E103: Tech layoffs surge, big tech freezes hiring, optimizing for profits, election preview & more

People are making more money on YouTube, on Instagram, on TikTok than ever before. There's a whole new class of work that revolves around the individual creating their own business, creating their own income stream that's simply taken off and has taken off.

This is something important you're bringing up here. Gig workers are about 9% of the workforce and Uber and Dara had, they grew over 70% this year, but I think the big number that I watched for was drivers are making $36 an hour in the United States working for Uber. So you're exactly right. People are finding other options, whether it's DoorDash, Uber, Etsy.

The Republicans will control Congress. The Democrats will control the presidency. And so as a result, you're going to be largely in a gridlock situation. But gridlock may be a lot better than what we've had over the last couple of years. So, you know, you've had basically this orgy of spending and money printing, and I think that's going to stop, obviously.

Look, I still believe in the Democrats. You know, I am hoping I gave a million bucks to the Senate pack trying to sort of tip the Senate. I really think it's important that we have a split government because I gave up on the House. I think it's clear that the Republicans are going to win, but the Senate is still up for grabs. And the reason is because I think that we need to sort of have stasis so that nothing bad happens between now and 2024 because I think the economic conditions on the ground are going to be bad in and of themselves.

So like, you know, for me, I'm like, wow, I thought that we could get through the worst of this by mid 23 But now you have to plan for the worst, which means, OK, now I'm thinking that, man, rates could be higher for much longer, which means, you know, we could be in this market till early 25

So David, to your point, the current three-month T-bill rate is 4%. You know, you can buy munis now between 4% and 5% that are triple tax advantaged, right? You can buy high quality corporate bonds that are 6%, 7%, 8%.

it's like if you're willing to take tech risk, then why wouldn't you buy a bond at 10%? Meaning the equity always has to beat that threshold return.

And so, you know, the 10, 13 percent cuts don't really pass muster. As a public market investor kind of looks at the management across these different companies to turn a profit, they're going to say the folks that are making the deepest cuts the fastest are the ones that are going to get valued.

The point Friedberg makes is so correct, which is, if you're doing a RIF, obviously there's a reason why, but I think we're seeing too many RIFs where the details of the RIF and the magnitude of the RIF don't match up with what the objective of the RIF is.

Meaning, if Google did it, I think that people really trust Sundar and Ruth, and I think the stock would go bonkers. They would probably move very quickly into the echelon of Apple, and Apple is sort of a first among equals.

When you're throwing off almost a billion dollars in free cash flow, people are going to perceive that business maybe as of this cohort, the flight to safety, right?

The thing with the labor participation rate that we're still not sort of like truly factoring in is like, we had a million Americans die because of COVID. And, you know, starting in that Trump presidency, we lost like seven or eight million immigrants.

And just slowly going down as boomers retire early because they made so much on their 401Ks and homes. And then you're right, Chamath, we've had negative. We've really cut immigration in the last whatever, five, six years.

Stimulant prescription is now the single biggest epidemic in children. It is now twice as prescribed as contraceptives and asthma drugs.

So, I was like, dude, your options are worthless. Like, you know, this is a real problem, I think, that's probably going to become very systemic for scaled unicorn software companies.

let's say you're a unicorn company, okay, and you raised at the peak, let's say second half of 2021, you raised $100 million at a billion-dollar valuation. And let's say you've got $50 million left in the bank, right, so you've burned $50 million. A lot of these founders are thinking that $50 million they've got left is only 5% dilution, but that's what it was historically. If you were to raise a new round today, you might only be valued at $250.

And I think like the next shoe to drop has to be these founders and these boards just saying, OK, let's just take the hard medicine. What's the real, you know, market clearing price and valuation? Let's get a third party to price it. And let's get new fresh equity and then move forward.

One is that the marginal cost of energy goes to zero, and the second is that the marginal cost of compute goes to zero. And the second one is really about shifting compute to more parallelism on GPUs and ASICs and FPGAs. But that's why all of this stuff is possible.

Well, I think that we had, if you take a very balanced view of what happened this week, you have to start, I think, with the Federal Reserve. And really, what they said is rates will probably be higher than all of you think, and they'll be higher for longer than all of you want.

My guess is that they'll be too slow to react to the recession. So we'll end up with a period of rates being higher than they should too long, and then they will correct.

It's just alarming statistics because if most people have most of their personal net worth tied up in their home asset and their home values are declining or going to decline, and we're seeing this dramatic spike in consumer credit in the US, it paints a really ugly picture for the next two years.

The point is that you didn't have to do this when rates were zero. There was just an abundance of free money and risk seeking and duration that is now out of the market.

I just don't see anybody rewarding hyper growth that is burning a ton of cash where you have to be back in market every year

I mean, look at Airbnb as an example. I mean, they did this ginormous riff during COVID because they had no choice. I mean, their revenue went essentially to zero. And now the business is incredibly strong. It's throwing off massive amounts of free cash flow. And the stock market seems to really love what Airbnb has done.

Yeah, but JK let's just be clear. Airbnb is still down almost 75% off its high.

But the reality is, if you look at this, we have now depleted our strategic oil reserve by almost 50%. Yeah. So we are running out of oil that we can introduce into the market at effectively zero cost to bring the price down. And because we've lost our relationships with folks like Saudi Arabia, there's no way to influence them in order to produce more. In fact, they're going to cut supply so that they can control the prices that they have, that they can sell into the market.

But now I think we're headed into the second part of it, which is the real recession, a recession characterized by joblessness. And you're starting to see economists say we're going to go from 3 something percent unemployment rate to say 5 or 6 percent unemployment next year.

I think the larger point is just that it feels to me like the economy is headed off a cliff right now. I mean, I can tell you within our larger portfolio of companies, like I can see the trajectory. So after Q1 board meetings, I would say about two-thirds of portfolio companies were hitting their numbers and one-third were missing.

And this was the Fed's goal, right? They wanted to take away this free capital. They want to slow the economy down. And it seems like they're making progress. They did the 75 basis point hike this week. But we're adding jobs to the economy. We have more job openings and we had 2.6% GDP growth.

And there's a lot of these distressed mid cap and small cap software companies out there that private equity firms now realize, wow, you don't actually need 50% of the workforce in order to keep the product running and to drive to profitability. And you could see a bit of a flurry of buyout activity as more folks come in and maybe try and mimic the Elon playbook.

So I think about two-thirds of these companies really have no line of sight to profitability in the next two to three years. And again, if you layer in this cost of capital argument, all of those companies, David, will have to raise money at very egregious terms in order to keep themselves going as a public business, in which case their alternative is to go private in a PE transaction.

Well, I don't, that's like a very specific question of like how many of them are going to get acquired by PE firms versus going public or going private after being public. That's like a very specific question.