Whiplash for Businesses

Why inconsistent policy is bad for operators

Okay so I had a cameo on the Complete Intelligence show (watch it, they’re great!) and we chatted a bit about markets and policy, and specifically about how erratic policy makes life hard for people who run businesses.

Imagine you sign up for a CSA. For those of you who aren’t weird rural hippies, CSA stands for Community Supported Agriculture. Basically, in the spring you buy a ‘share’ of produce from some local farmer, and then each week during the harvest months they bring you a big bag of food — whatever they grew that’s good and fresh. They’re pretty great, and you learn to cook with all sorts of stuff that’s high quality and hasn’t traveled thousands of miles in some obscure nitrogen-packed cold chain. Big fan.

Anyhow, what’s cool about them is that like… it’s a futures market. The farmer is short forward produce futures, and you’re long forward produce futures with the full intent to hold the contract and take delivery. Fun!

And the reason this exists is that it helps farmers fund the equipment and the labor associated with planting and harvesting, and this in turn highlights what markets are for and why we value them as a society: they help business work. They help businesses de-risk their operations. That’s awesome because in aggregate this means we all have more stuff (more business activity if it’s less risky) and also ultimately cheaper, so it’s kind of a pro-abundance thing for societies to have markets.

But here’s the thing: policy can impact the futures curve.

We see this in oil markets right now: we’re not sure what our stance on the energy sector is, and that’s causing a lot of uncertainty. There’s no particularly coherent energy strategy in the USA because the parties are at one another’s throats and we all know policy will wobble a lot depending on how elections go. Like, there’s this sense that we kinda want to go green, but also we just saw Europe really fuck that up by not having an energy transition plan so everyone is a bit nervous and it’s damn hard to know how to deploy capital (as an energy company) into that environment. And capital discipline is important to that industry because they just got blown out by the fracking boom not too long ago, so people are a little twitchy.

And all that uncertainty causes a lot of whip in oil prices and in the oil curve, and that makes business harder and that’s overall kind of anti-abundance for energy — at least for the strategies we have for making it right now. Yes, we should develop new strategies, but also… having a coherent and stable policy framework would be kind of a free win in terms of making life better now.

Oh, and more importantly: this is also happening with the Fed, because the Fed flips the levers that influence the current and forward price of money. And wow have they been flipping those levers recently.

First, in response to the pandemic, they hit the gas and generated this massive boom by 1) liquidating a bunch of savings and dropping that into the economy, and 2) making borrowing money free. These things take about 18mos — 2yrs to hit, so we’re still kind of wallowing in that excess capital now, and in the interim all these businesses got hit with a bunch of business (pricing pressure) and all had to staff up to handle it (labor shortage) but… well, sadly it was an engineered boom which the engineers have now decided shall reverse.

The reversal isn’t really here yet just because of the timing thing, but the rate of change slowed a while back so there’s already a cooler, plus some higher beta sectors are starting to feel the early part of the wave. Why is this important? Because… well, because things changing this fast is unusual.

For most businesspeople I know, this is the most extreme reversal from go-go-growth to layoffs that any of us have ever seen. The forward P&Ls everyone was running 9-12 months ago look nothing like the projections people are using today, and this is a near universal. It’s really wild.

The labor market 9mos ago in tech was the tightest, hottest thing I have ever seen. And this week Stripe just announced a 14% layoff. Stop for a minute and think about that, it’s really just incredible. Think about the change that implies at a company that size, like the delta in the internal narrative alone is so intense it damn near implies a fairly severe culture change in the company, and culture changes in big companies are expensive maneuvers.

Business is getting harder, because the act of business is basically wrangling a bunch of assumptions about forward prices — the price of labor, of input costs, of whatever you’re selling. It’s a complex, matrixed futures trade that FP&A teams try to wrangle all day long.

And those futures are whipping around at rates most of us have never seen in our careers. We need consistent, steady policy if we want to change that. Doesn’t really appear consistency or steadiness is on offer anytime soon, simply because we’re all too polarized.

So it’s gonna stay hard for a while.