December 9, 2022

With no Easy Money, the Tech Sector Faces Hard Times

Inexpensive money in the last decade has meant good times for businesses that barely make money and hire employees who barely work

The tech sector in the US has benefitted from more than a decade associated with ua-low interest rates and easy money.

But now it looks like the easy-money era may be ending— at least for now— and that means problems for the industry so long wedded to cheap loans.

Only a year ago, the ten-year treasury’s yield was 1 . 4 percent. This month, however , the 10-year’s produce is up to over 3. 6 percent, and throughout the economic climate, debtors are finding that financial debt service isn’t nearly as cheap as it used to be.   Employers in the tech field are responding as one might expect. Meta/Facebook has introduced 11, 000 layoffs. Amazon will soon lay off 10, 000 employees. Twitter has laid off at least 3, 700 employees. Stripe, Microsoft, and Snap have each laid off about a thousand employees. Salesforce and Zillow possess laid off hundreds. Dozens of additional firms  have slowed or frozen hiring .

Thanks to rising debt costs, employers need to cut costs, but many employers can soon be facing decreasing revenues as well. Given that a variety of indicators point toward an approaching recession— the particular yield curve is now one of the most inverted it’s been since 1982 — this is most likely just the beginning.

What we’re witnessing will be the end of the latest technology bubble, and what seemed like solid companies set to expand easily forever will suddenly be characterized more by cost-cutting, falling revenues, and a difficult slog in search of more funds.  

The conclusion of easy money will even separate the real innovators plus entrepreneurs— people who build real value— from the big-talking scams who only look wise or productive when they can just borrow more inexpensive money to kick the can of their failing and stagnating ventures down the road.  

Unless the particular central bank and governments intervene to provide bailouts plus backstops, the industry will encounter a much-needed  reckoning.   This will help  clear out more than a decade of malinvestments and bubbles propping up top heavy and inefficient companies that could never survive without the artificially cheap credit score provided by asset purchases and ua-low-interest rate policy at the central bank.  

Rising Interest Rates, Falling Valuations

Till very recently, interest rates  had  been decreasing for decades in the United States , which has meant companies, at any time, have generally been able to bank on cheaper financial debt not too far down the road. This has increased companies’ valuations, and it has made it easier for businesses to find investors.  

Even for businesses that never— or almost never— turn a profit, cheap cash has meant that the day time of reckoning can simply end up being pushed further into the long term. In many cases, we call these types of zombie companies: they don’t possess real value, but they can stay “ alive” simply by paying off older, more expensive financial debt with new cheaper debt.  

But , things are very different when easy money starts to obtain scarce. As Ryan Browne at CNBC recently  noted :

Higher rates mean challenges for much of the market, but they represent a significant setback for tech companies that are losing money. Investors worth companies based on the present value of future cash flow, and increased rates reduce the amount of that will expected cash flow.

As a result,

Venture deal exercise has been declining … Not all companies will make it through the looming economic crisis — several will fail, according to Par-Jorgen Parson, partner at VC firm Northzone. “ We will see spectacular failures” of some highly valued unicorn companies in the months ahead, this individual told CNBC. …

The years 2020 and 2021 saw eye-watering sums slosh around equities as investors took advantage of ample liquidity in the market. Technology was a key beneficiary because of societal shifts brought about by Covid-19, like working from home and improved digital adoption. … Within a time when monetary incitement is unwinding, those company models have been tested.

Part of the reason investors are now less interested in “ unicorns” is that as interest rates rise, investors are less desperate to search out yield even in the most unproven plus risky corners of the economy. For example , when government debt and other low-risk investments are paying next-to-zero yields, investors will be much more aggressive regarding finding riskier investments that pay at least something above zero. That includes high-risk trendy unicorn companies that guarantee big returns. But , since Treasurys and similar investments begin to promise higher yields— as they are doing now— there is less pressure to remove money in whatever flavor of the month is being put forward as the next big thing pertaining to investors. Moreover, in times of simple money, investors have more money to throw around.  

Once the cheap money regime ends, however , newly reticent investors become more interested in actually analyzing the basics of firms seeking investors. That means firms will have to really show they’re efficient in support of hiring employees who in fact create value.  

Easy Money Allows More Waste

For many top-heavy companies, which means layoffs. It’s why Meta’s Mark Zuckerberg  lately complained   that “ realistically, there are possibly a bunch of people at the company who shouldn’t be here. ” Zuckerberg went on to say he would deliberately be “ arriving the heat” for workers in the hopes that the less committed would simply give up. (Meta shares are straight down more than 50 percent this year, and Meta  has dropped revenues  as Zuckerberg’s obsession with the metaverse has not been especially popular with consumers. )

Elon Musk has been in the midst of something similar at Twitter, firing thousands of employees, plus demanding that those who continues to be be prepared to work long hours.   While Twitter employees and ex-Twitter employees have been whining constantly online about how everything has been wonderful at Twitter till Musk showed up, the reality is that will Twitter has only ever endured two profitable years (2018 and 2019) and is nor efficient nor innovative.  

Moreover, it can certainly not difficult to see why Zuckerberg and Musk would want to trim the fat if latest videos about “ per day in the life” at  Meta   and  Twitter   are true. The two now-notorious videos show young women employees walking around Meta plus Twitter offices showcasing just how little work they do and how opulent the office perks are. Perks apparently include supporting gourmet food, red wine on tap, and free cappuccinos. Last  May, Project Veritas reporters captured a Tweets senior engineer  bragging about how little he works :  

“[B]asically went to work, like, four hours a week last quarter. And that’s just how it works in our company. … [E]ssentially, like, everyone reaches do whatever they want, nobody really cares about, like, [operating expenses]. ”  

The engineer  contrasts this approach in Twitter with “ capitalists” who “ care about quantities or care about how to make the company more efficient. ”

If true, it’s just about all a perfect illustration of how the age of cheap credit has made it possible for companies to be highly valued even in the middle of senior  employees who are essentially dead weight.   As debt costs increase, labor costs must along with many cases. That makes workers who work a few hours a day ripe for trimming.  

These companies are most likely looking at more hits in the revenue side as well. David Zaslav, CEO of Warner Bros. Discovery this week warned that the advertising market is definitely worse now than  at any time during the pandemic slowdown of 2020 .  

Yet again, we discover that as borrowing costs rise, companies have less money to spend elsewhere. Advertisers have got reduced spending, and this provides meant hits to the value of media companies such as Warner Bros. Discovery. This extends to social media companies as well.  

Many years of Malinvestment

The story of the last decade provides in many cases  been increasing valuations for companies that often lose money, hire employees that barely work, and simply make the cash that yield-starved traders throw at them.  

In other words, much of the tech sector offers all the markings of a classic bubble and  the effects of many years of malinvestment. The lucky business people and employees on the receiving end of malinvestment are able to live high on the hog of cheap money with increasing wages, luxurious offices, and not ending “ growth. ” Workers and owners alike can then pat themselves around the back about how brilliant they all are. But much of it is an illusion and its existence depends largely on many years of central bank interventions designed to pressure down interest rates, prop up resource prices, and essentially print out money to keep liquidity flowing unceasingly to firms through investors.   Yet, when price inflation finally allows the central bank to allow interest rates to rise again— being now happening— the music prevents, and it seems all the excellent geniuses running tech companies weren’t quite so efficient, profitable, or clever all things considered.

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