Higher interest rates drive the Bitcoin crash, tech layoffs, and everything else
Oh Matt, one does not simply “buy” Taylor Swift tickets.
I think the observation that 'time preference is very important' is correct. A low interest rate environment allowed all kinds of speculative ventures to take off, knowing they had years to borrow money cheaply and make money in the long term. That's changing now, and consequently any business that was doing that is suffering. The Metaverse thing Facebook has was a dubious proposition in a low rate environment and looks downright kamikaze now.
And it's great to see crypto suffer. Nobody has identified a use case for it except crooks. The only reason people bought it was to gamble that someone would buy it off you in the hope they could sell it to someone else for a higher price. That's a bad bet at anytime, but looks ridiculous at a time when you can get decent yield at low risk. Bitcoin mining is an environmental disaster.
It seems weird to have an entire article about tech woes and not mention at all the straightforward business decline being suffered by the big players in tech.
Part of the story here is that during the pandemic, ecommerce was up, online advertising was up, streaming services were up, and so forth. The companies bet that they could hang onto most of those gains in a post-pandemic world, and they were wrong. Now they have revenue problems.
That's not to say that time preference isn't also part of the story -- it's certainly part of the story that tech is telling itself -- but there's some pretty straightforward business decline too.
"The story behind that long-term decline is itself interesting.."
This is probably a boring request, but I would love to see a write-up on that.
Bond yields & Treasuries are not sexy topics but have massive effects on economy / politics, and some insight on this relationship would be super interesting.
I schedule appointments for financial advisors. A few months ago, a guy calls in to schedule an appointment. A few days after the appointment he calls in to schedule another one, this time hopefully with a different, preferably a "younger" and "more open-minded" advisor. Why? He wanted to put his entire portfolio in to crypto and the guy I set him up with told him it was a stupid idea.
Re: big swings, Amazon's Alexa is going to end the year with something like a $10B loss, probably with no end in sight other than, well, ending it:
As a young-ish person, I for one would really like to see more speculative investments that I might be able to benefit from in a few decades and this newsletter really has me wondering what other alternatives we have to the Fed raising rates. Should we be relying on more fiscal policies to curb inflation, such as raising consumption taxes? Is it even possible for Congress and the President to effectively coordinate with the federal reserve if this is something they wanted to do? I'd definitely like to echo another commenter in saying I would love a history of how we found ourselves in the middle of a long term decline of the federal interest rate over the last four decades.
“Inflation was higher in 2021 and stayed high longer in 2022 than most forecasters predicted. And it’s important to remember that these were general errors. Joe Biden and his administration and their supporters made those mistakes. I made those mistakes. But so did Jerome Powell (a Republican), the Fed staff (a very nonpartisan group of professionals), and most private sector forecasters at the big investment banks. And crucially, the collective forecast of bond investors got it wrong.”
This true but I think misses the question as to why most everyone missed this. And generally why most experts fail to forecast major changes like this.
The two obvious reasons are:
- This is something that can’t be predicted.
- Groupthink and circular analysis.
Either way, it’s more evidence that long-term economic predictions from experts are not reliable, and this is what should be factored into future plans, not assumptions that the status quo ante will inevitably return.
Thank you as always Matt. I really like Thompson, but as a financial professional I found his dismissal of this case fairly odd. Fwiw - this is exactly what equity growth managers are saying on calls everyday to explain thier returns YTD.
This is a bit off-topic, but relevant to Matt's many posts promoting zoning reform to encourage Yimbyism. Today's WSJ has an excellent article ('Land-Tax Policy Seen as Hurdle to Housing', p B6), which points out that many municipalities' tax structures tax buildings at higher rates than land, with the result that a lot of developable land under current zoning regimes remains either undeveloped or underdeveloped. In NYC, for instance, there are 77,000 lots that are either vacant or occupied by a building less than half the size permitted by current zoning rules: "If the owners of these lots all developed buildings with the maximum size allowed under current zoning, they could add an estimated 858 million square feet of housing and commercial space... Around 96% of these sites are zoned for residential use". The article argues for flipping the tax structure, so land is taxed at a higher rate than buildings (essentially Georgism). I haven't seen this addressed in any of Matt's pieces advocating Yimbyism, which all focus primarily on zoning reform. If the articles is correct, at least in NYC, that doesn't seem to be the primary constraint to housing development. Of course, rising interest rates crimp housing development too.
Right around 3% on 10y rate I started seeing VC heads saying the money is gonna get shut off and you need to make profits now. It’s possible they were getting updates from end investors and passing that along to their startups, but higher interest rate->guidance change was very tightly coupled. The big tech companies seemed a few months slower, perhaps because their profit levels gave them more runway, but even this summer I was hearing intern horror stories about no one getting jobs.
If the Fed ends up inventing successful time travel, then that'll have made inflation totally worth it. Probably safer than SERN's attempts, anyway.
More seriously, it's a bit odd to write a post on time discount rates and not mention the opportunity cost of locking up now-funds for later-interest. 20% interest on a $100 investment (security?) is a fantastic rate, but if I'm really poor and that $100 is a major chunk of my emergency reserve cash...well, who's to say what new crazy thing will happen within the year that might require sudden expenditures? Better to have and not need, and all that. (At an institutional level, I guess this would be reflected in cash reserves and such...which of course ties into FTX. Leverage is more dangerous in a less-stable economic situation. Dividends and profits now, please, as you say.)
ETA: also thank you for not mentioning the Stanford Marshmallow Prison Experiment.
The 40-year drop in interest rates probably explains a lot about the economy, honestly. Prior to tech taking center stage, we built a similar system in the financial industry. Rich people would shovel money into funds built by successful traders, seemingly oblivious to the fact that it’s basically just gambling.
I saw on Twitter last night that Matt complained about running low on ideas, and I thought to myself “where’s the post on interest rates I’ve been clamoring for?” Ask, and ye shall receive!
This is a great piece. As someone who works in a finance-adjacent field, I grok intuitively why rising rates have been having the impact on the economy that they have been, but haven’t really been able to articulate it well. The “bending time” frame is great and I will be using it.
No one knows where interest rates will be in the future, not even the fairly short-term future. MY writes "the 10-year rate is also rising, after having been in a period of structural decline for literally 40 years." But the accompanying chart shows frequent periods of similar increases, followed by declines. That's just as likely to happen now as not. Morningstar predicts Fed fund rates and 10-year Treasury yields in 2026 to be well below the historical average (https://www.morningstar.com/articles/1106505/why-we-expect-the-fed-to-cut-interest-rates-in-2023); Krugman writes that the era of cheap money may just be briefly interrupted, not ended (https://www.nytimes.com/2022/11/18/opinion/interest-rates-fed.html).
Anyone thinking the low interest-based economy we had has been left in the rearview mirror is making a pretty bold prediction. We just don't know yet.
“I do think a lot of us have the sense that the past 15 years have featured too much emphasis on throwing technical talent into super-duper-speculative ventures rather than something boring like “let’s make the self-checkout machines better” “
I don’t think it follows that now will be a better time to make these kinds of incremental innovations either. Whether it’s building Tesla or rolling out better check-out machines you are talking about deploying capital today at a loss in hopes of a future ROI. While projects with nearer payback and smaller total capital required may be better off on a relative basis than moonshots, the net effect is going to be making all innovation more expensive to finance. (I’m skeptical technical talent has been a major bottleneck on relatively simple incremental improvements.)