This Is The Toughest Macro Environment Ever

In their latest episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss This Is The Toughest Macro Environment Ever. Here’s an excerpt from the episode:

Bill: No, I’m trying to figure out and unpack– Look, I was always in camp transitory on the inflation side. I think I underestimated in the beginning of Russia-Ukraine. I did not foresee Ukraine capturing people’s hearts and the West being this united in sanctions. I think if you’re interested at all to open up the– How much potash, for example, Russia makes and how much oil Russia exports? This commodity environment could be super messed up for a long time. Then you layer on China COVID 2022, I think this is the hardest macro environment I’ve ever seen and I don’t think that macro is the way that I’d be paid. But COVID 2020 was pretty easy because we all had the same risk that we were staring at. This is really wonky to me.

I’m not confident. Look, three years of sustained inflation, food shortages, global dislocations, fine, the leading economic indicators are strong in America, household net worth is strong, the higher end of America’s is doing fine, the people on the margin are about to just get waxed. $5.50 gas hasn’t really come through yet. I’m sure America will be able to procure food, but it’s going to be more expensive. Emerging markets, I feel horrible for. Coming out of the back of COVID and now, you just destroy them with food inflation, I don’t know, this has risk written all over it to me.

Jake: Other than that, how is the play Mrs. Lincoln?

Tobias: [laughs]

Bill: Now, the only thing that matters is okay, well, what are the prices? These are first order thoughts that I’m having, but I am not a dip buyer. Maybe that costs me money or whatever down the road, but 2018, I thought that was easy, late 2015, I thought that was pretty easy. This one, I’m not sure.

Tobias: Where are you, JT? You’re pretty bearish?

Jake: Well, it’s a good question. I don’t know. I guess, everybody, I’m not as bearish about the companies I own. [laughs] So, it’s fall down under no duh, but yeah, it’s definitely possible to imagine a messed-up supply chain that’s still not unfurled from COVID.

Then you layer on commodity shortages, and higher prices for everything, and then the time that it takes for supply to get on line to match those high prices, it could just take time and it’d be messy along the way, which boy, it makes it tough to bet a profit margin expansion for anyone at this point. Top line, hard to imagine similar over the last decades being more than that. I don’t know, but then at the same time– [crosstalk]

Bill: Well, I think it’ll accelerate, but not in real terms.

Jake: Wow. Okay, that’s fair.

Bill: I actually think heavily levered industries with any type of pricing power are going to win relatively.

Jake: Think so.

Bill: Well, if you think– [crosstalk]

Jake: [crosstalk]?

Tobias: What is that?

Bill: Yeah, that’s one of the solutions. I don’t have the answer, man. I’m still working on this.

Earnings Recession Coming Up

Jake: It does feel we may be on the other side of peak globalization for a while, and maybe we’re going backwards on that front, which then that’s inflationary in its own right. If you bifurcate the world into different markets and some people are not trading with other people, that stuff that’s just going to cost more. That’s just how it works. So, again, pretty hard to be bullish on profit margins from here. I wouldn’t be surprised if we’re entering earnings recession coming up, which makes prices feel like they have to come in so maybe. I don’t know. It’s not a bubbly effervescent period. That’s for sure.

Tobias: There’s a comment here from John Battle. This is interesting. I have seen this phenomenon too “walked near the grocery store the other day and noticed a sign out in front for 8 positions they’re hiring for. I doubt we will have a recession while having a labor shortage.”

Bill: Yeah, I mean, maybe.

Jake: Well, what if you can’t move as much product? What if the unit volumes are pinched because of labor shortages?

Bill: It should get pricing power in that environment.

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