In a world where nobody wants cash, proceed with caution
Cash is no longer king. It has been dethroned by the very institutions charged with its conservation. Central banks around the world (with the possible exception of ours, actually), can no longer be regarded as entirely independent of political interference — evidenced by the populist agenda of quantitative easing which, I have argued, has failed.
Practically anything trades at a premium to cash nowadays. Cash isn’t wanted by anybody. Even the major banks in the US are encouraging corporate depositors to move their cash into money market funds as demand for loans doesn’t keep up with banks’ excess liquidity and the looser capital rules (that were in place for Covid) expire. Deposits weigh on profits if not lent out.
It’s not just in the financial system — major corporates are also handing back the cash. Apple and Google just announced further share buybacks. Although these buybacks tend to prop up share prices, this is cold comfort and, at best, a temporary respite.
A business that is buying its shares is telling you that it has nothing better to do with the money. The onus is now shifted to the recipients to do something better with the money, and the banks don’t even want it on deposit.
One of the major drivers of the cryptocurrency revolution is to lessen the chance of regulatory interference with the value of fiat “money”, as has been happening with fiat currency through quantitative easing and monetary policy generally.
Capital doesn’t stand still in these changing circumstances. The future of capital allocation and the rules that preside over its deployment are changing radically, away from the accepted measures of value of yesteryear. It is no longer those familiar measures, like price-earnings ratios and net asset values. Instead, it’s ideas (funds go into “ideation”), and how many people can be convinced of their future commercial value. It’s client acquisition strategy and numbers of users and data “monetisation” — growth prospects leave earnings far behind when new capital goes out to play — all the more so when present-value assets, like cash, have no real value.
As the sway of discretionary economic power moves away from the institutional centres of capital allocation and into the hands of real-time informed (or misinformed) retail investors, it should come as no surprise that extraordinary volatility will be experienced in these fashionable assets. Beyond the noise and the irrational exuberance, however, there is change afoot, which should not be ignored. One such new development is the SPAC (special purpose acquisition company). SPACs have become increasingly popular, essentially as a short-cut, less cumbersome vehicle for putting cash in the hands of opportunity-seeking individuals, but in a listed, publicly traded entity. Listed M&A, if you like, listed private equity, if you like — previously the preserve of deep and informed pockets of wealth, now available to retail investors.
The very tests for capital attraction are changing, and those who don’t adapt their models will simply be asked to step aside. If established capital allocators don’t make it their business to understand and be able to fund these new mindsets, they will be disintermediated, left in the car park, admiring vintages. Asset managers will have to venture beyond their comfort zones in listed, liquid markets and banks are going to have to, somehow, partner with equity risk-takers, to incubate, and then grow, their future bankable clients with an initial capital funding mix that is aligned and bespoke for individual businesses.
Even entrenched lending metrics are going to have to adapt. Lending risk is going to have to move up the income statement, away from uncertain, managed profitability towards the more accessible revenue line as the source for loan servicing and redemption — it is, after all, the new measure of value.
Capital goes where capital is sought, at the right price, for the right period of time, and in the right formulation. It also leaves, in a hurry, when these conditions change.
Things are not going to be how they used to be, and artificial intelligence and algorithms are the new behaviours to figure out, and they don’t care. Get up early, if you want to play, and proceed with extreme caution, if not apprehension, lest you follow what is popular, instead of what is valuable.