The combination of all this fiscal and monetary stimulus is turbocharging what Keynes called aggregate demand. All that demand is putting tremendous stress on the global supply chain resulting in bottlenecks and raw material inflation. The inflation we are now experiencing is not transitory and it’s going to get worse – “Inflation, The End of the Bond Bull Market and The Second Great Depression”, Top Gun Financial, October 4, 2021
Three weeks ago I wrote about how margin pressure at FedEx (FDX) and Carmax (KMX) were “canaries in the coal mine” for an overheating economy (“FDX & KMX Are Canaries In The Coal Mine”, Top Gun Financial, October 1, 2021). Yesterday Intel’s (INTC) 3Q earnings report supported that contention.
INTC’s gross margin guidance for 4Q21 and subsequent years caught the market off guard. They guided 4Q21 gross margin to 53.5% – down 6.5% from 4Q20 – which they expect to result in a 39% decrease in EPS. They expect gross margin to compress even further – to 51% to 53% – over the next 2 or 3 years as they invest heavily in capital expenditures to meet the exploding demand for semiconductors.
While that surge in capex explains the depressed gross margin forecast for 2022 and beyond, it does not explain it for 4Q21. The reports from FDX and KMX support my interpretation that supply bottlenecks and raw material inflation caused by an overheating economy are the culprits here. INTC’s stock is currently down about 10% in the premarket (as of 3am PST).
With the futures down only marginally as I write after the S&P made a new all time high yesterday, the market seems unaware of the economic implications inherent in the FDX, KMX and INTC reports. The disconnect between economic reality and financial markets continues to grow.