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In this case, rising interest rates have a very direct negative impact on new investments. As new investments contract, demand shrinks for services across the i

In this case, rising interest rates have a very direct negative impact on new investments. As new investments contract, demand shrinks for services across the industry. As demand shrinks, fewer employees are needed and companies need to reduce headcount to avoid overspending relative to revenues. There is a cascading effect, but it would be a mistake to attribute it all to a big psychological mistake. When demand goes down (in this case due to rising rates) there really is less money flowing into companies.

echelon 4y ago
It also impacts the loans that companies frequently take out and the interest-inflated payments they need to service their debt.
- UncleOxidant 4y ago
  And this is more likely what's impacting companies like Lyft. Their business model worked in an easy-money environment, but doesn't work in an environment with more normal interest rates where it's harder to borrow money and costs more.
nunez 4y ago
Adding context: the US Fed raised the interest rate benchmark this week to 4%, with the expectation that it will be raised higher. Credit's getting a lot more expensive.
- Spivak 4y ago
  Yep, don't even look at mortgages until housing prices drop in response to the rate increases. Because the amount of total money paid in interest over a 30 loan increased more than 2x over the last year.
  - nunez 4y ago
    honestly i think this is the "real estate bubble" folks were looking for (it's not a bubble but housing might finally drop in price now that mortgages are so expensive)
curiousgal 4y ago
> avoid overspending relative to revenues. Most companies are already making a shit ton of money. Firing people won't keep their stock prices from going down if a recession actually hits. It's moot.
- disgruntledphd2 4y ago
  Lyft are not one of those companies though.
- vineyardmike 4y ago
  They could run out of money of course. It’s about the cash flow. When rates were low a lot of companies used debt to acquire cash, use it to hire/spend beyond their current means in order to expand their business (more revenue later). This is pretty common, use debt to build a warehouse/data center/app widget/etc. In a recession, that extra revenue may not come, so they need to cut spending so spending < revenue instead. Especially a company like Lyft that is likely losing money many months. I don’t know about today, but Uber and Lyft were famous for using venture capital to spend more than they took in every month. Eventually they run out of cash reserves, or they decide they can’t acquire more.
- ShivShankaran 4y ago
  they are also a lot in debt. Almost everyone of them borrowed with corporate bonds in the last 6 months on a very low interest rates.
- s1artibartfast 4y ago
  How far the stock goes down will depend on profitability. Would you rather own a more or less profitable company?
frontiersummit 4y ago
This puts it mildly. Paul Volcker has been (perhaps unfairly) called the Father of the Rustbelt, due to how rising interest rates broke the back of manufacturing in the American Midwest during the late 1970s and early 1980s. "Cooling" the economy means layoffs and plant closures, often concentrated in specific geographic regions. The only question is: what firms and employees get sacrificed to placate the inflation Gods this time around?
- ethbr0 4y ago
  Rising interest rates & a strong dollar Ironically, you can generally have your financial house in order as a country or be globally manufacturing-competitive, but not both*. * Exceptions Germany, Japan, et al., but as you go up the value chain you gain enough profit leeway to paper over the general rule.
  - Clent 4y ago
    Why are those countries the exception and not America? Other countries figure it out. America cannot. Therefore, it's not possible. America!
    - gretch 4y ago
      The poster you are responding to is probably incorrect in many regards. There aren't really 'exceptions' just 'differences'. For example, Japan's economy definitely is not feeling good at the moment, even if some particular metrics are performing at a top tier.
  - aksss 4y ago
    We should not ignore that for countries like Japan and Germany, they have an enormous advantage in not having to spend realistically on a defense budget relative to their risk-prone geography, living as they do under an umbrella. https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?end=2020&locations=EU&start=1960 https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?end=2... https://www.washingtonpost.com/news/worldviews/wp/2015/02/19/germanys-army-is-so-under-equipped-that-it-used-broomsticks-instead-of-machine-guns/ https://www.washingtonpost.com/news/worldviews/wp/2015/02/19...
programmertote 4y ago
> As new investments contract, demand shrinks for services across the industry. As demand shrinks, fewer employees are needed and companies need to reduce headcount to avoid overspending relative to revenues. As someone who has only taken Econ 101 in college, can you explain 1) why the demand shrinks when there's not enough new investments? Shouldn't demand at least be the same overall (I mean I can see that fewer new houses are built, so the demand for timber might shrink. But that only explains the housing sector. I'd imagine the demand might stay constant for some industry such as transportation)? 2) Related to #2, if demand does not shrink by much, shouldn't the same number of workers be kept employed to fulfill the demand for goods? If it's true that the contraction of new investments causes shrinkage of demand, it means the economy is heavily reliant on industries/sectors which relies on new investments (aka growth)? Thank you in advance for elaborating your answer!
- s1artibartfast 4y ago
  To put it simply, a portion of demand today is speculative and based on the expectation of greater demand in the future. for example, you might buy 2x the material and labor you need for today's demand, because you need them to meet tomorrows higher demand.
- opportune 4y ago
  New investment is things like making buildings, investing in VC, making new machines for manufacturing. Those are funded by cash or loans. When interest rates rise more cash goes to seeking interest and less toward these physical investments, and less money is created de novo from loans to fund these things. It’s worth keeping in mind that money spent on new buildings and machines goes to wages of employees building them, which then goes to rents and food, and elsewhere throughout the economy. For 2, yes and no. A lot of workers are employed doing things with low or speculative marginal ROI (example: Coca Cola starts funding R&D into a new line of beverages) because the cost of capital (taking a loan against cash flow or spending earnings on reinvestment instead of returning it to shareholders) is low. Increasing interest rates increases the cost of capital, the risk feee opportunity cost of spending money on more speculative pursuits like R&D. So now Coca Cola might instead choose to return that money to shareholders or not take out financing to start operations like that
drc500free 4y ago
Critically, tech workers are compensated highly because they are working on investments. We're not laying bricks where it's easy to measure what we accomplished in a given day, we are usually building products and tech stacks that are projected to bring in FUTURE cash. When interest rates were held low, the planning horizon was very long and we got a huge expansion in future-looking projects. Now that horizon is shrinking and disproportionately impacting the jobs that are associated with future investments rather than ongoing operations.
- ketzo 4y ago
  This is a really good take, and I wanna expand it further: when interest rates are lower and planning horizons are longer, valuations get bigger. If you think of a company’s market capitalization as a rough measure of its future cash flows, that valuation is gonna be a lot higher when those future cash flows don’t have to fight much future interest. Higher future valuations means it’s worth paying more NOW to capture a slice of that valuation.
  - drc500free 4y ago
    The cynic in me would say that the valuations were driven more from the cash-supply side, which allowed a lot of people to play "VC investor" or "VP with a sexy R&D portfolio." No one really leads with a low-level analyst's DCF model in real life, it's backfitted to justify an investment that feels right at the multiple that has comps. I think this is going to be less about the academic economics, and more of a baseball card bubble bursting around software products that promised free growth at 100% unit margins. The cash is still there, and still wants to be invested, but everyone's a little timid and doesn't want to look irresponsible.
danuker 4y ago
When demand goes down (in this case due to rising rates) Rates are rising because of inflation. Inflation is rising because people are spending. Why are people spending all at once? It could be because of the pandemic restrictions lifting, but also because of mass psychology ("OMG! everything is getting more expensive! I must buy while I can"). If people resisted the bandwagon effect, and bought when stuff is cheap, while saving when stuff is expensive, they'd be much better off. "The time to buy is when there's blood in the streets." - Baron Rothschild

echelon 4y ago

It also impacts the loans that companies frequently take out and the interest-inflated payments they need to service their debt.

UncleOxidant 4y ago
And this is more likely what's impacting companies like Lyft. Their business model worked in an easy-money environment, but doesn't work in an environment with more normal interest rates where it's harder to borrow money and costs more.

nunez 4y ago

Adding context: the US Fed raised the interest rate benchmark this week to 4%, with the expectation that it will be raised higher. Credit's getting a lot more expensive.

Spivak 4y ago
Yep, don't even look at mortgages until housing prices drop in response to the rate increases. Because the amount of total money paid in interest over a 30 loan increased more than 2x over the last year.
- nunez 4y ago
  honestly i think this is the "real estate bubble" folks were looking for (it's not a bubble but housing might finally drop in price now that mortgages are so expensive)

curiousgal 4y ago

> avoid overspending relative to revenues. Most companies are already making a shit ton of money. Firing people won't keep their stock prices from going down if a recession actually hits. It's moot.

disgruntledphd2 4y ago
Lyft are not one of those companies though.
vineyardmike 4y ago
They could run out of money of course. It’s about the cash flow. When rates were low a lot of companies used debt to acquire cash, use it to hire/spend beyond their current means in order to expand their business (more revenue later). This is pretty common, use debt to build a warehouse/data center/app widget/etc. In a recession, that extra revenue may not come, so they need to cut spending so spending < revenue instead. Especially a company like Lyft that is likely losing money many months. I don’t know about today, but Uber and Lyft were famous for using venture capital to spend more than they took in every month. Eventually they run out of cash reserves, or they decide they can’t acquire more.
ShivShankaran 4y ago
they are also a lot in debt. Almost everyone of them borrowed with corporate bonds in the last 6 months on a very low interest rates.
s1artibartfast 4y ago
How far the stock goes down will depend on profitability. Would you rather own a more or less profitable company?

frontiersummit 4y ago

This puts it mildly. Paul Volcker has been (perhaps unfairly) called the Father of the Rustbelt, due to how rising interest rates broke the back of manufacturing in the American Midwest during the late 1970s and early 1980s. "Cooling" the economy means layoffs and plant closures, often concentrated in specific geographic regions. The only question is: what firms and employees get sacrificed to placate the inflation Gods this time around?

ethbr0 4y ago
Rising interest rates & a strong dollar Ironically, you can generally have your financial house in order as a country or be globally manufacturing-competitive, but not both*. * Exceptions Germany, Japan, et al., but as you go up the value chain you gain enough profit leeway to paper over the general rule.
- Clent 4y ago
  Why are those countries the exception and not America? Other countries figure it out. America cannot. Therefore, it's not possible. America!
  - gretch 4y ago
    The poster you are responding to is probably incorrect in many regards. There aren't really 'exceptions' just 'differences'. For example, Japan's economy definitely is not feeling good at the moment, even if some particular metrics are performing at a top tier.
- aksss 4y ago
  We should not ignore that for countries like Japan and Germany, they have an enormous advantage in not having to spend realistically on a defense budget relative to their risk-prone geography, living as they do under an umbrella. https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?end=2020&locations=EU&start=1960 https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?end=2... https://www.washingtonpost.com/news/worldviews/wp/2015/02/19/germanys-army-is-so-under-equipped-that-it-used-broomsticks-instead-of-machine-guns/ https://www.washingtonpost.com/news/worldviews/wp/2015/02/19...

programmertote 4y ago

> As new investments contract, demand shrinks for services across the industry. As demand shrinks, fewer employees are needed and companies need to reduce headcount to avoid overspending relative to revenues. As someone who has only taken Econ 101 in college, can you explain 1) why the demand shrinks when there's not enough new investments? Shouldn't demand at least be the same overall (I mean I can see that fewer new houses are built, so the demand for timber might shrink. But that only explains the housing sector. I'd imagine the demand might stay constant for some industry such as transportation)? 2) Related to #2, if demand does not shrink by much, shouldn't the same number of workers be kept employed to fulfill the demand for goods? If it's true that the contraction of new investments causes shrinkage of demand, it means the economy is heavily reliant on industries/sectors which relies on new investments (aka growth)? Thank you in advance for elaborating your answer!

s1artibartfast 4y ago
To put it simply, a portion of demand today is speculative and based on the expectation of greater demand in the future. for example, you might buy 2x the material and labor you need for today's demand, because you need them to meet tomorrows higher demand.
opportune 4y ago
New investment is things like making buildings, investing in VC, making new machines for manufacturing. Those are funded by cash or loans. When interest rates rise more cash goes to seeking interest and less toward these physical investments, and less money is created de novo from loans to fund these things. It’s worth keeping in mind that money spent on new buildings and machines goes to wages of employees building them, which then goes to rents and food, and elsewhere throughout the economy. For 2, yes and no. A lot of workers are employed doing things with low or speculative marginal ROI (example: Coca Cola starts funding R&D into a new line of beverages) because the cost of capital (taking a loan against cash flow or spending earnings on reinvestment instead of returning it to shareholders) is low. Increasing interest rates increases the cost of capital, the risk feee opportunity cost of spending money on more speculative pursuits like R&D. So now Coca Cola might instead choose to return that money to shareholders or not take out financing to start operations like that

drc500free 4y ago

Critically, tech workers are compensated highly because they are working on investments. We're not laying bricks where it's easy to measure what we accomplished in a given day, we are usually building products and tech stacks that are projected to bring in FUTURE cash. When interest rates were held low, the planning horizon was very long and we got a huge expansion in future-looking projects. Now that horizon is shrinking and disproportionately impacting the jobs that are associated with future investments rather than ongoing operations.

ketzo 4y ago
This is a really good take, and I wanna expand it further: when interest rates are lower and planning horizons are longer, valuations get bigger. If you think of a company’s market capitalization as a rough measure of its future cash flows, that valuation is gonna be a lot higher when those future cash flows don’t have to fight much future interest. Higher future valuations means it’s worth paying more NOW to capture a slice of that valuation.
- drc500free 4y ago
  The cynic in me would say that the valuations were driven more from the cash-supply side, which allowed a lot of people to play "VC investor" or "VP with a sexy R&D portfolio." No one really leads with a low-level analyst's DCF model in real life, it's backfitted to justify an investment that feels right at the multiple that has comps. I think this is going to be less about the academic economics, and more of a baseball card bubble bursting around software products that promised free growth at 100% unit margins. The cash is still there, and still wants to be invested, but everyone's a little timid and doesn't want to look irresponsible.

danuker 4y ago

When demand goes down (in this case due to rising rates) Rates are rising because of inflation. Inflation is rising because people are spending. Why are people spending all at once? It could be because of the pandemic restrictions lifting, but also because of mass psychology ("OMG! everything is getting more expensive! I must buy while I can"). If people resisted the bandwagon effect, and bought when stuff is cheap, while saving when stuff is expensive, they'd be much better off. "The time to buy is when there's blood in the streets." - Baron Rothschild