SITALWeek #223
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, 3D printed toilet seats, 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: the 30-something Sneaker Wave is coming and it brings several underappreciated demographic impacts; Tesla has zero competition in sight, and might never see any; radio merger could create a new threat to streaming; Cisco disrupts itself; stock indices destroy value for investors; the cardboard problem; fear bubbles causes investors to miss the record highs in the market; and lots more below...
Stuff about Innovation and Technology
The 30-Something Sneaker Wave
There is a wave of US household formation accelerating this year led by people in their 30s. It’s not as big of a trend as the Silver Tsunami, but it’s nonetheless fascinating, and it will be a driver of household formation and shifting consumption trends. At the end of this week’s newsletter, there’s a longer explanation on the 30-something Sneaker Wave, but here is the TL;DR:
There was a ~5% increase in births from 1989 to 1994 – those kids are beginning to turn 30 in 2019.
The kids born just before them, from 1984 to 1988, delayed household formation for a variety of reasons, including student debt, and they will be forming more households soon.
Combined, this soon-to-turn-30 and 30-something group will drive a doubling of household formation compared to last decade.
This wave is likely to accelerate the on-demand and sharing economy into the suburbs, and initiate other emergent behavioral shifts.
Forgiving student debt would provide an economic tailwind that outweighs the moral hazard.
After this Sneaker Wave crests, and absent an increase in immigration, the US faces decades of challenging demographic headwinds.
Participation Award for Porsche's EV
Porsche’s new, all-electric Taycan Turbo will carry an EPA window sticker range of only 201 miles. That’s the worst range of any electric car on the market. The Taycan also doesn’t match Tesla’s Model S Performance on other key metrics. Separately, Ferrari announced they would have an all-electric model available in 2025. There isn’t an automaker today who is within 3-5 years of catching Tesla, and in 3-5 years Tesla will be even further ahead. When the Information Age comes for an industry like autos, a completely new set of rules begins to apply – and data, software, vertical integration, and high-speed innovation aren’t achievable by the vast majority of companies forged in the 1900s.
When Everyone has a Cheap Chauffeur
Researchers at Berkeley gave chauffeurs to 13 random people for up to 60 hours for one week to study how inexpensive autonomous vehicles might impact behavior. The surprising find? Participants increased miles traveled by 83%! The group is expanding the survey to collect more data points and information behind the increased usage.
3D Printing a Reduced Carbon Footprint
British Airways is looking into 3D printing parts on location in an upcoming trial for non-safety related components like tray tables and toilet parts. The test is also part of BA’s goal of becoming carbon neutral by 2050. On-site manufacturing reduces transportation costs and emissions, and the 3D-printed parts are lighter too.
Same Song, Different Verse
Back in the year 2000, radio giant Clear Channel Communications purchased concert promotion giant SFX Entertainment. In 2005, Clear Channel spunout SFX as Live Nation. In 2014, Clear Channel became known as iHeartMedia. In 2019, Liberty Media, which controls SiriusXM satellite radio and Pandora streaming music – and has a 33% stake in Live Nation – is looking to own more iHeartMedia (according to the WSJ), so it looks like there’s a good chance SFX and Clear Channel will be reunited! It’s worth repeating a point I made back in SITALWeek #220 – the value of local radio might be the key to shifting the 4+ daily hours of audio to streaming. If Liberty takes local iHeart content and makes it available as “podcasts” on Pandora, this could give it an advantage over Spotify.
Competition for Adobe?
Canva is a $3.2B Australia-based Adobe challenger that’s EBITDA positive and expecting $200M in revenue this year. Canva is currently about 3-4% the size of Adobe’s design software unit, but doubling in size y/y. The lower-end product offers basic design functionality for $10/mo. According to this Forbes profile, Canva has over 20M users, a China-specific version, and backing from the founders of Australian tech giant Atlassian.
TSMC Launching 5nm in 2020
TSMC, the world’s largest chip foundry, is ready to launch 5nm in early 2020. This will turn the heat up on lagging Intel even more. Leading-edge semiconductors are in an accelerated arms race, and the equipment providers stand to do well. The new chips have a 1.84x increase in logic density – equivalent to a 30% power reduction.
RISC-V Surges
This week’s open-source processor RISC-V summit saw 2000 attendees, or about 3x the number that came to a similar conference earlier this year. This VentureBeat article is a good recap of the event. The most notable announcement I saw was Samsung, currently a major ARM partner, embracing RISC-V across several new chips. In related news: ARM China, a joint venture controlled by the Chinese government, has doubled its headcount and has internal plans to over take the Softbank-owned ARM by 2025, accelerating China’s attempts to build its own semiconductor business (at least in terms of design, if not manufacture). This is a risky situation for ARM, to put it mildly, as the partnership could jeopardize relationships in the West just as RISC-V’s global popularity is rising.
Did Cisco just Disrupt Themselves?
Networking giant Cisco made an intriguing decision this week to disaggregate sales of its hardware, software, and networking chips. Frankly, I’m still trying to wrap my head around this move for the decades-old box maker, who increasingly faces disruption from white box networking gear and merchant silicon vendors. As workloads move from on-premises data centers to the cloud, the big Internet platforms are designing their own networking boxes and software with off-the-shelf parts for both performance and security reasons. Intriguingly, this announcement from Cisco quoted both Google and Facebook representatives. Cisco has long had one of the biggest and best ASIC design teams out there, and selling standalone chips could be a challenger to Broadcom in this market. It could also enable a new set of networking competitors to challenge the disruptors, like Arista, who is currently stealing share from Cisco.
iBuying Boom
iBuyers bought 3.1% of homes across 18 active markets in Q319, up from 1.6% the prior year. The biggest market was Raleigh at 6.8%. The fledgling industry is also getting much more efficient with days on market for iBuyer-owned properties at 28, down from 74 a year ago. A shift toward slightly-lower-priced homes vs. last year could be helping the properties sell faster as well. iBuyers are also incentivizing prospective buyers to come without agents and use their in-house mortgage and other ancillary services. Here’s the detailed report from Redfin.
TikTok Heralding Video-Ecommerce Wave?
TikTok discussed their most viral memes of 2019 and their focus on monetization in the NYT. Related: VC shop Andreessen Horowitz reviews the huge market for video-first ecommerce in China and why we might expect it to translate over to platforms like TikTok in the US.
Miscellaneous Stuff
Garden-Variety Silicon Carbide Superior for Quantum Computing
Common silicon carbide diodes are proving useful for quantum information processing. Unexpectedly, quantum signals are free of noise in this substrate compared to other silicon materials. And, the signal emitted is in the visual wavelength range, which makes it suitable for transmission over fiber optic cables. This is a very small step forward, but we still remain a very long way off from quantum computers.
Evolving a Friendlier Human
The first animals humans domesticated were...humans. It seems uncontroversial, yet not well understood, that we selectively bred ourselves over time to favor appearance and emotional characteristics that facilitate social behavior and cooperation, especially after the cognitive revolution around 150,000 years ago. Our domestication is still going on today (and I’m not talking about the crazy genetic-superiority nonsense, there just seems to be a long arc of more favorable characteristics, like compassion and tolerance, that’s distancing ourselves from our more wild ancestors; think doe-eyed, floppy-eared puppy dog vs. predatory wolf). Luckily, we haven’t created the human-doodle or chihua-human yet.
Cardboard Packaging and Doorstep Delivery Due for Upgrades
The glut of cardboard boxes from ecommerce deliveries is making it uneconomical to recycle cardboard, which will eventually lead to more trees being cut down. The faster the ecommerce industry moves to more locally-sourced items, which can be bagged in reusable totes or containers (to be picked up when the next delivery is made) and even placed inside homes, garages, or secure lockers, the better. Today’s big shippers – UPS and FedEx with their trucks full of stacked boxes – will have a harder time adapting to this vertically-integrated, “local” ecommerce growth compared to Amazon and Walmart.
Can More Gov't = More Freedom?
Could more government mean more freedom? It’s the opposite intuition of any card-carrying Libertarian, but in Finland, and other Nordic capitalist countries, it might be the case. This NYT article reports on the benefits of living in Finland, the business-friendly environment that scores higher on free market metrics and has higher levels of personal freedom. Also enjoy this new, delightful 3-part video series from Bloomberg’s Ashlee Vance on Finland.
Stuff about Geopolitics, Economics, and the Finance Industry
Index Fund Miasma
Al Gore takes on Vanguard and other index fund giants for “[financing] the destruction of human civilization” in FT’s Moral Money newsletter. Gore, who runs a large and successful socially-responsible investment firm, would like to see passive shareholders engage with companies and not blindly prop up shares in destructive companies just because they are in indices. He’s not wrong.
Speaking of index funds, the reality is that index providers like MSCI are negative-sum propositions – they are creating value for themselves only, while enabling an ecosystem of value destruction. There is some value in having an official, real-time record of various groups of stocks that provides data to grease the market for traders; however, I think that could be easily replicated with a free, open-source alternative. For the vast majority of investors, index fees are a pointless tax. What’s worse for investors is that these passive, market cap weighted indices can be increasingly backward looking as larger companies become subject to higher rates of digital disruption going forward. Add in Gore’s complaints, and you can see why NZS Capital isn’t lining up to buy shares in the index providers, and we will encourage our clients to ditch them as well. Morningstar, who has its own “open index” initiative, published a paper this month on the problems with the oligopoly price-fixing in the index business. And, here is yet another article on the index tax in the FT, which discusses DIY indices...anyone see a pattern here!? It’s time for active investors to shut down the negative-sum, monopoly index tax.
Non-Transparent ETFs Gain Traction
The SEC has given approval for T. Rowe Price, Fidelity, Natixis, and Blue Tractor, in addition to Precidian (previously approved), to offer non-transparent ETFs. An open question for investors and RIAs is whether the lack of transparency would enable higher performance, enough to offset the higher costs, which might be perhaps 10-20bps? The answer could favor a vertically-integrated provider, like T. Rowe, if they were to absorb those costs. The real question is: which mutual fund platforms will be bold enough to convert existing strategies to ETF structures and cut fees to benefit their investors?
Direct Listing IPO 2.0 Proposal from NYSE
The back and forth between the NYSE and the SEC continues over hybrid direct listing IPOs that would allow for raising direct capital. The Information recaps the events, covering the NYSE’s recent, amended-proposal resubmittal and the SEC’s concerns that hybrid listings need to both protect individual investors and not create an informational advantage for private holders (like VCs) selling on the direct listing. It’s likely 2021 before a new framework is implemented, which may mean we see a delay in the slate of 2020 IPOs for companies that both want to raise capital and enable their insiders to sell bigger chunks of stock on day one.
Fear Bubble Causes Record-High Outflows while Market Surges
Investors pulled more money out of the stock market this year than in any previous 27+ years – $135B yanked as the fear bubble continues amidst the strongest market rally since 2013. According to this WSJ article, $220B has left active managers while $85B has flowed into passives. What’s driving the market? Perhaps the $480B in share buybacks this year, according to GS.
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The 30-Something Sneaker Wave
All numbers discussed below include both native US births as well as subsequent immigrants who were born in those same years; data cited are all available at the CDC’s Vital Statistics Site. In addition to the CDC data, many of the trends below, including this chart I've annotated, can be found in ‘The Big Shifts Ahead’ (thanks to a SITALWeek reader for the great book suggestion!). If you interested in demographics, I also dove into aging and birth waves in SITALWeek #206.
Let’s orient ourselves on this birth graph: Baby Boomers crested at 4.5M in 1960, followed by a generally downsloping birth trend and then an ~8-year trough (“Gen X Lull”), which bottomed out in 1973 with 3.9M births (these are my people – the lost Generation X!). Starting in 1979, births began to pick up, and slowly rose before accelerating in ~1989 (beginning of the “Sneaker Wave”) to cross back over the prior 4.5M peak. Births stayed relatively elevated before dipping back below 4.5M in 1993 and then proceeded to decline (purple arrow) to below 3.8M in 2018.
The 30-Something Sneaker Wave Comes Ashore:
There are ~23M folks aged 26-30 (born 1989-93, blue). That’s almost 5% (1M, or ~200k/yr) more than the 5-year group born before (1984-88, red) and almost 10% (2M, or ~400k/yr) more than the 5-year group born after (1994-98, start of purple arrow).
But, there’s more: the ‘red’ group (now aged 31-35) born just before our Sneaker Wave accelerated the trend of delayed marriage, family, and household formation: in 2013, 54% of people in their late-20s were single without children vs. 44% in 2006 (10% increase over 7 years = 1.4% per yr). Compare those numbers to the prior ~2 decades: In 1987, only 36% of the late-20s population was single without children (8% increase over 19 years = 0.4% per yr). These data strongly suggest that there is a wave of delayed household formers joining the ‘Sneakers’ entering their higher consumption years. There were multiple reasons for this delay, but student debt seems to be an explanatory factor – this group of folks bears the biggest burden of student loans, which rose from $260B in 2004 to a peak of $874B in 2011 (as a reference point, people born in 1988 would be 23 in 2011). As we’ve discussed in the past: the moral hazard of student debt forgiveness could be far outweighed by the huge economic multiplier effect if relief enabled this cohort of folks to form households.
Consumption: historically, people aged 25-34 spend around $60,000/year, which grows to nearly $80,000 when they are 35-44 (sorry I can’t find the 5-year increments, but here is the source with many more details and breakouts). Some of the bigger increases are: food spend rising from $6000 to $8000, housing from $17,200 to $20,600, and entertainment spend going from $2200 to $3000.
This double swell of the delayed household formers and the 30-something Sneakers will drive accelerated household formation – a shift to living in houses (either owned or rented) from apartments (and/or still living with parents!), and all the lifestyle changes that come with having kids and spending on diapers, cable TV, and trips to Disneyland, etc.
Contrasting the Sneaker Wave and the Silver Tsunami:
Downsizing/selling homes – in SITALWeek #221 we discusses the extra 500k homes/yr up for sale in the next decade. It will be interesting to see if this supply of houses creates attractive prices for 30-something Millennials to move into “older” neighborhoods.
Decreased retiree consumption (dropping from a peak of $60k/year to $46k/year and declining with every year of age thereafter).
Retiring, which creates job openings; because the smaller Gen X has fewer people to fill in, it could create more employment opportunities for the 30-something swell.
The Boomer retirement wave and the 30-something sneaker wave are two unrelated phenomena (well, technically they are very related because many of this wave of 30-somethings’ parents are Boomers!); however, combined, they will be the two of the bigger impacts to the US economy over the next ~5 years. For the 40 years up until ~2005, the US had household formation ranging from 12M to 14.7M in each decade. Then, between 2006 and 2015, this number dropped to 6.7M. It should get back on trendline of more than 12M through 2025 before tailing off again.
The Silver Tsunami and the economic impact from rising household formation from the 30-somethings could reverse several suburban-to-urban trends in the coming years. Further, this digital-savvy set of household formers are likely to accelerate many trends underway in the economy as the Internet further disrupts legacy business models. For example, they won’t be queueing up at Walgreens to wait on prescriptions for their sick kids (prescriptions that probably won’t even be ready after waiting in line for 20 minutes!); instead they will get 1-hour delivery.
On the flipside, it’s possible that the forces of the housing recession and student debt will linger; and, perhaps the record low birth rate (now 1.73, down from 3.6 in 1960) is more structural than circumstantial. This is a key point: this Sneaker population is the last big bolus in the population pipeline for the foreseeable future and, when combined with the severe dropoff in immigration, sets the stage for significant economic stagnation, perhaps a decade from now, all else equal. This will likely put even more weight on policy decisions and political outcomes that focus less on economic growth and more on economic distribution. But for the next ~5 years, 30-something Millennials could accelerate the digital economic transition as they drive an increasing portion of consumption.
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