Up or down?

Feeling a little weighed down, but also up in the air?

Still anchored in what you think a valuation should be instead of what it is?

Stuck in old economy thought processes and price levels that you once thought were appropriate but have been exceeded by orders of magnitude?

Well, you’re not alone.

On one hand, interest rates are weighed down to almost zero and because valuation multiples are effectively their reciprocal, a 1% yield means a nose bleeding 100x multiple.

From a valuation perspective, that’s the new abnormal for the time being and you can thank Ben Bernanke and Jerome Powell for that.

And the world is also trying to balance on technological plates tectonic as cloud, Ai, mechatronic, fintech, EV, renewable, China rising, shelter at home and other massive forces smash into each other, grinding out new business models, industries and social fabrics.

Between central bank interest rate manipulation and intentional asset inflation, the Fed has stoked a tectonic movement that’s sure to effect your business and investment portfolio for years to come.

And the Fed and ECB will continue to fuel it, until they don’t.

But when might that be?

Depends on how long the employment recovery will take. If vaccines rip around the northern hemisphere quickly and efficaciously and economies and unemployment rates heal sufficiently, pent up demand will hit quick in highly populated regions and the primary (real) economy will start to reflate.

If this causes inflation (which commodity prices seem to be indicating) then it might be in 2021.

If not, it will take longer and create more main street strain and more central bank interference in markets and fiscal support form central banks (household and business chimney money drops) will be needed, and so the central terraforming of secondary asset markets will continue.

But if and when inflation occurs, there is the question of how long the centrals will let it continue before withdrawing the punchbowl, and starting the long march to normalisation, if that’s even still possible. It will have to be a massive and continuing bout of inflation to enable any material and lasting normalisation.

On the other hand, technology is disinflationary and so is central bank bond buying, so it will be interesting to see how high or low northern hemisphere flation prints in 2021.

I don’t know and I don’t anyone who knows. And if we are in uncharted territory, we might need to implement some uncharted tools and responses.

Anchors can weigh you down unnecessarily.

What I do know is that it can be detrimental to underestimate how much we might be anchored in past thought processes when faced with new information in rapidly changing, and uncharted markets.

It can be dangerous to apply old views to new scenarios in industries that are under constant evolution and revolution and are being terraformed operationally, strategically and financially.

Don’t forget, the market is made up of more players (human and electronic) than you or I can possibly count. And each unit of value in the market looking for a new home looks at the same asset differently, with many looking at options and second derivatives over those same assets, with stop losses in place depending on the position objective.

So, this festive season is a good time to aweigh anchor from our old biases and personal theories and look at what competitor moves and financial markets might be telling us - while remembering what’s happened in the past, but not anchoring oneself to it.

As a business owner and advisor to other business owners and leaders, I typically look at corporate transactions (or personal investments) through a strategic/macro lens to start with. And my lens currently tells me that the DNA of many industries is still being rewritten between plate tectonic collisions.

Until interest rates and central bank balance sheets normalise and technology finishes grinding out new industries, this technic transformation will continue - and the only new normal will be abnormality.

That’s why it’s important to always remember the past, but at the same time unanchor from it, leave port and take your fight to the new competition. The alternative is to risk a pearl harbour attack.

Anchors aweigh!

The difficult trick in 2021 will be to unanchor your old thoughts which are probably wrong as a result of continued terraforming, and think outside your polygon because your square just grew a few more sides.

If you can look at something not for what it is today, say a new kind of bookstore, but for what it is intending to be in the eyes of a different audience. e.g., a whole new system of retail, you might then be able to bridge the valuation gap or at least explain its attractiveness to others.

Most of all, if you can identify the changes in your industry’s competitive landscape and realign your business to deliver killer solutions into it, or better still lead or reshape it, your business is going to win big.

Happy Holidays, stay safe and until we meet next year, anchors aweigh!

Best wishes,

Mike.