SITALWeek #254

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

In today’s post: grocery’s margin problems; 800G fiber and 6G wireless; home shopping network 2.0; Chipotlanes; demise of 3rd party app and web tracking; coffee consumption; the inequality of unequal reopening; offshoring on the rise; and lots more below...

Stuff about Innovation and Technology
In case you missed it, here is NZS Capital's Mid-Year Update Letter.

Click & Burrito
Chipotle is hiring 10,000 workers to staff their new drive-thru initiative known as Chipotlanes. The burrito chain’s online orders grew 81% y/y in Q1 (before lockdowns started in earnest). Online orders for in-store pickup are growing, but demand is also aided in part by investors and delivery companies subsidizing unprofitable, but delicious, delivery. As Chipotle doubles its store base, the chain is planning for 60% of its new locations to have Chipotlanes (I hope the marketing genius behind that name gets the credit they deserve!). Chipotle has completed the transition to digital rather recently, pulling out the last order-receiving fax machine in December 2019.

800G Fiber
Infinera and Windstream have sent information over a live-network fiber from San Diego to Phoenix at a rate of 800Gb/s, roughly 8x the current long-haul fiber speeds. Their method uses Nyquist subcarriers, which split each wavelength into eight components, in combination with probabilistic constellation shaping (developed by Bell Labs, now part of Nokia). If implemented broadly, this transmission methodology would be a significant increase in throughput, and therefore capacity, for the current fiber networks. But, also just think about that for a second...in that one second 800Gb could have moved across the country! 

6G Wireless
Speaking of speed, Samsung is laying the groundwork (or should I say airwork?) for 6G. The next-gen wireless tech should land around 2028 and provide the necessary speeds, of around 500Mb/s, to power the transition from smartphone to augmented/virtual reality, which should be taking place in earnest around that same timeframe. 

Remote Work and Border Restrictions Fuel Offshoring
Increased acceptance of remote work, combined with US anti-immigration policies and visa restrictions, is causing permanent job loss in the US to increased offshoring. It’s a huge loss for the US. From a Bayesian standpoint, this runs counter to my hypothesis that remote work will enable re-shoring of jobs to lower-cost US cities.

Blanding Video
Pilotly is a startup that works with television and movie studios to strip video art of all its value, merit, feeling, heart, purpose, and soul. The company is involved at all stages of development to wipe clean anything that makes people uncomfortable as they water down the end result (“jokes that could be insensitive...are now flagged by audiences and removed by creators”). I don’t believe my characterization is quite how the company describes its tools (which are used by NBC, ViacomCBS and Netflix, among others, to audience test throughout development and filming), it’s just my interpretation based on this WSJ article.

Amazofluencers
Ever go to amazon.com/live? Well, I wish I hadn’t – it’s a puzzling array of live and recorded, social-selling video content. Amazon is emulating the success of Alibaba’s and Tencent’s ecommerce streaming in China (which is emulating the success of QVC and the Home Shopping Network in the US!) by offering live streaming for Amazon Influencers. While I don’t deny the ability of charismatic people to drive sales of crap that consumers don’t really need, my problem here is that Amazon is a utility. Like Google search, Amazon is designed to require as little time as possible on the site/app: search, choose, buy, move on. The less time you spend on the site, the more useful it is. So, social shopping will not likely succeed on Amazon; it belongs on entertainment apps designed to convince you to spend more time on them than you want to, such as Twitch, YouTube, Wastagram, etc. In related news, Amazon is also making the live-streaming engine behind Twitch available as a service on AWS. This is a classic example of Amazon selling externally a product that it uses internally; however, the pricing is fairly steep – this example implies around $17/hour for just a couple hundred viewers. Going live on YouTube or Twitch is free.

Amazon’s Smart Grocery Cart
Amazon’s new, high-tech Dash Cart, which looks like it was designed by the same aesthetic team as the new Ford Bronco (and could possibly transform from cart to drone and fly you and your groceries home!), guides you through a store and scans items visually as you drop them into the cart. Amazon uses similar machine vision/AI in their cashier-free Go stores. In addition to an array of cameras, the cart senses the weight of items (like produce) as they are added and automatically calculates their value. The cart also looks like a handy device for Amazon or Whole Foods employees to fulfill customer orders for delivery or click & collect – the touch screen would guide them through stores, pointing to which merch to grab, and scan it. 

Digital Grocery’s Margin Problem
In related grocery news, a new report from Bain highlights the lack of profits on grocery delivery and pickup. The consultancy estimates that a free delivery order currently comes with a -15% EBIT margin while click & collect has a -5% margin. In the best of times, grocers earn 2-3% margins, and much of that comes from trade promotion dollars and gasoline and/or pharmacy sales. It’s possible online margins could improve with advertising and trade dollars from the big brands vying for cart space; but, clearly, two things are true: 1) consumers want their groceries delivered or ready for pickup; and 2) the only way to do this profitably today is with robotic, purpose-built, micro-fulfillment centers and dedicated delivery routes (much like the Netherlands’ successful Picnic). I don’t see a profitable digital grocery business model in the US today. Right now, we are getting our groceries subsidized by the generosity of venture capitalists and Walmart, as well as Amazon’s willingness to lose money in the short term or bundle for Prime. (I went through some more details on this conundrum last fall in the Evolution of the Meal, if you’re looking for one more wafer-thin mint of reading on the topic of food).

Data Access Consolidation to Fuel Big Tech
Apple will be making the IDFA (the mechanism advertisers use to identify and target users) opt-in for the iOS14 this September. For each app, users will have to opt in to sharing data for ads, which seems unlikely to happen. This comes on the heels of Google’s announced elimination of 3rd-party cookies in Chrome (happening in 2022). The trend toward first-party-only data access – with the ultimate elimination of the enormous 3rd-party advertising ecosystem – will help Google, Facebook, Amazon, and Apple all get bigger and bolder in their control of the advertising industry and user data. It will surely have some negative consequences, and yet, it will also eliminate all sorts of bad behavior and data misuse that plague the Internet.

Floundering Haven
Haven, the healthcare JV between Amazon, Berkshire, and Chase has been struggling to launch for the last 30 months, according to The Information. Stat also reports that Amazon seems to be going off on its own with several healthcare initiatives, including partnering to build dedicated health clinics for Amazon workers. “Amazon’s latest efforts could be an attempt to trial their own digital health tool: a platform that would link patients with a dedicated care team or provider so as to offer the kinds of consistency and continuity that would lead to program loyalty and enjoyment.” I remember being hopeful for Haven’s success, but it seems to be another example of the impenetrable Gordian knot of US healthcare. Instead, I’m now hopeful technology will have a more positive impact via health-monitoring wearables.

Pending Arm Independence?
SoftBank’s Arm is divesting assets and raising prices to either sell the business or return as a standalone public company, according to the FT. The price increases, not uncommon when a company is artificially dressing up for short-term investors at the expense of its long-term business, come at a tricky time for the processor IP licensing company, with RISC-V open-source designs on the rise and the global smartphone market on the decline. On the positive side, Arm has seen great traction (finally) in server chips, and, of course, Apple recently announced Arm will replace Intel in its laptops. Arm is too big to fail, too important to be sold to a non-neutral 3rd party, and would be a little precarious as a standalone public company given the slowing growth, previously increased R&D costs, and open-source threat. An interesting outcome would be an acquisition by a group of customers such as Apple, Amazon, Samsung, etc. Alternatively, a potentially neutral acquirer would be one of the design-software and IP-license shops, Cadence and Synopsis; but, it would be a big bite to swallow (depending on how investors weigh the value of the business vs. the long-term threats, but I am going to guess $20B+ might be a ballpark valuation). SoftBank paid $32B for Arm in 2016.

Investors Buying SMIC’s Pipe Dream
Chip foundry SMIC’s stock soared 245% following a $6.6B equity offering on China’s STAR Board stock exchange. The event itself is an interesting move by the Chinese to shift their audacious semiconductor investment from the government to retail and institutional investors. This article in the FT does a good job going through various issues the company faces, including a pending ban on the sale of US technology to suppliers of Huawei, and no access to advanced EUV lithography tools (this article covers China’s nascent chip equipment efforts). As I said last week: “This capital raise, along with another $50B, unrestricted access to design software and manufacturing tools made exclusively in the US and Europe, and several miracles, could give SMIC a shot at being a leading-edge foundry in five to ten years time.” (For more on the semiconductor industry see: “How a Handful of Chip Companies Came to Control the Fate of the World”.)

Multi-Chip’s Bag-o-Tricks
There was an interesting interview with the chief technologist at design simulation software maker Ansys in SemiEngineering last week, discussing a variety of topics including the challenges of simulating a multi-chip package (increasingly used to skirt the end of Moore’s Law): “Now you’re stacking up other stuff around you, and you need to take into account that above you might be a memory, which typically runs cool, or it might be a SerDes, which typically runs hot. Or somebody may have decided to put some AI chiplets on top, and those are largely unpredictable. It depends on how they’ve been trained and what inferencing they’re doing.”

Miscellaneous Stuff
Goodbye Grant
IEEE covers the life of the late MythBuster Grant Imahara.

Nespresso, What Else?
Bloomberg reports that Arabica coffee futures are down 25% year-to-date as demand for home-brewed coffee isn’t offsetting the drop in consumption from shuttered cafes and restaurants (the wholesale abandonment of communal breakrooms hasn’t helped either). As a Nespresso household, I found this Guardian article interesting with regard to the scale of the business: Nespresso sells around 14B pods a year, with likely revenues around $10B, and 400 pods are pushed into machines every second. The historical perspective is also filled with fascinating factoids, like espresso's frothy crema is just rebranded scum, thanks to an inspired PR campaign. The article’s author had a clear axe to grind: “A Nespresso machine on the kitchen counter used to prove your membership of a convenience-loving global consumer coffee elite. Increasingly it suggests that you are not a serious coffee person, and that your attitude to the future of the planet is suspiciously relaxed.” I’m not so sure. The pods require less grounds to achieve the same potency, and therefore have a lower environmental impact in terms of coffee growing/processing. It’s also a little hard to say a 1 gram, recyclable, aluminum capsule has a bigger impact than a plastic-lined and lidded paper cup of Starbucks coffee. I’m not embarrassed to say that we order the pods 1,000 at a time.☕

Solar Campfires
Early images from the new ESA/NASA Solar Orbiter (the closest images taken of the Sun, from 48 million miles away, or about half the distance between the Earth and Sun) reveal lots of mini solar flares, or campfires, as the astronomers refer to them, which may help explain the extreme temperature increase of the solar corona compared to the surface of the sun. Anyone for Solar’mores? 🔥

Supersized Galactic Curtain
The ‘South Pole Wall’ is a large-scale structure of galaxies, stretching 1.4 billion light years across, that was recently found hidden in the Zone of Galactic Obscuration (an area of the Universe that is hard for us to see because it’s behind the bright, creamy center of the Milky Way Galaxy). This isn’t all that remarkable, but I wanted to write “Zone of Galactic Obscuration” in the newsletter.

Stuff about Geopolitics, Economics, and the Finance Industry
The Inequalities of Reopening
The implicit, and in some cases explicit, racism and classism of the pandemic response and rushed economic re-opening has been difficult to comprehend. This post from the WSJ’s Editorial Board criticized, in essence, California’s Governor for slowing down the reopening because COVID-19 is largely only impacting poor and Hispanic communities (also it expresses a particularly bad grasp of basic exponential math in their hospital bed capacity analysis). Huh, are these clowns for real!? It’s hard to, as the Editors suggest, take “personal responsibility to control the virus” when you live in cramped quarters, have an “essential” job, and have to choose between basic safety and necessity. Further inequality is coming in education. As evidence abounds about summer camps and early school sports programs contributing to more COVID spreading by children in the US, it increasingly looks like kids won’t be going back to school in person this fall. Bloomberg reports on the inequality of uneven distance learning experiences and well-off parents hiring tutors or forming their own mini-schools. The COVID-driven inequality could continue for years with devastating consequences – as pandemic expert Klaus Stohr, formerly of WHO and Novartis, said: “The virus will end this pandemic by burning every piece of dry wood it will find.”

Demographic Chart Toppers
A chart of shifting demographics from the Lancet shows China halving its population, from 1.4B to 732M, by 2100; meanwhile, India is forecast to become the #1 most populous nation at just over 1B (which is a ~20% projected drop from today). Four African countries (Ethiopia, Egypt, DR Congo, and Tanzania) are expected to move into 2100’s top-10, roughly tripling their collective population to 850M. Adding in Nigeria's rise from 206M to 791M, that puts the population of the African continent at over 1.6B in 2100. I'll take the under on all of these estimates. The Information Age is increasingly causing demographic, societal, behavioral, and structural downward pressures on population growth.

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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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #253

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, bleeding crabs, 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: virtual walls for countries; virtual conference rooms for video chat; Walmart’s spaghetti; Tom Hanks’ overlord; decision making in complex systems – getting comfortable with not predicting the future; and lots more below...

Stuff about Innovation and Technology
“Scream Inside Your Heart”
The WSJ reports on the potential problem of screaming on roller coasters in the pandemic world: even with a mask, any expelled infectious particles are likely to hit the people seated behind you. Fuji-Q Highland amusement park implemented a “no screaming” rule for its coasters, with a promo video of park execs stoically and silently plunging 230 feet on the Fujiyama roller coaster while declaring: “Scream inside your heart”.

EVs On the Road Again
Elon gave another Twitter update on Supercharger network utilization: “North American Supercharger usage is now at pre-covid high, Europe about a week behind, China & Asia-Pacific in general doing great.”

Elven-Forged Border Security
Anduril, a startup from Oculus founder Palmer Luckey, has secured a 5-year contract with the U.S. Customs and Border Protection to build a virtual border wall, according to the WSJ. The practicality of a physical wall made little sense to anyone (well, maybe to one person); and, moreover, the negative symbolism of a physical wall is problematic, especially when the US needs to promote immigration to fend off the pending demographic nightmare (a major headwind to economic growth facing all developed nations as birth rates drop below replacement rate). That said, the idea of a virtual wall built with solar-powered sensors and AI on towers (and maybe drones) has some logic and purpose to it even if you are pro-immigration and anti-wall (which I am!). However, I could also see this going to a dark place resembling the Sphinx gates at the entrance to the Southern Oracle...hopefully the operators of the virtual wall maintain the same compassion – and purity of heart – as the original bearer of Andúril. 

Dropped Frames Vol. 1
Linkin Park’s Mike Shinoda put together his latest solo album while live streaming the process on Twitch. He solicited feedback, and even vocals, from viewers. According to Shinoda, live streaming has helped him stay sane during the pandemic – I think we can all relate to the lockdown-induced “crawling in my skin” feeling. (Linkin Park’s “Hybrid Theory” album turns 20 this October! We miss you, Chester). Also, Linkin Park is big in China.

A Cure for the Common Zoom Fatigue
Microsoft announced a new “Together Mode” coming to Teams in September that tries to tackle some of the problems of video conferencing. The new feature separates you from your background and virtually seats you in a shared space. I initially blew it off as a gimmick until I realized Jaron Lanier was involved in its development. In this blog post for Microsoft, Jaron explains “People in Together mode know where others are in a shared virtual space. That means your brain can keep track of what other people are signaling or emoting in a natural way, relying on social/spatial perception; people can intuitively signal each other nonverbally. In a grid, you don’t know where other people are on the screen, relative to you, from their point of view, so natural glances and other subtle cues are impossible.” Jaron goes on to explain the utility of the feature in encouraging interaction: “Playfulness is not a waste of time, even for adults. It is not a bug in human nature, but rather a fine-tuned process crafted over deep evolutionary time that transcends species. It is how we learn to interact with new people, how we build trust and comfort, and how we investigate our environment.”

Waymo’s Disco LiDAR
Laser Bear Honeycomb, the LiDAR made and licensed by Waymo, is still bucking the trend of solid-state miniaturization and sticking with their old-school method of a rotating mirror on a turntable. The disco-like LiDAR has an impressive field of view: 95-degree vertical and 360-degree horizontal, which means you need fewer of the siren-looking things. This (and more than you could ever possibly want to know about LiDAR, including coherent and SPAD) is in this article from Junko Yoshida on EE Times. Elon Musk, who thinks LiDAR is for babies, said last week that Tesla is “very close” to level five autonomous...perhaps as close as when he said the same thing four years ago?  

Law Enforcement Buying Hacked Data
Following last week’s bit on the IRS abusing data (buying readily available advertising data that gave them access to the location of anyone anytime in order to prosecute tax fraud cases), Motherboard reports on law enforcement buying large pools of data from hackers, the vast majority of which is information on innocent people. “Riana Pfefferkorn, associate director of surveillance and cybersecurity at the Stanford Center for Internet and Society, told Motherboard in an email, ‘it's disturbing that law enforcement can simply buy their way into obtaining vast amounts of account information, even passwords, without having to obtain any legal process. Normally, if the police want to find out, say, what IP address is associated with a particular online account, they do have to serve legal process on the service provider. This is an end-run around the usual legal processes. We impose those requirements on law enforcement for good reason.’”

Walmart Revives Prime Competitor
Walmart is expanding and rebranding its $98/yr same-day grocery delivery service as Walmart+, which will also cover non-grocery items from supercenters as well as fuel purchase discounts. The expanded service comes three years after they shut down the $49.99/yr Walmart ShippingPass. Back in SITALWeek #234, when the relaunch rumor surfaced, I discussed Walmart’s spaghetti-based ecommerce strategy – whereby they throw things against the wall to see what sticks, and then pick up the leftovers and throw them again. Only months after selling streaming service Vudu, Walmart may even be getting back into video, according to the Vox article. No word yet on when Walmart will be re-exiting video and shipping membership services. Perhaps I’m being a little unfair; after all, Walmart is growing faster than Amazon in ecommerce, but they are also racking up huge losses as they build new distribution and capabilities. I’d like to see Walmart integrate a digital bundle with Walmart+ that includes services like Netflix and Spotify – and maybe even Lyft or Uber – that would be a compelling answer to Amazon Prime. Walmart is also trying out a lot of pasta dishes in other areas, which is admirable experimentation for such a large, established company. News last week of Walmart hiring agents to sell Medicare insurance is perhaps part of their broader health initiative with clinics and health supercenters.

Twitter 2.0?
Twitter might be working on some sort of subscription platform, according to a posted (and since removed) job listing. It’s not clear if Twitter wants to create a platform for Tweeters to build and monetize fan followings, provide an ad-free access option, offer paid access to premium tools for power Tweeters, or all of the above. The job listing indicated the platform would be “reused by other teams in the future”. At the company’s annual meeting in May, in response to a shareholder question about whether the company would consider “premium memberships, subscription-based follows for premium accounts, in-app purchases, cash transfers, et cetera”, Twitter’s CFO indicated: “we want to be thoughtful about doing them in a way that make sure that we provide people a great experience on Twitter, where they continue to find the things they're looking for and trust the information that they see”. So, you're saying there's a chance? Twitter is in an interesting spot in which to experiment with alternate revenue models – their event-driven advertising spenders have jumped ship during the pandemic, and they have a much smaller revenue base to replace compared to Facebook. 

Please Re-bundle, I'm Begging
We are supposed to be in the "Golden Age of Television", but instead Netflix is buying reruns of the 1990's game show Supermarket Sweep. Perusing the top-ten most popular shows on Netflix of late, I find there is a lot of classic, channel-surfing, syndicated drivel. Awash in a confusion of apps, rights, content windows, content wars, logins, battling connected-TV platforms, SVOD, AVOD, and rising prices for MVPDs, viewers have lost hope, and they’ve gone back to just watching whatever crap happens to be on (except for the Floor is Lava – possibly the greatest show ever!). The burden to find and watch something is so high that its pushing viewers to instead watch gaming or life streaming on Twitch and YouTube, spend time on TikTok, or play video games themselves. Something is wrong. Chris McCarthy, the head of MTV, Comedy Central, and other brands, said in a Vulture profile last week “The reality is we’re not channels. We’re content”. Yes, but, we need a way to search, keep track, and actually enjoy the content with much lower friction.  People are giving up (like SITALWeek’s Editor, who will only pick up a remote under exigent circumstances). Who will save us? As I have said in the past, let the great re-bundling of content begin! (Please?)

Being Late in 5G’s a Good Thing
The West is trailing China in 5G technology and deployment, but being late to the party just might have its advantages. Standards are coming together for virtual radio access networks (VRAN), which could be a superior and more flexible option compared to the current hardware from Huawei. It’s a trend Nokia is trying to capitalize on as Huawei is increasingly banned from global telecom networks. After putting all their chips in the FPGA basket, Nokia fell behind Ericsson and Huawei as the Finnish company’s expensive products were a non-starter for most cash-strapped telcos. After losing share in what is essentially a duopoly in many markets, Nokia has found itself in a very strange circumstance: underdog in a highly concentrated industry. In response to the situation, Nokia decided to go against the long-standing tradition of closed architectures and go whole hog into OpenRAN (O-RAN). O-RAN is an open-standard, software-based radio access network favored by carriers. Nokia’s moves could cause Ericsson to follow, which could ultimately enable lower-cost, more innovative 5G networks in the West. Huawei is not a member of the OpenRAN Alliance, and Chinese 5G could suffer long term as a result. Dish Network is building out a complete 5G network in the US with VRAN based on O-RAN-enabled vendors.

Chinese Chip Activity
As the Chinese chip stock market bubble continues, foundry SMIC is looking to raise $6.6B in a Shanghai equity offering. This capital raise, along with another $50B, unrestricted access to design software and manufacturing tools made exclusively in the US and Europe, and several miracles, could give SMIC a shot at being a leading-edge foundry in five to ten years time. Of greater note is the opening of open-source RISC-V research institutes by StarFive and LeapFive (affiliates of SiFive) in cooperation with local governments in China. This research could lead to low-cost chips that could be made in trailing-edge fabs, like SMIC, to challenge several global semiconductor makers' business in China down the road.

Tom Hanks’ Apple Overlords
The “world’s most relatable megastar”, Tom Hanks, bristles at Apple TV+’s micromanagement (to the point of dictating what can be on display behind him in his own home office) while doing Zoom press for his new movie “Greyhound” (reluctantly sold to Apple by Sony): “‘The cruel whipmasters at Apple’ decided the background needed to be a blank wall...as if he’s in ‘a witness protection programme. But here I am, bowing to the needs of Apple TV’.” I’m not sure micromanagement will win Apple TV+ a lot of creative talent deals.

Miscellaneous Stuff
Horseshoe Crabs Key to Vaccine Safety
Every year, 500,000 horseshoe crabs are captured along the mid-Atlantic seaboard, bled, and returned to the ocean. This is done by pharmaceutical companies to harvest limulus amebocyte lysate, the only known natural substance capable of detecting deadly endotoxin (a bacterial toxin) contamination. Endotoxin can make its way into vaccines, knee replacement parts, etc., with potentially deadly consequences, which is why detection is so important. There’s a synthetic reagent approved for use in Europe, but the US still isn’t sure it’s up to snuff with the blue blood of the primitive critters (“living fossils” of the arachnid group). For now, there seems to be plenty of blood available, even if we needed to test production for five billion vaccine doses; but, National Geographic reports that the increased bloodletting (which an estimated 30% of crabs don’t survive post-release), as well as commercial harvesting, could have broader ecosystem implications for the food chain.

Stuff about Geopolitics, Economics, and the Finance Industry
Crystal Ball Broken? Adapt!
At NZS Capital, we are very comfortable not knowing the road conditions ahead. How to navigate without knowing the future is  the core of our 2014 paper: Complexity Investing. We’re strangely at ease operating in the current, uncertain times because we know we always operate in uncertain times – we’ve acclimatized ourselves (not without effort) to not knowing what the future will bring. Indeed, we have an entire framework based on complex adaptive systems (and their frequent habit of spawning fat-tail events) built to function and find winning companies – regardless of the current macroeconomic climate – via adaptability and non-zero-sum outcomes. One lesson from this framework is that adaptability matters above all, and ‘barriers to entry’ or ‘competitive moats’ are mere illusions in most cases. Efficiency, however, is Enemy Number One of adaptability. In biological systems, messy redundancy is key to survival and progress. However, in a company, too much redundancy can drain resources and/or lead to bureaucratic paralysis, either of which can be even more dangerous. It’s a really hard – but feasible – cultural balance for organizations to achieve. And, there’s no time like the present to experiment and build adaptability into your organization anywhere you can. This essay, published in Nautilus by Geoffrey West and David Krakauer of the Santa Fe Institute (the home of complex systems science), is an interesting read on the fragilities of our existing systems in the face of the pandemic. Here is one excerpt:
“A key insight from complexity science is that complex systems function by the continuous tradeoff between robustness and evolvability. Robustness describes the ability of a system to withstand a critical perturbation without a significant loss of function. For example, individuals are able to sustain high levels of damage to the brain, such as severing the two hemispheres, while continuing to function. Evolvability describes a mechanism that allows for the efficient exploration of adjacent novelties, whereby small changes to a mechanism or structure can engender new functions. Many enzymes can be mutated into functioning alternatives once the space of functional molecules has been mapped. Evolution has discovered the means of balancing the competing demands of these two principles and together they account for both the long-run stability of lineages and the diversity of life. Contrast this complex, evolved reality to our modern, social-technical world. A typical strategy of companies and corporations is to eliminate redundancies and degeneracies in the name of minimizing costs. This is the major reason why almost all companies have great difficulty adapting to change, and eventually disappear. Just as biological systems pay a cost for robustness and evolvability foregoing efficiency for long-term persistence, so too should we demand this of our institutions.”

SEC Mulls Raising 13F Floor
SEC-registered investment firms in the US currently file quarterly 13F reports listing all holdings if they have over $100M in assets. The bogey was set 45 years ago, and the SEC has proposed changing it to $3.5B. The matter goes to vote after a 60-day comment period. There are countless algorithmic traders, and even individual investors, who track the moves of small managers; but, it’s also equivalent to giving away the 11 herbs and spices every quarter for some investors.

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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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #252

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, flying snakes, 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: dark stores and Catch-22s; the paradox of Eggo waffles; the grocery store magazine rack; connected fitness; open-source semis; lift and shift to the cloud accelerates; cloud M&A storm; adaptability and DCFs; mid-year update from NZS Capital and lots more below...

Stuff about Innovation and Technology
Smelling Hot and Cold
The trigeminal nerve endings in your nose send temperature signals to your brain using transient receptor potential (TRP) ion channels, which can be triggered by either specific temperature ranges or, importantly, certain chemicals. As a result, some smell molecules are perceived by the brain as temperature changes. For example, smelling peppermint can make you feel cold because it triggers TRPM8, which happens to be correlated with both menthol and temperatures below 77 °F (25 °C). Hot peppers contain capsaicin, which triggers TRPV1, signaling temperatures above 108 °F (42 °C). Some of the isolated chemical triggers (eucalyptol for cold, capsaicin for hot) don’t have much inherent odor, and so their presence can signal temperature without an overly distracting smell. And, that’s what researchers at the University of Chicago are using to make you feel hot or cold while immersed in virtual reality via a modified headset. The sensation isn’t as strong as direct heating/cooling of your skin, but it still might be a more energy efficient way to cool off this summer rather than cranking down the air conditioner. 

Alexa Increasingly Lending an Ear
Amazon’s Alexa chief told GeekWire that voice usage for Alexa apps is up 65% over the past two months. Voice search is up as well – one week in April, people asked Alexa for more cooking tips than they did during Thanksgiving week 2019. Amazon also launched the Alexa Agencies Curriculum: “a set of Alexa skill-building resources specially designed for agencies, brands working with agencies, studios, and tool providers who are building voice strategies and go-to-market campaigns for brands”.

IRS Purchased Marketing Data to Track Suspected Fraudsters
The IRS Criminal Investigation unit purchased commercially available data from Venntel, which takes data from the digital advertising industry and repurposes it to map cell phone locations, according to the WSJ. The data, which costs only $20,000, starts out ‘anonymized’, but can easily locate real people in the real world without difficulty. Accessing the data would appear to be a glaring violation of the 4th Amendment, as it normally requires a court order (based on reasonable grounds) to obtain the equivalent location data from a phone company. Venntel’s parent company, Gravy Analytics, also sells the data to advertisers to enable consumer targeting. Various law enforcement agencies are using similar data, which has resulted in false arrests in recent years.

Disney’s Face Swapping AI
Disney has developed cutting-edge, face-swapping AI to help offset the costs of reshoots or other minor edits once filming is complete. The innovative algorithm allows for much higher resolution, movie-quality face swaps that can be trained on footage from the original shoot. The downside is that the technological leap will make deepfakes much harder to ascertain.

DoorDash Goes Dark
DoorDash is using “dark stores” – locations serving delivery drivers only – to support a new effort called DoorDash Essentials. The goal is to offer a selection of convenience store items to customers with free delivery in under 30 minutes, which would be a real feather in their cap. Three weeks ago, I talked about Instacart’s Catch-22 (suggesting that – to avoid an existential middle-man crisis – they should vertically integrate with their own dark grocery stores, with the caveat that the move may curtail their current access to traditional shops). And, two weeks ago, I sensed the same Catch-22 at play when Uber decided to exit the cloud kitchen market (which would likely compete with the Uber Eats’ restaurant base). To really transform the food delivery market – whether grocery, convenience, or restaurant – vertical integration is likely to be the most durable business model. It’s a recurring theme we see as analog businesses go digital (see SITALWeek #219 for examples). DoorDash is also testing cloud kitchens in several cities, according to the HNGRY article. 

Fitness Mirror on the Wall
Lululemon announced the acquisition of Mirror – the maker of a connected, in-home, fitness interface – for $500M. In the past, I’ve briefly discussed the potential for Peloton (who is rumored to be coming out with a strength-training device to complement their connected bike and treadmill) to become a full-fledged lifestyle brand as it sells apparel and builds out the ‘Netflix’ of exercise classes. Depending on how long it takes for the world to get back to ‘normal’, the demand for exercise-focused lifestyle apparel could be depressed for quite some time, while the demand for home-gym options should continue to increase. So, this acquisition by Lululemon seems well intentioned; however, building a scale hardware, software, and content platform seems harder for Lululemon than it would be for Peloton to design and sell clothing. Nike and Under Armour have tried to extend into the tech world over the last decade with mixed results.  

Netflix Uses YouTube
Netflix is increasingly using rival YouTube to drive engagement with its content. The reversal comes as Netflix sees YouTube as a way to sustain interest in its comedy and made-for-kids originals. According to Bloomberg, toy makers believe engagement with YouTube may help offset the one-and-done nature of Netflix title binging by keeping the content in front of people more continuously. The company’s “Netflix is a Joke” YouTube channel has over 1M subscribers. 

Selection Freeze Sees Mild Thaw
There are currently 16 different types of Eggo frozen waffles: Homestyle, Buttermilk, Blueberry, Strawberry, Homestyle Mini, Cinnamon Toast, Brown Sugar Cinnamon Roll, Whole Grain, Whole Wheat, Nutri-Grain Blueberry, Mickey, Paw Patrol, Frozen, Spiderman Mixed Berry, Apple Cinnamon, and Chocolatey Chip. Following a similar taste explosion, Lays has gone from four to 60 types of chips over the last 45 years, while Campbell's has gone from 150 to 600 types of canned soup in the last 36 years. From 1975 to 2018, the average grocery store went from 9,000 items to 33,000. A 2004 book titled “The Paradox of Choice” described how modern consumers are so overwhelmed with selection that they become paralyzed and anxious with indecision. However, help may be on the way, with the WSJ reporting that the number of unique items sold at grocery stores is down 7.3% from last year. A similar percentage drop has occurred at both fast-food and full-service restaurants. The effort is driven more by manufacturers’ desire to focus supply chains amid changing demand rather than a sign that consumers want fewer choices. I wonder if the rise of dark stores and vertically-integrated food and grocery delivery will help streamline choice, or perhaps instead it will give us even more items to decide between? Will the marketing costs to put products and menus in front of consumers become even more competitive in the auction-based, digital ad platforms that will drive profits for delivery platforms? A suggestion: if anyone wants to create a healthy, delicious, curated sustenance delivery service that requires virtually no choice or effort on the part of consumers, I’ll be the first to sign up. 

What’s the Magazine Rack Worth?
I covered the existential business model transition underway at Facebook in SITALWeek #250 before the advertiser boycott escalated, so I won’t rehash that. I’ve seen a lot of cynical takes that the boycott is just virtue signaling by brands who aren’t meaningful to Facebook’s revenue. Maybe that’s true; but, in my experience, cynics sound smart, yet are never right over the long run. Ultimately, Facebook’s content needs to create value for both users and advertisers to sustain its advertising business, which represents the vast majority of its current revenue. The negative-sum value proposition of the news feed is based on content that largely represents the digital incarnation of the grocery store magazine rack (People Magazine and National Enquirer come to mind), but on a bigger scale, with personal data that can be used to sell ads, and risks being weaponized. How much is that magazine rack worth?

Processors Go Open Source 
Open-source processors are the next big thing to impact the market for semiconductors. I first wrote about RISC-V back in February 2019 and, since then, the movement has gained a lot of momentum. For example, there’s a 3-penny microcontroller based on RISC-V from China’s Padauk. IBM continues to open source aspects of its Power processor architecture and, recently, opened up their Power-A2 core. The Next Platform quotes the president of OpenPower: “the Power-EN and the Power-A2 that followed it were developed to be optimized for throughout but also for customization. The design has auxiliary units that can be tightly coupled to the core. We were almost ahead of our time a decade ago, since this is exactly what everybody is doing with their special purpose designs and we were also creating an edge of network chip. And on top of that, the Power-A2 design has the ability to balance performance and power.” For a good overview of the processor market, I recommend this recent Lex Fridman podcast with Berkeley professor David Patterson, one of the original creators of the now-dominant RISC architecture. RISC has beat Intel (CISC) in large part because it’s parallel instead of serial. This is also why GPUs are the new leader in AI and machine learning – Nvidia is in 8 of the top 10 supercomputers (and, its increasingly important network provider, Mellanox, is in 333 of the top-500 fastest systems).

Bull Market in China's Semi Stocks
The rising trade tensions between the US and China, increasingly centered on semiconductor technology access, has caused a bull market to form for the 45 Chinese-listed chip startups, which now trade at over 100x earnings – living up to expectations is going to require the sale of a lot of 3-penny chips! VC investments in China’s chip market doubled from 2017 to over $3B in 2019, according to Reuters. We covered the history and future of the chip market, including the China situation, in last week’s SITALWeek and accompanying podcast (Spotify) for those who missed it. 

Ant Rebrands and Refocuses
Alibaba’s successful banking subsidiary, Ant Financial, changed its name to Ant Group and embarked on a new mission to provide a broad array of services to consumers and businesses under the new leadership of CEO Simon Hu. Bloomberg reports on the company’s new strategy, which is meant to counteract payments share loss to Tencent and Meituan-Dianping. Hu’s goal is to “digitize the service industry” more broadly with payments and demand generation. Tencent has taken share with its innovative mini-apps in WeChat over the last three years – a strategy now being copied by Snap in the US. 

Accelerated Cloud Adoption
Data and research provider IHS Markit will move all of its on-premises and co-located workloads to AWS over the next three years, leveraging VMware Cloud for the migration. This is a notable, data-intensive cloud migration that signals more to come as the pandemic has accelerated many IT transitions.

Multi-Cloud Serverless Workloads
Tim Wagner presented some interesting slides – for the AWS Serverless Community Day keynote – that describe how serverless workloads can be inherently multi-cloud. Wagner was head of serverless (Lambda) at AWS from 2013 to 2018, and his new company, Vendia, aims to create serverless, distributed apps using a cross-cloud, decentralized database as a service for developers. 

Will Clouds Merge into Perfect Storm?
One broad way to conceptualize enterprise IT is four horizontal clouds: 1) customer cloud, 2) employee cloud, 3) finance cloud, 4) IT cloud (here, I mean products like ServiceNow, not tools for developers like AWS, Atlassian, and GitHub). The leaders of these clouds today are Salesforce (#1), Workday (#2 and #3), and ServiceNow (#4). Each focuses on a key decision maker: CMO, head of HR, CFO, and CTO, respectively, but it’s increasingly important to connect dots across all of these clouds. For example, you might need identity and security software like Okta for your IT department to manage internal employees (#4) and your external customers (#1). I suspect we are going to see a wave of software M&A similar to the ERP consolidation of the 1990s and 2000s. There are some obvious deals, some obvious empire-building CEOs, and some salivating bankers ready to make it happen. Related, Salesforce recently invested $100M in endpoint security company Tanium (that’s a leap from Cloud #1 to Cloud #4) as it launches a new “work-from-anywhere employee experience” for IT help desks.

Miscellaneous Stuff
Airborne Serpents Slither for Stability  
To determine whether flying snakes undulate their bodies to further their glide or simply out of reflex (like when dogs “air paddle” when held above water), researchers at Virginia Tech affixed snakes with reflective tape and let them glide around “The Cube”, a cavernous room outfitted with high-tech motion capture equipment (complete with padded floor and alert snake handlers). Turns out, mid-air undulations are complex, involving “horizontal and vertical waves, whose phases differ by 90° and whose frequencies differ by a factor of two”, but for a discrete purpose: to keep the snake stable – like a “morphing wing” – and extend its glide.    

Uh huh huh huh...Cool
ViacomCBS is working with Mike Judge to bring the 1990’s favorite deviants Beavis and Butt-Head back to TV. Judge is also well known for “King of the Hill” and the movie “Office Space”, though perhaps his 2006 movie “Idiocracy” is the most relevant work for the times in which we now find ourselves.

Navy: Just Say No
US Navy personnel have been asked to stop buying LSD off the dark web by the Naval Criminal Investigative Services. We might have a lot less war if soldiers (and their commanders) around the world had access to LSD🤷‍♂️. As Kurt Vonnegut said: “Our government's got a war on drugs. That's certainly better than no drugs at all”. (Michael Pollan’s Book “How to Change your Mind” has a good perspective on psychedelics.)

Sled Dogs: Oldest Dog Breed?
An archeological site in Siberia from 9,500 years ago demonstrates the long relationship between humans and sled dogs. The finding pushes back the timeline for domestication of Eurasian wolves to at least 15,000 years ago.

Stuff about Geopolitics, Economics, and the Finance Industry
Australia, India Wary of China
Australia will spend $185B over the next decade in defense capability, up 38% from the previously announced budget only four years ago. The main driver is risk associated with the “increasingly assertive China in an Indo-Pacific region”. That assertiveness has been on full display in Hong Kong and the Chinese-Indian border in recent weeks. India’s government has banned 59 apps, including TikTok, and is also looking to ban telecom equipment makers Huawei and ZTE. Notably, Reliance Jio, the largest wireless operator in the country, built its network without Chinese equipment. Biden’s campaign advisor on foreign policy, Eli Ratner, writes in the WaPo that we should not characterize tensions with China as similar to the cold war, but instead deploy “multiple strategies aimed at decreasing interdependence and competing effectively where necessary, and conserving energy and resources where not.”

Flexibility? Close Enough
NZS Capital’s investing philosophy in one sentence is: the earth is dominated by complex adaptive systems; therefore, adaptability is the most important aspect of any business. This leads to important conclusions, such as, discounted cash flow (DCF) analysis is of very little use. How many investors accounted for a pandemic in their 2020 DCF column back in 2019 when they analyzed a stock? We covered the problems with DCFs, including the serious math error they are based on, back in SITALWeek #229 (at the end, under the heading “Non-Ergodic Systems Bury the DCF”). We poked a little fun at DCF-champion Damodaran, so I was pleasantly surprised to see him realize the importance of adaptability in his latest post:
“Simply put, the flexibility of an organization measures the speed and cost with which it responds to changed circumstances, with more flexible firms adjusting faster and at lower cost than less flexible firms. That definition, though, encompasses a range of actions that stretch across every aspect of business, covering everything from how investments are made, to how the business is operated, to how it is funded, and finally to how much cash is returned to owners (in the form of dividends and buybacks).”
Damodaran’s focus is largely on quantifiable measures of flexibility, which don’t typically reveal the real drivers of adaptability related to corporate culture, long-term thinking, innovation, decentralized/empowered employee base, etc. (we cover all that in more detail in our 2014 paper Complexity Investing.) It’s not possible to put a meaningful “flexibility” row into a DCF or a financial model, and it's surprisingly hard to glean adaptability from numbers. Letting go of your desire to build detailed models and accurately predict the future is the most uncomfortable enlightenment you will face as an investor. It’s essential, yet very difficult to come to grips with.
[Answers to FAQ from last time I posted on DCFs: yes, I understand the value of an implied DCF; yes, I have read Damodaran’s work; yes, I have attended Damodaran’s seminars in person (over 15 years ago); no, I still do not think DCFs are going to help anyone identify long-term winning companies; and no, I don’t think DCFs are useful when thinking about Margin of Safety 😜.] 

NZS Capital's mid-year update letter can be read here.

✌

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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #251

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, chips!, 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: this week we are changing things up with a highly requested deep dive into semiconductors by my fellow NZS investors Jon Bathgate and Brinton Johns. How did chip stocks come to be the best performing sector of the last decade, and what’s the future look like? Chips are a broad sector with a relatively steep learning curve, and few learning resources available. There is also a companion audio interview with Jon and Brinton that discusses the outlook for many segments of the semiconductor market. The podcast is available on Spotify, and was produced by Dex McLuskey of Context Content.

How a Handful of Chip Companies Came to Control the Fate of the World

At the risk of sounding like hyperbolic doom mongers, let’s grab your attention from the outset: Because of a series of complex and unexpected global developments over the past several decades, the fate of the world now lies in the hands of fewer than a dozen semiconductor companies.

A good exercise in assessing a potential investment is to ask “could the world get by without this company?”. The answer is usually, “in time, probably just fine.” But should we wake up tomorrow to find that any among Taiwan Semiconductor Manufacturing Co. (TSMC), ASML Holding, Lam Research, Cadence, Synopsys and KLA-Tencor have suddenly ceased to exist, the answer at best is “well, yes, but global progress will suffer a setback of several decades at least.” The loss of a handful of critical chipmakers that depend on these companies – such as NVIDIA, Samsung, Intel, AMD, Texas Instruments, Xilinx, Broadcom and Microchip Technology – would dramatically impede the digital transition of the economy still further.

Why? Because these companies are at the core of a half a trillion-dollar industry that enables us to do pretty much everything, from flying across oceans to booking a ride and ordering a pizza when we get there; from diagnosing and treating a disease to boosting agricultural yields; from supporting the military to powering our cities.

ENGINE ROOM
No critical system can function without semiconductors and chip companies provide the wherewithal necessary to design, build and test ever-faster and more powerful sensors, microcontrollers, CPUs, GPUs, FPGAs, network switches, modems, memory, and all the other components that power our devices and, by extension, the entire digital economy.

Marc Andreessen famously proclaimed in 2011 that “software is eating the world,” and evidence of this truth can be seen more and more every day. But without the semiconductors that allow the machines to run the software, there would be no Information Age.

Chips are the engine driving the digital transformation of the world.

But how did we get to a place where more than half of all contract semiconductor manufacturing is handled by one company on an island whose sovereignty is in dispute; where a single organization holds what looks like an unassailable lead in photolithography; where virtually all memory is made by just three companies; and where it’s well-nigh impossible to even design a chip without software that only a couple of companies provide?

INCREASING COMPLEXITY

For one thing, as chips used in mobile phones, artificial intelligence and cloud computing applications become more complex, so too do the design, manufacturing and testing processes needed to produce them, making it impossible for all but a few of the most adaptable companies to keep pace. And as development becomes more complex, so does the cost to design, test and build an advanced chip, which has spiraled to as much as $500 million, creating an additional barrier for wannabe disruptors.

MAGICAL PROCESS
Photolithography is a good example. In short, when the light source used in the process had to change from a wavelength of 193nm to 13.5nm to accommodate smaller, more intricate patterns on leading-edge chips of ever-decreasing geometry, only one company even tried to do it.

Extreme ultraviolet lithography (EUV) is an almost magical process. In a vacuum, 50,000 microscopic droplets of molten tin are fired every second in a stream as one laser strikes each one so precisely that they flatten into discs before another bombards them with so much power that they become balls of plasma shining with EUV light. The machines cost almost $200 million, can be the size of a house and are contained within ultraclean environments to keep out even a single speck of dust. The scanners and lasers that power EUV lithography are so complex that a decade ago many scientists believed them to be an impossibility, and Nikon, ASML’s key competitor, viewed the technology as so complicated that it didn’t even attempt to develop an EUV tool.

Because of its unique mastery of EUV, ASML has built a de facto monopoly in manufacturing the machines that make the most advanced chips. The Dutch company expects to ship about 35 scanners this year, taking the total used by foundries around the world to around 100. TSMC and Samsung are already in high-volume manufacturing with EUV, while Intel will be using the process from 2021.

Without EUV, Moore’s Law, which states that the density of transistors on a chip will double about every two years, would likely have reached its limitations. But because of the process, TSMC is building 7nm and 5nm fabs, and is investing another $20 billion on a 3nm node foundry, while Samsung, South Korea’s biggest company, said in May 2020 it started building a 5nm facility near Seoul based on EUV as part of a $116 billion plan outlined in April 2019 to compete with TSMC in contract chipmaking. 

CLOSE COOPERATION
But even before you reach the manufacture and testing stages, intricate chips have to be designed, and as competition drives device makers to pack more performance, functionality and power efficiency into ever-smaller chips, the creation of semiconductors has become impossible without electronic design automation (EDA). A key provider is Cadence Design Systems, whose software is used to map advanced semiconductors. Cadence and its competitor Synopsys work in extremely tight partnership with chip designers and manufacturers (often TSMC) to ensure that those hundreds of millions of dollars invested into the next chip design will yield a functioning device. Initiatives such as TSMC’s EDA Alliance and Digital Reference Flow – which have no equivalent at Samsung or Intel – increase the likelihood that designs will be compatible with TSMC’s manufacturing processes, creating network effects by making it more likely that future projects will also be successful.

CONSOLIDATION EXPLOSION
While increasing complexity played a significant role in reducing the number of players, consolidation helped the process along. In 2009, there were 10 DRAM memory makers. Now, Samsung, SK Hynix and Micron Technology account for 95% of revenue in a roughly $100 billion sector.

Consolidation elsewhere was triggered in large part by Hock Tan, the longtime CEO of Avago, now Broadcom, who saw an opportunity following the Great Financial Crisis to buy underpriced and under-appreciated assets using cheap money. In addition to noticing that semiconductor companies were undervalued, Hock’s key insight was that they were often poorly managed – chasing growth markets that promised low returns. Working more like a private equity executive than a technology CEO, Hock shuttered or sold off underperforming divisions of acquired companies, while investing in established highly profitable franchises. After the resounding success of Avago’s 2014 acquisition of storage chipmaker LSI, rival CEOs saw the need to increase scale and returns to survive.

(As an aside, another more morbid reason for the quickening pace of consolidation was that many founders died, making it easier to build alliances that were previously unthinkable.)

So after lying dormant for a decade or so, semiconductor M&A exploded in 2015, surpassing $100 billion in transaction value, more than six times any of the preceding five years, and remained elevated for the rest of the decade. Broadcom was the poster child of the consolidation wave. During this period, Tan spent $50 billion on acquisitions, taking the company from a niche supplier of wireless technology to a powerhouse in wireless, networking and data center solutions at industry-leading profitability, a move that helped the stock to surge 1,800%, making it the best performer in the semis sector and one of the top-10 stocks in the S&P 500 in the decade.

DECLINING CYCLICALITY
Money poured into the space as Tan led others to realize that the industry’s traditional cyclicality was ebbing. For decades, sales revolved around events such as upgrades to the Windows operating system and mobile phone releases. But as the number of use cases and potential profit pools widened due to mega themes such as artificial intelligence, cloud computing, mobility and the Internet of Things, along with expanding industrial and healthcare applications, those cyclical peaks and troughs became less pronounced, making chips even more appealing.

Inevitably, the M&A activity eventually drew the attention of the US government, whose Committee on Foreign Investment (CFIUS) became concerned that key American intellectual property was leaving the country through some consolidations. The most ambitious transaction in the industry’s history, the $120 billion planned  acquisition of wireless giant Qualcomm by Broadcom, was blocked by CFIUS — even after Broadcom relocated to California from Singapore — over concerns that the target’s key wireless technology, including 5G, were critical to national security.

THE MOMENT EVERYTHING CHANGED
This decision made it clear that the US government appreciated the lack of resilience in the supply chain while also signaling that it would act to protect America’s strategic interests. That made it obvious that one key part of this critical supply chain would move directly into the crosshairs – fabrication.

And for that, we can blame Texas Instruments (TI).

In the early 1980s, Morris Chang was head of TI’s semiconductor business. Despite being an exceptionally talented leader and technologist, he was passed over for CEO, many believe because he is not American. So Chang returned to his native Taiwan at the government’s request to work on a way to build up the island’s tech chops. With no history, infrastructure, obvious skills or other resources in any aspect of semiconductor design and manufacture, Chang hit on the idea of creating a fabrication only model.

Until then, semiconductor companies both designed and manufactured their chips, and constructing increasingly large factories was the biggest impediment to innovation as it was the most costly part of starting a company. Chang removed that barrier by undertaking to never compete with customers in chip design. TSMC  grew over the proceeding decades into by far the biggest contract chipmaker, controlling 53% of the almost $70 billion third-party fabrication market by January 2020, according to TrendForce, compared with 18% for Samsung and 8% for GlobalFoundries, the next two biggest producers.

In 2019, TSMC manufactured almost 11,000 products for around 500 customers, including AMD, Apple, Alphabet, Amazon, Microsoft, Facebook, NVIDIA and Qualcomm, while in a deliciously ironic twist, Texas Instruments, whose market cap is less than half TSMC’s, now relies on the company to manufacture some of their advanced products.

TAIWAN’S STRATEGIC IMPORTANCE
What spooks the US government is that American companies account for about 60% of TSMC’s revenue, according to analysts’ estimates, with China bringing in a further 20%.

US-based companies are responsible for about 45% of global semiconductor sales, according to the Semiconductor Industry Association, yet almost 70% of chips are made in Taiwan or pass through the island during the manufacturing process.

Given that China as recently as May 20, 2020, said that reunification “cannot be stopped by anyone or by any force,” the US is keen to loosen the stranglehold of TSMC on the fabrication of leading-edge chips in Taiwan.

As a result, TSMC this year entered an accord to build a $12 billion, 5nm fab in Arizona, which it plans to open in 2024, while at time of writing Congress is also debating a multibillion-dollar package of incentives designed to further boost third-party fabrication options in the US. While these moves aren’t enough to significantly reduce the US’s exposure to Taiwan, they signal intent.

UNASSAILABLE LEAD?
While the US has sought to deny China’s Huawei access to the semiconductors needed to build 5G mobile networks, as a nation China remains several years behind its American and European counterparts, a gap that would likely be decades without access to western tools. Moreover, China has little to no hope of closing the gap, since it’s impossible to reverse engineer the complex processes, making traditional industrial espionage techniques pointless.

The $100 billion “Made in China 2025” effort, which seeks to essentially replicate the global semiconductor industry to reduce the country’s dependence on US and European knowhow, is therefore likely to result in success in lower-end parts of the market and not achieve the goal of technology independence. While total Chinese output is rising, the chips are still designed with US-produced software and manufactured with American and European gear. China is in no position to go it alone and won’t be for the foreseeable future.

FINANCIAL RESILIENCE
We go into the geopolitics of semi fabrication in more detail in this MarketWatch op-ed, but the fragility inherent in the supply chain stands in stark contrast to the financial resilience created by the concentration of capabilities in a few privileged hands.

It may come as a surprise to many that the best-performing sector of the S&P 500 since the Great Financial Crisis is semiconductors. From a nadir in November 2008, the 30-member Philadelphia Semiconductor index doubled in value in a year and surged 377% in the decade through 2019, returning more than twice the 182% of the main S&P 500.

Another example  is the stock of Lam Research, which increased in value 14 times since languishing around $20 in February 2009. Lam’s tech is a key enabler of both NAND and DRAM memory, which are seeing rising demand as the world generates and analyzes more data. Lam is the only provider of high aspect ratio etch tools, which are critical in the NAND market as the device architecture has started to scale vertically, leaving the latest chips looking more like skyscrapers than their one-story house antecedents. The magic in Lam’s process allows its tool to etch more than a trillion perfectly uniform holes — each one-thousandth of the diameter of a human hair — on a wafer. Lam’s leverage to the NAND market and a broader renaissance in memory helped the company to grow annual revenue by 16% on average from 2013 through 2019, double the rate of the semiconductor equipment sector. The company has also quietly built up about a third of its business to be a highly profitable recurring revenue stream of services, refurbs and consumables that improves its ability to serve customers while adding a stabilizing force to the cyclicality from the rest of the business.

IMPROVING PROFITABILITY
Despite that perception of heightened cyclicality, the profitability of many semiconductor companies now compares with top tier software providers. By transforming from a pure-play chip company into one that produces software that is monetized through silicon, graphics processing leader NVIDIA – which now employs more software than hardware engineers – is this year expected to earn a 38% operating margin based on consensus estimates, slightly higher than Microsoft.

Such performance is not limited to the leading edge. While some NVIDIA products sell for hundreds or thousands of dollars each, companies such as Microchip Technology and TI are earning software-like margins by pushing billions of sub-$5 embedded processing and analog chips a year to tens of thousands of customers. Both companies are earning higher margins at the current cyclical trough than at previous cyclical peaks seen earlier last decade. Moreover, the outlook for such products is brighter than ever as their market potential explodes in coming years to encompass trillions of connected devices as the mega themes lead to more chips being deployed across countless applications in healthcare, industrial, agriculture, automotive and other parts of the burgeoning digital economy.

WHAT NOW?
So having examined how we got here, the question now is what happens next?

While 2020 has shown us that forecasting can often be a futile pursuit, three broad predictions seems safe to make. China is in no position to go it alone, we’ll continue to rely on the key ecosystem enablers named at the start of this article, and the semiconductor renaissance will keep gaining steam.

In the final audio portion of this look at the space, we’ll talk about what’s happening in individual parts of the chip market, while also touching on why we’re excited about the absence of a Next Big Thing.
✌

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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #250

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, soft-shelled eggs, 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 huge wearable health monitor market; Uber’s food Catch-22; Facebook’s shift to payments and commerce from news feed; Information-Age utilities; The Dude talks complex systems; the nutty physics of N95s; inverting the relationship between debt and interest rates; and lots more below...

Stuff about Innovation and Technology
Over-Engineered Eavesdropping
Researchers came up with a way to listen in on conversations by sensing minute changes in the surface of a lightbulb – using a telescope and a $400 electro-optical sensor and inexpensive analog-to-digital converter – from hundreds of feet away. On the list of extreme ways to eavesdrop, this ranks up there with Van Eck Phreaking (interpreting the electromagnetic radiation from displays), and seems especially unnecessary when Alexa and Siri can eavesdrop for free😉.

TikTok Catching YouTube
Kids in the US spent 97 min/day watching YouTube, with TikTok quickly gaining eyeball share at 95 min/day, according to a new study covering the early part of virus sheltering (mid-March through April). Of note, the game sensation Roblox was played by over half of US kids, averaging 106 min/day.

Rx Gaming
In related news, the FDA has approved a new video game titled EndeavorRx as a prescription to treat children with ADHD. “Selective Stimulus Management engine (SSME)...presents specific sensory stimuli and simultaneous motor challenges designed to target and activate the neural systems that play a key role in attention function while using adaptive algorithms to personalize the treatment experience for each individual patient.”

Aqueous Air Battery
A battery startup backed by Bill Gates, Form Energy, is targeting grid storage and has a new contract to supply a 1MW/150MWh system to Minnesota-based Great River Energy. Little is known about the so-called aqueous air batteries; they may use a combination of water and sulfur (or another equally abundant and cheap element), and are reported to be dischargeable for 150 hours – a vast improvement over lithium ion cells, which use expensive metals and can only discharge for a few hours. 

Tesla Taps Chinese Talent for next EV
Hyping their new Chinese design and engineering center, Tesla is taking design submissions from the country’s designers (both pro and amateur) for its planned smaller EV. As I mentioned a few weeks ago, I think a smaller, shorter-range Tesla EV would do very well globally. In other Tesla news, the car company can finally sell vehicles to people in Michigan after overcoming anti-consumer blockades from the dealer networks of the increasingly little “Big 3” Detroit automakers. Also helping out Tesla are the continued stumbles of legacy auto makers when it comes to next-gen tech development: VW has encountered problems because it outsources 90% of its software development to Continental, but will try to get to 60% internal code by 2025. Meanwhile, BMW and Mercedes are abruptly ending their autonomous development partnership less than a year after it was conceived. Is there any car company besides Tesla that isn’t changing their strategy every six months!?

Wearable Health Monitoring: a new $100B+ Market
Smart-ring maker Oura is back in the spotlight with the NBA’s plan to equip players with the wearable health devices to monitor temperature, respiratory function, and heart rate (I still love my Oura, although SITALWeek’s Editor is currently having a technical problem with hers, which the Finnish company has been keen to solve). Las Vegas Sands, owner of The Venetian and Palazzo, is purchasing 1,000 Oura Rings to early detect illness, and has plans to equip all 9,300 employees if the initial test goes well. The cost to effectively test and monitor people in situations that require gathering in close proximity is simply going to be too high without this kind of wearable tech. For example, Universal is spending $5M to monitor actors and crew working on the final production of the latest Jurassic Park movie – that’s just a partial production for one movie! It’s becoming more obvious that networked, wearable sensors will be the route every company takes, and most people will want them for themselves as well. As wearables go deeper into becoming fashion/jewelry accessories, they will be an enormous market...quite possibly a billion annual units at anywhere from a hundred dollars to thousands of dollars each with $50-100+ of semiconductors and sensors. And, your future wearable might be powered by your own sweat, if this company is successful in using the enzymes found in sweat to power a biofuel cell “patch”.

Amazon is Afraid of Who’s Reading Your Email
I was wondering why Amazon stopped listing ordered items in their confirmation emails. It turns out it was likely a response to the rising use of email scraping tools to gather all sorts of competitive intelligence.

Walmart Expands 3rd-Party Marketplace via Shopify
Walmart is continuing its ecommerce strategy of “throwing stuff against the wall to see what sticks” by partnering with Shopify to power their third-party marketplace. This is one of many on-again, off-again, largely unsuccessful attempts by Walmart to boost selection on its website, including the $3.3B purchase of marketplace Jet.com, which was subsequently shut down. I am a bit amused by the irony of Walmart, who has driven many small businesses out of town over the last few decades (see South Park S8E9: 'Something Wall-Mart This Way Comes'), now trying to enable small-business ecommerce on Walmart.com. And so it goes. From Shopify’s perspective, Walmart is just another channel they enable for the platform’s growing list of online stores.

Uber Gives Up The Ghost (Kitchen)
Last week, I discussed the Catch-22 of Instacart: they probably need to vertically integrate with their own grocery warehouses in order to build a sustainable, profitable business; however, if they do vertically integrate, they will surely lose deals with the retailers they depend on. As UberEats exits the cloud kitchen business, I am reminded of the same Catch-22. In my view, this is a black eye for Uber’s ability to build a long-term, profitable food-delivery business; but, perhaps it was too big of a threat to those restaurants they rely on today? It’s certainly no feather in their cap, and it’s part of a broader pattern of Uber eliminating the potential Optionality around their core business, which is the opposite of what we prefer companies to do, especially in downturns. I mentioned at the end of my 2019 essay, the Evolution of the Meal, that I’d take a Bayesian approach and adjust my theories on the highly complex situation of the evolving food supply chain, and these recent developments make my theories on vertical integration seem further away. And yet, none of these developments are moving anyone any closer to a profitable, at-scale food delivery business for either grocery or dining. 

Social Network Transformation and Monetization
I think public broadcast social networks, like Facebook and Instagram, will eventually fade in favor of more private messaging (Zuckerberg agrees – he said this same thing last year in his essay “A Privacy-Focused Vision for Social Networking''). But, there’s reason to believe that private social networks are still subject to the same problems as the public ones. Wired reported last week on the eye-opening problems with Facebook groups, which have been elevated on the social network over the last year. In particular, the groups are easily exploitable by bad actors and appear particularly conducive to the spread of misinformation and hate. In essence, humans just aren’t ready to communicate at the speed – or with the anonymity – of the Internet from a social, biological, or evolutionary perspective. That means most online communication may revert back to small, established social groups with real-world ties. This evolution would stall the news-feed advertising business, which is the main business of Facebook today. Private communication is inherently less monetizable via ads without crossing privacy boundaries, and it’s difficult to make ads non-intrusive in private communication – does anyone really want to see a video ad for food delivery while they are in the middle of chatting with someone about where to eat dinner? Anyone want an ad for a hip and hilarious t-shirt interstitially inserted into a chat with friends or family? There will be some ad-based monetization of private social communication, but it’s unlikely to be a larger market than it is today, and it could be much smaller. 

There are, of course, alternative revenue sources. For a decade, Facebook has been focused on building a payment-based business with little to show for it, going all the way back to charging users for virtual sheep in Zynga’s FarmVille. It’s been fits and starts for Facebook, even after bringing over David Marcus of PayPal several years ago. WhatsApp’s stronghold in emerging markets (outside of China) is the primary vector for Facebook in payments. Payments is likely a key driver behind Facebook’s investment in Reliance Jio, India’s largest cell phone service provider (now under review by Indian regulators). Meanwhile, Facebook has launched WhatsApp payments in Brazil by leveraging Facebook Pay. The basic logic is to try and recreate the success of Tencent’s mega app in China that does social, gaming, payments, and pretty much everything else, which developed somewhat organically under protection of the Great Chinese Firewall. However, outside of China there’s no shortage of payment platform choices already. In Brazil, the idea is to wedge payments into WhatsApp messaging already taking place between consumers and businesses. It’s not clear to me why payments will take place in a messaging app around the world. From a regulatory perspective – if the Libra currency fiasco is any indicator – it’s too late for Facebook to try and buy an existing at-scale platform like Square or PayPal. And, could Facebook make one payment option exclusive in WhatsApp, or would US and EU regulators declare that as anti-competitive and force integration of PayPal and other wallets? The other way to grow beyond advertising is commerce – with Facebook’s apps becoming digital versions of the Home Shopping Network as a million influencers sell to 1,000 customers each, and/or perhaps big brands will be able to reach their customers on the platform. Facing an advertiser boycott this July, whether it’s ecommerce, payments, or something else, Facebook has a significant business model transition to make in the coming decade away from the hate-filled misinformation that drives its core business today.

Big Tech: Utilities of the Information Age 
I’ve covered the problems with excessive app store fees in the past more than once, so I won’t spend a lot of time on them again despite the headlines last week (David Hansson’s appearance on CNBC’s Squawk Alley was a good explainer as well). One of the funnier stories last week was Microsoft President Brad Smith declaring “some app stores create a far higher barrier to fair competition and access than Microsoft’s Windows did when it was found guilty of antitrust violations 20 years ago.” One of my guideposts continues to be the view of Epic’s Tim Sweeny that 12% is a good fee for an app store. An app store processes credit cards, handles fraud and refunds, in some cases vets apps for problems and security, and has some degree of involvement in delivery of the app. Apple is known for being stubborn and difficult to work with, but the uneven app store policies, in particular, express an unrivaled naivete and arrogance. An app store charging 30% – and forcing in-app payment – would be like Google charging 30% of revenue generated by each search click and mandating that all sites use Google for payments. It’s illogical. The highest non-zero-sum model for an app store is a fee that covers the basics, with a robust, quality-oriented advertising model to drive incremental revenue for the platform. Companies like Apple, Google, Amazon, and Facebook are the “utilities” of the Information Age. As such, they will likely be given government-granted monopoly status and regulated – just like Industrial-Age utilities (e.g., power companies, phone companies, and railroads). This monopoly status will be reinforced by regulatory capture and the associated extreme costs of dealing with regulatory requirements. Under this hypothetical framework, Amazon is an ecommerce and computing utility, Facebook is a social utility (I am loosely applying “utility” in Facebook’s case!), Google is a search utility, and Apple is a mobile computing utility. The government would set caps on rates and rate increases while requiring open access to the platforms and the data they collect (somewhat analogous to the telecommunications law changes in the 1990s for those utilities). Sadly, I can’t take any credit for this framework, it’s inspired by this quote from Jeff Bezos in a 2008 Wired magazine interview about AWS: “You don't generate your own electricity, why generate your own computing?" Indeed. This doesn’t necessarily mean these will be bad businesses or bad stocks; utilities serve a purpose and generate positive economic returns for their investors. But, it does likely mean they will be less able to innovate, acquire, or grow at the same rates they enjoyed over the last couple of decades...they may not generate the same amount of non-zero sum in the coming years, but the companies that tap into these utilities to build new businesses may do very well.

Miscellaneous Stuff
N95 Masks are like Multi-Layered, Electretized, Spider Webs
Minute Physics has a new YouTube video on the surprisingly complex workings of N95 masks, which rely on molecular-scale stickiness, the Brownian motion of the smallest interloping molecules, and layers of electric-field-emitting plastic fibers (a.k.a. “electrets” – electrostatic “magnets”), to trap particles.

The Dude on Complexity
When The Dude writes an article about complex systems, it’s a very safe bet to assume I’ll include a link in SITALWeek! So, here is Jeff Bridges discussing his documentary ‘Living in the Future’s Past’ in an insightful and moving short essay in Spin Magazine: 
“Big changes are needed, and we all know there is just so much you can do to make the world go where you would want it to go. It is a complex system. No one can predict what might emerge from the spontaneous actions of the many for good or bad. Emergence is interactive. Physicists like to talk about emergence as appearing as the result of the interaction of smaller and simpler elements. Think of yourself as a small but crucial element capable of moving our super-organism in a better direction. The super-organism is, after all, a system of relationships and we, as a species, are interlinked with all of the other members of our Earth’s household. As we examine the effects of our decisions, let’s not confuse what we need with what we desire, and what we desire, with what we need. One thing that is constant in history is that everything changes. Sometimes the changes are so fast that we experience change as a disaster...Traits like ingenuity, inventiveness and creativity are in our DNA and they hold the key to our continued existence on this small blue dot, this spaceship Earth. But ⁠— it’s just our opinion, man.”

Which Came First, the Hard- or Soft-Shelled Egg?
Most of the fossil record of dinosaur eggs consists of hard-shelled eggs, like those laid by modern-day dinosaurs (a.k.a. birds), so the general assumption was that all dinosaurs were hard-shelled egg layers. However, the facts didn’t all fit that theory, as hard-shelled egg fossils had only been found for the most recent (Cretaceous) period of dinosaur existence, and their morphology varied widely. New evidence published in Nature suggests that the early dinosaurs laid soft-shelled eggs, from which hard-shelled eggs evolved three separate times. This theory would explain both the varied microstructures of hard-shelled eggs, as well as their absence in the fossil record from the earlier (Triassic and Jurassic) periods, as the more fragile, soft-shelled progenitors would have been ill-preserved, and thus absent or overlooked. This theory might also shed some light on the origins of a giant soft-shelled egg found near Antarctica from a species dubbed Antarcticoolithus, described in the same issue of Nature. While it’s possible a giant marine reptile laid the egg (which would overturn the theory that all ancient marine reptiles bore live young) it’s possible it originated, instead, from a surviving lineage of soft-shelled-egg-laying dinosaurs.

Stuff about Geopolitics, Economics, and the Finance Industry
NZS Talks Tech on Squawk Alley
I was on CNBC last Monday talking tech stocks and the market. They put the segment behind their CNBC “PRO” paywall, unfortunately, but here is a link if you happen to have access and don’t get enough of me already. And, thanks to Dex McLuskey for helping me with the a/v setup. I don't usually mind trekking over to the studio in San Francisco, but I could definitely get used to broadcasting from home!

Which Came First, Low Rates or More Debt?
Back in May, Buffett sat by himself in an empty, 19,000-seat arena and wondered aloud: if rates can stay low forever, then why didn't civilization figure that out 2000 years ago? Over the last 20 years, there’s been a persistent fear that ever-rising credit cycles will create ever-bigger crashes, like we saw in 2009. One might expect a major shock to the global economy to pop a credit bubble created by artificially low rates; but, this spring we got the biggest shock of them all, yet it appears the economy could eventually exit the pandemic reasonably intact. However, the unevenness of the recovery – with inequality rising even more appallingly as a result of the pandemic – needs to be addressed (a point I’ll come back to shortly). Do low rates and seemingly infinite government monetary and fiscal stimulus perversely mean that shocks make the economy stronger? But, what about inflation!? Surely the flood of money will drive up prices and cause rates to jump higher, thus popping the giant credit bubble. But this hasn’t been the case, despite being decades into the steadily declining rate trend and monetary stimulus. Related to this, NZS Capital’s President and resident finance Lecturer, Adam Schor, reminded me of the collapse 49 years ago of Bretton Woods, the post-WWII global agreement to tie currencies to gold (if you’re like me, you may have napped during that macroeconomics class in college; as I’ve said before, I’m not an expert here, so it’s a good thing NZS’s investment philosophy doesn’t rely on successfully predicting the future – macroeconomic or otherwise!). Following the extreme inflation of the 1970s, rates began a steady, 40-year, downward march – which the termination of Bretton Woods likely facilitated. No longer tied to gold, central banks had flexibility to increase monetary supply and interest rates with much more flexibility. 

Did low rates increase debt, or did debt demand low rates? As an economy grows and debt increases, the borrowers – those people who need to make the interest payments and eventually return the principle – tend to be disproportionately less-wealthy, while the people who lend money out and make a return on it tend to be wealthier. As time goes on, the wealth of the wealthier is more and more tied to the interest payments from the less wealthy – one person’s indebtedness is another person’s asset. And, as inequality marches higher, the less wealthy have an ever-rising debt burden that can only be maintained by perpetually lowering interest rates. It’s in the best interest of the lenders to lend at lower and lower rates to preserve their assets. I want to point out that this explanation is somewhat at odds with the general narrative – that lower rates are the driving force behind rising debt. While I will certainly grant that lower rates allow rising debt, the common view misses the crucial point that increasing debt necessitates lower rates – which actually has mathematical support. Indeed, I’ve previously explained this theory in reference to the 2017 essay by mathematician and SFI External Professor Ole Peters, who provides an explanation for sustainable, low rates that relies on this relationship between borrowers and lenders. (Another term for this idea that debt necessitates low rates is ‘indebted demand’; the researchers behind this paper explain the idea further using a different strategy than Ole Peters, but arrive at a similar conclusion.) As well as allowing rising financial inequality to go unaddressed and unchecked, I believe decreasing rates have been one of the hidden deflationary forces in the economy, along with the shift from an asset-heavy Industrial Age to a data-heavy Information Age. Indeed, with a large number of people with rising indebtedness and stagnant incomes operating in an economy with technology-driven deflation, it’s hard to imagine what could create sustainable inflation. 

Now, if we think about this trend of falling rates and rising debt continuing into perpetuity, then we will need infinitely-negative rates and, in the end, one person will have 100% of the wealth while everyone else will be indebted to them. Thus, we find ourselves back in that empty, dark arena in Omaha, kindred spirits with Buffett in our puzzlement. Perhaps there is a solution to this quandary – one that almost seems demanded by the current, pandemic-exacerbated inequality of the world – redistribution. As I’ve written in the past, economist and SFI External Professor Brian Arthur calls this the “distributive era”. To paraphrase: we have created a lot of wealth in the global economy; now, it’s time to focus on increasing who has access to it. Distributing money to more people who are on less-certain financial footing is going to stabilize, or possibly reverse, the deflationary trend. However, it’s important to avoid excessive inflation and rising rates that would further burden the borrowers who are helped by redistribution. It seems like a hard needle to thread, but not one with an impossibly small eye through which to navigate. Why? The deflationary pressure from the tech sector is going to step up dramatically as we move into the “AI Age” over the next century and every part of the economy becomes tech enabled, starting from less than 10% digital today. So, we probably have a wide berth to drive a little inflationary pressure and maintain low rates.

That’s a neat and tidy story, right? It’s one possible explanation, and, moreover, it suggests that redistribution could be a way out of our current socio-economic quandary. But, we live in a world dominated by complex adaptive systems, which means that predicting the future isn’t so neat and tidy. Or, as Jim Goff said in one of our team meetings last week, “Just when you think you have something figured out, that’s when the market kicks you in the teeth”. The theory relies on smart redistribution by governments, and, if we’ve learned anything from the last few years, then we probably shouldn’t bank on smart decisions by governments around the world. 

And, the economy remains extremely vulnerable to inflationary shocks. Where might those come from? A multi-year drought driving up food prices dramatically could easily be in the cards. An oil price shock is possible over a short time period, but every decade that goes by has the world less reliant on commodities in general. Labor inflation is a real possibility, particularly if redistribution is successful and it pulls too many people out of the workforce (on the other hand, if that coincides with rising AI, it’s less of a long-term issue as well). And, I certainly think there is risk of inflation from a loose-money/excess-liquidity spiral, especially when I read that CalPERS is levering up 20% of the largest public pension in the US and investing in increasingly risky, illiquid assets that are also massively levered; or when I see that the Ford Foundation, a charitable organization, is taking on $1B in 30-50 year debt to hand out money to other charities. Other foundations, including MacArthur, Kellogg, Mellon, and Doris Duke, raised an additional $700M in the offering, all with the goal of helping other foundations who have taken a hit during the pandemic. The idea is to give more away now without selling foundation assets in a volatile market. But how are these institutions planning to pay their debt off, perhaps with more debt in the future at even lower rates? 

Well, as you can see, some mental gymnastics and willing suspension of disbelief are called for in the world today as the human super-organism (to borrow The Dude’s term) continues to evolve. Perhaps Buffett can keep a seat warm for us in that arena.

✌

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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #249

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, spherical PV, 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: delayed drones; the myth of the at-scale influencer economy; Instacart's Catch-22; iBuyers get into the brokerage business; Bob Dylan on technology; the myths of behavioral economics; rising desk job automation; and lots more below...

Stuff about Innovation and Technology
Google Deploys Denoiser
Google is rolling out a new feature that automatically eliminates background noise for its G Suite video Meet customers. The AI was trained with chatty YouTube videos and Google’s own video calls. In this detailed VentureBeat story, the engineer behind the project said that, when they did their first demo, people broke out in applause...which was immediately eliminated by the noise cancellation. Audio from a Google Meet call is end-to-end encrypted and run through Google’s custom TPU processors in the cloud (the secure service in the datacenter is referred to internally as “borg”). Google considered running the algorithm locally on computers; however, the local compute burden was inefficient compared to the mere 20 millisecond delay from cloud TPU cycles. Microsoft previously announced that a similar feature will be available for Teams in the future. Related, I recently tried out Google Meet’s real-time captioning of video calls and found it to be surprisingly good. The algorithm works in part by predicting what you might say, so it almost felt like I was reading my thoughts before I voiced them. 

It’s a Bird! It’s a Plane! It’s Not a Drone!
It’s been nearly seven years since Bezos went on 60 Minutes to show off Amazon Prime Air drone delivery and set a 2018 target to be live with the service. A year ago, Amazon said they would be delivering packages with drones “within months.” There have been a variety of reasons for the still delayed rollout, according to a Business Insider Prime article, including management changes and the difficulties of reconciling Amazon’s fast iteration process with the FAA’s slow regulatory approval. Renewed pressure has the Prime Air group focused on getting the service live as soon as possible. One FAA rule requires maintaining line of sight with the drone at all times. UPS and Google’s Wing have received waivers on this and other FAA requirements, which Amazon has yet to receive. It’s unusual to see Amazon, known for innovation and failing fast, to have failed so slowly compared to its drone rivals. One more optimistic explanation for Amazon is that there is no failure here – drones may simply not be an cost-effective delivery option for a long time to come.

Superior Spherical Solar Cells
Saudi researchers have created a spherical solar panel that absorbs 15-100% more photons per surface area compared to a flat solar cell. The ping-pong-ball-sized panels benefit from their ability to absorb light from more directions, including reflected off the ground (a similar concept to the albedo effect discussed in SITALWeek #219 for bifacial solar cells). The spherical boost to efficiency is noteworthy; but, perhaps more importantly, the researchers’ method of etching and folding a flat solar panel into a spherical shape suggests the potential for adding solar capacity to an array of oddly-shaped IoT devices. 

Robotic Process Automation
Wired reports on the rise of process automation as a result of COVID-19. The use of software to automate rote tasks, such as data entry or workflow approvals, will accelerate as AI begins to learn which tasks are amenable to automation and how to perform them. While software automation may increasingly impact higher paying desk jobs, it could also free employees to focus on more important tasks. Similar to manual labor automation, it’s not all bad news – the combination of humans working alongside robots and software is likely to be more powerful than either humans or robots alone. NZS Capital’s senior advisor, Jim Goff, always used to remind us that the golf carts are always coming for the caddies.

Big Tech Yields to Call for Facial Rec Regulation (sort of)
IBM took the moral high road last week by choosing to no longer allow general-purpose facial recognition on its cloud platform. They were soon followed by Amazon and Microsoft, who will now wait for the government to regulate the tools before allowing police to use them. Facial-recognition tech is problematic because the algorithms have inherent racial bias and thus perpetuate racism. This ongoing trend of creating and profiting from unvetted, potentially dangerous technology – and then waiting to get called out before doing the right thing – is disturbing (for more on the hypocrisy of tech platforms see last week’s SITALWeek). Microsoft called for regulation two years ago, and then apparently proceeded to sell their tools without it. Amazon and Microsoft didn’t mention whether other law enforcement agencies, such as ICE, will continue to use their tools, nor did the companies confirm what their plans are for the tools outside the US.

Influencer Economy all “Smokey Eye” and Mirrors 
Forbes recently ran an exposé on the inflated revenues of celebrity influencer Kylie Jenner’s cosmetic business. Forbes revoked the star’s billionaire status after learning that documents showing $360M in 2018 sales were falsified, with the reality closer to $125M. An icon of the Instagram influencer economy – and considered to be its best representative success story – it’s surprising to learn how paltry the brand's sales are (a drop in the bucket for the beauty industry) and how little her financial success apparently tracked with her rising number of Instagram followers (now clocking in at 179M). It’s a black eye for the aspiring influencer economy; although, certainly, a long tail of niche businesses for a small number of fans can still add up. It might be more logical to compare the influencer economy to the paid endorsement industry and the consumer brands market.

Instacart’s Catch-22
Instacart faces a classic marketplace vs. vertical integration dilemma. The company currently delivers items from grocery stores and other retailers. Ultimately, however, having a delivery middleman adds to the costs, and someone has to foot the bill besides VCs. So, unless consumers are willing to pay more, or unless we see a deeper subsidization of delivery costs from retailers and brands shifting promotion dollars (which would also hurt margins at those same grocery stores Instacart relies on), it’s not a viable long-term model. Instacart could instead begin building their own, tailor-made local grocery fulfillment centers and vertically integrate, but that would surely run off their current grocery store partners. It’s a classic business model Catch-22 without a clear resolution. My hunch is vertical integration is the only strategy that will win local logistics long term, but we could also see a platform created for local small-business fulfillment as well – following a classic power law dynamic with a long tail. In the meantime, ModernRetail reports that Instacart is focusing on growing with smaller chains instead of the big platforms, since the former are less likely to build out their own digital fulfillment, at least near term.

Cultivating Culture in a Remote World
Former Zillow CEO – and current LA-based VC – Spencer Rascoff posts on dotLA about how to maintain corporate culture in a work-from-home environment, emphasizing increased internal communication that repeats priorities often. In the past, Spencer has also talked about the importance of having an “internal brand” for employees. For example, companies should have a robust internal marketing group – something beyond simple HR – that messages the culture of the company in a sincere, high frequency way. 

Nextdoor Riddled with Racist Moderators
Nextdoor, the neighborhood-level social app, known as much for reuniting lost dogs with owners as it is for “snitching Karens”, has struggled to control racist moderators on the platform. The app cedes moderation control to local neighborhood leads, which has led to the takedown of many pro-Black-Lives-Matters posts and other biased censoring. The qualifications for becoming a neighborhood lead? Whoever first launches the app in a neighborhood becomes the lead. No training. In response to a disturbing exposé on rampant racism on the platform, Nextdoor is working harder to explain what’s allowed to neighborhood leads. I have never used Nextdoor because I’ve followed the Twitter account Best of Nextdoor for years, and I couldn't bear to find out the truth about my neighbors! Like all other social networks created to date, Nextdoor has in many cases elevated conflict and pushed people further apart without taking any responsibility for its platform. 

Arm Up on the Competition
Amazon’s ARM-based, custom Graviton2 chips are now in general availability with a 40% price/performance improvement compared to Intel chips. The announcement includes a number of customer testimonials, including Netflix who is using the chips for streaming, encoding, data processing, and monitoring – with a reported 50% improved performance over the last generation chip. 

TSMC’s Full Steam Ahead
Chip giant TSMC said last week they weren’t taking down guidance for the year despite the ban on shipping to HiSilicon/Huawei. In part, the COVID-accelerated tech adoption might be offsetting demand weakness. Meanwhile, Nikkei reports that chip design software maker Cadence has seen an 80% increase in sales over the last two years in China – to 13% of revenues – despite no longer selling to Huawei. Nikkei suggests, without significant evidence, that perhaps regional Chinese government research labs are picking up the slack, and that perhaps those might be affiliated in some way with Huawei. And, I would speculate, also without evidence, that perhaps those satellite research centers are placing orders for chips on Huawei’s behalf. Demonstrating just how hard it can be to figure out who is in charge of what in China, last week Arm fired the head of Arm China for serious violations of policies, only to have Arm China declare they couldn't. It’s unclear exactly what’s going on, but the JV, which Softbank setup for puzzling and unexplained reasons after it purchased Arm, ceded 51% control to China, and very well may have ceded control over the CEO as well.

iBuyers Add Brokerage
Real estate consultant Mike DelPrete reports that iBuyers Opendoor and Offerpad started offering brokerage services last week. So, in addition to buying houses, they will also directly list properties for sale. It’s one strategy for capturing a lead that comes in but ends up seeking a higher price than an iBuyer offer (indeed, only 2-3% of people who seek an iBuyer offer take it). The platforms are now more in-line with Redfin in terms of options for sellers (Opendoor and Redfin also have an ongoing partnership). This latest development reinforces the notion that a full-service, real-estate technology platform is likely to ultimately take significantly more market share given the diversity of homeowner needs.

Miscellaneous Stuff
Dylan Unpacks Murder Most Foul
Ahead of the this coming Friday’s release of his first original album since 2012, Bob Dylan did an interview with the New York Times:
NYT: There is a lot of apocalyptic sentiment in “Murder Most Foul.” Are you worried that in 2020 we’re past the point of no return? That technology and hyper-industrialization are going to work against human life on Earth?
Dylan: Sure, there’s a lot of reasons to be apprehensive about that. There’s definitely a lot more anxiety and nervousness around now than there used to be. But that only applies to people of a certain age like me and you, Doug. We have a tendency to live in the past, but that’s only us. Youngsters don’t have that tendency. They have no past, so all they know is what they see and hear, and they’ll believe anything. In 20 or 30 years from now, they’ll be at the forefront. When you see somebody that is 10 years old, he’s going to be in control in 20 or 30 years, and he won’t have a clue about the world we knew. Young people who are in their teens now have no memory lane to remember. So it’s probably best to get into that mind-set as soon as we can, because that’s going to be the reality. As far as technology goes, it makes everybody vulnerable. But young people don’t think like that. They could care less. Telecommunications and advanced technology is the world they were born into. Our world is already obsolete.

COVID-Induced CO2 Shortage Snarls Supply Chains
Ethanol production decreased 45% this spring following a flood of cheap gas and new regulations that exempted some gasoline manufacturers from using the additive. Similarly, carbon dioxide – a byproduct of ethanol production that’s used in food safety, beverages, and wastewater treatment – is now in low supply. The ethanol industry is responding by trying to retool some capacity from fuel grade to food grade, which could help the situation, but it’s a reminder of just how surprisingly intertwined supply chains are.

China Grants Protections to Endangered Pangolins
Pangolins, “the world's most heavily trafficked mammal” and intermediary thought to have played a role in the inception of COVID-19 infections in humans via Chinese wet markets, have been removed from an official list of traditional medicines by the Chinese government. Also removed from the official Chinese Pharmacopoeia were pills made from bat feces. 

Hot Hand is Real
Jason Collins has an insightful post on various behavioral economics myths, on which many still rely, despite the theories having been disproved. Bias is everywhere, even when we’re trying to uncover bias.

🐷🐷🐷 on a ✈
Russian cargo airline Volga-Dnepr has been flying thousands of pigs from France to China during the pandemic to help restore herds hit hard by African swine fever (slightly unnerving given the ease in which some types of viruses – notably NOT SARS-CoV-2 – move from humans to pigs and back again). The airline is also moving entire production lines out of China to countries who want to repatriate production of critical items, like face masks. Reuters reported on the problems Japan is having bringing manufacturing home from China – including the need to bring R&D back with it. And, Bloomberg also ran a long story on the complications of moving supply out of China despite intentions.

RVs all the Rage as Remote, Mobile Offices
As RV sales recover from a 2-year downcycle that began in 2018 (see SITALWeek #207 and #244 for more context on RVs), the WSJ reports on their rising use for remote work (and, I’d add that, if local zoning permits, they can make for a good home office in your driveway!). I’ve joked in the past that Tesla might build an RV now that Elon has given up all his houses, and I think the Tesla supercharger network would be an important asset, as some stations could be turned into RV parks for owners on the move. Rivian could potentially emerge as an EV chassis provider to Thor, Winnebago, and others (Class B RVs are van conversions, while Class C RVs are built on chassis from companies like Ford). Tesla could also adapt their Semi cab into a Class A RV. A boy can dream...

Stuff about Geopolitics, Economics, and the Finance Industry
The “Will to Solvency”
Fiction continues to reflexively create facts in our post-truth, high-velocity, information-based reality as Hertz, which previously filed for bankruptcy, is now considering an equity offering instead of debtor-in-possession (DIP) financing. Typically, equity values are wiped out or restructured in favor of first-priority debt investors in bankruptcies; but, in this case Robinhood day traders (or other speculators) seem to have willed the company back into solvency? While the debt was trading at 40 cents on the dollar, a lawyer for Hertz said: “The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity”. Yes, unique.

Big Brother’s Watching Your Zoom
Zoom disabled multiple user accounts following private calls on the platform that discussed the anniversary of the Tiananmen Square massacre, based on reporting from Axios and the FT. Shutting dissident accounts, which were outside of China, further calls into question the independence of the company, which has the majority of its engineers in China. Zoom has since reinstated accounts but reported that it will be monitoring IP addresses going forward in real time of meeting participants in order to comply with Chinese laws, which is disturbing to say the least. This news is in addition to their previous statements that they are not encrypting free video calls so as to comply with any law enforcement requests. 

Sweeping Huawei Restrictions Ensnare Government Contractors
New US regulations would force any company providing a service or product to the federal government to eliminate Huawei and ZTE equipment from not only their company, but also any company they work with. Bloomberg reports on the uncertainty begat by the requirement, which is set to begin in just two months. For example: “The provision could also apply to a pharmaceutical company that sells medicines to the U.S. Department of Veterans Affairs, if the company, for example, has an Indian manufacturing plant that taps one of India’s largest telecom companies, Bharti Airtel Ltd., for its employees’ mobile phone service. Airtel relies on Huawei for networking gear to operate its mobile phone services.”

✌

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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #248

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, quantum dots, 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: quantum dots for growing plants; automation renaissance is around the corner; trade promotion spending is going digital; four years of zero progress from social networks; your brain is a massive parallel processor; US ramping up research funding; and lots more below...

Stuff about Innovation and Technology
NZS Talks Stocks and Investment Philosophy on Investing City🎙🎧
Brinton and I were on Ryan Reeves’ Investing City podcast last week covering a host of topics including adaptability and what evolutionary biology teaches us about complex systems and investing. You can find the podcast on Ryan’s site here, or here is the Spotify link. Our thanks to Ryan for having us on and to our friend and reader who connected us!

TikTok Gives Lift to Space Kitten Sales
TikTok is driving increased growth for beauty product sales on Amazon and fledgling brands’ websites. While no official links exist between the Chinese-owned, Gen-Z dance-meme platform and ecommerce sites, viewers are clicking through to online stores from popular profile pages on TikTok. One such successful brand is 'I Dew Care', with their Sugar Kitten, Disco Kitten, and Space Kitten peel-off face masks. If you think that I don’t understand anything I wrote in this paragraph, you’d be correct.

Quantum Dots Boost Crop Yields
Researchers are experimenting with sheets of quantum dots to shift the wavelength of incoming light to promote greenhouse plant growth. This is the same material you might have in your TV if you have a relatively new model like the QLED from Samsung. QD TVs use blue LEDs as a source of light, which the quantum dots (semiconductor nanocrystals) absorb and selectively emit as green or red, so there’s no filter involved and less light is lost between source and screen. For the greenhouse use case, the sheets of quantum dots convert sunlight to the optimal growth-boosting wavelength – peppers grow better under a yellow light, while tomatoes prefer magenta, roses white, and lettuce orange. The latter is apparently the favorite flavor of the month – for crops ranging from cannabis to cucumbers – and the orange-shifting film is now in mass production.

Humans still Superior Screwdrivers
The Information reports on the problems of automation in manufacturing, highlighting Apple’s decision to revert to humans for iPad assembly. “Building a robot that can fasten screws is among the hardest challenges in the industry. A robot must pick up the screw at a specific angle and align it with a hole using multiple industrial cameras. Apple uses screws so tiny that robots had no way to measure the force used to drill them in. By contrast, human workers can feel the resistance from their hand and can tell when something is off.” The article mentions other companies, such as Boeing and Tesla, which also deautomated; however, Tesla has since acquired more than one robotic automation company in the last few years, and they are certainly still focused on robots. A fully automated production line has been the White Whale of manufacturing for a long time now. Clear advances have been made in machine vision; but, in most cases, it’s hard to beat the dexterity afforded by human hand-eye coordination, proprioception, and parallel processing (for the latter, see “Human Brain’s a Parallel Processing Powerhouse” below). Perhaps more important, humans can process complex visual input and manipulate items with only a fraction of the watts required to power an AI-based robotic arm (though we do still need sleep and bathroom breaks!). That said, there is a renewed interest in automation on a much grander scale than ever before. What we’ve learned from a decade of setbacks will no doubt foster breakthroughs in the coming years. Robotic animation is unlikely to be a winner-takes-all market, but rather a fragmented set of highly specialized solutions for a plethora of difficult-to-solve problems. One example of a specialized use case would be this supernumerary (wearable robotic arm) that can – somewhat awkwardly – pick fruit, paint, and smash through walls (video).

Shipping Surcharges a Break for Omnichannel Commerce?
UPS and FedEx are instituting peak surcharges on ecommerce deliveries of around 30 cents a package and $30 (!) for oversized packages. This move follows surcharges for peak air shipments, as well as a suspension of service guarantees, put in place in the early days of COVID-19. The fees are adding up – and likely won’t stop coming – as the capacity of current US delivery logistics is far below where it needs to be, both now and long term. If delivery costs keep rising, retail stores able to offer local fulfillment could have an increasing advantage. The Economist reports on the surging demand for warehouse space as commerce goes digital, but I wonder if that extra capacity is necessary, given that existing retail may quickly morph into hybrid warehouse space itself? 

Trade Spend Goes Digital
The surge in post-COVID-19 ecommerce has only been one of revenues – not profits – as expenses associated with fulfilling orders of (predominantly) lower-margin items – what Amazon lovingly refers to as CRAP (Can’t Realize a Profit) – have so far largely produced profitless prosperity. One way to drive ecommerce profits would be to shift the $500B annual trade-promotion market from physical to digital commerce. This spending, largely by brands, rivals the global ad market in size and includes things like coupons and in-store shelf placement. App placement is the new shelf placement, and BI reports that Instacart is rolling out an ad platform for brands to get their products in front of consumers. This move seems pretty obvious – if you search for Campbell’s Soup, you might happily click on an ad for a lower-sodium choice that appears alongside the result. 

In Face of Police Abuse, Big Tech Inaction Speaks Volumes
The protests in reaction to the poignant and tragic murder of George Floyd have helped spotlight the hypocrisy of the big tech platforms: they claim to stand with protesters while helping to enable the very abuses that necessitate protest and change. Protocol discussed the contracts that companies, like Microsoft, IBM, and Amazon Web Services, have with police departments, and Wired highlighted similar issues and complexities of companies calling for change on the very issues that their own technology helped create. One of the more glaring problems is the application of algorithms and facial recognition tools that often contain inherently racist biases, further compounding injustice. The cloud-based tools are becoming more powerful with no clear regulation in sight at either the federal or state level. In SITALWeek #197 last July, I expressed my dismay at AWS CTO Werner Vogels' laissez-faire attitude on facial recognition abuse, citing the following from a BBC article:
"Mr Vogels doesn’t feel it's Amazon’s responsibility to make sure Rekognition is used accurately or ethically. 'That’s not my decision to make,' he tells me. 'This technology is being used for good in many places. It’s in society’s direction to actually decide which technology is applicable under which conditions. It’s a societal discourse and decision - and policy-making - that needs to happen to decide where you can apply technologies.'"
This is the same straw-man argument I wrote about last week, especially with respect to Mark Zuckerberg. You can’t build a product – over which you have control – and then cede all responsibility to society and the government, while you print money and claim you have no way of controlling use of the product. 160 scientists funded by the Chan Zuckerberg Initiative (CZI) let Mark know how they felt this week as well, declaring “The spread of deliberate misinformation and divisive language is directly antithetical to [the goal of CZI] and we are therefore deeply concerned at the stance Facebook has taken.”
It's been four years since Facebook was used to brainwash and mind control millions of people in order to sway elections. Since then, as far as I can tell, Facebook has done nothing to address exploitation of the platform, transferring blame to the government and Facebook users while continuing to profit heavily from its misuse. It's well within Facebook's ability to fix the problems it’s enabling around the world, and it's an active choice they make to do nothing but cash checks from advertisers. Instead of using technology to police and harass, perhaps we could use it to identify and root out systemic bias and prejudice across the system and incent better behavior? The racial and ideological cracks in our world run deep, and, while I’m hardly an expert, the dire impact of the shifting economy seems crystal clear, with income inequality only set to worsen with the ongoing digital transition. Most constructive paths forward lead to social spending programs, such as UBI, as a step towards remediation of our society’s giant, complex, and increasingly urgent problems. The success of increased welfare in Nordic countries indicates that rectifying inequality is a direct way to help people while reducing the need for police and criminal persecution. Tech could play a positive role; but, for now, instead of lifting up the people who need help, it’s exacerbating the problems. 

Come on Down! You’re the Next Investor in Indian Telecom!
The competition to see who can write the biggest checks to Indian wireless carriers continues, with rumors of Amazon plunking down $2B into Bharti Airtel and Google looking to acquire 5% of Vodafone Idea (which could potentially be around $1B; it’s not clear how the investment would be structured, but the enterprise value of the company is around $20B). Joe recapped the reasons behind Facebook’s interest in Jio back in SITALWeek #242; since then, Jio has lined up over $10B in investments from Internet platforms and private equity firms, plus another $1.2B late last week from Abu Dhabi. Wait, there’s more – another $600M investment from Silver Lake! Every time I think I am done with this paragraph, a new fundraising headline hits! The value that Facebook sees in Jio to help build the 'Tencent of India' by leveraging WhatsApp is a little more obvious than what these other investors might be hoping to achieve. It’s early days in India for platform monetization, so much of Facebook’s investment, while optimistic, amounts to a bit of FOMO (remember when Walmart put $16B into Flipkart in 2018!?). It’s less clear what Amazon and Google would get out of an investment in the unprofitable #2 and #3 carriers. It also remains to be seen just how open India will be to outside companies given their history of forcing partnerships and rendering licenses difficult to acquire.

Miscellaneous Stuff
Human Brain’s a Parallel Processing Powerhouse
A transistor in a computer processor has three nodes total for input and output, but a neuron in a human brain can handle 1,000 signals to and from other neurons. This also enables mass parallelism along with serial computation, while in a typical x86 processor only serial functions take place, according to this Nautilus article. GPUs from companies like Nvidia are parallel, which makes them more suitable for AI and machine learning, but still far inferior to human brain capacity per watt (factor of 10 difference). This is one of the reasons I mentioned in the automation paragraph above that it’s hard to beat humans when it comes to a lot of tasks, especially if it involves learning. 

Sleeping Dragon’s Last Lunch
The fossilized remains of an 18-foot-long, 3,000-pound, armored dinosaur were found with preserved stomach contents. The herbivore, known as Borealopelta, had been eating predominantly a single type of fern growing in the lush conifer forests that once covered prehistoric western Alberta, likely in an area of recent vegetative regrowth following a wildfire given the amount of ingested charcoal found. Other clues indicate the dino died just a few hours after its last meal in early to mid summer, approximately 110 million years ago. It was then swept down a river and far out into the inland sea that once vertically bisected North America. Undersea fossilization allowed for superb preservation of both bone and plant material, as well as a clear delineation between true stomach contents (terrestrial plants) and random infill during burial – an incredibly rare occurrence. Pebbles were also present, like what birds (a.k.a. modern-day dinos) use today, to help food digestion in the gut. Fossil lovers will find NatGeo's photos of the so-called “sleeping dragon” truly remarkable.

Impermanent Permafrost Poses New Threats
A 20,000 ton leak of diesel fuel from a holding tank at a thermal power plant in Russia heavily contaminated the surrounding area, including two rivers. The tank’s support pillars reportedly sank when the underlying permafrost ground thawed. Soaring Arctic temperatures have caused the melting of permafrost throughout northern latitudes, which is creating an increasing threat to infrastructure that had long been stable in the – now – not-so-frozen North.

Wayne Newton and Cleopatra Play Craps
The Las Vegas Review-Journal has scenes from Vegas’ grand reopening this week, including Wayne Newton at the craps table next to Cleopatra and Caesar...all wearing face masks. The person in charge of the Bellagio fountains had apparently been storing up pressure for the last couple of months, and then pulled the lever all at once Friday night!

Stuff about Geopolitics, Economics, and the Finance Industry
ANTs Go Marching
BlackRock will license Precidian’s active, non-transparent (ANT) ETF platform to offer actively-traded structures in an ETF wrapper, which is more popular and cost efficient for most investors, according to CityWire. Fidelity is also launching three new ANT ETF products as the market heats up. It’s going to be very difficult for traditional mutual fund firms to hold onto their already decreasing share without this lower-cost, more flexible option arriving for investors. 🐜🐜🐜

Border Tensions Flare between China and India
As India aligns less with China and, in some cases, more with the US, China has escalated tensions along its border with India, according to Bloomberg. The decades-long border dispute has flared up recently as India has been more actively building infrastructure in the disputed region between India, China, and Pakistan. The recent Chinese troop buildup and ensuing skirmishes are part of a broader pattern of China asserting power in its environs, including Hong Kong and the South China Sea. Donald Trump’s offer to mediate the dispute was reportedly rejected. 

US Lobbying for Semi-Cold-War Funding
The Semiconductor Industry Association (SIA) is lobbying for $37B in government funding to boost the US’ chip capabilities in what has become the key battleground between East and West. There appears to be bipartisan support for such an effort, which, as proposed, includes $5B for a new, federally-backed semi fab, $15B in state incentives to bring new chip manufacturing capacity, and $17B for research and development. The SIA is also backing the “Endless Frontiers Act” that I mentioned last week, which has bipartisan support for over $100B in funds for expanding technology and scientific research. As Jon said to me last week: “if we can subsidize soybeans, we should probably subsidize semiconductors”. This MarketWatch op-ed – “A semiconductor ‘cold war’ is heating up between the U.S. and China” – recaps several of my recent thoughts on US-China semiconductor tensions. Hat tip to Dex McLuskey with Context Content for putting the article together.

✌

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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #247

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, swarms, 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: indoor solar; lockdowns increase traffic speeds and slow down EV sales; TikTok’s algorithms; escalating US-China tensions are closing off resolution options; converting mutual funds to ETFs; Understanding Section 230; and lots more below...

Stuff about Innovation and Technology
Barista Bots
In South Korea, untact, the opposite of contact, is increasingly taking hold across society. A trend already underway before the pandemic, untact includes increased contactless payments, mobile app usage, digital entertainment, and Baris, the robot barista that both makes and delivers coffee to your table.

Taste Synthesizer
The Norimaki Synthesizer uses five simple compounds in an agar substrate and electrophoresis to simulate different tastes – from gummy candy to sushi – when touched to the tongue. Eventually, the lickable tech could be miniaturized to the size of a vaping device. When combined with VR/AR, the result could be a powerful mind trick. I never miss an opportunity to post this quote from 'The Matrix': “I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After nine years, you know what I realize? Ignorance is bliss.”

Bug Bounty Hunters
HackerOne has paid out $100M in bounties to ethical hackers tracking down bugs in software for companies and governments. Half of this was paid in just the last year, and CEO Mårten Mickos predicts they could reach $1B in cumulative payouts within five years. As work becomes more distributed, system vulnerabilities will rise, and the company’s services are likely to be in even greater demand.

Harvesting Indoor Light to Power IoT
Flexible perovskite solar cells could potentially be used to harvest indoor photons three times more effectively than traditional polycrystalline silicon. That 20% efficiency is similar to what outdoor silicon solar cells achieve. Perovskites are a “hybrid of organic compounds, metals, and halides, with crystal structures mirroring those of the mineral calcium titanium oxide”.

Intercontinental Solar Power Pipeline 
Atlassian co-founder Mike Cannon-Brookes is looking to export renewable energy from his native Australia via a 2300-mile, undersea cable to Singapore at a cost of $20B with a completion date later this decade. 

Need for Speed
With adrenaline junkies taking advantage of the largely empty freeways, LA’s KTTV station now features the “Speeder of the Day”. California Highway Patrol issued 2,493 citations for speeding in excess of 100mph in the first month of lockdowns, up from 1,335 for the same period the prior year. Longtime readers know my fondness for reporting new records for the coast-to-coast Cannonball Run; but, it’s become rather tedious to keep score – with seven new records since lockdowns began – the latest under 26 hours. Drive safely.

Orphan Cars Put to Pasture, EV Sales Power Down
The LA Times shows oceans of cars parked in empty stadium lots. The cars are stacking up as they arrive by sea from Japan with no buyers, and as rental car companies struggle to find places to store their unused and unsellable vehicles. Meanwhile, gasoline car sales have rebounded in China, up 6% in April, but EV sales are down 27% in the post-pandemic recovery. Amidst the slowdown in EV demand, Tesla cut prices to spur sales, and miners are pulling back on new extractions of lithium, the key battery ingredient, which could result in future production bottlenecks when demand inevitably picks back up. I was recently looking at the profile of EVs in Norway – where the green vehicles represent 75% of new car sales – and most of the top selling models have around 200 miles of range or less. Gas cars have a 300-400 mile range because stopping for gas is inconvenient, but there is no reason to carry this anachronism over to EVs. An easy – perhaps only – way to get EVs to much higher penetrations sooner would be to break the focus on range, given that the vast majority of miles driven are for short trips. In the US, 95% of trips are under 31 miles, and a typical person drives a total of ~25 miles a day. EVs with a range under 150 miles would be cheaper and require far fewer natural resources to create. The EV market should be bifurcated to models under 200 miles and over 1000 miles in range; everything else is stuck in between. Rounding up EV news, here is Jay Leno driving the Cybertruck with Elon Musk through one of his tunnels under LA (video clip from Jay’s TV show).

Meat Processing Bots
Don’t read this while eating, or using a Norimaki Synthesizer: in the US, animal processing facilities were hampered by the pandemic; but, at Europe’s largest pig slaughterhouse in Denmark, we have a glimpse of the robotic automation to come for the meat packing – and many other – industries: “An infrared laser-emitting robot first measures each pig carcass. Next up, the so-called rectum loosener robot uses computer vision to identify the pig’s tail, cuts a 4-inch hole around it, and extracts whatever poop is inside. Then the feces-free carcass moves into a cabinet-like robot, where a large, circular blade splits the pig from sternum to ham. Next, each one moves onto a mechanized, autonomous organ remover, tendon slasher, and finally, the spine splitter. Ten minutes. Six robots. Minimal human supervision. By midnight, when the second (human) shift calls it quits, 18,000 pigs will have passed through this gauntlet of actuated steel and knives.” Hot dog anyone?

Understanding Section 230
Imagine I created a product with enormous potential for widespread harm to people and the planet. This product was wildly popular, but it threatened the ongoing existence of our species. However, I decided to take zero personal responsibility for how the product was used because it would generate hundreds of billions of dollars in profits over its lifetime, much of which would accrue to me personally. I eschewed responsibility for defining and enforcing proper usage of my product, declaring that it was the government’s responsibility, not mine. Then, if the government were to step in and detail how the product should/should not be used and asked me, as the product owner, to enforce these new rules, it would cost me a ton of money, but I could afford it because I would be making so much cash flow off the product itself. Even better, it would then be so expensive to enforce that, if someone wanted to compete with me, the new regulatory cost of entry would be insurmountably high, likely in the range of $10B’s/year. Then, I would have a government-granted monopoly that would print money forever. Sound familiar? This is indeed the state of the Internet platforms that rely on user-generated content, notably Facebook, Instagram, Twitter, and YouTube in the West, though the circumstances also apply to the applications (such as facial recognition algorithms) that run on the cloud services such as Amazon Web Services, Google Cloud, and Microsoft Azure. If I had created such a product and made no attempt to mitigate its toxic miasma, I would consider myself a coward who traded money for responsibility. 

I wrote about Section 230 and the question of social-media governance last summer in SITALWeek #199 and #205, and it’s now back in the spotlight after Twitter annotated several of Trump’s tweets about mail-in ballot elections as misleading (and subsequently annotated a Tweet from Trump because it was inciting violence). Trump responded by once again proposing to effectively repeal Section 230 status for Internet platforms. That would mean platforms would become publishers – responsible for everything any user posts. The platforms want the government to declare what is ok and not ok to post, that way they can avoid becoming publishers. As with the hypothetical scenario above, government oversight would greatly increase their costs to monitor everything posted; but, it would also create classic regulatory capture and raise the barriers against any new competitors. 

There is no reason to politicize this question – either companies are responsible for their products, or they aren’t. If they aren’t then government guidelines and regulation should step in. I personally think it’s fine for social networks to say “ABC is allowed, but XYZ is not,” but that would make them publishers under Section 230, so they would be liable for every single thing posted by any user. I’d prefer to avoid the government declaring what is ok and not ok to post because, if they do, it’s not only a questionable free-speech infringement, but it grants greater monopoly status to the incumbent platforms and stifles innovation and progress. What we’re trying to solve for is this: if it’s theoretically possible for a company to police how its products are used (or reasonably anticipate malicious use/outcomes), they should be held responsible if their products do harm, and governments shouldn’t be involved in policing free speech. This is a really complex issue – companies don’t always know ahead of time what could cause harm. That’s why in some cases they want a list of acceptable content from the government. But, the logic runs in circles without getting us anywhere. If I were CEO of Facebook, Twitter, or YouTube, I see three options: 1) zero oversight, a complete free for all with the only exception being an action that causes physical harm – this would not make me a publisher; therefore, I would have Section 230 protection; 2) declare my philosophical view of the world and enforce it, giving people the option to either participate or move to another platform – this would make me a publisher, responsible for everything anyone posts; or 3) censor based on a list of acceptable content from the government – this would make us China. It’s not clear the current Internet leaders are capable of having a coherent philosophical view to express, nor are they capable of acting like responsible stewards (and, I haven't seen a lot of responsibility in the government lately). Perhaps the most obvious solution is that society doesn't need the current iteration of anonymous, uncurated, broadcast social networks to begin with. Communication is important, but everyone communicating to everyone without any personal responsibility isn't a viable model – humans simply aren't built to process it.

Instagram to Give Creators a Cut
Instagram will begin to allow creators on IGTV to earn money directly from the social video app. Currently, YouTube shares around 50% of ad revenues with content creators; but, on Instagram “influencers” strike off-platform sponsorship deals directly. Instagram and YouTube take zero risk on the content made by creators, unlike a Hollywood studio, which takes significant risk funding new content. Therefore, I personally think the platforms should be paying out 70-80% of revenues (which allows for a small margin after hosting and moderation costs) to users that generate content on the platforms. It would be great to see competition for content put more money in creators’ pockets, without which there would be no YouTube or Instagram.

Chickens vs. Sheep
Rebelling against the dance memes that have gained huge, sheep-like followings on TikTok, the cult of the Step Chickens, along with the Weenies, Murder Hornets, Griswolds, Babbages, Duck Sanctuary, the Flamingos, and the Jeffs are rising up to fill identity-seeking voids. Make sense? Well, read this NYT article, and it will make even less sense*. Bloomberg reports that ByteDance had $17B in revenues and $3B in profits in 2019, largely from their China-based apps. Recently, Disney’s long-time strategy lead Kevin Mayer left to be COO of China’s ByteDance (TikTok’s parent company, or, should I say, Rooster?). As one person commented to me recently, that’s like going from the Happiest Place on Earth to the Internet equivalent of a white van with the windows painted over. In the FT, an anonymous “senior Disney executive” said: “At an operational level, ByteDance has the most advanced AI, it’s way more evolved than companies like Amazon, and Kevin sees great opportunities in that.” The Step Chickens agree. Perhaps it was that great AI that allowed TikTok celeb Charli D’Amelio to amass 58 million fans with no clue as to how or why, according to the WP. 
*I am an old Gen X’er, and I do not understand these newfangled social network apps at all.

Video Production Reimagined
This essay explores the evolving movie and TV production possibilities, including 8K video backdrops of real locations replacing green screens, smaller sound stages, more virtual everything – leveraging tech like Unreal Engine 5.0 – and more. An 8K video backdrop could come in handy on Zoom calls.

Miscellaneous Stuff
Optical Atomic Clocks
I love atomic clocks – we have half a dozen devices in our house that receive the signal from the NIST (National Institute of Standards and Technology) in Boulder, Colorado. Currently, the signal is based on the microwave resonance frequency of cesium atoms. New atomic clocks, however, are based on ytterbium and strontium, which vibrate in the optical spectrum of the EM field. The trick is to convert this optical signal into something modern electronics can use, which NIST has done with a high-speed photodiode. The precise timing provided by atomic clocks is critical for a wide range of applications including GPS, globally-synchronized databases at the big cloud computing platforms, distributed telescope arrays, and telling me when it’s time to get out of the spa.

The New “Stay Ahead of China” Act
The US National Science Foundation (NSF) is poised to see its budget go from $8B/yr to $36B+/yr over the next few years, amounting to an additional $100B over five years in total. The welcome bipartisan legislature titled “The Endless Frontiers Act” aims to fund innovation and new technologies.

Stuff about Geopolitics, Economics, and the Finance Industry
Chinese-Made Transformer Seized 
The US has seized a giant electric grid transformer weighing 500,000 pounds made by a Chinese company and diverted it to Sandia National Laboratories for analysis, according to the WSJ. The device was headed for a Colorado-based electricity producer also owned by the Federal government. No one is commenting on the reason, but the speculation is national security concerns. It’s easy to leap to the conclusion here that this is yet another datapoint supporting the likely repatriation of manufacturing to the US. Certainly, the electric grid is important, but lots of things with national security involvement are completely made in China, like iPhones.

Pharma Repatriation neither Easy nor Cheap
Drug makers are concerned about proposed legislation that would require manufacturing and ingredient sourcing to return to the US from China and other countries. There are 200 FDA-registered factories in China alone, and it would take years and billions of dollars to build a new facility in the US. The move could favor branded drug makers over generic substitutes (which operate at a much lower margin, thus relying on cheap, overseas facilities) and raise the cost of medications dramatically. 

Crumbling Globalization Threatens Conflict
If you missed Trump’s nine-minute anti-China speech on Friday, I recommend watching it (YouTube). Martin Wolf wrote an important editorial in the FT earlier in the week that I also recommend: 
“Rising friction between China and the US, and the weakening of globalisation, have been apparent since the global financial crisis. But Covid-19 has accelerated these trends. The pandemic is turning countries inward. The demand for self-sufficiency is rising. This is particularly true in products relevant to health. But other supply chains are also being broken. The economic collapses, stratospheric unemployment and pandemic-constrained recoveries make some leaders, especially populists and nationalists, happy to blame foreigners. The perception of US incompetence weakens its credibility and emboldens autocratic China. As the US withdraws from international organisations and treaties, and China pursues its own path, the fabric of co-operation tears. Even armed conflict is possible.” 
I discussed the broader trends of US-China tensions in SITALWeek #245: 
“There have been great benefits from globalization, but also hidden costs. The opportunity now is to reimagine the production of all goods and services with a digital, Information-Age lens. It’s going to be a very exciting period of innovation and growth around the world. And yet, decoupling and less interdependence will only feed rising tensions and competition between China and the rest of the world. The escalating cultural/technological clash points to many scenarios that can only be resolved in a destructive conflict. While we may not be facing the cold-war-era mutually assured destruction of nuclear weapons, we are facing an equally devastating mutually assured destruction from a hate, fear, and misinformation fueled technological cold war. Therefore, it is best to forge ongoing, collaborative partnerships globally while also seeking increased self-reliance. Non-zero sum (NZS) in game theory is the outcome where all parties in an exchange are better off doing the transaction than doing nothing at all; NZS will remain an important concept for success going forward in international relations; but, odds are, we will see some zero- or negative-sum games played too in the coming years.”

Samsung Fab Excludes US Technology
EE Times reports that Samsung is exploring whether they can build a new semi fab with no US equipment by exclusively leveraging tools from Japan and Europe. It’s another maneuver in the opening volleys of World War III that we find ourselves in. The global economy runs on semis, and without leading-edge chip production, society and innovation will slip decades back in time. 

Economic Tracking Data
Brent Beshore and the Permanent Equity team put together an impressive list of economic activity trackers, many of which are real-time across a number of economic sectors.

Out with Old (Mutual Funds), in with New (Active ETFs)
Mutual funds are high-cost, antiquated vehicles with tax disadvantages and typically higher fees than their active ETF counterparts. It is possible to convert a mutual fund into an ETF, and, recently, a couple of small funds have applied to do just that. All mutual fund shops should follow suit, as there is no practical reason for the legacy mutual fund structure to persist.

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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. 

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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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SITALWeek #246

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, swarms, 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: WFH and the potential for a domestic migration; a computational defense system; AR tech support; shifting listening habits; Shopify’s intimidating pace of innovation; 20th century ideological tensions remain unresolved; whence the wheel; and, lots more below...

Stuff about Innovation and Technology
🚷 🏀 🚷 🏀 🚷
Theme Park Insider reports on the confusion of where to stand: “At CityWalk, Universal has put down floor markings showing people where to stand when queuing. But at Disney Springs, Disney is using its floor markings to show people where not to stand.” Stand here, don’t stand there...one thing is for sure, it’s a great time to be in the tape and adhesive decal business! Both entertainment sections of the Florida parks reopened last week to limited capacity. Protocols would be important to figure out before the NBA season could kick off at ESPN’s Wide World of Sports complex in July. The NBA is in talks with Disney to work out the details that would see players housed  – and all games played – onsite for the season. I still prefer Entertainment Island, but I hope this comes together as well. At the end of every game played the winning and losing team can honestly exclaim “I’m going to Disney World!”
 
Tech Job Growth
Glassdoor shows job openings stabilizing after dropping 29% to 4.4M since the beginning of March. The trends vary greatly by sector with Internet and Tech job openings up 100% y/y.

Taking Emotions in Stride
An algorithm called ProxEmo runs on a robot to determine your mood based on the way you are walking. This allows the robot to steer clear if you are having a terrible, horrible, no good, very bad day. Imagine when this is an app on your Apple augmented-reality glasses in a couple of years – combined with real-time facial expression data, you will know peoples’ moods better than they know themselves (well, then again, they’ll probably add a selfie mode). Won’t that be fun.

Virtual Court Continues
Collin County District Court in Texas will hold a summary jury trial by Zoom in an insurance dispute case. This type of trial is non-binding and helps determine if a case will go forward or try for mediation. There is a growing backlog of court cases piling up during lockdowns and no obvious way to get all the participants in a room, including defendants who may be in jail. Meanwhile, a drug offender received a death sentence via a Zoom court session in Singapore.

VIP Zooms
Just when I thought SaaS companies might finally show some opex leverage due to lower travel budgets, I read that Okta is pulling in celebrity chefs and athletes for Zoom calls with customers. It’s all about letting customers know you care even if you can’t come and meet them in person. Okta CEO Todd McKinnon has an interesting take on working from home: "Office spaces will significantly change and become more experiential in nature. I envision our offices functioning like Apple Stores do today: a larger number of smaller spaces in various locations around the world where you can experience our brand and product."

Far-Reaching Consequences of WFH
I’ve been working remotely from my team since August 2008. Working from home changes (WFH) work from “something your life revolves around” to “something that revolves around your life.” Several big tech companies announced intentions last week to create permanent WFH programs. Shopify was perhaps the most aggressive, taking a WFH-first policy with a goal of making all traditional offices supplemental. If the leading employers all take this approach, then, from a pure recruiting perspective, every employer will need some form of WFH. Tech companies might have the right cultural DNA of trust and freedom to allow for broad WFH, but most other companies could crumble without the cohesion (or, perhaps tension) of physical-office politics. WFH shifts value from charisma and politics (face time in the office) more toward merit. WFH also means the same job takes fewer hours without the distractions of the office, but sometimes those distractions are valuable. Not everyone has the space, environment, or family situation to work from home, which could make the practice yet another inequality increaser. 

The consequences of WFH are far reaching for the commercial office space market and the network of services that support it – cleaning, maintenance, catering, security, public transportation, parking, etc. Could public transportation in most cities even survive such a trend? And where will people move? Zillow and Redfin intent data still suggest an urban-to-suburban and large-city-to-small-city migration. Is that real or just shelter-in-place dreaming? Could people leave cities for nearby 2nd-home destinations, and if so, are they prepared for those small communities that tend to lack fully-developed school systems, infrastructure, and Prime Now delivery? If office workers redistribute en masse, we could also see a new mixing of ideologies that reverses the long migration of liberals to the coasts, which could even impact the US’s antiquated Electoral College system. Part of me wants to believe WFH and domestic migration is probably a real trend, but I’ll believe it when I see it.

Fostering Creativity in a Virtual World
Google’s Sundar Pichai made these comments on working from home in a Verge interview last week:
“Productivity is down in certain parts, and what is not clear to me is — in the first two months, most of the people are already on projects in which they kind of know what they need to do. But the next phase, which will kick in is, let’s say you’re designing next year’s products, and you’re in a brainstorming phase, and things are more unstructured. How does that collaboration actually work? That’s a bit hard to understand and do. So we are trying to understand what works well and what doesn’t.”
Creativity tends to thrive on ad hoc connections and, thus, will suffer if we don’t find new ways of remote working that are more conducive to creative collaboration.

Powering the Grid with EVs
In the next few years, there will be millions of EVs in garages that could operate as grid-wide supplemental energy or home backup power. There was some excitement this week that Tesla might have added bidirectional charging to some of its models, which would enable vehicle-to-grid power transfer, effectively serving as a Powerwall-like battery backup for your house. However, for now, an engineer has discredited the theory for current Tesla models.

Podcasts Trend Toward Exclusive and Video
Spotify’s reportedly $100M+ deal to sign podcast-king Joe Rogan to a multi-year exclusive is a welcome sign that the company is further embracing original content and, more importantly, video content. As I mentioned in SITALWeek #242 and #245, I believe video streaming will increasingly take share from audio-only entertainment, and it’s a significant weakness for the top audio-streaming app, Spotify. Twitch, YouTube, Instagram, Fortnite, etc. are increasingly sources of longer-form live or recorded content, which will slowly take share from music-only streaming. Rolling Stone reports on how Twitch is opening up new revenue streams for artists; and, if we take a step back, we can see a broader acceleration of how creators (musicians, podcasters, etc.) can connect with fans and make money. These new avenues of connection and monetization will incent artists of all types to tour less and rely less on streaming while fans get more intimate experiences. 

Less time in our cars and at the gym has us at home in front of screens more often these days, where it makes sense to have video along with audio. Eventually, ambient audio will turn to ambient video with augmented reality. All of Rogan’s videos will depart YouTube for an exclusive home on Spotify for an unspecified number of years (I’d guess three+ years, assuming Spotify is paying him a premium over his advertising revenues from podcasts and YouTube video views). I don’t believe Spotify has the best podcast interface, and I wouldn’t even put it in the top 10, so I will be frustrated to use it for exclusive content until they improve it. Spotify will face many conflicting interests between podcasters, advertisers, and listeners in trying to optimize the experience for exclusive content and drive profitable revenue growth. I believe the ongoing diversification of ambient audio/video content sources will help streaming music platforms as they negotiate with labels, and it will push more and more musicians to embrace these new platforms to connect more directly with their fans (and generate revenue in the process). This Rogan deal has echoes of Howard Stern leaving terrestrial radio in 2006 for Sirius XM satellite radio for $100M a year (so, likely 3-5x the Rogan deal at the time). That Sirius XM deal is reportedly still worth $80M a year to Howard, and it’s up for renewal at the end of 2020. 

Spotify also acquired Bill Simmons’ podcasting and media business, The Ringer, earlier this year. Commenting in a Vulture interview last week, Simmons said: “As we were deciding whether to do the deal, I was reading different books and stuff, especially about Disney. In the ’80s, people thought they knew what Disney was, right? They had parks, animation, made some movies, made some other things. Then Michael Eisner gets in there and within ten years turns them into a completely different, much bigger company. And then Bob Iger goes even three steps beyond that. Now they’re the biggest media company we have. Do I think that could happen at Spotify? Yeah, maybe. It depends. At some point, are they going to think, “We’re killing it in audio. Should we start doing more?” You never know.”

Shopify Innovating the Future for Small Businesses
As the world economy goes digital at an accelerated rate due to the pandemic, the race is on to provide a small-business operating system. There is a lollapalooza of forces accelerating ecommerce – everywhere you look, a previously-analog transaction is fast becoming digital. Shopify is leading that race as they iterate faster than anyone with new features and new services for small businesses in the virtual and physical worlds. Facebook took another swing at ecommerce last week, including a partnership that will allow Shopify merchants to sell on Facebook, and eventually Instagram, seamlessly. It's my understanding that a lot of people use Facebook products (although, I've never been able to determine why), and this seems likely to be another successful new tax on commerce à la Google Search. Last week, Shopify announced a slew of new products including a small-business banking solution, which gets merchants money right away from sales, along with a debit card and rewards. They also launched an installment payment option for checkout. There are a lot of companies that probably never considered Shopify a competitor who might want to pay attention, but it may be too late. Shopify has grown as a more-or-less open platform, allowing other companies to offer services and solutions to Shopify merchants. As the company continues to take on a lot of this functionality themselves, they will face the classic platform dilemma that other tech companies have faced in the past: is Shopify still a platform, or will they do it all on their own to the detriment of partners? VentureBeat recaps the slew of announcements here.

Amazon lost eight points of ecommerce market share, falling from 42% to 34% by mid-April, as Walmart, Target, and other rivals well outpaced the orange giant, according to the NYT. It's been over two months since Amazon first fell down on its Prime promise, and they've yet to address the shortcomings or offer refunds against the $119 annual membership fee, which now only guarantees that you will get your items a week after you can get them from Walmart. In our house, Amazon has probably lost 90% share (including to merchants that use Shopify), and in some cases we've found better, permanent alternatives.

Tech Support Aided by Augmented Reality 
ASM Lithography, the linchpin to all advanced semiconductor manufacturing, has been using Microsoft HoloLens augmented reality to keep its onsite machines running around the globe without technicians traveling to customer locations. Downtime on one of the company’s machines can cost a customer millions of dollars a day. This is an example of what will be a much broader trend of employing AR for various enterprise use cases.

Computational Strategy for National Defense
On Nvidia’s earnings call last week, CEO Jen-Hsun Huang addressed “the importance of creating a computational defense system. The defense systems of most nations today are based on radar. And yet in the future, our defense systems are going to detect things that are unseeable. It's going to be infectious disease. And I think every nation and government and scientific lab is now gearing up to think about what does it take to create a national defense system for each country that is based on computational methods? ...You need to find a way to have an accelerated computational defense system that allows you to find insight, detect early warning ASAP. And then, of course, the computational system has to go through the entire range from mitigation to containment to living within the monitoring.”

Miscellaneous Stuff
Potters’ Axlent Invention
The wheel is impressive, but it was the axle that really got humans moving. Remarkably, the axle was invented only 6,000 years ago, and our current evidence suggests that the first person to figure it out was a potter, and the first application was a toy – a figurine on wheels with a small clay axle. These engineering insights appear to have happened independently in the Old World of Mesopotamia and the New World of South America – in both cases involving a potter and a toy – thousands of years apart, and before we have any evidence of communication between the two regions. It seems to be a classic case of engineering a model before going full scale, with full-sized wagons appearing in the archaeological record around 5,400 years ago.

Coronavirus Induces Lopsided Immune Response
Stat reports on some recent studies (some published, some “preprint” – yet to be peer-reviewed) of immune pathways activated by SARS-CoV-2 infection. When your body detects a virus, two main defensive pathways are triggered: 1) interferons are released to warn other cells that a virus is afoot, so your body can start to suppress viral replication, and 2) chemokines are released to recruit the professional, virus-fighting immune cells to the site of infection. Viruses, in turn, have evolved varied ways of compromising both immune responses. SARS-CoV-2, however, is unique in that it appears to strongly suppress the first response but leave the second intact. As such, the theory goes, viral replication continues largely unabated, so the infected cells keep ‘crying for help’, releasing more and more chemokines, leading to over-recruitment of immune cells and progressively worse inflammation and tissue damage – from your own immune response – on top of the havoc already wreaked by the virus. These insights suggest that interferon therapy may help control the virus (or prevent it from initially taking hold, if given preemptively), and that curbing the overactive inflammatory response (e.g., with specific pro-inflammatory inhibitors) may help limit damage. Moreover, these data help explain the extreme vulnerability of elderly, diabetic, and otherwise compromised individuals – their interferon-mediated, immunoprotective pathway is likely to be in an already weakened state before SARS-CoV-2 strikes, leaving viral replication completely unchecked and exacerbating the imbalance of the two-pronged immune response. (Thanks to SITALWeek’s excellent Editor, and PhD Chemist, for this explanation!)

Pollution Reprieve Depressingly Temporary
Mt. Everest was visible from Kathmandu for the first time in decades as lockdowns lift pollution. Nepali Times shared photos on Twitter. Pollution levels fell globally by 17% in April y/y; but, tragically, they are already back to pre-virus levels in China, as the FT reports.

Stewart’s Sonnets
I have been thoroughly enjoying Patrick Stewart amusing himself with his daily readings of Shakespeare’s sonnets during the lockdown. Here is Sonnet 62, and here is Sonnet 57 – with a special guest performer from the Enterprise NCC-1701-D.

Stuff about Geopolitics, Economics, and the Finance Industry
China Not Backing Down
China bypassed the Hong Kong legislature to effectively take control and eliminate the “one country two systems” setup that allowed Hong Kong to remain independent, according to the WP. It’s a chilling omen and a manifestation of fear and desperation in Beijing. Meanwhile in China, Bloomberg reports the government “will invest an estimated $1.4 trillion over six years to 2025, calling on urban governments and private tech giants like Huawei Technologies Co. to lay fifth generation wireless networks, install cameras and sensors, and develop AI software that will underpin autonomous driving to automated factories and mass surveillance.” Most of this $1.4T depends on access to advanced semiconductor technology from western companies. The WP also reported on Taiwan’s hardening views of China as Xi’s power grab and behavior makes the Taiwanese increasingly uncomfortable. 

Meanwhile, the US is looking to require Chinese companies listed on US exchanges to certify they are not government controlled and conform to US accounting standards and disclosures. Chinese listings in the US rely on the sketchy variable interest entity (VIE) structure, which means that when you buy a share in the US you don’t really directly own the profit interests of the operating business in China. These new requirements would likely cause most Chinese ADRs to leave the US exchanges (owners would probably get an option to exchange shares for a Hong Kong listing (but how feasible is that for global investors given China’s moves to dissolve the two-system rule of Hong Kong?). It’s a complex situation, and valuations could even rise once the uncertainty is lifted; regardless, the current legislation has highlighted the fact that these US-listed Chinese companies are not independent, and investors do not own claim to them when they buy shares, no matter where those shares are listed.

The range of outcomes continues to widen dramatically for Western investors in China for a variety of reasons. Allied forces are beginning to align against China, with the UK, France, and Australia increasingly in sync with US views. The ideological disagreements of the 20th century weren't resolved, they were merely put on hold, and will now be resolved in the unpredictable and frenetically paced post-truth, social networking age. In case you missed it, I wrote some more detailed thoughts on deglobalization and the complicated chess game involving the US, China, and Taiwan last week – unfortunately tensions continue to escalate, and attempting to reverse inequality is probably our best option to keep global peace.

Zero Rates Have Investors Stymied
As the market recovers, and many stocks are forging new all-time highs, so too are balances in money market funds as investors appear bearish on stocks overall. Right or wrong, it's not hard to understand what is driving the stock market today: as I wrote in SITALWeek #243 a couple of weeks ago, the move up in the markets is largely understandable in the context of low rates and large fiscal stimulus despite the economic uncertainty. Paradoxically, record levels of cash are now sitting idle, earning zero return, while the market rises, driven by those same, zero-returns-causing low rates (gross returns are probably negative after money market management expenses, but firms will likely waive those to keep returns at a healthy 0.00%).

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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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.

SITALWeek #245

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, swarms, 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: rising risk of US-China conflict puts spotlight on the misunderstood TSMC Arizona announcement; the mutually assured destruction of decoupling and deglobalization; live streaming nearly doubles; corporate culture requires better transparency with remote work; Nvidia driving AI charge; fragility of power laws; and, lots more below...

Stuff about Innovation and Technology
On the Road Again
Tesla’s charging station usage has rebounded to near-peak levels across China and the Asia-Pacific, while North America and Europe/Africa/Middle East have bounced from ~30% utilization to ~40-45% (vs. pre-virus levels of ~80%). Bloomberg also reports that driving is making a resurgence as commuters avoid public transport in China and Europe. Meanwhile, NYC is suggesting people might have to make reservations to ride the subway!

Tesla in Autonomous Driver’s Seat
Speaking of driving, EE Times has an interesting report on the state of autonomous driving systems, including all the convoluted partnerships and collaborations. Outsourcing innovation has historically been a great way for incumbents to ensure their timely irrelevance. This certainly seems to be the case with Ford, GM, VW, Daimler, BMW, Volvo, etc. When I look at the mess of partnerships, all I see is Tesla continuing to speed away in the driver's seat. 

AI-Enhanced Image Sensors
Sony, a leader in CMOS image sensors for cameras, has developed a new image sensor with a built-in AI signal processor. The integrated chip could be programmed to look for specific activities, such as a person approaching or objects on a conveyor belt, and it could parse information locally or selectively choose what to upload for further analysis. We will continue to see intelligence and algorithmic decision making pushed deeper and deeper into connected devices.

Pass the Dip
With consumers snacking in place, Frito-Lay is the latest company to launch their own website and go direct with ecommerce to meet consumers’ salty cravings. Frito-Lay’s parent Pepsi did $2B in ecommerce sales last year. The ecommerce push by brands may come in handy if you shop at Trader Joe's because the natural grocer said it has no plans to do curbside pickup or delivery. It’s a remarkably short-sighted position to take given that consumer preferences are changing rapidly, irrespective of the pandemic. Taking an opposite approach, Whole Foods is converting some of its stores to delivery only.

Store-Based eCommerce Difficult to Fulfill
Retailers are increasingly using stores as mini distribution centers for ecommerce orders, but the surge is straining FedEx, who is now restricting the practice for companies like Kohls. This is a bitter outcome for struggling retailers, further exposing distribution weaknesses in our increasingly digital world. 

Department-Store/Fine-Dining Mash-Up
The 3-star Michelin restaurant, the Inn at Little Washington, will stage tables with dressed up mannequins to fill the gaps between social-distancing diners.

Video Streaming Killing the Audio Streaming Star
Live streaming is up 99% from last year, driven by a 45% increase from March to April. Hours watched on Twitch rose 50% in April, vs. the prior month, to 1.65B (this still pales in comparison to the 20B+ hours of TV Americans watched April). I think this increase underscores a shift away from audio-only to video streaming in general as we spend less time in cars and at the gym and more time in front of a screen. The shift in streaming preference is happening as Google announced plans to shut down its long-suffering Play Music App to focus on YouTube Music, which is also struggling. Video could supplant audio streaming for both music and podcasting, particularly in an ambient computing world with always-on, augmented-reality glasses. Audio leader Spotify is also testing video podcasts in its App.

AI Falters when Faced with Real-World Deviations
Algorithms have needed a lot of human intervention as standard deviations blew out and the world became much more unpredictable. With complex adaptive systems (see Complexity Investing for more), it’s likely that algorithms will perhaps always rely on tweaking from fleshy non-computes. MIT Technology Review reports on the issues, including those faced by Amazon, which relies almost exclusively on computers to man its supply chain. 

Work-from-Home Mindset Driving Real Estate Trends
Redfin continues to see surging interest for homes in smaller towns as folks rethink their work-life scenarios. A Zillow poll concurs, indicating that 75% of Americans working from home want to continue to do so – at least half time – going forward. This interview with Nationwide CEO in Fortune also reveals it’s not just tech companies that are embracing a permanence of working from home. Seasonally-adjusted, home-buying demand is now above pre-pandemic levels. Redfin CEO Glenn Kelman remarked on Twitter: “It feels like the economy has officially split in two. For the lucky ones, this hasn’t been a recession at all, but a sale: on stocks, on money itself, & on houses, which dipped in March.” This is a point worth pausing on.

Kelman’s “Diary of a Pandemic”
Glenn also posted a series of essays on Redfin’s pandemic roller-coaster ride, which you can find here, here, and here. It’s a lesson in transparency and communication that a lot of companies should learn from. Increasingly, as more employees work from home, internal and external communication is going to become even more critical to maintaining core values and a healthy corporate culture. Companies will need to enhance their focus on marketing – and living – their values in the future. And, of course, I cannot help but repeat Glenn’s quote that I posted in last week’s newsletter, because it’s so damn good: “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.”

Epic’s New Engine is Unreal
Epic, the leading platform in game design and maker of Fortnite, released Unreal Engine 5.0 (UE5) last week. The new game engine is so real that it’s, well, unreal. A key angle on UE5 is that a game can look great on a smartphone as well as a leading-edge console. The system also takes great advantage of the SSD storage on the new PS5. Epic has also made its pricing even more disruptive: UE5 will be royalty free for the first $1M revenues, with a 5% fee after that. The Verge has more details, including the demo video, which is so impressive, in fact, that I am not sure Hollywood needs to return to real-world sets anytime soon, even after the pandemic ends.

Nvidia Ups Ante in AI Acceleration
An update on Nvidia from NZS Capital’s Jon Bathgate: Jen-Hsun Huang delivered a highly entertaining virtual “kitchen” keynote for Nvidia’s GTC on Thursday, highlighted by the long-awaited introduction of the A100 platform for AI and high-performance computing. The new silicon is already in volume on TSMC’s 7nm process, and the accompanying software and ecosystem improvements will drive up to 20x improvement in performance relative to its hugely successful predecessor, the V100. The step function in performance is needed to keep up with the evolution of AI models, which are following their own Moore’s Law, doubling in size every 3-4 months. Nvidia continues to be a moving target for challengers – assorted VC-backed startups, Intel’s recently acquired Habana Labs, and internal silicon efforts at Nvidia’s cloud customers – and appears, yet again, to have raised the bar substantially last week. What caught fewer headlines from the event is Nvidia’s continued push into edge computing. Ericsson is using Nvidia GPUs to accelerate their 5G base stations. In factory automation, Jen-Hsun showed a fascinating demo on how Nvidia’s Isaac platform (also based on the A100) allows factory managers to train robots in a virtual environment and then push that learning to robots on the factory floor – Nvidia is partnering with BMW to drive more intelligence onto their factory floor. The keynote narration was done by AI, and AI wrote the music for it all on Nvidia chips. For more on Nvidia’s new data center stack, see SITALWeek #243.

Miscellaneous Stuff
Partly Cloudy, with a Chance of Surrealism
After a depressingly long hiatus, David Lynch is back with his daily LA weather reports on YouTube.

Spring Swarm Season
NZS Capital’s Chief Beekeeper Brinton Johns had a busy “swarm season” week. He posted a few pictures on his Twitter. As we like to say at NZS, you can learn a lot more about investing from bees (and ants) than you’ll find in pretty much any investing book. 🐝🌺

Beam Me Optimism
The second worst thing about the current “Golden Age of TV” is the unbearably drawn-out, twisting and turning, multi-year plot arcs that actually require binge watching just to have a chance to understand what the heck is going on. The worst thing is the dark, antihero, too-complex-for-their-own-good characters that have been apparently mandatory ever since ‘Breaking Bad’. So, I’m very glad to read that the new ViacomCBS ‘Star Trek: Strange New Worlds’, which focuses on Spock and Captain Pike aboard the enterprise before the Kirk era, will have more self-contained episodes and “harken back to some classical ‘Trek’ values, to be optimistic”.

Food Supply and the Fragility of Power Laws
Michael Pollan’s essay “The Sickness in Our Food Supply” is an interesting read that highlights the fragility and lack of resilience that comes with the efficiency of centralization. Some information-based power law concentrations in industries can be net beneficial; but, in the physical world, concentrations are more vulnerable. This concept weighs heavily on my mind as we see the rising dominance of Amazon in physical commerce. It’s a digital version of Walmart’s playbook, and the combined centralization of retail by these two giants should give us significant pause in terms of the supply chain fragilities it has, and will, create.

Stuff about Geopolitics, Economics, and the Finance Industry
TSMC is the Latest Pawn
The Trump administration is officially moving to block the use of US technology for the manufacture of chips for HiSilicon, the semiconductor division of the Chinese government’s tech giant Huawei. But, just beforehand, they secured an announcement of a new, $12B fab on US soil from the world’s leading chip foundry, TSMC. I say “announcement” because it’s certainly plausible that this fab doesn’t come to pass as conceived; rather, this could be another complicated chess move in a high-stakes game that encompasses the entirety of the East vs. West ideological and technological cold war.

TSMC, based in Taiwan, is one of the companies that would be barred from selling leading-edge chips to Huawei, one of its largest customers. They would need approval from the US to continue to make, at the very least, lagging-edge chips in Taiwan for Chinese customers. Chinese and Western dependence on TSMC is a complicated topic that I first wrote about in SITALWeek way back in November 2017, when I suggested we will see a duplication of the semiconductor supply chain in the West. Here’s an excerpt from my more recent March 2019 post on Taiwan as the “ultimate chess piece” between US and Chinese tensions:
“China needs Taiwan and the West needs Taiwan. The West can scramble to build semi fabs, packaging, and testing facilities on US and European soil. For China, they need Taiwan at all costs as leverage. Will the US enter a war to save Taiwan’s sovereignty, or will we instead rely on Korea, Japan, and our semi companies in the US? Even if China takes control of Taiwan’s supply chain, they need design software from Cadence, Synopsis, and Mentor (A Siemens company) and the equipment to make chips, which is all made by US and European companies. It’s a mess, and it’s going to get messier! The important takeaway for investors is that semis are the heart of the future of AI, IoT, 5G, etc. – i.e., central to the entire digital economy – and they are only becoming more vital and valuable with accelerating profit pools.”

This newly-announced TSMC Arizona fab wouldn’t be in production until 2024 (if it happens at all), and replicating the complicated semiconductor supply chain, from silicon wafers to packaging to testing, etc., could take another 5-10 years. The planned 5nm process node is certainly advanced now, but it won’t be leading edge come 2024. Moreover, the desert capacity would be a drop in the bucket (only 20,000 wafers per month out of TSMC’s 13 million annual output!) and wouldn’t create any real buffer against the risk of China taking military control of Taiwan. Instead, the US would need at least 10-20x the proposed capacity in safe locations with Western knowhow and control. In SITALWeek #189, also from over a year ago, I suggested the following:
“One interesting and provocative solution I would propose is that a group of leading-edge semi designers form a foundry JV on US soil. It would take several years to get off the ground, but Apple, NVIDIA, Qualcomm, Amazon, Google, Facebook, Microsoft, Broadcom and others that rely almost exclusively on TSM for their leading-edge chip manufacturing could easily fund $100B foundry startup in the US.”

In the meantime, China’s increasingly digital and high-tech surveillance economy depends largely on chips made with technology developed by American and European companies, and many of those chips are made at TSMC (which derived 22% of revenues from Chinese customers last quarter). And, in turn, the whole global, increasingly-digital economy, not to mention all the biggest tech companies in the US, depends almost entirely on chips made on an island whose sovereignty is clear only to people who live outside of mainland China. China has expressed a desire for semiconductor independence; but, without Western technology, that dream is an impossibility within the next couple of decades. Leading-edge semi manufacturing is essentially a miracle – a specialized, mind-blowingly complex process. The nature of the magical tools – forged by ASM Lithography in the Netherlands, which cost hundreds of millions of dollars each, and a host of other specialized suppliers and designers – ensures that China’s typical ploy of industrial espionage isn't going to work this time. Indeed, any attempted piracy has been unsuccessful over the last two decades during which China has been trying to build its own semi industry (I was first in the Chinese SMIC and Grace fabs over 15 years ago). At best, they remain well over five years behind the leaders, and that is only by using all-Western software and tools to do so, without which they would be 20 years behind.

The US decision to disallow the use of these specialized tools in making chips for Huawei necessitates some type of response from China, and forces a series of events that may ultimately have negative consequences for Western companies like Apple that have naively become overly reliant on, and complacent with, their Chinese manufacturing base. There are three possible outcomes:

1. An escalation to World War III.

2. Buildout of $100B+ of advanced fabs on US and European soil.

3. Not much changes; this is all an escalating tit-for-tat that results in each side getting some semblance of what they want out of trade negotiations, albeit with ongoing cold war tensions.

Options 2 & 3 also do not preclude option 1 down the road. The stock market, for its part, has been surprisingly irregular in reacting to all this news – in some cases punishing the wrong stocks while ignoring those companies that would be most impacted, such as Apple.

Other major, leading-edge manufacturers on US soil include Idaho-based memory-maker Micron, Intel, as well as Samsung, which operates leading-edge memory and foundry capacity in Austin. My expectation is that Samsung matches TSMC’s announcement with an expansion in Austin (where they have made leading-edge memory and semis for years, including the latest Tesla autonomous driving chip). Samsung has fewer political complications than Taiwan, but certainly has regional risk, as does Japan. ‘Processor King’ Intel has leading-edge fabs in Arizona and has long wanted to be a foundry for other chip companies but has repeatedly failed – it’s a very different business than building your own, specialized chips. Intel even uses TSMC for around 20% of its chips, including Mobileye, Altera and a few other acquisitions. Intel has also fallen several years behind TSMC (and Samsung) in leading-edge manufacturing, and rival AMD leapt ahead by having their latest chips fabbed at TSMC in Taiwan. A win-win would see Intel start to become fabless by using TSMC to make their processors on US soil. I’ll repeat what I said over a year ago: “The important takeaway for investors is that semis are the heart of the future of AI, IoT, 5G, etc. – i.e., central to the entire digital economy – and they are only becoming more vital and valuable with accelerating profit pools.”

The announced TSMC semi fab on US soil is one example of the deglobalization trend that will dominate the economy over the next couple of decades. For the last 20+ years, global economic coupling has created a fragile and dangerous lack of self-reliance – efficiency has become the enemy of resilience. Coronavirus has taught us that comparative advantage is yet another flawed economic concept once we consider the broader, real-world context. For decades, China has taken over the world’s manufacturing and, in return, has delivered deflationary pressure that has helped keep inflation and interest rates low. For the next 20 years, we will have inflationary pressure as international supply chains are decoupled and repatriated. However, that inflationary pressure will be offset by next-generation manufacturing that is more automated and software driven than ever before. The outcome of this tug of war between the inflationary and deflationary pressure is unknowable at this point. 

As I wrote in SITALWeek #242, there have been great benefits from globalization, but also hidden costs. The opportunity now is to reimagine the production of all goods and services with a digital, Information-Age lens. It’s going to be a very exciting period of innovation and growth around the world. And yet, decoupling and less interdependence will only feed rising tensions and competition between China and the rest of the world. The escalating cultural/technological clash points to many scenarios that can only be resolved in a destructive conflict. While we may not be facing the cold-war-era mutually assured destruction of nuclear weapons, we are facing an equally devastating mutually assured destruction from a hate, fear, and misinformation fueled technological cold war. Therefore, it is best to forge ongoing, collaborative partnerships globally while also seeking increased self-reliance. Non-zero sum (NZS) in game theory is the outcome where all parties in an exchange are better off doing the transaction than doing nothing at all; NZS will remain an important concept for success going forward in international relations; but, odds are, we will see some zero- or negative-sum games played too in the coming years.

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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. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.