Podcast: Things Past and Things to Come January 9 2023
More volatility in the stock market, more shifting fundamentals for the economy, and a lot of fuzz and uncertainty in tech, particularly in the cloud and with the ad-sponsored players. Our podcasters look at all of this and present their view on the way the year will evolve.
01-Tom: Hello, and welcome to Things Past and Things to Come, a podcast of CIMI Corporation’s TMT Advisor. I’m Tom Nolle, president of CIMI Corporation, and I’m joined as usual by Maven Lightheart and Nigel Hardwicke. Today we’ll briefly summarize the economy and stock situation, and then move to the shifting world of tech and the cloud. I’ll turn things over to Nigel for economic fundamentals, and Maven for stocks. Nigel?
02-Nigel: Thanks Tom, and a warm welcome to our listeners. I can’t say that we’ve had a lot of fundamental economic shifts in the last week. The jobs report on Thursday was stronger than expected, which of course led to short selling. Maven will offer more on that point, and on what happened on Friday! I think it was actually good news overall, because it’s suggesting that the Fed may be able to avoid a recession. Those who have followed this podcast know that we’ve predicted that would be the case all along.
As far as stock fundamentals go, last week brought out a lot of financial analyst predictions that boiled down to the expectation that this year would be a kind of Tale of Two Halves, with the first half challenged and the second half better. OK that also fits our prediction that there would be an inflection in fundamentals in May. Where we differ from these economists’ view is that we don’t think that business tech spending will be as impacted as they do even in the first half. I think the signs are pointing to a slight dip in Q1 business spending on technology but a rebound in the second half that will more than offset it. Growth then would be slightly behind this year’s growth of seven percent, but still strong.
I also think that while consumer tech spending will be somewhat depressed for the first quarter, it will start recovering in the second, and be stronger in the third. All of this will impact stocks, of course, and Maven will explain it.
03-Maven
: Well, demon short-selling hedge funds were active last week, pretty obviously.
In fact, I think that without my theory, it’s pretty hard to explain the market’s movement last week. Markets were closed on Monday, and volume on Tuesday was low, so short selling pushed stocks down a bit, but while there wasn’t much buying conviction, we’re on the cusp of Q4 earnings, and if they’re decent there’s a risk to short sellers. Wednesday, stocks were up nicely, and I think that short-sellers covering their shorts was the reason.
Then we had Thursday. The ADP national employment data was released, and it showed a higher-than-expected jobs gain. Futures went negative on Thursday, and by end of day the markets were off by between a percent for the Dow and a percent and a half for the NASDAQ. Why? Supposedly because the stronger jobs numbers meant the Fed would likely keep raising rates. OK, they said that in the minutes of their meeting, so why was this news to drive markets? It wasn’t, but as I’ve said on past podcasts, short-sellers will jump on any negative news. They did.
But on Friday, we got the Labor Department jobs and wage data, which was almost exactly what the ADP report showed on Thursday. So did the markets tank even more? No, they boomed! The Dow was up over seven hundred points, two and a quarter percent, the S&P was up about the same percentage, and the NASDAQ was up over two-and-a-half percent. So help me with this one. The jobs data was bad for stocks on Thursday and the same data was great on Friday? Does this mean that bad news on Fridays becomes good news? Or does it mean that short-sellers were increasingly concerned about earnings reports sending stocks up and trapping them in short positions? You tell me.
Here’s what I still believe is the reality. Inflation will be lower in 2023, but still above recent pre-2022 years. Interest rates will top out about three-quarters of a point at most from where we are now. The US economy will see GDP growth dip to around one percent at the worst quarter, which is likely to be the one we’re in. Stocks will be volatile in the first four or five months because of short selling, but they’ll see volatility drop and gradual gains develop beyond that.
And despite the fact that short selling has cost people billions of dollars and created real fear among people who depend on investments for retirement, the SEC and Congress will do nothing to address the problem.
So, let’s move on. Tom you mentioned the fuzzy tech environment so will you enlighten us about the fuzz?
04-Tom: Sure, Maven. In tech, one of the sources of fuzz is the dust raised by people leaving after tech layoffs accelerate. There’s been a lot of talk about this, and the theme has focused on the notion that tech in general, and Silicon Valley in particular, have seen their best days. The biggest question in tech, and maybe in the economy overall, is whether that’s true.
Tech has been a bubble; that much we can say with confidence. The market loves bubbles, the media loves bubbles, and the VCs love them too. All that love has driven tech to be a market-leading sector for decades. But is that over now? Yes, perhaps, in the sense that all bubbles burst. Tech’s bubble has burst in the past, remember. But tech came back, because while exuberance and self-interest might promote tech more than it deserves to be, it still deserves promotion. We asked in the past where you went if you were looking for growth, for society-shaking change. Soft goods? Paper products? Or tech? So I think that tech has taken a deserved bubble-bursting prickle, but only that. The fundamentals are still there, and yes, they’ll soon be exaggerated again because everyone loves those bubbles. Even without the next tech bubble, though, tech is where it’s at.
That’s true of the cloud too. Let’s face it, the cloud is fuzzy in more ways than the literal. The biggest fuzz factor is the motivation behind cloud adoption. People are not moving applications to the cloud, they’re writing presentation-focused front-end technology for the cloud to augment the user experience with legacy applications that are staying in the data center. That’s why there’s so much buzz about new cloud development tools and middleware. If all we were doing was “moving” then there’d be no need to develop unless businesses were rewriting their applications for the cloud, and they are not.
The presentation-centric cloud front-end transformation, of course, can only take things so far. We still have new front-end applications being deployed, and we have even more expanding, but there’s also a movement to start exercising some cost discipline at the cloud level. We’re seeing a reduction in the rate of cloud growth, not a reduction in cloud spending, and that’s probably going to be the story going forward, unless something comes along to create a new set of benefits that would drive another spending wave.
In the chat we had on Mastodon regarding our last podcast, the ideas of contextual computing and point-of-activity empowerment came up, as applications that could drive edge computing. I think it’s clear that any massive increase in the rate of cloud spending growth is going to come through expanding what we mean by the cloud to include the edge. I think that those two ideas we chatted about are the path to doing that, but I don’t think we as an industry have made enough real progress on that front.
Another cloud fuzz area is the software-as-a-service space. We saw the top SaaS player, Salesforce, leapfrogged by other cloud providers in terms of market share, and as usual we’re not hearing much in the way of realistic analysis on the reasons. I think the issue is simple, and it goes back to the basic question of what people are doing with the cloud. SaaS is “application as a service”, which means it’s moving an application to the cloud. Not only that, the SaaS application doesn’t work the way that current data center applications with the same mission have worked. The cloud is not cheaper than the data center for simple hosting, so a SaaS move won’t save money, and it will create operational disruption because workers have to learn a new package. SaaS works best when the current requirements aren’t being met, and so it’s a market opportunity with clear limits. We’re starting to reach those limits, and so SaaS growth is slowing.
The final fuzz is the fuzz of social media. When people talk about big tech, they’re almost always focusing on social media players like Meta, but the broader common element in big tech is that it’s paid for largely through ads. As we’ve covered here before, ad sponsorship is a zero-sum game because adspend isn’t growing fast enough to give all the players the kind of revenue growth they need. We’re seeing another example of the cloud’s confusion in growth drivers in the ad-sponsored space, and we’ll see the same outcome. Growth will slow for these players because it has to. A new paradigm is needed to prevent that, just as it would be in the cloud. Meta thinks it’s a social metaverse, an alternate reality that people socialize in. But even if that sort of thing is possible, it either has to be something people pay for explicitly, or it falls into the same trap of ad sponsorship.
That’s my summary of the tech world.
05-Nigel: Can we talk more about those tech layoffs Tom? We’ve said on past podcasts that a part of the layoff strategy was to address the risk of an economic downturn on stocks by cutting costs to sustain profits. Is it getting deeper than that do you think?
06-Tom: I think that’s still the primary issue here, Nigel. As long as Wall Street was happy to give tech stocks higher price/earnings multiples, tech was happy to invest in hiring to drive future growth. Take that Street willingness to sustain high P/E, and you see pressure to stop or even reverse that hire-for-the-future mindset. Tech suffered more of a loss in 2022 than other market sectors. But the question is whether that means that tech has objectively lost that glamour of future growth, or whether Megan’s demon short sellers have simply attacked a sector to take it down, knowing they can then buy into it at a lower price and gain more when it inevitably goes up.
Whether tech hires for growth again, and when that happens, depends on when Wall Street values growth as much as it has in the past, so it affords tech the higher multiples it’s traditionally accepted. I don’t think that happens in 2023, but I think we’ll be heading there in 2024.
07-Megan: I totally agree. I continue to believe that at least half of the decline in the NASDAQ can be leveled at short selling. Reports say that short sellers made over three hundred million dollars last year, and of course that’s only on positions they’ve already closed. They’re still a massive short position in the market. There has been a big drop in tech due to short selling. There will be a big pop when short-sellers have to cover their positions or risk losing money instead of making it, meaning getting caught in a short trap. Then things will settle down to what the markets now believe is a reasonable tech multiple.
I’m a little more optimistic about tech restoring itself to its former glory, though. You’ve said that the market loves bubbles. You don’t create bubbles in value stocks, you create them in growth stocks. Investors need something to invest in, which is why they love bubbles, and I think that even toward the end of this year you’ll see some tech companies coming back into favor, and hiring replace layoffs in those companies.
08-Nigel: Let’s talk about layoffs from another perspective, which is where all those tech people end up going. It’s hard to believe that the sector’s companies could absorb laid off employees as they were laying off themselves. The majority of those tech people are probably going to be looking to join startups or to populate new technology initiatives that other companies were undertaking. There are a bunch of areas that could really use startup innovation, and maybe these laid-off employees will help provide it. What do you think Tom?
09-Tom: I’d love to believe that, Nigel, but I’m skeptical. Venture capitalists have drifted away from funding things that require a lot of investment and take a lot of time to build. They’ve loved things like social media because the companies are really just using the cloud to provide a user experience, and they can get in quickly. Also, social-media players including Meta have been struggling in a zero-sum ad-sponsorship model. They have to steal market share from somebody else, and buying something innovative is a quick path to doing that, so VCs have a feasible exit strategy.
I think that if we’re going to advance the way enterprises use technology, and also advance how technology can enrich our lives, the key elements of our advance will have to come either from startups whose backers are truly trend-setters, or from established players, in particular the cloud providers. There are a lot of tech employees out there now who could be hired in to contribute to either set of innovators, but the question is whether the market climate in 2023 will be right for them to move.
10-Maven: That is indeed the question, and for more than just the innovative advances in tech. We are obviously in a defensive cost-management mode now, and we’ll likely stay there until the whole inflation and interest rate mess shows convincing signs of resolution. That’s not likely to be until late in the first half, and that probably means that a restoration of faith in tech and in the markets won’t be fully realized until late in the year. So instead of wishing everyone a happy new year, maybe we should wish them a happy next year!
Anyway, that’s a wrap for this podcast. There will be a chat on Mastodon on these topics at 11 AM Eastern Time on Tuesday, January 10th. Any who want to participate should be sure they follow the process we’ve described for setting up to chat on Mastodon. Till next week, goodbye from us all.