SITALWeek #208
Stuff I thought about last week 9-1-19
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, robotic brain worms, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback. -Brad
In today’s email: the Apple-Goldman Sachs-Mastercard shows us how the card networks have successfully bullied tech companies away from innovation in payments; the special culture of Redfin; how Hume’s relative view of perception directly informed Einstein’s Theory of Relativity; big companies are joining governments in borrowing at negative rates for the first time; China makes progress on semiconductors, but the US keeps the upper hand in the tradewar. And, lots more below...
Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL (please note some ad blocking software may disrupt the signup form; if you have any issues or questions please email sitalweek@nzscapital.com)
Stuff about Innovation and Technology
Life imitates Sci-Fi: just as production is beginning on the 4th Matrix movie, researchers at MIT have developed a threadlike robot worm that can navigate inside a brain. If you are prone to nightmares about robots tunneling into your brain, don’t watch the video in that link!
This week I went on CNBC’s Squawk Alley and discussed two of my favorite topics: semiconductors and media stocks. Thanks to producer Ben Thompson for inviting me on and host Jon Fortt for chatting with me!
John Rotonti at The Motley Fool wrote this thoughtful framework of ESG characteristics of management teams including some very kind comments and excerpts from NZS Capital’s Complexity Investing and Non-Zero-Sum papers:
“To read more about a new competitive advantage framework based on a company's ability to adapt and innovate, check out the white paper titled Complexity Investing that's taking the investing world by storm.In the paper, Johns and Slingerlend argue that investors need to rethink the allure of qualities like legacy moats, ultra-fast growth, and even pricing power and rather focus on a company's ability to innovate and adapt in the digital age, all while providing win-win situations for the company, its customers, and other constituents involved.”
Speaking of management teams that exemplify NZS (non-zero-sum, or win-win) thinking, this interview with Redfin CEO Glenn Kelman is exemplary of what we look for in CEOs we invest with:
“You have to treat the culture of the company as some kind of living, breathing thing. You're not placing it under a slide or encasing it in amber. You're trying to make it better every year and someone new who shows up has something to add to that, not just something to learn about it. The fundamental trait of this company is humility...The company can be a little bit goofy, there's an authenticity to that. Part of who we are is just an acknowledgement that every company is just a collection of dingbats. A group of flawed human beings. Sweaty, hairy mammals who are trying to figure something out. It goes forward and then back, but hopefully more often forward than back.”
And, while I am praising Glenn Kelman, this blog post – describing his recent stint running product at Redfin – is enlightening, to say the least:
“We spend a lot of time filling one another’s brown paper sacks [with compliment cards]. When I was the age of many of our product managers, I was the brown paper sack, existing purely to get praise.” (This quote probably hits a little closer to home than I’d like to admit!)
On the other end of the spectrum, here’s a management team that seems to embody the opposite of non-zero-sum thinking: Johnson and Johnson CEO Alex Gorsky is currently featured on the cover of the September 2019 Fortune Magazine “Change the World” issue for spearheading the Business Roundtable’s efforts to go beyond shareholder value. However, somewhat embarrassingly, at the same time J&J is appealing a jury award in an opioid addiction case. I don’t pretend to understand the legal reasons why J&J is appealing this verdict, but it certainly highlights the firm’s role in the rampant opioid crisis. As I said last week, broadening the purpose of a company is a major cultural shift, and it's much more easily said than done.
When you swipe your slick, new Apple Card powered by Goldman Sachs and Mastercard, it appears that Mastercard can leverage your data in far reaching ways such as letting Google determine whether an ad you saw online is linked to buying something in a physical store. In other words, while Apple and Goldman have worked to restrict the sale of some transaction data, it may not apply to the Mastercard part of the Apple Card. And, this isn’t just the Apple Card, of course, it’s every bank- or retailer-sponsored Mastercard and Visa card in your wallet. I mentioned recently the less-than-optimal “NZS” levels of credit card system, suggesting that there remains a risk of both government regulation and technological disruption in the future. This type of purchase tracking is another example of a win-lose rather than a win-win with cards. I get nothing from my bank or a card network selling my data; and, in fact, it could have negative consequences in the event of a data breach or improper use by a 3rd party (for example, in most marketing databases I am labeled a “frequent gambler” even though I never gamble because I attend numerous IT tradeshows in Las Vegas for stock research!). The entire transaction chain – retailer, point of sale, merchant acquirer, card network, and issuing bank – is spying on you, as this WaPo article points out, with an eye towards exploitation. A criticism of my view on credit cards defends the ubiquity and convenience of the current card payment system. It’s popular to raise the golden “network effect” defense of credit cards payments. I don’t completely disagree, but the stranglehold of Visa and Mastercard in the US is causing consumers and merchants, notably small businesses, to miss out on progress and innovation, as evidenced by less than 10% consumer adoption of mobile payments in the US despite their widespread use in other parts of the world. We have to question: what has stopped PayPal, Square, Google, Apple, Amazon, and others from creating a new, closed-loop system with lower transaction costs, better user benefits, and friendlier borrowing terms? For the answer, we don’t have to look any further than the CEO of Visa himself for publicly threatening and bullying PayPal:
“For consumers, the difficulty of using credit cards on PayPal was an annoyance, but for payments companies, it was a threat. In the U.S., retailers pay $90 billion every year for payment processing, making Visa and Mastercard fantastically profitable. Visa, whose network processes $10 trillion in debit and credit transactions annually, was particularly frank in its hostility to PayPal. ‘Anyone that’s trying to take your customers and disintermediate you is not a friend,’ CEO Charlie Scharf said at a May 2016 tech conference. Visa would love to cooperate with PayPal, he insisted: ‘The other door is where we go full steam and compete with them in ways that people have never seen before.’ Visa and Mastercard threw resources into developing PayPal-killing digital payments platforms of their own.”
Under the current system, the card networks seem like monopoly abusers that are able to keep companies as large as Apple locked into the archaic US transaction chain that siphons value away from businesses and consumers. I am still swiping my retailer-branded, big-NYC-bank Visa card that is selling my data and exploiting the system, but I sure hope someone is courageous enough to challenge the status quo. Ideally, I’d like to see a company start from scratch with a disruptive system like Facebook wants to try with Libra, but one intermediate step would be a tech platform leveraging the infrastructure of Discover or Amex by partnering or acquiring. Discover and American Express are mostly closed-loop systems, though they still depend on point-of-sale terminals and other parts of the transaction chain, and a tech platform could more easily leverage their infrastructure to innovate a more consumer and business friendly payment option. Absent a disruption, Mastercard and Visa are likely to continue to be good stocks, but I’m left wondering what innovation we might be missing out on? I really appreciated all the pushback on my less-than-positive view of the credit card ecosystem a few weeks ago. I’m a true fan of Bayesian Logic: start with a view, and then absorb all positive and negative evidence objectively – so keep those arguments coming at me!
Google is a big proponent of using ethical hackers to find software vulnerabilities. The company has already paid out over $15M in bounties, and is now extending the program to Play Store apps with over 100M downloads. The partnership is with HackerOne – the premier platform for leveraging hackers to safely find security problems in software – which is run by the very thoughtful CEO Marten Mickos. Earlier this year, Google exposed a serious threat in Apple’s iOS Safari browser that allowed for a complete phone takeover just by passively visiting a website. The high-stakes Apple security flaw was allegedly created by China to target Muslim minorities according to Techcrunch.
Despite new chips from Intel and others targeting the AI market, NVIDIA remains dominant due to a combination of chip advancements and the network effect of the company’s superior CUDA programming platform. This lead is being held with a chip that is two years old, but seeing 80% performance improvements due to software upgrades. With NVIDIA’s next-gen AI chip on the horizon, their lead could extend even further.
As chip companies work around the slowing of Moore’s law with chiplets – stacking multiple chips into a single package – complexities are abounding. The industry is several years away from Cadence, Synopsys, Ansys, or others solving the design-and-testing complexities as this Semiconductor Engineeringpanel discusses. “When you put together two high powered chips on top of memory, will the memory hotspot be shifted because of the SoC thermal hotspot? So, the interactions between the dies or the stack is challenging. There are many challenges in addition to thermal integrity such as electromagnetics challenges, capacitive coupling, inductive coupling between the dies.”
Huawei continues to believe it will eventually get by without US semiconductor companies – a claim that I continue to question. This week the company discussed the Ascend AI chip, which was designed by Huawei engineers using US design software, and it will be made in Taiwan with TSMC’s 7nm process using US and European manufacturing equipment. Huawei also has many ARM-based chips, which could be problematic in the future due to US restrictions; thus, Huawei is considering using RISC-V open-source chips, but those also would require US intellectual property to design and manufacture. China has a long way to go to reach chip independence, which continues to give the US the upper hand in trade negotiations.
Yet, there is some progress for Chinese homegrown semiconductors in the microcontroller (MCU) segment of the market. GigaDevice is a Chinese company that has released a RISC-V-based MCU that is pin-for-pin compatible with an ARM-based STMicro processor. Importantly, software running on an ARM MCU will run the same on the new GD chip. GigaDevice’s history in flash memory gives them an advantage in chips like this one, which reportedly integrates memory function. Early applications of the GD RISC-V MCU are thermal printers, multi-touch screens, air purifiers with ozone and motor control, etc. Next up, the company will be adding RF capability such as WiFi.
“GigaDevice believes it has built ‘The bridge with RISC-V’ – a path for companies who have been designing with Arm-based MCUs to quickly make the switch to its RISC-V based replacements. The ‘complete compatibility’ between the two product families should ensure the reusability of the code, the company said, ‘making cross-core MCU selection and design’ very convenient. ‘This is our very leading, unprecedented innovation,’ according to GigaDevice.”
After 30 million people have had their DNA tested, the market has hit a wall. Privacy concerns may in part explain the slowdown that has impacted technology providers, like Illumina, in recent quarters. Ultimately, however, DNA testing was about companies like 23andMe gathering enough data and users to run panels and studies with big pharma while also finding potential drug testing subjects. 30M probably is plenty until we can get some useful results from the data, which, given the complex interactions of genes and gene products, may be a long ways off.
Epic, the maker of Fortnite (which is also part-owned by Tencent), is trying to disrupt the video game marketplace model by only taking a 12% cut of revenues, dramatically undercutting the dominant PC game download platform Stream, who charges 30%. If successful, it’s also a challenge to the typical app store take-rate model, which, if toppled, would be a boon to video game publishers. This move is evidence of the high-stakes, multi-platform war brewing between Google, Microsoft/Sony, Steam, Epic, and others as social and broadcast elements of video gaming become more popular and the market shifts to streaming.
Elon Musk and Jack Ma held a debate at an AI conference in Shanghai last week. The two disagreed on most issues, as Ma is optimistic humans will harness AI, while Musk remains concerned it will be the other way around. However, both agreed one one point: that population collapse is a problematic scenario (something I wrote on in more detail down in the macro section of SITALWeek #206). I also agree with Ma’s view that dramatically shrinking the working week – to around 12 hours – would be enabled by humans working in conjunction with AI (and, I think, would help offset potential problems stemming from a population collapse).
Last Sunday I suggested I’d much rather see Amazon spend money on exclusive premium content or acquire other content assets, and this past week they did just that. The company joined a group that acquired the YES Network (NY Yankees) from Disney.
Let down by increasingly partisan media, teens are leveraging Instagram and other mediums to create news platforms for a younger generation.
Miscellaneous Stuff
Hume is probably the closest Western philosophy came to Buddhism. As Bertrand Russell discusses in The History of Western Philosophy, Hume posited that there was no self, i.e., every time you look, you only find some perception of something, like feeling cold, not ‘a self’ that is cold. And, humans are just a "bundle or collection of different perceptions, which succeed each other with inconceivable rapidity, and are in perpetual flux and movement." I was reminded by this article that Einstein’s theory that proves time is relative was heavily influenced by Hume’s writings. It seems as though we’d be much less likely to have the theory of relativity had this philosopher, who lived 200 years before Einstein, not caught his attention. “Hume’s philosophy of time shows the fundamental relevance of the relation between an observer and a reference object. There is no evidence for absolute, self-existing time. Nor is there evidence for one universal time. There are different times, depending on the observer/reference-object relation. It is not ‘possible for time alone ever to make its appearance’, as ‘time is nothing but the manner, in which some real objects exist,’ writes Hume.”
The brain is a prediction machine and it’s not showing you any sort of objective reality. This Scientific American article is a great overview of the various ways in which objective reality is anything but real:
“Yet we have known since Isaac Newton that colors do not exist out there in the world. Instead they are cooked up by the brain from mixtures of different wavelengths of colorless electromagnetic radiation. Colors are a clever trick that evolution has hit on to help the brain keep track of surfaces under changing lighting conditions. And we humans can sense only a tiny slice of the full electromagnetic spectrum, nestled between the lows of infrared and the highs of ultraviolet. Every color we perceive, every part of the totality of each of our visual worlds, comes from this thin slice of reality.”
Speaking of problems with objective reality, Randonauts are people who think that we are in a simulation that can be glitched by traveling to random places. This scenario raises all kinds of amusing questions about free will: are they really going to random places, or is it all just part of the predetermined simulation? ;-) Likewise, the author paraphrases Schmidhuber: “...what we perceived as randomness was in fact a result of our puny human brains being unable to transcend the sense of perception we’ve been given.” And, as I’ve highlighted recently, usually once the subjects of an experiment find out they are part of an experiment, the experimenters shut it down...so maybe we should all act real predictable for a little while to allay suspicions.
By land or by sea? Newly discovered ancient human remains in Idaho suggest that early settlers to the US came by boat across the sea and then went up the Columbia, Snake, and Salmon rivers more than 16,000 years ago rather than walking across the Bering land bridge thousands of years later.
Targeting the 90B units/year plastic cup market, Ball Corp has debuted it’s much-anticipated aluminum cup (for reference, the current aluminum can market is around 300B, while the plastic water bottle market is 500B units/year). The first ever of its kind, the infinitely recyclable 20oz design will launch at entertainment and sports venues this Fall. The cups are cool to the touch and can carry branded logos.
“Ball’s research shows that 67 percent of U.S. consumers say they will visit a venue more often if they use aluminum cups instead of plastic cups and that 78 percent of consumers expect beverage brands to use environmentally friendly containers in the next five years.”
Stuff about Geopolitics, Economics, and the Finance Industry
The 'roller coaster' nature of Trump’s trade deal negotiations has created a lot of volatility in the market, which is actually great for long-term, active investors. This reminds me of something NZS Capital’s co-founder Brinton Johns said about risk in an interview this week, which sums up nicely how we lick our chops at market volatility: “Most of the market defines volatility as risk; we define it as opportunity.” (I’ll link to the podcast interview in SITALWeek when it posts.)
In lieu of boring everyone with yet another long exposition on declining interest rates, Brinton suggested I post this much more insightful video clip from our time traveling friends Bill and Ted. (But, if you can’t get enough of me rambling on interest rates, you can always re-read last week’s macro section connecting inequality, deflation, government policy and negative rates!)
As bond yields continue their 35-year decline, and Siemens issues the first zero-interest-rate corporate bond (and, it’s priced at a negative yield!), private and public pensions are facing a massive funding crisis, which will likely lead to benefit cuts and riskier investments, including those in the low-liquidity, private-asset market. As we know, when there is any sort of run on the bank for any of these funds invested in illiquid assets, things will get ugly fast.
One of our expressions at NZS Capital is ABCD: Always Be Connecting Dots. The term is borrowed from Danny Meyer’s book Setting the Table. I came across this quote from musician and author Amanda Palmer this week on Twitter that struck a note with me:
“Collecting the dots. Then connecting them. And then sharing the connections with those around you. This is how a creative human works. Collecting, connecting, sharing.”
Disclaimers:
The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”). This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry.
I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.
Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results.
Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.