A global recession is coming against a backdrop of the Fed raising rates, that is going to be very painful. A lot of people here don't seem to realise this is the case or are in denial. This is a bubble bursting, this is serious.
Lots of companies are laying off workers or at least freezing hiring because they anticipate earnings cratering, or are already seeing it happen. They haven't reported on it yet, but they will in the coming months. The layoffs will continue to gather pace, as will bankruptcies.
As far as I can tell, layoffs seem concentrated among high-earning folks - I can definitely see how anyone browsing HN would think we're headed straight for a recession. But it seems like overall, and especially in lower-wage jobs, employment is still humming along and people are very much not getting laid off.
That actually really gives me hope for a soft landing - those high-wage folks are much less likely to have serious financial problems like homes getting foreclosed (not to say it's not possible but they're much more likely to have a cushion to keep making payments). If they pull back on their discretionary spending plus stop doing things like driving up housing/car/stock prices by putting money into those things, that feels like it could be the basis for inflation slowing down without a huge uptick in unemployment and everything that comes with it.
This is a good point that I had not previously considered.
Inflation has been pretty stubborn. I assume some of that is coming from supply chain issues, but some of it also could be due to higher-earning households not being as price sensitive as they would have been in previous eras. i.e. a Google engineer is not going to really notice or care that milk is 50% more expensive. They might not even notice or care that their new car now costs $40k instead of $30k. Their annual stock options probably fluctuate by that much on a daily basis. That level of economic comfort used to be the exclusive purview of the professional class, i.e. doctors, lawyers, etc... But the tech boom has expanded that class (upper middle, lower rich?) considerably.
Will be interesting to see if this is the straw that can break the inflation camel. Overall, I am getting the impression that these layoff announcements, while grabbing headlines, are not very indicative of the market at large. But it does seem like they are picking up steam, and of course, these things can also reinforce each other. For example when you let go of 10% of your staff, that means you also reduce your per-seat SAAS software spend, and that money was someone else's revenue.
Anyways, I am rooting for a soft landing but still feel like these things are too hard to control. Would be nice if we could just let some air out of the more bubbly parts of the economy while keeping everything else chugging along. Previous recessions usually result in those who can least afford it getting hit the hardest, so a change of pace on that front would be welcome. Fingers crossed.
I make a good wage and the first thing I'll do if I get the boot is stop buying things from the plebs. No eating out and paying the cook. No day care paying the working class daycare worker. No buying lumber for house projects paying the logger and mill worker. No cars paying the auto worker. etc, etc. Less toys for the kid meaning less trucking and shipping work.
Compound that at scale and it will definitely have an effect.
True but at a minimum income I am not employing anyone and basically only paying rent (straight to the megarich) and taxes (straight to the destitute and the megarich) and food while scrounging and DIY for everything else. The portion people spend on working class worker services probably increases exponentially going from lower working class to upper middle class, which would make the effect naturally even worse than a linear one.
there is also the fact that the skewed income distribution means that there are relatively few high income people cutting back (a lot) on expenses, so while it has an effect, it’s probably a lot less than if the same proportion of low income people were losing their jobs
Yep, this is it exactly. Even tens of thousands of tech workers getting laid off and cutting back discretionary spending isn't actually that impactful in the grand scheme of things, especially since much of their spending is on high-end, luxury goods.
But it seems like overall, and especially in lower-wage jobs, employment is still humming along and people are very much not getting laid off.
There will not be a soft landing.
When has there ever been a soft landing and how would raising rates into a recession ever result in one? Raising rates takes 1 year to come through to the real economy - we haven't even seen the impact yet, only on stock prices which foreshadow the real economy and again are a leading indicator. They will raise till unemployment starts to rise.
Unemployment is the goal of this Fed policy - that is the point - cause unemployment so that inflation goes away.
The reality is we cannot see the future of our incredibly complex, ever-changing economy. Sure, this hasn't happened in the past, but on the other hand the economy today is vastly different than it was even fifty years ago. Not to say we couldn't end in a recession - of course that is a distinct possibility - but the reality is that we don't have a ton of history to draw on when it comes to post-pandemic recessions exacerbated by supply chain issues and large-scale war in major energy-producing countries.
I wonder if you've shorted the equities markets to the greatest degree practically possible given your financial situation? If not, then I think you're phrasing things with too great a degree of absoluteness.
In terms of the Fed's goal, it is reduction of inflation. Unemployment is both a driver and a signal of that, but it's not the ultimate goal. And besides, a rise in unemployment doesn't guarantee a recession - we're at 3.5% and folks from the Fed have said they see 4% as consistent with keeping inflation stable at an appropriate level. It is absolutely possible to have 4% inflation and not be in a recession.
I don't short stocks, but I would not buy the US market at the moment. There will be bear market rallies but I do think this is still a bear market and will take years to play out.
High interest rates causing unemployment and reducing investment is the lever they will use to defeat inflation, it's very very hard to get right and the Fed has a long track record of getting it absolutely wrong (including over the last decade when they stoked a massive asset bubble in the US and all sorts of crazy behaviour like NFTs and crypto speculation). I suspect they will get it wrong this time too.
The Fed created this bubble (and arguably others since 2000) with loose monetary policy, and now they're trying to kill it with tight monetary policy - what could possibly go wrong!
>I wonder if you've shorted the equities markets to the greatest degree practically possible given your financial situation? If not, then I think you're phrasing things with too great a degree of absoluteness.
The equities market doesn't have great correlation with the common pleb's job outlook so it makes no sense to short the equities market based on these kind of predictions.
The prediction was that we are guaranteed to go into a recession. Are you suggesting that we might have a recession in which the stock market doesn't decline? Bear in mind that this is a situation in which we can be sure the Fed will not prop it up, since they're the cause of it going down in the first place.
If we're making predictions about recessions based on history, then it seems pretty clear that the result of one will be a market decline.
I think the issue is that we’re already in a recession, everyone has been talking about this for months, and the stock market has taken a giant turn downward already last year. It could stay at its current level for a year or two before rising again, but the stock market has already been expecting a recession and that’s likely why it’s this low already.
It doesn’t have to drop more in a recession because it already has! People losing their jobs and spending less is already predicted by Wall St.
Apologies for not being clear. I was referring to this quote which you quoted.
>But it seems like overall, and especially in lower-wage jobs, employment is still humming along and people are very much not getting laid off.
There will not be a soft landing.
It seemed like you were responding to this statement that was about employment rather than the stock market, before making your comment about shorting the equities market.
This is a classic, desperate hope that people have going into a recession. "This time could be different". We've been waiting a long time for this one. It's not just about COVID, otherwise why would it happen as things get better.
Many of these businesses being hit were long overdue for a fall and behaving highly irrationally. This borders on the severity of the .com bust, though it does appear to be less severe.
How do we know it won't be worse either? We could be heading into a downturn and turmoil to rival the great depression.
> This borders on the severity of the .com bust, though it does appear to be less severe.
I don't think this is remotely true - the .com bust killed off a huge number of companies (and an enormous amount of market cap) that weren't profitable and had no real path to profitability. This time we're talking about layoffs at companies like Meta and Amazon that are just throwing off money every quarter.
I really wish we had other tools than the Fed at our disposal. Legislation could be passed to create surtaxes on profits that exceed the current rate of inflation to help curb the inflation spiral. Likewise, we could pass legislation restricting the ability of private banks to grant lines of credit (so as to shrink the money supply on the supply-side rather than the demand-side). Either way, it would be nice to see the supply-side take a hit in this circumstance rather than the demand-side. Hit the asset-holding classes harder than the wage-earning classes. Ultimately, it's the asset-holding class that got us into this disaster in the first place.
> I really wish we had other tools than the Fed at our disposal.
The fed is basically a team of scientists when it comes to monetary policy, and meanwhile congress is essentially warring factions of drunk, catty sorority girls when it comes to fiscal policy. It's unfortunate.
If instead of the massive tax cut passed in 2017 we had passed a 2 trillion dollar infrastructure spending bill (and I'm talking 2 trillion in additional infra spending, not the watered-down "1 trillion" that included routine spending) we could've been on a solid footing for supply capacity that could've fought inflation without targeted killing of the working class.
The idea is I think that inflation is caused by too much money supply in circulation, caused by overemployment, and the only cure for that is less employment. It's a lot like how inflation and deflation are two sides of the same coin, but you wouldn't "root for deflation" because that's just the opposite extreme – Fed doesn't want everyone to lose their jobs, "just a healthy amount"
This the reality because there's no political will for Congress to act, so we're left the Fed to implement anti-inflationary measures. A sufficiently empowered legislature might attack this on the supply-side so that nominal increases in wages could become real increases in wages while discouraging the supply-side from increasing prices to rent-seek those nominally increased wages.
It sucks, but it is what it is. The rich keep getting richer and the poor keep getting poorer.
Price controls were tried in the 70’s and it failed spectacularly and often led to shortages. We had almost a decade of stagflation - poor economic performance AND inflation.
It wasn’t until the fed took control of the money supply in the late 70’s did inflation get under control.
Even more it still seems like it’s mainly companies who doubled their headcount since COVID started because someone extrapolated the madness to last forever? I sure hope the first in line for layoffs are the people who thought that was a great idea
>As far as I can tell, layoffs seem concentrated among high-earning folks - I can definitely see how anyone browsing HN would think we're headed straight for a recession. But it seems like overall, and especially in lower-wage jobs, employment is still humming along and people are very much not getting laid off.
Shit rolls downhill. We'll see how well the service economy holds up when their client base has been out of work for 6 months.
Are tech workers really the basis of the service economy? And even if so, will they remain so if lower wage earners, of which there are quite a lot more, start earning relatively more?
One interesting concept is that falling inequality will look exactly like this.
Wealthy people have gotten used to increasing the gap and therefore assume that trouble at the top is much worse below.
But what’s actually panning out is that Internet technology is great at replacing white collar jobs and awful at replacing blue collar jobs (I don’t think electricians are losing sleep over ChatGPT).
I would actually very strongly disagree with that assertion.
Delivery robots are limited to certain college campuses, robotic waitresses are far from the mainstream, and self-checkout appears to still need 1-2 workers manning it for loss-prevention/general help.
Meanwhile, Robotic Process Automation is gutting the "I download a PDF and transcribe it to Excel" worker category at banks.
I don’t think we know that yet. GPT is less capable than StackOverflow, and a service like that using cheap human labour has not yet replaced programmers. In the absence of AI that can write code or change sheets how can we know?
Meanwhile, farm automation has flipped the overall percentage of labour force from >90% farm to <10%
And that doesn't even include the explosion in Buy Now Pay Later services like Afterpay, which are very much debt but likely don't show up in the report.
EDIT: Thank you all for generously sharing your time in writing up such thoughtful answers.
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Would love to hear more on your perspective / insight.
This is all intentional, right? My understanding is that the fed is leaning into this particularly hard in order to dislodge the stubborn housing bubble.
For an individual (someone who isn't a current business owner), does this basically mean we should continue stockpiling savings, and avoid moving (rent) / avoid buying house / buying a car?
Any ideas how long this could last / what the bottom looks like?
> My understanding is that the fed is leaning into this particularly hard in order to dislodge the stubborn housing bubble.
They are trying to reduce inflation. The housing bubble certainly played a part, but inflation was hitting nearly everything. A big concern here, is that many smart people think a fair bit of that inflation was due to COVID related supply chain disruptions (which still persist, see China and COVID). So while raising interest rates will help, it may not be the right tool for the job (but it is the only tool that the Fed has, so here we are).
> For an individual (someone who isn't a current business owner), does this basically mean we should continue stockpiling savings, and avoid moving (rent) / avoid buying house / buying a car?
Definitely build up your savings. The other three are more complicated. Rents appear to be finally going down in some marquee markets. So moving might actually save you money. Buying a house now feels like a bad idea, seems like the market is still carrying on from the fumes of the bubble, but interest rates are definitely having an impact. Based on historical examples, the full impacts will probably take a few years to shake out as housing tends to move pretty slowly. And buying a car, well that is complicated. If you need one, buy one. If not, probably best to avoid it.
If you do have savings, might make sense to start looking at CDs, treasuries, and municipal bonds. Interest rates are up and if you have a chunk of cash sitting around those are good ways to put it to use.
> Any ideas how long this could last / what the bottom looks like?
Watching the Fed is the key here. And the Fed is watching inflation. So as long as inflation stubbornly persists the Fed is likely to keep raising rates, and that is going to impact the economy. I read somewhere that the "market" is expecting inflation to normalize in the summer of 2023. But personally that feels optimistic. I think we still need to shake off the COVID induced supply chain disruptions before things get back to normal, and that still feels like another year or so away.
2022 was the worst performing year ever for bonds and among the worst-10 for stocks -- we've never been this deep in the "negative returns across sectors" quadrant as we are right now, and there's no clear indication or catalyst to suggest we're recovering yet either.
Wow. Take the maximum of both axis, which represent the ceiling of what you can earn with a conservative stock or bond portfolio, and it blows the rest out of the water. Really enjoy the way they distilled this down.
With China dropping its zero-covid policy, I think we're realistically on the way out. However there's no avoiding that we need to pay for 2-3 years of lost global productivity.
I mean picture yourself stopping work for 2-3y with zero planning, living on debt and pretending like nothing happened. At some point the bills come due.
I am not sure what to think about China. Dropping the zero-covid policy feels like just the start. They still might go through a couple of waves of covid before things get back to normal. Or things could snap back fairly quick, hard to predict.
Another factor working its way through the system is the "reshoring" of manufacturing. A lot of companies gave up on China and are moving their manufacturing to other countries or closer to home. This probably creates inflationary pressures as the development of the manufacturing facilities create s a fair bit of demand, but also staffing the facility creates more demand for the local workforce. So if this trend continues I could seeing this being a long term inflationary pressure.
I think at least the China situation or lack of manufacturing capacity will resolve itself by the end of the year. Reshoring will change things but I think over the next 2-3y, making it so that overall the big turbulence we live now goes down slowly until the end of the year and then stabilizes at a higher inflation rate than expected (3-4-5% out of my magic hat), but not as wild as now.
2008 lasted nearly 17 months. The hard part is deciding when the recession actually started. The media and government is in denial, so they'd tell you we aren't even in a recession yet. But the rule of thumb is typically two negative quarters of GDP growth, which we hit this summer.
If you run a VC backed business my suggestion is 24-30 months of runway is a good starting point.
As far as individuals go, it's not a bad idea to mirror this advice. Have essentially 2 to 2.5 years of income saved in the event that you get laid off and can't find a job for a long time. Hopefully it never comes to that, but it never hurts to be prepared.
It’s also hard to figure out when the recession ends.
The q1/q2 numbers were more than made up by the q3 gdp growth. The numbers for q4 aren’t out yet but the consensus thinks they’ll be slightly positive making 2022 a positive year. That’s after 2021 which was a barn burner.
The GDP curve is already nothing like 2008 so it’s hard to use it as a guide.
"The media and government is in denial, so they'd tell you we aren't even in a recession yet."
There are costant headlines about layoffs. Also you said that a recession has a defintion, if that hasn't happened how is the media and government in denial?
Like I said in my comment, it did happen. This summer we hit 2 quarters of negative GDP growth. At the time, and even now, the media is suddenly moving the goal posts and trying to redefine what a recession is.
Falling stock prices are really a reflection of real-world problems - while it obviously feels in the US like everything is fine (judging from the many comments saying this here on this thread), everything is not fine, companies looking at their P/L and laying off staff are not fine, and the Fed is deliberately going to cause a recession and cause unemployment to stop inflation, which is a very brutal and indirect tool to do so.
The Jeremy Grantham interview you cite to for him "correctly" calling a bubble in 2021 was posted on May 28, 2021. S&P was at $420.04. S&P closed today at $395.52. The S&P continued to climb from May 28, 2021 until January 2022.
I would not label this "correctly" calling a bubble when he is off by over 6 months and equities remain within 10% of when he gave his interview.
The peak came after he spoke, in late 2021, and it’s not over yet, bear markets often have rallies. The nasdaq in comparison to s&p has larger losses from peak as it was the epicentre of the bubble this time, hence the layoffs there, but every sector is going to suffer.
This is all about inflation, not housing. Housing is just going to get caught in the crossfire.
If you have a low mortgage, hang onto that! Otherwise standard advice applies, try to keep at least 6 months expenses in cash or cash equivalents. Don’t make big purchases.
>"God I wish we could just do a Land Value Tax and be done with it."
Can you say what this is and how it would address the housing situation?
The housing bubble certainly is a slow moving one at this point. It seems like there's still not a lot of inventory and prices are still at historic highs. Prices haven't come down although price growth has slowed. It's really quite bizarre. We're a mobile a society though, eventually people have to move for various reasons. Maybe people are going to hold on their mortgage and rent the house instead of selling? It's hard to see how all this plays out.
Unemployment is at a record low. US economy added 223k new jobs in December. US Q3 GDP increased annualized 3.2% over Q2.
Some companies are doing layoffs (mainly those that overhired during COVID), others aren't. Look at the data instead of clickbait headlines and everything looks much less bleak.
If you are really certain you can forecast how the economy is going to do with high accuracy, get a job at some hedge fund and get rich.
Unemployment is low due to a lot of early retirement/retirement. It is obvious we're headed for a recession, the question is how bad will it be. Will China's housing market collapse?
Retirement explains the low unemployment % since they're no longer part of the workforce.
The jobs added are great, especially since we need ~140K additional jobs per month due to the growing US Population. (that number probably dropped due to reduced immigration)
Unfortunately I don't work in all sectors of America so even if the GDP goes up to a China-inflated 10% or higher but I'm unemployed, it'll suck.
Sure but that doesn't mean there will be a recession. Sometimes it's just necessary to switch fields (ie horseshoe makers when automobiles were getting popular).
Housing starts (new construction). Home sales (it's harder and harder to get a mortgage). If you know any real estate agents take them out to lunch because most are hurting. Oddly housing prices aren't dropping as much as they should due to the higher interest rates, i.e., people are staying in their homes so not too much inventory.
> A global recession is coming against a backdrop of the Fed raising rates
I believe we're going to double dip. We already dipped before the holidays. We'll see one more very painful quarter, which may not be Q1, but Q2 or Q3. From what I've seen, Series B+ is essentially impossible right now unless you're in the top 0.0001% of companies. Even then, if you're that operationally efficient, you might even hold off on funding until you can pull a higher valuation in 24-36 months.
As far as tech layoffs go. I think this has been coming for nearly a decade. Companies have been hiring at what seemed an insane pace for so long that it just became the norm. My personal opinions on Elon aside, he proved how bloated a lot silicon valley tech companies are/were.
Yes, there will be more layoffs, and when earnings collapse there will be another fall in stocks.
Raising money is going to become very difficult, even for those in a good position who manage to raise, they'll be asked for a lot more of their company in return for less money.
This might be a real bear market in equities (anyone remember those?), where things are bad for years and we may see something like the 70s, where the inflation peaked twice, the second time it was worse.
Lots of companies are laying off workers or at least freezing hiring because they anticipate earnings cratering, or are already seeing it happen. They haven't reported on it yet, but they will in the coming months. The layoffs will continue to gather pace, as will bankruptcies.