SITALWeek #209
Stuff I thought about last week 9-8-19
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, wireless human implants, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.
In today’s email: If you have more berries, will you get more bears? Apple doesn’t worry about security exploits if they are only targeted at ethnic minorities; peer to peer networks used by protesters could soon be implanted under your skin; emergent behavior is a missing ingredient everywhere from investor predictions to climate change models; the NYT explains how a war over Taiwan could start; the fear bubble rises as a record $150B of corporate debt was issued last week; Brinton's 100 mile run, and lots more below...
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Stuff about Innovation and Technology
Brinton and I sat down with Nate Abercrombie at The Stock Podcast for a detailed discussion on our investment process, risk vs. volatility, valuations in various sectors of tech, the risk of a war over Taiwan, team process, and more.
Everyone please wish Brinton luck for his upcoming 100-mile ultra race in Steamboat Springs Colorado starting this Friday, September 13th (Friday the 13th!?). The course clocks in at 101.7 miles with 20,391 feet of elevation gain. Brinton is raising money to help fund research for a rare genetic disorder afflicting the child of a former coworker of ours. You can learn more about that cause and support Brinton at this link.
Criminals used a deepfake voice AI to call an executive at a UK energy firm and trick him into wiring $243,000 to Hungary. There are plenty of executives with enough webcasts and YouTube video interviews to copy anyone’s voice these days. Time for secret passcodes and cones of silence?
Starting in California, Tesla will offer insurance to its owners with savings estimated at 20-30%compared to existing policies. The company indicates it won’t be using sensor data to price insurance, but on-board cameras and sensor access could be very important in terms of determining what happened in an accident. And, it’s hard to believe they wouldn’t offer discounts for safe drivers in the future as well. As more and more cars have data, this could be an interesting revenue stream for car makers to either enter the insurance game or sell their data to other insurance companies, including video footage.
The fast food industry is grappling with a significant increase in employee turnover to well over 100% per year. Turnover adds a high cost to doing business given the time to recruit, hire, and train employees, and is likely exacerbated by the shift to on-demand jobs (now more than one out of three in the US workforce) and the falling teen labor participation. The industry is looking to automate with robots and technology, but the more obvious question is: as consumption shifts to delivery from centralized kitchens with private-label food brands, do we need all these quick-serve restaurants staffed with people? The increasing labor turnover problem isn’t unique to restaurants: Vail Resorts reports an increase in turnover from 11% in 2014-2018 to an estimated 16-18% in 2019 with a cost of $15,000 to replace each employee.
After a particularly wet summer in the mountains of Colorado, a neighbor once remarked to me: “with all the berries, there will be more bears this year.” The spirit of the comment makes sense, but I chuckled at the prospect of bears manifesting out of thin air just because there were more berries on bushes this year vs. last year. I see the Berries=Bears growth strategy often touted by management teams, e.g., “if we have more locations we will have more customers.” While this math may be true when you are forging a new industry or selling an innovative product/service, I don’t think this direct cause and effect holds to the same degree in many industries where distribution and marketing is shifting to digital platforms, like restaurants. Domino’s Pizza stock went up this week on management reiterating targets relying in part on growing locations, because, as we know, if you have more pizza, more bears will show up to eat it! Except now, if the bears pull out their smartphones and can choose from 20+ different deliverable cuisines, simply having more locations might not make much of a difference. Or, maybe it will, time will tell in the widening range of outcomes for the food industry.
There is an increasing trend in local wireless communication networks that run node-to-node or person-to-person, but do not completely connect up to existing cellular or WiFi Internet feeds. Protesters in Hong Kong have been using the Bridgefy App, which communicates phone-to-phone via Bluetooth, and thus cannot be centrally spied on. And, in perhaps the most extreme example I’ve seen so far, this humanimplant can be powered wirelessly to “store hundreds of gigabytes of data, stream movies or music to connected phones or computers, act as a server for an anonymized chat room or forum, and smuggle encrypted files across international borders. PegLeg was designed so that anyone who connects to the device’s network can upload or download files to the hard drive anonymously, but this radical openness raises thorny legal questions about who is responsible for the data stored in another person’s body.”
'Automation bias' is our tendency to believe the output of automated systems more than we should. This is one of the problems with handing over nuclear weapon control to an AI system, which has both clear negatives and positives to consider. Hopefully we have learned from War Games, and the system will be well-versed in tic-tac-toe game theory before it’s given nuclear codes.
Google is facing heightened scrutiny regarding mobile searches that increasingly push organic (unpaid) results out of view. Software company Basecamp’s CEO posted his company’s new mobile search ads, which read: “We don’t want to run this ad. We’re the #1 result, but [Google] let’s companies advertise against us using our brand. So here we are. A small, independent co. forced to pay ransom to a giant tech company.” Adding to the troubles, with Google providing more answers and transactions itself (displaying re-formatted excerpts from third-party sites and featuring Google Shopping results), 50% of Google search results now end without anyone clicking away, causing retailers to rethink how they approach search strategies. In other negative Google news, the makers of Brave – my favorite web browser – have evidence that Google has been secretly collecting and sharing data in violation of GDPR, as the FT reports. Lastly, Google is the subject of a new DoJ investigation and multi-state antitrust inquiry.
Apple is mad at Google for disclosing a serious Safari security breach because (to paraphrase the gist of their argument as I see it) ‘it only targeted an oppressed minority in China, and, therefore, none of Apple's affluent Western citizens were threatened by it’. Apple thinks Google shouldn't have scared all it's customers who aren’t a target of Chinese oppression. Apple’s security flaw allowed anyone to silently take complete control of your phone and its contents just by you visiting a website. By redirecting criticism at Google, Apple has sloppily side-stepped the real issue: the possibly life threatening exploit by China, the country where every iPhone is made. Their response, unfortunately, leads one to question Apple's involvement and motivations in the security flaw. Did Apple even notify the people impacted? How do we know China or others didn’t use this same tactic to exploit Western targets?
The drone bubble has gotten its rotors stuck in a bush following $2.6B of VC investments over the last seven years. In all, 25 companies have shut down and 67 have been acquired. This seems like a case of right idea, wrong timing, as we are likely just on the cusp of an explosion of drone use cases globally.
Lyft is entering the car rental market competing with the likes of Turo and incumbents such as Hertz. Currently only available in a few cities in California, the service comes with a $40 credit for the Lyft ride to and from the car pickup/dropoff location. I am not sure if the primary focus is on rentals for riders, drivers renting their cars out when they aren’t driving themselves, or drivers that want to rent a car to drive on the Lyft platform (or, maybe all three of these). It will be interesting to see whether the power of Lyft’s large base of riders and inspected cars will disrupt Turo, which is an excellent product itself with a large head start.
Texas Instruments has a new robot kit called the TI-RSLK that allows students to build a fully functioning robot in 15 minutes. Related: Magic Leap’s new app lets you assemble a dinosaur skeleton, and then watch it come to life in your living room.
MIT has built a working carbon nanotube RISC-V processor capable of running software. This achievement matters in our post-Moore’s Law world because carbon transistors are faster and more power efficient than silicon. There is a long way to go, but it’s a great proof of concept and a testament to open-source semis supporting innovation in the sector.
Amazon doesn’t compete with Shopify because it doesn’t have to according to Jon Reilly, VP global commerce at Publicis. In the past, Amazon made more than one attempt to provide what Shopify does, but given that Amazon wasn’t a neutral platform, it ended up failing on those attempts to provide e-commerce services for small businesses. “The majority of Shopify’s 800,000 customers are small and medium sized businesses, many of which will fail and be replaced by newcomers trying their luck at the eCommerce poker table.”
History has been kind in forgetting Masa’s investment track record, but gamblers sometimes see their luck run out. The 50% drop in the estimated value of WeWork, the drop in Uber, and troubles at ARM (that we’ve discussed in the past) are just some of the problems the Vision Fund faces. A propensity to lever anything and everything is another issue for Masa who is said to be using Softbank to lend $20B to employees to help fund Vision Fund 2 – on top of the $8B lent to employees, including Masa himself, for Vision Fund 1 (that’s $1.4B in annual interest payments!). “Son, who was on the brink of bankruptcy in the early 2000s during the dotcom crash, managed to spin a fortune out of an investment in Chinese e-commerce powerhouse Alibaba - a company which is now worth $461bn. But questions surround his ability to deliver on SoftBank’s mega-investments.”
As streaming drives the recorded music industry to 18% y/y growth, older catalog songs are growing listening even faster than songs from newer artists. In order to drive margins to sustainable levels, streaming platforms need to grapple with this headwind that favors incumbent music labels. As I wrote in Music as a Loss Leader: “Even though more and more people are discovering and listening to new artists, streaming services can’t get away with dropping the catalog. And, it’s a question of frequency – I might easily be able to live without my favorite movie on a video streaming platform, but a music streaming platform without Bob Dylan would be unusable to me.”
56% of Americans trust law enforcement to use facial recognition according to this Pew Study.
What investors can learn from operators and vice versa by Brent Beshore: forecasts are guesses, and guesses are wrong; capital allocation matters.
Miscellaneous Stuff
The dominant model for the economic impact of climate change, known as DICE from Yale professor William Nordhaus, is based on bad math. The Nobel prize winning economist (as SITALWeek readers know, we think economics should fall under the ‘fiction’ category of Nobel prizes) used a smooth quadratic instead of taking into account the potential for emerging properties and tipping points, or phase shifts. If you’ve been reading anything we write on complex adaptive systems, you know that not only will there be phase shifts, we also won’t be able to accurately predict them. Further, complex systems are dominated by chaos, which means small perturbations in initial conditions have wildly varied impacts in the future. Instead of modeling climate as a complex adaptive system, Nordhaus picked a random fudge factor of only 25% to estimate the impact of an event like accelerated warming from ice sheet melting.
And, as the ice melts at a record pace, the race is on to find and preserve the archaeological treasure troveemerging from the frozen ground. If this anthropological topic interests you, I follow two people on Twitter that post many cool finds: Jamie Woodward and Secrets of the Ice.
The airlines are one of the more at-risk industries as a result of climate change. With plane travel likely accounting for at least 5% of warming, the FT reports on the growing number of people refusing to fly. Would this be a far-fetched headline in the future: “Flights Grounded in Emergency Attempt to Stop Rising Temperatures”? At the very least, I wouldn’t rely on the DICE model to estimate the potential impact to investments in your portfolio.
Tim Ferriss helps Johns Hopkins launch a new $17M psychedelics institute to study the positive impact of the molecules on a range of mental disorders with hedge fund managers and tech entrepreneurs (hmmm, did I word that sentence a little awkwardly...oops!). The goal is nothing short of “bending the arc of history.” Pollan’s How to Change Your Mind is a good read on the developments in this space.
An issue with Malcom Gladwell’s books is that he tries to make psychology popular, but psychology isn’t hard science, and many of the themes he has put forth fall short of being useful, and often are simply wrong. This Guardian interview touches on some of these issues. If the inner workings of the human brain are of interest to you, I’d recommend Behave by Sapolsky instead of the new Gladwell fiction.
In reading this Techcrunch interview with Ray Dalio about his Principles in Action app, it struck me how rarely, if ever, Dalio attributes outcomes to luck and randomness. At NZS, we view luck and randomness as a fundamental force in success. A synonym for luck is humility, and we place a high value on humility. There are tons of smart and capable people, some of them get lucky, but most of them don’t. When you acknowledge the importance of luck and the unpredictable nature of complex adaptive systems, you are much more likely to hear luck when it comes knocking. In other words, there is a mindset that enables luck and opportunity to not be squandered. In that article, Dalio talks about how great it would be to have Bill Gates’ and Steve Jobs’ algorithms for decision making; however, odds are, those algorithms would be worthless without luck and good timing. Gates and Jobs represent smart and capable business people who were phenomenally lucky. Walter Isaacson’s 600+ page biography of Jobs fails to mention luck once – that simply cannot represent reality. Buffett has always been a champion of the role of luck, and perhaps because he is so cognizant of it, he and Munger always seem to hear luck when it comes knocking. Dalio’s formulaic, pattern recognition approach is exactly the type of analysis we work hard to avoid; when pattern recognition ends up actually working, we call that luck. The key element missing in Dalio’s brand of analysis is emergent behavior, i.e., unpredictable outcomes from the interactions of the system itself. (I am a big fan of Dalio’s economic research and open education efforts – it’s to be respected and emulated; my criticism here is a philosophical one concerning how useful research is in terms of predicting the future given the system complexity and the random role of luck.)
Stuff about Geopolitics, Economics, and the Finance Industry
The author of Creating Shareholder Value, Al Rappaport, questions what the Business Roundtable means by ‘going beyond shareholder value’.
“The Business Roundtable’s message that corporations should become more stakeholder-inclusive and socially responsive is significant and timely. Regrettably, it offers no specifics on how companies should allocate resources, on whether it supports corporate investments in socially motivated initiatives that do not create long-term value, or on how to align incentive compensation with long-term value.”
And, another economist points out that starting with actually paying taxes would be a nice way for corporations to start backing the Business Roundtable’s pledge.
This op-ed in the NYT this week was the first time I’ve seen the risk of war with China over the sovereignty of Taiwan articulated in a widely read publication. The article suggests China could try to destabilize Taiwan by taking down its power grid. Such an aggression would bring global chip supply to a standstill, as 70% of semiconductors pass through Taiwan in the manufacturing process. The global economy runs on those chips. “...in 18 of the last 18 Pentagon war games involving China in the Taiwan Strait, the U.S. lost. Still, that can be misleading, because the war games are much more limited than real life would be. For example, the United States could interrupt China’s oil supplies from the gulf.” For several years, I’ve been talking about the importance of Taiwan as the ultimate pawn in the growing tension between the US and China: the heart of the matter is China’s reliance on semiconductors and, therefore, complete reliance on US intellectual property and Taiwanese chip manufacturing. On a much more positive note, it was surprising to see China back down and withdraw the extradition bill that has caused months of violent protests in Hong Kong. It’s possible that China felt it could not risk a global eye on the rolling of tanks into Hong Kong. Maybe this backing down is an indicator that China will also not pose a military threat to Taiwan in the future. With a presidential election coming in 2020 for Taiwan, voters there are no doubt watching China’s handling of Hong Kong as they choose between candidates that are for and against closer relations with China. It seems as though the decision to withdraw created confusion on the Chinese mainland, where the extradition bill had been marketed as a just law. The government was quick to censor any discussion of the topic as Hong Kong’s leader told a group of business leaders she would quit if she could. Part of China’s propaganda campaign on the mainland is to blame the US: “China’s increasingly caustic accusations against the United States — in state media and official statements — reflect a deepening conviction that support for democratic rights in Hong Kong is part of a broader effort to undermine the Communist Party.”
A record smashing $150B in corporate debt issuance hit the bond market this week including 49 deals in just 30 hours!
Homeowners in Denmark are taking advantage of the country’s negative rates by taking on new mortgage debt. Lenders are working to offer 30 year mortgages with negative rates while making money on servicing fees.
It was funny this week to read back-to-back predictions by two finance industry veterans with opposite conclusions. Jim Paulsen called out the “fear bubble” (I love that term!) saying the market is poised to go up, while 13D Research predicted the US stock market will be “crippled” by a corporate bond meltdown as money is hoovered back from stock repurchases into debt payments. Who is right? For the long-term outlook, does it really matter? Other than having a half-baked view on long-term rates, we just view “macro” as volatility, which means opportunity for us.
Speaking of the fear bubble, high net worth individuals are said to be 28% invested in cash up from 27% a year ago.
And, even more fear: insiders are matching their 2006-2007 record share sales with $600M/day of insider stock sales in August.
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.
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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.
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