This is the time of year when predictions begin to circulate. For some, it’s always that time of year, especially when value is captured by what happens next rather than what happened last. Arbitrarily, perhaps, the new calendar year prompts the musings to begin in earnest. We step from one plank to another, or we think we do, although these steps are more correctly progressions along a continuum that – despite budget realities – is not so cleanly fenced in by calendars. Psychology, nevertheless, does have its impact on markets and economies, and if we think this is the time of year for predicting, then it is indeed that time, and if we think that pasts and futures meet head-on around new years, who is to say they don’t, the universe notwithstanding.
Respecting custom, therefore, while also cognizant of the continuum, the forecast I would put forth is mainly one of psychology. There is a four-year stretch in our past that will mark its approximate anniversary around this time, and that’s a sufficiently long period to influence the way we are likely to behave into the foreseeable future. A recent study has undertaken to illustrate the differences in management styles between generations, depending on the economic era in which these were rooted, and the same is no doubt true more broadly than in the enterprise per se. I would argue that events in the last four years have been sufficiently profound to plant deep roots from which some substantial biologies will blossom.
I would argue that, scenes of disarray on Black Friday notwithstanding, we could begin to see a shift from consumerism to production, and from value transference to value creation. At some level, there is no difference between stocks and homes and consumer trinkets and angel rounds when these acquisitions cause bubbles to happen; and bubbles are the result of value transference outpacing value creation. When we speak of perceived value exceeding fundamental value, this is a bubble, and when this pops, perception reverts to fundamentals. In markets these days, and elsewhere, the organized effort has been about propping up financial value, buying time for fundamentals to catch up. Fundamentals are about creation, and I expect this to start catching up.
We see these trends already underway in the entrepreneurial community, where makingÂ and innovationÂ are the central forces. That the ascent of entrepreneurship and its assortment of makers and innovators has paralleled other economic phenomena – employment disruption, the popping of bubbles, consumption shifts – is not a coincidence, and I expect that in the year ahead these trends will only intensify. By the same token, however, the funding that has underpinned this wave will become more selective and even cautious, and this is not a bad thing. Distinctions will be drawn between true innovation and merely refashioned apps, between lasting value and temporary splash, and between fashionable investing and purposeful capital.
In the small, private, and early-stage segment of financial markets, empirical evidence is hard to come by, but we can look at stand-ins by proxy for proof that the described theme is already underway. In more mature and voluminous public markets, the analogous phenomenon that describes a transition from fluff to substance, if you will, is going to be seen in a growing preference for income-generating investments and perhaps even a climb up the capital structure to the more senior and secured tranches. Part of this pattern, already happening, is prodded along by diminished risk appetite, but that is only one part. The other is a recognition: After a prolonged period of excess, retrenchment is only reversion to the mean.
For every action there is an equal and opposite reaction, or so the saying goes. When we predict, when we project out into an unknown future, we tend to think in terms of straight arrows and linear outgrowths. The tendency to think rigidly in this way is maybe the same that drives us to mark off certain calendar dates and consider new years as beginnings. In actuality, these are continuations and, to the extent that there is any abrupt change in the pattern, more like pendular swings than new directions. In the year ahead, I look for signs of both, the continuation of certain trajectories already formed, and a market reaction to historical motifs a long time in the making.