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Peloton reveals new measures to cut costs

Peloton Interactive Inc (NASDAQ: PTON) is up 15% on Friday after the connected fitness company made a string of announcements that reiterated its commitment…

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Peloton Interactive Inc (NASDAQ: PTON) is up 15% on Friday after the connected fitness company made a string of announcements that reiterated its commitment to “profitability”.

Peloton is cutting jobs

The Nasdaq-listed firm says it will cut 780 jobs (including in-house support team) and shutter an undisclosed number of retail locations to minimise costs. It also partnered with 3rd party providers to quit last-mile logistics. In a memo to employees, CEO Barry McCarthy wrote:

The shift of our final mile delivery to 3PLs will reduce our per-product delivery costs by up to 50%. These expanded partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates.

Once a pandemic darling, the Peloton stock is currently down more than 65% versus its year-to-date high in early February. Still, Wall Street currently has a consensus “overweight” rating on PTON.

Peloton is raising prices

Store closures, as per Peloton, will start in 2023. On top of that, the fitness equipment manufacturer announced a $500 and $800 increase in the price of its Bike+ and Tread, respectively.

Earlier this year, PTON terminated in-house production and doubled down on its agreement with Taiwan-based Rexon Industrial. CEO McCarthy has been announcing these moves since he joined in February to put the company on the path to profitability.

Peloton Interactive is expected to report its results for the fiscal fourth quarter on August 25th. Consensus is for it to lose 71 cents a share (unchanged from last year) on $722 million in revenue (down 23% year-over-year).  

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Economics

Roubini: The Stagflationary Debt Crisis Is Here

Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to…

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Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. US and global equities are already back in a bear market, and the scale of the crisis that awaits has not even been fully priced in yet.

For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.

The crisis is here.

Tyler Durden Tue, 10/04/2022 - 17:25

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Spread & Containment

A Policy Mistake In The Making

A Policy Mistake In The Making

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Market Instability” Causes BOE To Reverse QT….

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A Policy Mistake In The Making

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Market Instability” Causes BOE To Reverse QT. Is The Fed Next?

“Market instability” remains the most significant risk to central banks globally. Despite their desire to combat surging inflation, market instability is a greater risk to global economies due to the massive amounts of leverage. We previously discussed the importance of controlling instability. To wit:

Interestingly, the Fed is dependent on both market participants and consumers, believing in this idea. With the entirety of the financial ecosystem now more heavily levered than ever due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the most significant risk.

The ‘stability/instability paradox’ assumes that all players are rational, and such rationality implies avoidance of complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’”

So far, the Fed remains fortunate with a low volatility decline in markets. In other words, “market stability” continues to afford the Federal Reserve the operating room needed for the most aggressive rate hiking campaign since the late 70s. Market volatility and credit spreads remain “well contained” despite drastically higher interest rates and an ongoing stock market decline.

However, stable markets can become unstable rapidly when something breaks due to rising rates or volatility. The Bank of England (BOE) is an excellent example of what happens when things go awry. The BOE was forced to start buying bonds to solve a potential crisis with U.K. pension funds. The pension funds receive margin with yields fall and post additional collateral when yields rise. However, when yields spike, as they have recently, the pension funds are hit with “margin calls,” which have the potential to cause market instability. Due to leverage built up through the entire financial system, market instability can spread like a virus through global markets. Such was last seen with the Lehman Crisis in 2008.

Is the BOE’s actions an isolated event? Maybe not. According to Charles Gasparino, the Fed could be next.

The Market Instability Risk

The Federal Reserve is deeply committed to its aggressive campaign to quell surging inflation. As Jerome Powell stated at this year’s Jackson Hole Summit:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

While the Federal Reserve is willing to cause “some pain” to achieve victory, they hope to do so without evoking a recession. Such may be a challenge for two primary reasons:

  1. The Fed remains focused on lagging economic data, such as employment, which are highly subject to future revisions, and;

  2. Changes to monetary policy do not show up in the economy until roughly 9-12 months in the future.

The problem with the Fed’s use of economic data to guide monetary policy decisions was the subject of a St. Louis Federal Reserve research note. To wit:

“In the two quarters leading up to the average recession, all measures were still experiencing varying degrees of positive growth. Meanwhile, immediately following the onset of the average recession, all six indicators declined, which ultimately persisted for the entirety of the recession.”

Such brings us to the second most critical point.

Changes to monetary policy have a 9-12 month lag before showing up in the economy. Therefore, as the Fed is hiking rates based on lagging economic data, the risk of a “policy mistake” becomes heightened. By the time the economic data deteriorates, the preceding rate hikes have yet to impact the economy, which eventually deepens the recession.

As shown, the annual rate of change of the Fed Funds rate is now the most aggressive increase in history. However, every previous rate hiking campaign has led to a recession, bear markets, or economic event.

However, the Federal Reserve does not operate in an economic vacuum. Other factors also contribute to the tightening of monetary policy and the impact on economic growth. When those other factors such as higher interest rates, falling asset prices, or a surging dollar coincide with the Fed’s policy campaign, the risk of “market instability” increases.

A Policy Mistake In The Making

The current bout of inflation is vastly different than that seen in the late 70s.

Milton Friedman once stated corporations don’t cause inflation; governments create inflation by printing money. There was no better example of this than the massive Government interventions in 2020 and 2021 that sent subsequent rounds of checks to households (creating demand) when an economic shutdown constrained supply due to the pandemic.

The following economic illustration shows such taught in every “Econ 101” class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases by providing “stimulus” checks.

The problem for the Fed is the influence of lagging economic data on its decisions. In contrast, forward estimates for inflation are already falling quickly as economic demand falters due to collapsing liquidity.

Historically, the “best cure for high prices is high prices.” In other words, inflation would resolve itself as high costs curtail consumption. However, the Fed is not operating in a vacuum. While the Fed is hiking interest rates to slow economic activity, interest rates and the dollar have also increased dramatically in recent months. Those increases apply further downward economic pressures by increasing costs domestically and globally. Not surprisingly, sharp annual increases in the dollar are coincident with market instability and economic fallout.

Furthermore, the surge in the dollar accompanied the sharpest increase in interest rates in history. Sharp increases in interest rates, particularly in a heavily indebted economy, are problematic as debt servicing requirements and borrowing costs surge. Interest rates alone can destabilize an economy, but when combined with a surging dollar and inflation, the risks of market instability increase markedly.

The Fed Will Blink

After more than 12 years of the most unprecedented monetary policy program in U.S. history, the Federal Reserve has put itself into a poor situation. They risk an inflation spiral if they don’t hike rates to quell inflation. If the Fed hikes rates to kill inflation, the risk of a recession and market instability increases.

As noted at the outset, the behavioral biases of individuals remain the most serious risk facing the Fed. For now, investors have not “hit the big red button,” which gives the Fed breathing room to lift rates. However, the BOE discovered that market instability surfaces quickly when “something breaks.”

When will the Fed find the limits of its monetary interventions? We don’t know, but we suspect they have already passed the point of no return, and history is an excellent guide to the adverse outcomes.

  • In the early ’70s, it was the “Nifty Fifty” stocks,

  • Then Mexican and Argentine bonds a few years after that

  • “Portfolio Insurance” was the “thing” in the mid -80’s

  • Dot.com anything was an excellent investment in 1999

  • Real estate has been a boom/bust cycle roughly every other decade, but 2007 was a doozy.

  • Today, it’s real estate, FAANNGT, debt, credit, private equity, SPACs, IPOs, “Meme” stocks…or rather…” everything.”

The Federal Reserve continues to state its intentions to hike rates and reduce its balance sheet at the fastest pace in history, as inflation is the enemy it must defeat. However, while high inflation is detrimental to economic growth, market instability is far more insidious. Such is why the Federal Reserve rushed to bail out banks in 2008.

Unfortunately, we doubt the Fed has the stomach for “market instability.” As such, we doubt they will hike rates as much as the market currently expects.

Tyler Durden Tue, 10/04/2022 - 16:20

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Economics

How the tech giants are innovating to weather the looming downturn

In the current economic climate, some businesses are building resilience by expanding into new markets

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In uncertain economic times, businesses are trying to become more resilient. photoschmidt / Shutterstock

Rising inflation and looming recessions are squeezing household finances, but businesses also worry about an economic downturn. This is not just because of higher bills, but also because consumers spend less and finance from banks and investors dries up when the economy worsens.

Even strong industries such as technology feel these effects. With the Standard & Poor’s 500 stock market index down 17% in the year to date, and the Nasdaq 100 tech sector index down 33%, market uncertainties can affect a company’s ability or willingness to spend on the type of innovation that can help build strength in advance of the next downturn.

But research into business recoveries following previous financial crises shows that some companies do increase investment in innovation to survive. This makes them more resilient in the face of future downturns.

JP Morgan Chase, the largest bank in America by assets, for example, did relatively well during the last financial crisis. This was partially due to its diversification efforts. It emerged from the 2008 crisis with a “fortress balance sheet” and an improved position versus other banks, which has helped it navigate the more recent global pandemic.

Businesses in sectors such as tech and finance are now attempting to weather the current slump by protecting their businesses with similar strategies. This route has also been proven effective by other studies, which demonstrate that innovative companies achieved higher sales growth rates than non-innovative companies during past recessions. And that is a key determinant for success especially in the long run.

Still, justifying spending on future growth is difficult when times are tough. Recent months have brought job losses, recruitment freezes and delayed plans for tech startups to list themselves on stock exchanges.

Even the giants of the tech space have experienced financial difficulties. Amazon’s pandemic slump continued during the second quarter, Apple’s revenue rose slightly but profits fell and Facebook-owner Meta reported its first-ever quarterly revenue decline.

And yet, some companies are maintaining stronger growth prospects than others. Microsoft expects its revenue and operating income to increase at a double-digit pace over the next 12 months.

Its efforts to prepare for this recession started well before 2022. The company’s focus on newer areas such as cloud computing in recent years is now helping it to manage the impact of factory shutdowns in China and falling demand for PCs that have inevitably hit sales of the Windows operating system software.

Instead, Microsoft is now signing larger deals for its Azure cloud-computing software, moving clients to pricier versions of Office cloud programmes and has switched to a subscription-based model for its software products and services versus its previous one-time buy offering.

What Microsoft has recognised is that cloud computing, along with other deep technological trends such as Web3 – the next generation of the internet – , artificial intelligence and machine learning are here to stay. Being the first to build new capabilities in these areas provides an important long-term advantage in many industries.

Also, the success of tech companies with a single offering has reversed in 2022. From the beginning of 2020 to the end of 2021, many single-idea businesses saw a boost from people being stuck at home for work and play – think remote cycling app Peloton, Zoom, Netflix and trading platform Robinhood.

In the current economic environment, however, investors expect businesses to generate a healthy cash flow and are no longer willing to lavish highly valued companies – known as unicorns in the tech world – with unending capital. This means companies may need to find other ways to pay for expansion and diversification during difficult times.

Future ready businesses

The companies that are ready for the future are the ones that can deliver immediately while also building their next new, innovative product or service. Recent research has shown businesses that are more resilient anticipate, cope with and then adapt to new circumstances.

At the International Institute for Management Development (IMD) in Switzerland, I am part of a group of researchers who have developed an index to rank companies on this ability to adapt and become “future ready”.

We use a score based on data from 24 variables grouped across seven factors: financial fundamentals, investors’ expectations of future growth, business diversity, employee diversity and environmental, social and governance awareness , research and development, early results of innovation efforts, and cash and debt positions. This research shows that future ready companies, whether in finance, technology or some other sectors, exhibit very similar traits.

Financial technology companies (fintech) – start-ups that aim to disrupt industries like financial services – were a darling during the pandemic. PayPal and Block (formerly Square) topped our ranking in the financial service industry in 2021. But this year, they have been replaced at the top by several more traditional industry titans, including financial firms JPMorgan Chase and DBS Bank of Singapore.

As fintech companies have increasingly attempted to bypass traditional financial services providers with digital services, these companies have started to expand their businesses digitally. DBS has developed a marketplaces for selling cars, renting property and getting deals on electricity, mobile, and broadband services. The bank’s latest quarterly earnings remained robust despite weak markets and were its second-highest on record.

Still, growth did not happen across all business segments for DBS in 2022. It’s income from areas such as wealth management and investment banking decreased because these markets are slowing down. However, income from consumer lending, insurance and card fees grew. This shows how a diverse business can remain resilient in today’s business environment.

Smartphone with Amazon Care logo, surrounded by pills.
Amazon has expanded into the healthcare industry in recent years. mundissima / Shutterstock

Amazon is also diversifying into yet another new business, despite current economic uncertainty. It recently announced it has agreed to buy primary healthcare firm One Medical for US$3.9 billion (£3.2 billion). One Medical is a membership-based primary care provider that operates in 16 US markets.

This is not the first time Amazon has dabbled in healthcare. It teamed up with JPMorgan and Berkshire Hathaway four years ago to create Haven, which aimed to provide better healthcare and lower costs for their combined 1.2 million workers. That didn’t work out and was folded in 2021.

Amazon’s other activities in this area include PillPack, an online pharmacy purchased in 2018 for $753 million, and the creation of an in-house telemedicine service for its employees, called Amazon Care. Its latest foray with One Medical is a great example of the long and winding road of trial and error that a company often takes before hitting the jackpot of both making itself more resilient, while also disrupting a US$4 trillion market.

The former CEO of Intel, Andy Grove, wrote in reference to the first dot-com bubble: “We know that a downturn is no time to shy away from strategic spending … There is always too much of yesterday’s technology and never enough of tomorrow’s … Consequently, during this downturn, we did what may seem counterintuitive: we accelerated our capital investments.”

This is how companies invest their way out of downturns. And it’s why these companies often manage to emerge from a crisis stronger than ever.

Howard Yu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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