July 27th (Modern Constraints on the Free Market)

Greetings all,

It is Wednesday, July 27th and we have received a decision from the Fed: Chair Jerome Powell, following the conclusion of the Federal Open Market Committee's meeting this morning, announced that the Federal Reserve would raise the Federal Funds rate by 75 basis points to a range between 2.25% and 2.50%. Directly thereafter, markets rallied after the meeting because Powell was guarded in his remarks concerning upcoming rate rises and hinted at an eventual slowdown. The S&P 500 gained 2.6% to close at 4023.61. Yields on the benchmark 10-year Treasury note fell to 2.79%. Given Mr. Powell’s declarations that the Fed has to cause slower growth and rising recession risks to bring down inflation, “it is a bit surprising that all assets reacted in such an exuberant manner,” said Michael de Pass, Global Head of Linear Rates trading at Citadel Securities. Mr. Powell also said Wednesday it was premature to say whether the Fed would decelerate the amount of its rate increases to a half-percentage point or a quarter-percentage point at its next meeting in September. Even so, he stated that at some undisclosed date, it would be appropriate to slow the pace of rate increases in order to evaluate their cumulative impact on the economy. “These rate hikes have been large, and they’ve come quickly,” Mr. Powell observed, referring to the Fed’s fourth consecutive rate increase since March.

“And it’s likely that their full effect has not been felt by the economy, so there’s probably some significant additional tightening in the pipeline.” The Fed chairman stated that the deceleration in economic growth during the second quarter had been significant, citing signs of cooling consumer spending, hiring and housing activity. “Are we seeing the slowdown in economic activity that we think we need?” Mr. Powell inquired. “There is some evidence we are, at this time.” Mr. Powell stated the Central Bank wasn’t likely to slow down rate increases simply because of slower economic growth. That is because with inflation running well above the Fed’s 2% target, Powell wants to see economic growth fall below its estimated long-term trend of around 1.8%. “Not just tolerating below-trend growth but saying it’s necessary now puts a different gloss on acknowledging the slowdown in spending and production,” said Jeremy Schwartz, an economist at Credit Suisse. The Commerce Department will release its findings Thursday on U.S. gross domestic product, the broadest measure of goods and services produced across the nation, for the second quarter. In recent years, low inflation has afforded the Fed more flexibility to 'expeditiously' slash rates in reaction to growth slowdowns, but officials don’t have that luxury right now because inflation is extremely high. Central Bank Governors are worried about consumers and businesses expecting inflation to remain elevated, which economists observe as a real causal agent in estimating how Inflation may evolve over time.

“There’s no working age American who has traded [bonds] in a rising inflation environment,” said Mr. Morehead. He thinks likely that the Fed will raise the fed-funds rate to 5% or “some number that nobody can get their head around,” he said. Since the Fed raised rates by 75 basis points last month, several other central banks have hastened their own rate increases across the globe. Investors have responded in ways that?signal increasing apprehension about an incoming recession. Oil and commodity prices have tumbled, market-based measures of future inflation and bond yields have also tumbled. The fed-funds rate, an overnight rate on loans between banks, bears significantly on borrowing costs throughout the economy, including rates on mortgages, credit cards, auto loans, and business loans.

Now, here are today's headlines in the VC/PE ecosystem:

An investor whose expedition into venture capital included work with Google and the U.S. Department of Energy has raised a $25 million debut fund for Twine Ventures, one of a consortium of venture firms raising pre-seed funds. Leshika Samarasinghe formed San Francisco-based Twine in 2021 to propel what she sees as purpose-driven startups seeking to solve giant problems in healthcare, fintech and climate technology. She began capital-raising in the third quarter of last year and closed the fund in the spring, drawing capital from institutions and individuals. New venture firms have proliferated as investors, enticed by strong returns in the industry, have pursued venture funds. U.S. venture funds raised an estimated $138.9 billion in 2021, up from $85.4 billion in 2020, according to PitchBook Data Inc. Venture investors developed 1,179 first-time funds from 2017 to 2021, according to the firm. These new firms now encounter the challenge of yielding returns that would justify the creation of a second fund at a time when the economy is contracting and few companies are going public.

David Schummers, chief executive of Apella Technology Inc., which manufactures sensors and AI engines to help hospitals improve surgery workflows, said he extended the company’s Series A round so Twine could have the opportunity to research and participate. Ms. Samarasinghe has facilitated the hiring process for Apella through recruiting engineers, including some from public healthcare, by convincing them on the value proposition that the firm has and the problems it is working on. “Her success rate in convincing candidates that this would be the right choice for them, in a market that is very candidate-friendly, has been very high,” Mr. Schummers said. Twine has also invested in Alaffia Health, which uses AI to helo health insurers curtail overpayments stemming from fraud, waste, and abuse. Ms. Samarasinghe is uniquely equiped with knowledge of the industry, its' competitive landscape and potential partners for the company, said co-founder and CEO TJ Ademiluyi. “From the first call we had with Leshika, I could see right away she was really sharp on the problem we’re solving,” Mr. Ademiluyi said. "Purpose-driven companies have an edge when it comes to attracting and retaining talent", Ms. Samarasinghe said. “This next generation of founders want to work on something that matters,” she stated.

Aidoc, a startup that provides artificial intelligence-based software designed to help radiologists swiftly identify strokes and other illnesses, has raised $110 million in new funding to further stimulate the use of its technology in hospitals. Aidoc, based in Tel Aviv and New York, is one of?a series of startups?seeking to use AI to augment the efficiency of healthcare, for instance, in catalysing drug discovery,?linking patients with clinical trials?and helping drugmakers and physicians?extract life-saving insights from data. As AI technologies proliferate, it has become increasingly more difficult for companies to excel at a time when health systems are inundated with pitches. Startups are attempting to offer increasingly thorough offerings that set them apart from the pack. Aidoc says its software assesses images, such as from CT scans, and highlights those that reveal anything that necessitates immediate attention. That way, radiologists catch those images first and diagnose more extreme conditions—brain bleeds, lung clots and others—quicker. Founded in 2016, the company says over 12,000 doctors at over 1,000 medical centers in the U.S., Europe, Israel, Brazil and Australia already use its software. But radiology imaging is just one part of a patient’s care, so Aidoc raised this new financing, which brings its total funding to $250 million, in order to broaden the scope of its technology so that it can be used in other parts of the hospital.

Lastly, today's topic concerns the modern-day constraining mechanisms on the exercise of free markets across the globe. Well firstly, what exactly is a free market? The free market is a vast network of interrelated exchanges that occur within nation-states and between nation-states. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two or more economic goods, either tangible commodities or intangible services. Thus, when I purchase a newspaper from a news dealer for fifty cents, the news dealer and I exchange two commodities: I remit fifty cents, and the news dealer supplies the newspaper. Or if I work for a corporation, I exchange my labor in a mutually-agreed fashion subject to certain laws and conditions for a monetary salary; here the corporation is represented by a director (an agent) with the authority to hire candidates of employment. Both parties participate in the exchange because each expects to acquire some benefit or gain from it. Additionally, each will repeat the exchange the next time (or refuse to) because his/her expectation has proved correct or incorrect in the very recent past. This type of exchange, formally called trade, is practised precisely because both parties benefit; if they did not expect to gain, they would not rationally assent to the exchange. This simple reasoning invalidates the argument against free trade prominent in the "mercantilist" period of 16th to 18th Century Europe, and classically expounded by the notable sixteenth-century French economist Montaigne. The mercantilists argued that in any trade, one party can benefit exclusively at the expense of the other, stipulating that in every transaction there is a decisive winner and loser, an "exploiter" and the "exploitee." We can immediately see the fallacy in this still-popular viewpoint: the interrelated social facts that both parties are I) willing to engage in the exchange and II) possess different views concerning the material value of the good for which they are relinquishing and the good for which they are acquiring demonstrates the validity of the simple free-trade argument explained above.

Some of the most prominent and impactful constraining mechanisms on the free market today are: Central Banks, Administrative and Bureaucratic agencies, and Artificial Monopolies. Central Banks are potentially the most repressive force on the free market because of their active role in 'regulating' the money supply; since Central Banks are incapable of disseminating a fixed supply of the nation's legal tender, they frequently fall prey to disseminating too much money into the marketplace which results in inflation or they don't disseminate enough money into the marketplace which results in deflation or stagflation. Additionally, an even more cataclysmic symptom of printing money is the obfuscating effect it has on private property. In an inflationary or hyper-inflationary environment, the purchasing power of each U.S. dollar decreases exponentially which forces consumers to constrain their discretionary spending initially, but eventually debilitates them from paying for essentials (food, energy, and transportation). Administrative and Bureaucratic agencies also exert a constricting force on the free market because their actions make voluntary exchange exponentially more cumbersome and laborious for business owners. If it becomes extreme enough, business owners are unable to derive any operating income after fixed and variable expenses are accounted for. Finally, artificial monopolies also constitute a constricting force on free markets because they too obliterate the capacity for market participants to engage in voluntary exchange. If they are not competing service providers for the same good or service in a particular industry, then consumers are essentially forced to buy from that artificial monopoly and are unable to freely negotiate with other service providers. An artificial monopoly, to clarify, is a monopoly which develops because of the Governments' willingness to subsidise the firm and eliminate any potential competitors from doing business in the same industry through creating artificially high infrastructural costs and other barriers to entry.

As always, if anyone has any queries, please message me directly on LinkedIn or email me at [email protected]!

With gratitude,

Will