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Why Wall Street is Cheering Layoffs


The part of Fed Chairman Powell’s inflation fighting plan I’ll never understand is how he is basically rooting for people to lose their jobs as a means of alleviating wage pressure. The question of wealth inequality aside, is it really better to have no income and unable to afford anything, rather than paying slightly higher prices?

Now, Wall Street has joined in applauding layoffs, especially at tech companies, and, reluctantly, I find myself cheering along.

Since December, approximately 200,000 tech workers have been laid off, with most coming from the larger tech names, such as Amazon (AMZN), Alphabet (GOOGL) Microsoft (MSFT) and Salesforce (CRM). In total, each company has laid off about 5%-10% of their workforce.

But this barely puts a dent in the hiring frenzy that took place for most of the Covid-19 pandemic. In many cases, the layoffs will rewind the clock only about a year.

In each case, the day the company made the announcement the stock rallied on the notion the reduction in headcount is not only effective cost cutting that will drop to the bottom line, but will also force companies to become more productive and refocus on their core businesses. Basically, tech companies had become too bloated and were chasing too many ‘moonshots’. Wall Street likes the renewed emphasis on profitability, as well as probability.

Indeed, the most extreme of the layoffs/firings came at Twitter (TWTR), in which Elon Musk winnowed the staff from about 7,500 people down to just 2,000 in less than six weeks. This served as a bit of a warning shot for other tech companies who would later follow suit. Given Twitter is still functioning as if nothing changed, it left industry watchers asking, “What the hell did all those people even do?”

Granted Twitter is something of a unique situation and many of the layoffs were among sales and marketing, which will probably hamper growth and profitability. However, most of the layoffs at the other companies in question included engineers and programers. These layoffs were largely due to overstaffing, rather than a significant downturn in demand.

For years, tech workers have had the upper hand in the industry’s labor market, commanding high salaries and expensive perks, working their way up big tech’s ranks to the point of bloat. In addition to bringing some rationale to staffing, there has also been a certain amount of schadenfreude towards those twenty-somethings who made “a day in the life” TikToks, which suggested all they did was eat and drink for free, while taking naps in sleep pods provided to workers.

The painful shake-up was necessary. For the last 5 to 10 years, the tech industry has offered precious few, groundbreaking services as it grew fat on old business models. Big tech firms have also acted like a giant vacuum, sucking up all the talent in the sector, to the detriment of startups. It was virtually impossible for a new company to compete for senior engineers when places like Alphabet and Meta were paying upwards of $1 million a year plus stock options.

Boom and bust is part of tech’s history and with the right sized staff, as well as allocating capital to the most productive and promising projects, it looks a little more reasonable to expect 2023 will mark the start of tech’s next boom.

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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