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…


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.


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.

When we open our doors again

We often project current trends in growth, in markets, in speed and rhythm, linearly, as though what is will be and thus into the future without friction. But there is always friction, always pressures onto the trajectory, from above and from below, from every which way, and the trend line is perpetually disrupted.

With the most forceful trend, sometimes, there comes the most forceful disruption. Just as in physics – every action has its equal and opposite reaction – so also in markets and economies, the patterns can turn pendular as swings occur to balance out the force.

Underneath it all, in markets and economies, the forces are shaped by interests. Sometimes these interests converge, which adds to the momentum, and sometimes these are shaped by differences in goals, in outlook, in resources and resourcefulness, in fears and hopes, in options.

There are multitudes of interests in economies and markets, and under normal circumstance these manifest themselves as a result in twists and broken lines and fractals. Sometimes, however, the movements are extreme, as is currently the case, when interests align but are at once confused and lacking in conviction.

This period, like others in the past, is likely to resolve into a much more stable pattern. It may look like a reversal, a reaction to the turbulence, where converged interests drive momentum in a positive direction…


Or it may be a milder broken line of narrower twists and fewer turns, where varied interests are generally fearful, cloudy, and defensive for a while to come (as linearly projected in the two market commentaries below)…


In either case, the driving forces will be psychological, dominated by emotion, as we wake up from our seclusion and train our eyes to light and open space again. The re-adaptation may happen fast, or very slowly, and the difference will determine whether this was a Black Swan event or a lasting overhang that will define an era.

Magnitude is relative

There’s $2 trillion of economic aid in the works. The headline is big and loud, and the amount is monumental by any prior standard, but historic standards don’t apply for an event that is unprecedented. If the objective is to keep the economy from collapsing, the package may be a first step only.


In Q4 2019, U.S. GDP was approximately $22 trillion – and there’s no economic rule to keep it just exactly where it is – but a gap filler of roughly 10% when the economy is largely shutting down doesn’t seem to be as filling as it could and probably should be.

Without considering the details of how and where the funds are being spent, the aggregate is probably far less than monetary and fiscal measures can sustain… in the home of the U.S. dollar, where inflation risks were low even before this mess began.

It really boils down to the duration of the fall and trajectory of the rebound. If long and relatively slow respectively, then the current measure may be a warmup exercise. Hopefully that’s the spirit in which it is being contemplated.