SITALWeek #354

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

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

In today’s post: from humanoids to mining, robotics is steadily rolling into the mainstream as developed countries see structural declines in new labor-force participation levels; those same-labor force issues are structurally deflationary and only just beginning; a look at the detailed images coming back from the new Webb telescope; power shortages and the risk of further supply chain snarls and perhaps data center regulation; evidence is building that deglobalization, much like its predecessor globalization, will be paradoxically deflationary; and, much more below...

Stuff about Innovation and Technology
EVE on Duty
Last week, I wrote about some of the complications involved in our co-evolution with an increasingly complex and expanding set of digital tools, robots, and software. Earlier this year, ADT Commercial ordered 140 EVE humanoid robots from Norway’s Halodi to perform basic security checks, patrolling buildings to ensure that doors are locked, lights are off, and no unauthorized personnel are present. If EVE detects anomalies, centrally located humans can use VR goggles to assess the situation. As the EE Journal also reports, EVE works in retail to keep tabs on stock and relocate misplaced items to their proper shelves. In hospitals, EVE can deliver meals and check on patients.

Automated Mining
The WSJ recently wrote about the rising use of automation in mining. The new tools help keep mines running, but also put mining operations in competition with other industries for highly skilled workers and AI experts. A modern new mine ramping in Australia has a control center with 70 people overseeing 600 workers and an array of automated equipment: “At Rio Tinto’s Gudai-Darri mine, nearly two dozen driverless trucks haul iron ore on preplanned courses, tracked by autonomous water carts that are used to control dust. Robots are used to transfer samples in the site’s laboratory, while ore departs the mine on a driverless train for export to customers in Asia.” The Journal also reports that rail companies in North America are keen to look at the Rio Tinto autonomous trains (a topic I also wrote about in last week’s note linked above). Whether it’s EVE or automated mining, there is clearly a slow revolution happening in robots increasingly working alongside humans. And, those humans are increasingly not entering the workforce (see below).

Miscellaneous Stuff
JWST’s Jaw-Dropping Imagery
I eagerly awaited the arrival of the first images from the new James Webb Space Telescope last week. The telescope allows us to see further back in time than ever before with even greater detail. The images JWST gathers come from light and radiation that shone as far back as ~600M years after the big bang – taking ~13B years to reach the lens – and it far outshines its Hubble predecessor. An image that covers an area of space equivalent to a grain of sand held at arm’s length is filled with galaxy upon galaxy upon galaxy. The Webb also takes advantage of gravitational lensing, whereby light that’s bent by heavy objects can enhance faint signals and enable the search for exoplanets. (Gravitational lensing was also used to prove Einstein’s theory of general relativity!). While the images are awe inspiring, the technological accomplishments of the mission are nearly as fascinating (I covered the cool tech in the million-mile-away scope here). What you might have missed in the general social media and press coverage of the first set of images is the level of detail afforded by the massive optics of the Webb. You can open up and zoom in on the big files on Nasa’s website. My favorite, naturally, is the deep field with gravitational lensing magnifying distant galaxies behind a 4.6B year old cluster of galaxies. The full resolution PNG image file of the new deep field can be viewed here. Seeing alll those galaxies as you zoom in is a breathtaking way to place ourselves in the universe, as we are able to witness it, from our little pale blue dot.

Quantum Computing, Reviewed
The amount of time the average person should spend analyzing quantum computing is near zero given that the field is largely speculative and is a lifetime away from potential payoff (quantum communication and quantum battery storage, in contrast, have more near-term potential). That said, I found this article in IEEE to be a nice background piece on the field, prior problems, and current approaches to scalability and error correction.

Stuff about Geopolitics, Economics, and the Finance Industry
Feeling the Burn
With potential energy shortages due to the war in Ukraine and extreme heat/weather patterns, we may increasingly find ourselves in situations where we need to limit power consumption, e.g., residential rationing and curtailing of non-essential industrial manufacturing. As a center for manufacturing, Germany in particular may feel a pinch. Toyota said last week that it was limiting production in Texas due to chip shortages and power availability. Of course, even if there isn’t a power crunch, prices may be unfeasible. Will an energy shortage have regulatory consequences in the data center? Can we continue to crunch out funny images on Dall-E, run massive machine learning models to sell higher priced ads, and mine Bitcoin? Total data center power consumption is typically a low single digit percent of energy use, but AI's energy intensity is growing while some countries are subsidizing the costs. Will a curtailment in industrial production, an inability to heat our houses, or a future glut of funny dog pictures finally catalyze a real effort to overhaul our sources, storage, and distribution of energy? Or, are the resources needed to accelerate the transition out of reach?

Demographics Are Economic Destiny
This video does an excellent job explaining the connection between labor-force growth, GDP growth, and inflation. I often come across the seemingly false claim that an aging population is inflationary. In fact, it’s the opposite, as consumption peaks during child-raising years and then tails off from retirement onward. There are inflationary pressures from an aging population’s increased healthcare needs (and aging in place puts pressure on home prices), but, overall, a lack of young adults entering the workforce (as we now have in the US) is ultimately deflationary. Further, rising debt and a shrinking tax-payer base tamp down economic growth. This scenario, of course, started playing out in Japan in the 1990s, Europe around 2010, China around 2015, and now the US is approaching a similar situation, hastened by the recent decline in immigration. As I’ve argued before, developed countries should do everything they can to entice working-age immigrants if they view economic growth as important (which they should!). Further, EVE (see above) and similar robots don’t have children, buy cars, go on vacations, or pay taxes. The long-term deflationary pressures are stacking up. In a world of low or no growth, opportunity is created by the companies providing more value for less and driving growth through productivity.

Reshoring Rising
This FT op-ed addressing the changing nature of global trade contains several useful charts. Notably, they illustrate the peak of trade occurring over fifteen years ago (something I’ve covered before) as well as the decline in China’s wage competitiveness, which began leveling off around ten years ago. I believe fears that deglobalization will be inflationary have little merit based on the seemingly incidental impact of years of ebbing international trade (although, it’s admittedly hard to parse causation from correlation given everything happening, especially with aging populations and technological progress). The inflationary impact could certainly change if there is a significant uptick in reshoring, but I suspect there is a natural cadence to just how fast supply chains can move capacity and repopulate their labor force. If it took half a century to globalize, it will probably take that long to reverse. A breakthrough in general-purpose humanoid robotics like EVE or other automation technology could accelerate reshoring, but such technological leveraging would provide compensatory deflation. The WSJ reports on a perfume company with annual sales of ~$1B that has rapidly shifted capacity back to the US and is now sourcing 70% of inputs from US suppliers. It would take a significant further reduction in Chinese costs to shift back overseas. Meanwhile, Bloomberg reports a rapid acceleration in reshoring and nearshoring of manufacturing, 10x above pre-pandemic levels. The construction of new manufacturing in the US is up 116% y/y (note: expensive new chip fabs in Arizona may be a big factor in that number). The CEO of GE Appliances (owned by Chinese parent Haier) began reshoring to the US in 2008 and sees it as the way to go for producing large items with higher quality for less cost. Generator maker Generac has shifted from China and now sources more than half of their supply from the US and Mexico. I’ve theorized that, after decades of shifting overseas, deglobalization is a challenge given the lack of labor and infrastructure – not to mention the lost know-how – but there is clear evidence building that, at least in some cases, reshoring is economically and logistically feasible, in part thanks to technology. As I’ve said before, remaining largely a global trade society is far better for peacekeeping and progress, so finding an equilibrium between domestic and international trade/manufacturing would be ideal for ongoing prosperity.

✌️-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 #353

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

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

In today’s post: There's a trio of paragraphs about automation and our interaction with it. Traditionally, we have co-evolved with new tech at an analog pace. But, now, robotic and software automations are happening so fast that we don’t have time to learn to use them properly or mentally/technically prepare for manual intervention when they don’t work. The problems range from robotic surgery to driving, and they will only get worse as the population ages and vital skills fade away; content producers are overspending today given a future of infinite content and finite time; consumers are now scrolling through real-world choices much like we scroll through TikTok; the challenges of refining Lithium; and, much more below...

Stuff about Innovation and Technology
Automation Paradox
Inventing tools and co-evolving with them is an essential part of being human. Historically, tools we created were adopted at analog speeds, spreading from tribe to tribe. (Consider wheels: not only did they take a long time to invent, but we’ve spent millennia figuring out the best ways to craft and implement them!) Today, however, tech adoption is moving at an ever-faster pace. We thus find ourselves in an awkward period of evolution with digital tools, where we risk losing our analog artistry for many tasks. IEEE writes about the loss of basic surgery skills, as most medical students don't have the same training opportunities now that many surgeries have gone robotic. While there are still many surgeons who are able to step in and manually take over (which happens with some frequency in robotic-assisted surgeries) – because they trained well before robots were around – how many of them will still be in the OR in ten to twenty years? There’s inherent vulnerability from the rising complexity of automated systems, reliance on opaque algorithms, hacking risks, and systemic failures (flawed software, bad data, faulty hardware design, etc.). From IEEE:
“In many ways, the issues arising in robotic surgery mirror those confronted by other professions as they have come to rely increasingly on automation. The situation is summed up as the ‘automation paradox’: The more advanced and reliable the automated system, the more crucial the contributions of the human operator. That’s because the system will inevitably encounter unexpected circumstances that fall outside its design parameters or will fail in some way. In those rare but critical moments, the operator must detect the failure and take over, quickly bringing the very human faculties of creativity and problem solving to bear on a tricky situation. Airline pilots became familiar with this issue as autopilot became ubiquitous, and the promise of self-driving cars is bringing this conversation to the general public. Surgical robots have quite limited autonomy at this point, so the surgical profession should learn from these examples and act now, changing the human-machine relationship to both preserve surgical skill and avert tragic crashes in the OR.”
For the next few decades, humans will increasingly work alongside robotics and software, and we should make some efforts to always have a failsafe, or (at the very least) a deep understanding of how the technology, algorithms, and data work together to accomplish a task (see Algorithmic Threat to Illusion of Free Will for more). At some point in the next twenty years, ongoing labor shortages and technological advances will rapidly accelerate automation across all industries as the human race ages and shrinks. Sometimes, when an algorithm makes the calls, the outcomes are bad, but at least not life threatening, as was the case with Amazon’s aggressive software-advised and costly overbuild of fulfillment capacity in the US. We don’t want to find out what happens when automated decisions are made while lives are on the line and we’ve lost the ability for analog intervention.

Tricky Tech Tango
The introduction of automation can also be distracting as we learn to live with new technologies. When you switch from doing a task manually to having some level of digital assistance, you have to learn how to handle the new levels of information and interaction. This was true of the Apache attack copters in the late 1980s, when the “torrent” of new data streaming into the cockpit overwhelmed pilots. The LA Times reports the same thing is happening with drivers now as larger screens with complex navigation, more information, and more smartphone distractions increased 2021’s fatal crashes to a 16-year high. It seems counterintuitive that layering in automated driver assist tech, like lane keeping and braking/cruise control, would ultimately create more accidents, but I think another contributing factor could be our brain giving too much credit to the AI and, consciously or subconsciously, engaging in other distractions. Essentially, we are at an uncomfortable time in our co-evolution with all sorts of systems where our trust and reliance in (semi)autonomous tech exceeds its capabilities, thus causing more problems than it solves. We’ll ultimately reach a point of symbiosis, but we need to be careful how we handle the in-between time.

Automotive Automation
Transportation is a big candidate for automation as labor shortages persist over time. Airlines have been in the news for pilot shortages lately as travel demand bounces back. And, US Railroads are short an estimated 4100 crew members needed for a return to normal operational service levels, according to a report from Loop Capital. Is there a better candidate for automation than a train on a track traveling between two points? Granted, rail yard navigation is complex, but it seems like conductors working alongside advanced technology could resolve a lot of the labor shortages. Autonomous long-haul trucking is also soon to arrive in the US, as the WSJ reported a few weeks ago.

The TikTokification of Consumption Habits
Professional content, like movies, series, music albums, etc., is generally created with some hope of monetizable longevity. If you spend $100M on a movie today, you want to maximize the duration of returns, as with any investment. The 1986 original Top Gun is still paying large backend dividends to its owners and creators, and that was even before the major success of the $1B-grossing sequel. If content has only short-tail relevance, however, it should be worth far less (i.e., demanding a steeper markdown when you discount future cash flows back to today’s value). The current problem with expected returns for content is the vast proliferation of all types of media – from TikTok to video games to you name it. When divvying up the finite time we have available to consume various content forms, the denominator has dramatically increased. And, because content is getting shorter, it no longer becomes embedded into our common cultural lexicon to the same degree as it used to (see Digital Tribalism for more on this theme). The faster we binge or scroll through content, the more forgettable it becomes – with little time to process or appreciate, it evaporates before it can enter our long-term memory. Yet, producers are largely continuing to follow the old forecasts for future windfalls, spending more and more on content despite its risk of diminished value over time. Following in the footsteps of Netflix, the other Hollywood studios are shifting business models to streaming and copying the strategy of more upfront payments and very little, if any, backend.

There were two recent interviews of media execs that got me thinking again about content’s discount rate: Jason Blum from Blumhouse (a successful next-generation Hollywood production company) appeared on a Puck podcast, and producer/investor Jeff Sagansky was interviewed for Deadline. They both argued that talent is losing out on lucrative backends as a result of streaming’s new upfront-weighted business model. But, that view seems increasingly anachronistic as it becomes clearer that the backend might be worth far less in a world of exploding media and entertainment choices. Indeed, it’s entirely possible that even the upfront is significantly overpriced. The heart of the question is: how much is the value of content being diluted by the infinite proliferation of options? Sure, someone could make another Seinfeld or Friends today that becomes a culture carrier for a generation, but those odds seem to be getting exponentially longer.

What can content investors do? A good starting point would be to hone financial models of future value to account for an ever growing denominator of content. If you think we have a lot of content to choose from today, just imagine ten years from now, twenty years...It’s likely today's production costs need to be far less for the models to sketch out with a good return. Anecdotally, this content deflation may already be happening. Lucas Shaw reports that we are entering “an age of austerity”, citing one series director who took a pay cut from $4M to $750k!. Producers can also increase the near-term monetization (higher subscription fees, ad rates, and/or ticket sales) wherever content is being undervalued today. Further, content needs to be more engaging to more people in order to enter the collective cultural memory and create lasting value, like the recent Top Gun: Maverick sequel. Abandoning streaming-era binge watching in favor of traditional weekly meted-out consumption would also help create that space needed to form memories and relationships with content. Historically, in an era of content proliferation, you were better off owning the distribution, e.g., as when cable rose to prominence in the 1980s and 1990s in the US (until the pendulum swung back to “content is king” from distribution). But, with the commoditization of distribution in the direct-to-consumer digital age, that path to prosperity no longer exists (although certainly a lot of companies make money on the distribution of content, notably Amazon Web Services and fixed/wireless Internet service providers).

Is this vanishing content phenomenon happening in other industries? What if it’s true of music as well? Many mature artists have been selling their catalogs to labels and private equity groups, but what if the rise of endless media decreases the amount of music we listen to in the future? (See Beat It Mr. Tambourine Man for more on the business of music.) I was also recently looking at consumers’ rapidly shifting beverage preferences as we see more and more “innovation” in the drinks category – from craft beer to hard seltzers to ready-to-drink canned cocktails. The rise of fast fashion is another example. Consumers seem to be rapidly shifting preferences, which might be tied to the rise of short-form media, with its real-time parade of the latest trends and accelerating churn. It feels like a rewiring of our pleasure centers to bounce from one thing to another, whether it's content, drinks, fashion, people, jobs, etc. We are scrolling real life as if it were TikTok. Will we hit a breaking point and sharply revert back to nostalgic behavior of actually paying attention to engaging long-form content and choosing one brand of brew and sticking with it for life? Or will we find a new equilibrium with this manic, second-to-second switching from ephemeral content to ephemeral cocktail in a can?

Stuff about Geopolitics, Economics, and the Finance Industry
West’s Lithium Dependence
Wired reports on China’s dominance in the lithium market, a key ingredient in the massive number of batteries needed to transition from ICEs to EVs: “...there’s an important piece missing between mine and manufacturing. Turning lithium ore into the purer lithium carbonate or lithium hydroxide needed for batteries is an expensive and complex operation. It takes years to get a lithium processing plant or gigafactory off the ground, and it could take decades and an estimated $175 billion for the US to catch up to China. China controls at least two-thirds of the world’s lithium processing capacity, and it’s this more than anything that could give it a stranglehold on the battery market for years to come.
Without urgent investment in this middle step, lithium pulled from new mines in the US and Europe might still need to be shipped to Asia and back again to be refined before it can be used in electric cars—increasing emissions, compromising energy independence, and handing China a trump card.”

✌️-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 #352

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

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

In today’s post: the negative feedback loops of analog problems will slow digital progression for many industries; the energy costs of AI; graphyne; will mobile gaming also fall victim to our ever-shrinking attention spans? inflationary Vecnas and Demogorgons and how economists' certainty of inflation should give us great comfort; interest rates have powered PE, VC, debt, and public markets for over a decade, but some asset classes are more at risk to higher rate shocks than others; and, much more below...

Stuff about Innovation and Technology
Mobile Gaming Jeopardy?
One of the consumer behavioral shifts I’ve been writing about lately is how short-form video, such as TikTok and YouTube Shorts, is taking significant share from other media. Coupled with economic weakness and inflation, short-form might even be causing subscribers to drop streaming video and music services, at least temporarily. News last week that mobile gaming platforms Unity and Niantic are laying off employees might be a signal that casual, phone-based gaming will also fall victim to economic headwinds and shifting consumer behavior. While currently totaling over 60% of app store sales, mobile gaming could be an area of relative weakness in the near future, especially given its dependence on advertising in the wake of Apple’s privacy changes. Or, are game mechanics so addictive that they will prove recession- and TikTok-proof? The WSJ reports on the rise of hypercasual games, which people play for very brief periods of time, and the psychological hooks used in the battle between developers for user attention and dollars.

AI’s Electrons
While having Dall-E mini create image mishmashes for me last week (see #349 and #341 for more on AI transformer models and how they might displace traditional software), I was wondering who was paying for the server time, and, more importantly, the electricity required to generate the stupid images? IEEE has a story on new techniques to measure the energy usage for training AI models, along with ways to potentially reduce their carbon footprint. As AI models are increasingly deployed around the clock to run neural networks, process data, respond to queries, etc., their potential benefit will hopefully more than offset the rising energy footprint of using them. The NOAA has a pair of new 12.1-petaflop supercomputers named Dogwood and Cactus. As I joked a while back, the energy required to run the increasingly sophisticated weather models might be contributing to climate change. 

Digital’s Analog Shackles
A couple of weeks ago, I wrote about Amazon’s forecasting errors, with the company even fretting during the pandemic that they might run out of employees in 2024. I’ve been thinking more about that (albeit theoretical) concern as it broadly relates to the pace of the analog-to-digital economic transition. Some industries that are based more on bits (like payments) can transition faster, but most sectors are faced with the challenge of wrangling a host of analog inputs and bottlenecks. Amazon, if it were to run out of employees before it could replace labor with robotic automation, would be an example of a digital power law running headlong into an analog wall. Looking at battery forecasts for EVs (the US will need 500,000 metric tons of lithium by 2034, a market dominated by China), you can imagine a similar digital power law thwarted by the real, analog world. In #326, I discussed this challenge in a bit more detail:
What’s surprising about Amazon and Tesla’s blistering growth is how atypical it is for non-software companies to achieve. Amazon and Tesla leverage plenty of software, but, by and large, they deal with messy, complicated, real world things – objects, people, commodities, extremely complex manufacturing/physics, etc. We expect this type of accelerating progress more from a purely software business, such as Google’s search engine. To achieve this type of growth in sectors that require the interface of the analog and digital worlds is remarkable. 
I talk a lot about the transition from analog to digital – from the Industrial, to the Information, to the AI age. Amazon and Tesla are at the leading edge of this transition, and we hypothesize that we will see digital leaders emerge in other sectors/industries. However, the rollover isn’t inevitable by any means, especially for non-data-centric businesses. And even some data-centric sectors – like finance and healthcare – remain mired in the analog world. As we wrote in Pace Layers, regulation can be an impediment to change. Indeed, regulators have been long-time party crashers for finance and healthcare, yet have been late to the party for media, retail, and autonomous driving, leaving Amazon and Tesla to grow unfettered. Maybe that is part of the explanation for their success. We are seeing some fairly large digital finance businesses built, but it’s a wide open question as to whether they will survive the regulatory gambit.
If the underlying process (not just the interface) of a business is rooted in the Industrial Age, then the transition is more complex – as Zillow can attest. Their recent strategy shift was due (at least in large part) to the messy nature of trying to herd contractors into fixing up a house while simultaneously dealing with a complex financial market, interest rate risks, macro factors, and more. Energy is another messy, analog industry that’s struggling with massive logistical hurdles in storage, grid improvements, etc. in its bid to go digital. And yet, Amazon and Tesla have successfully dealt with some equally impressive analog hurdles, so what sets them apart? Vertical integration? Lack of regulation? Was the role of luck, timing, or some other unknown factor much more important than we might think? Does it come down to the personality of the lead entrepreneur – does breaking out of analog shackles require a higher risk-seeking propensity as well as creative genius? Will we wait decades for the next digital Einstein to emerge in finance, healthcare, or energy? Are Amazon and Tesla anomalies, destined to take over (and possibly evacuate) the planet in Buy n Large fashion? Or, is it just a matter of time before we see more transformational companies and leaders pulling the analog world into the digital future?
The safest bet is that the digital transition will take decades as negative feedback loops of the real world grind back on the positive feedback loops of innovation. It’s possible progress over the next twenty years will be slower than for the last twenty as the world faces constraints in labor and other resources. There will be a divergence in speed of innovation: if it’s a matter of bits only – like we are seeing with changing consumer media preferences for short-form video – shifts will accelerate faster and faster; but, when you are interfacing wholly or in part with the analog world, the further into the transition the slower it may go. If you're running/assessing a business that is navigating the transition to digital, I think the key is to identify areas where you can successfully push harder with automation – software, hardware, and data – and analog pinch points where you can find ways to relieve pressure from negative feedback loops of the real-world’s slowly moving cogs. In many cases, it will just take time – a lot of it.

Graphyne, not Graphene
Graphene has long been sought as a potential semiconductor substrate. However, difficulty in processing the naturally conductive material to make it semiconductive has pushed out expectations. Bulk graphyne, on the other hand, is a natural semiconductor, but it has been difficult to synthesize in large quantities. Now, researchers at the University of Colorado Boulder think they have a new way to make bulk graphyne. As IEEE explains: “Graphite, diamond, fullerenes, and graphene are all carbon allotropes, and their diverse properties arise from the combination and arrangement of multiple types of bonds between their carbon atoms. So while the 3D cubic lattice of carbon atoms in diamond make it exceptionally hard, graphene’s single layer of carbon atoms in a hexagonal lattice make it extremely conductive. Graphyne is similar to graphene in that it’s an atom-thick sheet of carbon atoms. But instead of a hexagonal lattice, it can take on different structures of spaced-apart rings connected via triple bonds between carbon atoms. The material’s unique conducting, semiconducting, and optical properties could make it even more exciting for electronic applications than graphene. Graphyne's intrinsic electron mobility could, in theory, be 50 percent higher than graphene.”

Miscellaneous Stuff

Ryder, Pitt in Profile
I am a sucker for profiles of aging Hollywood stars as they enter a different era of their career. Last week, I enjoyed reading these profiles on Winona Ryder and Brad Pitt.

Stuff about Geopolitics, Economics, and the Finance Industry
Rates Put Pensions on Thin Ice
The WSJ reports on the increasing use of leverage by pensions to try and make up for years of underperformance to maintain funding for future beneficiaries. And, risk isn’t limited to leverage, as pensions have also heavily increased their investments in private equity, whose returns fare better in low and declining rate environments. VC is another asset class that saw increasing allocations from pensions and other institutional investors that is now going through a valuation adjustment, much like the public markets, with a 23% drop in new investments from Q1 to Q2 this year and some high profile deals like Klarna rumored to be raising money at an 85% lower valuation than last year. Most pensions, endowments, and other large investors hold a mixture of bonds, public equities, private equity, VC, and real estate. Chasing returns in less liquid assets was boosted by low and declining interest rates. Odds are that we will see a normalized rate environment again sooner than the market thinks (see below), but the shock to the economy from higher rates may reveal the shine on these less liquid assets is not quite as bright relative to good old liquid, public equities. Of course, public equities have benefited from low rates as well, with around half of public companies’ margin expansion having come from low rates since 2010, according to a recent research report from Empirical Research.

When Economists All Predict Inflation...
We opened our 2014 paper Complexity Investing by explaining that no one can predict the future, and we showed that economists are some of the worst forecasting offenders. Economists and policy setters have no special knowledge, and often they know less than anyone reading this newsletter. For example, Federal Reserve Chair Powell believes that inflation is an enigmatic force that defies logic. As with Vecna in Stranger Things, he claims to know where it came from or what we can do about it, but he is certain it will multiply in a runaway fashion, destroying life on earth as we know it. At least that's how I interpret statements he and other central bankers have made over the last few weeks. Surely, recent inflation couldn't be the result of fiscal and monetary policy errors that he endorsed! Of course not! Instead, it must be a mythical beast that magically sprang into being, and Powell must tame it into submission. In a discomforting admission last week, Powell said: “We now understand better how little we understand about inflation.” Really? Then by all means jack up rates with no understanding of the consequences. Here is another wild prediction of Powell’s with little basis: there will be a reversal of globalization. I’ve covered this topic many times, but, in brief: globalization is a one-way street. There is no evidence that material deglobalization is happening, or even could happen, given the population and resource constraints in developed countries. It’s a narrow prediction that’s likely to have only marginal impact over a very long time. Assuming deglobalization is an inflationary certainty, like Powell seems to believe, could cause central banks to keep rates higher for longer, only to discover in hindsight the damage caused. (There is some irony here that higher rates will make it harder for US and European companies to borrow to rebuild lost infrastructure replicated by emerging markets, thwarting deglobalization.) We don’t need to bet on continued globalization to think inflation will return to steadier, lower levels once pandemic stimulus and supply issues are normalized. Global trade peaked in 2008 and has been declining since 2011. So, it would seem, globalization may not have been the disinflationary force central bankers think it was over the last decade. Speaking at the European Central Bankers forum, Powell and European Central Bank President Christine Lagarde kept referencing powerful "forces", as if inflation is a enigmatic evil. Like the Demogorgan or Vecna, these evil forces of inflation, they seem to believe, will beget more evil inflation in a runaway spiral (which can happen in third-world countries that borrow in foreign currencies, but that kind of flywheel scenario has no precedent in a developed country with a reserve currency). Or, maybe, they just don't want to admit their own role in opening the portal to the Upside Down. Given that economists cannot predict their way out of a paper bag, the one thing to take comfort in today is that the central bankers and economists all see higher inflation as permanent and inevitable. It is therefore destined to abate.

There are surely sources of inflation beyond anyone’s control or prediction capability, like the war in Ukraine. There is also a tug of war between shrinking births and aging populations (see the final section of #328 for more), which will create many cross currents of inflation and deflation over the coming decades – e.g., older people consume less in general (but far more healthcare), more younger folks are needed for labor supply, but lower child births will lead to less demand long term (and, ultimately the end of the human race). There will be times when the labor force is out of balance and driving inflation, and also times when declining consumption will be deflationary. Additionally, global warming and its impact on food supplies and energy demand will need to be met with heavy technology investments and innovation. However, there is no reason to believe that the largely technologically-driven deflationary run of the last several decades has been anything but temporarily derailed by two years of fiscal and monetary policy mistakes. Market economies (when governments don't messily try to intervene) are self-healing; a recession, rising unemployment, resolving supply chain issues, etc. will eventually return us to the deflationary road paved by innovation. And, we should be thankful for economic self-correction, because, if the economy doesn’t self-heal in time to stop Powell’s fantasy cures, we could suffer potentially irreversible damage. No one should be naïve about inflation – there are certainly some paths where it stays high before innovation, time, and human ingenuity stamp it out, but we also want to make sure we don’t bank on theoretical futures that are just guesses. Regardless of high inflation or a return to low inflation, the important thing to focus on as investors and business leaders is to solve problems for your customers and constituents by creating the most non-zero-sum outcomes possible. If you generate more value for others than you take for yourself, then you will fare better no matter what the economic future brings.

✌️-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 #351

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

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

In today’s post: grieving with the simulated dead; changing accents in real time speech; automation has been painfully slow to come to ecommerce; should we want companies to have opinions and incentivize their outcomes?; is TikTok displacing music streaming?; quantum batteries; VC-backed gig economy jobs may be at risk, spelling relief for hiring in the service economy; and, much more below...

Stuff about Innovation and Technology
Sim Relatives
Amazon’s Alexa voice assistant division announced it is working on a technology that will mimic anyone’s voice after processing only about one minute of audio from that person. One of the goals is to let people hear loved ones who have passed away. In the demo, Alexa reads a book to a child in the voice of his grandmother. It’s not a stretch to think that technology already available today would allow us to have actual conversations with the dead based on everything that person said on social media, emails, videos, and other sources of information on their life and views. And, from there, it’s not impossible to imagine this technology being loaded onto a lifelike robot. If this scenario sounds familiar, it’s because it was the plot of “Be Right Back”, the first episode of the second season of Black Mirror. After the Alexa announcement, several articles noted the dangers of criminals using the feature to copy voices, but the technology to do so is already widely available. I am more interested in whether it would be easier or harder to grieve the loss of human life if you could continue to carry on seemingly real conversations with the deceased? Will we need to give consent to our descendants in order to use our voice from beyond the grave? At the same event, Reuters reports, Amazon divulged that they had around 100M Alexa users – a notable lack of any growth since 2019, which may highlight the relatively small island of Amazon customers compared to the massive billion+ user bases of the larger Android and iOS platforms. In the mega race to create a working chatbot – which I think will ultimately be the new platform interface for everything we do (including AR companions, see #332) – gathering data from people speaking to simulated relatives would be quite valuable.

Morphing Accents
In related news, a startup has developed technology to change accents in real time while preserving the underlying voice. The software from Sanas, already in use in some call centers, can transform any accent into any other type of accent. Here too we can see that the data collected from a massive number of conversations could be quite valuable to the development of chatbots and the next computing UI.

Replicating Humans is Really Hard
Amazon reportedly was worried about running out of workers by 2024 based on the growth path they identified during the pandemic. Of course, we now know that projection was largely based on an error in their forecasting systems, an example of the pervasive recency bias we saw in the pandemic. At some point though, as the analog-to-digital transition of the economy creates natural power laws, Amazon might again find itself facing a worker shortage. This threat puts the burden of filling the labor gap on automation. On this front, Amazon has always struck me as being well behind the curve. While they excel at software automation, they have largely built their logistics around people. Even with warehouse robotics, they’ve only just announced that they have an autonomous pallet-moving robot that can work alongside people (previously, Amazon fulfillment center robots only worked in caged-off areas). It’s been over ten years since Amazon acquired the warehouse robotics startup Kiva with the goal of modernizing logistics with such free-range, autonomous, “human equivalent” bots. The pace of progress seems painfully slow. Part of the issue is the complexity and fragmentation of the robotics industry and use cases, as well as the lack of a platform. And, of course, humans are still just more efficient at most tasks. McDonalds can’t even get their speech recognition system to recognize a simple set of menu items for automated ordering (this automation failure, however, might speak more to McDonald’s inability to properly leverage technology). I’m not holding my breath for the Tesla Optimus prototype, said to be coming this September for the company’s AI Day, but it’s perhaps such lofty ambition that will bring us closer to a general-purpose human-labor replacement (let’s just hope Optimus doesn’t meet Alexa and try to recreate "Be Right Back"!).

Corporate-Backed Behavioral Incentives
Back in the fall of 2019, I wrote about the potential for software companies – given their pervasive importance to the business world – to incentivize their desired social outcomes (#210). Companies incentivizing customers with discounts could be more impactful than investors trying to convince boards to improve their ESG scores. What if, for example, Microsoft gave a ten percent discount on Office 365 for customers that pledge to achieve carbon neutrality at some future date? A fairly benign example (which I don’t think has had much of an impact) is Starbucks’ 10c discount (and 25 star points) for bringing in your own reusable cup (which is completely thwarted when you digitally order ahead!). There are certainly companies that have held public opinions on issues from their very start. Chipotle, for example, has views on animal welfare that not everyone might agree with, but, if you do, you can choose Chipotle over Taco Bell (unless you want a Taco Bell Mexican Pizza, which is always forgivable). There’s a slippery slope for incentives and I also understand the arguments for corporations avoiding political and moral decrees altogether. Let’s definitely not leave moral judgements to CEOs! It should be acceptable for companies to remain apolitical and not face cancelation if they don’t take a stance. The free market seems to generally (eventually) land in the right place, and in some ways that's what I am talking about here: would companies see positive or negative impacts to their businesses if they incentivized behavioral changes for their customers? In our increasingly polarized society, the safest path is for companies to stay quiet, but our current lack of inspiring leaders across the public and private sectors has left a vacuum. Lately we've seen a lot of CEOs make grand statements only to do nothing after they get their soundbites in the press. Societal division seems to remain the only path for now, and maybe that's not a problem corporations could, or should, solve.

Short-Form’s Long Arm
Subscriptions to music services like Spotify declined 1M in the UK in Q1 this year, with subscribed customers under 35 falling from 57% to 53.5% y/y, according to Reuters. While 37% of survey respondents indicated economic weakness was the primary reason, I wonder how much the rise of short-form video is impacting media habits – eating into music listening as well as long-form video viewing. Last week, I lamented the shift in human storytelling from long- to short-form. Regardless of what’s behind the decline, the drop in music subscriptions surprises me. One way long form video can reclaim people's attention is to produce a smaller number of much higher quality shows that are capable of holding our attention (like the new series The Old Man with Jeff Bridges and John Lithgow on Hulu and FX). Ultimately quality should win in art, but right now addictive apps dominate. Meanwhile, Bloomberg reports that music labels are increasingly engaging with TikTok, and TikTok itself has interest in signing artists and becoming a label.

Miscellaneous Stuff

Quantum Batteries
Researchers are just beginning to investigate the real-world potential for quantum batteries. The still-theoretical devices use excitable (e.g., photosensitive) molecules to store energy. Because quantum systems are probabilistic rather than deterministic, each molecule’s transition amplitude – the probability of going from a ground to an excited state – can constructively interfere with the rest, giving a total amplitude that’s greater than the sum of the individual amplitudes. This type of “collectivism” doesn’t exist in a classical battery, where the individual cells function independently. Owing to this unit function, a quantum battery can undergo faster charging (because the cells can charge collectively rather than individually), as well as superextensive charging, which means the more molecules in the system, the shorter the charging time. Taking advantage of this collective action requires either quantum entanglement (which is quite fragile) or quantum coherence (which is more stable and doesn’t require temps near absolute zero). Additionally, since coherence is easier to control, it allows for selective triggering of decoherence to modulate the rate of battery discharge. Coherence can also preserve the integrity of the charged state by preventing energy leakage into the environment. The practical implementations here are many years into the future, but, until then, at least you don’t need to worry whether your EV is existing in a simultaneously charged and uncharged quantum state.

Stuff about Geopolitics, Economics, and the Finance Industry
Will Rates Curb Gig Economy?
The FT wrote an article about the loss of startup funding titled: “Farewell to the Servant Economy”, which got me thinking about labor shifting away from the VC-backed gig economy. As interest rates rise and the most speculative growth business models risk losing funding, there’s some question as to how big of an impact this might have on employment. According to a December 2021 Pew study, 16% of Americans reported earning money from online gig platforms. While perhaps not all of these jobs are at risk, certainly a very high percentage of them are tied to startups that are not profitable. As I wrote about pre-pandemic in #215, a large degree of modern life was becoming subsidized by VC via companies that were aspiring to get to scale in order to stop losing money. Few of those companies made the leap to scale, and even fewer, if any, have become sustainably. The fundamental issue is the cost-of-labor transfer. As I noted with respect to food delivery in #309: “It may simply not be possible to transfer the labor cost from the shopper/eater to the merchant given that food is such a low-margin, highly-fragmented industry overall.” Grocery shopping, including drive time, can be easily 45 minutes to 1 hour, or $10-20 in labor costs. Only a small subset of the population can transfer that much of their own labor to someone else and pay enough (the average grocery store tab is $40-50, so that’s a 20%+ cost increase) for the company facilitating the labor transfer to make a margin. Ultimately, such services may be just for the rich until automation and technology can dramatically reduce costs. But, back to the employment problem, Pew reported that 30% of 18- to 29-year-olds have worked for a gig-economy company. While that includes a range of part-time to full-time earners, it seems plausible that several percent of the workforce would be at risk of losing part- and full-time jobs as startups run out of funding with rising rates. If this cohort of workers returns to traditional service jobs (with salaries paid by companies that earn profits), it could go a long way toward resolving labor shortages for the industries competing for workers with on-demand companies.

✌️-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 #350

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

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

In today’s post: repurposing retired EV batteries for grid storage; the evolution toward short-from storytelling; the regulatory capture of regulating big tech; when AI feels real, it can force us to confront many questions; molecular electronics; the breaking point of rising rates against the long arc of rising leverage; and, much more below...

Stuff about Innovation and Technology
Car-to-Grid Battery Recycling
By 2030, around 1.7M EVs will be aged out of usefulness, but their batteries will still be worth around $3,000 each, according to data from the International Energy Agency cited by the WSJ. Nissan and Renault, among other automakers, are increasingly repurposing batteries from retired vehicles for large-scale grid energy storage systems. The batteries can still be useful for grid storage for another 10-15 years after their EV mileage has degraded. In 2030, there should be around 107 gigawatt hours of retired car batteries, which would translate to around one hour of power for 80 million US homes for each discharge.

Recent Recency Bias
A couple weeks ago, I wrote about recency bias and how it can negatively affect decision making. In that post, I used Amazon’s overbuilding of pandemic ecommerce capacity as an example. Last week, the WSJ wrote a long and informative article on what went wrong with Amazon’s forecasting of pandemic demand: “Part of Amazon’s e-commerce challenges today stem from a piece of technology long prized during Mr. Bezos’ tenure as a secret weapon, an internal forecasting system called Supply Chain Optimization Technologies, or SCOT. It was designed to incorporate a multitude of factors and spit out projections for product demand and the growth in logistics needed to fulfill it.
Amazon’s SCOT forecasts produced low, medium and high estimates. Because of unprecedented volume in the early days of the pandemic, Amazon executives including Mr. Clark repeatedly chose the higher end of SCOT’s estimates, said people who used the tool and worked on the SCOT team at the time. Those estimates meant that the company needed many more fulfillment centers and other infrastructure to keep up.”
This is a great lesson that not only are we humans subject to recency bias, but when we program algorithms or models to make predictions, we can imbue them with the same problem of overweighting recent data points, compounding a very human error.

Bite-Sized Storytelling
At NZS, we like to think about the world in terms of broad vs. narrow predictions. Broader predictions are more likely to happen regardless of which path the unknown future takes. For example, a broad prediction is: “items that would benefit from being connected to the Internet will be connected to the Internet”. One consequence that follows from that prediction is that semiconductor utilization by objects/services will continue to grow. Another example: “payments will increasingly transition from analog to digital”.  In contrast, narrow predictions require specific future scenarios to play out. Using the payments example, more narrow predictions might involve which platform will gain share in digital payments or what role smartphone operating systems will play vs. digital wallet providers. Some narrow predictions become parlay bets with increasingly unlikely outcomes, which are especially dangerous. Ideally, we avoid narrow predictions – or at least match position size to the breadth of assumptions needed for a positive long-term outcome. A broad prediction for the media industry is: “storytelling is an important part of human nature and will always play a key role in the content we consume”. Another broad prediction – which now seems to be slipping – is: “long-form storytelling (e.g., books, television series, movies, professional sports*) will remain a primary way we get our storytelling fix”. When you look at the complicated, interwoven storylines of something like the Marvel Universe, you can see a prime example of our connectedness to deep storytelling. There are only a handful of storytelling patterns that tend to appeal to most of us (Kurt Vonnegut has an excellent and hilarious lecture on this topic). The breadth of this assumption on long form storytelling, however, is being heavily tested with the accelerating popularity of short-form video. Revolutionized by TikTok, desperately copied by Meta, and now sweeping YouTube with 1.5B monthly active Shorts users, scrolling through short videos is shifting our attention away from long-form storytelling. That said, if you follow one short-form content creator for a long time, you are still tracking a long-form story of that person and their life (and/or the stories they are telling). Short-form video consumption could be either a transient experiment or a major cultural/consumptive co-evolution of our brains with technology.

Like our penchant for telling stories, humans also like to analogize. The analogy that comes to mind for me is the shift from desktop to mobile that started, in earnest, around ten years ago. At the time of the Meta IPO, a major concern was whether Facebook could make the transition from desktop to mobile, and, if they could, would it be monetizable? Then the newsfeed was born and the rest is history. In addition to social networking, mobile accelerated growth for many desktop-based activities like ecommerce and media consumption. And, although desktop Internet still exists, its growth pales in comparison (and in some categories is down) vs. mobile. This too seems to be the case with video and media consumption in general. Our viewing of long form is shrinking slowly in minutes per day as short form grows dramatically. Over the next decade, it might be an increasingly narrow prediction to assume that long-form media will be more valuable to consumers than it is today. Is the shift to shorter and shorter bites of media inevitable in a digital, always connected world? If so, does this shortening have implications for other consumer/worker behavior? Which assumptions should be tested, and which predictions are narrowing, and thus leading to a wider and more uncertain range of outcomes? I’ve left out other forms of media for simplicity in this story that I’ve just told – notably video gaming (which is perhaps going through a similar transition, with mobile gaming tending towards shorter bursts of playtime), with mobile growing far faster than console and desktop gaming. 
*RE sports: Teams dressing up in costumes with underdogs and season-long story arcs...sports are just stories where the actors are extremely talented athletes and the directors are coaches – most just aren’t quite as choreographed as WWE.

Wrangling Big Tech: Unenforceable Laws and Regulatory Capture
The American Innovation and Choice Online Act is said to have bipartisan support to pass both the House and Senate and likely become law. The primary goal of the act is to keep big tech companies from preferencing their own products and/or decreasing choice of alternatives. It’s hard to say how the actual regulation and changes would play out. Will Amazon not be allowed to feature their own brands in search listings – even when they are the highest quality choice at the best price? Will Google be forced to decouple maps from their other services? The act also restricts tech companies from using the data their own platforms generate. What’s the point of being in business if that’s the case!? At some level, it’s completely impractical at this point and would do far more consumer harm. It’s hard to argue people can’t go find Spotify on their own in app stores. Of course, there are elements that might make sense. In particular, bundled services that make competitor options less favorable to consumers, as well as in-app store fees, which allow big tech platforms a free ride while the competition gets charged fees that render their business model impossible, are ripe for regulation. One thing we know with certainty is that when the government regulates big companies, it adds to regulatory capture (see How I Learned to Stop Worrying and Love the Monopoly), cementing and growing the power of incumbents. 

Semi Sentience
The Washington Post highlighted a Google researcher who internally raised concerns that a new conversational engine was sentient. According to a Google spokesperson, “AI doesn’t need to be sentient to feel real”. I wonder if it ever crossed their mind that, while they might feel real themselves, how would they know for sure?! Human consciousness is certainly special (and perhaps unique in the Universe), but it’s also just a lucky outcome of natural selection – a trick played by our genes to keep their replication going. When we feel aware that we are special, we want to create more “special” consciousnesses (until recently at least, when other distractions – see above short-form video discussion! – and stressors have overwhelmed the power of consciousness to keep the species going, contributing to worldwide declines in birth rates). The point is, of course, that highly advanced AI interactions designed to mimic humans are going to be just as real as the real thing. The world of Blade Runner is here already. We grant rights to fellow humans (in some countries) because they seem real. Logic follows we should grant rights to anything that seems real. Consciousness and sentience are just an illusion, after all. After watching the AlphaGo documentary (moved to YouTube from Netflix), I noted, way back in #221, what a gut punch it can be when humans realize that AI can not only be smarter, but also more creative. It really shakes the ground under our feet. It’s not just about fry-making robots replacing humans, it’s about confronting what it means to be human. My favorite movie that tackles the question of what it would mean for AI to become sentient is Her (see #332). With larger and larger neural nets and advancing transformer models, it does feel like a milestone is approaching. We’ll be confronting many of these “we’re not special” situations at an escalating pace in the coming years. I think the key for the species will be to not get lost in the disillusionment of our natural-selection programming, but rather to focus on creating things and connecting with each other, trying to do something truly unique and special. I am reminded of a quote I cite often from Vonnegut: “The arts are not a way to make a living. They are a very human way of making life more bearable. Practicing an art, no matter how well or badly, is a way to make your soul grow, for heaven’s sake. Sing in the shower. Dance to the radio. Tell stories. Write a poem to a friend, even a lousy poem. Do it as well as you possibly can. You will get an enormous reward. You will have created something.”

Miscellaneous StuffReviving Molecular Electronics
Biomolecule-based chips are designed to detect interactions with specific analytes via electronic signaling. One use case would be virus detection via interaction with antibody molecules attached to the chip. This article discusses the molecular electronics startup Roswell: “Let’s say Roswell wanted to create that 200+ virus chip. Their engineers would build sensor probes tipped with engineered antibodies like those the human body makes to identify and fend off, say, the SARS-CoV-2 virus that causes COVID-19, or the rhinovirus circulating in your daughter’s daycare—plus the many variants of those viruses and dozens of others. When an infected person blew into the straw and expelled virus onto the sensors, the antibody molecules would react by producing a distinct chemical-electric signal picked up by the chip’s electronic circuits. Software would then translate the signal almost instantly into a ‘positive’ or ‘negative’.” It will be a huge breakthrough if the Roswell team can successfully commercialize this type of biological sensor technology, which has been an elusive dream for decades.

Stuff about Geopolitics, Economics, and the Finance Industry
Chit Chat Cloudflare Part Two
Following up on his first discussion of zero-trust security and Cloudflare on Chit Chat Money, part two of the interview with Joe can be found here.

The Point at Which Higher Rates Collapse the Economy
The US private equity market stood at $7T in assets in 2020, with public and private US pension funds comprising just under half of the investors. That $7T asset total (up from $1T in 2005) was quite eye-catching given the high degree of leverage on PE assets – 53% average loan-to-value for 2020 – and the suddenly rising rate environment we now find ourselves in. According to Mother Jones, PE accounted for 6.5% ($1.4T) of the US economy ($23T total) in 2020, and their relative debt exposure is higher than the rest of corporate America. Leveraged private companies is just one risk in the economy to think about as rates march ever higher.

One theory on rates that I generally hold to be true (until proven otherwise) is the following: as economies layer on more and more debt, the natural, necessary direction of rates is falling or flat. One person’s (or company’s or government’s) debt is another person’s (or company’s or government’s) asset. As debt rises, the money to service the debt is covered by economic expansion (including population and/or productivity increases), or declining/steady rates (or, in the special case of governments, printing money to cover interest payments). Rate hikes hurt companies/individuals by not only increasing the financial burden of servicing the debt, but by reducing revenues (and worker income and employment) by forcing economic contraction. So, rising rates are a double whammy to those with leveraged assets, and the resulting defaults and bankruptcies can have a multiplicative ripple effect across the whole economy – taking down not only the indebted, but those holding the debt. In the case of PE, that includes the public and private pensions holding nearly half of those assets. Prior to the pandemic, we were on a steady course of low rates and economic/population ebb, which may be the natural end-state for a highly leveraged economy (not dissimilar to Japan’s situation of the last few decades). However, pandemic over-stimulus, supply chain shutdowns, and subsequent war in Ukraine caused an artificial, inflationary diversion, and the government is now haplessly trying to fix their own, short-term mistake by raising rates at the risk of causing debt to default (which is akin to causing assets to lose their value). In the case of a highly levered economy, the cure for inflation is worse than the disease if rates rise to a point where debt service is unachievable and debt cannot be rolled forward when it comes due. We might rather be happier with inflation (of course the Fed's real goal is protecting the dollar).

Accelerating technological progress can fix inflation in the long term (as continually providing more for less affords natural deflationary/disinflationary pressure), but there’s no easy recovery from mass bankruptcies and layoffs. What if pensions, which have been so eager to invest in PE of late, lose value because these rate hikes bankrupt their highly leveraged assets? Will the Fed then have to bail them out by writing checks, thus injecting even more money into the economy!? The current, precariously levered situation merits treating the sources of inflation rather than using the blunt tool of rate hikes to cause extreme economic contraction. Coupled with external sources of inflation (e.g., brought about by global conflict and extreme weather), higher rates could be especially damaging to huge swaths of low- and middle-income households – in some cases tragically. And, if rates cause sufficient damage to merit government bailout, we will ironically be in the same inflationary environment as we are in today. Rate hikes can essentially start a vicious cycle in an over-leveraged economy if they go high enough. The good news is that the scenario I’ve just walked through is highly unlikely to come to pass for two reasons: 1) the economy is self-correcting and is already taking steps to heal inflation on its own; 2) faced with higher rates and weakening demand, companies will turn to accelerated technology investments, which will be disinflationary in due time. Further, as more industries become digital and more middlemen are cut out of the economy, information will be available sooner for companies to react to changing demand (this is already evident with many direct companies cutting expenses and headcount). If we can achieve modest economic contraction before the Fed has a chance to raise rates further, we will, with a bit of luck, be just fine.

✌️-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 #349

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

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

In today’s post: transformer models show potential to replace traditional software and change the way we interact with technology; autonomous crime-prevention drones; more disruption for traditional distribution; what our distant past might teach us about valuing privacy over accountability; crossing the comedic line; jury instructions help us avoid pride; as the buy side withers, the game changes from exploiting bias in other humans to exploiting bias in machines, which might extend the time it takes for a stock to reflect its future cash flows; TSMC's struggles in the US highlight the scarcity of resources to (re)build global capacity domestically; and, much more below...

Stuff about Innovation and Technology
DTC Caskets
Last week, I talked about how many traditional distribution businesses are threatened by digital disruption by highlighting car dealerships. In a win for bereaved family members and vampires everywhere, Titan Casket is shaking up the high-priced casket market, which has been traditionally controlled by mortuaries and a small number of slumber-chamber makers. I remember first learning about the restricted-distribution industry structure on a trip to Batesville, Indiana twenty years ago. Disruption can take a long time, but, eventually, it’s coming for every traditional business. Titan recently raised $3.5M in venture funding for the BYO-casket market, reporting 400% growth in 2021.

Transformer Models to Replace Software?
Google’s new text-to-image algorithm, Imagen, is capable of creating some rather strange but accurate representations, such as a “photo of a panda wearing a cowboy hat riding a bike on a beach”, or oil paintings of equally silly scenarios in the style of any artist. While the model has reached a breakthrough in language interpretation, the team is not releasing it to the public due to various ethical concerns over potential misuse. However, you might have a shot at creating your own weird art mashups using OpenAI’s Dall-E (Dalí + Wall-E), which is allotting access to 1,000 new users a week. Dall-E’s creators also have ethical concerns about how such models reflect society’s ingrained biases (e.g., CEOs are more likely to be imaged as male) or whether or not images should represent more idealized views of the world. These models are part of a broader set of transformer AI engines attracting a lot of attention and funding. After reading this Verge review of Dall-E, I can't help but wonder if programs like Photoshop, Canva, etc. will lose the majority of their design value when you can just say what you want and get it instantly. Could this eventually happen with not just images, but video? Give me a 90-minute rom-com starring Jeff Goldblum and Annette Bening with a spy thriller sub plot set in Berlin in 1983 with the style of Werner Herzog. It feels like we may be getting much closer to the computer interface in Star Trek being a reality. Could transformer models also ultimately replace other traditional apps beyond design software? What about architecture and engineering? Design me a three-bedroom house out of concrete and wood in the style of... Obviously the data and answers don't exist for many applications beyond images today, but it seems plausible given enough time. As I've noted in the past, context and the ability to analogize is key for AI, and maybe it's just a gimmick that is fooling us, but there seems to be some element of higher level interaction in these transformer models. Paradoxically as these new models allow us to tinker, rather than remove agency and human influence, they might actually increase our ability to articulate more accurately what we envision in our heads.

Shock Bots
Taser-maker Axon found itself enmeshed in controversy after a proposal to create drones with tasers for deployment against gunmen in schools caused nine members of its board of ethics to resign. Much like sharks with laser beams, I suppose the question is: “what could go wrong?” While there do seem to be numerous open questions, and a lot of thought would be required for conscientious product development (for the taser-toting drone, I mean, we should obviously equip sharks with lasers), the instinct to create a non-lethal defense against deadly, illegal activity has a certain logic. Or, is it too dystopian and fraught with unknowns and potential abuse to even consider? AI could allow a drone to easily identify authorized law enforcement, but it might be harder for it to distinguish “good guys with guns” from bad ones. And, as I always ask whenever it comes to autonomous drone innovations: can we also use it against racoons? Maybe shock drones are just a dangerous step toward those shock collars that blow up your head if you break the rules, as featured in Rutger Hauer’s 1991 violent movie Wedlock. But, maybe technology could play a bigger role defending against crime and violence. Regardless, the technology to create such a product is off the shelf, so it’s only a matter of time before it exists, whether society wants it to or not. 

Farmer Bot
In somewhat lighter drone and laser news, farmers in Brazil are deploying advanced technology to fight rising fertilizer prices. Drones use cameras to determine precisely which plants need fertilizer, while lasers are used in lab analysis of soil. The technology could significantly reduce the need for fertilizer globally in the future. 

Privacy vs. Accountability?
Once upon a time, there was no (or at least very little) privacy. Humans lived in small tribes (or close-knit groups) with a high mutual dependency for survival. Reciprocal altruism dominated relationships, and good actors were rewarded and cheaters punished. I suspect it was hard to get away with anything nefarious for very long. Of course, there were surely downsides, and primitive human tribes probably could have used an anonymous suggestion box or a whistle-blower corkboard to great effect. Today, humans are obsessed with both privacy and spying. We don’t want anyone to know anything about us (and yet we let the entire world know everything, as we explicitly allow the big tech platforms to buy and sell our identities hundreds of times daily! See: Privacy Not Included). We want to pretend we are entirely anonymous and self-sufficient and don’t need everyone else in our complicated, interconnected world to survive. Maybe going from 50 people to billions increased the importance of privacy, or maybe we’re just wrong about privacy. Maybe our superficial sense of anonymity is the reason behind many of the challenges the world is facing right now. It’s perhaps harder to feel responsible when you think you are anonymous and unaccountable – at least until you are featured in a viral TikTok caught on someone’s doorbell cam. 

Tim Cook, appearing at the Time Magazine Time100 Summit, said he fears the loss of privacy because people will begin doing less and thinking less. Well, right now we only have a thin veneer of privacy, and we seem to be thinking and doing very little already, so maybe that’s true. But, isn’t the opposite more likely? If our thoughts and actions were as open to the world now as when we lived in small groups, might we feel more responsible to do good and come up with creative solutions for the problems we face together on this planet? In the same interview, Cook went on to say that losing some of his own privacy, in coming out as gay in 2014, was good because he thought his loss of personal privacy on this topic might help other people. I guess that’s my point: in aggregate, complete anonymity and privacy may not be the best path for human societies (obviously this applies only to countries/regions with protected human rights). When we prevent ourselves from experiencing and enriching our common culture by receding into tiny, private, one-person bubbles, we lose the ability to understand and relate to each other. Is giving up some anonymity while preserving free speech and living with accountability too much to ask? As Kurt Vonnegut wrote: “Human beings will be happier, not when they cure cancer or get to Mars, but when they find ways to inhabit primitive communities again.” Technology like Apple’s should perhaps be used to build transparency at scale rather than privacy at scale, e.g., by giving users complete control over how and when their opt-in data are collected, used, and shared. However, Apple’s creating neither transparency nor privacy; the secret Cook wants to keep private is that he would like you to reveal all of your secrets to Apple instead of his competition.

Miscellaneous StuffComedic Heart
After reading Maureen Dowd’s interview with Netflix CEO Ted Sarandos, it’s been nagging me that Sarandos defended much of his editorial decisions on what constitutes comedy by saying: “the only way comedians can figure out where the line is, is by ‘crossing the line every once in a while. I think it’s very important to the American culture generally to have free expression.’” It grates on me because I generally agree with the sentiment, but I also think testing the line needs to come from a place of curiosity rather than arrogance or ignorance. Comedy is a mixture of objective and subjective punchlines, and, obviously, not everything is funny to everyone. And, no one should be canceled for a joke, no matter how unfunny it is. If I try to write a joke and I am not sure where the line is – but the drive to shine a light on the topic comes from the heart – then the attempted comedy seems like a worthwhile exercise. If I cross a line because I think I know something other people don’t, or I think people who disagree with me are wrong, the intended comedy can open the door for hate, condescension, or, at the very least, land me in hot water for making fun of something I don’t fully understand. As I wrote in Laughter Is the Best Medicine: 
Laughing at the worst of the human condition is how we beat the worst of the human condition. When you can turn what seems like the most horrible tragedy into a smart and funny commentary on the challenge of just getting up every morning and trying to make it through the day, then you’ve beat that absurdity for at least another 24 hours. It’s possible that comedy is the only reason to try to actually make it through that next rotation of the planet – to laugh at how absurd it is that we even try, knowing how badly it could go. To find uplifting humor in the darkness is to overflow with empathy. Sometimes jokes lack empathy (i.e., that critical aspect of putting yourself in the shoes of the target of your joke) and/or spotlight one absurdity while ignoring another greater darkness. 
Rather than constructing a joke by saying one group of people is wrong, it’s far funnier to me if the joke asks questions about whose view is right or wrong and makes fun of both sides equally. Trying to derive comedy by saying everyone on one side of the line is wrong seems to come from a place of fear rather than love.

Stuff about Geopolitics, Economics, and the Finance Industry
First-World Labor Problems
The FT reports on the labor challenges facing TSMC as it attempts to add leading-edge capacity in the US – its first such foray off the island of Taiwan. From difficulty in finding construction workers in Phoenix to potential challenges in recruiting chip engineers, the problems represent a microcosm of what any industry would face trying to build out capacity in developed countries. There simply aren’t the people or resources to deglobalize (or, in TSMC’s case, globalize). Like it or not, for every day that goes by, the world is more globally interconnected than ever.

Withholding Judgment
A common jury instruction is to not announce your position until you’ve heard all other arguments from other jurors because doing so might allow a “sense of pride” that would keep you from abandoning your view should it prove false. This advice equally applies to many high- and low-stakes situations. The best course of action is to try to not even have an opinion at the onset, or at least dissociate from whether your opinion is relevant (see also last week’s letter #348). Instead, let the evidence speak for itself, and, if you aren’t sure, the ultimate way forward is to simply say: I don’t know. In a group discussion, it’s always best to hold conclusions until all the objective debate points have been exhausted. This is a really hard muscle to build, but it’s vital for investors and managers driving portfolio and business decisions.

Buy-Side’s Blunted Influence
Three current investing trends seem to have some connection to the goings on in the stock markets. First, the FT reports on the markets’ declining liquidity, which began following the 2008 financial crisis. Second, the FT separately notes that passive funds in the US are now 16% of the market, surpassing active mutual funds for the first time. Active funds now stand at 14% (and it’s hard to argue that all of that 14% is truly active and not just sticking close to a benchmark, which would make it indistinguishable from passive in aggregate). Overall, the combination of passive and active funds has remained ~30% of total stock ownership over time (see page 27 in the ICI 2022 report; the other ~70% of stock ownership is a combination of direct ownership by households, pensions, insurance companies, sovereign funds, and hedge funds, the latter of which is only around 2% of equities globally at $4T). However, ten years ago, active managers were three times the size of passives. Further, today’s biggest active managers are gaining share amongst the shrinking pie, and, by definition, the larger you get, the less active you can be (especially when combined with the drop in liquidity). And, third, large institutional investors, like pensions, continue to chase private market returns (with potentially dubious disclosures, as the WSJ points out), shifting allocations away from liquid stocks and bonds. In the context of these three trends, what we traditionally refer to as “the buy side” – the aggregate ability of active, professional investors to influence the value of stocks – is steadily evaporating. Some days it feels like that influence is already completely gone for all practical purposes.

Being a successful investor over the long term requires a framework that, in most cases, exploits some bias in the market. Ultimately, that success relies on the bias being remedied – a corrective action on the part of the “market”. Historically, that has meant other humans with an active view of the value of a security coming around to your view, and by “your view” I mean the potential for the investment to generate a certain level of free cash flow. Whether this human-driven corrective mechanism will be important in the future is hard to say. It seems more likely that allocations into and out of various groups of stocks based on algorithms – with diminishing human input/oversight and increasing reliance on macro data points and machine-red press releases – will be more and more dominant.

Ultimately, because investing lays claim to the underlying free cash flow of a business, logic demands that stocks will eventually trade at a multiple of their free cash (in a range depending on the long-term interest rate environment). However, the waning of human-controlled corrective mechanisms might make the path stocks travel more volatile. And, volatility is opportunity. So, if you understand how the mechanisms for correcting misvalued securities are evolving (from human bias to algorithmic bias), then you can also create more opportunities to exploit algorithmic biases. However, as algorithms experiment with trying to outsmart one another, the time it takes to see stocks converge on fair values may extend out. As such, you may need to take a critical eye to the resilience of your framework to ensure survival on the chaotic, non-ergodic path from today to a more logical future. If there comes a day when all of the caddies are replaced with golf carts, and those golf carts are programmed by machines without human input, then all bets are off. In the meantime: have patience – the end destination will be the same, but, with AI at the wheel, the path to get there may be bumpier.

✌️-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 #348

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

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

In today’s post: can nihilism and George Carlin teach us to make better decisions?; fickle music fans move from one social network to another; remote learning software was spying on your kids to sell ads; heat pumps are the future for HVAC; bike lane delivery robots; the declining value of car dealerships and what it means for other industries; are declining city populations and slightly rising births tied to the pandemic, or just another demographic wave?; a new paper on ergodicity shows that cooperation can emerge solely to increase growth; and, much more below...

Stuff about Innovation and Technology
Electric Air Taxis in 2024?
Electric vertical take-off and landing (eVTOL) aircraft maker Joby Aviation received FAA approval to start commercial air taxi service. Joby’s eVTOLs can carry a pilot and four passengers at 200 mph for 150 miles on a single charge. While FAA certification was a milestone, there are still more regulatory hurdles to clear, and commercial service is tentatively scheduled to begin in 2024. Joby hasn’t yet detailed where the central California-based startup is planning to launch.

Striking a Discord
Pitchfork discusses the evolution of musician fan clubs (to use an outdated term) on the social media platform Discord. Focusing on Weezer’s leading man, Rivers Cuomo, and his use of Discord servers for interacting with fans and outsourcing research, the article gives a sense for the unique positive and negative aspects of closed online communities. I’ve worried in the past about how increased fan interaction could shape music in a way that makes it more bland. I personally want art to reflect the heart of the creator, not the creator’s fans, but the lines can be blurry. There also seems to be the potential for artists to exploit devotees for free labor, but fans are rewarded by closer interaction with their idols, so I guess it’s largely mutually beneficial. We are living in a period of social platform proliferation, as fickle consumers fatigue on the last generation of time-waster apps and move onto something new (see Utility-Communication-Media matrix in this paper for more). As Cuomo notes: “I’ve seen platforms come up and they’re huge, they go away and nobody remembers them, I don’t expect that the neighborhood will be on Discord forever. Something else may come along.”

Fizzling Fusion
Nuclear fusion depends on the extremely rare element tritium, of which only around 20kg exists on Earth today. The substance costs around $30,000/gram (it’s a byproduct of nuclear fission, which is largely a dying effort), and a working fusion reactor would need 200 grams a year. Scientists had planned to use fission reactors to breed their own tritium; but the required costs and effort may push commercial fusion development decades into the future, according to Wired.

Remote Learning Data Funneled to Adtech
During the pandemic, many schools deployed remote learning tools that, according to the Washington Post, were sharing information with adtech companies to target ads to kids and families: “nearly 90 percent of the educational tools were designed to send the information they collected to ad-technology companies, which could use it to estimate students’ interests and predict what they might want to buy. Researchers found that the tools sent information to nearly 200 ad-tech companies, but that few of the programs disclosed to parents how the companies would use it. Some apps hinted at the monitoring in technical terms in their privacy policies, the researchers said, while many others made no mention at all. The websites, the researchers said, shared users’ data with online ad giants including Facebook and Google. They also requested access to students’ cameras, contacts or locations, even when it seemed unnecessary to their schoolwork. Some recorded students’ keystrokes, even before they hit ‘submit’.” As I wrote a couple weeks ago, the entire ad tracking industry is due to be shut down or heavily regulated and overhauled. 

Promoting Heat Pumps
Transitioning from natural-gas-burning HVAC to two-way electric heat pumps for domestic cooling/heating is a major win-win for the environment, consumers, and geopolitics. A new act in the US Senate called the HEATR Act would create tax credits through 2031 for consumer and commercial heat-pump air and water heaters and incentivize manufacturers to convert from AC (one-way heat pumps) to two-way units that also provide heat. On average, heat pumps are two to four times as efficient as traditional gas units, and they also dramatically reduce the amount of indoor and outdoor pollution. As I noted in #332, Tesla has hinted at their desire to enter the market, and combining a heat-pump system with solar and batteries is a big opportunity. 

Bike-Lane Bots 
Chick-fil-A is testing out Refraction’s robot-as-a-service delivery platform, which uses small autonomous delivery vehicles that can leverage the bike lane or the side of a road. I wrote a year ago that I thought we would see an ever expanding use of bike lanes for low speed autobots, ultimately leading to safer bike lanes, but progress seems very slow. The 30”-wide Refraction robots can carry six bags of groceries and travel at 15 mph.

Downsizing Dealerships
Many familiar forms of retail and distribution are feeling increasingly anachronistic. Take for example car dealerships. With most car shopping (and order customization) done online, a dealership is a formality at best. I’ll likely get in trouble with some car enthusiasts for saying so, but even test drives are increasingly unimportant as most low-, mid-, and high-end cars increasingly drive similar to others in their price range. Tesla famously sells direct to customers without third-party dealers, which makes the cars unavailable for purchase in all but a ~dozen US states due to anti-consumer laws protecting dealerships. The dealership stalwart is also significantly harming legacy auto makers by preventing the shift to electric vehicles (which are lower maintenance than ICEs and thus less profitable for dealerships over the EVs’ lifetime) and stifling ecommerce-enabled efficiencies (e.g., significantly lower inventories, consumer convenience). Of course, dealers – and certainly their service centers – will be around for decades as we slowly transition to 100% EVs, but they will continue to shrink in importance, number, and size. While there might be an opportunity to rethink dealerships, as Honda is doing with their blueprint for smaller dealers focused on EV selling and charging, for now, these dinosaurs serve as a major ball and chain for legacy car makers. Mercedes is looking to cut their dealer footprint by 10%, with a goal of selling 25% of their cars direct. And, VW is reported to begin testing a new direct-to-consumer brand, under the revived Scout name, in the US. In most cases, legacy business models across a variety of sectors relying on space, inventory (and its associated financing), ongoing maintenance, and people will be gifts to digitally-native, direct-selling disruptors. 

Shareholder Activism Fail
Amazon’s proxy vote this year contained fifteen shareholder proposals. Seemingly an example of activism run amok, there was a combination of bad and ok proposals on the list. Despite popular voting recommendation service ISS recommending a FOR vote on eight of the items, all of them failed to pass. There were two proposals aimed at improving Amazon’s lax oversight of how their tools, such as facial recognition, are used that I thought warranted passage (or at least more serious consideration by management). The company historically has had, at best, a strawman argument for absolving themselves of responsibility for abuse of its technology products, saying it’s up to governments, not Amazon, to set policy. Amazon should care more about the utilization of products they develop, especially given the vast impact of their cloud computing services.

Miscellaneous Stuff

Cognitive Lessons from a Counterculture Comedian
One of the biggest cognitive biases we should endeavor to overcome is recency bias, the tendency to overweight the value of more recent information vs. older information. There are different ways people use this term, but I think about how it relates to the way our brain makes predictions. To recap what I wrote in #272:
There are multiple lines of reasoning from various fields of study that all seem to point to this idea that our brain makes a prediction about the world and then tests that model against sensory input, adjusting the model as necessary. In other words, our brain has preconceptions about what we are experiencing before our current senses have a chance to exert an influence. Feldman Barrett characterizes the hypothesis-then-test neural algorithm as allostasis, or “automatically predicting and preparing to meet the body’s needs before they arise” (p. 8). Whatever we call it, there is a clear process by which our brain is constantly making predictions about the state of the world before checking against internal and external inputs. This is an inversion from the way we like to think the brain works, i.e., it seems to take in inputs, and then make a decision, which yields a false sense of agency over the entire process of thinking.
Importantly, the brain accords more weight to recent information about the world when making predictions. To take an example from recent headlines, Amazon canceling (and possibly subleasing) warehouse space and launching Buy with Prime (another sign of excess capacity) seem like end results of a prediction that overly weighted recent information. As I detailed in #336, Amazon was ratcheting down new leases in Q1 2022 after having doubled fulfillment capacity during the pandemic. Today, the company is now looking at minimal, if any, footprint growth for the foreseeable future as they digest capacity additions. Lockdowns early in the pandemic rocketed ecommerce, and apparently the brain’s best prediction was that ecommerce would gain share. So, the logical plan was to add capacity. But, now, overall ecommerce market share is back on the same path as it was pre pandemic, and Amazon is pulling back on capacity. Maybe that too will be an example of recency bias causing the wrong predictions – time will tell. If Amazon, one of the smartest, most data-driven organizations, can't accurately predict even the near future, we should be highly skeptical of our own ability to do so. If you’re an investor or a business leader, what recent information are you overweighting in your decision-making process? Simply asking the question can help uncover bias. 

As long-time readers know, we wax on about how predictions of the future are a fool’s game, and we’ve tried to supply alternative frameworks for making better decisions in an uncertain world. Predicting the future becomes even more absurd when you consider that the less personally vested you are in a decision, the more likely you are to make the right call (ostensibly because you can be more objective when you are less emotionally tied to a particular outcome). Thus, paradoxically, the more important a decision is to us, the more likely we are to get it wrong. This is where a bit of agnosticism might be helpful. What if we went beyond not predicting the future to not caring about the future? This framework extension came after I finished Judd Apatow and Michael Bonfiglio’s new two-part documentary on the late comedian George Carlin (on HBO Max; it’s not nearly as good as Apatow’s excellent doc on Garry Shandling, but still worth watching). In Part 2 (~1h10m), there’s a segment with Charlie Rose, recorded later in Carlin’s life, when Carlin says:
“I have pulled away, and I now reside out where the Oort cloud is, where the comets gather, I finally decided that I would dissociate myself, view all of this as an absurd tragic comedy, and really have a point of view that allowed me to say anything that felt right, that expressed how I was reacting to all of this and how it made me feel. I sort of gave up on the human race, and decided that I didn’t care about the outcome...Not having an emotional stake in whether this experiment with human beings works. I really don’t care. I love people as I meet them one by one. People are just wonderful as individuals. You see the whole universe in their eyes if you look carefully. But as as soon as they begin to group, to clot, when there are five of them, or ten, or even groups as small as two they begin to change...I decided it’s all under the control of groups now, and I would distance myself from wishing for a good outcome...when you say to yourself I don’t care what happens, it just gives you a broader perspective for the art, for the words to emerge.” 
Most of the above quote is captured in this Charlie Rose clip (which has a different edit). Carlin’s outlook immediately seems nihilistic, and the open question as to whether or not Carlin went from idealist to nihilist later in life is explored in the documentary (and discussed by his daughter in several interviews). Carlin was known to say: “if you scratch a cynic, you’ll find a disappointed idealist”. As longtime readers will know, I hate cynicism and always try to never assume the worst. As such, I love skepticism, which rarely assumes the worst, and I cherish optimism because it’s always right in the long term. So, are we to believe this evolution from not predicting to not caring (or not wishing for a certain outcome) is a step that leads into the hellish hole of cynicism and nihilism? Or, can letting go of our desire for a certain outcome create space to more objectively analyze odds and make better decisions? There is one trick we can use to overwhelm the brain’s reliance on recent information and ingrained pattern recognition. I’ve written in the past about free will and Feldman Barrett’s idea that you can get your brain’s prediction algorithm out of a rut by consciously choosing to expand its experiential data (do new stuff, read new things, etc.). Practicing letting go of a particular narrative/outcome might also create a new set of patterns in the brain. As a student of comedy, I have heard many standups discuss the importance of letting go in order to find the right relationship with an audience. I'll experiment more with creating space, whether it be physical, temporal, and/or emotional, between the present moment and future outcomes to see if it is helpful in making decisions. Perhaps, as this Aeon article points out, we also just need to exercise our imagination.

Stuff about Geopolitics, Economics, and the Finance Industry
Immigration Up, Big Cities Lose Out
A handful of data points indicate some slight reversals in the pandemic-accelerated headwinds to population growth in developed countries. In the US, births ticked up slightly, the first growth since 2014. However, we must look to the past to explain this trend, as the biggest rise was with women in their late twenties and thirties (see 30-something sneaker wave for more). Immigration has also modestly rebounded in the US from a low of ~20,000 new legal arrivals to ~100,000 in the most recent quarter. Meanwhile, “unretirements” are going back to pre-pandemic levels, with ~3.2% of former retirees going back to work (up from ~2% during the pandemic). In other migration news, large cities in the US have lost residents to smaller cities. In some cases, big cities have dropped back to population levels seen a decade ago, and thus could be an interesting test case for economies that shrink as populations decline. Since the beginning of capitalism, we’ve only had population growth, and we are wholly unprepared for the consequences of a shrinking population and the accompanying economic contraction. Or, this city flight might end up being yet another temporary pandemic trend (recency bias!) that soon reverts back to the long-term migration into cities. Migration from cities to suburbs is also a trend tied to the 30-something sneaker wave of Millennials aging into family life. Population migration from cities to smaller towns has also been uneven in terms of the types of professionals that had flexibility to relocate, leaving us with a dearth of doctors, teachers, and trades in cities compared to a growing shortage in small towns.

Cooperation is Ergodic Key to Success
Ergodicity and non-ergodic systems are a topic I write about often, e.g., from #229: Ergodicity assumes that the expected value equals the average outcome of a specific action (e.g., coin toss) repeated multiple times. However, in the real, non-ergodic world of investing, all that matters to an individual is their path through time. There is no averaging (since we have no interaction with our other selves in parallel worlds), there is only a single series of events over time. As a result, in non-ergodic systems, multiplicative effects overwhelm additive effects, and power laws and inequalities thrive.
A recent paper from Ole Peters and collaborator Alexander Adamou indicates that cooperation increases growth rates in part due to ergodicity. If multiple individuals repeatedly pool and share resources, their outcome is less influenced by random chance and looks more like (as one might expect) an additive, ensemble outcome. Importantly, they demonstrate mathematically that cooperation confers a positive outcome that is greater than what could be achieved by a collection of individuals working independently. The simplicity of their mathematical models shows that cooperation is the default solution for enhanced success without needing to invoke such explanations as altruism, relatedness, or reciprocity. 
From the paper:
Living beings exist not as minimal self-reproducing units but as cells, organisms, families, institutions, nations and so on. Cooperation, which we model as sharing resources, is ubiquitous in nature and society.
This ubiquity is puzzling because sharing seems prima facie to require the better-off member of a cooperating pair to relinquish something of value to the worse-off member, with nothing in return. If naked altruism is an unsatisfactory explanation of evolved behaviour, then we must expose the advantage derived by the better-off entity in such an arrangement.
Classical explanations involve two ideas. The first is that a net benefit arises when two entities cooperate. Specifically, the gain of the recipient—often expressed in terms of ‘fitness’—exceeds the cost to the donor. The second is that, over time, some of the net benefit finds its way back to the donor. This can happen through reciprocity, where past donors become future recipients, or through relatedness, where the recipient carries genetic material that the donor wants to propagate. 
There are two fundamental growth rates in noisy multiplicative growth. The ensemble-average growth rate is that achieved by the population average in the large-population limit. It is independent of fluctuations. The time-average growth rate is that achieved by a single entity in the long-time limit. It is lower than the ensemble-average growth rate by a fluctuation-dependent term. The difference between these growth rates is a manifestation of non-ergodicity…We find that repeated pooling and sharing reduces the net effect of fluctuations, thereby increasing the time-average growth rate of each cooperator’s resources, which approaches the ensemble-average growth rate as the number of cooperators increases. Therefore, cooperation in our model is advantageous for the simple reason that those who do it outgrow those who do not. 
Since we focus on non-zero-sum outcomes at NZS capital, we are of course gratified (confirmation bias alert! 😉) to see new theories that show cooperation is the natural way to increase positive outcomes in the world.

✌️-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 #347

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

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

In today’s post: why do big tech platforms think we want to strap a giant phone to our faces?; apps can drive market consolidations, but there are few good examples; the mess of online ad privacy meets the folly of regulation; passive ESG investing and gaming scores are hampering real progress; the slow path back in the private investing market; and, much more below...

SITALWeek will be on break next Sunday, see you back in two weeks.

Stuff about Innovation and Technology
Serving Up Digital
I generally prefer a good mobile website over an app. Maybe it's the Gen X in me, but I’d like to return to a world where most everything is browser based – with the exception of the few apps that require legitimate, native access to phone chips and sensors. I tend to install apps on my phone only for as long as I need them. The United Airlines app, for example, requires 176Mb of memory, control of my flashlight, and access to my unique device ID and audio recording (see also next paragraph on privacy). Despite wary consumers like me, the fast food industry has found that smartphone apps are proving to be a strong sales driver, especially when combined with loyalty programs and gamification elements. Unlike the United Airlines app, the Starbucks and Chipotle apps have earned (at least for now) a permanent spot on my phone. The US chain Noodles & Co. recently noted a ninefold increase in click-through rates and $71 in incremental orders for every 100 emails sent to app users. Success was strongest when connected to an omnichannel advertising approach that included social media and streamed video ads. The apps also help restaurants collect first-party data on customers, making them less reliant on the increasingly shady third-party ad networks and data brokers. Another chain leveraging technology to improve the customer experience is McDonalds in the UK, which will go to 100% digital ordering via app or kiosk, entirely removing the traditional ordering counter manned by people for 800 locations. We will continue to see such examples of automation solving for stagnating population growth and creating alternative jobs with better pay and working conditions. McDonalds is also signing more delivery partners in the UK. These innovations have been coming to US fast food joints as well. If the eight-year-old version of me were transported to a modern fast food joint today – with robots making fries, machine vision monitoring supply levels, and touch screens – it would feel like the future I imagined, at least until I realized the food hadn’t made any progress in the last four decades. The success of technology in driving restaurant sales may make it far more difficult for independent restaurants to hold their share against the leading digital chains. There are many apps aimed at Mom-and-Pop restaurants, but, as I wrote about last week, they tend to be net negatives. If other retail and service sectors can find a way to make apps more useful, that too might consolidate market share amongst larger companies with bigger budgets for technology. But, beyond the Amazon app, I am not sure there are many good examples. If digital drives power-law market share, then the antidote to keeping smaller businesses alive would be a great horizontal platform that takes a very small toll, but those too are hard to come by.

Privacy Not Included
The Irish Council for Civil Liberties (ICCL), which is currently involved in litigation against the digital advertising industry broadly, reported that European users’ personal and location data are tracked 376 times a day, while US users see data shared 747 times a day. The Mozilla foundation’s “Privacy Not Included” site offers a search engine for popular apps with reviews of privacy protections. In the mental health app category, for instance, there are many problematic examples of data collection and information sharing. Largely, data are used to target ads (significantly subsidizing consumer app costs), but it isn't necessarily clear to users just how much information might be shared and what ultimately can be done with their data. Here’s one scenario Mozilla highlights from the popular Calm meditation app: “[Calm could] get to know all about your meditation practices, your mood, your gender, your location, and more. Then use or share that information to target you with ads about things, like a wine company thinking you're ripe for targeting with wine ads when you're using the app a lot because that might mean you're stressed out. But you're a recovering alcoholic and the wine ads add to your stress.” If you listen to podcasts, you’ll recognize the company Better Help from their frequent ads. The app-based mental health counseling service also fails the privacy test for Mozilla. Consumers have had a Faustian bargain with advertisers for decades (centuries?) that predates the Internet. We get stuff cheaper, or for free, in return for ads. But, as tracker sophistication and the number of interactions has grown, the situation has become untenable. Thousands of data brokers, all tracking people hundreds of times a day, is offensive and potentially dangerous. Given the explosion of companies involved in the real-time ad bidding industry, the complexity of the connections, and the difficulty in getting proper user consent/permissions, I think it’s clear that third-party ad brokers and real-time bidding industries for online ads should be largely shuttered or neutered with regulation. As Apple and Google continue to limit the amount of user information that is shared, a small number of tracking sources should be made available – with transparency and user consent – to small publishers and ad networks in order to compete with the large first-party data owners. Legislation with bipartisan support called “The Competition and Transparency in Digital Advertising Act” may stir the debate on ads and tracking. The bill is targeted at breaking up ad giants with over $20B in revenues so that they can’t reach across more than one part of the ad chain. It would, for example, allow Google to sell ads but not tools to serve ads across other sites and apps. However, the heart of the issue isn’t size or reach, it’s permissions, transparency, and the real cost of ads that consumers are bearing. By forcing Google to exit its marketplace ad business (originally from the DoubleClick acquisition), it could create an even bigger third-party mess of privacy issues. The outline of the bill doesn’t mention privacy once. As I noted in How I Learned to Stop Worrying and Love the Monopoly, power laws are ok for digital platforms as long as there is transparency and proper regulation. For now, regulatory focus continues to be well off the mark.

Spatial Computing Stagnation
I’m baffled by the big tech platforms’ continued fumbling of spatial computing (augmented reality, mixed reality, etc. – see Meta-mess). The Information reported on Apple’s slow progress despite six years of effort. Facebook recently released a pixelated demo of a game that is far more basic than what Magic Leap commercialized four years ago. Indeed, no one is showing off better hardware or apps and games than what Magic Leap produced and released for the ML1 in 2018. I would generously describe Facebook’s demo as an embarrassing ripoff of a much better Magic Leap app that has been around for years. Microsoft’s HoloLens has been a commercial flop. As for Apple and Facebook’s early products, which are both video see-through (VST), I don’t understand the concept of strapping a giant smartphone half an inch from my face given that transparent AR displays (optical see-through or OST) offer a far superior way to experience the technology. Recreating the world with cameras that are not in the same location as our eyes – and using a weighty device that prevents the normal head movements critical to creating a 3D image of our world – seems like a clear dead end for VST-based AR. Google has come up with some interesting use cases, like real-time translation, but they haven’t demonstrated any compelling or unique advances in AR hardware. It’s possible we are just still waiting for the applications to drive the hardware rather than the other way around. Or, perhaps our brain isn’t capable of successfully blending today’s offerings of real and artificial elements, making the entire effort a failed science project until we invent much more advanced technology. (I don’t think this is the case, but at some point we need to admit it’s a possibility). I love the promise of augmented and mixed reality, but I am thoroughly disappointed with big tech's desire for us to strap disorienting phones to our faces, an "innovation" which can only ever be a parody of itself.

Miscellaneous Stuff

COVID Brain Damage
Severe COVID-19 infections appear to cause a material cognitive decline, according to researchers at the University of Cambridge and Imperial College London. The study showed that the effect was equivalent to losing around 10 points of IQ – or aging twenty years from 50 to 70. The FT detailed the research, noting that there is a future risk of increased cases of dementia stemming from the pandemic.

Stuff about Geopolitics, Economics, and the Finance Industry
ESG's Circular Reference: Passive Investing and Ratings Agencies
Citywire proposes that 2022 is the year of anti-ESG, given the growing backlash after the trendy investment style garnered assets and drove relative performance over the last couple of years. An example of this swing in perception was the reaction to the S&P’s removal of Tesla from their ESG index for having a disqualifying DJI ESG score (Tesla’s score stayed relatively flat, but other companies’ scores rose in comparison as they improved – or, in many cases, perhaps gamed – their scores to track better versus the monitored metrics). One thing we know for sure is that when you put a score on something, humans will start managing to that score. Sometimes this behavioral shift is compatible with the goals of the scoring system; but, more often, it creates a game where scores improve but no actual underlying progress is made. There are a lot of important reasons to be focused on many of the fundamental changes called for by ESG investing. However, we think taking a more holistic approach – that goes way beyond scores and grades – is merited. For the past decade, we have instead focused on the relative magnitude of non-zero-sum outcomes, or win-win, created by a company. First noted in Complexity Investing, we further outlined this NZS approach to creating value in more detail in this whitepaper in 2019. Given that no company is likely to be perfect, the most important thing is to analyze the net impact of their products and services on customers, employees, the planet, and society. It may be acceptable to have some weak areas (as long as they are improving) if the overall impact is a positive one. With respect to Tesla, while we would like to see some areas of improvement, we believe that the non-zero-sumness of the company merits a net positive assessment in a complete ESG framework. Taking a longer term perspective is also crucial. Shunning certain types of business today that are critical to achieving decades-out goals, such as energy independence, is likely to lead to an inflationary environment, or, worse, a lack of investment and innovation. While I wouldn’t go so far as to say that ESG has been “weaponized”, as Elon Musk indicated, I would certainly caution investors against blindly following scores/ratings and instead critically assess the net value added by a company against the goals you believe are most important to societal progress. While I suspect many active managers have thoughtful approaches to ESG, the reality is that passive ESG strategies are taking the majority of flows (62% in Q4 2021 in the US) for this rapidly growing segment of investing. That skew will likely lead to a vicious spiral of further metrics gaming, which will run counter to accomplishing real ESG goals. In 2022, ESG strategies hauled in $70B in the US alone, up 35% from 2020. We should encourage and reward companies for managing toward real, positive change rather than gaming a scoring system. And, investors seeking passive ESG vehicles may be causing more harm long term than they realize. A recent paper titled “Bet on Innovation, Not ESG Metrics, to Lead the Net Zero Transition”, from a former managing director at Credit Suisse HOLT, echoes a similar sentiment by using systems thinking to approach ESG issues: “The conventional Net Zero perspective with its emphasis on ESG metrics represents linear cause-and-effect thinking. That is, implementation of the metrics will then change company behavior with the eventual effect of a successful Net Zero transition. Different perspectives are presented rooted in systems thinking. Numerous company examples explain why innovation, not ESG metrics, will be the prime mover in achieving Net Zero.”

Realigning Public and Private Valuations
Closing the gap in reality that opened up over the last year between private and public market valuations will likely require a long digestion period as companies and VCs are reluctant to mark assets down. In prior corrections, we have seen a decline in the IPO market as private asset owners were hesitant to face the scrutiny of a public investor assessment of value. Even if public markets were to experience a bounce in valuations, they’d likely still be far below where private valuations sit. The change in sentiment is also likely to cause many of the tourists (such as crossover investors managing public funds reaching into later stage private markets) to exit VC investing. One time, many years ago, we marked down a private investment, and the company called to buy the shares back rather than have that valuation be made public. As hard as it is for VCs to endure markdowns, it can be even more painful for employees to see their options sink underwater. As I wrote in #320 last October: 
One of the quirks of venture investing is that a very small number of agents work to set the valuation of a funding round. Given the wide range of outcomes for high-growth, early-stage companies, it’s anybody’s guess, but, generally, more guesses are probably better than fewer. A problem you want to look out for in venture investing in times like this – when there is way too much money chasing way too few opportunities – is funds that make repeat investments, each round at an increasingly higher valuation as they are raising new, bigger funds. This lack of good price discovery can compound when a company goes public, as some of those same private market investors (typically crossover funds, but potentially evolving traditional VCs as well) hold onto, and maybe even buy more of, the floating shares of a company. This limited investor pool creates a value (due to scarcity of shares) that is perhaps not as accurate as you might have with a greater number of participants working to create a consensus value for a company. Companies are also waiting much longer to go public, which allows more time for inflated markups along the way. The real losers in the process are the company and its employees (and, ultimately, the investors who end up taking losses on their inflated investments). Valuing a company far too high vs. its long-term addressable market and raising too much capital create an impossibly high set of expectations for the vast majority of companies. Under mounting performance pressure with disappointment inevitably looming, employees may end up permanently underwater on equity and the company may lose discipline and focus. Because the economy has yet to adjust return expectations to a low- (or even negative-) rate environment, this pseudo Ponzi scheme will continue to offer an artificial source of performance as long as the low-rate music keeps playing. 
This past week, we saw evidence the correction in private market valuations is continuing to play out, with companies seeing a 40-60% discount today compared to 2021, as noted in Business Insider. Overall, it’s a healthy correction, and companies with real futures should continue to invest appropriately in opportunities ahead of them – even at the expense of short-term losses – to ensure long-term relevance and profitability. The world is not nearly as bad as investors, both public and private, think it is, and optimism will always win.

✌️-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 #346

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

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

In today’s post: digital interfaces evolve to remove our ability to choose; digital aggregation of demand creates power law platforms that confront many companies with major dilemmas – Shopify and restaurants are the latest examples; plastic-eating enzymes; China waffles on supporting Russia with technology; the best way to understand the world today is to time travel to 2019; and, much more below...

Stuff about Innovation and Technology
AI, Take My Brain
“Just give me the answer” is a growing trend in design and user interface. Presenting recommendations on a platter is a response to the increasingly overwhelming choices we face on a daily basis. Fatigue from infinite selection results in an overwhelming desire for the algorithms to narrow things down to a very small subset – or decide for us all together. For example, there’s “Amazon’s Choice” in ecommerce search results or the newer “Surprise Me” button on Netflix. The latest case is the new Airbnb interface, which is focused on “vibes” rather than traditional location-based vacation search. Show me a well-lit real estate photo so I can decide where to vibe out for a bit instead of having to look through a million options. I just want to click my heels and be transported to a new home that feels good without overthinking it. Of course, the problem is the algorithms operate in a way that removes our own agency, as I wrote about in more detail in the Algorithmic Threat to Illusion of Free Will. We don’t know what factors play into Amazon’s Choice (often I note that the top recommendation is also a paid advertiser for the same search query on Amazon). It’s not clear why Netflix wants us to watch a certain show over another or why Airbnb thinks we’ll like an A-frame in Rockbridge, Ohio, a spaceship in Joshua Tree, California, or a box perched over the ocean in Navidad, Chile. Algorithms now impact everything from who you date, to where you work and live, whether your struggles in life send you to church or rehab, and even how much you smile. The mysterious, integrated algorithms of our own brain and the global web dictate every move we make and every thought we have, with no conscious awareness. There are a few things we can do to take a little agency back, as I outlined at the end of Algorithmic Threat to Illusion of Free Will (see prior link). 

Virtual CC Numbers
Google announced forthcoming virtual credit cards for Google Pay at their developer conference last week. The technology will submit a randomized card number, not tied to your actual card, during online checkout. It’s a nice feature to have automatically available (it’s already an option from other financial services companies if you go through some extra steps). Integrating it into major digital wallets could go a long way toward decreasing credit card fraud online, and fees charged by credit card companies for card present/not present should also converge over time.

Third-Party Delivery Exacerbates Labor Shortage
When it comes to the rise of digital ordering from restaurants in the aftermath of the pandemic, the data are mixed. One report indicates that orders have gone from 12% before the pandemic to 33% today. However, delivery service providers are also competing for labor with their restaurant customers and taking a large cut of those restaurants’ profits. On the whole, it seems like third-party food delivery continues to be a classic example of a negative-sum business proposition. The Papa John's pizza chain in the US is using apps like DoorDash and Uber Eats to help take and deliver orders. However, do they realize they are funneling money into companies dipping into the same labor pool and thus exacerbating their own hiring and retention issues? The restaurant loses profits and faces higher labor costs for an order they would have very likely received and fulfilled directly before. Given the perpetually constrained labor pool, we can’t continue to see delivery grow and restaurants grow profitably – something has to give in this parasitic relationship.

To Buy or Not to Buy with Prime 
Shopify is grappling with whether or not to integrate Amazon’s new “Buy with Prime” offering for third-party ecommerce companies, which allows vendors to add a Buy with Prime checkout option to their own DTC website. As The Information reported: “Shopify CEO Tobi Lütke said on an analyst call that he was ‘thrilled’ with Amazon’s decision, and happy to integrate Buy with Prime into Shopify’s offerings for online sellers. But a Shopify spokesperson later told The Information that the CEO was only sharing his opinion on the matter, and the e-commerce company still needed to gather more details before deciding what to do. Meanwhile, an internal debate has been raging over the past two weeks.” In Heller’s Catch-22, fighter pilots couldn’t get out of flying missions by pretending to be crazy, because only sane people would not want to fly suicide missions. Shopify, like the restaurants that are choosing to use delivery platforms, is yet another company facing a Catch-22 as the Internet causes a power law distribution in the actual distribution of goods and services. The sane choice is for Shopify to fully embrace Amazon’s new Buy with Prime service for Shopify’s sellers because it would increase business for those sellers that want to use Amazon. However, Shopify would also have to be insane to let Amazon become a bigger direct partner to their sellers because eventually everything can just be sold on Amazon. Maybe Shopify needs a deal with Milo Minderbinder’s M&M Enterprises to fend off Amazon. We previously saw this same distribution power law taking place in video content. Streaming's direct-to-consumer model itself is a response to the old distribution power of cable and satellite. Then Netflix, for a brief period, had a chance at creating a new digital distribution power law, but the other Hollywood studios are fighting back with their own growing apps and content. This shift to digital distribution will continue to happen industry by industry, creating existential dilemmas for many companies.

Miscellaneous StuffResearch Revs Up Recycling 
Scientists have found a new way to quickly break down plastics like single-use water bottles and other polyethylene terephthalate (PET) products, which reportedly make up 12% of global waste. Using machine learning, they found a protein that can break down the building blocks of PET into the original monomers in one week, which can then be reassembled to make PET again. This method is more robust than melting plastic for recycling, which takes energy and eventually degrades the material. Importantly, this FAST-PETase enzyme can break down over 50 types of PET under a variety of conditions. Researchers keyed off natural plastic-eating enzymes that have been discovered in the last couple of decades (which we wrote about here). National Geographic also recently reported on the rise of microplastics being found throughout the human body, e.g., in organs and blood. We ingest the bits of plastic as they flake off our clothes, carpets, bottles, and food processing equipment/packaging materials. It’s not yet clear what long-term health impacts ingested plastics might have. Maybe we can take a FAST-PETase pill to flush the plastic out of our bodies.

Mexican ‘Za’s Triumphant Return
The peak of human culinary achievement was the Taco Bell Mexican Pizza. We have tragically had to live without this taste explosion since November 2020 when Taco Bell killed the menu item due to “environmental” concerns. The fast food chain is bringing back the creation on May 19th and celebrating with Mexican Pizza: The Musical, featuring Dolly Parton, a big Taco Bell fan and the patron saint of all things great. The PR-stunt musical will appear live on TikTok on May 26th. It's another notable example of TikTok garnering the attention of major brand advertisers. 

Fentanyl-Fueled Fatalities
107,000 people died from drug overdoses in 2021, up 15% from 2020. It’s the first time the annual number has crossed into six digits. Fentanyl-tainted drugs are said to be the major force behind the rise in deaths. Of the one million deaths since 2000, more than half have come in the last seven years, the WSJ reports. 

Android vs. iPhone Safety Divide
Apparently, Android users are better drivers than iPhone users, no matter which group of people you compare (adjusting for age, education, credit rating, gender, etc.). The data come from car insurance company Jerry and are based on 20,000 users driving over 13M km. Android users outperformed in all safety metrics, including overall safe driving, speeding, distraction, turning, braking, and accelerating. The difference was especially evident in the distracted driving category, where iPhone users were much more likely to be on their phones while driving. The stat that caught my eye was the widest gap, which was between Android users with the highest credit scores, coming in at a safety rating of 85, and the Apple cohort, with a rating of only 65. The explanation is still elusive, but researchers have suggested Android users are more conscientious and less emotional. Surely there’s a more nuanced explanation for this categorization, right? Rather than point fingers and make excuses, I suggest iPhone and Android users just try to get along, no matter how different we may seem! 

Stuff about Geopolitics, Economics, and the Finance Industry
Chit Chat Cloudflare
Joe appeared on the Chit Chat Money podcast last week to talk about Cloudflare and cyber security.

Tech’s Martial Menace
In an interview with the FT, Henry Kissinger had this to say on the rising pace of technological advancement in weapons: “We are now [faced] with technologies where the rapidity of exchange, the subtlety of the inventions, can produce levels of catastrophe that were not even imaginable. And the strange aspect of the present situation is that the weapons are multiplying on both sides and their sophistication is increasing every year. But there’s almost no discussion internationally about what would happen if the weapons actually became used. My appeal in general, on whatever side you are, is to understand that we are now living in a totally new era, and we have gotten away with neglecting that aspect. But as technology spreads around the world, as it does inherently, diplomacy and war will need a different content and that will be a challenge.” The 98-year-old Kissinger was also optimistic that China would not want to be shunned by the world like Russia: “I would suspect that any Chinese leader now would be reflecting on how to avoid getting into the situation in which Putin got himself into, and how to be in a position where in any crisis that might arise, they would not have a major part of the world turned against them.” The WSJ reported that Chinese tech companies are pulling back from supplying Russia despite guidance from Beijing to ignore sanctions. For now, the stakes remain far too high for China to do something that causes a Russia-like global backlash.

Think Like It’s 2019
As I’ve scanned the vast amount of information from people who think they know what they are talking about, but probably don't, as they try to make sense of recent market volatility, I keep seeing this interesting recurring behavioral bias: no one can fully come to grips with the basic fact that the pandemic has had no significant lasting impact to the way the world functions. Clearly, I am not saying the 20M excess deaths globally are meaningless. Rather, all the stress, tumult, and craziness we all experienced didn’t change much, if anything, about our behavior or the basic functional systems in the world around us. I wrote about this pandemic “non-event” in detail last November, just after the peak of the stock market, and I think it’s worth repeating that post here: 
Predicting the future is impossible – that’s the lesson from complex adaptive systems. Therefore, you want to focus on adaptability and win-win outcomes, which are the ancient truths that guide long-term evolution in any complex system like the global economy. There have been many predictions since the start of the pandemic about what might or might not change, what will stick or bounce, and where the world will end up on the other side. The jury is still out on many predictions, such as the rise in ecommerce as a percent of total retail spending, which has turned out to be not far off the pre-pandemic trendline (see #323). Other pandemic changes seem to have been somewhat temporary, such as telehealth, which is being rolled back in some US states. Indeed, most changes happening in the economy since the pandemic started may simply be a result of all the fiscal and monetary stimulus. In other words, excessive spending in all corners of the economy might be masquerading as behavior changes related to the pandemic. So far, evidence of long-term structural changes is muted or even scarce, with two notable exceptions. First, the pandemic has driven a difficult-to-reverse increase in our addiction to our smartphones thanks to their plethora of distracting social media, gaming, and video apps. Second, there has been a significant compositional change to the labor force. Some meaningful percent of workers (in the US, UK, and parts of Europe) have either left the workforce or shifted to different types of jobs (e.g., from working in a restaurant to doing customer service from home). As we’ve discussed ad nauseum, a combination of early retirements, shift to single-income households, relocations, rising work from home, declining immigration, increasing deaths, and changing demographics (see #320) have reshaped the labor force over the last two years. These labor changes also seem to be closely tied to the pandemic-related prediction of accelerated technological use/implementation across the economy: a fear of labor shortage and risk of rising wages have companies searching high and low for ways to automate jobs, both blue and white collar.

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

It seems unthinkable we could have had a global economic shut down, uncertainty, death, and everything else, and we’re back where we started (inflation adjusted!) with not much to show for it. We want some sort of prize in the form of a new world for having gone through the tumult of the pandemic, but all we get instead is more expensive prices for the same things we had three years ago. I am not sure which cognitive or behavioral biases keep us from seeing this reality, but their success is (quite literally) mind-boggling. Humans must have some sort of belief system, programmed by natural selection, to place enhanced importance on events that deviate significantly from the norm. Perhaps major changes trigger a reevaluation of our basic assumptions to help us reassess threats to ensure that we are not zeroed out by the evolutionary fitness function. As storytellers and lovers of tradition, we might need this impetus to force adaptation if the alternative is death. But, in this case, no adaptation is needed – there’s no new existential threat in our world that didn’t exist three years ago. And, this is cause for optimism because it means we know the cause and solution for the uncertainty in the markets (see the end of last week’s note for more). In the post above from last November, I conceded that the only things that seemed to have changed were participation in the labor market and our deepening relationship with (and reliance on) technology. I might still try to loosely grip onto those speculations; but, if you press me, I am not even sure the pandemic will end up having more than a temporary impact even in those areas. So, here we are in 2022, which is structurally similar to 2019, but we have this sense that we are in some parallel universe where everything is different. I think the best way to overcome this weird mental bias is to consciously reassert our 2019 mindset whenever we are trying to understand something in the world or make a decision. This trick is a form of mental time travel, which I discussed in more detail in Time Travel to Make Better Decisions. The fact that you might have trouble remembering what you were thinking three years ago sort of adds to my point. We have a propensity toward amnesia, even for the recent past, which allows us to recover from what may have seemed like a seismic event at the time and get right back to “normal” living.

✌️-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 #345

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

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

In today’s post: LEGO bricks journey into a virtual world; smarter water heaters; content fragmentation is driving down future values as it becomes near impossible to have a Top Gun moment; chips that reprogram cells; market-clearing wages; equally valuing all skilled jobs; burning things down to build them back up; everything is ok; and, much more below...

Stuff about Innovation and Technology
Smart Water Heater
We are likely to see a multitude of solutions driving energy efficiency in the coming years. One key area to tackle is heating and cooling for residential climate control and hot water. A company in Germany, Nexol, has created a hybrid AC/DC hot water heater. The unit has a smart controller and a two-stage tank that can warm directly via DC current from solar, without a converter, or via AC from the grid. Replacing HVAC and hot water systems is a messy, real-world problem that will take decades to solve, but, as I noted in #332, this is a good example of one of many opportunities to leverage smart technology to decrease energy consumption over time.

Digital LEGOLAND
The LEGO® brand has long worked to embrace technology and evolve their beloved bricks over time. But, kids today are increasingly on iPads and iPhones and TikTok and Minecraft and Roblox and Netflix and and and...the options seem endless compared to my childhood. While LEGO bricks are still a favorite, one wonders if kids spend less time in their physical building phase before moving on to more digital hobbies. A few weeks ago, the family that controls the LEGO Group invested $1B in Epic, the maker of Fortnite (and the mind-blowing Unreal Engine), alongside existing Epic investor Sony. Commenting on the investment, the CEO of the company that controls the LEGO brand, Søren Thorup Sørensen, said: “A proportion of our investments is focused on trends we believe will impact the future world that we and our children will live in. This investment will accelerate our engagement in the world of digital play, and we are pleased to be investing in Epic Games to support their continued growth journey, with a long-term focus toward the future metaverse.” Further, the FT reported that the LEGO Group will be tripling the number of software engineers at the company to 1800 by the end of 2023. The increase will take the overall software effort to several hundred million dollars/year as well as take back control of previously outsourced projects (when we look at investments, we consistently see that vertical integration is necessary to succeed as products evolve from analog to digital). LEGO executives no longer see a distinction between physical and digital products. This is an interesting case study of a largely analog company working actively to grow its relevance (or at least not lose it) in the face of a significant digital transition and change in the way their customers spend their time. The task is tougher given that Minecraft and Roblox have already built platforms for virtual world building. As I wrote in #327, Minecraft passed one trillion cumulative video views on YouTube last year. However, there are also significant shortcomings and problems with platforms such as Roblox when it comes to moderation and exploitation. Building a successful online world and nurturing its evolution is very challenging, as Nexon's Owen Mahoney has described in the past (see #322). Epic's experience from Fortnite could help the LEGO Group’s efforts on that front. There is also the consideration of where the real world meets the digital via augmented reality (with efforts underway to create real-time maps of the world by Niantic and Snap, see Fabric of Spatial Computing for more). I could see a lot of interesting opportunities for LEGO products with AR and a virtual world combined. Currently, smartphone operating systems are gatekeepers to many digital and AR experiences, which may present challenges for AR world creation in the future if they don’t fully open up their hardware and software features to LEGO (and other) developers, or if they charge a significant access toll to ecosystem users. While it may seem too late for a company like LEGO to make a major digital pivot into virtual world building, the shift from screens to AR may create opportunities and openings for disruption across a host of existing applications.

Crypto & White House Frustrate Green Energy Goals
It’s been a bumpy ride for crypto recently (but, what hasn't been bumpy lately!?). Wikimedia, the foundation that runs Wikipedia, voted to no longer accept cryptocurrency donations due to the energy costs and scam risks associated with the transactions (compared to the negligible energy/risk for a credit card transaction). Surprisingly, despite all of the riches created by crypto appreciation, only 0.08% of Wikimedia donations came via crypto, amounting to only $130,000 last year. Thanks to electricity subsidies, crypto mining will consume close to 25% of all electricity in Argentina’s Tierra del Fuego province in Patagonia. The cold temperatures make the Southern tip of the continent a more efficient location to run hot mining rigs. Argentina also has crypto-friendly political policies and is one of the top-ten crypto adopters. In other crypto news, the Bored Ape $320M virtual land sale frenzy for 55,000 “parcels” in Otherside caused such a burden on the Ethereum blockchain, the underlying platform for ApeCoins, that fees to transact the auction amounted to an additional $123M. The congestion caused more legitimate use cases of Ethereum to see similarly crippling fees. Meanwhile, California ran on 100% clean energy for the first time in history at the end of April, as production from solar (and other alternative sources like wind and geothermal) exceeded the energy demand of 18,762 megawatts – for an entire 15 minutes. Despite the promise of solar (which accounts for around two-thirds of California’s green energy), several hundred large-scale projects were recently canceled in the US as shipments of Chinese solar panels were halted over concerns that China is dodging tariffs by routing panels through other Asian countries. If there is one thread that ties the preceding stories together on crypto and energy, it’s our devastating inability to see the big picture and think long term.

The Declining Value of Ephemeral Content
Decades ago, when a movie or a song was a big hit, it was ubiquitous on the radio, in the box office, and in all forms of ads promoting the content (or, at least, that’s how I remember it). It’s not that it was easy to dominate the cultural zeitgeist, but there was certainly less competition to do so. The shifting content landscape has been on my mind with the upcoming theatrical release of Top Gun: Maverick. Back in 1986, the original Top Gun dominated the collective psyche of the US. The current hype around the sequel suggests public sentiment could approach the 1986 fever, so we will see if the box office lives up to those expectations. But, how unusual is that today? It seems like it stands out as an exception. The breadth of popularity is relevant because companies that produce music and video content (e.g., music labels and Hollywood studios) are essentially specialized lenders that help bring creative endeavors to life. Bankrolling the production of content today usually means making little money or, in some cases, taking upfront losses while making a long-tail return on the future value of that content. It’s essentially a payday advance for the creative talent, who in many cases forgo some of their future earnings in exchange for upfront cash. With ever-growing fragmentation, will today's content have limited long-term value because it leaves our cultural memory faster (or never reaches an enduring level of cultural awareness in the first place)? In other words, is the return on investment for content declining dramatically due to fragmentation? Further, with advances in technology and digital distribution, the cost to create and broadcast content is declining, fueling infinite supply in the face of finite demand. I don’t yet know if content is becoming less valuable, but I am very excited to see the new Top Gun!

Miscellaneous Stuff

Dynamite TNT Chips
Chip-based tissue nanotransfection (TNT) can effectively reprogram cells by using electricity to deliver specific reprogramming factors that control gene expression, allowing one type of cell to be transformed into another. For example, the technology has been used to turn fibroblasts into endothelial cells capable of blood vessel formation, repairing damaged tissue in mice. What’s interesting about this technology is that it doesn’t rely on a viral vector to deliver genetic cargo but rather an optimized nanoporation process, whereby an electrical current punches tiny, temporary holes into cell membranes, allowing direct delivery of the genetic payload from chip to cell. The cells then manufacture the corresponding protein transcription factors, which go to work reprogramming both nanoporated and nearby cells (likely due to transcription factor export). Besides wound healing, potential applications include repairing brain damage from strokes and nerve damage reversal from diabetes. Thus far, the chip has been successfully tested in pre-clinical trials with pigs, and various types of cellular reprogramming have been accomplished in mouse models. Researchers at the Indiana University School of Medicine released details of the silicon chip manufacturing process so that others can work on new commercial applications.

Stuff about Geopolitics, Economics, and the Finance Industry
Wage Bubble?
As I look through the March data for job quits, openings, and wage increases, I see a lot of people churning jobs but no meaningful growth in labor force participation. Most of the millions of people in the US who retired early and left the labor market for other reasons during the pandemic are not coming back to the market anytime soon, despite wage increases. This was also evident in April data showing a decline in labor force participation to 62.2%. Rising wages largely due to job hopping might be creating a hourly pay level that is actually above the market-clearing level for reaching balanced employment. In aggregate with wage increases of 5.5% y/y in April and inflation of 8.5%, real wages may actually be declining for some people. One company trying to tackle worker availability is the US-based Noodles & Company, which now offers immigration assistance as a benefit.

College Degrees vs. Skilled Trades
I’ve written in the past about how alleviating student loan debt could be a net-positive-sum decision that would lead to higher consumption among the debt-strapped Millennial generation as they enter their peak consumption years for the economy. Essentially, the multiplier effect could create more economic value for the US than the cost to waive the debt obligations. I still generally agree that some (at least partial) waiving of debt would be economically beneficial, but I’ve also been wondering why we would limit debt relief to college students/graduates? Why would we consider debt for careers that require college education to be more forgivable than for other types of careers, such as skilled trade (e.g., electrician, plumber, and small business owners of all sorts)? Trade workers might want to take on debt to advance skills, buy trucks or equipment, or access working capital to hire and grow a business. As we stare down a labor shortage that is only going to get worse due to prior low birth levels, Boomer retirements, and flagging immigration, what we need is more people working in all types of jobs. We were able to prove during the pandemic that Universal Basic Income isn’t currently necessary given the low labor force participation rate. Rather, we need some type of Universal Basic Opportunities, i.e., a mechanism to encourage people to get trained, get hired, start businesses, and enter or re-enter the workforce successfully. There is no reason to limit this assistance to jobs for which a college education is necessary. Indeed, with increased software automation coming to replace pencil-pushing (aka mouse-clicking) middle management, we’d be better off incentivizing critical skilled trade work and other skilled professions. It seems sensible to support everyone who wants to tackle the types of jobs that will be difficult to automate in the coming decades as the population ages and birth rates continue to decline.

Breaking the First Rule of Fight Club
I’ve put off linking to this Vanity Fair article “Inside the New Right” for a couple of weeks because I am not sure if I have anything interesting to say about it, let alone understand it. Part of my hesitation is my strong dislike of using labels to identify groups of people when individual variances are always wider, more important, and more interesting. My takeaway from the VF article, which may just represent my own bias, is that there seems to be a Fight Club-esque ideology of burning down the establishment so that we can build the world anew. Somewhat predictably, there isn’t necessarily an agreed-upon blueprint to rebuild. Several interconnected topics I’ve explored over the past few years include: 1) The rise of nationalism in the face of stagnant real-wage growth this century, 2) An increasingly existential sense of lost purpose as technology adoption palpably inches us closer to a future where humans are less special, and 3) A loss of common culture as the Internet both fragments and amplifies differences. I’ve also connected this socioeconomic dysfunction/evolution to crypto, which seems a manifestation of the anarchistic desire to start from scratch rather than make the existing financial/monetary institutions adapt to evolving needs and technologies. I can’t quite put my finger on it, but all these ideas seem connected in some important way. And this article, even though it tries to over-classify an exceedingly complex movement, still might provide a useful clue to fitting it all together.

Speaking of doomsdayism, all of the “expert” guests across the financial news media believe the sky is falling and end-times are near. They believe there is no hope, that everything has changed, and now is the time to run and hide. This I know is not true. There is nothing wrong with the world that won’t be fixed in time. How did we arrive at this moment with a mid-teens percentage decline in most global equity indexes and a historic 10% decline in bonds year-to-date? The explanation is surprisingly simple: a couple years ago there was a pandemic, and, without complete information or a working crystal ball, politicians injected too much money into the economy. Now, to correct this liquidity problem, the money is being sucked back out. It was a temporary economic experimental mishap that has little bearing on the long-term outcome of the global economy. Markets need homeostasis like all living creatures, and it can be a challenge to find it. Sure, there are things to worry about, but most of those worries won’t come to pass. Complex systems theory teaches us that you should expect the unexpected, but you can also prepare for the unexpected (which we discuss in Complexity Investing).

The successful path has always been one of optimism. As I have noted repeatedly in this newsletter, cynicism sounds smart, but it’s never beautiful, and optimism always wins in the long term. If optimism doesn’t win, then it doesn’t matter what happens, so always bet on optimism. There is an extended arc of 800 years of interest rate declines resulting from the simple math that one person’s debt is another person’s asset, and it’s unlikely to reverse because of an 18-month policy misstep. There are some things humans need to address that could cause structural inflation and rates to stay higher for longer. Declining birth rates and anti-immigration policies are inflationary. The moral panic against investing in real infrastructure (disguised in many instances as “ESG” investing) that we need for the energy transition and the future of the planet is damaging and inflationary. The heating up of planet Earth will be inflationary. Yet, as has happened for hundreds of thousands of years, human innovation and spirit will invent a deflationary way out of whatever crises we face. But, we don’t need to join hands and plead for collective salvation or pretend things are ok – because our world is already ok on balance. Social media platforms and their leaders have worked out ingenious ways to take advantage of our brain’s shortcomings to convince us that our social, political, and economic structures are failing us. They’ve convinced us we hate each other. They’ve convinced us we need to burn it all down in order to build it back up again. But, we’ve already built civilization, and we will continue to adapt and evolve alongside it as we make it better. Sometimes it feels slow, and sometimes it feels like we are moving backward; but, if you consider the bigger picture, it’s clear the long arc of human progress always has been, and always will be, moving forward.

✌️-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.