SITALWeek #270
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, truth, 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: Restaurant robots; equitizing hard assets; linear Netflix; how to think about inflation, rates, valuations, and volatility following the US presidential election; and more below...
Stuff about Innovation and Technology
Cyborg Roach Swarm
Researchers at the University of Tsukuba in Japan are working on turning cockroaches into cyborg armies.
“By stimulating the left or right antenna nerves of the cockroach, you can make it think that it’s running into something, and get it to turn in the opposite direction. Add wireless connectivity, some fiducial markers, an overhead camera system, and a bunch of cyborg cockroaches, and you have a resilient swarm that can collaborate on tasks. The researchers suggest that the swarm could be used as a display (by making each cockroach into a pixel), to transport objects, or to draw things.”
Rumor has it that similar research was carried out over a decade ago by the architects of social networking apps.
Fry & Flip Bots
Food service robots are expected to become a $300M+ industry by 2028 according to a report in this Restaurant Dive article. Given the need to accelerate order prep as fast-food chains gain share in the pandemic, that estimate is likely too conservative. One chef-bot example is Flippy from Miso Robotics, which can safely handle 360 batches of french fries per day or endlessly flip burgers (reportedly cooking them to the perfect temperature every time). White Castle is trialing both applications. The increased use of robots is one of the many tailwinds for the semiconductor, sensor, connectivity, AI, cloud, and design sectors of tech.
Discord’s Casual Communication
Discord, which started as an audio chat feature in 2014 for video gamers in different locations, now has over 100M monthly users. Rather than organizing calls in advance, different channels on Discord are always open and running, so it’s more like “walking into a room and plopping down on the sofa: You're simply saying, I'm here, what's up?”. The popularity of the service has caused a significant uptick in the number of Discord communities on a variety of topics and interests outside of video gaming. The company’s $120M in estimated revenue for 2020 came from premium features sold to its users, and the founders do not plan to sell ads or user data, which is perhaps the biggest differentiator vs. other casual communication platforms.
Equitizing All Things
As interest rates stay low (which is now even more likely without the potential inflationary impact of fiscal stimulus that could have taken place following a blue sweep of D.C.; see below for more) the race is on to find new and creative ways to slice up and equitize everything as people look for places to put money. I discussed the new startups creating exchange platforms for classic cars, art, and vacation homes in SITALWeek #265. Dot.LA reports on a VC looking to achieve a similar market for baseball cards, an asset class reported to have outperformed even the equity markets over the last ten years. Anything with any sort of scarcity becomes more valuable in a world of abundant capital, but speculation is sure to create some spectacular bubbles here and there.
Netflix Goes Linear
Netflix is testing its first programmed linear channel, called Direct, in France. Variety reports the new channel will show a diversity of shows and movies; but, so far, the service is only available on the browser and not connected TVs. Cynically, I would argue that this is more evidence of the abundance of formulaic content, decision fatigue, and apathy that is leading streamers to just want to watch something, no matter what that something is. But, I hate being cynical, so I’ll contend that there is real value in programmed channels. Indeed, the popularity of programmed, ad-supported services, like Pluto TV, supports this idea. According to Netflix’s website in France: “many viewers like the idea of programming that doesn’t require them to choose what they are going to watch...Whether you are lacking inspiration or whether you are discovering Netflix for the first time, you could let yourself be guided for the first time without having to choose a particular title and let yourself be surprised by the diversity of Netflix’s library.”
I imagine that this will become the preferred way to consume Netflix, and they end up with multiple channels and ultimately need less library content to feed personal algorithms. That's basically what HBO was (and still is for folks with cable). Such a development would also be consistent with my "less is more" hypothesis given the current abundance of mediocre scripted content.
Miscellaneous Stuff
Oregon OK’s Magic Mushrooms
Following previous decriminalization of the psychedelic drug psilocybin in Denver, Santa Cruz, and Oakland, last week voters in Oregon “approved a measure that will ultimately lead to the legalization of psilocybin, the hallucinogenic aspect of mushrooms, for medical purposes in the state”. Meanwhile, Washington D.C. also voted to decriminalize psilocybin, and research across various medical institutes continues to uncover its therapeutic benefits (see also the “Misc. Stuff” section of SITALWeek #209).
Stuff about Geopolitics, Economics, and the Finance Industry
CCP Squashes Ant IPO
Xi Jinping canceled the highly anticipated IPO of Alibaba’s fintech powerhouse Ant. The move came following critical comments from founder Jack Ma (although those comments were likely in response to foreknowledge of the pending cancelation). As Bloomberg reports:
“The timing of the decision showed once again that for Xi and the party, financial and political stability take precedence over ceding control of the economy -- especially to a private company. In Beijing’s view, allowing the IPO to go forward could effectively give Ant too much sway over the financial system, posing broader risks that could ultimately undermine the party’s grip on power.”
It’s a reminder that all businesses in China are effectively state-controlled entities serving the state's mandate.
Gridlock is Good for Markets
The US equity markets last week began to price in another four years of governmental gridlock (with a small chance that the Senate will work with the Biden administration on some issues, depending on how those races finish out). Predictability can aid stock market valuations, so markets like political logjams because – predictably – very little gets done. Given this seeming post-election clarity, I want to revisit a couple of posts from the summer where I discussed rates, inflation, and valuations. In our mid-year update, we raised the point that the market could be overpricing risk given the likely scenario of persistent low rates and long-term deflationary pressures (that’s not intended as a victory lap, we just tried to explain how that might be one of many possible outcomes). Now, with gridlock in D.C., the chances of having inflation from sweeping fiscal stimulus is lowered, and a future of existentially low rates with little risk of inflation becomes even more likely. And, maybe we can now even enter the post-post-truth era where reliance on facts and evidence might temper market volatility as well.
Why rates are likely to stay low (from our mid-year update):
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 – which actually has mathematical support.
Why deflationary trends are likely to outpace inflationary pressures, and how we might leverage deflation to improve social and economic equality (from SITALWeek #258):
Consider technological investments in today’s Information Age. Forging leading-edge technology is capital intensive for a handful of large cloud infrastructure providers, but the resulting productivity increases and technological advancements far exceed the capital invested. Think of the productivity output of a single Nvidia A100 system: a $100,000 investment could produce a breakthrough that creates billions of dollars of value...every day! So, although (at present) we are in a period of significant debt expansion in the economy, we are in a much more significant, overarching phase of ever-accelerating technological advancement.
Does accelerating deflationary pressure – from nonlinear advances in technology – enable the expansion of the money supply without the corresponding risk of inflation? This question is perhaps even more critical now that we are on the cusp of unprecedentedly rapid change/disruption as we move from the Information Age to the AI Age. Around 40 years ago, the pace of technological advancement went from analog speed to digital speed, and with AI it’s about to go to ludicrous speed. Technology was always jumping ahead with nonlinear improvements, but the pace of change accelerated even more with the introduction of the PC and the software revolution. Many activities and ways of doing business in the year 2000 would have been unrecognizable in the year 1980. Indeed, I have a difficult time remembering what it was like a decade ago without a smartphone and ubiquitous high-speed connections; so, in many ways, 2010 is unrecognizable to me today (and vice versa). I expect 2025 will look unrecognizable to us from today’s viewpoint. And, to follow this acceleration, 2028 may look unrecognizable from 2025. 2030 from 2028, 2031 from 2030, etc.
The late-1970s/early-1980s pivotal shift from analog to digital likely played into other society-changing forces that began around the same time, including increased globalization (enabled in many ways by digital technology and communication) and the beginning of real earnings stagnation for a large part of the population. The accelerated pace of change and the shift from an assets- to an information-based economy helped accrue wealth for the wealthy, and steadily declining rates over the last four decades enabled wealth concentration as well...For the last four decades, the pace of change has become much more nonlinear and exponential…Accordingly, it seems quite plausible that our current era of unprecedented technological growth offers its own solution – providing sufficient disinflationary/deflationary pressure that we might be able to buy our way out of our current, untenable societal problems, but time will tell.
If the low-rate and low-risk of inflation scenario continues to persist, then where does that leave the market and valuations? (Again, from our mid-year update in July):
There is much speculation in the markets that the markets have too much speculation. However, the current positive impacts from fiscal and monetary stimulus, combined with the negative impact of the short- and long-term effects of COVID-19, make it hard to know if the market is underpricing or overpricing risk. Before the global meltdown, “risk-free” long-term US government bond rates had around 2%-3% yields, corporate bond yields were a bit higher, and the market multiple was ~20x forward earnings. Absent the drop in interest rates and the fiscal stimulus, which has so far guaranteed almost all assets are “risk free” (as the central banks continue to purchase nearly anything to provide liquidity and stabilization), the shallow correction in equities seems to underprice the risk of multiple years of rolling shut downs and the fat-tail fallout from the pandemic. However, the penalty of holding cash at zero (or in some countries negative) rates is strong motivation to bid up riskier assets with higher return potential. Therefore, with zero rates and fiscal stimulus, the market might be unexpectedly overpricing the risk of the pandemic...which brings us to valuations.
The starting point when you buy or own a stock matters. A high starting point forces you to try to peer further into the future, requiring very narrow predictions about how the far future will unfold in order to be correct in the present. Conversely, a low starting point allows for broader predictions, and does not require that crystal ball to be nearly as accurate. We know from complex systems that attempting to precisely and accurately predict the future is of little use. Therefore, there are two responses to a high starting point: 1) the more narrow your prediction(s), the smaller the position size should be (and vice versa); and 2) keep an eye on the totality of those small position sizes, such that you aren't making a portfolio-level narrow prediction about valuations. It’s fairly easy when you simplify it: match the breadth of prediction to position size and monitor the total exposure of narrow predictions across the portfolio. None of this argues for selling a position entirely if the outcome asymmetry is still high; instead, it argues for thoughtful position sizing and portfolio construction – a good idea no matter what the starting point is.
To recap, if we take a Bayesian approach – constantly adjusting our prior credence up or down as new evidence comes in – then, we treat the outlook for gridlock in D.C. as supportive of a sustained period of lower inflation, lower interest rates, and higher valuations. If I revisit the topic above regarding 40 years of declining rates and increasing inequality, it's hard not to see this election framed as a vote to try and redress that issue. Or perhaps, the election outcome was simply a vote for the importance of honesty and compassion. Regardless of why it happened they way it did, we remember the world is a complex adaptive system, and any type of narrow prediction is a fool’s game...expect the unexpected.
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Disclaimers:
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