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.


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

Deflationary buybacks

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


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.

The portfolio of one

It’s always the portfolio… its diversification and composition, the relative performances and correlations, the needs of its overseer, and the chain of others who come in and out along the line.

Private equity and venture capital fund managers may at any point be caught between the urgency of portfolio companies and that of their limited partners. The limited partners, who often are fund managers themselves, are caught between the needs of their portfolio positions and their capital sources on the other side. And so on.

It’s a delicate situation all along the way of financial intermediation, where the two endpoints of the line – the individual whose savings and livelihood is ultimately at stake, and the business that gets funded or doesn’t – are in a sense portfolios of one, or highly concentrated in any case, all-in, so to speak, and exposed to their own concentrated profile.

When the chain of go-betweens for a variety of reasons gets disrupted, this is also an opportunity. What doesn’t kill you makes you stronger, as they say. Now is a good time to get strong.

The coming period of planning

When the economy and markets had been massively beat up in the great recession, there was a period of time when credit and private business funding massively withdrew. It was a rough time for business, especially the venture-backed or would-be venture-backed, where capital flows didn’t stagnate due to the long-term fund manager’s pessimism as much as the limited partner’s massive short-term hit across the diversified portfolio.

The warning signs are starting to show up again this time…


… and it seems unlikely that these early signs will abate and then reverse anytime soon, particularly as the economic impact on the unicorns is unclear (and probably unstable)…


… and the extent to which software businesses are immune to social distancing remains generally to be seen.

There will be coordinated fiscal and monetary response, as there were in 2008 and subsequently for some time, and the markets and economy will recover, as markets and the economy always do.

The questions now, however – how long will that take, which market pockets will bounce fastest, which economic areas will rebound slowest, how will that domino into other areas, how will that impact business cash as we head there – all asked when there is so much still unknown (maybe even unsuspected at this time), and while the value of portfolio positions may not be there to cushion undesirable answers.

The LPs and their constituencies will figure these things out, but in the meanwhile their investments or presumed investment targets will have to manage their way through. Which will take careful planning.

Related longer reading here, from a more stable time, now with additional importance…

The world’s digital immunity

A financially analytic outcome from the virus spread and its economic reactions will be to measure the extent to which software has in fact eaten the world, how this is priced by markets, and the company specific results that demonstrate their software dominance of scale and operations.

At the extreme, a purely digitized supply and value chain should be immune to biological disturbances.

Sequoia Capital: The Black Swan of 2020
Axios Pro Rata

It will also be seen, on a social level, to what extent a software eaten world is possible.

The Possibility of an Island