Surveillance: Supply Chains Dominate Earnings

I remember the morning at some point in the summer time, I've taken the morning golf and the note dropped from Jonathan Gollobert. Credit Swiss had a year end out look for next year of five thousand and Jonathan. Many people just strugged and said, Jonathan gol Up, here we go again. He's too bullish. He's too bullish, And here we are at all time highs. John, why do you think we can get to five K from where we are just north? Well, I think there's a couple of stories here. The first

one is that earnings benefit from these shortages. And I know that that sounds really bizarre, but they're getting tons of pricing power and um, and that's gonna mean that the earnings are gonna are gonna be driving this. If you look at the last twelve months, the price of the stock market is up less than the than the earnings have improved, and stock multiples are actually down over the last year. So that's the number one reason. The second thing which people missed is that, and you guys

are talking about it a second ago. Rising interest rates is a sign of confidence in the economy, not a problem for stocks, and that's been the story over the last month's interest rates in Brisen, Jonathan, you've absolutely now that your earnings sustained call has been great. You've got some great statistics there on how earnings have come in far better than what the gloom was. By the cell side, you're as strong as your analysts. Let's take Matthew Cabral

is just one example. What does Matthew Cabral on Apple or on tech and your other forty seven analysts, what are they whispering? Do you right now? Oh? You know, I hate to talk about individuals, get them broad you know, individual stucks. But you know we're we're seeing um in many ways. What the companies are telling us is that they're saying that things are pessimistic about their ability to

meet demand. And they they're they're pessimistic on you know, margin cost pressures, and then the numbers come in and and the buzz that we're hearing from companies is more negative than the results that they're delivering, and we're seeing we're seeing that across the border. One of the things I'm saying to the analystis, I know management is telling you that there's gonna be this cost ways, don't believe them. It's gonna come in better. There's there's more pricing power

than they're willing to tell you in their pre announcements. Jonathan, I'm looking at the e ago function on the Bloomberg which tells you basically how earning season is stacking up so far. And you're right, the earning surprises and average of on the top line, though the average sales surprise

is only about two percent. So is that just because the bar was higher on the revenue side, or is that because of some of these supply and demand issues and you actually are seeing companies not being able to pull in quite as much revenue because they don't have adequate supply. Well, well, first of all, it's two stories here. The first one is is that you always have um really small revenue beats and really big margin meats. I mean that's um atalyas UM have much more clarity on

the revenue line. So that's not that that's not a typical. But the story the earning season is that everyone thought that we were gonna get cost ways and what we're actually getting is uh is demand disappointment. And you you you know, you know. I don't want to comment on an individual company, but um I was out with a bunch of chief investment officers across different firms a few nights ago, and people were saying that they thought that

ad spending was gonna be a problem. Why if you can't meet demand, why would you advertise just cut your head spending, And especially in area like autos, which is so important for the ad market, why would you advertise a car that you can't deliver? So this is a big issue. When we're seeing it lots of places. I'll tell you where we're not seeing it. We're not seeing in banks. UM banks are showing up with you know,

really levitating separate from everything else. And let me just make one more in one comment there, if you split the market in half, which is, how are the bank's doing and how is everything else doing? It doesn't look as good as we're talking about. The market is beating by about seven percent the bank it exclu the banks um, and it's about you know, eleven or twelve percent with so there is a bit of a bifurcation on winners

and losers, Joel, before you go. Sometimes its strategist job is to walk with therapy to how people stay invested in sleep well at night, do some therapy right now, what's the one reason people should stay invested in this market through all the next year and beyond? Um? You know, I, you know, I actually John I and my my therapy is a little bit different. Um, I'm seeing a Listen, I'm a bullish you know, I'm bullish about the market

and optimistic in general. But I'm seeing almost complacency. What people just saying is just ignore the ignore any bad news. Just by the depths. The feed is backing this. Everything is gonna be okay, and there are things to be concerned about, to worry about. And in many ways I'm saying to the bullish guys, um, listen, I I agree with you, but there are you know, we didn't roll off of a ton of stimulus here. We don't have clarity on what tax policy is. You know, oil prices

can be disruptive. Just check to make sure that your bullishit and this is warranted. I think it is, but just you know, go and double check. The bullishness is just very strong. I'll give you a cool when I struggle to sleep later, John. Thank you, Jonathan Gullup that sas on the secondy market. The market was in line with this idea that QUEI was separate from higher interest rates. You can't say that anymore, Tom, in the same way.

That's changed in the last couple of months. Let's drive this conversation forward, and we do it with someone really interesting. She is a claim for hyper hyper detailed notes and high frequency economics, taking all the wonderful granularity of her Stone and McCarthy hears or throughout Rubila for Rookie could be with us today, working always with Carl Wineber RUBYLA, what is in the details right now? If I look at your high frequency economics domestic note, which is the

item that has your greatest attention? Well, good morning, thank you for having me. Uh you know, what we're looking at is how the consumer responding to high inflation pressures and what the underline trend and inflation is. And I think this whole debate around great heights and how the central Bank is going to respond is centered around these inflation high inflation readings that are lasting longer than expected

and also rising inflation expectations. So I do think that what is being priced in right now is a little aggressive, and I do think that this sets up the path that UH as we see inflation moderate over the course of twenty two, that these expectations are going to reset and that's going to have implications for the yield, especially the short end. You're as good as your data can

you get good made and data. Now, with the dislocations, say in the automobile business, or the dislocations at the ports on the West coast, how good is the goodness of the data you and Carl Weinberg have. It is definitely challenging right now to figure out what the underlying trends are in consumer spending or let's say, business investment, given the dislocations we're seeing on the supply side of

the economy. But what we do expect is that these disruptions are going to eventually pan out and what we see beyond that is a slower pace where the impetus from for demand, which is you know, is being built into expectations of inflation resting wronger longer that is not there. You're not going to see the sugar high or fiscal

posture and enhanced unemployment benefits. So as supply dynamics readjust, we do think that the demand side of this equation is also going to be tempered, and that's why we think we're going to move into a lower inflation and lower growth sort of environment. Repeat, Can you put some

numbers on that for next year? Just going through the e c f C function on the Bloomberg for where the major is right now, the survey that we conduct for economists going forward twenty two real GDP at about four percent, c p I three point three percent for

twenty two. For next year four and three, what are you looking for if you look at our forecasts and we are sub three percent on a que for Q four basis, you know, closer to three and a half percent on a calendar average basis, and on CPI inflation, we are still seeing higher readings and that is a function of you know, how we expect the goods and service sector. How that adjustment is going to happen, especially as you see normalization of the service sector o E

ER that is a large component. So I do think that we're going to see a lift from that and the goods side. There's so much uncertainty from the supply chain side that you know, it's it's really difficult to time how or when that is going to happen. But

we do expect to see elevated readings. But by the second half of the year, growth is going to be in our assessment closer to two and a half percent, and inflation readings are also going to ease quite substantially, closer to two So reveal on on those supply chain problems. That's not something that monetary policymakers are easily equipped to address.

But obviously the inflation caused by it is causing central banks to get pretty uncomfortable or seeing that at the b o e S. John said, you have Russia hiking as well. On the phase of inflation at a five year high, do we run the risk of when those bottlenecks eased, we end up with policy that is too tight, Well, that is exactly you know what we have been talking about, is that this is the supply dynamic that you know, any action from the FED is really not equipped to address.

So if you are looking at the expectation that demand is going to be so strong that it unlicits a FED response, we don't really subscribe to that new So I guess there is there is a chance that you know, you do see a response from the FED that you know, tamps down the economy, uh, you know, in a in

a more substantial way than is needed. But I do think that all this is centered around what the FED is communicating right now, and what they're communicating is that if inflation does turn out to be you know, substantially stickier, that they are ready to respond. But I think it's a matter of managing expectations rather than them saying that, you know, we are not we are just going to sit back and and you know, let this happen. The inflation and expectations are arising, and what they need to

do is manage those expectations. And this is the communication process.

What they're saying is that they're not going to uh, they're not going to let this occur at a rate you know that we're seeing right now, Well, it's a good point on inflation expectations, and that brings me to a question on the consumer, because obviously we're in the thick of earning season, we're talking a lot about supply chain issues and companies raising costs because of their higher input costs are colleaguet Bloomberg Opinion Andrea Fell said put

out a column on the terminal talking about the likes of Unilever, and yes, price hikes are working for them for now, but if they hike further, there may be a point in time where consumers are not going to be tolerant of them. What is your take on that? Yeah, that's that's exactly right. I mean, I do think that the expectation that these price increases are going to continue forever. I do think that, um, that is I'm not sure

that that's really realistic. At some point, either the consumer steps back or you know, you have to adjust your expectations about uh, you know, wage increases or the response from just in terms of how the consumer response to uh, you know, persistently high uh or or accelerating inflation. So I do think that there will be pushed back at

some point. I do think that these companies that are able to pass through the consumer is bast household balance sheet is very healthy right now, so the consumer is able to bear a little bit of this price pressure. But I do think that there's a limit to this, and in terms of you know, how successful companies will be in passing on price increases. Rebeta, thank you as always, Rebeata FERUKEI that of high frequency economics. John. What we can suggest is some girls would like to talk to us,

and that would be Lizzie and Saunders. Hardcore Stones fan joins us writing it up. I'll never be your beast of burden. My back is broad, but it's a hurt. And Lizzie Saunders, you are writing on the equity markets about the beasts of burden that are out there. Which one has your attention? Well, I think there are some signs that some pressures might be easing, even though durable goods prices are still up. There's some signs of durable goods consumption is rolling over a little bit, but a

little bit of rolling over in suppire delivery times. But to John's point just before I came on, it really depends on on what good or service you're talking about. Us to the timeframe associated when we get some balance back between demand and supply. But the one benefit to high prices is that it's actually easing some of the demand pressures, and the hope is that that force predates

that that's need to step in more aggressively. You will be overwhelmed at Charles Schwab in the coming days with what do we do at a record standard or high What do you advise? I think I think rotational leadership ships, even some rotational corrections which have characterized much of this year, are likely to persist. But there's enough offsets when you go through these pockets of weakness that the net is it keeps the index level declines to a fairly benign degree.

As we saw more recently when we had the five point drop in the SMP. You still have SMP that has had at least a tem per cent raw down this year, and the average draw down is eight and I think that type of environment is likely to persist. That's a pretty benign way to ease whether it's sent

him an excess with technical excess and valuation excesses. And I think if you do more sort of volatility based rebalancing as opposed to trying to do short term market timing that helps investors stay in gear in this kind of market. Well, speaking of volatility, Lisianne, the VIX is sub fifteen we're looking at this morning. Can volatility stay this subdued into your end? Yes, I think a measure

like the VIX can stay fairly subdued. But that doesn't mean you're not going to continue to see some of these underlying leadership shifts and some of the swaps that are happening even on a day to day basis, where uh, you know, you'll see energy at the top of the leader board for a day or two and check at the bottom and then you see a complete reversal of that. And I think those ships are keying off these days to a great degree, the bond market, and what what

tenure yields are doing. For a while there they were those leadership ships were keying off the delta variant um. That seems to be less of a force now and let's hope that stays in the rearview mirror. Well, the bond market is John was just talking about, is pricing in a much higher rate of inflation over the next five years, with three percent on the five year break even. I was reading your note from a couple of days ago, and you said that there's a shift from pro cyclical

to countercyclical inflation. Countercyclical meaning high prices drag on economic activities. So we're talking more inflation growth getting hit. Can you differentiate between that and stag inflation? Well, stagflation if you use the precise steffinition tied to what was going on in the seventies. It wasn't just weak economic growth and higher inflation. It was high and rising unemployment and to some degree, weak productivity. And we clearly don't have those

ladder two factors. So whether we come up with some catching new phrase for just a slow and growth environment, I think this is more of a shift from pro cyclical inflation, which is what we had at the beginning of the reopening. Higher demand pushed up prices. Now we've got high prices pushing down demand and economic growth. I think that's a better way to think about the current

environment than likening it to the seventies. Liszen Saunders, what is the new definition of the debate of pricing power? We've seen eras of discussion of pricing powers among our American corporations what's new this time. Well, I don't think we have yet kicked in the psychological component that feeds into the wage price spiral that we saw in the nine seventies. And that's a bit more esoteric. It's not as easy to measure, there's no numerics associated with it.

But it's when that psychology kicks in. When workers the psyche changes, they feel they have the power to demand not just one time higher compensation ship but on a persistent basis. The power that companies feel they have when

the psyche changes, to persistently pass on higher costs. I don't think we're there yet, but it's also why I think the margins story and the outlooks associated with that as we go through third quota reporting season, or maybe even more important than what the numbers are being reported

for the quarter. Now, we're gonna go inside baseball here, and we can do this with a wonderful Lisa and Saunders lisenne I plotted today the value line arithmetic index minus the value line geometric index, which is one indication of the consolidation the concentration of a given broader American stock market. The slope is absolutely original. Give us an update on the dominance of profitable cash flow big tech.

So I think profitability rising earnings revisions, as i've factor, is going to be increasingly important, especially if we if if this environment of weakening growth courtesy of higher inflation is less transitory than what was thought to be the case.

I think focusing on those factors that sort of separate you from the masses, and the beauty of of some of those factors, especially rising earnings revisions forward looking higher profitability is it's almost a hybrid growth and value factor because of course, if you've got those rising earnings revisions,

you've got a rising denominator, which means following multiples. And in addition to the volatility based rebalancing that we already talked about, I think a factor based approach makes more sense in this environment than trying to make sector calls. And I think taking advantage of weaker growth and what that means for companies that do have that sustainable growth trajectory looking forward is probably the best way to approach the market, especially if you're a stock. By always great

to catch. Thanks you so much, swap right now, Kaylee Lines, and I would like to manage the message on your next air travel over to Helene Becker to say she's senior research at Analystic Cowen with Kivan Rumor barely defines the ownership of Cowen with Airlines Securities Analysis Excellence going back decades and decades, Helene Becker, I know you're gonna tell me you've never seen it like this before. What

will our industry look like in twelve months. I think it's gonna be a lot better than it is now. We're still in that transition phase UM, which we expected would last. I actually thought it would last three to five years. And UM for for domestic recovery. Of course, I wasn't counting on the government giving people a lot of money UM, and I think the stimulus obviously helped travel. UM. Usually if you have time, you don't have money, and

if you have money, you don't have time. So it's been over the past I would say six or nine months, we've seen a huge recovery in domestic air travel and we expect that to continue. UM. Business travel should come back in two not all the way we're thinking of the way, which you know we've talked about. And in the international next summer should be a pretty good international UM.

People will want to, we'll take those trips. Tell me about the price discrimination, the idea of selling the cheapest seat and then forty seven slices up and up to a full price first class ticket. I look at the ratio of business class to economy and it's outrageous executed obviously because of COVID and all that. Are we going back to the normal price discrimination perceit of pre pandemic or is there a new new to all this now,

I see? I don't you know. I don't know how to answer the question, other than to say that I think, um, people don't like to be squished in the back of the planes, and what the airlines are seeing is more more leisure travelers actually buying up too, if not first class to premium economy or whatever they call this first maybe five or seven rows um to get just a little more leg room. And you know you've heard about

all the unruly passengers on board. I think part of it is just the squishiness, the wearing of the masks, the whole uncomfort level. I don't think that's going to change. Um. We we didn't talk about oil prices yet this morning, but the oil prices up sixty percent right, every year, right, So at some point capacity has to come down or

airlines have to raise ticket prices. And I think ticket prices are going off well that I'm so glad you brought that up, Lane, because we heard the likes of Delta warning about that, for example, saying oil prices are going to weigh and we might not actually be pro fitable in the last quarter of the year. Why is it that airlines can't exercise enough pricing power to offset

that cost. Yeah, So the issue for airlines is they sell six of their tickets within ninety days of travel, so generally you enter the first of the month having sold at almost two thirds of your seats. So the price that you've set it was using a fuel price that was established two or three months ago, So you're you're looking at the forward curve and you're trying to figure out what the price is going to look like

when the person takes the trip. We don't do fuel charges for domestic trips in the United States, only international, so there's that mismatch. You have to work through that group of tickets and then within the month you can address it. So it takes a couple of months. We figure the regressions. We've done show anywhere from two to four months. I know Delta set up to six months to get price. United said the other day we will raise ticket prices and they just have to because I

heard your segment with Lausanne and um excuse me. One of the things that she was talking about was wage inflation. Well, the Alanes are experiencing too, especially for entry level jobs and the markets where they're competing with people like Amazon or Facebook or Yahoo, are Microsoft. You're seeing huge wage inflation even at the corporate level, not just in entry

level jobs. You're seeing that in retention. So you know, we're we're looking at margin pressure over the next six or nine months, and you know the only thing they can do is raise ticket prices, which will which will tamp down demand. Helene, it's like you're reading my mind because I was going to go to labor next. Not so much because of the wage inflation part of the conversation, but just getting people to fly your planes, to be

flight attendants within the planes. Given a lot of the trouble that Southwest, for example, has had with its vaccine mandate, how do you handicap that kind of issue When are thinking fundamentally about these airlines. Yeah, so I'm not gonna get into the whole vaccine thing. I mean, United had a lot of success working with their employees and getting

the vaccine mandate. Everybody's done. It's you know, it's just got to be done from a safety perspective, right, That's like the number one thing airlines talked about all the time. We want to be safe. So that's the first thing. Um, flight attendants. I kind of think that it's not a hard job to fill. Delta had thirty five thousand applications for spots and United had twenty thousand for two thousand, So that's not the problem, even when maybe more so pilots. Yeah,

pilots are a problem for sure. Mechanics. Nobody ever talks about the fact that we're not turning out enough mechanics to keep the planes in the air. Um, you know, that's an issue for for airlines over the next few years. Pilots. United so they hired a thousand, They were going to hire ten thousand pilots this decade. American and Delta are not far behind. Mind. I mean, we we've estimated that in order to replace the pilots retiring and to handle

the growth they've talked about in Say and Beyond. We're we need pilots, so that's going to be an amazing career UM and their academies that you can go that will help you financially and that will wash you out if you don't have the skill set early, so you don't wind up going through the process of knowing lots of money. UM. Really the issue for labor is going to be in the areas of entry level like airport staffing, the contractors the airlines use at the catering, wheelchair runners, UM,

baggage handling. That's really where you're having a hard time finding people to come back. Hello, and we got to leave it the more questions will do it again legendary on the airline business. You know, Kayley, all of our audiences really care about this stuff. We've all got our anecdotes. I just want to say, in all the travel I've done through this horrific pandemic, I've seen service, Kaylee, like I've never seen. If there's been failures, yeah, but all

in all, it's been stunning. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg