Digest: The Second Dotcom Crash Is About to Begin

Plus, Why Higher Natural Gas Prices Are the New Norm.

Welcome to your weekly digest… my breakdown of the things we’re thinking about and talking about in the Global Intelligence world.

First up, this week… the dotcom crash, mark II.

The markets have been roiled for the past week by a series of large-scale banking failures. This is a major story, and one I’ll be addressing in-depth in my columns over the coming week.

But for the digest today, I wanted to tackle a less-reported story of another industry in peril… something that’s flying a bit under the radar amid the banking collapse—the rapidly popping tech bubble.

This week, you may have seen the news that Meta—the parent company of Facebook, Instagram, and WhatsApp—is cutting another 10,000 workers. This follows a mass layoff of 11,000 employees in November.

Interestingly, that November layoff marked the first time the company had ever cut its workforce. Now, between the two rounds of layoffs, Meta has announced plans to fire about 25% of its global workforce in less than six months.

And it’s not alone in this trend…

Amazon announced layoffs affecting 18,000 people in January. Twitter has cut half its workforce since Elon Musk took over. Microsoft is planning to lay off 10,000 workers. The list goes on…

And here’s the thing: These layoffs are coming from tech giants with proven business models and a history of profitability… characteristics that are far from the norm in the U.S. tech sector.

Silicon Valley is filled with tech startups that are highly unprofitable. For instance, the Bessemer Cloud Index tracks emerging public companies that offer cloud-based services, and only 11 out of the 75 companies on this index earn a profit. 

Now, to be clear, a lack of profitability is to be expected among new tech companies… Tech startups burn through a lot of cash as they grow.

But this model is only possible when cash is freely available. For that, you need low interest rates so you can borrow… or you need venture capitalists and investors willing to fund your growth based on the promise of future returns.

At the moment, Silicon Valley has neither.

The Federal Reserve’s rapid interest rate increases have pushed up the cost of borrowing.

Meanwhile, investors are shifting their focus to value stocks. According to analytics firm CB Insights, global venture capital funding hit a nine-quarter low of $74.5 billion in the third quarter of 2022. 

For the last several decades, Silicon Valley has had the wind at its back. Even during the Great Recession of 2008, tech companies significantly outperformed the wider economy thanks to the availability of cheap capital and the rapid adoption of new technologies like smartphones.

Those days are over now. Which means that any tech company that can’t show some level of profitability now or in the very near future could find itself out of business in a hurry.

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Next up… a brewing storm in China.

After three long years of intermittent COVID lockdowns, China’s economy seems to be finally getting back on track.

In February, the country’s factory activity expanded at its fastest pace in more than a decade, with industrial production rising 2.4% from December (it might not sound like it, but that’s a big jump for the world’s factory floor). Meanwhile, investment in fixed assets like infrastructure surged 5.4%. And retail sales jumped 3.5%.

All positive trends…

But hidden in the economic data was a very troubling figure.

Youth unemployment spiked in China to 18.1%, up from 16.7% in December. (The overall unemployment rate was just 5.6%.)

By way of comparison, youth unemployment in the U.S. was significantly less than half the Chinese figure, at 8.1% in February.

A big factor in this is the Chinese government’s crackdown on the tech, education, entertainment, and real estate sectors during the pandemic, which caused large-scale layoffs in industries that typically absorb lots of young workers.

The crackdown was partly inspired by the Chinese government’s fears about the growing power of industries like tech to influence society. China’s Communist rulers are notoriously sensitive to anything that could challenge their rule.

But the question becomes… Where do these young workers go?

The Chinese government has unveiled measures to encourage companies to hire younger workers. And it has announced programs to offer young graduates funding for their own startups.

But it remains to be seen if this will help resolve the youth unemployment crisis.

Consider that right now, almost one in five young Chinese are out of work… in a society with a weak social safety net.

If the situation is not resolved in the near term, it’s not hard to envision these young Chinese directing their anger toward the country’s rulers.

***

Finally this week, higher natural gas bills are the new norm…

The shale drilling boom of the 2000s was supposed to supply America with a near-endless supply of cheap natural gas.

Then came 2022…

Russia’s invasion of Ukraine upended global natural gas markets, as European economies shunned Russian gas and starting buying from the U.S., Norway, and virtually anywhere else that would sell to them.

This led to a big spike in natural gas prices in Europe… and also in the U.S.

It’s important to understand that natural gas is traded differently than oil. While oil is priced globally, natural gas is priced regionally. So traditionally, U.S. consumers would have been insulated to a significant degree from a major natural gas price shock in Europe.

Now that’s changing.

Coal-fired power plants were retired en masse in the U.S. following the shale gas boom. This was largely done on the expectation of a strong supply of cheap natural gas to feed America’s gas-fired power plants, as well as overly optimistic predictions about solar and wind power.

Meanwhile, pipeline projects to move gas across the U.S. have stalled over environmental concerns… even as projects to export more gas from the U.S. to Europe and Asia are being accelerated.

The net result of this is that U.S. natural gas prices are increasingly linked to international natural gas markets, and therefore increasingly affected by the volatility in markets overseas.

U.S. gas futures, which determine what millions of Americans pay for electricity and heating, swung by more than 7% on 44 days last year. That’s the greatest volatility seen in this market since the modern era of gas trading began in the 1990s.

The pattern has continued this year. Already in 2023, we’ve seen around a dozen trading days with swings of 7% or more.

Volatility like this ultimately means utilities are paying more for gas… and they’re passing those costs on to consumers.

Despite a mild winter in many parts of the U.S., many Americans paid more than ever before for heat and electricity generated from natural gas. With the market volatility set to continue into the future… so will these higher gas bills. Bills will be higher too for food since natural gas is a key input in the production of fertilizer.

In the mainstream media, certain analysts have been promoting the idea that gas prices would push lower once we navigated this winter. Now, as I predicted, we’re learning that this won’t be the case.

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website.

Enjoy the rest of your Sunday.