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but is going to we
believe deliver explosive cash flow growth over the years as it plays out and
we even hear these sorts of strategies dismissed as concept capital strategies
these are not concepts they are innovation platforms that are going to disrupt
the traditional world order and I I've been through them with you before but
just for those who are new they are DNA sequencing adaptive robotics energy storage artificial
intelligence and blockchain technologies.
each platform alone we believe has started to grow exponentially and they are converging as well and the convergence we believe is going to cause explosive growth and cash flow dynamics the likes of which we believe we've never seen before so I'd like to now go through the economics that we see I usually go through monetary policy fiscal policy economic indicators and market indicators and then end with some thoughts on innovation so let's do that I know that this fear that inflation at seven percent which is the cpi right now on a year-over-year.
the basis is
getting embedded into the system because wages are rising and so forth and so
what we're seeing on the monetary and fiscal front right now is effectively
significant tightening already on the monetary front we've seen money growth go
from 27 at its peak during the coronavirus the depths of the coronavirus to 13 recently but if you look at it a little more closely and at an, in a shorter-term time horizon
we're down to eight percent growth on a
three-month basis six and a half percent on a two-month basis.
we believe that money growth will continue to slow quite significantly, especially if the fed does raise interest rates now we wouldn't be surprised to see the interest rates go up in march many people after today's employment report are beginning to think that 50 basis points are the nber that the fed will basically telegraph that it means business and that it's going to head inflation off at the pass they may do that and if they do, however.
we think the stars
are aligning in such a way that they will get the message very quickly that
they don't need to do much more another break on them is you know in a
political year the midterm elections the
fed does not like to get in the middle
of the feeding of midterm elections doesn't
want to be accused of any political dynamic so they might want to do the 50 basis points
just to say okay we're done for a while now what's interesting about the
market's reaction to this possibility is
that strategists out in our world are.
now trying to
leapfrog each other saying okay I think it's at least three more tightenings
after that or four I've even heard all together seven so the
reaction you've seen in the equity market recently is is a fear I think that
the fed is going to go too far too fast because as I will go through in a minute the economy
is quite weak and I think the fed could
do it overdo it quite quickly so let's go through the fiscal policy side of
things.
if you look at the fiscal policy on a 12-month moving average basis so federal outlays peaked at more than 50 percent growth during 2020 they're nearing zero now on a year-over-year basis and if you just follow this through the programs that are rolling off, for example, the child care credits per child that ended I think at the end of December we're going to see fiscal outlays down about 19 by the end of this year so the again fiscal policy is in reverse.
so you've got both
fiscal and monetary policy moving in the same direction pretty quickly
potentially and I think that one of the reasons this is
happening on the monetary side is oil prices I do believe besides wages the fed
is looking at oil prices and saying wow you know there must be enough money in the system to accommodate this oil price shock and anyone who's read
history knows that in the early 70s when oil prices quadrupled after the oil
cartel basically got together and just jack prices up the accusation then and
which was true is that.
the fed accommodated that price shock and that price shock fed through the system for years and years and years and you know basically we needed chairman Volcker at the fed in the late 70s and early 80s to really choke money supply.
so it does seem
like there is some fear that this could be the second go of that and yet we look at oil and what's going on with
oil prices right now quite differently we do not believe that it is an indicator of
inflation we believe it's a taxi increase it's it is a supply shock that is
true the shortfall in supply-demand has not passed where it was pre-covered so shortfall in
supply but it's a tax and it's a terrible tax on the lower-income groups.
so we'll get into
what this means and and and how this how that is actually going to feed through
the system we believe in a moment but
I'd like to go through some of the economic indicators now on employment
Friday non-farm payroll came out today and it was much higher than expected we
got the ADP employment report earlier this week showing a decline of roughly
300 000 for January.
well, this report looked nothing like that non-farm payroll employment was up 467 well above the 125 000 expected so strong report but again you have to look through these reports a little more deeply to get the complete picture the workweek dropped 0.2 hours which is quite a big drop I mean occasionally we'll see a move of 0.1 but 0.2 is a significant drop.
it's a
six-tenths of a percentage point drop so 0.6 you multiply that by 12 to get a sense
of an annualized rate you know that's a drop of seven percent at an annual rate so that was interesting and it suggests that
there probably is more weakness brewing than many economists and strategists believe
right now.
what economists and investors did focus on rightly so was average hourly earnings up 0.7 percent and on a year-over-year basis that takes them to 5.7 so hence the fear that oh my goodness inflation is now feeding into the wage structure we believe that what's happening in the labor force has been impacted severely by the coronavirus and its variants and things are still sorting themselves out but one thing to note is that 5.7 is still lower than that seven percent cpi.
so real purchasing
power is going down right now we are seeing some indicators that
are earlier in the pipeline like the PPI surprised on the low side
at 0.2 percent, import prices fell by
1.8 percent, I mean that would be export
prices import prices fell by two tenths so we're beginning to
see earlier in the pipeline signals that inflation is going to come down at some
point in the future may get worse
on a year-over-year basis before it gets better, but again we are very focused on
on the pipeline what we are also focused on is that loss of
purchasing power is feeding through to retail sales so retail sales
in the all-important December month were down 1.9 percent on
the heels of a 0.2 percent increase in November with inflation at
0.4.5.6 those numbers that retail
sales nber would in real terms taking inflation away have been down
two and a half percent and in November also down,
so consumption is falling now in the next few months we'll probably see some sort of rebound we most surely will because auto sales popped up in January we'll get into that in a minute but we were also focusing on what companies like Facebook and Amazon are saying now amazon sales amazon reported yesterday it's sales on a year-over-year basis we're up only nine percent now it was up against a very tough comparison.
I think on a
two-year basis we've still got a solid growth but still, nine percent is
even lower than the lowest point during the 0809 prices which was 14 and a half
percent true amazon is a little bit more
mature of a company right now but nine percent I've never seen out of
amazon and the compar it was facing tough comparisons in the quarters before
now.
we saw nothing like that nine percent facebook is suggesting that for many reasons its sales growth in this quarter will be somewhere in the three to eleven percent range this is the lowest ever it's never been in single digits so facebook has we think some competitive problems, but it did point to weakness in the retail sector as did google in its report so consumption accounts for roughly two-thirds a little more than two-thirds of the u.s economy retail sales are mostly on the good side so that's about a third of total consumption.
the rest is
services so we look to the consumer sentiment surveys to give us a sense of where
we're going from here and if we did get another University of Michigan consumer sentiment survey
and it fell again to a new low and it's lower than at any time during 19
2020 during the coronavirus crisis and it is heading for lows that we haven't
seen since the 0.809 prices so the consumers don't like this loss of purchasing
power, and we know that the employment
rate unemployment rate and the
employment rate are working in the consumer's favor generally.
but and then that
usually is a prime determinant of how the consumer's feeling but its clear loss
of purchasing power is top of mind in
the survey deeply buried in the survey, there is there's a part that says or ask the conser is
now a good time to buy a car and I
hadn't looked at this statistic in quite some time but it is it has dropped to a new low
46 it is lower than the low in 0809 which was roughly a hundred and
recover it was running at 150.
so it's about a
third of that and it just dropped to a new low now this flies in the face of
what we saw in January auto sales moving up quite strongly from 12.4
million units in December to 15 million in January,, and what we believe has
happened there is the various automakers had been building up inventories at
the factories or near the factories just
waiting to put in chips as we heard all about the chip shortage during the last
year.
so they they are now saying that that chip shortage is alleviating so there have been people waiting for their orders to be delivered but if this survey is right there's not going to be much follow-through I will say that the other thing we're focused on is inventories and in the face of the conser feeling this way we are paying extra attention to inventories so for December retail inventories went up 4.4 percent think about that four points four percent in December a big holiday month after a two percent increase the prior-prior month now four point four percent again you annualize things to get a sense of the drama here.
if this were to
continue and it won't but you know that's the equivalent of 50 plus
increase at an annual rate and nothing's
growing at that rate right now we're
also seeing wholesale inventories backing up continuing to back up 2.1 percent
and after a 1.7 percent the prior month
and in the GDP report that was reported for the or for the fourth quarter we saw a massive increase in inventory so the gd real GDP
increased 6.9 percent but 4.9 percentage points of that were inventories, real final sales were about two percent.
so after a 0.1 increase in the third quarter so real demand here is quite sluggish and partly because disposable real disposable personal income is falling purchasing power is falling now it appears according to the Atlanta fed's GDP tracker which changes as economic statistics come through it appears that the first-quarter GDP is going to be fairly flat and if we had to guess it inventories will contribute to it
I think the fed
will take due note if that tracker continues to move down so that's it on
economic indicators I will say housing is still firm and strong I think that
the great migration away from the co northeast and California explains part of it another part is city dwellers
probably want that second home in the suburbs so that they have somewhere to go if and when we encounter another pandemic capital spending is also doing pretty
well.
I believe that that's because innovation solves problems we have big labor shortages and the world is going digital at an accelerated rate now that we're all in hybrid working mode and I think automation is going to surprise on the high side of expectations as companies try to try to counter the input cost inflation, particularly energy and other raw materials so I think innovation solves problems.
we keep we that is
one of our taglines certainly you heard it a lot from us during the coronavirus
and we are saying it again because innovation causes increased productivity and
efficiencies and creative solutions to problems that many companies are facing now in terms of just one more thing on oil
prices before I forget I should have mentioned it earlier I just saw that that
the shale oil production plans are up by roughly a million barrels per
day for this year.
now, this is really important we used to be the most important reason for the oil prices direction our shale oil production was the difference between rising and falling prices at one point one of the reasons we are facing a shock in the oil industry is as it is very well-intentioned of course esg but as big companies are forced by pension plans who now are very focused on ESG mandates they're forced to shift their budgets from fossil fuels to renewables it's very difficult to ramp in renewables and really to dismantle.
I mean if oil companies
stopped spending on fossil fuels to maintain a position in corporate pension
plans and so forth oil prices would go to the moon now a lot of people laugh at
the comparison to whale oil prices as we were shifting from whale oil for our
lighting needs to fossil fuels, but if you look at the history the supply shock did occur because a whale oil
manufacturer saw the writing on the wall and just pulled out in terms of
investing and the price was extremely volatile.
I am very surprised to see oil above 90 90 per barrel but that is causing a couple of things to happen here demand destruction and finally, the price, especially in the private sector private shale oil producers, are now ramping back up again the price was calling for them to do it you know even six months ago but they are very dependent on banks for loans and I think the banks had been a very gun shy after their experience during the coronavirus where oil prices crashed now it seems like the there are they are loaning again.
so I do believe
that we are going to see a resolution to this supply shock during the next year or so so let's go to
market indicators now equities as you
know we're moving toward they did move to an all-time high but the internals of
the market last year were not good they were I think I mentioned on the last
[Music] in the know that the ratio of new lows to new highs was as high
as it's been since 1999 and in 1999 it was the value stocks that were
hitting new lows as everyone was racing into the internet.
in this last year
it has been our kinds of stocks that were hitting new lows as value stocks were
hitting all-time highs and as you know the right thing to have done during the
late 90s when that ratio behaved that
way was to move away from the new highs into the new lows and I think the same
is true today and I'll just give you an I guess a sneak preview of
what may happen here you know I was very interested after ford said that the
demand for its f-150 lightning ev was so much stronger than it expected its
stock exploded.
now I want our auto manufacturers to be very successful in the EV space but to see its stock jp to highs that it had not seen since 2000 is is a sense of what I just said what what what that move said to me is oh my goodness investors don't understand that 97 to 98 of its sales base is gas-powered cars and we believe that the shift toward electric is accelerating here oil prices being one reason but also lower prices being another as battery costs come down so I found that very interesting in the context of the juxtaposition of the night the late 90s against today we're also seeing a lot of confusion in the more mature growth area of innovation facebook is facing real competition and it tick-tock is the is, of course, the reason.
it's also under pressure because apple is not
giving it or allowing it to have as much information about users and has put in place new privacy objectives and rules so Facebook is one of
the stocks hitting all-time highs now I have spoken to some really good value investors you know who've been doing this all their
lives and ask them you know is if interest rates were to move into the two to
three percent range let's say as measured by the long-term treasury yield which
parts of the market given where we are now would be hit and the answer that I found most interesting and
that I I think we've just seen in
Facebook.
is it would be the
more mature growth companies that are facing some competition and not the super
growth companies that are just entering into their exponential growth trajectories.
so again another argent for new growth thinks Amazon in the early 2000s you know if you had put into a dividend discount model amazon's revenue growth rate for the next 25 years at 20 to 30 say 20 25 which is what happened nobody believed it was possible then given the way that the cash flow dynamics would have been projected you would have bought that stock all day long as a value investor and many and of course the returns would have been phenomenal we are in that same place with truly emerging growth right now and the private markets know.
it is because
private market valuations have only gone up over the last
year we're writing a paper gathering the data on this right now but
in the last year as true disruptive innovation strategies
depreciated 50 or more private
market which is around which
focuses on disruptive innovation private market valuations seems to
have doubled there's really
something wrong with that picture and I think the private markets have
it more right there's more innovation taking place today than there ever has been in history,
if you take a look
at our big ideas 2022 webinar
which we spent five and a half hours it's up on our site it's
on youtube five and a half hours our director of research
brett Winton and all of our analysts describe how provocative and
profound these changes are going to be, I often use that during the Tekken telecom bubble,
I was in the
markets at that time, of course, I
saw investors you know falling all over each other trying to one-up each other
to get a bigger tech position because tech in the indexes had moved to 35
percent so we saw many portfolios with 40 50 techs again they needed to
outperform that index and of course, that was exactly the wrong thing to do but
it was mass psychology.
it was a very interesting time today we have the same thing going on in reverse we have investors shying away, in fact, running for the hills and the hills, in this case, are their benchmarks everyone needs to get close to that benchmark and they all look alike if you look at the top 10 in Nasdaq top 10 in s p the overlap is astonishing these benchmarks have really I think to do a disservice to the allocation of capital, but that said investors are running for the hills.
when when there's
volatility and fear around inflation and interest rates we think that that decision is going to
prove to be just as incorrect as the decision to move on mass in the late
90s just touching on a few other
markets bonds believe it or not the trend that started in the early 80s think
about that 40 plus years of falling interest rates that trend has not been broken
I don't think if you look at it from a
very long-term point of view it won't be broken even if rates hit 275. I'd be
surprised if they hit that.
but I do think
the deflationary forces out there are cyclical as I've just described as well as
secular these innovation platforms are
highly deflationary I think that we'd be surprised to see the long-term bond
yield go very much higher than here to be, to be
honest, and then commodities I've given you a sense of what we think on energy
I will say one other thing this supply shock that is happening in energy
because of esg is could be affecting other commodities could be affecting other
areas.
from that point of view, you could say it is inflationary, but as I mentioned with oil the consumer is reacting violently to this loss of purchasing power so I don't think it's going to feed inflation I think it's going to feed this negative sentiment that the conser has been feeling on the innovation front and on market indicators crypto cryptocurrencies bitcoin ether they have corrected with the equity markets more and more hedge funds are involved in them so when the market corrects.
we do see higher correlations these days although over a full market cycle the correlation between crypto-assets and any other asset is extremely low which means for diversification purposes crypto is a very interesting asset in our big ideas 2022 you will see how we break out crypto our understanding is evolving and we can describe it in three ways a money revolution a financial revolution and a next-generation internet or metaverse revolution so if that piques your interest do take a look at our big ideas 2022.
I'm very proud of our research is unlike anything else you'll see out there you will see ours because we give it away again unlike most other firms meaning we give it all away and one thing that we are intending to do during the next few months is to put out models for various companies these will be open source models so you can see the cash flow characteristics of these companies they're pretty explosive already so this idea of profitless tech is ridiculous just ridiculous we're excited to share with you our models we share our top-down models in the form of blogs now these actual models will come out so you can see how we build how we're building these models and how powerful the exponential growth trajectories.
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