Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, Hawking Radiation, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

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In today’s post: increased allocation to private assets by institutional investors might make their constituents, and the economy, worse off; the surprising outcome if the government prints money for healthcare; the half-baked trends in food delivery; Hollywood is making a lot more sense; speeding up Netflix; human brains need a lot more time to adapt to the Internet; the NZS of Uber and Lyft; and lots more below...

Stuff about Innovation and Technology
ICYMI – NZS on The Stock Podcast
If you’re new to SITALWeek, or in case you missed it: Brinton and I were on The Stock Podcast in September discussing process and outlook – you can listen or download the transcript here.

The Irony of Increasing Private Equity Investing?
Most pensions are increasing their allocations to private equity funds, which, among other things, are buying up healthcare companies and driving up the cost of healthcare for everyone, including pensioners! 🤦 This little irony made me chuckle until I realized that it might represent a bigger and more insidious problem: shifting more and more businesses into the hands of sometimes short-sighted financial managers probably isn't the best thing for society, and could continue to widen inequality. The trend is being fueled in no small part by institutions like pensions that represent a lot of employees who could end up being negatively impacted. There have been examples of questionable behavior by private equity in retail, real estate, newspapers, and healthcare. Just this week we saw the demise of Deadspin owned by the PE firm Great Hill Partners. I don't mean to paint the situation in too broad of a brush stroke here – I know there are responsible PE shops and many examples of acquisitions where companies have greatly benefited. Debt, low rates, and risk seeking is the fueler of this private investing bubble (more on that in SITALWeek #216 last week), and according to a report I saw from Empirical Research, trillions of dollars of leveraged private deals have seen debt/EBITDA deteriorate to 6x from 4x over the course of the current economic expansion. Using excessive leverage to drive asset price inflation, price increases, and worker layoffs might happen at an accelerating rate due to institutional demand for increased returns in the illiquid private asset market. Elizabeth Warren this summer unveiled the colorfully named “Stop Wall Street Looting Act” vilifying private equity (in many cases unfairly). I wonder how much of Warren’s own Federal pension (FERS) is allocated toward private assets? Information on that $600B fund is hard to come by online. I don’t think there is any sort of calculated, Flintheart Glomgold-type evil behind any of this, but it’s certainly worth connecting the dots and examining the potential consequences.

What's Behind the Self-Storage Boom?
And, speaking of private investment bubbles, this WSJ article describes the 5x increase in building of self storage facilities in the US over the last four years to $5B! I don’t know the industry well, but I have a hard time thinking that this trend is anything but excess capital looking for a home by creating assets that will one day be worth...less. If we do need all these storage buildings, then so much for the post-financial-crisis theory that people would want less “stuff”!

Wildfires Endanger California's Economy
Redfin reports that over $2T in real estate is at risk in four counties in California due to ongoing wildfires and that homeowners are starting to move away from impacted areas due to surging insurance premiums, power shutoffs, and evacuations.

Vintage Nuclear System Gets A Solid Upgrade
The Strategic Automated Command and Control System for nuclear weapons launch just updated from floppy disks to solid state storage. It’s easy to joke about this vintage system, but it’s somewhat reassuring that the nostalgic hardware doesn’t have an IP address.

Emotion Recognition Software Coming Despite No Evidence that it Works
According to the FT, emotion recognition software was on display at China’s largest surveillance trade show. There isn’t any comprehensive research to support the notion that you can accurately deduce human emotions based on facial expressions, body language, etc.; however, that’s not stopping many companies, including the big US Internet platforms, from developing the technology (perhaps because some of their management teams need help reading human emotions themselves! 🤣). The FT article mentions its use by Chinese customs as well as limited use at Chinese schools. China also uses the technology to control the Muslim population in Xinjiang, which is a region that produces a wide range of Western-branded products, like tomato paste for Heinz ketchup (the Guardian suggest we consider boycotting). Speaking of surveillance, the US Interior Department will heavily curtail the use of Chinese drones over Federal lands.

Tough Road Ahead for ByteDance’s HK IPO?
TikTok parent ByteDance is said to be planning a $75B IPO in Hong Kong early next year. I can imagine the risk factor highlights: 'Western governments may force us to divest a large portion of our business in a fire sale; the rest of the company is controlled by the CCP; the home country of our IPO exchange has permanent protests.'👌

The Smoke is Clearing in Hollywood, and it Looks a lot Like 2007!
After several years of blurring lines between video content and distribution, I think it’s starting to become more clear what the US (and ultimately global) media landscape will look like in five years – and it looks a lot like it did 10 years ago before the confusion set in. I see four buckets of video content creators today:

• (A) Netflix

• (B) ViacomCBS, NBC Universal (Peacock), and a long tail of smaller studios

• (C) Disney (Disney+) and WarnerMedia (HBOMax)

• (D) non-traditional, subsidized bundlers like Apple and Amazon (which combine content with hardware or Prime, respectively), or carriers like Verizon, T-Mobile, and AT&T.

On the distribution side, Netflix (A) is obviously its own platform, but its app is increasingly available in non-traditional bundles (T-Mobile) or on multichannel video program distributors (MVPDs) like Comcast. Then we have ad-supported streaming (AVOD) led by (B) and subscription-based streaming (SVOD) led by (C). The content arms dealers (B) will supply to Netflix, AVOD, SVOD, and MVPD (e.g., Comcast) and vMVPD (e.g., Hulu, YouTube TV) bundles. The SVOD platforms (C) will also continue to participate in the MVPD/vMVPD bundlers. Lastly, the non-traditional bundlers will continue to experiment by buying content while they distribute “channels” including traditional networks as well as AVOD and SVOD apps. Clear as mud, right?

Significant crystallizations are occurring around the delineation between the AVOD vs. SVOD playbook, as well as the conclusion that the traditional bundle is the BEST consumer value proposition for the foreseeable future. This harkens back to my call last week to “solder the cord” back together for those that cut the cord over the last few years. In my view, this remains a “have your cake and eat it too” for most of Hollywood – especially the arms dealers (B) selling to all four distribution buckets. Content will continue to experience inflation in value for the next several years, and likely well into the future as 5G connectivity gives everyone more screen time; however, right now it seems to be becoming overbid by groups A, C, and D and to a lesser extent B. I love South Park, but HBOMax (C) paying $500M+ to Viacom for US-only streaming rights (with a 24-hour delay for new episodes) over the next few years seems like a whole new level of cost inflation for library content. Indeed, it’s better than ever to be a content arms dealer. The Viacom studio head said recently, in this great Hollywood Reporter interview with seven major studio heads, that he is making movies for Netflix “Every chance we get.” Thus, the question of whether to be an arms dealer or direct to consumer platform in video appears to be becoming more clear (I’m betting on the former). I suspect we will see the content owners continue to gain leverage over the MVPD/vMVPD bundlers, as well as increased targeted advertising driving value for all participants, but there is no reason to blow up the bundle as it exists today. It hasn’t looked this appealing in a decade for consumers to subscribe to only Cable+Netflix. We’re right back where we started when Netflix announced streaming in 2007!

No Fastpass for Streaming Consumers as Directors Mandate the Scenic Route
I welcomed the news that Netflix was testing a 1.5x playback. But, the backlash from directors appears to have squashed it. Let’s call a spade a spade here: the righteous indignation from Hollywood directors over this news is because, deep down, they know that last 10-episode streaming series should have been somewhere between four and six episodes at most. This new concept of a 10-hour movie on streaming apps has created some seriously lax editing. Art exists within constraints (money, time, etc.), and streaming has taken too many constraints away.

High-Speed Digital Information Overwhelming for Our Species
I think the only thing to say on election ads and free speech is that the velocity of information and the ability to manipulate human neurons has far exceeded the brain's ability to adapt. The plasticity/adaptability of Homo sapiens is incredible, but it has met its match with the Internet. We were able to adapt to radio and TV within a couple of decades, but assimilation for the latest media revolution appears more like the advent of the printing press, which took society a couple of centuries to adapt to. We’re experiencing a super-fast moving, positive feedback loop of information crashing into a slow moving evolutionary process. The brain is able to mitigate some of that, but not enough. In that sense, I think Jack Dorsey’s insight that “democratic infrastructure may not be prepared to handle” the reach of online messaging is spot on – so I think it’s fine to take a timeout while humans figure out how to deal with the Information Age before more damage is done.

Future of Food Delivery Still Looks Half-Baked
In the future, food will increasingly be sourced and prepared in vertically-integrated facilities, tailored to customer tastes and diets (in some cases healthcare- and employer-subsidized), and arrive on preset delivery routes to subscribers' homes/offices. Grocery stores, chain restaurants, and mom & pop eateries are in vast oversupply as we transition to food-as-a-platform in the Information Age. Well, at least that’s the gist of my essay “The Evolution of the Meal” that I posted a few weeks ago, and it’s an example of a combination of 1) a broad prediction (i.e., because the way we produce and consume food today seems to have unsustainable negative externalities, it's highly likely to change in the future) with 2) a series of nested, narrow predictions and parlay bets with wide ranges of outcomes. Will the exact scenario I described above come to pass? It's anyone's guess, but the odds are high that the food landscape looks radically different 20-30 years from now. In rapidly evolving industries, we try to be good Bayesiansn by always adjusting our credences up and down as new information comes in, and this week we had a few news items that support my current view of the evolving food world. Grubhub gave a frank and welcome birdseye view of the problems with food delivery in their quarterly shareholder letter. Specifically, they discussed the problems of point-to-point delivery and the lack of operating leverage that it creates; in other words, it’s probably not a viable business model to have decentralized food delivery. And, this WSJ article implies that many Whole Foods locations exist mainly for on-demand delivery shoppers to battle it out in the aisles for delivery orders a la Supermarket Sweep (I used to love that show!). Lastly, the NYT reports on the congestion in NYC from the rise of delivery agents for food and ecommerce – underscoring the need for a winner-takes-most, vertically-integrated, and routed delivery provider. So what’s to become of today’s grocery stores and restaurants when food sourcing, prep, and delivery centralizes? There’s a lot of fixed costs and relatively low margins, so I would posit that most of them won’t survive; however, the future of food is far from determined.

Uber Eats' new delivery drone has six rotors and an 18-mile (18 minute) range carrying food for two adults. The drone is set to take flight in San Diego mid-2020, and it would be perfect for taking off en-masse from the roof of an Uber-owned central kitchen facility.

In the escalating grocery delivery wars, Amazon Fresh is now free for Prime members – the grocery delivery service previously cost an additional $14.99/mo.

How do Rideshare Companies fit into our NZS, or Non-Zero-Sum, Framework?
This question came up in a discussion of Lyft and Uber on Twitter this weekend. I consider both Lyft and Uber to be far out on the Optionality spectrum in our investing framework – there is significant asymmetry, lots of risk, and it’s still possible the stocks are “gambles” as opposed to investments, although I think there are good arguments why they have moved past the gambling phase of investing. These stocks are very fun to analyze because of the nature of the businesses, the disruption, and the crazy thought exercises (e.g., what if Amazon bought Uber and bundled rides, meals, and local delivery all into Prime? Or what if Google bought the rest of Lyft it doesn’t already own and integrated/bundled it with Waymo, Maps, local merchandise delivery via search product listing ads, YouTube premium, etc.?); and, it’s completely ok to have an official opinion of “I don’t know”. I first invested in Lyft in our prior fund when it was a private company in early 2016, so I’ve spent some time thinking about the industry. I have one broad prediction: transportation/logistics as a service (TLaaS) will be a large market over time; and I have several interdependent, narrow predictions (concerning duopoly structure, path to profits, rising prices, rising driver pay, regulatory capture, bundling, subscriptions, etc.) that would need to come together for the stocks to work. Here are some specific thoughts on NZS, or win-win. The core premise of NZS is that, in the Information Age, long-term successful companies will provide more value for their various constituents, including society and the environment, than for themselves. At a high level, ride sharing exhibits significant NZS today with its increased convenience/value for riders along with driver job flexibility, albeit with significant problems that need to be addressed including driver pay, rider safety, traffic congestion, etc. If I think of this industry on a 20-year time horizon, a manageable rise of TLaaS – specifically fleets of EVs that are partially or fully autonomous moving people and goods around locally and regionally – will eventually reduce car ownership, pollution, and resource use, while ultimately providing greater flexibility in the economy and productivity gains that are likely to offset the long-term disruptions to the existing industries that are (directly or indirectly) involved in transportation logistics. So, odds favor an all-around win, but it remains to be seen how it will all play out.

Miscellaneous Stuff
Toxins Catch a Cathartic Wave While We Sleep
Waves of cerebrospinal fluid wash over the brain during deep sleep (before REM) to clear out toxins that can lead to Alzheimer’s and other diseases. Wave generation requires coordinated firing of groups of neurons (to modulate blood flow), which is why we can't clear toxins while we're awake.

Ghosts of Universes Past
A group of cosmologists believes we can see echoes of other Universes in the cosmic microwave background (the radiation footprint that shows the birth of our Universe, effectively the energy left from the Big Bang). The theory, which I should add is controversial but thought provoking, claims that Hawking radiation emitted from decaying black holes can leave an imprint into the next universe that forms. Again, this is not a mainstream view amongst physicists, but it’s too cool to ignore.

Humor Still a Plucky Survivor at PE-Owned The Onion
“Silicon Valley Leaders Sit Down With Wildfire At Investment Meeting After Being Impressed By Its Rapid Expansion” – a perfect article from The Onion, owned by private equity firm Great Hill Partners.

Stuff about Geopolitics, Economics, and the Finance Industry
Want to Solve the Healthcare Crisis and Restore Hope? Just Fire Up the Printing Presses!
Here’s a fun thought exercise: what if Elizabeth Warren’s “Medicare For All” plan was paid for directly by the government printing money? The math here is pretty simple. The economic structural setup for the foreseeable future is low rates and low inflation. Healthcare is one actual source of inflation, and it’s a meaningful part of the economy that’s currently completely broken. Printing money for single payer healthcare could improve the out-of-control inflation driven by insurance, private equity, and other problems in the broken health system with a more controlled inflationary increase. If there’s too much inflation, the Fed can raise rates, which wouldn’t be a bad thing. Indeed, managed inflation (in addition to resolution of the healthcare crisis) could be a net positive – inflation and hope are tied together (see below). (For additional context, Jeff Spross in The Week talked about some of the economic pros and cons of deficit spending).

Regarding the relationship between interest rates and hope mentioned above, here is an excerpt from SITALWeek #205 that discusses the idea in more detail:
Lending and borrowing grew dramatically after the scientific revolution because humans started to believe in progress. This was fuel to the development of capitalism, which, as originally defined by Adam Smith nearly 250 years ago, broadly depends on two driving forces: productive reinvestment of capital and a growing population. You could say that lending depends on a brighter future where debts can be paid – a future built on progress. In other words, it depends on a growing pie, or something beyond a zero-sum game (Harari has a good discussion of this framework in Sapiens). So, it’s worth exploring the relationship between interest rates and hope for the future. Technology, power laws, and inequality are perhaps shifting pie filling, so to speak, from ‘the many’ to ‘the few’ instead of growing the overall pie. If that’s the case, then it represents a much less hopeful future: a pie that won’t be getting bigger. Moreover, the slower-growing pie combined with lower birth-rate trends would imply a future of less demand and therefore less inflation. A future of lower inflation, combined with technology-driven deflation, and a shift toward an economy that is driven more by information than commodities and hard assets is a prescription for low rates. That sounds like one plausible explanation of the global situation today. Therefore, low rates may be a direct reflection of less hope for growing the pie and the way that pie filling will be distributed. Further, what's more pessimistic than negative interest rates? I'll give you a dollar today and I only want 99 cents back in the future. It's a rather bleak explanation; however, it would suggest, rather speculatively, that redistribution in the form of higher wages, lower consumer debt burdens, and even direct government subsidies would create more hope, more inflation, and higher rates along with a stronger global economy. This FT article discusses the idea of central banks giving citizens money directly instead of lowering rates – both options “print” money, but the former would put it the hands of more people directly. The loss of hope and low rates is a paradox that strikes me as worthy of deep analysis.

-Brad

Disclaimers:

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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