Hire Slow Fire Fast

Read this online at www.fjellcapital.com/posts/hire-slow-fire-fast

Normally unemployment is an elevator up and an escalator down, however that was not the case in the pandemic. Elevator up; elevator down.

In a normal business cycle there is a peak and a trough, easy credit and tight credit, and slow and fast growth. Businesses use working capital - money they get from cash flow and from financiers - to hire, build, and grow. That is where credit plays into hiring decisions. But what matters more is growth.

The fundamental reason employees are hired is to bring in more revenue, if new revenue isn’t being created you shouldn’t be hiring more people, if old revenue is falling you should be firing people. Companies have a target of what each employee should be bringing in for revenue and what revenue thresholds demand a specific number of workers.

On the insides you also have internal analysts predicting where the company will be over the next couple of years to figure out what the company needs to be doing. Usually in the wake of great uncertainty and unpredictability you have downgrades in estimates that result in fast firing as the company see revenue or earnings leaving. AND in uncertainty and unpredictability it is hard to hire people back fast, because you don’t have the revenue pipeline you once did and credit for working capital is restricted.

We had very obvious peak and trough, and slow and fast growth, but we really didn’t have a completion of a credit cycle. Companies were able to refinance and borrow more in an instantly renewed low rate environment. Working capital was plentiful and so hiring was plentiful. People also were flush with cash giving companies unpredictable but positive expectations for revenue and because everyone was looking for a job, labor competition was fierce meaning you had to hire fast.

The Fed essentially distorted the normal business cycle and now they are out of sync and trying to regain sync. At the end of the day it’s my assumption that the Fed will need to create a recession, hopefully not a hard recession, to resync the normal business cycle. Credit will need to freeze up, people will need to be laid off, and growth will need to slow. Then they need to take it easy on the stimulus and let the cycle play out the way it plays out.