Riding the Roller Coaster

Could the macroeconomic environment be any more screwed up? Just when you thought it was safe… Fact is, there are no band-aids for the current economic crisis. It’s high time for old US shibboleths to be cast aside to make way for pragmatic solutions and long-term thinking. People need to get over the issue of taking over hopeless banks, even if they happen to be really, really big. Let’s get on with it. Many also need to come to terms with modifying mortgages for millions of homeowners on the edge. We can argue forever about how it’s not fair, the borrowers screwed up, etc., but we are way, way beyond the point where intellectual jousting will help us achieve a better outcome.

Picture this: 10-15% unemployment. Millions out of work, millions more out of their homes. What will this do to our psyche as a nation, as Americans? Are we going to live with industrial cities across Middle America becoming Hoovervilles and shanty-towns? This was a version of America known by many of our grandparents, a version which most thought impossible to see again because of “enlightened” monetary and fiscal policies. Well, if we don’t play our cards just right – and quickly – we might awaken to see the nightmare of generations past.

It is clear how Congress, President Obama and his advisers are looking at the banking crisis: as a giant option. By injecting cash into sick institutions (Option Premium), they are hoping to buy time value (Theta) in order to asset values to rise back to their marks and beyond (Intrinsic Value). There are, however, a few (very large) problems with this analysis: even by stuffing hundreds of billions of dollars into sick banks, it neither creates banks willing and able to lend nor builds trust in our financial institutions. Without addressing these points bank asset values will continue to decline, wiping out the value of the US taxpayer’s investment and leaving us worse off than we are today. And option value will have worked in the opposite direction: we will have burned valuable time pursuing patchwork solutions instead of swallowing the bitter pill of taking over our largest, sickest banks.

Trust is at an all-time low. Madoff. Stanford. What exactly did Ken Lewis discuss with John Thain about bonuses? Every day there is a new scandal, a new probe, a new indictment. It is almost as if the fates are conspiring to test our mettle. What’s really happening is that rising markets mask a lot of problems (and wrongdoing); how else do you explain billion-dollar Wall Street research budgets only seven short years ago that are now threatening to plunge towards zero? In short, sentiment absolutely stinks. But is the market really pricing in the possibility of a draconian 10%+ unemployment scenario with multi-trillion dollar deficits? I don’t think so.

As bad as the public markets feel, the private markets feel much better. Sure, you need a long time horizon to play, but it is hard to describe the early-stage vibe. Money is tight, no doubt. But deals are still getting done, even as the public markets grind down, politicians bicker, and global unrest looms. Social media is alive and well, and advances in ad targeting and ad optimization continue to produce fresh start-ups. I am super excited about new investments like Stocktwits and TweetDeck, while existing portfolio companies such as Buddy Media, TheLadders.com and Clickable continue to do very well. And the deals – good deals – just keep coming. As negative as I am towards the public markets is how positive I am about early-stage investing. While a vibrant public market certainly helps private companies, well-positioned firms can still thrive either by disrupting and taking share in established industries or by creating new markets and opportunities that didn’t exist previously.

Every day these days feels as if I am riding an emotional roller coaster. And from where I’m sitting there appears to be no end in sight.

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