Many parts of the economy are at a deep standstill. But does this mean that a recession is coming?
After years of Cheap money helped fuel the rise of speculative investing non-profitable US Business Models Over the past decade, stubborn inflation has forced the Federal Reserve to raise interest rates hurry up than ever in 2022. Now, a new era of higher borrowing costs and more cautious lenders — along with slower growth and recession fears — has frozen the once-red sectors of the US economy.
the initial public offering (IPO) The market is basically closed; technology companies Lay off workers and stop hiring; The housing market is witnessingResetAfter years of booming growth; the venture capital space has slowed dramatically, with private market valuations drop.
But despite the freezes in the main sectors – and the constant doomsday Forecasts From Wall Street – The economy as a whole continued to grow along with the flexible labor market. In the fourth quarter of last year, the US gross domestic product increased at an annual rate of 2.9%, exceeding analysts’ expectations. Forecasting. The unemployment rate came in near a pre-pandemic low of 3.5% in December.
However, many economists expect that to change this year. Elaine Zentner, chief US economist at Morgan Stanley He said This week that annual GDP growth will drop to just 0.2% in the first quarter, while Wells Fargo expect a decrease of 0.4%. Some CEOs, billionaire investors, and investment banks believe that complete stagnation He’s on the way.
It remains unclear whether frozen key aspects of the economy will eventually collapse under the weight of rising interest rates – leading to a recession – or if the deep freeze will thaw – enabling slow but positive growth. But credit markets could hold the answer.
“When the credit markets are down, and you can’t get transaction or investment financing, that’s when things freeze,” said Jim Kahn, chief investment and business development officer at Wealth Enhancement Group, a wealth management firm. luck. “Credit is the secret. It is the fuel of growth. And it has always been the fuel of growth, ever since credit markets developed 400 years ago at the beginning of the Industrial Revolution.”
Freezing and freezing sectors of the economy
A new era of high interest rates, inflation and recession fears has slowed various sectors of the US economy significantly over the past year.
For example, the VC space has been supercharged during the pandemic. In 2021, the amount of global venture capital funding reached a record $681 billion, more than double the 2019 figures.
“[A] Alex Warfel, an analyst at PitchBook, explained in a note Friday.
But in 2022, with higher interest rates, there has been a 35% drop in venture capital investment to $445 billion, according to Crunchbase. Gone are the days of “super-high startup valuations and easy fundraising opportunities,” Warfel said, sentiment in the venture capital space has been “crushed,” and capital has dried up. To his point, the estimated amount of capital required by US startups exceeded the amount provided by $42.8 billion in the fourth quarter, according to PitchBook. data.
said Logan Allen, founder of Fin Capital, a fintech-focused private equity firm luck He doesn’t see the venture capital space fully recovering until 2024 due in part to the credit crunch, and said that for tech startups, 2023 could be a challenging year.
“Our view is that 2023 will continue to be a year of very sharp pain, in fact more painful than 2022 from a private markets and public equity perspective in technology,” he said.
Allen added that a sharp market downturn should serve as a “wake-up call” for VC investors who have developed irresponsible habits during the pandemic, and failed to do due diligence on their investments. He gave the example of the now-defunct cryptocurrency exchange, FTX, which he “passed” because they did not cross basic “checklist items” in the due diligence process, including not allowing an independent auditor to look at their financial statements. But other venture capitalists have invested millions in the company without even looking at their books.
“They were asking for financial data and the team at FTX was sending them Excel spreadsheets,” he said. “It was just ridiculous.”
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But now, with interest rates rising and many less aggressive investors out of business, Allen thinks the market will return to a more aggressive investment approach.
“I think it’s going to be a much healthier and more sustainable environment for venture capital now, because we’re investing in valuations and multiples that make sense and that allows the company to grow in a much better way,” he said. “It’s a real return to basics. It’s a refocus on real diligence.”
When US interest rates were close to zero and consumers were cash flowing from stimulus checks during the pandemic, it was IPO market A similar boom has been seen in the venture capital space.
In 2021 alone, there were 1,033 new public listings in the US, but in 2022 — with interest rates rising and the S&P 500 down nearly 20% — there has been a 50% drop in the number of IPOs compared, according to EY. for the year 2022 Global Underwriting Trends Report. And in the Americas, the decline was even more pronounced, with the number of IPOs down 86% last year versus 2021, while total proceeds fell 96% over the same period.
“Deal activity and volume declined sharply throughout 2022. IPOs are completely closed,” Allen said. “There was very little general market appetite for anything, even potentially profitable ones.”
This year, Allen said he only sees “a small part of the IPO window,” and only for companies that can prove they can make money.
“Otherwise, they will decline dramatically, as any of the companies that went public last year or in 2021 did,” he said. “We still have inflation, high interest rates, geopolitical uncertainty, and high volatility, and that’s not creating a warm market for IPOs.”
Home prices have increased in the United States more than 45% Between the second quarter of 2020 and the third quarter of last year, lower interest rates and work-from-home trends fueled a boom in the housing market. But higher interest rates have pushed the average rate of a 30-year fixed mortgage — the most common type in the United States — from 3.45% in February 2020 to just over 6.1% today.
High borrowing costs and high home prices have led to an affordability crisis and “ResetIn the housing market. Buy a mortgage Applications It fell 39% from a year ago last week.
It’s not just potential homeowners who feel left out — institutional real estate investors are feeling the pain from higher interest rates, too, according to Jay Hatfield, founder and CEO of investment management firm Infrastructure Capital Advisors. He said high interest rates and fears of a recession had caused a “dry up” of lending from banks luckwhich makes acquiring new properties – and/or companies in the real estate sector – a challenge.
“There is a little bit of private lending going on, but it’s on very onerous terms to do LBOs [leveraged buyouts] “anymore,” referring to when one company attempts to buy another using borrowed money. And then also, the companies that were buying like Black stone. They are more likely to be sellers than buyers now. So M&A activity has dried up.”
Not only do lenders offer much higher interest rates, Cahn of the Wealth Enhancement Group says, they also offer more underwriting — or research and risk assessment — before lending money to avoid the risk of default. He pointed out that it is another example that the current freeze in some sectors of the economy is “a reflection of what is happening in the credit markets.”
“In 2021, and 18 months before that, people were throwing money at anything as fast as they could because there was so much cash, but in 2022, the credit markets basically froze,” he asserted. “And that’s why you’re seeing these industries freeze up.”
A frozen economy that is about to collapse?
Will the economy slowly melt away and avoid a recession, or are the cracks caused by high interest rates and high inflation about to tear? It depends who you ask.
Kahn said his “hunch” is that we will experience a recession “sometime in the back half of 2023.” I think it’s really, you know, maybe 2024, before we go back to business as usual,” he said.
He’s not the only one with a pessimistic view. Many of the major investment banks expect this to happen.moderate recessionThis year, some forecasters have argued thatsevere recessionor even another variant of a Big disappointmentIt could be in the way.
“We’re definitely going to be entering a tougher and tougher period from an economic and overall standpoint,” Allen said, “It could be a capital recession or a mini-recession, but it’s going to be bad.”
While many experts believe a recession is on the way, some argue that it will not be as destructive as previous recessions, and frozen sectors of the economy will begin to freeze by the end of 2023 and into 2024. That by the second half of this year “we will have a more normal IPO market.” And the recovery of mergers and acquisitions and the stock market.
He argued that “post-pandemic tailwinds” have kept the labor market in good shape – particularly in the service sector where many companies have struggled to find workers during the pandemic – and without widespread layoffs crushing consumer spending, it is unlikely to be possible. There is a downturn in the economy. He also noted that despite a rapid rise in interest rates last year, home inventories are near all-time lows which he believes will allow the sector to freeze over the course of the year.
We need the Fed to stop [interest rate hikes] Even so,” he said. “And we might get a negative quarter or two [of GDP]But we don’t think we’ll have a major recession.”