Preparing for Another Technical Nuclear Winter

I spend a disproportionate amount of my time following the various economic sites on the web, less because I'm interested in enriching my portfolio - I have very little skin in that game - as it is a way to keep track of what's likely to happen in the tech field in the next three months to a year. The tech arena is a lagging indicator, but is pretty well correlated to the equities market for what should be obvious reasons - the majority of all tech activity is either VC or equity funded and as a consequence when the equities market gets hot, there's more money to invest in startups, IT departments begin thinking about capital improvements or software projects they'd like to get underway and companies start hiring more consultants and freelancers. Similarly, when the equities markets drop, funding dries up pretty quickly, leaving programmers and projects stranded and forcing companies to shelf plans for larger scale projects.

For the tech industry, the 2001-2003 recession was often referred to as The Nuclear Winter, and as bad as the market in general was hit in 2008-2009, the earlier recession was the more catastrophic. In that one, because tech itself had been in a bubble, there were a lot of people in tech that weren't themselves all that skilled, there was a lot of money to be had if you joined the right startup at the right time, and the hype largely exceeded the capabilities of the time, so when the recession hit, it wiped out huge numbers of jobs and companies. People that had been going to work in limos the year before were living in their parents' basements, and Silicon Valley, the epicenter of the Tech Boom, became a ghost town.

2008-2009 was bad - I got caught up in a couple of corporate layoffs during that period, but except for a period of about eight months, there was generally work to be had if you were willing to relocate to find it. One reason for this was that the landscape itself had changed. Tech had gone from being THE career to be in to one that only geeks went into (the big money was in Real Estate), which meant that there was persistent overemployment (where there were too few people to fill critical jobs) coming into the recession. Thus, even as things got bad, it simply meant that employment in tech shifted more towards an equilibrium position. The market (if not the economy) rebounded starting in March 2009, about the same time that the mobile space was beginning to heat up and cloud computing was requiring another layer of infrastructure and the people to build it.

The market surged, dropped and surged again, and by March 2011 there were a lot of people that were beginning to feel that the economy was finally beginning to get back on its feet ... about the time that Greece slid into bankruptcy, the European Union began having trouble with outlier banks and the policy of qualitative easing, which by many accounts had helped to juice the equities market, was beginning to meet with stiff political headwinds. The bonds markets in particular began signalling panic, and the creditworthiness of sovereign nations, including the supposedly bedrock safe US market, were called into question. The stock market has begun to gyrate wildly, going up and down 4-5% in a single day, and palliatives that have previously proved effective in calming those markets have less and less efficacy. Even now there is one of the largest bank runs in history taking place, but because the run is due to electronic avatars asking for their money back, it's largely out of sight of the main stream media.

For the tech community, these should be worrisome times. Right now, even with bad earnings, companies are scrambling to get IPOs and buyouts done. Why? Companies are worried that there may be another credit squeeze on the horizon, this time brought about by Europe's tribulations and the possibility that such contagion could spread here, the real problems of a few very large banks, and because the downgrade of the US and of several key municipalities is going to tie up any available credit. What's worse, the political climate has become extremely hostile to broad government intervention, especially given that a significant amount of the money created by the Federal Reserve may have gone into shoring up both local and foreign (primarily German, French, Swiss and British) banks. This means that traditional fiscal stimulus may not be either applicable or even available here as we go into the second dip of a global Depression.

For tech, this couldn't have come at a worse time. Many tech firms were able to sustain themselves upon Federal projects, but those are coming to an end as the US grapples with the necessity of deep cuts in spending. Municipalities have been shedding workers at an alarming rate, often to an extent where the infrastructure to even start IT projects becomes non-existent. Consumer spending, which had been picking up through 2010 and earlier this year, is slowing. Universities and educational facilities are under significant pressure even as the number of people going back to school reaches an all time high. There's still some momentum in the mobile space, but in most cases those opportunities tend to be comparatively low value. Social networking is going into one of its regular contraction phases again (it seems to have a cycle of about 3 1/2 to 4 1/2 years). Areas such as Hadoop and Big Data are hot right now, but big data by its very definition is very much like data mining in general - it requires heavy equipment and you end up needing to have a large data dump nearby to extract meaningful value, because you have to sift through a lot of dross to find those ingots of gold. This points to specialist requirements that may very well be filled by existing talent.

This doesn't mean that there aren't opportunities to be had moving forward with tech, only that such opportunities should be seen as long term investments with long timelines and low immediate return rates. Companies will become smaller and more evanescent, in many cases down to one or two people working over the Internet. Paychecks will go from being regular and moderate to irregular but potentially higher; the consultant model going from being a small part of the ecosystem to the dominant employment relationship. With this the studio model, in which you have a single nucleating corporation around which works a swarm of consultants skilled at handling one particular aspect of software development, will continue its ascendancy as well. It's not an unfamiliar model for most people who have worked in IT for a while, and seems to better suited for handling the vagaries of IT winters than the large scale corporate approach, but it also means that people have to be more responsible about saving for the future.

In many respects what is happening now is that the long deferred reckoning is finally coming due. There will be some bank failures that the government can no longer prop up - I expect a few household names in the financial sector will not be around by the time the smoke clears on this. The pretense of the housing situation (and the mortgage market) needs to be resolved, the financial books of quite a number of corporations need to finally get marked to reality, and debts that are unpayable need to be written off as uncollectable. Investors will lose money - they made bad decisions, now they have to live with the consequences. This is always a painful process, but it cannot be put off too long ... eventually the economy becomes too unstable to support the fraudulent infrastructure and it collapses. I suspect that within the next couple of years, it will.

However, the power of IT is that it is usually about the application of foresight, intelligence and hard work to the solving of problems. It can prove more or less effective depending upon the degree to which the status quo constrains the current environment, but when that status quo finally ceases to be a barrier, it is more likely that the engineers, programmers and architects who generally tend to be focused on problem solving will be the ones to deal with the problems, at least until the status quo arises again. It's just going to be a long winter before that happens.