The Newsletter
The Transcript 08.16.20
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Succinct Summary: The Great Recession of ’08 pales in comparison to the kind of recession that we have here. The UK just recorded the worst quarterly recession on record. The virus levels remain stubbornly high in many places. The hope comes from the modest recovery in some hard-hit industries.
Macro Outlook:
This is not your grandmother’s recession
“The important player in getting the country back, help the local communities and all that stuff. But it’s going to take time. There’s no doubt about it. And this is different. This is not your grandmother’s recession. I mean, when you have GDP drop 30%, whatever it was, 34%, I mean, that’s not normal” – Simon Property Group (SPG) CEO David E. Simon
The Great Recession pales in comparison to what we’re dealing with
“…the pandemic has obviously had a dramatic impact much greater – and I’ve experienced a lot of volatility in my career. The Great Recession frankly doesn’t – it pales in comparison to what we’re dealing with. Obviously, the amount of bankruptcies in our sector is tremendous and it’s more reminiscent to me of what we’re dealing with, of what we dealt with in the early 1990s than the Great Recession” – Simon Property Group (SPG) CEO David E. Simon
“Certainly, COVID-19 has accelerated bankruptcies that frankly were going to happen anyway. Those tenants that are filed for bankruptcy this year were all on our watchlist for a number of years and their bankruptcies were not a surprise” – The Macerich Company (MAC) CEO Tom O’Hern
Virus levels are still very high
“The virus numbers are frustratingly high particularly in the United States, and they remain high, and it is hard to look across the country and see the kind of what strategy that we’d like to see to have confidence that we can put this thing behind us sooner rather than later.” – Marriott International (MAR) CEO Arne Sorenson
Some companies are planning for things to stay like this into 2021
“There is still frustration to me that when we – too often – see big, big companies they’re making decisions about keeping offices closed for as much as the next year; frustrating to us because in a sense that’s just sort of withdrawing from the economy. And while all of us need to make decisions that protect our people, and make sure that we’re not putting people out in risky environments before it’s ready. There is absolutely no reason for us to be making decisions about what offices look like or what travel looks like in the second quarter of 2021 for example” – Marriott International (MAR) CEO Arne Sorenson
But there’s also been a big rebound even in some hard-hit industries
“Our business for last month has been at or above last year’s levels from a gross booking value. It’s totally crazy…So it dropped by about 80% and I mean, you know, nobody knows that this is pent up demand or not, but no, we’re, we’re around last year’s levels all around the world or averaged out” – Airbnb CEO Brian Chesky
“bookings have been softer for the first quarter, are quite strong for the summer and back half of 2021, highlighting the continued demand for cruising” – Royal Caribbean Cruises (RCL) CEO Richard D. Fain
“The picture has improved since we last spoke in May. 317 hotels or 5% of our estate is currently closed compared to around 1,000 hotels at the end of April. Occupancy levels are also slowly starting to increase, reaching around 45% in the Americas and over 50% in Greater China. But it’s important to emphasize this has been not linear and the pace and scale of this recovery still remains unclear.” – InterContinental Hotels (IHG) CEO Keith Barr
Hopefully, the worst is behind us
“…what’s optimistic about it is the worst is behind us. April was the worst month, May was a less worse month, June was better, and in fact July was even better than June. You’re going to have some ebbs and flows based on the virus track, but I think you have to be optimistic that you’re seeing the U.S. consumer continue to spend” – Bank of America (BAC) CEO Brian Moynihan
International:
Chinese mall traffic is at about 85% of pre-COVID levels
“China is a pretty good example as a post-COVID example. By late March, nine weeks after the country shutdown, 90% of the malls reopened and traffic has recovered to about 85% of the pre-COVID levels. That is very similar to the numbers we’re seeing in the U.S. Our town centers are a vital part of their communities.” – The Macerich Company (MAC) CEO Tom O’Hern
The UK is officially in the worst recession on record
“The recession brought on by the coronavirus pandemic has led to the biggest fall in quarterly GDP on record..Our latest estimates show that the UK economy is now 17.2% smaller than it was in February, the effects of which have been most pronounced in those industries that are most exposed to public health restrictions and the effects of social distancing.” – Office for National Statistics Deputy National Statistician for Economic Statistics Jonathan Athow
African seems to be handling the pandemic well
“I am very encouraged about the responsiveness across Africa and the way the virus has been managed, sometimes even better than some of the more developed countries we operate in” – Barrick Gold (GOLD) CEO Dennis Mark Bristow
Financials:
Interest rates could stay low for the next 5-10 years
“There is almost no debate that a good portion of the last few months’ stock and bond market reflation has been due to the money pumped into the financial system by governments post-Covid, as well as the oil market collapse. What has been lost in this story is the fact that, contemporaneously, central banks around the globe reduced interest rates to zero. It also appears that interest rates will stay at zero for a good while—and barring a change in the macro environment, rates will stay in a low range for the next five to 10 years. Zero to low rates have great influence regarding the valuations of assets and businesses” – Brookfield Asset Management (BAM) Q2 Shareholder Letter
M&A activity is starting to come back
“As you come into July, you’re starting to see more M&A activity because of the stability of the market. The third quarter, we expect to see more M&A activity. You’ll see more IPO activity—health care IPOs, plus some other tech IPOs” – Bank of America (BAC) CEO Brian Moynihan
Stripe may not be IPOing soon but Airbnb might be doing so this year
“We have no timeframe that we are working toward in terms of going public. It’s not a near-term thing on the cards for Stripe.” – Stripe President John Collison
“we don’t know when we’ll be back public, but I basically said we’ll be ready this year. If the market’s ready for us, if the market’s not ready, we’ll be ready when they are” – Airbnb CEO Brian Chesky
Consumer:
The pandemic caused an abrupt shift towards in-home dining
“The biggest shift clearly was from out-of-home consumption to in-home consumption. And that is against the prior trend, because for years people had started to consume more food and beverage out-of-home. Around the world, apartment sizes, kitchen sizes, pantry sizes have been shrinking because people consume more and more on the go and on the road. And now all of a sudden, you have this crash reverse. It’ll take some years for things to return to a pre-crisis level.” – Nestlé (NSRGY) CEO Mark Schneider
Parents want their kids to go back to school
“I think they’re willing to send their children back to a bright horizon center has actually been quite high. what we have found is regardless of whether or not an employer is reopening their office, they recognize that employees can not be both productive employees, as well as full-time caregivers and teachers. And so they are reopening their childcare centers that are at or near their work site. Irrespective of whether or not they’re opening their offices. And so the children are coming back, whether or not the parents she’s working at home or working at the office, they still need that critical support.” – Bright Horizons (BFAM) CEO Stephen Kramer
The consumer still wants to travel
“…notwithstanding the frustration around the virus numbers, the American traveler and consumer; and I think increasingly the business traveler too will say what we got to get back and live our life. I’ve got to get back, I’d like to get back to work; I maybe can’t get back to the office depending on where I go to the office” – Marriott International (MAR) CEO Arne Sorenson
“We have been both humble and surprised with the amount of bookings we are seeing for 2021 with literally no marketing efforts, and frankly, very little good news…Our guests want to come back. Families want and need the vacation.” – Royal Caribbean Cruises (RCL) CEO Richard D. Fain
But is staying close to home
“Chinese travel that would have gone abroad maybe to Asia Pacific or to some place else, and has stayed home in China this year. We’re certainly seeing the same dynamic in the United States. Nobody’s going to Europe and they’re more likely to take their vacations here.” – Marriott International (MAR) CEO Arne Sorenson
“Most Americans live within a tank of gas of a national park and national parks have historically not been the main way people travel. They go to Miami, they go to Vegas, you know, they either go to times square. Well, I think that if this is a time of reconnection, you know, maybe this is a time of reconnection to family. This is also could be a time of reconnection with nature and the outdoors for a lot of people. I mean, where are we seeing huge growth, cabins, Airstreams, camping. This is that’s the kind of travel that you’re going to see. I think this is going to just change trends. I think people are going to want to. Kind of reconnect to nature. This is a big trend” – Airbnb CEO Brian Chesky
The trend towards suburbanization may be overstated
“Are people fleeing the cities for greener suburban pastures? Some faint signals may have emerged in certain places, but by and large, the data show that suburban housing markets have not strengthened at a disproportionately rapid pace compared to urban markets. Both region types appear to be hot sellers’ markets right now – while many suburban areas have seen strong improvement in housing activity in recent months, so, too, have many urban areas” – Zillow (Z) 2020 Urban-Suburban Market Report
Technology:
The pandemic has accelerated the adoption of the internet
“As the world adapts to the challenges created by the pandemic, several major technology inflections are being accelerated. Work from home, home schooling and online retail are driving investments in cloud data centers and communications infrastructure.” – Applied Materials (AMAT) CEO Gary Dickerson
“We’ve seen an acceleration in the channel shift from offline to online, more customers than ever before have joined our platform. And the same is also true for the partner side of our business. And therefore, we think it’s actually time to play offense, it’s time to invest with even more conviction” – Zalando (ZLDSF) CFO David Schröder
“Across every industry, we’re seeing this surge towards a digital-first strategy, and all of the tools and products and services that we offer are probably more relevant and important across multiple industries than they’ve ever been before” – PayPal (PYPL) CEO Dan Schulman
But the internet can’t replace everything
“In gaming, our view is that the entertainment experience, the in-person experience in a hopefully a post-COVID world, but that experience is not replaceable online. And that experience is a tremendous complement to the online experience.” – IAC/InterActiveCorp (IAC) CEO Joey Levin
“I don’t think you’ll ever replace face-to-face interactions. Software is very powerful, but I don’t think any amount of software will replace the magic of true face-to-face contact. You can’t replicate what’s happening in the offline world. Spotify reinvented consuming music online, but they didn’t replicate a music store experience” – Web Summit CEO Paddy Cosgrave
“Even with growing and accelerating eCommerce sales, it cannot make up for the lost sales and profits from the physical stores. The crisis has emphasized the importance of brick and mortar locations as key sales and profit drivers for most retailers” – The Macerich Company (MAC) CEO Tom O’Hern
It’s been hard to build momentum for new projects when working from home
“Projects which are well underway, we’ve seen tremendous momentum continue, but when you’re trying to create a new project, you want people around that water cooler. You want that sense of urgency. I feel like productivity is impacted a little bit in that” – Adobe (ADBE) CEO Shantanu Narayen
There will probably only be enough room for five or six streaming services
“There will be more than 800 streaming services. There will be thousands. But there will be five or six, maybe a little less or more, that will account for the majority of mind share” – WarnerMedia CEO Jason Kilar
Miscellaneous Nuggets of Wisdom:
You can’t fear change
“We cannot just live in the past, fear change and hope that it will never take root. Sometimes one has to stare change in the face, recognize that it has or soon will arrive and reshape it to one’s own benefit.” – AMC Entertainment (AMC) CEO Adam Aron
Sometimes it takes an outsider to view things with a fresh perspective
“Right from the start, I thought, ‘What does ten million subscribers look like? And why not aspire to more: 20, 30 million?’ Many people laughed at me…An outsider has many disadvantages, but one advantage is a “cold eye.”” – New York Times (NYT) CEO Mark Thompson
