E98: Big tech starts making cuts, Fed incompetency, global debt, Russia/Ukraine & more
- Meta is expected to reduce its headcount in 2023, marking the company's first historical reduction in workforce size.
- Apple anticipates pulling back production of the iPhone 14, signaling a broader contraction in big tech expansion.
- The era of unfettered growth for major technology firms (Apple, Facebook, Google, Microsoft) is ending, necessitating a shift toward tight expense management, smaller controlled experiments, and trading within tighter valuation multiples due to tapering growth.
- Silicon Valley is projected to enter a new phase where compensation bands, option values, and fringe benefits will contract, while job-hopping opportunities diminish as startups face increased bankruptcy rates and a consolidation of talent toward stronger entities.
- A broad-based recession is likely to impact the real economy, with Wall Street content deals in Hollywood halting and the 2022 asset bubble affecting real people and sectors beyond financial markets.
- Equity markets are described as consolidating near lows, potentially within a 3% to 5% range of the bottom, with a "double bottom" formation anticipated; investments made in 2023 and 2024 are viewed as having high potential upside for future market leaders.
- The Federal Reserve is expected to intervene to prevent a "hard landing" by slowing or reversing rate hikes once unemployment reaches an "awkward" level of 5% to 6%, with rate increases possibly limited to 50 basis points; the neutral interest rate forecast has been raised from 3.5% to 4.6%.
- Adjustable-rate mortgages (ARMs) are set to reset significantly higher, with U.S. payments spiking by roughly 300 basis points and UK interest-only ARMs resetting in January to approximately 4%, potentially increasing global debt service costs by $15 trillion annually.
- Demand destruction from resetting mortgages may cause consumers to delay purchases of durable goods, while governments may extend maturities to 100-year bonds to avoid defaults, with the Bank of England acting as an unlimited buyer of gilts to ensure stability.
- Macro economic outlooks include a potential "flat decade" for equities similar to the 1966–1982 U.S. period or Japan's lost decade, with the Dow Jones projected to remain at current levels over the next ten years, though market bottoms historically occur in the first third of a rate-hiking cycle.
- The "Fed Put" mechanism is expected to return, historically eliminating true supply/demand balance for talent and operations, but its removal forces true price discovery; its return is anticipated to stabilize markets and trigger a rebound.
- The Ukraine war is on a path toward escalation with removed off-ramps for peace, carrying a non-zero chance of tactical nuclear use if Russian leadership feels threatened, which could embolden U.S. hawks to target China.
- Financial institutions like JP Morgan are shifting to recognize that tail risks, including fat-tail events with low probability but high impact, now outweigh potential upside, particularly regarding the nuclear war scenario.
- Life sciences companies remain well-funded but face a shortage of physical lab space in the Bay Area, while remote work models continue to lower operating costs and expand talent access for software firms.
- U.S. boomers control approximately $71 trillion in assets; housing and stock market declines are expected to redistribute value by deflating these assets, potentially altering labor force participation which has dropped from 70% to 62% due to wealth effects.
- The IPO market and broader economic health are correlated with consumer goods rotation and capital spending, with market resolution potentially catalyzed by a conclusion to the Ukraine conflict.