Inflation, Labor Costs, and JPow | The Daily Peel | 3/3/23

Mar 3, 2023 | Peel #411

Market Snapshot

Happy Friday, apes.

If you weren’t hungover after Wine Wednesday, I sure hope you are after Thirsty Thursday. Equity markets were up, so who cares anyway?

After spending the early hours cloaked in red, indices ripped higher for the rest of the day as (mildly) dovish Fed commentary caused investors to forget about all their problems for a bit.

Like Ferris Bueller, treasury yields had a bit of a day of their own, with the 2-year setting a new 52-week high at 4.902% while the 10-year notched above 4% midday.

We’re far from Halloween, but it might be spooky season already.

Let’s get into it.

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Banana Bits

• In this economy?! Jk, I don’t think any of us can be surprised anymore, but still, jobless claims once again came up way short of expectations
• Mortgage rates cannot and simply will not stop as they steam toward 7% amid last week’s gains
• Never one to leave us without an encore, just a day after their latest Investor Conference, Tesla gives the middle finger to chipmakers as it says the firm plans to cut 75% of one crucially important kind of EV semiconductor

Macro Monkey Says

Unit Labor Costs

CPI this, PCE that…let’s read through all that gobbledygook today.

As all of you intelligent, wise, and attractive apes know, Fed Chair Jerome Powell hates when low-income earners make enough money to feed themselves. Maybe that’s a stretch, but the man’s goal since C-19 started to fade has been unitary: to get inflation to chill tf out.

According to those primary inflation measures mentioned above, inflation is mostly moving in the right direction. However, those inflation metrics barely scratch the surface. CPI and PCE are great for the casuals among us, but the vast scope of these measures to include every cost reasonably possible from a consumer perspective can divert attention from other things that might matter more to investors.

Specifically, what matters here are the specifics. The main problem with this whole inflation thing has been forthrightly attributable to the cost of labor more than anything else, and according to recent data, it’s not getting much better.

Basically, the cost of labor is rising while the productivity of workers falls. Yesterday, the Labor Department reported revisions to Q4’22 figures, including the following:

• Unit labor cost growth was revised up to 3.2% from the 1.1% previously thought
• Annually, labor costs accelerated by 6.3%, revised up from 4.5%
• For the calendar year 2022, labor costs gained 6.2%, also revised up from 5.7%
• Productivity growth (aka growth in output per worker per unit of time) was revised down from 3.0% to 1.7%
• Productivity fell 1.8% from the year-ago period

Notice a pattern there? Cost growth has been accelerating while the productivity of that cost has either slowed or fallen. Meanwhile, reports claim that JPow wet the bed last night.

Essentially, what the above factors imply is that companies are paying more while receiving less work from their employees. Of course, employees getting paid more to do less don’t mind, but it’s persistent growth among fundamental underlying costs that maintain acceleration in overall inflation.

The fact that hourly wages (aka the cost of labor) increased 4.9% (vs. the 4.1% initially reported) last quarter suggests the rate hiking endeavors of JPow and the gang at the FOMC haven’t exactly worked as surgically as previously might’ve been thought. Sick meme, bro.

Growth in the cost of labor implies growth in the cost of things sold by that labor. That tends to translate to consistently outside growth in price increases, aka consistently high inflation. With January CPI coming in at 6.4% annually vs. labor cost growth of 6.3% for the same period, it’s evident other factors are at play as well, but I’d love to hear the argument for +6% growth in the cost of labor while the Fed’s target rate of inflation sits as less than 1/3rd that rate.

At the end of the day, one metric is just that—one metric. That growth in labor costs comes amid one of the strongest job markets in history, confirming the trend of tightness in the labor market that we damn well knew was already here. The question now is, how does this affect the rate hike going forward?

Honestly, never mind, scratch that question. I don’t wanna know.

What's Ripe

Salesforce ($CRM) ↑ 11.50% ↑

• Salesforce is feeling like a Jedi after yesterday’s stellar performance, where the firm demonstrated that the force certainly is, in fact, with the.
• The stock posted its best day since the wild west that was 2020 on the back of a ridiculously strong earnings report and upbeat guidance. Benioff and the team reported $1.68 raked in per share and sales of $8.4bn for the quarter. Needless to say, both beat estimates like Jon Jones is gonna beat that other guy tomorrow.
• Shares are already up nearly 40% thus far in 2023, while the market’s new average price target, well over $210/sh, was revised up all over Wall Street. That was largely in part to the firm’s intention to shift focus from an exclusive growth orientation to one that actually has costs in mind.
• As much as investors love earnings beats, they for sure love higher margins even more. It’s almost as if the sales forced their way through (sorry, I had to).

Macy’s ($M) ↑ 11.11% ↑

• How downbad do you have to be where literally yelling from the mountain tops that you expect revenue to fall 1-3% translate to a sizably double-digit up day? Well, let’s ask Macy’s.
• Shares in the department store chain that apparently owns beauty retailer Bluemercury as well (who knew) spiked on the company’s reported earnings of $1.71/sh on $8.26bn in sales, while analysts had been expecting $1.57/sh on the exact same amount of revenue.
• Apologies in advance to shareholders, but there’s a lesson here: when Mr. Market has no faith in you at all, beating last quarter’s expectations is good enough. When Mr. Market has high standards, you better have some damn good guidance in store.

What's Rotten

Silvergate ($SI) ↓ 57.72% ↓

• I don’t know if I should be giving Silvergate an L to hold or a gun to…never mind…
• The “non-crypto crypto bank” that sat high up on top of the world from 2019-2022 just gave depression, anxiety, and poverty to shareholders everywhere. Shares collapsed nearly 60% yesterday alone as the firm had to delay releasing its annual reports.
• Now a delay like that isn’t the worst thing ever, but it’s faaarrr from good. Usually, companies do this when they’re so f*cked that they get nervous or, in the end, try to unf*ck themselves using “creative” accounting. Yeah, not ideal.
• Silvergate did cite a few way-too-nerdy accounting terms as the reason for the delay, but investors couldn’t even wait to hear the explanation before selling. You still buying the dip??

Tesla ($TSLA) ↓ 5.85% ↓

• Yesterday, we hyped up Tesla so much; we thought shares would cross $1tn again. Apparently, not enough people read the Peel (whack af) to pump shares like you were hoping for.
• Still, we won’t take all the blame. Like when Musk smoked pot on the world’s biggest podcast, another Tesla exec is squarely to blame this time. His mistake? Being just way too honest.
• CFO Zach Kirkhorn really stepped on stage and said the firm plans to spend around $150bn (billion with a B) to achieve their long-term goals of things like selling 20mn cars/year. The largest car makers today, like Toyota and Volkswagen, don’t even scratch 10mn.
• So, they’re def feeling a little ambitious, to say the least. That’s about as much money as we’ve given Ukraine in the form of $ and weapons, so yeah… But then again, betting against Tesla or Musk himself has never exactly been a winning bet for long. We’ll see.

Data Peel

Source

Thought Banana

Everyone Say

Not to get too political, but…

Everyone is freaking out about ESG investing right now. Whether you’re on the left, right, center, up, or down, it seems like everyone with $100 in a Robinhood account has got something to say.

And yesterday, that tension came to a boil on Capitol Hill. Let’s see what’s going on.

During Big Donnie T’s administration, the Labor Department created new rules centered around reiterating existing law that essentially limited the considerations of investment managers for pensions, ERISA retirement plans, and other similar accounts to focusing solely on achieving the best returns for a client’s goals.

When Joey B showed up, he and his Labor Department scrapped that real quick and tossed another element into the mix, and that element was carbon, or more specifically, the lack thereof.

Recently, the federal government has given the thumbs up for “public” investment managers to consider other factors in their decision-making, including things like…ESG.

Suddenly, and noticeably as we sit here still down over 16% from the S&P 500’s all-time high, ESG investing has become the hot new topic in Washington and your parents’ Twitter feed.

In case you live under a rock, ESG is Environmental, Social, and Governance investing, an investment style that intends to reward the companies most friendly to social justice causes over those that snub the subjects. The key word there is “intends” as, like anything in investing, it doesn’t always work out like that.

This could be a large contributor to why Congress has moved forward with a bill to reverse the Biden Admin’s changes and make sure that those investment managers only consider the investment return they mean to achieve for their clients.

I mean, the fact that the government has to tell investors and fund managers what they can and can’t think is wild enough, and the fact that there’s so much beef around it only adds to the entertainment.

Now, in all reality, none of this actually really matters. I’d bet my life savings that Biden vetoes this thing without a second thought, so it’s kinda moot to be talking about as it stands. Where things get interesting, however, is speculating wildly on what this means for ESG investing overall.

Look, we’re barely even a year into the latest bear market, while the S&P’s return over the past year is basically flat. However, during that same period, as liquidity crunched and all of a sudden, making money in stocks wasn’t completely automatic, ESG funds saw their priority in the minds of investors diminish like you to your Hinge date after you spilled your drink at dinner last night.

Don’t get me wrong—this isn’t to say ESG investing is or isn’t good or bad; we’ll let the data speak for itself. What it does confirm, however, is the fact that politicians will literally fight over anything as long as they look cool to their constituents?

The big question: Was the whole ESG investment strategy always just a ZIPR, bull market fantasy? Can the strategy make a comeback in future years once markets figure out how to go up again?

Banana Brain Teaser

Yesterday — I am a fruit. If you take away the first letter of my name, I become a crime. Take away the first two letters of my name, and I become an animal. Take away the first and last letter of my name, and I become a form of music. What am I?

Grape.

Today — It’s 100 bananas off the WSO's IB Interview Course for the first 3 respondents. LFG!

My sides are firmly laced about, yet nothing is within; you'll think my head is strange indeed, being nothing else but skin. What am I?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“A loss never bothers me after I take it. I forget it overnight. But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.” — Jesse Livermore