The Great Contraction
And Rent Seekers (the SEC) Gonna Rent Seek
It’s been a rough week and a half.
The company for which I work, Finder, laid off 15% of its workforce due to tightening financial conditions mid-week last week.
I feel both lucky and grateful to not have been part of that 15% — as I really like my job and feel privileged to have it — but it didn’t make the sobering reality of watching so many of my colleagues go any easier to stomach.
I’ve been watching the layoffs in the tech industry from afar…
…and I figured they’d eventually hit home, yet I still wasn’t totally prepared for it when they did.
But instead of letting that sad and anxious energy that I feel as a result of what’s happened fester within me, I will channel it in this news letter to teach a little lesson about why all these layoffs are happening.
Here goes.
Below is a chart of the Fed Funds Rate from July 1954 to the present day.
The Fed Funds Rate is the target interest rate set by the FOMC (Federal Open Market Committee), the policymaking body of the US Federal Reserve system.
More specifically, it’s the overnight interest rate at which commercial banks lend their excess reserves to each other.
So why is the Fed Funds Rate important?
Well, it impacts everything from the annual percentage yields (APYs) on savings accounts to interest on credit card balances to mortgage rates.
You can see in the chart above that in late-2008 (post-Global Financial Crisis), the Fed Funds Rate plummeted to its lowest level ever — and then stayed there for almost seven years (basically the entire Obama presidency).
The FOMC raised rates from 2016 to 2019, but was then forced to cut them again in the face of the US economy essentially shutting down due to COVID.
So, from 2008 to 2022, aside from about three years, banks could borrow money virtually for free (while you were paying 6-10% on your student loans).
This means that they were able to extend cheap credit to other entities, as well, which led to expansion in the job market — particularly in the tech industry — from 2008 to 2022.
Jobs were created because companies could borrow money at extremely low rates to expand their employee base.
Let’s call this 2008-2022 period The Great Expansion.
Now that the cost to borrow capital is more expensive, companies — especially tech companies — are not only not expanding, but they’re contracting.
There are two primary reasons for this (and they overlap a bit):
Companies can’t keep borrowing at low rates to pay salaries for employees that work in “growth” divisions. In other words, some companies hire people to do jobs that don’t turn a direct profit for the company right away, but the companies hire these employees anyway because they believe that one day these employees or these new divisions will eventually turn a profit. The problem here is that when dollars are scarce because capital is expensive, companies tend to stick with what works (AKA what generates revenue). Hence, they chop the positions that aren’t directly generating revenue.
Most tech start-ups take the Amazon approach and try to grow into their valuation. The problem here is that there aren’t that many “next Amazons” out there. Let me break this down a bit more… Amazon spent years operating in the red and not creating enough free cash flow to justify its valuation. And most of the cash Amazon made, it reinvested into the company. Many people predicted Amazon would fail because when they valued the company using traditional metrics like price earnings (P/E) multiples. However, Amazon was benefitting from network effects, and once the Amazon network reached a certain size, it became a highly profitable entity. Instead of building slowly and steadily, most tech start-ups attempt to do what Amazon did, which often requires that they borrow to keep expanding. But, again, when money becomes expensive, lenders become more apprehensive, and funding dries up.
Because of these two reasons, we’re now experiencing something that we could call The Great Contraction.
Generally speaking, this is healthy for industries. It cuts the fat, and makes companies focus on what’s actually turning a profit and what isn’t.
It’s both tough and sad for workers, though. Workers under the age of 35 have only been working during this era of expansion as a result of cheap credit issuance, and I’m sure this new, sobering reality has caught some of them by surprise.
I find this all quite hard to swallow, because the contraction didn’t have to be this sharp. It’s only happening to this extent because of poor Fed policy.
As I’ve stated before in this newsletter, Fed Chair Jerome Powell is now actively trying to get people unemployed, as he feels it’s a necessary dimension of his mission to curb inflation.
And if you think I’m just being hyperbolic when I say that the bad J Pow (I’ll mention the good one in the next section) is trying to put people out of work, please see what major political publication The Hill has to say about Powell’s recent actions.
Below are the first three paragraphs from the following article: “Why the Fed is pushing unemployment higher” (The Hill)
“Federal Reserve Chairman Jerome Powell said Wednesday it will be almost impossible for the central bank to beat inflation without hundreds of thousands of Americans losing their jobs.
Fed officials expect the unemployment rate to rise to 4.4 percent next year, up from 3.7 percent in August, as they jack up borrowing costs and slow the economy, according to projections released Wednesday.
Experts say such an increase in the jobless rate over the course of a year would likely push more than 1 million workers out of their current jobs and leave millions more unable to find better work or higher wages.”
This absolutely didn’t have to be the case. It is the case now, though, because The Biden Administration along with The Fed insisted on calling inflation transitory for months instead of taming it when it was closer to 4% or 5%.
Happy times.
Let’s move on to what another parasitic, unelected bureaucrat is doing to make life harder for the little guys and gals.
SEC Chair Gary Gensler Fines Kraken $30 million and Forces the Platform to Shut Crypto-Staking Service
A true master of rent seeking, Goldman Gary and his posse at the SEC have fined Kraken $30 million for offering its staking service to customers, claiming that the service is an unregistered securities offering.
Instead of offering Kraken a path forward and a way to legally offer its staking service to customers, Gensler opted to sue one of the most legitimate, long-standing and trustworthy crypto exchanges in the space (see my piece for Nasdaq on Kraken: “In Crypto, Some Trust Is Necessary — and Kraken Is Trustworthy”).
Below are some words on the situation from Jesse Powell — the founder and former CEO of Kraken and the good J Pow.
And the following tweet from Powell was also pretty on point.
This is the type of exchange that the SEC should be urging crypto investors to use, but instead, they are fining it — and those costs will likely be passed on to Kraken’s customers.
Think I’m just being hyperbolic again? Well, don’t take my word about Goldman Gary is up to; instead, take the word of SEC Commissioner Hester Peirce, who issued some of her thoughts on what Gensler did in an official SEC press release on Thurs., Feb. 9.
Below are some of the words Peirce issued in the statement:
“Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent…
…The Commission argues that this staking program should have been registered with the SEC as a securities offering. Whether one agrees with that analysis or not, the more fundamental question is whether SEC registration would have been possible. In the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline…
Here’s a good tweet thread to shed more light on what Peirce meant in that last section:
Back to the queen.
…We have known about crypto staking programs for a long time. Although it may not have made a difference, I should have called for us to put out guidance on staking long before now. Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action…
…Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating. Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it…
Most concerning, though, is that our solution to a registration violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service in the United States, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.”
Who needs me to shit talk Gensler when a member of his staff does it so well?
Thank you, Commissioner Peirce. You’re a real one.
With all that said, y’all should get out of the habit of using centralized platforms to “stake” crypto assets.
Learn how to use a non-custodial wallet, and stake your crypto on your own. You’re adding an unnecessary level of risk by lending your assets to a centralized platform to stake them for you.
Yes, I know, most people won’t do that, and here’s what will probably happen:
And that’s all I’ve got for you.
Let’s all keep keepin’ on this week — even as Jerome Powell and his cartel at The Fed try to put us out of work and Gary Gensler and his cronies at the SEC make it more difficult for us to invest via reputable platforms that have a long history of serving their customers well.
These rich, old, paternalistic white men are about to make me get that keychain Taylor was talking about in “All Too Well”.
Best,
Frank
Twitter: @frankcorva
