Volume 124: Looking Back, Looking Forward

Looking Back, Looking Forward With Depressing Nostradamus.

tl;dr: Reflections on 14 years of ZIRP and what’s to come.

Happy New Year! I hope that 2023 is filled with much joy, laughter, good health, and prosperity for you and those closest to you.

It’s common at this time of year to see various looks backward and forward, but outside decade ends, these are typically focused only on the year past and the year ahead. However, it’s more likely that history will view 2022 as the end of the past decade rather than 2020.

When 2020 ended, we were still at the height of the pandemic, with $10 trillion worth of global economic stimulus keeping things moving. By the end of 2022, for all intents and purposes, the pandemic is over (It isn’t, but we act like it is, so it may as well be), and world governments have swung hard from stimulus to tightening, and the impact of that is going to be…interesting.

To understand why let’s look back. Just as history is likely to view 2022 as the end of a decade, it’s just as clear that this decade started in 2008 rather than 2010. Why? Because the financial crisis that melted down economies across the world ushered in ZIRP (If you only click one link today, click this one. It’s an excellent explainer of what happened to the economy under ZIRP conditions).

ZIRP stands for “Zero Interest Rate Policy,” which happened across the globe as a means to fight the effects of the financial crisis.

Now, why, you might wonder, am I singling out interest rates dropping to zero in a newsletter about branding? Well, because it’s super important to the situation we now find ourselves in.

You see, ZIRP fueled the post-2008 economic bounceback, which means that anyone entering the workforce, buying a home, buying a car, investing in stocks, or opening a savings account in the past 14 years has only known a world where interest rates are either zero or pretty darned close. It’s also the case that we view brands that grow up alongside us as “ours.” For me, this was Orange in the late 90s. So even though I was never a customer, I viewed it symbolically as mine in a weird way.

So, while tech didn’t cause the financial crisis, it was by far the biggest beneficiary of ZIRP, as it became the investment destination du jour for capital seeking a return. (Which explains why every business seeking capital pretended it was a tech business, even if all it was doing was renting out office space). This means that without ZIRP, there would’ve been no DTC revolution, no Uber, no Lyft, no Doordash, no Peloton, no Snap, no Pinterest, and very possibly no crypto, no Tesla, no Airbnb, and certainly, no WeWork. In other words, the brands that an entire generation now views as “theirs” wouldn’t have existed but for the disastrous actions of Wall Street risk-takers in the lead-up to 2008.

It feels very odd to realize that a whole universe of brands we now take for granted only exists because ZIRP drove pension funds to pump capital into risky tech speculation because safe assets were paying zero. (I am over-generalizing here, but only by a little). And that as interest rates rise and capital flows inexorably out of speculative tech and back toward safety, many of these businesses will cease to exist. More on that later.

Unfortunately, when we branding people do “trends” work, we all too often make two mistakes. First, we don’t look at trends at all; we look at fads. First, because short-termism dominates, and marketing is a very short-term game these days. And, second, because we overweight groovy new toys like “The Metaverse!” ahead of much more important but vastly less monetizably-sexy-in-a-deck issues like interest rates, inflation, working age population, income inequality, wage growth (or stagnation), political dysfunction, health outcomes, education, climate, etc. You know, the stuff that has a huge impact on society that we conveniently like to ignore in our pursuit of the Next Big Gizmo™. For example, a big reason for the unlikely resilience of the labor market appears to be boomers retiring en masse during the pandemic, leaving a labor shortage. Of course, this begs the question of how many marketers have young-ish retired boomers with time and money on their hands in their marketing plans? Fewer than have a Metaverse strategy, I’d safely bet.

It’s only when we take a broader look at the forces impacting society and the economy that we generate true strategic insight. Take the automotive market, for instance. Auto brands entering the metaverse tell us precisely nothing. However, the used car market is almost certainly going to crash to earth in 2023. Why? Because rapid increases in interest rates to try and combat inflation means car loans are now pushing as high as 10% interest, car payments increasingly exceed $1,000 p/month, forcing people to take out 72-month (or longer) loans on a depreciating asset that risks negative equity and the Repo Man. As a result, subprime car finance looks, well, horrible, and it doesn’t take a rocket scientist to see how fundamentally unsustainable this is. The days of selling your used BMW with 40,000 miles on the clock for more than you paid are long gone. Don’t be surprised if we see a wave of car repossessions in 2023, a spike in bad car debt (with commensurate pain to car financing companies), and a fairly brutal collapse in used car values as a result (Oh, yeah, and Carvana is almost certainly going bankrupt). All this means that some car company somewhere will get real smart and roll out the Hyundai playbook from 2009 to gain share in a down market. A play that will be vastly more valuable than any amount of Metaverse trend decks.

However, as we look back over the past 14 years, it’s clear that what we should’ve been doing when capital was free was preparing for a zero-carbon future. With zero percent interest rates, we could’ve financed electrification on a massive scale for free. But, instead, we got 15-minute delivery, loss-making taxi companies, and whiny, cruel Bullshitter Billionaires.

So, what next? Well, as I’ve said a million times, the only consistently accurate prediction of the future is that predictions of the future are almost always wrong. But here are a few thoughts based on what we can see right now.

Interest rates will dictate almost everything in 2023, replacing inflation as the primary source of economic pain as corporations and households that over-leveraged themselves in the past 14 years come to terms with a cruel new economic reality. Some of the 2nd order effects of this will include a continuing decline in value among profitless corporations (the chart in the link is insane, BTW), a rise in bankruptcy among zombie corporations (and households), as well as pain in sectors dependent upon debt-finance, including both automotive and housing (Ironically in the US, a housing sales collapse might have only a minimal impact on prices. This is because most homeowners are on long-term, low-rate mortgages, which creates a huge incentive to stay put rather than accept a big drop in what’s affordable under a new interest rate reality).

For branding folks, the DTC world will go from boomtown to tumbleweeds, if it hasn’t already, and tech will get a lot tougher, as even the largest find themselves fighting off activist investors pointing to Twitter as a rationale for slashing staff and other costs. (While conveniently forgetting that this same slashing also crippled Twitter’s revenue and, very likely, its operational resilience).

Because tech is so depressed, layoffs will continue. Strangely, this might be good as the tech talent previously hoarded by Silicon Valley is now available to all the other companies struggling to attract desperately needed tech talent. This, in turn, will make unlikely tech powerhouses like Walmart more common. Embedding technology into businesses that were previously viewed as distinctly non-tech savvy. For this reason, the next tech revolution will likely be the transformation of non-tech companies with solid balance sheets that can afford to hoover up the talent exiting Silicon Valley.

With Silicon Valley in mind, it’s sobering to consider the future of San Francisco. Unlike New York or Los Angeles, San Francisco lacks the scale and diversity of economic output to be resilient to a collapse in its tech core. With leased office space at historic lows and people exiting the city, there is a distinct possibility that San Francisco could become the Detroit of the 21st century. It’s easy to say it’ll never happen, but if history is any guide, it could.

I’m acutely conscious that this all seems a bit depressing, which may have more to do with my ongoing issues with SAD than actual reality, but then again, maybe not. I find it hard to separate the two. But, ultimately, I’m not particularly down about the situation we find ourselves in. I view this more as a period of short-term pain brought about by quickly rising interest rates hitting an economy artificially built upon a platform of ZIRP. It’s going to be something of a cleanse if you will. At some point, possibly by the end of 2023, inflation will drop, and the pressure will be on to stimulate a stalling economy. And when it does, the next wave of tech innovation will be fueled by things like AI-Bing (I kid, I kid, I didn’t even know Bing still existed), climate science, bio-computing, and life sciences. In other words, things that are generally more useful to society than ad tech, profitless taxis, fictional currencies, and 15-minute delivery. Just think, we’re on the verge of making cancer vaccines real, and enzymes that eat plastics already are.

So, yes, in the short term, I’m a little concerned about what we face economically as we face up to the inevitable pain of higher interest rates. But longer-term, exciting stuff is on the way.

Thank you for allowing me to play Depressing Nostradamus for a day. Regular service shall resume, with a big fat grin, next week.