Pretty much title. I've seen this talked about a lot but I only very vaguely know what all this means, could someone elaborate on what happened, why it happened and what the consequences of it are?
Pretty much title. I've seen this talked about a lot but I only very vaguely know what all this means, could someone elaborate on what happened, why it happened and what the consequences of it are?
The company I worked for was a VC backed startup and they used the phrase: no more free money, to let us know we were let go. A lot of governments kept interest artificially low to ward of a recession (causing our current one) before and during covid. With this low interest rate people (more likely companies) were able to borrow money from the banks with no or even negative interest. Thus the idea of free money, as long as you invest and don’t lose it you can use that money to “make” more money.
Now with the interest rates rising this is a lot riskier, and VCs and companies are less eager to invest.
Let me know if this cleared it up 😁
Yep.
Companies were borrowing massive amounts of money at interest rates that could be fractions of a percent, which meant all they needed to do was find a way to exceed that via investing and they had free revenue. LIBOR, which is what dictates interest rates in most of the West, was around half a percent from 2010-2020 (excepting 2017-2019), now it's at 5.5.
In addition to that, a lot of companies were using it to finance stock buybacks, which would increase per share metrics like raw earnings per share, while also inflating stock price due to there now being fewer shares outstanding, which of course artificially inflates the way your corporation's finances look; they could also be compensating their executives in stock options, which now likely had the added 'incidental' benefit of being worth more. But of course, they were only doing buybacks to pass earnings on to shareholders, certainly not to enrich themselves.
I feel compelled to mention this is all perfectly legal as long as these things are disclosed within the appropriate timeframe, but it (obviously) should not be. We can thank Reagan for legalizing buybacks, and we can thank Clinton for fucking up how they legislated limiting executive compensation (whether it was intentional or not is up to you).