SITALWeek #221

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, a 5th Force of Nature, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

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In today’s post: a modern milkman would have big implications for food delivery and potentially packaging waste; the future is in...Africa; the Super Bowl sells out; what Mister Rogers teaches us about time’s passing; you can’t predict stocks even with perfect information; the problems of aging global demographics; direct listings back in the new; and lots more below...

Stuff about Innovation and Technology
Robot Beekeepers
Beewise in Israel uses NVIDIA AI to identify bees infected with mites. The robot tech can isolate and sterilize the problem bees in real time before a hive is further infected.

When AI Wins, Humans Retire
Former Go champion Lee Se-dol retired from the game after declaring the AI from DeepMind unbeatable. Last year’s Netflix documentary AlphaGo offered insight into the painful emotions humans experience when they realize machines are better, and even possibly more creative, at a given task.

Into Africa
Twitter and Square CEO Jack Dorsey will move to Africa next year for 3-6 months because the continent will “define the future” of technology usage.

Just Say No...To Plastics
“I want to say one word to you. Just one word...Plastics.” Well, that was 50 years ago, and today this classic quote from The Graduate requires a makeover: Just three words: anything but plastics! This WSJ article discusses how big brands are struggling to get off the plastic but will keep trying. For any young engineers out there, I might suggest a career in material science and package design – there’s a huge market ripe for disruption as single-use plastics (for non-medical purposes) will likely become illegal across the globe over the coming years. As we have more and more food and products delivered to our houses directly, it also sets up a big opportunity to reuse packaging – maybe those Amazon vans can take back the old containers as they drop off new ones (just like the Milk Man did!).

Zero-Waste Grocery Delivery with Factory Robots
Speaking of the modern milkman: Amsterdam-based grocery delivery service Picnic raised a EUR250M round of venture capital. The company uses EVs to deliver food on scheduled routes, and is working on a robotic zero-waste fulfillment center. Picnic delivery is free, which is actually like a rebate because it saves you time and transportation costs going to the store yourself! This seems like a great early proofpoint of some of the trends I discussed in my piece Evolution of the Meal.

Live Sports and Content Fragmentation Support the Old Cable Bundle
As consumer attention continues to fragment among increasing entertainment options, the scarcity value of live sporting events is driving increasing advertising demand. Fox has already sold out the Superbowl ads for as much as $5.6M per 30 second spot – the earliest sell out since 2011. Over the last several years, the spots weren’t completely sold until right before the game aired. In general, I think investors remain too pessimistic about sports-rights values and the TV bundles that support them.

Around four years ago, Comcast introduced a monthly fee of $3.25 on bills to pay for broadcast TV “retransmission” costs levied by CBS, ABC, NBC, and Fox. After a couple of price increases, this fee will leap 50% to $14.95/mo in December. On the one hand, you could argue this will cause people to cut the cord faster; on the other hand, you could argue it’s evidence of the ‘power of the bundle’ and how underpriced it is relative to the increasingly expensive (and frustrating) option of signing up for and navigating 5-10 disconnected apps.

Privacy According to State Gov’t: Do As I Say, Not As I Do
The California DMV is making over $50M, or about $2/licensed driver, selling data to pretty much anyone who wants it, including private detectives. At the same time, the state is pushing its own restrictive consumer-privacy rules for Internet companies. Selling DMV data seems like common practice – recall back in SITALWeek #202 I discussed the same issue in Florida to the tune of $77M/year (>$5/licensed driver). California should work with Google or Facebook to try and close that shameful monetization gap with Florida! There is a broader issue worth mentioning here – States are set to lose lots of revenue over the next two decades as 1) more people choose to use ride-share services instead of owning cars (even if people keep their driver’s license, fewer cars will get registered), and 2) the loss in gas taxes as cars shift to electric. Both will likely spur significant new taxes on ride-share companies to pay for roads, etc.

Open Source Relocates to Neutral Territory
RISC-V is moving to Switzerland amid rising US trade and tariff concerns. China is one of the biggest leaders and beneficiaries of the open-source processor movement led by RISC-V. This seems like a smart move for ensuring global access to the tech, but US and European software and tools are still required to design and manufacture the chips, which keeps a Western grip on China’s increasingly-challenged homegrown semiconductor industry.

Miscellaneous Stuff
"Jupiter's Great Red Spot Storm Isn't Dying Anytime Soon"...there is no evidence that the vortex that powers the cloud formation is changing.

Standard Model of Particle Physics Leaves Room for Improvement
There was a lot of press this week around a possible new 5th force of nature. It’s an exciting topic, and if it’s of interest, this article does a nice job explaining the background for why there might be an additional force and why the new experiment may or (likely) may not demonstrate it.

Nature Of Time: From the Universe to Mister Rogers
Brinton and I have been talking a lot about the nature of time lately. It’s at the center of our latest paper “Redefining Margin of Safety” (at the end of this week’s email is an excerpt about time from that essay). I was recently intrigued by the idea at the end of Sean Carroll’s book, Something Deeply Hidden on quantum mechanics and gravity, that time might be an emergent property of the Universe rather than a foundational one. It’s possible that all times past, present, and future exist at once. Each configuration of the universe might be entangled with a certain time, and perhaps that’s where the feeling of time passing, and the arrow of time, comes from. Entropy, or the concept that matter spreads out and cools down over time and contains less information, is integral to the passage/arrow of time. Yes, I’ve seen Interstellar a couple dozen times!

One of the fascinating qualities of time to us is how you can do certain things to slow it down. In the early years of children’s television, shows were often focused on superheroes, race cars, and pie-throwing antics. They were fast paced, with a chaotic – often frantic – energy. Then along came Mister Rogers, with his unique ability to slow down time. On one episode, Mister Rogers set a timer for a minute and just watched it in near silence, sitting next to his friend Mr. McFeely. In another episode, he simply watched a turtle move. One of Fred Rogers many insights seems to have been that time moved at a different pace for children. When you are constantly learning novel concepts, time actually appears to pass slowly. As we age, we know more and learn less, which causes the feeling of time flying by. This effectively translates into a life philosophy, as well as a business and investing strategy: do whatever you can to slow time down, and you will find all kinds of opportunities to learn and adapt.

Stuff about Geopolitics, Economics, and the Finance Industry
AAPL Root of Active Underperformance?
Fundamental active mutual funds underperformed by 154bps in Europe and 106bps in the US while quant mutual funds trailed benchmarks by 214bps. I haven’t seen the analysis, but I suspect systematic underweighting of Apple stock, which is a large outlier in most benchmarks and is up 72% year to date, could be a factor here. AAPL stock has gone from around 3.3% to around 4.3% of the S&P 500 this year, meaning it outperformed by 100bps at an equal weight. An underweight position would have accentuated this pressure. (Apple is also now 17.4% of the US technology index!)

Silver Tsunami of Population Decline
China’s aging population will make it increasingly harder for the country to maintain its growth lead over the West. By 2050, about 1/3 of China will be over 60. The massive shift from workforce to retirement with a much smaller replacement generation will be a global common theme as we hit peak population for humans much sooner than everyone realizes. It will require a big adjustment in thinking about the economy, growth, and inequality: under capitalism, when the pie stops growing, it tends to get distributed according to power law, making wealth inequality the 2nd biggest problem facing the world today, alongside global warming.

The “Silver Tsunami” has its own implications in the US as well – the WSJ writes this week about Zillow research indicating that one quarter of homes in the US will be up for sale in the next 20 years as Boomers age. Gen X is too small to buy all those homes, but Millennials are at the beginning of a trend of increasing home ownership. Boomers staying in their homes longer is one of the explanations for the average time between moves going from 6 years to 13 years since the early 2000s. Over the next decade, an extra ~500,000 homes per year will be for sale (vs. the prior decade) as a result of the aging population. The excess supply could put pressure on prices, which might open up big demand from Millennials. And, iBuyers and institutional homeowners could provide needed liquidity for the changing market. The flipside of the Boomer home market is RVs and retirement-focused communities, which should see another decade of secular growth. If you like demographics, you’ll enjoy the WSJ article linked above; I wrote in more detail about demographics and the big potential shifts coming in SITALWeek #206.

Even with all the Data, it’s Still Hard to Predict the Future
Here’s an amusing analysis of a group of hackers who had access to 150,000 earnings press releases before the market: “The informed traders had “perfect foresight” from stolen earnings announcement press releases, but they were only able to enjoy mixed success in predicting next-day stock returns. Their poor performance implies that capital market participants have difficulty mapping earnings information to stock price reactions.”

Option to Raise Capital with Direct Listings?
The NYSE is seeking SEC approval that would allow companies going public to simultaneously do a primary share direct floor listing and a secondary shareholder direct floor listing. This change would allow insiders/previous investors to sell AND the company to raise money at the same price. This plan would certainly improve one of the biggest problems of direct listings, which require excessively-dilutive pre-IPO financing for companies that need to raise capital. However, this proposal from the NYSE doesn’t address any of the other important issues around direct listings related to information asymmetry (insiders sell with more knowledge of the company than new public holders have), costs (which are comparable to traditional IPOs), etc. Setting the price of a company at a given point in time is near-impossible even with perfect information, and information is far from perfect. There is no evidence that direct auction listings will be better at finding a fair price that takes into account the future risk of new, high-growth businesses. For now, they serve only to provide inflated exits for prior holders while keeping long-term institutional investors patiently watching from the sidelines. I wrote more extensively on this topic in The Great IPO Debate.

Fidelity Frowns on Schwab’s AMTD Ambitions
Fidelity had a good take on Schwab’s proposed purchase of TD Ameritrade as the multi-trillion-dollar asset aggregators get bigger: “‘Unfortunately for investors, the combination of Charles Schwab and TD Ameritrade means they will likely be doubling down on revenue practices that directly disadvantage investors, including paying extremely low cash sweep rates and taking significant payment for order flow,’ Kathy Murphy, president of Fidelity’s Personal Investing business, said in a statement Monday.”

Time for More Time!
Our latest paper “Redefining Margin of Safety” argues adaptability is the new “cheap”...below is an excerpt from that paper on the nature of time:

Time Dilation: Slowing Down The Game Clock
Ultimately, what highly nimble companies are able to do is act in a way that slows down time relative to their competitors. The world is moving and changing at an accelerating pace, but with a Quality company operating in a long-duration, slow-growth industry dynamic, it’s possible to operate in a bubble in which time appears to move more slowly than in the frantic world around you. Imagine two paths connecting two points in time, 2020 and 2021: one short path, where time is normal, and one long path, where time is stretched and slowed. Because time moves slower on the longer, time-dilated path, you have more time to react and adapt relative to your competition on the direct route, so when you both arrive at 2021, you have out-thought and out-innovated your competition.

In physics, Einstein discovered two ways to think about time dilation. The first way is described by Special Relativity: as objects move at higher speeds, their “clocks” will appear to run slower to outside observers. Second, in General Relativity, your “clock” will run slower as you approach large masses (black holes being an extreme example). In fact, since your feet are closer to Earth than your head, they are actually younger than your brain, which is less affected by our planet’s gravity. Luckily, the effects are negligible at these scales!

If you are a competitor at a poorly run company looking across space and time at a high-Quality business, you will be running around putting out fires and focusing on the wrong things while the Quality business will be calm and functional, buying themselves time to focus on their customers, products, etc. When your clock runs slowly, you have far more time to react to change and disruption. Quality is a way to slow down time; it’s like a black hole that allows you to focus on the long term.

Access to data concerning customer needs and future disruptions is another way to effect time dilation, expanding the reaction time window and facilitating early adaptation. Likewise, innovation also slows down time. Think of data/innovation in terms of Special Relativity – if you can anticipate customer needs and innovate more efficiently, that’s like a moving clock; it buys you time relative to the fast moving clocks of your competition, essentially like time traveling to the future!

Tesla is a good example of how to think about time dilation. The company has out-innovated every automaker, which has bought them at least a five-year headstart – the watch is ticking away quickly for legacy car manufacturers wasting their time on combustion engines and failing to develop the electric drivetrain, batteries, software, data, and sensors they need to build a modern car. But, at Tesla, they’ve enacted a paradox: by quickly innovating around the needs of their customers, they’ve slowed down time and pulled years ahead of the competition. If Tesla continues to gain market share, they will be like a gravity well, or a back hole, allowing them to operate far into the future ahead of their competition.

Amazon is another great example – for years, the company innovated to stay ahead of the competition in retail and cloud computing, buying themselves time along their way. And now they have created such large, defensible gravity wells of network effects around logistics and technology that they exist years ahead of their competition.

We’d be remiss if we didn’t extend our physics metaphor by talking about time’s arrow itself: entropy. Entropy is a measure of disorder: around the start of the Universe (at least the part that’s visible to us) ~14B years ago, matter and energy were very organized – i.e., there existed an extremely low entropy state. When you have information (a.k.a. order) entropy is very low. As information (or matter and energy) become disordered, entropy grows over time.

Life, as it turns out, is uniquely suited to taking ordered, high-information matter/energy and turning it into disordered, low-information states; indeed, this seems to be the vector of the Universe and life’s role in it. For example, take sunlight, plants, and animals: sunlight is highly-ordered electromagnetic rays that help plants grow through photosynthesis; then animals eat those plants (and sometimes animals eat the animals that eat those plants); and then animals (e.g., humans), turn that energy into all sorts of interesting things, ultimately scattering that neat, organized solar energy into myriad disorder around the planet and surrounding space.

Much of what society has done is to try to create temporary order despite the long-arching trend toward disorder in the Universe. We build buildings, cities, communities and companies – we take organized energy and reshape it into all sorts of literal and figurative structures. But, it’s only a temporary, local increase in order, and, in the long run, the information value is lost and entropy rises. The trend toward more disorder means that predicting the future is very hard, if not impossible; therefore, companies that can slow down time don’t need to operate with rigid views of the future. Thus, they are more adaptable and durable.
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