Return to Risk-On
Risk in asset market is a lot like matter in physics. Best laid plans and marketing pitches aside, risk is never really created or destroyed. Instead, we move risk around, share risk and decide if we will acknowledge our scary friend or not. After the great risk surge of 2008-2009 was buried under trillions in policy accommodation, we have been on a really great run for asset prices, technology related and start-ups assets particularly. This involved swallowing risk, planning on taking risk and feeling like risky was not risky. We have gotten really good at pretending the world is less risky than it is and will be. Across growing geographies we are now seeing sudden and pronounced displays of the inherent risk of risk assets – I suppose there is something in the name. We are also seeing a sudden, mass re-acknowledgement of risk. We have two resets at once, one cyclical, rational and somewhat predictable and another, well that second is very hard to get arms around.
As emerging markets have started submerging, currencies and all, support structures for high technology, start-up valuations have been eroding too, just no one cared to notice. Great pools of investable wealth have been chasing returns. High commodity prices, new fortunes and institutional funds have been funding – directly and indirectly- recent aggressive rounds of private funding. Long and sustained commodity booms loaded high net worth, family office and sovereign fund coffers with vast pools of wealth spent chasing the newest and hottest investments. Policy rates have been at or near zero real returns, low risk assets offer nearly assured, inflation-adjusted losses. Some of this wealth has found its way to tech startups and helped swell the unicorn herd, in the US and globally.
Many start-ups will find a positive path through the difficulty that is worsening and spreading through public markets, commodity prices, developing world currencies and macro economies. Some will not come through the storm. For most, valuations will be tested and not everyone will pass. Opinion and opinion pieces tend to oscillate between extreme bullishness with assertions of omnipotence and lessons learned. Dueling extremes and bold forecasts of smoldering wreckage engage passions, they rarely shed true light. The future is probably less exciting than the recent past. We will see more caution and cautiously funded evolution and a bit less hype and claims to revolution.