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.

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.

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)

> 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.

Lyft are not one of those companies though.

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.

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.

How far the stock goes down will depend on profitability.

Would you rather own a more or less profitable company?

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

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.

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?

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.

Why are those countries the exception and not America?

Other countries figure it out. America cannot. Therefore, it's not possible. America!

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.

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=2...

https://www.washingtonpost.com/news/worldviews/wp/2015/02/19...

> 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!

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

> why the demand shrinks when there's not enough new investments?

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.

Some of these questions won't be answered in Economics class, but may be in Management Science class (that's what they called in back in my day).

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.

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.

Tech jobs are somewhat decoupled from true demand. They are usually inherently an indirect investment, not a direct cost. But when they and their activities go away, you lose the B2B demand that they had to accomplish their jobs and the B2C demand they had from spending their salaries.

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.

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.

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.

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.

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