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This Week in Apps: French developers sue Apple, time spent in apps grows, Instagram adds NFTs

Welcome back to This Week in Apps, the weekly TechCrunch series that recaps the latest in mobile OS news, mobile applications and the overall app economy….

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Welcome back to This Week in Apps, the weekly TechCrunch series that recaps the latest in mobile OS news, mobile applications and the overall app economy.

Global app spending reached $65 billion in the first half of 2022, up only slightly from the $64.4 billion during the same period in 2021, as hypergrowth fueled by the pandemic has slowed down. But overall, the app economy is continuing to grow, having produced a record number of downloads and consumer spending across both the iOS and Google Play stores combined in 2021, according to the latest year-end reports. Global spending across iOS and Google Play last year was $133 billion, and consumers downloaded 143.6 billion apps.

This Week in Apps offers a way to keep up with this fast-moving industry in one place, with the latest from the world of apps, including news, updates, startup fundings, mergers and acquisitions, and much more.

Do you want This Week in Apps in your inbox every Saturday? Sign up here: techcrunch.com/newsletters

Top Stories

Mobile users are spending 4-5 hours per day in apps

Image Credits: data.ai

Looks like we’re all still addicted to our apps! A new report this week from data.ai (previously App Annie), found that consumers in more than a dozen worldwide markets are now spending four to five hours per day in apps. While the daily time spent in apps varies by country, there are now 13 markets where users are spending more than four hours per day using apps. These include Indonesia, Singapore, Brazil, Mexico, Australia, India, Japan, South Korea, Canada, Russia, Turkey, the U.S. and the U.K.

And, in three of those markets — Indonesia, Singapore and Brazil — mobile users are spending more than five hours per day in apps.

While the growth in app usage has slowed a bit from the second quarter in 2020, it’s worth noting that two years ago was the height of COVID lockdowns, which drove app usage to spike across all categories as users worked, shopped, banked, gamed and studied, and attended meetings, school and events from home. If anything, that means the slowdown in growth seen in a couple of the markets is only representative of a normalizing of trends, not a larger decline.

And some markets saw significant growth in app usage over the past two years. In the second quarter of 2020, Singapore users were spending 4.1 hours in apps. Now that’s grown to 5.7 hours. In Australia, users went from 3.6 hours to 4.9 hours from Q2 2020 to Q2 2022. Both represent a 40% rise in time spent.

French iOS developers sue Apple over App Store fees

Apple app store iOS

Image Credits: TechCrunch

Apple is facing another antitrust lawsuit over its App Store fees, this time filed by a group of French iOS app developers who are suing the tech giant in its home state of California. The plaintiffs are accusing Apple of anti-competitive practices in allowing only one App Store for iOS devices, which gives it a monopoly in iOS app distribution and the ability to force developers to pay high commissions on in-app purchases.

The complaint argues that these commissions, on top of Apple’s $99 annual developer program fees, cut into developers’ earnings and stifle innovation — and yet developers aren’t permitted to offer alternative payment methods per Apple’s App Store rules, nor can they distribute their apps to iOS users outside of the App Store, despite Apple allowing this on Mac computers.

The case is now one of several antitrust legal battles Apple is facing, including the high-profile lawsuit with Fortnite maker Epic Games, which is under appeal, and another by alternative app store Cydia.

Developers involved in the class action include Société du Figaro, the developer of the Figaro news app; L’Équipe 24/24, the developer of L’Équipe sports news and streaming app; and le GESTE, a French association comprised of France-based publishers of online content and services, including iOS app developers.

Of note, the case is being led by U.S.-based Hagens Berman law firm, which last year won a $100 million settlement against Apple over App Store policies and recently filed a $1 billion case against Apple over antitrust issues with Apple Pay. The lawyer involved also previously secured a $560 million settlement against Apple regarding e-book price-fixing and a $90 million settlement on behalf of Android developers. In France, Paris-based antitrust lawyer Fayrouze Masmi-Dazi is helping manage the claims.

New data on in-app subscriptions shows the first month is key

Subscription management service RevenueCat took a deep dive into more than 10,000 subscription apps across iOS and Android to see how subscription renewal rates stacked up. It found that monthly subscriptions had a median first renewal rate of 56%, which would increase over time. In other words, customers who didn’t get value from the app would churn in the first month — an indication of how important it is to convince users of that value in their first days using the service. In subsequent months, renewals were higher — 75% or 81% for the second and third months, for instance.

The company analyzed its own customer base data for the analysis, but notes it’s not showing all renewals on RevenueCat, as that would bias the data toward larger customers, like VSCO. Instead, it looked at the median of each individual app’s renewal rates.

In addition, RevenueCat developer advocate David Barnard pointed out that a lower renewal rate may not necessarily be a bad thing, depending on the business. For instance, if the developer was acquiring users organically at a low cost, a lower rate could be better than a higher renewal rate with expensive customer acquisition costs.

Weekly News

Platforms: Apple

  • Apple is expanding its App Store ads. The company previously offered two ad slots, on the main Search tab and in the Search results. The new ad slots will be available on the App Store’s Today tab and at the bottom of individual app pages in the “You Might Also Like” section.
  • Bloomberg reported that iPadOS 16 will be delayed about a month as Apple works on its multitasking features. The report says this would put the release in October, alongside macOS Ventura.
  • A new report indicates iOS has lost 4% of ad spend market share since the launch of ATT, which makes targeting advertising more difficult for iOS developers. Its share dropped from 34% in April, down 4% YoY according to Adjust.
  • Digiday reports Apple may be building its own demand-side platform, based on a job posting looking for a senior manager for a DSP in its ads platform business. Apple’s DSP may be focused on serving ads on its own properties, like the App Store, but the company declined to confirm details.

Platforms: Google

  • Google revealed the finalists for the Indie Games Festival, which highlights some of the best games on Google Play. This year, the company is hosting the Festival in South Korea, Japan and Europe for local developers on September 3. At the European finals, Google will also reveal the 2022 class joining the Indie Games Accelerator, a program that provides indie game devs with training and mentorship.
  • Google offered a guide to Android developers as to how to support predictive back gestures, as it’s making an early version of the UI available for testing with Android 13, Beta 4.

E-commerce

  • Facebook’s live shopping feature is shutting down on October 1 to shift the company’s focus to Reels. After this date, users will no longer be able to host new or scheduled live shopping events, but they’ll still be able to use Facebook Live for other live events — but won’t be able to create product playlists or tag products in those streams.

Fintech

  • Coinbase partnered with BlackRock, which oversees $10 trillion in assets, to provide its institutional clients with access to cryptocurrency.
  • Starbucks Rewards, the coffee company’s loyalty program that doles out perks for customers’ purchases, will expand to include NFT rewards as part of a broader web3 push. The company said it’s being advised by Starbucks Mobile Order & Pay architect Adam Brotman on the effort, where NFT rewards will translate into exclusive content and “one-of-a-kind” experiences.
  • The SEC is probing trading app Robinhood’s compliance with short selling rules. The SEC has been investigating since October 2021 and requested additional info from the company in Q2 2022. Robinhood also announced headcount reductions of 23% after posting a $295 million quarterly loss. In addition, New York’s State Dept. of Financial Services fined Robinhood’s crypto unit $30 million for violating anti-money laundering and cybersecurity regulations.
  • An exploit in the Slope mobile wallet was possibly to blame for a major network attack that saw thousands of wallets drained of millions of dollars.
  • iOS 16 beta 4 added support for Apple Pay in non-Safari browser apps including Chrome, Firefox and Edge, likely in response to the EU’s Digital Markets Act.

Social

instagram testing nfts

Image Credits: Instagram

  • Instagram expanded support for NFTs to more than 100 countries in Africa, Asia-Pacific, the Middle East and the Americas after first launching a test of the new feature in May. Users will be able to connect their digital wallet, and share NFTs to the Feed, Stories or in messages. They can also automatically tag creators and collectors for attribution. The feature relies on Coinbase Wallet and Dapper integrations and the Flow blockchain.
  • Instagram head Adam Mosseri is temporarily moving to London to work from Meta’s King Cross offices as the company rethinks how to shape its plan to take on TikTok with Reels.
  • TikTok is on track to overtake Facebook in influencer marketing spend in 2022, and will overtake YouTube by 2024, per an analyst report. However, Instagram this year will still capture 3x the influencer marketing dollars as TikTok, or $2.23 billion versus TikTok’s $774.8 million.
  • The Washington Post reported video entertainment app Triller failed to make promised payments to a number of Black creators. Triller denied the claims.
  • Discord announced it will finally bring its Android app into parity with its iOS counterpart. The new Android app has been rebuilt with React Native, which will allow it to expedite new feature releases and bug fixes.
  • Pinterest missed on earnings and delivered zero user growth in its most recent quarter — it’s stuck at 433 million MAUs. The company cited a combination of factors for its issues, including the lingering impacts of the pandemic, reduced traffic from search engines, the rise of TikTok and — like many companies reliant on digital advertising, the broader economic environment. Still, the stock popped on the news (up 20% after hours) as revenue was close to expectations ($664.9 million) and the company was praised by new investor Elliott Investment Management.
  • Pinterest also began testing a new app, Shuffles, for collage-making and leaderboards. But the app, which includes image cut-out features and animation, requires an invite for the time being.
  • A top anonymous social app, NGL, which hit the top of the App Store earlier this summer, was forced to adjust its app to stop tricking users into thinking they had received messages from friends, when really a bot was delivering them. Both it and rival Sendit also changed their subscriptions to include more features than just “hints” about who was sending the messages.

Dating

  • Match Group said Tinder CEO Renate Nyborg is leaving after less than a year and it’s reorganizing the app’s management team after disappointing earnings. It also said it’s not moving forward with plans for Tinder Coins, its virtual currency, nor its plans for a dating metaverse. The company wanted to characterize this stoppage as merely a pause, but did not offer any sense as to if or when it would revisit these ideas. Instead, the company spoke of plans to introduce shorter-term subscriptions on Tinder while it tries to figure out why it couldn’t convince new people to try dating apps.
  • TikTok-style dating app Desti launched to match up users by fav date destinations, initially in its debut market of Austin.

Messaging

  • Kakao blamed Google’s new payment policies for a decline in the number of emoji subscription purchases on the messaging app KakaoTalk. The figure dropped by a third over the year, the South Korean app maker said in its quarterly earnings call Thursday.
  • Google is merging its Meet and Duo apps. Duo is being rebranded as Meet (the mobile app will be updated with the new branding). This will include features from both of the apps. Meet will be called Google Meet (original) and will be eventually phased out in favor of the new Meet. Not confusing at all!
  • Brazilian prosecutors asked WhatsApp to delay the launch of the Communities feature in Brazil until January in order to avoid spreading misinformation about the October election.

Streaming & Entertainment

Image Credits: Spotify

  • Spotify updated its app to address a long-standing user complaint with music playback — but it’s asking customers to pay for the fix. The company announced it will introduce a separate Play Button and a Shuffle Button at the top of albums and playlists to make it easier to play the music the way you like. This replaces the combined button available before. However, the new button is only being offered to Spotify Premium subscribers, despite arguably being a UI/UX issue that should be available to all.
  • Clubhouse began beta testing a new feature, private communities called Houses, which allow a group of friends to hang out, catch up, hop from room to room and more. The Houses can be kept private and closed or users can each nominate a few friends to join.
  • Spotify’s biggest playlist is getting its own video podcast. The company said Brandon “Jinx” Jenkins, the podcast host of “Mogul” and “No Skips,” will host the new “RapCaviar Podcast.” The new video podcast will explore the rap genre and include panels of guests.
  • SoundCloud announced it was laying off 20% of its global workforce due to the challenging economic environment. Staff in the U.S. and U.K. will be informed if they’re impacted.
  • TikTok has been filing “TikTok Music” trademarks in global markets, suggesting the company is considering a launch of some sort of music streaming service similar to its existing service in select markets known as Resso.

Gaming

Image Credits: Sensor Tower

  • A new report indicates most mobile gaming genres saw revenue declines in the U.S. during the first part of the year. According to Sensor Tower, Arcade and Tabletop games were the only categories with revenue growth. Arcade was the fastest growing genre, with player spending up 14.8% year-over-year to approximately $176 million. Top games included Clawee, Gold & Goblins and Idle Mafia. Tabletop grew 1% YoY to $388.8 million. However, in terms of revenue, Puzzle was the largest with $2.3 billion, down 8.8% YoY. It was followed by Casino ($2.2 billion) and Strategy ($2 billion). Gaming downloads also declined 2.5% YoY to 2.4 billion.
  • Apple Arcade added a handful of new games to the service, including the popular Jetpack Joyride, as well as Amazing Bomberman, My Talking Tom+ and Love You to Bits+. The company also recently pulled 15 games from the subscription service.
  • Blizzard and NetEase scrapped plans for a World of Warcraft mobile game after a disagreement over financial terms for the title, Bloomberg reported. NetEase disbanded a team of more than 100 developers tasked with creating content for the game — only some of whom were given internal transfers.
  • Amazon’s cloud gaming service, Luna, which allows users to play on mobile, tablet, PC or Mac, now supports Samsung Gaming Hub on Samsung’s smart TVs and monitors.

Transportation & Travel

  • Uber partnered with the Berlin-based travel service Omio in order to test train and bus bookings in its U.K. app. Omio’s inventory includes more than 1,000 transport providers.

Utilities & Productivity

  • Google Maps and Search apps now allow merchants to label their businesses as “Asian-owned,” following similar additions that allowed labeling businesses as Black-owned, Latino-owned, veteran-owned, women-owned or LGBTQ+-owned.
  • Microsoft launched a new Outlook Lite app for low-powered Android phones aimed at users in emerging markets.

Government & Policy

  • The European Commission is investigating Google Play’s policies over possible antitrust issues, according to Politico. Specifically, the investigation is looking into billing terms and developer fees, the report said.

Security & Privacy

  • Security researchers found an error in more than 3,200 mobile apps, which would allow them to take full or partial control of Twitter accounts. The names of impacted apps have not yet been disclosed.
  • A ruling by European Union’s top court may have major implications for online platforms and apps that use background tracking and profiling to target users with behavioral ads or for personalizing content. It set a precedent that even this inferred data derived from things a company learned about a user could be considered personal data.

Funding and M&A

Dating app Desti raised $1 million in early-stage funding in July at a $5 million valuation. The company also makes a related app for friends, Besti.

Uber to sell stake its 7.8% stake in the food delivery app Zomato for $350 million+ after taking a $707 million loss on the deal in H2 2022.

Locket, a popular app that lets you post photos to your friends’ homescreens, raised $12.5 million in seed funding from OpenAI CEO Sam Altman, Sugar Capital, Costanoa Ventures, along with Instagram co-founder Mike Krieger and Quora CEO Adam D’Angelo.

Downloads

Banish

A new app for iPhone users can help you browse the web without being constantly bothered by pop-up panels that beg you to use the company’s app instead. The app, called Banish, is a Safari extension that helps remove the “open in app” banners from various websites and other popups that block content across a number of sites, like Reddit, TikTok, LinkedIn, Twitter, Quora, Medium, Yelp and some Google sites, to name a few.

While there are a number of similar Safari extensions for blocking cookie banners and ads, the scourge of the “Open in App” banners is often not addressed by existing solutions.

To use Banish, you’ll first install the app to your iPhone, then configure it in the Settings. This involves a few key steps for Banish to function properly. There are two places where Banish needs to be enabled, under Safari Extensions — you need to toggle on the switch next to Banish under “Allow These Content Blockers” and “Allow These Extensions.” Then you need to set the “Allow” permission to “All Websites” below. You can read more about Banish here on TechCrunch or download it from the App Store for $1.99.

 

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Economics

Roubini: The Stagflationary Debt Crisis Is Here

Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to…

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Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. US and global equities are already back in a bear market, and the scale of the crisis that awaits has not even been fully priced in yet.

For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.

The crisis is here.

Tyler Durden Tue, 10/04/2022 - 17:25

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Spread & Containment

A Policy Mistake In The Making

A Policy Mistake In The Making

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Market Instability” Causes BOE To Reverse QT….

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A Policy Mistake In The Making

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Market Instability” Causes BOE To Reverse QT. Is The Fed Next?

“Market instability” remains the most significant risk to central banks globally. Despite their desire to combat surging inflation, market instability is a greater risk to global economies due to the massive amounts of leverage. We previously discussed the importance of controlling instability. To wit:

Interestingly, the Fed is dependent on both market participants and consumers, believing in this idea. With the entirety of the financial ecosystem now more heavily levered than ever due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the most significant risk.

The ‘stability/instability paradox’ assumes that all players are rational, and such rationality implies avoidance of complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’”

So far, the Fed remains fortunate with a low volatility decline in markets. In other words, “market stability” continues to afford the Federal Reserve the operating room needed for the most aggressive rate hiking campaign since the late 70s. Market volatility and credit spreads remain “well contained” despite drastically higher interest rates and an ongoing stock market decline.

However, stable markets can become unstable rapidly when something breaks due to rising rates or volatility. The Bank of England (BOE) is an excellent example of what happens when things go awry. The BOE was forced to start buying bonds to solve a potential crisis with U.K. pension funds. The pension funds receive margin with yields fall and post additional collateral when yields rise. However, when yields spike, as they have recently, the pension funds are hit with “margin calls,” which have the potential to cause market instability. Due to leverage built up through the entire financial system, market instability can spread like a virus through global markets. Such was last seen with the Lehman Crisis in 2008.

Is the BOE’s actions an isolated event? Maybe not. According to Charles Gasparino, the Fed could be next.

The Market Instability Risk

The Federal Reserve is deeply committed to its aggressive campaign to quell surging inflation. As Jerome Powell stated at this year’s Jackson Hole Summit:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

While the Federal Reserve is willing to cause “some pain” to achieve victory, they hope to do so without evoking a recession. Such may be a challenge for two primary reasons:

  1. The Fed remains focused on lagging economic data, such as employment, which are highly subject to future revisions, and;

  2. Changes to monetary policy do not show up in the economy until roughly 9-12 months in the future.

The problem with the Fed’s use of economic data to guide monetary policy decisions was the subject of a St. Louis Federal Reserve research note. To wit:

“In the two quarters leading up to the average recession, all measures were still experiencing varying degrees of positive growth. Meanwhile, immediately following the onset of the average recession, all six indicators declined, which ultimately persisted for the entirety of the recession.”

Such brings us to the second most critical point.

Changes to monetary policy have a 9-12 month lag before showing up in the economy. Therefore, as the Fed is hiking rates based on lagging economic data, the risk of a “policy mistake” becomes heightened. By the time the economic data deteriorates, the preceding rate hikes have yet to impact the economy, which eventually deepens the recession.

As shown, the annual rate of change of the Fed Funds rate is now the most aggressive increase in history. However, every previous rate hiking campaign has led to a recession, bear markets, or economic event.

However, the Federal Reserve does not operate in an economic vacuum. Other factors also contribute to the tightening of monetary policy and the impact on economic growth. When those other factors such as higher interest rates, falling asset prices, or a surging dollar coincide with the Fed’s policy campaign, the risk of “market instability” increases.

A Policy Mistake In The Making

The current bout of inflation is vastly different than that seen in the late 70s.

Milton Friedman once stated corporations don’t cause inflation; governments create inflation by printing money. There was no better example of this than the massive Government interventions in 2020 and 2021 that sent subsequent rounds of checks to households (creating demand) when an economic shutdown constrained supply due to the pandemic.

The following economic illustration shows such taught in every “Econ 101” class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases by providing “stimulus” checks.

The problem for the Fed is the influence of lagging economic data on its decisions. In contrast, forward estimates for inflation are already falling quickly as economic demand falters due to collapsing liquidity.

Historically, the “best cure for high prices is high prices.” In other words, inflation would resolve itself as high costs curtail consumption. However, the Fed is not operating in a vacuum. While the Fed is hiking interest rates to slow economic activity, interest rates and the dollar have also increased dramatically in recent months. Those increases apply further downward economic pressures by increasing costs domestically and globally. Not surprisingly, sharp annual increases in the dollar are coincident with market instability and economic fallout.

Furthermore, the surge in the dollar accompanied the sharpest increase in interest rates in history. Sharp increases in interest rates, particularly in a heavily indebted economy, are problematic as debt servicing requirements and borrowing costs surge. Interest rates alone can destabilize an economy, but when combined with a surging dollar and inflation, the risks of market instability increase markedly.

The Fed Will Blink

After more than 12 years of the most unprecedented monetary policy program in U.S. history, the Federal Reserve has put itself into a poor situation. They risk an inflation spiral if they don’t hike rates to quell inflation. If the Fed hikes rates to kill inflation, the risk of a recession and market instability increases.

As noted at the outset, the behavioral biases of individuals remain the most serious risk facing the Fed. For now, investors have not “hit the big red button,” which gives the Fed breathing room to lift rates. However, the BOE discovered that market instability surfaces quickly when “something breaks.”

When will the Fed find the limits of its monetary interventions? We don’t know, but we suspect they have already passed the point of no return, and history is an excellent guide to the adverse outcomes.

  • In the early ’70s, it was the “Nifty Fifty” stocks,

  • Then Mexican and Argentine bonds a few years after that

  • “Portfolio Insurance” was the “thing” in the mid -80’s

  • Dot.com anything was an excellent investment in 1999

  • Real estate has been a boom/bust cycle roughly every other decade, but 2007 was a doozy.

  • Today, it’s real estate, FAANNGT, debt, credit, private equity, SPACs, IPOs, “Meme” stocks…or rather…” everything.”

The Federal Reserve continues to state its intentions to hike rates and reduce its balance sheet at the fastest pace in history, as inflation is the enemy it must defeat. However, while high inflation is detrimental to economic growth, market instability is far more insidious. Such is why the Federal Reserve rushed to bail out banks in 2008.

Unfortunately, we doubt the Fed has the stomach for “market instability.” As such, we doubt they will hike rates as much as the market currently expects.

Tyler Durden Tue, 10/04/2022 - 16:20

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Economics

How the tech giants are innovating to weather the looming downturn

In the current economic climate, some businesses are building resilience by expanding into new markets

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In uncertain economic times, businesses are trying to become more resilient. photoschmidt / Shutterstock

Rising inflation and looming recessions are squeezing household finances, but businesses also worry about an economic downturn. This is not just because of higher bills, but also because consumers spend less and finance from banks and investors dries up when the economy worsens.

Even strong industries such as technology feel these effects. With the Standard & Poor’s 500 stock market index down 17% in the year to date, and the Nasdaq 100 tech sector index down 33%, market uncertainties can affect a company’s ability or willingness to spend on the type of innovation that can help build strength in advance of the next downturn.

But research into business recoveries following previous financial crises shows that some companies do increase investment in innovation to survive. This makes them more resilient in the face of future downturns.

JP Morgan Chase, the largest bank in America by assets, for example, did relatively well during the last financial crisis. This was partially due to its diversification efforts. It emerged from the 2008 crisis with a “fortress balance sheet” and an improved position versus other banks, which has helped it navigate the more recent global pandemic.

Businesses in sectors such as tech and finance are now attempting to weather the current slump by protecting their businesses with similar strategies. This route has also been proven effective by other studies, which demonstrate that innovative companies achieved higher sales growth rates than non-innovative companies during past recessions. And that is a key determinant for success especially in the long run.

Still, justifying spending on future growth is difficult when times are tough. Recent months have brought job losses, recruitment freezes and delayed plans for tech startups to list themselves on stock exchanges.

Even the giants of the tech space have experienced financial difficulties. Amazon’s pandemic slump continued during the second quarter, Apple’s revenue rose slightly but profits fell and Facebook-owner Meta reported its first-ever quarterly revenue decline.

And yet, some companies are maintaining stronger growth prospects than others. Microsoft expects its revenue and operating income to increase at a double-digit pace over the next 12 months.

Its efforts to prepare for this recession started well before 2022. The company’s focus on newer areas such as cloud computing in recent years is now helping it to manage the impact of factory shutdowns in China and falling demand for PCs that have inevitably hit sales of the Windows operating system software.

Instead, Microsoft is now signing larger deals for its Azure cloud-computing software, moving clients to pricier versions of Office cloud programmes and has switched to a subscription-based model for its software products and services versus its previous one-time buy offering.

What Microsoft has recognised is that cloud computing, along with other deep technological trends such as Web3 – the next generation of the internet – , artificial intelligence and machine learning are here to stay. Being the first to build new capabilities in these areas provides an important long-term advantage in many industries.

Also, the success of tech companies with a single offering has reversed in 2022. From the beginning of 2020 to the end of 2021, many single-idea businesses saw a boost from people being stuck at home for work and play – think remote cycling app Peloton, Zoom, Netflix and trading platform Robinhood.

In the current economic environment, however, investors expect businesses to generate a healthy cash flow and are no longer willing to lavish highly valued companies – known as unicorns in the tech world – with unending capital. This means companies may need to find other ways to pay for expansion and diversification during difficult times.

Future ready businesses

The companies that are ready for the future are the ones that can deliver immediately while also building their next new, innovative product or service. Recent research has shown businesses that are more resilient anticipate, cope with and then adapt to new circumstances.

At the International Institute for Management Development (IMD) in Switzerland, I am part of a group of researchers who have developed an index to rank companies on this ability to adapt and become “future ready”.

We use a score based on data from 24 variables grouped across seven factors: financial fundamentals, investors’ expectations of future growth, business diversity, employee diversity and environmental, social and governance awareness , research and development, early results of innovation efforts, and cash and debt positions. This research shows that future ready companies, whether in finance, technology or some other sectors, exhibit very similar traits.

Financial technology companies (fintech) – start-ups that aim to disrupt industries like financial services – were a darling during the pandemic. PayPal and Block (formerly Square) topped our ranking in the financial service industry in 2021. But this year, they have been replaced at the top by several more traditional industry titans, including financial firms JPMorgan Chase and DBS Bank of Singapore.

As fintech companies have increasingly attempted to bypass traditional financial services providers with digital services, these companies have started to expand their businesses digitally. DBS has developed a marketplaces for selling cars, renting property and getting deals on electricity, mobile, and broadband services. The bank’s latest quarterly earnings remained robust despite weak markets and were its second-highest on record.

Still, growth did not happen across all business segments for DBS in 2022. It’s income from areas such as wealth management and investment banking decreased because these markets are slowing down. However, income from consumer lending, insurance and card fees grew. This shows how a diverse business can remain resilient in today’s business environment.

Smartphone with Amazon Care logo, surrounded by pills.
Amazon has expanded into the healthcare industry in recent years. mundissima / Shutterstock

Amazon is also diversifying into yet another new business, despite current economic uncertainty. It recently announced it has agreed to buy primary healthcare firm One Medical for US$3.9 billion (£3.2 billion). One Medical is a membership-based primary care provider that operates in 16 US markets.

This is not the first time Amazon has dabbled in healthcare. It teamed up with JPMorgan and Berkshire Hathaway four years ago to create Haven, which aimed to provide better healthcare and lower costs for their combined 1.2 million workers. That didn’t work out and was folded in 2021.

Amazon’s other activities in this area include PillPack, an online pharmacy purchased in 2018 for $753 million, and the creation of an in-house telemedicine service for its employees, called Amazon Care. Its latest foray with One Medical is a great example of the long and winding road of trial and error that a company often takes before hitting the jackpot of both making itself more resilient, while also disrupting a US$4 trillion market.

The former CEO of Intel, Andy Grove, wrote in reference to the first dot-com bubble: “We know that a downturn is no time to shy away from strategic spending … There is always too much of yesterday’s technology and never enough of tomorrow’s … Consequently, during this downturn, we did what may seem counterintuitive: we accelerated our capital investments.”

This is how companies invest their way out of downturns. And it’s why these companies often manage to emerge from a crisis stronger than ever.

Howard Yu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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