The Cure for Higher Prices | The Daily Peel | 7/13/22

Silver Banana goes to...

Market Snapshot

Futures slowly moved lower and lower prior to the opening bell on fears of an inbound recession and crappy earnings. The two-year and the five-year yields were both above the ten-year yield, signaling an inversion in the yield curve. Crude lost $5 in the morning only to close just below $95.50, and BTC and ETH both retreated.

Markets moved lower by the end of the day. The Dow lost 0.62%, the Nasdaq was down 0.95%, and the S&P lost 0.92%.

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Let’s get into it.

Banana Bits

Work-life balance, you say? Yeah, WFH is on the decline
Say what you want about the state of America, Prime Day should probably be a national holiday
New to M&A? The best way to learn it is from the best, and we know where to find them
The battered IoT home fitness equipment maker Peloton is planning to outsource all manufacturing
Everyone likes a bull, but small biz owners are fearful for their livelihoods
Starbucks is closing 16 stores across the country, empowering store managers to close restrooms off to the less fortunate because of workers’ complaints

Banana Brain Teaser

Yesterday — Where are the lakes always empty, the mountains always flat, and the rivers always still?

On maps.

Today — For today’s BBT, we will slash 47 bananas off of our Resume Review service for the first 10 correct respondents. Here we go:

What are two things you can’t eat for dinner?

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

Macro Monkey Says

USD-EUR Parity — We put together a piece in the Macro Monkey a few weeks ago about strong dollar economics. I won’t recap it for you because you only have a few minutes to read our rants.

This week the Dollar has achieved parity with the Euro. Or, better put, the Euro has lost value. In all, the funny-colored bills from across the pond gave up approximately a 20-cent advantage in the last year.

I’d argue that now is the time to buy your flights to Europe for next spring and summer. A strong Dollar/weak Euro relationship is amazing for tourists.

But is it good for businesses? A beneficial exchange rate makes it nominally cheaper to import goods from a foreign land.

Interestingly, this trend has been noted amongst French luxury goods. High fashion retailers from the land of the Eiffel Tower have already noticed boosts to their bottom lines as the Euro has lost strength. It turns out that their goods are just that more attractive.

For the US economy, in a macro environment that has proposed a return to America First Manufacturing, a strong Dollar makes it that much harder to invest in a more industrial economy. The incentives just don’t align to force that investment.

Indeed, importing raw materials, process inputs, pre-fabricated components, and assemblies are way more attractive if you can somehow navigate supply chains and get your goods from overseas.

Historical data also shows us that a weak dollar is good for businesses. Companies routinely benefit from a weaker currency, particularly multinationals that do business in many countries but do their accounting primarily in dollars. This translates to the hypothesis that a weak dollar = higher stock prices.

What does a strong dollar mean in the DeFi space? I have a decently off-putting answer for you: I have no clue and couldn’t point you to an expert to satisfy your questions. Given that there’s still debate between asset, inflation hedge, or currency for some of these shitcoins, I think the jury still might be out.

All that I know is that I’m booking my flights this week. See you in Europe, apes.

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What's Ripe

Peloton ($PTON) — Shares of Peloton climbed 3.70% after some significant news yesterday.

In an attempt to optimize its cost structure, $PTON is sending its manufacturing overseas. Instead of making bikes themselves, they’re moving towards a contract manufacturing model. This eliminates a huge chunk of the supply chain headaches for them. Investors ate this news up.

Canoo Inc ($GOEV) — Shares of $GOEV ripped higher in some of the coolest news of the day. These cats are partnering with GM to move towards a Walmart EV delivery fleet.

On the news, shares soared, ending Tuesday up 53.16%.

What's Rotten

ServiceNow ($NOW) — Shares of $NOW took a fat, steaming dump yesterday. Their CEO ran his fat mouth and delivered some obvious news similar to my Macro Monkey for today.

He thinks that tech companies, in general, won’t be able to outrun a strong Dollar. No sh*t, Sherlock. Shares lost 12.74% yesterday.

Atlassian ($TEAM) — Shares of $TEAM shed 8.70% today. Their price target was slashed and their rating cut by Morgan Stanley.

There’s also this general feeling that a recession is looming, the dollar is too strong for companies in the software or tech biz, and businesses are tightening their belts.

Thought Banana

The Cure for Higher Prices — As the cliche goes, the solution to the problem of higher prices is higher prices.

When prices move higher, consumers are less likely to spend more money, which can *eventually* introduce some stability. It’s supply and demand: the consumer eventually doesn’t want to buy the same goods and services while shelling out more of their hard-earned bananas.

There’s a problem with this explanation, though. It takes too damn long.

Remember the peak inflation argument from two months ago? When the markets rejoiced because we thought, wow - inflation is high, but it can’t get any worse!

That wasn’t the case, and potential 50 bps rate hikes turned into potential 75 bps rate hikes. I don’t want to recap the last couple of months’ worth of headline CPI prints because PTSD is real, but prices haven’t stopped kicking us in the wallets.

There’s no magic button to cure the inflation problem. Political pundits always joke about a button in the oval office to just lock prices in at certain levels on certain goods. Frankly, that’s not how reality works in the real world.

I watch a lot of interviews with business leaders, mostly of US Fortune 500 companies. While economists and politicians appear to be hell-bent on killing the inflation beast, CEOs and CFOs appear to be at peace, sanguine even, with the idea that the economy is going to be in an inflationary environment for quite some time.

Reading through the lines: businesses are going to protect their margins. Anyone with pricing power is going to exploit it. On the contrary, if you don’t have pricing power, your margins are going to shrink. This tendency is going to slash bottom lines for companies far and wide.

Wise Investor Says

“Haste in every business brings failures.” — Herodotus, Greek Historian, 484-425 B.C.

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