The guidance of the networks

When there’s a disturbance to one part of the network flow, the change is often felt throughout the mesh, and can be unpredictable. The magnitude and nature of the disturbance, the density and quality of links, direct or indirect transmissions between nodes and clusters that may be differently conditioned and responsive, the causes and effects that may be circular or reflexive, these and other mysteries of large complex systems are redoubled when the mystery of individual behavior is added to the collective. The butterfly effect is essentially a network observation.

The economy is a large multisided marketplace (i.e., a multilayered network), mirrored in the large complex network that is financial markets. The large disturbance of the epidemic, itself a network entity with network patterns and unpredictable complexities, is having a large complex effect on the economy and markets. The final outcome (but who’s to say precisely when that is and what defines it), when the smoke has cleared (which is perhaps a never-ending process), is unpredictable… not only in the aggregate, but individually and for different businesses and sectors.

WSJ – KKR Warns of Damage

Enterprise value broadly speaking, made up of the asset and its optionality, is going to evolve in this time. In theory, the asset value should be shrinking as the underlying business slows or, in many cases, ceases. In theory, the option value – the unknown behind the door – should be growing with the growing volatility and declining funding costs.

With earnings season coming up, there may be hints at how such theory might manifest itself in practice. In a sense, the earnings and guidance report will be a comment on the asset, while the market’s settled value multiple in response will add a comment on the asset’s optionality.

The combination of these two elements will be different in different cases, and results are always more interpretive than formulaic, but when we look for hints of sense in an economic network pattern that is shaken and chaotic, the market network’s reflexive narrative may offer up some guidance.