Inflation
Our hidden cost!
There is a huge chasm in our society. Last week, the American consumer sentiment came in at rock bottom. Economists, however, are far more positive. In general, they say that while consumers feel bad in aggregate, they continue to spend as before. “In their heart of hearts, they know that things are good”, as the Secretary of Finance Scott Bessent stated in a comment to the readings.
So, what is going on here? The explanation is extremely simple. Last week, I saw a chart on Italian television showing that prices for basic food items (bread, milk, pasta, tomatoes) have nearly doubled over 10 years. Alas, the official inflation rate is grossly understated compared to what draws money in the median household: food, transport, and housing. The Italian example gives a food inflation rate above 7%. No wonder that people who live paycheck to paycheck feel shit, their salaries are not keeping pace with the inflation they experience in their real life, and not spending isn’t a choice, everyone needs to eat, get to work, and have a roof over their head. The price shocks stemming from recent events, such as the pandemic, the war in Ukraine, or the closure of the Straits of Hormuz, don’t improve the overall picture. For people who are well off, like Scott Bessent, things are far less dramatic. Basic consumption draws far less of their income than for average workers; for them, the official inflation rate makes much more sense.
Is inflation worse than accopalyse?
American homebuilders have to consider the affordability crisis. Last week’s earnings reports showed that D.R. Horton, America’s largest homebuilder, is struggling to grow volume. To adapt, the company has focused on offering smaller, more affordable homes aimed at first-time buyers, allowing it to maintain stable sales levels despite the headwinds. D.R. Horton remains exceptionally well managed, and even in this difficult environment, it continues to grow earnings, raise dividends, and repurchase shares.
ServiceNow’s challenges differ from those of American homebuilders. Its customers are other businesses, and the enterprise economy is doing well, with many businesses exhibiting record profits. Last week’s earnings report bears witness to this. ServiceNow continues to grow sales by around 20% year-over-year (YoY). Still, the market reacted negatively, sending ServiceNow’s shares down over 15%. We are back in the SaaScopalyse narrative here; investors fear that AI soon will upend the growth story. This dramatic market reaction comes despite massive insider buying and the launch of a share buyback program. However, if I put on my long glasses, I get a less myopic view. With long glasses, I see that ServiceNow’s share price is double from where it was in the depths of the inflation crisis of 2022. Therefore, I am tempted to say that threats of armageddon might be less worrisome than high inflation - one of these small market paradoxes.
Nasdaq Inc. sits on the edge of the SaaScopalyse. Nearly half of its revenue is now derived from software, underscoring its growing exposure to the SaaS segment. Last week’s earnings report highlights SaaS as the primary growth driver, with its financial crime detection solutions leading the way at roughly 20% YOY. Despite Nasdaq’s accelerating topline growth, the share price has fallen since early winter due to the AI disruption narrative. Even so, the stock remains well above its 2022 lows, underscoring the paradox above.
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