Podcast: Things Past and Things to Come January 23 2023
Debt ceiling issues are potentially overhanging a credible recovery for the global economy and stocks. They may also be encouraging big tech companies to lay off workers to cut costs and sustain their stock price in case of a downturn in spending. But is tech also facing a reckoning on some of its high-flying, over-hyped technologies?
01-Nigel: Hello and welcome to Things Past and Things to Come for January 23rd 2023. I’m Nigel Hardwicke and I’m joined by Megan and Tom as usual. This is a podcast of TMT Advisor.
Well, there’s not much question what the top-line issue is for this week, it’s the US debt ceiling and how it might impact the economic recovery that we seem to be in if we disregard that issue. We’re not into politics here so we won’t get into that aspect of the issue. Instead we’ll focus on how it might impact our forecast for the economy, stocks, and tech.
One thing I’ve personally noticed is that the coverage of the debt ceiling face-off is different from those of the past. In the past, reports on the problem were linked not to the condition of running out of borrowing authority, but to the end of the measures that Treasury can take to continue to fund things. This time, we’re starting crisis coverage four or five months ahead of that point. That means that consumers and businesses are now being told that a catastrophic economic condition might be on tap for this summer. That view is coming when there’s already uncertainty about the economy because of inflation and Fed interest rate hikes.
I think there’s a chance that we could see a bit of a self-fulfilling prophesy here. If people believe a problem is coming, they’ll start to address it. I think we’re seeing that in tech with the layoffs. As we’ve said, if you expect revenue pressure and you don’t want to see your stock drop, you have to offset that revenue risk with cost management.
The broader economic situation looks better than expected, and that’s what came out of the Davos summit. Fundamentals seem stronger but as we’ve said, we’re in uncharted territory with respect to the economy. If we can navigate through the spring without major issues with the debt ceiling then there’s a chance we will work through this new cycle, and maybe figure out how to deal with cycles like it in the future.
Maven do you have any comments on this so far?
02-Maven: Thanks Nigel. I’m Maven Lightheart, and I do have some thoughts. We’ve been saying that if the Fed, at the meeting from the end of January into February, raised rates by a half-point it would be the last of the increases. It seems to me now that the Fed is aiming at two quarter-point increases, one at each of the next two meetings. I’m not sure that’s smart under the circumstances because it leaves rate increases on the table for all the first quarter, which is the quarter we all feel is the most problematic in terms of recession risk.
There’s also some chatter now about the possibility the Fed would decrease rates in the final quarter of the year, which of course would be positive for the market. This is likely a response to some data that claims that inflation has dropped below two percent year over year already. All of this is really good news from an economic perspective, but I also agree that the debt ceiling risk overhangs it. It’s not clear just how serious the markets will take this early airing of the issue. They could simply wait till we’re closer to an actual problem, or they could start to react because as you say the consumer and business spending levels could be impacted immediately by the discussions.
Tom would you parse the issues we’ve raised so far with regard to the tech sector?
03-Tom: Hi, I’m Tom Nolle, president of CIMI Corporation. I agree that tech layoffs are related more to a desire to mitigate the impact of near-term revenue declines on stock prices. I do wonder if they might not have other impacts, though, and be indicators of another issue. I think that Wall Street is less willing to think about tech as a source of future growth, and so they’re pulling back on the price/earnings multiples they’ll allow for tech stocks. That makes tech less inclined to invest in new technologies. A lot of tech R&D has gotten almost to the point of being gambling. If you’re flush, you can afford to buy a dozen lottery tickets. If you’re financially pressed, you maybe buy one or two. Could tech be betting less because they see less appetite on the Street for longer-term bets?
04-Maven
: That’s an interesting question
for me because there are so many innovations tech has already generated for the global economy, and because there are many others still in the early stages. We’ve always said that you had to look for tech for longer-term growth because you weren’t going to get that from paper products or salad dressings. I still hold that view. Do you?
05-Tom: I do, but as I’ve been saying in my blog for years, it seems like tech has gotten a bit off-track with its innovative thinking. We seem to have more focus on things that consume bandwidth or computing power than on things that create or justify either one of those things. Take Web3. Do we really believe that “decentralization” of the Internet, breaking the power of big tech by creating distributed federations to replace it, is somehow going to earn money for those who invest in it? I have real questions about whether the decentralization concept is even practical. Same thing, or even worse, with the metaverse concept. There’s a value core down inside a broad metaverse model, but a lot less value in the social-metaverse approach that’s getting all the attention.
Tech has things it can do, that it needs to do, now. It doesn’t seem to want to do them, and it may be that the venture capitalists and Wall Street are finally recognizing that the innovation we need now is going to be harder to realize, take longer to have an impact, and maybe need different kinds of skills than the abstract stuff that’s gotten all the attention recently. You can lay off to cut costs, but also to free yourselves of resources that you don’t think will advance your business and reward your shareholders.
06-Nigel: Let’s look at Wall Street, then, and at Maven’s demon short-sellers. Under the scenario Tom has described, tech has been overvalued. I accept that. We believe it’s also oversold, and I believe that too. Somewhere between oversold and overvalued is where things need to be. Layoffs that cut cost and let companies redirect their efforts at things that will really pay off could then be smart for both tactical and strategic reasons. For example, if we are really looking for a metaverse-like platform to do contextual services, we probably don’t need many web developers. If we’re looking for social media, we do. If we’ve got more of them than we need because we’ve had too much of a social-media focus, we can boost stock prices and frame our resources for the future by culling the resources in areas we don’t think can now pay off. Maven?
07-Maven: That plays with my demon short seller theory for sure. Short selling is a good idea when a market is overvalued. It stops being a good idea when it’s oversold. I think that January has showed that short sellers who were confident of the overvalued thesis in 2022 are getting antsy in 2023, and while they’ll still pile on to bad news to drive stocks down, as they did on Wednesday and to a degree on Thursday of last week, they’ll cover when they see buying develop.
Friday, the markets were up sharply because I believe short-sellers were covering before earnings reports next week. Those reports include tech companies like IBM and Intel, and both AT&T and Verizon on the service provider side. Yet again the tech-centric NASDAQ led on Friday, and ended the week up a half percent. The S&P was off three quarters of a percent, and the Dow off two point seven percent. Tech is still a strong sector, or at least one that’s oversold.
As far as the future focus of tech is concerned I like AI. I’m starting to see more comment on it from the tech giants; the Reuters article that talked about Google laying off twelve thousand said AI is a focus for tech now. Microsoft invested in ChatGPT as it laid off ten thousand. Do you think AI is a real opportunity?
08-Tom: I think it is, but whether it can be a big enough opportunity to lift all those AI boats that are being launched is another matter. The thing about AI is that it has its own less-than-healthy dose of hype built in. CEOs at Davos are using it to write work emails, so CNN said. Is that an economic revolution? Are these CEOs running their companies with a chatbot? I don’t think so. I think there are major opportunities for AI in the future, but like other areas like contextual services, I think there’s a whole ecosystem that needs to be created to allow AI to make a major difference in work and lives, enough of a difference to justify a lot of money changing hands.
If tech is being impacted by Wall Street’s dismissing some of its initiatives as too futuristic or too expensive, then tech needs to have a credible revenue model to exploit the success of some tech innovation. Financial success is what markets reward.
09-Nigel: But aren’t those broad ecosystem-level advances you’ve advocated rejected by VCs because they take too long and they’re too expensive? Isn’t a chatbot a better way to exploit AI benefits financially than a whole application ecosystem?
10-Tom: No it isn’t, Nigel. It’s an easier way because it’s a limited approach. I can do a chatbot easily, but how easily and extensively can I monetize it? Let me put it another way. Between Microsoft and Google this week, we laid off twenty-two thousand workers,
and the biggest tech companies have laid off over fifty thousand
. How many would it have taken to build a true AI application ecosystem, or contextual services, or a generalized metaverse platform? I submit any or maybe even all of that could have been done in a year or less by that many people. The truth is that something like Web3 is an ecosystem, and it’s an ecosystem that has to compete with an established solution to
the problem of identity authentication. It’s never been clear to me how Web3 could generate a big return, but it’s certainly a big investment. Why not invest big in something that returns big?
11-Maven: I love tech but what you say makes me wonder whether the Valley has become a kind of micro-culture that’s so disconnected from everything else that it’s an alternate reality. Tech for tech’s sake? That might be what’s at the root of the part of today’s tech crisis that’s not just about stock price management.
Do you think that hype and over-hype really drive decisions on Wall Street and for tech companies?
12-Tom: I do, because I see the evidence. Look at cloud computing. We saw cloud growth take a hit in 2022, and we saw many companies talking about how the cloud cost them way more than expected. Could that have been true only in 2022? I think businesses, meaning business managers and executives, saw the cloud bandwagon rolling along and jumped aboard. Then they saw the bills coming in and figured at first that it was something they could tune around, or maybe that doing the same thing off the cloud would have cost even more. When the tide of hype turned a bit, they all realized they’d been worried more about new software techniques than about smart business decisions.
That’s the tech challenge today. We need smart business decisions that drive tech adoption, tech spending. Not hype, not looking modern at CxO meetings somewhere. That means we need the kind of tech that you can adopt with a smart business decision.
13-Nigel: The impact of hype isn’t limited to social-media and web spaces either. Ericsson’s earnings report was worse than expected and the reason is that 5G spending was down. 5G is surely been an over-hyped technology so the question is whether expectations were too high, or whether vendors got complacent on 5G prospects and didn’t work hard enough to develop the basis for those smart business decisions you mentioned.
14-Tom: The latter, I think. There are a lot more people in any given sector who are looking for quick, easy, money than are looking to do something fundamentally valuable. If there’s a parallel driver for hype, which works because people want things that are interesting more than they want things that are true, then you create a culture of exaggeration that self-validates. In tech, the largest layoffs are coming from the companies who are involved in technologies most susceptible to hype. It will be interesting to see how IBM’s earnings come out later this week because they’ve been perhaps the most practical-minded of the tech firms.
Well, it’s time to end this podcast. We thank you for joining us and hope you’ll listen again next week.