I remember the dot-com crash of 2001 and seeing companies close so fast, they didn’t their employees a final paychecks; I remember one day, after the dot-com collapse a position I was qualified for got filled within three hours.
As someone who has seen this before, things are looking ominous: The stock market drop of late 2018 reminded me of the stock market drop we had in 2000, about a year before everything fell apart. The yield curve inversion doesn’t look good, nor does the problems with the German economy. Uber posting a multi-billion dollar loss and Tesla having a hard time getting income remind me of the very same issues during the dot-com bubble, where highly valued companies weren’t actually earning money. Moviepass’s debacle reminds me of Webvan; a company which tried to get VC by having a business model which was hemorrhaging money.
I hope I am wrong, but I predict a tech sector crash in late 2019 or early-to-mid 2020.
First of all predicting a crash is a fool’s errand. It as much about emotions as it is about fundamentals. There’s a perfectly valid explanation for the valuation of Startups and the availability of capital for startups in the last 9 or so years. After 2008 crash, markets were stagnant until 2012. At the same time capital was being eased by govts worldwide. This capital has to flow somewhere. Tech startups were ripe at this crucial juncture for investments - we had seen enough successes with the likes of Facebook, Amazon and Google - and tech had a major point in its favour in terms of being able to scale easily. Now, in hindsight (personally i never thought it could work as claimed) this is emphatically not true for the sharing economy.
Plenty of articles have been written about it 2-3 years ago. We all have short term memory and are forgetting this. Every major tech publication predicted a crash in the startup economy. It never came about.
None of this related to the macro environment we are at. Trade wars wreak havoc on the sentiment of business than the actual supply chains themselves. Which is what seems to be happening now.
I am pretty sure recessions will at least be good for ridesharing companies, since they will get more drivers, which will lower driver pay. Since they can treat the prices consumers are willing to pay as sticky, this could help them solve profitability issues. I am not sure how much a recession would affect demand or consumers' willingness to spend on ridesharing though, but I think overall a recession is actually good for ridesharing
For Airbnb, it's a bit harder to say. More people will probably try to airbnb their places out, which will bring average costs down but increase the supply a lot. Demand may also increase as people unfortunately may turn to short term housing due to being in financially precarious situations. Since it's theorized that the American dollar will strengthen in the recession, this could also boost Airbnb's presence in international markets
Wework will probably gain too. More unemployment probably means more people trying to work out of weworks in startups or as freelancers. For the buildings they rent from non-executives, they could see a lower rent which would also help profitability.
So in summary I think the sharing economy is actually going to do ok. What do people do when they're unemployed? They try to make ends meet, and that means participating in the sharing economy
I'm not convinced a recession would be good for ridesharing companies. In a lot of places today, using Uber or Lyft is significantly more expensive than driving yourself on a per-mile basis, and way more expensive than alternatives like public transit. In a recession scenario where people are losing jobs and tightening personal budgets, it's pretty easy to envision a lot of people taking a hard look at their rideshare expenditures and either deciding to use an alternative or just not go out places nearly as often.
It depends a lot on how much ridesharing companies pass on any labor cost decreases to consumers, and consumers' demand curves.
Personally, my ridesharing use is a mix of relatively inelastic demand and elastic demand. Inelastically I am almost always going to use ridesharing to get to/from the airport, go places in other cities where I don't have a car and public transportation is too complex to figure out. I will usually use ridesharing if it is significantly faster and only $10 or so more expensive compared to public transportation that I can figure out. The only thing I would really reduce is using ridesharing to go out drinking - but if that becomes significantly cheaper, maybe not
Totally agree, I just think that on average, the net result in a recession will be less rideshare usage, even with lower costs. For example, people are probably more likely to ask a friend/family member to take them to the airport in a recession scenario than they are today. If you've lost your job, a $20 ride can be a significant expense for a large portion of potential customers.
The reason why tech has done so well in the past 10 years is partially due to luck. While investment dollars continued to pile up post-2008, tech was one industry who had recently shown really impressive returns. As such, that's where the dollars flowed.
My concern is what happens when a few of those unicorns fail (e.g. Uber)? If sentiment shifts enough, you might see tech suddenly become the ugly duckling. Companies that in reality are doing reasonably well will be painted with the same brush.
When people start to see Uber failing and other unicorns struggling, it just become a self-fulfilling prophecy - "I knew a recession was coming". People get risk adverse, company's stop hiring and it spreads to the economy as a whole.
Until every competitor leap frogs them. Everyone's running up a down escalator.
If uber just keeps the lights on, they will not maintain their stronghold on ridesharing, let alone be the last to market for the next generation of mobility that will replace their current product. Even Facebook goes out of fashion - that's why they bought Instagram and WhatsApp.
IMO, we’ve reached the diffusion limit of innovation in ridesharing. Autonomous is a pipe dream and in a recession, human drivers will be cheap.
Uber and Lyft lose money because they’re over-hiring talent and they’re consolidating their monopolies via marketing/market share wars. When the bubble pops, people are going to stick to MS and Apple - they’re not going to jump to Amiga or BeOS.
The bond yield curve inversion mentioned in the article has led every recession in the last 70 years by 12-24 months. It's an indicator, because we don't know the future, but it's historically accurate to a T. On some level it is self fulfilling but the evidence of past crashes is there too.
Auto loan defaults are at a high, as is student and household debt (higher than 2007). Those auto loans are often bundled almost exactly like junk mortgages in 2007 leading to a similar investment risk. More americans live paycheck to paycheck than ever before possibly increasing the number needing support should unemployment jump back up to 12%, where it was when Obama took over in 2009. It won't be as bad but the federal government under Trump/GOP has cut taxes and drastically pumped up the deficit putting us in a worse position to weather a recession of any length. Cuts to social programs will also extend a recession or at least increase it's effects as people will still need food and affordable housing. The number on social security will increase while less will be employed to pay in and as SS was used as a piggy bank for GOP spending decades ago that system could go from failing in a few decades to gone.
It could be 6-12 months of job losses and stock market falls like the .com bubble but it could quickly complicate as the government may be slow or unable to respond in traditional ways due to lack of funding, lack of staffing (an existing issue in the current admin), lack of experience of the current staffing, and continued conservative/GOP attacks on social programs and minority groups most likely to be hit hard by any recession.
It's like Jenga. In 2007 a core lower block was pulled and a lot of pieces went with it but we had the leverage federally to hold some in place or put back others like auto manufacturers. This time, the piece may be much higher up but automakers are already suffering under tariffs and the federal government won't have the funding capacity or push by the GOP led government to react in time and, like midwest farmers, that could be the end of an era for some industries.
I'm not sure whether to feel vindicated to see someone else echoing my own internal thoughts, or to feel nauseous about reliving those years. I was fortunate enough to have been at a company that was making money, but I still remember growing from 500 employees to 4000 or so in 2 years...and then dropping back down to 1500 two years later. We bought a small software company for the talent, and 3 months later was told to layoff the entire team.
Many great colleagues left tech at that point to become Realtors, landscapers, accountants. This is not to say that we are destined to relive exactly the same fate, but it's good to remember that rapid change is always a possibility.
Most my friends went back to grad school and retrained for other professions, too, like attorneys and some optometrists.
I think what's a bigger risk these days is just how much tech talent if off-shored to other parts of the world, even at fast growing startups. Serious risk for engineers, likely in the Valley, where I don't know if you remember all of the billboards going from having ads on them, to pretty much being blank for several years.
That seems exactly how you would expect capitalism to work, isn’t it? Labor retrains when demand for it drops and chases capital in other industries which do need it.
Real GDP grew above market expectations in the second quarter of 2019, according to the advance estimate released this morning from the Bureau of Economic Analysis (BEA). Growth was particularly strong in real consumer spending, which rose 4.3 percent at an annual rate in the second quarter of 2019. This increase is notably higher than the 2.5 percent pace set in the preceding four quarters.
Also, if the unemployment numbers continue at record lows, I would expect consumer spending to remain positive. A lot of the market instability has been due to the shaky trade stuff going on with China.
I think the difference this time around is that the largest tech companies (Apple, Google, Facebook, Microsoft, to a lesser extent Amazon) are generating healthy profits. So while there is likely an issue with a lot of the unprofitable unicorns, the industry as a whole won't collapse.
If anyone has done a comparison of the size of profitless companies in the (tech) market, today and before the dot-com crash, that would be incredibly valuable.
My gut feeling is that they constituted a larger portion of the market back then, but I've never seen a direct comparison.
Not enough time to do a real comparison, but Uber feels a lot bigger than all of the mid-sized startups which dominated the dot-com landscape. They are a lot bigger than Webvan was (22,000 vs. 3,500 employees) not to mention Netscape (2,500 employees at its peak); Webvan and Netscape were the most famous big dot-com flops.
Thanks for the data point. It's helpful, but I'd be worried about extrapolating too much from one outsized data point.
For one thing, BLS stats say that computer programming has grown from 528k to 1666k from 1999 - 2018 (the broad category of Computer and Mathematical Operations went from 2620k to 4384k). For another, just looking at the largest company only works if the distribution is similar.
However, the collapse of unprofitable unicorns will propagate across tech. Reduced investments in start-ups and tech companies with risky ventures translates to increased labor supply, which means downward pressure on compensation across the industry (even at the healthy big-5 tech).
Housing prices near tech hubs will also pop. Here in Seattle, housing prices are propped up by tech-couple mortgages with high stock-based compensation - which will suffer even at companies with healthy fundamentals. SFO housing is further inflated by IPO speculation.
Yeah, I mean as a software engineer as long as job availability doesn't reduce too much, I don't mind compensation reducing if housing prices go down with it...
It seems like one of the key characteristics in a crash is a domino effect. Whereby companies' financials that previously looked solid are suddenly cast as untenable in a new economic light. Usually because of an underappreciated correlation with a substantially removed market.
E.g. most recently, banks and leveraged junk mortgages
As you noted though, the biggest tech companies today aren't really externally dependent. They generate substantial cash flow, have relatively modest debt loads (better than heavier industry!), and don't have easy substitutes.
The strongest case I could make for a tech crash: retail activity substantially slows and/or freezes (Apple & Amazon), advertising follows suit as advertising budgets plummet (Google & Facebook)
But it's hard to see that happening with any rapidity in the US with unemployment where it is.
(I can't see a strategic corporate debt crisis as long as the Fed keeps rates low?)
I think there are definitely systemic risks which could hit the US economy (small recession due to everyone cutting back spending to weather the recession, resulting in poorly profitable zombie firms - many of them retail firms - being unable to service bad corporate debt). It's noteworthy that we've been seeing retail bankruptcies like Sears and Payless in a consumer economy this good - what happens to other retailers when the sentiment turns for the worse? Note that low fed rates won't necessarily keep the cost of servicing debt low, if investors anticipate potential bankruptcies and flee from poorly-rated bonds.
And yes, the big tech companies would certainly see revenues hit hard by such a scenario - but the big tech companies have plenty of cash to weather the storm.
Sears (and possibly Payless too) were mortgaged past the point of sustainability.
That's fundamentally different from firms that accrued a lot of cheap debt, but have an ability to service it even under conservative revenue models.
If I have 10%+ profit margins and could increase my revenue with additional capital, why wouldn't I sell as many bonds as the market will eat, at current prices?
Provided I'm not expanding in financially risky ways (e.g. opening new stores or other delayed-revenue choices), there's not much consequence even if the music stops playing.
Which is why you saw Ford and GM announce they're hording enough cash for multiple years of downturn.
There's lots of relationships whereby the fortunes of one company can be effected by another. For example Tesla and Uber are total dogs snd I could see them imploding. Are there smaller startups that sell services to Tesla and Uber in a significant enough way that they could get hurt too?
Another relationship that has been mentioned before is that of mobile games and google and facebook advertising services. A recession and/or anti-lootbox legislation could harm mobile games, which would reduce ad spend on platforms like facebook/google.
While they will survive, there's a ton more people in the rest of tech, and if they don't have jobs and are desperate that's going to change the lives of Google employees.
During the dot com bust that was part of the problem. As the startups started dying, it turned out that the big companies had started to rely on them for their profitability.
Yeah, but the only one of these that might be reliant on a booming tech startup industry for profitability is Amazon (due to AWS - I'm not sure how much of its revenues come from traditional enterprises vs. VC-fueled growth money).
Agreed that it’s not exactly the same but the larger point holds IMO. That is that the tech economy is more like the food web, where it’s not always obvious what chain effect will happen when something starts dying off
Well, two of those companies survive largely on the basis of advertising, which is in turn financed through the Silicon Valley Venture Capital Machine. If that dried up, it would be Bad News.
The hyper growth of the dot-com crash was way different than today. Are there companies that are outrageously unprofitable today and over-valued? Yes. But it's nowhere near the dot-com hysteria. I doubt a tech sector 'crash' is going to occur but I wouldn't be surprised if a correction happens.
I'm not 100% sure this is true, there are a few big high profile companies that will need to substantially restructure to achieve profitability, however there are loads of companies with lots of customers and growth that can be turned into profit.
I would actually argue that this recession is hugely policy based and we should worry that The Donald in charge of these systems will lead to more instability. It isn't tech being over valued that will bring the system down.
I'm not sure software will stop eating the world in a recession, the almost religious belief that more software will make your business better is something everyone has bought into. There might not be any other jobs however.
"Tech" is another way of saying "risk" in the eyes of investors. When the yield curve inverts, it means investors - as a herd - are turning away from risk in the short term. Tech being a manifestation of risk is going to take a short term hit in the form of more difficult capital raising.
It's probably too early to roll this out, but for those who didn't live through 2008, I present Sequoia Capital's "RIP Good Times" deck from that period:
For me that Deck basically says what I think will happen now and what happened in 2008. Some people will lose money, governments will panic, people with normal jobs will have a harder and harder time and people in IT will get richer as if there is no recession even happening.
It will also push automation to happen much faster meaning an even bigger underclass of people.
And finally you will still be able to raise shedloads of money (if your business is good) but it will cost you more of your business. Poor you.
I heard a few key thinkers predicting a larger recession due to our inability of getting more energy out.
GDP and energy seemed to be correlated so far, as if our growth is directly or indirectly fueled by the cheap labor of machines and automation.
Gas and electricity production reached a peak which can only go down in a finite world. With a constrained energy supply, GDP should go down. At least that's what happened so far since the 1800s.
Germany and UK entered recession the last quarter.
That model seems incomplete given the lack of efficiency as a variable. Home energy usage went down in spite of growth in electronics and power mainly due to better lighting efficiency alone. While it can help it doesn't drive all.
One common mistake in economic growth modeling is thinking only in terms of bulk. We are far richer than bronze age herdsmen but very few of us have tens of thousands of livestock.
I don't think it's a tech crash at all. Sure, we've got companies being propped up by VCs that are doomed to fail (Uber, etc), but the fundamentals of other big tech companies are sound. They have customers, they sell products, and demand for some of those (advertising and support services) are and will be perpetual. The signals for the downturn don't really seem to have anything to do with tech in particular.
In a crash, I'd expect the VC money to become more cautious... for a bit. But that can be a good thing, too, because it means you aren't competing with garbage companies that are always operating at a loss.
As someone who has seen this before, things are looking ominous: The stock market drop of late 2018 reminded me of the stock market drop we had in 2000, about a year before everything fell apart. The yield curve inversion doesn’t look good, nor does the problems with the German economy. Uber posting a multi-billion dollar loss and Tesla having a hard time getting income remind me of the very same issues during the dot-com bubble, where highly valued companies weren’t actually earning money. Moviepass’s debacle reminds me of Webvan; a company which tried to get VC by having a business model which was hemorrhaging money.
I hope I am wrong, but I predict a tech sector crash in late 2019 or early-to-mid 2020.