Some light economics if you need a nap
Did you know that 2022 is on track for the lowest number of layoffs in a year, ever? Since we started keeping track, anyway. (Source.)
Yet Big Tech’s layoffs meltdown accelerated. 59,710 in November. The most this year. (Source.)
I wrote about this in July and it’s gotten more absurd. I stayed at Holiday Inn Express last night so today I’ll explain economics of it:
First, understand Bull Market Phenomena. Some poor business practices thrive due to good economic times. Confidence. People invest in things that are doing well, just because they’re doing well. Why question what works?
By people, I mean everybody. Regular people buy stocks like Amazon or Meta. VCs fund the next pre-IPO unicorn.
When we think good times will continue forever, we throw money at anything we can find.
Best case, we create markets with ridiculously high valuations.
Worst case, we pump money into awful businesses that don’t make any sense.
Sound familiar?
That’s how Big Tech companies with questionable financials (i.e. the ones that don’t make money), see sustained stock price growth. Based entirely on future projections. Which fuels even more price growth.
That’s also how we’ve come to accept that some tech stocks are worth 100x earnings. It’s been like this for over a decade.
Suddenly: inflation!
Demand for products kept going up. But Covid jacked up the supply. Prices rise.
Inflation is bad. That’s where the Fed comes in. Their mandate is price stability. So they raise interest rates.
Higher rates do 2 things:
1. Cost of capital goes up. Debt is more expensive. Higher operating costs. Lower profitability. Which drives layoffs.
Exactly what fed is counting on. Layoffs (theoretically) lower consumer demand and curb inflation.
2. The ‘risk free’ rate of money goes up. Investors require even higher returns on new investments.
So they don’t make those investments…until prices drop.
e.g. Meta laid off 11,000 people in November and their stock is down 65% for the year.
Add shrinking ad budgets (social media revenue) and a crypto implosion, you have quite the Big Tech meltdown.
But we added 263,000 jobs in November! Why isn’t everything crumbling?
Two things:
????Tech jobs are tiny part of the job economy. Under 3% of the jobs in the US.
Crazy right? Hard for those of us in the LinkedIn bubble to comprehend. It’s a small, attention-consuming pond.
????The tech sector & tech jobs are not the same thing.
Big Tech may not need as many software engineers or sales peeps. Who does? Everyone else.
There were still 0.6 unemployed people for every open job in October (Source). Near all time lows.
One good thing about recessions: they purge bad business practices and poorly run companies.
Some tech orgs grew larger than they ever should have. I feel horrible for anyone who lost their job.
The good news is: there’s plenty of other companies willing and able to bring them on.
Ones on better footing.
Partner at Hirewell. #3 Ranked Sarcastic Commenter on LinkedIn.
