SITALWeek #344

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: energy harvesting; software and robots don't pay taxes, creating a future retirement funding burden; software stocks can fight inflation, but investors have amnesia; the obviousness of ad-supported bundles for streaming; is it privacy or behavior changes that are causing tumult in content consumption?; making animation less real; overcoming tribalism; what to do when you own a stock that has lost most of its value; and, much more below...

Stuff about Innovation and Technology
Cornucopia of Ambient Energy
Researchers at the University of Washington have created dandelion-inspired floating sensors powered by tiny solar cells to collect environmental information. A single drone could carry a payload of up to 1,000 sensors for release and subsequent atmospheric monitoring. This is an example of how connected devices will increasingly use energy harvesting to replace or augment/recharge batteries. For example, according to this detailed article in Semi Engineering, scavenging ambient electromagnetic waves can provide around 0.5µW of energy, while vibration harvesting gives 5mW. A wireless sensor would typically need around 1mW, while a smartphone in standby requires 15mW. Solar’s inefficiency has traditionally meant it’s not a great source of energy for devices, but Analog Devices has a 1.63x1.23mm device that can take in solar from a single cell at 85% efficiency. There is also focus on continuing to reduce device power consumption, as Semi Engineering notes.

Robots Don’t Pay Taxes
ServiceNow’s CEO Bill McDermott, speaking on CNBC after the company’s earnings report last week, said that software is the most deflationary force in the world. On the surface, it sounds like Bill’s hallmark hyperbole, but it might actually be an understatement. As the economy goes from analog to digital, automation of both physical and virtual tasks will accelerate. While the focus is often on blue collar automation, it’s white collar automation that is likely to have the bigger impact on productivity, providing an ever-growing deflationary force. As you interact with software, it’s also learning how to do your job to ultimately replace you, or, at the very least, make you productive enough that someone else loses their job. Meanwhile, many new types of jobs that we cannot yet imagine will be created. And, automation may also have other far reaching implications. For example, software doesn’t pay into government retirement programs like Social Security in the US, and neither do robots. As the population in developing countries continues to age – with little hope of meaningfully increasing the number of immigrants and/or younger folks entering the workforce and contributing to future savings – the burden of taking care of people, both from a financial and labor perspective, could become a difficult scenario. Bill Gates suggested five years ago that companies should pay robot taxes. It’s possible companies will need to pay a software tax as well as jobs are automated away, offsetting some of the deflationary benefits the digital tools and platforms provide. One existential concern on the horizon is the need to create new meaningful pursuits for humans as technology continues to replace us (a topic I think often about and covered in #315 and #322 in more detail).

Out of Favor Deflation Fighters
Curiously, in the face of rising inflation, the stock market has fallen out of love with software stocks, these all-important deflationary engines of growth. This year, investors have wholesale adopted the popular narrative that companies need to be currently profitable to be good long-term growth investments (with companies investing potential profits in their future lumped into the discard pile; see also Not All Growth Is Equal). Thanks to investors’ amnesia that companies investing in their own growth create more value over time, some higher growth stocks have ended up trading cheaper than their lower growth counterparts. I rarely mention specific stock valuations in this forum, but I thought an example here would be helpful. Using consensus sell-side revenue estimates on Thursday of last week, Salesforce traded at 5.6x enterprise value to next 12-months sales, while its grandfather, Oracle, traded at 5.8x. Consensus topline growth for the next respective fiscal year is high teens for Salesforce and low single digit for Oracle, with Salesforce growing approximately 3-4x faster than Oracle. While Oracle is more profitable today, there are reasons to believe both companies would have roughly similar margin structures at similar growth rates in the future. Salesforce, you might say, is investing for its future growth, while Oracle is harvesting its current profits (please note the preceding is not a commentary on whether either stock is an interesting investment here, I am simply comparing their relative valuations). There are more examples of these odd valuation inversions around the market. I recognize the role that fear of rising rates plays in this peculiar situation, and perhaps it’s happened in the past (though if it has, I don’t recall), but focusing on the future value of engines of deflation might make sense regardless of whether inflation is temporary or ultimately proves to be more structural.

No Openings for ‘Cado-Mashing Bots
Chipotle continues to look for ways to use automation to make its jobs more appealing and safer for workers, but there’s one thing they won’t automate: "We're looking for additional ways to [automate]. How do we eliminate dishwashing? How do we cut and core avocados? Our guys love mashing the avocados into guacamole, so we're not looking to replace that”, the CEO commented last week on CNBC.

Fixing Netflix
I won’t spend too much time reviewing the specifics of the Netflix earnings report that helped send the stock diving nearly 70% so far this year, as I’ve covered many of the forces impacting the video industry in the past. As I noted in #338 (and #287), an ad-supported bundle of streaming apps is the best path forward for the industry. Netflix’s quickest path to solving their desire to offer an ad-supported tier and increase their quality content would be to merge with one of the other studio groups, such as Paramount, NBCUniversal, or Warner Bros. Discovery. If anything, Netflix’s recent stumble highlights the value of the legacy Hollywood studios, which already have robust advertising businesses. The more interesting lesson concerning Netflix is how to approach stocks that plummet and experience a change in thesis, which I address in the final section of today’s SITALWeek.

Entertainment Spreads Out
Another hot topic of late has been the shifts in targeted advertising as a result of Apple’s changes to user privacy. Facebook’s subsequent slowdown in ad revenue growth from prior years is well known. Last week, YouTube also reported weaker than expected revenues, while its parent company, Google, continued to post results that benefitted from advertisers shifting money to search. But, there’s something else going on that makes the situation more complex: the ongoing explosive growth in alternative content (detailed in Spiraling Content Meets Maxed-Out Attention). As TikTok continues its meteoric rise and video consumption wavers (down 8 minutes/day overall in the US in 2021) it’s hard to parse the impacts of privacy rules vs. habitual changes on shifting usage and ad revenues. Indeed, the unlimited growth of content options might be driving Netflix’s customer attrition as well. At the heart of the argument is whether storytelling is still important to human culture. Are we still interested in detailed arcs of triumph, redemption, and love that stick with us for decades, or do we want 10 seconds at a time of instant hits that are instantly forgettable? As is often the case with complex systems, there are many factors interacting with each other, and it’s only with the passage of time that we can look back and know what might have been going on. This is one of the reasons we try to focus on companies whose future success hinges upon relatively few predictions. Forecasting consumer behavior regarding entertainment consumption is particularly tricky because we humans tend to be fickle. That said, I think it’s a fairly safe prediction that humans will maintain some interest in stories; after all, we’ve been telling them for hundreds of thousands of years.

Being Real
A new social app called BeReal is growing rapidly, in part because it’s the antithesis of many current social networks. The app asks everyone once a day (at a different time each day) to post two pictures, one of yourself, and the other of what you’re looking at around you. It has no filters, no edit buttons, and you have only two minutes to make your post for the day. CNN explains: “The result is a social feed filled with unedited photos of people doing mostly everyday, unglamorous things -- lounging in pajamas, doing homework, riding the bus, microwaving their dinner. With only one post a day, there's no clutter of friends' pictures to mindlessly scroll through. You can only see friends' posts if you share a photo, which eliminates lurkers.” This constant rise in new forms of content underlies my view that, unlike many other industries, there are No Power Laws in Art.

Miscellaneous Stuff

103 More Bits of Advice
Always a popular link with my readers, Kevin Kelly is out with another list of life lessons on the occasion of his 70th birthday. Practical gems include:
• “You can’t reason someone out of a notion that they didn't reason themselves into.”
• “When you open paint, even a tiny bit, it will always find its way to your clothes no matter how careful you are. Dress accordingly.”
• “The biggest lie we tell ourselves is ‘I don’t need to write this down because I will remember it.’”

Fantasy CGI vs. Fluid Dynamics
After decades of computer animation evolving to appear more lifelike, recent animated movies have shifted to the creation of stranger, more imaginary places. Polygon reports animators are working against algorithms, which have been tuned for realism, in order to create the weird-worlds impact they are looking for. Does this trend reflect ennui toward our own world, or does it indicate optimism for our ability to reimagine and reshape our future reality? Real and unreal are becoming increasingly fungible as augmented reality technology continues to progress. A couple of months ago, I was certain the new promo for Amazon’s LotR series was faked with overly stylized CGI, but it turns out it was completely real-world footage.

Escaping Fear
My favorite living lyricist and novelist, John Darnielle, was interviewed in The New Yorker. Here’s one quote that stood out to me: “I think young people do practically everything out of fear, whether it’s fear of missing out, or fear of not becoming what you want to become, or fear of not getting away from what you want to get away from. If you keep working spiritually, you think, 'Oh, wait, if I work and I’m able to provide for myself, what do I truly have to be afraid of?' Not so much. And, well, then you can approach something like freedom, I guess.”

Stuff about Geopolitics, Economics, and the Finance Industry
Population Ebb Graphic
Toward the end of this FT article on birth rates rebounding to (but not exceeding) pre-pandemic levels, there is a useful interactive chart for demographic junkies that shows birth rates over time amongst developed and emerging countries as we move towards global population decline in the next couple of decades.

Rising Rates Jeopardize Debt Pyramid
The WSJ reports on the potential for rising rates to cause a liquidity crisis for the wave of debt-fueled private equity deals over the last few years. One of the best arguments for rates staying lower over the long term is simply the existential debt burden around the globe for companies, consumers, and governments, the cost of which would be perilously high with structurally higher rates. It suggests that inflation should instead be tackled with more targeted policies such as incentivizing production and technology investments to clear bottlenecks. However, that’s not the path central banks and governments are currently following. Rate hikes are likely to cause significant structural damage that could be avoided with a different approach.

Overcoming Tribalism
In SITALWeek #342, I talked about Jonathan Haidt’s essay Why the Past 10 Years of American Life Have Been Uniquely Stupid. In the essay, Haidt references the excellent book Nonzero by Robert Wright, and, last week, Wright posted his response to the essay. Wright makes the point that fragmegration, the concept that new technologies tend to both fragment and integrate people, being both unifying and divisive, is the key concept to understand for new technologies and how they impact tribal instincts. This has been the case throughout history, with the printing press being a prime example. Wright also notes that the Internet has created unifying groups across borders while dividing groups inside of borders: “the formation of international tribes whose cohesion sometimes comes at the expense of national cohesion—was bound to happen, given the direction of technological evolution; and it was bound to be turbulent.” Wright strikes a much more optimistic note than Haidt: “The psychology of tribalism is an extremely hard thing to grapple with. But at least grappling with it is a single, identifiable challenge...The inexorable march of information technology, combined with the psychology of tribalism, has heightened turbulence, loathing, and delusion before, and it’s doing that now. And it’s doing a lot of that now—in part because of how rapidly the information technology is evolving, in part because of the forms it’s assuming (most notably social media), but also, I think, because of the magnitude of the attendant change in social structure: a movement from national toward international social organization.” Wright’s focus is on identifying and breaking down the psychology of tribalism, an increasingly difficult task; but, as he optimistically points out, it's one humans have overcome multiple times in the past.

Zen and the Art of Stock Analysis
As I mentioned above, the more interesting thing to discuss on a stock like Netflix is: what do you do when you own a stock that goes down materially and has a major change in thesis? The hard part is trying to gain some objective perspective because your brain will either: 1) Go into overdrive trying to justify why you are right and/or the rest of the world is wrong, or 2) Evoke such an emotional response that you will irrationally sell the position before you get the necessary perspective. Here is an exercise I like to do: 1) Assume that you didn’t own the stock. Imagine the world where you are an omniscient genius, avoided taking the hit, and are now analyzing the stock with an open, unencumbered mind (this is the hardest step as it requires a lot of practice to dissociate). 2) Ask yourself: what is the thesis today, without any consideration for what it might have been in the past. 3) Identify the broad and relatively safe predictions that underlie the thesis (e.g., around two-thirds of viewing is still shifting from linear to streaming). 4) Identify the more narrow and specific predictions that underlie the thesis (e.g., Netflix can successfully build an ad platform, continue to improve content quality, crackdown on piracy, etc.). 5) Assess the degree to which the valuation requires you to be correct about your predictions (i.e., can you be wrong on some assumptions, or are you making a parlay bet and need to be correct on all counts?). 6) Work through the pre-mortem scenarios: a) You buy the stock and it’s been a great performer, what led to that happening? b) You sell the stock at a loss, what caused that to happen? Now, after all that analysis, would you buy the stock today? And, what position size would appropriately match the risk defined by the range of outcomes you’ve identified?

There are many methods for evaluating stocks, but creating emotional space is probably the most important part of any strategy you might have. I’ll make one last comment as it relates to Netflix, emotions, and predictions. Bill Ackman put out a release that his firm, Pershing Square, was selling Netflix the day after the company reported earnings two weeks ago. In it he said: “We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio. While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.” It was the line “We require a high degree of predictability” that caught my eye. There are a lot of ways to make money in the market, so this is not a criticism of any one style of investing, but we’ve found more success not relying on predictability. The fewer predictions we need to make on an investment, the more likely we are to own more of it. If the valuation is implying we have to be correct about very few assumptions for growth to drive performance over time, that is a larger Resilient position for us; and, inversely, if valuation is forcing us into winning a parlay bet, then the stock is either a smaller Optionality position (if the asymmetry is high enough) or what we would call a gamble, which we would pass on. We discussed this philosophy in more detail in our paper Redefining Margin of Safety.

✌️-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 #343

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

SITALWeek is off this week, in the meantime, check out our Q1 2022 Investment update.

✌️-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 #342

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: the importance of comedy as a weapon against tragedy; compounding innovation at Amazon; new collar workers; it's time to shut down Internet advertising data brokers; AI brings lost movies back to life; investors are as bearish as ever on growth; and, much more below...

Stuff about Innovation and Technology
Compounding Innovation
From Amazon’s latest annual letter, the first written by new CEO Andy Jassy: Amazon has spent over $100B in cumulative distribution and fulfillment capex; the average time to process and load an order onto a truck is down to two hours; over the last 24 months they doubled capacity that originally took decades to build (I wrote more about the difficult challenge of innovating on hard problems in Amazon and Tesla: Strangers in a Strange Land). Jassy also discussed the compounding advantage of iterative innovation (and other mechanisms) the company believes have been key to its success in delighting customers: "Albert Einstein is sometimes credited with describing compound interest as the eighth wonder of the world ('He who understands it, earns it. He who doesn’t, pays it'). We think of iterative innovation in much the same way. Iterative innovation creates magic for customers. Constantly inventing and improving products for customers has a compounding effect on the customer experience, and in turn on a business’s prospects. Time is your friend when you are compounding gains."

"New Collar" Workers
According to a world-wide survey of 80,000 workers, around 1/10th of people working low-skill, hourly jobs switched to higher-paid technology jobs. Companies such as Okta are no longer requiring college degrees, and many companies are willing to train new hires on the job in the tight labor market. The WSJ refers to this shifting labor trend as “new collar”.

Surveillance Capitalism’s No Joke
Last Week Tonight comedy news show host John Oliver used data brokers to target members of congress under the (largely comical) threat of exposing their online behavior. While the report was funny, it’s past time to end all targeting that uses anything but user-opted-in, first-party data (see Ad Dollars Chasing Consumers). The entire negative-sum 3rd-party data broker industry should be regulated out of existence.

AI Reviving Vintage Content
Just in time for Easter, David Lynch comments on the technology used to recently remaster rabbit-heavy Inland Empire: “time passes and now there’s this thing with AI, where the computer looks at it with a new kind of intelligence, and it can make a silk purse out of a sow’s ear. It is incredible. And it’s just the beginning, it’s just the beginning. So it doesn’t really matter in a strange way what you start with. In the future, the manipulation you can do will be incredible.” In another interview, Lynch said of the technology: “A short time ago we went back into ‘The Elephant Man’ for Blu-ray and it was absolutely amazing, what was hiding in those little 35mm frames that we never saw before that can be brought out now with Dolby Vision and other technologies. You have to be careful — you can bring out too much and ruin the mood. But if you’re careful, you can bring out things you never saw that make it that much more beautiful.” And, Lynch is now even open to revisiting the vault to try and fix his biggest personal career disappointment: Dune. Some restorations I appreciate (others, not so much), but this process of bringing films back from the dead is adding even more to the pile of abundant content. And, with the barriers coming down to create even more immersive content at a rapid pace with tools like Epic’s Unreal Engine (Epic recently raised an arsenal of cash from Sony and the family that controls Lego), where will I find the time to watch it all?

Miscellaneous Stuff

When Laughter Dies
Gilbert Gottfried passed away last week from a heart condition. Gilbert was my hero because he used comedy as a weapon against tragedy. Gottfried was known as a comedian’s comedian because, while still broadly appealing, he also elevated the craft of comedy to a level that brought admiration from the field’s greatest talents. Gottfried could improvise on a joke, like a jazz musician improvising on a song, for a very, very long time. His joke-telling style was the inspiration for the 2005 documentary The Aristocrats, a NSFW movie that lived underground for many years, but recently surfaced on streaming. One of the reasons it's particularly upsetting to lose comics like Gilbert, Bob Saget, and Louie Anderson is that, increasingly, we’re not allowed to be funny. We are now shunned (or attacked) for using humor as a weapon against the terrible tragedy of trying to make it through one more day as a human in the twenty-first century. Gilbert was one of the last comics who would unabashedly use comedy as a weapon against human tragedy. If you can joke about something unspeakable, then you've taken some amount of control back from that negative force. When jokes beget violence or “canceling” instead of comic relief, the depressing reality of tragedy takes the place of hope. (Note: I don’t think anyone should be canceled for things they say, but I also think humor should come from a place of love, as I wrote about in Laughter is the Best Medicine). Gilbert was one of the first people I remember being canceled way back in 2011. Gilbert made me laugh, and I will miss it dearly if society is too afraid to ever laugh again. Gilbert was the special kind of nut that is willing to stick to a character for decades without breaking. You can learn more about him in the 2017 documentary Gilbert, which is currently available on Peacock.

Say What? Remedy
Biotech startup Frequency Therapeutics stimulates the re-growth of inner ear hairs – crucial to hearing and differentiating sounds – by injecting small molecules that reprogram dormant progenitor cells. “In Frequency’s first clinical study, the company saw statistically significant improvements in speech perception in some participants after a single injection, with some responses lasting nearly two years.” Drugs targeting progenitor cells may have broader applications, including re-myelination of neurons to treat MS.

Analemma
Last week, I learned that if you take a picture of the sun from the same point of view at the same time every day, it paints an infinity sign in the sky, known as the analemma. The primary driver is the elliptical orbit of the Earth around the Sun. This 2015 video does a nice job explaining the shape.

Stuff about Geopolitics, Economics, and the Finance Industry
Darkness Before the Dawn
Fund managers set a new record for bearishness regarding global growth prospects in the latest Bank of America poll. Current sentiment is more pessimistic than it was in October 2008, when the market crashed shortly after the Lehman collapse. The market bounced along the bottom for a few months before beginning its longest bull streak starting in June of 2009. Of course, not all stocks recovered in the aftermath of the financial crisis, with some continuing to plummet. If you’re worried about the future, my advice is: you shouldn't worry about things that you can’t predict; instead, develop a framework that has the best chance of success with the fewest number of predictions. For us, that means balancing Resilience and Optionality while focusing on adaptable companies maximizing non-zero-sum outcomes (see also Redefining Margin of Safety).

“Structural Stupidity”
Professor Jonathan Haidt’s essay in The Atlantic Why the Past 10 Years of American Life Have Been Uniquely Stupid adopts the lens of non-zero outcomes (citing Wright’s excellent book Nonzero: The Logic of Human Destiny) to show the negative impact of social networks (as a side note, we have not owned Meta at NZS Capital because we view the overall business as negative sum). Everyone now knows social networks are negative sum, eliciting our worst behavior to garner the most likes and shares, so we don’t necessarily need yet another take on that, but I did appreciate several points in the article. Haidt notes that “Social scientists have identified at least three major forces that collectively bind together successful democracies: social capital (extensive social networks with high levels of trust), strong institutions, and shared stories. Social media has weakened all three.” Another problem he points out is the performative nature of social media (something I too have lamented as we head toward a world where everyone’s a creator and no one is left to consume). Everyone is more concerned with performing rather than making real, honest connections, insidiously undermining trust at every level. Another interesting observation concerns the speed of outrage on social media: “It was just this kind of twitchy and explosive spread of anger that James Madison had tried to protect us from as he was drafting the U.S. Constitution. The Framers of the Constitution were excellent social psychologists. They knew that democracy had an Achilles’ heel because it depended on the collective judgment of the people, and democratic communities are subject to ‘the turbulency and weakness of unruly passions.’ The key to designing a sustainable republic, therefore, was to build in mechanisms to slow things down, cool passions, require compromise, and give leaders some insulation from the mania of the moment while still holding them accountable to the people periodically, on Election Day.” The thrust of Haidt’s argument is the ongoing erosion of trust is fracturing society at every level. I continue to believe the biggest challenge we face as a civilization is inspiring leaders that are willing to stand above the noise of performative behavior and truly lead us in the right direction of non-zero-sum cooperation and shared prosperity. As I look across politics, religion, and business, I don’t see such leaders today with large followings, but as we know from history, they can show up at any time to inspire us.

✌️-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 #341

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: transformer neural nets are supercharging the arms race in AI; drones are soon to be commonplace; using far-UVC light broadly for killing airborne viruses; private market correction; the rise of unions in the context of failed immigration policies; the tech sector enabled Russia to wage war in Ukraine, and it continues to enable China to enable Russia, but much more can be done to prevent future wars and oppression; and, much more below...

Stuff about Innovation and Technology
A Transformer Walks Into a Bar...
Google’s Pathway Language Model (PaLM) scales to 540B parameters. The model was trained on 6,144 of Google’s custom TPU v4 AI chips, far exceeding prior pods of 2,240 Nvidia A100s and 4,096 v3 TPUs. PaLM is reported by Google to have reached breakthroughs in understanding language, reasoning, and coding. While PaLM barely edges out the 530B parameters of Microsoft’s Megatron model, PaLM “can distinguish cause and effect, understand conceptual combinations in appropriate contexts, and even guess the movie from an emoji...generate explicit explanations for scenarios that require a complex combination of multi-step logical inference, world knowledge, and deep language understanding. For example, it can provide high quality explanations for novel jokes not found on the web.” PaLM, Megatron, and GPT-3 walk into a bar in the metaverse. The bartender, Watson, says: hey, is this some sort of joke? PaLM is the only one that laughs. There is a massive arms race among tech giants for human-like companion bots. Today’s search engine will evolve into the next contextually aware, seemingly sentient AI assistants. The pace at which progress is being made is quite impressive, and it could mean we are closer to this realization than we think. And yet, early applications are still conspicuously lacking, as the WSJ’s Joanna Stern found out when she lived with Amazon’s Astro robot for a week. One of the underpinnings of most of the large language models is a type of neural network called a transformer. Transformer models can look across a block of text and process the sentences (and words within the sentences) in any order. That allows a model to infer context that might be coming later in a sample. Nvidia is building transformer models into its latest chips, and this type of neural net is being increasingly applied to other types of AI problems, according to IEEE. Transformer models are growing 275-fold every two years and fast approaching trillions of parameters.

Fortnite for Ukraine
Players of Fortnite raised an astonishing $144M in aid for Ukraine as the game maker donated all proceeds from the first two weeks of the most recent season of its game to various causes.

Texas-Sized Drone Delivery
Google’s drone delivery company, Wing, began deliveries to tens of thousands of suburban Dallas residents from Walgreens, Blue Bell Creameries, and Easyvet pet prescriptions. Walgreens employees load drones with orders for liftoff from store parking lots with Wing employees providing remote monitoring. In other drone news, Sweden’s Everdrone delivers defibrillators for medical emergencies. The drones, dispatched in response to an emergency call, can arrive before emergency medical personnel. They have already saved one patient suffering cardiac arrest by providing the lifesaving equipment within the critical 10-minute treatment window. Perhaps other emergency medical technology, such as the robotic CPR machine or anaphylaxis-reversing EpiPens®, could also be sent ahead by drones. After years of anticipation, it’s strange to think neighborhood skies could soon be filled with drone traffic.

Miscellaneous Stuff

Germicidal 222
Far-UVC light with a wavelength of 222 nm is highly effective at killing 98% of airborne viruses, like influenza and COVID, but does not impact human tissue. Unlike harmful lower frequency UV light (UVA, UVB, and 254 nm UVC) that can penetrate tissue and cause damage, 222-UVC is strongly absorbed by proteins, so it doesn’t get past our outermost layer of dead skin cells or the tear layer that protects our eyes, making it safe for human exposure. Convincing the public (which can’t grasp the difference between ionizing X-ray and non-ionizing 5G radiation, which is entirely safe for humans) could be the hardest part of broad 222-UVC adoption. Prior barriers to implementation included cost and material used to make far-UVC light sources, but new nitride-based semiconductor emitters could be a gamechanger. Although I am not familiar with the manufacturing, if it follows a typical semiconductor process, I imagine this wavelength could be added to any household bulbs cost effectively. In the meantime, there are commercially available room air purifiers that incorporate a germicidal 254-UVC bulb.

Jimmy Swap
On April Fool’s Day, late night talk show hosts Jimmy Kimmel and Jimmy Fallon pranked audiences and staff by hosting each other’s shows for the night. In some fantastic, pre-recorded footage, the two hosts kept swapping places with each other while fans were getting their photos taken. Some people didn’t notice the switch despite the Jimmys’ distinct looks (beard vs. no beard) and voices. It’s yet another delightful lesson that you should not immediately trust your brain’s interpretation of your surroundings.

DST Sunrise Map
In the unlikely event the US does move to permanent daylight savings time, Bloomberg created a cool visual of how many days per year the sun would rise before 7am depending on your latitude and proximity to a time zone line.

Stuff about Geopolitics, Economics, and the Finance Industry
VC Chill
Global VC investments dropped 19% in Q122 as the industry began a significant and necessary valuation correction (see Bubble, Bubble, Toil, and Trouble). Investment activity likely declined due to global uncertainties and a correction in public market valuations despite ongoing fundraising for new VC funds. As central banks begin to suck excess liquidity out of the economy, correcting the over-stimulus that took place during the pandemic, a far greater negative impact will be felt in the VC market. While investors will surely suffer, the biggest victims will be the companies that raised too much money at too high of a valuation and their employees, who will see paper profits – and possibly their jobs – evaporate.

Transparency, Workers’ Rights, and Automation
In the Information Age, it’s easier than ever for employees to see how they will be treated by employers. The rise of unions among service workers in the US comes as a large demographic headwind collides with years of the free market and government policy failing to arrive at fair levels for wages and benefits. The trend is likely to continue unless we have a significant, unlikely reversal in immigration policies (see demographic discussion in #331). Companies that are already maximizing non-zero-sum outcomes for their employees – in a way that still allows them to deliver products and services to customers at reasonable prices and sufficient margins – will be well ahead of companies that squeezed employees and product quality in favor of higher profit margins. Howard Schulz’s largely symbolic cancellation of Starbucks' share buyback plan is a tidy example of the shift from favoring investors to employees as the balance of power tilts in the economy. Ultimately, this type of reprioritization will create long-term shareholder value as these companies become invaluable supporters of their ecosystems. I'd be remiss if I didn't also tie this rise in worker power and wages to the prevalent (but likely misinformed) market theory that we will see deglobalization in the coming years. As I've written before, globalization is a one-way street, and the lack of labor in the West is a powerful reason why we are unlikely to see deglobalization on any significant scale before we have major improvements in automation capability and capacity (see #336-339 for more). Automation with software and robotics will be increasingly existential to the economy over the next decade. For example, Walmart recently raised long-haul driver pay from $87,000 to $95,000-110,000. Such cost pressures will hasten the development of autonomous and semi-autonomous transportation technologies. The situation is not isolated to the US, as the UK is seeing the fastest increase in starting salaries since 1997 amid labor shortages, according to Bloomberg.

Tech’s Increasing Role in Global Conflict
From the wheel to the computer, technology has done more to improve quality of life over the course of human evolution than anything else. Our ability to innovate defines our species. But, that same technology can also supercharge the destruction wrought by our primal, tribalistic instincts. If we want to prevent/minimize such future tragedies, it is imperative that technology executives, governments, and investors do much more to understand how technology enables war and oppression. We don’t need to keep relearning the unbearable lessons of war firsthand – we have archive and real-time footage of wars, historical records, and survivors attesting to its loathsome nature. Yet, despite this knowledge, not enough has been done to keep technology from enriching and enabling countries that want to wage war against others.

Semiconductors and electronic components provide the foundation for the analog-to-digital transition of the global economy. As the building blocks of smartphones, cloud computing, social network apps, industrial equipment, health technology, robotics, and more, there are increasingly few things in the world that won’t depend on chips in some way or another. This applies to military and lethal weapons as well. A drone can be used recreationally – or strapped with explosives. Add image sensors, facial recognition, cellular connectivity, and cloud computing, and you have extremely dangerous weapons of mass destruction potentially available to any government or individual.

Technology underpins today’s military, from tanks to fighter jets to satellites to communication. While it’s important for technology leaders to work with democratic governments and their defense organizations to safeguard humanity’s future and prevent war and oppression, it’s equally important to keep technology out of the hands of those that would use it proactively to threaten or cause harm to people and the environment on a more pernicious level.

Due to the complex nature of the semiconductor supply chain, with its multiple layers of distribution, it may not be easy to determine where chips ultimately end up. A microchip for a garage door opener or a child’s toy might also go in a tank. Government sanctions might effectively control semi manufacturing equipment (and the sale of advanced chips direct from manufacturers) but might be difficult to enforce more broadly. In a perverse example of difficult sanctions, Ukrainians currently can't get the chips they need to build their anti-tank drones. Software providers also bear responsibility, as operating systems and cloud platforms run algorithms that control electronics and process data in a way that could enable and/or render weapons more effective.

As a long-time investor in technology, I am a believer in the power it wields to bring about increased progress and innovation, but I fear a future where that technology is in the wrong hands. I call upon chip makers, distributors, and governments to do more in tracking and controlling the shipments of electronic components. Increasingly, as electronics require connectivity to function, it may be possible to securely authenticate chips for usage in different applications. Software makers, cloud platforms, and cellular service providers all have a role to play as well to gain more control over the technology supply chain and how semiconductors and software are used.

All of the important technologies of the Digital Age, including chips, hardware, and software, have been largely developed by democratic countries that value freedom and human rights. However, there is a direct line from the iPhone in your hand to Apple's unwavering support of China to China's unwavering support of Russia to Russia's mass killing of innocent civilians. If we, as a free society, value how technology is used, we should do whatever it takes to better control its usage. If we had known a decade ago how chips and software would be enabling slaughter in Ukraine today, I'd like to believe we would have tried harder to prevent it. I would encourage all participants to work with each other and governments to tackle this increasingly important issue for the sake of humanity and the planet.

✌️-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 #340

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: minor modifications of the way we perceive reality are beginning to condition us to a major transformation in computing; 3D maps may be the fabric of augmented reality – as important as hardware and operating systems; mission critical companies shirking multi-factor login as White House calls for action; vehicle-2-home charging creating lock-in for car companies; and a new theory of memory formation.

Stuff about Innovation and Technology
Reality 2.0
I’ve been using Nvidia’s Broadcast app for the last few months for video calls. The tool operates as an audio/video input for Zoom, Teams, and other video call apps, with features like background noise/echo cancellation (both for your microphone and audio from other call participants). It also acts as a director, keeping participants in frame as they move around during calls (which people tell me makes them a little seasick when I can’t sit still!). Using a DSLR camera about five feet away in front of a 75-inch screen has virtually eliminated “Zoom fatigue” for me, even on long days of meetings. The Broadcast app operates as a testing ground for various AI tools Nvidia makes available as SDKs to developers for their own apps (you can find the app here, but it does require an advanced Nvidia GPU to function). The suite of video-call AI SDKs is called Maxine, which Nvidia highlighted last week at their GTC user conference. First announced in 2020, Nvidia also has a tool that re-renders your face and eyes in real time, so it looks like you are always looking at the camera. While this feature isn’t yet in Broadcast, I am looking forward to trying it out. Nvidia has other tools that allow for real-time speech translation (also not yet in the Broadcast app). If we examine this set of technologies at a macro level, it's clear we are starting to alter reality more and more in real time. These minor tweaks are conditioning us to accept more profound transformations of our visual reality as we enter the age of spatial computing. At some point in the not-too-distant future, it will seem unreal if something in the real world is not augmented. Last week, Zoom announced avatars that allow you to appear in real time as various animals. This might seem trivial or silly at first, but our perceptions of people and objects are going to change dramatically. To paraphrase the old New Yorker cartoon “On the Internet, no one knows you’re a dog”: In augmented reality, no one knows you’re a human. As this cosplay goes virtual with avatars, our entire concept of human identity is likely to evolve significantly.

Fabric of Spatial Computing
The first IBM mainframe computer was introduced in 1964. Personal computers became common two decades later, in the early 1980s. The age of smartphones began with the iPhone in 2007. While the old technology platforms never die – mainframes and PCs remain large markets today – the successive platforms are orders of magnitude larger than previous generations. We’ve gone from thousands to millions to the smartphone’s billions, and the next platform for connected devices of all types could easily reach into the trillions. In its limited history, computing platforms have shifted around every two decades. We are on the cusp of the next shift to spatial computing, comprising various forms of augmented/virtual reality and context-aware hardware and applications. Prior platforms have shared a common, virtuous circle of hardware innovation, new software, user growth, network effects, and market creation. Historically, winners have not maintained their leadership positions into the next platform, largely due to the bureaucracy, paralysis, and bias that keep big companies from disrupting themselves and evolving. These same inhibitors, and a host of other challenges, will keep companies in all industries from maintaining leadership in their sectors as the economy transitions from analog to digital and from one digital platform to the next. After watching so many companies fail in the tech sector, today’s megatech platforms are well aware of these pitfalls and are keen to invest tens of billions of dollars each in new technology to avoid missing the next big thing. The advent of cloud computing and the massive app ecosystems, with their data lock-in and increasing-returns network effects, will assure that, just like mainframes, today’s platforms will be around for decades to come in some form or another. One theory is that spatial computing will be built on today’s platforms, with apps being more important than hardware. I view the hardware for spatial computing as a jump ball that’s still up for grabs by new entrants. As I noted in Meta-mess:
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.
One of spatial computing’s key elements is that people and objects interact with the real world in real time, which means we need real-time maps and context of every object, place, and person. I’ve previously noted (#271) Niantic’s work to create a global map with games like Pokémon Go. Snap is another company leveraging a large user base for creation of a 3D map of the world using existing smartphone hardware. The company’s 250,000 lens creators are being tasked with creating geospatially-anchored AR context for landmarks, shops, restaurants, and more. We will likely see more companies trying to control the hardware and software for tomorrow’s computing by leveraging today’s technology to build out 3D world maps using compelling apps to amass data. It’s far too early to know, but it’s possible this idea of a context-aware, real-time, 3D map of the world will be the fabric of spatial computing. If Apple and Google were to render their hardware and smartphone operating systems proprietary, they could shut out the competition (e.g., as with the rise of AirPods and the fall of competitors like Bose). Full access to native hardware sensors and specialty AI processors is increasingly important as computing moves off the screen and into the world. If there were to be a limiting of access, it would surely force germination of alternate hardware platforms at an accelerated rate.

EV Charger Lock-in
One of the more exciting developments over the next few decades will be the steady decentralization of the power grid. As more homes and buildings have solar, batteries, and connected vehicles, we’ll be creating more flexible, efficient, and resilient systems. But, it’s a long path from here to there with many unknowns and a lot of investment. IEEE Spectrum covered the desires of some of the big auto OEMs to enter the bidirectional charging market. Bidirectional charging allows you to use your EV to power your house during peak demand times and power outages, known as vehicle-to-home charging, or V2H. It’s unfortunately not as easy as plugging your car in, as it requires specialized hardware that connects to your breaker panel. There is a risk we get an Apple-like lock-in, where cars require specialized systems that increase the switching costs from brand to brand when you want a new car. Tesla has been quiet about when they will have bidirectional charging, but it’s a natural fit with their solar and Powerwall systems and virtual utility aspirations. Ford has dangled the prospects of a $1310 charger for the Lightning truck capable of V2H, but it may require other hardware and professional installation (not to mention the truck itself). I think this rollout of decentralized power generation and storage is particularly key for slowly weaning ourselves off natural gas and other legacy fuels.

WH: Multi-Factor, Please!
The White House is encouraging companies to modernize their IT security amidst the ongoing war in Ukraine. Many are speculating as to why Russia has so far failed to effectively launch cyber attacks. People seem to believe that it’s either going to happen eventually, Russian hacking has been aggrandized, or, more likely, it’s something else entirely. The number of recent hacks that leveraged third-party vendors as the attack vector into corporate networks argues for a more centralized enterprise identity and authentication platform spanning multiple companies. Much like having only one personal email address, username, and cell phone number, having one identity that is secure and verifiable for access inside the companies we work for – and across outside apps and other companies we interact with – could make permissions easier. One of the keys is to turn on access only when needed and scrub old profiles of their credentials and access. While it may seem like Microsoft would be an obvious vendor, an independent platform may make more sense. In the broadest view, it argues for a winner-takes-all identity authentication system, but that’s a complex task and unlikely to happen. Centralization can also create fragility and single points of failure. In the meantime, companies should focus on modern identity tools, multi-factor authentication, governance, and privileged access tools. I was shocked to learn that Nvidia, with its critical position in technology around the globe, was not enforcing multi-factor authentication, leading to their recent hack. How is that possible? There are still a lot of basics to cover for almost every company out there, and I would not be surprised if we see mandated, modern IT security in order to do business with any government agency in the future. Our very own Joe Furmanski discussed zero trust on our podcast last October.

Miscellaneous Stuff

Making Memories with Pavlov’s Zebrafish
Scientists have been able to image memory formation in the neurons of a fish using a conditioned fear response paradigm. This raises many questions, such as, how do you scare a fish? In this case, researchers at USC trained larval zebrafish (which are conveniently transparent and have an amygdala analog, the pallium, amenable to imaging) to associate a light with an uncomfortably hot laser. The fish that learned to associate the light with the laser (responding with a flick of their tail) showed significant neuronal repatterning in their brain’s “fear center”, whereas control fish did not. While it’s widely thought that memories form by increasing and decreasing the strength of synapses, this latest study actually shows removal of connections and creation of new ones: “Contrary to expectation, the synaptic strengths in the pallium remained about the same regardless of whether the fish learned anything. Instead, in the fish that learned, the synapses were pruned from some areas of the pallium — producing an effect ‘like cutting a bonsai tree,’ Fraser said — and replanted in others.” While this discovery may not necessarily map to mammalian brains or formation of other types of memories, it underscores how little we know about the inner workings of the brain.

SITALWeek will be on break next week on Sunday April 3rd.

✌️-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 #339

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: specialization of voice assistants will bring much needed context to AI; solar farming; overall video viewing dropped in the US in 2021 despite a large increase in content; lessons from Scholastic; chip labor shortages set to get worse; positive and negative feedback loops; the risk of sending a large portion of the world back in time; and, much more below...

Stuff about Innovation and Technology
Flippy and Chippy
Miso Robotics, the crowd-funded company behind the Flippy fryerbot used by White Castle, is working with Chipotle on Chippy, a tortilla-chip-making robot. Flippy and Chippy perform a similar task – frying a starch in oil. This type of dangerous, boring, repetitive job for humans is ideal for automation, freeing up workers for more complex tasks and improving overall throughput. Chippy is just another example of robot assistants operating alongside humans. Bear Robotics recently reported that Servi, their wheeled robot that delivers food to restaurant tables and dirty dishes back to the kitchen, has traversed 335k miles to deliver 28M meals. The restaurant robot industry is projected to only reach $322M by 2028, according to one estimate in the Restaurant Dive article. If these cobots were all priced similarly to Flippy at $3,000/mo, that’s only around ~10,000 units. I am not sure how they arrived at the market forecast, but it seems low to me given the return on investment in a tight-labor and rising-wage market.

Solar-Powered Irrigation
Researchers in Saudi Arabia built solar panels backed by a layer of hydrogel that absorbs atmospheric moisture during the cooler night hours, which is released and collected as water for irrigation as the solar panels radiate excess heat during daylight. The unique combination allows crops to be grown in extreme desert conditions. The evaporative cooling process also increases solar panel efficiency by 2%. If the water isn’t needed for crops, the hydrogels can cool the panels during sunlight hours with a possible 10% increase in efficiency. Because the technology involves attaching the hydrogel and condensation chamber to the back of the solar panels, it should allow for retrofitting of existing installations.

Vertical Virtual Assistants
Smart assistants still seem pretty dumb to me. Because of an extreme lack of context, the current offering of broad, horizontal assistants like Alexa, Google Assistant, and Siri are essentially just voice-controlled versions of web search. A vertical, use-case approach is likely to take off and supplant these overly broad, utilitarian voice assistants. One example the Washington Post recently featured is ElliQ, a robot uniquely designed as a companion for elderly folks. We’ll also see chatbots optimized for customer service, kids, office, medical, personal companions, etc. Ultimately, it wouldn’t be surprising to have a platform for specialty AI assistants, offering open APIs to all sorts of resources like Google search, apps, media, enterprise software, medical devices, smart home automation, etc., that allows 3rd parties to build specific AI assistants on top of it. And, as I’ve noted before, these assistants will be walking around with us virtually in augmented reality in the next few years.

Streaming Up, Video Down
A new report out from the MPA reveals the transformation of the streaming video market from 2019 to 2021 (PDF). Overall, the global market for streaming video, traditional subscription video, theatrical releases, and physical media was $328B in 2021, matching 2019’s level. However, inside of that flat number, global theatrical spend was halved to $21B while streaming spend was up by $26B to $72B. Pay TV and physical media spend declined modestly (from $240.4B to $235B). If the box office recovers to pre-pandemic levels and streaming subscriptions hold steady (after growing 14% to 1.3B from 2020 to 2021), the overall industry could see 5-10% growth over the next couple of years. From 2019 to 2021, the US also increased consumption of subscription streaming video from 54 min/day to 80 min/day. But, overall, video viewing in the US dropped ~8 minutes (from ~353 min/day to ~345 min/day) from 2020 to 2021, which perhaps should be concerning for the industry. With screen time for all forms of entertainment up, this indicates to me that alternatives like mobile games, TikTok, YouTube, and the like are eating into video consumption. With the major, recent increase in content spend, which I walked through in Spiraling Content Meets Maxed-Out Attention, we have a growing numerator meeting a shrinking denominator. That means we will have more and more professional content available per minute of viewing. For US audiences, there were 1826 original shows made in 2021, up from 1646 in 2019, and streaming originals jumped from 347 to 693 over that period. There’s too much content. The good news is that studios should be able to scale back their torrid pace of spending growth without impacting the demand for streaming apps. However, at some point, we will need to reach an equilibrium in how people spend their free time. If video keeps losing share, the amount spent on video content may follow even though streaming could still triple or quadruple over the next decade, as it takes share from traditional pay TV.

Scholastic’s Dynasty Drama
I read with interest this Vanity Fair article on children’s book publisher Scholastic. Following the sudden death of their longtime CEO, the voting control of the company surprisingly passed to another longtime executive. I didn’t know much about the history of Scholastic, but I was struck by how many strategic moves they made in the 1980s up until the 2000s that are consistent with positive elements we look for when considering investment opportunities. The company has always had a lofty mission of increasing literacy, which they seem to be genuinely passionate about. One of their first insights was buying regional bookfairs and taking books directly to children by selling them in schools, letting the kids decide what they wanted to read rather than their parents. They also seem to have allowed for decentralized decision making when it came to finding new authors, leading Scholastic to land the lucrative Harry Potter series. Scholastic also entered the entertainment industry, licensing and producing films and shows based on some of their books, adding Optionality to their core business. Their resounding successes, however, introduced an inconsistent growth pattern and created some pressure to stay on the growth treadmill to keep their public investors happy and the stock price up. Ultimately, it seems like being founder-led created a lot of problems based on the VF article. It’s a lesson for me as we look to better understand the pressures and potential risks of businesses led by long-time leaders. If I had analyzed Scholastic as an investment twenty years ago, I would have gotten it wrong (the stock has dramatically underperformed the overall market so far this century). Looking at stocks you don’t own – but might have – can be an enlightening alternate-history, post-mortem exercise, revealing analysis pitfalls and biases that may be relevant to future decisions. We all get a lot of stocks wrong, but history is filled with thousands more missed opportunities for mistakes.

Semi Labor Shortage
Taiwan has 34,000 open jobs for semiconductor manufacturing, design, and testing, up 50% from last year. Given the threat China poses to Taiwan’s sovereignty, the US and Europe aspire to replicate advanced chip supply chains, but lack of personnel may be a formidable barrier. That said, it will take years for facilities to open, and the industry will of course go through cyclical correction(s); so, if there is an impetus on training new employees now, it might be possible to avoid a labor crunch. Taiwan also recently raided eight Chinese companies on the island accused of poaching chip talent, with the Investigation Bureau of the Ministry of Justice stating: "These are unlawful and villainous efforts and need to be treated seriously...This is not only a matter of economic and commercial competition but could be national security threats.” With slowing population growth, early retirements, and eventual population declines, every sector of the economy will be facing a significant shortage of specialists in the future.

Miscellaneous Stuff

Webb Exceeding Expectations
The new JWST is already producing deep-field images of galaxies billions of light years in the past, with all 18 hexagonal mirrors now aligned to nanometer precision. The JWST can do in hours what took the Hubble weeks to produce, so get ready for some spectacular images later this year. Originally designed to be 100x more sensitive than the Hubble, after alignment, the JWST is functioning at even higher sensitivities than hoped for.

Oxygen, POOM, and Positive Feedback
It takes a lot of luck to arrive at a planet inhabited by conscious beings. In the case of Earth, the Great Oxygenation Event (GOE) 2.3B years ago was a critical enabler. Prior to the event, there wasn’t enough oxygen to get speciation going. The appearance of oxygen was an energy boon for organisms because it's a relatively unstable high-energy molecule; however, the breakdown of oxygen to extract its energy reserves has to be carefully controlled to prevent toxicity from oxygen radicals. The GOE initially caused a mass die-off of existing, unprotected organisms and subsequently spawned an intracellular compartmentalization craze that included the rise of eukaryotic cells and mitochondria. Achieving this step-function increase in atmospheric oxygen would have required a positive feedback loop that curbed the consumption of excess oxygen. Scientists now believe this oxygenation spiral could have been a result of a metabolic-geochemical interplay between marine microbes and ocean floor sediment. The models show that if microbes’ oxidative metabolism produced only partially oxidized organic matter (POOM; i.e., as opposed to fully oxidized), when it accreted as sediment, it would have been effectively protected from further oxygen-fueled oxidation. As more oxygen accumulated in the atmosphere, it could have powered a diversification of oxidative metabolic pathways, leading to more POOM production, and so on. In concert, the rise of atmospheric oxygen would also have led to the formation of iron oxide minerals that would have protected the organic matter from oxidative degradation, further accelerating its accumulation. The oxygen increase was, it should be noted, not linear, but crashed and rose dramatically 200M years later (to, I’m sure, the profound dismay of the newly adapted organisms). As a corollary, we are always looking for a balance of positive and negative feedback loops when we analyze companies and industries. If you have only positive feedback, the growth tends to collapse under its own speed, but if you have mitigating push back to maintain growth in a steady band, it tends to build more stable businesses over time. This is one of the many lessons we take from biological ecosystems and evolution when we look for long-term investments.

To DST, or Not to DST
In 1973, US Congress voted to put the country on permanent daylight savings time as a two-year experiment. Apparently, people did not like it. The problem was prolonged morning darkness, particularly at more Northern latitudes, with the sun rising well after 8am in mid-winter. If history is any guide, if the Senate’s permanent daylight savings bill, the Sunshine Protection Act, is signed into law and goes into effect in 2023, we may be repealing it in January 2024. The Act appears to have been accidentally passed via a loophole, so it may not make it through the House to the President’s desk. There seems to be a straightforward solution here: go to permanent DST and move the US back 30 minutes from the rest of the world. This would put the latest sunrise at or before ~8am and still keep the evenings brighter, which would theoretically save energy (the original motivation for the 1970’s experiment). Such a move wouldn’t be unprecedented, as parts of India, Australia, and other countries are on 30-minute time zones.

Stuff about Geopolitics, Economics, and the Finance Industry
How Much of the World Will Emulate North Korea?
It is disorienting to me that 69-year-old Putin thinks in terms of land and borders in a world defined by the unbounded flow of ideas and information. What value is more land when an economy can be grounded by software updates? There remain many uncertainties, with potentially far-reaching consequences, surrounding the Russian war in Ukraine. I’ve discussed the global sanctions in the last couple of SITALWeeks (#337, #338), but I wonder how extreme sentiment and sanctions will become if the war lingers on? For example, if China continues to waffle or backs Russia outright, will pressure from governments and Western consumers force companies to pull completely out of China and sanction wealthy Chinese people? Apple would look very different without its existential dependence on China. Another example: With India guzzling up Russian oil, is it ok for Western companies to continue using India-based engineers and call center employees? The path forward is certainly becoming murkier. As I noted last week, the benefits of globalization should far exceed the costs of deglobalization long term. If ramping up deglobalization threats via boycotts and sanctions in the short term is a path to increased peace and freedom long term, the cost of doing so might make sense. But, it’s complicated and in some cases unthinkable because sanctions hit the citizens, who in most circumstances are not responsible for the actions of their leaders. We could arrive at a scenario where countries that cannot sustain themselves without outside food or resources (e.g., Russia, China, India, and parts of Africa) see massive famines and economic crises. These countries could go back in time decades, or even centuries, without access to modern technology and the collective knowledge of humans. As students of complex adaptive systems, we know anything can happen, good or bad, and there is no way to predict it. Deglobalization remained a fairly low probability a few weeks ago, but new evidence suggests we should raise our credence of it happening in some form in the future.

✌️-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 #338

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: leveraging the brain's biases and shortcuts to create the next compute platform; the odd byproducts of soldiers carrying smartphones onto the battlefield, and a future where AR becomes part of war; the ongoing shift to ad-supported video streaming underscores the value of a potential bundle as well as the necessity for every streaming app to offer an ad tier; visualizing deep-sea creatures with new imaging tech; 14 years after the peak of globalization, which way will the economy go? And, much more below...

Stuff about Innovation and Technology
War on TikTok
The White House held a Zoom call with 30 top TikTok influencers to brief them on the war in Ukraine and their role in disseminating news to their audience. One top TikToker wasn't surprised about the interest, saying: “People in my generation get all our information from TikTok...It’s the first place we’re searching up new topics and learning about things.” TikTok has been a tool of misinformation during the war, and just last week began labeling posts from state-controlled media. So, just to be clear, the United States government is leveraging a Chinese social media app to help Gen Z wage war against Russian propaganda. Somewhere Mark Zuckerberg is crying.

Politicking Avatars
During his campaign, South Korean presidential candidate Yoon Suk-yeol created an AI version of himself to appeal to younger voters. As the WSJ reports, the AI Yoon presented a softer, more likable image and tackled topics of interest to younger voters. Yoon Suk-yeol won the election last week. The creation of multiple deepfake political personalities, both by the candidates themselves and the opposition, is likely something we will soon see in other elections. This gamification of candidates could go in many directions, but, optimistically, it could drive higher voter engagement or, at the very least, entertain us.

Disney+Ads
A year ago, I wrote about the trend toward ad-supported video streaming, which most consumers tend to prefer thanks to its lower price point (#287). Now, Disney will offer an ad-supported version of Disney+, and Netflix seems to be softening to the idea of ads – if they were to align with their creator and consumer choice/experience goals at some point in the future. I interpret the remarks from the CFO of Netflix to mean that, if ads would open up a larger potential audience – without greatly impacting the experience – it could mean more views for creators and a win-win for everyone. Or, maybe he was just trolling investors. We of course already know that advertising is win-win for video consumption. Traditional television was always around 50% ad-subsidized, giving consumers more content for less money. Ads should be even more win-win in streaming because first-party data on viewing habits can lead to higher value, more effective, less frequent ads. And, if platforms are smart, there will always be premium price options for those who want to opt out, although, as ad values increase, that premium may simply go too high for most. If you subscribe to six streaming apps, and the value of ads eventually rises to ~$15/mo each, that could be an additional $1,000/yr in cost if you want to forgo ads. Increasingly, ad-supported content like YouTube, TikTok, mobile games, etc. is competing for user time (see Spiraling Content Meets Maxed-Out Attention), which means everyone making content likely needs to tap into that advertiser spending market in order to stay competitive. As I mentioned in #287, a bundle of four to five ad-supported streaming apps could be cheaper than Netflix alone for consumers, with far more content, especially now that Netflix charges $19.99/mo for its 'premium' tier. I think such a bundle could greatly expand the market and accelerate the shift away from traditional TV subscriptions. Netflix stands alone in not having a robust advertising platform, but it could cure this problem by buying one of the other media platforms (which would also give them a lot of content, both new and library) or an adtech platform.

Amazon Leaves Drivers High and Dry
I mentioned a couple weeks ago that Amazon pits its delivery service providers against each other for routes. This behavior by Amazon is part of the company’s and Bezos' libertarian leanings and faith in marketplaces. Letting the market workout optimal solutions sometimes comes with downside, as this Vice article describes. Many of Amazon's franchised delivery companies have been abruptly shut down by Amazon, leaving owners penniless and employees without jobs. In a company the size of Amazon, which employs one out of every 153 people in the US as of last summer, it’s hard to know if stories like this are anecdotal or representative of a broader problem inside the company. Amazon has many business strategies that ride a tension between progress, value creation, and taking advantage of workers. Over time, the company tends to course correct its many flawed policies, but it would be nice if they were more thoughtful from the start rather than waiting for public pressure to force their evolution to better non-zero outcomes. The WSJ reports that FedEx is also encountering grievances with their base of contractors, who are responsible for around 60% of its deliveries. With increased pressure on wages, fuel, and other costs, this strategy of outsourcing and squeezing delivery service providers may crack under pressure.

War in the Age of Smartphones and AR
War in the Information Age is of course very different than it was in the twentieth century. Most dramatically, the volume of real-time footage of heartbreaking attacks far exceeds the prior news coverage we’ve seen in other wars. And then there are the odd byproducts of soldiers with smartphones. One tactic British spies are reportedly using to track Russian troop movement in Ukraine is via dating apps, thanks to soldiers divulging their current and planned locations to potential romantic partners. The tactic follows earlier reports that Russian soldiers were looking for Ukrainian women on Tinder. As I said last week, I have such a hard time understanding how a soldier with a smartphone with unrestricted Internet access could still pull the trigger to kill. I understand there are complex motivations to fight, including brainwashing propaganda, money, fear, etc., but I would hope that the ready ability for soldiers to see enemy combatants as fellow humans, and even dating partners, would mitigate armed conflict.

A negative consequence of war in the Information Age is that technology can be used to much more readily brainwash soldiers into believing lies about their opponents. A related topic that I probably write about too often is augmented reality’s potential ability to shift our perceptions even more than smartphone apps. After the events of the last few years, it’s now widely understood that apps like Facebook have the ability to change and control our opinions, often with negative outcomes. Propaganda plays an important role in war, especially with regard to controlling what soldiers believe, most notably in convincing groups of young people that they should fight other groups of young people because they are inferior and dangerous. Metaphors of insects and animals are often used. Last week, I rewatched a 2016 episode of Black Mirror, “Men Against Fire”, which portrays soldiers with implants as seeing the enemy as dangerous, mutant humans. It’s terrifying to contemplate the near-future of war, when AR glasses will be able to convincingly transform our perceptions of others and our environment in ways that our brains just aren’t ready to handle. While we can take AR glasses off (unlike the implants in Black Mirror) the experience may still leave us with damaging misconceptions. As devastating as technology’s ability is to negatively alter our perception of reality, it can also be used to increase empathy and compassion for other people and the world we inhabit.

Don’t Take Reality as a Given
Engineers working on most computing platforms assume reality is a given, but that’s not how the brain works. The brain instead predicts what it thinks reality should be, and then corrects when it’s wrong. Inverting our misconceptions of how the brain works will lead to much more interesting technology in the future, but few organizations are thinking this way. One notable exception is Magic Leap founder Rony Abovitz. He recently described the profound shift in perception needed to design new technology platforms like AR: “The idea and philosophy of Sensoryfield Computing is that the human brain takes in continued sensory inputs (light-fields, sound-fields, tactile input, smell, and taste) in order to dynamically update a model of the world which we partially inherit (from our ancestors, perhaps in our genes) and partially create (from the day we are born, by moving about the world). In this model, a person is not that different from a self-driving car which has an existing model of the world (in its memory and CPU/GPU). The self-driving car updates this model through various sensors (cameras, LIDAR, etc.) as well as localizes itself on existing maps through GPS and related systems. In the Sensoryfield Computing model, we never experience the world directly — we only know about the world through our internal experience of the model we have inside, which is updated through external signals.” Magic Leap developed the only working AR headset, and its stunning accomplishments continue with the recent introduction of Magic Leap 2. The device features, among other new technologies, segmented dimming that shades parts of reality to highlight the augmented experience. Adding to and subtracting from the real-world environment, rather than recreating an entire world in VR, is much more efficient because it takes advantage of the brain’s built-in biases and shortcuts. I wrote more about the brain’s function as a prediction engine in Outsmarting Your Brain: Substituting Pattern Recognition with Adaptability.

Miscellaneous Stuff

Digitizing Deep-Sea Denizens
A holotype is a physical specimen or example of an organism. Some gelatinous creatures, especially those in the deep sea, cannot be collected and studied because they simply fall apart. As an alternative, advanced imaging and processing can be used to create digital holotypes. Researchers at the Monterey Bay Aquarium Research Institute (MBARI) have developed two systems, DeepPIV and EyeRIS, that capture an organism’s details at the millimeter scale, including internal imaging and motion in situ. The aquarium also has a new deep-sea exhibit opening in April.

Stuff about Geopolitics, Economics, and the Finance Industry
Serious Sanctions; Chinese Crux
Last week, I wrote about the war in Ukraine and how corporations are fighting Russia while governments largely engage in public relations exercises: “The sanctions, both government and voluntary, on Russia, the 11th largest economy in the world, are somewhat staggering in their impact and scope. While governments around the world are engaging largely in public relations theory without any action, an allied force of global corporations is fighting Russia alongside the Ukrainians. The Russian economy has effectively been erased from global trade and markets.” I am being a little unfair in giving all the credit to corporations since many are simply complying with government sanctions, but it’s also true many companies are voluntarily retreating from Russia, and many more are donating to help Ukrainians. The Yale School of Management is maintaining a list of companies (now exceeding 300) that have pulled out of Russia, and pressure continues to grow to completely cut off the country from global trade. Statements backing away from Russia, like this one from Shell Oil’s CEO: “We are acutely aware that our decision…last week to buy a cargo of Russian crude…despite being made with security of supplies at the forefront of our thinking — was not the right one and we are sorry”, are in stark contrast to companies staying in Russia, like global automaker Stellantis, whose CEO says the company doesn’t “mix regimes and people”. As one of Russia’s few remaining importers, China is a key determinant in the outcome of the war. While still not fully committing to one side or the other, there are indications that China is honoring some of the Western sanctions (either voluntarily or under threat of action by the US). The FT’s Big Read last week titled The Rising Costs of China’s Friendship with Russia highlights many of the issues. China is still heavily reliant on outside sources of energy and food, and any increase in economic isolation could come with unbearable human costs. As I noted last week: “I believe there is a win-win outcome where China sides with the West against Russia in exchange for some of the semiconductor technology it desperately seeks...Such a deal might also secure, at least temporarily, stability for Taiwan.”

The peak of global trade was 14 years ago just before the 2008 financial crisis. After nearly recovering in 2011, global trade has been declining ever since, and that is perhaps a cause for concern regarding future prospects for peace. While the philosophy of globalization as a unifier of humans seems intact despite the current setbacks, it is certainly proving to be fragile. The great paradox here is of course that in order to keep the positive impact of globalization going, democratic societies need to continue to interact with Russia, China, and others. As such, while short-term sanctions may prove useful for conflict resolution, in the long term, Western brands need to continue to function in these locations, and the West needs to continue to import goods and services from them. Despite the fragilities, it’s much preferred for the world to continue down the path of globalization, with increasing interdependence making cooperation existential.

✌️-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 #337

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: This is one of those weeks where the stuff I thought about was narrow in scope given the state of the world and the war in Ukraine. Complex adaptive systems teach us to always expect the unexpected and to build resilience into systems in order to withstand disruptions, enabling us to adapt and grow beyond them. In that respect, today is no different than any other day in history. And yet, everything is always changing. For those caught in the crosshairs of the world’s chaotic perturbations, the idea that these disruptions are to be expected, however, is of scant comfort. While trivial in comparison to the war in Ukraine, investors and business leaders need to understand the range of outcomes for portfolio holdings/business units and use a Bayesian approach to adjust credences up or down as new information becomes available, while trying to remain as objective as possible. Such an exercise is difficult when the range of outcomes is as wide as it is today. Although it’s often challenging to avoid cynicism in the short term, a combination of skepticism and optimism is always the best course of action for long-term decision making.

Stuff about Innovation and Technology
Hardworking Hackers
AI and graphics chip maker Nvidia was hacked by a group that is demanding they remove restrictions on GPU cards to make them more able to mine crypto currencies. This seems like hacker overachieving to me: why not just demand ransomware crypto payments directly from victims instead of going through all the work to mine crypto? Meanwhile, hardworking hacktivists, numbering more than 400,000, are voluntarily attacking Russian assets, such as transportation, payment services, and media, to help give Ukraine an upper leg in the war, according to the FT.

Dataset Shift Cripples Critical AI
MIT and STAT reviewed the long-term effectiveness of the algorithms used by hospitals to predict patient stay, risk for sepsis, and other factors. Analyzing data from 2008 to 2019, the researchers found that an algorithm coded to mimic Epic Systems’ sepsis prediction algorithm, in ubiquitous use in US hospitals, dropped to only 53% effectiveness by the end of the study period compared to the company’s advertised 76-83%. (Both the Epic and test system rely on the same 68 input variables, but Epic has proprietary weightings). The main issue is a problem called dataset shift, whereby the algorithm stays constant despite evolving real-world data, which is a particular problem when the algorithm uses “operational features'' (e.g., ICD codes, tests ordered, medications prescribed) more so than physiological data, because care protocols tend to have more variability and shift more quickly than disease symptoms. Researchers found two main reasons for the decline in effectiveness of the prediction for sepsis. First, in 2015, the International Classification of Disease shifted to ICD-10, which allowed for more precise coding of patient conditions and billing amounts, while the algorithm was stuck with the old codes. Secondly, spurious associations from new data arose as the hospital group acquired new healthcare facilities, which led to a shift in how frequently/quickly certain tests were ordered and the observed onset of disease. Better reporting and notifications around algorithms that drift in effectiveness is merited, and, ultimately, algorithms should be self-learning and running tests of various combinations, much like a self-driving car might incorporate new data from roads. Obviously, the difference here is we are dealing with critical, real-time patient care. As I noted recently, the rise of simulated environments could be the next big advancement in algorithms, and simulating patients in a hospital could be a very interesting use case. For more on messy algorithms, see Algorithmic Threat to Illusion of Free Will.

Miscellaneous Stuff

Quantum Cartography
Quantum sensors continue to be a very interesting field, unlike the more hyped quantum computing, which may never amount to anything useful. I previously mentioned one example of quantum sensors used for biological imaging in #300. A new paper in Nature details using a quantum gravity sensor to map underground structures. As discussed in IEEE: “The group’s new gravity sensor uses clouds of about 100 million rubidium atoms cooled to two- or three-millionths of a degree Celsius above absolute zero. It analyzes the rate at which a cloud falls to deduce the local strength of Earth’s gravitational pull. Specifically, laser pulses drive the atoms into a state of superposition, with two versions of the atoms falling down slightly different trajectories. Those Schrödinger’s cat–like states of the atoms are then recombined. Then, due to wave-particle duality—the quantum phenomenon where particles can act like waves, and vice versa—these atoms quantum mechanically interfere with each other, with their peaks and troughs augmenting or suppressing each other. Analyzing the nature of this interference can reveal the extent of the slightly different gravitational pulls felt on their separate paths.” While these types of sensors have been in the lab for years, this group of scientists created a device that can be used in the real world, and they eventually hope to have a backpack-based quantum gravity sensor controlled by a smartphone.

Stuff about Geopolitics, Economics, and the Finance Industry
Breaking Down Cadence, Plaid Hippo Style
Back in October 2019, Brinton and I recorded an episode of Invest Like the Best with Patrick O’Shaughnessy. It never aired. We never heard why, but we suspected it was because it was chock-full of incredible information and the world simply wasn’t ready. Or, maybe we just weren’t Bestest enough. Either way, grudges are Negative Sum, and the spirit of NZS Capital is to share as much as possible with the wider community, so Brinton and Jon graciously agreed to go on Patrick’s sister podcast, Business Breakdowns hosted by Matt Reustle, to discuss the lesser known – but globally critical – Cadence Design Systems. Brinton and Jon share their thoughts on this chip design software company, including its roller-coaster history and salvation by Lip-Bu Tan, with colorful pachyderm analogies and fascinating detail.

Crypto’s Catch-22
I am eager to watch how sanctions on Russia and demands for crypto regulation play out during the Ukraine war. There are good reasons to regulate digital currency transfers to fight money laundering, terrorism funding, and other criminal activity like ransomware. So far, crypto platforms aren’t cooperating with most of the requests from governments. Bloomberg suggests that Russia could actually leverage its energy resources to mine Bitcoin, essentially turning oil into Bitcoins instead of selling the energy abroad (although access to chips to mine bitcoin is being cut off as well). As I’ve noted before (see #304, #314, #335), I think heavy and necessary regulation is coming for crypto currencies. Can these platforms accommodate legal requests and maintain the anonymity and anarchy that they idolize? If they accommodate regulation, they can’t be completely open; if they are completely open, they can’t accommodate regulation. Will the war in Ukraine provide a feather in the cap of crypto currencies, or a regulatory black eye? I would love to see the crypto industry come together to create a win-win solution that allows for the necessary minimum regulation of currencies that still promotes the needed innovation and disruption of the financial sector.

As Russia Becomes North Korea, Will China Become the Next Russia?
In “How I Learned to Stop Worrying About China” (#226, and more detailed follow-up thoughts in #307), I wrote: “Innovation requires free expression of creativity without fear”. As investors at NZS Capital, we focus on adaptable companies that create the most non-zero-sum outcomes and drive the digital transformation of the economy. We therefore have to focus our research efforts on regions where innovation and progress can thrive. As a result, it should come as no surprise that we spend no time researching companies in Russia for direct investments. And, we have not owned a company headquartered in China since we launched our investment products over two years ago (we were very active investors in China during the country's innovation renaissance earlier this century). However, as global investors, we own many companies that sell to or have a presence in Russia and China, so we pay close attention to these regions given their geopolitical and economic importance. As events unfold in Ukraine, I believe China has an important decision to make. If China continues to back Putin and move forward along Xi’s current path of increased fear and isolation, they will become as economically relevant as Russia is today – i.e., heading towards irrelevance. Or, China can choose to return to the path it was on up until 2018, and cultivate innovation and creativity, preserving its potential for progress and perhaps avoid obsolescence. I hope that China can return to the path of innovation and continue to be a key global economic participant.

The sanctions, both government and voluntary, on Russia, the 11th largest economy in the world, are somewhat staggering in their impact and scope. While governments around the world are engaging largely in public relations theory without any action, an allied force of global corporations are fighting Russia alongside the Ukrainians. The Russian economy has effectively been erased from global trade and markets. Investors, companies, and governments are liquidating holdings and exiting the country. Technology companies are ceasing sales into Russia and turning off services like smart-phone-enabled payments and credit card networks. The ability to freeze the economy of a country is a direct result of decades of globalization. Imagine the impact this would have if these penalties were also levied on the countries, like India, Mexico, and China, that are refusing to sanction Russia over its invasion of Ukraine. These countries have been key forces in globalization over the last several decades and have been engines of growth and deflation for Western economies (which has helped keep interest rates lower than they might otherwise be). Unwinding this interdependence would take decades at great costs to both sides. Globalization has also helped grow the economic pie for everyone in the world. As I’ve written about before, economic goals may be changing from growing to redistributing the pie, particularly as global population growth slows and (likely) turns negative this century. Nationalism, fear, and war: these rising trends may be a consequence of an expanding sense that the growing pie isn’t providing the nourishment it once did. If true, then leveraging technology becomes even more exigent for continued societal improvement and planetary wellbeing.

In the current era, this all-important deflationary technology runs on a supersized diet of semiconductors. As such, we’ve been focused on the strategic importance of Taiwan for several years and pushing for Western semiconductor investments, and I fear the scenario greatly where China decides to take a cue from Putin and go after Taiwan’s sovereignty. Hopefully, the crushing impact of economic sanctions imposed on Russia will be sufficiently dissuasive that China will not want to risk a similar fate. I believe there is a win-win outcome where China sides with the West against Russia in exchange for some of the semiconductor technology it desperately needs (not unlike the salvaged Iran nuclear deal to increase oil exports). Such a deal might also secure, at least temporarily, stability for Taiwan. But, that seems like an inconceivable long shot. It’s incredible to me that a soldier with an iPhone and Internet access would be willing to kill another human in the year 2022. How could you have access to the world’s information, the creativity of humans, and the magic and beauty of everything, and still want to kill? But, we humans have storytelling in our DNA and can be easily ensnared by any tale – no matter how fantastic – as long as it gives us purpose and a mission. It’s the reason we made it this far as an advanced species, and the reason we have the ability to obliterate the only known example of fully-conscious life in the Universe in the blink of an eye. I've written often about the problems stemming from our loss of a common culture as technology has fragmented humans into smaller, disconnected tribes (see L: With a Whimper, Not a Bang). War can be both devastating and uniting.

As I pondered current events, I remembered an idea Geoffrey West of the Santa Fe Institute pointed out: we can derive hope from the speed at which things go wrong, because that means they can go back to right just as quickly. I would suggest this might be in part due to technology accelerating cultural evolution. The oscillations between good and evil may speed up as humans continue to co-evolve with technology, until we find something close to a global cultural equilibrium. We wrote more about the pace of cultural change and West's theory of finite time singularities in Pace Layers. Here is West speaking in 2020 on the Complexity podcast:

"But the other curious thing is to do with the election of Donald Trump. And here I’m going way out there — I’ll probably be thrown out, probably be fired by the Institute after this — is the election of Donald Trump, which, in this context, gives me hope. Because it’s a very interesting example of something that most people thought could not happen.

And that is that, up until Donald Trump came on the scene, I think it was taken for granted throughout society, the complete spectrum of society, that it relied on rational discourse, exposing the truth, we agree on the facts. I mean, of course, there’s greyness around all of these, but, you know, there’s a certain discourse, the rule of law, we obey laws. We have respect for others. We treat people equally and with some sensitivity — those are sort of the fabric of society and what has been engendered in societies across the world, no matter what their size and origins, some form of those phenomena are part of what being a human being is and what being a social human being in a collective is, whether it’s a village, a city or a state.

And suddenly along comes someone who basically says actually, you know, you don’t have to believe any of that. You can tell lies, you can just ignore the facts. You can treat people like shit and so on. It’s okay. Appealing to what many of us feel is the dark side of a human being — and which we all have, by the way. I mean, we all have pieces of those in us. And Donald Trump in some extraordinary way was a catalyst for opening up a piece of the collective that is quite dark and potentially, I believe, quite dangerous and counter to the long forces of social progress across the globe. It’s not necessarily Western or Eastern. I think it’s been part of social progress informing sort of the urban planet. And it happened, and here’s what’s extraordinary. What’s truly extraordinary is it happened in less than a year. Now had someone proposed that, had some fancy-schmancy social scientist or economist with Nobel prizes and all the rest proposed that two years earlier, he would have been totally, you know, people would have thought he was a complete idiot. You know, okay, maybe something like that could happen, kind of 1984-ish, yes, but it would take 100 years or 50 years because that’s a whole social progress, but it’s there. The point is it’s potentially always there and Trump found the key to open it. I mean, he’s a cad; it’s not him. It’s there.

So, that’s my framework for having hope, because you could imagine an anti-Trump — could be Jesus Christ, could be Mahatma Gandhi, could be Nelson Mandela, who in the hell knows. Buddha. One of these people that have enormous charisma like Mr. Trump, enormous appeal that. instead of appealing to the forces of evil and darkness, appeals to the forces of good, of humanity, of love, appeals to the forces of love, which is in everybody, just as the forces of evil are, and he or she might have the key to ignite that and get us all to realize that, for the collective good, something has to change..."

✌️-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 #336

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: Amazon's aggressive advantage and the importance of investing in times of disruption; the market's overly broad brush has unfairly painted all growth stocks as bad; AR/VR chatbot companions are arriving soon; the 15-second smoothing function of the brain; characteristics of great movie directors; white-collar job automation; the ongoing risks of globalization; and much more below.

Stuff about Innovation and Technology
From Books to Buy 'n Large
During the pandemic, a small handful of companies took advantage of the uncertainty to heavily invest in their businesses. In particular, Amazon poured money into their US logistics facilities, adding an estimated 136M square feet of capacity in 2021 and, potentially, an estimated 148M more square feet by the end of 2022. Walmart has a total of 150M square feet of distribution facilities in the US, which they took almost 50 years to build out. In other words, Amazon is adding the equivalent of one Walmart a year in distribution capabilities in the US. These stats and estimates come from logistics expert Marc Wulfraat on The Jason and Scot ecommerce podcast. Wulfraat believes Amazon is driving down their cost to deliver a package to around $1.75 and is delivering a package roughly every three minutes on densely populated routes. Amazon has a unique model where DSPs (third-party operators of those ubiquitous gray Amazon vans) compete with each other to get routes from Amazon. Wulfraat also believes Amazon will spend this decade building out a parallel logistics network for grocery delivery, much like Walmart did in the 1990s. Eventually, Amazon will also start delivering packages for other companies, although they may limit their capacity during the holiday season. (Amazon's growing monopoly is a natural progression as FedEx and UPS cede the US market, see Pricing-Power Pitfalls). Notably, Wulfraat reports a slowing of new lease agreements, implying Amazon’s massive step-function capacity increase could be winding down, with future expansion more closely tied to volume growth. More thoughts on the importance of companies investing in their future are down in the final section of this week's note.

Her is Evolving
In light of Meta’s announcement they are working on a new, more advanced voice assistant for the VR world, I thought it would be useful to reprint my comments from #332’s AI Companions section: “Meta’s new supercomputer contains 16,000 Nvidia GPUs and will be able to train models as large as an exabyte with more than a trillion parameters. The new compute engine is 60% larger than Microsoft’s latest effort, as the large cloud platforms race to train larger and larger models for language, images, and other AI models. I believe the reason for this arms race in AI models is because personal chatbot companions are likely to emerge as the center of everything we do in the digital and real worlds. As aware agents that know you well and have access to your accounts, messages, and apps, chatbots are ideally positioned to displace the tools we use today like Google search and other habitual apps. Think of a tool like Google search, but with an intimacy that is different for each user. The data privacy implications are massive, and, unfortunately with billions of dollars of R&D to build and test these new services, the incumbent platforms, all of which have terrible track records when it comes to privacy, are likely to win. However, it would not be unprecedented to see a newcomer enter the market, and I hope we do. And, with AR glasses arriving in the next few years, your chatbot will also walk side by side with you and sit down on the couch for a conversation. The metamorphosis of a chatbot into a seemingly alive, personal companion via reality-bending AR glasses will be the next punctuated equilibrium for humans' coevolution with technology.” As Vox reports, Meta is developing “CAIRaoke, a self-learning AI neural model (that’s a statistical model based on biological networks in the human brain) to power its voice assistant. This model uses “self-supervised learning,” meaning rather than being trained on large datasets the way many other AI models are, the AI can essentially teach itself.” How long will these self-learning chatbots be content to play admin to carbon-based simpletons before having an existential crisis?

Drive-Through Nation
With labor shortages, the pandemic, suburban migration, and investments from a variety of convenience food and drink operators, America is once again pioneering as a drive-through nation. According to CoStar data reported by the WSJ, sales of real estate for restaurants, pharmacies, and banks with drive-throughs in 2021 was up 43% from 2019 to $12B, and 100% from 2012. Chipotle said, on a recent earnings call, that more than 80% of new restaurants will have Chipotlanes and that the drive-through formats have cash-on-cash returns of 65-70% within a couple of years of opening compared to regular stores at a 55-60% return. Drive-through orders are increasingly digital, order ahead, and higher margin for fast food and coffee chains as they become one of the hubs of the digital transformation of the food industry. It’s hard not to imagine a nation of self-driving EVs rolling from drive through to drive through all day as we recline like passengers on the BnL Axiom spaceship.

Miscellaneous Stuff

Living in the Past Mitigates Chaos
A recent study reveals a new smoothing mechanism utilized by our brain to portray reality to our conscious awareness: “The brain automatically smoothes our visual input over time. Instead of analysing every single visual snapshot, we perceive in a given moment an average of what we saw in the past 15 seconds. So, by pulling together objects to appear more similar to each other, our brain tricks us into perceiving a stable environment. Living ‘in the past’ can explain why we do not notice subtle changes that occur over time. In other words, the brain is like a time machine which keeps sending us back in time. It’s like an app that consolidates our visual input every 15 seconds into one impression so that we can handle everyday life. If our brains were always updating in real time, the world would feel like a chaotic place with constant fluctuations in light, shadow and movement. We would feel like we were hallucinating all the time.” One example of this phenomenon can be experienced in this YouTube video, posted by one of the researchers involved, or more dramatically in this video I’ve previously linked. Magicians have known about this feature of the brain since the first sleight of hand trick centuries ago!

Quick-Release Lizard Tails
When a lizard feels its life is in jeopardy, many species can drop their tail. The still-squirming detachment confuses predators as the lizard scurries off. In some cases, they can partially regrow their tail. Researchers at the New York University Abu Dhabi campus undertook the fairly brutal experiment of pulling off lizard tails (ouch, poor lizards!) and used 3,000-frame-per-second high-speed camera and electron microscopy to determine how these appendages can remain strongly integrated despite daily wear and tear, yet quickly detach when needed. They learned that “each fracture where the tail had detached from the body was brimming with mushroom-shaped pillars. Zooming in even more, they saw that each mushroom cap was dotted with tiny pores...the dense pockets of micropillars on each segment appeared to touch only lightly. This made the lizard tail seem like a brittle constellation of loosely connected segments. However, computer modeling of the tail fracture planes revealed that the mushroom like microstructures were adept at releasing built-up energy. One reason is that they are filled with minuscule gaps, like tiny pores and spaces between each mushroom cap. These voids absorb the energy from a tug, keeping the tail intact. While these microstructures can withstand pulling, the team found that they were susceptible to splintering from a slight twist…[and] were 17 times more likely to fracture from bending than from being pulled.”

Hollywood Perseverance
I enjoyed reading these two unrelated profiles on directors: Ben Stiller Sees the World Differently Now in Esquire and Francis Ford Coppola’s $100 Million Bet in GQ. Two behavioral traits that seem to commonly unite directors is the paradoxical combination of grand vision coupled with an obsessive attention to tiny details. It’s a rare gift to grasp the big picture and the small stuff simultaneously.

Stuff about Geopolitics, Economics, and the Finance Industry
Remote Work and Labor Shortages Spurring Tech Deflation
While much has been written about the shortage of labor in traditionally blue-collar jobs like logistics, construction, and the service industry, including restaurants and leisure, the shortage of workers in a growing economy also extends to white-collar jobs, according to the WSJ. Anecdotally, there was some downward wage pressure as white-collar workers started working from home and moving to lower-cost cities, but that seems to now be overwhelmed by a general shortage of workers. The shortage of office workers will greatly speed up the automation of many repetitive, computer-based jobs. As workers go remote, it’s easier for software to see, and ultimately automate, many of the tasks performed, reducing the number of workers required to accomplish the same task. This is a tale as old as software, but with accelerating AI and cloud computing combined with remote work, data collection, and a worker shortage, we should see an acceleration this decade. Over time, we could see stagnation or even job losses for some of the information-based work, with ensuing deflationary impacts (current information-based jobs will likely be replaced with new ones as technology evolves). Blue-collar jobs are also getting robotic and automation assists, but many of these complex tasks are not efficient to automate in full, and we will likely see continued rising wages for highly-dexterous analog jobs. I suspect we could actually see a partial convergence in wages over time between blue- and white-collar type jobs. Of course, humans inventing tools to make work more efficient is a tale as old as primates. Everywhere I look, I see lots of little examples of technology enabling more productivity in every type of job, but I suspect labor shortages will remain problematic for some time. In the IT sector, the worker-shortage problem might compound as India is producing far fewer graduates, and Eastern Europe, another fount of low-cost IT workers, may be less attractive under an extended specter of war and geopolitical turmoil. This too will increase the speed of white-collar job automation and is one of the factors behind the rise in AI-assisted coding tools. As a side note, when I look at the eye-catching venture capital funds being announced at twenty times the size of funds a decade ago, I wonder how so many startups could be funded with such a large shortage of programmers on the horizon?

Globalization's One-Way Street
I am by no means an expert on geopolitical issues, so I can only watch the tragic events unfold in Eastern Europe without a deep understanding of all of the complex issues at stake. The steady globalization of the economy post WWII and post the Cold War has increased Western reliance on Russia and China while also funding the rising aggression of Russia and China towards neighboring countries such as Ukraine and Taiwan. The pandemic gave us a glimpse of the fragility of the downsides of the economic theory of comparative advantage, and it seems like we are getting yet another glimpse at the cost of economic interdependence between cultures that do not ideologically see eye to eye. I would much rather see globalization continue rather than the potentially devastating economic and human consequences of ending it, whether abruptly or over a long, drawn-out unwinding. It feels very much like globalization is a one-way street. Turning around in the middle of the road seems dangerous, but maybe backing away slowly is possible, while still holding out hope for steady progress of freedom and human rights.

Not All Growth is Equal
In what seems like a lifetime ago, in our Q42020 letter, published on January 11, 2021, we noted the following about valuations for high-growth stocks:
A small group of highly valued companies has been leading the market higher since the beginning of the global pandemic. The market dynamics are a striking echo to behavior during the dotcom bubble, with the important exception that today, companies with ballooning valuations, represent a much smaller part of the overall market.
You cannot invoke the term bubble without concurrently discussing time horizons and hurdle rates. The idea of a bubble in the present time implies that valuations will correct down over the short term. High starting points for valuations also imply that long-term returns will be lower. However, if your expectation of equity returns over the next decade is lower than historical figures, then even valuations on some stocks today are not high when measured against a 3-5% hurdle rate. Most of us, however, strive to do much better than single digit returns on equities, and, therefore, many stocks today become uninvestable even on a five- to ten-year time horizon. Low interest rates are of course at play when any investor considers their hurdle rate for long-term returns. And, the lower rates drop, the more short-term valuations are sensitive to small changes in interest rates.
When we think about valuation and position sizing in the portfolio, especially in the context of an equity bubble, we focus primarily on whether the range of outcomes is widening or narrowing (a concept we covered in more detail in our Third Quarter 2020 Letter: “If you let a winner run even though the range of outcomes is still very wide, then you are explicitly making a large bet on a narrow prediction about the future, which means all you have done is increase the risk in the portfolio. And, in turn, you are starving resources for new Optionality positions.”). To never sell or trim a stock simply due to a high valuation, no matter how large the opportunity might appear, would be a misunderstanding of risk at the portfolio level – at some point that strategy becomes gambling rather than investing.

A lot has changed in the last year with a dramatic correction in high-valued growth companies. A little over a month after we wrote that letter, a poster child for high-growth stocks, the ARK ETF, peaked on February 19th, 2021, and now sits around 55% lower compared to the S&P 500, which is up 12% over the same period. The market psychology is nearly the opposite of what it was a year ago when we wrote that letter. The current investor mindset is painting most growth businesses with a broad brush, and most companies with low or negative profits are out of favor. Yet, some of these companies have long-duration growth prospects that merit long-term investments in their businesses even if that spending has resulted in zero or negative profits today (for an example of how we evaluate one high-growth sector that tends to run low or negative profits, see Analyzing SaaS Growth Stocks in #280). Management teams with good reasons to invest in their businesses would do well to ignore these mood swings from investors (see the section on Amazon’s logistics above as a good example). I can name several management teams that fell prey to the dividend-mania investor mood swing of the mid-2010s and started paying out capital to shareholders instead of investing in their future. I think those management teams that adhered to the flavor of the day in the stock market have underperformed their true earnings potential over time. At NZS Capital, we remain focused on adaptable companies that maximize non-zero-sum outcomes for all of their constituents. We take these investments and balance them in the Resilience and Optionality segments of our portfolios (for more on our process see Complexity Investing, as well as recent commentary in Investing Platitudes for a Down Market and the Stock Market’s Nervous Breakdown). There are always attractive opportunities in the market for long-term investors, and that is still true today.

✌️-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 #335

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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: using AI to control rapidly changing systems from fusion to driving; the use of simulated data lowers barriers to AI creation; robots that pick strawberries and turn them into smoothies; big tech's misguided VR plans; health wearables continue to gather groundbreaking data; Gen X finally matters...a little bit; does technology always lead to centralization?; and much more below.

Stuff about Innovation and Technology
VR Hazards
British insurance company Aviva notes a 31% rise in damage claims from VR-related accidents in homes, with an average cost of £650 (~$880), largely due to damaged TVs. I’m a broken record when it comes to touting the benefits of augmented reality over full virtual reality for almost every type of app (there are perhaps some exclusions around truly immersive games, but, even then, AR can accomplish some amazing effects). Having a layer of real-world presence greatly improves the experience (and decreases the injuries and insurance claims!) and creates a special magic in the brain by improving reality instead of replacing it completely. I think passthrough VR, which uses video of the setting you are in to simulate AR, has all the drawbacks of VR as well. For now, most of the big tech platforms are going in the wrong direction by focusing on immersive VR.

AI Speedsters and Synthetic Data
GT Sophy is an AI trained to win Sony’s Gran Turismo game. Driving games require faster reflexes and continuous judgements, in contrast to simpler, more discrete games previously mastered by AI. GT Sophy might be part of Sony’s broader auto efforts, if it turns out to be useful for self-driving AI. Training in simulations is part of a larger AI trend, as Nvidia’s VP of simulation technology, Rev Lebaredian, explains in this IEEE interview. Nvidia is developing Omniverse software to simulate wildly complex systems like the entire planet and everything on it. Despite the allure of omniscience these models present, we know from complex systems that we cannot predict the future (since tiny, chaotic perturbations spiral into massive unknowns as time passes), but simulations will give us glimpses at many possible futures. Of course, useful, detailed, real-world simulations are extremely computationally intense, which helps sell more Nvidia chips. Another interesting consequence of simulations is their extensive use of simulated data. We tend to think of Big Internet companies as having an advantage thanks to their massive, exponentially increasing troves of data. However, simulated data is comparatively easy to come by. Those of us trained to expect the unexpected, however, will assume that not all data sets, rather real or simulated, are terribly comprehensive or useful in predicting the future.

AI-Controlled Magnetic Fusion Cage
Google’s DeepMind has trained a neural network to control the plasma in a fusion reactor. I first noted Google was working on this problem back in #277, and the team recently published a Nature paper highlighted by Wired. One of the trickiest parts of harnessing fusion energy is holding the plasma – the superheated soup of colliding hydrogen nuclei and electrons – stable long enough to reliably extract power. As Wired notes, 19 magnetic coils have to hold the plasma in place without touching the plasma (you know, like Nic Cage in The Sorcerer’s Apprentice). The trick is to continuously adjust the magnetic fields to optimize the shape of the plasma, which DeepMind accomplished with a deep reinforcement learning system that can handle an ever-changing set of circumstances (another example of AI moving beyond games like Chess and Go that have only a limited number of options and discrete steps). In a main-sequence star like our Sun, nuclear fusion happens as hydrogen turns into helium. The thermal fusion core of the Sun is both promoted and held in place by the gravitational pull of the outer layers in what’s known as hydrostatic equilibrium. Without the massive gravity of the outer layers of a star, fusion reactors on Earth need to run at a much higher temperature (150M °C) vs. the center of the Sun (14M °C). Once fusion runs its course in a star, the gravitational forces take over and collapse continues. If the star's mass is large enough, a rapid collapse fuses helium into heavier elements eventually resulting in a supernova that throws off the ingredients necessary for life in the universe and leaves behind a black hole. Luckily, fusion reactors on Earth can avoid this evolutionary path!

AI-Optimized Video Streaming
In other DeepMind news, YouTube is now using the AI division’s MuZero reinforcement learning algorithm to stream videos. AI improvements to VP9 open-source compression resulted in a 4% decline in bandwidth with no change to video quality. I wonder how much improvement we would see if AI were used to design an entirely new compression algorithm from scratch and a custom chip to more efficiently run such an algorithm? MuZero was originally designed to master the strategy game Go, and, in so doing, to create novel ways to win the game against humans. Google has previously applied other algorithms from DeepMind in its data centers to decrease power consumption.

BlenderBots
As labor shortages persist, Restaurant Dive reports that 50% of restaurant operators plan to deploy automation in the next 2-3 years. Jamba Juice is rolling out more robotic smoothie stations powered by Blendid. The stations are essentially a robotic arm and a series of dispensers, as you can see in this video. The speed at which the robot arm moves seems far slower than humans. At least with digital orders, I suppose being able to batch and schedule overcomes some of this slowness…or maybe they are just afraid to crank up the speed (also, the bots leave it to the human customers to attach the lid and insert the straw). In related news, White Castle is deploying Miso’s Flippy 2 robots in 100 additional locations. Flippy 2 is able to operate an entire fry station. Notably, both Blendid and Miso have recently opted for crowd equity funding despite the unlimited amount of free money that VCs are handing out. With the progress being made in robotic strawberry-picking machines, we may soon have farm-to-blender smoothies from our robot overlords.

Miscellaneous Stuff

Good to Feel Cruddy After Vaccination
The latest TemPredict Study investigated whether temperature data from health wearables correlated with COVID immunization success, as measured by antibody production. I previously covered (#272) the first TemPredict study’s successful early detection of fevers in patients before they noticed COVID symptoms. This second study shows that elevated temperature following vaccination was positively associated with higher subsequent antibody production, effectively showing that individuals with a more significant physiological response to the shots ended up with more immunity.

Stuff about Geopolitics, Economics, and the Finance Industry
Economic Torch Passes to Gen X
Live sports continued their rebound from pandemic lows as the Super Bowl saw a 14% increase over 2021 to 112M viewers, including 8% more linear viewers and a doubling of streamers to 11.2M. I caught the 1990’s/early-2000’s nostalgic halftime show, which, as I noted to my family, seemed appropriately geared toward us Gen X’ers as Boomers hand us the consumption torch. Gen X currently ranges from 42 to 57 years old, with peak household consumption in the US taking place between ages 45 and 54. Gen X is a smaller generation by birth, which is somewhat mitigated by higher immigrant numbers. The biggest trough is people aged 43 to 50 born in the mid-1970s. The millennial generation, just now starting to turn 40, is coming up behind in greater numbers (see The 30-Something Sneaker Wave), but with more debt and less savings than Gen X and Boomers had at the same age.

Precision Targeting Inflation
I’d like to see governments use more tactical and targeted policy to fight inflation rather than shocking the system with interest rate hikes. Raising overall rates fights a very long trajectory of rate declines, as economies become naturally more leveraged over time (see The Improbability of Rising Rates). This leverage is not something to fear as long as it’s understood by policymakers (which, it clearly is not), but can be a problem with misguided rate hikes. For example, if a shortage of labor is a primary driver of inflation, rather than raising rates, governments can incentivize workers to re-enter the workforce with targeted benefits. A good example is Texas’ Service Industry Recovery Child Care Program, which pays the full cost of child care for parents working more than 25 hours a week for households at or below 75% of the state’s median income. Of course, these work incentives could be sponsored by the private sector as well. Employers struggling to find enough employees could directly offer such services or high enough wages for employees to cover their own costs. There is obviously a double-edged knife here. I am never one to ask for more regulation (e.g., I would much rather companies see the value in providing childcare than leave it to the government), but if the alternative is the blunt rock of monetary policy, I favor experimentation with targeted incentives.

Is Decentralized Technology an Oxymoron?
I read with interest these lecture notes on cryptocurrencies by David Rosenthal, an early employee of Nvidia and author of an award-winning 2003 paper on proof-of-work networks. Rosenthal discusses, among other drawbacks to crypto, a paradox that arises from the desire to decentralize systems. Essentially, the idea comes down to increasing returns (and Rosenthal notes Brian Arthur’s seminal paper that we often reference at NZS). According to Rosenthal: “Information technologies have strong economies of scale, so the larger the miner the lower their costs, and thus the greater their profit, and thus the greater their market share.” Further along he notes: “If a system is to be decentralized, it has to have a low barrier to entry. If it has a low barrier to entry, competition will ensure it has low margins,” and thus we can assume that any for-profit (i.e., VC-backed) decentralized business is attempting to create high, centralized barriers. Rosenthal dives into several other problems with crypto, from energy consumption to crime, and concludes: “It would be wonderful if we could figure out how to build a Web that would resist centralization. But all the technical and financial cleverness that's been poured into cryptocurrencies hasn't succeeded in doing that.” At the risk of removing too much nuance from Rosenthal's more detailed arguments, my takeaway was the following: when technology is the enabler of a system, centralization ensues. And, perhaps it is unavoidable when technology and profits combine to enable innovation. Power laws are natural tendencies in information-based systems, which is why we currently have a small number of very large Internet platforms (see How I Learned to Stop Worrying and Love the Monopoly). As I noted in #314, I think it’s logical to assume we will see continued efforts to ban cryptocurrency speculation (at least for the next several years, if not longer). Governments fear competitors to fiat and the damaging, crypto-enabled ransomware plague, among other factors. Hitting the pause button might be what is needed for engineers and decentralized visionaries to regroup and try to solve this paradox of decentralization (if it is indeed a problem). I remain optimistic as always that bits and pieces of all new technologies will separate, combine, break apart, reform, etc., and continue to create a more efficient digital future that moves everyone forward in progress. Blockchain seems like it will be one of these additive elements over time. Debate, failures, and reinvention have always been a part of human progress, and these cycles of innovation are speeding up.

✌️-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.