Both the bubble and the crash are almost purely psychological. It's greed and fear coming in waves. There can be technical fundamentals, but to take the example of Bitcoin, you don't need any technical fundamentals. Humans can create and destroy value on top of a very complex random number generator.
Or 1. Convince people stocks are going to go down. 2. Mass sell-off. 3. Now stocks really are going down.
I think this is just a self-fulfilling prophecy where business leaders convinced themselves a slowdown is coming, causing them to take actions that will result in a slowdown. A lot of what happens at the CxO level is looking around at your peer companies and imitating what they are doing.
Stocks are not the economy.
We literally have a cold war with China escalating, a hot war in Europe (which we aren't directly involved in..yet), all after years of loose monetary and fiscal policy, inflation is at generation highs, with rates rising and housing relating prices crashing, and on and on...
Maybe HN needs some more serious economic analyses posted if people think all of this is caused by a 15% fall in SPX.
I'm not saying I know that's what's happening. But I wouldn't be surprised.
As for high flying tech (cloud, etc) - yeah, probably too much speculation there.
Powell has been saying for months he wants people to save and pull cash out of the economy.
This is intentional because DC decided tech workers were undermining Washingtons of course most correct and immutable control over agency.
Why if all these people kept earning and could acquire more assets and live comfortable, politicians and uber rich would have no place in our society.
The fundamentals must be maintained. Fundamentals being we serve their goals, not the other way around.
If you want to go on a specific tangent involving dead men’s philosophy, be my guest. I was merely attempting to illustrate how apt the bank run analogy is.
Pet conspiracy theory: boom/bust cycles are not only inevitable, but desirable to some extent. If the housing and stock markets didn't undergo catharsis every so often, new/beginning investors wouldn't be able to buy in.
The signs are usually telegraphed well in advance, but not by collusion or intent. A self-organizing conspiracy of sorts. It could be interpreted as "herd mentality" but I think that oversimplifies what's really going on, and why.
I wouldn’t call this a conspiracy theory at all. The founder of Bridgewater Associates, the largest hedge fund in the world, spent time and money to publish this idea in various forms. I learned about it from here:
There’s more to this idea—-the long term debt cycle—-but the premise is exactly what you stated. There are benefits to both the boom and bust phases of the economy.
1. Hype around new technologies is sometimes warranted. Electrification, for example. It wasn't clear how long it would take for these weird new internet companies to really start turning a buck, but after a few years spreadsheet parameters were updated and the whole financial industry saw the writing on the wall for most web companies.
2. Many profitable and completely unfunded web companies primarily received their funding from other web companies that were. This set off a cascading reaction of bankruptcies and massive layoffs. Advertisers, publishers, tool makers, and many others were in this second category of legit business that lost the vast majority of their customers.
One of the downsides of an inflating currency is that there is a general feeling of "well I have to invest my money somewhere!" that is hard to overcome and leads to bubbles until the sky starts falling, so I agree with you that psychology is a factor; but the fundamentals still dominate in the medium to long term.
...also HN today kind of looking like fuckedcompany[1] back in those days.
My take away is that we may have a mild recession, but the likelihood of a massive recession is a lot higher than it has been in decades.
Which companies go bankrupt now?
Then, it was because {value} = {idea} + {Internet}.
Except nobody knew how much value the {Internet} part added, because the Internet wasn't done solidifying in terms of capability (e.g. "AJAX? What's that?") or connectivity (PocketPC!).
Now, the Internet is a pretty well-known quantity.
So while Uber and Lyft and Masayoshi Son's portfolio might be massively overvaluing things, the fundamental nature is well understood.
Some stupid companies will die, but there are lots of companies making actual money doing actually useful things.
And the primary casualties of the dot-com bust are all so consolidated that the tools-impact will likely be lesser too. Amazon/MS/Google aren't going to go bankrupt over softer cloud demand.
If you see cloudy skies, and the weather reports suggest "maybe hurricane, maybe not", and your neighbors are boarding up their windows, you might be driven to action as well.
So, internal numbers are probably showing a downwards trend too, if so many companies are laying off workers.
So I don't see it as mass hysteria but instead. "We need to cut costs by 10% to avoid hitting the downward spiral of taking out loans".
More like a long overdue correction in tech.
Some of these businesses have been around for nearly 15 years and haven’t had a single year of consistent profits. It was about time that markets humbled them.
Conversely, the government could raise taxes across the board to control demand and trickle that money back to individuals over time, but it is political suicide.
Every downturn is like all the others and every downturn is a unique snowflake.
We're waking up from a a long night of heavy drinking (free money via zero interest rate, unrestrained QE, etc.), the bill is due and you're plugging your ears and yelling that the party must go on.
https://www.cnbc.com/2018/10/24/interest-rates-trump-attacks...
We deserve the world we have.
Was it not mass hysteria when FB, a company that everyone openly hates and who's main product is clearly dying was hiring by the thousands so they could "expand"?
High inflation → need to reduce demand → slower economy → layoffs.
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.
(it's not a bubble but housing might finally drop in price now that mortgages are so expensive)
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.
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.
Would you rather own a more or less profitable company?
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.
Other countries figure it out. America cannot. Therefore, it's not possible. America!
For example, Japan's economy definitely is not feeling good at the moment, even if some particular metrics are performing at a top tier.
https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?end=2...
https://www.washingtonpost.com/news/worldviews/wp/2015/02/19...
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!
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
The way I understand it: when interest rates increase, the ROI for any investment goes down, which makes many new investments risky or worthless. Thus investments in new projects go down, which reduces the demand. The investment could be a new shop, raw materials for new buildings, software projects, etc. When it's said the "demand" decreases, its not the want that goes away but the ability of people to realize the want that goes away.
> if demand does not shrink by much, shouldn't the same number of workers be kept employed to fulfill the demand for goods?
Depends. If the cost of doing business rises, the profit decreases. To maintain value, there could be a decrease in headcount increase or layoffs.
> it means the economy is heavily reliant on industries/sectors which relies on new investments (aka growth)
I think (and someone who is more aware can correct me), it boils down to the ROI. Why would any business investment in something with risk when the ROI doesn't make it worth it. If the risk-free interest rate 5%, any investment with a ROI of say 7% or below (higher for riskier investments) are out of the question. Any entity could make money by saving at the risk free rate.
Regarding your #2:
Companies cannot adjust headcount in real-time. Economics is a 'social science' as a result; you cannot create experiments in controlled environments with randomly selected populations like you can with the natural sciences. Experiments of this kind happen do happen, but for small-scale things like behavioural finance among neighborhoods, rather than between billion-dollar companies.
Layoffs are a human decision. As such, the logic behind them, and the timing of them, can't fully be explained by economic theory.
One reason why workers are sacked even when demand remains the same, can simply be because there is a surplus of labour available at that time, and the company is betting that they can fire them and rehire at lower wages.
Another reason is simply 'fitting in' with what everyone else is doing to meet Wall St expectations (or VC expectations). Look at the job cuts today: Stripe 14%, Lyft 13%, Mollie 15%. Why are they all the same? Because they are all in the 'tech' industry and valued by the same set of metrics.
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.
For example, my last 3 product jobs have been a business travel offering, an HR learning management tool, and a Predictive analytics tool for data scientists working in marketing. A lot of the users who paid the bills were some form of tech worker that were executing on projects that were future investments.
Investors have been handed a truly mind-boggling amount of cash since 2008, but there hasn't been a lot of stimulus to the actual day-to-day economy. Valuations had to go up to accommodate this cash, and without a corresponding increase in consumer spending there's really only one lever in the financial model that drastically impacts valuation without seriously changing the core business: year-on-year growth.
Most growth stories are laughably improbable, and the investors need plausibility to play the game. Fundraising turned into a story-telling competition of who could spin the most plausible growth story that is hard to verify and hasn't been disproved. That story is some form of "we will completely dominate market X, by building software that enables hyper-scaling with minimal unit costs, and that also includes AI/ML/Optimization (to be developed) that solves the inherently hard problems in this industry."
That story is used for both VC-style external fundraising and internal project pitches, and it has crowded out most other approaches. A side-effect of that story has been a massive bubble in the jobs that can deliver on it - software engineers, designers, data scientists, product managers, etc. The game at most firms has been to keep kicking the outcomes down the road and claim that the hockey stick growth is right around the corner.
That worked until interest rates went up and far-future cash became much less valuable. The CFO and the Fund now need to show results in the very near term, and the knives are being sharpened for departments and companies who can't deliver on that. Those departments and companies remove demand when they fold, and there isn't a clear immediate activity that returns quick cash to replace them.
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.
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.
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.
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
If you have a whole economy ignoring signs and pretending growth goes forever you get bigger, harder crashes.
We can hope that this downturn is going to be a short wave just in response to the post covid overhype. But really there are still big problems with real estate valuation with lots of things going to be literally under water in decades and everything overpriced as a result of bad policy with low interest and too many people having enormous loans for most of their working lives.
Housing as investment needs to be drug out into the street and shot, but there isn’t really any way to do that which doesn’t cause a huge economic shock.
What we're seeing are the natural consequences of the fed's mandate to prevent inflation. This is always at the cost of demand for labor, bu design.
The regulation supplied by the fed preserves the interests of capital at expense of the interests of labor. The dual mandate is essentially meaningless.
I do live in Europe and not in the States, though, maybe things are different there.
Psychology is a clear factor which acts as a positive feedback loop, but raising the cost of money/credit is very, very real to a lot of businesses. The immediate effect it has on the cost of loan service for cars and houses will start to affect those markets pretty quickly, which spills over into homebuilders. And companies at the margins that have been surviving by cheap debt service will get pushed over into insolvency.
Then those closures and layoffs affect demand, that affects every other company in the economy. Those people couldn't afford houses and cars at any interest rate, and they're not buying computers or anything else as well, they're probably trying to sell their used cars for some cash. Since everyone's spending is someone else's demand then as spending contracts demand destruction ripples through the economy.
The psychological effect is another positive feedback loop, though, and it will cause the correction to overshoot to the downside.
At the same time, though, this means that assets are on a fire sale, and the rich people who have cash on the sidelines can step in and buy up even more of the country, which does put a floor under the crash.
(Thought stolen from Alan Watts)
The workers will be fired because the boss has run out of societal-effort credits.
The only "illusion" is the collective understanding that these "made-up" credits can be redeemed with other counterparties for human effort in the future. So long as we all approximately believe that idea, it works.
This is because the boss imagined getting more inches in future and made a leveraged bet. A downturn is a great opportunity for someone enterprising to become a boss and take everything in the construction site, hire people and build it themselves.
Layoffs leading to more layoffs leading to the entire economy slowing down ?