A few days ago, we were informed of the collapse of Silicon Valley Bank, a lender and deposit-holder for many of America’s start-ups and venture capital funds. SVB lost 60% of its value in one day, then 70% more, and then was taken over by the FDIC, America’s insurer for banks.
Technically, SVB’s collapse is a classic case of the tribulations of a quick increase in interest rates. Given persistent inflation, America’s Federal Reserve has raised interest rates by 850% in one year – from 0.5% last March to 4.75% today. The bank had purchased government bonds at the old interest rate, guaranteeing around 0.5% per year, but due to the rise in interest, these bonds have become a loss. The bank then had to publically declare efforts to plug the hole in its balance sheet, which scared away depositors, and presto – a collapse.
It’s worth mentioning that like Elrond, who was granted the gift of foresight, Peter Thiel saw this advance and had his own start-ups get out in time. Which perhaps had accelerated the collapse. Anyhow, I digress.
More deeply, there is something meaningful in the collapse. Not in a symbolic but in a very real way: the collapsing bank was the product of an industry that DEPENDS on cheap money. America’s start-ups, with their pink unicorns, are mostly the product of the BS economy – entities created by the power of cheap money. This happens because money has to go somewhere, and it’s not going to go into a rusty old steel mill in Cleveland. But America’s “tech” companies create little real value.
First, many are simply money-losing endeavors including giants such as Uber and Airbnb. They stay afloat thanks to investments, their own portfolios, and other tricks, but not thanks to their operations. Second, the services America’s technology companies offer are by and large derivative, non-innovative, and amount to a clever re-arrangement of existing things. Take things like Snapchat, another losing endeavor – why would anybody expect this thing to survive when the cheap money runs out? Beyond the strange thrill of cheap image processing it offers nothing.
When the money is cheap, it *wants* to come to you. Especially in an economy offering very few real options. And so it may suffice to have a gesticulating Adam Neumann type to create a big hype. But when the money is tight, the picture changes dramatically.
So my prediction, unless something dramatic happens, is that we shall see much drainage in all of America’s nonsense industries, what my mother would call America’s luftgescheften, or air businesses. Let’s try to identify the key areas.
Anything transactional. This is a no-brainer. Industries that by definition thrive on the speed and volume of financial transactions thrive when cheap money is plentiful. Examine stock trading, investment banking, mergers and acquisitions consultancies, etc. All these professions are due for a contraction.
Anything that serves as a sinkhole for cheap money. Just like America’s luftgescheften start-ups, there are other areas that attract cheap money simply because it has nowhere else to go. The housing market might be an example, but given that mortgages, even when rates were low, were fairly conservative by comparison to 2008, and given that houses have a basic utility, I don’t necessarily expect an implosion. Commercial real estate, however, is a different game – we have too much of it and many people now work permanently or partially from home. I have clients paying leases for empty offices. Notably, Amazon has halted the construction of its new headquarters in DC.
Things not improving the bottom line. Without cheap money, even profitable enterprises find it hard to borrow and receive lines of credit. And since inflation is persistent, many corporations have been adjusting salaries upwards. Meaning, there will be belt-tightening for everybody. So most likely, spending on things like non-crisis public relations will decrease; spending on “diversity and inclusion” will decrease (such “professionals” are already losing their jobs); spending on corporate communications will decrease – anything not impacting positively the bottom line.
Barring massive government subsidies, true ideologues will have to take their ideology all the way to the bankruptcy court.
On the positive side, things that improve the bottom line may thrive – technology and advice for cost-cutting, cash acceleration services, collection agencies, outsourcing specialists, etc. If offered a choice nowadays between retaining your revenue-making job and being “promoted” to a corporate role, my advice would be to keep your revenue-making role for just a bit longer. The people “coordinating” and “project-managing” are in danger, not so much the people making money or cutting costs.
I’ll come back to this in a few months to look back and see which of my predictions came true.
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