The Newsletter
The Transcript 04.20.20
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Succinct Summary: The modern economy has never experienced economic carnage on the scale of COVID19. US GDP is forecast to fall by 30-40% while unemployment is likely to rise to 20-30%. What matters though, is how long it lasts. A 30% rate of decline in production for a quarter is different from a 30% decline for a whole year. As public attention seems to turn from the virus to the economy, the debate is on whether we will see a V-shaped recovery or not. There are lots of reasons why we are unlikely to see such a rapid recovery but there are also glimmers of economic hope. Still, the path of the economy seems to pale in comparison to the importance of the path of humanity.
Macro Outlook:
The economic data that we’re seeing is unfathomably bad
“We’re seeing, you know, horrible data for the second quarter. We’re already seeing that data, obviously in regional sales, in unemployment and other indicators.” – New York Fed President John Williams
“Our economists have updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%. That’s obviously materially different.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
“The macro environment that I’m making the assumption around, I mean, take the 5 million job claims this morning for unemployment benefits, I mean, this is – we’re in a wild period. We’re going to have negative GDP of, I don’t know 30%. So, short-term, anybody – and I don’t mean to disparage anybody, but a CEO who stands by their short-term targets that was set right before this virus hit, I don’t know what planet they’re on.” – Morgan Stanley (MS) James Gorman
“We are moving with alarming speed from 50-year lows in unemployment to what will likely be very high, although temporary, levels.” – Fed Chair Jerome Powell
Consumer spending is getting crushed
“We’ve entered into a world we haven’t seen before. Much of the economy is essentially closed. Consumer spend is down over 25% year-over-year this past week with food and drug increasing and other spend down significantly. New auto sales in the month of March were down at 32%” – Wells Fargo (WFC) CEO Charlie Scharf
“if I think about kind of the last week of March. the card spend activity, just broadly for us was down about 30%, U.S. spend by category down total of 30%. The big categories, if you will, impacted are not going to be of any surprise to you, travel down 75%, dining and entertainment down some 60%, discretionary retail, which would include apparel, department stores, etc, down 50%, essentials were up 10%.” – Citigroup (C) CFO Mark Mason
The economy probably can’t get much worse than this, but how long can we stay at the bottom?
“it certainly feels like we’re at the bottom. Our revenues are down 90% on a year over year basis. And they’ve been that way now for a few weeks. So, the real question is how long do you stay at the bottom? And when do we begin to recover? I don’t think I know that better than anyone else.” – American Airlines (AAL) CEO Doug Parker
“the big question is when the economy will reopen, and when people can go back to work and go back to spending money. You know, consumer spending is down markedly year over year and that has an impact” – Wells Fargo (WFC) CFO John Shrewsberry
Most companies seem to be modeling a recovery by the second half of the year
“Despite the current weakened conditions, the respondents remained optimistic about growth over the next six months” – Philadelphia Fed Manufacturing Index Report
“Both scenarios, though, do include a recovery in the back half of the year.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
“we see the environment showing near-term disruption and turbulence, but expect the longer-term to present opportunities to capitalize on many of our existing priorities” – J B Hunt Transport Services (JBHT) CEO John Roberts
“based on the data that we’re seeing from – that we’re collecting on a daily basis, is that we can see a recovery into Q3 and into Q4, especially for these more elective procedures…our modeling here suggest the kind of recovery that I’ve just described.” – Abbott Laboratories (ABT) Wyatt Decker
However, there are many reasons why this may not be a V-Shaped recovery
“It is not going to be what happened then, which was a very, very quick return to normalcy. That is not going to happen. At best, we’ll have kind of a rolling way out. As far as travel is concerned, while I’m absolutely optimistic that at some point, but I don’t think soon, I don’t think it’s until probably September, October, November, December, really get life back. And in order to travel, you’ve got to have that. So, they’re totally different situations. This is not analogous. I don’t think it’s analogous to anything. Certainly not analogous to 9/11 and to the financial crisis in ’08″” – Expedia (EXPE) Chairman Barry Diller
The Fed certainly isn’t expecting a quick rebound
“Barring some health-care miracle like that, it seems we’re going to have various phases of rolling flare ups..different parts of the economy turning back on, maybe turning back off again…This could be a long, hard road that we have ahead of us until we get to either an effective therapy or a vaccine. It’s hard to see a V-shaped recovery under that scenario” – Minneapolis Fed President Neel Kashkari
“I don’t expect a sharp V-shaped recovery, I expect something more like negative quarters of growth throughout 2020, and then a gradual return to positive growth in 2021” – San Francisco Fed President Mary C. Daly
“The economy is under distress in ways we’ve not experienced in our lifetimes.. don’t see the economy being back to full strength by the end of the year. It’s going to take longer to get us back to where we want to be.” – New York Fed President John Williams
We won’t be back to work in May. More likely to be June to August.
“a rational plan to get back to work is a good thing to do. And hopefully it’ll be sooner rather than later, but it won’t be May. We are talking about June, July, August, something like that.” – JPMorgan Chase (JPM) CEO Jamie Dimon
“We’re not going to get to the point where everybody is on the subway in one day. To get consumers and small businesses back and to get everybody feeling like the world is stable again, that’s going to take months” – Morgan Stanley (MS) CEO James Gorman
It’s going to take time for the fear to subside
“People are not going to feel confident right off the bat. There’s going to be a lot of trepidation. That concern is going to lead to people holding back in spending money” – Minneapolis Fed President Neel Kashkari
“we’re all too frightened right now. We’re going to have to get over it. Or everything will change” – Expedia (EXPE) Chairman Barry Diller
“One of the things that we’re hearing a lot from business contacts and leaders in the community is our concerns that even as the pandemic passes, even as the restrictions are relaxed gradually over time, people may take quite a while before they’re willing to get back on airplanes or trains or go to the theater or go to concerts and things like that. So, I think there are some risks that it takes longer to get that recovery for the economy than just what happens in terms of the formal restrictions that are in place.” – New York Fed President John Williams
We could be working through a recession through the end of next year
“I would say through the end of next year, we’re going to be working through the global recession.” – Morgan Stanley (MS) CEO James Gorman
But there are signs of life
“I will say that in just the last week we started to see bookings outside of 90 days start to tick up a little bit. Again, those could be changed in the future, that doesn’t seem to be the case, but it seems to be a little bit an indication that maybe our country is ready to get moving again…our sales team tells me we’re being asked to work on conventions in the fourth quarter. That certainly isn’t going on in the second and third quarter. So, there are indications that the world is ready to start traveling again. But they’re very preliminary and it’s certainly not happening today.” – American Airlines (AAL) CEO Doug Parker
“In markets less affected by the outbreak, diner ordering has returned to, and in many cases exceeded, our pre-COVID-19 expectations. We are also seeing record numbers of new diners and new restaurants on the platform. In markets more affected, New York in particular, we have seen a stabilization in consumer orders, and even some improvement from the low points observed in March, but New York orders remain below pre-COVID volumes” – Grubhub (GRB)
“I wouldn’t call them excessively depressed either. They are active. They are doing things. We are still getting home purchases. We are getting some multi-family purchases. We are certainly – but the stock, as Gaye has been speaking about deposits, the amount of money in our sweep accounts is up to as a percentage of the account. So that indicates our conservatism there. But I would say that it’s very cautious continued activity, is the way I would describe it. So very cautious.” – First Republic Bank (FRC) CEO James Herbert
And if we get a second wave in the fall, we will be better prepared
“our estimates do not assume the virus returns in the fall with the same intensity currently experienced. What do I mean by that? As the experts have noted in various forums, if the virus does return, the world should be much better prepared to test, identify and isolate it. There may also be therapeutic options available. So, our premise is that elective procedures and doctor visits will largely be permissible in the second half of this year.” – Johnson & Johnson (JNJ) CFO Joseph Wolk
International:
In China, employees are back to work and hotels are in back in operation
“We have more than 50% of our employees back to work following very specific protocols and directors to ensure their safety, but we are confident that as we proceed in the coming months that we will see a more of return to normal continuing.” – Johnson & Johnson (JNJ) CEO Alex Gorsky
“our franchisees were ready to resume business operations, when sheltering in place was to be properly lifted. As a result, today, 93% of our hotels are back in operation and occupancy exceeded 50%, up substantially from the low of 21.9% on January 31st” – GreenTree Hospitality (GHG) CEO Alex Xu
We are seeing a 50-70% return to normal in elective procedures in China
“within China, and what we have seen over the past several weeks, I would say is a gradual return of the business. It’s important to remember that in our case in addition to the economic statistics that I think many other people can share given the number of associates that we have on the ground that are literally visiting hospitals even in some more of the remote areas, we are confident that we are starting to see what I would call a reentry into procedures depending on where you are that can range from 50% to as high as 60% or 70% as of today” – Johnson & Johnson (JNJ) CEO Alex Gorsky
Other countries around the world are starting to see the same recovery trends as China
“We’ve seen other markets around the world, whether its Asia or some of the other European smaller markets there, where we’ve seen the beginning of the same kind of recovery trend that we saw in China. So starting to see some of the beginning of that recovery. And then in other markets, we’re seeing kind of just a flattening and a stabilization here that’s suggesting here that the speed of the virus is a little bit more controlled” – Abbott Laboratories (ABT) CEO Robert Ford
The market is under-appreciating the impact this will have in developing countries
“I think what the market is still under-appreciating, it has been mostly the developed world that has experienced the virus. As we start entering summertime, the southern hemisphere is beginning to have their winter. Are we going to see an acceleration of the disease in other parts of the world? And does that mean we close our borders for a longer period of time? We may be opening up some businesses, we may be experimenting how we reboot our economies and our businesses” – BlackRock (BLK) CEO Larry Fink
“This is a huge problem. The world recession will be deep. It especially impacts poorer countries. Many of the cities in poor countries are overcrowded, don’t have good transit facilities, and that itself is bad with COVID” – World Bank President David Malpass
Financials:
Banks are setting aside increased reserves and are stress testing recession scenarios
“This reserve increase assumes in the second quarter that U.S. GDP is down approximately 25% and the unemployment rate rises above 10%, followed by solid recovery over the second half of the year.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
But the stress hasn’t emerged at banks yet
“I would start by saying that we haven’t actually seen the stress emerge as of yet. So, I wouldn’t necessarily use the term mechanistic. But I would say that what we took in the first quarter is our best estimate of future losses.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
And the loss rates are still very uncertain
“The reality is that the full scale of the economic consequences is still unknown…To put the current situation in context, we are running more open market operations, for greater sums, than at any time in our history.” – New York Fed President John Williams
“You just, you can’t, you can’t predict that” – Morgan Stanley (MS) CEO James Morgan
Investment grade debt markets are wide open though
“In investment banking, there was a surge in debt issuance by investment grade clients as the market remained open, and clients’ desire to shore up liquidity was top of mind. It was the largest quarter ever in terms of investment grade debt issuance” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
“Continuing the issuance of bonds for highly rated companies ($85 billion) – it may surprise you that the first quarter of 2020 will be our largest quarter for investment grade issuance” – JPMorgan Chase (JPM) Jamie Dimon
“investment grade bond issuance reached record levels, especially in March.” – Morgan Stanley (MS) CFO Jonathan Pruzan
And credit line utilization is easing as companies feel more confident about their liquidity position
“It’s worth noting that the high rate of growth at line utilization by our commercial clients is backed off since credit markets have reopened.” – Wells Fargo (WFC) CEO John Shrewsberry
“So those daily monitor, those daily draws just to understand what’s happening by industry, by customer, by customer type, etc. And they really have flattened out. And they have been negligible for the last several days, more than a week. And so, they peaked probably at the end of the third week in March and then came right back down. So, not growing at anything like that pace. So the related question of how long do they stick is a good one. And I guess, it depends on the reason for the drive to begin with, whether it was window dressing, whether it was a need to access credit markets which – some of which had been closed and some of which are more or less open high-grade market wide open obviously.” – Wells Fargo (WFC) CFO John Shrewsberry
“The draw activity was pretty normal through the first week of March but ramped up in the second week before peaking in the third week of the month. The requests have come down in every one of the last three weeks” – Bank of America (BAC) CEO Brian Moynihan
If the economy gets worse, there will be additional losses because credit markets are so open
“you’ve got to be a disciplined capital provider because undisciplined loans are bad. So, you take your calculated risks. We’re making additional loans. We’re adults. We know that if the economy gets worse, we’ll bear additional loss, but we do forecast all of that so we know we can handle really, really adverse consequences” – JPMorgan Chase (JPM) CEO Jamie Dimon
There could be a shock to the downside when the real numbers come in
“I personally wouldn’t be surprised that as the earning cycle continues and as we start to see these numbers, even though people are talking about big numbers, they’ll potentially continue to be surprised by the size of them and that will create additional volatility in the environment that we live in, and it wouldn’t surprise me to continue to have to add to reserves as those things impact confidence and ultimately what economic growth looks like.” – Wells Fargo (WFC) CEO Charlie Scharf
Consumer:
Supermarket/non-discretionary spend was initially high, but is now stabilizing
“While most spend categories were ultimately impacted, we did see an initial boost to supermarkets, wholesale clubs, and discount stores as people stocked up on provisions. But even that is now starting to normalize.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak
“Similar to credit card, debit card spending shifted significantly to grocery in March, but the growth in this category started to slow in the last week of the month.” – Wells Fargo (WFC) CFO John Shrewsberry
Shoppers are changing their usual shopping patterns within grocery stores
“I’ve been into a fair number of stores just watching shopping behavior and actually in the stores the behavior is really interesting. So people are moving into the stores, quickly doing their shopping and for the most part, staying in center of store, so shopping shelf-stable, I would say basic staple and getting out of the store pretty quickly. So one of the behaviors we noticed early in this is even when people are shopping they’re avoiding the perimeter not always getting into the health and beauty section” – Simply Good Foods (SMPL) Joseph E. Scalzo
E-commerce is surging
“While a vast majority of our stores are temporarily closed, our customer facing digital channels continue to service our customers and we are seeing an online demand growth significantly.For example, the Bed Bath &Beyond digital business is seeing net sales growth of more than 90% for the month of April to-date further strengthening our omni-channel strategic direction” – Bed Bath & Beyond (BBBY) CEO Mark Tritton
“We’ve also seen a very rapid uptick in click, things like 3-tier e-commerce, click and collect. Our Company had its single biggest – in wine, had our single biggest direct-to-consumer week we’ve ever had last week as consumers again found alternate ways to continue to buy our products.” – Constellation Brands (STZ) CEO Bill Newlands
Historical context: E-commerce surge isn’t *that* novel. Mail order also surged in 1918 Spanish Flu
“Curiously enough mail order transactions are unusually large. But the explanation of this is far from pleasant. It means that there has been a recurrence of the influenza epidemic in parts of the West. It has kept country buyers from the larger cities. The parcel post traffic under the circumstances is abnormally large. What the country would do without this method of reaching the consumer is such circumstances is hard to see” –Commercial and Financial Chronicle, December 1918
The Fashion industry has been severely hit
“fashion, due to its discretionary nature, is particularly vulnerable. The average market capitalisation of apparel, fashion and luxury players dropped almost 40 percent between the start of January and the 24th of March 2020 — a much steeper decline than that of the overall stock market…Widespread store closures for an industry reliant on offline channels, coupled with consumer instinct to prioritise necessary over discretionary goods, hit brands’ bottom lines and depleted cash reserves.” – The Business of Fashion and McKinsey
Technology:
Productivity is holding up while working from home
“when we look at those productivity numbers, they actually are very similar to the productivity numbers that we saw before starting to work at home, which I think is very good, which is also a tribute to the flexibility of our people.You see also in the log-on numbers that people make much longer hours. I mean, they log-on the same time, but they log-off much later. So there’s a lot of working in the evening. And we check very regularly with our managers across the Company of how we are doing and there’s a lot of virtual teamwork going on even leading to virtual drinks in Friday afternoon, where they all sit together in front of the camera with a glass of beer” – ASML Holding (ASML) CEO Peter Wennink
“People are really working their tails off even though people are working from home, I have found that as a consequence of that people are available 24/7, people over communicating certainly relative to how much they’ve communicated in the past. People are trying to make sure that they’re connecting with people globally.” – Goldman Sachs (GS) Global Markets Division Global Co-head Ashok Varadhan
High performance computing (Cloud etc) still strong
“As a result, we changed our – well, we modified our forecasts as compared with the January number. To be specific, except for the HPC – the HPC has been very strong” – Taiwan Semiconductor Manufacturing (TSM) CEO C.C Wei
Because COVID 19 doesn’t change the fact that 5G and HPC are megatrends
“the majority of our capex is spent on advanced nodes that drives our growth in the next year and beyond. As we expect the multiyear megatrends of 5G-related and HPC applications to drive strong demand for our advanced technologies in the next several years continuing, we will continue to prudently invest for our future growth.” – Taiwan Semiconductor Manufacturing (TSM) CEO C.C Wei
Streaming is taking over the world
“Streaming is taking over the world. Hollywood is irrelevant. The only companies that have a true path, absolute clear business model path forward have nothing to do with the history of the entertainment business. Amazon and Netflix. Everybody else, good luck to them. I mean, they may be able to build subscription services that may be profitable, but that world has changed forever” – Expedia (EXPE) Chairman Barry Diller
Industrials:
Industrial activity has taken a big step down but not a straight line down
“I mean, certainly relative to the first three weeks, a big step down. But I wouldn’t say between the two weeks of week four and week five of March, which again crept into April, I wouldn’t see it as trend line straight down, correct.” – MSC Industrial Direct (MSM) CEO Erik Gershwind
” construction is – at least in California, has been designated as an essential service. As I drive around, I see trucks out, builders out, auto repair stores are still open.” – WD-40 (WDFC) CEO Garry Ridge
Current manufacturing activity reporting lowest readings since 1980
“The diffusion index for current activity declined strikingly for the second consecutive month from -12.7 in March to -56.6 this month, falling below its nadir during the Great Recession (see Chart 1). This is the current activity index’s lowest reading since July 1980.” – Manufacturing Business Outlook Survey
The largest risk now is customer ability to pay
“we view our largest risk going into the second quarter around our customer’s liquidity and ability to pay. We monitor working capital on a daily basis and are in frequent communication with our customers and providers.” – J B Hunt Transport Services (JBHT) CFO John Kuhlow
Materials & Energy:
Q2 is going to be very uncertain in Oil
“Despite the recent agreements by the world’s largest oil producer to cut production, Q2 is likely to be the most uncertain and disruptive quarter that the industry has ever seen. we face two degrees of uncertainty beyond the severe impact of oil demand contraction and the level of commodity oil pipe.First, it is very difficult to model or predict the frequency or magnitude of the COVID-19 disruption on field operations. Second, it is too early to judge the impact of recent OPEC+ decision on the level of international activity, as well as its repercussion on storage level globally and related risk of production settings.” – Schlumberger (SLB) CEO Olivier Le Peuch
The benefits of lower oil prices will take time to materialize
“While we do expect some midterm benefit in commodity costs from the recent decline in oil prices, it usually takes about six months for movements in feedstocks like oil to make their way through the raw material supply chain and our inventories to our P&L.” – Procter & Gamble (PG) CFO Jon Moeller
Healthcare:
Telehealth has been a huge beneficiary of the crisis
“the telehealth certainly I also believe will take a significantly increased role as we move forward. And I think for all the obvious reasons this COVID-19 crisis has pushed regulators and others to kind of expand their view of what pharmacists and nurse practitioners ought to be able to do through telehealth. It is too early to tell.” – Rite Aid Corporation (RAD) COO Jim Peters
“We have dramatically scaled our ability to care for patients digitally, including through telehealth vehicles, and will by the end of this month have over 10,000 providers on telehealth platforms and solutions.” – UnitedHealth (UNH) OptumHealth CEO Wyatt Decker
Many hospitals are well under 50% of capacity and straining financially.
“what you see in many cases are hospitals that are well under 50% of their capacity that have also increased some of their investments to the threefold sometimes more and appropriately so preparing for the absolute worst case in a pandemic. But at the same time, they have lost a very significant portion of their income, seeing a cost increase putting potential financial stress on them. And so – and we are also hearing a consistent theme of making sure that as they think about returning ensuring that we can get consumer and patient confidence back up to the right kind of testing programs, the right kind of protocols in the hospital in place to make sure that we can get healthcare professionals that is physicians, nurses, the kind of assurance that they are going to need to get back to a more normal state of working as well as in some cases given the amount of work they have been doing make sure that they have got the kind of backup resources in place to be able to do that is going to be very, very important” – Johnson & Johnson (JNJ) CEO Alex Gorsky
Urgent procedures are down along with elective procedures
“You can also see that we are assuming declines in urgent procedures as well. Individuals are spending less time outdoors engage in physical activity, which we expect to impact procedures even urgent ones, particularly in a market like trauma.” – Johnson & Johnson (JNJ) CFO Joseph Wolk
Miscellaneous Nuggets of Wisdom:
This is way more than an economic crisis. It’s a public health crisis, a test of our humanity
“this isn’t a financial crisis. It’s a public health crisis with severe economic ramifications” – Citigroup (C) CEO Michael Corbat
“No, this pandemic is not a war. Nations do not stand against nations, nor soldiers against soldiers. Rather it is a test of our humanity. It brings out the best and worst in people. Let’s show each other the best in us.” – German President Frank-Walter Steinmeier
“This is first and foremost a public health crisis, and the most important response is coming from those on the front lines in hospitals, emergency services, and care facilities.” – Fed Chair Jerome Powell
People are under significant stress and are having to handle it alone
“at a time in which you’re feeling all of the things that you feel when there’s a lot of volatility and there’s a change in the economic cycle which could be anxiety, fear, uncertainty all of those types of things. Now you have to kind of deal with it alone. That’s the part that’s very unprecedented and people won’t write about it because it’s not necessarily economic but let me tell you, it’s very psychological with respect to how it impacts how it’s impacting all of us.” – Goldman Sachs (GS) Global Markets Division Global Co-head Ashok Varadhan
“the bad economy has very adverse consequences, way beyond just the economy. In terms of mental health, domestic abuse, substance abuse, et cetera.” – JPMorgan Chase (JPM) CEO Jamie Dimon
We’ve got to remember that this is about more than 13 weeks of earnings
“We’re in a 100-year crisis right now, and it’s a health crisis first and foremost. And the personal anxiety and stress to our employees and to their families can be overwhelming…we’ve got to remember, this isn’t just about 13 weeks of earnings, I’m much more focused on the integrity of this organization over the next decade or two decades and this kind of thing sets that up.”- Morgan Stanley (MS) James Gorman
We appreciate our frontline workers in this crisis
“We watch in collective awe and gratitude as these dedicated individuals put themselves at risk in service to others and to our nation.” – Fed Chair Jerome Powell.
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