Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, giant herds of giant sloths, 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: TikTok dances become Fortnite emotes; co-presence video conferencing with AR glasses; 5G sports betting; the consumer IoT is becoming dumber; the risk of dust bowls; the slow pace of cultural change; how and why to kill and bury the DCF; I promise NOT a single mention of the stomach turning, woke-washing news from Davos! And, lots more below...

Stuff about Innovation and Technology
NZS Welcomes Adam Schor
We’re very excited to welcome Adam Schor as president of NZS Capital. We worked with Adam for a decade at Janus where he was Director of Global Equity Strategies. We are thrilled to have Adam on board to help us serve our clients and fulfill the mission of NZS Capital.

Fortnite to Emote Hip TikTocker's Dance Move
In a Gen-Z mashup, the social app TikTok has partnered with Fortnite for the Emote Royale competition. Users post an original dance on TikTok, and Fortnite will select a winner to power an in-game emote based on the dance. (According to the youths, an emote is a short, animated movement made by a character in a video game.) In other TikTok news: the company’s Chinese parent ByteDance has built a team of 1,000 people to enter the more sophisticated video game market (as opposed to mobile/casual games) in a challenge to Tencent’s dominance. 

Can Byte Take a Bite out of ByteDance?
From the creator of Vine comes Byte: a new, looping video app to take on TikTok. Topping the download charts out of the gate, here is a little more info from The Verge on the Byte app (no relation to TikTok’s parent company ByteDance).

Video Conferencing via AR ‘Teleportation’
Here is an interesting look into the near future of augmented-reality video conferencing, or co-presence, which allows you to put the person you are talking to in the room with you. This demo (minute 4:20 in this YT video) uses currently-available tech from Magic Leap and Google Hangouts. For me, it’s much more compelling than prior VR versions of co-presence I’ve seen. Between flight shaming and the new coronavirus, this can't arrive soon enough!

From Several Billion to 50 Billion
Satya Nadella discussed the next 50B connected devices – dwarfing the current stature of Android, iOS, and Windows by an order of magnitude. Microsoft is focused on serving this explosion of connected devices with its cloud platform Azure. Nadella referred to Windows as “Azure Edge” highlighting the extensive integration between internally-developed hardware and software creating the “world’s computer.” 

This vision of the world plays right into the recent activity at edge data center provider Vapor IO. The company raised $90M in VC funding from tower operator (and existing partner) Crown Castle amongst other backers. Vapor IO puts co-located data center facilities at the cell tower, thus providing an edge-based data exchange service, which can connect users to apps (and those apps to other apps and data) without necessarily needing to leave the tower. Vapor IO also has a partnership with Cloudflare, the CDN and workload-balancer provider, to run serverless workloads at the edge. 

Will 5G be a WiFi Protocol Replacement and Sports-Betting Enabler?
The ability to create private 5G networks using small slices of spectrum could spell the beginning of the end for the often-maligned WiFi protocol. Because 5G is a better protocol for many connected devices, it could slowly take over as the dominant connective fabric. I think I just heard the sound of Qualcomm’s royalty tabulator explode! 

Speaking of 5G, Mark Cuban made a great point in a Variety interview at CES (Spotify Podcast link) that 5G’s zero latency will be crucial for enabling legalized sports betting in the US. In the same interview, Cuban also discussed his TikTok skills and how sports rights are likely to stay on pay TV for a while. But, that won’t stop Amazon and others from driving the bids higher when they come up for renewal. As I mentioned last week, legalized sports betting is one of several trends that will continue to boost the value of live sports – and thus the value of cable TV packages – in the majority of households. 

The Not-So-Smart IoT
One view of the consumer IoT is hundreds of billions of ultra-smart devices with sensors, human interaction (microphones/screens), AI processors, and of course connectivity to the cloud and other devices. Even your toaster would have a microphone and a screen, an array of bread-monitoring AI sensors, a processor with sophisticated toasting algorithms, and wireless connectivity to the all-knowing cloud (which could change the algorithms on the fly depending on real-time atmospheric conditions). Likewise, a smart speaker would have a microphone array, a screen, and cloud or on-board access to Google Assistant and Alexa. But, there is an alternative, emergent topography of the IoT that seems more likely: those consumer devices will all be dumb or unnecessary. The main driver of this alternate evolutionary path is wearables, starting today with hearables like AirPods and continuing to the commercialization of augmented-reality glasses in the next 2-3 years. This world envisions your smartphone as an increasingly intelligent edge server, in constant connection to the cloud, with input/output directly to you via wearables and other connected endpoints around you. Why would you need smart speakers or screens around your house if everyone has AR glasses and hearables to customize their environment while simultaneously augmenting conversations and relevant environmental sounds while filtering out noise? This view favors the ever-increasing power of vertically-integrated hardware, software, and services platforms, such as Google, Apple, Microsoft, and Amazon. It also implies constant ambient media experiences, or always-on audio, video, or games (this doesn’t have to be dystopian, it could actually improve well being). It’s why we are seeing existential struggles at companies like Sonos, whose CEO testified this week about anti-competitive tactics from the big-4 tech platforms at the same time the company fumbled a product obsolescence. We have argued that this vertical integration is actually non-zero sum, but only if it comes with open access to and control of data/services, which is not the case today. It is worth contrasting this view of the evolving consumer IoT with the industrial IoT, which is more likely to have sensor-rich, processor-heavy connected devices.

More Evidence that Technology isn’t Inherently Evil
There's now even more evidence that there’s no evidence of negative associations between screen time and kids' well being. A large review of 40 studies “generated a mix of often conflicting small positive, negative and null associations. The most recent and rigorous large‐scale preregistered studies report small associations between the amount of daily digital technology usage and adolescents’ well‐being that do not offer a way of distinguishing cause from effect and, as estimated, are unlikely to be of clinical or practical significance.” Further, the review has some practical advice: “Digital technologies are here to stay, and have become pervasive in the lives and relationships of young people...Policies restricting adolescents’ access to new technologies are advocated, but may be ill advised if new technologies are being used as a valuable source of social support or are required in order to build digital and interpersonal (digitally mediated) skills for economies of the future.”

Imagination’s Back as (RISC-V-Based?) Apple Supplier
Imagination Technologies – who supplied graphics chips for iPhones until 2017, was acquired by quasi-Chinese PE shop Canyon Bridge the same year, and recently signed a new, expanded license with Apple – is switching to RISC-V open-source cores for their graphics chips. One could speculate that future Apple phones will contain RISC-V architectures, which would be a huge blow to Softbank’s ARM. (Note: RISC-V is for general processing workloads on the GPU, not the actual graphics processing.) Imagination’s CEO commented on RISC-V: “We see a lot of momentum. A tremendous number of customers are interested in it...It’s an increasingly believable true alternative to Arm. This is not just our opinion, but it’s what customers are telling us.” We’ve been talking about RISC-V for almost a year, but it’s only recently hit the mainstream, with Bloomberg reporting on the looming threat to Intel, ARM, and others. You heard it here first in SITALWeek! 😉

Miscellaneous Stuff
China Trendsetting Single-Use Plastic Elimination, Big Oil Not On Board
China set a new high bar in the elimination of single-use plastics. Plastic bags and straws will be illegal in all major cities by the end of this year and all other cities and towns by 2022. Restaurants' single-use plastics are targeted for 30% reduction by 2025. This follows prior bans on imports of plastic waste, which sent the rest of the world into a recycling quandary; now, most plastic that's “recycled” is just landfill fodder. I expect the entire single-use plastic supply chain to largely disappear over the next two decades (with the exception of sterile, medical use cases). And yet, faced with a disappearing gas market, big oil is preparing to ramp up plastic production. They see plastics growing to 50% of oil usage, which would put them at over 10% of total global carbon emissions by 2050. 🤦 In related news, Ball Corp’s aluminum cup will be making a big debut at this year’s Super Bowl. 

Dust Bowl Downunder
One of the interesting parts of the movie "Interstellar" is the interviews with survivors of the American Dust Bowl of the 1930s, which were taken from a Ken Burns 2012 documentary. I am reminded of how quickly our agricultural ecosystem can turn to dust when I see drought conditions in Australia producing these stunning images and videos of dust storms. For more context I recommend a great book on the Dust Bowl titled “The Worst Hard Time”.

Pilot Production Facility for Lab-Grown Memphis Meats
Memphis Meats has raised a fresh round of $161M in VC to build a manufacturing facility for its lab-grown “meat.” Unlike the plant-based, highly-processed ‘junk-food’ burgers made by companies like Impossible and Beyond, Memphis Meats cultures real animals cells – and, importantly, they do it without animal-derived fetal bovine serum. Notably, Cargill and Tyson Foods participated in the latest funding.

New TCR with Potential for Universal Cancer Detection
Researchers have found a specific type of human T Cell receptor (TCR) that could potentially scan the body looking for all types of cancerous threats. This TCR interacts with the protein MR1, ubiquitously expressed on the surface of all cell types, which can signal distorted cellular metabolism indicative of cancer. If advanced from mouse models to the therapeutic stage, it would be similar to other immune-based cancer treatments – a patient’s blood would be extracted, the T Cells “upgraded” with the specific receptor, replicated, and then reinserted.

Pleistocene Traffic Jam
A fossil find in Ecuador reveals a mass death of giant sloths from around 20,000 years ago, indicating for the first time these creatures might have been herd animals. Just imagine, for a moment, the comedic value of a herd of slow-moving sloths the size of elephants.🤣

Cultural Change as Slow as Biological Change? 
Our intuition is that culture undergoes an ever-rising pace of change and disruption. However, a new analysis shows that certain indicators, like the prevalence of guitars as the dominant instrument in songs, change at the same pace as, e.g., moth coloration in response to rising soot in the Industrial Age. In essence, cultural shifts either survive or die off just like evolutionary fitness functions in natural selection. And, just like in biology, culture can experience punctuated equilibrium, such as the introduction of smart phones. With the ever-increasing technological change brought about by the Information Age, perhaps we’ll see the pace of cultural evolution remain constant, but an acceleration in the number of punctuated equilibria.

Outsized Learning from a Fruit Fly’s Mini Mind
The fruit fly has 100,000 neurons (vs. a human’s 86B), so it's a good model organism for studying the neural net. Researchers have found patterns in fly brains that can improve search algorithms, so perhaps it's no coincidence that Google has mapped the connectome (the pathways interconnecting neurons) of ~1/3 of a fruit fly’s poppy-seed-sized brain.

Stuff about Geopolitics, Economics, and the Finance Industry
Non-Ergodic Systems Bury the DCF
When you grow to understand the role of non-ergodicity in complex adaptive systems, one of the investing tools you will want to throw in the garbage is discounted cash flows (DCFs). The problem with DCFs is that they assume ergodicity and, thus, don’t account for the unpredictable path through time. As such, they are anachronistic tools based on the flawed math of 1700s-1900s economic theory. Briefly, DCFs use the concept of a constant discount rate that typically derives from weighted average cost of capital (WACC, or just sticking a finger in the air). WACC, in turn, relies heavily on the contentious concept of equity risk premium and beta, which is equally as useless and manipulatable. All these concepts go back to the Capital Asset Pricing Model (CAPM), which derives from Expected Utility Theory (EUT), which derives from a paper by Daniel Bernoulli in 1738, which contained a math error (see Ole Peter’s Nature Physics article). 

Many Nobel Prizes have been given (and should be rescinded) based on EUT. The heart of the problem is that traditional economic theories and financial models assume ergodicity – effectively removing time from their equations. However, as we have learned from Brian Arthur, in complex adaptive systems like the global economy, nonequilibrium is the normal state, and things can change drastically and unpredictably over time in ways that don’t adhere to simplistic methods of averaging and bell curve probabilities; So, the path through time matters...a lot. Consequently, EUT and all of its children – all the way down to the DCF – are simply not useful.

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. The biggest factor in most outcomes is therefore luck. Learning to identify and attribute success (and failure) to luck is very important as an investor, and (perhaps even more so) as a human being. DCFs will not account for random chance that compounds dramatically in negative or positive ways. Here’s another excellent primer on ergodicity economics from economist Jason Collins for anyone wanting to understand this critical reframing of modern economics (I also covered the fallacy of loss aversion last week). 

At NZS Capital, we are aware that others use DCFs, so we occasionally (when extremely bored, and if the weather outside is particularly bad) look at what a DCF might imply, but it stops there. Instead, we think about valuation using our framework of Quality, Growth, and Context, as we describe in Complexity Investing. Does the business have the attributes that will allow it to adapt and evolve to the changing circumstances within the complex adaptive system in which it operates? If it does, then how many predictions do we have to make to forecast future success? Are they narrow or broad predictions? The fewer the predictions, and the more broad they are, the more Resilient the business. (See also our paper on Redefining Margin of Safety). 

Here is a better way to think about valuation: Expected Return = (Current FCF Yield) + (10 year Growth Rate of FCF/Share). For example, a stock at a 3% FCF yield that’s growing FCF/share at 12% per year would have an expected annual return of 15% over 10 years. That doesn’t mean the stock goes up 15% a year – that’s unknowable. What it does mean is that, based on Quality, Growth, and Context, the company has the attributes that allow it to navigate its business in a way that might support that level of growth over the long term even with large fluctuations. Of course a FCF yield in the short term can go from 1% to 5% to 2% to 4% to 3% to 6% for any number of reasons – that just means there is a lot of volatility in the stock. But, volatility does not equal risk; rather, volatility translates to opportunity for long-term investors. We combine this with an intuitive interpretation of the Kelly Criterion to think about position sizing within either the Optionality or Resilient portion of our portfolios. We think the sooner you can shift your investment frameworks from ergodic to non-ergodic, the clearer the world becomes.

DCF-aholics Anonymous
While I am on the topic, I cannot resist poking fun at DCF-aholic Aswath Damodaran (last mentioned in SITALWeek #211, when this weakly-argued FT article reported his skepticism of Netflix’s business model; Netflix stock is up 21% since then). Damodaran could be a poster child for the multitude of investors doing everything wrong. For example, he has an obsession with precisely calculating that supernatural artifact known as the equity risk premium. In this recent The Economics Times interview, Damodaran remains true to character: 
Interviewer: Do you think active investing is going to be dead...?
Damodaran: Absolutely, and the reason is it was long overdue. Active investing for the most part is lazy and inefficient. It’s always been lazy and inefficient. Most portfolio managers were charging you one-and-a-half to two percent of your money to manage it by buying low PE stocks blindly and hoping that they would go up. Guess what, I can create a ETF of low PE stocks and charge you nothing. I think active investing is getting exactly what it deserves. I will shed no tears for active portfolio managers who get wiped out by ETFs and index funds because many of them deserve to be wiped out.”
Well, to borrow the perfect quip from @nongaap, we should probably apply a "heavy discount rate" to opinions from Damodaran! 🤡 We’ll shed no tears when legacy economics, with its snake oil, indolence, and ineptitude, gets wiped out by non-ergodicity. Until that happens, there is plenty of inefficiencies to exploit once you come to understand non-ergodic, complex adaptive systems.
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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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