Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
Special Episode: Clean Tech Thrives Under Most Budget Outcomes
8:00Debates in D.C. continue to make headlines, but even with lowered expectations for the Biden agenda, we find a robust set of climate-focused provisions likely to survive the process and benefit the clean tech sector. ----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas, head of U.S. public policy research and municipal strategy for Morgan Stanley.Stephen Byrd And I'm Stephen Byrd, head of Morgan Stanley's North American Research for the Power and Utilities and Clean Energy Industries.Michael Zezas And on this edition of the podcast, we'll be talking about clean energy and the latest developments for the bipartisan infrastructure deal and President Biden's build back better agenda. It's Tuesday, October 26th at 10 a.m. in New York.Michael Zezas So Steven, with the negotiations winding down on the legislation Congress is considering around the president's economic agenda, I wanted to speak with you because you cover a sector, clean tech, that's really at the nexus of many things Congress and the White House are trying to achieve. In particular, even as the size of the economic and climate package has been cut from $6 trillion dollars to $3.5 trillion dollars now, perhaps as low as $1.5 trillion dollars, one constant has been a potentially large amount earmarked for clean energy infrastructure. By our estimate, there could be roughly $500 billion of new money allocated towards this goal. So, last month on the podcast, you outlined eight headline proposals, maybe we could start by updating everyone on those proposals as they stand now in the scaled back version of the bill.Stephen Byrd Yeah, thanks, Mike. There is still a lot of support for clean energy in the draft legislation. Let me walk through the eight elements that investors have been most focused on to give you a sense for just how broad that support is.Stephen Byrd Number one, and the boldest of these proposals is a clean electricity performance program or CEPP. This would essentially push all utilities and load serving entities to adopt clean energy and phase out fossil fuels. Number two is a new tax credit for energy storage and biofuels. Number three is a major extension of tax credits for wind, solar, fuel cells and carbon capture, and the payment for many of these technologies is higher than they've been in the past. Number four is significant incentives for domestic manufacturing of clean energy equipment. Number five is what's often referred to as direct pay for tax credits. This essentially provides owners with the immediate cash benefit of tax losses; that avoids these companies needing to go monetize those tax losses via the tax equity market to the same extent that they do now. Number six is support for nuclear power. There's a production tax credit for nuclear power output. Number seven is a major clean hydrogen tax credit. And number eight is significant capital to reduce the risk of wildfires. So it is very broad, very far reaching. It has impacts across the board.Michael Zezas So, which kinds of companies do you think stand to benefit the most from this funding?Stephen Byrd It's really interesting, quite a few subsectors that I cover would receive significant benefit here, I'll highlight the biggest beneficiary. So first, any company involved in green hydrogen, I see quite a bit of benefit here. The tax credit for green hydrogen is $3 a kilogram. That is a very large amount. And we think will incent customers to adopt green hydrogen more quickly. It will incent developers to build out the infrastructure needed to both produce and distribute green hydrogen. So, a number of companies from fuel cell companies to those involved in the industrial gas business to clean energy developers, I think will see a significant benefit there. Another category would be renewable development companies. So, the tax credit for wind and solar and storage is increased. In the case of storage, this is the first time energy storage would get a tax credit, and this further lowers the cost of clean energy. Another category that could be quite significant is carbon capture and sequestration. This technology would receive a significant benefit in terms of the payment per ton of hydrogen. And we believe in many cases, this is going to be really the amount needed to get essentially over the finish line. That is, to provide enough support for those big carbon capture projects to actually get built, which is really quite exciting. Biofuels gets a big benefit. Anyone who wants nuclear power would receive a significant benefit. And also, companies that are working to reduce the risk of wildfires would receive significant government support. So, you can tell it's just very broad and touches on really every subsector that we cover.Michael Zezas Now, the Clean Electricity Performance Program, or CEPP, will likely end up on the cutting room floor. Why is this program's exclusion not a bigger problem in your mind?Stephen Byrd The CEPP, it's really interesting. It certainly is a very bold effort to reduce fossil fuel usage. What we find here, though, is that all of the other provisions are so significant that we believe the adoption of clean energy will continue at a rapid rate. To give you a sense, in 2020 renewable energy in the United States was about 11 percent of power output. By 2030, we project that that can approach around 40 percent. That is a huge increase in just a decade. That is predominantly driven by economics. The cost of wind, solar and energy storage is dropping so quickly that many customers are adopting clean energy based purely on economic grounds, and the elements of support in this draft legislation would further enhance those economics and push customers in that direction anyway. So, we do see a big shift occurring, with or without the CEPP. Fortunately, there are many other elements of support in this draft legislation that we think is going to really provide a boost to many clean tech technologies, many business models, and we're excited about the growth that that would bring.Michael Zezas What about the other types of companies you cover, utilities? This government investment seems like a step toward developing a very different type of business model for them. What do you think the outlook for the sector is?Stephen Byrd I'd say the government support for clean energy that's in this draft legislation does have a number of benefits for utilities. So, we see in parts of the country a virtuous cycle that's been forming. And let me walk through how this is playing out. The coal power plants in many parts of the U.S. are quite expensive compared to renewable energy. So, for example, in the Midwest, the cash cost to run a coal plant could be three times as high as it costs to build a new wind farm. And so what utilities are doing is they are in a very careful, measured way shutting down coal, replacing that coal typically with a combination of wind and solar and energy storage. And typically, customer bills are not going up as a result, because of the benefit from avoiding the cost of running those coal plants. That virtuous cycle is resulting in better earnings per share growth. Now, with the government support that we're seeing in this draft legislation, that shift will accelerate. We will see more transmission spending, for example, more energy storage spending. It will boost the economics of wind and solar, which is fantastic. Also, in terms of risk mitigation, the capital that's in the bill that would help with dealing with the physical damage from climate change, such as wildfires, is another area of benefit. The cost from climate change to our sector is rising. And so government support there will help essentially defray a cost that's becoming quite significant for some of our utilities. So, you know, I think you're right to point this out. The utility sector is quite a big beneficiary here. And, you know, many of our best-in-class utilities can achieve, we think 7%, sometimes 8% EPS growth over a very long time period. By very long, I mean, a multi-decade time period. That to us is quite exciting because risk adjusted, that growth is quite excellent. For many of our utilities, the risk to achieve that is fairly low because the economics of what they're doing is so clear and so compelling. So, we are excited about the impacts to the utility sector.Michael Zezas Steven, thanks for taking the time to talk.Stephen Byrd Great talking with you, Michael.Michael Zezas As a reminder, if you enjoy Thoughts on the Market, please take a moment to review us on the Apple Podcasts app. It helps more people find the show.
Mike Wilson: An Icy Winter for Investors?
4:00The forecast for inflation still appears hot for both consumers and corporates, but when it comes earnings and economic growth, the outlook looks a bit chilly.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, chief investment officer and chief U.S. equity strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 25th at 11:30 a.m. in New York. So, let's get after it.Over the past few weeks, we've discussed the increasing probability for a colder winter, but a later start than previously expected. In other words, our "fire and ice" narrative remains very much intact, but timing is a bit more uncertain for the ice portion. Having said that, with inflation running hot in both consumer and corporate channels, the Fed is expected to formally announce its tapering schedule at next week's meeting with perhaps a more hawkish tone to convince markets they are on the job. In other words, the fire portion of our narrative—higher rates driven by a less accommodative fed spurring multiple compression—is very much in gear and a focus for investors.With so much attention on rising inflation now from both investors and the Fed, we shift our attention to the ice portion of our narrative - meaning the ongoing macro growth slowdown and when we can expect it to bottom and reverse course. As regular listeners know, we've been expecting a material slowdown in both economic and earnings growth amid a mid-cycle transition. The good news is, so does the consensus, with third quarter economic growth forecast coming down sharply. While consensus’ fourth quarter GDP forecasts have declined too, it expects growth to reaccelerate from here. This is due to the fact that most have blamed the Delta variant, China's crackdown on real estate or power outages around the world for the economic disappointment in third quarter. The assumption is that all three will get better as we move into year end and 2022.Needless to say, we're not so sure about that assumption, mainly because we think the more important driver of the slowdown has been the mid-cycle transition to slowing growth from post-recession peak growth, an adjustment that's not finished. In our view, would be intellectually inconsistent to think that the mid-cycle transition slowdown won't be worse than normal given the greater than normal amplitude of this entire economic cycle so far. We can't help but recall our position over a year ago when we argued for much faster growth driven by greater operating leverage than normal for earnings. This was directly a result of the record fiscal stimulus that effectively served as government subsidies for corporations. Today, we simply find ourselves in the exact opposite side of the argument relative to consensus, but for the same reasons. Since we believe consensus missed that insight last year, it seems plausible it could be missing it this time on the other side.In short, we think the gross slowdown will be worse and last longer than expected as the payback in demand arrives early next year with a sharp year over year decline in personal disposable income. While many have argued the large increase in personal savings will allow consumption to remain well above trend, it looks to us like personal savings have already been depleted to pre-COVID levels. The run up in stock, real estate and crypto asset prices do provide an additional buffer to savings, however, much of that wealth is concentrated in the upper quartile of the population. At the lower end of the income spectrum, consumer confidence has fallen sharply the past few months, and it's not just due to the Delta variant. Instead, surveys suggest many consumers are worried again about their finances, with inflation increasing at double digit percentages in necessities like food, energy, shelter and health care.Bottom line, the fundamental picture for stocks is deteriorating as the Fed begins to tighten monetary policy and growth slows further into next year. However, asset prices remain elevated as the upper income cohort of retail investors continues to plow money into these same investments. With seasonal trends positive this time of year, institutional investors are forced to chase prices higher. If our analysis is correct, we think this can continue into Thanksgiving, but not much longer. Manage your risk accordingly.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
Andrew Sheets: Why Lower Oil Futures Matter for the Shape of the Market
4:03The market’s long term trajectory for oil suggests a decline in prices, but the 'why' matters, and the transition toward more green energy may imply a different outcome.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, chief cross-asset strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, October 22nd at 2:00 p.m. in London. The price of energy has surged this year. While the S&P 500 is up an impressive 21% year to date, that pales in comparison to a broad index of energy commodities - things like oil and natural gas - which are up almost 80%. I wanted to talk today about some of the broader implications of this move and importantly, the somewhat surprising message from future price expectations. Let's actually start with those expectations. While the price for oil is up sharply this year, future prices currently imply a pretty significant decline in the price of oil over the next one, two and three years. Buying a barrel of oil costs about $84 today. But if you want to buy a barrel for delivery in a year's time, the price is $76, a full 10% lower. And for those of you looking ahead to Christmas 2023, that same barrel of oil costs $70, 17% below current levels. Those implied declines in the future price of oil are historically large. If current oil prices simply move sideways over the next year, buying oil 10% below current levels in a year's time will return, well, 10%. That's more than double the return for U.S. high yield bonds, and one reason commodity investors care so much about the shape of these prices over time. Indeed, it's a way for investors to make a pretty healthy return, in this case 10%, in a scenario where the day-to-day price of oil doesn't really move. This dynamic that we see today, where future oil prices are lower than current levels, is called 'backwardation'. And while it matters for commodity investors, it can also have broader implications for how we interpret the economic outlook. When oil prices are rising like they are today, one of the single biggest economic questions is whether this rise is mostly coming from increased demand or more limited oil supply. The price impact may be the same between these two dynamics, but the underlying drivers are very, very different. According to the work by my colleague Chetan Ahya, Morgan Stanley's chief Asia economist, higher demand suggests underlying activity is strengthening and higher oil prices are easier to afford. Limited oil supply, in contrast, works more like a tax and can be more economically disruptive. So how do we know which one of these it is? Well, there are a lot of things that investors can look at, but the shape of oil prices over time, what we've just been discussing, can be a really useful way to quantify this question. Short term oil prices, we'd argue, tend to be influenced more heavily by the demand for oil. If you're going to go on a long road trip, you're going to fill up at the pump today. Longer term oil prices, in contrast, tend to be more linked to supply, as the producers of that oil really do care about selling it over the next one, two, three and five years. So, if demand is strong, short-term prices should be biased higher. And if supply is more plentiful, longer-term prices tend to be biased lower. That downward shape of prices over time, that 'backwardation', is exactly what we were discussing earlier, and that's what we see today. That, in turn, suggests that the current oil price strength is being driven more by demand than supply. I'll close, however, with the idea that the market might have this long-term trajectory of oil prices wrong. As my colleague Martijn Rats, Morgan Stanley's chief commodity strategist, has recently argued, an expectation of a green transition towards renewable energy has caused investment in new oil drilling to plummet. That should mean less supply over time, challenging the market's current assumption that oil prices will decline significantly over the next several years. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.
Special Episode: The Promise of Green Hydrogen
9:50Sustainably generated hydrogen has great promise as a fuel where electricity alone won’t suffice, but the road to its broad adoption remains complicated for investors to navigate. ----- Transcript -----Jessica Alsford Welcome to Thoughts on the Market. I'm Jessica Alsford, Global Head of Sustainability Research at Morgan Stanley. Ed Stanley And I'm Ed Stanley, Head of Thematic Research at Morgan Stanley. Jessica Alsford And today on the podcast, we're going to be talking about the investment implications of hydrogen. It's Thursday, October the 21st at 3:00 p.m. in London. Jessica Alsford So Ed, hydrogen has been something we've been looking at for some time, given its potential role in a low carbon economy. So why is it that the debates around green hydrogen seem to have intensified over the last 6 to 12 months? Ed Stanley Great question. Massive, centralized support and road mapping in the form of the European Hydrogen Strategy and the US Infrastructure Bill simultaneously thrust hydrogen to center stage around the world. Ed Stanley But the froth has come and gone to some extent from most of these hydrogen names. And so now it's a really interesting time to be relooking at the space from a stock picking perspective. The number of dedicated hydrogen thematic funds is really beginning to accelerate as well. We've reached 10 hydrogen funds in Europe from only 1 two years ago, and many of the pure play equities that these funds are or will be buying are pretty illiquid, which we expect will lead to further volatility in due course for single name equities. The electrolyzer stocks are up to two thirds of their highs, so the reason why now is that as the market froth subsides, we're beginning to see these thematic alpha opportunities all the way along the supply chain in hydrogen. Jessica Alsford Now, projections by the Hydrogen Council suggest that green hydrogen could enable a global emissions reduction of around 6 gigatons by 2050 - so almost 10% of current global emissions. It also has the potential for unlocking something like 30 million jobs and $2.5T of associated revenues. And yet, despite this huge potential, it does feel that we're still at a very early stage. So why is that? What are some of the challenges around the wider adoption of green hydrogen? Ed Stanley That's right, and I don't think you can fault the ambition. The Hydrogen Council, as you mentioned, is over 200 member companies and they have a clearly defined goal and they're pulling in the same direction. And increasingly, governments are also walking the talk. I guess, though, when you ask our analysts what the greatest hindrances are, if I had to boil them down to two factors, it would be these: first, the lack of standards, and that really means we have dual investment and thus potentially wasted investment going on as each stakeholder has their own vested interests on whether to use PEM or alkaline electrolysis, for example; or whether to retrofit existing pipe networks or to rebuild from scratch. So, a lack of agreement on these dichotomies is a risk of diluting the early stage growth and investment. Ed Stanley And the second is much simpler, actually, it’s economics. Costs for renewable energy, predominantly wind and solar, that feed these very power hungry upstream electrolyzers have fallen substantially in cost - over 90% decline in 10 years. But it still requires cost per unit breakthroughs across the rest of the supply chain; from ammonia, for example, or redesigning jet engines to make it viable, particularly for publicly listed companies to make the necessary investments. Ultimately, we should probably expect very generous subsidies for some time if we are to hit that 6 gigatons value, you mentioned. Jessica Alsford So there are challenges, but also clearly opportunities as well. Where do you think the most value can be created and how should investors participate in this market? Ed Stanley Again, our analysts obviously have their own single stock preferences, of course. But if I were to take a step back and look at the supply chain holistically, it's a question of relative risk reward. For example, upstream, some electrolyzer names have over 100% upside in our view, but that has to be taken in the context of an ongoing debate, as I mentioned, into which electrolyzer technology will become the industry standard, and so at risk potentially putting all your eggs in one basket. At the other end of the spectrum, downstream, rail and aviation has potential, but with extremely long time horizons, which risk compounding forecasting errors several decades away. Ed Stanley So in my mind, some of the best plays are midstream - the chemical names, for example, with best-in-class green ammonia platforms. And you can see that in their excellent intellectual property positioning relative to the rest of the supply chain. Other subsectors include the inspection companies, which will benefit to the tune of 0.5% to 1% of all global hydrogen capex being spent on safety testing. And that's irrespective of which technology or country is the first to roll out. And we don't believe some of those fundamentals are being priced in. So given there's a still very high degree of uncertainty as this technology rolls out, our preference is for midstream and particularly technology and country agnostic companies. Ed Stanley On that note, hydrogen is obviously only one of a handful of decarbonization tools. So, what else do you think has promise in the decarbonization outlook? Jessica Alsford Yes, you're right, Ed. And if we are to achieve a net zero scenario by 2050 and achieve the Paris Agreement, then we need to deploy a range of different strategies. Now one of them may be renewables from a power generation perspective. Solar wind is already economically viable, and we expect to see a huge amount of roll out of renewable power capacity over the coming decades. Elsewhere, we need to see electrification of certain types of energy. The great example being on the auto side as you see movement from the combustion engine to electric vehicles. And though again, although adoption rates are still very low, the stimulus has been set. The policy is outlined to really incentivize this drive from the combustion engine to an EV. So, we're very confident it is only a matter of time before you see that greater adoption of EVs globally. Jessica Alsford Then we come on to some of the more innovative technologies. I think CCS - carbon capture and storage - is a great example of this. Just a few years ago, it was really viewed quite negatively as essentially CCS allows you to still use fossil fuels, whether that be in power generation or in industrial processes like steel and cement manufacturing. But I think now there is a greater acceptance that in some situations we're not going to be completely able to remove all fossil fuels, and so by using CCS technology, you can allow coal/gas to be used, but without emissions as a result of that. And so, I do think that CCS is a really interesting technology to also watch alongside hydrogen as an enabler of a low carbon economy. Ed Stanley That's very clear. And I guess the timing is very opportune to speak to you today because COP26 is approaching. And so, I'm keen to find out from you, what do you think we will see from the world leaders or even corporates in terms of decarbonization pledges? And what impact could that have ultimately on the market for hydrogen longer term? Jessica Alsford Absolutely. So COP26 starts on the 31st of October in Glasgow. It has been delayed since last year because of the pandemic. Two things that I'd particularly point to is, first of all, we would expect many world leaders to step up and announce more ambitious carbon reduction targets. Not everyone currently has a 2050 net zero ambition. And we also now need to see that shorter term trajectory about how are we're going to get there at the right pace of decarbonization as well. So, 2030 reduction targets is also something that we'll be looking for at COP. Jessica Alsford The second area I'd point to is then in terms of global carbon markets. So, the EU has been leading the way for a long time in terms of establishing a very broad and effective carbon market through the Emission Trading Scheme. However, in order to really, again accelerate the transition to a low carbon economy, we need to see a broader adoption of higher carbon taxes, higher carbon prices globally. And why is this important for hydrogen? Well, one of the ways I think that you can really incentivize adoption of hydrogen is to make the higher carbon incumbent alternatives more expensive, and you can do that by pricing carbon at a much higher level. Jessica Alsford So I think the combination of more ambitious carbon reduction targets and more acceptance of the need for higher carbon taxes could be two positive catalysts for hydrogen at COP26. Jessica Alsford Ed, thanks for taking the time to talk today. Ed Stanley Great speaking with you, Jess. Jessica Alsford As a reminder, if you enjoy Thoughts on the Market, please do take a moment to rate and reviews on the Apple Podcasts app. It helps more people to find the show.
Michael Zezas: Infrastructure SuperCycle on the Horizon?
2:58The bipartisan infrastructure and ‘Build Back Better’ plans remain in legislative limbo, but what could their passage mean for markets? ----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, October 20th at 11:00 a.m. in New York. We spend a lot of time here thinking through exactly how and when Congress will manage to raise the debt ceiling, keep the government open and pass a multitrillion dollar package of spending offset by tax hikes. To be clear, we continue to think it will do all of the above. But for this week, let's deal with DC's policy choices in classic Morgan Stanley Research fashion... by focusing on tangible market impacts. Let's start with new government spending, which can be a positive catalyst in equity sectors such as construction and clean tech: in our view, a conservative estimate is that Congress approves $2.5T over 10 years between both the bipartisan infrastructure and build back better plans. While that amount might fall short of the numbers you might have heard thrown around, it should get your attention. For example, the bipartisan infrastructure framework, which would make up about $500B of this total, would nearly double the US's current baseline infrastructure spend. Our colleagues think this would catalyze an infrastructure ‘supercycle’ where factors like a surge in cement demand could lead to a positive rerating of stocks in the construction sector. Additionally, the framework could include $500B in new spending and tax credits aimed at clean energy production. That means a substantial ramp in demand for clean tech companies, which our colleague Steven Byrd sees as a clear bullish catalyst for that sector. As for corporate taxes - yes, DC is likely to push them higher. Yet for now, we don't see this as more than a near-term challenge that shouldn't get in the way of the positive medium-term outcomes for the equity sectors we've highlighted. As Mike Wilson and the Equity Strategy Team have argued, enacting higher taxes could bring down forward guidance, something investors may not yet be pricing in, given current valuations. In the near term, that may prompt U.S. equity indices to price in a greater chance of a sustained economic slowdown. But such weakness would likely be more of a correction than a bear market signal, as we expect the total fiscal package would ultimately be GDP supportive. Likely incorporating more spending than taxes, our economists expect it to boost net aggregate demand and support the view that the US can continue to grow at a brisk pace in 2022. So, of course, we'll be tracking these policy paths into year end, but it's important to keep an eye on why they matter from a market perspective. We'll stay focused on what's going on, and what you can do about it in your portfolio. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.
Special Episode: The Podcasting Industry Comes Into Its Own
12:48Moves toward scale and consolidation show promise for what is already a burgeoning content industry. ----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research. Ben Swinburne And I'm Ben Swinburne, Equity Analyst covering Media, Entertainment, Advertising and the cable/satellite industries. Andrew Sheets And today on the podcast will be going a bit meta, as the kids say, as we talk about some interesting upside for podcasting and advertising. It's Tuesday, October 19th at 2pm in London. Ben Swinburne [00:00:25] And 9am in New York. Andrew Sheets So, Ben, you recently wrote a research report titled, a bit surprisingly, “Mic'd Up. Is Podcasting the Next Big Thing?” I say surprisingly, because podcasting has been around for quite a while now. So why do you think that it's now where it's actually going to be it's time to shine? Ben Swinburne You're right. Podcasting has been around probably for at least 15 years, but what we're really seeing is a significant increase in engagement by consumers, investment by platforms and content creators jumping into this space. We think we're at a point now where the business model, at least from an advertiser ROI point of view, has been proven out. You know, advertisers are paying $20-$25 CPMs, or cost per thousand listeners, to access a podcast audience, particularly through host-read ads, that's as high as linear television. And that just shows you that advertising on podcasting works for advertisers. So, what the industry needs from here is significant growth in adoption, which we believe is going to come given the investment we're seeing in content. Wrapping it all up, we think the industry can grow at a 30% CAGR through 2025 and become a $6-7 billion market globally, which is meaningful for the companies that are in this space. Andrew Sheets So to kind of put those numbers in context, if I have a podcast that has 4,000 regular listeners, you know, if I'm getting paid by an advertiser $25 per thousand, that'd be about $100 for that $4,000 advertising block. Is that a good way to kind of think about those numbers. Ben Swinburne Per spot, yes. And then obviously, it's a question for you on your podcast, how many ads you want to run per hour. Andrew Sheets Podcasting is now charging, was it similar advertising rates as local television? Did I hear that correctly? Ben Swinburne You did. You did. Andrew Sheets Would you say though, investors believe in that? Because you cover a wide range of media companies in your equity coverage here at Morgan Stanley, how is the market pricing that advertising opportunity? And do you think the market believes that podcasting can be this major advertising vehicle? Ben Swinburne I think the market's skeptical, frankly. Part of that is because as we talked about earlier, podcasting is not new as a media. But also because even at 15-years-old with a lot of excitement around it, it's a very small market. You know, estimates range from a billion dollars to maybe $2 billion in 2020 of global ad revenue on podcasting. That is a low single digit percentage of the global ad market. it's just been a very slow rise in monetization. And I think the market is skeptical that it can really break out from here. Andrew Sheets So I imagine another area where the market might be skeptical is a lot of people have been stuck inside as a result of the pandemic. They've been listening to more podcasts. But as things normalize, maybe that listening trend will shift. Can you just kind of give us some numbers around, what percentage of the U.S. population listens to podcasts and do you think that that engagement will decline or rise as we look ahead over the next couple of years? Ben Swinburne In 2020, the reach of podcasting in the U.S. accelerated to 25% of the population. If we think about that level of adoption, in a lot of other instances, Andrew, that's a part of the S curve where we start to really see the adoption rate accelerate. In other words, you're going from sort of early adopter to mass market. So that's our expectation here. We actually saw that in streaming music years ago. So, we're optimistic that we're going to see that from here. And frankly, when I look at the investment, the amount of money companies are pouring into content and monetization technology, I'd be really surprised if we don't see it accelerate. The other thing I would add is that even though podcasts consumption held up well in 2020, it was still negatively impacted by the pandemic. People were not commuting, not going to the gym, not going to work. All of that reduced the amount of time people were consuming audio content on their phones. So that is still the primary use case for all audio consumption but including podcasts. So we have started to see already improving data in the last several months on audio consumption as people have started to go back to work and go to school and hit the gym again. Andrew Sheets So then, Ben, can you talk a little bit more about what's been happening on the merger and acquisition front in podcasting? And how this media is getting reshaped by some of the changes that we've seen? Ben Swinburne Absolutely. Yeah, it's a very active market. You can sort of break down the M&A into two broad areas: content and sort of advertising technology. If you think about the media business, in the sort of the pre-internet days, you had media producers and media distributors, it's a pretty simple value chain. The internet, by its nature, but also because it's much less regulated, has created an environment for more vertical integration. Podcasting is rapidly moving in that direction, with distributors buying up podcast IP and creators rapidly. Now, that can probably only go so far because, like music, podcasting is a business built on ubiquitous distribution. So, where we've seen exclusives, they just haven't really worked, and that makes sense from an advertising monetization point of view. On the monetization front, there is a lot of work left to do. I mean, we're still looking at a very, while attractive media for advertisers, pretty old school in the way the ad products actually work. Now this is starting to change. We're seeing more things like advanced measurement, attribution, programmatic buying-- all wonky things us media people like to talk about. But the most popular ad format in podcasting is host-read ads. It's Bill Simmons reading a promo code to go to a website and buy a product. You know, this is like Howard Stern 25 years ago. So, from that point of view, it's still early days. Andrew Sheets So, to kind of put some numbers around that, I mean, could you give us a sense of how much is currently being spent on podcast advertising versus other types of advertising that are out there? Ben Swinburne Oh, yeah, absolutely. I mean, the video market is $100 billion in the United States. Between linear television and streaming video, the radio, traditional radio market in the United States is sort of $15 to $18 billion. And as I mentioned before, podcasting, we think will probably be around 2 billion this year. Andrew Sheets Got it. So, it's still even as ubiquitous as it's starting to seem. It's still very small, still very nascent relative to some of these much bigger areas where companies are already spending a whole lot of money. Ben Swinburne That's right. Andrew Sheets So, Ben, you cover a large number of the largest entertainment and media companies. What do you think is going to be their strategy for podcasting going forward? And do you see this as more of a US opportunity, a global opportunity or something in the middle? Ben Swinburne We think the strategy going forward is primarily one that monetizes podcasting through advertising. And to be successful in that, you're going to need a significant content offering. But also, importantly, a scaled and advanced technology platform. And so, we're seeing companies that are going after this opportunity really invest aggressively in both. In terms of U.S. versus global, we definitely see it as a global opportunity. However, if we think about the TAM for podcast advertising, radio is the obvious one. Radio is very much a U.S. marketplace. A lot of radio outside the U.S., think of BBC One in the U.K., is in fact ad free. So, the global radio advertising opportunity skews very much U.S. That's why it's so important that podcasting can attract digital advertisers or buyers of digital advertising - those that might buy search or display ads - that opens up podcasting to a much larger opportunity and global. Andrew Sheets And Ben, I was hoping you could also talk a little bit about what are the demographics of podcast listeners and how does that impact the advertising landscape? Ben Swinburne So as you can probably guess, particularly since we're in the early adopter phase of podcasting, it does skew, sort of technology savvy, educated and often higher income from an audience point of view. That's part of why advertisers are so attracted to the space and why the ad rates are so high. Clearly, the long-term bull case is widespread adoption now as reach goes from 25% of the population to hopefully 50% and 75%, by definition the audience is going to look much more representative of the overall population, which will bring with it, you know, lower income or advertising targets that have lower propensity to spend. So that will get reflected in ad rates and probably different kinds of ad products. But ultimately, even if that puts some downward pressure on ad rates, we think the growth in engagement will more than offset that, creating a nice growth story over time. Andrew Sheets Ben, I thought you made a really interesting point about just the types of advertising that are most effective here, you know, often, host read, often funny are very engaging. I mean, is there a good precedent in advertising for something that feels that personal? And, is there any other, implications for that just about how advertising feels and sounds, more broadly going forward? Ben Swinburne It's a great point, and it's a good news, bad news situation, I think, for the industry. The good news is that host read ads are incredibly effective. The demand outstrips supply, frankly, and the more widespread, highly popular podcasts that can be developed, the more opportunities there will be for monetization. The bad news is that to really scale the business host read ads are just it's hard to scale them. You can only have so many in an hour. And if you want to start really doing sophisticated, digitally driven ad buys and ad provisioning, you've got to automate all that. And doing host read ads in an automated fashion across the long tail of millions of podcasts really can't be done. The industry now is working on lots of technology and ad products to try to create an ad product or an ad unit that is hopefully not as effective as host read, but more effective than traditional radio. Andrew Sheets So, Ben as somebody whose father back in the day used to sell advertising for a radio station. What do you think are the questions that companies who want to advertise in a podcast should be asking to try to maximize that effectiveness? Ben Swinburne Well, a lot of the measurement in attribution technology today remains pretty early stage, frankly. Most of the podcast business historically has been measured by downloads. But just because you download a podcast doesn't mean you listen to it. And frankly, nobody really downloads podcasts anymore because they're all streamed. That just gives you an example of a key area like measurement that needs to evolve. You can go even beyond that when you think about multichannel attribution. For example, let's say I listen to a podcast ad and then I go online and I buy that product. How does the advertiser know that I went to buy that product because I heard that ad? Those things are all happening at a pretty sophisticated level online in general today. But podcasting is not plugged into that ecosystem in a real way yet. Andrew Sheets And finally, Ben, you know, based on your work and your forecasts, what do you think the next five years hold for the podcasting industry? Ben Swinburne We expect to see continued substantial investment in podcasting content, monetization technology and also personalization and curation. I think one of the challenges that consumers have, as I mentioned earlier is there's well over two million podcasts in a lot of these major platforms, so figuring out what to listen to is challenging. Sampling a song which might be 3 or 4 minutes long is a commitment. Sampling a 30/45 minute podcast is a whole different situation. And so those companies that can help consumers find what they want to listen to, that could be a huge advantage in the marketplace. And I'd say, much like we've seen in streaming video, we think we'll see an explosion of compelling podcast content across genres and across countries. There is so much talent out there which, when combined with the global growth and connectivity and connected devices, means we will all be plugged in all of the time, hopefully feeding our minds and hearts with information and stories from around the world. Andrew Sheets Fantastic. I think that's a great place to leave it. Ben, great chatting with you. Ben Swinburne Great speaking with you, Andrew. Andrew Sheets As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.
Mike Wilson: Retail Investors Continue to Support Valuations
3:58With supply chain pressures and rising costs still weighing on markets, retail investors continue to see long term value.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, chief investment officer and chief U.S. equity strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 18th at 11:30 a.m. in New York. So let's get after it. Last week, we noted it may take a bit longer for the Ice portion of our Fire and Ice narrative to play out. More specifically, we cited the potential for markets to look through the near-term supply bottlenecks and shortages as temporary. With the Biden administration directing substantial resources toward addressing the problem, that conclusion is even easier to make. Second, the budget reconciliation process has been pushed out and is unlikely to be resolved until later this year. This delays the negative earnings revisions from higher taxes we think have yet to be incorporated into 2022 consensus forecasts. In short, while earnings revisions' breadth is falling from extreme levels, it isn't falling fast enough to cause a deeper correction in the broader index, at least not yet. Perhaps most importantly for the broader index is the fact that retail continues to be a major buyer of the dip. We highlighted a few weeks ago that the correction in September was taking longer to recover than the prior dips this year. In fact, both the primary uptrend and the 50-day moving average had finally been breached on significant volume. Could it be that the retail investor had finally run out of dry powder or willingness to buy the dip? Fast forward to today, and the answer to that question is a definitive “no”. Instead, our data show retail investors remain steadfast in their commitment to buying equities, particularly on down days. Until these flows subside or reverse, the index will remain supported even as the fundamental picture deteriorates. As already noted, earnings revision breadth is rolling over. Some of this is due to higher cost and supply shortages, which investors seem increasingly willing to look through as temporary. We remain more skeptical as the data also supports sustained supply chain pressures, rising costs and the potential for weaker demand than anticipated next year. Last week, our economics team published its latest Business Conditions Index survey, which showed further material deterioration. While most of this decline is due to supply issues, rather than demand, we're not sure it will matter that much in the end if earnings estimates have to come down one way or the other. As part of our mid-cycle transition call, we have been expecting business confidence to cool. We think it's important to note that our survey suggests it's not just manufacturing businesses that are struggling with cost and supply issues. Service businesses are also showing material deterioration in confidence to manage these pressures. Whether and when it proves to be a concern for equity markets remains unknown, but we think it will matter between now and January. Until proven one way or the other, the seasonal path of least resistance for equity markets is flat to higher. Similar to our Business Conditions Index, consumer confidence surveys have also fallen sharply. Like business managers, the consumer appears to be more concerned with rising costs rather than income. Yet, the retail investor continues to aggressively buy the dip. This jibes with the conclusion other investors are making -- that demand remains robust, and we just need to get through these supply bottlenecks and price spikes. One other possible explanation is that individuals are worried about inflation for the first time in decades, and they know it's not temporary. Stocks offer protection against that rise to some degree, and so we may be finally witnessing the great rotation from bonds to stocks that has been predicted for years. While we have some sympathy for that view in the longer term, the near-term remains challenged by the deteriorating fundamentals in our view. In short, we'd like to see both business and consumer confidence improve before signaling the all clear on supply and demand trends. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.
Andrew Sheets: Will Cash Stay On The Sidelines?
3:15Consumer saving is up, way up. But whether investors put this money into the markets may have more to do with how much wealth is already in play.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, October 15th at 2:00 p.m. in London. Over the course of the pandemic, strong government support and some of the difficulties of spending money as usual, led to a large surge in consumer savings. This was a global trend, seen from the U.S. to Europe to China. For markets, one of the most bullish arguments out there is that these savings can still come into the market. In sports terms, there's cash sitting on the sidelines waiting to come into the game. But we think this story is more complicated. Yes, there are a lot of savings out there by almost every measure that we look at. But to continue with the analogy, while investors may have cash sitting on the sidelines, they also have a lot of wealth already on the field. To put some numbers around this, the amount of cash currently held in US Money Market funds is about 20% of gross domestic product relative to a 30-year average of 15%. But total household wealth, that is the value of all the homes, stocks, bonds, businesses and stamp collections, is now about 590% of GDP, 170pp higher than its average over that same 30-year period. So, yes, overall Americans are holding more cash than normal, but they also have more, a lot more, of everything else. Meanwhile, that everything else is riskier. Stocks, which generally represent the most volatile asset that most households hold has been a growing share of this overall wealth. U.S. households now hold more stocks relative to their other assets than at any time in history. It's possible that people decide to put more money into the market, but many may decide that they already have a reasonable amount of exposure as it is. Indeed, this echoes the comments of someone with real world insights into this dynamic: Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Recently on this podcast, Lisa mentioned similar dynamics within the over $4T of assets managed by Morgan Stanley's Wealth Management Group - cash holdings were still ample, but exposure to the equity market for investors was historically high, as market gains have boosted the value of these stock holdings. For investors, we think this has two important implications. First, we think the figures above suggest that many investors actually do have quite a bit of exposure to the market already relative to history. That exposure could rise But while it's always more fun to imagine a market that has to rise because everybody needs to be more invested, we just don't think that that is what the household data really suggests. Second, that high exposure means that fundamentals, rather than more risk taking, may be more important to getting the market to move higher. Strong earnings growth has been an under-appreciated boost to markets this year and will be important for further strength. Third quarter earnings season, which is now beginning, will be an especially important element to watch around the world. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you.
Special Episode: The Two-Pillar Tax Overhaul
4:43Last week, over 130 countries announced an agreement to overhaul international tax rules. The changes may seem high-level, but should investors pay closer attention?----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Todd Castagno And I'm Todd Castagno, Head of Global Valuation, Accounting and Tax within Morgan Stanley Research. Michael Zezas And on this edition of the podcast, we'll be talking about recent developments around a major overhaul of international tax rules and what it means for investors. It's Thursday, October 14th at 10 a.m. in New York. Michael Zezas So, Todd, I really wanted to talk with you after last week's announcement by more than 130 countries about an agreement to undertake a major overhaul of international tax rules. Central to the agreement appears to be a change in how companies are taxed and a new 15% global minimum tax rate. So, investors might see a headline like this and think it's one of those things that sounds important, but maybe a bit too high level to matter. But you think investors should pay attention to this. Todd Castagno Right, it's big news. There are really two key motives driving what is referred to as a two-pillar global tax agreement, and this motivation provides really important context. So let's start with pillar one. There's a growing desire from certain countries to change who gets to tax the largest and most profitable corporates. So Michael, in a modern marketplace, companies can engage and transact with consumers in countries where they may not have much or any physical presence. So the first pillar of this agreement proposes to reallocate profits of the largest and most profitable companies to where they transact with customers. Then there is desire to stop what's often referred to as the 'race to zero' in terms of corporate tax rates. So under pillar two of the agreement, countries will need to adopt a 15% minimum tax rate structure on corporate foreign income. So why should investors care? A few reasons: Not to overstate the obvious, but tax rates are likely going up for multinationals if this is implemented. There are also important geopolitical dynamics. These changes have the potential to significantly change where corporates invest. And countries have been increasingly imposing unilateral taxes, particularly on digital services. Those taxes are complicating trade relationships. Pillar one seeks to remove those taxes so trade dynamics may actually improve. Michael Zezas OK, so assuming these guidelines are implemented globally, what's your expectation about which industries overall could see the most headwinds? Todd Castagno Well, it's an interesting question. Not all sectors and industries will be impacted equally. According to our analysis, technology hardware, media services, pharmaceuticals and broader health care appear most exposed to both pillars. Michael Zezas OK, so the concept is that some industries' tax burdens are going to be affected more than others. Can you walk us through a specific example? Todd Castagno Yes. Technology hardware appears predominately exposed to both pillars. Why is that? Manufacturing and IP are centrally located, and the industry currently benefits significantly from tax incentives, which often drive a very low tax rate. This illustrates a potential political tension, as countries are currently motivated to provide more tax and R&D incentives given the current supply constraints. So, it'll be interesting to see how countries attempt to incentivize under a new minimum tax rate system. Michael Zezas OK, so last question here. Just because countries have agreed to pursue these tax changes doesn't mean these changes are imminent. They obviously require countries to go back and change their own laws. And regular listeners may know that our base case is that the US could soon raise corporate taxes, including a potential hike in the global minimum tax rate to 15%. So, how much do the current tax changes proposed in the U.S. already reflect this international tax agreement? Todd Castagno So what's notable is pillar two really emerged as a function of the tax bill passed under the prior U.S. administration. Today, the U.S. is the only country with a minimum tax remotely similar to what's being proposed under pillar two. However, there are both rate and structural differences. Our base case is 15% in line with the agreement. But Michael, as you know, Congress and administration have proposed higher rates. What's also important is the structure. So, today's U.S. system applies a minimum rate on aggregate foreign income. What's notable about Pillar two is it would apply that rate on a country-by-country basis. So, what that means is many companies may be exposed to a new minimum tax rate structure versus what's in the U.S. today. Todd Castagno But before we close, Michael, taking all this into account, what could this mean for markets moving forward? Do we think these changes are already in the price? Michael Zezas You know, it's an important question that really defies having a simple answer. In the view of our Equity Strategy Team, the impact of these tax changes to U.S. companies bottom lines probably isn't fully appreciated yet and could cause some short-term market weakness. But beyond that, these tax changes are part of a broader fiscal package that spends more than it taxes. And so that should continue to support robust economic growth into 2022. So that makes the medium-term outlook rosier for risk assets. Michael Zezas Todd, thanks for taking the time to talk today. Todd Castagno Great talking with you, Michael. Michael Zezas As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.
Special Episode: Planes, Trains and Supply Chains
9:26With supply chain delays in air, ocean and trucking on the minds of investors worldwide, what could it mean for the labor market and consumers headed into the holiday season?----- Transcript -----Ellen Zentner Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research. Ravi Shanker And I'm Ravi Shanker, Equity Analyst covering the North American transportation industry. Ellen Zentner And on this episode of the podcast, we'll be talking transportation - specifically the role of freight in tangled supply chains. It's Wednesday, October 13th at 10:00 a.m. in New York. Ellen Zentner So, Ravi, many listeners have likely heard recent news stories about cargo ships stuck off the California coast waiting to unload cargo into clogged ports or overworked truck drivers struggling to keep up. And there's a very human labor story here, a business story and an economic story all rolled together, and you and your team are at the center of it. So, I really wanted to talk with you to give listeners some clarity on this. Maybe we can start first with the shipping. You know, talk to us about ocean and air. You know, where are we now? Ravi Shanker So, this is a very complicated problem. And like most complicated problems, there isn't an easy explanation for exactly what's going on and also not an easy solution. What's happening in ocean is a combination of many issues. You obviously have a surge in demand coming out of Asia to the rest of the world because of catch up following the pandemic and low inventory levels. In addition to that, you've had some structural problems. For instance, the giant Panamax container ships that they started using in recent years have created a bit of a boom-and-bust situations at the ports - dropping off far too many containers that can be processed, and then there's like a lull and then many more containers show up. So that's a bit of an issue. Third, there's obviously issues with labor availability of the ports themselves, given the pandemic and other reasons. Ravi Shanker And lastly, as we’ll touch on in a second, there is a shortage of rail and truck capacity to evacuate these containers out of the ports. And it's a combination of all of these, plus the air freight situation. Keep in mind that kind of one of the statistics that has come out post the pandemic is that roughly 65% of global air freight moves in the in the belly of a passenger plane rather than a dedicated air freighter. And a lot of these passenger planes obviously have been grounded because of the pandemic over the last 18 months. This has eliminated a lot of the airfreight capacity. Some of that has spilled over into ocean. And so, all of this has kind of created a cascading problem, and that's kind of where we are right now. Ellen Zentner So let me ask a follow up there. You know, in terms of international air flights, it looks like international travel is picking up. But when would you expect it to be back to normal levels? Ravi Shanker So I think that actually happens at some point in 2022. So, we also cover the airlines and we saw a significant amount of pent-up demand in U.S. domestic air traffic when people started getting vaccinated and when mobility restrictions were dropped. We think something very similar will happen on the international side when international restrictions are dropped, and we're already starting to see some of that take place. Whether that fixes the ocean problem completely or not is something we need to wait and watch for. Ellen Zentner So, you know, once we get goods here, we have to move them around. And I know I've heard you say before just how much of it has to move on the back of a truck. So, let's talk about the trucking industry. You know, there's been some structural and labor issues there, but that's even before the pandemic, right? Ravi Shanker That is even before the pandemic. Kind of, you and I collaborated to write a pretty in-depth piece as early as December 2019. We revisited that last year. There are a bunch of new regulations that have gone into place in the trucking industry over the last few years. It's no coincidence that we've had two of the tightest truck markets in history in the last three years. And these factors, whether it's the ELD mandate in 2018, the Driver Drug and Alcohol Clearinghouse in 2020, some of the insurance issues that the industry has seen over the last year; those have really created a structural tightness in the trucking industry. The pandemic made things a lot worse. Obviously, it pushed some driver capacity temporarily, maybe even permanently out of the marketplace. The driving schools were largely closed for the last 18 months, and so that limited the influx of new drivers into the space. And so, some of this pressure will ease, but we think a lot of the driver and the insurance issues that we're seeing in the trucking side the last 18 months are structural and not cyclical. Ellen Zentner So, Ravi, it certainly does seem like the labor supply issues could stretch on for longer. If we think about demographic trends in the U.S., it does appear that generations Y and Z are really leaning away from trucking jobs and toward gig economy like jobs. Some call them new generation jobs. When you think something like driverless trucks would be in place in a way that could alleviate some of those issues, or is that so far off on the horizon? Ravi Shanker We've been writing about driverless trucks since 2015, even longer than that, and we are now getting to a point where we think this can be quite real on somewhat of an investable time horizon. We think the first level for autonomous trucks will be ready for commercial use by the end of 2023 or early 2024. And we actually expect to see some very clear demonstrations of the viability of the technology and the commercial deployment of the technology within the next few months, actually. So, we think autonomous trucks can be a solution to fill that gap for the driver shortage if the demographics kind of are going to be against us for a while, and that could start happening pretty soon. Ravi Shanker With the outlook in mind on the supply chain disruptions you've seen so far and what's currently taking place, Ellen, how does that inform how you look at the inventory cycle and your forecast for inflation for the overall economy? Ellen Zentner It's been very complicated as, you know, about as complicated as you having to cover freight. You know, I think about the relationship that we have with our equity analysts across the firm, you know, these conversations I have with you are extremely important because it gives me a view of when can we get goods to where they need to go. Ellen Zentner So the inventory cycle has been delayed. There are many sectors that are running below normal inventory to sales ratios. And so, we do need production to pick up globally and we can see that exports globally are picking up. So, if I think of building a composite view of, you know, you saying air could be normalized first half of the year, but say certainly by the middle of the year. Trucking is probably going to continue to be a drag for a bit, but when I think about what you say about ocean, it sounds like all together by the middle of the year, things should start to look and move more normally. So, you're going to have a lot of inventory building that happens next year, that should have happened this year. And ironically, that's going to really add to growth, to GDP growth next year. Ellen Zentner Now all of this taking longer to normalize means that inflation pressures due to supply chain bottlenecks and COVID related pressures are going to remain higher for longer. All that's going to start to get alleviated around the middle of the year, but it means that we have to wait longer. And so that's how I'm thinking about it in terms of the inventory cycle and inflation. You know, it's going to support inventory building next year, but it's going to keep inflation elevated for longer. Ravi Shanker Right. So, looks like light at the end of the tunnel by middle of next year, but a tricky few months still to navigate. Obviously, the biggest thing to look forward to in the next couple of months, I think, is its holiday season. And I know that in the transportation and supply chain world, everyone is working overtime to make sure that Christmas isn't canceled. What do you think Christmas season means for retailers and the broader economy? Ellen Zentner Yes, I think our retail team is pretty constructive on the consumer, as are we. Buying power from consumers is very strong. That's helped by labor income, continued government support, as well as some of the savings, excess savings that we have available to pull from. But the goods have to be there as well. We know that shelves are going to be lighter. Let's put it this way, this season than normal. You know, I've heard media reports crying out, you know, do your holiday shopping now. I've heard reports of big retailers using their own ships to transport goods here, although you would sit there and tell them “Yeah, but who's going to unload it for you when it gets here?" Ellen Zentner But all in all, it doesn't sound like from our retail analysts, it's a bad set up for retail. I mean, one thing that I would think about as an economist is if you've got fewer goods through the holiday season with strong consumer demand, which we expect, well then you certainly don't have to go through a big markdown season on the other side of the holiday, which is going to support prices for longer after that. So, I think that's all an interesting combination. Ellen Zentner Well, I think this was a really interesting conversation, Ravi, and I think it starts to tie in some of the themes and what everyone's really focused on. It certainly has far-reaching effects across the broad economy and the global economy. So, thank you so much for taking time to talk today, Ravi. Ravi Shanker Well, thanks for having me on. It's great talking with you as well, Ellen. And I think if there was one major takeaway for our listeners from this podcast, it is please shop early this holiday season. Ellen Zentner Shop early, shop often. That's what I do. Ellen Zentner Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.