(8) Markets
The market rises and the market sets, and hurries back to where it rises. It blows to the south and turns to the north; round and round, ever returning on its course. What has been will be again, and there is nothing new under the sun…
But there is such a plentitude of permutations.
A recurring theme in this series about digital economics has been the vastness of those numbers, while the subject of this eighth installment is the market ebb and flow and certain signals in the fluctuation. The archive, to revisit, is itemized below.
In transition
The year thus far has brought a global market pattern that many referred to as “turmoil,” to start, which eased into a rebound later on and which for the past several months has spiked and troughed in waves within what seems to be a trading range of sorts. That anyway is what the index chart would show. The net change to date: approximately nil.
Oil prices, economy stagnation, China, politics, and, as seems now to be a fixture since the dawn of time, action or the absence of it by central banks on all sides of every ocean, these things have tended to dominate the headlines from one day to the next. The messages and their dissection, the algos digesting text and fund managers talking their book, are churning fast and wide on our networks and devices, adding to the excitement of a market that is, as mentioned, back where it started. But that is a superficial read, and anyway the causality is unclear, possibly even circular.
Under the surface of this persistent multitude of factors that may be fundamental on some level, there are traces of a different volatility acting on the system, which is not noticeable in the charts. When Icahn and Tepper and Tiger Global, for instance, are sellers of what Berkshire Hathaway is buying; when Soros is long gold because of deflationary concerns; when fund managers voice pessimism that reaches alarmist levels although price multiples continue to be historically record-setting; and when ventures are marked up or down by double-digit percentages, and then back again, without catalyst; that may all signify a thing that is not turmoil, strictly speaking, as much as inconstancy. The distinction may seem vague but is in my opinion important: If turmoil is akin to choppy waters, inconstancy may be a bit like floating over steady seas without a rudder.
One interpretation is this: The market described is a market in transition — from old to new economies extending their reach — for which central monetary props have been a sort of camouflage. It is, I think, significant that monetary intervention on one hand, and widespread industrial and consumption changes on the other, have generally coincided. That “software is eating the world” was famously reported by Marc Andreessen in 2011, a few months after the Fed launched QE2. In their respective ways these have been the defining milestones of our time, for both the market and economy that it (in theory) reflects.
The undertow
It was tempting and maybe necessary over the period referenced, to have watched the flow of capital — both private and public — and stared googly-eyed at headline grabbing funding rounds and “unicorns” and the social media IPOs and the explosion of startups that was not like the dot-com bubble this time, because now the selection process was more discerning and the traction generally real. In the finer print, however, there was a more challenging dynamic settling into financial markets, particular to analytic estimation and value recognition, which in the end has consequence in strategy and competition in all the underlying sectors. The difficulty is one of capturing key metrics in financial models (that in principle drive capital flows), and the challenge pertains to differences from custom: the business formula and methodology are not what they used to be, and the science is still being tested.
Below is an illustrative list of the new puzzle pieces, many of which have been touched upon in prior articles in the series:
- Digital technology is built on operations and directions that are often still in process of trial and error.
- Category convergences are leading to uncertainties of comparison and competitive peer group assessment.
- Ongoing business transformations are (more than typically) stifling the credibility of financial forecasts.
- Blurring lines between incumbents and disrupters are leading to the same in the discounting of risk.
- Innovation is driving down costs and also revenue potential in a deflationary pattern that is uneven.
- Winner-take-all fundamentals are increasing the precondition of scale, which can be hard to predict, as well as sustain.
As is always the case in finance — and this new era is no exception — the overarching rule is supply and demand. But in the digital economy in question, which is predicated on a unit (the digital bit) that can be produced and reproduced without limit and distributed virtually anywhere instantly, that basic economic equilibrium is altered.
By way of contrast, consider the quantities to which our analytics had become accustomed for a long time prior: the stone, the grain, the yard, the barrel, the metric ton, the railway car, the bullion, the channel lineup, the city size, the market rank… In short, the list of changes and transitions points to something far more fundamental to financial markets than, say, a change in growth rate, profit margins, or valuation range. The event, in fact, is one of a general recalibration — of a system that is very big and at the same time sort of dizzy.
Emerging focal points
But markets are by definition adaptable, even if certain circumstances take longer than others to internalize. So it is possible already to discern the semblance of a method that is taking shape as swings and turns from one day to the next, or quarter to quarter, might seem disorienting. Three areas in particular stand out, having started to come into focus, and to outline a shape in our field of vision to which market attention is increasingly drawn. This is not always purposeful, not always consistent, but seems more and more universal and with an attitude that approaches understanding:
- Networks: In this new economy driven by the connectivity of systems, the nature of networks — their nodes and clusters, their combinations and splits, the robustness or malleability of different types, and their very definitions — requires a great deal of attention. We are accustomed to thinking of networks strictly in the sense of communication, but as connectivity becomes the dominant quality in all sectors, so also the concept of a network is being revisited. Its value is a key driver in the enterprise and elsewhere, and not all networks are equivalent in effect, we begin to realize.
- Options: Defining this to signify undeveloped, likely unknown, perhaps unknowable possibilities that exist in an enterprise and elsewhere, and considering the concept in the strategic rather than the trading sense of calls and puts, there is a very real correspondence to value (creation as well as destruction) associated with optionality. In a time of massive transformation, these unknowns take on special significance. The Black-Scholes formula is not what is required to make sense of strategic valuation, but its basis in volatility as a positive attribute deserves to be acknowledged in a volatile time.
- Currency: What constitutes a store of value and medium of exchange has been scrutinized quite extensively with the emergence of cryptocurrency, but more fundamentally still (and contained in the idea of the blockchain) is the notion of information itself as a currency. In an age of mechanized knowledge that is at once accessible and highly liquid, conceptions about value and exchange are being revisited. The formation or erosion of capital is increasingly and more immediately linked to data — which, like the blockchain itself, has become a distributed resource.
The three areas summarized are interconnected and not listed in order of importance necessarily. Rather, these make up a whole that could be a cause, effect, or both, in a system based on digital traffic flows, reflected in the foggy mirror of financial markets, based on the same.
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In subsequent installments these subjects will be expanded upon with examples and further questions that arise. Please don’t go away.
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