SITALWeek #314

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, food, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: Ransomware is triggering crypto regulation as governments contemplate digital currency landgrabs of their own; Unreal takes over Hollywood; ETFs are not a tax loophole to be closed; painfully slow Apple Pay adoption; the breadth and depth of YouTube's rapidly expanding business; the flawed nutrition industry; and much more below.

Stuff about Innovation and Technology
The Virtual Stage is Set
Unreal Engine, the gaming development platform from Epic, is fast becoming a default multi-platform enabler of video production for Hollywood. Netflix has partially funded a copycat of Disney’s StageCraft (see #276 for more) called Volume. The site, located in Germany, comprises a 4500-sq-ft circle surrounded by high-res LED screens, rendering real-time Unreal Engine backgrounds, and it’s being used on the new series 1899. The technique replaces the green screen strategy of adding effects post production, which, in turn, largely supplanted old-school set building (which is also still a thing of course!). The immersive, holodeck-like world allows actors and directors to become more tangibly immersed in the scene and have a better sense of what the final product will look like. Because of the Unreal Engine technology, it’s not just a static screen; for example, as you move the camera, the background evolves relative to the camera’s position, as if you were walking around in a real location. The availability of the technology is impacting the movie production process all the way down to the writing of the screenplay since ideas are now even less constrained by real-world filming. The accelerated shift to virtual sets would have likely taken longer if not for COVID curtailing on-location filming around the world.

What’s Wrong with Tap and Pay?
Seven years after the introduction of Apple Pay, it’s apparently a colossal market failure with only 6% of US iPhone users that have enabled Apple Pay utilizing the tap-and-pay NFC technology when it’s available. I find this a little hard to believe. I am such a fan of the competing Google Pay product on Android that I will avoid stores if they don’t have NFC payment options. Reportedly, 70% of US merchants are said to support Apple Pay, and I’ve rarely run into issues not carrying a credit card for the last couple of years. So, I am baffled by these low-adoption data (the survey doesn’t get to the root of the problem of why people aren’t using tap and pay). It’s also frustrating to see retailers like Home Depot rebuild their entire checkout system from scratch and put in brand new payment terminals that do not accept Apple Pay or Google Pay, like they did last year in my local store. According to the PYMNTS’ survey data, there is a growing usage of contactless card tapping at checkout from 4.6% in 2020 to 10.8% in 2021, which is encouraging, but still far lower than I would have expected.

YouTube’s Smorgasbord
Whenever I read about YouTube, I have a hard time getting my head around the scale of it. The platform now has a user base of 2B. According to YouTube’s chief business officer, around 25% of the content viewed on the app is from professional media, 25% music, and 50% from creators. Over the past three years, YouTube has paid out $30B to around 2M creators. While Twitch still dominates in live streaming, that standalone engagement mechanism is facing stiff competition from the variety of options that YouTube is offering creators for connecting with fans and monetizing content, according to this WaPo article. This Verge interview with YouTube’s chief product officer, while not particularly information dense, does help frame just how big YouTube is and how many areas the platform is involved in. As I pointed out in SITALWeek #307, based on YouTube’s $7B Q2 2021 revenues, they could theoretically be as big a content spender as Netflix and Disney. And, they also have a growing subscription business with 50M YouTube Music members.

Battery Blowout
In a blow to grid-scale battery storage deployments, the world’s largest facility, which I mentioned back in SITALWeek #310, has taken 300 megawatts offline after an unknown failure created smoke and overheating. Vistra claims to be working on the situation and hopes to have the facility back online, but they haven't given any timeframe for individually assessing the 100,000 battery modules.

Miscellaneous Stuff
Dying of a Misprint
As I was reading Gary Taubes’ op-ed in STAT last week about how the conventional wisdom of obesity and type 2 diabetes is fatally flawed, I couldn’t help but think that his focus (though perhaps not his basic conclusion) is, well, flawed itself. Taubes’ villainous view of carbs is that “People don’t get fat because they eat too much, consuming more calories than they expend, but because the carbohydrates in their diets — both the quantity of carbohydrates and their quality — establish a hormonal milieu that fosters the accumulation of excess fat.” I’ll come back to that argument after a brief rant: there is so much written about food “science” that anyone can find peer reviewed studies to support both sides of every diet advice paradigm. Most of these fad diet writers, bloggers, and podcasters are essentially one person saying “hey, this worked for me, so it will work for you” without any thought to the complex individual circumstances everyone faces. Take for example the “intermittent fasting” (IF) fad that is increasingly prescribed by nutrition book authors and a gaggle of podcasters which shares many similarities with an eating disorder: “According to the National Eating Disorders Association, people with anorexia nervosa generally restrict the number of calories and the types of food they eat, ignoring their bodies' hunger and satiety cues. They tend to be obsessed with issues concerning weight, calories, food and dieting. Anorexia is also characterized by disturbed body image and avoiding social situations that involve food. IF prescribes many of these features of an eating disorder”. Just because our ancestors lacked consistent access to breakfast and second breakfast doesn’t mean that recreating those circumstances on a regular basis is the optimal path for everyone. I am eager to see more data come in from wearables, continuous glucose monitors, smart toilets etc., and I suspect we will learn that what people should and shouldn’t eat for longevity/health will vary widely from person to person and even day to day. And, we are nowhere close to having those answers despite what some snake-oil peddlers believe they can discern from your DNA test. Most of the mainstream fad eating prescriptions all share one thing in common: try to avoid overly processed foods (i.e., if it comes in a bag, it’s probably not great for you to eat every day). Michael Pollan’s Omnivore’s Dilemma, (one of the books whose 2007 release coincided with a resurgence of pie-in-the-sky eating recommendations that, like everything else in the era of social networking, keep getting more and more extreme and silly), probably had the right advice: eat a wide variety of real food (Michael’s specific three-part advice is: “eat food, mostly plants, not too much”). But there’s the rub – eating real food is more time consuming and more expensive. So, to agree with Taubes’ assessment – that the obesity problem is caused by the type and quality of food people are eating – is to ignore that people are, in general, eating what they can afford and what they have time to prepare. Whole Foods founder and Libertarian John Mackey has made similarly ignorant comments in the past, suggesting that poor people just make uneducated food decisions. Processed foods are cheaper, faster, more calorically dense, less filling, and therefore much easier to overeat. Boosting consumer awareness by adding “glycemic load” info to nutrition facts is unlikely to magically change much of anything because obesity is, in part, a class and inequality problem, not just an ingredient problem. It’s a wage problem, an hours-worked problem, and an access to healthcare problem. It’s also a usefulness problem – as more of our jobs are taken by software and automation, we are probably increasingly inactive. And, maybe it’s a technology problem, with the allure of the screen beating the allure of the outdoors. All of these factors point to a political policy problem for a portion of the obese population (obviously I am generalizing a wildly complex dynamic). If we want to de-escalate the obesity crisis, we need more than scientific understanding – we need to create the circumstances for people to afford and have time to prepare meals made out of real food. And, maybe we need some help from Semaglutide. Unfortunately, in Taubes’ 5,000+ word op-ed, he didn’t once mention access to food, healthcare, or income levels, and neither are those key variables mentioned in the American Journal of Clinical Nutrition review paper he co-authored with 16 other people. It seems like a big missed opportunity to identify the root causes of why people eat a diet that can lead to obesity. If you've read this entire ridiculously long and rambling paragraph, there is a pretty good chance I've offended your senses in some small or possibly even large way, so I'll finish by quoting Mark Twain, who said: “Be careful about reading health books [and newsletters]. You may die of a misprint.”

Stuff about Geopolitics, Economics, and the Finance Industry
Don't Double Tax ETFs!
A Democratic tax proposal, which hopefully dies before it reaches the point of legislation, aims to eliminate the rational taxes of ETFs by making them more like mutual funds, which in taxable accounts are double-taxed on gains. ETFs (and Vanguard’s mutual funds, thanks to a patented system they’ve neglected to let the rest of the industry use for decades) shift around assets – rather than cash – to intermediaries so that investors only pay taxes on their gains when they sell the ETF (or Vanguard fund), just as with any stock transaction. Given ETFs are helping democratize investing for households with lower incomes and engaging younger generations in investing, hopefully lobbyists can actually do something worthwhile here and knock this idea down before it goes any further.

Fed Fears Upstart Digital Currency
IEEE reports on the rise of trust chains across the digital economy and why they are important. Trust chains, “which combine open alliance legal agreements (like Visa or Mastercard's legal agreements), distributed ledger technology (for example, blockchains like hyperledger), and end-to-end encryption—can handle not only payments but also finance, trade, tax, and audits in a uniform manner.” Globally, 86% of central banks are exploring the possibility of having digital central bank currencies that leverage trust chain technology. As I wrote last week, one of the likely motivations for a shift from cash to digital currencies is to enable central banks to take rates lower (which, as I pointed out, is a completely flawed mentality in a world dominated by technology-driven deflation for the foreseeable future, which requires more economic distribution than growth). Another motivation, as IEEE points out, is the desire to maintain a position as a leading world currency, in the case of the US Dollar and the Euro. Further motivations are to tackle money laundering, tax avoidance, and, depending on your local flavor of government, to track your every move and dictate what you can and cannot spend money on. As we might expect, when there is a government power grab to be had, the competing alternatives will face regulatory pressure, or even become illegal. And, right on schedule, the Biden administration is signaling they think stablecoins like Facebook’s Diem could “undermine the stability of the financial system”, as the WaPo reports. The Fed’s actual concern is that, since Facebook is a global company with billions of users, if Diem proves successful, it could become a global currency replacing the US Dollar, thus dethroning the Fed from their position of power. Facebook’s head of payments, David Marcus, said of US regulation in a recent Protocol interview:
“I think we're behind. I feel like we ought to create the appropriate regulatory framework for this innovation to happen in a way that is going to protect consumers. And I think we're not there. But to your point, I feel that we're having all the right conversations. So I'm hopeful that we land in a good place soon, and that we can stay in a leadership position in what is undoubtedly going to be one of the greatest areas of innovation in the next decade. If the U.S. misses the boat on innovation, and talent and companies flee to other jurisdictions that have more innovation-friendly environments, and with clearer regulation, we have a lot to lose.”
IEEE is calling for a “digital Bretton Woods”, a cross-nation collaboration to make the new digital currencies interoperable, suggesting that the digital version of the post-WWII agreement should include “technical and governance standards for all aspects of digital trade, tax, finance, privacy, and security in order to build a stable and inclusive world economy”. Clampdowns in the developed worlds by overly zealous regulators could give rise to a new, more powerful currency on an unstoppable decentralized trust chain arising in an emerging market – or perhaps even in a video game – that ultimately becomes a global digital currency for everyone.

Regulation to Rein in Ransomware
In other crypto news, the Biden administration’s rumored wide-ranging sanctions on crypto to stem the rampant ransomware attacks follow the path I thought we might go down when I wrote the following in July:
“Supply chain hackers that exploit widely used tools, hardware, or managed service providers represent a new type of broad threat against a multitude of companies and government organizations. It’s worrisome that criminal gangs are increasingly leveraging advanced tactics previously only accessible to nation-states. The situation is a crisis, and cyber security insurance is being priced out of existence. The likely solution is to rapidly accelerate the shift to the cloud. Any company with software running on on-site servers (i.e., units you can physically walk up to and turn on/off) should migrate to modern architectures as soon as possible. The cloud is not immune to hacking, but shifting to the cloud and implementing zero-trust security – focused on identity and encryption – solves many problems of legacy, on-prem systems. Migrating to the cloud also shifts the blame, which many boards will be keen to do given the lack of insurance available and the existential threat posed by hacks. In many ways, I believe we could see the next five years mirror the IT spending frenzy of the late 1990’s Y2K software overhaul. It also would not surprise me if we see large companies ask Western governments for help with crypto currency regulation to slow down the primary vector hackers are using to monetize their crimes. It may be necessary to regulate crypto to buy companies time to shift to the cloud.”

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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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #313

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Adam Smith, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: digital sovereign currencies are poised to institutionalize deeply negative interest rates, and that's a big problem in an economy with technology driving deflation; health tech is getting better batteries, the ability to detect pregnancy, and the power to examine your poop; the tribalism torch is shifting back from politics to sports, and that makes me happy; Microsoft gives up on bringing people back to the office; Jaron Lanier connects the dots; detecting emotion is very hard, if not impossible; and much more below.

Stuff about Innovation and Technology
Whoop for Silicon
The new Whoop fitness band features batteries with silicon anodes from Sila. The silicon replaces graphite in order to hold more lithium ions compared to current technology. The incorporation of Sila’s silicon anode material is said to give the new Whoop a 17% increase in energy density over the prior version, which allowed Whoop to shrink the wrist device by 33% while maintaining five days of charge. As is always the case with novel battery improvements, commercial scaling has proven to be extremely difficult. Sila, run by a Tesla veteran, has pushed back its goal of creating batteries for EVs (they have a current partnership with BMW, among others) from 2023 to 2025, stating: “We were naïvely optimistic about the challenges of scaling and bringing products to market”. One issue is the complexity of completely replacing graphite with silicon – for now, Sila’s material is only 25% of the Whoop battery.

Wearable for Early Pregnancy Detection
Smart ring maker Oura posted results of their conception study showing that the temperature sensors on the ring were able to identify conception in all study participants “on average 9 days before these individuals received a positive at-home pregnancy test and only 5.5 days after conception”. While the findings were based on only 30 pregnancies, the data were consistent across the study group.

‘Seatable’ for Early Disease Detection
Researchers at Stanford’s School of Medicine hope to have their new smart toilet in clinical trials later this year. The porcelain doctor has cameras, dipsticks, and algorithms to identify solid waste characteristics, ‘urodynamics’ (including color and volume), and biomarker analysis to spot suspect parameters. For toilets with multiple users, the device recognizes everyone’s unique ‘anal print’ 🧐💩. Data is reportedly anonymized before it’s uploaded to the cloud. Researchers at Duke also have a smart toilet in development, and several startups are working on smart seats and other connected bathroom devices.

Tribalism Torch Passes Back to NFL, Disney Superheroes
Last week’s NFL kickoff game had the highest ratings for a season starter since 2015. News of record sales for 2022’s Super Bowl ads landed last week as well. And, rounding out news of strong NFL interest is Amazon reportedly looking to supercharge Prime with the big Sunday Ticket package at a cost of $2.5B/year. Sports are a primary surrogate for humans’ tendency toward tribalism. And, so is politics. For the past few years, politics really took the lead in human tribalistic expression, and perhaps we are seeing that torch go back to sports. As I wrote earlier this year in #286: “We humans love rivalries – a good ‘us vs. them’ – we can’t help ourselves. Sports provide that outlet for many people. Last year, there was plenty of ‘us vs. them’ going on without sports, so perhaps sports can regain their spot as our tribalism of choice at some point in the future.” And, there are other indicators of shifting tribalism outlets, most notably the ongoing decline of religious membership in the US. In contrast, one new form of religion – superhero movies – seems to be doing quite well. Disney’s Shang-Chi had the best Labor Day weekend in history, despite the ongoing pandemic. The success caused Disney, which is perhaps feeling pretty good about its Disney+ subscriber base, to announce exclusive theatrical releases for the rest of this year instead of simultaneous streaming+box office releases. Since evolution has forced our brains into always picking sides, I’ll take sports or superheroes any day over a two-party political system.

Staying Flexible During the Great Work Reshuffle
After eighteen months of uncertainty over returning to the office, Microsoft is throwing in the towel and no longer targeting a specific date for the reinstatement of in-office work. The decision comes despite a new peer reviewed study of 61,000 Microsoft employees showing that collaboration between groups at the company has been stymied by remote work. Microsoft is in a unique position to both experimentally improve flexible work and gain from the outcome as the new way of working further embeds their suite of productivity tools in the corporate world. The company is iterating quickly on new software+hardware collaboration products and staying flexible themselves, as they explain in this blog post. A LinkedIn poll indicates 87% of workers prefer to stay remote at least half of the time (based on ~300K employees at 60+ global employers), and 81% of companies are changing policies as a result (per 500+ surveyed executives in the US and UK). The adaptability of most technology-based companies should continue to give them a significant leg up in recruiting given the increasing permanence of the hybrid work world.

CAC Stymies DTC
Retail guru Jason Goldberg points out the disappointing results of the leading direct-to-consumer brands like Warby Parker and AllBirds. The main problem is the unsustainably high cost to acquire or re-acquire customers (to the benefit of the big Internet ad platforms like Facebook). It’s a particular problem for low-frequency purchases like eyeglasses, where you might need to keep re-acquiring the same customer relationship. The issue, Jason indicates, may favor in-house brands at the likes of Target or Amazon, where existing relationships lower customer acquisition costs dramatically.

Miscellaneous Stuff
The Invisible AI Hand
Jaron Lanier, a founding father of VR and current Microsoft researcher, has always offered sharp insights into the intersection of culture and technology, so he’s frequently quoted in SITALWeek. Last week, Lanier spoke with Lex Fridman (YouTube video) on a variety of topics, notably including Lanier’s opinion that AI is just another tool humans invented, not some new higher power, and the problems with social media. While these might be cliché topics in many circles, Jaron’s perspective and ability to connect dots yields interesting insights. One observation connecting tech and economics that stood out to me was: “The AI idea isn't really new, I would say it was born with Adam Smith's invisible hand with this idea that we build this algorithmic thing, and it gets a bit beyond us, and then we think it must be smarter than us. And, the thing about the invisible hand is absolutely everybody has some line they draw where they say no, no, no, we're going to take control of this thing. They might have different lines, they might care about different things, but everybody ultimately became a Keynesian because it just didn't work. It really wasn't that smart. It was sometimes smart and sometimes it failed you know, and so if you really know people who really, really, really, want to believe the invisible hand is infinitely smart screw up their economies terribly. You have to recognize the economy as a subservient tool; everybody does when it's to their advantage. They might not when it's not to their advantage. That's kind of an interesting game that happens, but the thing is it's just like that with our algorithms, you can have a sort of a Chicago economic philosophy about your computer and say no, no, no, my things come alive, it's smarter than anything.” For those on holiday last week, I mentioned Lanier’s coining of the term VR in 1987, and I wrote about how peering into our subconscious predictions will likely be a source of information for future algorithms; and, VR may even allow us to actually see those simulations that run below our conscious perception.

Context Key to Decoding Emotion
A new paper from Lisa Feldman Barrett and collaborators shows just how hard it is for humans – let alone AI – to read emotions based on analysis of facial expressions without other context. It turns out that even professional actors, who tend to be extremely adept at portrayal of authentic emotions, rarely utilize stereotypical emotional expressions (e.g., a scowl for anger or pouting for sadness). Indeed, not only did actors communicate the same/similar emotions using a variety of facial expressions, they also used expressions with underlying similarities to convey a diversity of emotions – depending on the situation. Barrett and colleagues were able to conclusively tease out the importance of context for facial expression interpretation using several clever studies. In one study, participants were divided into two groups that had to assign emotional states to photographs of actors either with (one group) or without (other group) the corresponding written scenario the actor was portraying in the photo. Importantly, the written scenarios didn’t give direct emotional cues, like “pretend you are sad”, which are often interpreted with stereotypical facial expressions; rather, they consisted of descriptions lacking direct emotional references, e.g.: “He is a motorcycle dude coming out of a biker bar just as a guy in a Porsche backs into his gleaming Harley”. For the vast majority of photos, the assigned emotions didn’t match up between the group who had access to the scene description and the group who didn’t, indicating that context plays a vital role in assigning emotional state. In another study, Barrett had professionals score the same photos using the Facial Action Coding System (FACS), which breaks down muscle movements into action units (AUs) that can be used to extrapolate emotion (apparently, they tried computerized FACS analysis but had to rely on humans when the algorithms systematically miscoded certain AUs). The researchers then compared the coded faces against the emotions assigned to the corresponding written scenarios by a separate group of study participants. The Authors found little common ground in AU assignments within emotional categories, and similar AU clusters matched up with a diversity of emotions. So, not only could the computational algorithms not get the raw data inputs right, but any emotional extrapolation based on scored facial characteristics alone is likely to be incorrect given the variety and inconsistency of facial expressions used to convey a particular emotion (and that was just among a group of English-speaking North American actors). My conclusion from this interesting research is that it’s going to be darn near impossible for AI to accurately read human emotion without an enormous amount of context, which in many cases is not going to be accessible. The Nature Communications paper is explained in detail in this article.

Stuff about Geopolitics, Economics, and the Finance Industry
The Big Gig Economy
After appreciably dipping in 2020, the number of Americans who are classified as independent contractors rose from 41M in 2019 to 51M today. This surge follows a fairly flat growth curve over the five years prior to 2020. Nine of the ten million new independent workers from 2019 to 2021 were part timers, suggesting they might be picking up occasional gig-economy jobs like food delivery. This trend is evolving against the backdrop of millions of job openings as employers struggle to find full- or part-time wage/salary-based workers. Flexibility seems to be the main driver of the shift to gig work. Restaurant Dive indicates that the restaurant industry is still 1M workers short of pre-pandemic levels as folks have moved onto other industries – and seem unlikely to return.

Digital Currencies Enable Negative Rate Fallacy
A lot of people are worried about inflation in the short term, but longer term, I believe deflation is the more likely outcome thanks to ever accelerating technological advances (see: The Improbability of Rising Rates). And, with dramatically slowing global population growth – which is likely to go negative far sooner than people generally believe – the global economy is losing a key consumption-driven growth engine. Indeed, we seem to be losing the gas for Adam Smith’s vision for capitalism. Ultimately, I think the reality of deflation and changing population dynamics will indelibly change the theory of how an economy should work. For example, we’ve discussed Brian Arthur’s idea that the economy is moving from growth maximization towards a distributive era. Rather than maximizing the speed of pie growth, the shifting economic engines now favor attending to how best to divide the pie – ideally in a way that improves economic equality while still producing growth and a modest degree of inflation (which would stabilize rates and likely prevent deeply negative rates). However, the vast majority of policy makers are stuck in the “grow the pie as fast as possible” mentality of the last few hundred years, so much so that they are contemplating a future of dramatically negative interest rates. The WSJ reports on adoption of digital sovereign currencies backed by central banks, which could make it far easier to implement deeply negative rate policies. Negative rates incentivize hoarding physical money (which isn’t subject to rate deductions); but, if cash gives way to digital currency, negative rates could motivate people to spend or invest the money. To me, that line of thinking just highlights the problem – we are stuck in a high-growth mentality when we need to shift to moderate growth (or possibly no growth per capita) with faster redistribution. Do we really need deeply negative rates to drive even more asset price bubbles, which are a significant contributor to inequality? With 7.5M Americans effectively “losing” their job last week, as government pandemic support largely ended, pursuing an economic agenda to ward off deflation with ever-declining rates seems a bit misguided. It’s an Industrial Age mentality that just doesn’t fit with the world we find ourselves in today. Technological progress provides the deflationary backdrop and labor solution to complete this massive shift from growth to slower growth with increased distribution. The irony is not lost on me that, on the surface, China is trying to carry out this exact switch (under the surface, however, the aim is more likely about power consolidation than than redistribution of economic fortunes). The key difference for the West compared to China is: we are much better positioned to enter into a distributive era while preserving freedom, entrepreneurism, and the motivation for innovation. Indeed, I am optimistic that we can accomplish this redistribution (while maintaining modest growth) without resorting to authoritarianism. Our economy is a hugely complex system with wildly unpredictable outcomes, but one thing seems likely: as analog objects like money go digital, the pace of change is going to accelerate dramatically.

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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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #312

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, 1991, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: the rock 'n roll culture of Gen Z is video games; EV trucks; Amazon's massive pawn shop; the powerful bundle of YouTube Premium; walking whales; how a 1991 representation of VR might inform the direction of AI and shed a little light on consciousness itself; and much more below.

Stuff about Innovation and Technology
“The Ultimate El Camino”
MotorTrend reports on their test drive of the new Rivian R1T pickup truck – with glowing reviews of the functionality and drivability that are somewhat offset by not-so-great impressions of the user interface (which they deemed overly software based for making comfort and other adjustments). Overall, MotorTrend’s Aaron and Christian were impressed with the acceleration and handling – both on- and off-road – thanks to software-controlled power management and suspension systems that are simply not achievable with a traditional drivetrain. While I have no view on Rivian as an investment (Elon shared his view, dripping with irony: “Don’t want to be unreasonable, but maybe they should be required to deliver at least one vehicle per billion dollars of valuation *before* the IPO?”), overall, the reviews of the EV-specific capabilities of this vehicle are yet more confirmation of the vast difference in skill set, hinging upon a software-centric mindset and vertical integration, for producing a modern EV compared to a dinosaur-fueled ICE vehicle. All that said, there are still no Rivian, Ford, Tesla, or other consumer EV trucks on the road yet, so take it for what it's worth. Ultimately, form factor (truck, van, SUV, sedan, hatchback) and brand are important for a lot of drivers, so rather than a Model-T scenario, we will see a proliferation of makes and models over time. It remains an open question if there are enough network effects in data and software to create a winner-takes-most outcome for autos. I talked a bit more about EVs in #297.

Digital River of Stolen Goods
The WSJ reports on Amazon’s standing as the largest shady pawn shop in existence, with a massive rise in shoplifting rings utilizing the website to hawk stolen goods. From meds to power tools, US retailers are suffering $45B in annual losses, up from $30B ten years ago. Of course, not all of that flows through Amazon, but the article cites many examples of multi-million-dollar, third-party sellers dealing in stolen goods. I remember, many years ago, RFID tags were slated to improve inventory tracking, but their usage never really materialized. It seems illogical to not be tracking reasonably high value retail goods at the item level to know if they’ve been stolen and resold. With all of the ambient tracking networks launching from Apple, Amazon, etc., it seems like maybe there is a technological solution that could be implemented at some point. In the meantime, it’s a free-for-all at drug stores and big retailers – with shoplifting up 30% since the start of the pandemic – and more and more inventory is going under lock and key, all of which is helping consumers choose ecommerce over physical shopping. In some cities chains are simply closing stores or dramatically reducing hours, which benefits no one...except Amazon.

Gen Z’s Rock 'n Roll
YouTube’s head of gaming, Ryan Wyatt, posted an insightful thread on Twitter about the rising importance of gaming to Gen Z and how the gaming industry is evolving to create platforms to engage creators in order to build a broader, more sustainable ecosystem. Gen Z’s favorite entertainment activity is gaming (26% vs. only 10% for TV/movies; source). For Millennials, votes for gaming and video were nearly equal (16% vs. 18%, respectively), and Gen X is nearly the inverse of Gen Z, with only 10% preferring gaming and 29% opting for TV/movies as their top entertainment choice. Wyatt points out that we appear to be in a period of proliferation for new games and that game developers increasingly need to embrace content creators to take share. YouTube’s main perspective on this trend is the growth in video game streamers on their platform, but I think it also applies to creators who make and contribute digital items for the games. Token-based games, NFTs, and a robust creator/gamer ecosystem may be a winning formula. And, games will increasingly cross from the virtual to the real world. In the Philippines, some stores are accepting payment in SLPs (Smooth Love Potion), the tokens from the popular Pokémon-Go-style game Axie Infinity, which recently passed $1B in NFT sales. Tokenomics could play a much larger role in the future economy. Every generation has its own cultural art form and expression. Immersive gaming, or watching live-stream as people play games, is as foreign to some older generations today as rock ’n roll was to their parents in the 1950s/1960s. Video games are rock ’n roll, a culture for a younger generation that will have a wide ranging impact, just as rock music did, but perhaps more so given gaming’s technological underpinnings (although, rock music's ubiquity and accessibility was far greater than gaming so far, which might mean it carried a far larger cultural impact than gaming ultimately will). As games proliferate, the fragmentation of the art form might prevent one game from creating a winner-takes-most power law that would have a broader cultural impact (following my “no power laws in art” rule, as consumers’ tastes and artistic preferences are fragmented and fickle). Regardless of how it plays out, gaming’s impact on culture and society is likely to be as large or larger than the artistic movements of previous generations.

YouTube Premium’s Powerful Bundle
I was a longtime big fan of Google Play Music, but apparently I was their only fan because they shut the service down in 2020 and migrated users over to YouTube Music. I dallied with Spotify for a while, but ultimately it wasn’t for me, so I switched over to YouTube Music, and I am quite happy with it. For new subscribers, YouTube Premium – which includes music and eliminates ads on all YT videos – is $11.99/mo (or $17.99 for up to five family members), making it one of the best subscription values out there, especially if you or your kids spend much time watching videos on YouTube (a music-only sub is $2/cheaper). Apparently, I am not the only one hip to this deal, as the FT reports on YT Music landing 50M total subscribers, up from 30M last October, and being the preferred platform for Gen Z (and this Gen-X’er) vs. Spotify. According to the FT, Spotify has 165M subs, Apple has 78M, and Amazon has 63M. It seems like Apple, Amazon, and Google were able to leverage their platforms to quickly build music subscribers, but, in the case of Amazon and Apple, their growth trailed off. We might expect something similar for YouTube Music as well. However, as I look across the four largest music streaming apps (outside of China), YouTube Premium’s video strength and powerful ad-free video+music bundle looks hard to beat.

Chipping Away App Store Tyranny
The trajectory of app stores toward openness and lower tariffs seems sufficiently obvious that I dislike writing about the topic, but some recent news is worth looking at more closely. Apple has made a few small steps under pressure, with some major exceptions, toward opening up the iOS app store. Recently, a settlement with Japan has resulted in Apple globally allowing developers to send users from an app to the app’s website to set up a direct account and payment methods that bypass the app store. This news follows a concession a couple of weeks ago that allowed developers to offer lower prices outside of the app store. But these changes don’t apply to mobile games, which, as the founder of gaming platform Epic has pointed out, seems to have no justification except for profit, given that games are estimated to be around 70% of total app store sales. Why should Netflix or Spotify be allowed to send users to create direct accounts and payments, at perhaps lower fees, but game developers are stuck with the 30% fees and no direct relationships? Indeed, Apple and Google have quite an unfair advantage in building their music streaming apps (see above paragraph), as they don’t need to pay themselves their own app store fee like Spotify does. South Korea recently passed legislation mandating the app stores allow alternative payment methods, and other countries could follow. App stores are very profitable – the FT reports that a disclosure (from a lawsuit brought by multiple US attorneys-general) showed a 62.5% operating profit margin for the Android Play store in 2019. That profit pool appears to include app store search ads but is still roughly twice the operating profit margin of Alphabet’s overall business (which is weighed down by moonshot and other investments unrelated to Google’s advertising-based businesses). It seems reasonable and obvious to everyone, except for Apple and Google, that the app stores could charge a fair, profitable fee that covers payment, fraud, and supervision costs while making additional profits on app search ads.

Miscellaneous Stuff
Limbed Cetacean
A fossil of a 43-million-year-old four-legged whale has been found in the Sahara Desert by Egyptian scientists. Whales are believed to have evolved from terrestrial, deer-like herbivores to aquatic carnivores over a span of just ten million years.

Until the End of the World: 1991’s Virtual Reality Informs Consciousness
1991 was a great year for movies. According to IMDB’s ranking of the most popular releases from that year, there are classics in the top ten like Silence of the Lambs, Terminator 2, Thelma and Louise, and Point Break (you can also view the list ranked by US box office, with Beauty and the Beast on top at $219M). There were some great comedies (a seemingly dying medium for film and TV these days), like City Slickers, What About Bob, Father of the Bride, and LA Story (it was a big year for Steve Martin, starring in three top-100 movies, including the often overlooked, but excellent, Grand Canyon). There is a prevalent sense of dejection that the movies of the 1980s and 1990s wouldn’t get made in today’s clickbaitable and often mediocre streaming world – or at least not made for cinema, even putting the pandemic aside. As I compare that 1991 list to today’s meager cinematic offerings, I find myself sharing in that lamentation. But, we have much to learn from the popular movies that came out before the commercial Internet and long before smartphones turned us into zombies.

Many classic 1980s/1990s period films exploited glimpses of emerging technologies that were still decades away, like mind-body interfaces and virtual reality. Jaron Lanier, now at Microsoft, coined the term ‘virtual reality’ in 1987, and it rapidly started to enter the pop-sci lexicon. One of my favorite films of 1991 is Wim Wenders’ epic Until the End of the World (the five-hour director’s cut is streaming on the Criterion Channel app). It’s at least two films in one, and today it perhaps might get made as a multi-part show for an ambitious streaming app. Without giving too much away, the first three hours are a classic road trip/detective/chase movie, and the last two hours explore the concept of VR and neural interfaces in more depth. I’d rather not admit to how many times I’ve seen the movie, but, in a recent rewatching, the latter section landed a bit differently with me as we stare down the arrival of VR and neural interfaces for the masses in the next decade or two. Thirty years ahead of its time, Wenders touched on some provocative themes. Another movie that comes to mind from that cinematic golden era that deals with VR and brain interfaces, in a much darker way than Wenders’ classic, is 1995’s Strange Days.

When I think about VR, I immediately start thinking about consciousness. One of my favorite experiences occurred when I first donned the prototype Magic Leap headset – and could actually feel an AR pixie on my finger. Later on, the incredible app Tónandi, produced in collaboration with Sigur Rós, created a similar melting of the real and virtual for me. Consciousness is essentially a filter that creates a certain ‘movie’ – a virtual reality representation of the world around us – that is composed and played for our conscious, awake awareness. The world we experience is thus one of illusion, by many measures. To take a basic example from daily life: our brain offers us a simplified version of reality in which the sun appears to rise, move through the sky, and then set. But, in reality, we are actually hurtling essentially backward through space away from the setting Sun as Earth rotates, with the sun staying fixed relative to Earth. Because we are so used to our brain’s version of events, it’s perhaps not surprising that total solar eclipses can be so strange to experience in person – even when we know, intellectually, what’s really happening, it just doesn’t fit with our brain’s prediction of what is supposed to happen: the sun just doesn’t simply evaporate from the sky in the middle of the day! If you consider a world devoid of conscious awareness, our raw sensory data would consist of electromagnetic and pressure waves. It’s our brain that creates a view of reality based on these alien inputs. Here is how Victor Johnston beautifully puts it in his book Why We Feel:

Consider a world without consciousness. The darkness is a bubbling cauldron of energy and vibrating matter, locked in the incessant dance of thermal agitation. Through shared electrons or the strange attraction of unlike charges, quivering molecules, not free to roam, absorb and emit their characteristic quantal packages of energy with the surrounding fog. Free gas molecules, almost oblivious to gravity but buffeted in all directions by their neighbors, form swirling turbulent flows or march in zones of compression and expansion, according to the dictates of oscillating substrates. A massive solar flux and cosmic radiation from events long past crisscross space with their radiant energy and silently mix with the thermal glow of living creatures, whose hungry metabolic systems pour their infrared waste into the chaotic milieu. But within the warmth of their sticky protein bodies, the dim glow of consciousness is emerging to impose its own brand of organization on this turbulent mix of energy/matter. The active filter of consciousness illuminates the darkness, discards all irrelevant radiation, and in a grand transmutation converts and amplifies the relevant. Dead molecules erupt into flavors of bitterness or sweetness, electromagnetic frequencies burst with color, hapless air pressure waves become the laughter of children, and the impact of a passing molecule fills a conscious mind with the aroma of roses on a warm summer afternoon.

One definition of consciousness I’ve been thinking about is: a system or network sufficiently complex to run simulations, make predictions about future events, and check objective reality against those simulations with sensory input. This model for the brain is something I’ve discussed before, with the work of Lisa Feldman Barrett and Karl Friston (#272), and its focus on highly complex predictive ability is what most interests me as a defining element of consciousness. The sensory inputs used to create and check the predictions are sevenfold: sight, smell, taste, hearing, feeling (external sensation as well as internal feedback from our gut, heartbeat, etc.), thought, and emotion (these last two strike me as sensory inputs, but it’s a non-standard way of framing the senses). Consciousness then filters this reality into our awareness, but we aren’t aware of the unknown number of unconscious simulations the brain runs to try and predict reality. By unconscious here I mean those thoughts (if that is the right word) that we are not consciously aware of. Yet, what if we could be aware of those unconscious simulations? That’s the question that my latest rewatching of Until the End of the World raised for me.

Let’s say we have a VR device that could show you your unconscious thoughts via a neural link. Or, the device could replay your dreams from the night before for you to watch in full conscious awareness. And, it could show you other people’s recorded dreams or experiences, both conscious and unconscious. It doesn’t seem too farfetched to believe this could be possible one day, and that someone is perhaps even working on it right now. Here is where things get a little more trippy: what if an AI could access all of those unconscious simulations our brain is running to predict reality? And, what if it could look across millions of people running millions of simulations below the threshold of conscious awareness? What if that AI could then determine an algorithm that was better than our current “consciousness algorithm” that natural selection has come up with? That would be one heck of a prediction machine. Using my definition of consciousness above – a complex system that can predict with the help of sensory input – it would be an entirely new level of conscious awareness. If consciousness is effectively our waking awareness of the best algorithm natural selection arrived at for predicting the future in order for life to survive and reproduce, then imagine what access to those unconscious simulations at massive scale would bring. It’s the stuff of sci-fi movies for sure, and I am looking forward to someone in Hollywood bringing it to the screen, and then looking back thirty years from now to see how things ended up.

Stuff about Geopolitics, Economics, and the Finance Industry
What Would Marx Do?
Way back in the 1990s, while interviewing for a summer internship, I was asked who I thought Karl Marx would vote for in the next US presidential election. I got the answer wrong – because I naively answered it from an economics perspective – but luckily still got the job. The more interesting answer is that Marx would probably vote for whichever candidate is most likely to cause a proletariat revolt against the ruling class. For example, Marx would not have voted for Biden last year, even if he agreed more with his politics, because Biden is unlikely to provoke mass unrest. It’s just a silly thought exercise with no real-world value, but it keeps coming to my mind when I read about China. Most recently, the CCP has banned video game playing for folks under 18 except for one hour on Fridays, one hour on Saturdays, and one hour on Sundays. In light of the stats on Gen Z and video games above, the CCP’s new directive seems like a particularly harsh sentence. The WSJ reports the gaming ban is an effort to fight niang pao, or “sissy pants”, pop culture following “a notice from China’s Ministry of Education late last year warning that young Chinese men had become too ‘feminine’”. Going a step further, the CCP is banning all effeminate men from television. The lady doth protest too much, methinks. The CCP is also making dramatic changes that further limit personal freedom as well as motivation for entrepreneurship, thus widening the range of outcomes for the country (see #307). Citing such crackdowns as having an actress removed from social media and purging her 25-year film career from movie streaming services, NPR suggests the possibility of a Cultural Revolution 2.0. (As a side note, the increasing cognitive dissonance for a CEO like Tim Cook to endure in order to keep his company 100% reliant on Chinese production must be quite a challenging psychological accomplishment for him!) Birth rates have been dropping in China, even after the country shifted from a one-child to two-child policy in 2016, and men outnumber women by 35M. This declining birth rate trend might suggest a certain pessimism among China’s youth regarding the future. If there were an election in China, I think Karl Marx might favor the incumbent regime, but not as an endorsement of its political ideology.

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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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #311

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, allostasis, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: innovation in fintech as the legacy banks increasingly regulate speech and action; drone deliveries becoming a reality; autocratic espionage; Brian Arthur and Sean Carroll talk; piles of clothing waste; the endemic and its long-term impact on shipping times and costs; the permanent loss of labor and the rise of robots; and much more below.

Stuff about Innovation and Technology
Wing's Chicken
Google’s drone delivery service, Wing, has now delivered 100,000 orders. More than half of those were in Logan, Australia, where Wing has dropped off 10,000 cups of coffee, 1,700 snack packs, and 1,200 roast chickens. A recent bustling week in Logan saw drone deliveries taking place every ~30 seconds during business hours. Wing estimates that 2B people live in cities about the size of Logan (pop. 300,000) that could be servable by drone delivery.

Human Brain on a Chip
In an interview with Semi Engineering, the chief strategy officer at the global semi R&D shop, IMEC, discusses the work being done at the intersection of chips and biology: “The idea is that we can build a circuit of neurons on the silicon chip surface. With the use of electroporation by electrodes and injecting biological vectors through microfluidics, we can program regular cells to become stem cells again. Then, with the right stimuli we can program those induced pluripotent stem cells to make them become neurons of a certain type. We have a project running with experts in the cell biology to master the process to build or mimic the neuronal circuitry of a human brain on a chip.” The interview also covers the shift from wearables to ingestibles and implantables for better, continuous monitoring, but with the added challenges of energy harvesting and cooling.

Battery Power Law
Demand for EV batteries rose 40% y/y to 134.5 gigawatt-hours last year, powering 3M new cars. By 2030, some estimates show 145M EVs on the road, up from 10M in 2020. IEEE reports that six companies have 87% share of EV battery supply, and the top three, CATL, LG Energy, and Panasonic, control 69%. CATL and LG have gained the most share, growing ~10x and ~3x vs. the market, respectively, from 2016 to 2020. IEEE also mentions the trend toward reducing cobalt in batteries. To meet projected demand, the US alone needs a terawatt of new battery capacity this decade across 20-40 new gigafactories.

Coerced Espionage
Protocol reports that the FBI is ramping up its warnings to US tech companies about the risk of theft by China and Russia. In particular, the bureau warns that well-intentioned employees can be influenced to steal IP and other trade secrets when foreign governments threaten their family members back home. In one case, an employee of a US company was under threat of the CCP denying their mother dialysis. The FBI stresses it’s important to not discriminate against anyone just because they have family living in an autocracy, but to be aware of the elevated risks. The agency is working with Silicon Valley VCs to determine where the most valuable tech is being created so they can alert companies of the need to identify – and help – individuals with potential vulnerabilities.

Prudish Banks Catalyze DeFi
It’s a little hard to parse what happened recently with the multi-billion-dollar adult-content creator platform OnlyFans, which abruptly told its members they would be banning explicit content due to pressure from banks and credit card companies following some recent rule changes. However, days later, management reversed course, saying they had come to an agreement that allowed explicit content to carry on. There are a lot of cross currents in this situation that I don’t fully understand, including banking’s role in helping prevent sex trafficking and other illegal behavior. However, it’s not clear to me that allowing consenting adults to create and share explicit content is inconsistent with targeting illegal behavior. Protocol points out that MasterCard and Visa’s monopoly in payments makes them a default arbiter of free speech, which strikes me as a bad situation for a lot of reasons. OnlyFans pays out $300M a month to creators. It’s a long running joke in the tech industry that the adult entertainment has always been an early adopter of most new technology and media formats. Accordingly, this recent controversy could serve as a catalyst for a DeFi monetary solution that completely cuts out the traditional banking system, keeping the adult entertainment industry on the cutting edge of innovation. In the interview with the FT, OnlyFan’s founder said JP Morgan Chase, which, as we know, calls DeFi (and fintech innovation in general) shadow banking, “is particularly aggressive in closing accounts of sex workers or . . . any business that supports sex workers.”

Miscellaneous Stuff
Starring Complexity Economics
Brian Arthur and Sean Carroll are two of the most quoted people in SITALWeek, so when they sit down for a conversation together, you can bet I will link to it! Sean interviewed Brian about many aspects of applying complex systems science to economics.

From Pandemic to Common Cold, Eventually
As COVID shifts from a pandemic to an endemic, one of the ways our species will cope with the virus going forward is that new generations will have the benefit of earlier exposure – when there’s less risk of adverse reaction – allowing progression of herd immunity over time. There are four main coronaviruses behind the common colds we all get, and they have existed for generations. Because we grew up with frequent exposure, our immune system developed a better ability to fight off those viruses, so we now don’t get as sick as we otherwise might upon subsequent exposure later in life (of course, the virus strains are constantly evolving, but exposure to an earlier variant tends to confer a degree of immunity to mutated progeny). If the novel coronavirus becomes the fifth common cold, we can expect younger kids to handle the virus better over their lifetime as compared to today’s adults, who don’t have the benefit of building a natural immunity to a novel virus in their youth when the immune system is more responsive and resilient.

Fast Fashion’s Load of Rubbish
We buy 60% more clothes than we did 15 years ago, and we keep items for half as long. This trend has powered a doubling of the clothing industry since the year 2000. In Accra, Ghana, much of the used clothing we donate ends up as mountainous piles of refuse, dotted with human and bovine scavengers. Forty percent of the 15M garments, called “‘obroni wawu’ – dead white man’s clothes”, that arrive from the US, Europe, UK, and Australia are discarded as unusable. This disposable clothing trend follows the overproduction of inferior-quality “fast fashion” garments and donation of excessively damaged goods, which are subsequently barged across the seas instead of being disposed of locally. There is potential for escalating environmental damage somewhat akin to our plastic recycling mess (actually, since cheap polyester features prominently in fast fashion, it’s perhaps more accurately an extension of the plastic waste catastrophe), as first-world countries flood poorer nations with more and more of our trash. Hopefully, increased awareness will dampen the revolving fashion trend. But, consumers aren’t the only ones responsible for the waste. On the production side, brands often overproduce items and end up scrapping them wholesale. Online luxury seller Farfetch is working with several luxury brands on preorders to help adjust manufacturing to meet demand (although, admittedly, this is a small part of the overall market for clothes).

All About Allostasis
Lisa Feldman Barrett penned a concise explanation of allostasis for Technology Review, explaining how senses, thoughts, and feelings are a consequence of the brain trying to regulate you (specifically your body, so that you continue to remain viable) given the conditions of the world around you. The brain is constantly creating models of you and your interactions in physical and emotional space, and then checking new input vs. that model. This explanation is opposite to how we intuitively think our brain works, i.e., reacting to already observed inputs. I discussed this idea in more detail in #272 as it relates to decision making. The logic inversion is very useful once you fully internalize it – we are not a product of our environment; rather, our reactions are shaped by what our brain anticipates our environment to be, with an eye towards physical fitness/survival.

Stuff about Geopolitics, Economics, and the Finance Industry
Enduring Labor Dearth
The labor shortage persists as a major headache for businesses, with restaurants continuing to close dining rooms and logistics companies struggling to meet demand. If the labor force is structurally lower relative to steady-state demand, then this is not so much a labor shortage as a wage problem. If we want people to re-enter the labor force long term, then we potentially need significantly higher wages. Higher pay is going to be in tension with the rising use of technology and robotics, which will ultimately act as a natural damper on wages and labor demand. In the restaurant sector, Sweetgreen (a chain of salad eateries) recently acquired Spyce, which uses touch screens for ordering and robots to assemble customers’ custom bowl meals. Restaurant Dive also reports that Piestro, a robotic pizza machine that can make a wood-fired ‘za in three minutes, will roll out across the 16-restaurant chain 800 Degrees Pizza. Another example comes from the world of sports, with the rise of the robot umpire, now used in some minor league games (an experiment we first wrote about nearly two years ago). The ump is still behind home plate, but only to call out what the robot tells them via an earpiece. The games are said to be a bit quieter, as neither side argues over calls anymore and fans assume the automated system is more accurate.

COVID’s Supply Chain Snarls
Discount retailer Dollar Tree imports 90,000 40-foot containers per year, and the company estimates it brings in more containers per dollar of sales than any other retailer in the US to feed its shelves. Due to China's zero tolerance COVID policy, Dollar Tree experienced a two-month delay on one vessel as a result of one positive COVID test requiring a new crew to be staffed in another country prior to returning to China. Meanwhile, C.H. Robinson is adding a $175 congestion surcharge to every container. As COVID turns into an ongoing endemic, it’s prevalence could continue to snarl the ports and cause multi-month delays for a very long time. After decades of globalization, the West has shifted production overseas to save on labor (fun fact: 98% of all Big Lots artificial Christmas trees come from a port in the Yantian district of Shenzhen). Given trending political-economic East-West tensions, COVID-induced logistics costs, and adverse environmental impacts, I see few good reasons to continue outsourcing production for many of the items we import from overseas. And, now that automation reduces (with ever-increasing impact) a lot of the labor costs (such that labor itself is now more expensive across previously cheap manufacturing locales vs. automated production), the only logical solution may be a decades-long rebuilding of supply chains and factories for re-localization of production. Until that happens, you might want to do your holiday shopping now!

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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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #310

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Black Bart’s Cave, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: the digital ghosts we leave behind in augmented reality; robots: the Tesla Bot, a drug bot, the need for construction bots; office worker surrogates; avatar-based meetings could reduce bias; the complex interplay between Afghanistan, China, Taiwan, and the US; Casa Bonita; and much more below.

Stuff about Innovation and Technology
Innerspace Docking Station
Researchers in Italy have developed an implantable robotic device for insulin delivery that attaches to the small intestine and receives insulin re-supply via ingested magnetic capsules. Following robotic docking, a capsule transfers its insulin payload to the microinfusion system located in the abdominal cavity. The motors/actuators in the phone-sized device are charged and controlled wirelessly. As reported in Science Robotics, the team from the Sant’Anna School of Advanced Studies has already trialed the device in pigs with good success. The possibilities seem endless here – it would be a great way for everyone to get their Soma in the future.

Digital Ghosts
The current situation is Afghanistan is beyond concerning for those that need to leave the country but cannot. While pale in comparison to the humanitarian crisis, it’s strange to think of the digital-only footprints we will leave behind all over the world, invisible from the distant future. Stars and Stripes magazine reports on the Pokémon left behind at American bases in Afghanistan. Pokémon Go was apparently quite popular at the Bagram Airfield. The augmented reality game, which brought together troops, contractors, and civilians, can only be played in geographic proximity to the gamer’s device, meaning many Pokémon at now-uninhabited locations could languish at their posts unchallenged. “Screenshots of Bagram after the troops left show low-level Pokemon, normally easily defeated, stuck guarding locations, perhaps indefinitely. A tiny Lotad has defended the former Warrior Chapel at Bagram for 10 days, while a lowly Aron has defended a memorial to a fallen service member for about two weeks.”

Smoothing CA’s Energy Supply
The world’s largest battery storage facility is now online in Moss Landing on California’s Central Coast. The Vistra project has a 400MW capacity, enough to power 300,000 homes during peak demand periods using energy stored during times of excess renewable energy production. The site is adjacent to PG&E’s Tesla Megapack storage facility, which has 182.5MW of power. In aggregate, the location could power ~2% of homes in California, and Vistra anticipates their facility will ultimately power over 1M homes.

Looming Infrastructure Mega-Projects Need Robots
As I was thinking about the cost to upgrade infrastructure to handle more extreme weather swings, it seems like there are a lot of ~$20B projects under consideration. A couple weeks ago, I mentioned (#306) it would cost about that much for PG&E to bury a portion of its power lines in high risk areas, and for Detroit to upgrade their stormwater drainage system. Apparently, it was also determined that damming the Golden Gate Bridge to keep rising tides at bay would cost...$19B. It’s certainly easy to see how expenses could add up to well into the trillions. I can’t help but wonder where the labor will come from (and with what incentives) to even consider some of these projects. 21,000 people were involved in the construction of the Hoover Dam. Is it less people-intensive to build a dam today than during the New Deal era? It’s possible that governments won’t even be able to contemplate breaking ground until deflationary automation/robotics renders construction more affordable. In the meantime, I’d expect a lot of design and simulation engineering to take place as projects are proposed and considered. And, we might expect a stronger focus on greener steel production in the coming years.

Tesla Exocomps vs. Facebook Avatars
Perhaps the labor needed for the global infrastructure overhaul is going to be available soon. The Tesla Bot, revealed by Elon Musk last week, is meant for repetitive and unsafe tasks. The 125-pound, 5’8” humanoid bot is designed such that humans can run away from it if it goes rogue (what if it grabs a weapon!?). Musk said: “Essentially, in the future, physical work will be a choice. If you want to do it, you can, but you won't need to do it.” Tesla’s AI event is more for recruiting than product announcements, so the Tesla Bot may never see the light of day (at the event, the bot was just a person dancing in a costume, and it’s highly likely the bot announcement is something between a joke and a troll). But, it does seem likely that, in the next decade, we will have purpose-built robots for many manual labor tasks, which could coincide with the timeline for rebuilding failing infrastructure (I talked more about our future of purpose-built robot minions in #257).

And, perhaps instead of Facebook’s new VR-based Workrooms cartoon collaboration tool for virtual meetings in the metaverse – complete with avatars that track movements and facial expressions (which does seem more compelling than today’s Zoom) – Tesla could make us office-bot doppelgängers who can be physically present in meetings with the real humans (or maybe just each other). Instead of congregating around the coffee pot, we could gossip at the communal charging station. What’s interesting to me about Workrooms is that you could theoretically appear in any form – if you remotely interview and work on such a platform, it could remove a lot of bias in human interaction that is based on subconscious (and conscious in some cases) reactions.

Embiggening the Bot Brain
And, these robots have the potential to become a lot smarter. Nvidia’s Jensen Huang mentioned on last week’s earnings call that AI models are doubling in size every two months! Current models are in the 100-trillion parameter range. Although the comparison isn’t a fair one, Huang noted the human brain has around 150 trillion synapses (connecting around 86B neurons).

AI Chip Design Goes Commercial
Samsung is using Synopsys’ new AI chip design tool, DSO.ai, for its Exynos mobile processors. As we’ve discussed in the past, letting algorithms configure more efficient chip designs (pathways between blocks and billions of transistors, etc.) could have a meaningful impact on performance. There may be a step function in chip design over the next few years, particularly if a design platform is able to aggregate learnings across various chip designs to improve overall efficiency.

Miscellaneous Stuff
Cartman’s Casa Bonita
In some delightful hometown news, the creators of South Park are buying Casa Bonita. For those of you who didn’t grow up in/near Denver, Casa Bonita is a bit hard to explain. It’s certainly a restaurant, but it’s more of a fantastically campy dining experience, with tables spread throughout a multi-tiered, 52,000 square-foot jungle-like setting, complete with grottos, mariachi bands, cliff divers jumping off a 30-foot-tall indoor waterfall, dancing gorillas, games, and more. The business, which declared bankruptcy during the pandemic, will get some much needed investment and improvement from Matt Stone and Trey Parker, who featured the “Disneyland of Mexican restaurants” in a 2003 episode. As a ViacomCBS shareholder, I can’t think of a better use of proceeds, from the duo’s recent $900M expanded content deal, than revitalizing Casa Bonita.

Stuff about Geopolitics, Economics, and the Finance Industry
Fall of Afghanistan Heightens US-China Tensions
China’s proximity to – and complex relationship with – Afghanistan could be something to watch as control shifts in the embattled region. The Washington Post reports: “Afghanistan’s stability is key to protecting the approximately $60 billion in Belt and Road projects in neighboring Pakistan that provide an overland route to the Indian Ocean. With those concerns in mind, China’s Foreign Minister Wang Yi hosted a senior delegation of Taliban officials last month, where he pressed the group’s chief negotiator Mullah Abdul Ghani Baradar to break with the East Turkestan Islamic Movement and prevent it from launching attacks on China’s interests from Afghan soil.” The article concludes: “In the long term, China wants Xinjiang to be a prosperous and stable neighborhood, and for that, there cannot be instability in their backyard. But with the Taliban back in power, instability is all there is.” Vice reports that: “Chinese state media have sought to frame the Taliban as an enemy of the U.S. that enjoys some degree of popular support. On Monday, the Communist Party mouthpiece People’s Daily shared a one-minute video about the Taliban on Weibo, saying the group had expanded in its early days thanks to its anti-corruption efforts and the support from the poor population. But many Chinese social media users questioned why the official media did not report on the group’s radical ideology and human rights violations.” The situation in Afghanistan is a good example of a complex adaptive system for which the ultimate outcome is somewhere between difficult and impossible to predict. With the anticipated shift of Xi from party-elected official to dictator in 2022 and the escalating tensions surrounding Taiwan, increased Chinese support of the Taliban could compound what is already a tense situation with enormous stakes. While Xi may not be ready to openly throw the CCP’s full support behind Afghanistan’s new leaders just yet, his government is using the Taliban’s rise as an opportunity to discredit the US and question their military support of overseas allies. Military Times reported on China’s intensified drill activity near Taiwan last week, and the official China state news agency said: “The fall of Kabul marks the collapse of the international image and credibility of the US...Following the blows of the global financial crisis and the Covid-19 pandemic, the decay of the American hegemony has become an undisputed reality. Its failure in Afghanistan is another turning point in that spiral fall”, as reported by CNN. The US, for its part, held one of the largest drills since the Cold War, according to the WSJ, involving 25,000 Marines and US Navy personnel in the Western Pacific. The exercise involved several allied countries and was designed to simulate the takeover of islands in the region. At any point in time anything can happen, a key lesson from complex adaptive systems. And, at this point in time, it seems like a wide range of outcomes is possible, and should perhaps be anticipated.

More-for-Less Digital Wave Wiping Out Inflation-Surfing Dinosaurs
A key area of investment focus at NZS Capital is the analog-to-digital transition of the global economy. At present, we are probably 5-10% of the way through this decades-long transformation. So far, we have few, if any, good examples of 1900s companies that have truly reimagined themselves into digital leaders. Winning in the Information/AI Age takes adaptability and a focus on maximizing non-zero-sum outcomes for all constituents. That’s a very hard DNA rewrite for companies that were built on maximizing profits at the expense of some other group (customers, suppliers, distributors, society, the environment, etc.). In many ways, analog companies were built to take advantage of inflationary growth, but digital companies are built as engines of deflation – providing more and more value for the same or less money over time. In this context, we typically run away from companies claiming pricing power and get nervous when we see management raising prices without an accompanying increase in value provided. Just because a product might be underpriced doesn’t mean companies should charge more for it. Underpricing keeps the customer base growing and limits vulnerabilities exploitable by tomorrow’s next upstart. It’s easier than ever to start and grow a new business, and the tools that enable startups are multiplying rapidly. When we ask ourselves: would we rather own inflation beneficiaries or deflation enablers, it is almost always the latter.

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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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #309

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, cryogenic mirrors, 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

In today’s post: ironic emojis; AI lacking analogizing; mobile gaming takes off while console/PC gaming plateaus; protecting consumers and labor vs. over regulating monopolies as the economy goes digital; making reality better; the James Webb Space Telescope; and much more below.

Stuff about Innovation and Technology
AI-Enhanced Mineral Prospecting
KoBold Metals is a material exploration company that flies a helicopter sporting a 115-foot-diameter copper coil to find deposits of cobalt and nickel for use in EVs and other tech devices: “These researchers plugged the new survey data into machine-learning models, which combined it with reams of other data the company has gathered to improve understanding of the region’s geology. Finally, they fed all this information into an artificial-intelligence system KoBold developed in partnership with Stanford University. The system draws on vast computational power to advise the team on the best places to survey next.” The new method is in contrast to the traditional way of manually analyzing field-collected data after the mining season. KoBold uses their data to acquire mining claims; so, if you see a strange copper thingy flying over your property, you might want to raise your asking price.

🤣➡️☠️:😕
The WSJ reports on the widening generational gap for interpreting emojis. A smiley face for the younger generation is now sarcastic and disingenuous. An LOL or a cry-laughing emoji is now a skull and crossbones...because they are dying laughing. With increased use of enterprise texting apps at work, the generational gap can lead to misunderstandings and miscommunications, according to the WSJ. Given the prevalence of text-based communication in the Information Age, a shift to a universal symbolic language sometimes seems inevitable to me. But, if one emoji becomes ironic to some and not to others, we might see a complete breakdown in our hieroglyph-ing. My go-to is always Emojipedia to check what something is supposed to mean; or, better yet, maybe we should just stop communicating altogether until Neuralink is available. PS: I am old.

Mobile Madness
Mobile games are continuing their pandemic surge as App Annie is still predicting 20% growth in 2021 ($120B total by year’s end) following similar growth rates in 2020. This growth trend for mobile strikingly contrasts with that of console/PC gaming, which has been flatlining this year following meaningful growth in 2020. We’ll have to see how gaming behavior continues to evolve, but, at the moment, there seems to be a fairly large expansion of the casual, mobile gaming market due to increased phone usage that, like a bad habit, has stuck to post-lockdown life. Anecdotally, I see people using their phones in scenarios in which I don’t recall them being used pre-pandemic, suggesting the cigarette-like behavior is manifesting in increased mobile gaming and short-form video viewing. In related news, Axie Infinity, a Pokémon-Go-like game, has recently and rapidly achieved $1B of in-game NFT sales.

Omniversified PowerPoint
At Nvidia’s 2021 GTC keynote address earlier this year, CEO Jensen Huang briefly appeared as a virtual replica of himself, with his avatar mimicking both voice and appearance (see 1:02:29 to 1:02:56 in the video as he unveils their new DGX computing platform). Nvidia revealed last week that they built the virtual Jensen, his kitchen – and the rest of the keynote – inside the company’s Omniverse design software. While virtual Jensen is somewhat of a letdown, the blog post contains a 30-minute explanatory video with all the details and advantages of collaborating and building in a shared, virtual world.

App Stores Need Consumer Protections, Not Growth Inhibitors
If there is an important tool or service only available from one or two places that many people absolutely need to function efficiently in their job/life, then the providers of that tool/service are probably monopoly utilities and should be regulated as such. I am, of course, describing the Apple and Google app stores. Multiple transactional aspects controlled by the platforms (fees, payment options, data portability, and communications) are now under scrutiny, and there’s a new bipartisan bill (PDF) in the US that attempts to solve some of the problems developers are facing. Today, perhaps less than 10% of the global economy is digitally transacted; but, decades from now that number could be 90%, the bulk of which could be taking place via apps distributed by app stores on software (and in some cases hardware) that is controlled by only two companies (outside of China). You occasionally see a company like Snap say they are perfectly happy with the app store fees and control mechanisms, but I would posit that’s because those high fees and controls make it harder for new Snap competitors to scale up economically while relying on app stores for distribution. TikTok was able to rise to prominence and become the top downloaded app globally only because its parent company funded billions in losses.

Regulators Serving Up Food-Delivery Roadblocks
Grocery and restaurant delivery in the US is a hypothetical business model where, if you squint hard enough, you can imagine a scenario where vertical integration, subscriptions, purpose-built warehouses, advertising, and routed delivery eke out enough margin to make up for the labor cost transfer from the consumer to the business. The imaginary business model seems unlikely to succeed without meaningful horizontal and vertical consolidation, unless a winner-takes-all platform emerges that is heavily subsidized by advertising or some alternative business model (like Amazon Prime subscriptions). But, the state of the business today is sufficiently negative sum (taking more value from restaurants, stores, and drivers/shoppers than it creates for itself, resulting in unsustainable consumer surplus) that proposed mergers are drawing government scrutiny. The Information reports that the FTC is investigating the Uber partnership with Gopuff and that DoorDash may have abandoned a deal for Instacart due to potential regulatory concerns. As I’ve written about several times, the multi-trillion-dollar food industry appears ripe for analog-to-digital transformation. Typically, that means a small number of platforms will develop network effects and scale to create a viable business with value creation for all constituencies. However, regulatory action that prevents consolidation might completely kill this negative sum biz. That said, there are clear issues today with underpaid workers, and narrow restaurant/grocery margins are problematic. It may simply not be possible to transfer the labor cost from the shopper/eater to the merchant given that food is such a low-margin, highly-fragmented industry overall. Instead, the winners may be the companies that find niche segments of higher margin and convenience, or those who take share with the best array of digital and robotic tools to create better customer experiences.

Don’t Replace Reality, Augment It
These comments from John Hanke, CEO of Niantic (Google spin-out and maker of Pokémon Go and other AR games), struck a chord with me:
“I’m not denying that the metaverse is a cool concept from a technology point of view; it comes from one of my favorite sci-fi writers, Neal Stephenson, who coined the term in his 1992 novel, Snow Crash. Along with the works of William Gibson, that book created the cyberpunk genre, in which characters spend time wired into a digital universe where they explore, socialize, fight, and (at least in the novels) save the world from villainous plots. The concept reached one of its most complete expressions in Ernest Cline’s Ready Player One, where virtually everyone has abandoned reality for an elaborate VR massively multiplayer video game.
A lot of people these days seem very interested in bringing this near-future vision of a virtual world to life, including some of the biggest names in technology and gaming. But in fact these novels served as warnings about a dystopian future of technology gone wrong.
As a society, we can hope that the world doesn’t devolve into the kind of place that drives sci-fi heroes to escape into a virtual one — or we can work to make sure that doesn’t happen. At Niantic, we choose the latter. We believe we can use technology to lean into the ‘reality’ of augmented reality — encouraging everyone, ourselves included, to stand up, walk outside, and connect with people and the world around us. This is what we humans are born to do, the result of two millions years of human evolution, and as a result those are the things that make us the happiest. Technology should be used to make these core human experiences better — not to replace them.”

Miscellaneous Stuff
Peering Back in Time with NASA’s Webb
After 25 years and $10B, the 7-ton James Webb Space Telescope (JWST) is nearing its launch into heliocentric orbit 1.5M km beyond Earth, from where it will take the deep space exploration helm from the 30-year-old Hubble. Once deployed, “eighteen hexagons of gold-coated beryllium mirror will open out, like an enormous, night-blooming flower. The mirrors will form a reflecting surface as tall and as wide as a house, and they will capture light that has been travelling for more than thirteen billion years.” The JWST will orbit in line with the Earth/Moon so the mirror array can be isolated from radiation generated (or reflected by) the Sun, Earth, and Moon via a tennis-court-sized parasol. To keep the telescope out of the shadow of the Earth/Moon, it will also orbit the 2nd Lagrange point (L2) on the far side of Earth perpendicular to its heliocentric orbit (see embedded animation). Ball Aerospace made the mirrors and cryogenic actuators that can move each mirror and curvature to within 1/10,000 the width of a human hair. The more light we can collect, the deeper and longer we can stare back into time – potentially 13.5 billion years – toward the beginning of the universe as we know it, some 14 billion years ago. Unlike the Earth-orbiting Hubble, which could be repaired and upgraded (Ball Aerospace fabricated instruments to fix its fuzzy focus, among other improvements), the JWST will be beyond our physical reach, so let’s hope for a flawless deployment.

Analogizing Key to AI Success
SFI professor Melanie Mitchell sees inability to analogize as one of the biggest hurdles to AI. Mitchell comments: “Today’s state-of-the-art neural networks are very good at certain tasks, but they’re very bad at taking what they’ve learned in one kind of situation and transferring it to another.” Analogy is the central skill needed for AI to predict the future, express common sense, and retrieve the relevant past information for a current situation, according to Mitchell. “One of the theories of why humans have this particular kind of intelligence is that it’s because we’re so social. One of the most important things for you to do is to model what other people are thinking, understand their goals and predict what they’re going to do. And that’s something you do by analogy to yourself. You can put yourself in the other person’s position and kind of map your own mind onto theirs...It’s essentially a way of making an analogy.”

Opaque AI Scoring Controls Opioid Dispensation
NarxCare is a US database designed to flag medical patients that may have opioid addictions; however, it’s unfortunately a textbook example of AI that is underdeveloped and overly trusted before it’s been vetted as serving an unbiased, useful purpose. The system can cause a complete denial of medical care for yourself if you happen to have a dog that is also on medication or if you have cancer. It seems that NarxCare could use a little analogizing.

Philip Morris to Make Respiratory Medications
Cigarette maker Philip Morris, considered only a “medium” ESG risk according to Sustainalytics, is looking to buy respiratory drug maker Vectura for over $1B. It seems to me that a cigarette giant treating respiratory ailments is highly analogous to an undertaker drumming up their own business. In a call back to the paragraph above, I hope I am using the right emoji here: ☠️

Stuff about Geopolitics, Economics, and the Finance Industry
Rocketing CVC
CB Insights reported VC investments by corporate internal venture investment divisions hit $79B in the first half of 2021, exceeding the $74B for all of 2020. I seem to recall similar surges (in what is a typically looser source of VC money) during prior investment cycle peaks. Global VC deals of all types totaled $288B in the first half of 2021, more than double the prior six months. It’s an astonishing record that highlights the free money burning holes in enterprise pockets. Looking at the ratio, corporate-backed deals were around 27% of total VC investments. During the last 6-month peak, back in 2018, corporate deals were a little under 20%.

Soros on Xi
George Soros had a well-articulated WSJ op-ed on Xi's plans to stay past his term limit and become a dictator in 2022: Xi "faces an important domestic hurdle in 2022, when he intends to break the established system of succession to remain president for life...He knows that his plan has many enemies, and he wants to make sure they won’t have the ability to resist him. It is against this background that the current turmoil in the financial markets is unfolding, catching many people unaware and leaving them confused...He doesn’t know how the financial markets operate, but he has a clear idea of what he has to do in 2022 to stay in power...Thus, his first task is to bring to heel anyone who is rich enough to exercise independent power. That process has been unfolding in the past year and reached a crescendo in recent weeks." I wrote more about the widening range of outcomes in China in #307.

Optimism and Awareness Revisited
Last week, I linked to Kevin Kelly’s excellent case for optimism. It was a popular subject for readers (including my comments on optimism vs. cynicism in investing), as was my short essay relating magicians and comedians to investors; so, for anyone who happened to be on vacation and missed it, you can read #308 here.

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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 #308

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, comedians, magicians, 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

In today’s post: the overlap between investors, magicians, and comedians; creepy VR tech; hosted desktops evolve; GoPuff; the IOC and NBC's attempts to kill the Olympics; AI drug seeking; and, the case for optimism.

Stuff about Innovation and Technology
Hollow HoloEyes
Facebook is working on technology to project a live shot of your eyes on the outside of a VR headset. The reverse pass-through VR is just a project out of Facebook’s research group, but the images of the prototype...well, who knows, maybe this is our future. Sigh. What seems painfully obvious is that this "solution" proves just how awkward the entire concept of full VR is for human interaction in real life.

The Network is Finally the Computer
Microsoft’s new virtual desktop service has launched for business customers. In beta, the service was so popular the company had to close trials to new users. Since Sun Microsystems trademarked "the network is the computer" in the mid-1980's, we’ve had a range of attempts to virtualize the desktop with thin clients, VMWare’s VDI, Citrix, etc. And, Amazon and Microsoft have offered hosted versions of Windows desktop for quite a while, but at fairly steep prices. The new Windows 365 desktop service on Azure starts at $20-30 a month for a fairly basic machine. With rising cyber security threats, this might finally be the time for the virtual desktop to gain traction. If we do ultimately move more processing to the cloud from laptops, phones, etc., it will put ever increasing demand on the network and ultimately alter the nature of processors and the duties they split between the cloud and the device.

Gopuff Goes Hot, Vertical
I continue to be impressed with the Gopuff playbook of vertical integration in convenience/food delivery as they target higher margin product segments. The company, which recently raised an additional $1B, seems to be built around the Bezos philosophy of focusing on what won’t change: people will always get the munchies. In addition to integrating micro-fulfillment centers within regional alcohol shops like BevMo! (which they purchased last year), Gopuff is also experimenting with hot meals by adding kitchens to their locations.

Olympics Flubs Social Media Engagement
Last week, I mentioned the dismal ratings for this year’s Olympics (down 40-50% vs. the 2016 Rio Summer games) – in part due to fans viewing clips of key moments ahead of time on social media. One tactic would be for the Olympics to embrace new media to engage an entire generation of young athletes as potential future Olympians and life-long fans. Another tactic would be to destroy the Olympics entirely by banning social media sharing by athletes/fans and issuing take-down notices for anyone sharing content in order to protect a contract with NBC, who is at fault for poor ratings by not engaging social media enough with its Olympics coverage. The IOC chose the latter, effectively killing the future of the Olympic games by ensuring that they take place in a vacuum. Sports spectating is half tribalism and half storytelling, and both behaviors thrive in the domain of social media.

YouTube Shorts Throws Long with New Content Spend
Last Sunday, I walked through the math on how YouTube could rival Netflix and other streaming platforms in content spending. Since then, YouTube announced a plan to pay $100M over the next year to creators of original short videos, up to $10,000 per month.

Miscellaneous Stuff
Powerful, Poetic Case for Optimism
Kevin Kelly details his case for optimism, both short and long term. I’ve often said, the cynic is never right in the long term, a statement I believe more with each passing day. Kevin comments on the asymmetry of the future in his beautiful case for optimism: “Every question answered by science generates at least two new questions, two new territories of unknown things that we now know we don’t know. In this way our ignorance expands faster than our knowledge, which is healthy. Because behind this expansion there is a great asymmetry: what is knowable but still unknown will always be larger than what we already know, meaning there are more possibilities waiting to be discovered than have already been discovered. This asymmetry in knowledge is reason to be optimistic, because it means there are no limits to our improvement.” And he addresses the importance of compounding: “The solutions to most problems will create new problems. But if we can create 1% more solutions than problems, that 1% compounded over decades equals civilization. However 1% of almost anything is invisible in the now, lost in the noise. Such a small differential is really only visible in accumulation and seen in retrospect.” Kelly also details seven reasons for being optimistic right now: urbanization, connectivity, AI/robots (liberating humans from unwanted jobs), green energy, accelerating pace of innovation, bio-engineering, and the rise of a more optimistic younger generation. For investors, I believe it always pays to be optimistic in the long run. Some businesses' success hinges on a cynical outlook – perhaps they rely on customers not knowing better or assume that quality doesn’t matter. Rarely are these going to be good long-term investments because they typically have some sort of vulnerability that an optimist will inevitably target to start syphoning their customers away.

AI Uncovers Treatment Options for Orphan Diseases
MediKanren, a new effort to use AI to uncover novel treatments for rare diseases is proving fruitful: “the program works to harvest biomedical data from diverse sources, structure it, and connect the dots. It’s looking for what Might calls 'unknown knowns': drug interactions that have already been revealed by science but remain buried deep in millions of data points.” STAT News reports on the AI’s success in finding ketamine as a potential treatment for a neurodevelopmental syndrome called ADNP.

Stuff about Geopolitics, Economics, and the Finance Industry
Of Investors, Comedians, and Magicians
The following is an excerpt from a shareholder letter I wrote back in Q3 2014 (the full letter is in the public domain in this filing). The heart of the argument is that being a good investor means paying attention to the obvious, which is often much more difficult than it sounds. It’s a concept related to cultivating awareness in the present, which I covered in my essay Time Travel to Make Better Decisions.

Here is a question you might not have thought about before: what does investing have to do with standup comedy and magic?
September 30th, 2014

There are a couple characteristics that all three disciplines have in common. To begin with, all of these fields require a passion for perfection. It requires an enormous amount of dedication and focus to constantly learn and hone the art of investing, delivering a knee-slapping, hilarious standup show, or a mesmerizingly, mind-boggling magic performance. All of these skills require a near obsession in order to transform a passion into an art form. The second thing all three art forms require is presence – the ability to step outside one’s self-centered world and really focus on what matters – a sort of vigilance that is hard to develop, and even harder to perfect. In standup comedy, the comedian must be ever focused on the vibe of the audience, empathically sensing their emotions and reactions in order to work the crowd and involve the audience in the narrative. Magicians must also focus deeply on their subjects and surroundings in order to create a convincing alternative reality. Similarly, investors must be vigilantly focused on every piece of available information in order to construct the proper circumstances for winning long term investments and portfolio construction. All three require an intense observational skill in order to achieve successful performances over and over again.

Standup comedy specifically shares an attribute with investing that we call nonlinear thinking. Comedians, at their core, observe human behavior. In fact, many comics consider themselves “observational” performers. They are constantly on the hunt for patterns and correlations that are not obvious to folks as they go through their everyday life. Then, in pointing out a non-obvious connection between two things that initially seem unrelated or glossed over by conventional wisdom, they create a spark – a spark that turns into a big laugh as the audience says to themselves, “That’s so funny because it’s so true!”

Investors likewise are always trying to connect nonobvious dots – we use the acronym ABCD for “always be connecting dots.” We see the world as a giant puzzle ready to be solved if only we can discern which pieces fit together. Then, when we connect a few seemingly disparate pieces of information, we find insight which informs our investing. The things a standup comedian points out, and the ideas we connect for investment themes are worlds apart, but when we draw those connections they start to become obvious.

Magicians also share a specific attribute with investing – leveraging cognitive bias. Cognitive bias is a term for the way our brains try to trick us. Over time we’ve been wired for simpler worlds – wake up, hunt and gather, secure shelter, and enjoy ourselves. But, the world has become increasingly complex, and our brains have developed impulsive shortcuts that make us believe one thing is true, when in fact something completely different explains the situation. Magicians are the kings at exploiting this misfiring of the brain – they take advantage of vulnerabilities in our ability to accurately perceive the world around us.

Likewise, as investors we fall victim to many biases of impulsive or emotional thinking. For example, we anchor on a prior cost basis, or we over-emphasize recent information above more relevant data points. All of these shortcuts work against superior long-term performance. So while magicians exploit bias, investors must remain vigilant to never be fooled by impulsive thinking.

This comparison of the three seemingly unrelated fields largely comes back to the idea of presence – the hardest thing we do every day is to simply be in the moment, 100% focused with vigilance and attention. This is an obsession that all great investors, standups and magicians are constantly perfecting. If a standup isn’t paying attention all the time, they will miss their next great joke opportunity – and if they fail to follow cues from the audience, they will lose the reaction. If a magician fails to pull off a trick leveraging the brain’s built-in biases, the illusion is revealed and the mystery is lost. The standup and the magician lose their audiences if they lose focus, much like the investor loses long-term performance if they fail to connect dots, avoid cognitive bias, and pay attention. Technology investing is a dynamic environment with a rising pace of change – this creates an even higher burden for presence and the ability to connect unrelated dots. Using these methods, we are able to focus on finding the signal in the noise of data points.

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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 #307

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, time crystals, 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

In today’s post: pushing buttons; YouTube’s theoretical content budget now rivals that of Netflix and the Hollywood studios; taking a flexible approach to hybrid work; time crystals; China viewed from the lenses of freedom, equality, innovation, and regulation; and lots more below...

Stuff about Innovation and Technology
Complexifying Button Pushing
As we’ve learned from The Jetsons, the future is all about button pushing. Well, now there exists a prototype, WiFi-enabled button pusher designed to interface with all the analog, mechanical switches, knobs, levers, etc. languishing without advanced IoT connectivity. The IoTIZER, developed by researchers at Korea’s KAIST, is showcased in this concept video. The demonstration seems rather tongue in cheek, but it highlights the ongoing struggle taking place everywhere analog meets digital in our increasingly connected world, where technology often seems to make things more complicated instead of improving our quality of life (I am looking at you, QR codes!).

Charging While Driving
Magment, developed by the eponymous German startup, is a concrete doped with magnetic particles that can inductively charge electric vehicles (e.g., scooters, fork-lifts) when driven/parked on the electrified substrate, with a reported 95% transmissivity. Now, Purdue and Indiana’s DOT plan to test whether or not magment can charge EVs as they drive on a quarter-mile section of electrified test road. I am not sure customizing roads for inductive charging will ultimately make sense, but we are likely to continue to see a world of ambient charging as everything becomes electrified.

Netherlands’ ‘Food Valley’
The Netherlands is the second largest agricultural exporting country in the world, owing to its long-running focus on efficiency and significant investment in agtech and greenhouses post WWII. For example, a Dutch greenhouse can grow a kilogram of tomatoes with four liters of water compared to the average 214 liters, and, by locating greenhouses in proximity to cities, transportation costs can be dramatically reduced. Despite the potential for significant advancements, Sifted reports that the greenhouse sector is relatively unloved by venture investors.

YouTube Rivals Studios
With Alphabet reporting $7B in ad revenue for YouTube in Q2 2021, content creators could have netted $3.85B (55% revenue share), if all of the ads were paid out to creators who had enabled monetization (which is not necessarily the case). If I translate that max potential revenue share into a hypothetical annual run rate, $15.4B is in the ballpark of the non-sports content spend at the major streaming companies (Netflix is projected to spend around $17B in 2021, and, while precise numbers excluding sports rights aren’t available for the other studios, each is likely to spend somewhere between ~$13B to ~$19B for the year). The 84% y/y growth in YouTube ad revenue also means it’s currently one of the fastest growing pools of money for content creators. As noted in Google’s 10-Q filing: “The increase in other cost of revenues from the three and six months ended June 30, 2020 to the three and six months ended June 30, 2021 was primarily due to increases in content acquisition costs primarily for YouTube as well as data center and other operations costs.” Meanwhile, Netflix’s share of demand for original streaming series has gone from 71% in 2017 to 46% in Q2 of 2021, coinciding with rising competition for streaming (note: market share is obviously influenced by the timing of new content release, but demand even for Netflix’s new content seems to have lagged.) In related news, after reading that Netflix’s film boss gave the greenlight to Yes Day 2 and signed a broader production deal with Jennifer Garner, I feel like I’ve simultaneously lost both my faith in Netflix and humanity. The first Yes Day (“aiming for family fun but settling for harmlessly mediocre”) is a good example of what happens when a studio doesn't provide enough guidance and production oversight for creative talent, an evident blind spot in many of Netflix’s originals. In yet another example of content shifting from professionally-produced to user-generated, the WP notes that folks are consuming Olympic clips on TikTok and social media rather than waiting for the broadcast (primetime Olympics ratings on NBC are down 50%!).

Cloudflare’s Paradigm Approach to Future of Work
I thought this blog post from Cloudflare regarding the future of hybrid work was one of the more thoughtful approaches I have seen so far. Notably, under remote work conditions, Cloudflare has seen improved productivity and participation from previously underrepresented groups. “Just as it’s important to have genetic diversity in a species, having diversity on every dimension in hiring makes us a stronger, more creative company. Prioritizing a diverse team is the right strategy if you're optimizing for innovation, like we are at Cloudflare.” As such, they are sticking to a meeting policy whereby everyone is either digital or everyone is in person, which I agree is a better way to run meetings in a hybrid work scenario. Cloudflare is taking a flexible approach, keeping a very open mind, and collecting data as they (and others) run experiments in remote, office, and hybrid work models. As I’ve said in the past (and as the WSJ noted last week), being flexible and open minded about the future of work is likely to give tech companies an even bigger leg up against the Industrial Age dinosaurs.

Miscellaneous Stuff
Time Crystals
Time crystals are a phase of matter, like solid, liquid, or gas, but they aren’t found in the natural world. Instead of existing in a state of equilibrium, time crystals are a stable state of disequilibrium, cycling back and forth between different states without consuming/producing any energy, like a perpetual motion machine (which, incidentally, is a violation of the second law of thermodynamics). Time crystals were first conceptualized by physicist Frank Wilczek in 2012. Now, Google researchers, along with their collaborators, have leveraged the company’s quantum computer to purportedly create an elusive time crystal. It would be truly mind blowing if the time crystal were a closed system; however, it appears to need an external driver to promote the periodic switching. Time crystals are esoteric, but a potentially important step if quantum computers are ever going to materialize (which remains a low probability). And, for everyone who is wondering, yes, I do hope time crystals become a plot device in a future time travel movie, even though one has nothing to do with the other!

Stuff about Geopolitics, Economics, and the Finance Industry
China's Widening Range of Outcomes
In SITALWeek #226, back in January 2020, in a paragraph entitled “How I Learned to Stop Worrying About China” I wrote the following:
“China’s been trying to catch the West in semiconductors for decades and has little to show for it despite $100B’s in targeted spending. Why? Because monopoly platforms and profits can’t thrive in China. This is why China lost the trade war with the US – they rely on foundational technology and creativity that could only be created under Western incentives...Innovation requires free expression of creativity without fear. For a period of time, China did allow Alibaba and Tencent to create monopolies and monopoly-like profit pools, which caused them to pull ahead of the Western Internet platforms in terms of innovation. But, then they reversed course as Jack Ma relinquished his control of Alibaba and the government took increased control of the sector through board seats, censorship, etc. The West can maintain the innovation that will continue to create more progress and solve more problems for the entire planet by taking a smart approach to balancing monopoly formation with regulation.”

While the sentiment regarding the CCP's misguided intentions in that paragraph still resonates for me, the market seems to be taking a longer time to digest the consequences of the CCP’s plans (it's important to separate the actions of the CCP from the well-intentioned citizens of China). While some of the larger Chinese tech companies, like Alibaba and Tencent, have underperformed broader indices over the last 18 months (Alibaba is down around 9% and Tencent is up around 29% compared to the S&P 500, up 37%, and the MSCI ACWI, up ~32%, as of July 30th, 2021; at one point in February, however, both stocks were up 4x vs. the broader indices before their dramatic retracement!), a broader measure, such as the Invesco China Technology ETF, is up around 33%, putting it between the S&P 500 and the MSCI ACWI indices over that period. The question is how to think about a group of market-leading companies that are increasingly restricted to operating in a single country and look more like state-controlled entities than management-led/investor-influenced autonomous organizations. I think often about a topic I articulated in #214:
“Throughout human history, there has been a spectrum of freedom and equality: if you have 100% freedom, you tend to end up with extreme inequalities; if you have 100% equality, you tend to end up with very little freedom. Capitalism, on the one hand, has tended toward freedom, thus causing ever-rising inequality, while Communism strives for equality by suppressing freedom. There is some threading of the needle of equality and freedom that we still need to do as a global society, but for now the path isn’t yet clear. I’d suggest the ultimate tact to take for companies and investors struggling to make sense of the China situation is to support rising freedom over the long term.”

I have the same viewpoint today as what I’ve articulated over the last few years: with the CCP increasingly quashing entrepreneurship and capitalism, the range of outcomes has widened for Chinese companies on multiple vectors over the last few years, which requires a critical analysis of position sizing for investors interested in that group of stocks. This higher degree of uncertainty is perhaps true not just for Chinese companies, but also for Western companies relying on the domestic Chinese market for growth. Longer term, I think value creation will follow innovation, and I think innovation thrives with freedom and dies with fear. But, like I say often, I am wrong about almost everything. For those interested in the counterpoint, Ray Dalio continues to preach the bull case for China (Ray: if the CCP has kidnapped your dog, blink twice next time you are on TV!). The final point I want to make here is that some of China’s targeted regulation has parallels to the consolidation of power of the large Internet platforms in the West, and we should pay close attention to those experiments so we can create better outcomes through regulation and incentives for our own mega platforms.

✌

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 #306

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Darmok and Jalad, 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

In today’s post: solar storage and hydrogen creation; robot mysteries; dancing drones; the cost of upgrading infrastructure for climate change; the death of the password approaches; proteomics bounty; jumping spiders; humility; and lots more below...

Stuff about Innovation and Technology
Rain Dancing Drones
Dubai scientists are using drones to deliver electric shocks to clouds to induce rain to fall. Apparently, the electric shock causes water vapor to condense into larger, rain-prone droplets. With the water tables shrinking dramatically around the world, the race might be on to grab hold of wispy water vapor and instigate precipitation before it drifts to another country!

😐〰️
Growth of emoji usage slowed quite a bit over the last year. Based on global Tweet data for the month of July, ~21% of tweets contain a symbolic figure (up from less than 10% seven years ago) but that’s only ~0.5% growth vs. last year. This plateau follows significant usage growth in 2019 and 2020. The data also show that we tend to go emoji crazy around year-end holidays and then start off each new year in an emoji lull. I look forward to the day we speak exclusively in emoji metaphors, like "Darmok and Jalad at Tenagra...Shaka, when the walls fell" in Star Trek: The Next Generation.

Storage to Solve Solar Deflation
Lavo is an Australian startup with a hydrogen storage device aimed at absorbing (or, rather, adsorbing!) excess power generated by solar. Because of the frequent mismatch between alternative energy production and usage, recurring overproduction (combined with more facilities coming online) has caused a drop in green power’s market value in some regions. In California, the wholesale price of solar has dropped 37% since 2014, compared to the cost of other sources of energy. The market for energy storage is expected to increase from 800 to 4,000 gigawatt-hours by 2030; however, I’d argue there could be a scenario where better storage options lead to even more demand than what's forecast. Lavo’s tech is based on an AU-developed metal hydride technology. Excess power first charges a lithium ion battery housed in the “HEOS” unit, and further spillover is then diverted to an electrolyzer, which splits water into oxygen and hydrogen. The oxygen is released to the atmosphere and the hydrogen is adsorbed on metal hydride and stored in solid form. The HEOS system can then reverse and power the grid directly through the lithium battery and/or desorb hydrogen for powering fuel cells, whose usage is expected to grow significantly in coming years. The trick with so many novel storage systems like this is to overcome the chicken-and-egg problem of getting enough demand to scale manufacturing at/below cost. In related news, Japanese researchers have greatly extended the life of photoelectrochemical water splitting systems from around a week to 100 days. Similar to HEOS, these systems allow direct solar to hydrogen conversion in a completely sustainable manner rather than relying on natural gas production as a source of hydrogen.

Looks Like We’ve Got Another Robot Mystery on Our Hands
A robot collision caused a fire and shutdown for the second time in Ocado warehouses in the UK. The online grocery company indicated three robots in their hive of 1,000 bots, which move crates of food around to help humans pack orders, collided. The resulting electrical fires are very difficult to put out and raise a lot of safety issues, especially as warehouses and factories in many industries automate. If I learned anything by watching every episode of Scooby Doo a zillion times, it’s that it's almost never the robot’s fault. For example, in ‘Foul Play in Funland’ a robot ran rampant in an amusement park, but it turns out (spoiler alert) that park co-owner Sarah Jenkins didn’t like the idea of kids and robots mingling, so she enacted an evil plot to sabotage the bot. Of course, there was also that time Artie the store clerk impersonated a robot to slander the department store’s new security bot. And, let’s not even mention the Robot Master in the Robot Ranch episode. Anyway, I’m just saying, it’s possible the robots are just innocent casualties here of some sinister plot. With news that Instacart is building out robot-powered grocery fulfillment centers, they might want to have the Mystery Gang on speed dial.

UnitedHealthcare's Hollow Fitness Pursuit
UnitedHealthcare (UHC) is paying for twelve months of a digital-only Peloton subscription (or four months of an all-access, hardware-based subscription) for employer-sponsored plans, roughly a $160 value. Hopefully, I won’t have chest pains on my UHC-sponsored Peloton because the insurance giant is going to start requiring members to accurately self-diagnose medical conditions before seeking emergency assistance or risk incurring massive hospital bills. While UHC said last month they are delaying their controversial ER claims denial policy, it’s astonishing they considered it to begin with and are still planning to go through with it. In other words, the supposed goodwill, preventative-care effort with Peloton is nothing more than a superficial PR stunt, and UHC is a negative sum business destroying far more value than they create. Putting aside the unsolvable problems of the US health insurance industry, it would be fantastic to see more collaboration between employers, healthcare providers, connected fitness makers, and wearables to drive better prevention and treatment of medical conditions.

Death of the Password
Okta recently released a report (PDF) on zero-trust security (a topic we’ve covered many times in the face of rising cyber threats around the world). Based on a survey of 600 global security leaders (of various sizes in various industries), 78% of companies are putting an increased priority on zero trust, with 90% working on a zero-trust initiative – more than double last year’s 41% of responders (and over 5x 2019’s 16%!). Further, 41% of the Forbes ‘Global 2000’ plan to implement more secure, passwordless access tools by the end of 2022. Most organizations are adopting a best-in-class approach by implementing and connecting various zero-trust tools from different software vendors. The biggest challenge is the availability of people to do implementations.

TSMC's Positive-Sum Playbook
On their recent earnings call, TSMC was asked why they aren't more aggressive in raising prices given their long-standing technological leadership position. Their CEO’s answer is a textbook example of what we look for in non-zero-sum (NZS) businesses – companies that partner to create more value than they take: “First, we do have a very high market share on the leading-edge technology node. But our pricing strategy is strategic, and we don't take an optimistic approach. And it's far away from you say that we try to [have] bargaining power. In fact, we work with our customers closely and we want to help them to be successful while we get a proper return. That's all I can answer for you for our pricing. And looking ahead, we continue our practice, try our best to hear our customers, to grow and we want to get the proper return. So that's why we are firming up our wafer pricing. And we are confident that we can get our gross margin about 50% or above in the long term.”

Miscellaneous Stuff
Arachnids Distinguish Animal from Mineral
Jumping spiders are able to differentiate between animate and inanimate objects, the first reported demonstration of such behavior from an invertebrate. (I imagine the ability to perceive “biological motion” could be quite widespread in animal phyla besides our own, the trick is developing assessment tests). As a household with multiple pet jumping spiders, I can vouch for their precocious perception, and we even think they can distinguish between people, seeming to know who tends to feed them more often.

AlphaFold Delivers
Researchers at DeepMind’s AlphaFold have unveiled predicted structures for 350,000 proteins, with a goal of 100M in the coming months. The structures have been deposited into a publicly accessible database. The data include structures from the proteomes of 20-some model organisms, including Homo sapiens. Indeed, AlphaFold has provided a structure for 44% of human proteins. On a “per residue” basis (each protein being composed of a string of amino acid residues), 98.5% of the human proteome is covered by the dataset, with 58% of residues having a “confident” prediction and an exceptional 36% of residues having a “highly confident” prediction. For comparison, in the Protein Data Bank (PDB), the global central repository for protein structure information, only 17% of human protein residues have experimentally determined structural data. So, for the human proteome alone, AlphaFold has essentially doubled the structural data available to researchers – and done so in a matter of years rather than the decades it has taken to seed the PDB repository with hard-earned, experimentally determined results. Importantly, AlphaFold’s dataset includes structural predictions for membrane-embedded and transmembrane proteins, which are among the most intractable classes of proteins for experimental structural determination – but include some of the most important and attractive drug targets. This treasure trove of structural insights provided by AlphaFold will no doubt prove an incredible boon for myriad research programs, including drug discovery.

Rear-View Forecasting and Inadequate Infrastructure Suffer Perfect Storms
Most stormwater drainage systems were built to handle 10-year rainstorms. However, with the increasing frequency of so-called 100- and 1,000-year storms (which seem to be the new annual/10-year storms!), the current flood management systems of some municipalities are woefully insufficient. Detroit, which was recently hit by a 1,000-year rainstorm that dumped 3.7” of rain in an hour (and suffered a near-repeat three weeks later), would need to spend $17B to overhaul its drainage network. The cost of pumps/pipes is nonlinear, so doubling the capacity costs more than double the price. The problem of flood mitigation is compounded in coastal cities, where pump outlets might become submerged with rising sea levels. And, it’s not just water that will require a ton of money – power grids need to be updated for global warming as well. PG&E is planning on spending $15-30B to bury 10,000 miles of lethal, fire-sparking power lines in drought-stricken California. That figure represents just the most at-risk 10% of the company’s total power lines, and the project is likely to take a decade or more. The tangibly imminent cost of dealing with increasingly extreme climate will be in the trillions of dollars.

Stuff about Geopolitics, Economics, and the Finance Industry
Fintech and DeFi in Spotlight
Fintech and blockchain/DeFi startups raised a record $30.8B and $4.4B, respectively, in Q2. For fintech, that’s a 30% increase from Q1 2021, and, for blockchain businesses, that’s a 50% increase from Q1 2021 and 9x from Q2 2020. These are the businesses attempting to disrupt the regulatory capture of big financial institutions that Jamie Dimon refers to as “shadow banking”; (although, Dimon did recently change his tune on Bitcoin – instead of a “fraud” that’s “worse than tulip bulbs”, it’s now apparently an attractive digital commodity that he’s enabling his wealthy clients to invest in through JP Morgan).

Humility in Decision Making
Humility is the most important trait we try to cultivate at NZS Capital. It's an important mindset for successful investing, as well as navigating all of life’s decisions. I talked more about this concept in my paper Time Travel to Make Better Decisions a few weeks ago. As we contemplate possible future states of the world, the best science we've come across for thoughtful decision making is the lens of complex adaptive systems. Coming to terms with our existence within a vastly interconnected network – that’s subject to entropy and chaotic perturbations – necessitates a healthy dose of humility. This type of thinking is at the heart of our Complexity Investing framework (the paper discusses the tension between humility and confidence on page 36). For this complex lesson on life, we owe a debt of gratitude to the humble cast of characters at the Santa Fe Institute in New Mexico. There is no better way to be humbled than to try to grasp the vastness and complexity of the Universe, our fragile existence on our pale blue dot, and how small changes can create huge ripple effects into the future. The only thing we know for sure is that we don't know anything for sure.

Another lesson we’ve learned from complex adaptive systems is that thinking biologically, e.g., with an eye to adaptability and evolution, is, more often than not, a better framework for analyzing the world around us. This provocative quote from Magic Leap founder Rony Abovitz beautifully captures the evolving biomimetic disruption of capitalism: “Every major company today (2021) is a liability to itself and in a doom loop. Tiny, hyper-agile, modular company-like things will swarm them out of existence.” 🐜🐝

✌

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 #305

Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, chill pills, 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

In today’s post: regulating to create new pro-consumer monopolies in real estate; the incompatibility of linear and interactive storytelling; cooling the body as the world warms up; the surprising drop in asthma; space roller coasters; 700-year rate trends and the great redistribution; the rapid shift to active ETFs; and lots more below...

Stuff about Innovation and Technology
AI is not Power Hungry
Despite the big growth in cloud computing and video streaming in 2020, Google's global data centers only used slightly more energy than 2019’s 12 terawatt hours. Further, machine learning, thought to be a major energy hog, is reportedly only a tiny fraction of the total energy consumption – even when they account for things like GPT-3, the language model, which takes one month to run on 5,000 computers. To make AI even more efficient, Google is placing data centers in Iowa and Oklahoma, where nighttime temps are lower and daytime brings wind power. Using custom-built accelerators like the TPU helps Google achieve this efficiency as well.

EU Emissions Standards Favor EVs
New EU emissions rules will likely make gasoline powered cars less profitable than EVs as soon as 2025 – due to the sophisticated technology that would be required to make ICE vehicles compliant.

Realtors Back in DoJ Crosshairs
There are a lot of somewhat obscure focal points in Biden’s new executive order on competition. One that caught my eye involves the real estate industry. Following a settlement between the National Association of Realtors and the DoJ (covered in #273), the DoJ subsequently backed out of the deal earlier this month: “‘The proposed settlement will not sufficiently protect the Antitrust Division’s ability to pursue future claims against NAR,’ said Acting Assistant Attorney General Richard A. Powers of the Justice Department’s Antitrust Division. ‘Real estate is central to the American economy and consumers pay billions of dollars in real estate commissions every year. We cannot be bound by a settlement that prevents our ability to protect competition in a market that profoundly affects Americans’ financial well-being.’” The original settlement favored transparency and seemed likely to advantage modern brokers, such as Redfin, who put customers first and can reduce commissions thanks in part to their lower, technologically-enabled overhead. However, apparently the administration thinks the settlement didn’t go far enough. The section in the Biden EO regarding real estate calls on the FTC to spearhead reform to address potentially unfair or non-competitive practices, and unwinding the settlement would allow the FTC to pursue additional changes. Legislating industry-wide transparency could foster competition, which would be a rare example of regulatory action that does not ultimately benefit incumbents through regulatory capture. If the government makes good on their promise to increase consumer protections, the impact to traditional brokerages (and their ad budgets), could also be a catalyst for the real estate portals (and iBuyers) to become more aggressive with expansion into the broker business (covered in #264). As I mentioned toward the end of last week’s newsletter in reference to our papers on regulation, Information Age monopolies, when managed correctly (e.g., keeping the platform intact but granting competitors access to data), can advantage the consumer through network effects, which would be lost if regulators were to fragment the monopoly or raise the cost of doing business. But, at this point, tech is still trying to break into the established real estate ecosystem, and, I would argue, there are shenanigans keeping the tech-driven platforms from creating those network-effect benefits for consumers. For example, Zillow brought some transparency to the market with their Zestimate of home values, but they have not transformed the cost or logistics of the home transaction yet. Ironically, by regulating real estate, the US might ultimately create a winner-takes-all (or a small number of platforms that take most) for the real estate transaction market; nevertheless, the network effects of a digital real estate platform could greatly benefit homeowners.

Netflix Seeks Entry to Metaverse
Netflix has expressed interest in licensing more content to game makers, and, with a recent hire, might even be looking to offer games in the Netflix app. It’s not clear to me how that would work – would I use my Roku remote to play Candy Crush or a game version of Stranger Things on my TV? I believe, at some point in time, every Hollywood studio has dabbled in video games directly or indirectly. Some of them famously built out or acquired large gaming businesses only to sell them off or shut them down in failure. Sony is perhaps the exception, as they own both a massive gaming franchise and successful Hollywood studio; but, one does not necessarily feed the other. Interactive storytelling is a vastly different art form than linear, scripted storytelling. Over time, interactive content will likely grow faster and take share from traditional film and TV (see #261), and, if Netflix is serious about gaming, they may need to make a much bolder off-platform move, like acquiring a metaverse engine like Epic or Roblox. Separately, Netflix is working with its creators on more live events to offset slowing subscriber growth, according to the Hollywood Reporter. As I’ve said in the past, if Netflix can create more enduring franchises, they should be opening Netflixlands around the world. Or, with Comcast seemingly waffling on its commitment to Peacock (Comcast’s Universal has licensed live action to Amazon and animations to Netflix after the shows spend only four months on Peacock in a half-pregnant strategy that is likely to harm Peacock’s success as a standalone app), perhaps Netflix could get their hands on those studio assets and the Universal Theme Parks. While I am speculating on media mergers that are unlikely to happen, it struck me recently that Roku should use its lofty market cap to do a much bigger content deal, like perhaps acquiring ViacomCBS.😏

Miscellaneous Stuff
Extending Life via Chill Pills?
Humans are homeotherms, which means we use energy to keep our body temperature (and thus our metabolism) in a narrow band. However, for the majority of life on Earth, internal temperature/metabolism is heavily influenced by the external temperature, with small changes in external temps having exponential impacts on metabolic rates. Geoffrey West of the Santa Fe Institute (and the author of the excellent book Scale) notes that metabolic dysregulation is a major, and very underappreciated, risk with global warming. He also posits that one way to potentially extend our lifespans would be to develop a pill that artificially lowers our target body temperature a bit, thus reducing the speed of – and wear and tear on – our metabolic system. Sounds good in theory, especially if you consider the energy savings of food production if we are all consuming fewer calories. However, I’d guess that we would have to take a reversal pill every time we needed to do some heavy mental lifting, and we had better get fully autonomous driving figured out beforehand.

Pandemic Mediation Efforts Benefit Asthmatics
Asthma attacks were down 40% after the start of the pandemic, according to a US study with 1200 participants. People who worked outside the home at the (pre-pandemic) onset of the study saw an even bigger decrease (65%) than those who reported working at home (23%). Air pollution didn’t seem to be a material factor, leaving researchers to conclude the viral loads of common colds and flus, which were dramatically lower during the pandemic, may be bigger asthma triggers than previously thought. It seems to me a key takeaway is that masks greatly helped people with asthma from potentially multiple standpoints – reducing exposure to viruses, pollen, and indoor/outdoor pollution (e.g., cleaning supplies, car exhaust). Or, maybe many of us are allergic to other people, and the social distancing helped!

Space Roller Coaster
A trip to space for civilians is the ultimate theme park ride to gain a little perspective on our pale blue dot. Virgin Galactic’s CEO is even the former president of Disneyland, and the company recently hired a former Disney Imagineer as an Experience Architect. Theme Park Insider writes: “Themed entertainment strives to create moments that bring people into another world. Ultimately, that is exactly what Virgin Galactic is selling. It's a moment in space (or, at the edge of it, if you're a Karman hard-liner), that awakens your imagination and passion for space and the opportunities it provides.” The $250,000 ticket, however, edges out the cost of a ride on Space Mountain. Of course, traveling to space has many different meanings for everyone (Vonnegut's always struck me as one of the funniest).

Stuff about Geopolitics, Economics, and the Finance Industry
Interest Rates’ Historical Downward Trend
A new working paper from the Bank of England (PDF link) has one of the more detailed looks at interest rates’ downward march to zero over the last 700 years. I’ve covered the myth of interest rate mean reversion in detail in #257 as well as the deflationary impact of technology in #258, which I believe to be vastly underestimated in analysis of long-term rate trends. Whenever I see a chart on long-term rates, I am reminded of an essay by Ole Peters that I’ve previously discussed: “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. This explanation is somewhat at odds with the general narrative – that lower rates are the driving force behind rising debt.”

The BoE author reached a similar conclusion: “There is no reason, therefore, to expect rates to ‘plateau’, to suggest that ‘the global neutral rate may settle at around 1% over the medium to long run’, or to proclaim that ‘forecasts that the real rate will remain stuck at or below zero appear unwarranted’ as some have suggested...the long-term historical data suggests that, whatever the ultimate driver, or combination of drivers, the forces responsible have been indifferent to monetary or political regimes; they have kept exercising their pull on interest rate levels irrespective of the existence of central banks, (de jure) usury laws, or permanently higher public expenditures.” As previously mentioned, I like Brian Arthur’s views that we are entering the distributive era of economics. Rather than rates cracking through zero and continuing to negative infinity, it seems much more likely the wealth of the world will be redistributed in a way that creates some inflation to offset dropping rates. In a potential Goldilocks scenario, deflationary pressure from technology would make the porridge of inflation, rates, and redistribution taste just right over the long term.

Jumping Off MF Ship
Mutual funds are starting to follow their customers to the more friendly ETF model. In 2020, ETFs saw $497B of new flows compared to $506B that left mutual funds. Following a record $483B of inflows to ETFs so far this year, most large MF shops are, at the least, dipping their toe into ETFs. It’s a classic innovator’s dilemma – ETFs are a better product for most circumstances (lower fees, more tax advantaged, higher liquidity), but they largely displace the direct retail customer relationship, lower the value of the advisor sales channel, and put the products in direct competition with a bigger pool of lower-fee alternatives. Dimensional Fund Advisors, a $637B Texas-based asset manager, is moving aggressively by converting existing MF products into ETFs and is providing the same products for 27% lower fees, not to mention the lower annual tax hit for non-retirement accounts. The worst part about those taxes on MFs is that, as people sell and exit funds, the remaining holders are potentially left with a bigger share of the tax bill. Many large asset managers have lost their direct retail connection with current and potential customers and will need to rebuild those relationships. The winners will be the ones who can provide attractive products with lower fees and successfully market to a demographically shifting customer base, who may be more in favor of Robin Hood than the Sheriff of Nottingham.

Beijing Cracks Down on Chillin’
According to the NYT, and I assume they checked their sources, “lying flat” (“tangping” in Mandarin) is a new phenomenon in China whereby youth, disillusioned with the frenetic pace of the rat race, are choosing to chillout in an act of defiance. As the NYT says, they are “refusing to participate” in China’s “long-held prosperity narrative”. The viral behavior was triggered by a blog post by a fed-up former factory worker. The post has since been removed and was widely censored by the Chinese government. “To lie flat means to forgo marriage, not have children, stay unemployed and eschew material wants such as a house or a car. It is the opposite of what China’s leaders have asked of their people.” Unwilling to take this terrible affront to progress lying down, the Chinese government has ordered social networks to “strictly restrict” posts on tangping and ecommerce sites to discontinue selling t-shirts with any sort of tangping activity on them. China barred access to the popular song “Tangping is King”, but it’s still available on YouTube (which is also blocked in China).

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