Podcast: Things Past and Things to Come January 3 2023
It’s a new year, and our podcasters summarize the conditions of today and what they think we’ll see for 2023, in both stocks and the economy. We also talk about tech prospects, including the cloud, consumer tech, business IT, and business networks. There will be a test chat on Mastodon on January 4th at 11 AM Eastern US Time, for those who have completed the Mastodon connection process.
TPTTC 01032023
01-Maven: Good day, and welcome to our first Things Past and Things to Come podcast of 2023. Happy New Year, and we all hope you had a great Holiday Season. I’m Maven Lightheart and I’ll be joined by Nigel and Tom as usual. Today, we’ll be talking about the overall economic picture, the stock market, and tech. Nigel will lead on the economy, I’ll be the lead on stocks, and Tom will handle tech details. Nigel go ahead.
02-Nigel: Welcome everyone. I’m Nigel Hardwicke and I’m going to talk about the economic situation. I’ll focus on the US since that’s the market we’re all in, but I’ll mention global conditions too.
The big question for the global economy is the killer combination of inflation and central bank interest rate increases that spoiled the post-COVID recovery in 2022. What’s going to happen and will it drive economies into recession? My answer is that it’s going to depend on the market area we’re talking about. I think that the UK and EU will both dip into recession this year, that the US and Asia-Pacific will avoid it narrowly. However, any countries in the latter group could dip into negative GDP for a single quarter, which doesn’t meet the strict definition of a recession.
The problem here is that central bank rate increases are really the only tool we have to deal with inflation, even when excess money supply isn’t at the heart of the problem. We have a supply-side issue here, a constriction in supply chains that coupled with a bounce in demand created by the lessening of COVID concerns. A lot of people have resisted returning to work, especially in customer-facing jobs. That’s a problem that interest rate hikes may actually make a bit worse by encouraging an economic slowdown and job losses.
The good news as I see it is that the January increase may be another half-percent, but if it is I think it will be the last of the increases. If it’s a quarter-percent then we’ll likely see another in February. I think increases will stop there, but as we said in a prior podcast, it’s not likely that the Fed will reduce rates in 2023.
We all think that the supply problems will be visibly improved by May, and that we can expect central bank measures on interest rates to hold steady by then, though we don’t see them dropping until perhaps the very end of the year. The good news is that by May we believe that things will be visibly improving in most market areas. My family home, the UK, is the only area where we think there may be longer-lived impacts, because of the deeper issues created by Brexit.
How about stocks now Maven?
03-Maven: Thanks Nigel. Stocks are if anything more complicated than the global economy. At the minimum we have to think about two factors that impact stock prices. First the fundamentals, which means the earnings growth that could drive stocks up or down, and second the technicals, meaning the number trying to buy stocks versus the number wanting to sell.
On the fundamentals side, supply constraints and interest rates have had an impact on stocks, but the third-quarter numbers suggest that the impact wasn’t enormous. This month, the economic news has been shifting toward the view that the Fed was going to succeed in creating their “soft landing” for the economy. Why, given that, did we see stocks falling so sharply between Christmas and New Years? Short selling.
Volumes are typically low in a holiday period. Buying conviction isn’t really strong yet, and so at any time when anything negative could be said, and even some times when nothing was really out there, short sellers hit the market and drove shares down. This is an entirely artificial move, something regulators should be handling and are not. It will only end when short sellers get worried that shares will go up, and start to cover.
In 2023 we face the question of whether bad news will end, and with that the short sellers would cover, meaning buy. That would drive the market up. Retail sales over the holidays were strong but not decisive, but starting this month we’ll get earnings reports just as we did in October. They drove stocks up then and they’re likely to do the same now. That doesn’t mean that all bad news is ended, though.
Companies are legally responsible to their shareholders, and if there are questions on economic fundamentals that could impact their revenue, their response is likely to be to cut costs. If we have a supply-side problem that means goods are in short supply, enough to drive up prices and cause inflation, then why spend a lot on advertising to further increase demand? The ad-sponsored tech world is almost surely going to see pressure in the first quarter of 2023 as consumers recover from holiday spending. That adds to the points Tom has been making about ad sponsorship being a zero-sum game.
We’ve seen a lot of layoff announcements from tech companies, and I think that’s an effort on their part to improve their earnings per share by lowering costs. Tech was overvalued in price/earnings terms relative to the rest of the market, because of the presumption tech offered good growth opportunity. Some of tech, the part that’s ad-sponsored, may not have that kind of growth opportunity, and so that segment may find its stock price has to level with the rest of the market segments in terms of price/earnings.
Not all of tech, though. For the product side, there’s still a lot of positive signs. Tom why don’t you take that topic?
04-Tom: Thanks Maven, I’m Tom Nolle, president of CIMI Corporation and I want to add my welcome to the other two. I hope you’ll continue to follow Things Past and Things to Come, and the other new podcast called TechsRay, that we’ll be posting on TMT Advisor in 2023.
Maven, what you called the “rest of tech” divides into two spaces, the consumer tech space and business tech. The issues and prospects for the two are a bit different.
On the consumer side, the holiday shopping data and consumer confidence in inflation moderating seem to show that inflation hasn’t really had a major impact on consumers so fa, at least with regard to tech. There have been sales on many tech items, which some could interpret as a need by retailers to cut prices to induce spending, but that’s also been true in past holiday seasons. I think that consumer tech ended the year in solid territory, but the test will come in the early part of this year. The holidays are over, and if people overspent a bit they’ll cut back a bit now. So far, the retail predictions suggest that tech will be fine, but that things like clothing and soft goods may take a hit as consumers buy things that make them feel good.
On the business side, we have some of that same “did-we-overspend” question, but with a different slant. Companies ended 2022 with a desire to boost their sales during a period when consumer sales are typically stronger, and so they may have spent to augment both compute/cloud and networking. There are, as we’ve said in past podcasts, signs that while businesses seem confident about tech budgets for 2023, they may be prepared to push some projects a bit later, until the second quarter or even to the start of the second half.
The place to watch in 2023 in business tech is the cloud. In 2022 we saw a kind of retreat to realism about the cloud, a realization that everything wasn’t going to move there. That was a simple value proposition that propelled a lot of favorable publicity for the cloud, and that in turn probably contributed to the approval of some cloud projects that probably fell short of meeting ROI goals. Companies also demonstrated a lack of real insight into cloud costs and cost control. We saw cloud spending growth slow last year, and it’s almost certainly going to continue to slow through 2023.
There are paradigms that could drive further and faster cloud growth, but they’d require some big-time productivity paradigm shifts, and right now I don’t see anybody working to make that happen. I don’t think there’s any chance it will in 2023, but the new cloud realism, and the fact that both IBM and Oracle have been promoting hybrid-cloud models aggressively, may generate cloud provider interest in fleshing out a new productivity model. Every business tech boom since the 1950s has been driven by a productivity model shift, and there’s no reason not to think another shift would create another boom. This time, it could be for the cloud.
05-Maven: Do we need a different software model for that shift Tom? I know that a hybrid cloud application demands new development when simply moving something to the cloud would not. There’s surely been a lot of discussion about “cloud-native” and new software architectures for the cloud. Could your productivity model shift be supported by the software architecture that’s emerging?
06-Tom: That’s a complicated question, Maven. It seems likely to me that a new productivity model, like all the model shifts that have already happened, would act to bring computing closer to work. I’ve blogged on this, and for over a decade. I call it “point of activity empowerment”. Today, information technology’s capabilities are something we build work practices around. Tomorrow, I think we’ll integrate IT into work practices. I did some modeling on this, and my determination was that it could generate hundreds of billions in new IT spending. I think edge computing and a lot of the current cloud architecture tools will play a role, but software today is a combination of real applications and the middleware tools used to build those applications. Cloud-native work has been giving us the middleware, but we still need to build the applications with the middleware tools.
07-Nigel: So what you’re saying is that the cloud growth we’re seeing now is happening because the steps companies have taken to use the cloud to improve things like online shopping and maybe even remote worker access are taking effect, and the number of remaining steps they’ll take is limited. That slows growth. OK that makes sense. You are also saying that if we had another paradigm to support workers, one that tied computing, meaning edge computing, tighter to their activity we could see growth rates pick up again. Right?
08-Tom: Right, Nigel. Cloud adoption, as a front-end to traditional applications, tends to attack the low apples first, the places that offer the greatest return. Over time, the focus moves to applications that aren’t quite as attractive, and of course as ROI falls the pace of cloud growth can be expected to decline. We might see more enhancement to online retail, meaning support of customer access, but it’s hard to see how changes there would be dramatic enough to impact cloud growth. On the other hand, most worker access to applications hasn’t moved to the cloud. Can that be accelerated with a new paradigm? I think so.
09-Maven: You covered business cloud use, but what about business networks? Let’s look at both services and equipment because they’re related, I’m sure.
10-Tom: They are related, and also related to the cloud. We talked on a past podcast about the way that cloud usage tended to change business networks. If something enters an application through the Internet and the cloud, which is the way traffic moves in the hybrid cloud front-end model that prevails today, it doesn’t have to pass into the corporate MPLS VPN. If you switch branch worker access to the Internet and cloud, you move traffic off the MPLS VPN. If you use Secure Access Service Edge (SASE) or SD-WAN in the cloud to link back to your data center, then you could also impact security practices.
It’s branch worker access to applications via the cloud that could change equipment, I think. First, it would eliminate the need to have MPLS/BGP branch routers for VPN access. You’d either have nothing but Internet there, if you were passing all traffic through the cloud, or you might have SD-WAN edge points there if you still had applications that were accessed from the VPN connection to the data center.
11-Nigel: Tom let me step back to your business tech point and link it up to both your remarks and Maven’s stock comments. I think business tech vendors could be divided into two categories, the “cash flow” plays and the “growth” plays. Companies like Cisco and IBM are now more cash-flow-and-dividend plays than they are growth stocks. Companies like Broadcom, VMware, and Juniper are still growth plays. Do we think that in the first half of the year when the economy is still in flux, the cash-flow players may do better?
12-Tom: Good question, Nigel, and one I wish I could answer confidently. Juniper did well in their last quarter and their stock did well too. I think the difference between, say, Cisco and Juniper has more to do with size and incumbency than anything else. Most network spending is refresh spending, the modernization of networks and replacement of aged assets. That tends to favor incumbents, players who have account control. Cisco in networking has more account control, and IBM in computing has it. The other players we’ve named, including Juniper, are companies that win on change. It’s tempting to say that early this year we’ll see a lot of change avoidance, but we didn’t see it in the third quarter.
Our challenge for 2023 is really not much different from what it was in 2022, though the way it gets addressed will hopefully be different! We have inflation, central banks raising interest rates, supply-side problems…you get the picture. We’re in the economic and stock market unknown.
Before we close, I want to remind our listeners that I’ll be participating in Mastodon chats on podcasts this year. Generally they’ll be the day after a podcast is released, at eleven AM Eastern US time. Only people who have registered on the blog.tmtadvisor.com website will receive notice and be able to ask questions. If you want to participate, you need to follow the instructions on that website to register, get a Mastodon ID, and connect with the chats. I hope those interested will participate.
That ends our podcast for today, and we all hope you’ll join us for Things Past and Things to Come regularly this year. Happy New Year from us all.