Earnings season angst

Jul 19, 2022

By Kate Davidson and Aubree Eliza Weaver

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Bracing for the storm — It may be (relatively) smooth sailing still, but corporate executives are bracing themselves for an economic storm that could hit in a matter of months.

From our Ben White : "Talk about recession and inflation has been a dominant topic on second-quarter corporate earnings calls that are starting to flood in. Many executives say they have given up trying to figure out whether inflation has peaked and what the Fed is going to do about it and shifted to preparing their businesses for a prolonged period of rising prices and slower growth."

Asutosh Padhi, managing partner overseeing North America at consulting firm McKinsey & Co., says the debate around inflation has started to shift.

"People have stopped trying to forecast, at least clients I speak with, on how much and how long" the run of inflation will last," said Padhi, who sat down with POLITICO editors and reporters last week to discuss the outlook. "It's permanent enough, therefore let's strategize to think what it means to lead through inflation."

More from Ben: "In private conversations, top CEOs grumble about uncertainty over whether inflation might cause the Fed to speed up rate hikes as well as over what many say are fiscal policy missteps in Washington. Surveys show business confidence is sagging, and consumer sentiment is near record lows."

Unpredictability of the moment: "Both investors and executives are wrestling with one of the more complicated – and in many ways unprecedented – moments in American history, where the economy looks simultaneously strong, with solid job growth and consumer spending, and also close to toppling over," Ben writes.

On top of that, it's an environment that few executives have grappled with in their careers.

Consider this: The last time inflation was this high, in 1981, JPMorgan Chase CEO Jamie Dimon — among the longest-serving big-company CEOs — was 25 and still at Harvard Business School.

Jamie Dimon stands in front of a JP Morgan sign.

JPMorgan CEO Jamie Dimon, among the longest-serving big-company CEOs, was still in business school the last time inflation was this high. | Michel Euler, Pool/AP Photo

White House critics: Some financial company CEOs griped that the White House doesn't engage enough with front-line business leaders. "What I would criticize the administration for is they rely on economists rather than those deeply engaged in the economy. And it's been hard or impossible for any economist to get any of this right because of the incredibly unique nature of all these disruptions."

Another CEO of a financial titan agreed: "[T]hat doesn't work when there are so many things going on that are unprecedented."

"The White House has said its top officials meet regularly with corporate executives to address their concerns across the economy."

IT'S TUESDAY — Some news on women in the labor force (or one woman, to be precise): The Blue Angels are adding a female jet pilot to their ranks for the first time. Lt. Amanda Lee joins the squadron this fall.

Have a tip or story idea for the week? Send them our way at kdavidson@politico.com or aweaver@politico.com, or on Twitter @katedavidson and @aubreeeweaver.

Driving the Day

Housing starts and building permits data released at 8:30 a.m. … SEC enforcement director Gurbir Grewal testifies before a House Financial Services subcommittee at 10 a.m. … Senate Banking hearing on racism and discrimination in banking at 10:15 a.m. … Senate Banking hearing on homelessness at 2:30 p.m. … Fed Vice Chair Lael Brainard speaks at Minneapolis Fed conference on the Community Reinvestment Act at 2:35 p.m.

THE NEW BAGEHOT PROJECT — For policymakers in the midst of a market panic, being able to pull programs off the shelf rather than build them from scratch is essential. It's why the most successful efforts to avoid a full-blown financial crisis in the early days of the pandemic were ones that had been tried and tested in 2008, says Andrew Metrick, director of the Yale Program on Financial Stability and a former economist at the Obama Council of Economic Advisers.

But honing those crisis-fighting measures often takes a backseat to efforts to prevent future crises from happening.

That's why researchers at Yale began building a database five years ago, which they'll unveil today, with detailed case studies of hundreds of financial crises around the world, dating back to the mid-1800s. Dubbed the New Bagehot Project , the idea is to provide a platform for policymakers to study up during times of calm and use as a resource when markets go off the rails.

"We try to understand, in those specific interventions, what seemed to work, what was a good idea, what was a bad idea, really down into the nitty-gritty details," Metrick said. "So that the next time this happens, if somebody really understands these details and has studied them before and knows how to access them, we will avoid at least making the same mistakes we made before."

The program also announced today that it has raised another $7.5 million to continue building out the platform over the next five years, with donors including Bloomberg Philanthropies and Dalio Philanthropies. You can catch more details on the project at a 9 a.m. webinar presentation Yale is hosting today.

DON'T MISS — Yale also published a transcript of an interview between senior research associate Steven Kelly and Scott Alvarez, the former Fed general counsel often referred to as the eighth Fed governor because of the power he wielded at the central bank. The conversation delves into the Fed's emergency lending authority. Among the newsy nuggets: Alvarez says those powers don't give the central bank the legal authority to buy stocks.

LIANG: ANY BANK AFFILIATE SHOULD BE ALLOWED TO ISSUE STABLECOINS — Our Victoria Guida: "A top Treasury official on Monday said the department is working with Congress to pass legislation governing stablecoins that would allow any affiliate of a bank to issue the tokens. In remarks at a Financial Services Forum conference, Nellie Liang said any legislation governing stablecoins, whose value is pegged to an underlying asset like the dollar, would be aimed at allowing both banks and nonbanks to issue the tokens."

HOW JOE MANCHIN LEFT A GLOBAL TAX DEAL IN LIMBO — Just last month, Treasury Secretary Janet Yellen privately assured Ireland's finance minister, Paschal Donohoe, that the Biden administration would hold up its end of a global tax agreement brokered by the United States, NYT's Alan Rappeport and Jim Tankersley wrote. "It turns out that Ms. Yellen was overly optimistic."

But, but — Jared Bernstein, a member of the president's Council of Economic Advisers, said at a White House briefing Monday that "any rumors of its demise are hugely premature." (h/t Alan)

WORD OF TRUMP MEDIA DEAL LEAKED MONTHS IN ADVANCE — NYT's Matthew Goldstein: "Employees at the Miami investment firm, Rocket One Capital, had learned of the pending deal over the summer, long before it was announced, according to three people familiar with the firm's internal discussions. Two of the people said that Rocket One officials at the time talked about ways to profit off the soon-to-be-announced transaction with Trump Media & Technology Group by investing in the SPAC, Digital World Acquisition Corporation. … Federal prosecutors and regulators are now investigating the merger."

TREASURY APPROVES $940M IN SMALL BUSINESS CAPITAL FUNDS FOR NINE STATES — Reuters' David Lawder: "The U.S. Treasury Department on Monday said it approved nine state plans for the State Small Business Credit Initiative worth $940 million, bringing total approvals under the COVID-19 recovery venture capital program to $1.5 billion."

HOUSE PREPS FISCAL 2023 MINIBUS — House Democrats have teed up their first fiscal 2023 funding package for floor action this week, approving amendments for debate as the chamber prepares to pass the six-bill bundle, our Jennifer Scholtes reports. The House Rules Committee voted Monday to ready the package, H.R. 8294 (117), which combines half of the 12 annual funding bills, including the Financial Services spending bill.

Fed File

QUARLES: FED SHOULD HAVE HIKED MID-TAPER — Bloomberg's Jonnelle Marte: "The Federal Reserve should have started hiking interest rates before it was done tapering its bond purchases to avoid falling behind on the fight against inflation, Randal Quarles, the Fed's former vice chair for supervision, said … during an interview with the Macro Musings podcast."

TRADER BEHIND HUGE FED FUNDS WAGER BAGS $14M IN FIRST DAY — Bloomberg's Edward Bolingbroke: "A trader is pocketing big profits for breaking with the pack and placing a sizable bet that the Federal Reserve won't increase the size of its interest-rate hikes."

DIVERGING JOBS DATA RAISE QUESTIONS ABOUT LABOR MARKET HEALTH — WSJ's Jeffrey Sparshott: "The U.S. added workers at a strong pace over the past three months. It is also losing workers. … The divergence raises questions about the labor market's overall strength as more signs point to a slowing economy."

Jobs Report

Diane Swonk has joined KPMG as chief economist. Swonk was most recently chief economist at Grant Thornton. She also serves as an adviser to the Fed and its regional banks, and serves on the U.S. Chamber of Commerce economic advisory board.

Fly Around

Rising interest rates are slamming the brakes on a global housing boom that spread far beyond the U.S. during the pandemic, heaping extra pressure on central banks as they try to tame inflation without triggering deep downturns in their economies. — WSJ's Jason Douglas, Paul Vieira and Stephen Wright

A year-long rush to the exits by institutional investors has left the stock market's foundation delicate and given to quick swings. — Bloomberg's Lu Wang

Big U.S. banks say net interest income, a key source of revenue, will continue to grow this year as interest rates rise, helping to buffer their bottom lines against declines in other key areas of the business. — Reuters' David Henry

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