Capital Inefficiency | Hacker News Reader

Capital Inefficiency

cutlefish.substack.com

43 pointscdme49 comments

Regarding worsening conditions for tech workers - my theory is that this is because tech is particularly sensitive to interest rates. Software developers are often building products that will start making money in the distant future. With interest rates going up, the present value of these future cash flows goes down.

Very nice way to explain a concept that usually takes me several paragraphs.

Hopefully this will result in a more conservative approach to tech with a greater focus on immediate needs vs long-shots in the distant future which tends to result in winner-take-all for the victors.

Something tells me this won't impact the AI race, but otherwise I think you're right.

>Hopefully this will result in a more conservative approach to tech with a greater focus on immediate needs vs long-shots in the distant future which tends to result in winner-take-all for the victors.

Hopefully it doesn't, as that sounds really depressing.

I don’t follow. Wouldn’t the future value (actual future benefit) of the product be independent of inflation, and when expressed in terms of eventual future pricing, simply increase with inflation?

Future revenues are discounted to present value using a discount rate that increases as interest rates increase. This is called a discount cash flow model. Initiatively this makes sense because if a future dollar was the same as a today dollar you could just invest today's dollars in treasuries and have more in the future.

Inflation as long as it’s predictable doesn’t really matter, since the future cash flows just get bigger with more inflation. However real interest rates do affect the discount rate; higher interest rates relative to inflation discourage investment since you could just put the money in a bank instead of taking risk. That means inflation does have an effect, since higher inflation is historically more volatile which raises risk thus real interest rates. That’s all assuming a free market without government price fixing interest rates.

Nice explanation! It's the second order effects.

It's not just inflation; actual real interest rates are now the highest they've been in a decade[1]. This is how the fed works -- raise real rates until demand for goods drops. Today's real rate is still not particularly high, but at the margins a doubling of the cost should lead to some drop in activity, and in borrowing.

Look at a company like Apple[2], which has something like 100B in debt. After setting aside the 60B in cash, thats still 40B that they will eventually roll over into high cost debt, or unwind the business line that the debt fuels. Probably a mix of the two based on margin and risk.

But once you start cutting business lines, you cut revenue and that usually leads to lower share prices, since equity is basically priced on a 15-30 year forecast. Which I think is why patio11 says that all tech compensation plans are an option on interest rates or some such.

[1]: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y [2]: https://finance.yahoo.com/quote/AAPL/key-statistics?p=AAPL

The lack of labour organisation and oversupply of notional workers (I say that because unless something has changed a new graduate is not performant in role for a long time, 18 months possibly) surely has more to do with it? Having seen 7-10% layoffs in coding & development staff, then the natural rate of full employment in this sector is way over-achieved: there's a massive supply of labour to fill holes, Either price yourself down, or go hungry.

It is interesting because right before the macro conditions went haywire, when we were raising capital for our current startup, we often got responses like, Oh, well, you guys are not from SF, or you should build your team in SF; all the action is here.

It is true that action is still in SF. But suddenly, the VC ecosystem has started appreciating capital efficiency as we are building quite a large team in India. It has its own issues, but overall, you can be really competitive with a Bay Area startup. A 2 million-dollar venture may take two years for a Bay Area startup, whereas if you have a team in India or elsewhere, it goes way further. People talked about moat, hype etc. before the downturn now everything is talking about capital efficiency (which I think is good)

>Developers: "Am I a good developer? Are there 10x developers? Were those high-profile things I worked on now on the cutting room floor worth it? What does it mean to be an effective developer these days?"

This hits hard. Along with the "please don't fire me" line at the end.

After spending so many years watching so many people do such great work together which amounted to nothing, I'm left wondering where to go at this point.

The current market conditions in the US seem more like a Capital strike than “Capital inefficiency”:

https://en.m.wikipedia.org/wiki/Capital_strike

The pandemic created both labor shortages (and thus higher wages) and improved conditions for many workers. Capital owners are now doing everything in their power to claw back those gains, though not without newly-emboldened resistance from organized labor.

You left off that the response to the pandemic in the US revived a marker for capital that hadn't existed for 15 years, and made all other risk taking much more expensive

High interest rates are certainly erasing some forms of irrational allocation that can’t be sustained under them (e.g. all the crypto stuff), but the collusion between firms on things like return to office, wage suppression, and price gouging is largely independent of them.

You keep talking about collusion. Do you have any supporting data to back this up?

Every FAANG simultaneously decided they needed to layoff roughly the same percentage of workers, and even more through return to office, with no justification or demonstrated impact on profits, productivity etc, they share large investors, and oh, yes, they all got busted for colluding in the past? It’s all pretty much out there in the open.

Not to mention they're immediately hiring to replace those workers that they laid off. The management is either incompetent or they're trying to depress wages. They openly admit they're trying to achieve "durable savings" which seems like it may be an MBA code word for depressing wages.

What if it’s not a decision made in a smoky back room behind closed doors but rather monkey-see-monkey-do/“hey we can get away with it”?

Definitely is weird to say the least. Even small companies often have HUGE investment firms behind them of course.

This is exactly what you would have said the last time there was proven collusion. It takes a while for the proof to come out, but as the sibling comment says: it's awfully convenient that all the RTO policies and layoff ratios are in alignment.

Collusion is the default human condition. It is absence of collusion that has to be proven.

Or are we assuming governments around the world are effectively preventing collusion of multi-national corporations? Now that would require incredible proof.

Those things don't constitute a capital strike. Businesses don't suppress wages to strongarm the government, they suppress wages because they want higher profits. Likewise with prices.

Return to office might be more organizational pathology than rational self-interest, but it's still not an attempt to influence policy.

> Businesses don't suppress wages to strongarm the government,

They do threaten to relocate operations overseas. And when they do, the wages paid may indeed be "higher" than average in the new regions.

Maybe, but there was also bipartisan legislation to crush the rail strike, simultaneous dismantling of pandemic protections on the state and national levels, the removal of the child tax credit, and so on and so forth.

That crypto part is an assumption. If you want real irrational allocation, check back to office and how and of capital overlords are pushing it for no rational reason.

I would say it’s more rational than crypto as the tech companies investors and commercial real estate investors have a significant degree of overlap. Crypto was little more than digital tulip mania.

you know that's exactly what they said in 2017 about crypto and now Blackrock is pushing an ETF. what a tulip that was pushed by biggest financial org. isn't it. 0 handsight about future

There’s a sucker born every minute.

Here's the problem: "crypto stuff" is just the easy, low hanging fruit. That went away when the Fed began hiking. We're long past that now, with 30 year treasuries at 5%, and venture capital defines itself by extremely long duration speculative investment. That's irrational allocation in a world with high real rates.

Margins are up across the board from 2021 onward: https://fortune.com/2022/03/31/us-companies-record-profits-2...

There is room for workers wages to go up but right now the higher prices are mostly benefiting investors and owners.

Margins need to be up in order to pay for the increased cost of capital.

If they were paying lots for capital, they'd have lower margins.

Only if it’s debt financed.

You don’t pay costs out of margin. That’s what‘s left after costs.

Own capital costs are exactly the thing that margins pay for.

Adding in that the economy was partially parked up through COVID and the risks of being shut down by the government turn out to be much higher than people realised hitherto. Margins need to go up in that sort of environment to push everything back to how things were pre-pandemic, otherwise nobody will bother. Not many are crazy enough to put lots of money into low-margin businesses that are at high risk of being shut down. Capitalists are greedy but not stupid.

Not quite right.

I'd argue the reason you want higher margins in a higher interest rate environment is the "risk free rate" is now higher.

If the risk free rate is basically 0%, you'll invest in a risky business that makes 5% margin. If the risk free rate is 5%, now you want the risky business investment to have 10% margin to be worth the same investment.

>There is room for workers wages to go up but right now the higher prices are mostly benefiting investors and owners.

Hence we're getting levels of labor action across the board not seen for generations. The system is working, albeit slowly.

This seems like an overly simplistic "capital owners greedy/labor-good-capital-bad" kind of take. I don't know if you've applied for any tech jobs recently but at least outside of super-senior and FAANG positions that I'm familiar with, it's pretty brutal. When I applied for my current role I was basically going against 3-4 other people and we all matched about 80% of the qualifications for the role. My boss is hiring right now and within a day received over 100 applications, and as of last week he has at least dozen who fit 100% of the qualifications for a comparable role to mine.

That’s not really in conflict with anything I wrote? Firms are colluding on layoffs to force these kinds of conditions and drive down wages.

What do you mean by collusion? Do you mean an explicit agreement like the old FAANG no poaching agreement? Or something more subtle?

Return to office is largely layoffs in disguise, all of FAANG is doing it, and have more or less explicitly stated that they have no rationale beyond “we can make you do this, so we are.” As you pointed out, they already conspired in the past with their no poaching agreements, so draw your own conclusions.

Yep. Not too mention the actual layoffs that are going on. If you actually look at the hiring for the companies with these layoffs then you find that they are actually growing their workforce while still announcing layoffs. That seems almost designed to depress wages...

In every case I've seen layoffs-but-expanding-hiring it's always been completely separate teams, maybe even completely different business units - which in a sufficiently large company might as well be different companies.

Have you seen any occurrences of, e.g. layoffs in a team of web developers while simultaneously still hiring web developers?

This is pseudo-scientific BS. But must admit, named right factors, just they linked into BS scheme.

What really happen, first, in 1920s, 90% of population working in agriculture, mostly without any tech, and things slowly moving to current state, only 5% in agriculture, and more than 60% in services.

Transition from agriculture to modern, was slow and biased, so first transit most active people (entrepreneurs) and preferred smart people, because bright perspectives, etc, but we see from modern side, there was not computers on agriculture side, so our vision biased.

Also important, US was one of first countries made transition, started in 1920s, and for example, China started transition in 1978, HALF HUNDRED years later.

What world looks like for modern underdog, yes, we long time see many bright persons, who make things right, or even more, in some cases looks like friendly aliens with incredible technologies.

And even, when in West, transition mostly complete in 1980s-1990s, in Asia it was just started in late 1970s, and peak was in 2000s. What this mean, even when smart people sources in US agriculture already exhausted, appear smart immigrants from Asia, for some time feed with fresh minds already stagnating system.

Than, transition complete in current state, agriculture exhausted, grow ends, and now appear generation of ordinary people.

To return old good times, we need some Great frontier, like Mars colonization, so again, will be spend huge resources on huge investments and again, smart people will got great salaries and will have motivation to work there.

When he writes:

"X is a bit toxic. What should we do? ..."

I really feel like he's talking about the company formerly known as Twitter.

That one can be referred to as "Xitter" to avoid ambiguity. X by istself is too common to be associated with a single company.

I prefer "The company formerly known as Twitter" or "That wretched place". Xitter is a bit twee for my taste.

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