December 20, 2022

Big Tech’s Layoff Meltdown, Explained

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Episode Highlights

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When things go south in the business world, it always feels like the employees are the ones to take the brunt of it.

How are so many companies laying off when unemployment is only 3.7%?

And why are all the biggest names in tech, who had (seemingly) unlimited money a year ago, leading the charge?

Most importantly: what can we learn from this going forward?

Jeff Smith and James Hornick put on their economist hats in Episode 56 of The 10 Minute Talent Rant, Big Tech’s Layoff Meltdown, Explained.”

Episode Transcript

The 10 Minute Talent Rant is live. I’m James Hornick joined by Jeff Smith, who’s recovering from some sort of weird illness, so hopefully sounds okay. Barely live. Barely live. We are on the clock. The 10 Minute Talent Rant is our ongoing series where we break down things that have broken in the talent acquisition of hiring space, maybe even pitch a solution or two.

Before we dig in, all of our content can be found at talentinsights.hirewell.com. And I want to give like an extended lead in on this one. I love nerdy documentaries. I love- I love YouTube channels like economics explained in real life lore. I love boxes explained series on Netflix. I stayed at a Holiday Inn last night, so I’m going to give it a shot.

Yes! Today’s episode, episode 56: “Big Tech’ s Layoff Meltdown, Explained.” It’s like at the beginning of the pandemic when everybody was binging the Netflix, whatever explained, and it was pandemics explained. It’s like, oh, that’d be terrible. It happened. That was a good one. Yeah, that was, that was a really good one.

I’ll start with a question. James, did you know that 2022 is on track to be the lowest number of laughs in a year ever? Crazy, right? Yes, I did. I read the Fed Data. Did your research. Yeah. Anyway, this is since we started keeping track, “we” being the country and I will also say the source being the Fed.

There’s some dubious ways in which they look at this, but the source is the Fed. However, hence the title, “Big Tech’s Layoff Meltdown” accelerated. So we’ve got close to 60,059 and some change in November the most this year. Thanks for, TrueUp.io for that data. So what does that mean? So we first need to talk about what I call the bull market phenomenon.

Poor business practices can thrive only because the economy is doing well. People have confidence. People invest in things that are doing well just because they’re doing well. Why question what works? The last 10 year- ever since the actual meltdown in 2008/2009, it’s been pretty much straight up.

Everything works. Everyone just keeps investing in stuff, especially technology. It’s just exploded as we all know. By everyone, I mean everyone. Regular people invest in Amazon, Meta places like that, tech stocks, whatnot. VCs, they invest in pre IPO unicorns. It’s just money just getting kind of pumped into these things because it just keeps doing well.

We think good times will just continue forever, so we keep throwing more money on it. But that in itself is a problem that causes like a lot of these issues. Best case scenario, you’re creating markets with ridiculously high valuations, way higher than they should be. Worst case scenario, you’re pumping money into businesses that are awful and just don’t make any sense.

Yeah, totally. Everyone’s the Forest Gump that got the investment in the fruit company. Move your reference if you know that, right? Look, without profitability to point to, which is a lot of these companies, one of the things, keeping it topical to our subject matter expertise is headcount. They use that as a success metric.

It absolutely should not be used as a success metric. No. These companies that have questionable financials, i.e. let’s just generally say that don’t make money, that’s not a great thing. They continue to see sustained stock price growth and it’s based completely on future projections. So that fuels even more price growth and most of the growth is fueled by hiring i.e. human capital and projecting what they will produce in X amount of time.

It’s a really risky bet without any sort of real business governance at all. So this is kind of how we’ve come to accept that all these tech stocks are worth 10, 50, 100 times their actual earnings. And it’s been like this for over a decade now. And we’ve actually, this is kind of the second big cycle.

And then suddenly, as everyone could have foreseen but somehow didn’t, we have inflation. It’s crazy how that works. Yeah. It’s one of those things that it hasn’t been a big deal really in our lifetimes until now. So what happened was demand for products kept going up and we’re talking like real products, not just tech products now, right?

Yeah. But Covid jacked up the supply. How many times have you heard like, “Oh, supply chain issues.” That’s a real thing. Like when- there’s a ship stuck in a channel somewhere. Yeah. Like when there’s still demand, but you don’t have enough stuff that people to buy, that’s the demand’s higher than supply, prices rise.

It’s just kind of real basic stuff. An inflation primer. Maybe this can kind of, if some people have a hard time wrapping their heads around it. A normal amount of inflation is by design. Typically we target 2% inflation because it encourages people to spend money. It keeps the economy going.

You want your money to be worth just a little bit less and yesterday, that way you don’t hoard it. So if you’ve ever hear people talk about how deflation is bad, you know, and you’re like why is that bad? My money’s getting worth more. Think of all the dorks that have tons of crypto, but never want to do anything with it. They just want to hold it forever. When your money gains value, you have zero reason to actually spend it, which is why having a deflation environment will actually cripple an economy more because then like nothing’s getting produced because no one’s buying anything. I think that’s a, this is a very key point in this whole kind of equation, right?

Yeah. It’s a delicate balance. But inflation to the levels we’re seeing 7%, 8%, 9% is bad. That’s where the Fed comes in. Their primary mandate- they have two mandates, but their main mandate is price stability. Second mandate is maximize employment, but that comes very much second to price stability.

So they raise rates. When they raise rates, people are less inclined to spend money because they can actually get a higher risk-free return by holding onto it, which would theoretically get prices down. Got it. So how does that all happen? All right. So two things are typically going to happen here, cost of capital goes up.

Meaning debt is more expensive. If you’re a company, if you’re running an organization, debt’s more expensive. You have higher operating costs, you have a lower profitability, that drives layoffs. So sorry. I don’t want to- so debt meaning “borrowing” just so everybody understands what that means.

Yeah. That’s what the Fed’s actually counting on. They want layoffs theoretically because when there’s less people working, there’s less money, there’s less consumer demand, which curbs inflation. The second thing is just the risk-free rate of money goes up. Meaning investors, if you want to make an investment

but what you can get for not taking any risk at all is higher, you expect an even higher return for taking risk. So if you were okay like with a 10% return when interest rates free money was zero but all of a sudden no risk money is 5%, that 10% doesn’t do it for you anymore. You need something even higher than that to kind of take that on.

So ultimately people make less investments until prices drop. Right. So examples, the biggest, Meta, Facebook, whatever we’re calling it these days, nailing off 11,000 people in November. Stock is down 65% for the year. Amazon’s another interesting case study. They’ve lived 10,000 people, which is not an a very, very significant amount of people, but in the grand scheme of their structure, it’s-

we didn’t look it up, but I’m guessing it’s percentages, single digit. Stocks down 45%. There’s another handful of large tickets that have incurred the same sort of story and it’s based almost entirely on this market and this market in this sense, being post Covid, that’s totally unique and unpredictable.

So you add in shrinking ad budgets, social media revenue companies are not just pedaling on Twitter, Facebook, et cetera, as much as they were and the crypto implosion. These are all the ingredients for the meltdown that we’re seeing. Plot twist, we added 2,263,000 jobs in November. Things are actually getting better for the economy.

We’re still at 3.7% unemployment. But James, everything that we’ve been doom scrolling on LinkedIn says that we’re all chicken little. Look, it’s important for everybody to understand tech jobs are a tiny part of the US economy. It’s a significant but tiny, roughly 3%. It’s hard for us in this kind of, in the social and LinkedIn bubbles to comprehend it.

It was hard for us. We depend a lot on technology companies as our customer base, so. It’s definitely a small, but it is an attention gobbling pond. The tech sector and tech jobs, not the same thing. So big tech may not need as many software engineers or salespeople to pedal the add-ons and stuff.

But guess who does? Literally everybody else. Yes. We’re seeing this all the time. Yeah. Our own client base has, in like the mid-market sectors, traditional industries has exploded this year because those companies are hiring like mad. Yeah. Our engineers super excited right now to go to investment banking or insur-

they’re starting to be because guess what those companies are? Profitable. Mm-hmm. So we’re at near all time lows for unemployed people per job opening. So the one good thing about the scary R word, recessions, is they really, they do, they purge bad business practices in poorly run companies. Investors have an important job.

Now there’s always, anytime you start talking like investing, people don’t realize there’s actually a tangible purpose for people who are investors, whether that’s people like you and I or whether that’s big organizations. But they are the ones who actually determine how to best deploy an economy’s capital to maximize output.

Sounds like pie in the sky or whatnot. But think of it this way, if an economy is being propped up by government stimulus and free money, there’s no need for investors to take their job seriously, and they throw money at literally anything just because they think it can work. Some tech orgs grew large- and this is the bitter pill to swallow, is some of these tech orgs grew larger than they should’ve.

I’m not defending Elon Musk by any way, shape, or form, but when he first took over Twitter, he’s got a ton of issues. I don’t like a lot of things he’s doing, but I think anybody who pays attention, like 7,500 employees to run that organization with like most basic technology, it feels bloated. I believe personally that those people, those tech workers for the good of the economy, would be best working at other organizations that had a better need for kind of what they did. Having organizations that are twice as large as they should be with people who are making 400 to 600K- good for them, but what’s that really mean for the soundness of your business?

And eventually that’s going to catch up and cause issues. Yeah. Well it also has repercussions as you’ve stated throughout the rest of the economy with companies who are, sound with their money, aren’t going to overpay for that stuff. So look, the good news is, is there’s plenty of companies that are going to be willing and able to bring these folks on.

They’re destination spots to work at. Tech companies, you know, you gain experience, you get to put X whatever on your LinkedIn profile, fine. Good. But thinking these places are going to be your long-term home, it’s just, it’s not realistic. They literally defined employment based on the market webs. Onward and upward,

this is going to make us all stronger in the end, so. We are short on clock, and that’s a wrap for this week. Thanks again for tuning into the 10 Minute Talent Rant, part of the Talent Insight series, which is always available for replay on talentinsights.hirewell.com, as well as YouTube, Apple Podcast, Google Podcast, Spotify, and Amazon.

This is our last episode of the year. Jeff, thanks again as always. Everyone out there, thanks again. Happy holidays, happy New Year, and we’ll see you in 2023. See y’all.

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