4 ms·

Without really getting into the economic nitty gritty, the current environment feels a lot like late 2007. While the broader economy was still humming along fin

Without really getting into the economic nitty gritty, the current environment feels a lot like late 2007. While the broader economy was still humming along fine, but the sector (finance then, tech today) that led the growth during the expansion was going off the rails. During that cycle, the frothiness was led by the financial sector instead of the tech sector. The mega banks like Citi, JP Morgan, and Goldman had a lot of analogies to the FAANG tech giants today. During the bull run their market caps exploded, everyone thought they were geniuses to the point that the orgs started getting complacent, and they were scooping up people left and right paying huge total comp packages. The hedge fund explosion in the mid 2000s felt a lot like the VC and startup excesses of 2021. Money was sloshing around, and basically anyone could raise a ton of funding off a pitch deck with minimal due diligence. All that being said by late 2007 there was major distress in high finance. The structured credit markets had already basically imploded, the banks knew they were facing major imminent losses, and hiring was basically frozen. But this didn't really affect the broader economy until about a year later. It took a while for the complex credit markets on Wall Street to really impact vanilla credit markets on Main Street. But just because it was slow, didn't mean the tidal wave wasn't massive. I don't know if history will play out the same. But my point is recessions don't happen all at once. They typically take some time to really unfold across the entire economy. We can expect that there are "leading sectors" and "lagging sectors". Probably the sectors that were really the tip of the spear during the expansion phase are generally most likely to be the canary in the coal mine during the crash. And we know that tech has been responsible for a huge amount of growth in American over the past ten years. My guess is this is very unlikely to play out as "tech gets clobbered and everything else pulls through fine" just as 2007 was very unlikely to play out as "Bear Stearns collapses but the good times keep rolling".

boole1854 4y ago
A notable difference between 2007 and now is that in 2007, major banks were highly leveraged and held large quantities of assets whose value was highly sensitive to increases in interest rates (specifically: ARM-financed mortgages). So when the single-family residential mortgage delinquency rate when from under 2% to over 10%, it was a balance sheet catastrophe for those banks. There's no analogue to that highly leveraged dependence on rate-sensitive assets among the FAANG tech giants today. The FAANG companies are low-leverage, high-return monsters with an incredible 50+% average return on equity in 2021 and a low average debt-to-equity ratio of 1.8. (For comparison, in 2006 Bank of America had a return on equity of 15.6% and a debt-to-equity ratio of 9.8).
- dehrmann 4y ago
  > There's no analogue to that highly leveraged dependence on rate-sensitive assets among the FAANG tech giants today. The open question is how much VC spending (this was how easy money flooded into tech) poured into compute and ad spending, how much will it pull back, and what share of FAANG's revenue was it.
AnimalMuppet 4y ago
To me, it's different in a very important way. The financial sector is central to the economy in a way that the tech companies aren't. 2008 felt like the world might end (I was literally 24 hours away from withdrawing all my money into physical cash). 2023 may be a lot of people out of jobs, but it won't be systemically threatening in the same way... unless banks have been as stupid as they were in 2003-2006.
throwaway2037 4y ago
Tons of corporate debt has been issued in last ten years at historically low rates. If floating, they are screwed, but anyone with a smart treasury / corp fin dept will use a tenor-matched interest rate swap to convert float-to-fixed... so fine. However, if you need to roll-over expiring debt... uh oh, that will now be more than twice as expensive. Junk debt (and rated just above) will see more bankruptcies and "loan workouts" in next year than we have seen in last 10 years. Still, I cannot see a crash. I do see a "major slowdown" -- recession -- but not a depression.

boole1854 4y ago

A notable difference between 2007 and now is that in 2007, major banks were highly leveraged and held large quantities of assets whose value was highly sensitive to increases in interest rates (specifically: ARM-financed mortgages). So when the single-family residential mortgage delinquency rate when from under 2% to over 10%, it was a balance sheet catastrophe for those banks. There's no analogue to that highly leveraged dependence on rate-sensitive assets among the FAANG tech giants today. The FAANG companies are low-leverage, high-return monsters with an incredible 50+% average return on equity in 2021 and a low average debt-to-equity ratio of 1.8. (For comparison, in 2006 Bank of America had a return on equity of 15.6% and a debt-to-equity ratio of 9.8).

dehrmann 4y ago
> There's no analogue to that highly leveraged dependence on rate-sensitive assets among the FAANG tech giants today. The open question is how much VC spending (this was how easy money flooded into tech) poured into compute and ad spending, how much will it pull back, and what share of FAANG's revenue was it.

AnimalMuppet 4y ago

To me, it's different in a very important way. The financial sector is central to the economy in a way that the tech companies aren't. 2008 felt like the world might end (I was literally 24 hours away from withdrawing all my money into physical cash). 2023 may be a lot of people out of jobs, but it won't be systemically threatening in the same way... unless banks have been as stupid as they were in 2003-2006.

throwaway2037 4y ago

Tons of corporate debt has been issued in last ten years at historically low rates. If floating, they are screwed, but anyone with a smart treasury / corp fin dept will use a tenor-matched interest rate swap to convert float-to-fixed... so fine. However, if you need to roll-over expiring debt... uh oh, that will now be more than twice as expensive. Junk debt (and rated just above) will see more bankruptcies and "loan workouts" in next year than we have seen in last 10 years. Still, I cannot see a crash. I do see a "major slowdown" -- recession -- but not a depression.