SITALWeek #434
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: investing seen through the lens of cynicism vs. skepticism; looking at Geoffrey West's model of finite time singularities, and what's required to avoid the collapse of open-ended growth in the next technology phase shift; the $2B Bluey franchise is on a cliffhanger; the oddness of robots playing drums; a shift toward vocational schools; you might be in a bubble if...; and, much more below.
Stuff about Innovation and Technology
Delivering Cynicism
Longtime readers know that I strive to maintain skepticism while skirting the fire swamp of cynicism. Skeptics question something until they get as close to the truth as possible, while cynics assume the worst, generally without supporting evidence. There is a big difference between questioning the motivations behind an action vs. automatically assuming those motivations are bad. And, as I am fond of repeating, cynics sound smart, but are rarely right long term. Over an expansive time horizon, the only philosophy proven to work is optimism. These days cynicism abounds, even to the point of skewing economic “data”, as I discussed last week. I was recently listening to Carol Burnett’s discussion of the cinema she grew up with: “Nothing, when I was growing up in the '40s, was cynical. And I just had this naive, optimistic quality that, and I think it came from the movies, that everything was going to work out okay.” After hearing that sentiment, I thought of the infinite, largely negative, 24/7 media we are bombarded with. I tried to imagine a world where people were optimistic, where utopian visions outnumbered dystopian realities, and where mutual encouragement and success propelled everyone forward. In Burnett’s world of MGM musicals, “they would say we're going to put on a show – we're going to put on a show in the barn, and then it's going to go to Broadway.” This, of course, is not the world that social media and the Internet have shaped for us. Our world is mutating into eight billion tribes of one, as I detailed in Digital Tribalism over 100 issues ago. It seems as though each individual is increasingly living in their own – largely cynical – reality. I’m an optimist (I have no choice on that matter) but it’s hard to not get sucked into the orbit of someone’s narrow cynicism. I recognize that my entire commentary here is perhaps more a reflection on me than the reality of the world.
But, I do actually have a point on this topic that has some relevance to the job of investing: it’s important to identify cynicism, transform it into skepticism, and try to find the truth to see if there is cause for optimism. By way of example: last week, there were two hit pieces on the food delivery industry. One was from the always funny, but never well researched, “cynicism-as-a-profession” comedian John Oliver on his HBO show. The other was an article in Vox. I discussed the food delivery industry’s evolving transition to a potentially higher non-zero-sum business in #386’s Divert to Digital Dining. Pre-pandemic, I laid out the issues facing the food industry broadly in The Evolution of the Meal. Currently, my general take is that the network effects and win-win might be moving in the right direction for consumers, restaurants, and (to a lesser extent) drivers, but it’s too early to tell how much of the overall $1T US food industry is likely to be aggregated by delivery platforms (I am focused on the US here because different dynamics are at play in other countries). Like all complex adaptive systems, there isn’t a simple way to assess the range of outcomes for food delivery. Economic strength and inflation are certainly influential, labor availability is key – as is the health of the restaurant industry – and maybe even GLP-1s are a factor in weak french fry demand. It’s inconceivable how all these (and myriad other) factors will interact. But, I do know that it’s easier than ever these days to find a few anecdotal cynics, and therefore it’s easier than ever to make the wrong extrapolations. As I noted, our job as investors is to cut through cynicism, determine where we should be skeptical, and then find out if there is any optimism to be had. This is, in fact, one way to conceptualize investing: optimism beating cynicism over time. In my commentary here, I’m not attempting to endorse food delivery companies as investments; rather, I think it’s a timely example of cynicism run amok. Maybe the cynics will be right, much like a broken clock gets lucky twice a day. But, skepticism is the harder fought path to take, and I think it’s worth the effort. We are perhaps wired for pessimism because assuming that bad things can/will happen (e.g., that ROUSs are always around the next bend) probably helped us prepare for them in our evolutionary past. But, in this day and age of abundance and growth, that cynical wiring could drive bad decisions.
One Shark Jump to Singularity
In his book Scale, theoretical physicist and Santa Fe Institute faculty member Geoffrey West (we are huge fans of West here at NZS Capital!) uses the math of finite time singularities to illustrate the nature and increasing pace of change. According to West: "A finite time singularity simply means that the mathematical solution to the growth equation governing whatever is being considered—the population, the GDP, the number of patents, et cetera—becomes infinitely large at some finite time…This is obviously impossible, and that’s why something has to change." Essentially, as things grow exponentially in a system with open-ended growth like our economy, you reach a point where you need an innovation phase/paradigm shift to keep a system from collapsing. (We discussed this idea that there must be some sort of intervention to redirect the growth trajectory in a bit more detail with a visual (excerpted from Scale) in this paper we wrote a few years ago, and see also West’s discussion in this lecture clip from five years ago). This framework is obviously relevant to describing innovation in the tech sector. For the last six decades, we’ve experienced a steady progression of compute power growing exponentially as governed by Moore’s Law. The chronology of this progression is roughly: mainframes, PCs, servers, dotcom, smartphones, cloud computing, “big data” analytics, and, now, AI (see AI Is the New Dotcom for a deeper discussion). Each one of these overlapping eras represents some sort of platform or phase shift along exponential technology growth curves that stack onto one another. The catch in West’s progress curve model is that you have to move to the next exponential curve before the prior one mathematically collapses. And, with each new curve, we reach the collapse point more quickly than the last, requiring more rapid phase shifts. It certainly feels like technological changes are accelerating, although it’s hard to distinguish what’s objectively real from the always-on, 24/7 barrage of hyped media we’ve been living with for over two decades. Yet, the phase shift to AI (which is another way of saying that computer chips have finally caught up to the capabilities of the human brain), does feel like it’s happening with unprecedented pace. And, already, reports of OpenAI/Microsoft’s $10B AI data center and rumored $100B AI data center cluster suggest the sort of massive, multi-trillion-dollar investments that will be necessary to usher in the next phase of ultra-advanced AI, perhaps around the end of this decade. We haven’t even fully wrapped our heads around the current AI, and already we need to look to the future – to what is often described as the hypothetical Kurzweilian concept of the Singularity, where AI surpasses us and humans no longer reign supreme in the Milky Way Galaxy.
The stakes have risen with each technology platform shift over the last six decades, just as they’ve risen every century since the Renaissance and the Scientific Revolution. The current pace is exasperating, and part of me wouldn’t mind a little break, so to speak. West’s concept of finite time singularities is mathematical, while Kurzweil’s “singularity” is conceptual and means something entirely different. West referred to Kurzweil’s view of the technological singularity as “untethered” in a recently updated version of his Scale talk. West also quotes John von Neumann, who is considered the father of the technological singularity concept (which, again, is disparate from West’s mathematical concept of open-ended growth collapse), from 1954: “The ever accelerating progress of technology…gives the appearance of approaching some essential singularity in the history of the race beyond which human affairs, as we know them, could not continue.” Perhaps not coincidentally, von Neumann made that statement the same year the first silicon transistor was invented. Whereas West and many others might take issue with various theories of the technological singularity, the event of AI surpassing humans might be the only next-in-line solution to the ever increasing pace of phase transitions that West’s model of finite time singularities calls for. Based on our current trajectory, AI tech will only continue to get bigger and better. Thus, the technological singularity appears to be the inevitable next phase shift in our future (even if it arrives without some of Kurzweil’s farfetched prognostications). However, beyond the fuzzy event horizon of the technological singularity, we’d be relying on AI to keep jumping the shark, because, at that point, human innovation will be unable to keep sufficient pace to create the next big thing. Effectively, in West’s model of progress, humans are close to taking their hands off the wheel. Each successive jump to avoid the collapse of open-ended growth is far more costly than the last. It’s unclear what type of economy or size of capital investment would be required to keep the pace going beyond the point of computers becoming more capable than humans.
Miscellaneous Stuff
Bluey Blues…or Verse?
Australian animated show Bluey has captured the hearts and minds of children and adults for three seasons now. With the uncharacteristically long season three finale called “The Sign”, on the calendar for two weeks from now, anxieties are running high that the creator may wrap the series or possibly take it in a new direction. The show was created by Joe Brumm and is owned by Ludo Studio. The BBC currently has the global rights for distribution, and Disney+ has made Bluey the number one streaming show across all platforms in the US. (Bluey even accounted for 29% of all TV viewing on Disney+ in the fourth quarter of 2023). Bloomberg estimates the franchise to be worth $2B, and I bet Disney would love to wrestle the rights away from the BBC in order to create a Blueyverse of epic proportions. As speculation rises, Bloomberg notes that:
Ludo’s founders don’t offer much clarity, either. Aspinwall and Pearson insist that “The Sign” won’t be the end of Bluey, but they don’t seem to know what form the show will take afterward. “Now that it’s gone to 28 minutes, is it another season? Is it another—another something?” Pearson says. “We always wanted Bluey to be surprising and give the audience something they don’t know they want. That’s what we’re thinking about. What is that thing? What is that vehicle that is next for Bluey?” “We don’t have a master plan,” says his partner, Aspinwall. “I think that is what Daley is trying to say.” Nor is Disney’s Davis forthcoming. “I can’t really comment on Bluey’s future,” she says. “But this is an important piece of business to our company.” She adds, “We do love Bluey and Bingo, and so we want to stay in that business.
Given Disney’s adorable robots, imagine the potential for an LLM-powered Blueybot to entertain your kids.
Bot’s Beat
When you watch the late, great Neil Peart from Rush on drums, the experience is viscerally analog. By that I mean you can feel every drum beat in your core, going directly from Neil’s heart into yours. Both feet and both hands seem like they are reaching out and kicking you, pulling in your attention, and your heartbeat speeds up to match Neil’s rhythm. Thus, it’s an odd experience to see a humanoid robot do the same thing. There have been some crude drum playing robots over the last year, but there was a glimpse of a more accomplished robo-percussionist, the Fourier GR-1 humanoid, trained on the Groot model, shown in the Nvidia keynote a couple weeks ago. At one point, the company posted a full video of the robot playing drums on YouTube, and it was very odd to see something so inherently digital – a robotically embodied AI – do something so viscerally analog as playing drums and making music. For some reason, the company took the YouTube video down, perhaps it was a fake (as of press time for this week’s newsletter, you can still see it on this X post). It’s a good example of how very human it can feel when you take an AI from the cloud and put it into the real world.
Stuff About Demographics, the Economy, and Investing
Welding Renaissance
Enrollment in vocational schools in the US was up nearly 16% in 2023, while four-year college enrollment was down, according to the WSJ. For the last four years, starting salaries for construction workers have been larger than starting pay for professional services and information-based jobs. In 2023, that pay gap hit 22%, with construction workers’ median starting pay at $48K. The majority of respondents to a survey cited by the Journal indicated that fears of AI’s impact on jobs factored into their preference for blue collar work.
AI Bubble Index
Above, I named the various phases of technological phase/platform shifts since the 1960s. Each of these step functions involved a period of bubble investing (to varying degrees) across the hardware/infrastructure and application/services layers. Currently, we are somewhere in the middle of the AI bubble where the long-term promise and market size is something to salivate over, but the near term will bring some degree of correction before we can get back on a steadier path of value creation. It’s of course impossible to make a precise call on when a bubble will pop, and (fortunately) we’re not in that business at NZS Capital. Rather, we strive to assemble a portfolio with a combination of Resilience and Optionality that’s focused on long-term growth opportunities. So, while we don’t enjoy the post-pop vertical drops, we do our best to navigate them. There’s a theory that if everyone says it’s a bubble, then it must not be one because, surely, everyone is rational and not everyone can be the greater fool. For example, there was a lot of bubble talk about SaaS and cloud software a little over a decade ago. And, it turned out not to be much of a bubble (with a few isolated exceptions).
There are a few things that I think are needed for a real, large-scale market bubble. Some of them we are starting to see, but some of them haven’t arrived yet. A really big bubble, like the dotcom market rally in the late 90s (I started working professionally in the stock market in 1998), pulls nearly every asset class and sector into it. Every company in 1999 somehow had a dotcom strategy and valuation, no matter how little they had to do with the Internet (aside: it’s rather ironic that some of the biggest dotcom bubble stocks were the ones most threatened by the Internet in the end!). Today, by analogy, if you saw a taco joint declare that it’s an AI company, that might be a red flag. The WSJ reports that Yum Brands chief digital office “has a vision for ‘AI-powered’ fast-food in which artificial intelligence shapes nearly every aspect of how its Taco Bell, Pizza Hut, KFC and Habit Burger Grill restaurants are run.” Or, maybe, if you happen to see a steel manufacturer acquire a supplier of AI data-center equipment, that might be a flag. Well, maybe we're a bit further into this bubble after all. By the end of a market-wide bubble, every company in the market has some narrative tied to the bubble du jour. Another marker is when you see irrational IPO activity, with lines of black SUVs outside of investment firm offices clamoring for the latest money-losing FOMO stock. This carbonated cavalcade has yet to materialize for AI. I’d posit that future bubbles will arrive faster and be shorter than bubbles of the past. I can’t really back that sentiment up beyond instinct and experience, but, perhaps, like West’s finite time singularities, necessity will dictate that bubble cadence increase and duration shorten, allowing the system to keep on keeping on.
✌️-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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