SITALWeek #368
Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.
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In today’s post: a fascinating look at an algorithm used by the apartment industry that might be one of the biggest false flags in the Fed's policy-setting data; why EV chargers may proliferate at a much faster rate than expected; waterways are becoming very stressed with more drought on the way; an economic blueprint for the next few decades; public investors sitting on record cash levels while private companies burn record amounts of cash; and, much more below...
Stuff about Innovation and Technology
Algorithmic Distortion of Apartment Rents Fuels Interest Rate Hikes
In Magic AI-Ball, I wrote about the accelerating implementation of algorithms in corporate decision making, declaring that “the increased use of AI tools/software add-ons will have one tangible impact: a significant increase in the amplitude of feedback loops in the economy.” Referencing the Amazon SCOT inventory/capacity planning system, which caused Amazon to far overshoot on pandemic ecommerce capacity, it seemed entirely probable that broad implementation of algorithmic tools, all crunching the same data in similar fashion, could increase the frequency and amplitude of business cycles. This might be exactly what happened with apartment rentals in the US during the pandemic. According to ProPublica, a large portion of apartment operators were using the same pricing and yield software tool from RealPage, causing a spiral in rent prices beyond what might have otherwise happened. In some cities, nearly all major apartment owners were using the tool, which utilizes private pricing data from competitors to determine rental and occupancy rates that maximize revenues. The result was an apparent form of collusion using an algorithmic go-between to push double-digit percentage rent increases. RealPage-driven price increases coincided with an unexpected uptick in demand during the pandemic (see the final Demographics section from two weeks ago for an explainer on that topic). Now, the rental market is experiencing an aberrant drop in demand while abundant new supply hits the market. Likely, much of that new supply had been started before the algorithmic acceleration of rents, but it’s possible high rents also encouraged supply. The outcome could be a glut of supply and a downward spiral in rents as the pricing software tries to beat the competition to drive occupancies. The victims appear to be the renters, who are potentially being charged more than a normal free market clearing price (RealPage claims to advocate higher rents at the expense of occupancy). And, the bigger victim here might be the economy as a whole, given how heavily the Fed relies on rent prices – which account for 40% of core CPI measures – to feed its interest rate decisions (if the Fed could digest more real time data we might avoid a major recession or liquidity crisis in the economy). I wouldn’t go so far as to say that one misguided algorithm is going to drive the world into a global recession as central bankers aggressively raise rates (there are many other factors at play, including excessive fiscal stimulus and overly accommodative rates during the pandemic), but algorithms are clearly having a negative, multiplicative impact.
Another area I mentioned where algorithms are increasing volatility is stock trading, which, as we saw last week, can induce rather seismic political upheavals. As easy as “swiping up” on TikTok, the UK is getting another new prime minister after the bond and stock markets reacted negatively to policies from PM Liz Truss. Investor concern regarding new fiscal policy is nothing new, but the stock and bond markets’ severe reaction and political impact were largely without precedent. Given how much short-term market moves are now dictated by algorithms and high-frequency trading, it seems logical that algorithms feeding each other headlines and sentiment indicators exaggerated a feedback loop that effectively caused the resignation of the UK’s shortest reigning prime minister. The complexity of the system makes it hard to trace the exact causal sequence, but I think we can disconcertingly say that algorithms have an outsized impact on major parts of the world. This is likely to continue to become a larger issue as more companies rely on so-called AI to make business decisions.
Mexican ‘Za with Side of Electrons
A Taco Bell franchisee with 120 locations plans to install EV chargers in parking lots for customers. The ChargeNet chargers will add about 100 miles of range in 20 minutes for $20 while you eat your Mexican Pizza. That cost is roughly the same as gas for an ICE car that gets around 20 mpg. However, I wonder if, over time, having chargers available will go from a profit center to a cost of doing business, with management offering subsidized electrons to entice consumers to their business over a competitor. There are currently an estimated eight parking spaces for each car in the United States. If every household and a significant percentage of parking spaces eventually have a charger, the size of the charger market could be quite large. You could imagine a future where each grocery store, movie theater, mall, office building, etc. has hundreds of subsidized chargers in their parking lots to win your business and/or maintain your employment. Meanwhile, rest stop chain Pilot (owned by Berkshire Hathaway) plans to install 2,000 EVgo rapid chargers across 500 stations in partnership with GM, with the first units going live in early 2023. Ubiquitous charging would eliminate range anxiety for potential EV owners, thus accelerating adoption. IEEE has a bunch of stats on EVs and charging in this article, noting that if 90% of vehicles were EVs by 2050, grid demand would increase by 41% from 2021 levels. That load would need to be balanced throughout the day and rely on vehicle-to-grid stabilization, all of which could be accomplished with a wider availability of charging infrastructure.
Miscellaneous Stuff
Aqueous Stress
The World Meteorological Association indicates that one-third of thermal power plants, 15% of nuclear plants, and 11% of hydroelectric plants are in regions experiencing stress to waterways due to drought and/or flooding. These facilities in large part depend on freshwater to operate, e.g., cooling nuclear power towers. Meanwhile, the mighty Mississippi, critical for moving agricultural and energy products, is running dry, with the sinking water level tying an all-time low of -10.7 feet. The US is expecting its third La Niña weather pattern in a row, a drought-causing sequence of events that has only happened twice since 1950.
Stuff about Geopolitics, Economics, and the Finance Industry
Blueprint for Rebooting Distributive Era
A couple of weeks ago, I wrote about the forty-year cycle of growth and positive reallocation in the economy, with a distributive cycle beginning post-WWII and ending around 1980, when wealth started to become more concentrated. My suggestion was that the potential to return to a distributive period of economic growth could be driven by a number of factors, including steady deglobalization and/or rebuilding of manufacturing in the West along with significant green energy projects. You can think about the post-WWII era in the US as being a social engineering and government policy project designed to build a robust middle class and a strong domestic manufacturing industry. This period was marked by mid-single-digit inflation and domestic economic expansion, which existed up until the Vietnam War and energy crisis of the 1970s. Since then, the economy has become increasingly leveraged – to the point where we risk financial collapses. As such, we need to reduce the debt burden by cycling back to a distributive economy so that borrowers can rebuild their balance sheets. Market strategist Russell Napier provides one potential blueprint for doing so by “increasing the growth rate of nominal GDP”. Specifically, governments should (1) back commercial banks with credit guarantees, allowing them to guide how much – and where – money is invested, and (2) follow a policy of financial repression to redistribute wealth held in government bonds. In this framework, mid-single-digit inflation (4-6%) is something to be embraced rather than feared. Such inflation levels would make debt more affordable (allowing debt holders to pay off debt in the future with inflated money) and act as a steady form of wealth transfer from savers (the aging population) to debtors (those entering the workforce and establishing households). It’s almost too much of a Goldilocks scenario to actually happen. But, if we could engineer a multi-decade period of targeted policies that reversed the inequality created by the last 40 years of globalization and accommodative interest rates (which drove debt levels sky high in the public and private sectors), it seems like it’s worth a try. One missing ingredient is the boom of babies seen post WWII. As long-time readers know, we have an aging population crisis as birth rates decline globally and certain countries (like the US) discourage immigration, putting a big damper on economic growth (and causing labor-cost inflation absent significant automation/innovation offset). While I expect a small bump in births due to the bolus of Millennials hitting their 30s in the next few years, perhaps an even bigger trend will emerge. NBER data suggest births in late 2021 and early 2022 were running around 5% above trendline in the US (after dropping a similar amount below trendline in 2020 and early 2021; page 18 of PDF). More recent data from California shows a modestly above-trendline birth rate continuing throughout 2022. Birth rate growth was highest among mothers in their 30s with 4+ years of college education, which could be explained by work-from-home flexibility (pages 20, 24).
Cash Hoarding
A recent survey of global fund managers by BofA Securities revealed high cash levels not seen since 2001. Cash sits at an average position size of 6.3%, and equity allocations are three standard deviations below the average. This hoarding of cash – specifically the US dollar – is driving the dollar’s high valuation that’s wreaking havoc on emerging markets. Bloomberg reports food exports are piling up in the US as foreign countries cannot afford to pay for orders, risking a hunger crisis in many locations. Emerging markets also frequently borrow and make debt payments in dollars, increasing the risk of defaults. Regarding the far-reaching impact of algorithms discussed at the start of this week’s newsletter, perhaps it’s not too much of a stretch to say that this food crisis is, in part, a consequence of algorithm-driven rent hikes. The economy is increasingly interconnected and complex.
Pop!
Cash might be piling up for investors, but it’s disappearing fast at startups. Silicon Valley Bank (SVB Financial Group subsidiary), the preferred banking institution for startups and VCs, saw cash withdrawals in the latest quarter second only to the first quarter of 2001, during the dotcom crash, according to a report by Steven Alexopoulos at J.P. Morgan. Plummeting balances are a result of startups burning more cash than they are raising, ending a long run in the VC funding bubble. The trajectory of the cash-burning, high-growth publicly traded stocks and private companies appears quite similar to the early post-dotcom bubble-bursting era, which could suggest a prolonged, multiyear lull before fresh capital circulates to begin the next cycle. Twenty years ago, the Federal Funds Target Rate decreased from around 6% to 1.5% over the course of 2001, laying the groundwork for a recovery. Today, however, the Fed is planning the exact opposite, an unprecedentedly steep increase in rates in short order, just as things are beginning to unravel. Hopefully, it will only take a few modest quakes to reacquaint the Fed with reality, and we can thus avoid the big one.
✌️-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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