The Economy

Stock buybacks are a form of returning money to the owners of the company (by using it to increase the relative stake each owner has in the company, increasing the value of what they own). This is why people own businesses. To earn a return on the capital they are investing. They are not inherently a bad thing (any more than taking a dividend from profits is), even though it elicits a Pavlovian response from some people.

Let's say you are an owner of Google. Your equity in the company today is worth 35, 40 percent less than it was less than a year ago. You have lost money. And your company's profits have been shrinking, which typically doesn't bode well for coming returns on capital.

The layoffs presumably reflect the fact that those excess workers no longer are growing the company, and the expense of employing them has become greater than the marginal income they bring.

Think about it that way, and the "stock buyback" vs. "layoffs" thing is not a dichotomy. They both accomplish the same thing for the owners of the company (who want a return on their capital). They are laying off people on the hope that it will increase profitability, and increase the value of each owner's stake in the company. They buyback stock, because it increases the stake each shareholder owns in the company, making what they own more valuable.

 

Nope. It sucks for those people.

It was just a false dichotomy to me. Just as a small business owner, I could maybe employ an extra person, make the business less profitable as a result, and consequently make less myself from the business. But you wouldn’t expect me to do that probably.

 

Sorry, but "They are all making money" is lemonade stand analysis.

That whole thing was silly, frankly. We are in a rising rate environment for the first time in forever (and off the world having gotten addicted to zero funding costs), and it doesn't portend well for business. Those companies actually held off on these layoffs even as their businesses have all 1) seen earnings decline, and 2) the valuations of their companies have gotten slaughtered.

I'm sorry, Google (the announcement this morning) is not laying off people because of that claptrap. It is selling way fewer ads than it was and its business has slowed down a lot. It's exactly what it looks like. In Q3, Google reported its slowest revenue growth in a decade. YouTube ad revenue declined for the first time ever. The company's earnings dropped by $6 billion. And things have likely only gotten worse since then (they report full year results in 2 weeks), and right now are probably looking bad to the extent they can project beyond.

Earnings are declining for all of those companies. What these layoffs are telling us about the economy is pretty straightforward. When the pandemic hit, they unleashed a monetary tsunami that created the exact opposite of what should have happened when everything shut down. Demand for the digital services that these companies offer exploded on the back of the "stimulus." And each of those companies hired tens of thousands of people, as a result of the skewed signals the artificiality gave them.

The boom that monetary / fiscal injection spurred was an unprecendented thing, and we are now getting a corresponding bust (as always happens). That boom-bust cycle is happening incredibly fast, because the amount of "stimulus" was massive, so the whole thing is now like a roller coaster that went up steeply, and is now entering the precipitous drop off the top.

At this point, those companies are basically back to earning what they had been prior to hiring tens of thousands of workers to meet that stimulative demand. And even with these layoffs, they still will have more workers than they did prior to all of the hiring they did. They all held off on doing these layoff, even as their business dropped off, because nobody wants to hire tens of thousands of people and have to get rid of them that quickly.