximum employment and price stability goals.” – US Federal Reserve Chair Jerome Powell

The Fed wants to see inflation above 2%

“For interest rates, as I said a moment ago, we want to see labor market conditions consistent with maximum employment. We want to see inflation at 2% and we want to see it on track to exceed 2%. So, those are our tests.” – US Federal Reserve Chair Jerome Powell

It is not time to talk about tapering

“So, no, it is not time yet. We’ve said that we would let the public know when it is time to have that conversation. We’d said we do that well in advance of any actual decision to taper our asset purchases, and we will do so.” – US Federal Reserve Chair Jerome Powell

Even if it leads to some frothiness

“I would say some of the asset prices are high. You are seeing things in the capital markets that are a bit frothy. That’s a fact. I won’t say it has nothing to do with monetary policy, but it also has tremendous amount to do with vaccination and reopening of the economy.” – US Federal Reserve Chair Jerome Powell

“…we don’t have kind of thing where we have a housing bubble where people are over levered and owning a lot of houses. There’s no question though, that housing prices are going up…It’s part of a strong economy with people having money to spend and, and wanting to invest in housing. So in that sense, it’s good. It’s clearly the strongest housing market that we’ve seen since the global financial crisis.” – US Federal Reserve Chair Jerome Powell


Travel spend in China is back to pre-COVID levels

“We’re also seeing steady improvements internationally as Michele will cover later. Most notably in China, where spending on travel is once again back to near pre-COVID levels.” – Wyndham Hotels & Resorts (WH) CEO Geoff Ballotti

Spending in hardest-hit sectors picking up in the UK

“We are seeing some positive signs in our Spend data, drawn from our UK consumer cards…Encouragingly, spending in some of the hardest hit sectors, including hospitality and travel, is starting to pick up.” – Barclays (BCS) CEO Jes Staley

Emerging economies are used to inflation

“In emerging markets, I mean, in general acceptance of pricing is better, right, because inflations are more normal on the local economies” – Kraft Heinz (KHC) International Zone President Rafael Oliveira


Retail trading volumes are lower

“…the retail trader tired as it relates to equities, right now, we’re looking at a very seasonal slow month of April…And that’s probably what’s reflecting on what you’re seeing right now in the last couple of weeks.” – CME Group (CME) CEO Terry Duffy

Good credit quality now may lead to worse credit later

“I do want to flag that this period of unusually strong credit could lay the groundwork for credit worsening down the road as an industry point. And let me elaborate on that just for a moment here…the benign rear view mirror could encourage lenders to reach for growth and to loosen underwriting standards, which as you know, can invite adverse selection. And then overlay on top of that, the excess liquidity and capital that’s out there, and that could push lenders to stretch for less resilient business.” – Capital One (COF) CEO Richard Fairbank


Many pandemic behaviors will probably stick around

“So the behaviors that were formed during the pandemic are clearly in endure. Video callings meteoric rise will not reverse. Most calls are moving permanently to video. A place in your house having one for each person to work or study or do both is here to stay.” – Logitech (LOGI) CEO Bracken Darrell

“…some of the changes that happen with consumers through this pandemic like doing more delivery like going through drive-thru that those we expect are going to be enduring” – McDonald’s (MCD) CEO Chris Kempczinski

“…the increases that we have had in digital, that’s going to be stickier and stay in our business.” – Yum! Brands (YUM) CFO Chris Turner

“…what we’re hearing is, when the pandemic subsides, 70% of people are saying, I’m going to continue to use more online commerce than I have before the pandemic. Almost 70% is saying the same thing for digital — for digital banking.” – Mastercard (MA) CEO Michael Miebach

“…consumer preferences has shifted permanently. Again, the center of gravity was offline. It is now online. And there’s no going back to the pre-pandemic version of that.” – Shopify (SHOP) President Harley Finkelstein

“…it seems like many companies will be operating in a hybrid kind of mode. And so it would seem that work from home and the productivity of working from home will remain very critical.” – Apple (AAPL) CEO Tim Cook


The semiconductor shortage persists

“The overall supply constraint in semiconductors for us is really across all product lines. It’s not unique to one thing or the other. It’s not only smartphone. Frankly, it’s a good position to be in that we actually have more demand than supply across all of our business. And that’s a good sign, gives us confidence about the growth position.” – Qualcomm (QCOM) CEO-Elect Cristiano Amon

We have a couple of years until we catch up to this surging demand across every aspect of the business”

Ford was forced to decrease production by 17% in Q1

“The global semiconductor shortage reduced our planned Q1 volume by about 17% or 200,000 units.” – Ford (F) CFO John Lawler

Apple and Sony have not been affected by the semiconductor shortage

“We did not have a material supply shortage in Q2. And so how were we able to do that? You wind up collapsing all of your buffers and offsets. And that happens all the way through the supply chain. And so that enables you to go a bit higher than what we were expecting to sell when we went into the quarter 90 days ago.” – Apple (AAPL) CEO Tim Cook

“Shortages of semiconductors have become an issue recently. But with the cooperation of our partners, we have already secured enough supply of logic semiconductors used in our image sensors to cover our production plan for this fiscal year” – Sony (SNEJF) CFO Hiroki Totoki

Apple grew revenues by 54%

“Our revenue reached a March quarter record of $89.6 billion, an increase of over $31 billion or 54% from a year ago. We grew very strong double digits in each of our product categories, with all-time records for Mac and for Services and March quarter records for iPhone and for Wearables, Home and Accessories. We also set new March quarter records in every geographic segment with growth of at least 35% in each one of them.” – Apple (AAPL) CFO Luca Maestri

AWS is a $54B ARR business

“To put it little bit in perspective for you, in Q1 of 2019, we were at $31 billion run rate. By last year, we had increased that to $41 billion revenue run rate, which is a 32% increase. This year, we’re up to a $54 billion annualized run rate, which is, while also a 32% year-over-year growth, it added $13 billion of revenue in the last 12 months as opposed to $10 billion prior — $10 billion in the prior 12 months before that” – (AMZN) CFO Brian Olsavsky

Amazon sees advantages in investing in last mile logistics

“…the ability to control the whole flow of products from the warehouse to the end customer…that gives us a lot of ability not only to control the flow of the product, but also flow of information…I think you’ll see it, too, as a customer where you’re starting to get more precise estimates of delivery. You’ll get notes that say, hey, you’re eight stops away from your delivery, et cetera….we see a lot of benefit from that…because we pretty much have perfect information between the order placement allocation to warehouses where we’re going to pick and box up the product and send it on its way. So lots of advantages. We are continuing to invest, and we’ll see a large investment in this area through 2021 as well.” – (AMZN) CFO Brian Olsavsky

Tesla and Google are both investing heavily in AI

“So, yeah, so it’s basically saying that the, like, right now people think of Tesla has — a lot of people think Tesla is a car company or perhaps an energy company. I think long-term people will think of Tesla as much as an AI robotics company as we are a car company or an energy company.” – Tesla (TSLA) CEO Elon Musk

“I think we are one of the largest R&D investors in AI in the world. And so thinking ahead and doing that and we are doing it across all the foundational areas and we are taking many diverse approaches.” – Alphabet (GOOG) CEO Sundar Pichai

Industrials and Transport:

Vehicle inventories are low

“U.S. new vehicle inventory levels finished the quarter at 14,500 units, of 34 days supply. We anticipate inventories remaining tight and we’ll continue to adjust our operations as necessary.” – Group 1 Automative (GPI) President-U.S. and Brazilian Operations Daryl Kenningham

OEMs are in dire straits

“…you saw Ford profits yesterday. And they’re obviously in dire straits when it comes to being able to produce vehicles in the second and third quarter” – Group 1 Automative (GPI) CEO Earl Hesterberg

Auto companies are expecting some recovery in the second half of the year

“The semiconductor shortage and the impact to production will get worse before it gets better. In fact, we believe our second quarter will be the trough for this year. We have worked to do to get our industry footprint back to firing on all cylinders or maybe should I say fully charged.” – Ford (F) CEO Jim Farley

“The current worldwide shortage of supply in certain semiconductor components affected deliveries in the first quarter and could further impact sales in Q2. However, we assume some recovery in Q3 and Q4. At this stage, the visibility is limited.” – Daimler (DDAIF) CFO Harald Wilhelm

Prototypes are trivial, production is hard

“…the thing to bear in mind with production is for those who have never done production, they just don’t understand how insanely hard production is. I want to really be very, very emphatic here. Prototypes are trivial. They are child’s play. Production is hard. It is very hard. Now you say production at large scale with higher liability and low-cost, insanely difficult.” – Tesla (TSLA) CEO Elon Musk

Materials & Energy:

Oil markets are finding balance

“We expect oil prices to remain firm as demand improves, driven by strong growth in the US and China, the ongoing vaccine rollout programs and supported by continued supply intervention by OPEC.” – BP (BP) CFO Murray Auchincloss

“Buoyed by vaccinations, massive fiscal and monetary policy actions and strong fundamental leading economic indicators, global demand for oil is expected to continue to rise through the year…but a steady drop of global oil inventory stock suggests measured increases in OPEC plus oil production output is being absorbed by higher global demand, resulting in a tightening of the oil supply and demand balance.” – Liberty Oilfield (LBRT) CEO Chris Wright

80% of the world’s energy still comes from fossil fuels

“Hydrocarbons supply just over 80% of world energy when we founded Liberty, 10 years ago, and they still supply just over 80% of global energy today. The biggest shift in hydrocarbon demand has been natural gas displacing coal market share in electric power generation. In fact, oil and gas are currently at their record market share ever in the United States, at just under 70% of total primary energy supplied. Yes, I know that we hear lots of talk about an energy transition that is soon to make us all obsolete. That is simply not so. Let me put things in perspective. Wind and solar today supply roughly 2% of global energy, concentrated in the electric power sector, which collectively supplies less than 20% of global energy. In absolute terms, the trillions invested in wind and solar do produce a great deal of energy, but in relative terms they are still quite modest, even compared simply to the growth in energy demand the world will see in the next decade alone.” – Liberty Oilfield (LBRT) CEO Chris Wright

Transportation is the 4th largest source of greenhouse emissions

“Just remember, we’re just talking about transportation. That’s the fourth largest source of greenhouse gas emissions globally, right. The first is manufacturing, second, power generation, third is agriculture and land use and then fourth is transportation.” – Chevron (CVX) CFO Pierre Breber

You can power the whole US with 10,000 sq miles of solar

“…you can actually power the entire United States with just sort of a hundred, roughly 100 mile — by 100-mile grid of solar. Sometimes people don’t quite understand, how much solar is needed to power the United States” – Tesla (TSLA) CEO Elon Musk

Nuggets of Wisdom

Our nugget of wisdom this week is from the Berkshire Hathaway (BRK) Annual General meeting that happened this past weekend. We asked Tren Griffin, a long-time Berkshire/Munger/Buffett admirer who wrote the book Charlie Munger: The Complete Investor, to select his best quote from the meeting and this is what he gave us:

“Interest rates are to the value of assets what gravity is to matter…so you’ve had this incredible reduction in the so-called super risk-free rate…and that is the yardstick against which other values are measured. I mean if I could reduce gravity’s pull by about 80 percent I mean I’d be in the Tokyo Olympics jumping and essentially if interest rates were ten percent valuations are much easier so you’ve had this incredible change in the valuation of everything that produces money because the risk-free rate produces…right now nothing” – Warren Buffett

More quotes from the AGM can be found on a thread we did on our Twitter page.

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