It seems like an eternity ago that chiefs were out performing with some semblance of conviction, at least some variant of guarded caution, to an expectant audience that always pushed for more. The market watchers were out toying (as liquidity and portfolios can sometimes make one do) with metrics and configurations like these were a kind of tender. That was a while ago, though not so long, before the focus shifted as it has to the assumptions, the assumptions, the assumptions…
(Which can’t be emphasized enough.)
It’s possible to look past certain things, approximate results, or get swept up in the excitement when the funds flow, the IPOs are pricing, and the economy is trending in an upward sloping line. When the economy can be defined and its component pieces somewhat understood, visions may be influenced by keeping up, and the attention to assumptions – their elements, causality, and dynamics – can sometimes trail the outcome, so to speak.
When the mood changes from gain to survival, the focus on assumptions picks up steam. It’s natural that this should happen: for market watchers who now have to look more closely as portfolio positions start to correlate and the liquidity gets questioned, and for the chiefs who might get by without it, learning to depend only on the enterprise that is forever being reinvented.
(This is a welcome thing at every level, I believe.)
The current case is an extreme, perhaps, (I am reminded of a wise investor who once cautioned against thinking of anything as extreme, for it can always be extremer), and the circumstances are unfortunate to say the least. But if there is a silver lining in it all – as there is with the popularizing and advancements of biotech, its methods and innovations – there may be one as well in financial planning and analysis.
The talk of a swoosh shaped economic recovery…
… and related top-down theorizing and crystal-ball hypnotics…
… might start to shift to a bottom-up approach that’s based on direct experience in the individual case, shaping value drivers and metrics that will hopefully get shared for scrutiny, making both the enterprise and markets more efficient and the economy more robust, in the future that is always arriving.
The social media hubbub over facts and checking, voices and editors, freedom and control, the public and the private gain, is a hubbub over network principles.
Economically, socially, technologically, politically, artistically, educationally, and in many other ways that overlap and interrelate, the explosive social media emergence of the past decade has been transformative. The speed with which this happened and its global scale have been unprecedented in all the listed ways.
Outside of certain market trades, niche publications and entrepreneurial segments, there hasn’t been much of a discussion at the mainstream level on the meanings and results of it, the qualities that shape the different outcomes, or outcomes that shape certain qualities, the nature of the different platforms at their root, and the defining principles.
What is now starting as a hubbub may lead to needed progress in a more formalized and structured understanding. That is the opportunity. Below are some excerpts from a longer post that went up on a different medium a while ago, which starts to play around with some such matters. The full thing is here.
Distribution and hierarchy
- In a networked information economy Power Law distributions emerge. This can be seen in the category dominance of leaders, followed by a long tail of smaller competitors behind (“winner-take-most” phenomenon), and it is sometimes also seen within the networks themselves as certain nodes and clusters gain in presence. Sometimes the loudest or most popular voices in the social web control discussion, certain apps in the app store rise up in the ranks, the top search results attract the most attention… these examples are all from the distributed multi-directional network types. The edited one-directional networks, like broadcast operations, are much more obviously hierarchical.
- The tendency of networks towards hierarchy, by design or evolution, is a quality that in important ways resembles product distinctions previously described. In the extreme case, where a network’s flow is purely one-directional, this runs the disruption risks and profit pressures of a service offering, at the expense of much more valuable community. In a highly commoditized and competitive environment, networks seek to resist such outcomes.
- Historically, the longest lasting networks in commerce have been multi-directional and distributed, where the operator’s purpose is to optimize the quality of distribution. Looking back past the current examples of digital search and marketplaces and others, examples include telecommunications systems that survived (but for regulatory intervention) since their first emergence and financial exchanges (that may have gotten into trouble from the concentrations that occurred). On the other hand, publishers of all forms (video, audio, print) have had rougher going.
- This distinction of distributed versus hierarchical, and various points of nuance between the extremes, is shaping value formation within the network category in its current digitized form. Netflix, despite its global growth and dominant position, must compete with Hulu and HBO on the basis of its unique content. The competition is expensive, and the value of these properties, even the best of them, is nowhere near the value of the decentralized Big 5. There is no cord cutting, not really, only new digital cords.
The old adage in finance, which isn’t sanctioned or canonical but nevertheless survived over the years, goes like this: “Cash is fact, profit is opinion.” Not all opinions are equally influential, and in the case of profit measurement the auditor’s opinion matters more than say, the marketing executive’s. But if both should one day find themselves together in a room, the marketer’s enthusiasm and the auditor’s stack of policies and standards will mix about as well as any politics. Cash, in the meanwhile, keeps them both whole.
We might be in for arguments and trouble should we get tangled up in Twitter’s fact-check rigmarole that’s gaining national attention, and bringing up the differences between an edited publication and a decentralized network probably won’t help. The mess that’s likely to ensue when we add network science, the public good, capital formation, media (and, come to think of it, accounting) to the untried chemistry experiment, is prone to make our heads spin in all sorts of ways. And when facts, some things that seem like facts, some things that don’t, the voices of varying volume and the opinions of varying importance are all blended, it’s probably too late to bring up first principles and the definition of one’s terms.
But we can always look to markets – which are an aggregate of judgments that are formed, which clear at some point where conflicting judgments find a common ground, which look to past, present and future (mostly that) and which directly or indirectly gravitate to cash (with all respect paid to accounting profit) – to guide us.
Here is what markets have been saying.
No judgment, only facts.
The semblance of traditional financial markets behavior and cryptocurrencies has been a theme these past few days around here (Differences, parallels and crypto, If speculation is the use case). The observation isn’t about identity – obviously the respective nature of the assets is very different – but rather about the recognition of certain qualities and patterns that are shared.
At the root is the idea of fundamental analysis versus technical patterns, where the former is predicated on the substance and the use case of the product or the business model that underlies value, and the latter is the behavior of market liquidity (i.e., supply and demand) on the same. As fundamental analysis approaches a void, in the absence of supporting data, product, use case or business model, the asset’s market value and trading flows are largely substantiated by the technicals and charts.
In the case of cryptocurrency, this has been a defining quality, more or less, even as the shape of future fundamentals may sometimes begin to be observed. In the traditional financial markets, particularly equities and related, the sudden breakage of the fundamentals as economies shut down and their emerging new profile remains a mystery to most, the technicals (i.e., liquidity) seem to have displaced the fundamentals in the basic structure of it all.
When value based on technicals gets far ahead of that supported by the fundamentals, it is a bubble (or so at least I’ve argued here before) and this is only really known with hindsight, when it pops. For cryptocurrency, the notion is more delicate perhaps, because the underlying product and its use cases are connected and defined by their liquidity, so that the fundamentals and the technicals are not so clearly distinct. In this case it may be argued that what sometimes appears to be a bubble forming is in truth a network tipping point, and what seems like a price chart is a sort of look into network activity as well.
To an extent, and if the observation about the current state of markets has some merit, what holds true in crypto may now also hold true more broadly. And, if one conclusion from the crypto experience is that speculation is (at least so far) the product’s true use case, then perhaps we are now in a technically driven stock market where the same can be said.
That there is on one hand a speculative risk-taking pattern taking shape (in financial markets) while, on the other, we see a flight to safety (in the consumer spending pull-back), these are not necessarily contradictory themes. According to some, safety and risk-taking are separate and distinct needs and behavioral motives on a basic human level – which contains multitudes, often contradictory on the surface.
Perhaps we are now in a time when the philosopher’s hunch may be proven out by data.
A notion that is most interesting to consider in the investment thesis published by Andreessen Horowitz – The Crypto Price-Innovation Cycle – is the sequential flow and the direction of the arrows.
A certain order is implied, circular in nature, that may originate at any of the spheres and cycle back around clockwise through the laid-out system.
One could, as a visual experiment, divide the cycle and the flow into its basic elements, where the two spheres on the left represent market liquidity, driven by supply and demand, or, in analytic parlance, the technicals…
… and the two spheres on the right represent the underlying use case of the product and its future possibilities, or the fundamentals…
Because the nature of the flow is circular, the cycle may begin with fundamentals and lead to technical action, which is to say, the product’s function could drive market price; or it could be that market price and interest may drive the product’s fundamental base.
The implied relationship of technicals and fundamentals in the illustrated loop may be recognized by market followers as reflexivity, and by network analysts and builders as network effects. The concepts are similar, and maybe even interchangeable in the context of financial markets, which are large multi-directional networks.
One could take the idea a step further – if reflexivity and network effects indeed apply to the case at hand – and reverse the order of the circular mechanism, such that the presented sequence leads to price, which would in turn drive use and substance, in counterclockwise fashion…
… or, maybe more correctly still, a scenario in which the technicals and fundamentals act and counteract on one another, signaling and inferring, leading and following, depending on the circumstance, or possibly at all times in balance.
This balance is especially significant in the particular case of cryptocurrency, where use case and liquidity are not only interlinked, but arguably one and the same. And this gives rise to a more general idea about value swings and market trends that rise or dive…
If a value bubble is defined as a wide divergence between technicals and fundamentals (i.e., between the market supply-demand dynamic and the function of the underlying asset), and if technicals and fundamentals are tied up into one, what may appear as a value bubble in the crypto segment may be in truth a network tipping point, or anyway a graphic illustration of network behavior.
In the broader market context, for investment securities of any type, we may now be in a phase in which the blue box on the right (the fundamentals) is being redesigned; a phase in which the business models, the profiles, the technology solutions, may be reinvented, with an outcome that is currently unknown. There is a parallel in all of that with the crypto experience to-date, and so ideas such as bubbles, tipping points, balances and interplay of technicals and fundamentals, may similarly apply.
It may be argued that the primary and mainstream use case of Bitcoin has been as a speculation mechanism, which over time may lead to other things. Perhaps we’re at a point where similar views may be justified about financial markets more generally. The referenced Andreessen Horowitz report might thus also be read in a wider context.
In remembrance of the smallest thing well done, because it isn’t trivial.
“… [it] may make all the difference. One thing well done can make – “
Don’t ask for whom.