Image and Reality

A theme permeating Barbara Tuchman’s books is the recurrence of periods when the gap between image and reality becomes excessively wide, and the system fractures.

I think we’re living through one of those periods.

It could just be my mental state after two months of sheltering in place with young kids at home.

But there is a yawning gap between the illusion of prosperity in the (U.S.) stock market, and the scale of economic destruction in the real world.

More than 33 million Americans have filed for unemployment insurance in seven weeks. The International Labor Organization has warned that the equivalent of 305 million full-time jobs will be lost globally in Q2, consigning more than 1 billion people to poverty.

This is a world-historical calamity.

Global central banks — with the Fed primus inter pares — have pulled out the stops, flooding markets with trillions of dollars of liquidity.

But as TayTay admonishes us, “Band-Aids don’t fix bullet holes.”

At a certain point, it doesn’t matter how much credit central banks inject in the system, because the issue is one of cash flow and solvency.

The Fed has foamed the runway for sensible institutions and people of means to calibrate their portfolios for a range of possible futures.

I think the range of futures is much wider than most people appreciate.

See, it’s not simply the scale of suffering, it’s the distribution of it. It’s not just unemployment, it’s the destruction of small business owners’ life work and savings. Asset price inflation is a poke in the eye with a sharp stick.

Alas, I’m wondering whether the Fed’s actions to support credit markets and ‘flatten the curve’ for asset prices ultimately transfers the risks from capital markets to politics.

And I don’t know if you’ve been paying attention to the long-running trends in the United States, but the political realm is primed for an explosion.

Trump is an appetizer.


In last month’s newsletter, I shared five ideas I’d been pondering during quarantine.

One of them was around the intertwining of corporate and national interests; I asked:

  1. How will the state use its expanded control over the flow of funds to influence corporate decisions?
  2. How will corporations use their ties to the state to shape the markets for labor and capital?

Re: #1, I think there is a non-zero probability that the United States tapdances its way into a command credit economy in the next few years. If we enter a debt deflation, then I suspect the Fed will become more activist in shaping the volume and direction that banks steer credit (assuming it doesn’t do so itself) to engineer inflation. What’s the probability? I have no idea.

Re: #2, there is a fairly broad consensus that labor is going to get a fair shake out of this crisis. That companies will pay higher wages to lure people back to work. That companies will be eager to bring back their staffing to pre-Covid levels. That the government will create a better safety net for citizens.

I think that sentiment is utterly delusional.

I think we will see downward pressure on wages, greater appetite for rationalizing headcount, and little movement on an expanded welfare system.

It’s a bit counterintuitive, but I think the odds are that (large) corporations and the state will shape the markets for labor in ways that will squeeze workers and small business owners until the system breaks.


Is there a more fitting curtain call for the post-World War II international system than a pandemic that disproportionately kills the Silent and Baby Boom generations?


Clearly, there is an incredible degree of uncertainty. We could have the S&P at 500 or 5,000.

The list of questions I have about EM grows the longer I think about ‘em.

I have an abiding preference for tilting toward markets and / or verticals where dollars are scarce — but dollars are scarce nearly everywhere!

That said, a few themes I’ve been pondering for the post-Covid world:

  • Long-term ownership interests in (family-owned) private businesses — preferably businesses that pay dividends and whose ‘shares’ can be owned for a decade or more;
  • Financial inclusion — particularly ‘flow’ businesses (e.g., digital payments) in markets where households aren’t leveraged;
  • EM secondaries and distressed / special situations; and,
  • Bitcoin as a safe asset? (disclosure: long BTC; see also “King Dollar“)


Even though I think things in the United States could get bad over the next five years …

… like very, very bad …

… I want to close on a high note.

I am (still) cautiously optimistic that “younger generations will respond to these challenges with ingenuity, catalyzing a political realignment that will lead to regeneration and prosperity. We just can’t see it yet.”

Peace and health be with you.

Alla prossima,


It’s Time to Build

Last month, Marc Andreessen published a compelling essay proclaiming that “It’s Time to Build.” You should read it — it’s quite vivifying.

The essay is a bit of a Rorschach test, but among the thoughts it kindled in me are the following:

We must transition to an economy where value creation is > value extraction
Legislate LBOs out of existence. Also, the Fed toying with junk bond purchases when 66% of the lowliest credits are PE-backed companies is total malarkey.

U.S. venture ain’t the solution
The institutionalization of U.S. venture is leading to less innovation and a gamification of returns. If we are “transitioning from a focus on the ethereal world of bits to the tangible world of atoms,” I wrote last year, then “perhaps U.S. VC will need a software update.”

Low rates are a bug, not a feature
Low interest rates distort the flow of capital away from productive users of financing to the non-productive. (I’m in the camp that thinks U.S. rates will go negative, fwiw).

As I type this, Netflix has a market cap of $195 billion — in the neighborhood of Coca-Cola, ExxonMobil, and Pfizer. It’s trading at 40x EV/EBITDA (NTM) and ~7.5x forward sales, while carrying $16 billion in long-term debt (185% of equity) and a quick ratio of 0.8x.

This is a company, mind you, whose customers LITERALLY SIT ON THEIR BUMS AND WATCH TELEVISION. Look, people need to stay home, and circuses distract the masses from their misery, so it has value. But I see this as an illustration of how capital providers have lost the plot.

Creative destruction
This isn’t an original idea, but bailouts protect incumbent industries, entrenching the worst elements of capitalism (e.g., cronyism, rent-seeking) whilst depriving us of the best (i.e., innovation).


Actis Discovers People Are Worried

Actis undertook a survey of its 100+ portfolio companies, the findings of which are available here.

Covid-19 is not good for business.

The most interesting finding to me was that “civil unrest” was the second-biggest concern over the next 3-6 months, garnering votes from 65% of respondents.

Civil unrest isn’t good for anybody.


KKR Discovers It Owns the Wrong Things

I always enjoy reading Henry McVey’s thoughts, and his latest dispatch is no exception.

I think he’s right to call scene on the “experiences over things” thesis in Emerging Asia. But this snippet threw me for a whirl:

Screen Shot 2020-04-17 at 2.23.59 PM

KKR and the other buyout shops that hold (surprise) medical billing, medical staffing, and medical transport companies in their portfolio may want to evaluate those companies’ practices and do the right thing for society here.

I’m not holding my breath, tbh.


From the Bookshelf

The times were not static. Loss of confidence in the guarantors of order opened the way to demands for change, and miseria gave force to the impulse. The oppressed were no longer enduring but rebelling, although, like the bourgeois who tried to compel reform, they were inadequate, unready, and unequipped for the task. Marcel could not impose good government, neither could the Good Parliament. The Jacques could not overthrow the nobles, the popolo minuto of Florence could not advance their status, the English peasants were betrayed by their King; every working-class insurrection was crushed.

Yet change, as always, was taking place. Wyclif and the protestant movement were the natural consequence of default by the Church. Monarchy, centralized government, the national state gained in strength, whether for good or bad. Seaborne enterprise, liberated by the compass, was reaching toward the voyages of discovery that were to burst the confines of Europe and find the New World. Literature from Dante to Chaucer was expressing itself in national languages, ready for the great leap forward in print. In the year that Enguerrand de Coucy died, Johan Gutenberg was born, although that in itself marked no turn of the tide. The ills and disorders of the 14th century could not be without consequence. Times were to grow worse over the next fifty-odd years until at some imperceptible moment, by some mysterious chemistry, energies were refreshed, ideas broke out of the mold of the Middle Ages into new realms, and humanity found itself redirected.

— Barbara Tuchman, A Distant Mirror (Ballantine Books: 1979)

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