SITALWeek #345
Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, snowflakes, and whatever else made me think last week.
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In today’s post: LEGO bricks journey into a virtual world; smarter water heaters; content fragmentation is driving down future values as it becomes near impossible to have a Top Gun moment; chips that reprogram cells; market-clearing wages; equally valuing all skilled jobs; burning things down to build them back up; everything is ok; and, much more below...
Stuff about Innovation and Technology
Smart Water Heater
We are likely to see a multitude of solutions driving energy efficiency in the coming years. One key area to tackle is heating and cooling for residential climate control and hot water. A company in Germany, Nexol, has created a hybrid AC/DC hot water heater. The unit has a smart controller and a two-stage tank that can warm directly via DC current from solar, without a converter, or via AC from the grid. Replacing HVAC and hot water systems is a messy, real-world problem that will take decades to solve, but, as I noted in #332, this is a good example of one of many opportunities to leverage smart technology to decrease energy consumption over time.
Digital LEGOLAND
The LEGO® brand has long worked to embrace technology and evolve their beloved bricks over time. But, kids today are increasingly on iPads and iPhones and TikTok and Minecraft and Roblox and Netflix and and and...the options seem endless compared to my childhood. While LEGO bricks are still a favorite, one wonders if kids spend less time in their physical building phase before moving on to more digital hobbies. A few weeks ago, the family that controls the LEGO Group invested $1B in Epic, the maker of Fortnite (and the mind-blowing Unreal Engine), alongside existing Epic investor Sony. Commenting on the investment, the CEO of the company that controls the LEGO brand, Søren Thorup Sørensen, said: “A proportion of our investments is focused on trends we believe will impact the future world that we and our children will live in. This investment will accelerate our engagement in the world of digital play, and we are pleased to be investing in Epic Games to support their continued growth journey, with a long-term focus toward the future metaverse.” Further, the FT reported that the LEGO Group will be tripling the number of software engineers at the company to 1800 by the end of 2023. The increase will take the overall software effort to several hundred million dollars/year as well as take back control of previously outsourced projects (when we look at investments, we consistently see that vertical integration is necessary to succeed as products evolve from analog to digital). LEGO executives no longer see a distinction between physical and digital products. This is an interesting case study of a largely analog company working actively to grow its relevance (or at least not lose it) in the face of a significant digital transition and change in the way their customers spend their time. The task is tougher given that Minecraft and Roblox have already built platforms for virtual world building. As I wrote in #327, Minecraft passed one trillion cumulative video views on YouTube last year. However, there are also significant shortcomings and problems with platforms such as Roblox when it comes to moderation and exploitation. Building a successful online world and nurturing its evolution is very challenging, as Nexon's Owen Mahoney has described in the past (see #322). Epic's experience from Fortnite could help the LEGO Group’s efforts on that front. There is also the consideration of where the real world meets the digital via augmented reality (with efforts underway to create real-time maps of the world by Niantic and Snap, see Fabric of Spatial Computing for more). I could see a lot of interesting opportunities for LEGO products with AR and a virtual world combined. Currently, smartphone operating systems are gatekeepers to many digital and AR experiences, which may present challenges for AR world creation in the future if they don’t fully open up their hardware and software features to LEGO (and other) developers, or if they charge a significant access toll to ecosystem users. While it may seem too late for a company like LEGO to make a major digital pivot into virtual world building, the shift from screens to AR may create opportunities and openings for disruption across a host of existing applications.
Crypto & White House Frustrate Green Energy Goals
It’s been a bumpy ride for crypto recently (but, what hasn't been bumpy lately!?). Wikimedia, the foundation that runs Wikipedia, voted to no longer accept cryptocurrency donations due to the energy costs and scam risks associated with the transactions (compared to the negligible energy/risk for a credit card transaction). Surprisingly, despite all of the riches created by crypto appreciation, only 0.08% of Wikimedia donations came via crypto, amounting to only $130,000 last year. Thanks to electricity subsidies, crypto mining will consume close to 25% of all electricity in Argentina’s Tierra del Fuego province in Patagonia. The cold temperatures make the Southern tip of the continent a more efficient location to run hot mining rigs. Argentina also has crypto-friendly political policies and is one of the top-ten crypto adopters. In other crypto news, the Bored Ape $320M virtual land sale frenzy for 55,000 “parcels” in Otherside caused such a burden on the Ethereum blockchain, the underlying platform for ApeCoins, that fees to transact the auction amounted to an additional $123M. The congestion caused more legitimate use cases of Ethereum to see similarly crippling fees. Meanwhile, California ran on 100% clean energy for the first time in history at the end of April, as production from solar (and other alternative sources like wind and geothermal) exceeded the energy demand of 18,762 megawatts – for an entire 15 minutes. Despite the promise of solar (which accounts for around two-thirds of California’s green energy), several hundred large-scale projects were recently canceled in the US as shipments of Chinese solar panels were halted over concerns that China is dodging tariffs by routing panels through other Asian countries. If there is one thread that ties the preceding stories together on crypto and energy, it’s our devastating inability to see the big picture and think long term.
The Declining Value of Ephemeral Content
Decades ago, when a movie or a song was a big hit, it was ubiquitous on the radio, in the box office, and in all forms of ads promoting the content (or, at least, that’s how I remember it). It’s not that it was easy to dominate the cultural zeitgeist, but there was certainly less competition to do so. The shifting content landscape has been on my mind with the upcoming theatrical release of Top Gun: Maverick. Back in 1986, the original Top Gun dominated the collective psyche of the US. The current hype around the sequel suggests public sentiment could approach the 1986 fever, so we will see if the box office lives up to those expectations. But, how unusual is that today? It seems like it stands out as an exception. The breadth of popularity is relevant because companies that produce music and video content (e.g., music labels and Hollywood studios) are essentially specialized lenders that help bring creative endeavors to life. Bankrolling the production of content today usually means making little money or, in some cases, taking upfront losses while making a long-tail return on the future value of that content. It’s essentially a payday advance for the creative talent, who in many cases forgo some of their future earnings in exchange for upfront cash. With ever-growing fragmentation, will today's content have limited long-term value because it leaves our cultural memory faster (or never reaches an enduring level of cultural awareness in the first place)? In other words, is the return on investment for content declining dramatically due to fragmentation? Further, with advances in technology and digital distribution, the cost to create and broadcast content is declining, fueling infinite supply in the face of finite demand. I don’t yet know if content is becoming less valuable, but I am very excited to see the new Top Gun!
Miscellaneous Stuff
Dynamite TNT Chips
Chip-based tissue nanotransfection (TNT) can effectively reprogram cells by using electricity to deliver specific reprogramming factors that control gene expression, allowing one type of cell to be transformed into another. For example, the technology has been used to turn fibroblasts into endothelial cells capable of blood vessel formation, repairing damaged tissue in mice. What’s interesting about this technology is that it doesn’t rely on a viral vector to deliver genetic cargo but rather an optimized nanoporation process, whereby an electrical current punches tiny, temporary holes into cell membranes, allowing direct delivery of the genetic payload from chip to cell. The cells then manufacture the corresponding protein transcription factors, which go to work reprogramming both nanoporated and nearby cells (likely due to transcription factor export). Besides wound healing, potential applications include repairing brain damage from strokes and nerve damage reversal from diabetes. Thus far, the chip has been successfully tested in pre-clinical trials with pigs, and various types of cellular reprogramming have been accomplished in mouse models. Researchers at the Indiana University School of Medicine released details of the silicon chip manufacturing process so that others can work on new commercial applications.
Stuff about Geopolitics, Economics, and the Finance Industry
Wage Bubble?
As I look through the March data for job quits, openings, and wage increases, I see a lot of people churning jobs but no meaningful growth in labor force participation. Most of the millions of people in the US who retired early and left the labor market for other reasons during the pandemic are not coming back to the market anytime soon, despite wage increases. This was also evident in April data showing a decline in labor force participation to 62.2%. Rising wages largely due to job hopping might be creating a hourly pay level that is actually above the market-clearing level for reaching balanced employment. In aggregate with wage increases of 5.5% y/y in April and inflation of 8.5%, real wages may actually be declining for some people. One company trying to tackle worker availability is the US-based Noodles & Company, which now offers immigration assistance as a benefit.
College Degrees vs. Skilled Trades
I’ve written in the past about how alleviating student loan debt could be a net-positive-sum decision that would lead to higher consumption among the debt-strapped Millennial generation as they enter their peak consumption years for the economy. Essentially, the multiplier effect could create more economic value for the US than the cost to waive the debt obligations. I still generally agree that some (at least partial) waiving of debt would be economically beneficial, but I’ve also been wondering why we would limit debt relief to college students/graduates? Why would we consider debt for careers that require college education to be more forgivable than for other types of careers, such as skilled trade (e.g., electrician, plumber, and small business owners of all sorts)? Trade workers might want to take on debt to advance skills, buy trucks or equipment, or access working capital to hire and grow a business. As we stare down a labor shortage that is only going to get worse due to prior low birth levels, Boomer retirements, and flagging immigration, what we need is more people working in all types of jobs. We were able to prove during the pandemic that Universal Basic Income isn’t currently necessary given the low labor force participation rate. Rather, we need some type of Universal Basic Opportunities, i.e., a mechanism to encourage people to get trained, get hired, start businesses, and enter or re-enter the workforce successfully. There is no reason to limit this assistance to jobs for which a college education is necessary. Indeed, with increased software automation coming to replace pencil-pushing (aka mouse-clicking) middle management, we’d be better off incentivizing critical skilled trade work and other skilled professions. It seems sensible to support everyone who wants to tackle the types of jobs that will be difficult to automate in the coming decades as the population ages and birth rates continue to decline.
Breaking the First Rule of Fight Club
I’ve put off linking to this Vanity Fair article “Inside the New Right” for a couple of weeks because I am not sure if I have anything interesting to say about it, let alone understand it. Part of my hesitation is my strong dislike of using labels to identify groups of people when individual variances are always wider, more important, and more interesting. My takeaway from the VF article, which may just represent my own bias, is that there seems to be a Fight Club-esque ideology of burning down the establishment so that we can build the world anew. Somewhat predictably, there isn’t necessarily an agreed-upon blueprint to rebuild. Several interconnected topics I’ve explored over the past few years include: 1) The rise of nationalism in the face of stagnant real-wage growth this century, 2) An increasingly existential sense of lost purpose as technology adoption palpably inches us closer to a future where humans are less special, and 3) A loss of common culture as the Internet both fragments and amplifies differences. I’ve also connected this socioeconomic dysfunction/evolution to crypto, which seems a manifestation of the anarchistic desire to start from scratch rather than make the existing financial/monetary institutions adapt to evolving needs and technologies. I can’t quite put my finger on it, but all these ideas seem connected in some important way. And this article, even though it tries to over-classify an exceedingly complex movement, still might provide a useful clue to fitting it all together.
Speaking of doomsdayism, all of the “expert” guests across the financial news media believe the sky is falling and end-times are near. They believe there is no hope, that everything has changed, and now is the time to run and hide. This I know is not true. There is nothing wrong with the world that won’t be fixed in time. How did we arrive at this moment with a mid-teens percentage decline in most global equity indexes and a historic 10% decline in bonds year-to-date? The explanation is surprisingly simple: a couple years ago there was a pandemic, and, without complete information or a working crystal ball, politicians injected too much money into the economy. Now, to correct this liquidity problem, the money is being sucked back out. It was a temporary economic experimental mishap that has little bearing on the long-term outcome of the global economy. Markets need homeostasis like all living creatures, and it can be a challenge to find it. Sure, there are things to worry about, but most of those worries won’t come to pass. Complex systems theory teaches us that you should expect the unexpected, but you can also prepare for the unexpected (which we discuss in Complexity Investing).
The successful path has always been one of optimism. As I have noted repeatedly in this newsletter, cynicism sounds smart, but it’s never beautiful, and optimism always wins in the long term. If optimism doesn’t win, then it doesn’t matter what happens, so always bet on optimism. There is an extended arc of 800 years of interest rate declines resulting from the simple math that one person’s debt is another person’s asset, and it’s unlikely to reverse because of an 18-month policy misstep. There are some things humans need to address that could cause structural inflation and rates to stay higher for longer. Declining birth rates and anti-immigration policies are inflationary. The moral panic against investing in real infrastructure (disguised in many instances as “ESG” investing) that we need for the energy transition and the future of the planet is damaging and inflationary. The heating up of planet Earth will be inflationary. Yet, as has happened for hundreds of thousands of years, human innovation and spirit will invent a deflationary way out of whatever crises we face. But, we don’t need to join hands and plead for collective salvation or pretend things are ok – because our world is already ok on balance. Social media platforms and their leaders have worked out ingenious ways to take advantage of our brain’s shortcomings to convince us that our social, political, and economic structures are failing us. They’ve convinced us we hate each other. They’ve convinced us we need to burn it all down in order to build it back up again. But, we’ve already built civilization, and we will continue to adapt and evolve alongside it as we make it better. Sometimes it feels slow, and sometimes it feels like we are moving backward; but, if you consider the bigger picture, it’s clear the long arc of human progress always has been, and always will be, moving forward.
✌️-Brad
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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry.
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