Crash on the levee

As many venture investors will tell you, the idea is a nice start and all, the execution is everything. The pandemic and its economic consequences have been compared by some to a state of war, effectively, requiring a wartime response. This is to say, a disciplined, energetic and reprioritized execution at all levels.

That’s the idea in any case, and the execution of it remains to be seen. Early indications however have not been impressive. This commentary is limited to finance, markets, and the economic battles.

News about unpreparedness and bottlenecks in the response system have started to multiply – for mortgage relief, for business loans, for unemployment benefits, to name a few examples among many – and that isn’t a small issue in this crisis.

The idea of a $2.2 trillion rescue package, whether the magnitude of it is sufficient or not (it probably isn’t), was a wartime idea. The implementation of it, however, is a peacetime implementation so far – driven by and through peacetimes systems and protocols, built on a large base of peacetime generated channels.

The markets, which sooner or later reflect all economic things, haven’t yet started to reflect this discrepancy, I don’t think. In wartime, when the risk of unintended consequences is escalated, controllable actions (i.e., execution) are that much more important. Any venture investor and startup entrepreneur can tell you that.

Down in the flood

Just print the money, officers, and load the helicopters. This is no time for dillydallying and sandwich meetings to discuss.

Magnitude is relative (cont’d)

Looking back on the timeline, the market changed course sharply from its downfall around the time the fiscal rescue package was done. The bill was approved in the Senate on March 25, but word about its magnitude and substance had been spreading.

Yahoo Finance source chart

Now that the market has had some time to digest the package and its economics, and factoring in portfolio maneuvers on the before and after side of quarter-end March 31, we’re roughly 15% ahead of the pre-bill low.

On its face, the $2.2 trillion package seems to have been fashioned as an exact stopgap of 10% on a $22 trillion GDP economy. Whether the order of magnitude is correct, sufficient, insufficient, headed for another round, is a subject of continuing discussion…

Magnitude is relative – March 25

… and it looks as though another round is being considered, which probably is not yet priced in.

These are all questions and responses based on magnitude, with the implied understanding that the dollar amount will be a GDP refill, bridging the economy at least somewhat to the other side of the disruption.

Listening in on several expert calls these past few days, to discuss the bells and whistles, consequences and conditions, procedural dynamics, federal and state authority, degrees of benefit and assorted options that require further consideration by all businesses, small and large, based on incomplete knowledge, before even getting to the point of action… a point at which the funds flow will not be immediate, but will still need to pass through bureaucratic protocols that are themselves less than prepared for orderly movements…

Learning about the details of these matters in the enterprise, which don’t seem to be dissimilar at the individual level…

CNBC

I wonder if aspects of efficiency and speed of rescue have still to be priced in. (As I’m writing this post, stock futures are jumping.)

Stable and unstable currency

One of the reasons attributable to the slow transactional adoption of Bitcoin has been its volatility. An item that may cost 1 BTC this moment may end up costing 0.8 BTC or 1.2 BTC the next, simply as a result of the underlying currency’s volatility. This aspect of the phenomenon has rendered it a speculative mechanism – although the cause and effect are more likely circular – where the analysis is almost purely technical in nature, despite the fundamentals that are argued.

A similar volatility has now taken over in other financial assets, notably public equities…

Howard Marks – March 31, 2020 memo

and the reason for it, in a sense, has similarly been a relative breakdown of fundamentals…

Same source

As with cryptocurrency, this sudden shift in market reality, which is essentially a shift from fundamental underpinnings to technical factors, is having its transactional effects.

WSJ

The value of non-cash assets in an enterprise is now increasingly difficult to estimate, as is in many ways the value of net liabilities. This is true for both buyers and sellers, rendering the relative equity valuation of each highly speculative, and the potential transaction itself the same.

As with stablecoins that have emerged, coordinated monetary and fiscal interventions are meant to artificially peg the value of the asset to the last known fundamental, as it were. This peg, however, is to an unpredictable and volatile economic measure, based on its own set of fundamental drivers and consequences that are without modern precedent.

We don’t know anything, in other words, nobody does, and so, for now at least, cash and liquidity are at a premium, while all else zigzags with the wind.

Howard Marks – March 31, 2020 memo

The next big thing

As traditional businesses adapt…

Axios

… the digital age continuously advances.

It was already happening before the virus – VR headsets, wireless earbuds, wearable devices – all steps in the direction of technology-human symbiosis. These popular products are still early and primitive in application, but the course is set. Outside the mainstream, in specialized medicine for instance, it’s been happening for years (e.g., pacemakers, other implants and monitoring devices, artificial limbs).

It’s hard to say what causes what, if fantasy is inspired by events or vice versa, but the early speculative authors, like Wells and Verne – who among other things contemplated travels to the moon and explorations of the earth’s interior and oceans – or Huxley – who thought about the changes in society as technology advanced – were not wrong.

The integration of our body with technology has been speculated about by the storytellers for a while. Stephenson dealt with the digitized brain in his most recent novel, Pynchon created an increasingly mechanized person in V., and before all of that there was Frankenstein. The currently popular series Westworld almost seems like a culmination…

If nothing else, these tales have been projections of what the writers felt was underway. The artists feel these sorts of things, it seems, and in the case of symbiotics there is some mounting evidence and, as it now turns out, incentive.

Things happen fast and getting faster nowadays. Your edge is not the next big thing, but the one after.

Deflationary buybacks

This WSJ markets commentary is an interesting addition to the cash reserves vs. corporate bailout arguments that are these days inflating.

WSJ

At the crux of the analysis is the clarification, which is necessary I think, that cash is not actually cash. Cash is in fact an investment decision, a position in the active market and in the strategic plan.

Holding cash usually means holding interest-bearing liquid marketable securities (even if indirectly through a money market fund or savings account) which, all things being equal, pushes up their price. In other words, this drives interest rates down. Strategically, the decision to build up cash reserves implies that internal reinvestment is not expected to produce greater value for the business than the interest earned on these positions.

In essence, cash hoarding is deflationary, whether it’s a cause or an effect, and deflationary spirals tend to loop the two in any case. The cash unit today is expected to have greater purchase power tomorrow… or, if building up reserves towards a rainy day, demand for non-financial assets diminishes. Prices fall.

These things can’t be taken out of context though. And in context of the new economy – technified, digitized, and global – deflationary pressures are built in. The comment about software eating the world is a comment about deflationary economics. It’s also a comment about the evolution of digital global platforms that become dominant with time (e.g., Apple, Google, Amazon, Microsoft, Facebook) and get to hoard not only cash but also market share.

Stock buybacks, in this context, aren’t necessarily about greed (although perhaps that too) but about a natural market reaction to these rapidly changing and global-scale realities. It’s natural for markets to want stock prices to rise, which fundamentally becomes a challenge that financially can be engineered, even in a deflationary environment.

In memory

The author W.G. Sebald gave a reading at the 92nd Street Y in New York roughly a month after September 11, 2001, and he died two months later. I was in the audience that night, but didn’t appreciate the significance of his work as I think I do now.

The Rings of Saturn

The new Bob Dylan song about the JFK assassination is about much more than that…

… and the timing of the release may not be happenstance.