Drunk with Easy Money, companies were hogging office space and workers for a future that did not come.
By Wolf Richter. This is the transcript of my podcast on Sunday, January 22, THE WOLF STREET REPORT.
The layoff announcements rippling through tech and social media companies are special. They’ve been coming on a daily basis for months. Lots of big tech and social media companies, lots of startups and crypto outfits, have announced layoffs. Among the biggest ones: Alphabet, Meta, Microsoft, Amazon, Salesforce, Cisco, HP, Twitter, etc., hundreds of companies, some of them five-digit layoff announcements, meaning a company firing 10,000 employees and more.
But these are global announcements, by global companies, that employ a lot of people in other countries, and so the actual layoffs taking place in the US are much smaller.
This is the result of an insane hiring binge over the past few years. And that hiring binge came with an even more insane office-leasing binge going back a decade, and all of this to prepare for a future that never came, and won’t come.
Elon Musk fired over half of Twitter’s employees and thousands of contractors in one fell swoop, and he told other employees to take a hike if they didn’t like it, and many did. And under his leadership, Twitter is now defaulting on some of its leased office space and is getting sued for not paying rent. And it’s getting sued by suppliers that have gotten stiffed. And it’s tangled up with its laid-off workers. But despite gutting the workforce and cutting out service providers and shedding office space one way or the other, Twitter’s service is still running just fine.
Sure, Musk ruffled some feathers, and some users quit because they couldn’t handle all the stuff on Twitter anymore, and he pissed off advertisers and they quit in droves.
But wait a minute… advertisers were already looking for an excuse to cut back on advertising anyway, because now just about everyone is cutting back on advertising.
Slashing the ad budget is the easiest and fastest way to cut costs, especially for companies that spend a lot on ads. You can cut half of your ad spend and not see any immediate impact on your revenues. There is a long-term impact to cutting your ad spend, but immediately, you might not feel it in your revenues.
And advertisers are doing it. The advertising industry generally just skips a recession and goes straight into a depression, in my experience.
Which is in part why the social media companies, which get nearly all their revenues from advertising, are laying off employees because their revenues depend on advertising, and advertising budgets are getting cut right now.
So Musk gave advertisers that were on Twitter an easy excuse to cut their ad spend by pulling their ads from the Twitter platform.
But I think Musk is on to something. And I think other CEOs in tech and social media are seeing the same thing: The way he gutted Twitter, and Twitter is still up and running, confirms to them that he has cut out huge layers of fat that Twitter had put on after years of overhiring, overleasing, and overpaying. He’s teaching everyone a massive lesson.
He’s also teaching everyone a massive lesson in how not to do it, pushing a company to the brink like that. But so far so good. Twitter is now a privately owned company and no longer has to deal with the hissy-fits on Wall Street.
What he demonstrated is that Twitter, and other companies in tech and social media, were hogging workers they didn’t need and couldn’t productively use, and they were hogging office space they didn’t need and couldn’t use, and they were doing this to overcome perceived shortages of workers and office space, because when there is a perceived shortage, it triggers a very human reaction: panic buying, panic hiring, panic leasing. And all this actually created those shortages then.
Back in 2018, San Francisco was the tightest hottest office market in the country, with an availability rate of around 8%. And every time some decent office space came on the market, tech companies, social media companies, startups with so much funding they didn’t know what to do with it, they jumped all over this office space to get their share of the office pie and squirrel it away before someone else would get it. They didn’t need it, they didn’t have the people to fill it, and it remained empty and sat there. No one ever needed this office space.
As I’ve said many times before, easy money from central banks is like a virus that turns human brains to mush. But the easy money has ended, and these brains are recovering.
In San Francisco, about one-third of the total office space is now on the market for lease, according to real-estate consultancy Savills, much of it as sublease from companies that had signed long-term office leases but didn’t need it and couldn’t get rid of it because they’d signed a long-term lease, so now they’re trying to sublease it at whatever rent they can get, but there are few takers, as leasing activity has collapsed by something like 40% from before the pandemic, and much of what there is in leasing activity is relocations and upgrades when an old lease expires, with companies downsizing often to smaller but better spaces, which just puts more office space on the market.
And so the office vacancy rate – the availability rate, as it’s called politely – keeps getting worse and worse, and keeps hitting new records every quarter, and at the end of Q4 it hit 32%, meaning that nearly one-third of the entire office space in San Francisco was available for lease.
And more office space is vacant, and waiting to be added to the availability. And new office buildings are still being built. And that’s why this will continue to get worse.
And this is happening in Silicon Valley, and it’s happening in Houston, and in Chicago, and in Dallas, and all around the country to varying degrees.
And the executives are seeing that they hired too many people, that they leased or bought too much office space, that they overpaid and overspent on everything to meet imagined future demand and future needs, projecting that the pandemic boom would just keep on going. And now there’s this reckoning, and so we have these layoffs and the attempts to shed office space. Companies can get rid of workers pretty easily, but they cannot get rid of office space just like that.
Big tech CEOs are now admitting in their layoff messages to their hapless workforce that they were drunk with growth models in preparation for a future that didn’t arrive, and that they’d overhired and overleased.
Alphabet CEO Sundar Pichai in his message to employees on Friday said that too, when he announced that the company would axe 12,000 people globally.
He said, “Over the past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today.”
He said, “So, we’ve undertaken a rigorous review across product areas and functions to ensure that our people and roles are aligned with our highest priorities as a company. The roles we’re eliminating reflect the outcome of that review.”
Musk probably didn’t do the kind of “rigorous review” Pichai was talking about. He had a gut feeling of what needed to be done, and shot from the hip at it, and he kept shooting at it from the hip, hitting some targets and missing others, and making a huge mess, but he demonstrated to Big Tech how to cut over half of your staff and still keep the company running, proving his point that – well: what were all these people doing anyway?
CEO after CEO has now told employees pretty much the same thing, but in polite we’re-sorry-to-see-you-go terms: we overhired, we were planning for a future that didn’t come, we were seeing exponential growth that flopped, we were doing all this and we were seeing all this because the money-printing virus had turned our brains to mush.
But other companies with tech divisions are still hiring, and they’re breathing a sigh of relief because they couldn’t compete with these overhiring and overpaying tech and social media companies with their rich salaries and huge stock compensation packages.
And these other companies are seeing that some of the pressure is now coming off the labor market, and that they can actually hire tech workers. It’s still not easy because a laid-off Meta employee that was making $220,000 a year plus stock-based compensation plus a gazillion benefits, including working from home, isn’t eager to work in an office for the tech division of an industrial company doing something actually productive, for less. So that shift would take some getting used to.
What is now over is this ridiculous phase where decisions were made by brains that had turned to mush because of the money-printing virus. That’s over. Now there is a form of reckoning, sort of a cleansing process mostly. The consequences will ripple through the economy.
I’m really concerned about the office sector of commercial real estate. This is a slow-moving catastrophe that will take many years and huge losses for investors and lenders to work through.
The labor force is a lot more flexible, and what we’re seeing now is the process of how it is being reallocated.
However all this will turn out, one thing is for sure, Easy Money led to terrible business decisions and miscalculations. And now there’s a price to pay.
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A lot of the Twitter layoffs were whole groups, including ethics oversight groups. Admittedly, I wasn’t going to Twitter to read random Tweets until after Elon took over. There is something intriguing about watching a dumpster fire burn…
Wallstreet lowered estimated earning growth for past quarter to -4% in a 7% (official avg) inflation environment. That’s a pathetic 11% decline in real terms. Now Wallstreet is building up expectations of a rally on expected 0.25% earnings beat (real 10.75% decline).
Wallstreet thinks that its investors are either foolish enough to allow this pivot bluff, or that they lack the balls to punish these companies for not cutting costs as earnings decrease.
Most of tech needs atleast 25% layoff!
I worked at several big name tech companies and banks. I can tell you they can all cut at least 50% with no loss of service. If managers could manage instead of having useless meetings all day, cuts could be deeper than that.
Not sure I believe the twitter story, but it’s amusing. Musk asked that each programmer submit work samples, explaining what the code does and why it’s important. Of course the ones sitting around the cafeteria all day couldn’t do that.
It’s like watching an airplane crashing onto a train wreck in slow motion.
It’s the predictable outcome of what happens when government distorts an economy. This article describes monetary policy distortions, but the same thing applies due to fake demand from fiscal policy.
I’m quite confident organic demand is weak or very weak. As one of or the best indication, anyone can estimate this by the potential impact of reducing annual government debt increases back to pre-2008 levels (as a % of GDP). Most “growth” is the result of higher deficits or spending.
I’m quite confident the easiest money from ZIRP and NIRP (from elsewhere) is over, but borrowing standards are still nowhere near “tight”.
It’s going to take longer for fiscal policy to change. But first, there will probably be more fiscal binging when the assets markets actually crash. None of the major asset classes are even close to cheap now, still in a mania.
Distortions shifted a lot of money into investments that newer made money. Now the backlash may keep investments away from areas in need.
High interest rates and expectations of low demand may now stiffle investment in extraction of natural resources and energy.
With low demand and low purchasing power energy may not become expensive in the future, but still become scarce.
“I’m quite confident the easiest money from ZIRP and NIRP (from elsewhere) is over, but borrowing standards are still nowhere near “tight”.”
We’re still in the halcyon days of the biggest credit bubble in the history of mankind. Almost everything’s subprime at this point. Remember, the biggest defaults during the last housing bust were not “subprime,” but “prime” loans. So, those prime loans were in reality more subprime than subprime itself.
The biggest reason people default is because the asset is no longer worth what they owe, meaning they are underwater. That’s the case with all borrowers for cars and houses the past 2 years who did not have large down payments. Once these asset price declines begin in earnest, it’s jingle mail for everything. All those ABS rated AAA will, once again, prove to be fraudulent garbage.
With the ridiculously low mortgage rates the monthly payments are going to keep people from using jingle mail….Dont you think!!!
Not if prices crash to the extent that even at higher interest rates the monthly payment is lower.
Also, people took note that in the last housing bust, people could stop paying their mortgage and live rent free literally for years before the bank would finally foreclose. Often, after years of living rent free, the bank would work out a mortgage mod that lowered their outstanding amount and their monthly payment. Sometimes without even dinging their credit.
If you’re underwater, you have the advantage. If the bank takes the home, they’ll have to book a loss on the loan, so they’re always looking to get out of that. Otoh when you’re not underwater, the bank has the advantage: it’s to their advantage to foreclose quickly and recover their full loan amount.
Guess they’ll just have to utilize that house for shelter.
I see the future employer to employer workplace evolving as follows. which will affect commercial RE in a big way. Many jobs can be done WFH with no loss in productivity or customer service. Many, not all, will be eventually be outsourced to India and other developing economies. Many jobs cannot be done at all using that model, as I recently found out with my insurance company. The service which went WFH was so bad that I wound up cancelling my policy which I had for many decades. The last option is the hybrid model. 85% is WFH and 15% working in the field. This is the future for many self employed and gig workers, like plumbers electricians, home inspectors etc. All these above scenerios will lessen the need for commercial office space. Commercial RE is heading for a full fledged depression and defaults that will rival the GFC.. Nothing can stop it.
Swamp Creature I had the same issue with my insurance company after they sold their home and auto policies to Farmers Insurance. Calling customer service took hours to speak with a person and then the background noise from the Indian call center was so loud you could barely hear the agent speaking who still couldn’t help me. I ended up having to write to their US HQ to get my policies cancelled. Then they sent an amount to collections after I cancelled my policies and had received a refund check back in the mail. Just another FUBAR company in my books.
I had to call my cable internet provider last night. After going through the AI did not solve my issue, I was transferred to a “tech”. I could tell right away the guy was answering his phone from his house. After going through some troubleshooting he gave me some very wrong information. I know this because I am a system admin/network engineer. When I tried to correct him he got really pissy with me, so I just let it go and hung up the call.
In the past when I called their call center, I usually talked to very knowledgeable people, and if they didn’t know the answer, they would ask a supervisor they were in the same office with.
Not sure if this is because of WFH or just the standards for hiring are lower now.
I am a big proponent of WFH though, I have been doing it for 16 years now. But I’m also self-employed.
Commercial real estate is badly overbuilt because of decades of artificially cheap money. It’s far more than just WFH or pending outsourcing.
This doesn’t just apply to office space either. The US has more retail SF per person by an order of magnitude over anywhere else. Part of it can be attributed to cheaper real estate, but much of it is to show Wall Street “growth” by opening locations that aren’t needed or uneconomical.
Yep. Look at the U.S.’ retail space versus Australia and Canada, also big land masses. We have way way more.
You can’t have a long term economy based on buying cheap crap.
“Part of it can be attributed to cheaper real estate, but much of it is to show Wall Street “growth” by opening locations that aren’t needed or uneconomical.”
This is what happens when people and entities become so ungodly wealthy that they spend money just to spend money, because they have nowhere else to spend it. Then they drum up magical fantasies and justify them until you see the sign “COMING SOON – White Elephant Museum.”
Hello Salesforce Tower…
That ego project was obvious 5+ years ago.
On the block I live people sometimes leave their two car garages open. Now I know why they don;t park their cars in their garages. Most of the garages are so filed with junk that there is no room for a car. When we have storms, the debris blows down the street and slams into their cars which are parked in harms way. One dude tried to get me to pay for the damage to his car from debris alledged to be from my lot. I told him to go f$ck off.
Stuffed garages are what’s known as a “California basement”.
In our small Midwestern town of less than 12,000, there are five auto parts stores plus Walmart and a farm store with some auto stuff. Auto zone, advance, and O’Reilly are all within eyesight of one another on the same road. They barely ever have any traffic, and O’Reilly had 4 guys standing around behind the counter yesterday just twiddling their thumbs. Auto zone has been there for years, but the other two just popped up in the last 2 or 3 years.
Ridiculously overbuilt auto retail for our town but I attribute their presence to cheap money and the never ending need to show growth.
Dominoes pizza just did the same thing a year or two ago. They dumped a pile of money into an empty KFC building right next to O’Reilly. Barely ever see a car in their parking lot. This town already has four local pizza shops.
Sounds like mattress stores! There are some literally across the street from each other here, and they’re the same company!!
Many of those retail auto parts stores have wholesale accounts where they deliver the parts to, so you won’t see the normal retail traffic. Markup in “spare parts” is huge.
Pizza joints are also heavily reliant on delivery. The storefront is just a front for a kitchen. The “imaging” is nonsense (that’s where the stores take on a corporate image as in they all look the same. Car industry term for it is “image facility”) which causes them to spend waaaay too much money to make a fancy place that few will ever see the inside of.
“Many jobs can be done WFH with no loss in productivity or customer service.”
Sure, but it doesn’t mean they WILL be. That’s the problem. Too many people aren’t really working, and even when they are they are doing an extremely poor job of it. The quality of service has gone into the crapper.
My guess is that long term, the people who are good or better will be allowed flexibility on coming to an office, and those who are average or below will not. Too many people will screw around when left to their own devices.
I WFH at a top 100 Sillycon Valley corporation and I can tell you, the problem isn’t necessarily that people just aren’t working because they WFH. My job is reliant on the people I work with. Slow downs in the market place, along with bleak outlook in the economy, paired with quiet quitters have mgmnt putting growth strategies temporarily on hold for now. I know further cuts are coming to my workplace. The mentality of if you’re not growing you’re dying days have come to a close, and now there is lots of fat to trim off the edges. The really messed up part of the whole equation is they are also probably cutting the yalent. if mgmt would agree to at least a partial temporary pay cut, they could actually afford to keep the talent they hired in the first place that keeps their businesses afloat in the first place. But apparently they would rather shoot themselves in the foot then suffer any short term loss personally.
Full disclosure. I wrote this while WFB. So excuse the typos. Talent doesn’t do social.
Good article. Interesting that Nutflakes is counting that AdSpend is going to drive the Big new source of revenue they are counting on via customer paying less and accepting ads with the wokeified content. Doesn’t seem like that will work out.
A company that has stopped paying its suppliers, eh.
For me, that is a big warning flag.
Not an outfit (or person) I would want to do business with.
Stiffing your landlord and suppliers are a quick way to save money though. Musk is thinking outside the box.
Rotten business but twitter was negative cash flow and had no way out so there was no cash to pay suppliers. Oilfield that looses their revenue (low oil price ) stops paying their vendors as well having a customer that is recession proof is wonderful but hard to find. Again a product of free money everywhere there is leverage.
Great Article!
“But despite gutting the workforce and cutting out service providers and shedding office space one way or the other, Twitter’s service is still running just fine.”
There is quite a bit of bloat in a company that a team of dedicated engineers can solve by working 24/7 and sleeping on cots in their cubes. At least for awhile. It is the Elon way of running a company. Just like the Railroad/Mining/Manufacturing Barons of the 19th century.
However, the future is murky. His dedicated team may not have time to look at future features or even bug reports. They are not testing future platform support (ie one Google, Samsung, Apple update may cause the entire Twitter space not to work anymore.).
Not being there in a cot, I cannot accurately comment. I can just describe how a well-run company should operate. Not one that is drastically cutting costs.
If revenue does not support the cost structure, it doesn’t matter. The company can go bust, liquidate, and then everyone will be out of a job.
Besides, there are many jobs which never existed decades before and somehow the organization survived without it.
Yeah, I think Wolf is being too cavalier about what Musk has done to Twitter. Tech is the same as marketing. It can run on autopilot for a while but eventually it needs continued development. For example, google is constantly refining its page rank algorithm to make sure results stay relevant. Can you stop doing that for 6 months? Sure. But stop doing it for a year, and the results gradually become less useful and then a competitor wipes you out.
Musk hasn’t shown the tech world anything. No one is following his example. Yes layoffs are occurring but not because Musk has shown the way. Rather the market is forcing it.
Truth is, Musk has reduced cost by less than he has decimated his revenue. That’s not a tradeoff any smart company would make.
Many of these new “features” are a bunch of junk that make the interface useless to most people. Witness iPhone. I don’t need a landing page with 900 widgets nor a flashlight on the lock screen that can turn on when it gets folded up against the fabric of your pocket.
Those aren’t “improvements”. They’re justifications for their existence and usually the answers to questions no one asked.
ElK – to reprise the old engineering joke:
‘If something works really well, it doesn’t have enough ‘features’, yet…’.
may we all find a better day.
The funny thing is this has been tried before in the same industry. Back in the early days of software, IBM made it their personal mission in life to hire up as many PhDs and qualified software specialists as they could. Bill Gates called this phenomenon “masses of a$$es.” Lean, efficient, garage-front software companies ate their breakfast with almost no overhead and vast amounts of productivity. IBM got the idea from Bell labs, who admittedly did a lot of great work with the collective intellectual firepower of a generation. Now we’re seeing Silicon Valley’s twist of fate as they have become the so-called massses-of-a$$es. As they say, you either die a hero or live long enough to become the villain. Google et. all are going to have to figure out a way to make all of the eggheads they’ve collected useful or send them packing to other areas. I don’t think the “ethics and compliance” wing that Elon pink-slipped was doing anything productive for the company, but I’m sure they’ll find themselves finger-wagging and conducting DEI trainings in every mid-level company and higher from Portland, OR to Portland, ME.
Very interesting reading about the easy money due to massive QE and money printing. Yes, lots of brains turned ‘mush because of the money-printing virus’. Good thing that’s over. Of course, it’s time to face the consequences.
But it’s not over, yet.
Real interest rates are still negative and credit standards remain absurdly low.
The credit mania isn’t just a function of central bank monetary policy. That’s only one aspect, since central banks aren’t making direct loans to most borrowers.
I am thinking we are a few weeks from shtf. Four indicators:
1. Treasury market action since Nov.
2. Leading economic indicators.
3. M2 at or below zero.
4. Housing market rolling over.
Fed got behind the inflation curve and going to wreck a lot of stuff in killing inflation off.
Brainard going to White House to be an economic advisor doesn’t make sense to me. Plus what’s up with the new chief of staff being heavily invested in gold on his disclosure form? Seems weird if really true.
“4. Housing market rolling over.”
Either Bberg or maybe it was WSJ had an article today about housing coming back to life now. Pending sales up significantly. Some serious cheerleading in that piece.
The market has been frozen. Lower prices will unfreeze the market — meaning more volume, not higher prices.
Anecdotal, but we looked at a house yesterday and four other couples showed up in thr 45 minutes we were there. This is suburban Bay Area. If you’ve got the cash for a bigger DP, prices are more attractive. And not everyone here works in tech.
So what? Over staffed, over extended with commercial space, over leveraged balance sheet? Wall Street will just invent a new type of hopium and IT stocks will race to the Moon.
I vote for AI to reignite the romance with irrational exuberance.
What an image … Wall Street and AI snuggled up in a gondola gliding under the Tunnel of Love.
Would be a thrilling plot for a sequel to this shitfest from Kubrick.
But is it going to be it this time around? I’m afraid we can’t do that, Dave.
They should consider converting all the unused office space into affordable housing.
Who is they that will convert space that was engineered for office that lacks plumbing electrical and fire escapes for large occupancy. Would be nice but too cost prohibitive better to build from scratch. Start of comment who is “they”
Considering the mayor of D.C. suggested to President Biden that all the unused government buildings get converted to affordable housing, there must be someone out there that can do it. Do you have any ideas other than to attack other people’s suggestions?
I understand what you’re saying but in reality, many high rise buildings (7+floors) have been renovated into hotel rooms and apartments/condos. It’s usually not an issue of fire escapes- far more people work in an office building per square foot than in a residential building. The renovation cost is high so who indeed will pay! But letting those buildings sit vacant is also costly. How many decade old buildings that never reached full occupancy have negated ordinarily planned maintenance and look the worse for it?
The reality is simple: these buildings are assets and resources. Let’s hope we can deflate our economic bubble, let those dumb and hopium investors lose this shirts, allow society to learn an important lesson about economics and rebuild- or renovate as needed.
Lucca,
The problem is that none of these office buildings are designed for human habitation. Converting them is expensive — and for many buildings, too expensive, meaning it’s cheaper to tear them down and build a residential building from scratch. The buildings that can be converted economically will likely be converted. That has been done for decades all over the US, but only a relatively small number of office buildings make that economically feasible. In San Francisco, there is now one such conversion in the planning stages, it seems.
The other thing that has to happen is that the landlord has to default on the mortgage, and the lenders have to foreclose on the building and sell it for 20 cents on the dollar to a developer who will then have a much lower cost base and is more likely able to make a conversion work economically. All this takes years.
Wolf, in DC, I’ve seen a number of church rectories converted to Condos. No problem. They sold quickly. A 15 story building in Silver Spring, the Grammax Building, which was once the National Weather Service HQ building where I worked for 6 year was converted to condos a decade ago. No problem. Of course, these conversions work better with older buildings.
yes, check out what made them work. There are some basic ground rules. This is all well-known.
Thanks Wolf for the explanation and not berating me. I’m learning a lot from your website.
The City of New York recently convened a panel to study what was needed to help convert MORE old office buildings to residential Lucca.
Sure you can find their report on internet; in summary, they suggested reduction of red tape for more buildings both by age and by location, as their program has been on going for decades but needs expanding up to those built before 1991, etc.
During the last couple of busts, the vacant office space survived (but probably went through a decrease in rent).
What I saw last time:
1) Large space (ie Home Base) became auto showrooms, convention space, private/charter schools, and a couple of megachurches. Due to the lack of pot growspaces, these large spaces have been gobbled up recently. Our local bowling alley is now full of pot plants. Half of our local mall has been torn down and condos are being built.
2) Medium space became startup churches, small restaurants, libraries, and government offices.
3) Small space became home to local startup businesses. Crafts, antiques, specialty foods, taquerias, Ebay private sellers.
Depending on what is in demand now, I think this space will be filled but at much lower rents. In some ways, this could help local startups. It probably won’t help speculative landlords.
…will be watching to see how this new situation of adapting unused urban office space to other uses plays out in comparison to the urban ‘lofting’ of movement of old factory spaces a few decades back…
may we all find a better day.
Money still seems very easy. How come ten year yield is falling for almost three months now? Why 10 year yield is lower than Federal Funds Rate?
Just look at today’s market. There’s you answer.
I don’t quite follow. Some of the high flying stocks are up big time in last couple of months.
It means that the “market” thinks the Fed is done so they are buying up long term bonds thinking the yields will drop on a fed pivot. And if they raise only 25 bps, they will be right, at least in the short term.
It also means that someone else is dumping those bonds because they think bond prices have peaked and yields have bottomed and are headed higher, and they want to get out at the top, and so they dump those bonds now. It takes a seller — someone of the opposite persuasion — to make a transaction. People keep forgetting that.
It’s called inversion. It is what happens before a recession
Nothing goes to heck in a straight line.
That’s for sure:
BTC up 50% from recent low
ETC up 80% from recent low
TSLA up 40% from recent low
that’s quite a zig zag. Just wait until next week when they only raise 25 bps.
25 bps is “priced in.”
“25 bps is “priced in.””
When you print over $10 Trillion, you can price it in multiple times.
It’s interesting for sure. I heard a bond trader say he thought 4.25% was the top on 10 year. It was the right trade so far.
For me Vanguard pays 4.28% in a money market which is a reasonable place to wait when most dividend stocks pay less and 10 year pays less.
I guess there is a saying not to buy the dip til the Fed cuts rates 3 times. I bought too early in GFC and had a long year waiting for the bottom to be put in. Hope to do a little better this time.
Old School – thanks for the 4% plus Vanguard money market fund reminder with only 0.11% expense ratio, no transaction OR redemption fees, etc. I just put in a decent size order in for Thursday close as I have been cost averaging out of long term corporate, govt, and some foreign bonds these last few days as I am hedging for another leg down some point in 2023 (in case inflation stops falling and bounces around 3-4% range) …
I just got 4.67% on a 90 day T bill…a third of the way to the “good old days “!
I think this pre-layoff, imminent recession period, is exactly like the buildup pre-hurricane, weather storm broadcasting.
There’s a large amount of people on the beach, oblivious to all news, then people in Nebraska glued to every new updated probability.
While some see a category 5 spinning monster, others are eager to stake out locations for hurricane parties, anticipating their fun future.
The lagging layoffs narrative, clearly suggests a communication breakdown. That brings up spin, propaganda and media distortion and the capitalistic notion of monetizing chaos, by generating noise and gaming the emergency envelope — versus viewing pandemic dynamics, where most modeling and forecasting ended up broken.
Either way, if we go back to the Katrina Hurricane, the lack of preparation and planning that resulted in chaos, provided a lesson for the next big storm. In general, there was a far greater awareness to be proactive and take measures to get away from danger.
That was then, but now we have amped up disinformation and distrust of virtually everything on the internet highway. The polarization and social fragmentation of the past 10 years has gone parabolic, just like financial markets, and now, as the hurricane approaches, that fragmentation amplifies chaos to new levels of distortion.
In two or three months, we’ll all have a far better understanding of the storm narrative — either it will have dissipated into exhaustion or we’ll definitely know the party barge is underwater.
Nostradamus
I use the simple mental model of French during 1700’s as they were getting their first taste of experimental paper money policy.
1. There is a government expense problem.
2. Central banks spur economic activity by dumping paper wealth in the system.
3. It turns in to a repetitive cycle of boom and bust as ever larger money dumps are needed.
4. Eventually confidence is lost and there is runaway inflation that central bank has to stop or the system fails.
Most central bankers are highly educated now, but not that much has changed.
The same reasoning was used to push congress to increase work visa numbers and bring in more foreign workers. That is cheap disposable labor that does not demand much, and also acts as the proverbial sword of Damocles over the heads of local labor. The sad part is the people who made the bad decisions, that drove the companies to the brink, are now saying they are sorry in a letter to thousands of employees they are getting ready to flush, while facing no consequences themselves. Which tells me these creeps will be back to their shenanigans as soon as the winds turn slightly. Meantime the bought and paid for government looks the other way.
The govt and financial elites, not to be “conspiracy”, but the honest truth is they need the retired folks (and more immigrants too) back into the work force as cogs in the wheel of their faux wealth lifestyle enhancing machine. Thus why there are now articles in MSM talking about the end of the world unless, for example, medicare age is raised from 65 to 67 immediately to save a CBO calculated $22 Billion per year. Sure $22 billion saved per year is a flea fart in a category 5 debt hurricane, yet another 2 years of healthcare slaves forced from retirement back to the labor force could really boost that magical “GDP” number, which magically increases stock values and then magically gives 3-5% of the population a fantasy lifestyle that could not be replicated by being individually productive alone…
Ha. Madison Ave moved to the internet. Remember the series Bewitched where Darren would get up, have a nice breakfast and drive from New Rochelle to the office. Good luck with that. How can you plough who knows how many people into advertising. And call it “tech”, what nonsense.
Musk isnt stupid, the previous hradcount was. The reality is the twitter service is run from 3 bit barns (data centers) so maybe 120 or so people working 3 shifts per DC to keep the lights on. Then maybe another 500 or so in HQ for development, purchasing, support, HR etc. Thats it the whole service with about 1000 people. Wolf is right all the free capital not only rotted invester brains it also turned CEO and VC brains to mush.
“It’s still not easy because a laid-off Meta employee that was making $220,000 a year plus stock-based compensation plus a gazillion benefits, including working from home, isn’t eager to work in an office for the tech division of an industrial company doing something actually productive, for less.”
Except for not having worked for Meta, you’ve described my nephew. Making 4x annually what I did as a public high school teacher, he bragged about working only 4-6 hours a week, etc. Didn’t save. Quit Amazon to work for Uber, moved to the East Coast, overspent on a condo and now, guess what….unemployed.
Learning to adjust to making too much money for too little effort and now with a mortgage on a unit he bought at the peak.
Good luck nephew, I love you, but…
25 or so years ago my then wife’s friend married some sort of broker on the Chicago merc. He made so much money it was stupid. Giant mansion, designer clothes, living like Gatsby.
I can’t remember the exact time but you’ll note there are no more Merc traders – all went away within a decade. He was not really employable as anything else except general sales. They spiraled down and down and then my wife was my ex and I lost the story.
I think the non tech folks from these gilded companies -HR, DIE people and such – will be in the same boat.
“It’s still not easy because a laid-off Meta employee that was making $220,000 a year plus stock-based compensation plus a gazillion benefits, including working from home, isn’t eager to work in an office for the tech division of an industrial company doing something actually productive, for less.”
Exactly. I think some smart employers will be leery of hiring people who were laid off from one of the heavily bloated tech companies. If hired, they’d drive their co-workers nuts as they whined their way to performing in a results-oriented environment.
Only in a brain-mushed and heavily overstimulated economic scenario could such ridiculous compensation levels and lavish benefits take place. The whole thing is actually kind of sickening.
A lot of that compensation is to cover cost of living. It’s a little more expensive to live in San Fran than St. Louis or Omaha. Even so, paying $220k plus generous benefits for your average software engineer is ridiculous.
The payment of the ones up the hiarcy and pay scale at the same companies is probably even more ridiculous. And it only get worse to the top.
Chicken and egg. The cost of living increased commensurate with the number of dollars that were out there.
Fifteen years ago I used to routinely get offers from California companies that were $50k increases in my salary. I used to tell them that’s not enough to make up for the increased cost of living. That was then.
Yes, tech employees living in Silicon Valley, San Francisco, and most of S. CA are on a completely different pay scale within companies due to the higher cost of living.
Many companies don’t have tech managers who live elsewhere manage Silicon Valley employees. The starting employee in Silicon Valley may be earning much more than the senior manager living in Dallas. That can cause friction.
Work from anywhere and the pandemic disrupted this. Now a Silicon Valley new employee can be living in a mansion next to his senior manager in Dallas. There is some balancing going on but it isn’t easy to give a junior employee a 50K pay cut. They will likely leave.
“It’s still not easy because a laid-off Meta employee that was making $220,000 a year plus stock-based compensation plus a gazillion benefits, including working from home, isn’t eager to work in an office for the tech division of an industrial company doing something actually productive, for less.”
Especially if they thought Work From Home was permanent and moved to somewhere in the Midwest, 2000 miles away from the home office in San Francisco. That is a long commute as companies are calling their employees back home.
It’s fascinating to see so many people focusing on the fed as the source of cheap money.
Cheap money is a product of income inequality. Organic demand comes from the those who don’t have enough yet. Investment funds comes from those who do have enough. The fruits of efficiency gains over the last 40 years have gone to the those who already have enough money to meet all the requirements of life.
All that extra money becomes available for investment, and very little goes to building demand. As a result, there have been more and more investment dollars ever more ephemeral money-making opportunities..
This leads to what I like to call “stupid money”: People with vast amounts of capital looking for the “the next big thing.” The result is an entire sector of the economy milking stupid money, or cooking up ways to further squeeze the money out of non-existent demand.
You’ve got this completely backwards.
The Fed held interest rates far below the market rate for more than a decade. And really since 2001, so 20 years.
Artificially low rates are free money for private equity and LBO businesses that leverage cheap debt to buy up companies. Because returns from safe investments are artificially low, regular investors are forced from bonds and large company stocks into speculative assets like crypto and meme stocks, and speculative ventures like WeWork are bid up by investors starved for yield. PE firms and hedge funds and high finance roll in money, assets massively appreciate, and the wealthy prosper. Grandma and Grandpa on a bond ladder get crushed.
The Fed causes the inequality. Higher rates will destroy it.
Not sure if Musk is a genius here. Seems like he massively overpaid, his lawyers couldn’t figure out a way for him to back out the deal, and he’s running the standard PE play of cutting the company to profit rather than grow. Seems more necessity than vision.
I think that the entire tech industry is starting to herd layoffs. Unsure if they’re overdoing it like the restaurants, or ahead of the pack. What seems to be different is that Wall Street doesn’t assume these firms are all staffed by geniuses will devour the world because (some of) their access points are accessible through a browser or phone.
The drunkest of them all has to be Zuckerberg. Does he really think we’re all dreaming of spending our lives in his Metaverse? To me it looks like the Matrixverse, a dystopian nightmare. Nah give me nature any day, hiking, fresh air, birdsong, sunlight …
Concur!
MySpace II
Second Life 2 (but probably worse than the original)
He’s always been alphabetically suspect, the last kid to get called on in school.
The “metaverse” is idiotic, the ultimate delusion in a delusional society.
It’s arguably worse than Chevy Chase’s talk show career, but you didn’t really want Chevy to fail, being the difference.
Well, if SciFy movies are prophetic, we will all be living in the Matrix Metaverse eventually and most won’t even realize it. Maybe we already are.
No thanks,
I read Snow Crash too so I think the concept is “cool.”
Problem is that a VR-indistinguishable-from-reality concept is kind of like fusion. You can kind of see the pathway but the tech isn’t there yet and there are a bunch of breakthroughs are needed before it becomes anything more than a niche product, and it might always be a niche product because of the really, really hard stuff like the other senses.
I mean, back in day they were sure we would have colonized the moon but computers would still be gigantic (and, eventually, murderous!). Making accurate long term tech projections is really hard. Betting the company including literally changing the name of the company is insanity.
Facebook’s acquired tech was weak. Valve had a better product and Google made fun of it with Google Cardboard.
Per Wolf:
“However all this will turn out, one thing is for sure, Easy Money led to terrible business decisions and miscalculations. And now there’s a price to pay”.
If is reported, layoffs are spreading beyond the tech/social media companies into other sectors. 3M and Newell Brands announced they will be reducing staff just yesterday.
I think Wolf may be prescient in his comments.
Economic decay is hiding under the housing bubble.
Some argue that McJobs were not designed to provide a livable income but rather to provide supportive, secondary incomes. In the same vane way, I would argue that most service businesses were never designed to support entire communities but instead to be supportive of the growing industries, they are built around.
So much of what I see is just McMansion building, no real productive capacity has been added for decades in many cities.
Laid off from twitter, oh my, no more tweets for you. Now go get a real job if you can find one.
Wolfstreet will not go straight to depression. Wolfstreet is an x2 inverse
blog, telling the truth as it is. Wolf might expand, spread his wings, hire “associate” from Meta, Twiter…Googl.
I was on the verge of almost understanding that, scary stuff kids.
Zuk banged his head using VR. He is on disability.
Zuk banged his head against the Ancient Great Spirits by usurping First Peoples’ Rights and not following through on the Responsibilities that are mandatory with such invasions.
Meta : Trump reinstated
Wolf, thanks again for taking the time of putting into print your podcast. It makes it accessible to us hearing impaired. Or just impaired…
I don’t think we’re done seeing draconian cost cutting from Musk. He has the twin fires of Twitter and Tesla to battle heating up with operation costs and cash burn. It’s doubtful the winds will shift in a positive way, as the Fed hikes into a recession, with deficit battles raging out of control.
” Tesla had worst gross profit margin since 2021, a 64% rise in its operating costs year-over-year and a 49% quarterly decrease in free cash flow.
Automotive gross margins came in at 25.9%, the lowest figure in the last five quarters. Operating cash flow was down 29% from last year, and down 36% from last quarter”
Tesla cut its prices and thereby boosted its sales. It has the fattest margins in the industry, so it can afford to cut prices the most and still make money.
Maybe Elon is a genius.
He is trying to capture his highly paid potential customers before they are laid off and can’t afford his cars or qualify for a 15% auto loan.
As you pointed out, the layoffs are relatively small now but there is downward pressure on tech wages as people are let go from their highly paid FAANG jobs. Elon likely has a quarter million fewer potential customers in line for his higher end EVs compared to last year.
One of my kids is in his mid/late 20’s making over 200k in the Seattle area as a programmer. He’s smart no doubt, but part of that pay has to be ‘market premium’ due to the insatiable demand for his kind of skills. Some of that looks (we shall see) like it’s about to drop off. What amazes me is the people getting paid this kind of money really have no reference what it means in the ‘real world’ outside of tech land. You avge small business owner has a hard time getting to his kind of pay & has been slogging away for some time by the time it maybe happens.
Twitter is essentially a very simple company. It’s not Alphabet. Musk himself said that Twitter has about 1/10the the complexity of Tesla. I’ve always wondered why Twitter needed so many people.
Any deals on second-hand foosball tables?
Foosball tables, ping pong tables, high end cappucino makers, pizza ovens, Kegerators, wine fridges,…….
2 and 3 years from now, the discussions of Fed easy money leading to terrible decisions, will still be occurring, except it will babe every sector, and the unemployment rates will be much worse than today. Maybe even from the depths of a real depression.
I hear the theory a lot that total financial assets to real GDP was worse this time than GFC, so the eventual recessionary pain has to be worse.
“The labor force is a lot more flexible, and what we’re seeing now is the process of how it is being reallocated.” And overbuilt properties will eventually be used, at a reduced cost.
That’s what happened in the 1860’s when railroads were overbuilt. They were overpriced, but very productive in the long run. And the investors took the losses.
There is a simple explanation. The stock prices have tanked. You can thank Vlad for this invasion of Ukraine which kindled inflation which gave permission to the Fed to raise rates. I can assure you had not for that invasion this would not have happened.
Also, weren’t people complaining that “house prices” are sky high! Now the Masters of the Universe can convert that empty real estate to …housing.
Simple: incompetent leadership. Execs need to go.