Axios Capital: When society faces the unprecedented

When the world changes its mind

Our febrile world is not normal.

  • The precautionsthat we’re taking against the spread of COVD-19; the way in which the president of the U.S. delights in violating political norms; the fires, hurricanes and other signs that catastrophic global warming has arrived; the virulent spread of the QAnon conspiracy theory — all of these things, and many more, represent a stunning break with the world as we knew it.

Why it matters: Society is made up of what Santa Fe Institute president David Krakauer calls «collective public ledgers.» Many of those institutions have «tipping points» — the rate of surface change can seem slow, even as deeper underlying dynamics set the stage for a sharp or violent change in public opinion.

What they’re saying: «You can think about bodies of belief like a huge public ledger,» says Krakauer. Every individual inscribes their opinions into the ledger, and most of the time the ledger itself moves much more slowly than private opinions do.

  • Dependingon where you set certain initial assumptions, ledgers can be largely static, they can evolve slowly, they can flip back and forth in a predictably volatile manner — or they can flip suddenly, like a phase change from liquid to gas.

Between the lines: It’s easy to think of public opinion about wearing masks, for instance, as a top-down function reflecting the differing messages sent by various public figures. That’s easy to believe in the U.S., where attitudes to mask-wearing align strongly with political beliefs. But it has a harder time explaining why, say, only 58% of people in Italy regularly wear a mask, compared to 93% in Spain.

The big picture: Krakauer has spent his career studying complexity, which is a defining feature of the pandemic — and of the whole world, at the moment.

  • The virus is a great exampleof a stochastic disease, as Zeynep Tufekci explains in The Atlantic. «Randomness plays a much larger role,» she writes, «and predictions are hard, if not impossible, to make.»
  • The QAnon conspiracy theoryis similarly complex and unpredictable, morphing from its far-right roots to infect wellness influencers and left-wingers like Piers Corbyn, the brother of former UK Labour Party leader Jeremy Corbyn.

The bottom line: After the «black swan» and «25 standard deviation events» of the financial crisis, followed by the victories for Brexit and Trump in 2016, and now a global pandemic, society has started to expect the unexpected and embrace the irrational.

  • People now rationally expectthat unlikely fat-tail events will happen multiple times per year. That expectation in turn makes it much more likely that they will rewrite the ledger of societal institutions.


-How equity became more attractive than debt

The prime example of something highly improbable that became conventional wisdom: The idea that both interest rates and inflation will remain near zero for well over a decade.

Why it matters: As Axios” Dan Primack writes, private equity firms (the polite rebranding of «leveraged buyouts») have historically bought companies and loaded them up with debt.

  • Now, they’re starting SPACs, filled with fresh equity capital, with the intent of taking companies public. «The acquisition part is the same,» says Dan, «but the transaction financing is inverted.»

The big picture: Normally, debt is cheaper than equity, because it is tax-advantaged. In 2005, for instance, the effective tax rate on equity financing was 36%, while the effective tax rate on debt financing was negative 6.4%.

  • What’s changedis that interest rates have become so low that tax-deductible debt service expenses aren’t big enough to generate much of a tax savings. Simultaneously, stock prices are so high that raising equity capital has never been cheaper.

The bottom line: SPACs are less work for private equity companies: Rather than own and operate a company, they will often just take a board seat. But they will still see enormous upside if the deal works out.

  • SPACs also comewith less accountability. There are no deep-pocketed limited partners asking awkward questions, just public shareholders who can come and go as they please.


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