The Panic of the Techbros

Thinking about the recent market volatility

Photo by Lala Azizli on Unsplash

How to explain yesterday’s volatility in global financial markets? there is a proximate explanation and a deeper explanation. Let’s discuss each in turn.

The first half of the proximate story is simple enough: investors are worried about a slowing U.S. economy. Last Friday the U.S. jobs market report showed some decided softening, though nothing catastrophic. 114,000 jobs were added, which was below market expectations. The effects of Hurricane Beryl, however, might explain that low number. The unemployment rate rose to 4.3%, raising questions about the Sahm Rule¹ of a spike in unemployment presaging a recession.

The thing is, the creator of the Sahm Rule acknowledged that it probably does not apply to the 2024 economy. Furthermore, as the AP notes, “Unemployment has been rising steadily not so much because companies are slashing jobs but because so many people have poured into the job market.” In other words, the U.S. economy is still showing signs of a soft landing. The possibility of tipping into recession later this year if the Fed does not act with greater urgency has certainly risen.

It would be safe to say, however, that this is not how financial markets reacted on Monday:

Anxiety over a slowdown in the U.S. economy intensified on Monday, with a retreat in markets that began last week snowballing into a global rout.

The turmoil was the latest example of how distinct economic forces can ricochet across markets, forcing down company stock prices and erasing billions of dollars in value. In this case, a rapidly rising yen over the past week had disrupted the flow of global capital, prompting a pullback from some popular investments.

But the sell-off quickly expanded into a more widespread panic that the Federal Reserve may have waited too long to start cutting interest rates, threatening the strength of the U.S. economy….

On Wall Street, the S&P 500 fell 3 percent, its sharpest daily decline since September 2022.

While some investors saw the sell-off as a signal that the economy was at risk of recession, others maintained that the move was more the result of a pullback from overextended bets, especially on tech stocks and artificial intelligence. Despite its recent decline, the S&P 500 is still up nearly 9 percent for the year, a healthy return.

“Markets are a little bit out of control,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “This is just total panic. It’s not real but it is painful, and it could be with us for a few weeks.”

Few corners of the financial market were spared from the turmoil as investors cashed out and sought refuge from a broad-based slump. Oil futures, gold and cryptocurrencies were also swept up in the turmoil. A number of big technology stocks — which have sway over the market because of their size — tumbled, and the tech-heavy Nasdaq Composite index fell about 3.4 percent. In Europe, the pan-European Stoxx index fell 2.2 percent.

The second half of the proximate story is about the Japanese carry trade. As Axios’ Hope King explains:

There's an unwinding of the popular "yen carry trade" happening "at lightning speed" that will continue to cause volatility until it's over, Art Hogan, chief market strategist at B. Riley Wealth, tells Axios.

The premise of the trade is simple: Investors borrow cheap yen in Japan, where interest rates have been stuck at zero, and buy higher yielding assets in other countries with predictable returns, such as U.S. stocks (primarily Big Tech names) and bonds.

Well, that approach recently lost its appeal, as the value of the yen has risen in recent weeks and after Japan's central bank raised rates last week.

That's the main fuel for today's market meltdown.

The good news there is that the Nikkei, which was battered on Monday, is rallying hard on Tuesday.

So this mostly seems like a tempest in a teapot. Yes, the Fed should take action soon, but as the yen carry trade unwinds itself, market jitters should subside.

But now I want to talk about an underlying reason that is unlikely to entirely go away, which is the panic of the techbros. Because the fact is that they panic a lot.

Remember the hyperinflation of 2021-2022? No you don’t because it didn’t happen. Inflation was on the rise, but nonetheless techbros like Jack Dorsey were convinced that hyperinflation was coming to the United States. Elon Musk now seems to be in permanent panic mode, whether it’s about civil war in Europe or that Christianity will perish.

Techbros have been bearish on the economy for quite some time. I have attended too many events where I had to listen to techbros assure me that the Mother of All Recessions was happening in 2024. This was after an entire year of techbros assure me that the Mother of All Recessions was happening in 2023. Or 2022.

You get the picture — Silicon Valley entrepreneurs have been bearish on the U.S. economy for quite some time. To be fair, this might be because the tech sector has been subject to a lot of brutal layoffs — but it’s the techbros who are doing the firing.

Yesterday’s selloff hit the tech sector hardest, so maybe that is the source of their anxiety. On a deeper level, however, one wonders if Silicon Valley is about to face twin reckonings. The first is the massive amount of unproductive entrepreneurship coming from tech. The second is whether the air is coming out of an AI bubble.

Experts are telling folks to hold onto their stock portfolios and not panic. Based on everything I have read, seen, and heard, that makes sense. But it would not surprise me if this week sees more volatility due to the pre-existing panic of the techbros.

1. The rule states that the initial phase of a recession starts when the three-month moving average of the U.S. unemployment rate rises to at least a half a percentage point higher than the 12-month low.