When you can get a 5% risk-free return from treasuries, even 7% rate of return is unattractive when compared to the safest asset on earth returning 5%.
My point is, layoffs will continue until companies are much more efficient, or interest rates go down.
DO made a profit of a little over $250m in 2022, on revenue of $428.6m. That's a 60% margin. How much efficiency does a company need?
EDIT: Correction.. those are the 2021 numbers. The latest numbers on the DO website for Q3 2022 state;
"Gross profit of $97.6 million or 64% of revenue, an increase of 300 basis points year-over-year, and adjusted gross profit of $121.5 million or 80% of revenue."
https://investors.digitalocean.com/news/news-details/2022/Di...
I've found a lot of tech workers (including myself) really need to learn how to read an earnings statement. Coursera has an excellent Intro to Financial account course [0] that I've found very helpful in understanding what's really happening at these places.
https://www.youtube.com/watch?v=Jbp3-AU9v_g&list=PLUkh9m2Bor...
It's either financially illiterate or completely disengenuous for commenters to cherry pick financials such as gross profit, which doesn't include salary expense, when we are talking about layoffs.
Other commenters calling execs sociopaths when company is losing money, as if they can lose money forever.
What are these high margin numbers both DO and CF report? They both report high margins but then do not make any money. Are these margins excluding most expenses - because that makes no sense. Companies have expenses and that affects the bottom line. If digital ocean had real margins of 60% they would show a profit.
about 25 single family homes.
You put in one house, I put in one house. There are no resultant houses for others to consume remaining.
Another way to think about it might be manual farm labor. If an acre of food grows enough potatoes to feed 1.2 people (idk if that's true), and it takes 1 person to labor over. The acre is only producing enough food to have .2 people as non-farmers.
Interest rates are the key parameter for calculating the present value of future cash flows, which is (theoretically) how companies are valued. When interest rates go up, those present values go way down, to the point where they're no longer competitive with risk-free investment options.
Obviously I’m not understanding something very basic about finance here, but I don’t see how “profitable company is not more profitable than a loan would be” implies layoffs.
The shareholders are the owners of the company. Their ownership stake is referred to as shareholder's equity, and the company's net income divided by this equity is called return on equity.
Now, if you're a shareholder, and you've determined that your return on equity in this company is lower than, or not all that much better than, the risk-free rate of return, what is the rational thing to do (economics-wise)? Shut down the company and put all your money into Treasuries. Why would you leave your money in a company, that has all the risks associated with the ups and downs of business, when you can just park it in a risk-free option (though, of course, Congress in their grand stupidity is trying to change that "risk-free" designation at the moment, but I digress...)?
I think often times when you wonder "why does the economy work like this?", it's really helpful to put yourself in the shoes of a company owner. What are their incentives and competing options?
One thing I don’t fully get yet, is that you say that if the DO return on equity is lower than that of a government loan, the shareholders should just dissolve the company. How is dissolving the company going to get them their money out? They’ll get only a tiny sliver of their original investment back, right?
What happens is that market participants sell their holdings of the company's stock (since they want to free it up to buy bonds with higher returns), causing the stock price to fall. Eventually the price theoretically reaches an equilibrium level where it's worth what it should be relative to the risk-free interest rate (with a risk premium factored in).
Whichever participants were still holding company stock will have seen the value of their holdings shrink as a result of this price fall.
So what do company executives do? They cut costs (staff and investments for the future) to improve their operating profit, which directly equates to justifying a higher stock price - thus lessening the fall in the stock's price. They're being compared to peers/competitors, too.
What if they don't do this? Shareholders (often big funds) won't be happy (because their own portfolio value will fall and they might lose bonuses or get fired), and some will call for the CEO to be replaced by someone who will do the job.
That's the magic circle of life on Wall Street.
Nobody wants income. They want capital gains.
Corporate profits are a necessary evil in the way to extracting out lower-taxed capital gains.
When interest rates go up, the value of future profits goes down, and the value of current profits goes up.
This means, if you're the CEO of DigitalOcean, and all you care about is the stock price... You fire people so you have more current earnings so your stock price goes down less, so 1) your pay goes down less, and 2) your shareholders are happier.
That's pretty much it.
Sure, they're not the same but the quoted number is freely available and correlates with the returns.
As an extreme example, a SPAC that hasn't acquired anything yet has near-zero revenue, profit and expenses, but a lot of capital
A 60% margin, wow, can't do much better than that! What's their P/E ratio? Oh ...
> We define adjusted gross profit as gross profit exclusive of stock-based compensation, amortization of capitalized internal-use software development costs and depreciation of our data center equipment included within Cost of revenue
DO has a negative roe
If you don't count salaries and operations. From the linked statement
> Income from operations was $9.4 million and operating margin was 6%.
Last quarter was DO first profitable quarter. If sales go down it's going to be hard to maintain that.
Exactly what the FED wanted.
Corporations seeking investment in this climate might try to attract it by increasing the expected return on investment, which would involve committing fewer resources or achieving greater returns - being "more efficient".
Labour costs are typically one of the main outgoings for a corporation, and so they might try to increase their rate of return by eliminating positions which are considered to be producing too few returns.
The Federal Reserve might want this because they believe (erroneously, in my view) that high employment is the main contributing factor for inflationary pressure.
TBF, we already have redistribution via progressive taxation which funds "social safety nets to ensure the poor are at least housed, clothed, and fed." (to use GP's words). Trick is to ensure that we do not do too much of it, else people will not have any incentives to work harder.
Also, the Laffer Curve has been thoroughly debunked time and time again. You may want to pay attention to what happened to wealth distribution since the start of the Reagan Administration and its adherence to "voodoo economics" - the very same economic theory plaguing us to this day.
What do you see as primarily driving inflation? Supply chain, China, Ukraine?
https://www.politico.com/news/2021/11/10/rent-inflation-bide...
https://www.politico.com/news/2022/12/31/labor-market-high-i...
“Tech and finance are taking the impact of rate hikes the hardest because they gorged the most on low rates,” said David Kotok, chief investment officer at Cumberland Advisors. “But if you are a carpenter or a retail worker right now you can still quit your job whenever you want and instantly go somewhere else and get paid more. This won’t continue to be true if we go into a real recession.”
Everyone is closer to being a millionaire than any of the billionaires mentioned.
I found this visualization by MKorostoff very educational on just how staggeringly much money a billion dollars is. https://mkorostoff.github.io/1-pixel-wealth/
The top 10% of Americans by combined household income is any household (not income, household) earning ~170k or above. [0]
Layoffs at this point have mostly been within the tech industry only, hence why rates continue to be hiked. Who cares about techies who most live and vote in already dark blue districts. To win elections you gotta decrease inflation in purple districts and red districts with much more diverse economies. (Big reason Big tech started nearshoring in Atlanta, Austin, Nashville, Columbus, and RTP btw - to get some political capital from legislators in Red states)
This is why you see Dems who get most of their support from white collar professionals like Warren and Ro Khanna slamming rate hikes as they negatively affect their core constituents. [1][2]
This is a white collar recession [3] and most Americans aren't white collar. Hence why you are seeing strong job growth in blue collar jobs still [4] leading to even higher rate hikes, because they clearly aren't negatively impacting most Americans
[0] - https://finance.yahoo.com/news/much-money-top-1-5-100000529....
[1] - https://www.politico.com/news/2022/08/28/warren-elizabeth-re...
[2] - https://www.politico.com/news/2022/10/11/jerome-powell-riski...
[3] - https://www.bloomberg.com/news/articles/2022-09-13/tech-layo...
[4] - https://www.politico.com/news/2023/02/03/employment-report-b...
5.5m Nurses
4m Teachers
9.8m Retail workers
Rates are hiked to combat a high CPI. Housing costs, with the exception of home-related taxes, are not even included in the CPI.
“The housing shortage is going to push up the overall [consumer price index] to uncomfortable positions for the Federal Reserve,” National Association of Realtors chief economist Lawrence Yun said. “Consequently, this high inflation that we have is certainly not transitory, and it’s going to remain stubbornly high through the end of the year.”
https://www.politico.com/news/2022/03/18/housing-costs-infla...
Also, the CPI DOES include cost of housing - https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
Inflation expectations, particularly”wage spiral”, are tied to unemployment. The historically low unemployment would/should drive further increases in wages due to scarcity/bargaining position of labor. More layoffs and job suppression will reduce that inflation pressure.
The issue right now with "full employment" is incentive based -- after covid large numbers of people opted out of the jobs available to them because they finally recognized how much they have been being screwed over by the employer classes. The social contract is bad -- people are unhappy with raw deals.
I think the only thing that could actually work right now will require actually addressing the structural social wealth imbalances.
Too much employment --> introduce mandatory hour caps and increase mandatory vacation allowances and decrease retirement ages.
Too much overhead per employee -- get healthcare the hell out of the employment contract ...
It's insane to me that when we saw relative cross class wage growth for the first time in decades -- the immediate conclusion of all the decision makers had been that the labour market is over-exuberant and needs to be tamped down...
Honestly Powell should stop pretending he has any control over the situation and say it explicitly that rate hikes aren’t really having the intended effect. He is a bad Fed chair.
Also the poverty line is a moving target. People with streaming TV and video game consoles are technically in poverty in the US. In the 1960-70s, access to those items would be only for ultra wealthy.
Yea, this is a tricky one. Is there something below poverty? Googling it says the poverty line is $35,801 for a family. I have relatives in a foreign country that would die for $35k (even all things relative). They have a TV but that's about it. No streaming, no reliable cell phones, etc. All through college and even a bit before, I would have lived in what was considered poverty... but to say "I lived in poverty" just sounds silly.
My friend mentioned something similar on the topic of wages being 'too high': "it's pretty screwed up that the economy essentially needs a significant portion of workers to be two paychecks away from financial disaster to be sustainable."
This has no relation at all with the employment rate.
Pretending that the government can push that number low or high for any long period is a joke. It can smooth some noise, or make some extra noise, and that's all.
The best I can understand it, the low interest rates encourage lending / borrowing, which expands the money supply. As the supply of real goods and services is not keeping up, theres more money than goods, so prices of everything go up.
Layoffs are a way of keeping wages down, but that's just corporate greed. If wages went up, it would effectively negate inflation - we'd just get extra zeros on everything, but individual purchasing power would stay on par (you could still pay your rent with half a paycheck, etc).
Of course in a global economy that would cause the country to be at a disadvantage in the import/export game.
You can get a 43" 1080p TV for $150: https://www.bestbuy.com/site/insignia-43-class-n10-series-le...
This is wrong. The Fed doesn’t want higher unemployment. It isn’t even willing to tolerate it. That’s the whole “soft landing” conversation, and why hikes are so hesitant.
The ideal path would be labor market loosening with no more unemployment. Absent structural adjustments, that’s possible. But we need structural adjustments, so layoffs are necessary, which makes the closest to ideal layoffs and immediate reuptake, i.e. constant employment with less wage growth.
A single-mandate Fed would respond to last year’s inflation like Russia did: a sharp, steep rate hike.
Softening of labor conditions is pretty directly saying "Increase unemployment".
> and why cuts are so cautious.
They're so cautious because they want to hit the right amount of increased unemployment, not that they don't want unemployment to go up at all.
Not at all. It means less nominal wage growth. That can and does happen without an increase in even job losses, let alone unemployment. (You can have job losses with constant or even increasing employment.)
It’s literally what we’re seeing right now. It’s not the norm, but it’s precedented[1], most recently in America in the 90s.
[1] http://pombo.free.fr/phillips1958.pdf Figure 1
Also job numbers have been incredibly good so it's not even generally true unemployment is increasing outside of sectors that are incredibly susceptible to fears of recession.
I don't think that is a major difference to someone who is laid off because of intentional decisions that the fed makes to effect an outcome, knowing that layoffs will be a consequence.
The difference between being laid off and having job offers versus going onto a growing roll of the unemployed is major. We're not seeing a meaningful increase in unemployment [1][2].
No, they want less nominal wage growth. The less people lose their jobs, the better. But economies don’t adjust without creaking, which means yes, an expected effect is layoffs and bankruptcies. But the Fed doesn’t want that, and goes to significant lengths, often with negative impact on its price-level mandate, to manage this downside.
The interest rate can be thought of as the “cost of money”. The higher it is, the more expensive it is to get more money in the short term. This is why 0% was labeled “free”
When companies have access to cheap money it is less risky to invest short term in long term growth. Generally “growth” is expensive up front and pays out over time.
Also, hiring takes time so starting to grow happens on a lag.
Now, we had a long span of cheap money so, companies not only planned to grow but they planned to keep growing. This meant they were hiring today for tomorrows growth.
Money is no longer cheap.
All of the future growth is a lot riskier so any hires made for that purpose are cut. Also any in-progress growth became risky, so some of those hires are cut too. Lastly, there is no growth after the current crop of projects so, as they complete, some or all of those hires are let go.
Cheap money is risk free growth opportunities. Growth needed people. Expensive money is very risky belt-tightening opportunities. That leads to layoffs.
This is nonsense. Nobody benefits from high nominal and low or negative real wage growth. Everyone does from real wage growth, including investors.
it's supply and demand, Feds can't really impact supply - but they can impact the demand of it
Now that disclaimer is out of the way...
So the Fed has three mandates (in theory), minimize unemployment, keep inflation low and stable, ensure moderate interest rates.
Inflation in an economy is always caused by supply and demand dynamics. If there's a lot of demand for something but not enough supply then prices will rise until an equilibrium is reached. Rapid changes in prices is something the Fed is mandated to tackle.
The Fed as a central bank can't really do anything to change how many goods / services businesses are supplying so all they can really do to control prices (inflation) is influence demand.
I won't get into the details of all the ways they can do this here, but to summerise they basically have a few really crap tools, with the primary one being to increase interest rates – not 100% true, but close enough. This has the impact of making it more attractive for consumers to save, rather than spend (basically).
More saving and less spending means lower demand for goods, and therefore inflation should fall back to target. The opposite is true when the Fed wants inflation to be higher. The Fed wanting more inflation was why interest rates have been so low in recent years. One of the consequences of lower demand is that businesses may need to slow hiring, or cut jobs.
Their mandate on employment and moderate interest rates largely stems from low and stable interest rates. This is because employment and interest rates are mostly a product of growth dynamics and the only way the Fed can encourage long-term growth is by ensuring prices in the economy are stable and accommodative to long-term decision making.
When people say the Fed wants unemployment what they mean is that the Fed wants people to stop spending money so they stop bidding up the price of goods and services in the economny. Historically tight labour markets (as we have now) correlate well with robust economic demand, and therefore higher inflation. This is partly because consumers have jobs and can spend, but also because in a tight labour market businesses have to compete for labour so consumers tend to get pay rises easier too.
I'm skipping over a ton here, so feel free to ask if there's anything you're unclear on. But basically the Fed wants you to lose your job so you'll stop spending money and so businesses don't have to compete as aggressively for labour. In theory, this is good for long-term growth dynamics.
The Federal Reserve wants to raise rates for multiple reasons. One is to try to slow inflation. Another is to try and salvage the dollar as the global currency. Yet another reason is to try and save the banking system. The overnight market has seen a lot of activity and change over the years as banks operate on slimmer margins with low required reserves. Raising interest rates will get people to park money in banks and help to ameliorate the heat.
It seems like the low interest rates were helping sustain a bubble in tech and that bubble is now deflating.
Disney https://www.cnbc.com/2023/02/08/disney-reorganization.html
3M https://www.cbsnews.com/minnesota/news/3m-to-lay-off-about-2...
GE https://www.cnbc.com/2022/10/06/ge-layoff-20percent-of-onsho...
Dow Chemical https://cen.acs.org/business/finance/Dow-rolls-layoffs-profi...
Ford https://wraltechwire.com/2023/02/14/layoff-watch-ford-cuttin...
I can keep going, but this is much broader than tech
Spot real rates versus long-term inflation expectations. If you think we’ll be at 3 or 4% inflation long term, the short term bite is fine. As such, yes, higher nominal rates, even if lower in real terms in the short run, can still have this effect.
I got news for you. The riskiest place to park your money right now is government bonds. Long-dated US treasuries are risky. You will end up losing everything.
But if you insist on US treasuries, be my guest. I need someone to trade against.