My fishing pal Sam Rines has spent a lot of this yr pushing a thesis of “Value over Quantity”; I discovered it a compelling narrative, one that matches in properly with an apsect of inflation that I had initially underestimated: “Greedflation.” 

The Value over Quantity thesis is each compelling and underappreciated. I hope you discover his take thought scary…  -Barry

Value over Quantity stays a key theme this earnings season with PG’s earnings report the tip of the iceberg. As a reminder, this has been certainly one of PolyMacro’s themes for the previous yr.

It stays early within the present earnings season. However the persistence of the PoV narrative is changing into virtually comical. The quantity of worth flowing by way of the system to customers is quite obscene. Pushing 10% worth at P&G with comparatively little pushback on volumes (-3%??) makes for a tough argument that there’s a disincentive to proceed discovering that elasticity breaking level. And P&G doesn’t seem to have discovered it but.

And the present S&P World PMI numbers serve to strengthen the PoV narrative. Manufacturing corporations? Pushing worth. Providers corporations? Pushing worth.

And taking all of it collectively – the uptick in demand is inflicting pricing pressures to re-emerge that can’t be ignored. If the S&P PMI report proves to be appropriate (inflation reaccelerating) that’s going to be extremely problematic for threat belongings which have change into extra snug with a “hike to pause” narrative.

Firms are saying costs are going larger, and the surveys are confirming it. It must also not be ignored that this survey is following the banking scare.

If you mix the narrative from P&G (“now we have worth energy and we all know it now”) with the FOMC’s biggest concern (providers inflation), it’s not tough to parse out what occurs subsequent. There’s little in the way in which of aid coming within the pipeline for the patron.

This isn’t the identical financial system because the pre-Covid period. That is the financial system of “pushing worth” and discovering that marginal greenback.

There was – was – a rational argument for a much less aggressive PoV coming by way of the system. Following the SIVB debacle and the following funding pressures seen by some regional banks, the soundness of the monetary sector was in danger. That was speculated to be a headwind to the US financial system and inflationary pressures.

However because it seems that’s merely not what is going on.

There’s a sense that the banking scare solved the inflation drawback. And – whereas there are theoretical causes to imagine it to be the case – it has not confirmed to be true up to now in earnings. United Airways referred to as it out as a “two week” headwind, and there have been scarce others that face customers even acknowledging it.

And Pepsi – the one firm that was not supposed to have the ability to elevate costs due to the direct competitors from KO – is among the most blatant PoV culprits.

The acceleration in pricing throughout – however notably at Pepsi and the like – is astonishing. It’s indicative of the present company mentality. There are only a few probabilities to seek out the elasticity of demand. And – in the meanwhile – there are ample excuses to determine it out.

There’s a battle. There’s a labor scarcity. These are good excuses to boost pricing and never care about quantity. And that’s the world we live in. Quantity doesn’t matter. Value does.

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Samuel Rines is the managing director at Corbu, Samuel Rines is an analyst of all issues financial with a deal with how “the micro meets the the macro”. Sam is the writer of “After Regular” and writes incessantly on the cross-section of the financial system and markets.

Samuel Rines | Managing Director
CORBŪ
samuel.rines@corbu.co