We are reading the headlines about layoffs that have started across corporate America. Twitter made headlines this week. But then anything involving Elon is making headlines these days. Even Facebook parent Meta is expected to lay off thousands after hiring nearly 42,000 employees since the start of the pandemic. Free cash flow at the company has fallen 98% in recent months.
This is not limited to the US of course. It’s happening globally. If the economy is so strong as we are being led to believe, then why are these layoffs happening? Is it going to get worse? If so, why would it get worse? Is it falling revenues? The answer is yes, partly. But that’s not the entire story.
On today’s show I’m going to show you a leading indicator that can help you anticipate layoffs. The evidence is plainly and publicly available for anyone to see, if you choose to look. There are literally thousands of proof points. But we only need to look at a couple to establish the connection.
What is not making headlines are commercial bank balance sheets. These balance sheets are actually sitting on much higher risk than we can readily see.
Credit is the engine of business. Almost nothing happens in business today without credit. Inventory purchases are made with lines of credit. Construction of new manufacturing capacity in order to re-shore manufacturing to protect against global geopolitical risk requires credit.
With the near doubling of interest rates, the cost of that debt service will be crushing for business. Lines of credit are variable rate. Large capital projects are often funded by bond offerings. But bond offerings in a rising interest rate environment are difficult to underwrite and even more difficult to fund.
Host: Victor Menasce