Netscape floated its shares on August 9, 1995, and they doubled in value that day. This was big news at the time, and it foretold a massive rush of human and financial capital to northern California.
Did an “easy” Fed instigate this? Try to be serious. The Fed vainly tries to assert its wildly overstated influence through banks that can’t touch the risky, almost-always-failing startups of the technology sector. Instead, what powered the rush was possibility. If Netscape’s shares could soar as they did, what other internet-style companies offered the potential for similar outsize gains?
It turns out many did. The internet would change commerce and life as we knew it, and valuations reflected this optimism. Eventually the first day doubling of IPO shares would appear as commonplace. In other words, over the next five years Netscape the company, along with its initially eye-opening IPO, would be forgotten in a figurative sense as other splashy offerings eclipsed it.
It’s something to keep in mind as the simplistic in our midst look to the Fed for clues as to whether the U.S. economy will continue to grow, or not grow. The reality is that economic growth is born of talent being matched with resources, and the Fed has neither on offer.
So, while history will look back on this kind of reporting as comical, it’s notable that last week a front page Wall Street Journal story suggested that “financial conditions are doing less to cool the economy.” You think?
Backing up a bit, the near-monolithic view among Federal Reserve economists (and to be fair, economists in general) is that economic growth causes demand to outstrip supply on the way to higher prices. Except that supply is what precedes all demand. By definition. After which, economic growth is just another way of describing productivity, and productivity is all about falling prices. In short, economists get it backwards. The surest sign of growth (meaning productivity) is plummeting costs. Basic stuff.
Bringing this back to “financial conditions,” that the Fed’s machinations aren’t cooling the economy is a statement of the obvious. Central planning is the picture definition of slow growth. Do you remember the 20th century? Which is just a way of saying that if the Fed were capable of allowing or dis-allowing productive economic activity, then it’s safe to say that financial conditions would always be awful, and the economy always in decline.
Except that the Fed’s relevance is as mentioned vastly overstated. For evidence, we need only consider Silicon Valley some more. In 2022 venture capital firms started to rein in their portfolio companies. With private valuations in decline, so declined the capital flows to the Valley’s “unicorns.” The “tight money” was a consequence of rising pessimism among investors, including pessimism about investor interest in future IPOs of these unicorns. Call it the Netscape effect in reverse.
What does this hopefully convey to readers? It’s something fairly simple: tight credit or skeptical capital flows don’t cause economic downturns as much as they’re a consequence. Which is hardly some kind of revelation. To believe otherwise, is to believe that central planners cause investors to forego impressive returns just by fiddling with the artificial cost of borrowing.
Bringing it all into the present, the past year has been defined by ongoing and fairly persistent layoffs in the technology space. The simple in our midst naturally point to the Fed. They deserve our ridicule.
Indeed, as we’ve seen with the $10 billion+ that has migrated to AI concepts in the first quarter of 2023 alone, capital is abundant where it’s expected that returns will be abundant. Yes, “financial conditions” are a reflection of reality, not the discredited theories of central bankers.