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The stimulus in 2020 and 2021 was historic and caused rapid economic growth, therefore companies hired in response to that growth. The rise in interest rates f

The stimulus in 2020 and 2021 was historic and caused rapid economic growth, therefore companies hired in response to that growth. The rise in interest rates from 0.25% to 4.75% is meant to slow economic growth, therefore companies need to adjust to a period of slower growth. The higher interest rates work primarily through the real estate market, slowing construction, but this means less consumers, and therefore less income for companies. Keep in mind, the banks raised rates rapidly as soon as they knew the Fed was going to raise rates. The Fed took many months to get to 4.75% but the banks jumped ahead and raised rates almost instantly. In 2020 many CEOs needed to plan for hypergrowth, in 2023 many CEOs need to plan for a possible recession. The money I spend becomes income for a company, and when that company pays you a salary, and you buy something from my company, then they money you spend becomes my salary. Everything goes around in a circle. Therefore, it doesn't matter how much debt a company has, but it does matter how much debt other people have. If other people suddenly need to pay more interest on their debts, then they have less money to spend whatever it is that your company is selling (unless you work at a bank).

dboreham 4y ago
> hired in response to that growth I think it's more direct than that. Rich people weren't getting any return on their money from fixed income instruments so instead they gave it to funds that invested in tech startups that then used it to hire people. Now interest rates are higher, rich people don't need to do that any more.
- emodendroket 4y ago
  Yes, that’s ultimately the theory behind rate hikes in the first place. On a big enough scale, wages get driven downward and then that has a knock-on effect on prices. It just turns out tech was especially vulnerable.
  - short_sells_poo 4y ago
    > It just turns out tech was especially vulnerable. This should not be surprising at all! The entire tech rally was fueled by a huge amount of leverage. That leverage was very cheap in the last 10 years, because there was a lot of money sloshing around and the interest rates were zero (sometimes even negative), which meant that the bar on portfolio returns was very low. I'm going to simplify a lot: let's say you have a portfolio that returns 10% p.a., if the risk free rate (ie bond returns) are 0, then you can say that your portfolio gives people 10% in excess of what they could get by holding safe assets. But now rates are 5% (for the sake of simplicity), that same portfolio only gives you 5% excess returns. On any single given year that's not a huge difference, but if you compound this over 10 years, that's the difference of having earned 60% vs. 160%. Huge difference! So as you can see this relatively small (in absolute terms) change really compounds itself into a massive re-evaluation of investments. When rates are negative, you'd be happy to hold assets that merely do nothing - ie neither gain nor lose value - but once rates start to rise appreciably, the future value of those investments needs to be discounted and because we are dealing with compounding, the discounting itself can be pretty brutal. This is then further compounded by the expectation that money supply itself is shrinking, which makes the pool of available money smaller as well. It's really a double whammy which will mostly affect highly leveraged and risky bets, as they become much much less palatable. It was really perverse how many tech companies had no discernible avenue of ever becoming profitable, and yet had billion dollar valuations. People were looking desperate for parking capital anywhere they could.
    - MuffinFlavored 4y ago
      > The entire tech rally was fueled by a huge amount of leverage I'd like to see a source/citation/proof for for that claim. I find it hard to believe Apple, Microsoft, Google, or Meta have "huge leverage".
      - emodendroket 4y ago
        Aren’t we talking about businesses like Uber that haven’t really ever made much money?
- MuffinFlavored 4y ago
  > that invested in tech startups But the companies doing layoffs aren't tech startups (Microsoft, Amazon, etc.)
- jpadkins 4y ago
  Did VC investments actually increase a lot in 20-21? Did Twilio issue more stocks? I get that Rich people were buying new assets, but I don't see how that is new funding for hiring. I thought it was more of an increase in asset prices for more risky assets. So the previous owner of the stock gets paid, but that doesn't result in hiring.
MuffinFlavored 4y ago
> Keep in mind, the banks raised rates rapidly as soon as they knew the Fed was going to raise rates. The Fed took many months to get to 4.75% but the banks jumped ahead and raised rates almost instantly. "Banks are intermediaries between the central bank (such as the Federal Reserve) and consumers and businesses. Banks borrow funds from the central bank at a certain rate and then lend those funds to their customers at a higher rate, earning a profit on the spread between the two rates." > therefore companies need to adjust to a period of slower growth. I think this is the missing piece for me. I didn't realize that since consumers will purchase less houses, the real estate sector will lag, and those who earn their living in it will have less discretionary spending to pump into the economy. From there (at scale), companies like Microsoft will grow less due to weakened consumer demand. That and people who need to finance car purchases right now (new or used) would also be affected. If it costs them more to finance a car than it did 12 months ago, Microsoft/Amazon/Google/Facebook can expect to have weakened consumer demand. So it isn't that Microsoft itself is directly impacted at a "we finance debt to pay our employees with the Federal Funds rate", but more that the Federal Reserve is trying to weaken consumer demand. Once that weakened demand reaches Microsoft, they need to adjust (lay off unprofitable teams/projects) to stay on their previously baked in growth projections that Wall Street expects to see/demands. Without this, Microsoft stock will go backwards because Wall Street wants to see perpetual continuous growth.
- lkrubner 4y ago
  "Banks borrow funds from the central bank at a certain rate" Right, but banks don't have to borrow money from the Fed. Banks also have the deposits from their customers, and so banks can make new loans based on those deposits. Last time I checked, this was roughly a 5 to 1 ratio (a bank with $1 million in deposits could make loans of $5 million) but that changes all the time, based on limits set by the Fed. But in general, right, when the Fed raises rates, consumer demand will weaken, and then that spreads to the retail sector, and then that works backwards to the manufacturing sector and all the service sector activities that support businesses in general (accounting, legal, janitors, etc), eventually slowing all economic activity.
  - 4y ago

dboreham 4y ago

> hired in response to that growth I think it's more direct than that. Rich people weren't getting any return on their money from fixed income instruments so instead they gave it to funds that invested in tech startups that then used it to hire people. Now interest rates are higher, rich people don't need to do that any more.

emodendroket 4y ago
Yes, that’s ultimately the theory behind rate hikes in the first place. On a big enough scale, wages get driven downward and then that has a knock-on effect on prices. It just turns out tech was especially vulnerable.
- short_sells_poo 4y ago
  > It just turns out tech was especially vulnerable. This should not be surprising at all! The entire tech rally was fueled by a huge amount of leverage. That leverage was very cheap in the last 10 years, because there was a lot of money sloshing around and the interest rates were zero (sometimes even negative), which meant that the bar on portfolio returns was very low. I'm going to simplify a lot: let's say you have a portfolio that returns 10% p.a., if the risk free rate (ie bond returns) are 0, then you can say that your portfolio gives people 10% in excess of what they could get by holding safe assets. But now rates are 5% (for the sake of simplicity), that same portfolio only gives you 5% excess returns. On any single given year that's not a huge difference, but if you compound this over 10 years, that's the difference of having earned 60% vs. 160%. Huge difference! So as you can see this relatively small (in absolute terms) change really compounds itself into a massive re-evaluation of investments. When rates are negative, you'd be happy to hold assets that merely do nothing - ie neither gain nor lose value - but once rates start to rise appreciably, the future value of those investments needs to be discounted and because we are dealing with compounding, the discounting itself can be pretty brutal. This is then further compounded by the expectation that money supply itself is shrinking, which makes the pool of available money smaller as well. It's really a double whammy which will mostly affect highly leveraged and risky bets, as they become much much less palatable. It was really perverse how many tech companies had no discernible avenue of ever becoming profitable, and yet had billion dollar valuations. People were looking desperate for parking capital anywhere they could.
  - MuffinFlavored 4y ago
    > The entire tech rally was fueled by a huge amount of leverage I'd like to see a source/citation/proof for for that claim. I find it hard to believe Apple, Microsoft, Google, or Meta have "huge leverage".
    - emodendroket 4y ago
      Aren’t we talking about businesses like Uber that haven’t really ever made much money?
MuffinFlavored 4y ago
> that invested in tech startups But the companies doing layoffs aren't tech startups (Microsoft, Amazon, etc.)
jpadkins 4y ago
Did VC investments actually increase a lot in 20-21? Did Twilio issue more stocks? I get that Rich people were buying new assets, but I don't see how that is new funding for hiring. I thought it was more of an increase in asset prices for more risky assets. So the previous owner of the stock gets paid, but that doesn't result in hiring.

MuffinFlavored 4y ago

> Keep in mind, the banks raised rates rapidly as soon as they knew the Fed was going to raise rates. The Fed took many months to get to 4.75% but the banks jumped ahead and raised rates almost instantly. "Banks are intermediaries between the central bank (such as the Federal Reserve) and consumers and businesses. Banks borrow funds from the central bank at a certain rate and then lend those funds to their customers at a higher rate, earning a profit on the spread between the two rates." > therefore companies need to adjust to a period of slower growth. I think this is the missing piece for me. I didn't realize that since consumers will purchase less houses, the real estate sector will lag, and those who earn their living in it will have less discretionary spending to pump into the economy. From there (at scale), companies like Microsoft will grow less due to weakened consumer demand. That and people who need to finance car purchases right now (new or used) would also be affected. If it costs them more to finance a car than it did 12 months ago, Microsoft/Amazon/Google/Facebook can expect to have weakened consumer demand. So it isn't that Microsoft itself is directly impacted at a "we finance debt to pay our employees with the Federal Funds rate", but more that the Federal Reserve is trying to weaken consumer demand. Once that weakened demand reaches Microsoft, they need to adjust (lay off unprofitable teams/projects) to stay on their previously baked in growth projections that Wall Street expects to see/demands. Without this, Microsoft stock will go backwards because Wall Street wants to see perpetual continuous growth.

lkrubner 4y ago
"Banks borrow funds from the central bank at a certain rate" Right, but banks don't have to borrow money from the Fed. Banks also have the deposits from their customers, and so banks can make new loans based on those deposits. Last time I checked, this was roughly a 5 to 1 ratio (a bank with $1 million in deposits could make loans of $5 million) but that changes all the time, based on limits set by the Fed. But in general, right, when the Fed raises rates, consumer demand will weaken, and then that spreads to the retail sector, and then that works backwards to the manufacturing sector and all the service sector activities that support businesses in general (accounting, legal, janitors, etc), eventually slowing all economic activity.
- 4y ago