SITALWeek #324

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

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In today’s post: the pandemic has had surprisingly few long lasting impacts so far, but the effects of a changing labor composition and our escalating smartphone usage are hastening technology adoption; eventually all payment options become a digital wallet; a record year for stock market flows, and a near record year for IPOs; VR, from motion sickness to pain management; and much more below.

Stuff about Innovation and Technology
VR’s Inverted Kinetosis
Visually-induced motion sickness (VIMS) is a problem for a lot of people using full-immersion VR. The brain is constantly trying to predict the immediate future and place ourselves in that future position. When the prediction doesn’t match sensory data, the brain updates the prediction until it matches. VR throws a wrench into this system by creating an often dramatic mismatch between our visual and vestibular (motion detecting) inputs. Typically, motion sickness is caused by motion that is detected in the inner ear but not seen, whereas VR creates motion that is seen but not felt. It’s likely that an inability to resolve prediction failures is what causes VIMS, according to an article in Frontiers in Human Neuroscience. While still speculative, the researchers note a decrease in information flow to the areas of the brain involved in vestibular signals, which may be the brain’s attempt to stem the influx of contradictory data. Motion sickness is seen in other mammals, and even fish, indicating it’s an ancient feature of the brain, one that’s perhaps related to detecting and protecting against exposure to neurotoxins. The vestibular system also happens to be very close to the part of the brainstem that induces vomiting. As there doesn't yet seem to be any practical way to avoid VIMS, AR that allows some grounding in the real world is likely superior to VR for any activity that involves simulated movement.

VR Pain Management
The FDA has approved EaseVRx to treat chronic low back pain. The at-home VR-based system uses cognitive behavioral therapy and interoception for seven minutes a day over eight weeks as a boost to traditional mindfulness and breathing techniques to break patterns and refocus the mind away from pain. Chronic pain can linger for months or years after the body has already healed from an injury, but with a tool like EaseVRx 66% of the patients in the trial saw a greater than 30% reduction in pain. Interoception teaches us that we have an ability to listen to internal signals from the body, not just the external stimuli in the world (see #272), and the work of the late Dr. John Sarno reveals that chronic pain can often (but, obviously, not always) be intercepted/eased by psychologically addressing the mind-body connection. These techniques are available without VR, but perhaps the added element of immersion will make it easier to practice them. No word yet if there will be a VR program to treat chronic motion sickness from VR.

Amazon’s Terra Firma Acquisitions
Commercial real estate data provider CoStar reports on Amazon’s land grab for US fulfillment space. In a departure from its near-exclusive leasing policy, in 2021 the ecommerce giant acquired 2,200 acres of land for new warehouses and data centers because commercial developers in certain key locations were not keeping pace with enough finished buildings to lease. In Ohio, 700 acres of purchased land will be dedicated to AWS data centers. (Note: the video at the top of the CoStar article contains much more information than the article.) Although the shift to ecommerce was not dramatically accelerated by the pandemic (see last week’s newsletter for the numbers), substantial growth in overall retail demand still translates to significant growth for ecommerce, and, therefore, massive demand for logistics and warehouse space. Amazon's scale and pace of growth in physical space remain challenging for smaller rivals to match.

Digital Wallet Profusion
Buy Now, Pay Later (BNPL) apps appear to be morphing into multipurpose digital wallets, with the single form of digital payment serving as a jumping-off point for building more extensive customer relationships. Klarna is now offering a “Pay Now” option that’s linked to checking accounts, as well as a “Klarna Kard” for offline installment purchases. The BNPL app Affirm has introduced a debit card for physical transactions. They have also expressed “super app” ambitions in payments and will be joining digital wallet incumbent PayPal and other challengers (e.g., Square, Shop Pay) vying for digital transactions. With the rise of so many convenient digital wallet options, entering a credit card number may fast become a thing of the past. As the wallets all grow in size, the fungibility of payment mechanisms inside the apps will likely also increase. The more speculative question is whether the wallet apps themselves will become marketplaces and hubs for ecommerce search and shopping, and whether any of them will become large enough to offer their own closed loop form of payment, cutting out banks and cards.

5G Clickbait
There has been a lot of bad reporting on the FAA looking into potential interference from C-band wireless signals on airplane altimeter function. Much of the sensational reporting is erroneously lumping all 5G signals into the temporary, narrow throttling of power the carriers have agreed to do nationwide, especially near airports. The power down actually only involves the small swatch of spectrum between 3.7-3.98 GHz that was auctioned by the Federal Government in 2020. While this FAA investigation may reflect an abundance of caution, it seems to be more political theater than anything else, as two congressional members are behind the yellow flag. Altimeters receive signals in the 4.2-4.4 GHz range. If interference between bands separated by 200+ MHz were even remotely routine, it would wreak havoc with all sorts of radio communication. So, don’t stop flying (well, maybe cut back a bit if you are a one-percenter per the next paragraph) or bust out your tinfoil hats because 5G, as with all non-ionizing radio signals, is still safe (see also #202).

Miscellaneous Stuff
Commercial Aviation’s Carbon Footprint Power Law
As I read this stat from a year ago that ~1% of the world’s population is responsible for half of the carbon emissions from commercial flights, I couldn’t help but think that a focus on thoughtfully taxing carbon emissions is needed to change behaviors and put the burden of offsetting burned carbon on the companies and those of us who are responsible for it.

Protecting Pollinators
Buried in the $1T US infrastructure bill is a combined $260M for rehabilitating pollinator habitats along roadways throughout the US. The largest program is the $250M Monarch Action, Recovery, and Conservation of Habitat Act, which aims to replace (over the next five years) invasive species with native plants friendly to bees, butterflies, bats, and birds. The western monarch butterfly population has dropped to only 1% of what it was in the 1980s.

Stuff about Geopolitics, Economics, and the Finance Industry
IPO’ing Like it’s 1999
Bloomberg reports that US stock fund inflows in 2021 (year-to-date) amount to more than the last 19 years combined. The ~$900B windfall, a likely result of fiscal stimulus, excess money searching for a home in a world of low rates, and increased retail investor activity during the pandemic, boggles my mind. ETFs took the lion’s share of equity flows at $785B vs. only $108B for mutual funds. The flows have driven stocks to near-record valuations, which, in part, reflect low rates and the lower return thresholds for investors in addition to basic supply-and-demand dynamics as money sloshes around. What’s remarkable is how well markets have done over the last two decades without these types of large inflows. Buoyed by corporate stock buybacks, M&A, private equity takeouts, and a dearth of IPOs, the markets moved higher as the denominator of total buyable shares shrank (PDF), though the smaller base alone doesn’t account for the magnitude of the increased valuations. The denominator reversed this year, with a huge pickup in IPOs and SPACs, but the inflows were more than enough to absorb the supply. 2021 has so far seen 375 traditional IPOs, a trend unrivaled in the past two decades (not since 1999’s 547 and 2000’s 439). In a related sign of the times, S&P has launched the Twitter Sentiment Index using $cashtag Tweets to track sentiment as retail investors have flocked back to markets. As we are fond of saying, the range of outcomes is widening.

Repackaging Climate Change
The Guardian reports that some leaders on the right are shifting from climate change denial to embracing the problem so that they can use it to drive fear of increased immigration. There is likely to be widespread climate-related diaspora in the coming decades if the Earth continues to warm and many regions become uninhabitable (see #256). Perversely, if this amped up xenophobia turns into broader support for climate proposals, it could be a net positive for planet Earth and the people on it, but the continued loss of immigrants into the developed world has negative economic implications as well.

Pandemic-Spawned Digital Butterfly
Predicting the future is impossible – that’s the lesson from complex adaptive systems. Therefore, you want to focus on adaptability and win-win outcomes, which are the ancient truths that guide long-term evolution in any complex system like the global economy. There have been many predictions since the start of the pandemic about what might or might not change, what will stick or bounce, and where the world will end up on the other side. The jury is still out on many predictions, such as the rise in ecommerce as a percent of total retail spending, which has turned out to be not far off the pre-pandemic trendline (see #323). Other pandemic changes seem to have been somewhat temporary, such as telehealth, which is being rolled back in some US states. Indeed, most changes happening in the economy since the pandemic started may simply be a result of all the fiscal and monetary stimulus. In other words, excessive spending in all corners of the economy might be masquerading as behavior changes related to the pandemic. So far, evidence of long-term structural changes is muted or even scarce, with two notable exceptions. First, the pandemic has driven a difficult-to-reverse increase in our addiction to our smartphones thanks to their plethora of distracting social media, gaming, and video apps. Second, there has been a significant compositional change to the labor force. Some meaningful percent of workers (in the US, UK, and parts of Europe) have either left the workforce or shifted to different types of jobs (e.g., from working in a restaurant to doing customer service from home). As we’ve discussed ad nauseum, a combination of early retirements, shift to single-income households, relocations, rising work from home, declining immigration, increasing deaths, and changing demographics (see #320) have reshaped the labor force over the last two years. These labor changes also seem to be closely tied to the pandemic-related prediction of accelerated technological use/implementation across the economy: a fear of labor shortage and risk of rising wages have companies searching high and low for ways to automate jobs, both blue and white collar.

Most tax-filers who survived the pandemic seem to be financially better off following many months of government payments and low interest rates. While the rising economic tide lifted most boats, allowing millions to exit the labor force, it also preferentially inflated the bigger boats and increased the gap between the asset-owner economy and the asset-renter economy (e.g., rapidly rising home prices favoring owners over renters). When, or perhaps it’s still “if”, the money flows back out of the economy with a decline in government stimulus, we may see that the world still looks a lot like it did in 2019. Like the butterfly-effect in chaotic, complex systems, it wasn’t the pandemic itself but rather the unpredictable, emergent impact on the labor force and our increased addiction to screens that may boost the automation of jobs over the long term and accelerate the analog-to-digital transition of the global economy.
✌️-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #323

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: ecommerce is no bigger than it would have been despite the pandemic; Web3 is a rallying cry that governments and corporations are failing us, but are we ready for anarchy?; Earth-2; fusion; teaching VR in VR; a documentary on Kilgore Trout's alter-ego; declining employee loyalty from remote work; and much more below.

Stuff about Innovation and Technology
VR 101 in VR
Stanford’s Virtual People class is among the first to be taught with instructors and students wearing VR headsets. The fully remote class connects students in a virtual environment for about half of the total course time. Students felt the shift from Zoom to a shared virtual space was a marked improvement. The class on VR has been taught since 2003, but technology is just now getting to the point where it can actually be taught in VR. Here is a short YouTube video from the summer version of the course that gives a little bit of a feel for how class functioned in the virtual space.

Progress Toward Portable Stars
Humans have coveted fusion – the same process that fuels stellar combustion – for decades as the last energy source we’ve yet to harness in a controlled manner. Nature had a good overview of the progress in fusion technology (a topic we’ve been following for a while, e.g., #277, #265). Fusion is achieved by combining hydrogen nuclei under extremely high pressures and temperatures (tens of millions of degrees). When the nuclei in this superheated plasma merge, they throw off excess energy. The trick is keeping the plasma state contained and stable, and it’s still looking like it could achieve commercial deployments in about a decade (or sooner, if AI can improve plasma handling). A lot of private projects are being funded, suggesting the industry could experience a “SpaceX-like” acceleration of innovation. The publicly-funded institutes working on fusion are skeptical of the timeline, and believe the ten-year figure is being used to attract investors.

Inventing the Future with Omniverse
The Next Platform conducted an insightful interview with Nvidia’s Jensen Huang following GTC in which he discussed the company’s Omniverse platform and the ambitious goal of simulating the entire planet with Earth-2 (if we know what’s coming, we can act now to avoid it, the thinking goes, although we know from complex systems science that predicting the future is a fool’s errand). He also explained how he conceptualizes the Omniverse as entirely distinct from gaming worlds. Unlike a VR game engine, where a lot of components are “pre-baked” and then assembled with lighting effects to create a dynamic surround, the Omniverse will be an entirely real-time environment – rendered moment to moment – based on calculations of how data in/outputs would interact with the laws of physics. I liked this articulation of AR vs. VR: “AR is how the AI comes out of the Omniverse into our world, and VR is a wormhole that we use to go into the Omniverse”. Jensen concludes: “The time has come where we could go create these incredible digital simulations of the world. We are going to give our ourselves a leap and this will change computer science. I am completely convinced this is going to change scientific computing altogether. This is really about how computing has fundamentally changed because the computer science changed the algorithms and now the algorithms are coming came back to change the computer science.”

Arrested E-commerce Development
In the ten years leading up to the pandemic, ecommerce grew from 4.7% (Q42009) to 12.4% (Q42019) of total US retail sales, averaging gains of around 0.8%/yr (notching the strongest gain of the period in 2019 at 1.3% over 2018). Then the pandemic hit, and ecommerce surged to 15.2% share in Q42020, an acceleration of ~2 years vs. the historical trendline. Now, with the economy largely reopened and people back to shopping in stores, the numbers tell a different story. Despite extremely strong consumer spending overall, ecommerce share is back to 12.4% in Q32021, implying (if the data follow historical seasonal trends) ~14.4% for Q42021, which is, surprisingly, what we would have expected had there been no pandemic. And, with rumors of relatively weaker ecommerce spending so far in Q4, data for the next quarter might actually wind up below trendline. What are we to make of this? The conventional wisdom is that the pandemic accelerated the economy’s transition from analog to digital, but that doesn’t appear to be the case in aggregate. Surely, the supply chain woes are having an impact and perhaps causing more people to shop in stores. As I wrote about last week, the infrastructure required to support growth in ecommerce, from warehouses to delivery, is enormous, and the digital wave may be hitting an analog wall before it can push forward with more automation. At the very least, the range of outcomes for ecommerce growth over the next few years has widened a bit, and I’ll be eager to watch the data come in and see which consumer habits are still evolving and whether or not we can get back to the trendline of around 1% annual share increases.

Amazon’s Ex-Visa Simulations
Amazon continues to threaten Visa, first by adding a 0.5% fee in Australia and Singapore, and, now, by removing it as a payment mechanism for customers in the UK starting next year. Meanwhile, Amazon is busy adding alternative payments to their app, such as Affirm and Venmo. Are these warning shots a negotiating tactic, or is Amazon serious about removing bank-sponsored Visa credit cards? Visa credit card usage is relatively small for Amazon in those countries (WaPo suggests perhaps around 7% of total sales in the UK) and these changes don’t impact Visa debit cards. Amazon is well known for running tests to assess impacts before scaling up, which could be the case here. Eliminating Visa credit cards would be a much harder and more complicated test in the US, where Amazon has the JPMorgan-Chase-branded Visa card. The shift from analog to digital payments is early days, likely less than 10% complete across the economy. Digital generally affords higher non-zero-sum transactions, leaving all participants better off, as long as the enabling platform doesn’t take too large of a cut. Visa and Mastercard claim to only take a relatively low fee, but their system readily enables middlemen to tack on additional fees and can engender predatory lending to the detriment of the customer. None of the new payment platforms/wallets have yet had the guts to go closed loop and eliminate the ubiquitous cards. This reluctance may be due to threats and bullying from Visa and the like (see #208). Continued reliance on existing cards keeps fees high – often ~3% for digital transactions – while the actual cost of such a transaction should be declining over time with technological advances, such as AI fraud-detection engines. Some of the fees fund rewards programs, effectively shifting loyalty from merchants to banks (a win-lose at best). There’s obvious value in the payment network itself, as well as legitimate costs for maintenance, fraud detection, dispute resolution, etc. But, what’s a fair fee in the digital age, and will someone be bold and big enough to disrupt it? Apple seemed a potential candidate, but they rolled over and played the credit card game as well. Square is trying to put the pieces together. Is Amazon gunning to make a run at eliminating its reliance on the card networks and the banks that promote them? In the meantime, it’s likely a classic “and” not “or” situation, as all forms of digital payments are likely to rise as the economy continues to break from its analog shackles. We will probably see behavior split demographically: us old folks are unlikely to give up our points and miles, but fewer younger folks are carrying credit cards vs. prior generations. A new closed-loop replacement would likely need some sort of incentive or rewards system, and may not ultimately be that much cheaper, but it could come with a higher-value data stream (and better opportunities to create customer loyalty) for merchants. If a new, ultra-low-cost payment wallet did get traction, it would disproportionately benefit low-margin retailers, as well as digital merchants who forfeit a high percentage of their profits to cover credit card fees.

Secret to Netflix’ Low Buffer
Netflix uses its Open Connect platform to serve content globally, relying on 17,000 servers and investing over $1B in the last decade. The company keeps three copies – of varying quality – of each piece of content to accommodate different user connection speeds, and they move popular titles from regular storage to flash storage for faster service when demand spikes. Although maintaining this storage/distribution hub is a large investment and a big undertaking, it’s still fairly small ($100M/year investment on average over the last ten years) relative to the size of the various streaming platforms, so it’s a little surprising that this type of system hasn’t been fully replicated by Amazon, whose AWS division partners with all of the streaming apps.

Miscellaneous Stuff
Unstuck in Time
A long awaited documentary on Kurt Vonnegut, Unstuck in Time, was finally released in theaters and on demand last week. The movie has several good tidbits on Kurt’s life and a lot of footage spanning his childhood through later years, as well as interviews with his children. Unfortunately, the documentarian fell into the painful trap of trying to make the movie about himself rather than the subject, so you have to endure some of those rather annoying segments in the movie. Nonetheless, the documentary is a notable attempt to explain what made the writer tick. Vonnegut’s 1952 book Player Piano comes to mind whenever I write about the changes happening to the labor market and our overall well-being, now that rising automation and AI seem to be subsuming more human purpose. In the very first public edition of SITALWeek nearly three years ago, I wrote the following: “Written in 1952, Player Piano takes place in an alternate post-war world where machines have been elevated to all decision making and humans become for the most part increasingly useless. It’s an obvious parallel to the issues facing humans today as AI takes over more and more jobs. One of the book’s insights is that it’s human nature to destroy the things we’ve built, so we can build them back up again. Humans are tool and technology building machines - it’s where the fitness function of natural selection landed our mind-bodies after millions of years. To rail against technology platforms of the 21st century is to rail against the wheel, fire, spears, etc. It’s the same story, different century in human progress - this decade it’s all about AI turning on humans.” The book turns seventy next year, and it’s as relevant today to the state of the universe (and our little place in it) as ever, but that’s of course true of all Vonnegut’s works.

Stuff about Geopolitics, Economics, and the Finance Industry
Work-from-Home Waning Loyalty?
The SEC has received nearly double the number of whistleblower complaints so far this year compared to an already record-setting 2020. What intrigued me is the assertion in this Bloomberg article that remote work is making employees less dedicated to their employers and more likely to snitch. It’s also said to be easier to gather evidence of wrongdoing from a remote computer vs. in office. Obviously, if companies are doing bad things, increased reporting is a positive trend, but I wonder what it means for corporate cultures more broadly? Finding genuine ways to foster employee loyalty should be a key focal point for managers in the hybrid world.

Japan Relaxing Anti-Immigration Stance?
As developed countries face a labor crisis with aging populations and low birth rates, they should start competing to entice immigrants. Bucking their long-held bias against immigration, Japan is considering changes to allow foreign workers in 14 sectors, such as farming and manufacturing, to stay in the country indefinitely vs. a previous cap of five years. Japan estimates they will be short 345,000 workers by 2023. With anti-immigrant politics around the world, the only alternative will be a mix of inflation and economic stagnation until technology can automate more jobs. But, not all jobs can be automated anytime soon.

Baby Steps Back to Anarchy
In a particularly low moment for me last week, I found myself enduring this interview of Mark Zuckerberg by Gary V. My mind wandered and meandered as I tried to ignore the interview and attempt to distill the difference between Web 2.0 and Web3 (apparently, as time progresses, we have no patience for decimal points or excess use of the space key). As I understand, folks who classify the Internet into epochs say that Web 2.0 was about users participating and creating content à la social networking (although the term was conceived several years before the first large-scale social network, Myspace, was formed in 2003), and Web3 is about decentralized, blockchain-based Internetting for identity, data, payments, content, etc., without any one company in control of how data is used, algorithms are programmed, or transactions are processed. Both Web 2.0 and Web3 share a rising emphasis on creators – more and more people able to express themselves to an ever-increasing audience. Whereas Web 2.0 is dominated by centrally-controlled social networks and search engines that sell ads based on data they collect about you, the idea with Web3 is to turn that model on its head and move from equity-based corporations to token-based economies. The current iteration of Web 2.0 has not accomplished much in terms of moving society or the economy forward. Social networking essentially takes the idea of a print magazine, replaces the journalists and photographers with amateurs, the editors with algorithms, and the ad salesforce with technology. It’s not any sort of revolution.

That brings me to an important difference between the two epochs: while Web 2.0 has largely been a digital evolution of the content and advertising industry, Web3 could profoundly change the game by directly competing with governments and the equity-based, Industrial Age capitalistic system they rely on. Web 2.0 was an easy sell – it took many existing analog behaviors and broadened/amplified them (in many cases reinforcing more bad behavior than good). Web3, on the other hand, tells governments their currencies are no longer relevant, their rules need some updating, and that equity-based companies, centralized banking, and other supposed evils are outdated. That idea is of course very intriguing, but also a much tougher sell. At its heart, Web3 is a reaction to authorities and systems, both public and private, that are perceived to be failing the world today: governments, corporations, and many citizens all eschewing responsibility for the state of things. Web3 would remove the responsibility of trust and data from third parties and decentralize it.

There have been some decentralized societies throughout history, but it’s unknown whether such anarchy works only in small pockets on a regional scale. The conventional wisdom is that bureaucracy is essential for social order, with a lack of hierarchy ultimately devolving into chaos, but that’s not necessarily the case. By subscribing to the false, macroscopic narrative of Hobbes or Rousseau – i.e., for better (Hobbes) or worse (Rousseau), humans have progressed from natural hunter/gather clans to a higher-order civilized state via the agricultural revolution – we’ve obscured the true diversity of successful human social structures. As the late anarchist David Graeber tries to explain in The Dawn of Everything: A New History of Humanity, bureaucracy was not a necessary, uniform consequence of the agricultural revolution. We’ve been lulled into thinking that hierarchy is the only way the world can function without reverting back to a merely subsistent existence, but there is some historical evidence that humans can get along under many different structures. And yet, we seem to lack the imagination to perceive what today’s digitally-connected global society might truly look like without any centralized authorities. I suspect we will see elements of Web3 molded to work with the existing system, and we will need to wait for W4 (or w5?) to bring about more radical changes. Ultimately, as long as Web3 technology has to interface back with the analog world as we know it, some of the more radical concepts will be heavily stymied by regulation. But, decades from now, when the economy has gone from 10% digital to 90%+ digital, things will get very interesting for the anarchists. As I noted in musing on Player Piano: it's human nature to destroy the things we build, so that we may build them back up yet again.

✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #322

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: balancing the loss of meaning and purpose with the coming robotics and automation revolution; drive through groceries; supply chain problems help the big get bigger; the challenge of nurturing virtual worlds; looking back at LA Story thirty years later; dropping college enrollment, especially for men; Walmart is already using driver-out autonomous trucks; and much more below.

Stuff about Innovation and Technology
Monkey Music
Universal Music is creating a super group out of four virtual apes from the Bored Ape Yacht Club NFT collection. The band, Kingship, will be brought to life by Universal’s Celine Joshua and NFT collector Jimmy McNelis, who apparently holds $100M worth of ape NFTs. The foursome follows in the footsteps of other virtual primate-themed bands like Gorillaz, and, of course, the ancestor of them all, The Monkees.

Free-Range Robots
I am a sucker for those shows that demonstrate how everyday things are made in giant automated factories. When I think about the robotics revolution that is starting to spread out across the landscape, the factory automation analogy seems apt with one big difference: automation in a factory is highly controlled, repeatable, 24/7, and inside four walls that never change. When you introduce a chicken wing frying robot to a fast food restaurant, or a cobot for unloading a delivery truck, you are bringing factory automation into the wild, where varied circumstances, chaotic inputs, stoppages, and a much bigger human factor come into play vs. a factory floor. As a result, machine learning, machine vision, and more complex algorithms are going to be essential. Given the network effects of machine learning, this situation could give rise to a power-law winner-takes-most platform, but, then again, the applications are so diverse that deployed robotics may stay just as niche and fragmented as the factory automation world. One thing is for certain: if we don’t drive a productivity revolution with robotics and automation over the next decade, we will have a much larger problem in the economy (see the final section of this newsletter for more).

Grocery’s Digitization Dilemma
Grocery continues to be a very tough ecommerce nut to crack. This razor-thin margin business, which makes much of its profits from gas and prescription sales, relies on consumers using their own labor to wander aisles and checkout. Grocery is also the value option compared to restaurants and delivery, so charging price-conscious customers additional fees doesn’t fly. There continues to be a lot of innovation – and money lit on fire – as investors eagerly back startups in the US and Europe. In Europe, the list of grocery delivery startups includes Cajoo, Deliveroo, Flink, Getir, Glovo, Gorillas (not a virtual band), Jiffy, Picnic, Weezy, and Zapp, just to name a few, and US-based Gopuff recently acquired Dija and Fancy. Amazon has infamously failed for nearly a decade to get grocery right with decent margins, but they continue to try. In South Carolina, Opie offers drive-through grocery convenience, promising orders in just minutes from its 3,000sf custom-built warehouses. Each location stocks ~5,000 items, including prepared meals and coffee drinks. By not having actual stores, Opie can charge grocery store prices with no additional fees. Such experiments suggest a combination of automation, more limited choices, and savings-optimized physical space could overcome the low margins, reduce/eliminate customer labor, and allow for an en masse digital transition in grocery. Not to be outdone by grocery startups, Walmart, in partnership with Gatik, has been using fully-autonomous trucks – on a 7-mile loop for twelve hours per day since August without a safety driver – to fulfill online grocery orders. Orders are packed at a dark store, loaded onto the truck, and driven to a local Walmart for customer pickup.

Ecommerce Growing Pains
During the pandemic, we saw power laws accelerate trends that were already underway. We’ve often described this phenomenon as a ‘hollowing out of the middle’, which tends to happen during an industry’s analog-to-digital transformation: the big get bigger, the long tail of niche providers becomes longer and more niche, and the stuck-in-the-middles die off. As ecommerce accelerated during the pandemic, online retailers of all sizes benefited. However, WaPo reports on how small stores are struggling with the supply chain much more than the big box retailers, which can charter their own ships and pay up for logistics and merchandise. And, as key ecommerce enablers like UPS continue to raise prices for smaller merchants (largely to offset lost business with large merchants), we should expect to see the same hollowing out of the middle, and possibly even decimation of the long tail. The shipping cost conundrum may unexpectedly shift purchases back to digital ordering and customer pickup, placing some of the labor cost burden back on the consumer. We’ll be out of the acute phase of the supply chain crunch soon, but longer-term growth in ecommerce is starting to collide with the real world supply problems of sufficient warehouse space, truckers, warehouse employees, etc. It’s estimated that every $1B in ecommerce requires 1M square feet of warehouse space.

Successful Virtual Worlds Require Real-World Caretakers
Most of our early examples of metaverses are MMORPGs (massively multiplayer online role-playing games), and only a few of these virtual worlds have been long-running successes. As I was reading this post from Nexon’s Owen Mahoney, I was struck by how biological virtual worlds are. They are living, breathing ecosystems, but instead of pure natural selection and evolutionary fitness functions, you have human creators controlling the parameters for adaptability and survival. As Owen points out, it’s all about balancing the player experience, the economy, the content, etc. As virtual worlds layer on machine learning and algorithms to enhance the realism of game play (or mesh with the real world), we run the risk of those algorithms mirroring our bad behavior (like we’ve seen in social networking and YouTube recommendation engines). Likely, these algorithms will require a lot of oversight from conscientious real-world creators as well. Indeed, one of the main takeaways from Owen’s essay is that maintaining a virtual world for decades, as Nexon has done, requires very talented developers, careful oversight, and a lot of hard work. As spatial computing increasingly meshes the real and virtual worlds, I’ll be curious to see if games continue to lead metaverse creation or if other types of apps emerge. And, as players increasingly take on the role of creator, the evolution of these AR/VR worlds will be fascinating to watch.

Meta-mess vs. AR
Augmented reality game leader Niantic, maker of Pokémon Go, announced their Lightship Augmented Reality Developer Kit, which enables creation of blended real/virtual experiences. While currently optimized for integrating phone-based game play with the real world (using the camera function), Lightship will also eventually work with augmented reality glasses. Niantic aims to build a cross-platform ecosystem that works on iOS, Android, and various hardware systems. It remains to be seen whether AR glasses will be screen-like commodities or integrated parts of broader platforms like iOS or Android. I suspect phones will be the default gateways to spatial computing for the foreseeable future (see last week’s Meta-mess for more), with AR hardware functioning as peripheral devices. I’ve previously quoted Niantic’s founder, John Hanke, sharing his thoughts on the dystopian VR mess that’s being championed by the likes of Zuckerberg: “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.” In a recent Wired interview, Hanke explained that the Zuckerberg vision of the metaverse “takes us away from what fundamentally makes us happy as human beings. We’re biologically evolved to be present in our bodies and to be out in the world. The tech world that we’ve been living in, as exacerbated by Covid, is not healthy. We’ve picked up bad habits—kids spending all day playing Roblox or whatever. And we’re extrapolating that, saying, ‘Hey, this is great. Let’s do this times 10.’ That scares the daylights out of me.” In contrast to the reality-avoidance philosophy of Zuckerberg, this video from Nike using Snapchat Spectacles to augment a run is a cool, if slightly crude, example of how we can productively use AR to make the real world better.

In related news, gaming and virtual world development platform Unity will be acquiring the technology platform of Peter Jackson’s New-Zealand-based Weta. The technology team at Weta has created a lot of tools that have enabled cutting-edge special effects for movies like The Lord of the Rings and Avatar, as well as for games like Dr. Grordbort’s Invaders (my favorite) for the Magic Leap platform. (Note: the Lightship vision of AR looks very similar to that of Magic Leap). The creative team at Weta will continue to be independent and run by Jackson.

TikTok Turns to Gaming
TikTok is evolving beyond the endless scrolling short videos with the introduction of games. The first to launch is Zynga’s Disco Loco 3D: “a single-player endless runner game where players collect their own dance moves while challenging their friends and followers and avoiding obstacles on an increasingly challenging catwalk. As well as dancing to funk music, players can enter “fever mode” and use their dance moves to swipe away at objects approaching them.”

Miscellaneous Stuff
LA Story’s Sentimental Journey
Steve Martin’s great LA Story, which turns 30 this year, is being celebrated with a Blu-ray release. As he explained in the LA Times, the plot is based on the Irish folk song “The Maid of Coolmore”. According to Martin: “The song tells the story of a man in Ireland, in Coolmore, and he passes a young woman three times. The first time he passes her, he just thinks how lovely she is. They look at each other. The second time, they talk to each other. But the third time he passes her, she says, ‘Goodbye,’ and he says, ‘Why?’ She says, ‘Because I’m sailing away to America,’ which a lot of Irish people did in the late 19th century. And he says, ‘If I had the power on the day that she is to sail I would turn the winds around.’ Which is what happens in ‘L.A. Story.’ The weather and L.A. conspire to stop her from leaving.” Martin commented on the early 1990s as a turning point for society toward cynicism, implying that it would be hard to make a similarly styled rom-com today. But, he’s also quick to point out the proliferation of new outlets on streaming and cable creates a safe haven for non-cynical romances. I’ve previously written about 1991 as a golden year of film releases, and Martin’s point about a pivot to cynicism really resonates – there may have been a key cultural shift that occurred in the early 1990s. In a bit of meta, Martin's character in another 1991 gem, Grand Canyon, was a jaded Hollywood producer that struggles to shake off his cynicism. We humans are probably always looking in our rose-colored rear-view mirror for turning points where we “went wrong”, but cynicism has probably been around as long as we have. On a side note, I’ve really enjoyed Only Murders in the Building, Steve Martin’s new series with Martin Short and Selena Gomez on Hulu.

Giving Up on the Old College Try
A couple of months back, I read a story in the WSJ about the record number of males in the US who are not attending college. The story noted that females were 59.5% of college students at the end of the 2020-2021 school year, and that college admissions had declined by 1.5M students over the last five years, with men accounting for 71% of that drop. Declining birth rates in decades prior, as well as our recent slowdown in immigration, have no doubt contributed, but those factors don’t seem to account for the full magnitude of the enrollment reduction (which started to turn negative around a decade ago, with 2.8M fewer students enrolled today vs. 2011) or the gender difference. The widening male/female gap, which holds for both two-year and four-year programs regardless of race, location, and income level, is part of a long-term trend. Female enrollment reached parity with males in the late 1970s, rose to 55% by 1992, 57% by 2017, and then made its recent jump to nearly 60%. Schools reportedly have tried to maintain a more equal ratio, which means female applicants have faced stiffer competition for acceptance, according to the NYT. And, the gap could have further consequences down the road, as college-educated women tend to marry college-educated men. The explanations for the decision to eschew college seem anecdotal, but the rising cost of higher education compared to the lifetime value of a degree (said to be around $1M) might be one reason it seems less attractive, particularly as wages are rising for less skilled jobs due to the dearth of workers. When you look at the rising suicide rates and opioid crisis among men in their 20s-40s, there is perhaps some loss of hope and/or feeling of uselessness, offering a bleak outlook for the younger generation. Maybe the rise of technology across the economy, displacing humans and offering more sterile working conditions and indifferent oversight, is generating some existential malaise. (And, technology also drives an ever-increasing pace of change, which challenges our sense of order and ability to adapt.) I think often about the NYT op-ed from the Dalai Lama five years ago where he and Arthur Brooks wrote: “Leaders need to recognize that a compassionate society must create a wealth of opportunities for meaningful work, so that everyone who is capable of contributing can do so." The current world presents an odd set of circumstances. We have this apparent growing hopelessness about the future alongside a worker shortage, and rising wages don’t seem to be enough to solve the problem. Automation has a long history of usurping blue collar jobs, and, now thanks to software and AI, college graduate jobs are at risk as well. With remote work, software tools are getting a lot more data about how we perform our daily repetitive tasks on a computer, much of which can be automated. The robotics revolution could also accelerate given the rapid progress and nature of machine learning. It’s probably too convenient to label our new work landscape as having lost its meaning, but automation’s impact on our mental state shouldn’t necessarily be discounted. (I talked more about the lack of hope in #315 in the section on the Drake Equation.) On the plus side, there are lots of in-demand, high-paying craft and trade jobs that robots won’t soon overtake, so hopefully the next generation of job-seekers can find fulfillment there.

Stuff about Geopolitics, Economics, and the Finance Industry
ESG Fog
Former chief investment officer for sustainable investing at BlackRock, Tariq Fancy, writes in the Economist about the dangers of ESG investing obscuring its own purported goals and causing a complacent belief that market forces can fix what is a market failure to begin with. He calls for more regulation of bad behavior and for governments to penalize companies for environmental damage. Daily, I see companies striving for good ratings based on rosy ESG reports, and most investors consider that enough, without thinking deeply about what it means to actually create more value than you take. Meanwhile, despite the wave of ESG investing, we’re not even close to tackling any of the problems facing society. Each year, we’re falling further behind in the global fight to make the world better. An over emphasis on checking ESG boxes may be shifting resources away from sectors of the economy that we will actually need to bridge the gap to a sustainable future, such as natural gas. I spoke more about ESG and the importance of focusing on non-zero-sum outcomes at the end of #318. Investors need to find a way to translate ESG investing into real world impact. Maybe it's just a matter of time, but so far the lack of results is concerning.

Robots Needed, but What Will Humans Do?
As I read about the $1T infrastructure bill now passed in the US, around half of which is destined for building new things (like EV charging stations and public transit) and fixing old things (like bridges and roads) I keep wondering where the government and its contractors think they will find the workers to undertake these projects? We already are well short of the people needed to make the currently-sized economy function today without this new demand for even more jobs. Wages are rocketing and workers have an extreme amount of bargaining power from years of declining immigration, declining birth rates, COVID-induced early retirements/exits, and the rising death rate of people in their 20s and 30s from opioids (see Where is Everyone in #320 for more). It seems like the odds are slim that any of this money will actually be put to good use anytime soon. Coming back to the topic of robots, what we seem to need is a decade of rapid productivity increases from automation. We are essentially being forced into leveraging technology to drive productivity to offset the labor deficit and inflationary pressures. Consequently, the coming robotics/automation wave could be one of the most fertile and interesting tech booms we have witnessed since the start of the Industrial Revolution. And yet, how will we feel as we are increasingly surrounded by android coworkers as purposeful human work is absorbed by machines and algorithms? Society needs a thoughtful framework to balance the inevitable automation advance with the loss of work-driven meaning as we race toward the robotic revolution.

✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #321

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

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In today’s post: spatial computing will be driven by applications, not technology, and it represents a special challenge for human brains; the iBuying threat that wasn't, and the importance of experimenting and adapting in the Information Age; turning exhaust into animal feed; rapid restaurant expansions; labor's upper hand is getting stronger; driver-out trucking; humans' diverse past; NZS Capital on the Acquired podcast; and much more below.

Stuff about Innovation and Technology
Flip to Frying
Longtime readers are surely tired of me starting off SITALWeek by discussing Flippy the burger-flipping robot and droning on and on about how restaurants are the crucible of the analog-to-digital transformation of the global economy. Well, I am going to change things up today and talk about Flippy’s baby, Flippy 2, which is “lighter, faster, better, and cheaper” than its predecessor restaurant robot kitchen helper. Miso Robotics’ focus on Flippy 2 moves the company away from burger flipping toward fryer operation. Flippy 2 can take frozen products from the container through cooking over and over again. Buffalo Wild Wings is testing the new Flippy Wings robot, which has a 10-20% increase in food production speeds while also reducing risk of human injury and oil spillage. Agot, which makes surveillance tools to monitor human fast food workers for mistakes and efficiency, thinks robots are a decade away from being a mass market. I think I’d rather work alongside Flippy than have a camera recording every move I make. It’s certainly not clear how quickly robotics can make an impact on the labor shortages and inflation facing restaurants. In the meantime, triple-digit growth in digital orders has the restaurant industry rapidly expanding both locations and the amount of technology deployed. It’s questionable how this digitally-disrupted sector is going to find enough employees and enough equipment and technology to actually open all the new locations, let alone serve out of the existing ones.

Turning Exhaust into Protein
Chinese scientists are able to transform carbon monoxide, carbon dioxide, and nitrogen into proteins for animal feed using Clostridium autoethanogenum bacteria. The tech, which researchers say works at scale, would displace soybean imports for livestock feed and aid in China’s decarbonization program.

Singles Day Single-Day Record
Livestreamer Li Jiaqi sold $1.9B of products on the first day of Alibaba’s annual November shopping event. The record haul, which included sales of Shiseido cosmetics and Apple AirPods, was watched by 250M people, more than 10x vs. a normal day.

Autonomous Long-Haul on Horizon
Self-driving truck company TuSimple has seen a 13% fuel savings over 160,000 test miles between 55-68 mph. By my crude calculations, with typical fuel efficiency of ~6mpg, current gas prices, and average long-distance truck travel of 50-100k miles a year, that’s only around $5,000-6,000 in savings per truck per year. The bigger cost savings would likely need to come from removing the driver for long-haul miles, a feat that TuSimple claims could happen on its Phoenix-to-Tucson route, in conjunction with partner UPS, possibly before the end of this year. “Driver out” trucking remains early days, with a lot of technology yet to be proven, but the promise of caravans of self-driving semis on long stretches of rural roads seems potentially within reach this decade.

Twitch Reinvents MTV
Warner Music is partnering with Twitch to launch individual artist channels. Debut channels will feature round-the-clock content from Bella Poarch, Saweetie, or Sueco and include exclusive and behind-the-scenes footage. Basically, it’s like MTV from 30 years ago, but each artist has their own channel. It’s an interesting evolution of the always-on fan model. I am not clear why this is exclusive with Twitch – it seems like, just as with a cable network like MTV that is available on cable, satellite, streaming, etc., you could broadcast the Warner Music channels on YouTube, Instagram Live, and other video platforms. I expect most labels will follow suit and set up channels for popular artists. While it seems like we are already in content overload with social, streaming, games, and more competing for our time, the acceleration of new things to watch is not slowing down.

The Meta-mess
I’ve long been a follower and proponent of the shift from screen-based computing to, call it whatever you like, spatial/ambient/x-verse/AR/VR/MR/etc. computing. It’s a natural progression as chips and connectivity improve speed and power to provide augmentation of the real world with information and interactive visuals. There are many elements of this platform shift already in operation, largely thanks to gaming companies. Snap and Niantic (Pokémon Go) have made significant progress in phone-based AR. Microsoft and Magic Leap have produced, and continue to improve upon, compelling technology that can already make you question the foundations of reality. Over the next decade, I expect we will see some great new platforms emerge for spatial computing, all of which will likely rely on the smartphone as a hub. For the foreseeable future, those phone hubs are controlled by the iOS/Android duopoly, barring some huge regulatory shift that transforms those companies into utilities like power or telecom companies. That means anyone that wants to have a shot at building a spatial computing platform needs to either be subservient to Apple or Google, or they need their own phone platform and end-to-end developer and hardware ecosystem. Android, being open source, offers the best way to jump start a phone platform. Microsoft has been experimenting with Android phones, but we would need to see a complete phone platform from a company like Meta, Epic, or Roblox to take on Apple and Google. I don’t know that a gaming-centric approach to spatial computing will ultimately solve for enough use cases, but if someone were to make a killer gaming-based phone and spatial computing platform, like an Xbox phone, it might have a shot at becoming a third platform. It would be inspiring if the next computing platform was more open, more creator driven, and more distributed, but odds favor incumbents controlling spatial computing with the same potential problems we experience today.

We have a vision of spatial computing, like all other technology shifts, thanks to sci-fi writers. And most of those visions are dark. And, many of those visions stem from the imagination of one person, e.g., Snow Crash author and definitive creator of the term metaverse, Neal Stephenson, said in a 2017 Vanity Fair interview: it was “just me making shit up”. If you are in need of a refresher on the dark visions for the metaverse, rewatch the disturbing Strange Days (and see #312 for more on the 1990’s vision of VR). Advances in tech hardware are typically not what drives a platform shift; rather, it’s the applications, most of which are unknown until years after the hardware is mature, that cause the real shifts in usage. The obvious examples today are games. And, fitness apps seem to be a natural fit. Communication might emerge as a killer app if something can beat Zoom without giving me a headache. But, most likely, standing here today with our headsets on, we don’t know what the transformative apps for spatial computing will be. If the metaverse is just gaming, it probably won’t constitute much more of a market than today’s game console industry.

The stakes are high in the transition from screen to spatial computing because every shift in technology – from print, radio, TV, Internet, and smartphones, to altered reality – brings with it a faster pace of disruption that, increasingly, far outpaces humanity's ability to co-evolve. We have not come close to adapting to living alongside the Internet, and yet we are hurtling toward an even more disruptive technology shift. If you spend much time learning about ancient Greece, you realize that while the color palette and mediums of discourse have changed, everything else with humans has pretty much been status quo for millennia. Whether it's Plato’s world, Shakespearean times, the Renaissance, the Enlightenment, or modern day, we worry about the same things. We dream, fight, love, hate, resent, envy, and argue the same ideological questions. The Enlightenment's scientific revolution marked one of the only material changes in the last 3,000 years in human thinking, when it became possible to say “I don’t know” and then investigate why things are the way they are. While this is a Euro-centric example, diverse cultures around the globe have followed sufficiently similar paths such that all humanity shares common, basic parameters for interacting with new technology – namely, a few early adopters tend to wield dominant control over a spellbound (or brainwashed) audience before reverence dissipates, diversity reasserts itself, and usage slowly evolves to benefit the masses. What has changed the most over history is how quickly the new medium (i.e., technology platform, from stone tablets to VR goggles) for communicating ideas and artistic expression can have a viral impact (especially while still in the hands of a few dubious autocrats). Globally, it's not how, but what, we choose to communicate that matters as we go from screens to glasses. If we aren’t careful, we will continue to amplify all the worst of humanity's past, both ancient and recent, instead of shining a light on the best of our traits. Whatever the winning spatial compute platforms are, I hope the popular applications they spawn come with a goal of usefulness and kindness instead of just exploiting our fears and biases to sell more ads.

iBuying Course Correction
Zillow announced this past week they would be exiting the direct iBuyer business in favor of offering a broader choice of options – provided by other marketplace participants – to home sellers. If we go back a few years, there was an existential risk that a large platform would create a liquid marketplace for homes that would ultimately lead to a disruption of Zillow’s core real estate portal business. It was hard to put a probability on that risk, but it was high enough to warrant co-founder Rich Barton’s experiment in iBuying. Today, it appears the risks involved with the experiment outweighed the actual threat to the core Zillow business, and it makes sense to unwind and shift strategies again. While some investors might see this as a blunder, we see their bold experimentation and prompt course correction (see also Chapter 5 of Complexity Investing) as exactly what good management teams should be doing when their business faces disruption – and every business will face disruption to some degree in the analog-to-digital transformation of the global economy. I wrote a lot about Zillow’s pivot in early 2019 in Zillow Disrupts Itself, and I’ve suggested in the past that iBuying may make more sense as a marketplace offering rather than a vertically-integrated product due to the messy and complex nature of the housing industry (see #319 for more details).

If we back up to first principles for real estate transactions, sellers need to unlock their home equity – to take something illiquid and make it liquid for a short period of time. Before the housing crisis in the US, it was fairly easy to get bridge loans to do so. Going forward, I suspect there will be a variety of solutions, including bridge-loan type offerings as well as offers to buy houses from local and national investors. I think it’s smart to offer the most comprehensive menu, and, importantly, to focus on customer outcomes. Redfin’s strategy of providing the most options, including a broker-assisted transaction, appears to be validated by the latest shift at Zillow. We always look for two main characteristics when evaluating potential business investments: non-zero sumness and adaptability. Who can offer more value than they take while also quickly changing to meet customer and market needs? iBuying may not be a positive-sum solution because it enables a class of institutional investors with a lower cost of capital to increase housing prices to such a degree that ownership is out of reach for individuals with less ability to borrow cheaply or access their own equity. Maybe that loss of affordability was inevitable with or without iBuying, but it sure seems like iBuying has been accelerating the problem (we’ll need more time and data to know for sure what the impact is, since any mechanism that decreases friction might increase prices, so blaming iBuying might end up being unfair). The other takeaway for investors from Zillow’s strategy shifts is to always match position size with the range of outcomes for the business. When the range of outcomes is widening, you want to reduce your portfolio weighting accordingly. For a longer discussion on this strategy, see Investment Portfolio Gardening at the end of #259.

In Zillow Disrupts Itself from February 2019, I wrote:
“This is a classic example where Bayesian logic will inform an investment decision. Put a flag in the ground today on your scenarios and objectively analyze each new incremental data point to move your credence up or down with as little cognitive bias as you can humanly muster – that means you need to find a partner in your analysis who will hold you accountable for remaining objective to the facts. This is also a classic example of a complex adaptive system where the outcome is unknowable with any certainty. Therefore, as you gain more confidence that you are making fewer predictions for your world view to come true, own more, and if instead you are making more specific predictions with a wide range of outcomes, own less or sit on the sidelines. We discuss this type of analysis and portfolio construction process in our investing white paper and there is an excellent and brief overview of Bayesian logic you can find here. Lastly I want to say this one more time: Zillow’s bold move to disrupt their own business and industry is what many companies are facing across many industries around the world today. While it’s the right strategy to undertake, most of the time it will fail. It takes a strong leadership team and culture of innovation and adaptability to have a shot, and that means Zillow has a shot, but only time will tell.” I think this analysis from nearly three years ago is still applicable today, and, with the new strategy shift, Zillow still has a shot at continuing to adapt and provide more value for all its constituents.

Stratospheric Chip Design
A Cadence blog post details the massive scale of Google’s chip design efforts. Google designs completely in the cloud (obviously!), with some projects using over 100k cores overall, and up to 6 terabytes of memory on a single machine. Google uses 6 petabytes of SSD memory for silicon development. In addition to Google’s custom TPU chip, the company also developed a VCU, or video encoding unit, to accelerate the global videos served by YouTube.

Miscellaneous Stuff
Ancestral Middle Earth
Our human ancestors were much more physically diverse than modern humans: “For most of our evolutionary history, we did indeed live in Africa – but not just the eastern savannas, as previously thought. Instead, our biological ancestors were distributed everywhere from Morocco to the Cape of Good Hope. Some of those populations remained isolated from one another for tens or even hundreds of thousands of years, cut off from their nearest relatives by deserts and rainforests. Strong regional traits developed, so that early human populations appear to have been far more physically diverse than modern humans. If we could travel back in time, this remote past would probably strike us as something more akin to a world inhabited by hobbits, giants and elves than anything we have direct experience of today, or in the more recent past.”

Alzheimer’s Cure on Hand?
If animal studies translate to humans, we may have an Alzheimer’s remedy that’s been readily accessible for decades. Mouse models suggest a combined treatment with the once-popular cholesterol-lowering drug gemfibrozil and the vitamin A derivative retinoic acid may be the answer. The combination appears to target the brain’s abundant astrocyte “maintenance” cells, forcing cleanup of the toxic Αβ fibrils.

Beyond 💩 Humor
Actor, comedian, and alien-hunter Dan Aykroyd had some articulate comments on comedy in The Hollywood Reporter: “There is enough range in humor where you don’t have to go scatological and you don’t have to go pulling any divisive cards to get a laugh. There is so much in the world to comment on that is outside the realm of offensiveness. As a writer, you can go to other areas and have successful creative endeavors. Scatological humor is fun. It’s easy laughs. But there is more intelligent writing that can happen if you stay away from the offensive material that should be rightly canceled for its hurtfulness.” Personally, I am all for being offended by comedy (see Laughter is the Best Medicine), but only when it’s making an insightful point or illuminating observation, rather than going for the cheap, cynical laughs.

Stuff about Geopolitics, Economics, and the Finance Industry
Digital Yuan Ascending
140M digital wallet users have spent just under $10B in digital yuan in China. This record experiment in digital sovereign currency has 1.55M merchants that can accept the eCNY payments. Governments around the world are increasingly in competition with alternative currencies, from stablecoins to crypto. It’s an unusual instance of the private sector competing directly against a service that is typically only provided by a government, and it remains to be seen to what extent those governments will regulate, or even shut down, the burgeoning currency competitors.

Advantage: Labor
John Deere union workers have turned down a contract that included an immediate 10% pay hike plus an $8,500 bonus and a 5% raise in 2023, an additional 5% raise in 2025, and 3% bonuses in 2022 and 2024. That looks like a staggering 25-35% combined wage and bonus inflation over the next four years that apparently wasn’t enough to satisfy the bargaining power of workers in the US. I believe this situation is compounded by the smaller group of folks in their twenties (compared to the size of the Millennial generation), the early retirements from COVID, and the declining immigration numbers, all of which range from very difficult to impossible to resolve.

Acquired's Taste of Semis
Jon and Brinton joined the crew at the Acquired podcast last week to talk about Complexity Investing, NZS, and chips, including the history of how we acquired semi tech from Roswell aliens.🛸

✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #320

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: the algorithmic paranoia of suburbia; the rising scarcity value of first-party data for advertising; the missed opportunities for Industrial Age companies that don't see technology as a core competency, raise prices, and build moats instead of nurturing non-zero-sum platforms; a 🐐 goes viral; the missing people in the labor force aren't going to magically reappear; the VC Ponzi scheme; and much more below.

Stuff about Innovation and Technology
Codifying Copilot Coding
After introducing Copilot, the AI code writing assistant, GitHub claims it now generates up to one-third of all code on the platform. Built on OpenAI (Microsoft owns GitHub and has a partnership with OpenAI), the tool is like an autocomplete for programmers. Axios reports that demand for software programmers grew 25% in 2020, so tools like this will be in high demand as the world goes digital without enough programmers to suffice.

Digitized vs. Dinosaur
There is a division across many industries between companies that see themselves as digital vs. those that do not. As a great example, Chipotle, which heavily embraces technology to their advantage, just hosted a virtual Halloween party on game platform Roblox, while McDonalds announced it’s selling its technology division to IBM (I guess they are still around) because they don’t see it as a core competency. No matter what your business is, if you don’t see technology as a core competency, you’re going to be in trouble at some point.

In Business Strategy, Prepositions Matter
While we’re on the topic of legacy business mentalities, I was reading about UPS’ “Better not Bigger” strategy around their earnings release last week. The backdrop for UPS and other shippers is an accelerating transition of commerce from analog to digital. Logistics – moving objects from point A to point B in the most efficient way possible – is the enabling fabric of this transition. UPS missed a major opportunity to build a digital-economy-transforming logistics platform, one that could have offered customers lower prices and better, faster service (e.g., Sunday and same-day delivery). Now, they face the ongoing challenge of larger customers like Amazon vertically integrating their own delivery. Amazon passed FedEx in volume in 2020, and, if you extrapolate the data, it’s likely they are approaching the size of UPS. UPS’ prices are rising dramatically, both from deliberate increases and a shift to small business customers, who pay higher prices than larger retailers like Amazon. Consequently, UPS reported a 2.7% y/y drop in volume as revenues rose 9.2%. This price ratcheting incentivizes customers to find cheaper alternatives, like handing off fulfillment to Amazon or building out their own logistics, especially for local delivery. Passing on higher shipping fees to customers will likely only increase traffic for large ecommerce platforms. UPS’ strategy creates an umbrella for competition in national parcel delivery as well, as evidenced by the recent merger of OnTrac and LaserShip. Taken to its logical conclusion, UPS’ current zero-sum tactics could ultimately divest the company of many of its customers. My point is not that UPS is a bad business today (time will tell if they mortgaged their future too much), but that it could have been a much better one. In the digital age, bigger and better tend to go hand in hand and are rarely mutually exclusive. Imagine if Amazon had viewed logistics as something beyond its core competency, like what McDonalds is doing with technology.

Pursuit of Pivotal First-Party Data
As I ponder the puzzling possible pairing of PayPal and Pinterest – a deal that PayPal proclaimed it’s not pursuing – the paucity of first-party data is in the public eye. With changes afoot at Apple and Google to make it even harder to fingerprint people/devices for targeted ads and various types of tracking, there remains a relatively small number of companies with large amounts of data on their own users (aka first-party data). Obviously, Amazon, Google (including YouTube), Meta (a new name that an algorithm determined was better for the algorithms formerly known as Facebook), and Apple probably collect the most demographic and intent data. Then there is a host of other media properties, such as the video streamers and various other social media entities, that contain some level of data, but perhaps don’t have the tools to attract and support advertisers at scale, at least not yet. I am not certain how online data collection/sharing will play out, but I suspect the value of first-party data is rising and the value of combining sources together will continue to increase. I’ve covered this topic a lot in the past (going back to early 2019 in this iteration of SITALWeek), and it seems to be more important than ever.

Surveillance Troubles Paradise
WaPo reports on the rise of private license-plate reader technology. The surveillance tech’s marketing scheme is based on creating a false sense of fear (and security), and it’s causing a lot of disharmony in suburban communities, like Paradise Hills, CO. For most of human society, it was not possible to remain anonymous. In tribes of a couple hundred (and usually far fewer) people, if you failed to take responsibility for your actions, you had little chance of surviving. Mass anonymity is a very recent phenomenon. It seems to inherently raise everyone’s suspicions and lower their trust of others’ intentions. Mass surveillance is now sufficiently cost effective (e.g., $2500/year per license-plate reader camera) that it’s taking over every corner of the planet. While one might expect the decreased anonymity to boost accountability and trust, Big Brother’s recording eye seems to be accomplishing the very opposite. Tribes are tribes because they share a common culture, and it seems that you cannot have culture without tribalism. And, thanks to algorithmic ad engines (aka social media, or Meta as it wants us to call it), humans are increasingly aligning along a plethora of new, troubling, tribal attributes. In short, the algorithms act like a giant array of mirrors focusing and amplifying back the worst – much more so than the best – of us, thanks to our evolutionarily-fueled pursuit of survival-oriented data (did you hear about the cave bear in the next valley over that ate Doug?!?). Thanks to this neural wiring, we are perfect targets for clickbait, with the overinflated fear of being targeted by a criminal a prime example. The algorithms are therefore very effective at serving surveillance technology ads to people who might be irrationally fearful of crime because of false stories the same algorithm fed them, helping to sell $2500/yr license-plate surveillance systems, and thus padding the pockets of the algorithms’ owners.

Homeownership Increasingly Out of Reach
Redfin CEO Glen Kelman reflects on the blunders of 2020 and the challenging state of the increasingly exclusive housing market: “The original premise of my stint at Redfin was that we’re selling the American Dream and the idea that everyone can afford a house sooner or later if they work hard and play by the rules. Recently, I’ve had this feeling that there are so many people who are never going to become Redfin customers — that maybe the product we’ve been selling just isn’t a middle-class product anymore but an affluent product.”

Miscellaneous Stuff
All Hail The Mountain Goats
The Mountain Goats are (were?) a relatively obscure group helmed by singer-songwriter John Darnielle, one of the greatest songwriters and performers around. Darnielle describes the group as a “boutique concern...not for everybody.” I’ve linked to them on more than one occasion here in SITALWeek, in particular, This Year, which is my anthem every year that goes by. One of their cult classics, No Children, always a pinnacle of their live performances for the decades I've attended them, is a dark tale of a divorcing couple in Tallahassee who, well, probably shouldn’t have children. To everyone’s surprise, the twenty-year-old tune became a viral sensation on TikTok, featuring people’s cats mimicking some of the darker lyrics. Darnielle has great perspective on it: “They’re hearing a brief portion of a song that already has a specific meaning in our catalog and to our fan base and among a lot of people. And I’ve been doing this for 20 years, and our existence suddenly is being gazed upon by a whole bunch of new people through this very narrow lens. But at the same time, you have to admit that they sort of get it. They latched onto a 15 seconds that’s a key moment in both the song and the catalog and sort of identified it as that. It tells you a lot about how good the critical eye of the public can be — that people are good at reading stuff, if [they] get a chance to hear it.” The Mountain Goats are a tricky band to introduce to someone because Darnielle has penned so many albums (and some great novels) that it’s hard to know where to start, but Tallahassee is as good a spot as any. As Darnielle puts it so perfectly: “the artist does not dictate the terms in which his art is understood.”

Zero-G City Center
Blue Origin plans to build a space station, Orbital Reef, as a business park and tourist destination. I’ve made the comparison in the past to space flight and theme parks, and I think this concept bears that out. I love the idea of space flight and a civil space station. Philosophically (not financially), I don’t think that you can legitimately argue that Disneyworld is ok, but Orbital Reef or space tourism is not. Walt Disney was always focused on the dreamers as well as creating a vision for the future, and an attraction like this should inspire a lot of dreamers.

Stuff about Geopolitics, Economics, and the Finance Industry
Where is Everyone?
Over the last few weeks I’ve been writing about the various demographic and work shifts in the economy. To briefly recap: 1) as each year ticks by, there are fewer 20-somethings entering the US labor force due to 20 years of declining birth rates (i.e., we are slowly rolling off the 1M+ Millennial birth peak of 1989-1993); 2) we are missing ~600k immigrants due to a decline in net immigration from 2017 through 2020; 3) COVID resulted in 3 million early retirements from the labor force; 4) COVID created a new class of work-from-home job alternatives for people who might have been in different jobs pre-COVID; and, lastly, 5) COVID caused lifestyle changes in the number of workers per household and prompted many households to shift locations. Most of these impacts to the labor force are structural changes that will not reverse even if COVID were to become a thing of the past. The only long term solutions are immigration and/or automation – the replacement of jobs with technology, both software and robotics. It could be a structural loss of well more than 5M people in the US labor force, and it could grow a little each year due to dwindling birth rates from two decades past and a restrictive immigration policy. And, the economy is still growing, so demand pressure, on a per-unit-labor basis, is getting worse as time goes by. The demand driver of inflation is much harder to predict than the supply of labor. An aging population also acts as a natural consumption governor to demand over time. Further, demand is still temporarily elevated from the pandemic due to deferred spending and government stimulus. When I’ve talked about the potential for a Goldilocks threading of the needle on inflationary pressure and the disinflationary forces of technology, this concerted shock from COVID, immigration, and demographics may be enough to derail that ideal scenario for a while until technology can catch up to offset the lost labor, or until demand returns to a pre-COVID level (or even lower perhaps over time). In the meantime, the dearth of skilled (and unskilled) workers training to enter the workforce means that existing assets with embedded labor will become even more valuable. This is perhaps why Lennar is focused on 3D printing houses in Austin as their CEO commented: “skilled tradesmen are a dying breed, so there have to be alternative building solutions to help with this labor deficit”. The 15.5-foot-tall printers from Icon can create a 2,000-square-foot house in a week. While the process doesn’t entail a large cost savings, it does require 50-75% fewer workers. If some countries have a more pro-immigration stance or increased birth rates, it could create a divergence in inflation rates, and, ultimately, in interest rates, in order to prop up currencies in countries with higher relative inflation due to the missing people.

Bubble, Bubble Toil and Trouble
One of the quirks of venture investing is that a very small number of agents work to set the valuation of a funding round. Given the wide range of outcomes for high-growth, early-stage companies, it’s anybody’s guess, but, generally, more guesses are probably better than fewer. A problem you want to look out for in venture investing in times like this – when there is way too much money chasing way too few opportunities – is funds that make repeat investments, each round at an increasingly higher valuation as they are raising new, bigger funds. This lack of good price discovery can compound when a company goes public, as some of those same private market investors (typically crossover funds, but potentially evolving traditional VCs as well) hold onto, and maybe even buy more of, the floating shares of a company. This limited investor pool creates a value (due to scarcity of shares) that is perhaps not as accurate as you might have with a greater number of participants working to create a consensus value for a company. Companies are also waiting much longer to go public, which allows more time for inflated markups along the way. The real losers in the process are the company and its employees (and, ultimately, the investors who end up taking losses on their inflated investments). Valuing a company far too high vs. its long-term addressable market and raising too much capital create an impossibly high set of expectations for the vast majority of companies. Under mounting performance pressure with disappointment inevitably looming, employees may end up permanently underwater on equity and the company may lose discipline and focus. Because the economy has yet to adjust return expectations to a low- (or even negative-) rate environment, this pseudo Ponzi scheme will continue to offer an artificial source of performance as long as the low-rate music keeps playing. What I describe here is clearly not true for all companies or all VC investors, but it seems to be happening in various instances with increasing frequency. I remain skeptical, but not cynical, by never assuming the worst. To end on a lighter note, in case you are looking for signs of excess in the economy (which are not hard to find), in California you can now sell your vanity license plates. Two-letter plates are apparently coveted, and “MM” is for sale for $24.3M. It comes with an NFT as well, of course.

✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #319

Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Eight-Nozzled Elephant-Toted Boom Blitzes, and whatever else made me think last week.

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: the rise of specialized robots will change the world around us; should iBuying be a marketplace or vertically integrated?; the defense industry is overdue for a crucial Information-Age makeover, and ESG investing is holding it back; a space rock on a pillow; we wear costumes on Halloween to blend in; and much more below.

Stuff about Innovation and Technology
Help Us Kitchen Robots, You’re Our Only Hope
One of the most dramatically impacted industries from COVID is restaurants. Fast food and larger chains, which were more able to adopt technology and absorb costs from reduced patronage and a shift from dine-in to take-out, fared much better than the independents. And, as patrons reemerged from lockdown, the pandemic-precipitated labor shortage maintained pressure on technology adoption. As a result, restaurants continue to be on the leading edge of experimentation with automation and robots – from basic digital ordering to the more exotic burger-flipping machines. However, it’s becoming more clear that the labor dearth isn’t simply an acute phenomenon, and its persistent nature suggests a structural shift, namely due to demographics and immigration policies, as I discussed last week. The CEO of Domino’s Pizza also called for US immigration reform. If you want your pizza delivered, you have three choices: 1) overhaul immigration; 2) go back in time 20 years and have more kids; or 3) sit tight and hope your local ‘za chain is deploying technology and automation. The first two of these options seem fairly close to impossible. That means we are left with choice number three. Restaurants are the poster child for an industry adopting technology in the face of human shortages. The NYT reports on the trend, quoting an executive from White Castle: “This is the toughest labor market we’ve encountered since World War II”. To help, the Servi robot, made by Bear Robotics, can bring plates to and from tables, freeing up servers’ time. And, some robots are cleaning bathrooms, while others – like Makr Shakr – mix drinks (shaken or stirred, with garnish). Buffalo Wild Wings is using Miso Robotics’ Flippy Wings chicken-wing-fryer bot. I don’t believe anyone has invented Rick’s butter-passing bot, but surely someone will. The big takeaway here is that there is a massive set of very specific use cases for robots and automation. Robotics is still a highly fragmented industry with a lot of specialization that needs to be very close to customers to better understand what pain points need to be addressed and the feasibility of different solutions. That’s perhaps why we have not yet seen a vertically-integrated platform for robotics emerge. It also highlights just how damn efficient humans are at everything. We’ve optimized our entire world around our unique ability to communicate verbally and non-verbally, manipulate objects with extreme dexterity, and utilize a metabolic system that supports phenomenally efficient neural supercomputing and muscle usage. Until someone perfects the human android, we will likely see thousands of specialized solutions, both in hardware and software. Over time, the world will adapt and become more customized for robots than for us humans. By the time someone can make a human-like android, the world may already have morphed into something humans today wouldn’t recognize. But, in the meantime, it’s a fascinating co-evolution of humans and robotics.

iBuying’s Potential Paths to Platformhood
One of the topics we write a lot about is the characteristics of a business that matter when an industry goes from analog to digital. A couple weeks back, I addressed this theme in the context of Walmart. Things like vertical integration, network effects, data, adaptability, non-zero-sum business models, etc. are the defining characteristics of digital-age platforms. This past week, I’ve been thinking about this trend as it relates to the digital transformation of the real estate industry in the US. Zillow, Redfin, Opendoor, and Offerpad have been building various degrees of iBuying businesses, essentially trying to create a lower friction marketplace to buy and sell houses in the band of low-to-median priced homes. The concept relies on an ability to take a highly fragmented (and very localized) market and turn it into a platform. Profiting from fixing and flipping houses requires extensive local market expertise and access to an array of local contractors to paint, patch, and facelift properties. In other words, it’s messy and hard, and it involves a lot of people. And, people are messy and hard to deal with, unlike software that always does what it's told on time. If, for example, we contrast the digital transition of real estate with that of the automobile, its fragmented and individualized nature presents a very different set of challenges than building mass-produced EVs in a couple of centralized factories and selling them directly to customers. Zillow paused their purchase of homes recently, citing, in part, high demand maxing out their flipping capacity. Construction labor shortages, similar to other industries, are one of the snags for Zillow. As noted above, these labor shortages are only partly related to the temporarily overheated post-COVID-lockdown economy and may persist in the US due to the reduced number of domestic and immigrant workers in their 20s. It’s also possible that Zillow’s purchasing hiatus is part of a larger growing pain as the rapidly expanding industry digests an overheated housing market. Or, perhaps the pause indicates fear about the direction of home prices more so than a labor shortage. If it’s a scaling problem related to the labor and local elements of the business, it suggests a different approach to iBuying might make more sense. I have long argued that iBuying would work best as a marketplace business, whereby consumer real estate portals could aggregate and leverage a large home buying and selling audience and hand off qualified leads to a diversified group of local and national buyers. In other words, iBuying would take a cut and leave the messy worker scheduling, painting, patching, and reselling to the analog world. Or, the industry could go to the other extreme and become a single-family rental business, buying houses to own and lease rather than resell. Marketplace or REIT – those might be the platform plays in real estate’s analog-to-digital transition, with a middle road (like what is currently being pursued) ultimately presenting more challenges. Time will tell; for now, it’s way too early to know which path the industry will follow. Having the broadest menu of options for consumers, being adaptable, and providing the highest non-zero-sum outcomes will determine who gains or loses share as real estate, and many other analog markets, digitize. Some industries will favor complete vertical integration, others will be better served by marketplace platforms. But, in the case of complex industries like real estate, the technology transformation wave might be an unstoppable force meeting an immovable object.

Digital-Only Rx Failure to Launch
STAT reports that Amazon’s prescription share is likely to stay low as long as they are digital only. This might be another example of an unstoppable digital force meeting an immovable (and highly regulated) object. The article notes that Amazon could go faster by adding pharmacies to Whole Foods locations (I think there is some space to be leveraged on a few of those nutraceutical shelves) or by doing a large acquisition (which is off the table in the current regulatory climate). I certainly would have expected a bigger impact from Amazon pharmacy by now given the bad customer experience of going to a drugstore, especially when sick.

Alexa: Tell Me About Alexa
The SVP of devices at Amazon, Dave Limp, who oversees 10,000+ Alexa employees and Amazon’s other hardware initiatives, was on the Verge podcast (transcript). Limp described some different types of decision making processes at Amazon, such as one-way or two-way doors (i.e., irreversible or reversible decisions) and work backward, the popular Amazon strategy of starting with the end product and working back to today’s development focus and decisions. Amazon gives their acquisitions, like Ring, Eero, Blink, and Zoox, freedom to run and/or adopt Amazon tools and techniques where it makes sense. I learned that Ring is the first home security camera to allow end-to-end encryption (here is how to enable it). In discussing the definition of a robot with regard to the Astro home device, Limp said he’s partial to a combination of problem solver and companion.

Miscellaneous Stuff
Falling Sky
A meteorite crash landed on a pillow next to a sleeping Canadian woman, Ruth Hamilton. I was certain the story was clickbait, but it seems like it really happened. Afterall, it was in the NY Times, and they have all the news that’s fit to print. According to Victoria News: “Hamilton says that her insurance company will be doing a walk-through to see if roof holes cause[d] by space debris are covered”. Humans have a large impact on the planet, but we occupy a small percentage of the surface area, so a strike this close to a person is quite rare.

Frightening Irish 🎃
Modern, commercialized Halloween originated, at least in part, in a 2000-year-old Celtic tradition known as Samhain (pronounced Sow-in) celebrated in Rathcroghan, Ireland. October 31st for the pagans marked the end of the farming year. During the accompanying festival, animals were sacrificed to the spirits of the underworld, some of whom left their realm via the Oweynagat cave to make the land ready for winter. To avoid being kidnapped, festival goers would disguise themselves as fellow ghouls and goblins and light fires on the nearby hills. National Geographic reports that elements of the tradition arrived in the US in the 1800s via Irish immigrants. Today, of course, costumed trick-or-treaters are sent on their way with sacrificial candy rather than the more traditional bloody offerings. The Rathcroghan area is yet to be excavated (although it has been mapped with remote sensing tech), and Nat Geo explains there is a movement underway to preserve and explore this birthplace of Halloween. If you've ever been in a packed neighborhood of trick-or-treaters after dark there is an indescribable energy to the spectacle that carries the weight of thousands of years of humans celebrating the changing of seasons and the mystery of the unexplained.👻

Stuff about Geopolitics, Economics, and the Finance Industry
Yooks vs. Zooks
Returning to the topic of what drives success when an industry transitions from analog to digital, I wonder if the wrong approach is being taken by the defense industry in the West. My sense is that the defense industry has become an Industrial-Age relic, i.e., horizontal to a fault, where a focus on cost savings and outsourcing has ended up sacrificing innovation and waterlogged the system with a morass of bureaucracy, subcontractors, and processes that slow down progress. Although not directly defense related, I think you can look at the success of SpaceX compared to the ongoing problems with Boeing’s Starliner crew launch vehicle as an example. With the rapidly changing pace of global threats and disruption from evolving technologies, today’s military and defense feel uncomfortably vulnerable. A vertically-integrated, tech-focused defense contractor would likely accomplish far more over a shorter period of time. As long as we have ideological differences around the planet, the goal of defense technology spending should be to assure the peaceful, ongoing stalemate of mutually-assured destruction. If one or more regions pull ahead because they take an Information-Age approach while the rest doggedly pursue an Industrial-Age path, then we lose that all-important equal footing. The nature of increasing returns and non-linear disruptions in the digital age could mean that one region runs away with an uncatchable lead. Defense technology development is one example where the ESG investing wave, which generally shuns the sector, might be doing more long-term harm than good for society. The ultimate win in the game theory of war is to avoid war, which requires symmetric capabilities. As long as technology is advancing, and as long as humans find reasons to disagree with each other, failing to invest enough resources to keep all sides at parity could be devastating. I learned this lesson as a child from my favorite Dr. Seuss book, The Butter Battle Book. Seuss’ Zooks and Yooks find themselves in an escalating arms stalemate over which side of a slice of bread should be buttered. In the end, both regions develop the Bitsy Big-Boy Boomeroo, a device that, if deployed, would eliminate all bread, butter, and people.

Calling All Social Poets
In a recent broadcast (transcript) to “social poets”, Pope Francis colorfully laid out what sounded a lot like an ESG manifesto, noting that the current capitalist system, “with its relentless logic of profit, is escaping all human control. It is time to slow the locomotive down, an out-of-control locomotive hurtling towards the abyss.” Highlighting problems with banks, environmental polluters, weapons makers, exploitative tech platforms, post-truth media conglomerates, and more, the pontiff also recommended shorter work weeks and UBI. Remaining optimistic, he said it’s not too late, and the time for action is now.

Don’t Worry, Invest
Bill Miller’s latest quarterly letter marks forty years of letters for the investor, and he says it will be his last (letter, that is, he continues to invest). It’s short and sweet and worth a read: “When I am asked what I worry about in the market, the answer usually is ‘nothing’, because everyone else in the market seems to spend an inordinate amount of time worrying, and so all of the relevant worries seem to be covered. My worries won’t have any impact except to detract from something much more useful, which is trying to make good long-term investment decisions.”

✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #318

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: where is the Fortnite or Xbox Phone?; autonomous trains; digital dubbing; Slack's cultural influence; love of laughter; quarterly letter; labor shortage is more from demographics than the pandemic; the ESG marketing fad; and much more below.

Stuff about Innovation and Technology
Riding the Robotic Rails
Trains account for a third of freight transport (per weight/distance; including moving around fossil fuels like coal), up from 22% in 1980. The WSJ argues that autonomous and robotic technology could make trains even more efficient at taking the burden of transport away from long-haul trucking, which is also looking to adopt autonomous technology. Importantly, autonomous trains could follow each other more closely, improving throughput and efficiency. Robotics would also accelerate loading, unloading, and sorting of containers/goods at rail stations. Whether or not we get relief from robotic choo-choos in the future, it seems the temporary supply chain crisis from snarled port traffic has peaked, according to the FT. Although the ripple effects of the backups will be felt for months still, container costs are falling and Biden stepped in to drive more throughput at ports. But, all that aside, supply chains are heavily seasonal, geared toward filling shelves and warehouses in preparation for the holidays, so it makes sense that the worst will be over soon.

Driver Safety Powers Real-Time Insurance
Tesla has started offering the first insurance service that uses real-time driving data to set prices. Unlike other auto insurance companies, Tesla will not use age, gender, or credit history to determine pricing. The tech uses the same safety score that gives Tesla users access to the self-driving beta that I mentioned a couple weeks ago. There are five factors: number of forward collision warnings, hard braking, aggressive turning, tailgating, and forced autopilot disengagements. Drivers with the safest score will save 30-60% compared to the standard policy. Premiums will change month to month depending on your driving mood. There is some irony here because advanced autonomous features should allow cars to drive more aggressively and be safer at the same time.

Digital Voice Fab
Back in #298, I noted the golden age of analog dubbing might be coming to an end for films and series, and it looks like it could happen even sooner than I expected. The WSJ reports that the first example, 2019’s Every Time I Die, will be released in South America entirely dubbed using an AI model of the original actors’ voices. The model only requires five minutes of recorded voices for each actor speaking English for training. And, it turns out that Mark Hamill wasn’t just anti-aged in The Mandalorian, his voice was artificial as well. Hamill’s voice was sent back in time forty years thanks to old recordings, including an audiobook. In the forthcoming Top Gun, Val Kilmer, who lost his voice to cancer, will appear with an AI-generated voice as well. I am still waiting for a full-length production film for which AI is used for both digital foreign language dubbing and alteration of the actors’ lip movements/facial expressions to match the voice. Seeing – and now hearing – is no longer believing.

The Slack Way of Life
The Atlantic writes that office communication platform Slack (now owned by Salesforce.com) has been a tool for democratization of workplaces, largely thanks to its utility in dismantling silos across organizations and building transparency. The pandemic accelerated Slack usage, which accelerated the trends. “Slack so thoroughly permeates companies’ culture that it changes them. It changes the language of the office and the texture of the workday. It enables a sui generis kind of communication, one that’s chatty, fast, stream-of-consciousness, and always on; one that often feels less like an email than a group text. It is work software that insinuated itself into our lives precisely by feeling unlike work software—and, in turn, it has made work feel less like work.”

Phonic Tollbooth
Reading this WaPo piece about Epic and their view of the metaverse crystallized just how stuck we are right now with closed platforms. Around a decade ago, I developed a theory that information-based networks like the Internet oscillate between open and closed ecosystems – when things get too open, walls are helpful, and then when the walls get too high, you knock a few down. The concept was an overly convenient shorthand, and probably not that useful in practice. But, we did see a shift from Prodigy/AOL in the US to the wide-open Internet enabled by directories like Yahoo and, ultimately, search engines. Then, social networks started to rebuild walls but remained interconnected with the web to varying degrees. More recently, however, iOS and Android have been fortressing more and more territory, especially with respect to data. And, while our phones connect us to countless apps and websites, the phone itself increasingly mediates those interactions – charging a toll, tracking the data, etc. The phone is becoming such a powerful stronghold, it’s now hard to imagine how we could once again have a wide open, level playing field. There are a lot of people thinking about token-based economies, blockchain, and open versions of today’s products, but what hope do they have when our primary devices are controlled centrally? What surprises me the most is that we don’t have several companies trying to enter the phone market by leveraging an open-source version of Android that links to their own world of services and products. For example, where is the Epic phone? The game maker is challenging Apple and Google in court, but why not just target their hundreds of millions of users with a bundled, high-end, gaming-focused Android device with an Epic app store? Is it too late to gather enough users to get past the chicken and egg problem? Granted, there is a graveyard of failed attempts, and even Amazon’s Fire phone failed despite their huge user base and distribution. However, perhaps shifting sentiment could now support such an effort. Microsoft is running a version of Android on their Surface Duo phone – why not create an Xbox phone as well? For the moment, I’ll keep hoping for a breakthrough device that isn’t shackled by Apple/Google or perhaps some helpful legislation that knocks a few walls down.

Thinking Outside the Analog Box
One of the biggest challenges for us humans in navigating the current economic transition – from our analog past to our digital future – is a distinct lack of prior experience. The brain is a prediction machine, and it largely depends on knowledge of past events to predict future ones (see: Outsmarting Your Brain in #272). We have a very hard time reacting to what we’ve never seen before, which is perhaps why sci-fi has predicted so much future technology – as we consume sci-fi, it becomes a prior set of knowledge. But, digital, information-based progress is often nonlinear and thus even more unpredictable than the analog pace we’ve been accustomed to throughout millions of years of human evolution. One of the biggest mistakes we can make as investors is to use an analog analogy to predict a digital outcome. In the late 1990s, a lot of retailers compartmentalized Amazon as an online version of a mail-order book catalog. Even Bezos used an analog-influenced analogy for AWS, saying computing would be like electricity: companies who used to run their own power plants ultimately switched to centralized providers. Of course, there is always some truth to these analogies, but they fail to capture just how big the digital opportunity is. Last week on their earnings call, the CFO of JP Morgan Chase commented on the rapid growth in buy now, pay later (BNPL) platform growth: “everyone is talking about it. It is funny how layaway is back in the e-commerce checkout lane...And it's a moment for us as a company where even though for any given thing that's emerging, you can easily convince yourself that it's kind of not a threat. We're in a moment of taking all types of potential disruptions, especially fintech-y type disruptions quite seriously. And in the case of BNPL, it's obviously particularly high profile because of the growth that we've seen, although, it's a relatively small portion of the overall market.” Clearly, JP Morgan Chase understands that BNPL has the potential to be much more than analog layaway (which was never a major part of overall retail sales); however, just making the analogy is a dangerous mental trap. Further, CEO Jamie Dimon followed up by saying: “we will spend whatever we have to spend to compete with all these folks in our space.” This is another mistaken mental trap. When an industry goes from analog to digital (assuming overregulation doesn’t get in the way), you have to reinvent the way products are created and consumers are served. Just throwing more money at the problem, without any fundamental shift in approach, is often the wrong strategy. The customer has to be much more at the center, the pain points need to be solved in novel ways, and you need to be thinking: platform-not-product, vertical integration, data, network effects, etc. In other words, you have to go far beyond the confines of ‘your space’. Often, the digital way to do something is a higher non-zero-sum proposition, creating more value for customers than for the companies that solve the problem. That usually means that the old way of doing things was extracting too much value or relying on information that is no longer proprietary. This seems to be precisely the case with BNPL compared to the traditional predatory credit card and banking industry practices.

Laughter Is the Best Medicine
There is a long history of leveraging comedy and satire of all types to highlight problems in the world. Standup comedy is a unique form of this social commentary. For a long time, standup was a series of one liners – non sequiturs. Mark Twain is credited as the first standup routine to go on tour, which he did mostly because he needed the money later in life. Lenny Bruce is regarded as the first standup to walk out on stage and make comedy personal. Thus, comedy started to lose its innocence and become more about seeking the truth through observation. Then, Pryor, Carlin, and a host of other comics started doing this new type of routine that shined a light on what was hidden right in front of our faces that we were just too busy to notice. Laughing at the worst of the human condition is how we beat the worst of the human condition. When you can turn what seems like the most horrible tragedy into a smart and funny commentary on the challenge of just getting up every morning and trying to make it through the day, then you’ve beat that absurdity for at least another 24 hours. It’s possible that comedy is the only reason to try to actually make it through that next rotation of the planet – to laugh at how absurd it is that we even try, knowing how badly it could go. To find uplifting humor in the darkness is to overflow with empathy. Sometimes jokes lack empathy (i.e., that critical aspect of putting yourself in the shoes of the target of your joke) and/or spotlight one absurdity while ignoring another greater darkness. Often, that type of comedy comes from a place of fear or lacks context. Good comedy always comes from the perspective of love and a desire to make everyone better through seeing the truth. Comedy is an art. The point of art is to see into someone else’s heart – to really understand them. Humans need these glimpses of insight because it’s hard to look into our own hearts. Art exists to influence the audience, and, in turn, the artist. The best description I’ve heard of art came from Penn Jillette: art is the collision of the intellectual and the visceral – a one-two punch to the mind and the gut. Of course, not all creations have to influence people or culture. Sometimes entertainment is just a mindless distraction from the absurdity of life – a vehicle to help the world spin a little faster. However, my favorite comedy makes me laugh and it makes me uncomfortable. By examining that discomfort, I hope I can make a little progress on this short journey we're on. I see art, and nurturing artistic talent, as absolutely critical to our progress as a society. Thus, I worry whenever the large technology platforms, or, more specifically, whatever drives their algorithms, start deciding what is or is not art. Platforms and algorithms prefer things that are sticky and popular. But, the algorithms are a reflection of us, and we don’t know ourselves well. So, whatever they spit out is limited at best and dangerous at worst. No art should ever be censored, but some of it might not be worthy of algorithmic promotion. I think comedy especially should never be censored, no matter how unfunny it might be. I would hope that the people in charge of those platforms understand that they have power to influence real life – real people and our real future. I am puzzled, and admittedly fairly disheartened, when one of these mega entertainment platforms takes the view that art doesn’t have real-world value or influence. If that’s true, why bother with art? Maybe just to make a buck, I guess? I hope that’s not true. But when I read in the NYT that the CEO of Netflix said “the core strategy is to please our members,” I worry they aren’t focused on making real art. A lot of pleasing things are not necessarily good for you. I hope that art can be filled with heart, and that it can be a vehicle for progress. I hope that it makes people think, laugh, and feel. I hope it helps people make it through one more day. Penn’s partner Teller says: “art is what we do when the chores are done.” Anything can be art if you care enough about it – that’s what Pirsig teaches us in Zen and the Art of Motorcycle Maintenance: art is Quality. Kurt Vonnegut wrote in A Man Without a Country: “Practicing an art, no matter how well or badly, is a way to make your soul grow, for heaven's sake. Sing in the shower. Dance to the radio. Tell stories. Write a poem to a friend, even a lousy poem. Do it as well as you possibly can. You will get an enormous reward. You will have created something.” If I were funny, I’d be a standup comedian instead of an investor; and, I would hope that, by telling jokes, I would shine a light on life with love and compassion.

Miscellaneous Stuff
The Structural Dynamics of Flow
For fans of Amazon’s series The Patriot, I recently discovered that creator Steven Conrad did a five-part audio series exploring more of the backstory of character Leslie Claret, with actor Kurtwood Smith reading a mock audiobook version of The Structural Dynamics of Flow. The Patriot follows the complicated exploits of a secret government agent forced to make a series of escalating greater-good decisions; he also plays folk music, and his dad is his handler. It’s a near-perfect two-season show on the existential meaning of John Prine’s song “Pretty Good”. The series might be one of the best examples of the paradoxical use of comedy that I wrote about above, juxtaposing the unthinkable with the absurd. If you like the show, you should really enjoy this audiocast addendum.

Stuff about Geopolitics, Economics, and the Finance Industry
NZS Capital Q3 2021 Letter
You can find our Q3 2021 letter on our website here or in PDF.

Labor Shortage More Demographic than Pandemic?
Hospitality workers quit at more than twice the rate of other US workers in August. The 6.8% quit rate coincided with the fastest wage growth for the sector since the early 1980s, with average pay climbing to over $15/hr for the first time earlier this year (often, quitting is the way to unlock higher wages if your current employer isn't keeping pace). Overall, quits across all sectors in the US were at a record high since the data were first collected twenty years ago. The NYT reported on the disappearing services as a result of the labor shortages – the hotel room that costs the same but doesn’t have daily cleaning, restaurants closing dining rooms and offering takeout only, etc. Headlines and CEOs are largely blaming the labor shortages on the pandemic, especially the spending shift from last year to this year, and a change in worker preferences and expectations, but I wonder if the explanation is far simpler: there aren't enough 20-somethings. Back in the 30-Something Sneaker Wave in December of 2019, I noted that after the bolus of Millennial births in the late 1980s and early 1990s, there was a long decline in the birth rate in the US. Further, this trend would normally be offset by immigration, but is coinciding with a decline in immigrants. Therefore, if you want to understand the supply chain and hospitality labor shortage, you need to look back to the declining birth rate from 1991 to 1996 of several hundred thousand kids and missing immigrants. Now, on top of this demographic and immigration headwind, add in: 1) the excess loss of lives from the pandemic, 2) the approximately 1% of the labor force that retired early due to COVID, as we approach peak Boomer retirement, 3) the shifts from dual- to single-income households as people had to stay home to take care of kids, 4) the shift to gig workers and new work-from-home jobs, etc. You can see that this labor problem won't completely resolve by itself. There are two options: accelerate the use of technology and automation or pay people to immigrate to the US. My recommendation is to do both.

When ESG Fad Fades, Non-Zero Sum Will Persist
Bloomberg reports on the wave of greenwashing rules coming at fund managers. I suspect the ESG marketing bonanza is entering its later years, as the term appears to be losing much of its meaning. Anything that can be measured will be gamed, especially when it’s difficult to calculate or frequently intangible. At NZS Capital, we are highly sympathetic to the original philosophical thrust behind ESG investing. Long before we first heard the term, we wrote a paper entitled Complexity Investing (published in 2014) that discussed, among other things, the important concept of non-zero sumness (NZS). It’s a geeky term from game theory, but it means win-win. We elaborated on the idea in a 2019 paper (PDF) when we launched NZS Capital, eponymously. In that paper, we noted that companies have a fiduciary duty not just to investors, but customers, employees, society, and the environment. In a while, perhaps soon, ESG won’t be the marketing fad of the day, but non-zero outcomes will still matter. Why? Because all of human evolution has relied on positive-sum games – the desire to win is instinctual. Companies whose core business model is to create the most winners (e.g., by offering a better deal than the establishment), stand a much better chance of surviving and thriving. It’s counter intuitive, but even war can be positive sum (albeit the worst example of such an outcome!). When two or more parties come together to transact, the most optimal outcome is when everyone leaves better off than if they had never met. The companies we strive to invest in are, in large part, creating more value than they take. It’s not always black and white, and it never comes down to a score, a grade, or a checklist. It’s hard. Sometimes you take some bad with the good, because, longer term, you believe the good outweighs the bad. I mentioned this last week in reference to semiconductors: their fabrication creates a huge carbon footprint, but they can enable efficiencies in the global economy that greatly save on energy. Is the semiconductor industry overall a good “ESG” steward? Well, maybe not if considered in isolation. But, we think electric vehicles, variable speed HVAC motors, LED lighting, AI to more efficiently route transportation, etc. are important benefits that would not exist without the sometimes dirty chips. Another example is energy, where underinvestment, perhaps due to ESG focus, has helped fuel today’s rising prices. Having enough natural gas for the decades-long green transition seems important, as current green energy shortages are causing more dirty coal and oil to be burned (see #317 for more on this complex situation). Obviously, there is some balance between maintaining the fossil-fuel energy economy while aggressively investing in alternative energy and technology to upgrade the power infrastructure. Every company we invest in could do better. We could all do better – and should. In positive-sum interactions, both the Golden Rule and economics align. Creating more value than you take is the blueprint for companies that will gain share of the increasingly transparent global economy as opaque analog barriers crumble, and that is good for the world – and ultimately investors – regardless of what we call it.

✌-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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 #317

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: the television set's overdue transition to the smartphone business model; Walmart's super app push in conflict with its cost-optimized business; semiconductor's complicated environmental problems; abstracting reality; ESG inequality; pointing technology in the right direction to solve the long-term sources of inflation and economic shocks; and much more below.

Stuff about Innovation and Technology
Microcasting
Hyperlocal weather forecasts are coming thanks to Google’s DeepMind and Microsoft. Last week, Microsoft announced DeepMC, a weather predictor that also uses local sensor data. The initial goal is to accurately predict overnight frosts to improve agricultural yields. Last Sunday, I joked that DeepMind was using so many chips to calculate the weather that it might cause more global warming...but perhaps it’s not such a joke after all, now that IBM’s Weather Company, Apple’s Dark Sky, and Microsoft are also using machine learning to predict weather alongside Google. I understand some of the reasons for this focus on knowing the weather minute-by-minute, but it also feels like an example of misguided resources; more on that at the end of today's newsletter.

Supersized Living Room Smartphones
Sky is bringing the smartphone model to TVs with the introduction of Sky Glass in the UK. The video service provider, acquired by Comcast in 2018, will sell the TVs with integrated video and streaming app access for a monthly subscription and no upfront fee. Future plans include adding fitness, gaming, and video conferencing features. The connected TV market is still wide open; early leaders in smart-TV dongles, like Roku and Amazon Fire, each have around 35% of the US market, and, from a user’s perspective, they leave a lot to be desired. Apple’s efforts have largely been a failure, garnering less than 15% share. Part of the problem is the hardware’s inability to reach into the increasingly fragmented streaming app smorgasbord to access last-watched data, maintain programming lists, and generate recommendations. Sky joins Roku, which announced a TV with TCL in June, and Amazon’s recent Omni TV launch, but neither Roku nor Amazon are taking Sky's tactic of selling the TVs like smartphones are marketed. Given the massive financial opportunity in the living room for apps, services, and ads, it’s quite odd that it has taken so long for the industry to shift to a phone-like strategy for TVs and even more odd that Apple, the inventor of the modern smartphone business model, is watching it all from the sidelines.

Walmart's Horizontal Challenges
Walmart’s Chief Product Officer, Meng Chee, describes the company’s super app ambitions in Google’s marketing research publication Think with Google: “...when the pandemic hit, it only accelerated our efforts to bring one app together. This acceleration has also helped us focus on our larger ambition to create a super app, meaning we want our app to be more than just a shopping transaction. Ultimately we want it to be a lifestyle app, because we’re growing our business, and adding health and wellness services, financial services, auto care, etc. All of this comes together and represents a lifestyle package that we can give our customers via a super app.” It’s fairly easy to be skeptical here since the number of legacy companies who have successfully transitioned to fully digital so far rounds to zero; but, the one advantage the existing big box retailers have is their scale, which increasingly matters as the middle of retail is hollowed out, leaving only giants and boutiques. The area that still falls short for Walmart seems to be logistics vs. Amazon, who has made massive investments on the ground since the pandemic started. Over the last six quarters, Amazon posted capex of $66B, which is about what they spent over the 13-quarter period from Q42016 to Q42019. Walmart seems to be sticking to their spaghetti strategy for digital transformation (discussed in #253)...they also announced last week they would begin delivering packages for Home Depot. Walmart's lack of focus seems to be emblematic of a company that has optimized for margins and costs that now cannot seem to innovate at the speed necessary to create as much value for customers as their digital competitors. Brinton posted some tweets on this dichotomy between horizontally-optimized legacy companies and vertically-integrated disruptors. A prime example of this today is the legacy auto makers, which have outsourced most of their key R&D rather than keep it in-house. Those businesses now find themselves short on chips and far removed from the layers of technology disruption, while Tesla posted a record delivery quarter. I covered the topic of vertical integration in more detail in #219.

Netflix’ Extreme Streaming Hardware
The Next Platform reports on the monster servers that Netflix puts together to maximize video throughput for their content delivery network (CDN). The servers run on an AMD Rome chip and have 18 2TB SSD drives, 256GB of DRAM, two Mellanox cards, and two 100 Gb/s Ethernet ports. The team at Netflix recently pushed the output to 400Gb/s, all while encrypting the video, and have a goal to get to 800Gb/s. Ampere’s Arm and Intel’s processors were reportedly trialed as options; however, AMD’s support of FreeBSD, a server OS, has so far given them the advantage. FreeBSD, which is also integral to iOS and MacOS, comes out of the Berkeley Software Distribution (BSD) and, in contrast to Linux, it’s a complete system (not just the kernel and drivers).

Dinosaur-Fueled Semi Fabs
A few months back, Bloomberg reported on the environmental costs of semiconductor manufacturing, citing a report that concluded: “Chip manufacturing, as opposed to hardware use and energy consumption, accounts for most of the carbon output” of information technology. We have been chip investors for a long time, but we also care about companies’ impact on the environment, so this presents something of a challenge if not addressed by the supply chain. I was recently disappointed to see TSMC not commit to becoming carbon neutral until 2050. For semis, environmental impact is a complex calculation because chips can go into many end markets that enable significantly lower emissions over time, including HVAC systems, EVs, alternative energy sources, and AI, that eliminate inefficiencies across the economy. The biggest chip power users, like Microsoft, Amazon, and Google, have committed to aggressive environmental goals. Perhaps the all-in environmental cost, including the positives, makes the chip fab carbon footprint worthwhile, but it would be great to see both an effort from the supply chain and the positive impact of chips. This complexity of supply chain energy costs exists in many other industries, e.g., aluminum – the infinitely recyclable green option for beverage cans – which relies heavily on coal for manufacturing.

Miscellaneous Stuff
Neural Pacemaker Cures Depression
A UCSF team of researchers identified a part of the amygdala, which governs threat response, involved with the onset of depression-inducing thoughts. Using a neural implant, the team was able to send an electrical pulse to interrupt the negative thought pattern whenever it emerged, effectively curing major depression in a patient who had struggled for five years to find a treatment. The research is detailed in Nature Medicine. Given the extreme nature of the implant, the team hopes to find a non-invasive alternative for identifying and re-routing the debilitating neural signals. Typically, emotions involve a vast constellation of neural areas, as well as internal and external feedback (Lisa Feldman Barrett’s How Emotions are Made is a good read on the topic), so it’s interesting that there is perhaps one spot in the brain that is involved with this particular vicious cycle. To evaluate to what extent depression pathways vary between individuals (and how they might change over time), the UCSF team hopes to enroll another 11 patients in the study.

Constructing Reality, An Artist’s Perspective
Painter David Hockney discussed the end of abstraction in The Art Newspaper. This is not a publication I frequent, but the idea of perception and abstraction caught my eye as it relates to AR/VR: what should our virtual world look like? Hockney says: “What does the world really look like? I know it doesn’t look like photographs. The camera sees geometrically, and we must see psychologically. So what does it really look like? I think you have to draw it. The world is very beautiful, but human beings are quite mad. I have always thought the world of humans mad, and there is little likelihood of this changing, no matter how much we try. Cézanne looked at the world, found it beautiful and knew photography was not very realistic, the same with Van Gogh.” Although Hockney was not addressing virtual reality with his comments, if we are going to portray a new version of reality, what should it emphasize or deemphasize? We know that our brains favor a certain fractal degree, but how much abstraction should be present in a constructed reality? Should we emulate The Matrix, making the virtual world exactly like the real world, or would there be an artistically more satisfying abstraction of reality to strive for?

Immigration Plea Broken Record
Population growth peaked globally in the 1960s at 2.1% and has declined ever since to 1% in 2020. With ongoing declines in birth rates, IEEE reports that “substantial population declines by 2050 are now inescapable in at least a quarter of the world's nations.” One of the problems of population decline is you have to spread the cost of infrastructure and running an economy (and taxes!) over fewer people, making life pricier for those still around. I continue to think developed countries, which are facing the biggest declines, should be paying immigrants to move in to help future economic stability.

Stuff about Geopolitics, Economics, and the Finance Industry
ESG: A Luxury Fueling Inequality?
The increasing focus on ESG may slow progress in emerging markets. Since ESG reporting and governance is costly, the logic goes, it therefore favors monopoly producers of non-tradable goods in developing economies and disadvantages exporters and smaller producers. If access to capital continues to follow ESG scorecards, then progress – driven by exports and rising wages – could slow, causing the wealth gap between countries to widen. The concept comes from Ricardo Hausmann, a Harvard professor and former minister of planning of Venezuela, who concludes: “the motivation behind ESG comes from a good place. But the world needs a different scorecard, one that would favor specifically those export activities that allow for greater complexity, innovation, and higher wages.”

Hyperactive Butterflies Snarl Energy Supply
I opened the newsletter with the weather, and I think I’ll close on the same topic. The inherent unpredictability of interconnected things is one of the most important lessons of complex adaptive systems. It's also one of the hardest lessons to truly internalize because our brains are excellent at convincing us that we're good at making predictions. In complex adaptive systems, outcomes can be nonlinear, go through phase transitions, and are chaotic, which means small changes in the initial conditions can create massive changes over time. The concept is represented simplistically as the butterfly effect. When it comes to the weather, the most concerning elements of climate change are not the linear predictions about a steadily rising mercury, but the unexpected, nonlinear events. And, extended drought, fires, altered wind/rain patterns, etc. are all causing changes in the ecosystem, economy, and human behavior, which all feed back into the system in unpredictable ways. This past year, droughts across the Northern Hemisphere left many reservoirs low, which in turn impacted the availability of hydroelectric power. Hydroelectric energy usage varies widely around the globe, constituting 7% for the US, 17% for China, over 60% for Brazil, and 95% for Norway. In the Nordic region, power prices are up fivefold from last year, and, in Sweden, an old oil-burning power plant is proving indispensable. In China, the lack of hydro power seems to be contributing to an increased demand for coal as well as blackouts and global competition for fossil fuel inputs – natural gas prices in Europe hit a record 100 euros per megawatt-hour. China is also struggling with the negative implications of a price-controlled economy that impaired coal plants, a strategy failure that comes as no surprise to anyone in the free market. This past year, the wind also seemed to slow down a bit, which was no help to renewable wind energy producers. It’s possible the shift to green energy sources with low storage capacity, and the concomitant shuttering of fossil fuel plants and coal mines, has not adequately taken into account potential areas of fragility related to climate change and swings in global supply. To further complicate matters, the post-pandemic reboot of the global economy is causing higher energy demand as plants get back up to full speed. And, the Northern Hemisphere is heading into winter, so we can expect further energy demand spikes. Climatic turbulence has created a veritable conflagration that has, with astounding ease, wreaked havoc on short-term global energy supply (and caused actual conflagrations with record forest fires!). It’s an ironic situation when you might not have enough coal to burn in order to manufacture solar panels. And, that’s just the weather. The tail impacts to food supplies, logistics, population migrations etc. are likely to all increase volatility in both directions – for all we know, the wind will blow again (though perhaps not if the "global stilling" phenomenon continues on its current trajectory) and it will rain like crazy next year. But, in some cases, the volatility will lead to short-term inflation shocks in sectors where technology is increasingly providing disinflationary ballast. When we speak of the long-term deflationary impacts of technology (a topic I discussed, among other things, on CNBC last week – the first part is here and the second part here), we also know it cannot create short-term immunity to volatile inflationary shocks, like those coming from climate change. And yet, we also know that the more serious the shock, the more smart engineers and entrepreneurs will come together to create the technology to fight back. Perhaps we need fewer resources trying to forecast the weather ten minutes from now, and more focus on the bigger challenges of the coming decades. Technology-driven deflation is a powerful – yet largely unacknowledged – weapon that needs to be increasingly pointed at these emerging sources of chaos-driven inflation.🦋

✌

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 #316

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: ransomware attacks on hospitals are reaching urgent levels as Biden increases crypto scrutiny; Covid breathalyzers; products like Tesla that judge you; Lego and the loss of toy merchandising in a streaming world; TikTok explores shopping; Amazon's vulnerabilities; the major challenges to scale lab-made meat; AI-washing is reaching a peak, much like dotcom before it; and much more below.

Stuff about Innovation and Technology
Hospital IT Requires Intensive Care
A whopping 43% of healthcare organizations have been affected by a ransomware attack, with 22% reporting a subsequent increase in patient mortality (out of ~600 health providers surveyed), according to cybersecurity publisher SC Magazine. The cyberattacks also caused longer hospital stays and delayed procedures. The WSJ reported on a lawsuit over a potentially preventable infant death due to a hospital hack that caused a critical monitoring alarm to be missed. We are likely to see a Y2K-like IT upgrade frenzy to replace vulnerable legacy systems and modernize IT in the coming years. And, we may also continue to see governments banning and/or regulating crypto, a prime vector for ransomware payouts, to provide the time for these upgrades to happen. Regulation of crypto will anoint a small number of winners via regulatory capture. The Biden administration is convening a panel of 30 countries to determine how to crack down on ransomware attacks and reportedly intends to have stablecoin issuers regulated as banks. Covering the topic of ransomware attacks and security risks, NZS’ Joe Furmanski sat down with our friend Dex McLuskey to explain zero-trust security and how we think about investing in the sector relative to our Resilience and Optionality investment framework. We’ve been interested in the evolution of enterprise security to an identity-centric model ever since an investment in Okta in 2014. You can grab Joe’s podcast here or read a transcript here.

Covid Breath Test
Several companies are working on COVID breathalyzers to improve upon the current nasal swab testing for identifying infected individuals. IEEE reports on the technology, which could start popping up around the globe. Singapore has approved Breathonix – not to be confused with Breathomix, which has been deployed in the Netherlands. While I don’t fully understand the scope of the technology, I wonder if it could be adapted for monitoring in air handling systems as well?

Digital Dressing
Luxury fashion retailer Farfetch worked with digital fashion platform DressX to create 3D models of luxury fashion items, which can then be virtually fitted on influencer-provided photos. The practice is aimed at decreasing the physical samples sent out to fashion icons, gauging consumer interest before commercial production, and making the process of showcasing new items more efficient. And, of course, digitized items are just a click away from ordering.

Tesla Knows if You’ve Been Bad or Good
Before Tesla grants you access to the latest “full self-driving” release, you have to be deemed a good driver. As an interesting consequence of increased device connectivity and data collection, more companies will be able to dictate to what extent we can or cannot use their products. Imagine what kinds of consumer behaviors a company could influence.

Lego Up on the Competition
Lego has been crushing the competition, posting H1 2021 earnings of $1B – 10x more than the #2 Hasbro. Lego has executed brilliantly, innovating to keep up with its evolving customers. In decades past, toy lines were heavily entwined with kids’ linear TV shows, both for advertising and storytelling (see #234 for more details). As kids have migrated to YouTube and streaming, merchandising deals have lagged. With streaming platforms more interested in short-term hits than long-term franchises, and offering fewer ad opportunities, the days of building a toy line on the back of a TV show may be over. This shift favors brands like Lego, whose popularity doesn’t sink or swim with a TV franchise. If you haven’t seen the first two seasons of the reality competition show Lego Masters on Hulu (or wherever you watch your Fox TV shows), it's great family fun and remarkable to see what people can do with Lego.

TikTok on a Tear
TikTok has 1B monthly active global users and is closing in on Instagram, which probably has around 1.3 to 1.4B monthly active users (the last official disclosure from parent Facebook was 1B in 2018). TikTok did not disclose daily active users. In the summer of 2020, TikTok reported just under 700M global users, of which around 100M were in the US. Among Gen Z, TikTok is thought to have surpassed Instagram for monthly users. As noted in #304, TikTok garners more of US users’ time than YouTube and is the fastest growing social app. They also revealed more about their ad and shopping strategy at TikTok World last week.

Amazon’s AWS Margin is Your Opportunity
Many years ago, Jeff Bezos infamously said “your margin is my opportunity” as he was leading Amazon on a multi-decade growth path that challenged the fat margins of many incumbent competitors in retail and IT. Lately, when it comes to AWS, there are some folks that would like to turn that quote on its head, as Amazon has become the 800-pound gorilla in the cloud computing industry. The Information interviewed Ariel Kelman, who was AWS’ global marketing head for nine years and is now at Oracle. Kelman noted, in an ironic twist, that Oracle is now trying to sell themselves as the customer-friendly alternative to AWS and that AWS’ fees to remove data from the cloud platform are a “customer-hostile pricing strategy”. Cloudflare agrees. Last week, they introduced R2 storage on their edge computing platform with no fees for data removal. A series of blog posts from the company calls out Amazon’s massive markups (reportedly 80x for US/Europe) and their “egregious egress” pricing. Obviously, this is all just a marketing war, but the idea that Amazon would have left the door open to disruption by becoming the high-cost option would have been unthinkable a decade ago. In IT, almost nothing ever dies (just look at IBM mainframes!), but growth rates can stagnate if developers change platforms. Workloads are changing to serverless functions, and proximity to users is becoming more important for low latency. Today’s cloud platforms can continue to be successful because typical workloads are still growing very rapidly, but they aren’t necessarily architected toward these newer types of apps. If you want to know where the market is headed, always follow the developers.

Amazon’s Hardware
Amazon has been focused on consumer hardware development both internally and through acquisition. The obvious successes are the Alexa smart speaker/screen devices along with the acquired Ring security and eero WiFi product families. The more cutting-edge hardware, however, has seemed more vaporware than tangible. Last year, they showed off the Ring in-home security drone (which I longed for in #264), but they are only now saying it’s open to private testing. According to Ring founder Jamie Siminoff: “I have it in my home, and it does work, but today’s homes are so unique, so we really need to get it into more customers’ homes to make sure everything we are doing is right. With any other product, we would have probably just been shipping. With this one, we are going to take our time, make sure it’s right before we go to full, general availability.” In what seems like another potentially too-early-for-primetime announcement, Amazon unveiled a little Alexa on wheels called Astro. Here’s a description from CNBC: “Astro is about the size of a small dog. It roams around your house on three wheels, including two big ones that prevent it from getting stuck and a smaller one for rotating. It has a camera that rises up on a 42-inch arm that can keep an eye on your home as Astro patrols while you're away. It can follow you around and play music or display TV shows on its 10-inch touchscreen. It can recognize faces (if you want it to) so you can load up two sodas in the back storage compartment and tell Astro to go to someone in the living room.” I like the imagination, but I'd like it even better if the products were fully baked.

Amazon’s Big B2B Business
Rounding out Amazon news, Industrial Distribution reports that Amazon could be the largest industrial distributor, with $27B in projected B2B marketplace sales this year. Because Amazon doesn’t disclose Amazon Business sales or break them down by end market, some of this total might just be landlords ordering light bulbs, so Grainger officially stays at the top of the list at less than half of the $27B in sales. Some distributors have grown alongside Amazon by focusing on proximity to customers for rapid fulfillment (such as Fastenal’s onsite parts vending machines), but it does seem likely that Amazon has siphoned off some share of distributor growth. Amazon is also pitching a broader procurement and cloud solution for large enterprises vs. what most product distributors are offering.

Miscellaneous Stuff
“Mosquitogeddon”
Climate change is helping mosquitos thrive and spread disease. A temperature rise of only 1 °F increases humidity by 4%, helping to supercharge storms. The resulting record-breaking rainfall has significantly expanded habitat and breeding opportunities for the pesky bugs. If you need one more reason to become a climate activist, let this be it!

Cultured Meat Pie in the Sky
Lab-grown meat still faces huge real-world scaling problems, as detailed by The Counter and Biotechnology and Bioengineering. To start, a massive, hypothetical bioreactor facility, equivalent to ~1/3 of all of the volume of the biopharmaceutical industry today, would only yield 22M pounds of lab-grown protein, or around .02% of the 100B pounds of meat the US produces each year. To ramp cultured meat production to 10% of global demand projected for 2030, we would need 4,000 factories of that size encompassing 2.4M bioreactors at a cost of $1.8T. And, even at that scale, the cost per pound might end up multiples higher than conventional animal husbandry. One of the problems with animal cell culture is the risk of viral and bacterial infection, requiring laboratory-grade cleanrooms. When you are talking about supersized bioreactor arrays, the costs for building the cleanrooms alone would be extraordinary. And, cleanrooms only reduce, but do not eliminate, the chance of infection. Since cultured cells have no immune system and are relatively slow growing (compared to viruses and bacteria), a single point of failure would cascade, causing a potentially catastrophic loss in material and downtime. And, even with pristine conditions, it’s not at all clear that animal cells would even be amenable to that kind of scaleup production, which has never been attempted. They don’t like to grow too densely, require ongoing supply of fresh nutrients and waste removal (lest their catabolites, like ammonia and lactate, build up and inhibit their own growth), and are fragile to shearing if overly agitated. Also, when you look at the costs (and required amounts) of media ingredients, such as amino acids, micronutrients, etc., it starts to look like animal-derived protein isn’t so inefficient after all. The cultured meat conundrum continues to garner a lot of attention globally, and, eventually, we may see breakthroughs with the media ingredient supply chains, engineering of more robust and densely-growing cells, and greater bioreactor size/efficiency. Not every pie-in-the-sky dream makes it past the engineering hurdles, but history is also littered with pessimists who didn’t see the viable path for disruptive innovation that can be forged when humans put their minds to something. For now, however, it seems skepticism is still in order with respect to lab-grown meat.

Stuff about Geopolitics, Economics, and the Finance Industry
AI is the New Dotcom, and That’s OK
Back in the late 1990s, every business was either appending “.com” to their existing name or touting their dotcom strategy and how it was going to transform them or their industry. A lot of hyped-up ideas ended up being right, just twenty years too early. But, for the many legacy companies that put on dotcom lipstick at the turn of the century, the Internet was ultimately a negative disruption of their business. For some industries, such as media and retail, we’ve seen the near completion of the disruptive, Internet-enabled transformation. For more highly regulated businesses, such as the banking and healthcare sectors, which have successfully lobbied to keep disruption at bay, it’s unknown if/how they will ultimately be affected by the Internet Age. And, for a large bucket of companies that have harnessed the Internet to improve their products, supply chain, and/or customer interactions without significant disruption to their business model, dotcomization has been more subtle. For all industries, the Internet enabled an accelerated pace of change, and dotcom simply became shorthand for digital transformation. The biggest winners of the Information Age have been the new companies – those that were built by the Internet, for the Internet, in the late 1990s and early 2000s. These are the familiar mega platforms of today, all of which are facing a global wave of regulatory pushback that is handicapping their ability to enter new markets or even innovate in some of their existing markets. These constraints are likely to lead to paralysis for many companies, as was the case for Microsoft nearly two decades ago (they were able to recover, but it took a long time).

And, now, we find ourselves in another technological jargon bubble: AI. For most established companies today, AI of course is no more real than dotcom was twenty years ago for Industrial Age companies. AI has jumped the shark and become a metaphor for digital transformation in exactly the same way dotcom evolved. For most of today’s companies, AI will be a negative disruption – an acceleration of the digital transition that will bury the incumbents and create new winners. And, AI, just like dotcom before it, will be enabled by software and semiconductors, the enduring engines of the analog-to-digital transformation of the global economy. It’s possible that the emergent dotcom winners, whose cloud platforms constitute the next semi/soft incarnation, will power the new AI wave of innovation and transformation. And, there will be new companies, just like twenty years ago, that will dwarf anything we’ve seen in the last two decades. There remains a chance today’s mega platforms will maintain power, but that’s up in the air with regulation and the challenges any incumbent faces when a new market emerges. AI also has a mega investment bubble associated with it. So far, this bubble has stayed more in private markets, while the dotcom bubble manifested a little faster in the public markets of the late 1990s.

There is one big difference I see with AI as the new marketing term for digital transformation compared to dotcom: we seem to be willing to believe AI is real, but it’s not. At least not yet. We are seeing companies hand off decision making to AI as if it were something more elevated than a complicated search algorithm scanning pools of data. It’s this dangerous “invisible hand” mentality of AI – which Jaron Lanier warned us about – that has me worried. It’s distorting how people are hired and fired, whether people can rent apartments and access government benefits, and how doctors and hospitals treat patients. It’s determining who people date, what music they listen to, what shows they watch, and who they interact with. Facebook was designed to collect, amplify, and reflect our own thoughts and emotions back to us in order to sell ads. In and of itself, social media is a dangerous reflective chamber, but becomes even more so if we accord its half-baked algorithms any sort of divine power. All of these life changing algorithms have the transparency of mud, and to rage against them is to shout into an infinite abyss. AI is nothing more than a fallible human tool – it’s a reflection of human nature, and lately, we’ve been a little crazy. Along with the increased influence of social media algorithms, we’ve seen a rise in extremism, hate, misinformation, and violence. There will of course be legitimate artificial intelligence systems and uses that perform incredibly complex tasks and might be able to make short-term predictions and decisions that are useful. But, recently, when I see a company talking about AI, that is clearly not what they mean.

We will have incredible breakthroughs in artificial general intelligence when AI can gather enough context to make analogies, reason, and learn on its own. However, the computational burden of trying to make better decisions through deep learning systems might also hit a breaking point even with these breakthroughs. IEEE reports that halving the error rate in image recognition would require 500x the computational power! The world is complex and unpredictable by nature. The amount of energy required just to predict the weather an hour from now, on every square meter of the planet, might just not be worth it compared to looking out the window. I can’t help but laugh at the absurdity of DeepMind’s new rain prediction nowcasting model, which trained on 16 TPU cores for one week, accelerating global warming in exchange for a mere 1-2 hour advance notice of impending storms (fairly useless for staging a massive evacuation). I wonder whether their model takes their own climate impact into account! The butterfly effect is real.

The next wave of digital will bring major structural changes to the economy as well with deflationary pressures and job displacements. There will be periods where the short term negatives outweigh the long term positives. Long-term, I am optimistic about the ongoing, accelerated, digital transformation of the global economy. It will ultimately do a lot of good for people and the planet over the next few decades, but I am a little worried about the blind faith that’s being put into what amounts to nothing more than a marketing term. So, if you are a CEO, or marketing person, appending “AI” to your company, product, service, etc., I still want you to do that – I love the benefits of the accelerated use of technology – but please recognize you are dotcomming your business. Just like twenty years ago, there is a lot of work to be done; but, decades from now, we will be looking at a completely digital, completely transformed economy, perhaps with a little bit of real AI.

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The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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SITALWeek #315

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

Click HERE to SIGN UP for SITALWeek’s Sunday EMAIL

In today’s post: the collision betweendigital and analog as supply chains gear up to ruin Christmas; workers are increasingly monitored by AI; email privacy changes compound an already difficult holiday season for marketers; returning to White Sands to walk in our ancient footsteps; how fractals give life an extra dimension, and why sleep is for the brain; do advanced civilizations annihilate themselves, or do they fade away as technology supplants their usefulness? regulatory capture coming to crypto; and much more below.

Stuff about Innovation and Technology
Grinch Working Overtime to Steal Christmas
As commerce continues its pandemic-accelerated shift from analog to digital, we are experiencing the collision of bits with bricks. While there is no limit to how many times I can click the buy button on Amazon, there is a real world limit to how many container ships, port/warehouse workers, vans, and drivers are available to get me those shipments. Examples of the strain on the physical world abound. FedEx reduced its earnings expectations for their current fiscal year last week, citing the tight labor market. In discussing the FedEx shortfall, the WSJ pointed out that the US may exceed available shipment capacity by 4.7M packages per day in November and December. Vanageddon, as Scot Wingo calls it, may be with us for a while as services of all types struggle to locate new vans or parts to keep old vans running. The CEO of Flexport, Ryan Petersen, said on CNBC last week that around 20% of ships in the Pacific are in a holding pattern as they wait to load/unload in congested ports (largely due to labor shortage and compressed demand as the economy catches up from COVID). The WSJ puts the number even higher for all of North America, stating that 40% of all cargo ships are waiting to get to port to unload. Petersen deemed the situation a national security crisis and called on the government to help unload containers. With the holiday season coming soon, toy companies are increasingly using airplanes to bring products West. Nike lowered its guidance last week as COVID-related supply chain issues, largely in Vietnam, are causing a shortfall in shoe supply. Meanwhile, Costco is limiting purchase of paper and cleaning products as it deals with driver shortages and supply chain challenges (unlike last year’s hoarding, this appears to be more of a supply issue). Even the king of digital, Amazon, tacked on a $9.95 fee for Whole Foods grocery delivery for Prime members, attributing the change to increased costs. Unless there is a structural change like reduced consumerism, significant reshoring of manufacturing (see #245 for more on deglobalization), or increased wages to entice people back into the workforce, we are likely in for a long haul as the analog world struggles to keep up with the digital transition – not only in logistics, but across a multitude of sectors. This trend is likely to continue to lift up technology as the deflationary and efficiency solution to our analog hurdles. In the meantime, I think we are about to experience a very strange few months of random out-of-stock items leaving us all to exclaim in puzzlement: “we don’t make that in the US? And, it’s going to take how long before it’s available!?” Random holes are opening up in retail shelves across the country as the Grinch clasps his hands and looks eagerly down on Whoville.

Cruel AI Overlords
The usage of technology to manage employees is accelerating rapidly. Bloomberg reports that, since 2012, the number of workers per supervisor has doubled from ten to almost twenty as tech enables oversight. But becoming a slave to an increasingly algorithmic boss has its downsides: “In interviews workers describe feeling like cogs in a giant machine that can spit them out with little more than an automated termination email.” California passed regulations last week, targeted at Amazon, that limit the use of productivity quotas, which the state sees as driving up “workplace injuries and indignities”. The Occupational Safety and Health Administration said in June that Amazon had a higher rate of serious injury than other retail warehouse operators, according to WaPo. Vice reported on Amazon’s driver monitoring system that erroneously penalizes drivers for ‘distracted driving’ when checking their side mirrors or ‘failing to maintain a safe distance’ if another driver cuts them off. Despite the seeming unfairness of the technology, accidents involving Amazon drivers are said to be down 48% since usage began. WaPo noted Bezos’ defense of performance goals in his April annual letter to shareholders, and the new Amazon CEO claims worker safety is a priority, with over 6,000 safety professionals and $300M spent just this year on safety. In the meantime, the Bloomberg article on Amazon’s automation efforts says the ecommerce giant will still need humans for a while until robots get better at grabbing things. And, this is not just a blue collar AI-surveillance crisis, white collar remote work is bringing a lot of monitoring of every minute of work.

CCP Limits International Aspirations of Chinese Companies
The Lithuanian Defense Ministry warned that some Chinese brand smartphones are sending secret encrypted messages back to mainland China. Xiaomi phones also contained a censorship module for terms that scare the CCP, which could be turned on at any time without users knowing (the Chinese handset maker denied the accusations). Of Xiaomi’s 53M smartphones shipped in Q2, around 40M of them were sold outside of China. As I think back to only a few years ago, when markets expected China’s Internet giants and growing hardware companies to breakout of the mainland markets and gain a global foothold, it seems increasingly likely that the current trajectory of the CCP will relegate those companies to their home turf, significantly reducing a potential competitive threat to non-Chinese brands and platforms around the world.

Email Privacy Adds to Ad Conundrum
Apple’s privacy focus continues to have a wide ranging impact on companies that grew to depend on data from iOS. We’ve already heard about the app tracking constraints as a result of iOS 14, and Facebook even had to pour cold water on their guidance last week as those restrictions continue to hamper their business: “In a blog post Wednesday, Graham Mudd, Facebook’s vice president of product marketing, said the company has heard from many advertisers that privacy changes in the online advertising industry have had a greater-than-expected impact on their operations.” The new iOS 15, which launched last week, promises a similar level of disruption to the email industry, which relies on tracking data for email opens to demonstrate success of campaigns, particularly for ecommerce (Mailchimp had great timing for the $12B sale right before the iOS 15 launch!). The loss of key email data is landing at a particularly hard time with the holiday season coming up. Losing stats on email opens will put a greater emphasis on getting people to click on embedded links for tracking engagement. Apple’s changes are also hitting smaller online businesses quite hard as they see a drop in returns for their ad campaigns and will now have to deal with the lack of email visibility (and Vanageddon could hurt smaller online commerce businesses as well this holiday as they have fewer delivery options than larger companies like Amazon). Android and web browsers will no doubt follow the same trajectory towards privacy, so the entire ad industry really needs to hustle to cooperate and come up with alternative means of reaching customers that don’t just disproportionately favor Apple and Google, but also give consumers the benefits of having their data used smartly and anonymously.

Green Energy Follows Moore’s Law, Fossil Fuels Don’t
A new working paper published by the Institute for New Economic Thinking at the Oxford Martin School demonstrates how we are systematically underestimating the cost declines of green energy, leading to a significant underinvestment in renewables. The new analysis shows that solar, wind, battery, and hydrogen fuel cell tech follow a power/cost progression similar to Moore’s Law for chips. In contrast, fossil fuels have had a static efficiency output for more than a century. Consequently, speeding up the timeline of fossil fuel replacement could save trillions. Bloomberg published a summary article co-authored by Eric Beinhocker and one of the paper’s authors. One of the problems this new analysis overlooks is the human cost of the cheap solar, with half of the polysilicon material made in regions of China with human rights violations. In related news, IEEE reports on the rise of distributed power companies, such as Tesla and Octopus Energy in Germany.

Miscellaneous Stuff
Footprints in White Sands
Back in SITALWeek #266, I wrote about the discovery of ancient human footprints at the White Sands National Park in New Mexico from around 12,000 years ago: “a person carrying a child made their way hastily across a muddy flat in a straight, 1.5km+ journey, and then, several hours later, retraced their steps back, seemingly without the child (who was perhaps dropped off at another camp?). On the outward journey, sometimes the child walked for small stretches, and, at other times, the main tracks show evidence of a toddler-sized encumbrance. Perhaps they were in a hurry due to the area’s active megafauna, which included saber-toothed cats, dire wolves, bison, camels, mammoths, and giant sloths, some of which left tracks that crossed the trail of human footprints in between the outbound and return journeys. This remarkable record tells a story, but it mostly raises more questions about what life was like for these ancient humans. Another set of prints records children playing in the puddles formed by giant sloth tracks and jumping between mammoth tracks. Those images will be with me next time I see a kid splashing in a rain puddle.” White Sands was back in the news this week with a new find of decidedly older footprints, dating from ~21,000 years ago. While it will be debated for a while by anthropologists, it appears the evidence is solid that humans were in North America around 10,000 years before previously thought. The find could validate many debatable sites of older human evidence as well. One thing we know for sure is that natural selection certainly selected for wanderlust as a way to survive.

Sleep, Fractals, and Extra Dimensions
We’re big fans of Geoffrey West’s work and have often recommended his book Scale to people who ask us about complex systems and the Santa Fe Institute. In Scale, West describes how physiological characteristics of mammals follow quarter power scaling laws. For example, an elephant weighs 10,000x more than a squirrel and grows 10x slower, has a 10x longer gestation period, and lives 10x longer (10 being 10,000^¼). Because growth is dependent upon distributing nutrients to cells throughout the body, one might think that volumetric (a.k.a. weight in this case) differences would determine growth rates, giving third power scaling (since volume is three dimensional), which would correspond to 22x slower growth/gestation. Why is the elephant able to eke out a faster growth rate, and thus better reproductive fitness? The fascinating reason for this quarter power scaling is likely due to blood vessel and respiratory networks that have evolved through natural selection to maximize metabolic rates in the three-dimensional world we find ourselves in. The best way to maximize space in a 3D world is to use fractal, or self-similar, patterns. Fractals are so efficient that they essentially give a network, like blood vessels, an extra dimension, which is why the number four repeatedly shows up as a scaling factor – it’s three dimensions...plus one. In other words, a linear fractal is two dimensional, a surface area fractal is three dimensional, and a volumetric fractal is four dimensional. I just love that about nature. But, there is one standout exception to this metabolic scaling consistency, and that is the amount of sleep we need. It turns out that the larger the animal, the less sleep it needs (elephants only need 3-4 hours per night vs. 15 for squirrels). Based on quarter power scaling, we would expect the opposite – that an elephant would need 10x as much sleep as a squirrel. West and his collaborators have two theories to explain the divergence. First, sleep’s function is to counteract damage from energy production and process neural information into memory. Larger animals suffer less damage per fixed volume of tissue, so less time is required to repair the damage. The second reason appears to be related to relative brain size. It turns out it’s the amount of time needed to repair the brain that matters more than the overall body, and brain size scales more slowly as total body size increases. Lastly, the researchers looked at how sleep needs change as we age. Surprisingly, up until the age of about 2.5 years old, sleep is focused on neural reorganization more so than repair, abruptly shifting as the brain becomes less plastic.

Inspiration4 Makes History
I was inspired by Inspiration4’s first civilian crew to orbit the Earth for three days and happy to learn of their safe splashdown last weekend. There were apparently some not-as-inspired elements to the trip, such as the toilet, which Elon Musk proclaimed will be upgraded for future missions. The astronauts were also trained to use zip ties and sedatives in the unlikely event of a mental break during the journey. During the crew’s extensive five months of training, they ran a 30-hour flight simulation together in preparation for the mission inside the 328-cubic-foot Dragon capsule.

L: With a Whimper, Not a Bang
The Drake equation, proposed by Frank Drake in 1961 at the first SETI meeting, attempts to estimate the number of extraterrestrial civilizations with communications capabilities at any given time within the Milky Way Galaxy. While it was never meant to be rigorously scientific, it has, over the years, spurred many debates about the variables that might contribute to the number of intelligent civilizations in the Universe. The key inputs listed below, some of which we know and some of which we guess, are all multiplied together. Per Wikipedia:
R∗ (the average rate of star formation in our galaxy)
fp (the fraction of those stars that have planets)
ne (the average number of planets that can potentially support life per star that has planets)
fl (the fraction of planets that could support life that actually develop life at some point)
fi (the fraction of planets with life that actually go on to develop intelligent life)
fc (the fraction of civilizations that develop a technology that releases detectable signs of their existence into space)
L (the length of time for which such civilizations release detectable signals into space)

The variable that gets most attention is the one that has the widest (5-6 orders of magnitude) range of predictions: L, the length of time a communicative, intelligent species survives. It’s a ‘glass half full or glass half empty’ cocktail-party question: are you optimistic that a species of sufficient intelligence to develop radio technology will survive without catastrophically annihilating itself or its planet? I’ve thought about the equation frequently over the past quarter century (after learning of the Drake equation in Astronomy 101), and I often quote Carl Sagan’s line from Contact on this topic: “The Universe is a pretty big place. If it's just us, seems like an awful waste of space.” This last week, I was thinking about L in a different context: birth rates. I write often about human’s declining proclivity to procreate and how it impacts our economic growth ideology. On the one hand, there are positive reasons for declining birth rates (a more equitable society for women globally, improved child mortality rates, etc.), but, on the other hand, there is a certain lack of hope for future generations embedded in a declining birth rate. It represents an existential malaise – a slowly encroaching dread that much of our function in society is being replaced by machines of various types – leaving us as nothing more than inadequate cogs, woefully flawed by emotions, desires, and physical fallibility that interfere with the economic bottom line – until our AI overlords fully assume control. China’s plummeting birth rates could be a manifestation of a people losing their hope for the future. Perhaps, instead of annihilation via a catastrophic event, civilizations of intelligent, communicative species instead run out of hope and usefulness. Drake formulated this equation around the height of the baby boom in 1961, during the middle of the Cold War, which is likely why the L factor historically put the spotlight on annihilation rather than birth rates. If it’s declining birth rates that explain the Universe’s lack of little green men, then maybe the lack of hope stems from a loss of common culture as population growth creates more and more fractured tribes. Or, the absence of a common enemy, which would serve to unite a civilization, could be to blame. Alternatively, loss of hope could be a sign of a growing dysfunction of tribalism altogether – you can’t have culture without functional tribes (I noted that the pleasant tribal shift from politics to the relatively more benign sports as a good sign for humans). And, some companies feel like tribes – like they have built their own culture and optimism for the future. However, when those cultures sour, attitudes shift from optimism about growth to fear of stagnation. Sometimes entire industries die off as civilization marches on. I can’t help but reflect on Apple’s transformation from an engine of inspiration and innovation – creating technologies that changed the world under Steve Jobs – to a culture of fear under Tim Cook, where employees who leak dirty laundry are hunted down, the castle is defended by legal action rather than disruptive innovation, and they take more value for themselves than they create for the world. One could also make an analogy to governments as well: countries that favor fear and communism over democracy and entrepreneurism will be more likely to fail as their people – their economic engine – lose hope. We could easily look at the lifetime of companies and draw some parallels to the L in the Drake equation (indeed, the folks at the Santa Fe Institute have done just that). All of these signals of lost hope and stagnation are the reasons that the two key attributes we look for in our investments at NZS Capital are adaptability and non-zero sumness: to what extent can a company adapt to a changing future, and how much more value are they creating for others than they take for themselves. Well, I’ve rambled enough here, so I will conclude as I often do with a link to Carl Sagan’s Pale Blue Dot soliloquy, and I’ll continue to hope that the Universe is not a waste of space.

Stuff about Geopolitics, Economics, and the Finance Industry
Big Brother Hating on Crypto
Following recent crypto clampdowns to combat ransomware attacks, favor sovereign digital currencies, and facilitate a terribly misguided monetary policy (see the last sections of #313 and #314 for more context), China declared cryptocurrency transactions illegal last week. Meanwhile, US regulators are relying on colorful pioneering-era analogies, with the head of the SEC likening crypto to the ‘Wild West’ days and the ‘wildcat banking’ era, and the Acting Comptroller of the US Currency calling crypto a ‘fool’s gold rush’, according to WSJ. If governments and central banks are successful in regulating crypto currencies, without declaring them illegal to transact, then we will likely see regulatory capture: a very high cost of running regulated crypto exchanges and maintaining regulated protocols will enable a small number of digital currencies and a small number of trading platforms to dominate the industry.

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The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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