May 10, 2020

SITALWeek #244

May 10, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Margaritaville, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: return to work with tickets to ride the elevator; the de-urbanization trend; social distancing theater resembles security theater after 9/11; rideshare's range of outcomes; the adaptability of standup comedy; lessons from RV sales; the morality (?) of low interest rates; and, lots more below...

Stuff about Innovation and Technology
Bottoms Up! For Online Liquor Sales
As parents are homeschooling their kids during shelter in place orders, US alcohol ecommerce sales were up 5x in early April. Correlation or Causation? 🍺🍷😅

QuaranCleaning Problematic for Thrift Stores
The dregs of spring cleaning have inundated thrift stores at a time when they can’t necessarily process or sell the donations, according to Bloomberg. Thrift stores, which do $18B a year in business serving an important role in local communities, have asked that people hold onto their donations until later in the year, otherwise goods are highly likely to end up in landfills, potentially creating a future vacuum of secondhand merchandise.

Peloton In Yellow
Connected fitness company Peloton is selling a lot more bikes and digital subscriptions, posting 94% y/y user growth. Subscribers are also using the product more under lockdowns. A little math from their earnings call last week implies the average user worked out every 41 hours (every ~1.7 days) during Q120 vs. every 52 hours (every 2.2 days) in Q119. I’d assume there was an acceleration in that trend at the end of the quarter, implying a lot more users were doing daily workouts (or twice a day with a morning ride and an afternoon yoga class!). Peloton has an interesting opportunity to take a great product and turn it into an entire fitness and lifestyle brand.

Work from Home an Enduring Trend?
Both Google and Facebook indicated last week that employees may be working from home for the rest of 2020. It’s surely for safety, but it’s also a great experiment for these tech giants to learn about remote, cloud-based work, which could feed insights into their products. CNBC also reported on the rising number of companies across all industries making permanent changes to allow employees to work from home. The alternative appears to be going back to work with plexiglass between desks, temperature taking, and Disneyland-style tickets to ride the elevator at scheduled times, like Salesforce is planning as they reopen their Seoul office next week.

Brands Go Direct to Consumer and Accelerate Amazon’s Flywheel
There were a couple mentions from earnings last week of brands increasingly setting up shop online to sell direct to consumers as retail outlets close and face an uncertain future. I’m thinking specifically of Heinz, which launched a Shopify Plus store in just one week in the UK, and David Spitz at ChannelAdvisor, who had this to say: “Brands are really having to evaluate the path to the consumer and what digital means for them...this has really been a wake up call.” Concurrently, brands are reluctantly selling more through Amazon as they lose retail distribution.

Travel and Events in Demand amid Social Distancing Theater
The degree to which human social behavior will go back to normal is completely unknown; but, for now, all the incremental data suggest our mammalian social genes are going to prevail. Conde Nast Traveler reports that 2021 cruises are booking fast. Ticket sales for NFL games at the new Raiders’ Stadium in Las Vegas (or Entertainment Island, as some call it) are off the charts. Shanghai Disney will reopen to 30% capacity on May 11th, and it immediately sold out the 24,000 tickets. 🎢Disney’s reopening protocols look a lot like social distancing theater to me, reminiscent of the security theater we have endured since 9/11. In the video embedded in this report from Theme Park Insider, you can see how the magic of yellow tape is apparently presumed to have virus fighting capabilities throughout Disney Shanghai. In other Disney news, the company announced last week it would forego $1.6B in upcoming dividend payments. Maybe it was financial prudence, or maybe it was to make Abigail Disney’s Thanksgiving family dinner just a bit awkward – the heiress criticized the Mouse for paying dividends while furloughing employees. The Disney family is reported to still own around 3% of the company, meaning Disney heirs will miss $48M in dividend payments. 🦃

Housing Market and De-Urbanization
The housing market continues to recover in the US, with Redfin seeing seasonally-adjusted home buying search activity at 96% of its Jan/Feb levels and average home prices up 5% from 2019. However, new listings are still down 39% vs. the same time last year. Both Redfin and Zillow are starting back up their iBuying activity (as Zillow’s Rich Barton colorfully said on the earnings call: “It's time for us to get back to business on the Zillow Offers and get Han Solo out of that Carbonite.”). It’s possible that this is iBuying’s moment to show the value of a liquid market maker in the housing market, which may create a small number of very large winners in the real estate industry.

Redfin also predicts a “seismic demographic shift” toward smaller cities. The company saw a 71% increase in searches for homes in towns with populations under 500,000 – nearly twice the 38% search growth rate for homes in cities with over 1M people. De-urbanization was a trend that was already underway pre-pandemic, owing to increasing Millennial household formation and affordability problems in large cities. This demographically-driven trend (see “30 Something Sneaker Wave”) is now going viral. The open question is how far will the reversal of urbanization go? Will it sufficiently extend to support my theory of the middle-America renaissance? Based just on demographics, the shift could encompass a few million households. Or, it could be too early to know one way or the other, so we’ll be good Bayesians and keep looking for confirming or disconfirming evidence.

Dinosaurs vs. Mammals in Asteroid Strike
Speaking of Redfin, CEO Glenn Kelman said this on the earnings call: “When the world is changing this fast, what is most valuable is our own ability to change. The company you want to stake in isn't a big fat incumbent. It's the crazy little mammal, crawling out of the crater of the asteroid strike.” We get asked often how we quantify adaptability – the key trait that we look for in companies. The short answer is that it’s not quantifiable; but, right now is an ideal time to look for evidence that companies are reacting quickly to changing data, and experimenting as much as possible to become stronger no matter what the future holds. I’ve seen great examples of this from many companies, but Redfin, Zillow, Square, and Shopify stand out as companies that have been iterating at warp speed over the last few months. With customer needs rapidly changing for every industry, the nimble, adaptable companies will forge the new economy, while the others will go extinct from the asteroid strike.

Blustery Mix of Headwinds and Tailwinds for Rideshare
When it comes to rideshare, the range of future outcomes is quite wide. In the US, both Lyft and Uber were barreling toward profitability this year until the economy hit the viral wall. After China reopened, rideshare leader Didi saw a return to 70% pre-virus levels; however, with car sales also recovering in China, many folks who were using rideshare may be driving themselves. We could see a similar scenario in the US: a return to rideshare, possibly dampened by a one-time bump in auto sales to clean out the inventory that has built over the last few months. With high unemployment, the cost to find and keep drivers has plummeted; but, with future rideshare demand an unknown quantity, there’s a need to expand into adjacencies – with potential opportunities in delivery, logistics, employee shuttles, and public transportation replacement. Uber has also been operating as a temp staffing agency – placing drivers in jobs at other companies. It might be useful to return to first principles: what are the core functions of the rideshare platforms, and how big are their markets going to be? It again raises the interesting question: are rideshare companies in the rideshare business, or are they the modern staffing and logistics platforms of the gig economy era? In related news, Uber recently reported it’s working on a system to provide healthcare benefits in proportion to how many hours drivers work.

Inference Accelerating the Edge
Semi Engineering reports on the shift of inference AI to the network. This is somewhat of a technical subject, but the point is that non-data-center AI engines will be interpreting signals from phones and edge devices to speed up answers and save bandwidth. There is an explosion of demand for inference, and the solutions are likely to be heterogeneous. As NZS Capital investor Jon Bathgate informs me, we could see FPGAs used for video compression, ARM processors and DSPs for plain vanilla AI – like a connected doorbell distinguishing a squirrel from a package delivery – and GPUs for big models, language processing, and even optimizing the network itself. And, of course the X86 CPU will do its share of inference. Maybe there is the potential for a single, unified inference engine to rule all of these AI decisions, but time will tell.

Stream Sharing
Streaming report from CordCutting reveals that 34% of adults in the US exclusively stream content, up from 30% last year. 20% of Hulu watchers and 15% of Netflix viewing is from “borrowed” passwords. All in, there are 40 million borrowed accounts in the US, amounting to a lost value, or gift to the moochers, of $2.7B a year. About 70% of Gen Z “borrows” Netflix and Disney+ passwords compared to around 30% for other age groups.

With Hollywood Halted, TikTok’s on Fire
As TikTok’s Gen Z popularity goes astronomical during the lockdowns and distance “learning” period, its most popular creator has just passed 50M followers. The company owned by China’s ByteDance is working to build an advertising revenue stream; but, interestingly, they aren’t sharing with any of the creators – who supply 100% of the content for the site – according to this long Hollywood Reporter profile. This approach for now is in fairly stark contrast to YouTube (which pays out about 50% of ad revenues to video creators), and means that TikTok creators seek their fortunes on other platforms, often driving their subscribers to follow them on YouTube or Instagram. Popular creators are able to book six-figure sponsored-post deals, and $25,000 deals from record labels to promote a song (which then sees huge spikes in streaming activity on Spotify and other platforms).

Miscellaneous Stuff
Backyard Black Hole
Astronomers found a small black hole in the Milky Way only 1,000 light years away (meaning it takes light 1000 years to traverse the distance between the black hole and Earth; for context, the Milky Way is about 105,000 light years in diameter). At four times the size of our own Sun, this back hole is not terribly hungry, so astronomers noticed it by the way its large gravity was impacting nearby star movement.

Antibody Production via Llama
Scientists are using mice and llamas to produce antibodies to coronavirus. If the antibodies prove to work in humans, they could be administered by inhaler or in a shot. 🦙

Seinfeld on the Adaptability of Comedy
Jerry Seinfeld did an interview with the NYT concurrent with his latest Netflix stand up special. The special is funny if not out of place as it was filmed back in October to a live crowd in NYC. From the interview: “I would bet on this virus. Can you imagine how jealous the other diseases must be of this idea of no symptoms for two weeks? Like, polio: 'Just think of what I could have been if I thought of that.' Smallpox: 'This could have been so much bigger.'” Seinfeld also discussed the adaptability that’s built into the comic profession: “People are going to go back, first of all, because laughter is the greatest feeling of release that there is. And No. 2, the comedians are going to adapt so much quicker than everyone else. The TV shows won’t quite know what to make. The movie people might not know what to make. The comedians, within three nights, will know what to be doing. Because you’ll get that feedback instantly of what works and what doesn’t.” And, on TikTok: “I’m curious, very briefly. 'What’s TikTok?' I look at it. 'OK, I got it.'”

Chapter 11 On the Table
As I read last week that Sur La Table was planning on filing for bankruptcy, I couldn’t help but remember the classic, 2009 South Park episode on the banking crisis titled “Margaritaville” (Season 13, Episode 3 is on various streaming platforms – Hulu in the US). This short clip on YouTube features Stan trying to return a Margaritaville Margarita maker to Sur La Table. Stan’s Dad bought in on credit, then the banks created MBS (Margaritaville-Backed Securities), which were then sliced up and sold off in tranches. Stan has to see if the Federal government will decide to bail out his Dad’s purchase or not. It’s surprising how well the episode holds up, and it’s a good reminder of the 2009 zeitgeist, and how tragically history has repeated with leverage in the current downturn. Sur La Table was sold to private equity in 2011. I am actually going to miss the Sur La Table down the street from me, and yes, it’s my fault it’s closing because I bought my last pan on Amazon.

Stuff about Geopolitics, Economics, and the Finance Industry
RV Sales Recessionary Prognosticator
Back in SITALWeek #207, I discussed how RV and camper sales have historically been a very good early indicator of recessions. The industry dipped 20% in 2019, so, with the help of a global pandemic, RVs are now three for three in calling 21st-century recessions a year ahead of time. This is probably a coincidence, but it might be something more. RV purchases are dominated largely by older folks and retirees. And, perhaps this more seasoned generation has a 6th sense for when the world becomes a little too risky – when things feel out of balance – leaving the system vulnerable to the ensuing shocks of 9/11, the banking crisis, and now the coronavirus. Well, RV sales are now surging back for a few reasons. I’ve been covering the industry ever since I flew to Forest City Iowa in 2002, where Winnebago used to be headquartered, so I’m slightly more than a casual observer, but I am mainly guessing (like usual). Clearly, there is going to be demand for RVs as a substitute for air travel and hotel stays in a pandemic. Also, inventory was worked down because the industry already went through a correction last year. Low rates help with financing, and there are twin demographic tailwinds – primarily from the growing Boomer retiree pool, but also younger generations that appreciate the hipster nature of RVs and Airstream living. And, maybe Boomers are signaling for everyone else to take a breath and recognize life will go on. With Elon Musk declaring that he no longer wants possessions and is selling all his homes, I am hoping we are closer to getting a Tesla autonomous RV soon! Here is Elon talking about his minimalist lifestyle change with Joe Rogan last week, days after his new baby was born.

Sustainable Low Interest Rates or Capitalism 2.0 – What will it be?
Owning stocks today can be interpreted as a deliberate bet that rates will stay low (for more context, I wrote some guesses/analysis about rates and the market at the end of last week’s email). Low or zero rates push money into riskier assets, and right now, the government is also saying there is little risk in risky assets as the Fed gobbles up all types of debt and many companies are bailed out. This of course should offend our senses deeply – at some point we have to pay the price, don’t we? At least that’s what Buffett seemed to say last week, as he expressed bafflement at the staying power of low rates (also in last week’s email). There is another lens though, and it’s one I’ve mentioned in SITALWeek in the past: ergodicity-king Ole Peters speculated the following in this 2017 blog post (which I’ve summarized here, but I highly recommend reading the original): the 40-year drop in interest rates has enabled the debt accumulation by the less wealthy and (formerly) middle class that has fed the current, unequal bifurcation of wealth globally.

The current, zero-rate, bail-out environment will only exacerbate this wealth inequality even further. Even Worse, increasing rates without wealth redistribution would create an existential, not to mention immoral, crisis for the vast majority of people who have effectively negative wealth – the indebted, so to speak. And, if wealthy peoples’ wealth is essentially derived from low rates (driving asset prices up) and other peoples’ debt, then the introduction of higher rates would necessitate a messy unravelling – absent some form of UBI and/or significant, widespread governmental assistance. I’d add one more complicating factor to the conundrum of eternally low rates: the massive overhaul of the global economy – from asset heavy and analog to information heavy and digital – changes all the rules, and certainly has a dampening impact on the traditional bogeyman of low rates – inflation. This is just one guess as to what’s happened and what might continue, but it’s a useful lens because it underscores the unpredictable range of outcomes and provides a framework for perpetually dropping rates – 0% is not any sort of special floor for rates, why not negative 10%?

I am reminded of SITALWeek #205 where I discussed the relationship between interest rates and hope. The expectation of a growing pie and increasing prices is in many ways the hopeful, optimistic outlook. Negative rates conversely represent a fundamental pessimism that calls for an active, steady redistribution of wealth: “what's more pessimistic than negative interest rates? I'll give you a dollar today and I only want 99 cents back in the future. It's a rather bleak explanation; however, it would suggest, rather speculatively, that redistribution in the form of higher wages, lower consumer debt burdens, and even direct government subsidies would create more hope, more inflation, and higher rates along with a stronger global economy.”
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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.

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jason slingerlend

May 3, 2020

SITALWeek #243

jason slingerlend

May 3, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, aquatic dino’s, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: the programmable data center; spending and construction on cloud data centers slow; Shopify signals potential marketplace and local pickup tools; consequences of bankrupt hospitals; changing landscape for discount apparel retailers; fragility of power laws; Buffett recap; and, lots more below...

Stuff about Innovation and Technology
Turnip Speculation
The cost of turnips and tarantulas is rising in Nintendo’s Animal Crossing game due to a sudden rate cut. The decreased return on savings has forced gamers into riskier assets and closed a loophole whereby players could deposit funds and time travel to benefit from the miracle of compounding. Game developers insist the price of turnips is randomly determined.

Socializing Drives Gaming
As Microsoft reported 90M Xbox live users and 10M Game Pass subscribers, head of Xbox, Phil Spencer, discussed the flood of new gamers coming online during the lockdowns. Social interactions are becoming an even bigger part of gaming as friends stay in touch while they play. Travis Scott’s Fortnite “world tour” event I mentioned last week ended up with 27M viewers, as people are increasingly experiencing life via games. A lot of folks talk about the "Metaverse" and how games will be the new Internet, but I think, for now, that is overreaching. Games are the new social network, not the new Internet.

Diagnostic AI Needs Shades of Grey
Google’s AI for diagnosing retinal disease, which initially showed a lot of promise, has stumbled in the real world. Many real-world scans are rejected because they don’t meet the resolution Google used to train the AI. Additionally, bandwidth problems related to uploading the large image files to the cloud has caused delayed results.

UPS Launches Drone Couriers
A retirement community in Florida with 135,000 residents (the largest in the US) will be able to receive prescriptions from CVS via UPS drone delivery starting this month.

Social Distancing Leaves Robot-Shaped Gaps
Robots will be filling in gaps between people as factories reopen. Wired reports on the rise of automation in factories, including wheeled robots that retrieve parts and pick & place robot arms that assist or replace workers.

White Collar Automation
Microsoft is in talks to acquire Softomotive, an automation software tool that replaces repetitive jobs done by people, such as data entry and workflows. As I've written over the last few weeks, automation will be coming to white collar jobs as well as manual labor. This is a double-edged sword for Microsoft because for every job they automate away, they lose a user of Teams and Office 365 (and, the unemployed will have less money to spend while gaming on Xbox!).

Microsoft Zooms While Zoom Backtracks
Microsoft Teams has seen a 70% increase to 75M daily active users from just a few weeks ago, and that’s up from just 20M five months ago. Meanwhile, Zoom backpedaled on its claim of 300M daily active users – now saying that was 300M daily zoom participants – which is more comparable to Microsoft’s reported 200M users in one day (it’s not clear if all of those Teams meetings were with video). Zoom has not yet reported daily active users, but it’s likely to be substantially lower than the participant number, since a single individual using zoom multiple times a day racks up counts for each use. Google, for their part, announced 100M daily meeting participants, which is growing by 3M new users a day and is now free for up to 100 participants per meeting (earnings transcript PDF).

Creepy Virtual Proctoring
As if Zoom anxiety wasn’t bad enough, the Verge reports on the challenges for students dealing with remote proctoring during test taking, which appears to involve a disturbing degree of privacy and security concessions. Schools aren’t alone as companies are increasingly using surveillance tools to monitor employees working from home, driving already high anxiety levels even higher.

Uncertain Future for Discount Retailers
Discount retailers, like T.J. Maxx and Ross, have been considered a resilient offline retailing strategy despite the rapidly growing share of ecommerce in the apparel category. Historically, these companies, which have a unique ability to efficiently monetize overstock and mistakenly manufactured items, served an important and high-value role for fashion brands. However, these chains, which rely on a treasure-hunt-like in-store experience and never built out ecommerce strategies, are now adrift among lockdowns. Further complicating their outlook, with most other retailers canceling orders, there may not be much overstock with which to stock discount shelves later this year. Restructuring specialist Gordon Brothers is expecting 20,000-25,000 store closures, and excess merchandise could be out of season and out of fashion when the time comes to get rid of it. Treasure hunt shopping may be at risk as customers may be reluctant to dig through bins of items that many other shoppers have recently touched. Online overstock sites, like Amazon's 6pm.com, should fare better. In the physical world, diversified retailers, like Target and Walmart, which can stay open during lockdowns, stand to take market share in apparel – another example of the big getting bigger. This shift is reminiscent of the decline of department stores and general merchandisers, like JC Penny, Kmart, Sears, Ames, etc. Do the 5,500 discount-apparel retail stores in the US – accounting for over $100B in equity market cap – have a reason to exist in the future?

Computing Soup
Nvidia’s CEO gave a very insightful interview with Next Platform last week as the company closed the Mellanox acquisition. If you’re interested in AI and the evolution of data centers and serverless workloads, you will want to read the full interview.
“The onion, celery, and carrots – you know, the holy trinity of computing soup – is the CPU, the GPU, and the DPU. These three processors are fundamental to computing. And if you had if you had a world-class processor in each one, you’re going to have a really great computer.”
“Now in the case of Mellanox, it allows us to create something that the world doesn’t have. And you and I spent a lot of time talking about it already. This is the giant new architecture. The really exciting thing right now is not to build yet another server. The exciting thing for the world is the server is not the computing unit anymore. The datacenter is the computing unit. You are going to program a datacenter, not a server.”
In other Nvidia news, you can use the AI on your RTX chip to remove background noise when you are on video calls or gaming with friends (YouTube video).

Cloud CapEx Cyclicality
Cloud computing is faring well during the work-from-home and shelter-in-place trends, but capital spending on cloud infrastructure is looking less clear. Amazon saw 31% growth in AWS to $10B in the quarter; but, to me, that's a disappointing number – owing to weak demand in several sectors, including the travel industry. Google, Facebook, and Microsoft all reported strong usage growth; however, with construction stopped on new data centers, their spending is likely pushed out into 2021 (though Microsoft seems a notable exception, perhaps because they make use of more co-located data center space that can be more easily filled with servers).

AI for AI Chip Design
Using reinforcement learning, chip design software maker Synopsys saw projects completed 86% faster with 80% fewer engineers needed.

Shopify’s New Shop Marketplace
Shopify announced a local merchant marketplace called Shop (from SITALWeek #242: “Shopify is a good candidate for such a marketplace aggregation service, especially as they expand further into payments and logistics.”). The app allows users to connect with Shopify merchants, including local businesses. Also, last week Shopify released new functionality for curbside pickup for local merchants. So far these are rudimentary, somewhat rushed product launches, but clearly represent an evolution of the platform. Shopify CEO Tobi Lütke also discussed his work-from-home life with Zendesk CEO Mikkel Svane in a video this week, including Tobi’s red-light system outside his home-office door for alerting his family that he’s on a video call (which, he explained to me on Twitter, is just a Hue light strip – great hack!).

Movie Theatres Hasten Their Own Demise
After Comcast’s Universal trolled theaters by digitally releasing “Trolls World Tour” – to a $100M streaming windfall – movie theater chains are drawing a line in the sand by refusing to show movies from any studios that plan to digitally release movies simultaneously with (or ahead of) the theatrical release. This is a prime example of theaters not putting customers first and not adapting to the decades-long evolution of movie viewing. I discussed the $11B US box office in more detail in SITALWeek #237, noting the risks involved for all parties in collapsing the various theater and rental windows. This overplayed hand from the theaters could greatly increase the risk that they all disappear. A Reuters poll revealed that only 27% of frequent movie goers plan to return to theaters before there is a vaccine, while 32% wanted to wait for the needle poke. The Oscars have relented and removed the 90-year-old requirement of theatrical release for award contenders this year. Meanwhile, Hollywood is sorting out how filming might resume, including more sound stages, less on-location filming, and no craft services tables.

Quarantine Couch Potato Binge Ebbs
American TV viewing peaked in late March at 41 hours per week per viewer, up from 33 hours in the same week for 2019 (and that’s despite no March Madness this year). However, the number has since dropped about an hour per week to 38. As the NYT commented, there’s only so much TV people can watch.

Hospital Revenues in Severe Decline
Hospitals are in dire straits, having lost most of their revenue due to cancellation/delays in elective surgeries and emergency room avoidance over coronavirus fears. Hospitals accounted for 40% of the Q1 estimated GDP decline in the US, according to the FT, and many hospitals are likely to file for bankruptcy later this year. The BBC reported on the large numbers of healthcare workers currently unable to work. Rural and smaller hospitals will be hardest hit, with the former already closing at a rate of one every three weeks before coronavirus hit. Hospitals are, so far, not being bailed out by fiscal stimulus, and if that doesn’t change, the virus could be a catalyst to reconfigure the entire US healthcare system. Or, given the messy quagmire of lobbying, regulatory capture, and competing political interests, healthcare could just become a bigger and more lethal problem for the citizens of the US. America still spends around 70% more as a percentage of GDP on healthcare than most other developed countries, with no better health outcomes to show for it. It’s a broken system, but can the coronavirus catalyze change?

Tesla Forging New Future, Ford Retreats
Tesla updated its self-driving software to function at intersections; commenting on the earnings call Musk said “We are collecting data from over 1 million intersections every month at this point. This number will grow exponentially as more people get the update and as more people start driving again. Soon, we will be collecting data from over 1 billion intersections per month.” This comes at a time when legacy automakers are struggling to make the transition to autonomous EVs: Ford canceled plans to launch an electric SUV on Rivian’s EV chassis and delayed autonomous plans, citing the pandemic environment. As the economy experiences accelerated transformation, this is exactly the wrong time to be slowing investment in the future.

Miscellaneous Stuff
7-Ton Semi-Aquatic Dino
Spinosaurus, a predatory dinosaur of comparable size – but longer than – T-Rex, appears to be the first example of an aquatic-adapted swimming dino (distinct from the swimming ichthyosaurs and plesiosaurs, which originated from another branch on the reptilian family tree). The new fossil evidence shows that Spinosaurus had a massive, paddle-like tail, and was superbly equipped for a semi-aquatic lifestyle. Spinosaurus possibly preyed upon giant crocodiles, in addition to car-sized fish, from the mid-Cretaceous period 95-100 million years ago.

Don’t Trust All-Purpose Glue
"68 bits of unsolicited advice" from Kevin Kelly, founding editor of Wired and all around predictor of the future, on his 68th birthday is a great read.

Repatriation of Drugs a Monumental Task
As large drug makers traded resiliency for efficiency this century, 72% of ingredients needed for the manufacture of medicines are imported from outside the US, according to the FDA. NPR reports on the loss of facilities and knowhow in the US, with one expert saying it would take billions of dollars and a decade or longer to rebuild. STAT also reported on China’s 80% control of the global antibiotic supply.

Bill Gates: Pandemic & Vaccine Expert
This interview with Bill Gates is very insightful, as was his post on covid-19 vaccine potential. Gates has probably put more thought into pandemic risk and response than most, and he remains levelheaded and constructive as we think about moving forward on the long road to normalcy. While there is a lot of caution, there is also some optimism from Gates on prospects for a functioning vaccine that can treat billions of people within a couple of years.

Covid-19's Mysterious Manifestations
The Washington Post explains the stroke risk for young people from coronavirus. There seems to be some growing evidence that one of covid-19’s primary pathologies may be blood clotting. Although we should consider this anecdotal so far, the blood thinner heparin appears to significantly improve patient outcome. NY Mag also reported on the mysteries of how this virus works. In more puzzling virus news, The Telegraph reports that there are no known cases of children passing along the virus to an adult.

With Concentration Comes Fragility
The concentration of the meat processing industry – highlighted by recent forced closures – exposes a broader problem in the Information Age economy: power laws and market concentrations form more and more naturally in the modern world, creating extreme fragility to shocks.

Stuff about Geopolitics, Economics, and the Finance Industry
High Stakes Tit-for-Tat
As the Whitehouse plans an apparent retaliation against China, which could include a trillion dollars of new tariffs, it’s worth remembering how delicate the tensions were between the US and China even before the virus spread from the country. Our base case should be a stalemate, given that China needs US tech for their semiconductor-based surveillance economy, and the West needs antibiotics and PPE. Over time, however, antibiotics should be much easier to make in the US than semis will be to manufacture in China.

Buffett’s Annual Q&A
Warren Buffett presented and answered questions for 4 1/2 hours in an eerily empty 19,000 seat arena in Omaha Saturday. Here are the comments that stood out to me - most of these are my interpretation of what was said, please do not misconstrue these comments as direct quotes in any way.

Buffett remains very optimistic long term, always believing that, if you have a 20-30- year horizon, equities are the place to be; “never bet against America.” Capitalism needs some fine tuning, but it’s the best model out there. In response to a question from actor and Berkshire-shareholder Bill Murray about taking care of the new war veterans – healthcare workers – Buffett said the US needs to take better care of everyone, and we should hold ourselves to higher standards. “We have been going in the right direction in the US, but it's been awfully slow.”
Berkshire is not investing its current cash balance of $137B because the pandemic has made the range of outcomes too wide; further, the risk of an event like a natural disaster on top of the pandemic calls for even more caution. Buffett didn’t detail what worries him because talking about it can increase the risk of it happening.
The Fed stepping in was the right thing to do; central banks learned a lot of lessons from 2008/2009; thus, government intervention limited the opportunity to provide capital to distressed companies. Berkshire would still put $30-40B into a deal Monday if the terms were right.
If rates can stay low/negative without consequences, then why didn’t civilization figure that out 2000 years ago? In other words, Buffett still believes low rates are unsustainable, and remains puzzled at the situation. If rates do stay low, then you better be in equities.
I was personally bothered to hear Buffett once again talk about how bad credit cards are for people given that Berkshire owns over $60B of bank and credit card stocks, which compromise around one third of its equity portfolio. In my view, Berkshire still largely invests in companies with fragile moats from the 1900s, many of which are zero- or negative-sum businesses for society.
Berkshire has sold all four of its airline investments, losing over $1B, because Buffett isn’t confident travel will be back to 2019 levels in a few years, which means there is an oversupply of planes which will hurt pricing for a long time. Buffett seemed amazed that airlines were able to raise equity.
Buffett hasn’t had a haircut in seven weeks, and Saturday was his first day out of sweats!

Uncertainty is the Only Certainty in Complex Systems
The math of rates and expected returns makes it especially hard to know if the market is underpricing or overpricing covid-19 risk. Roughly speaking, before the global meltdown, “risk-free” government bond rates over 10 years were around 2-3%, bond yields were a bit higher, and the market multiple was ~20x forward earnings. Today, rates are down and earnings estimates are down, thus the market multiple is up. Global equity markets are down around 15% year to date. Absent the drop in interest rates and the fiscal stimulus, which has so far guaranteed almost all assets to be risk free (as the central banks continue to purchase nearly anything to provide liquidity and stabilization), that 15% drop seems to underprice the risk of 24+ months of rolling shut downs and fat-tail fallout from the pandemic. However, if you take those government efforts into account, it’s possible valuations for the market should be twice, or more, what they were before things went to hell in a handbasket. 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 overpricing the risk of the pandemic! The main points on the market today that I would make are:
1) The relative strength of equity markets is explainable in the context of fiscal and monetary measures.
2) Nobody knows what the future holds, but we are sure to have a chaotic outcome; in other words, the exact prevailing conditions when we exit the pandemic will greatly impact the long-term outcome of the economy.
3) Trends that were already underway before the pandemic are highly likely to accelerate coming out of it.
4) Like always, it’s critical to focus on the adaptability of the companies you invest in – which management teams would you hand your wallet to today and expect to get more money back over the next 5 to 10 years?
The longer term wild card is whether the stimulus liquidity will need to be vacuumed back out of the economy when things pick back up; if that happens, then you would expect rising rates, which would compress multiples on equities even if the economy is recovering. As always, the most important point when it comes to investing is that nobody knows anything, especially me. So, it's important to push your investment time horizon farther out and focus on adaptable companies.
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Disclaimers:

jason slingerlend

April 26, 2020

SITALWeek #242

jason slingerlend

April 26, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Entertainment Island, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: a short story about human ingenuity; WhatsApp with Facebook in India?; Google trying again for ecommerce marketplace alternative to Amazon; video games could face new content delays; coronavirus’ unexpected impact on drug cartels and organ transplants; aging in place on the rise for Boomers; thinking about de-globalization; and, lots more below...

Stuff about Innovation and Technology
Welcome to Entertainment Island, a dispatch from the year 2030
A decade ago, as rolling shelter-in-place orders kept the global economy in limbo amid record unemployment, an idea was formed to reboot the struggling sports and entertainment industries. Fears of infection had stopped movie and television production along with all live sports. During the summer of 2020, people had run out of things to watch and had no one to root for – there were no stories of triumph or despair, no happy endings, no rivalries, no comebacks. People played more video games and watched surreal life streaming, but a tangible connection to the real world was lacking.

Then came a vision: Entertainment Island. It started as a joke in some obscure newsletter, but soon caught on. Several sports leagues sent all their players, staff, and TV production crews to a single location to quarantine for a few weeks. Fans came and quarantined as well. Then, entire seasons were played to live audiences in a single location, broadcast around the world. Hollywood jumped on board, relocating actors, directors, technical staff, production teams, etc., and movies and TV began filming again. In December 2020, after a massive effort to put everything in place, the newly-walled-off Las Vegas Strip officially became Entertainment Island.

The Strip’s row of world-famous casinos was the ideal location for Entertainment Island. It had a football stadium, arenas, and enormous convention centers that functioned as sound stages. Unending hotel rooms housed teams, actors, fans, and all the staff needed to support a small city. There was ample kitchen space and other infrastructure. Isolated by an encircling border wall, shipments of food and other consumables, along with needed equipment, came in at a central location to be disinfected. Within months, a hundred-thousand laid-off workers from around the US had been funneled through quarantine and were living with free room and board, attending live sports and concerts, starring in reality TV, and generally having a good time.

The NFL season began with two games a day, five days a week, which stretched the season to around 25 weeks. NBA restarted soon after, but had to play a shorter schedule until construction was completed on four new arenas over the next several years. At first, there was no location to play baseball, but soon the MLB heavily modified the rules so that it could be played on jet skis on Lake Bellagio – needless to say, it got much more interesting.

In January 2021, President Cuban was sworn in during a ceremony outside of Caesar’s Palace in between filming new episodes of Shark Tank, and construction began soon thereafter on White House II, with most of the government relocating eventually from D.C., to enable operation during pandemics. Movie and television production had started in earnest throughout the vast ballrooms and outdoor areas. Within a few months, there was a steady stream of new and acclaimed content for all the streaming platforms.

Every night there were endless choices of live shows, matches, and activities – much of it broadcast around the world. More and more people were needed just to fill all the seats. Magicians Penn & Teller, the longest running headline show in Vegas before the pandemic, started up their show again by taking over for David Copperfield at the MGM (Copperfield elected to stay sheltered on his private island) and played to twice the audience every night.

Everyone was free to leave Entertainment Island, they just needed to re-enter quarantine if they returned. Eventually, owing to advances in health-monitoring wearables, quarantine was replaced with health checkpoints, but few people left. Now, 10 years later, as I write this from Tower 12 at the Wynn, over five million people live in the expanded radius of the Las Vegas Strip, and cranes fill the sky with new construction. Of course, there is no longer a quarantine, but the region remains ready to begin a lockdown procedure if necessary, so that entertainment and government function can be isolated from disease outbreak. A desire to create a virus-proof city resulted in heavy investments in robotics, automation, software and communication infrastructure, so that now the city virtually runs itself and has become a model community for the world. Everyone who lives in Entertainment City has all their costs covered by the revenues that sports and entertainment generates globally, and there is virtually no crime. It’s an accidental paradise.

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Virtual Concerts
Musician Travis Scott did a brief world tour inside of Fortnite last week, performing his new track in each region around the world, with his debut concert garnering an audience of ~12M viewers (including players who also live streamed on YouTube and Twitch). Fortnite metaverse inhabitants could also buy merchandise in the in-game store, such as outfits and emotes for their avatars. Musicians are increasingly connecting with fans through alternative mediums, especially with live music likely shut down until a vaccine is available and deployed. Twitch has been a standout, and the company recently hired Spotify’s lead product manager, Tracy Chan, to oversee artists and events on the platform. Chan will focus on building tools to support musicians live streaming to fans. Spotify seems to be missing out on the interactive and video-based ways that artists are increasingly connecting with listeners.

Smart Hats
LA-based WorkerSense makes hard hats that track social distancing and alert construction employees when they are within six feet of another worker. The helmets also allow supervisors to monitor workers remotely, as reported by dot.LA.

Viewers Hunger for Something New
WWE Raw, the longest-running weekly episodic show on television, experienced record-low ratings last week, and yet gained share among 18-49 year-olds – landing at the number one cable show for that demographic. It seems to indicate that, although there are fewer folks watching cable, those that are seek live action. The show, which is airing without its usual, boisterous, sign-waving audience, is odd to watch – it’s an uncomfortable combination of silent loneliness and a new intimacy in bringing viewers closer to the action and the wrestling stars. I heard that the McMahons were in early discussions to take over an exclusive venue on Entertainment Island to showcase all WWE events going forward.

Facebook’s Investment in Jio – a Coming-of-Age Story
From NZS’s Joe Furmanski: Five years ago, when Mukesh Ambani’s Reliance Industries launched a new Indian telecom company, many were left scratching their heads. One could see why at the time: The Indian telecom industry was highly competitive (albeit fragmented), the vast majority of the population would be unable to pay premium prices, and rolling out such an endeavor on a national scale would require billions of dollars in upfront costs. It was a high-risk investment that many investors felt would never earn its cost of capital. Fast forward to today, and Reliance Jio has the third-largest subscriber base in the world and is the only profitable telecom company in India. More importantly, Jio started a phenomenon that brought a large portion of India’s population into the Digital Age, with Jio phones being their first and only access to the Internet. Concurrently, Reliance amassed a retail empire, serving a broad range of Indian consumers, and launched an eCommerce offering, all the while keeping companies like Walmart and Amazon at bay.

So, the announcement that Facebook (who has been, by their standards, largely unsuccessful in penetrating the Indian market) will take 10% stake in Jio should be viewed as a Coming of Age for the high-risk venture launched five years ago. This new Facebook + Jio Platform + Reliance Retail partnership is poised to bring together the various pieces needed to facilitate eCommerce in India. The stake by Facebook seems like a savvy way of driving deeper penetration into India for WhatsApp (especially from a payments perspective), and Jio gets a partnership with a leading Indian communication app that can close the gap on B2B and B2C payments, which Jio has been slow to address. The combination begins to look like what Tencent has created in China – a platform juggernaut across multiple end markets.

People are Tired of Their Homes
Zillow reported a significant uptick in people looking for a new place to live last week, with page views up 18% y/y for the week ending April 15th. This rebound erases much of the 19% decline to the mid-March low-point, thought obviously actual sales remain depressed. However, requests to connect with premier agents via Zillow were actually up y/y after declining steeply in March. Perhaps, with everyone stuck at home, people are realizing they need a bigger space (or, alternatively, how much they dislike their neighbors). Back on April 17th, Redfin CEO Glenn Kelman indicated there was a “profound, psychological change among consumers who are looking for houses” as searches for rural locations rose sharply, reversing a long preference for urban migration. Prices are up as inventory remains tight and lower rates have improved affordability. These headwinds are offset by significantly stricter lending standards, creating an interesting dynamic in the housing market, which could open the door for a market maker to step in – iBuyers could be well poised to take over a large segment of the real estate market.

Virtual Court Now in Session
State and local software provider Tyler Technologies has 60 court systems using its new virtual court platform. The system allows defendants to appear via video from remote locations and integrates with Tyler’s real-time, case- and document-sharing platform. Summaries and fines are automatically sent to defendants, who can use online tools for resolution.

Google Taking Steps to Democratize Marketplace
Google Shopping will no longer charge fees to list items for sale. While Google Shopping has far less traffic than Google’s organic results and search ads (per ChannelAdvisor), this policy change could mark a more concerted effort by Google to create a real shopping marketplace, and is no doubt in response to the letdown that Amazon has become. In addition to disadvantaging 3rd-party sellers as discussed last week, Amazon has failed to effectively communicate with customers regarding supply/delivery problems and is still charging full price despite not holding up the promise of Prime. I’ve been visiting a lot more independent sites over the last couple weeks (many powered by Shopify), and would welcome a new marketplace search engine. Shopify is a good candidate for such a marketplace aggregation service, especially as they expand further into payments and logistics. However, the potential failure of the US Postal Service, which Trump is pushing for, will heavily favor Amazon and larger retailers such as Walmart because independent sellers would have no cost-effective shipping alternative.

Video Games Face Content Lag
Video game sales are booming, but problems abound for game developers. The rapid transition to working from home has delayed game launches and could delay new downloadable expansion content for existing games – at a time when gamers are hungry for new quests. New games also must go through certification for all the major consoles, which, when done remotely, can create security issues. Delays in the release of new Xbox and Sony consoles, originally slated for this fall, could also cause significant ripple effects for new titles coinciding with their launch. Some game developers, with whom Jason Schreier spoke for the NYT article, said rather than delay games, they would be cutting back on scope, which will no doubt also disappoint gamers.

Zooma Zoom Zoom
With 300M daily active users, Zoom usage is now nearly 1/3 the estimated daily user base of Microsoft Outlook.

Miscellaneous Stuff
RNA Vaccine
Bill Gates shares his outlook on moving forward and his optimism for an eventual RNA vaccine with WaPo:
“The new approach I’m most excited about is known as an RNA vaccine. (The first covid-19 vaccine to start human trials is an RNA vaccine.) Unlike a flu shot, which contains fragments of the influenza virus so your immune system can learn to attack them, an RNA vaccine gives your body the genetic code needed to produce viral fragments on its own. When the immune system sees these fragments, it learns how to attack them. An RNA vaccine essentially turns your body into its own vaccine manufacturing unit.”

Theme Park Reopening Predicated on Vaccine?
Theme Park Insider theorizes about various ways Disney and others might reopen parks. Based on the discussed options, including fewer attendees, gloves, testing, sanitation, etc., it’s easy to see why we simply might not have any mass gatherings until a vaccine is ready and well distributed.

Coronavirus Hurting Drug Cartels
A combination of missing precursors for synthetic drugs and less border traffic has made times tough for drug cartels. One company in Wuhan – subsidized by the Chinese government – supplies most of the ingredients necessary to make illegal fentanyl, according to the AP.

Organ Transplantation Down along with Violent Crime/Accidents
Transplants are down for a variety of reasons, including hospital safety and availability; but, perversely, fewer car crashes and gunshot wounds (see cartels above) are a key driver – fewer organs are available to transplant.

New Zealand’s Doomsday Mansions
If you are a rich person fleeing to your secret underground lair in New Zealand, make sure you know under which rock the access key is hidden. Bloomberg reports on the problems people are having as they adjust to bunker life. One shelter operator got a call from an owner wanting “to know how to open the secret door to his multimillion-dollar bunker 11 feet underground”. The whole thing is quite precious: I too used to make forts...when I was eight.

Black Lodge Coming to Entertainment Island
Director and painter David Lynch is enjoying his time in isolation, but believes it’s unlikely any filming can start back up before a vaccine is available given the nature of production sets. Rumors are that his agent is in talks for a deal to recreate the Black Lodge on Entertainment Island.

Black Eye for Nursing Homes
NYT reports on the vulnerabilities of nursing homes exposed by covid-19. One trend that was already underway ahead of the pandemic was Boomers aging in place longer than prior generations. Back in SITALWeek #221, I discussed some of the impacts of this trend. The virus’ impact on nursing homes could cause Boomers to stay put even longer and/or downsize to continue living independently. We could also see more multi-generation living (Redfin noted anecdotally a rise in demand for homes with "in-law" apartments). More seniors living independently will no doubt increase demand for in-home health care, as well as tech for health monitoring technology and household automation.

Stuff about Geopolitics, Economics, and the Finance Industry
Decoupling
I continue to look for confirming or disconfirming evidence of onshoring, a trend I wrote about last week (paragraph entitled “Heartland Revival?”). De-globalization appears to be an increasingly broad (i.e., more likely to happen than not) prediction. Indeed, the trend was already underway – wage arbitrage was already running its course and trade tensions were causing supply-chain shifts – the coronavirus just added fuel to the fire. For example, a $25B outsourcing industry in the Philippines was disrupted by coronavirus right when many companies were experiencing a greater need for customer support. Similarly, India’s $100B IT outsourcing industry depends on workers being able to sit at their desks in secure offices (although the industry is rapidly adapting). As I wrote last week, when comparative advantage must consider a broader set of indirect costs, it makes sense to redomesticate jobs that are now fulfilled by overseas workers. In a more automated technological landscape, labor arbitrage, a key reason for globalization, isn’t a material consideration; for example, the FT wrote about the possibility of offshore call centers being replaced with AI.

However, I want to be especially clear that I am not talking about any sort of nationalism or “they took our jobs!” silliness. While there have been consequences to globalization, outsourcing has had an overwhelmingly net positive impact on the world, lifting many people out of poverty. For decades, offshore outsourcing (e.g., shifting manufacturing jobs to China and IT/BPO jobs to India) fueled the rapidly growing GDP in emerging market countries. Now that it appears some degree of job repatriation will occur, can these countries manage a rapid transition to domestic consumption and a services-based economy? The issues at hand today, in an increasingly interdependent world, are twofold: 1) to what degree should each country have self-sufficiency for times of crisis; and 2) will the current global crisis be a catalyst for increased automation (both robotic and software-based) on an accelerated timeline.

Round Up of Post-Virus Life in China:
—Quartz reports on a slow economic return in China, with 41% of survey respondents planning to reduce spending. The Japanese term duansheli, meaning to cut out trivial things, is trending in China.
—Bloomberg reports on “dystopian” life in Wuhan: cars are selling well as subways and ridesharing remain less utilized; increased surveillance governs nearly all aspects of everyday life; a green code on your phone app is required to generally move around (a yellow code indicates you’ve been in contact with a sick person and you need to be quarantined).
—SCMP reports a bounce in tourism, as travel is expected to double for the upcoming holiday vs. one month ago; but, numbers are still down anywhere from 60-70%.
—Congress’s US-China Commission discusses data emerging from China that suggest a struggling economy as well as routs in the energy market and logistics. (PDF)
“Beijing’s Policy Responses to Weakened External Demand: Chinese policymakers are grappling with how to restore economic activity while avoiding another outbreak. Beijing also contends with a third risk: reduced external demand for Chinese exports. While low global demand may push China’s policymakers to resort to broader stimulus measures to forestall further economic weakness—as was done in the global financial crisis—Beijing is limited by already high levels of indebtedness and a stressed financial system. To protect its position, Beijing is falling back on state intervention in its economy to spur growth in prioritized industries, reinforcing the use of distortive economic practices.”

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”). 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. I 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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

April 19, 2020

SITALWeek #241

jason slingerlend

April 19, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, monkey pirates, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: decline in globalization will drive a heartland renaissance; Amazon demonstrates the problem with Big Retail; in a few months, there will be nothing to watch; health monitoring is the gateway to broader surveillance; monkeys building rafts; the inflexible food supply chain; 2 years of social distancing; when Berkshire is fearful, what should investors do?; and, lots more below...

Stuff about Innovation and Technology
Evening News Renaissance
With fewer people stuck in rush hour commutes, evening news from the top broadcast networks has seen a 42% increase to 31 million viewers according to Variety. It has been a generation since evening news enjoyed this level of popularity. In the age of media fragmentation, this is a notable shared experience.

Remote ICU Patient Monitoring
Partnering with Microsoft Azure, GE Medical announced Mural Virtual Care Solution, which allows five hospital staff to oversee up to a 100-bed, multi-site intensive care unit from a remote hub, helping to limit exposure to infective patients.

Goat Cameos
Animal sanctuary Sweet Farm’s new service, Goat 2 Meeting, allows you to add a llama, goat, or other farm animal to your live video meetings. At $100 for a 10 minute cameo, the service is so popular there is currently a waitlist.🐐

Rolling Up Amazon 3rd-Party Sellers
Thrasio, a startup that acquires successful direct-to-consumer brands that leverage Amazon, has raised $110M in VC funding. The company is said to generate $35M in EBITDA on around $200M in sales with brands such as TrailBuddy hiking poles and Sky Mat anti-fatigue mats.

Beam Me Some Power, Scotty!
A team of researchers are developing a drone that can wireless beam power – in the form of radio waves (i.e., WiFi) – to recharge hard-to-access IoT sensors. The sensors need to be plugged into a specialized antenna, which harvests and converts the signal to electricity. Their initial drone prototype has to be within about a meter of the sensor, but parameters should improve. They are also creating rectennae (rectifiers+antennae) to harvest intermittent WiFi signals for power.

Good DogBot
Google is teaching a robot dog named Laikago to walk by having a digital twin of the dogbot watch footage of real dogs. The robot dog gets virtual “good dogs” and “bad dogs” as a reward or punishment to reinforce the learning – I hope they consulted Cesar Millan!

Surveillance State From Health Checks
Chinese company KC Wearables has an augmented-reality helmet that can check 200 temperatures per minute as people walk by. Along with facial and license-plate recognition, the device can read QR codes on phones to know if someone has been in contact with a sick person. This is the kind of hardware we could see in the West (e.g., as you enter a sporting event or other crowded area). Health monitoring feels like a gateway application that could allow people to quickly become more comfortable with a broader, global surveillance state. There is a lot of hardware in this helmet – 64Gb of eMMC memory, 4Gb DRAM, an Arm Cortex A53 octa-core 2.5Ghz processor – all running Android 8.1. The specs underscore China’s ongoing, heavy reliance on foreign companies for growth/maintenance of their surveillance state.

Disinfectant-Dispersing Drones
Drones made by XA Global in China can disinfect 600,000-700,000 square meters. A similar area would require 100 people and 5x as much disinfectant to sterilize in the same amount of time. Use cases include school playgrounds. The company also makes a 4-wheeled spraybot.

Heartland Revival?
Tesla wants to build its Cyber Truck in the central US, and Joplin Missouri is offering the company $1B in incentives. With the virus highlighting global vulnerabilities in the supply chain, we could see a lot of manufacturing find new homes in (or a return to) the central US. Australia is likewise looking to rebuild its manufacturing capabilities – the FT quoted the country’s head of their new manufacturing task force: “Australia drank the free-trade juice and decided that offshoring was OK. Well, that era is gone.” The head of the company featured in the Netflix documentary “American Factory” predicts a problem for China as companies relocate out of the country. But, domestically, a repatriation of manufacturing would require a huge buildout of the entire supply chain and knowhow, which America has, to some extent, lost over the years. And why stop at factories? Many service jobs outsourced to countries such as India or the Philippines could also return to the US as working from home is institutionalized. Remote working would also allow jobs to disperse from expensive, coastal cities to towns throughout the US, leading to a significant rural- and mid-America renaissance. For decades economists have preached about the benefits of comparative advantage and globalization, which in many ways, now appear to be fragile economic relics of the Industrial Age.

No Country for Middlemen
The WSJ reports on the problem of food delivery companies, like GrubHub and UberEats, charging too much margin for the restaurants to be profitable. This isn’t new – in our paper from last fall, The Evolution of the Meal, we discussed the margin problems. We concluded that vertically-integrated cloud kitchens – with subscriptions and regular delivery routes – were the likely path forward. Today, that transition seems more probable than ever, and may well happen on an accelerated time scale. From our paper: “Vertically-integrated cloud kitchens, bundles, subsidies, schedules, and routing combine to drive the flywheel for Uber (or whoever else takes this strategy in the US or other countries – I could easily see Amazon leverage its massive Prime membership base, Whole Foods kitchens, and Amazon delivery service to offer a Prime Meal bundle) to generate a huge user base to densify their cloud kitchens. With one (or two) winners serving a given geographic location, the advantages of centralization, along with scheduling, could also greatly cut down on the number of drivers out on the street.”

Amazon’s Stress Cracks Show Vulnerability of Retail Centralization
Amazon posted their 2019 letter to shareholders this week. The letter was devoid of information except for the interesting stat that the AWS cloud was 3.6x more energy efficient than companies running their own servers. I’m old enough to remember when Bezos’ annual letters weren’t just elaborate PR statements crafted to distract folks from the company’s real problems. Amazon’s temporary shutdown of 3rd-party sellers utilizing FBA (Fulfillment by Amazon) put many sellers who relied on the service in a bind; meanwhile, prioritizing orders for essential items stranded 3rd-party-seller inventory in Amazon warehouses (limited shipments into FBA are said to restart this week). Amazon also discontinued Amazon Shipping (not to be confused with FBA) in several states. Additionally, last week came news of Amazon drastically cutting affiliate commissions to sites that refer customers, damaging publishers like the NYT and search engine DuckDuckGo. Amazon’s success is in large part owed to Bezos’ philosophy of decentralized decision making, so it’s rather paradoxical that Amazon has become a centralized point-of-failure during the pandemic, with WSJ’s Christopher Mims questioning: “Will We Forgive Amazon When This Is Over?”

Amazon’s commerce identity crisis (are they a platform for other companies or just a retailer?) highlights the dangers of relying on one company to do everything, and their fumbling could provide an opportunity for other platform competitors, such as Square or Shopify, to gain market share. Shopify reported this week that they are currently seeing Black-Friday levels of traffic every day. More broadly, to the extent SMBs reopen and new ones are started from scratch, it seems likely they will be mostly virtual businesses with physical space for local order fulfillment and pick up only. I imagine it could be difficult for small businesses to afford to check customers’ temps as they walk in or test employees daily for illness (Amazon is said to be deploying thermal cameras that cost anywhere from $5,000-20,000). But, we also don’t yet know what retail-shopping protocols will be in the future – maybe health-monitoring wearables will be mandated, which would shift most of the burden from the store to the consumer. Given the limited resources and tight margins for SMBs as they contemplate (re)launching out of the economic standstill, they will undoubtedly be looking for the digital partner who provides the highest-NZS (non-zero sum, or win-win) solution, which, right now, does not appear to be Amazon.

Watching Amazon disadvantage its retail partners should probably also give pause to companies relying exclusively on AWS for their IT infrastructure. In times of network stress, would Amazon consider prioritizing their own databases over competitors or their own video streaming over Netflix traffic? I wrote more about the potential issues at Amazon in the “Bezos Reverence Power Law” in SITALWeek #214.

Trough of Content Favors Live Streaming
Comcast launched Peacock last week; but, with all of the original TV and movie production stopped, it doesn’t have much new content. All of the streaming apps and traditional TV channels will be facing a huge gap in fresh content soon, perhaps with little hope of anything new this year, given the extended shut downs in California and diminishing hope for professional sporting events (though many, like the PGA, may forge ahead without spectators). These factors all seem to point to a continuing shift to live streaming and life streaming – whether we all like it or not, we’re spectators of the Truman Show. Or, as Alex Danco smartly wrote, watching the virus and slow recovery itself unfold will be our entertainment.

Surging Semis
In a surprise move amid escalating semiconductor trade tensions with the US, China has approved Nvidia’s acquisition of Mellanox. With pending legislation that would ban any company from using US technology to make chips for Huawei, it’s quite surprising China would stand down from a lengthy delay in approving this deal. Perhaps it signals there has been some backroom negotiations that are going to allow TSM and others to keep making chips for Huawei? In the meantime, TSM is cranking out chips as fast as they can, including for Huawei, as the company reported a jump in Q1 sales up 45% y/y.

Semis Go In-House
Google is working with Samsung to develop their own leading-edge Arm processor to power Pixel smartphones; presumably, the chips will eventually power Chromebooks as well. The processor is another step for Google in using customized silicon to support Android and Pixel functionality, like Google Assistant (Google already makes a small processor to enhance the incredible image quality of photos taken on a Pixel). In-house silicon design is obviously a page out of Apple's playbook (who also closely partnered with Samsung in the first generation of the AX series in the iPhone), and it’s another example of the vertical integration happening at the large tech platforms. Apple finally appears to be close to moving their AX processors into MacBooks (seriously this time) as early as later this year. Amazon has also made headlines recently with the performance of their second generation of Graviton ARM-based processors for the data center (see SITALWeek #236). The large teams of chip design engineers, distributed across the big tech platforms, continue to drive healthy demand for design software from companies like Cadence and Synopsys.

Google Downgrades Nest Uploads
As Google took action to downgrade upload speeds from Nest connected cameras this week, I can’t help but wonder if their ubiquitous data on the health of the Internet is finally indicating some signs of strain from all the video conferencing upstream data? The change easily allows users to reverse the downgrade, so it’s not mandatory, yet.

Miscellaneous Stuff
Prehistoric Monkeys Rafted to New World...Arrr...Ooh Ooh E E!
An African monkey species known as the Lost Monkey of Ucayali (Ucayalipithecus perdita) appears to have crossed 1500-2000 kilometers of open ocean, likely using a vegetation raft, around 30 million years ago. Am I the only one imagining these monkeys with eye patches and peg legs? 🏴‍☠️🐵

Dune Coming...to a Small Screen Near You?
Vanity Fair’s exclusive look at the new Dune movie adaptation – starring Timothée Chalamet – is sure to excite fans of the novel. The first installment of the two-part movie is set to premier in December, but perhaps we will be watching it in our living rooms instead of on the big screen.

Paradigm Shift Ahead for Higher Ed?
The NYT questions whether kids will go back to college (or enroll to begin with) as a result of the coronavirus. Several campuses are indicating they will postpone the fall semester or stick with distance learning. Many smaller colleges could struggle with declining admissions and endowments. The situation also spells trouble for the College Board, who administers the biased ACT and SAT standardized “tests” – with testing suspended, many colleges have decided to forego them. College is hard to replicate as a stepping stone for specialty disciplines, and it has an exceptional ability to foster ad hoc connections and research progress. But, for most kids, it’s a question of whether to attend college for the learning/social/personal growth experience or if online classes, community college, or simply entering the workforce are preferable alternatives.

Treasure Trove of Vintage Vehicles
The recently-deceased inventor of the popular children’s party staple, the patented bounce-house castle, collected over 140 antique and rare cars and stashed them away in Kansas. The collection, largely a secret, will go up for auction this October.

Virus Spotlights Dangers of Air Pollution
Air pollution has been linked to higher Covid-19 mortality rates.

Inflexible Supply Chain a Major Stumbling Block
The food supply chain is proving to be highly inflexible as demand shifts from restaurants and commercial kitchens to eating at home. As we come into peak strawberry season, 24 million pounds of the berries could be trashed weekly in California. Lettuce growers are seeing 30% of their crop go unpurchased and are uncertain if they should replant. Similar stories of milk dumping, egg smashing, and a chicken wing surplus have been reported. It’s a similar story with toilet paper – hoarding is certainly limiting consumer supply; but, the bigger issue is that much of the supply is geared toward commercial (and now largely vacant) buildings. Failure to account for the necessary switch from commercial to consumer production was perhaps one of the biggest mistakes made in issuing the rapid shelter in place orders – the supply chain simply isn’t ready to handle shifting consumption patterns, let alone changes that need to be made in order to keep workers safe during harvesting, processing, and packaging.

Stuff about Geopolitics, Economics, and the Finance Industry
When the Greedy are Fearful
For as long as I can remember, Warren Buffett has advised long-term investors to be fearful when others are greedy – and greedy when others are fearful. As the market hit new highs over the last decade, Berkshire, acting on their first directive, continued to stockpile cash instead of fully deploying it. Now, given the current environment, I would have expected Berkshire – the insurance giant and industrial/consumer conglomerate – to be more greedy. If you glance at the stock market, you see virtually no fear; but, if you look below the surface, there seems to be nothing but fear across the economy. The massive government stimulus and uncertainty has meant no one is calling Warren and Charlie Munger and asking for a white knight. But, at the same time, based on this interview with Charlie by Jason Zweig in the WSJ, it seems that Berkshire is just as fearful as the herd – abandoning its long-time stance to be emotionally contrarian. Munger indicates in the interview that the thing to do at a time like this is sit on cash and wait.
“We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].’ He added, ‘Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it. We’re always going to be on the safe side. That doesn’t mean we couldn’t do something pretty aggressive or seize some opportunity. But basically we will be fairly conservative. And we’ll emerge on the other side very strong.’”
As long-term investors – who are optimistic regarding the continuation of the human race and planet Earth – what are we to make of this? I, for one, am still greedy. Sure, things are uncertain, and the big bounce in the market is really only explainable by the penalty on cash (owing to low and negative real interest rates rather than economic fundamentals), which certainly bothers me (how could it not?!). But, if I transport myself to the year 2025 or 2030, I see a new, digital operating system for the modern, Information-Age economy that will be accelerated by this pandemic. I see adaptable companies taking advantage of the downturn to create more value (non-zero sum, or NZS) for their customers and the world. I see technology, innovation, and ingenuity solving problems and making the world better, on average, over the long term. We’ve been improving our lot, as a species, for a couple hundred thousand years now, and, barring a truly cataclysmic event, we will keep improving. I do wonder how much of Munger’s perspective is colored by the fact that Berkshire, outside of its insurance business, is largely a collection of 1900s, Industrial-Age businesses who, instead of creating the future, are relying on legacy moats – now vulnerabilities – to prop up their businesses. I also wonder how much their fear is colored by their insurance business itself, given everything going on. I’m of course being a bit unfair as Berkshire has some real gems in its portfolio of businesses, and Warren and Charlie are still the greatest of all time. I’m pulling for Berkshire to survive this pandemic (according to this photo, Warren seems to be doing fine in his BYD mask!) and once again get greedy.

Get Cozy with Social Distancing
A Harvard study published in Science last week suggested social distancing of various forms through 2022 is probably necessary in order to build herd immunity and deal with the seasonality of Covid-19. A particularly dire scenario would be a rise in Covid-19 concurrent with a bad seasonal flu next winter. The degree to which consumer/business behavior experiences lasting changes seems to hinge on whether we can return to normalcy this year. Comments from California this week on a slow reopening, which would likely prohibit any large gatherings this year and see students alternating time at school this fall, along with comments from Germany on significant, extended limitations, paint a grim picture for the analog economy. In Wuhan, people are free to go to restaurants again, but they aren’t. If we have staggered shelter in place and protection measures for the next 24 months, I imagine we will see significant, lasting change to the way things are done. The list of accelerating trends we discussed at the end of SITALWeek #239 would be more likely to happen with this type of delayed recovery scenario. The staggered, long reopening is increasingly the base-case scenario, but there remains potential for tail events on either side of the curve: 1) an antiviral, like (potentially) Gilead’s Remdesivir, or, on the opposite end, 2) a devastating mutation(s) that increases the contagiousness and/or severity of the virus season to season.

The ‘Charlie Brown’ Millennial Generation
The Atlantic discusses the bad luck of Millennials – they entered the workforce around the time of the banking crisis, and they are entering their peak earning years around the coronavirus crisis. The WSJ wrote a similar article on the topic – will they be the first generation that fails to build significant, sustainable wealth?

Amsterdam Will Trial “Doughnut” Strategy to Restore Economy 🍩
“The inner ring of her donut sets out the minimum we need to lead a good life, derived from the UN’s sustainable development goals and agreed by world leaders of every political stripe. It ranges from food and clean water to a certain level of housing, sanitation, energy, education, healthcare, gender equality, income and political voice. Anyone not attaining such minimum standards is living in the doughnut’s hole.
The outer ring of the doughnut, where the sprinkles go, represents the ecological ceiling drawn up by earth-system scientists. It highlights the boundaries across which human kind should not go to avoid damaging the climate, soils, oceans, the ozone layer, freshwater and abundant biodiversity.
Between the two rings is the good stuff: the dough, where everyone’s needs and that of the planet are being met.”
✌

Disclaimers:

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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

April 12, 2020

SITALWeek #240

jason slingerlend

April 12, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, non-isotropic inflation, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: automation trend accelerates; privacy vs. health and freedom as contact tracing comes to smartphones; the grasshopper, the ant, and the stock market; mixed signals on China’s economy; how to look better on video from home; wireless virtual radio networks; restaurants churn and apparel orders are canceled; new Cannonball record; and, lots more below...

Stuff about Innovation and Technology
Coronaball Run
Back in SITALWeek #224, when I reported on the latest adrenaline-inducing Cannonball record, I learned that quite a few SITALWeek readers are enthusiastic about the race. Now, a new group has broken the previous, mind-blowing record by 45 minutes, crossing from the East to West Coast of the US in 26 hours and 38 minutes. There is some controversy that perhaps doing the race when roads were empty was, well, cheating just a bit.

Grocery Robots Joining Workforce
Grocery store chains are increasingly using robots in stores and warehouses to keep up with demand. Walmart will have robots in 1860 stores this year, mostly scanning and alerting employees to low-stock areas (robots to the toilet paper 🧻aisle, ASAP!). Automation is a good example of an existing trend that will be heavily accelerated by coronavirus, as the NYT reports.

Drones Enforce Social Distancing
The city of Elizabeth, NJ is one of the first in the US to use drones to tell crowds to disperse and go home. Such technology was widely deployed in China during its lockdown. Meanwhile, Google is seeing a surge in demand for its drone delivery trial in Virginia.

AI Pet Management
Camera-maker Furbo will now monitor your dogs’ in-home behavior, alert you to behavioral changes that might indicate a health issue, and offer analysis as to why they might be barking/misbehaving (here at SITALWeek headquarters, we could use some AI to keep tabs on free roaming reptiles!). To develop the new version of their dog camera, Furbo ran machine learning on short video clips from thousands of users. The NYT article also discussed a robotic laser toy, called Felik, to keep your pets occupied chasing the red dot around the house.

Gamers Decode Gut Microbiome
Borderlands maker Gearbox Software (in conjunction with their distributor, Take-Two’s 2K) is harnessing players to map the human gut microbiome in return for in-game rewards. The effort is part of Borderlands Science, a module inside Borderlands 3, in which gamers solve virtual puzzles that help decode bacterial DNA. Due to the nature of the task, using gamers should be faster than developing research-trained AI.

Tech, Becoming Tech, or Disrupted by Tech
Atlassian Co-Founder and Co-CEO Scott Farquhar last week said in a Protocol interview: “There's only three types of companies, right? Companies that are technology companies, companies becoming technology companies, and companies that are being disrupted by technology companies. And so every company in the world needs to go through this digital transformation to make sure that they can produce goods and services in a digital way.” The Australian collaboration software maker is seeing an uptick in product usage as employees need to function remotely as a team.

Privacy vs. Freedom
I’ve written several times in the past about the tradeoff between equality and freedom (e.g., see SITALWeek #214), but asking where we should be on the privacy-freedom continuum is a question of equal importance. In the US, ever since the terrorist attacks of 9/11 initiated a loss of civil liberties, there has been much debate and worry about loss of privacy. In 2013, Snowden revealed many invasions of privacy perpetrated by the government. While I am not aware of significant damage done as a result of our loss of privacy, I am very cognizant of the risk of future harm. Perhaps one of the reasons we haven’t seen extreme abuse of privacy is due to the transparency of the Information Age, where injustices seem to be spotlighted and addressed fairly quickly. I recognize I am probably being a bit of a Pollyanna on this topic.

How should we feel about giving up our health and location data to mitigate damage from current and future pandemics? Can we solve this crisis with technology and not risk serious abuse? I don’t know the answer, but it certainly merits pondering. The FT’s China correspondent has been grateful to have the tracking in Beijing recently despite the risks; but, we also know millions of people have been unjustly oppressed by the same tools. The Economist reported on Chinese factories using smartphone apps to track worker location and health (along with the rise of automation in Chinese plants post COVID19). The Atlantic discussed health tracking systems in China, South Korea, and Singapore, concluding that ‘testing and tracing’ works exceedingly well to control viral spread; but also that “the sheer amount of information made available by tracing apps will be tantalizing for power-hungry governments and data-hungry corporations”. In a Barron’s interview, Disney’s Executive Chairman Bob Iger hinted at temperature checks at their theme parks and discussed how China will likely implement the process for school children. A company like Amazon, who is reportedly building its own, internal COVID19 testing labs, could theoretically require employees to wear 24-hour health monitoring devices, and preemptively grant sick leave for anyone who is deemed unsafe to come into work. And, the Trump administration is now exploring a PATRIOT-Act-like tracking system.

How far away is the West from a comprehensive health and contact tracking system? Currently, MIT is working on an open-source, Bluetooth-based contact tracking system for pandemics; but, Apple and Google appear to have beat them to the punch in an unprecedented collaboration to make a similar tracking system available to developers by mid May (the tech keeps track of close-proximity interactions with other smartphone users, and would send an alert if someone on the list indicated they were diagnosed with the virus). From a health tracking perspective, it seems that, within a few years, we could have a huge pool of data from wearable smart watches, rings, etc., which could be anonymized and combined with GPS/Bluetooth contact tracking to create a monitoring system capable of shutting down disease spread before it reaches pandemic proportions. Such a system could prevent you from accessing a public place, like a concert or bar, if it seems you might be getting sick. Or, it could let you know if you were in contact with someone who became sick – without letting you know who that person was, or relying on individuals to manually update their health status. Taking a step back, it's not just about pandemic events – we could greatly suppress seasonal flu and cold season (not to mention the potential for identifying underlying health problems before they become critical), which would prolong many lives and increase productivity while decreasing Kleenex sales. From a philosophical standpoint, I tend to favor freedom whenever possible; but, from a personal standpoint, I’d give up a great deal of my privacy to avoid even one case of the sniffles!🤧

Embiggening Big Tech
The big Internet platforms stand to get even bigger in the downturn as competitors of various sorts go beyond furloughs into permanent layoffs while the tech giants are hiring. Facebook has 10,000 open roles in engineering as Yelp, Eventbrite, and Groupon lay folks off in their SMB-focused businesses. As small businesses close around the world, Amazon is hiring hundreds of thousands of workers, and the current situation plays directly to their ecommerce, cloud, and entertainment strengths. The ability to accrete business away from small competitors in times like this is how the wet cement dries for monopolies in a downturn. Back in SITALWeek #236 and #238 (which feels like a lifetime ago!) I talked about how big tech was sidling back into governments’ and consumers’ good graces as they offered helping hands. The biggest gestures and donations have (so far) come largely from tech companies and tech-founder billionaires (I compiled a list, but it’s frankly too long to go through – highlights are Google’s $800M in donations, Dorsey’s $1B fund, and even TikTok’s $250M). But, talk of government giving tech a hall pass seems premature, as the DoJ is still ramping its investigation into Google’s Fitbit acquisition amid the EU’s worries about the deal’s data privacy implications. Also, EU regulators are raising more questions regarding Facebook’s marketplace.

Wireless Networks Go Virtual
NZS Capital’s Joe Furmanski discusses a big trend in wireless infrastructure: As 5G hype starts to give way to 5G fear, the new telecommunication standard is beginning to coalesce around an emerging trend: vRAN. While virtualized Radio Access Networks are not necessarily new, they do provide an elegant solution to many of the problems surrounding deployment of 5G, including cost, efficiency, and latency, with the added benefit of closing the gap to Huawei. Innovative companies like Altiostar, Mavenir, and Parallel Wireless are striking partnerships with major tech firms to provide ‘carrier grade’ solutions for the major wireless providers across the globe. What strikes us as particularly interesting is that vRAN is a ‘cloud first’ technology that will provide new and sizable markets for Microsoft and Google, as Forbes notes, as well as semiconductor companies like Nvidia.

Internet Holding Up Despite Major Usage Shifts:

Cloudflare has some cool data showing Internet traffic by city and category of use, as well as shifting patterns of hacker attacks.
Verizon’s CEO reports that gaming is up 100%; the current average of 800 million calls/day is 2x the Mother’s Day peak, and calls are 33% longer; VPN use is up 50%; web browsing is up 20%; roaming between cell towers is down 27%; so far, there’s been no network stress.
Nielsen reports a 45% increase in video game usage.
Google Meet (formerly known as Hangouts, which is now reserved just for the consumer version) has been adding two million new video conference users a day. Salesforce has doubled their Meet usage to 50,000 video calls a day as employees have gone remote. In related news, Google has a new AI feature for calls in its consumer Duo app that can smooth over packet losses by filling in missed audio segments up to 120 ms long.

New Dining Landscape in US
In the US, 30,000 (3%) of restaurants have already permanently closed as a result of COVID19, and a survey indicates that 11% of restaurant owners plan to close their establishments permanently by the end of month, according to the National Restaurant Association. Ultimately, perhaps 200,000 (20%) may not reopen, according to a UBS report cited by Business Insider. I would note that research suggests the average restaurant survives five years, so 20% closing/year is probably typical, but we are likely to see the closures compressed into a smaller window, and/or exceed estimates.

Uber Rides, Uber Eats, Uber Employment, Uber Everything?
Uber is helping its workers find other jobs, with the rideshare’s driver app now listing jobs from other on-demand and retail employers. One of the core competencies of Lyft and Uber is their ability to hire and onboard a large number of contract employees. The size of their driver networks are also a key advantage – it’s kept new entrants from competing in ride hailing, and now provides a large labor pool for filling vacancies in other industries. Uber previously unveiled their aspirations of becoming a gig-economy recruiter with a temp labor app last fall. And, on the consumer side, Uber also expressed interest in becoming a broader app with banking ambitions. Are Lyft and Uber ultimately a marketplace for labor-for-hire across a multitude of employers, a marketplace for rides and meal delivery, or both? It’s not yet clear if this is a case of identity crisis, or a smart way for Uber to build Optionality around their core business.

US Housing Market Hanging Tough
US home listing/buying continues to trend down only ~30-40%, which seems impressive given what is happening with the economy. Redfin reported a 33% drop in home buying, with new listings down 44%. One third of home tours are now video-based, and 12% of offers are being made after video tours. With low rates and low inventory, it remains a competitive market favoring sellers. Meanwhile, Zillow reported a slightly better drop of only 27% in new listings.

Miscellaneous Stuff
Good (lack of) Vibrations
With everyone working from home, there is less traffic and movement, which is causing the Earth to vibrate less and seismic measurements to be more accurate. The vibration levels of a typical day are now roughly equivalent to those observed on Christmas, when most people are home.

Video Equipment Makeover
Many of us are now more frequently on video conferences and/or TV appearances from home. Here is a great video from our friend and PR-guru Dex McLuskey at Context Content on what gear you need to look and sound better from home.

Cotton Prices Down with Retail Closures
Cotton prices hit a 10-year low as the effects of billions of dollars of canceled orders ripple through the global cotton growing regions. One of the largest apparel retailers, Gap Inc., has already canceled all summer and fall orders. Given the seasonal nature of clothes, when stores open back up, what will they be stocking? If the work-from-home trend persists, perhaps they should consider upticking manufacture of Levi’s and sweatpants.

Human-Bat Social Distancing Needed
When it comes to viral transmission, bats are basically tiny, flying humans. Their 30-year lifespan, social living environments, and relative insusceptibility to symptoms make them an ongoing, primary vector of human diseases, according to the WSJ. It seems logical that we need to let bats be (they are shockingly beneficial for insect control) and stop the bat-human (and bat-exotics-human) interactions that, in particular, seem to take place in China.

💩 News
An article in Nature Biomedical Engineering is titled “A mountable toilet system for personalized health monitoring via the analysis of excreta.” According to the article: “Each user of the toilet is identified through their fingerprint and the distinctive features of their anoderm, and the data are securely stored and analysed in an encrypted cloud server.” In related 💩 news, the publishers of Nature recently apologized for saying the coronavirus started in China. While it is of critical importance to not fuel racism, it’s also important to not obfuscate the truth.

Pseudoscientific Storytelling
Economist Jason Collins cautions on the perils of using flawed, behavioral-economics concepts to assess risk during a pandemic.

Ancient String
The oldest known string has been found in a cave in France. Dating back 50,000 years, it was made by Neanderthals from conifer bark fibers. Given the timing, modern humans may have learned how to make string from Neanderthals. Previously, the oldest string found dated to 19,000 years ago in Israel.

Universe Expanding Non-Isotropically
The Chandra X-Ray Observatory has new data suggesting an uneven pace of inflation for the Universe. Previously, we assumed things were expanding in every direction at a similar, accelerating rate (see SITALWeek #232 on the Hubble constant); but, the expansion might not be as uniform as we once thought, perhaps due to unequal action of dark energy.

Stuff about Geopolitics, Economics, and the Finance Industry
Mixed Signals from Reopened Chinese Markets
Satellite data from SpaceKnow show no signs of economic recovery in China, according to Barron’s. The Nikkei reports that business is slow to return to shops, with Walmart Shanghai traffic down >50%. Meanwhile, car sales at some Wuhan dealers are back to pre-crisis levels, according to Bloomberg. But, live-stream ecommerce is poised to more than double, from $61B in 2019, as people shop from home. The WSJ reports that travel is resuming cautiously.

Manufacturing’s Exodus from China
Taiwanese companies are moving manufacturing out of China to places like Vietnam. iPhone assembler Wistron aims to move 50% of its capacity from China by next year, according to Bloomberg. In related news, Taiwanese-headquartered Foxconn is using their controversial Wisconsin plant to make ventilators in conjunction with Medtronic.

Q1 Money Left Large Active Management for ETFs
Active managers posted mixed performance during the market volatility, per Barron’s. Meanwhile, passive-king Vanguard took in $48B in Q1, ahead of Blackrock at #2 with $10B inflows, and ETF-provider ProShares at #3 with $7B. Most large, active managers experienced outflows.

The Ant and the Grasshopper
Most everyone knows the fable of the Ant and the Grasshopper: the ant toils all summer and is ready to withstand the winter while the grasshopper goofs off and is unprepared. In the traditional story, the ant rebukes the grasshopper. But, if you are like me, you might primarily remember Disney’s politicized 1934 version of the fable that was, in part, a response to FDR’s New Deal. In that version, the grasshopper is granted room and board in return for playing his fiddle.

As the government backstopped nearly all types of debt last week, including so-called ‘fallen angels’ (companies that lost their investment-grade status), and we await the broad fiscal stimulus, the question of moral hazard comes up. I, like many others, believe we should do everything possible to keep individuals safe and financially-bridged to the other side. What interests me is where this leaves us for the next inevitable crisis. Some have argued that the 2008 financial crisis was a result of risk-seeking behavior that ensued after the government bailed out Long-Term Capital Management (the hedge fund that apparently had no understanding of real-world risk or complex adaptive systems, despite having Nobel prize winners Myron Scholes and Robert Merton on its board!). We could also speculate that, today, we need such a large bailout because the widespread 2008 bailouts implicitly sanctioned a continuation of irresponsible behavior. The extent of the bailouts today would imply that nearly any level of risk will find a safety net when another crisis comes knocking in the future. The ultimate consequences of the widespread corporate bailouts announced in response to coronavirus are unknown.

The market corrected violently down as coronavirus spread globally, and it has, with nearly the same ferocity, gained some of that lost ground back. The downdraft was related to economic uncertainty, while the updraft seemed to be built on two factors: 1) the global safety net offsetting the drop shock to the economy, and, in particular, the bail out risky behavior; and 2) zero and potentially negative rates, which make it philosophically – and mathematically – expensive to sit on cash relative to higher-risk assets. Indeed, the message seems to be that there is little risk in equities or debt if the safety net can be as big as it needs to be.

The offset to the stimulus would be the fear of future inflation. Yet, as the world transitions from a capital- and asset-intensive system to one based more on information and technology, rising productivity and deflationary pressures have been enough for money to hold its value, at least so far, in the 21st century. That could obviously change, and, at some point, governments might need to vacuum capital back out of the economy with higher rates and decreased spending. Given the lingering impacts of the virus, we may find it’s necessary to support a significant portion of the population long term with some form of universal basic income. As Disney’s grasshopper sang: Does the world owe us a living? Or, as he realized at the end, do we owe the world a living?

It seems likely that decades of disruption and change caused by the shift to the Information Age will now be compressed into ~five years, so we will likely need a bridge to bring everyone across together. One of the reasons that the world seems so strange now is a result of an odd dualism: there is a great sense of urgency, yet time seems to be standing still (how many years were there in March 2020?). The great pause in economic activity gives us time to be thoughtful about the future. I think the best course of action would be to help the companies that were already bringing positive change to the economy (i.e., ones with high non-zero sum – helping the most people while extracting the lowest tariffs), while hastening the death of the businesses that were already losing relevance and were structurally challenged by the shift to the Information Age to begin with. Indeed, many companies have spent the last couple of decades starving innovation and financially engineering returns while mortgaging their futures, and, in some cases, heavily damaging the environment in the name of shareholder returns – these aren’t the best candidates for society to save. Rewarding companies for going carbon neutral, or even carbon negative, would be another good initiative as stimulus is doled out. If we can boost the innovators while financially bridging individuals, we can accelerate the transition to a digital economy and bring everyone across the divide.

✌

Disclaimers:

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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

April 5, 2020

SITALWeek #239

jason slingerlend

April 5, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, virtual worlds, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: deep dive into what might (or might not) change emerging from the coronavirus lockdowns; the metaverse could come from the business world instead of video games; what types of movies and tv shows will we want when production starts back up? TV gains advertising as radio and billboards lose; smartphone usage changes at home; app store inequality; esports takes hold; US-China tensions rise over semiconductors and Taiwan; and, more below.

Stuff about Innovation and Technology
Gateway to OASIS
Interactive virtual worlds have existed in various forms for decades – MMORPGs like World of Warcraft or Fortnite and other simulated environments like Second Life or Minecraft. While some of these have tens of millions of users, they remain a small albeit rapidly growing market relative to other forms of entertainment. It’s been surprising how quickly a broader swath of the global population has adjusted to virtual interaction in the last couple of weeks, primarily through video conferencing (PSA: you’ll want to password protect all your Zooms, or better yet switch to Microsoft Teams or Google Hangouts due to new hacking threats like zWarDial and FBI warnings). Video conferencing and real-time collaboration tools are perhaps gateway drugs to the inevitable augmented-reality virtual worlds of the future, like the Metaverse in “Snowcrash” or OASIS of “Ready Player One”. Even business collaboration software Slack started out life as a video game. Wired wrote this week about the rise of socializing in MMORPGs, and The Verge reports on students recreating their entire school campus in Minecraft. In what would be a surprise to many, the new metaverse platform may be more likely to emerge from business and education than video games.

Actions Define Brands
Despite the difficult times, management teams and boards need to realize they do owe their fellow humans respect and support. As Mark Cuban said recently, how companies treat their employees during the crisis is going to “define their brand for decades.” An example of a company's destructive actions was reported by Ben Bergman, of the new SoCal tech news site dot.LA, detailing the fumbled mass layoff at Bird scooters this week. The degree to which companies can take care of their employees and meet the needs of their customers during the crisis may be a strong indicator of their potential success and trajectory as the economy starts moving again.

Real Sports Meet eSports
We’ve talked about NASCAR drivers competing in esports, and now we have F1 drivers doing the same. When will we have NASCAR drivers face off against F1 drivers in a video game tournament? The virtual Grand Prix series will be broadcast on YouTube, Twitch, and Facebook, and I am surprised they won’t be on broadcast or cable as well, given these types of events are doing well on TV. The NBA, meanwhile, is planning a virtual esports tournament with real NBA players via the game NBA 2K. When real-world events start back up again, will we keep these new esports tournaments as well – effectively doubling the sports industry? The popularity of these virtual events is likely to create a new set of younger fans for the sports leagues around the world. Indeed, leagues will increasingly be targeting the next gen of fans, like in the new deal between the NFL and ViacomCBS to broadcast postseason games on the Nickelodeon network.

Advertising's Punctuated Equilibrium
The pandemic has hit advertising revenues especially hard for radio, newspaper, and outdoor advertising as people stay home and watch more TV. Dating app conglomerate Match Group is decreasing its advertising, but also shifting it: “The marketing landscape is also changing: while out of home, cinema and rush hour radio are no longer effective mediums, we see television and digital platforms with increased impressions becoming more attractive.” If working from home sticks for some percentage of folks, and media habits change while we all spend more time at home, this could represent a dramatic and final nail in the coffin of many legacy ad mediums.

Stay-At-Home Shifts Wireless Usage
Stuck at home on video conference calls and distance-learning apps with a big screen TV and lack of daily commute, our use of smartphones could be changing. Time spent on our phones grew at a similar pace to prior quarters – around 20% y/y. But spending on mobile apps in the US grew a meager 5% in Q1. AppAnnie shows that China saw a much larger increase in mobile usage than what the US is experiencing. We know TV viewing was up anywhere from 20-40% across traditional and streaming in March. Homebound parents on video conference calls have turned to YouTube Kids to entertain the little ones – the YouTube Kids app took the top slot globally for time spent in a mobile video app in March, according to this report from Apptopia (PDF, page 17). YouTube also reported 100% increase in cooking video views, 200% for workouts, 55% for meditations, and 500% for videos tagged “at home” in mid-March (as compared to a typical day) as the video site grows in popularity. I suspect console gaming is up a lot, but mobile game downloads were up 30% in March compared to the average weekly downloads in Q4. Mobile traffic is also shifting to WiFi. As a result, we could see a pushout in wireless network capacity increases and decreased demand for new phones (such as Apple’s rumored 5G model this fall).

Vertical Integration of the Auto Industry
As the value in a car shifts from the chassis and engine to batteries, autonomous systems, sensors, etc., car makers are hiring semiconductor engineers and increasingly insourcing parts (that they’ve previously sourced from outside suppliers) in order to design and iterate faster around common platforms. Ed Sperling at Semi Engineering comments: “For the Tier 1, 2 and 3 suppliers, this raises some serious questions about their role in the development of these electronic systems, as well as their financial model. If carmakers develop these electronic architectures, then it’s likely that none of them will be standard outside of their own subsidiaries.” Vertical integration is a trend we’ve noticed in the past when an Industrial Age product transforms into an Information Age one – see: The Inevitable Vertical Integration of Information-Based Platforms from SITALWeek #219. Vertical integration could be one of the trends that accelerates as a result of coronavirus.

App Store Inequality
Apple is now allowing Amazon to do in-app purchases in its Prime Video app without giving Apple a cut. I don’t see how this can apply to only Amazon and other video apps; game makers and the like should demand the same treatment if they have users with accounts (and credit cards on file), as Epic’s Tim Sweeney pointed out. If Apple and Google don’t ultimately lower their 30% app store take rates for all developers, then behavior like Apple’s comes off as big companies colluding against smaller ones. It would also be the right, high NZS, thing to do – the fees on the app store are too high and represent a regulatory vulnerability. Such a change in fees could represent a significant headwind to app store revenue growth for Google and Apple and a boon to digital media and gaming companies.

Amazon Aiming to Become Ultimate Gaming Platform?
Amazon is reportedly investing hundreds of millions of dollars into becoming a video game publisher, according to the NYT. It’s possible the NYT is overstating the effort by Amazon in gaming given that only nine months ago the ecommerce giant was laying off dozens of its game developers. As I wrote in SITALWeek #231 with regard to the rising battle for gaming platforms between Microsoft, Google, and Amazon: “no one has everything it would take – cloud+games+social – to win if game streaming becomes a big business; however, if Amazon or Google were to acquire a major game publisher, that could change things overnight.” Polygon also had a great story on Microsoft’s plan for the new Xbox Series X, Xbox Game Pass, Project xCloud, and Xbox All Access as the company looks to hold its foundation in console gaming and extend its position into the cloud as rivals Amazon and Google circle.

Pilot Season a Bust
As discussed a few weeks ago, the disruption of production for new shows is going to cause an air pocket in new content for all the streaming apps. Now, the LA Times has reported on the disruption to pilot season, with 55 out of 56 shows vying for a spot in this fall’s broadcast TV lineup not completing their pilots. Pilot season is a microcosm for pandemic-accelerated change, as we are now likely seeing a permanent end of the idea of doing pilots in favor of “straight to series”. I thought these comments from producer Gail Katz were interesting: “So much depends on how long this whole thing lasts. And it feels like a lot of things could be done online, without driving all over Los Angeles, because we are already doing so many things online...But one question is, what will people want to see after this? Will they want comfort food, escapism, feel-good programs, comedies or more medical dramas?” Is any of the video content we enjoyed pre-virus going to fit in this new world we suddenly find ourselves in? What’s going through writers’ heads right now – what new themes of humanity will they probe when production starts back up? Will we still want billion-dollar comic book lollapaloozas, dark anti-hero shows, and surreal reality TV that have dominated our viewing for the last decade?

Location Data Tracks Stay-At-Home Adherence
Google has made available anonymized location data (by country and region) around the world showing compliance (or lack thereof) with stay-at-home recommendations. Also, the CDC is using location data – collected when mobile ads are served – to identify places where people are still congregating to guide the next iteration of pandemic response. As I mentioned last week, Google and Apple are in a unique position to combine anonymized location and health tracker data to provide important insights that could help stop the spread of COVID-19 infections.

Miscellaneous Stuff
Devs
I’ve been enjoying the new FX show Devs (available on the new FX hub on Hulu, along with a lot of amazing FX shows). I’m hesitant to reveal any spoilers, so I’ll just say it's one of the best explorations of the deterministic universe I’ve seen, and it also has some fun with the quirky tech culture of the Bay Area. This type of show exploring the increasing interaction between tech, science, and human life might rise in popularity as we try to understand our new post-virus existence.

AI and Humans are Equally Bad at Predicting
Predicting the future in a complex adaptive system is impossible, and machine learning and AI won’t help. Here is an interesting example: “Three sociologists at Princeton University asked hundreds of researchers to predict six life outcomes for children, parents, and households using nearly 13,000 data points on over 4,000 families. None of the researchers got even close to a reasonable level of accuracy, regardless of whether they used simple statistics or cutting-edge machine learning.”

First Ripples of Disruption in Food Supply Chain
Unintended disruptions to the global food supply chain could result from restriction of movement of people to pick crops as well as the delivery of those crops. “In Florida, a lack of Mexican migrant laborers means watermelon and blueberry growers face the prospect of rotting crops. Similar shortages of workers in Europe mean vegetable farms are missing the window to plant.”

Stuff about Geopolitics, Economics, and the Finance Industry
Chinese Asset Management Opens to Foreign Firms
This week, China began allowing international financial institutions in the wealth management sector to sign up mainland citizens as clients. JP Morgan Chase took the opportunity to buy out their joint-venture partner in China. This new directive comes as global virus turmoil has caused a 31% drop y/y in the US imports from China, the largest since the data were first compiled nearly 30 years ago, according to the April economics and trade bulletin from the US-China Economic and Security Review Commission (PDF). So far, despite China being through the worst of the virus, the country is not seeing capital inflows to their markets. The report also points out that, leading up to the pandemic, 50% of the world’s PPE (personal protection equipment) was imported from China – a supply chain that, along with critical pharmaceuticals (e.g., penicillin), we might consider repatriating. In related news, India has banned export of hydroxychloroquine, another signal that drug manufacturing will likely permanently return home.

China vs. West Posturing Continues
Meanwhile, the Trump administration is once again threatening China with our most effective weapon: cutting Huawei off from advanced semiconductors. This is the “nuclear” option for the US, with potentially far-ranging consequences, as discussed in SITALWeek #233: “Trump’s ban here would effectively cut Huawei out of the 5G market, and force China to rely on foreign suppliers for all of their wireless communications (which would obviously give the West complete ability to spy on China). Taiwan continues to be the ultimate chess piece in trade negotiations, and China fancies TSMC a Chinese company while the rest of the world (including TSMC and Taiwan) do not. This move by Trump would also put Samsung in South Korea in the hot seat. I can only continue to conclude this is yet another surprisingly savvy negotiating tactic with an ulterior motive by Trump, because it would appear to force China to play nice, or use their “nuclear” option and take military possession of Taiwan.” Huawei’s chairman had this to say in response to last week’s posturing: “If the Pandora’s box were to be opened, we’ll probably see catastrophic damage to the global supply chain -- and it won’t just be one company, Huawei, destroyed. I don’t think the Chinese government will just watch and let Huawei be slaughtered on a chopping board. I believe the Chinese government will also take some countermeasures.” Despite a trade ban in 2019, Hauwei managed to spend $19B on US components, up from $11B in 2018, according to the FT.

WHO’s Pandering to China
Speaking of igniting tensions with China, the US State Department held a virtual forum calling for Taiwan to be recognized by the WHO. The WHO, which seems to have lost credibility due to its early handling of the Chinese pandemic, still refuses to recognize Taiwan as a sovereign state, a failing that obscured Taiwan’s early success containing the virus and arguably hampered global efforts.

Crisis Analysis, NZS Style
Rule #1 of investing at NZS Capital is: don’t try to predict the future; Rule #2 is: be skeptical but not cynical – in the long run, things always get better. (Only during a Zombie Apocalypse will these rules slip to #3 and #4 – behind Rule #1: Cardio and Rule #2: Double Tap 😁) When the market is moving all over the place, it tends to create two reactions in our brains: first, a feeling of helplessness – like we can’t find the earth under our feet – because we have a hard time processing the discordant flood of data; second, to regain the lost footing, our brains go into overdrive looking for patterns and extrapolations that, while they may make us feel more secure, yield a dangerously false sense of overconfidence in our knowledge of future events. But often, there is nothing to grip onto until time passes and more evidence becomes available. To help with this uncertainty, we did two team exercises this week, which you also might find useful as you think about the world and investing.

Exercise 1: we circulated an alphabetical list of stocks we own plus an additional 10 blank spots. Each team member independently created a portfolio from scratch from the list of existing holdings (with the ability to zero them out and add new ones). The goal was to do this as quickly as possible without referencing the current position sizes – we were looking for gut feelings to later intellectualize in a team discussion. I put everyone’s fresh alphabetical portfolio in a single spreadsheet highlighting discrepancies, and then we did a long video call to walk through it. This yielded some interesting results and excellent stock debate, which is the entire goal of our team function: respectfully challenge the ideas, not the person. The goal is to leverage the team to reduce cognitive bias as much as possible. We made a few adjustments around the edges, some of which were important, and outlined several future options depending on where the market goes from here.

Exercise 2: for nearly a decade, we’ve done an annual exercise of “What will change in 10 years? What won’t change in 10 years?” This is inspired by Bezos’ advice to focus on what won’t change in the long term, which for Amazon at the time (and still today) was: customers will want more selection, lower prices, and faster delivery. We weren’t due for this analysis until August, but we did an abbreviated exercise contemplating the accelerating pace of change as a result of the pandemic. We focused on the 2nd derivative – which growth rates will inflect higher and which decay rates will deteriorate further? The safest assumption emerging from the crisis is that trends already underway will be accelerated and compressed.

If the second exercise sounds like a violation of Rule #1 (don’t make predictions), you’re sort of right. But, the main point of the exercise is to explore the new fuzzy bounds of the (now significantly expanded) range of possible future scenarios. And, we do try to keep the discussion grounded in those predictions that we feel are fairly broad and safe, which we will continually reevaluate in a Bayesian manner as confirming and/or disconfirming evidence becomes available. An example of a broad and safe prediction: it appears the ongoing shift to cloud computing will rapidly accelerate. I imagine that most of our predictions, summarized below, will turn out to be wrong, which is part of the learning process of the exercise – a reminder to be humble and avoid immutable convictions.

The global economy and ecosystem of Earth are experiencing a punctuated equilibrium that is rivaling events not experienced since World War II, the Great Depression, or the Spanish Flu. That means, as we sit here today, the number of branching pathways into the future is multiplying much faster than normal. The initial branch we emerge onto from the economic shutdown is going to depend heavily on the length and severity of the recession, the effectiveness of government stimulus, enduring behavioral changes, etc. Time-dependent, highly-variable outcomes are a classic attribute of complex adaptive systems – which exhibit characteristics of chaotic systems in which tiny perturbations in the initial conditions create giant and unpredictable changes in the future state. There are 100 places the economy can be in a year, 1000 in two years, 10,000 in three years, etc. Evolutionary fitness functions will determine which companies, behaviors, and ideologies survive. Imagine the analogy of an Everettian interpretation of quantum mechanics: there are many worlds in the future we might find ourselves in – but which trends are likely to exist in the greatest number of those many thousands of branching pathways through time? The most common trends are likely to be the broader, safer predictions over time, but they are always subject to revision based on disconfirming evidence along the way. The key is to determine which characteristics will drive the survival of the fittest companies. We believe attributes of survival and growth are the same themes we outlined in our 2014 paper, Complexity Investing, with the most important concept being non-zero sum – NZS – the degree to which companies are maximizing value for all constituents.

What Won’t Change?

The two most important characteristics of winning companies in the 21st century will be adaptability and NZS – their ability to maximize non-zero-sum outcomes that create more value for all of their constituents, including customers, employees, society, the environment, and, lastly, shareholders. This will be more important than ever as a smaller economy tries to repair itself and consumers and businesses choose how they will spend their limited resources – companies giving the most without taking too much in return are likely to build virtuous network effects.
Humans are likely to remain social animals. So, we think group events and traditional sports will survive (and thrive), and esports could be a much bigger industry in five years than they would have been without the pandemic. The WSJ had a detailed article last week on the live-sports fallout including this comment from Mark Cuban: “[People] will be starving for new content, and [live sports] will be there to feed them.”
With respect to the world going green and consumers placing an increasing value on products and services that are better for the environment, we are guessing that holds constant, but the economic consequences of these decisions may slow the trend down for a period of time.

What Might Inflect?

Based on past crises during 21st century capitalism, three trends are apparent: 1) accelerating pace of change and technological progress; 2) rising inequality; and 3) rising nationalism. As I wrote in more detail in SITALWeek #237, the current crisis will likely cause these trends to continue or accelerate unless, as a society, we come together to intervene and reverse the problem of inequality.
The hyper-accelerated pace of change will compress 10-20 years of digital economic transformation into a period of 3-5 years (or perhaps even less time than that). This means zombie companies that have been riding their 1900’s Porter’s 5 Forces “moats” while they buy back stock and pay dividends – literally mortgaging their future – will die faster than they otherwise would have. And, this accelerated pace of transformation will come to sectors that were largely untouched so far by the Information Age due to regulatory capture and lobbying – namely financials and healthcare. Capital-based moats at losing companies will increasingly fall to network effects and data-driven growth at winning companies.
Power laws will keep growing across more industries, with share concentrated amongst a few large platforms, plus a long tail of specialty, niche-focused companies. The middle will continue to hollow out, perhaps at a faster rate.
The accelerated shift to the cloud seems almost too obvious to mention; but, there are many branches to think about in that trend, as Aaron Levie tweeted. New Jersey has put out a plea for COBOL programmers to fix their 40-year-old-unemployment software.🤦‍♂️ And, working from home might be here to stay as a Gartner survey of CFOs revealed 74% of companies plan to keep at least 5% of their workforce remote with 23% planning for at least 20% of workers to be remote.
Accelerated shift to ecommerce and digital commerce is another blatantly obvious trend – Publicis’ retail geek Jason Goldberg had a comprehensive post on that this week. Related, the food industry will also see compressed transformation, with outcomes that likely resemble some of what I discussed last fall in The Evolution of the Meal. Or, as we learned in “Demolition Man”, will Taco Bell be the only restaurant to survive?
Innovation in the finance sector also seems too obvious to mention. Certainly we will see a huge acceleration in digital payments for consumers and B2B. Perhaps this crisis will finally break the monopoly control of the US banking industry that has put the US decades behind in fintech innovation, but I am not holding my breath. I was excited to see that millennial-focused Chime Bank will be spotting customers on their $1200 government checks – it’s a great example of how a more modern, customer-friendly approach is needed.
Given the success and relative affordability of video conferencing, business travel might not bounce back. The CEO of online travel giant Booking was also skeptical of the return of business travel to pre-crisis levels in this CNBC appearance, and I would add that a collapse in business travel would make consumer travel much more expensive and challenging if the airlines lose steady, profitable revenues that support seasonal leisure travel. Could this force airlines to all become nationalized by countries around the world? Likely, domestic tourism will rise, but international tourism will be slower to return, and perhaps more people will own RVs.
The higher-than-normal turnover in small- and medium-sized businesses (typically 10-15% of SMB go out of business every year) could mean that 30-50% of SMBs are new in the next few years. Who will become the winner-takes-most platform for the SMB operating system – could it be Square or Shopify? Someone else?
Will my 30-something demographic sneaker wave get a boost from the quarantine, or will the economic hardship continue to delay household and family formation? If people don’t get back to dating in real life soon, that’s going to greatly change social dynamics.
Automation and robotics may finally arrive in a big way to replace our fleshy fragility – by the time jobs come back, the robots might be ready to take our place. Amazon is hiring tons of people right now, but wouldn’t they rather have zero people and 100% robots? In China, autonomous grocery delivery vehicles have already made 2500 trips in three cities. Protocol has a deep dive into how automation and robotics could impact retail, healthcare, and other sectors. What’s the best way to play robotics and automation? Reply back and let me know your thoughts!
Will universal basic income take hold as we emerge from the crisis and be here to stay, resolving a 30-year escalating problem of inequality that has fueled nationalism and fear amidst accelerating technological progress? If the economy settles 20% lower after the pandemic is over, and then slowly starts growing from there, it will be a near certainty that UBI will arrive and stick.
Will the world be less interconnected as a result of fear, rising nationalism, rising inequality, and the disorienting pace of change? Will supply chains and capital flows decouple, especially from China? This is a hard one to have a solid view on, so it’s safest, we think, to think through the consequences of decoupling; although, over a longer time horizon, I personally foresee a cautious re-coupling at some point.

Or, perhaps nothing significant will change (seems unlikely now, but it’s still a strong possibility to consider). We may develop great near-term treatments and (eventually) a vaccine for the virus, and government stimulus might bridge everything until society starts moving again – the gears of society may simply turn too slowly to be greatly impacted, despite the magnitude of a (relatively) short-term disruption. So, we will keep watching for evidence to support or dismantle any/all of these ideas. The most important behaviors today are to stay optimistic and hold your convictions very loosely. I was thrilled to read that Bill Gates is spending billions of dollars to produce vaccine candidates for COVID-19. He is a beacon of reason and hope that stands out amongst the world’s wealthiest people, who have much more they can all do to help society now and in the future.

✌

Disclaimers:

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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

March 29, 2020

SITALWeek #238

jason slingerlend

March 29, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, precision cotton candy, 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: a big cloud infrastructure cycle is coming as big tech finds itself in good graces again; stifled fintech innovation in the West hampers crisis reaction; how thinking in terms of complex systems helps us prepare for, and react to, tail events; the problem with asset management’s use of attribution analysis; cities are facing a cash crunch; who might buy Arm Holdings? and, more below...

Stuff about Innovation and Technology
Melt-Blown Fabric Bottleneck
A key component of N95 masks is melt-blown fabric. The machines to make the material cost around $4M each. It’s like making precision, nanometer-scale cotton candy. The price of melt-blown fabric in China has gone from $6,000/ton to $60,000/ton since the outbreak began, according to NPR, and one Chinese maker of masks has seen his fortune rise over $1B, according to the FT.

eNASCAR a Hit
Fox Sports aired a NASCAR esports racing competition last weekend, pulling in over 900,000 viewers according to Nielsen. Real-world race car drivers competed in the virtual race, and NASCAR was reportedly “blown away” by the popularity. Fox will continue to air virtual esports versions of canceled races in the coming weeks.

Quarantine by E-Fence
Taiwan is using cell phone GPS to virtually contain people. If your phone leaves your residence or is powered down, you will be checked on by authorities within 15 minutes. They also call randomly twice a day to make sure you are near your phone.

Surge in Patreon Creators and Patrons
Patreon has seen a 36% jump in patrons supporting creators in March compared to levels in February.

Puzzles Up, Apparel Down
Ecommerce marketplace software platform ChannelAdvisor has been posting weekly trend data based on transactions from sellers using their platform. Jigsaw puzzles and computers are up big, along with other items to keep people busy at home, while discretionary items like clothing are down. Some of the early surge in demand for things like K-Cups has softened in recent days as people are stocked up.

Non-Gamers Flock to Twitch
In addition to the live concerts (discussed last week) taking place on Twitch, electronic music artists are turning to the self-broadcasting platform (historically mostly used by gamers) to connect with fans. Live broadcasts, rehearsals, and studio sessions are opportunities to grow fan bases and accept donations to keep the music alive. This long article on DJ Mag is filled with examples and challenges. Non-gaming content on Twitch has quadrupled over the last three years. Last weekend set a new Twitch record of 47M hours viewed on both Saturday and Sunday; and, this weekend, Twitch Stream Aid hosted over 70 live musical performances.

Contactless Payments Encouraged
The European Banking Authority is encouraging payment firms to increase use of contactless payment cards and smartphone transactions. The coronavirus crisis could massively accelerate digital payments in the West, perhaps allowing us to catch up with China, which is years ahead. And, with no viable alternatives on the horizon, market share could all accrue to the card networks near term and create significant network effects for Apple Pay and Google Pay. This Economist article points out that Visa makes $7/card per year in revenues (call it $20-30/person if people have 3-4 types of various cards in their wallet). That number is deceivingly low as it doesn’t account for the bank fees that tax transactions (which are 5-10x larger), often usury-like interest payments, or the lost innovation due to the monopoly control of the industry. My prediction for a crazy deal during this crisis: Amazon could buy JP Morgan Chase and make a big splash in payments and banking by creating a new closed loop.

Legacy Banking Slows Economic Recovery Disbursement
The US Government appears ill-equipped to distribute fiscal stimulus to consumers and loans to companies. Slow loan approval processes and an inability to efficiently print and send checks could delay the much needed injection of money to thaw the frozen economy. Debit cards are one possible solution to get cash to consumers fast. Meanwhile, online lenders are offering to help speed the process of getting loans to small businesses, but they are likely to meet with regulatory roadblocks. If US fintech innovation hadn’t been crushed for decades by the regulatory capture of the current banking and card monopolies, stimulus money could have perhaps found its way into wallets much sooner.

5G Delays as Engineers Fail to Collaborate Virtually
The 5G rollout will be delayed as the standards board 3GPP punts and suspends work during the pandemic. Many deployments were already underway globally (especially in China); but, with a pushout for phone availability (Apple is rumored to delay the 5G iPhone launch) and the recession, 5G was likely to be delayed regardless of standards setting. In particular, this standards setting delay will mostly impact the incremental use cases of 5G like IoT. The delay is a good example of how we all need to rapidly adapt to working virtually: “Part of the problem here is that 3GPP meetings tend to be large, conference-style affairs, held all over the world, sometimes including hundreds of delegates from all continents. The whole process relies on consensus being reached at every stage. Online meetings and conference calls, which working groups have already organized for the coming months are, traditionally, less likely to lead to compromises and swift conclusions.”

Big Tech Lends a Big Hand
Over the last couple of weeks, I’ve been trying to keep track of all the good things big tech companies are doing to help their own employees as well as frontline workers and others impacted by COVID-19. But, there have been so many examples I couldn’t effectively keep track – Google just donated $800M in cash and free advertising! In SITALWeek #236 a couple of weeks ago, I talked about big tech getting back in good graces with the government: “I can’t help but reflect on how quickly the anti-tech-platform rhetoric has slipped from the political vernacular. With the lefter-leaning presidential candidates dropping out, a seeming lack of public support for anti-tech regulation, and the distraction of the coronavirus, it seems like the extreme threat of breaking up the big tech platforms (or imposing heavy taxes) may be dropping in probability.” Last week, even the EU’s Internal Market Commissioner praised big tech, (proving that we’ve jumped to a bizarre branch of the multiverse!). Indeed, it seems times have changed, and, if anything, we are relying more and more on Microsoft, Google, Amazon, and Facebook to work from home, stay in touch, and entertain ourselves as we adjust to this new way of life. While it’s easy to be cynical, I think big tech genuinely wants to help. However, closer ties between big tech and government runs the risk of rising regulatory capture that snuffs out innovation – an idea I discussed in detail in “How I Learned to Stop Worrying and Love the Monopoly”.

Helm to Engineering: We Need More Cloud Power!
Microsoft saw a 775% increase in Azure cloud usage in areas impacted by stay-at-home orders and, as anticipated in SITALWeek #236, will be prioritizing some customers and limiting some access to services for others in order to avoid downtime. Microsoft is “expediting the addition of significant new capacity that will be available in the weeks ahead”. It’s an acute problem for Microsoft specifically because they have large apps on Azure that their direct customers rely on, including Office 365 and Xbox Live. As I discussed a couple of weeks ago, we are likely at the beginning of a long wave of computing and networking infrastructure buildout around the world, which will be followed by a complete shift to the cloud for all workloads and apps. This demand will likely also increase multicloud models whereby customers spread workloads/risk over multiple, redundant locations and providers, which will also spur demand for hardware and connectivity.

Wearables Become Disease Sentinels
Oura is back in the news again – they are partnering with UCSF to determine if their connected, biometric rings can detect COVID-19 early. In the study, 2000 frontline health workers will wear the rings. Another trial at the Scripps Research Translational Institute is looking for a much larger group of people, with various fitness trackers, to participate in a longer-term study to identify viral hotspots. With all the health data that Apple and Google have from apps and sensors, it’s not clear to me why they haven’t created anonymized maps of potential viral flare-ups already – maybe something they will launch before next fall’s outbreak?

Could SoftBank Amputate Arm?
SoftBank is looking to sell $41B in assets, including $14B of its stake in Alibaba, to shore up confidence and, in perhaps the ultimate gamble, buy back its own stock. The company’s Sprint stake is not immediately liquid following the T-Mobile deal; and, many of its private assets have suffered valuation declines, as have key public holdings like Uber. WeWork saw its bonds trade at 43 cents on the dollar this week, and SoftBank allowed satellite startup OneWeb to go out of business. Could all of this point to Arm Holdings as a source of cash for SoftBank? Arm has seen its revenue growth slow dramatically with the overall deceleration of the smartphone market; meanwhile, it has also taken up R&D spending and is facing a threat from open-source competitor RISC-V (I wrote more about Arm and RISC-V in this post from back in Feb 2019). I don’t have more than a guess as to what Arm could be worth today, but it’s far less than the $30B price tag paid by SoftBank in 2017 – perhaps now worth half that? Despite the disruptions, there is still a lot to like about Arm – it’s a fantastic company with terrific engineering talent and is critically important to companies like Apple, Samsung, Google, Amazon etc. The world runs on Arm-based chips today as much as it runs on any other technology. And, as noted in SITALWeek #236, Arm has started to gain significant traction in the server market with Amazon’s Graviton2 chip. Complicating matters for any potential acquirer, however, is the fact that Arm China is controlled by China, thanks to a bizarre deal struck back in 2018. If Arm is one of the assets SoftBank sells, the buyer likely needs to be a neutral 3rd party, such as IP and chip design software provider Cadence, or a consortium of Arm’s largest customers. I would love to see Apple, Google, etc. get together and buy the asset and transfer it into a non-profit, open-source foundation with a commitment to fund R&D for years to come.

Those Who Can’t Do, Watch
Following up on last week’s musings on the demise of movie theaters, Amazon has now launched an “In Theater Purchase” hub on Prime Video for people to buy current releases for $19.99. Meanwhile, streaming video apps saw a surge of signups – Disney+ new users tripled in one weekend as quarantines went into place around the world. Overall, TV viewing for the prior week was up 20% according to WarnerMedia, which also saw a 40% increase in HBO Now app usage. Even TNT and TBS saw increased viewers. The WSJ reports that overall streaming is up 12% and ad slots are up mid teens, but advertisers are increasingly canceling their ads due to the frozen economy. Google is now limiting YouTube bandwidth globally for a month, and I think that forebears a significant risk the Internet is going to crash soon. After all, Google has all the data – remember, they sent their global workforce home before anyone else made that call! Podcasts, however, are on the losing end of media consumption. According to analytics firm Podtrac, the audience for podcasts has dropped around 10% over the last two weeks, likely from less commute and gym time.

Uncertainty and Quarantines Slow Home Buying
The homebuying market has slowed around 30% in the US in the last couple weeks, and is likely to slow further. Redfin reported a 27% drop in requests to see homes and noted closings taking place by passing documents through cracked car windows! Zillow has seen around a 30% drop in site traffic and leads to realtors, according to analyst Mike DelPrete. When the market picks back up, housing is a good example of a market that will likely see an accelerated digital transformation as a result of the crisis. Zillow is well positioned to enable this transformation, as co-founder and CEO Rich Barton explained this week (PDF of call slides) in an investor update: “Lloyd and I were raised at Microsoft in the '80s and '90s. Part of the Microsoft lore is that Bill's dad told him he always should have enough money in the bank to be able to run the company for at least 1 year with 0 revenue. This is how I have managed every company I founded and led, and this is how I have advised every company I have invested in or sat on the Board of.”

Miscellaneous Stuff
Tired of Netflix?
If you need a break from all the contemporary video streaming apps, I highly recommend checking out the Criterion app. As they say, it’s “A Movie Lover’s Dream”. The app houses 1,000 movies, plus a rotating selection of art house titles, and is available on all your favorite platforms. 🍿📽

Fading French Wine Consumption
Wine consumption in France has been on a steady decline for decades, falling by around 15L per person every decade to 40L (less than one glass/day, on average, across the population). Exports to the US and China are so far picking up the slack. 🍷

Crowler Production Up with Demand for Portable Brews
Ball Corp, the only maker of 32 oz crowler cans (the aluminum version of glass growlers), is ramping up production to satisfy demand by breweries that are doing more carry-out business during the lockdown.

Dylan’s JFK Elegy
Bob Dylan released an elegy to JFK this week. Murder Most Foul, Dylan’s first original song in eight years, is also his longest ever at nearly 17 minutes. The enigma hasn’t been unraveled yet, but the song also feels like an elegy to many elements of the 60s and 70s, and perhaps much more.

Stuff about Geopolitics, Economics, and the Finance Industry
Where’s Warren?
Investors have been waiting in anticipation for Warren Buffett to emerge from hiding and declare that the world is still going to continue, and that there are great values for long-term investors. Maybe some are even hopeful that Berkshire will rescue some companies or buy some big American brands...Well, instead we get this new animated handwashing PSA narrated by Buffett on YouTube.🧼👐🤷‍♂️

Local Gov’t Cash Crunch
State and local governments are going to face a large, crisis-caused cash crunch, thanks to delayed tax revenues from postponed filing deadlines, lower sales tax collection with decreased consumption/gas, and increased pension liabilities (as underfunded status rises with the market drop). It will be interesting (and probably painful) to see how it all plays out. My local town reported last week that it has four months of payroll and interest payments liquid without dipping into emergency reserves. This could hamper the much needed digital transformation of government without Federal and state action to save local governments.

The Problem with Attribution-Based Incentives
Across the investment industry many of today’s $100B+ asset managers are facing the same existential problem: too many assets, constraints, and liquidity problems, which can lead to undifferentiated performance; yet, they still charge for “active” management even as products increasingly act like the passive indices. As the competition from passive index funds rose, many large shops focused more on the index benchmarks as their bogeys; in consequence, asset managers now often use attribution to measure performance of analysts/PMs. Attribution measures the performance of a stock in a fund relative to its benchmark weight. If compensation is linked to attribution, then incentive shifts (consciously or subconsciously) from optimizing a portfolio for client outcome to sizing positions in closer adherence to the benchmark to protect individual compensation. This misalignment in incentivization can be sub-optimal for long-term portfolio outperformance. Many institutional and retail investors understand this rising problem, and they are seeking investment opportunities elsewhere – index funds, boutique or other shops that prioritize active management, private equity, etc. At NZS Capital, we know attribution is a flawed system that can disadvantage the client. NZS’ investment team owns our firm, and we only do well when our clients do well. Our process puts a healthy burden on debate and rooting out sources of bias in portfolio construction: it’s never about “me” or “my” idea, it’s always about what is best for the portfolio and the client. Brinton and I are thrilled to have Joe Furmanski and Jon Bathgate join our investment team at NZS Capital because we know they are team players and world-class stock pickers. At NZS Capital, we only win as a team if our clients achieve their objectives – 100% alignment.

Complexity Mindset
The muted early reaction to coronavirus was a failure to understand complex systems, as this Atlantic article explains – a failure to understand multiplicative dynamics and 2nd and 3rd order impacts. “In many complex systems, efficiency, redundancy, and resiliency pull in different directions: More efficient systems, which are cheaper, eliminate redundancies, which provide resilience but cost more.” Critical analysis is of course much more easily accomplished in hindsight – humans are terrible at precisely and accurately predicting the future in a complex world. However, when thinking about the future, a good start is to accept that we do indeed exist within a complex system, with myriad interconnections and a strong disposition to “fat tail” events. Who thought to mass produce skinny nasal swabs ahead of the pandemic? No one. But, adaptable companies, who can quickly and efficiently evolve their businesses to meet the changing needs of the world will emerge stronger from the crisis. Thinking in terms of complex adaptive systems is the heart of our portfolio construction process at NZS Capital, so it’s second nature to us to look for companies who exhibit adaptability. And, because the exact nature of crisis events will undoubtedly affect different sectors and businesses to varying degrees, we will continue to use resilient companies in our portfolio as batteries to power investments in a wide range of disruptive and innovative companies transforming the world for the better.

The events of the last few weeks have frequently reminded me of the importance of understanding ergodicity and the failures of asystemic thinking. How many people in their 10-year DCFs had 2020 revenues down 60%? As investors, we want to believe that a spreadsheet can give us comfort; but, the concept of margin of safety has very little to do with forecasting business prospects and building complex models (see Non-Ergodic Systems Bury the DCF for more explanation). As we wrote in Redefining Margin of Safety last fall, investors should focus on “the ability of a company to adapt – which, in turn, is dependent upon management Quality and nature of growth...Hallmarks of gentle sloping ‘S-curve’ businesses that we look for are negative feedback loops, tight-knit customer relations, and positive NZS. Slow, long-duration growth allows for timely innovation, decelerating the game clock so managers can make smart decisions and maintain their lead through adaptation.” When extreme events happen, such as what we are experiencing now, stock price movements are volatile, but that volatility does not represent risk. Risk is represented by the degree to which a company can or cannot adapt to changing circumstances. We took no comfort in DCFs before the crisis, and we take no comfort in them now. A great place to start today when looking at the market is asking: Which management teams will emerge from this crisis stronger and with more future Optionality in their business?

✌

Disclaimers:

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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

March 22, 2020

SITALWeek #237

jason slingerlend

March 22, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, woolly mammoth construction, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: an exploration of the three trends accelerated by the four 21st-century crises: rising pace of technological change, rising inequality, and rising nationalism; special guest post from Gibson Smith on the bond markets; is video conferencing a platform, or just a feature? Square becomes a real bank; the dollars behind the collapse of theatrical movie releases; and, more below...

Stuff about Innovation and Technology
Viral Impressions
In case you missed it, I went through my analysis and framework for thinking about the coronavirus crisis last week in SITALWeek #236. If you are unfamiliar with complex adaptive systems or ergodicity, these are excellent topics to help understand the world right now. I also have some more thoughts down in the Macro section at the end of this edition. While most of us are doing the right thing and distancing to reduce the burden on the healthcare system (at NZS Capital, we are working from home and living on Zoom; I’ve been largely remote from my team since 2008, known as Brad-distancing😁), now it’s time for politicians to get over themselves and help people. My main advice in times like this never changes: optimism wins and cynicism loses. Try to gain some temporal distance – put yourself five years in the future and look back to decisions you can make today; in the equity markets, be greedy when others are fearful. But, perhaps the best advice comes from Kenny Rogers, who passed away this week:
That the secret to survivin'
Is knowin' what to throw away
And knowin' what to keep

Increased Internet Traffic and AI to the Rescue:
—Netflix, Amazon Prime, Disney+, and YouTube are all cutting video quality in Europe at the request of the EU to counter the increase in streaming traffic.
—Verizon reported 75% growth in video game traffic and 12% growth in video streaming during peak hours. Overall, traffic was up 20% with social networking flat.
—Meanwhile, with canceled tours, artists are turning to live concerts on Twitch – quaranstreaming!
—BT reports that, although traffic us up 35-60%, it’s running far below peak network capabilities.
—Coronavirus work-from-home trends strain the IT supply chain as companies scramble for laptops anywhere they can find them.
—Redfin CEO Glenn Kelman reported a 24x increase in video home tours over the last week!
—IBM’s Summit supercomputer, which performs 200 quadrillion calculations a second (1 million times as fast as the laptop I am typing on), narrowed down a list of 8000 drugs to 77 candidates for testing against coronavirus in just 48 hours. The system uses over 27,000 NVIDIA GPUs!

Surging Food Pickup/Delivery:
—SWIPEBY is a provider of curbside pickup technology solutions for restaurants. The platform connects customers to restaurants via a mobile app without onerous commissions. In just the last few days they have seen a 1500% spike in site traffic and over 1000 new restaurants interested in the app according to a SITALWeek reader. Curbside pickup for a variety of businesses could be structurally on the rise.
—Dutch online grocery sales topped €1 billion as shoppers stock up (article in Dutch). The market leader, Picnic, has kept all delivery spots booked up in advance and is hiring 100s of people to keep up with demand and service levels. Already operating at capacity, the company has seen an approximate 50% increase in daily average app traffic. Here is a Bloomberg article from earlier this year on Picnic and their recreation of the ‘milkman’ business model.
—Rakuten Intelligence reports a 52% increase in food delivery (up from the run rate of 22% so far this year) compared to this period last year.
—Amazon Prime Pantry closed temporarily to restock staples.
—British online supermarket Ocado had to temporarily halt orders to restock and catch up to demand.
—CNN reports that downloads of the Instacart app surged 218%, while Walmart’s rose 160%, last Sunday vs. a year ago.
—Amazon is hiring 100,000 workers and Walmart is hiring 150,000 workers to deal with demand. Amazon is also increasing overtime pay from 1.5x to 2x normal wages.

Increased Work-from-Home Collaboration Tools and Video Conferencing:
—Last week, I heard about people holding cocktail parties and kids’ birthday parties on Zoom, in addition to the novel idea of all-day video conferencing! No word yet on whether people are holding all-day cocktail parties, or combination kids’ birthdays and cocktail Zooms. I’ve also seen lecture series turned into paid seminars using the Zoom seminar feature.
—Slack added 7k customers in the first seven weeks of Q1 compared to 5k new customers in all of Q4.
—Microsoft Teams daily active users surged from 32M to 44M between March 11th and 18th, more than doubling the 20M active users as of last November. Microsoft’s high degree of product execution and strength of collaboration platform tools is shining along with the the global Azure data center and technology footprint. This week, Satya Nadella introduced some compelling new AI features on Teams video chat – including automatic background noise reduction using AI (the demo in that link is very cool). This elevated investment in Teams by Microsoft is something that should give investors a bit of pause when analyzing Zoom’s prospects. Is video conferencing a platform unto itself, or will it ultimately be just a feature of a larger collaboration suite? Zoom’s founder explains his strategy in depth in this great interview on Protocol. Zoom clearly has ambitions of becoming a broader platform (including potential plans for smell-o-vision!). Our NZS team certainly lived in Zoom last week as we all worked from home, and the obvious benefit of Zoom’s relentless focus on reducing latency to <150ms really shines in the product's useability. On the one hand, if there is extreme asymmetry in growth and outcome for a business like Zoom, you don’t want to lose the forest for the valuation trees. On the other hand, if Zoom stock triples from here, the video conference platform would have a market cap of around $100B, making it the 6th largest software company in the world, just behind Salesforce.com. 🤷‍♂️

Building a Better Battery
IEEE reports on the multiple advances in EV battery technology as we await Tesla’s upcoming battery spotlight event. Advances include decreasing or eliminating the need for cobalt, a switch to supercapacitors to improve charging time while extending battery life, and multiple anode technologies in development that could dramatically drop charging times. The WSJ also wrote about the promise of solid-state batteries. There are a lot of reasons why we don’t have a “Moore’s Law” of batteries, but the progress is clearly accelerating, and we should expect it to yield dramatic impacts to both EVs and grid energy storage.

Cloud Laboratories Automate Drug Discovery
Strateos is a lab automation startup that allows biologists and chemists to remotely develop new drugs with the use of robotics. Their robotic cloud laboratories allow for design and automated synthesis and biological testing of potential drug compounds. It’s not clear how many different types of drug compounds they can make; but, if the chemical diversity is substantial, the platform could be a boon for accelerating drug discovery.

Theatrical Window Shuttering
In 2019, the US box office was $11B, of which around $6.8B went to Hollywood Studios. The average time in theater was around 12 weeks before heading to home delivery, according to Vanity Fair. With movie theaters shuttered, there’s a very real possibility that some/most won’t survive the downturn due to high debt loads and potential shifts in post-pandemic consumer behavior. AMC Entertainment had net debt/EBITDA of 6.6x at the end of 2019, and their 2020 EBITDA is anyone’s guess. Cinemark was in better shape with 2x net debt/EBITDA, while National CineMedia stood at 4x. It’s certainly possible that a nostalgia for shared storytelling experiences (which is programmed into us after hundreds of thousands of years of gathering around a campfire🔥) and need for a date-night destination keeps people congregating and movie theaters going. It’s depressing to contemplate – but not hard to imagine – the tall odds against independent arthouse theaters surviving the recession without significant bailout if viewers don’t return to see movies like they did before. But, it also seems possible that there will be a wholesale shift to collapse the theatrical window and feed the content beast of the new streaming platforms controlled by the five big movie producers – Disney, ViacomCBS, Warner, NBC Universal, and Netflix. Disney, which was 38% of the US box office in 2019 (almost 3x #2 WarnerMedia), is leading the charge – they brought Frozen 2 early to Disney+ and now have pushed Pixar’s Onward to the digital purchase window after only two weeks in theaters. And, Onward will come to Disney+ early (April 3rd). Universal will release movies straight to purchase on popular streaming apps as well. The movie release windows are complex, but the big ones are theatrical, rental, DVD, and then basically streaming apps (and premium cable networks). After that, rights are complicated; but, most studios are retaining rights on new movies and clawing back old ones to feed their direct-to-consumer streaming apps. There is a lot of money in those various windows, so collapsing and going direct with “day-and-date” simultaneous release to everyone, as it’s called in the industry, would need to drive huge streaming subscriber expansions or come with premium charges, such as $20 to watch a movie in its first month of release or a premium subscription tier that included all new releases.

Fox and Roku Part Ways in Content Tug of War
Fox has sold its stake in Roku to acquire advertising-based streaming platform Tubi. I covered the evolving Fox-Roku relationship in SITALWeek #230, and the rumored Tubi deal along with the logic behind the rise of AVOD streaming in SITALWeek #233.

Oura’s Biometric Ring
Finland-based smart ring maker Oura raised $28M from Google and Square, amongst others. I’ve been wearing an Oura for about a month, and I am a big fan! It’s a little trickier than getting a fitness band or smartwatch because you do need to order their sizing kit (or find a friend who has a kit), and then wait for it to arrive from Finland. I think it’s by far the easiest tracker to sleep with. Also, fitness bands (in their current state) tend to cause what I call ‘tracking anxiety’, so I like that Oura feels more passive.

Tracking Coronavirus Exposure via Location Data
The US government is looking into whether the tech companies can help create a smartphone-based tracking app to see who has had potential coronavirus exposure, according to the WaPo. This situation should challenge our emotions on the topic of tracking: on the one hand, what a slippery slope; but, on the other hand, I envision myself opting into such an app on a temporary basis.

Square Banking
Last week, the WSJ reported that Square finally got their application approved to become a bank after 2 ½ years of waiting. The Journal described Square’s new designation as an ‘industrial-loan company’ as similar to a bank, but lacking Federal Reserve oversight given that it’s part of a broader company. Back in October, I wrote about Square’s stalled bid to get a bank charter license and lamented the potentially fragile reliance of fintech on community bank partnerships to make loans to their customers. It’s primarily the bank lobbyists who have gridlocked financial services innovation in the US – with their disturbingly-close connections to Washington and decades of regulatory capture, which has cemented their monopolies. One dissenter, FDIC Board Member Martin Gruenberg, objected “Square has yet to demonstrate its viability during a downturn in the economic cycle. In fact, it has failed to demonstrate its viability during the upside of an economic cycle”...well, we are about to find out the answer to that objection right now as Square has very large exposure to some of the hardest-hit small businesses in the US due to the coronavirus.

Miscellaneous Stuff
Osteo-Architecture
A 40-foot diameter, 25,000-year-old building made of the bones from 60 woolly mammoths was recently discovered in Russia. It’s difficult to ascertain the purpose of the unique building, but signs point to it being a commissary of sorts with evidence of fires and food remains.

Micro Dino
A hummingbird-sized dinosaur skull was found trapped in a Myanmar amber sample. This new, 99M-year-old sample sets an earlier date for when dinosaurs began to miniaturize on their path to becoming present-day birds. The sample has intact soft tissue as well; at press time, however, Ian Malcolm was not available for comment. A report by the NYT bummed me out by explaining how these great new Myanmar fossil finds are funding war and violence there.

Coronavirus’ Natural Origins Confirmed
There have been a few wild rumors circulating that the coronavirus was released (intentionally or unintentionally) from a research/military laboratory. However, thanks to a bit of comparative analysis by scientists from around the world (US, UK, Australia), we can put those rumors to rest. As detailed in Nature Medicine, researchers compared genomes of multiple coronaviruses, including SARS-CoV-2 (the scientific designation for the current coronavirus). Based on homology, the authors postulate that the virus passed from bats to pangolins to humans. They conclude: “the genetic data irrefutably show that SARS-CoV-2 is not derived from any previously used virus backbone…[and]...is not a laboratory construct or a purposefully manipulated virus”. They, of course, are not the first to suggest a bat origin. Indeed, scientists at the Wuhan Institute of Virology (among others) previously reported in Nature that the original viral host was highly likely a bat based on genetic studies.

Stuff about Geopolitics, Economics, and the Finance Industry
Ancient DNA Impacts Our Response to Crises
The trajectory of the first fifth of the 21st century has been an interesting one. The Internet has transformed the economy and our daily lives in incredible ways, and it’s only just beginning. The digital age has come with both positive and negative consequences, as humans take time to adapt to the new communication medium. We’ve been through similar adaptations in the past – with each new wave of communication technology bringing progress and disruption – from the printing press to radio, television, social networks, etc. Here is something I wrote for SITALWeek in 2017:
A paradox I have been thinking a lot about: each new media invention raises human empathy while also increasing our genetically programmed inclination toward tribalism. The printing press gave us glimpses into other people's lives that we could not previously understand, but it also helped, to pick one of many examples, enable Protestant vs. Catholic tribal entrenchment (which also yielded America!). Radio and TV/movies gave us incredible insight into other parts of the world and storytelling, and it gave us amplified voice for the first time – almost god-like – that helped create fascism, communism, Hitler, etc. We had a pretty hard time adjusting to the reality of radio and video, but we largely got there after a couple of decades for each. The Internet takes up empathy and tribalism by several more orders of magnitude. Each time the species invents a new media tech, we have a challenging and often deadly learning curve. We are neck deep in this struggle right now. It will get worse before everyone learns to cope with this new Information Age; but, just like the printing press and radio/video, I am super optimistic we eventually pull through with more empathy, but less tribalism than we are seeing today.

What has struck me lately is some of the common threads from the four 21st century crises – the dotcom crash, 9/11, the financial crisis, and now coronavirus (I apologize for my American-centric view of these events, as I know there have been a multitude of salient crises around the world during this period). Three aftereffects stand out to me: 1) the subsequent resolution of each crisis has increased inequality (see next paragraph), largely due to the nature of government response policies; 2) each disruption has accelerated the shift to the digital economy; and 3) nationalism has been on the rise during this entire 20 year period, and it seems to be in some way connected to the accelerating inequality and progress, respectively, of the first two trends.

Deloitte reports on crisis-driven rising inequality: “After both twenty-first-century recessions, the upper-income bracket showed significant discretionary income growth. The same pattern held true after the Great Recession. However, a substantial portion of the US consumer base—consisting of the low- and middle-income groups—is not materially better off today than they were nearly two decades ago. This income bifurcation—more than region, gender, or generation—has impacted spending patterns.” (PDF) Further, throughout the recovery from the Great Recession, e-commerce accounted for all of the growth of retail – doubling to 20% of total retail sales.

If I had to guess, the coronavirus pandemic will accentuate all three of these trends, leading to: 1) increased inequality as the recession and government responses disproportionately impact people at either end of the income spectrum; 2) increased creative destruction, promoting faster adoption of the digital operating system that is already taking over the economy; and, 3) increased nationalism and fear of foreign impact on domestic life. To me, current events underscore a rising rebellion against the increasingly interconnectedness of the world as a result of the Internet revolution. Our ancient evolutionary programming – from living in small tribes separated by distance on the open savannah 200,000 years ago – is something that hasn't yet been overwritten in our brain’s operating system. Shocks to our everyday lives, such as the current pandemic, are more likely to stimulate the nerve cells in our brain’s more primitive regions (primitive from an evolutionary perspective – those most closely related to fight-or-flight survival), and the resulting psychological responses may not be quite in sync with modern-day life. This programmed-in, primal fear, combined with the rising inequality between the haves and the have nots and the pace at which technology is changing our lives and world around us, makes the world vulnerable to destructive ideology now more than ever. Indeed, it sets us up for a repeat of the strife of the first half of the 20th century – if we aren’t careful. Government bailouts that assist the 99% (instead of corporations and the top 1%) will be instrumental in stemming the dangerous trajectory we are on. Kindness and generosity also go a long way in times of crisis. I remain optimistic that humans will adapt to living in the connected, digital age brought on by the Internet. This crisis gives the tech sector in particular an opportunity to thoughtfully accelerate the digital economic transformation in better ways for everyone. We will come together – both locally and globally – to help each other out.

What’s Going on With Bonds?
The bond market has shown significant signs of stress during this crisis. Leveraged loans – preferred by private equity and other high-risk balance sheet borrowers – are at record levels of $1.2T, according to the WSJ. And, there are signs that the growing bond ETF market is not well supported by underlying liquidity of the market, with Blackrock and Vanguard quadrupling fees to sell some ETFs.

Below is a special guest post from Gibson Smith of Smith Capital Investors. Gibson has nearly three decades of experience in the industry, and we’ve had the pleasure of knowing him for the last 2 decades. It’s safe to say you won’t find a more thoughtful or talented bond investor to learn from in times like this. Information about Smith Capital’s products can be found here, and you can connect with Gibson on LinkedIn or Twitter for more insights.

Gibson Smith, Smith Capital Investors:
The corporate bond market has fallen victim to the coronavirus and the sharp decline in energy prices. Both surprises come at a time when a large number of companies were vulnerable to downgrades by the rating agencies. The potential downgrades were a result of elevated leverage within Corporate America, a result of the borrowing binge over the last decade that fueled large mergers and acquisitions and shareholder friendly activities. Our 2020 theme of Downgrades and Defaults is playing out, albeit in a much more extreme fashion than even we expected.

The moves in the credit markets have been violent and extreme in nature. On January 2nd of this year the Investment Grade spread (premium paid by companies to borrow money) stood at +68 basis points. Today that spread is +330, an almost 5x increase over a 2 ½ month period of time and a decline in price of 16.8 points (114.8 to 98.0). In the High Yield market (below investment grade rated companies, so called junk bonds), the spread on February 20th of this year was +331 and today it stands at +1012. This resulted in a 20 point drop in price in one month. The Energy sector has been the greatest casualty to date with many Energy bonds trading in 40-50 dollar price, usually a foreshadowing of defaults on the horizon.

This great reset in the credit markets will have a significant longer term spillover into how management teams think about their use of leverage and desired capital structures, as well as adjusting how they think about their cost of capital. For investors, once the dust settles, this will likely create some incredible opportunities in fixed income, likely creating historical equity type return potential. Equity investors rarely need to pay too close attention to the credit markets, but in today’s market where anything with leverage is vulnerable, it makes sense to stay engaged and understand what is playing out.

✌

Disclaimers:

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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

March 15, 2020

SITALWeek #236

jason slingerlend

March 15, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, adaptability, 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 signup form; if you have any issues or questions please email sitalweek@nzscapital.com)

In today’s post: the coronavirus will be part dotcom crash, part 9/11, part financial crisis, part pandemic, and the first global emergency in the social-network-dominated Information Age – my thoughts on which industries might be impacted and the importance of staying focused on long-term adaptability; also this week: virus-fighting robots; the KISS method for avoiding facial recognition; new team members at NZS Capital; and, more below...

Stuff about Innovation and Technology
NZS Welcomes Jon Bathgate, Joe Furmanski, Jim Goff, and Minesh Patel
NZS Capital is excited to announce several new team members this week. Jon Bathgate and Joe Furmanksi join Brinton and myself on our investment team. We worked with both of these world-class investors at Janus Henderson in Denver for over a decade. We also welcome Jim Goff, former Director of Research at Janus Henderson, as a Senior Advisor to NZS Capital. We are thrilled to have guidance from someone of Jim’s experience and character as we build our enduring investment culture over the coming decades. We also officially welcome Minesh Patel, Chief Corporate Strategy Officer at Jupiter Asset Management, to the board of NZS Capital.

Viral Pandemic in a Complex Adaptive System 🦠
Before I go into thoughts about coronavirus, I want to first and foremost recognize the humanitarian crisis and thank every frontline worker around the world for their ongoing efforts to help everyone who has been/will be affected by the viral spread and shutdowns. 🙏

Julius Caesar was assassinated in Rome on this day, March 15th, in 44 B.C. Known as the Ides of March, March 15th has become a sign of ominous events since Shakespeare immortalized the expression in ‘The Tragedy of Julius Caesar’ Act I, Sc. 2:
Soothsayer: Beware the ides of March.
Caesar: He is a dreamer; let us leave him: pass.
However, with the global, coordinated effort to slow the coronavirus pandemic, we can both take the threat very seriously and be optimistic about the future. It will always pay to be skeptical short term, but optimistic long term. Cynicism (i.e., assuming the worst), might pay off in the ultra-short term, but it never pays over time. For long-term investors, volatility is opportunity, not risk.

The coronavirus is becoming a significant disequilibrium shock to the economy. In a complex adaptive system like our global economy, these shocks have potential to create punctuated equilibria, widening both the near- and long-term range of outcomes. This is the 3rd significant economic shock in my 22 years of professional investing, and there are clear parallels today to both the dotcom crash (including the compounding impact of 9/11, which happened shortly after) and the 2008-2009 global financial crisis. The coronavirus will be part dotcom crash, part 9/11, part financial crisis and part pandemic. When you combine the elements and layer in the added complexity of society living through its first, very real and serious shock in the Information Age and the post-truth era, it’s best to think long term and focus on adaptability.

The terrorist attacks of September 11, 2001 redoubled the dotcom crash’s economic impact, putting many startup industries out of business. Ultimately, a lot of great ideas disappeared, only to become bigger, more interesting, and more transformative years later with the advent of smartphones, apps, and mobile Internet. Seven years later, the great financial crisis exposed the extreme use of leverage and systemic risk across the banking system. We have infinitely more liquidity in the system today than in 2009, and that money is looking for a home, so the problems won’t be quite as halting. Both recessions exposed excesses, bad behavior, and questionable business models. And, they both ultimately accelerated the digital transition of the global economy. I suspect the coronavirus’ impact will be similar: it will expose marginal businesses, punish risky leverage, and cause a wave of creative destruction and behavioral shifts, giving a huge boost to innovation and the Information Age economic revolution.

But, I need to make one crucial point: this is a complex event in a complex adaptive system. Everyone, including me, is completely guessing about what could happen. Perhaps, if fiscal and monetary stimulus bridge us through the negative consequences, nothing happens. Shocks to the system significantly broaden the range of possible outcomes. Predictions are useless, especially if they contain narrow guesses about the future, even if those guesses seem informed. I am optimistic, now more so than ever, about the future. But, it’s still worth thinking about the expanded range of outcomes, so below are some thought exercises about changes that could happen or accelerate for various sectors of the economy.

Sharing, Gig Economy, and Direct to Consumer: Dotcom Bust 2.0?
One obvious fallout from coronavirus could be an accelerated bankruptcy trend for physical retailers that were already on the edge of survival, and an increased adoption of ecommerce and local retail (e.g., Walmart) delivery. With Apple now closing all stores globally (except China where, optimistically, all stores are now back open) for two weeks, there is a huge loss in foot traffic for many mall-based stores that people walk by on their way to get AirPods.

In the dotcom crash, we saw a lot of great ideas go away because they were too young to have gained sufficient traction, and the recession put the final nail in their coffin. But, we later saw a lot of those ideas reimagined and reborn with the advent of smartphones and mobile Internet. Today, we have a lot of sharing economy (AirBnB, Lyft, etc.), gig economy (DoorDash, UberEats, etc.), and new direct-to-consumer brands (Casper, etc.) that have reached customer scale, and in some cases meaningful network effects; but, largely, they are yet-to-be-established business models.

If travel and social interaction are slow to return after coronavirus, or if there is significant viral flareup this coming winter, we will likely see a much bigger shift in behavior and a lot more creative destruction in the economy. This scenario will likely favor the bigger, profitable, and (in many cases) vertically-integrated platforms, such as Amazon. In the food business, if a lot of restaurants don’t survive the next year, then we will see an accelerated reimagining of the restaurant, delivery, and food supply chains. This too will likely favor larger, vertically-integrated platforms with ghost kitchens, subscriptions, delivery routes, etc. (so far those winners aren’t emerging, but Amazon and Walmart could be well positioned). I suspect many of the gig-economy workers might ultimately transition to full-time employees (with benefits and sick leave!) of these larger, surviving platforms in retail and food.

We may also see power law trends pushing consumer behavior to two ends of the spectrum, away from the current marketplace middle. Take AirBnB for example. The sharing economy travel site was seeing slower growth, and a lack of profits before the coronavirus hit. If there is an extended negative impact to home/room renting as a result of coronavirus, consumers may lean toward hotels and professional vacation home rentals on the one end (which can all easily be found on Expedia and Booking sites), and if necessary, couch surfing on the other end, and the latter probably wouldn't support AirBnB’s $30B valuation. That would leave AirBnB stuck in the middle without profits or easy access to public capital markets. This idea of a shift to “professional” sharing economy workers from “gig” workers could happen in ridesharing as well. The current iteration of Lyft and Uber may fizzle, only to see a reimagining years down the road. To be clear, I am NOT predicting any of this, I am just laying out a framework for thinking about what may or may not happen – the point being that there is no reason we should expect automatic mean reversion on the sharing- or gig-economy businesses.

Media Industry Impact
Effects in the media world are also being felt. Obviously all sporting events, live and broadcast, are on pause; meanwhile, the Phoenix Suns will play out the rest of their season in Take Two’s NBA 2K video game, in what could be emblematic of an accelerated growth in esports and video game spectating. I fully expect live sports to come roaring back in popularity when the leagues are up and running again. Coronavirus has also stopped production on most TV and movie sets globally. While it’s about the least important problem facing the world right now, for the coterie of new, streaming apps that just launched (or will launch soon), it will leave a large air pocket of new, original content in their competitive lineups.

This content shortage will likely favor the streaming apps of incumbent studios with deep libraries to draw from at launch; but, they will all need to get fresh content ASAP to fend off churn. Disney announced that Frozen 2 will come to Disney+ today, three months early, to help parents “during these challenging times”. The interesting event here is that this collapses the DVD window (the time between renting a new movie and when it hits cable or streaming), and could signal a significant change going forward. Will the theatrical, rental, DVD, and pay-TV windows all disappear as a result of coronavirus?

Cloud Shift Accelerates Despite Speedbumps
The big, coronavirus-induced increase in video conferencing, work-from-home, distance learning, video streaming, and online gaming could put a heavy strain on cloud computing. Telecom Italia reported a 70% increase in traffic – driven in no small part by kids playing Fortnite. The market for cloud servers to run all these workloads was 1M units in Q419, according to this Next Platform article on the state of the server market. Looking through the impacts of the 2018 cloud overbuild and the 2019 trade wars, it’s reasonable to assume 20%+ cloud server revenue growth. That supports 40-50% server unit growth (with price declines being the difference), which in turn (given price/performance increases) implies around 80-100% traffic growth.

If all of this virus-driven demand causes an increase in overall traffic of 50-100% in short order, we could see significant strain at peak times. To be sure, there are mitigating factors – clouds typically operate at a fraction of peak demand, there is some balancing that can be done across time zones, and some workloads are time dependent (e.g., enterprise apps during the day and Netflix at night). I’d speculate (somewhere between an educated guess and just pulling numbers out of nowhere), that Amazon might typically install ~2000+ servers a day (or a ~million a year) to meet annual traffic growth. A traffic surge of 100% within a few weeks would roughly 10x that server install number. While China is already back online (iPhone- and computer-maker Foxconn’s founder Terry Guo said things are back much stronger than expected already), not all components can be rushed to production and tested quickly enough. Intel has been a bit behind AMD lately; but, everyone making chips for data centers, including NVIDIA and the foundry TSMC, should be in hot demand now and into the future.

If this perfect cloud storm happens, AWS, Azure, and Google might need to begin limiting or favoring some apps, such as banking software over Fortnite. While this underscores a limitation of the cloud to some degree, it also clearly reinforces the value of the cloud over time, and could create the potential for premium availability pricing tiers and capacity redundancy commitments. We are going to need vastly more compute power in the future; (I have a far-out theory that autonomous vehicles, with their extensive and under-utilized compute capacity, will become connected data centers on wheels). Then, we have the network bottleneck, which highlights the value of fixed-broadband providers, which carry the vast bulk of Internet traffic vs. wireless. This week, AT&T removed overage caps to help people work from home. If usage stays high, the idea that 5G could replace a wired network any time soon seems less likely. And, as more people work from home successfully (I started in 2008), they will finally realize they only need about three productive hours a day to do most jobs that currently clock in at 40-50 hours/week in the office! 😂

The growth and demands of the cloud might also be great timing for ARM to finally take off in the data center. At a partner conference in August 2015, ARM targeted to get to 25% server share in 2020; but, instead, that number today rounds out to zero. But, times are changing – Anandtech’s test of the new Amazon Graviton2 ARM server chip shows a huge leg up in cost/performance vs. Intel and AMD: “In terms of value, the Graviton2 seemingly ends up with top grades and puts the competition to shame...If you’re an EC2 customer today, and unless you’re tied to x86 for whatever reason, you’d be stupid not to switch over to Graviton2 instances once they become available, as the cost savings will be significant.” The chip was designed in house by Amazon’s fast-growing chip division, Annapurna. In addition to Amazon’s Graviton2, there’s a new ARM-based chip from Ampere Computing, a company that has several Intel veterans and backing from Oracle and ARM-owner Softbank.

What other areas of IT are highlighted by the shift to the cloud and remote work as a result of the coronavirus? Identity protection and zero-trust, or perimeter-less, security come to mind – companies like Okta, SailPoint, CyberArk, etc., and of course any software that is enabling remote collaboration and customer service – Zendesk, Atlassian, DocuSign, and a host of others. Of course, Zoom video conferencing stands to benefit; here is an interview with Zoom founder in Forbes on his decision to give free access to K-12 schools (and, I bet Logitech is making cameras as fast as they can!). The Washington Post reports on the burden of federal employees working from home. Many government systems (state and federal) are extremely old and require on-premises access; so, the pandemic could dramatically accelerate the shift of government IT spending for cloud conversion. Vendors like Tyler Technologies would continue to benefit from state and local agencies going to the cloud.

When you step back, it appears the coronavirus will be fuel added to the already-raging cloud transition for enterprises. This move could, in turn, create increased vulnerabilities for the legacy IT hardware and software companies, many of whom have taken on a lot of debt to pay dividends and buy back shares over the last decade. These businesses may ultimately be like the retailers and restaurants, churning away at a faster pace, fighting time as customer behavior shifts.

Coronavirus Closing Thoughts
Let’s identify some common threads woven through these various scenarios and thought exercises. The coronavirus has significantly widened the possible range of outcomes, which could include 1) causing a recession that smothers emerging consumer (Uber/Lyft, AirBnB, food delivery middlemen) and legacy businesses (IT, retailers) from multiple angles; 2) providing oxygen to fuel accelerated consumer and enterprise behavior shifts (cloud computing, vertical food supply chain); or 3) some combination of the two, or 4) no significant changes if government stimulus saves the day. Fiscal and monetary stimulus combined with human behavior are complicated and difficult-to-anticipate factors. The value propositions and economic models (both short term and long term) of all of these businesses – and the severity and duration of the lingering effects of coronavirus – will dictate the outcome. When analyzing businesses, I’d pay special attention to management quality, adaptability, and the degree of NZS (or win-win, which can provide critical insulation from competition and drive network effects, provided there’s sufficient path to profitability) that these companies are creating for all of their constituents – not just their customers, but their employees, contractors, suppliers (all sides of the network effect), and investors.

It’s possible the coronavirus will create echoes of the dotcom crash – great ideas (like today’s ride sharing and ghost kitchens) that were simply too early, or hadn’t quite become economically viable, may disappear, only to be reimagined 10 years from now. It’s also possible that we will see echoes of the financial crisis – excess leverage and risky behavior accelerating the digital economic transition from the losers to the winners. Younger, adaptable companies that tend to already run in the cloud with an eye toward meeting customer needs are likely to shine compared to the older businesses still depending on disappearing 1900’s competitive “moats”. Mean reversion, pattern recognition, and traditionally-defined margin of safety, etc. are mythical concepts for us at NZS Capital. Instead, we try to make broad and safe predictions where possible, and this advice holds here. We discussed this concept in more detail in our paper Redefining Margin of Safety.

There is every reason to stay optimistic while also being vigilant and focused on stopping the virus as quickly as possible. The good news for the economy is that all this sequestering might feed right into my theory on the pending baby boom from the 30-something demographic sneaker wave! 😜

Germicidal Robots
Danish company UVD Robotics makes hospital-bots that can enter an area and “shred the DNA and RNA of any microorganism” with UVC light. The $80-90k robots clean a room in 10-15 minutes. Related, here is an interview with the founder of Chinese industrial drone company MMC. MMC drones have been used in the coronavirus outbreak in China to broadcast messages, monitor hotspots, and even spray disinfectant. The company sees a need for all governments to have a diverse set of skilled drones for the variety of low frequency, but high importance, events that take place.

The ‘Gene Simmons Method’ of Fooling Facial Recognition
Makeup applied in geometric shapes easily fools facial recognition software.

Big Tech Back in Government’s Good Graces
As I listened to Trump, speaking from the Whitehouse Lawn on Friday, publicly thank Google for their efforts to contain the coronavirus by putting 1700 people to work building a viral testing website (turns out the website was only theoretical, according to Alphabet subsidiary Verily), I can’t help but reflect on how quickly the anti-tech-platform rhetoric has slipped from the political vernacular. With the lefter-leaning presidential candidates dropping out, a seeming lack of public support for anti-tech regulation, and the distraction of the coronavirus, it seems like the extreme threat of breaking up the big tech platforms (or imposing heavy taxes) may be dropping in probability. Remember Bernie Sanders’ “Stop BEZOS Act” of 2018? Times have changed, at least for everyone except Facebook, which seems to be missing from Trump’s four-company, “Trillion-Dollar MAGA Club” of Microsoft-Apple-Google-Amazon.

Google Enters the Streaming Hardware Market
Google is (finally) releasing an Android TV box (aka Chromecast with a remote control, according to 9to5Google). It’s not clear why anyone needs yet another inexpensive adapter to stream video apps on the TV, but it again highlights the fragility of the standalone Roku platform. Roku’s competitors for streaming video hardware are Amazon, which leverages video in their Prime ecosystem, Apple, which leverages video as part of the iPhone ecosystem, and now Google, which leverages video as part of their giant Android, YouTube, and advertising ecosystem.

Miscellaneous Stuff
Silver Lining: Environmental Reprieve
Decreased economic activity in China due to coronavirus dropped carbon emissions by 25% compared to the same period last year. With similar effects likely pending across the world, the Earth will get a small buffer against spiraling global warming this year.

Virus Infects Humans and the Social Collective
Tweet From Lex Fridman: “Coronavirus does not only infect individual human organisms, it infects the organism of collective human intelligence which emerges and evolves over the billions of social network interactions per day. It spreads through coughing, sneezing, and communication of ideas on Twitter.”

Stuff about Geopolitics, Economics, and the Finance Industry
US Housing Market Aided by Rate Drop
Redfin reports that the 100bps drop y/y in the 30-year fixed mortgage to 3.2% in the US allows the average homebuyer to buy a 10% more expensive house. So, despite the record-low inventory of homes for sale, there is an increase in the affordability of those houses that are for sale from 68.6% to 70.5% in just the last week. Redfin also reported that the housing market overall was hanging in there, but that the drop in the market could cause buyers to lose part of their down payments – it’s a fluid situation short term that is likely to change this week.

Vanguard’s Investors Smarter than the Average Bear
According to an interview on CNBC Friday, only 1.5% of Vanguard’s clients traded on Monday’s selloff, and 77% of their households shifted into equities, not bonds. Vanguard’s head of portfolio construction in the Vanguard Investment Strategy Group, Fran Kinniry, sees both their clients as well as other retail investors becoming countercyclical reblancers, buying stocks when they are down. If true, that would fix an enormous problem that has plagued investing for years – selling at the bottom and buying at the top.

Asset Management in a Pandemic
How will the coronavirus-induced market correction impact the asset management industry? The bear market likely keeps the power law going, whereby big managers merge and get bigger and a large number of truly active boutiques thrive. Depending on how things play out, it might impact the passive vs. active debate. I certainly hope active managers can differentiate themselves vs. the market on the way down and on the way back up. Also, perhaps leverage will expose underlying vulnerabilities in a few over-levered private equity strategies, which could make public equities more attractive for institutional investors again (the most contrarian investment for institutions coming into 2020 seemed like active public equities!). Unfortunately, with the lack of liquidity in private investments, institutions cannot shift those dollars on a dime into public markets; but, liquid fixed income might be a good source of capital here to play the eventual recovery. And, fresh capital looking for distressed private assets could do well here, but don't bank on mean reversion across the system.

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Disclaimers:

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 (“NZS”). 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 has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

jason slingerlend

March 8, 2020

SITALWeek #235

jason slingerlend

March 8, 2020

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, phleBOTomists, 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: Alphabet is showing signs of capital discipline, will margins follow?; Waymo is becoming the technology provider to auto companies; big plastic lobbying has us all eating plastic; ESG vs. NZS; interest rates vs. fiscal stimulus in the coronavirus recession; rational thinking masquerades as cognitive bias; and, lots more below...

Stuff about Innovation and Technology
Robotic Phlebotomist
Scientists at Rutgers have developed a robot that can use ultrasound, near-infrared imaging, and AI algorithms to draw blood and deliver IV drugs. The machine is said to outperform humans in accuracy and speed. 💉😱 A practical application in the near term would be in research involving lab mice that require frequent blood draws.

Superfast Image Sensor
A new type of chip builds the neural network for image recognition into the photodiodes, which are powered completely by the photons of light coming in. The system is very rudimentary today and can only recognize a few basic letter shapes, but it operates at 20 million frames per second vs. 1,000 fps in current high-end image recognition systems, with no external power needed.

Western Frontier of the Surveillance State
Bodycam maker Wolfcom is working to bring real-time facial recognition to its 1500 police, education, and government customers – encompassing 1M cameras globally. This move is in contrast to taser and police tech provider Axon, which has taken a more thoughtful, wait-and-see approach – they want facial recognition accuracy proven and regulatory guidance on its use before implementation. Wolfcom, short for Wolf Commander, started out in the paintball industry according to this detailed article on OneZero. Anyone else thinking about the Ed-209 “malfunction” scene from the original Robocop? Meanwhile, the state of Utah has given AI-startup Banjo real-time access to traffic (and other) surveillance cameras, 911 call feeds, and more; combined with social media and other data, Banjo is building real-time surveillance across the state. And, the NYT reports on how contested facial-recognition app Clearview was a “Secret Plaything of the Rich”, and Vice explains how – thanks to the new California Consumer Privacy Act – if you are a resident of California, you can retrieve your file from Clearview and have them stop collecting information on you.

The Truth is no Stranger to Fiction
Last week I talked about the increasingly complex interplay between fiction and truth. The Information Age was supposed to bring us radical transparency that could only lay bare the truth for all to see; instead, it elevates fiction, both at the individual and societal level, to new heights of influence. I came across this excerpt from Nietsche’s Beyond Good and Evil in an American Scholar article on humans tendency to have a “will to truth”:
“The Will to Truth, which is to tempt us to many a hazardous enterprise…what questions has this Will to Truth not laid before us! What strange, perplexing, questionable questions! It is already a long story; yet it seems as if it were hardly commenced. Is it any wonder if we at last grow distrustful, lose patience, and turn impatiently away?…We inquired about the value of this Will. Granted that we want the truth: why not rather untruth? And uncertainty? Even ignorance?”
The authors of the article (paywall), which is about finding comfort in the space between ignorance and knowing, comment: “As Nietzsche writes, when our demand for certainty is frustrated—when the quest for truth is longer and stranger than we would like—we often give up. And just as some people turn to authority, others abandon even the idea of truth, deciding that there is no truth to be found.”

Money ‘Laundering’
This week, the Louvre banned cash in response to virus fears, and it could represent a good example of this new truth-bending vector of the Information Age. An accelerated shift to digital payments today, while the incumbent monopolies are squarely in charge, would further entrench status quo and make any new payment platform threats futile. According to this PBS article on the Louvre ban, fears over money transmitting diseases date back to the Middle Ages when it was smoked to clean it.

Amazon Stays Ahead of the Curve
Amazon is cutting fees on FBA, their fulfillment service for 3rd-party merchants, by up to 30% according to Business Insider. Meanwhile, the company is also opening more fulfillment centers closer to customers. The new 100,000sf facilities will stock 100,000 items and sort up to three million more from other inbound Amazon orders for same-day delivery (in many cases within a few hours).

Alphabet’s Maturing Capital Allocation; Waymo Becomes Android of Autonomous
There appears to be some signals from Alphabet that the company is entering a period of more disciplined capital allocation in the post-Larry-and-Sergey era. Speaking at the MS TMT conference this week, the company’s CFO discussed both buy backs and a subtle shift that could open the door for dividends down the road:
“...in the fourth quarter of 2019, we more than doubled the pace of repurchase. And that was -- not to overuse the word journey, but that has been a journey as well, really consistently increasing the pace of capital return. And I think that given the cash flow business and where we are today, it's incrementally additive. It gives -- we still have tremendous flexibility, and that's the way we've looked at it.”

Meanwhile, in another sign of fiscal discipline at Google, Waymo did an outside fundraising round of $2.25B (at a $30B valuation!) instead of tapping into Google’s own treasury. The same FT article also implies that Waymo is increasingly looking to become a tech supplier to other automakers:
“‘Our role could be just focusing on the Driver’ — the name given to its driverless technology — ‘and leaving the rest of the customer [experience] to others in the industry,’ said [Waymo chief] Mr Krafcik, indicating a possible shift from bona fide self-driving car maker and robotaxi operator to supplier of autonomous-driving technologies to other companies.”
In SITALWeek #231 I wrote about this likely evolution for Waymo: “we could see Tesla becoming the Apple of cars, and Waymo, or some other technological enabler of competitors, playing the Android role.”

Back to Google’s margins and capital discipline: the search giant intentionally took its pro-forma EBITDA margins from 42% in 2009 to 28% in 2019 as they invested in both the core product and “other bets”. Could that trend reverse? Margins rose 170bps in 2019, reversing the long decline. It’s anyone’s guess, but worth keeping an eye on. There are certainly still plenty of new growth areas for the company to invest both opex and capex, including enterprise, gaming, etc.

The EV Moving Target
In a press event where the press was banned from taking photos, car maker GM announced they would have EV cars in 3-5 years that are on par with Tesla’s current models. Competition is of course great to assure the pace of innovation rises ever faster; but, legacy car makers need to at least catch the leader, not get lapped while they play catchup. GM boasted about future EVs with 400+ mile range, however, the focus on range has consistently puzzled me. The vast majority of people don’t need more than 100 miles of daily range; and if they do, they can have a longer-range 2nd car, or leverage ridesharing and car sharing rental programs. So, I’d much rather see a broader selection of cheaper, quick-charge, 100mi-range vehicles with a smaller environmental footprint. We’ve been driving a Nissan Leaf with 80 miles of range for over six years as our primary car, and never had any range problems. One thing is for sure though, with all the focus on EVs from an R&D perspective on one end, and consumer demand on the other end, we are likely to see a faster-than-expected shift to EVs in the base of consumer vehicles over the next 10-15 years.

Video Apps are Just the New “Channels”
As the pay-TV ecosystem steadily declines in favor of streaming, the big content owners and creators are reprioritizing spending – focusing on both in-house shows and their own streaming apps. A good example of this is ViacomCBS canceling a few shows on the Pop cable network that were produced by outside studios. But, at the same time, it’s highly likely we see all six vertical streaming apps – Netflix, CBS All Access, Disney+, HBO Max, Peacock, and to a lesser extent Prime Video – become integrated parts of existing pay-TV bundles. Already, Netflix is available in the cable bundle on Comcast, and CEO Brian Roberts, speaking at the MS TMT conference this week, noted both Hulu and CBS All Access would soon be joining Prime Video as integrated components of their X1 TV platform. Comcast-owned Sky also announced a deal with Disney+ outside the US this week (glad Brian and Bob have buried the hatchet as I figured they would in SITALWeek #228, but this likely has as much to do with Sky’s strong position as it does Disney’s strong content). So, this isn’t necessarily the studios de-funding their cable networks in favor of apps, but it is a reprioritization and ultimately a rebundling of the same content. We have yet to see an effective, digital-only re-bundler emerge as Amazon, Roku, and Apple have all fallen short (in my opinion) of meeting consumer needs. Either the existing pay-TV players will be the re-bundlers, or, as I suggested last week, a streaming app like Netflix could make a play for this as well.

Netflix’s Global Focus
Netflix’s Ted Sarandos sat down with Jason Hirschhorn recently to discuss several interesting topics (video). Netflix is producing 130 seasons of local language shows this year outside the US as they continue to be well ahead of streaming competition on the global front.

Spotify Trying Everything to Reduce Royalty Rates
Spotify is testing out whether or not record labels will pay an “ad” fee to promote songs in users’ music feeds. This attempt to create lower net royalty rates feels disingenuous – if I am likely to enjoy a song in a playlist, Spotify’s algorithms should know this without charging the label a fee, which really just amounts to a discount to the royalty Spotify would pay to the label to begin with. However, if hearing a song more often would lead to me to buy a concert ticket, this clearly benefits the musicians (but not the record labels). With the music industry set to surpass its 1990s sales record of around $15B in the next ~5 years, the range of outcomes remains wide for the revenue split between musicians, labels, and streaming platforms.

Miscellaneous Stuff
Plasticastrophe
From Rolling Stone’s long read “Planet Plastic”: we ingest about a credit card’s worth of plastic particles every week thanks to lobbying efforts of the Big Plastic Hydra – big oil, big soda, and big tobacco – to keep the plastic industry going and polluting. Since 1950, 91% of plastic waste produced (6.3 trillion kg!) has never been recycled. A dumptruck’s worth of plastic enters the ocean every minute. In Colorado, microplastic fibers come down from the sky in rain and snow. Senator Udall is working on the “Break Free From Plastic Pollution Act” that would transfer some of the $100B’s of annual cost to the plastic producers, but the legislation faces a tough uphill road.

Charged-Up Bees
Bees return from searching for pollen with a positive net charge due to the in-flight collisions with particles in the air. The waxy exoskeleton acts as an insulating layer, causing charge to build up to produce voltages of 450 volts (that’s higher voltage than a fully-charged Tesla! No need to worry about electric shock though, bee amperage is quite a bit lower). The accumulated positive charge helps attract pollen from flowers, which tend to carry a negative charge, as well as identify recently-visited vs. fresh flowers. Here is another article from 2013 on the electric field interaction of bees and flowers that NZS head-beekeeper Brinton recently sent me.

Stuff about Geopolitics, Economics, and the Finance Industry
Peters Argues for Replacing GDP with DDP
Ole Peters argues that GDP is particularly good at masking inequality because a small number of people (or companies) gaining a lot outweighs a large number who are worse off. He proposes using DDP, or democratic domestic product, which would equal weight people instead of dollars. There’s a more in-depth explanation in his technical post here.

Ole, Ole! Peters Mathematically Refutes Cognitive Bias in Probability Weighting
And, in a double dose of Ole this week, here is a new post that shows humans are NOT acting with the bias that behavioral economists have assumed. Instead, when we make a decision, we are acting rationally by taking into account our path through time. Ergodicity economics explains the decision as based on rational thinking, so we don’t need to bring in psychological factors of bias.

ESG vs. NZS
Brinton and I have long used the concept of non-zero sum as a way to gauge the future success of companies (first discussed in our 2014 whitepaper Complexity Investing). We think NZS is very different than ESG. Maximizing for NZS, as we wrote in this whitepaper, means solving for the best outcome for customers, employees, the environment, society, and investors. ESG, however, has become a game that companies are playing to score high ratings and attract ESG investors who are just lazily checking boxes, without digging into whether a company is really making the world better. Here is how Al Gore’s wildly-successful Generation Investment Management describes sustainable investing:
“A sustainable company is: one whose current earnings do not borrow from its future earnings; one whose sustainability practices, products and services drive revenues, profitability and competitive positioning; and one that provides goods and services consistent with a low-carbon, prosperous, equitable, healthy and safe society.”
This seems intuitive enough, but when I look through Generation’s holdings, I see several companies that I would classify as low-NZS businesses (e.g., I wrote just last week about gene sequencer Illumina, which has kept prices artificially high, possibly slowing the advancement of gene research). A company can seem fine from an ESG perspective, but might be falling far short of maximizing NZS outcomes for society. We believe NZS maximizers will take an increasing share of investment returns over time.

Print Money
The Fed dropped rates 50 bps this week. It’s certainly important to keep liquidity in the system, especially for economically-sensitive companies with near-term debt maturities or interest payments that might require access to short-term borrowing; but, I think there are better ways to tackle an economic shock. We are in the decades-long, slow burn(out) of capitalism – likely caused by declining birth rates, the shift to an information-dominated economy, and tech-driven productivity, which all seem to be feeding the excess liquidity and decline in rates (see the end of SITALWeek #217 on interest rates, birth rates, tech-driven deflation, and hope). The recession of 2020 will have a much better liquidity situation than 2008-2009. The best action here might be one that is similar to my suggestion in #217: governments would be better off cutting checks to citizens than further lowering rates. Lowering rates can feed fear, but providing cash could drive hope and safety. The economic strain from coronavirus is likely to be from reduced spending, not necessarily illiquidity.

Don’t Take Health Advice From Investors
VC Sequoia rang the panic bell for the 2nd time in 12 years by asking their portfolio companies to make “fast and decisive” adjustments in response to the coronavirus. When Sequoia posted their “RIP Good Times” slide deck in 2008, predicting death spirals and a lengthy recovery, it was largely an alarmist “sky is falling” set of instructions that, in my opinion, looked silly at the time, and certainly looked silly in retrospect. I chuckled at the title of their new warning: “Coronavirus: The Black Swan of 2020” because the point of black swans is that they aren’t supposed to happen every year! But, it actually makes a good point: something crazy can happen at any time, so your company should be adaptable and ready all the time, not just right after something crazy has happened. As I say often: in long-term investing, it pays to be skeptical, but it never pays to be cynical – skeptics are looking for the truth, cynics are assuming the worst. Anyway, don’t take healthcare advice from me or any other investor, but please do wash your hands!

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