Investing

Wall St. Vet Warns 'Mass Layoffs Are Next'

Austin Smith

Published: August 22, 2024 7:38 am

Key Points:

• Mass layoffs, especially in tech, are tied to companies missing out on the AI boom.
• The car industry shows signs of trouble, with layoffs and increased incentives.
• Layoffs often foreshadow a broader economic slowdown.
• Layoffs may be coming, but the best dividend stocks will pay you through thick and thin. Smart money is loading up on these two dividend legends before everyone else finds out.

Douglas and Lee discuss the recent wave of mass layoffs, particularly in the tech industry, despite a seemingly strong economy. They analyze the reasons behind these layoffs, with Douglas suggesting that companies not heavily invested in AI are cutting costs due to a dimmer outlook. They mention significant layoffs at companies like Dell (NYSE: DELL) and Cisco (NASDAQ: CSCO) and express concern that these job cuts, often seen as a way to boost stock prices, may signal deeper economic issues. The conversation also touches on the auto industry, where layoffs are beginning to emerge despite recent strong retail sales driven by new car purchases. They agree that layoffs often precede broader economic slowdowns, indicating that some companies may already be feeling the pinch.

Transcript:

One of the things that we’ve seen in really the last two weeks is mass layoffs.

And by that, I mean thousands and thousands of people.

Now, some of them have happened in tech.

If you had to say which industry dominated these, I would say it’s tech.

But the economy is supposed to be awesome right now.

There’s just some pessimists that say that consumer spending is slowing down, but the retail sales today certainly didn’t indicate that at all.

So what’s going on? Why are we starting to see layoffs again?

Well, retail sales were better than expected, but that’s because credit card debt is over a trillion dollars.

All right. Okay. Yes. I’ll concede that.

Yeah. But all in all, the only reason those retail sales were higher, Doug, was because of one item, new car purchases.

That was what skewed the number against what everybody anticipated.

And I don’t see how we’re going to get around this hump of everybody waiting for the Fed to start lowering interest rates because the bond market’s already done that.

The vigilantes in the bond market have already taken rates down.

And there seems to be a sense that the economy is just going to grow and grow and grow when the biggest thing that you see when people are polled is their concerns in front of the election, the economy.

I’m going to give you a theory and you’re going to tell me whether you think it’s right or not.

I will.

The tech layoffs are primarily now at companies that did not win in the AI sweepstakes.

At least so far, yeah.

Right. What I’m saying, though, is that I think that these are the people when they were haves, guys who have nots, people who were not big AI players.

I think they’re looking out into the future and saying theirs are getting more dim because they do not have a big AI play.

And this is the time to position themselves in terms of earnings by cutting costs.

Yeah. And for some of them…

And Dell being the biggest one, because they laid off 12,500 people.

That is a lot of people, even from a big corporation.

And Cisco, who just recently reported, laid off 7% of their workforce, which is one of the few things that drove the stock higher.

Our numbers were a little bit better.

But, you know, you’re always a little bit leery when the only reason, you know, the stock gets a boost is because they laid off a bunch of people.

Well, you remember we had a round of tech layoffs with companies like Facebook, if you go back.

Earlier this year, yeah, big layoffs.

Those have seemed to end.

But again, a lot of the people who had layoffs a year ago were companies that did catch the AI bug recently.

And what I’m wondering is, if you’re looking into the economy and you say, well, where are the layoffs going to come from?

This is what I would look for.

Number one, the non-AI big tech companies.

They know today that they’re losers.

You’re not going to suddenly get on the AI train months after everybody else and end up being a winner.

The other thing is that you are starting to see these in what I would describe as consumer-facing businesses.

Again, we’re starting to see it in the car industry.

Everybody says, you know, the car industry is doing better, but there are a lot of things that aren’t good about the car industry.

A lot of these guys bet billions of dollars on, you know, the EV craze.

That sunk money. I don’t know when they’re going to earn it back, but they’re still making money in that part of the businesses.

You’re starting to see incentives again.

Whenever I start to see car incentives, it means to me that they’re not, you know…

They’re not flying out the door.

And labor got a big win.

The UAW got a massive win in this most current contract.

There’s a good news, bad news part of that.

The good news is your workers are going to be paid a lot more.

The bad news is that you’re eating into the profits of these companies substantially.

Ford said that over the price of what it would cost them over the contract time with the UAW was $8.5 billion compared to if there hadn’t been a contract.

So I think the consumer-facing companies that have large employee bases, you are going to start to see layoffs in those businesses.

Yeah.

Well, and to your point, Stellantis, the Chrysler Dodge owner, laid off almost 3000 people.

And even if new cars are what kept the retail numbers better than they were expected to be, that’s not going to last.

And also, like you said, when you’re starting to see these financing deals, well, they’re being financed internally.

So they’re carrying that debt on their books, you know, as a financing entity.

And where is the money being made here?

You know, because the only money made in the car industry is on repair.

It’s not on used cars. They make more on used cars than new cars.

So where’s the money gonna be made if you’re getting squeezed on trying to get incentives plus you’re having to lay off people to account for the lack of sales?

I don’t remember ever being in an economy where you started to see lots and lots and lots of layoffs that was not followed by a big slowdown because the company’s doing the layoffs…

…know that for them, the slowdown’s already here.