Convergence, platforms and new market color

The categories on which we continue to insist make little sense and getting littler with time. We still insist on calling them consumer, industrial, financial, telecom and so on. We also call one isolated category tech, as though the notion can be isolated still, like it was (arguably) before becoming universally adopted.

We need such guideposts to stay organized and clear in our perspective(s), but there comes a point where the method turns against us on account of unreality…

WSJ

… because, when everything is tech, and when so-called Big Tech is by extension into everything, the lines of demarcation get all blurry and confused, the reference points to which we are accustomed become faded, the competitive landscape turns into a tangled web… gradually, gradually, and then of a sudden.

It’s gotten to the point, perhaps, where rather than evaluating stocks and assets on a standard model that narrowly compares each to others in its increasingly artificial category, we recognize now that Big Tech (a misnomer, really, these are the Big Platforms) is now the standard by which others can be universally assessed.

The exercise may not be formulaically financial, necessarily, as much as strategically diagnostic, though these things tend to be connected. The Big Platforms, to begin with, are made of multiple dimensions, network entanglements, and effects. These, once a certain depth is reached, become too deep to fail, (unless by legislated disentangling, as is now apparently considered with much effort and confusion).

Secondly – a broader, more impactful aspect of all this from an economic vantage point – is the theme of industry convergence that these platform companies represent. Media, finance, healthcare, commerce, transportation, even manufacture, are all represented here, and other categories also that are transformationally underway (e.g., robotics, virtual reality, symbiotics).

We once went through a major phase, some decades back, of big conglomeration. It was the time when synergy became a common term and when some big conglomerates became the standard-bearers. After a while the trend reversed and there were spinoffs and divestments and restructurings, and the word synergy went out of style as much of its luster faded.

This time is different. It really is. The fundamentals are inherently created now, and the strategic expansions referenced are following their natural progression. As much as software is eating the world, the new analysis and study is network science.

Aesthetics and returns

“The number of true theorems is, I believe, infinite. And the number of definitions that one can make is infinite. All these things are out there, but on the other hand, you don’t know this, there’s no book of all these things, because there’s an infinite number of possible theorems and definitions. The key in doing mathematics is to find a good definition, a definition that will get you somewhere, that will unify perhaps other things, and so on, that’s a creative act. It’s a creative act to find something interesting in an infinite field, in an infinite collection of things. It’s out there, but you have to find it, and have good taste… in finding something that will really go somewhere.”

“The word beauty permeates mathematics. There’s an aesthetic to it, and that’s why we use that word.”

From this, the segue into finance is the concept of compound interest, the “eighth wonder of the world” according to another mathematician.

“Our research goes on all the time,” he says, before the cigarette gets lit.

Summer reading

Among the list that’s shrinking, a new short story collection from the prize winner…

The Atlantic

I’ll take the Scarface Pacino and The Godfather Brando
Mix it up in a tank and get a robot commando
If I do it upright and put the head on straight
I’ll be saved by the creature that I create

“… do it with decency and common sense.”

I’ll pick a number between a-one and two
And I ask myself, “What would Julius Caesar do?”
I will bring someone to life in more ways than one
Don’t matter how long it takes, it’ll be done when it’s done

Complete lyrics here for all ten short stories.

After midnight, if you still wanna meet
I’ll be at the Black Horse Tavern on Armageddon Street
Two doors down, not that far a walk
I’ll hear your footsteps, you won’t have to knock

The fate of the big data banks

I remember “disintermediation.” In finance that used to be a thing. The vision and the trend line was predicated on the dismantling of banking institutions that stood between depositor/investor/consumer and borrower/issuer/vendor into various component parts to give each more direct access to the other.

And the result was many funds – hedge, venture, growth equity, assorted debt, and so on – and funds-of-funds, and other forms of go-between through which sources and uses passed. And banks of course were still involved in all of that, plus countless new advisory (gatekeeping) operations to help sort through the tangled mess. And later on the ETFs and index funds that would in theory disintermediate the mutual fund segment. (And who even knows what dark pools really are, apparently these also are disintermediating something.) And as the funds-flow architecture evolved to also disintermediate the system, there is by now a so-called payments category made up of layers like a jigsaw puzzle, where finance and technology converge.

So anyway, that’s how “disintermediation” seems to have unfolded, while the disintermediated banks are now many times larger than they were when this whole thing began. And every layer in the illustrated market network takes a cut for services provided. And every layer grows the shrinking distance between depositor/investor/consumer and borrower/issuer/vendor, the space where there is interference of some kind, for payment that is rendered.

With that by way of history, we enter now a time of break-up and anti-trust motif, directed at new data banks that have emerged. These, too, it seems, are ripe now for their fated disentanglement.

In the footsteps of giants

Sometimes, such as now, when the market’s watchers seem entranced by day traders and their daily whims, it’s fun, behind the scenes, to add another layer to the picture, imagining a silent smiling figure among the watchers, pressing a button here and there, infrequently and almost casually, which causes everything at once to scramble and change course. Like an elephant or some such giant walking slow and heavy through a jungle, oblivious to specimens that scurry down below, the frenzy of each giant step that’s taken.

It isn’t fair for either the big or little specimens to think about such things (for one’s amusement), because it isn’t altogether like that in the real life of the market or the jungle, but when we watch things from afar we simplify. For fun or not. And in this case the walking influential giant, for fun, embodies the investment funds’ limited partners. The limiteds, in parlance.

This ultimately is the money source that calls the shots, if only indirectly. It can move funding and commitments from here to there; it can deposit big amounts or take these out; it can go the private or the public route, equity or debt, early- or late-stage, alternative or what have you. And sometimes, if it wants, it takes from one pocket and transfers to another, all casually like – as mentioned, the cartoon is for amusement – and even when that happens all the market watchers and the traders and what have you, scramble.

Remote work, entertainment, supermarkets
Institutional Investor
Who’s writing the first checks
“On Wall Street, the rich aren’t easy to rob.”

The structure and the cash

The speculative market theme that seems to be emerging is a phenomenon that shouldn’t be surprising. Some commenters have discussed lockdown boredom as an explanation, some are pointing to the gap between the market and economy as a cause (and an effect), and then there is the disagreement among the very powers that be – the monetary chiefs seem to be looking at a slow and gradual recovery, just as the fiscals’ latest inactivity implies a quick and forceful rebound is already in the works – which stirs up speculative passions and motifs among the rank and file. In a world of guesses, speculation is the use case for the market product.

Another potential explanation, arguably less nuanced and for that reason possibly more likely, is that for savers there is no other choice but speculate. There is no interest paid on savings nowadays, there is no interest paid on risk-free debt, and when operating incomes start to take a hit the zeros where financial income had been thought to be gets noticed. It isn’t an analysis that takes a PhD from U Chicago to resolve. What’s more, it isn’t a narrow-based reality for the retail trade, it’s fairly universal. Even if it didn’t start that way, it’s gaining strength.

The risk in all of this is that a speculative frenzy can only go so far to substitute for steady income, and when some trigger happens that would cause arrows to start pointing down – it could be anything, even a brief miscommunication – the avalanche has the potential to wipe out a whole region, as it were, which may have magnifying consequences all around. This is a risk (only a risk, not a prediction), but the mitigating factors of it may not be the usual this time. Low rates and easy money, which have been typical so far, are already factored in.

The cheapening of market presence

The winner-take-most statistical power law effect we’ve seen in many emerging business categories is a phenomenon that network scientists have noticed in their natural investigations for some time. It is a trait in certain business models where network effects can reinforce a market presence, sometimes exponentially and to the marginalized exclusion of competitors who are relegated to a long (and narrow) tail, which is dreaded. The Big 5 techs, so-called, are more truly the Big 5 networks (in the broad sense), and it apparently will take some kind of intervention to keep their dominance in check. There are other examples.

An overlooked example in this way of seeing the network power law phenomenon in market presence, is on the funding side of the equation. That is to say, there is a winner-take-most parallel in financial markets, which has as much to do with the nature of the underlying business target as it does with the network nature of the markets themselves. Bubbles form sometimes, concentrations gather, attention focuses or fades, and thus the masses of financial capital shape similar leaderboard formations at all their many levels. The portfolio positions of fund managers tend to overlap, the structure of securities go in and out of fashion, certain institutions amass growing troves, and so on etc. (The wealth gap that is growing, perhaps, is also part of the event and its network effect drivers.)

And just as the individual products, messages or links that pass through the Big 5 networks (and others) tend to commoditization by sheer undifferentiated volume in these network concentrations, it’s possible to see financial flows and products the same way. That is to say, the financial category and its varied funding elements that accumulate, are contributing to the cheapening of these, if you will. And the return opportunity fades.

In this context, some news items from the financial press the other day, which, like everything described herein, is a participant in the gatherings.

Progress and the clusters

The formations and movements of the clusters is the pattern recognition that ultimately matters. It’s referred to as momentum by some, strategy by others, depending on one’s technical or fundamental bias. In the first case, the criss-cross lines of history are extended out, subjectively, until it’s noticed that the line is broken. In the second case, the exercise is in principle the same, but with a more attentive look at underlying drivers and a proactive push. No matter, the clusters form and move, and thus the markets.

The “markets” in the aggregate are the network graph manifestation. Equities are just one part, with debt and all the other asset classes, and all the non-financial forms, such as the shopping mall and Amazon dot com, which in turn tie to supply and value chains back to financial categories.

The economy is reflected in markets, they say, and the reverse is also true. Underneath it all, the clusters grow or shrink or change their shape and nature of their links to other clusters that are very rarely static. The change has its effect in ways that aren’t easy to predict, because the system is multivariate and dynamic.

Nevertheless, it is inherent in our nature (and important) that we try. A bubble only happens if and when it pops. And sometimes even then, it bounces back. It isn’t final, though possibly transformed to something else. That is the pattern, that is progress.

Morgan Housel

The RH traders and the Treasury

The diverging positions of RH traders and bankruptcy financiers, in the end, is a difference in outlook: the distinction between, say, the letters V and L. The former signifies a sharp and expeditious economic bounce after an artificial short-lived stoppage that did nothing to the business fundamentals; the latter is a slower drift, where the asset value remains permanently damaged.

It is conceivable that if the broader funding market were to see the future the same way the RH traders seem to, at least implicitly, the bankruptcy scenario – its valuation exercise, its ranks and splits, perhaps even its timing – would be different. In this scenario, perhaps, the scope of the proceeding would be more mechanical in nature than financial; in other words, a short bridge to protect the company for some missed near-term payments. Until the rapid rebound that’s in this scenario expected.

In essence, the described position is similar to federal stimulus initiatives enacted at the outset of the economic lockdown. The PPP loan structure, for instance, intended to preserve small business payrolls with a short-term bridge to the V-recovery’s other side, the unemployment benefit boost set to expire a few months after implementation, the 90-day tax extension to mid-July, are all predicated on a quick economic bounce and return to “normalcy”.

In this sense, the RH traders and the Treasury department are more or less the same, although the latter holds more weight (because sophistication). In truth there is no way to really know, at least not yet, whether the V or L, or other shapes and letters that are kicked around, will be upcoming reality. But where the RH traders might reverse their bets at any time with ease and at a relatively small potential loss, all things considered, the federal institutions may not be as nimble or inconsequential.

So far at least, both seem well set and almost stubborn in their opening positions. Let’s hope that they are right, for our collective sakes and theirs.