Episode 103 | The Experts, Not the Populists, Are to Blame for Economic Crises
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It’s the Economy Stupid
TL;DR Section 1
Joe Biden’s popularity has declined 654 days into his presidency due to the economy. If there is a recession in 2024, those in power will be held accountable. The rise of populism is not to blame for recent economic crises but rather the experts and establishment figures in charge. To stop the populist wave, we need to start having experts in positions of power who actually know what they’re doing.
Who’s to Blame for the Rise of Populism
Joe Biden is 654 days into his presidency and is now as unpopular as Donald Trump was at this point in his presidency. The economy is the main reason for his decline in popularity. 2024 is an interesting setup for the election cycle because there is a potential for a recession. If this happens, those in power will be held accountable.
The rise of populism is not to blame for recent economic crises but rather the experts and establishment figures in charge. The pendulum of democracy is swinging back away from populism after recent radical outcomes have blown up in our faces. The vaccine for the pandemic was ineffective, and the experts caused the reaction to the pandemic, not the populous. The populist wave is a reaction to something real, which is the failure of this expert class. To stop the populist wave, we need to start having experts in positions of power who actually know what they’re doing.
A Looming Recession
The economy is turning, and inflation is out of control in Germany, so the government has nationalized assets. This could happen in America if there is not a split government.
The Federal Reserve has said that rates will be higher than expected, and this has caused companies to re-prioritize the value of short-term profits. The FED’s goal is to take away free capital and slow the economy down, leading to many companies running out of money. The question is whether or not the FED can stop consumer growth. If they cannot, then rates will have to be higher for much longer, which means that we could be in this market until early 2025.
The GDP growth in the U.S. was net negative in the first three quarters of 2020. This means that when inflation is taken into account, the economy is actually shrinking. Many economists believe that we are headed into a second recession, characterized by high unemployment rates. Federal Reserve Chairman Jerome Powell has said that he will take whatever measures necessary to fix the economy. Still, many people are skeptical that he will be able to do so in a timely manner.
A New Way to view Employment
The U.S. added 261,000 jobs in October. However, the number of unemployed Americans increased by 36,000, and the labor force participation rate declined for the third consecutive month to 62.2 percent. The data is mixed and feels like the last gasp of the bull market where there is residual job creation, but Stripe, a software company, recently cut 14 percent of its workforce. It seems like the beginning of a long cycle of the unemployment rate going up as the economy slows down.
The amount of money that individuals are earning is the better way to frame thinking about labor going forward. Gig workers are a small part of the workforce, but they are growing. Independent contractors are counted in labor participation, but how they are calculated is unknown. The bank of England has warned that the U.K. is facing its most prolonged recession since records began, and this is scary because no one knows how long it will last or who has been stress tested. Founders should be cautious and prioritize their survival above all else.
According to the FED of St Louis, if you accounted for casual workers and informal workers overdoing over 20 hours a week of informal work, AKA gig work, you would increase labor participation between a half point and a point. If you counted all of them, maybe even slightly more than two percentage points higher, so probably about a point seems like a realistic way to look at Labor participation. And of the eight points or maybe now the six or seven points, the ten percent, it would then account for 10 to 20 of the ten drop in labor participation.
TL;DR Section 2
In the current market, companies are cutting costs in order to be more profitable, as opposed to the previous mindset of growth at any cost. This is especially difficult for public companies to weather. Many software companies will need to go private in order to restructure and be rightly valued. Bill Gurley’s advice for these companies is to cut deeper into expenses. If successful, this could set a new standard for how lean and profitable tech companies can be.
Silicon Valley Companies Cutting Costs for Profit
Companies are now bearing down on this realization and are cutting costs in order to be more profitable. This is a contrast to the previous mindset of growth at any cost. It is better to grow slowly and be profitable than to burn money trying to grow quickly with no clear path to profitability. This is happening in Silicon Valley companies, where layoffs and cost reductions are being used to improve the bottom line. If successful, this could set a new standard for how lean and profitable tech companies can be.
Public companies will find it especially difficult to weather the storm, and private equity is an alternative for those businesses. There are 400 companies in the software industry that are valued at an average of 3 billion dollars. Of these, 70 are public, and the rest are private. Of the public companies, 50 are valued at more than 5 billion dollars, while only 40 of the private companies are valued at this amount. The point is that when interest rates were zero, there was an abundance of free money and risk-taking that is now out of the market. As a result, many of these software companies will need to go private in order to restructure and be rightly valued.
The biggest mistake people make when trying to save money is not cutting enough costs. This was a tweet by Bill Gurley a few months ago. He was talking about how Silicon Valley companies are cutting costs to try and turn a profit. The problem is that most of these companies are not cutting enough costs to make a significant difference. Elon Musk showed Silicon Valley this week that you can cut deep and still turn a profit. This sets a new standard for how these companies should be managed. Jack Welch, the former CEO of General Electric, used to recommend dropping the bottom 10% of employees every year. This is what Gurley is saying should be done in order to make these companies more profitable.
The question for shareholders is whether or not to stay in a stock and companies that are doing well are those that are making deep cuts to expenses. If a company like Facebook were to make cuts and start buying back its shares, the market would react positively. However, it is a challenging game to play, and one thought experiment for founders is to think about what their plan was at the end of 2019 before 2020’s distortions.
I used bundleIQ to research and write this overview of Episode 103.