SITALWeek #257
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, candy, 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 sign up form; if you have any issues or questions please email sitalweek@nzscapital.com)
In today’s post: package bottleneck could cripple ecommerce; Apple values Warren Buffett’s opinion over its customers’ problems; health wearables are our best way out of COVID; lost Halloween; lost baggage; inflation and the paradox of mean reversion investing; and lots more below...
Stuff about Innovation and Technology
Robots are Arriving
Robots have been a frequent topic in SITALWeek for years mainly because I think they are cool. And don’t even get me started on drones! We invest in a lot of semiconductor, component, and sensor companies across our strategies that enable robots (and drones!) as a small part of their overall businesses. However, a world filled with humanoid robots is still just wishful thinking, and the potentially enabling tech is still not a big industry. The heterogeneous and specific uses for AI-enhanced robots are so varied that there isn't much of a platform or network effect opportunity that would enable the industry. The software is increasingly complex, development involves intensive data collection and machine learning, and the industry is currently only supported by fragmented end-market opportunities. There have been tons of task-specific industrial automated machines for a long time, which is a nice industry with decent growth, but it’s nothing revolutionary. Turns out, the biggest hindrance to development of intelligent, dexterous robots has been the high bar we ourselves have set – humans are off-the-charts efficient at taking in food and outputting incredibly complex mental and physical gymnastics. Think I’m exaggerating? Just watch a robot do something as simple as trying to fold towels. Much effort has been put into teaching robots how to learn on their own (by watching YouTube videos, for example), but general purpose humanoid robots still seem a long way out; so, for now, we have a purpose-built laundry folding machine instead.
All that said, COVID appears to be accelerating robot adoption because those zillions of niche use cases are suddenly getting much bigger, and that’s exciting. The NYT covered Avidbots’ Neo floor scrubbing robots used in airports. Neo costs around $50,000 plus $300/mo, which pays for itself in about 18 months. Or, there’s the Whiz vacuuming robot that leases for $500/mo (given the name, I initially thought it was a bathroom cleaning robot😉). And now we get to the tricky part: “pays for itself” means that these intelligent robots are becoming more cost effective than paying humans to do the same jobs, especially in a post-COVID world where humans are a bigger liability in public spaces. So, if we see a big robot acceleration, we will have to face the question of UBI (or other government assistance) much sooner. Should there be a robot “payroll” tax? Should people who are replaced by robots receive benefits? Are we already centuries into the robot revolution and all living in pods that use our brains to power said robots? Is the T-800 coming back soon to fight the T-1000 and help us prevent the future war with robots? So many questions. I’ll be back with more answers...someday. 🤖
Package Delivery Bottleneck Breaking Ecommerce
Package fulfillment is gearing up to be such a bottleneck, as ecommerce gains share, that it seems likely to drive people toward click-n-collect, local delivery, or even back into stores later this year. As I noted last week, UPS and FedEx are raising prices much faster than they are raising capacity, and USPS is in disarray. Now, UPS says it will implement a $3-4 per box surcharge around the holidays for big customers shipping 25,000 packages a week – effectively rendering many ecommerce shipments unprofitable for all but Amazon (who fulfills a little over half of its own packages) and its Fulfillment by Amazon (FBA) customers. But, there’s even trouble for those 3rd-party merchants as Amazon has slowed intake of FBA items. Merchants using FBA are in a bit of a bind – with Amazon’s algorithm limiting how much they can send to their warehouses, they are more likely to sell out of inventory items, in which case another algorithm will demote their rankings. With rising shipping surcharges and lagging capacity from package carriers and an increasingly closed off Amazon, what can retailers do? In terms of marketplace alternatives, there’s eBay and Walmart, or you can sell independently using a platform like Shopify (which is still trying to build-out its fulfillment), but you still have to get the packages from A to B without losing money on every shipment. The US needs a new last-mile provider willing to provide a positive sum, win-win outcome for retailers. Such a network, while not trivial, would be quite inexpensive to build out. Amazon accomplished a lot of its package delivery capabilities by leasing Sprinter vans and uniforms to contractors looking to start their own business. And, there is plenty of warehouse space as people are even spec-building new facilities. Shopify or Walmart could build out end-to-end logistics much faster than they are now – and include last mile – but a certain package density is needed to get the flywheel going. In the meantime, UPS and FedEx are increasingly negative-sum businesses focusing on short-term EPS growth while they put their retail customers out of business, with their current strategies handing even more of the US ecommerce market to Amazon.
Why Would Anyone Still Use an iPhone?
Apple has shut down the efforts of Microsoft, Facebook, Google, and others who want to launch their video game marketplace on Apple. This leaves all of Apple’s customers unable to access what’s shaping up to be a compelling new set of ‘game pass’ apps that allow access to multiple games across platforms for one fee. Microsoft’s Xbox Game Pass, set to launch in September, costs $15/mo, includes over 100 games, and allows customers to start a game on one device, like an Xbox, and then pick it up on a phone, but no such luck if they have an iPhone. Tim Sweeny of Epic, maker of Fortnite, had this to say: “Apple has outlawed the metaverse. The principle they state, taken literally, would rule out all cross-platform ecosystems and games with user created modes: not just XCloud, Stadia, and GeForce NOW, but also Fortnite, Minecraft, and Roblox”. Apple’s excuse is essentially that they need to personally approve all games even if they are inside of a gaming app, and Tim Cook just doesn’t have the time to play them all (that’s my facetious interpretation of the situation, you can read what Apple actually said here). Apple allows users to access YouTube, so is Tim Cook also watching every piece of content on that app? That’d be impressive. How about Netflix? Does every TV show and movie get Apple’s seal of approval? How about every book on Kindle? Every fake news and hateful post on Facebook? How about web browsers, like the Chrome app on iOS? Would we like Tim Cook to vet the entire Internet for us, or are we capable of looking out for ourselves!? Apple is considerably more tone deaf than Microsoft was 20 years ago, when Microsoft had similar moral missteps, which resulted in a ten-year consent decree from the US government that caused them to miss mobile, search, and other big markets. This same behavior at Apple will have the same consequences, causing them to miss AI, AR, and other upcoming next-generation platform shifts. Tim Cook has taken bold and innovative products, developed over a decade ago by Steve Jobs, and run a risk-averse, 1900’s Industrial Age, MBA playbook focused on squeezing users to create more value for shareholders. Apple today appears to value what Warren Buffett thinks of its share buybacks more than it values what its customers think of its products. In the year 2020, that is the riskiest strategy any CEO could plot for a company. Of course, this is all just sour grapes.😉
Google Cloud Pivots to Customer Centric
RedMonk reports on the big shift underway at Google Cloud under the leadership of former Oracle exec Thomas Kurian. Google is landing an impressive list of long-term platform deals as it changes to a customer-centric approach. This characterization of the three big cloud platforms is particularly insightful: “Tech companies tend to see the world in very particular ways. At Amazon Web Services (AWS) the focus is Always Product – everything is in the service of the customer and thus of the product, with small teams organised to build compelling primitives. Microsoft has always been about Programs – build tools and platforms and then build world class programs around them. Google meanwhile has never really been about people, product, or program but rather the primacy of the Platform. At GCP everything has been in the service of the Platform. Sure it has programs, people, and product ownership, but Google is always Platform all the time.” However, one big deal Google might be poised to lose – if Microsoft has anything to say about it – is its $800M+ three-year deal to power TikTok.
Food Fulfilment Going Vertical
DoorDash is launching DashMarts in cities around the US – offering 2,000 grocery, convenience, and restaurant items for delivery. The vertically-integrated strategy, which strikes me as the only way to profitably do local food logistics, puts them at odds with their partners, like 7-Eleven and CVS, but that’s the reality of the situation. The delivery platforms that can overcome this Catch-22 (previously discussed in a few SITALWeeks) could have a very big opportunity ahead of them. And, Amazon is still in the mix as it plans to launch 15 new Amazon Fresh grocery stores across the US, rumored to feature Dematic robots that can pick 80% of the items from an online order in under five minutes. The stores, which are split between a micro-warehouse for robots and aisles for humans, will also feature Amazon’s new smart shopping carts.
Wearables the Answer to COVID’s Slow Burn?
This Nature feature reviews the ways in which COVID is likely to be around in some form for a long while. I believe the best way forward as a global society may be to embrace wearable health monitoring (along with masks!). If people are willing and able to wear sensors that monitor temperature, respiratory rates, heart rhythms, etc., then we would all know when we are potentially getting sick and could self-isolate much earlier. There is an obvious dark side with potential data misuse, as well as the anxiety that health monitoring can cause, but I hope that the benefits ultimately outweigh the downsides. If people didn’t want to participate in health monitoring, it’s possible they would ultimately not have access to certain parts of society, like stores or public gatherings. The data from wearables could launch the healthcare system decades ahead in prevention and treatment of many diseases. Most employers and insurance plans should be happy to subsidize the costs, which are low compared to the benefits. As I’ve said in the past, fashion will play a big role as well. If I were running a luxury brand, I would be focusing all my efforts on wearable tech. Apple’s watch has some traction, and Fitbit and Oura are great products, but there isn’t a clear platform winner emerging yet in the wearables space.
GPT-3?
I’ve been puzzled by the excitement over the new AI language model, known as GPT-3, but assumed it’s because understanding it is beyond my comprehension. I thought this Economist article was useful, in particular this quote from SFI external professor Melanie Mitchell (who taught Brinton and me complexity science way back in 2012!): “It doesn’t have any internal model of the world—or any world—and so it can’t do reasoning that requires such a model.” For example: “GPT-3 often generates grammatically correct text that is nonetheless unmoored from reality, claiming, for instance, that ‘it takes two rainbows to jump from Hawaii to 17’”. Then again, as I look around, it’s not clear any of us have a working internal model of the world!
Miscellaneous Stuff
Candy, Candy...Candy?
$16.1B: that’s 60% of all annual candy sales in the US associated with just four holidays: Valentines, Easter, Christmas, and – the motherload of all – Halloween👻🎃🧛♂️. In the eight weeks leading up to Halloween 2019, $4.6B in candy was sold, or 28% of the four peak-sugar holidays. Candy is big business – the Mars family is worth an estimated $90B! As you can imagine, candy makers are a little apprehensive about sales this year with the COVID pandemic. According to Adweek, a poll suggests that only 27% of parents will let their kids trick-or-treat on All Hallows’ Eve this year. Marketers are planning on ramping up ad campaigns to “treat yourself” this fall and focus on non-Halloween specific packaging. These are difficult times, and I would like to pledge right now that my family will do its part to pick up the slack whenever possible when it comes to candy consumption. 🍫
Unclaimed Baggage
Prior to COVID, there were 4.3B bags checked every year on flights, of which 25M were lost and 1.3M were never claimed! After 90 days, the airlines sell them all to one company in Alabama called...Unclaimed Baggage. This article from The Hustle describes the bizarre situation and some of the strange and valuable things found. About a third of the items in the suitcases are donated, a third are tossed, and a third are sold in a 50,000 square foot store in Alabama that had 1M visitors last year.
Gates Unchained
Bill Gates’ great Wired Magazine interview by Steven Levy showcases the increasingly animated Gates, who is realizing now is not the time for diplomacy. Read about Gates’ view on the poisoned chalice of social media, being told to “shut up and listen” by Trump’s minions, how the Big Tech CEOs got off easy in front of Congress, and his newfound microwaving skills.
Stuff about Geopolitics, Economics, and the Finance Industry
Western Companies without WeChat?
Trump’s new executive order for US companies to cut ties with TikTok and WeChat introduces complexities that surely weren’t considered in advance. In particular, Tencent’s WeChat is a communications and payment platform so pervasive in China that asking US companies to sever ties with it is effectively like asking them to leave China. For Apple’s China-based customers, iPhones would be useless bricks (for the most part) without Tencent’s apps running on them. Walmart wouldn’t be able to communicate with or charge many of their customers in China. And, what of Tencent’s extensive investments in Snap, Activision, Reddit, Riot (League of Legends), Epic (Fortnite), Tesla, etc.? I am eager to watch this play out, but it’s another clear indication that the virtual border war between the US and China is heating up, and retaliation should be expected. The further Balkanization of the Internet is troublesome, to say the least.
The Myth of Interest Rate Mean Reversion
There is a certain profile of investor I call an “interest rates will Mean Revert” investor, or MR for short. There are a lot of really smart MRs with great track records, like Warren Buffett. In May of this year, at the annual Berkshire gathering, Buffett had the following to say:
“So if the world turns into a world where you can issue more and more money and have negative interest rates over time, I’d have to see it to believe it, but I’ve seen a little bit of it. I’ve been surprised. So I’ve been wrong so far...if you’re going to have negative interest rates and pour out money and incur more and more debt relative to productive capacity, you’d think the world would have discovered it in the first couple thousand years rather than just coming on it now. But we will see. It’s probably the most interesting question I’ve ever seen in that economics is can you keep doing what we’re doing now and we’ve been able to do it or the world’s been able to do it for now a dozen years or so but we may be facing a period where we’re testing that hypothesis that you can continue it with a lot more force than we’ve tested before.”
MRs like Buffett believe that there is a certain anti-gravity that should cause rates to be structurally higher (largely to offset inflation stemming from higher debt levels), which they are counting on so that bank stocks rise and value stocks reverse their long period of underperforming growth stocks. There is a funny paradox worth noting about the MR view of rates: companies at lower valuations tend to be more mature and therefore tend to have more debt (though certainly that’s not true in all cases), which means that, if rates rise by several hundred basis points, catastrophe could ensue for those companies unable to sustain their high levels of debt. And, it’s not just value companies at risk, but the whole system, since one company’s debt is another’s asset. Likewise, higher rates could easily create a geopolitical crisis owing to the massive government borrowing around the globe. If borrowers can’t service and pay back that debt, then the debtholders don’t have assets. And that’s bad. I discussed this conundrum in more detail in our mid-year update last month:
“Did low rates increase debt, or did debt demand low rates? As an economy grows and debt increases, the borrowers – those people who need to make the interest payments and eventually return the principle – tend to be disproportionately less-wealthy, while the people who lend money out and make a return on it tend to be wealthier. As time goes on, the wealth of the wealthier is more and more tied to the interest payments from the less wealthy – one person’s indebtedness is another person’s asset. And, as inequality marches higher, the less wealthy have an ever-rising debt burden that can only be maintained by perpetually lowering interest rates. It’s in the best interest of the lenders to lend at lower and lower rates to preserve their assets. This explanation is somewhat at odds with the general narrative – that lower rates are the driving force behind rising debt. Certainly lower rates allow rising debt; however, the common view misses the crucial point that increasing debt necessitates lower rates...” (Note: this concept is explored in more mathematical detail in this essay from Ole Peters).
Now, let’s consider inflation. Rates can go up for different reasons, but one view is that rates should be increased to vacuum money out of the economy to offset inflation (or preemptively counter expected future inflation). The main inflationary fear right now is that excess liquidity from COVID-driven fiscal and monetary stimulus will be the source of that inflation (I’m rather puzzled by this fear because much of the stimulus has been replacing lost GDP, not adding to it, but let’s shelve that point for now). And, there can be short-term shocks which cause inflation – e.g., war can reduce oil supply and drive up prices, or drought can increase crop prices. There are also localized bubbles of long-term structural inflation, e.g., US healthcare costs.
But, let’s try to take a first principles look at systemic, structural inflation – in particular, long-term price increases on the scale of hundreds of years. Why would prices go up, on average, for everything over a prolonged period of time? I couldn’t really find an answer that made sense to me when I researched this question (and, let's generously say that my degree in economics was less helpful here than my degree in astrophysics😁; so, to be clear: I am guessing here). So, here is my interesting, simple hypothesis: a long-term cause of structural inflation would be upward pressure from population growth, which would be offset by downward pressure from technological progress. A growing population outpacing the production of goods and services (produced/provided for their own consumption) and leveraging their growing wealth would cause inflation, while technological progress (i.e., making more for less) would offset inflation. Seems reasonable, right?
Humans (Homo sapiens) took at least 200,000 years to get to a population of ~400 million by the early 1400s (following a dip in the 14th century due to the Black Death). But then we went from 400 million to nearly eight billion in the last ~600 years. One of the reasons for population growth was the burgeoning expansion of the economic pie. A dash of Renaissance, a touch of Enlightenment, and a heavy pour of science and the Industrial Revolution all created a lot of hope for the future – and a lot more people. There was more to go around, and people believed that there would be even more to go around in the future. When you believe the future will be bigger than the present, you are also more inclined to borrow and invest in that future.
Inflation over this 600-year period has been a little over 1% on average*; however, sustainable inflation has been the highest over the last 60 years, at around 2%, which corresponds to a period when aggregate borrowing in the US (both public and private sector) went from around 1.5x GDP to around 3.5x GDP. So, there seems to be at least a modest correlation between a significant increase in borrowing and an increase in inflation (borrowing driving up inflation makes intuitive sense, since lenders are conceptually printing money; that said, certainly a lot else has changed in the last 60 years as well). More recently, inflation has been declining (from its most recent high ~1980) while borrowing continues to grow (US public and private debt).
So, what have been the overriding deflationary pressures that account for this recent decline? The pace of technological development has been massively accelerated and global population growth has slowed. Over the last 60 years, the annual global population growth rate has dropped from around 2% to a little over 1%. And, in the US, the birth replacement rate has been steadily falling to the point where, without immigration, the US population would be shrinking marginally.
While we’ve had a clear, declining interest rate trend since the 1980 peak, real rates have actually been declining since the 1400s*, tracking the population increase, GDP, and, in turn, rising debt. So, in some ways, the trend of rising debt and falling rates has been happening for a long time. Perhaps it is the natural way of civilization, per Ole Peters’ theory referenced above, i.e., falling rates are necessary to sustain the value of an ever-increasing pool of debt (one person’s debt is another person’s asset). Rates may dance around the mean short term, but there’s no historical evidence that suggests we should expect an increasing interest rate trend in the future (indeed, quite the opposite!).
Let’s turn briefly to potential systemic, sustained deflationary pressures we might face, which are a little easier to guess at. Advances in technology, as well as improvements in productivity, are constantly giving us more for less. While we might have a period of oil price shocks, green energy will solve that long term. As the economy becomes increasingly digital, from less than 10% now, to 100% over the coming decades, and as AI increases, we will see unprecedented deflationary pressures. Look at what’s happened just this year – thanks to broadband, our houses have become offices, gyms, schools, etc. – talk about a lot of technologically-enabled bang for your buck!
Putting all the variables together, we see inflationary pressure from increased borrowing and deflationary pressure from slowing population growth and increased technological progress. Of course, there are a thousand other variables – like how quickly AI can destroy or create jobs, whether or not de-globalization will follow decades of globalization, etc. It’s incredibly complex. Indeed, the world’s economy is a complex adaptive system, and no one can accurately and narrowly predict its behavior given its sensitivity to small perturbations and propensity for spawning fat-tail events. With near certainty, we can say that short-term inflationary shocks will happen, but when, why, and how big are anyone’s best guess. Moreover (MRs pay attention here), it seems clear that we can no longer treat the “symptom” of inflation with the “cure” of raising rates because it would destroy the asset value of our highly leveraged global economy. Therefore, government tactics will likely turn to treating the localized inflation directly via offset, e.g., using fiscal stimulus to offset an oil or food price shock. Sure, fiscal stimulus could temporarily add inflationary pressure; but, unless we somehow deleverage the economy without destroying it, it’s hard to make a case for structurally high rates. However, I am rather obsessed with making a case for higher rates since I cannot find one that passes both logical and mathematical scrutiny. For years, I’ve searched for answers that would support the counterargument, and have utterly failed thus far. So, if you have a theory for why rates will be sustainably higher that considers or falsifies what I’ve written here, please let me know!
*several numbers in this section were taken from this post for convenience, but are generally available across the web as well.
✌
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.