Stuff I thought about last week 8-4-19

Greetings – Ninja moves to Microsoft’s tiny streaming platform as the video game cloud platform war heats up; the box office power law is stable, but fantasy flicks are increasingly popular; police give out Amazon cameras in return for information; is tech driving a structural change in inflation, or are mean reverting forces still to come in this economic cycle? Mind reading, wearable air conditioning, cameras that can see around corners, and lots more! As always, grab me on Twitter with any feedback.

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Stuff about Innovation and Technology

Video game streaming legend Ninja will move exclusively to Microsoft’s Mixer platform leaving Twitch and YouTube missing his presence. In what was likely an enormous amount of money for Ninja, but a tiny amount of money for Microsoft, this is just one more sign that the software company is very focused on gaming as a core part of their overall business. Ninja risks losing a huge part of his audience given Mixer barely registers in terms of market share: of the 3.8B hours of live-gaming viewing in Q2 2019, Mixer had only 3% share compared to 72% on Twitch and 19% on YouTube. This shift of thinking on gaming at Microsoft is a big change from 5-10 years ago as Satya Nadella explains in this Fortune interview. The rise of the cloud and multi platform gaming (console, mobile, PC) etc., combined with 5G network rollouts is creating a very large opportunity for Azure, which recently signed rival Sony as a gaming customer. Microsoft has a ton of assets to deploy in gaming, and their commitment in both platform and dollars is encouraging. However, I don’t know of any examples of a company attempting to buy a network effect away from an already established network (in this case two networks, both Twitch and YouTube have massive scale). I wrote more about the shifting network effects in gaming and how Microsoft appears to be playing more defense than offense back in SITALWeek #194. And, here is a delightful interview with the $3M prize winner at last week’s Fortnite esports tournament – an event that smashed records for live, online viewing, peaking at 2.3M simultaneous watchers.

IoT Diapers? As the diaper industry suffers with the declining birth rate in developed markets, the industry is adding connected sensors to tell parents when it’s time to change the diapers. As the author of the article suggests, maybe just use your nose! The declining birth rate in the West is a ticking time bomb not just for diaper makers but for all of capitalism. Adam Smith was right when he said a growing population was one of two critical components of capitalism (the other being productive reinvestment of capitalism, which gets hazy as we are shifting from an industrial to an information based economy – much more on this topic down in the Macro section this week).

Stanford has developed a laser-based camera that can see around corners by analyzing single particles of light reflecting off a surface.

Researchers at the National University of Singapore demonstrate wearable antennas (e.g., sewn into clothes) that can boost signal 1000x, thus reducing RF power requirements and dramatically improving battery life. (And, as I wrote two weeks ago in SITALWeek #202, don’t fear RF signals.)

Chinese researchers have developed a new type of chip design that incorporates both Von Neuman and neural net elements: essentially, one part of the chip is programmed traditionally by engineers, while the other can learn on its own. The first application is an autonomous bicycle that can steer around objects and respond to voice commands.

Google’s Deepmind can predict 90% of kidney failure 48 hours ahead of doctors.

Facebook published details of a new brain interface in Nature Communications this week based on machine learning algorithms trained on epilepsy patients with direct brain interfaces. When participants were asked to answer questions, the context of those questions and possible answers aided greatly in the algorithms ability to determine what people were thinking with a 76% accuracy rate.

Several companies are developing tech to take down drones, but it’s currently illegal for anyone in the US to do so except federal agents. Even local police are not able to legally counter a drone. Physical nets and digital signal jammers are the most popular measures for now but you also have the obvious risk of falling objects when you try to stop a drone.

Matthew Ball has a great myth busting post on the current state of movie box office sales over on Jason Hirschhorn’s site REDEF. The power law of box office success has been stable at the head: the top 25 movies are still 50% of ticket sales. However, the long tail has truncated, so in effect the power law is steeper, but the top hasn’t moved any higher. One thing that has changed is the composition of the top 25, which has shifted more toward sci-fi, animation, and fantasy. Romcoms and dramas are still being made, but their distribution has changed to streaming, and they aren’t drawing blockbuster crowds. This shift reminds me of a passage from Kurt Andersens’ fascinating book Fantasyland, which discusses the unique predilection of Americans to favor fantasy over truth; I posted an excerpt from the book here on my Twitter feed.

There’s a wide range of guesses on how much power AI might consume – anywhere from 1-10% of the global energy supply over the next decade. Training is the most power consumptive, which tends to be more upfront on GPUs, while inferencing can be done in a relatively efficient manner on a variety of purpose-built chips. I think it will depend on how often models are retrained based on the incoming data from sensors. If models are retrained continuously it will require a lot of power.

Speaking of energy consumption, about 10% of global energy generation goes toward air conditioning and refrigeration. With the growing number of annual “fatal” days of heat around the world, a/c is another rising energy burden. India is funding an a/c innovation prize looking at ideas to reinvent cooling, including the combination of rare earth minerals and magnetic fields. Sony meanwhile is introducing wearable a/c tech – the device can go in clothing between shoulder blades. Imagine a wearable a/c shirt with built in 5G signal boosting antennas!

AMD has become a credible number two supplier in the server market, in no small part thanks to its shift to TSM in Taiwan for chip fabrication, while Intel continues to face manufacturing challenges. Meanwhile, all signs continue to point to the potential for a rebound in data center spending in the 2nd half of 2019, after 2-3 quarters of heavy inventory digestion.

Amazon is said to be pursuing an ambitious new grocery store chain separate from Whole Foods(which, as far as I can tell, has suffered a bit following the acquisition, but I save so much money there with my Prime membership, I’m not complaining!). Grocery is facing a couple of different challenges: 1) Americans have spent more eating out than on groceries since 2015, and this trend is likely to accelerate with the food-delivery wars, ride-share bundling, and cloud-kitchen trends; 2) grocery itself will see a percentage of customers prefer delivery (at least in some instances) vs. in-store shopping; because grocery is low margin, it might not take much of a drop in frequency to impact the business in an existential way. This isn’t as much about competition with Amazon as it is about changing consumer behavior. The range of outcomes for incumbent grocery and fast-food chains is widening to a point where narrow predictions of the future based on the past likely won’t hold.

BBC Earth’s new Magic Leap app will bring nature to your coffee table (although, if you live in California on top of the 3,700-mile long Argentine Ant supercolony, you won’t need this app to bring nature into your home!). Magic Leap’s recent coral reef portal app is also highly recommended if you have one of their headsets.

Facial Recognition News of the Week:
Amazon’s Ring subsidiary, which already pursues several questionable business practices, is contracting with police departments for real-time 911 call information, which can then be transmitted to Ring customers in the area. The odd thing here to me is that this system could alert someone that their neighbors just tattled on them in real time! Amazon has 225 police departments signed up for their other service, which allows police to request access to household security cameras. This usage raises a lot of questions: for example, if your doorbell camera happens to capture a stop sign and license plates, is that now a camera that can be used to issue tickets? In related news, the city I live in is in the process of installing license-plate-tracking cameras at every major point of access. It’s easy to see how most cities could become instant dragnets for even the mildest of offenses. Amazon’s Ring business is also giving cameras to police, who are then giving them for free to people in return for information on crimes.

Which brings us to London where four people were arrested for hiding their faces from a police recognition experiment:
The police demanded that he comply and scanned his face with a facial recognition tool on a mobile phone. Although his face did not match that of any known criminals, a verbal altercation ensued, which resulted in the man being fined £90 for telling an officer to “piss off”. The entire incident was caught on camera by journalists.
“The fact that he’s walked past clearly masking his face from recognition. It gives us grounds to stop him,” an officer says, defending his actions.
London’s 420,000 cameras are 2nd only to Beijing’s 470,000. Facial recognition technology isn’t ready, and humans aren’t ready for it. When we lived in tribes of 100 or less, we had explicit game theory rules governing interaction – there was no chance at anonymity, and cheating was punished while cooperation was rewarded. This is the heart of non-zero-sum (win-win) interactions between humans, which Robert Wright calls the logic of human destiny. But, humans left accountability in the dust several hundred years ago thanks to cities, capitalism, and ultimately everything that underpins that extremely razor-thin balance of civility and hostility that in America we call “suburbs”. Today we are ruled by the illusion of anonymity, and the mirage that we don’t depend on the rest of society to survive. A scenario of zero-anonymity from facial recognition is a significant loss of liberty that the western branch of the human species is nowhere near close to accepting.

Which leads us to an update on the future of the social credit system in China, which appears to still be a work in progress. What seems clear is that multiple models are being run and trialed and one will likely prevail. An insight from the Lex Fridman podcast with Kai-Fu Lee I linked to last week was just how actively China uses local governments to seed and experiment with various initiatives. FT reporter Yuan Yang reports “The Xinjiang police used a facial-recognition app on me. In Beijing...When I checked into a hotel, a police officer came to the lobby to register me with her smartphone.”

In more lighthearted news, facial recognition steps up to help you get your drink at the bar – assigning a number to each face based on who walked up to the bar first. Worth it?

To summarize this section on facial recognition, I want to reiterate that I am not against the use of the technology when it’s ready, and when the social contract between governments and civilians has been worked out. Part of me yearns for a time when anonymity once again gives way to accountability, even if that means a loss of some degree of liberty. What’s troubling today is that tech companies like Amazon are being irresponsible, and some democratic governments are proceeding without consent of voters.

Miscellaneous Stuff
With the announcement of Universal’s new Orlando park, it appears we can see the path the theme park industry is taking toward more and more immersive, siloed “world” experiences. Similar to Universal’s wildly successful Harry Potter attraction and Disney’s new Star Wars Land in Anaheim, the new Universal park will contain separate, walled off, immersive experiences. It is perhaps a bow to the ever-deepening drift of America into Fantasyland, as evidenced by the box office trends mentioned above.

Can sharks really sense a drop of blood in the ocean? The semiconductors of our favorite micro-controller company, Microchip, are used in this cool DIY device to test the theory (10 min youtube video; if you want to save time, the answer is: nope).

As the arctic burns and glaciers melt at extreme rates, SFO will ban plastic water bottles in another example of growing consumer intolerance to the PET industry. As I’ve mentioned (probably too many times), with the mighty aluminum can, Ball Corp continues to be one of the best examples I’ve seen – perhaps the single best – of what we call ROOTMO: Resilience with Out-of-the-Money Optionality. The company reported this week and discussed the accelerating demand for aluminum, including their new proprietary cup that will roll out to select colleges and sports venues this Fall. The industry will need to work together to shift the 500B plastic bottles over to aluminum, and that could take decades, providing a long tail wind for the aluminum industry.

Stuff about Geopolitics, Economics, and the Finance Industry
Institutional Investor discussed Boston Consulting Group’s report on the asset management industry. Normally I’d cut my arm off before I’d agree with a consulting firm, which tend to be populated with that 1900’s-type of thinking that is lost in the Information Age; however, I tend to agree with this analysis. It discusses the power law happening in the industry, which will leave only multi-trillion dollar financial services platforms and a long tail of boutique active managers. The middle, approximately $100B to $1T according to BCG, will be hollowed out – acquired and gutted or death by billions in outflows. As we’ve discussed in the past, the middle of the industry has tended (certainly not true in all cases) to offer something more akin to “risk-adjusted returns”; however, investors can now get index performance, which by definition has zero risk relative to itself for free, or close to free. And, having hundreds of billions of dollars in assets makes it hard to drive genuinely active strategies. The final part of the BCG report recommends smaller firms also use data as an advantage – I covered my thoughts on that topic in depth last week in the final section of SITALWeek #203 (tl;dr: data do more harm than good except when applied very specifically and mostly for behavioral advantage as opposed to informational advantage; but I admit there can be nuance to the use of data – just make sure it helps lower cognitive bias, not increase it).

83% of advisors are “hoping their favorite active mutual funds become available in a nontransparent ETFstructure.”

As I’ve said in the past, having a degree in economics makes me uniquely disqualified to comment on macro, but here is some of what’s been on my mind lately. Ray Dalio published a paper on “Paradigm Shifts” a couple of weeks ago that is worth reading in full (PDF). While it’s unfair to reduce the smart and nuanced thought piece to a simple conclusion, the crux of the argument is: low rates at some point will be unattractive enough to cause lenders to stop lending; therefore, buy gold because excess capital will cause asset bubbles and inflation throughout the system. It’s hard to disagree with the logic. Throughout economic cycles, the excess availability of capital has tended to cause it to revert to the mean and decline at some point, typically overshooting on the downside. Putting aside the shorter-term risk of a recession, it’s still worth questioning whether there is any sort of structural change as the Industrial Age Economy transitions to the Information Age. With a new digital operating system being written for the global economy, is there a structural abundance of capital, or are we simply seeing the result of policy decisions (quantitative easing, lower corporate taxes, etc.)? I was struck by the comments on iBuying from Redfin CEO Glenn Kelman on his earnings call this week: “It is such an ahistorical cost of capital today that has created this market. Middle Eastern money, Far East money, there's all sorts of capital coming in at almost no cost. So we can easily provide liquidity to a consumer who has no other way to get it...right now there's so much money being thrown around, but it's hard to say what the value proposition will be 2 years from now, let alone 10.” As a result of increased information velocity and technology platforms, is the economy going to be structurally less capital intensive? Capital will continue to be generated across the world, and it shouldn’t all go into unproductive gold and bitcoin; mathematically, assets all are cheap relative to the current cost of capital, which is approaching zero. But, as we say over and over again, the global economy is a complex adaptive system with emergent properties that is highly sensitive to small perturbations. That leads us to think about non-ergodic systems and the importance of the path through time and probabilities of certain outcomes. The rising productivity, shift in labor forces for on-demand services, rise of alternative energy supply, and other changes resulting from the shift to a digital economy and the disequilibrium caused by low rates – without the accompanying inflation – seems like it has some persistence; only a small portion of the economy has become digital so far. It seems as though we need inflation to catalyze a rise in rates and a correction; however, maybe technology means “this time it’s different,” or maybe inflation will come from a more unexpected vector, such as the cost to mitigate global warming, social unrest, or the trade costs of rising nationalism. Or some other trend, like the globally weakening birth rate, could cause a new paradigm shift for capitalism. Thinking about macro is interesting, but it isn’t part of our investment process, instead we are always looking for adaptable companies with very few predictions required to win over the long term - the heart of our Complexity Investing philosophy.

China is eliminating foreign-ownership caps on asset managers, and JP Morgan has been the first to move to a majority stake of their mutual fund complex in China. Likely, this change represents a significant new opportunity for foreign asset managers.

Equifax’s settlement with the FTC appears to be a fraud even greater than the original egregious identity breach. The company is only required to pay out $31M to the 147M affected individuals, or 21c each if everyone claimed their share. That’s less than the cost of the stamp used to mail the checks. The actual economic cost of the offense was agreed at $125 per person, or over $18B (greater than the value of the entire company, which exists only to mooch off of a broken credit system!). In other words, Equifax should be bankrupt.

Tensions are rising all around Asia this week. Of significant potential impact to the semiconductor supply chain, Japan is keeping critical material supply from reaching S. Korea (in response to South Korea’s new rules allowing citizens to sue Japanese companies over forced labor during colonization from 1910-1945). Meanwhile, China is stockpiling troops at the Hong Kong border amidst ongoing protests over how the island is governed. And, China has suspended individual tourism to Taiwan ahead of the early 2020 presidential election, as tensions rise over which party will win, pro-China or pro-independence.

-Brad

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The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

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