SITALWeek #244
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Margaritaville, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.
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)
In today’s post: return to work with tickets to ride the elevator; the de-urbanization trend; social distancing theater resembles security theater after 9/11; rideshare's range of outcomes; the adaptability of standup comedy; lessons from RV sales; the morality (?) of low interest rates; and, lots more below...
Stuff about Innovation and Technology
Bottoms Up! For Online Liquor Sales
As parents are homeschooling their kids during shelter in place orders, US alcohol ecommerce sales were up 5x in early April. Correlation or Causation? 🍺🍷😅
QuaranCleaning Problematic for Thrift Stores
The dregs of spring cleaning have inundated thrift stores at a time when they can’t necessarily process or sell the donations, according to Bloomberg. Thrift stores, which do $18B a year in business serving an important role in local communities, have asked that people hold onto their donations until later in the year, otherwise goods are highly likely to end up in landfills, potentially creating a future vacuum of secondhand merchandise.
Peloton In Yellow
Connected fitness company Peloton is selling a lot more bikes and digital subscriptions, posting 94% y/y user growth. Subscribers are also using the product more under lockdowns. A little math from their earnings call last week implies the average user worked out every 41 hours (every ~1.7 days) during Q120 vs. every 52 hours (every 2.2 days) in Q119. I’d assume there was an acceleration in that trend at the end of the quarter, implying a lot more users were doing daily workouts (or twice a day with a morning ride and an afternoon yoga class!). Peloton has an interesting opportunity to take a great product and turn it into an entire fitness and lifestyle brand.
Work from Home an Enduring Trend?
Both Google and Facebook indicated last week that employees may be working from home for the rest of 2020. It’s surely for safety, but it’s also a great experiment for these tech giants to learn about remote, cloud-based work, which could feed insights into their products. CNBC also reported on the rising number of companies across all industries making permanent changes to allow employees to work from home. The alternative appears to be going back to work with plexiglass between desks, temperature taking, and Disneyland-style tickets to ride the elevator at scheduled times, like Salesforce is planning as they reopen their Seoul office next week.
Brands Go Direct to Consumer and Accelerate Amazon’s Flywheel
There were a couple mentions from earnings last week of brands increasingly setting up shop online to sell direct to consumers as retail outlets close and face an uncertain future. I’m thinking specifically of Heinz, which launched a Shopify Plus store in just one week in the UK, and David Spitz at ChannelAdvisor, who had this to say: “Brands are really having to evaluate the path to the consumer and what digital means for them...this has really been a wake up call.” Concurrently, brands are reluctantly selling more through Amazon as they lose retail distribution.
Travel and Events in Demand amid Social Distancing Theater
The degree to which human social behavior will go back to normal is completely unknown; but, for now, all the incremental data suggest our mammalian social genes are going to prevail. Conde Nast Traveler reports that 2021 cruises are booking fast. Ticket sales for NFL games at the new Raiders’ Stadium in Las Vegas (or Entertainment Island, as some call it) are off the charts. Shanghai Disney will reopen to 30% capacity on May 11th, and it immediately sold out the 24,000 tickets. 🎢Disney’s reopening protocols look a lot like social distancing theater to me, reminiscent of the security theater we have endured since 9/11. In the video embedded in this report from Theme Park Insider, you can see how the magic of yellow tape is apparently presumed to have virus fighting capabilities throughout Disney Shanghai. In other Disney news, the company announced last week it would forego $1.6B in upcoming dividend payments. Maybe it was financial prudence, or maybe it was to make Abigail Disney’s Thanksgiving family dinner just a bit awkward – the heiress criticized the Mouse for paying dividends while furloughing employees. The Disney family is reported to still own around 3% of the company, meaning Disney heirs will miss $48M in dividend payments. 🦃
Housing Market and De-Urbanization
The housing market continues to recover in the US, with Redfin seeing seasonally-adjusted home buying search activity at 96% of its Jan/Feb levels and average home prices up 5% from 2019. However, new listings are still down 39% vs. the same time last year. Both Redfin and Zillow are starting back up their iBuying activity (as Zillow’s Rich Barton colorfully said on the earnings call: “It's time for us to get back to business on the Zillow Offers and get Han Solo out of that Carbonite.”). It’s possible that this is iBuying’s moment to show the value of a liquid market maker in the housing market, which may create a small number of very large winners in the real estate industry.
Redfin also predicts a “seismic demographic shift” toward smaller cities. The company saw a 71% increase in searches for homes in towns with populations under 500,000 – nearly twice the 38% search growth rate for homes in cities with over 1M people. De-urbanization was a trend that was already underway pre-pandemic, owing to increasing Millennial household formation and affordability problems in large cities. This demographically-driven trend (see “30 Something Sneaker Wave”) is now going viral. The open question is how far will the reversal of urbanization go? Will it sufficiently extend to support my theory of the middle-America renaissance? Based just on demographics, the shift could encompass a few million households. Or, it could be too early to know one way or the other, so we’ll be good Bayesians and keep looking for confirming or disconfirming evidence.
Dinosaurs vs. Mammals in Asteroid Strike
Speaking of Redfin, CEO Glenn Kelman said this on the earnings call: “When the world is changing this fast, what is most valuable is our own ability to change. The company you want to stake in isn't a big fat incumbent. It's the crazy little mammal, crawling out of the crater of the asteroid strike.” We get asked often how we quantify adaptability – the key trait that we look for in companies. The short answer is that it’s not quantifiable; but, right now is an ideal time to look for evidence that companies are reacting quickly to changing data, and experimenting as much as possible to become stronger no matter what the future holds. I’ve seen great examples of this from many companies, but Redfin, Zillow, Square, and Shopify stand out as companies that have been iterating at warp speed over the last few months. With customer needs rapidly changing for every industry, the nimble, adaptable companies will forge the new economy, while the others will go extinct from the asteroid strike.
Blustery Mix of Headwinds and Tailwinds for Rideshare
When it comes to rideshare, the range of future outcomes is quite wide. In the US, both Lyft and Uber were barreling toward profitability this year until the economy hit the viral wall. After China reopened, rideshare leader Didi saw a return to 70% pre-virus levels; however, with car sales also recovering in China, many folks who were using rideshare may be driving themselves. We could see a similar scenario in the US: a return to rideshare, possibly dampened by a one-time bump in auto sales to clean out the inventory that has built over the last few months. With high unemployment, the cost to find and keep drivers has plummeted; but, with future rideshare demand an unknown quantity, there’s a need to expand into adjacencies – with potential opportunities in delivery, logistics, employee shuttles, and public transportation replacement. Uber has also been operating as a temp staffing agency – placing drivers in jobs at other companies. It might be useful to return to first principles: what are the core functions of the rideshare platforms, and how big are their markets going to be? It again raises the interesting question: are rideshare companies in the rideshare business, or are they the modern staffing and logistics platforms of the gig economy era? In related news, Uber recently reported it’s working on a system to provide healthcare benefits in proportion to how many hours drivers work.
Inference Accelerating the Edge
Semi Engineering reports on the shift of inference AI to the network. This is somewhat of a technical subject, but the point is that non-data-center AI engines will be interpreting signals from phones and edge devices to speed up answers and save bandwidth. There is an explosion of demand for inference, and the solutions are likely to be heterogeneous. As NZS Capital investor Jon Bathgate informs me, we could see FPGAs used for video compression, ARM processors and DSPs for plain vanilla AI – like a connected doorbell distinguishing a squirrel from a package delivery – and GPUs for big models, language processing, and even optimizing the network itself. And, of course the X86 CPU will do its share of inference. Maybe there is the potential for a single, unified inference engine to rule all of these AI decisions, but time will tell.
Stream Sharing
Streaming report from CordCutting reveals that 34% of adults in the US exclusively stream content, up from 30% last year. 20% of Hulu watchers and 15% of Netflix viewing is from “borrowed” passwords. All in, there are 40 million borrowed accounts in the US, amounting to a lost value, or gift to the moochers, of $2.7B a year. About 70% of Gen Z “borrows” Netflix and Disney+ passwords compared to around 30% for other age groups.
With Hollywood Halted, TikTok’s on Fire
As TikTok’s Gen Z popularity goes astronomical during the lockdowns and distance “learning” period, its most popular creator has just passed 50M followers. The company owned by China’s ByteDance is working to build an advertising revenue stream; but, interestingly, they aren’t sharing with any of the creators – who supply 100% of the content for the site – according to this long Hollywood Reporter profile. This approach for now is in fairly stark contrast to YouTube (which pays out about 50% of ad revenues to video creators), and means that TikTok creators seek their fortunes on other platforms, often driving their subscribers to follow them on YouTube or Instagram. Popular creators are able to book six-figure sponsored-post deals, and $25,000 deals from record labels to promote a song (which then sees huge spikes in streaming activity on Spotify and other platforms).
Miscellaneous Stuff
Backyard Black Hole
Astronomers found a small black hole in the Milky Way only 1,000 light years away (meaning it takes light 1000 years to traverse the distance between the black hole and Earth; for context, the Milky Way is about 105,000 light years in diameter). At four times the size of our own Sun, this back hole is not terribly hungry, so astronomers noticed it by the way its large gravity was impacting nearby star movement.
Antibody Production via Llama
Scientists are using mice and llamas to produce antibodies to coronavirus. If the antibodies prove to work in humans, they could be administered by inhaler or in a shot. 🦙
Seinfeld on the Adaptability of Comedy
Jerry Seinfeld did an interview with the NYT concurrent with his latest Netflix stand up special. The special is funny if not out of place as it was filmed back in October to a live crowd in NYC. From the interview: “I would bet on this virus. Can you imagine how jealous the other diseases must be of this idea of no symptoms for two weeks? Like, polio: 'Just think of what I could have been if I thought of that.' Smallpox: 'This could have been so much bigger.'” Seinfeld also discussed the adaptability that’s built into the comic profession: “People are going to go back, first of all, because laughter is the greatest feeling of release that there is. And No. 2, the comedians are going to adapt so much quicker than everyone else. The TV shows won’t quite know what to make. The movie people might not know what to make. The comedians, within three nights, will know what to be doing. Because you’ll get that feedback instantly of what works and what doesn’t.” And, on TikTok: “I’m curious, very briefly. 'What’s TikTok?' I look at it. 'OK, I got it.'”
Chapter 11 On the Table
As I read last week that Sur La Table was planning on filing for bankruptcy, I couldn’t help but remember the classic, 2009 South Park episode on the banking crisis titled “Margaritaville” (Season 13, Episode 3 is on various streaming platforms – Hulu in the US). This short clip on YouTube features Stan trying to return a Margaritaville Margarita maker to Sur La Table. Stan’s Dad bought in on credit, then the banks created MBS (Margaritaville-Backed Securities), which were then sliced up and sold off in tranches. Stan has to see if the Federal government will decide to bail out his Dad’s purchase or not. It’s surprising how well the episode holds up, and it’s a good reminder of the 2009 zeitgeist, and how tragically history has repeated with leverage in the current downturn. Sur La Table was sold to private equity in 2011. I am actually going to miss the Sur La Table down the street from me, and yes, it’s my fault it’s closing because I bought my last pan on Amazon.
Stuff about Geopolitics, Economics, and the Finance Industry
RV Sales Recessionary Prognosticator
Back in SITALWeek #207, I discussed how RV and camper sales have historically been a very good early indicator of recessions. The industry dipped 20% in 2019, so, with the help of a global pandemic, RVs are now three for three in calling 21st-century recessions a year ahead of time. This is probably a coincidence, but it might be something more. RV purchases are dominated largely by older folks and retirees. And, perhaps this more seasoned generation has a 6th sense for when the world becomes a little too risky – when things feel out of balance – leaving the system vulnerable to the ensuing shocks of 9/11, the banking crisis, and now the coronavirus. Well, RV sales are now surging back for a few reasons. I’ve been covering the industry ever since I flew to Forest City Iowa in 2002, where Winnebago used to be headquartered, so I’m slightly more than a casual observer, but I am mainly guessing (like usual). Clearly, there is going to be demand for RVs as a substitute for air travel and hotel stays in a pandemic. Also, inventory was worked down because the industry already went through a correction last year. Low rates help with financing, and there are twin demographic tailwinds – primarily from the growing Boomer retiree pool, but also younger generations that appreciate the hipster nature of RVs and Airstream living. And, maybe Boomers are signaling for everyone else to take a breath and recognize life will go on. With Elon Musk declaring that he no longer wants possessions and is selling all his homes, I am hoping we are closer to getting a Tesla autonomous RV soon! Here is Elon talking about his minimalist lifestyle change with Joe Rogan last week, days after his new baby was born.
Sustainable Low Interest Rates or Capitalism 2.0 – What will it be?
Owning stocks today can be interpreted as a deliberate bet that rates will stay low (for more context, I wrote some guesses/analysis about rates and the market at the end of last week’s email). Low or zero rates push money into riskier assets, and right now, the government is also saying there is little risk in risky assets as the Fed gobbles up all types of debt and many companies are bailed out. This of course should offend our senses deeply – at some point we have to pay the price, don’t we? At least that’s what Buffett seemed to say last week, as he expressed bafflement at the staying power of low rates (also in last week’s email). There is another lens though, and it’s one I’ve mentioned in SITALWeek in the past: ergodicity-king Ole Peters speculated the following in this 2017 blog post (which I’ve summarized here, but I highly recommend reading the original): the 40-year drop in interest rates has enabled the debt accumulation by the less wealthy and (formerly) middle class that has fed the current, unequal bifurcation of wealth globally.
The current, zero-rate, bail-out environment will only exacerbate this wealth inequality even further. Even Worse, increasing rates without wealth redistribution would create an existential, not to mention immoral, crisis for the vast majority of people who have effectively negative wealth – the indebted, so to speak. And, if wealthy peoples’ wealth is essentially derived from low rates (driving asset prices up) and other peoples’ debt, then the introduction of higher rates would necessitate a messy unravelling – absent some form of UBI and/or significant, widespread governmental assistance. I’d add one more complicating factor to the conundrum of eternally low rates: the massive overhaul of the global economy – from asset heavy and analog to information heavy and digital – changes all the rules, and certainly has a dampening impact on the traditional bogeyman of low rates – inflation. This is just one guess as to what’s happened and what might continue, but it’s a useful lens because it underscores the unpredictable range of outcomes and provides a framework for perpetually dropping rates – 0% is not any sort of special floor for rates, why not negative 10%?
I am reminded of SITALWeek #205 where I discussed the relationship between interest rates and hope. The expectation of a growing pie and increasing prices is in many ways the hopeful, optimistic outlook. Negative rates conversely represent a fundamental pessimism that calls for an active, steady redistribution of wealth: “what's more pessimistic than negative interest rates? I'll give you a dollar today and I only want 99 cents back in the future. It's a rather bleak explanation; however, it would suggest, rather speculatively, that redistribution in the form of higher wages, lower consumer debt burdens, and even direct government subsidies would create more hope, more inflation, and higher rates along with a stronger global economy.”
✌
Disclaimers:
The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC. 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. 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. 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, LLC has no control. In no event will NZS Capital, LLC 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.