Weekly Research Briefing: Nature Wastes Little Time

September 08, 2021


The seasonal clock for the U.S. Rocky Mountains is a bit ahead of schedule this year as a drier summer has moved our mountain aspen trees to turn a bit earlier than usual. The northern Colorado aspen are turning now and if you travel out before the first week of October, you should be able to catch some peak days. While nature reminds us of the changing seasons, less is changing in our COVID-affected work, study and play environments. We all hoped that COVID would be entering the rear-view mirror by now, but the ongoing spread of the Delta variant combined with knowing many who have had rough breakthrough infections has led to a more depressing outlook for the fall. Big office reopening dates in the U.S. are now being pushed to the back, masks still adorn our kids in the classrooms and taking a trip or going out to eat has become less attractive. While the absolute hospitalization data looks to be rolling over again, seeing full college football stadiums makes one wonder if the numbers can come down fast enough to empty the hospitals before the holidays.

COVID fatigue has also hit the recent U.S. economic data as last week's non-farm payroll data showed. Most impacted were the service-affected areas of travel, dining and retail which saw pullbacks along with the August stagnation in mobility data. Manufacturers continued to hire as job gains remained healthy, which is a great sign. But services drive two-thirds of the U.S. economy so we will need to see COVID data ebb to get the U.S. to upshift once more. In the meantime, expect economists to revise lower their Q3 economic numbers while they hope that demand shifts into the Q4 and beyond. We know that U.S. consumers have the savings built up to spend, it is now a function of when they will spend it. And as the supply chains remain in a state of flux, will consumers be able to find the goods they want at the prices that they expect? Again, many moving parts that we did not expect to be worrying about right now. We should have been past this COVID distraction and wondering whether Q3 GDP could be at a double-digit growth rate.

Of course, the equity markets seem to be quietly enjoying all of this increased uncertainty. A buckle in near-term growth rates means more time for the Fed to refrain from pulling back the dual punch bowls of tapering and rate hikes. And while supply chain-driven inflation pops remain a concern, most believe that these will be isolated and temporary. We do not know if the bond market's recent rise in longer-term rates are a function of future growth expectations or rising inflation—maybe a mix of both? The credit markets remain most healthy, so we will lean toward the better growth argument for now. That said, I do see some smart investors dialing up the inflation dial which worries me. As we enter the third month of the quarter, and with September being a key conference month for companies, we should expect to see a lot of news from the corporate sector for us to chew on. Let's hope that the releases will be better than the ones from PPG and Hawaiian Airlines yesterday. If you are returning to the city and the office this week, be safe and do what you can to avoid the Delta variant. Not an enjoyable experience from many that I know who have crossed its path.

That was a punk of a jobs datapoint on Friday...

US Nonfarm Payrolls

The Nonfarm Payroll numbers were heavily impacted by the slowdowns in the service sectors like hotels...

US Nonfarm Payrolls MoM

And restaurants and bars...

US Nonfarm Payrolls MoM Food Services and Drinking Places

And retail...

US Nonfarm Payrolls MoM Retail Trade

Manufacturing continued to show solid job growth...

US Nonfarm Payrolls MoM Manufacturing

So now, we must cross our fingers that a retreat of COVID cases and hospitalizations will lead to stronger job growth in the months ahead...

The meager 235k US payroll gain in August—nearly half a million below consensus—and the downward revisions to our Q3/Q4 GDP forecasts complicate the near-term Fed outlook, but they ultimately don’t change our tapering views.... the Delta fingerprints are all over the recent weakness, with much of the payroll slowdown concentrated in the virus-sensitive hospitality sector. However, there are now signs that the Delta wave is cresting, with a drop in the positivity rate over the last couple of weeks and a more recent decline in new hospital admissions. We therefore expect a job market rebound in coming months and have also offset part of the Q3/Q4 GDP downgrade with stronger numbers in the first half of 2022.

The US Delta Wave is Cresting

(Goldman Sachs)

Expect September to also be sluggish for service job growth. Likely that we will need to look to October and November for big gains...

Tweet from @bencasselman

COVID in August has punished the Q3 GDP estimates...

Evolution of Atlanta Fed GDPNow


COVID continues to have its impact on the manufacturing and transportation pieces of the global supply chains...

General Motors will shut production at most of its North American plants for a week or two starting next week as the worsening chip shortage takes another bite out of its plans.

GM and other automakers had hoped the chip shortage would be mostly behind them by now. But the surge in Covid cases, especially in Southeast Asia where many of the chip manufacturers are based, has actually created a worsening problem for automakers.

Only a small handful of GM's plants will remain in operation during the pause. Those plants make full-size SUVs and pickups, as well as some of its sports cars, such as the Camaro and Corvette. That's because GM is prioritizing the chips it does have on hand for its most popular and profitable vehicles.

Still, some of its large pickup and SUV production capacity will be affected by the shutdowns.


As the U.S. ISM data last week showed, there isn't a demand problem, only a delivery problem...

@RenMacLLC: There is no demand problem. New orders rose to a three-month high of 66.7 while supplier delivery times eased to 69.5, their lowest since January. That is a welcome combination.

ISM Manufacturing

Supply chain experts are earning their stripes this year...

Phillipe Moreau had to get creative to keep Temahome’s production lines whirring after shortages of timber, resin and steel left half of his furniture maker’s 600-item catalogue out of stock earlier this year.

“We played around,” said the chief executive of the French maker of wooden tables, shelves and TV stands. “If black panels weren’t available, we switched to oak or white ones.”

Across the world, manufacturers of everything from cupboards to cars or computers are still grappling with a logistics crunch that has disrupted supplies of essential inputs, threatening the post-pandemic economic rebound and boosting inflation.

Combined with rising consumer demand as economies reopen, in Europe these shortages have led to inflation reaching a decade high — a factor that may lead the European Central Bank to scale back its €1.85tn pandemic stimulus programme this week.

Furniture, the latest sector to feel the supply chain pinch, encapsulates the broader problems. Even giant companies such as Ikea have been affected. The Swedish flat-pack furniture maker has said it “cannot predict” when normal supplies will resume because of a “perfect storm of issues” that includes a shortage of truck drivers in the UK.

“We’re not naive to think that it’s over in the next weeks or even months,” Henrik Elm, Ikea’s global supply manager, said of the disruptions.

A record one in three EU furniture makers say they have been affected by supply shortages, according to a quarterly survey by the European Commission. At a global level, high shipping costs and delivery delays because of bad weather and Covid-19 shutdowns in major Asian ports are big pinch points.

Transport is a “nightmare” where even “a screw or small component from Asia can take three months”, said Temahome’s Moreau, who also heads France’s furniture trade body. “We had 16 containers being shipped to the US in June and July and they still hadn’t got through by August. Lead times to the US have doubled.”


Temahome furniture


As PPG showed today, fully built cars sitting on lots waiting for semiconductor chips does little to help their auto window and paint business...



Supply chain issues even hit members of the Ryan Zimmerman fan club this weekend...

Try explaining that to a 6-year-old baseball fan.

Statement from The Nationals


Salesforce has more than a handful of customers, so their insight into a return to work is important...

"A lot of things have changed for our customers in this new world, whether it’s Europe or the United States, and one of them is really return to work. The phenomenon that I see happening globally is not as many employees are coming back into their offices locally as any CEO expected...“You’re really starting see some very low attendance numbers in offices because employees are so productive at home” - Salesforce.com (CRM) CEO Marc Benioff

(The Transcript)

Bloomberg's survey of 45 top corporations last week makes you wonder if business travel will ever recover to pre-COVID levels...

Business travel as we’ve known it is a thing of the past. From Pfizer Inc., Michelin and LG Electronics Inc. to HSBC Holdings Plc, Hershey Co., Invesco Ltd. and Deutsche Bank AG, businesses around the world are signaling that innovative new communications tools are making many pre-pandemic-era trips history.

Take Akzo Nobel NV, Europe’s biggest paint maker, for instance. At its Amsterdam headquarters, Chief Executive Officer Thierry Vanlancker has spent the past year watching his manufacturing head, David Prinselaar, flap his arms, madly gesticulate and seemingly talk to himself while “visiting” 124 plants by directing staff with high-definition augmented-reality headgear on factory floors. A task that meant crisscrossing the globe in a plane before is now done in a fraction of the time — and with no jet lag. For Vanlancker, there’s no going back.

“Trips to drum up business could drop by a third, and internal meetings by even more,” he said in an interview. “It’s a good thing for our wallets and helps our sustainability targets. Our customers have had a year of training, so it’s not a social no-no anymore to just reach out by video... There’s an enormous efficiency element.”

A Bloomberg survey of 45 large businesses in the U.S., Europe and Asia shows that 84% plan to spend less on travel post-pandemic. A majority of the respondents cutting travel budgets see reductions of between 20% and 40%, with about two in three slashing both internal and external in-person meetings. The ease and efficiency of virtual software, cost savings and lower carbon emissions were the primary reasons cited for the cutbacks. According to the Global Business Travel Association, spending on corporate trips could slide to as low as $1.24 trillion by 2024 from a pre-pandemic peak in 2019 of $1.43 trillion.

Cutting Back


This recent Gallup survey on COVID is eye-opening...

Tweet from @LizAnnSonders

Disney World is even seeing consumer attitudes toward COVID reflected in their weakening attendance figures...

YTD Disney World Attendance


Business and vacation travelers may be slow to return to hotels, but Marriott is still looking for 10,000 new employees to fill the ranks...

Marriott, the world’s largest hotel company, has about 10,000 vacancies at its 600 managed hotels across the US.

Capuano said the challenge was “particularly acute” in states such as Florida, one of the markets that has bounced back fastest from the pandemic thanks to soaring demand for resort holidays...

Buoyed by pent-up demand for holidays and the strength of the domestic market, the US hotel industry had its best month ever in terms of revenues and room rates in July, according to data provider STR.

But hotels and restaurants have had to cut opening hours and services, with as many as a fifth of hospitality staff globally by some estimates having permanently left the industry as the volatility of lockdowns pushed them to seek more stable jobs.

Marriott was forced to furlough tens of thousands of its hotel staff and cut its corporate headcount by 17 per cent in September last year.

But Capuano said the company was now “actively and aggressively hiring”, offering one-off incentives and benefits, with the recruitment focused on markets where demand had recovered.

Marriott operates more than 7,300 hotels worldwide.


The longer that COVID holds the consumer back, the bigger the savings becomes...

One can only spend so much on housing and cars/trucks. Eventually, more spending needs to be done in an outwardly social environment. The dollars continue to build but are still waiting for COVID to diminish.

Excess spending potential has piled up


Spending on housing is going berserk as reflected in exponential price gains tied to little inventory...

@jsblokland: US House Prices rose a whopping 19% YoY in June.

US House Prices

Lack of ability to spend has led to more assets remaining invested in an appreciating stock market...

GWIM equity allocation at all-time high


Why are Treasury yields moving higher?

Are investors betting on improving growth or are they betting on rising inflation? Or maybe just better investments to own than U.S. Treasuries?

10-year US Treasury Yield


While the credit markets look great around the world, Chinese real estate is the one thorn...

Will the government move to bailout Evergrande or will they let it fail? We might know the answer very soon given the price action in this debt.

Evergrande Bond Price

If you have been an investor in the HVAC industry, congrats...

Here is a great chart that Carrier put out highlighting the long-term tailwinds at the back of the HVAC manufacturers and suppliers.

Megatrends Drive Sustained Industry Growth


With the most recent private markets fund data now out for the Q1, let's look at the returns in the largest category: PE Buyouts...

The below Cobalt data gives us a glance into a broad slice of the Q1 performance of funds in the buyout segment. The return of +7.57% was over 50% greater than the return of its public market equivalent, the MSCI World Index. As you can see from the chart, the Q1 results only add to the 25-year string of higher returns of the PE Buyout space where $1 invested in 1995 has now grown to $40.17 versus $1 invested in the MSCI World, which has only grown to $7.22.

Also, it’s important to highlight that the better PE Buyout fund returns are occurring with much less volatility than an investment in public equities. You can see at the bottom of the table that, over a period of 101 quarters, PE Buyout funds on a quarterly basis generated 164% of the returns of the MSCI World with only 63% of the volatility.

While we will not have the Q2 private market returns for another month, as we aggregate everything, we do know that the public market index registered a 6%+ return. Given all of the M&A deals and PE exit activity, it will be interesting to see how the Q2 PE Buyout fund return compares to the MSCI World return.

If you are a Cobalt client or would like to become one, reach out to us and we'll set you up with our team to get you the full raw data below.

PE Buyout Fund

Source: Hamilton Lane Data via Cobalt LP (September 2021)

More on PE Buyout data...

In looking at the major PE Buyout datapoints for the year to date and annualizing them, you can see that the industry today is nearly 3x larger than it was 10 years ago. It is here that our CEO Mario would remind me that the number of U.S. public companies is basically flat over the same time frame. Given the distractions and barriers to being a public company these days, the trend of more private companies should only continue.



A great chart on how U.S. states generate their power...

You might want to print this one out and keep it close at hand if natural gas prices continue to rip higher.

U.S. Electricity Mix

(Visual Capitalist)

Researchers will study for years (and possibly decades) how the U.S. once led the world in COVID mortality...

25 highest mortality rates vs Dev World



PME (Public Market Equivalent) – Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based on these adjusted cash flows.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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