Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, aquatic dino’s, 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:  the programmable data center; spending and construction on cloud data centers slow; Shopify signals potential marketplace and local pickup tools; consequences of bankrupt hospitals; changing landscape for discount apparel retailers; fragility of power laws; Buffett recap; and, lots more below...

Stuff about Innovation and Technology
Turnip Speculation
The cost of turnips and tarantulas is rising in Nintendo’s Animal Crossing game due to a sudden rate cut. The decreased return on savings has forced gamers into riskier assets and closed a loophole whereby players could deposit funds and time travel to benefit from the miracle of compounding. Game developers insist the price of turnips is randomly determined.

Socializing Drives Gaming
As Microsoft reported 90M Xbox live users and 10M Game Pass subscribers, head of Xbox, Phil Spencer, discussed the flood of new gamers coming online during the lockdowns. Social interactions are becoming an even bigger part of gaming as friends stay in touch while they play. Travis Scott’s Fortnite “world tour” event I mentioned last week ended up with 27M viewers, as people are increasingly experiencing life via games. A lot of folks talk about the "Metaverse" and how games will be the new Internet, but I think, for now, that is overreaching. Games are the new social network, not the new Internet.

Diagnostic AI Needs Shades of Grey
Google’s AI for diagnosing retinal disease, which initially showed a lot of promise, has stumbled in the real world. Many real-world scans are rejected because they don’t meet the resolution Google used to train the AI. Additionally, bandwidth problems related to uploading the large image files to the cloud has caused delayed results.

UPS Launches Drone Couriers 
A retirement community in Florida with 135,000 residents (the largest in the US) will be able to receive prescriptions from CVS via UPS drone delivery starting this month.

Social Distancing Leaves Robot-Shaped Gaps
Robots will be filling in gaps between people as factories reopen. Wired reports on the rise of automation in factories, including wheeled robots that retrieve parts and pick & place robot arms that assist or replace workers.

White Collar Automation
Microsoft is in talks to acquire Softomotive, an automation software tool that replaces repetitive jobs done by people, such as data entry and workflows. As I've written over the last few weeks, automation will be coming to white collar jobs as well as manual labor. This is a double-edged sword for Microsoft because for every job they automate away, they lose a user of Teams and Office 365 (and, the unemployed will have less money to spend while gaming on Xbox!).

Microsoft Zooms While Zoom Backtracks
Microsoft Teams has seen a 70% increase to 75M daily active users from just a few weeks ago, and that’s up from just 20M five months ago. Meanwhile, Zoom backpedaled on its claim of 300M daily active users – now saying that was 300M daily zoom participants – which is more comparable to Microsoft’s reported 200M users in one day (it’s not clear if all of those Teams meetings were with video). Zoom has not yet reported daily active users, but it’s likely to be substantially lower than the participant number, since a single individual using zoom multiple times a day racks up counts for each use. Google, for their part, announced 100M daily meeting participants, which is growing by 3M new users a day and is now free for up to 100 participants per meeting (earnings transcript PDF). 

Creepy Virtual Proctoring
As if Zoom anxiety wasn’t bad enough, the Verge reports on the challenges for students dealing with remote proctoring during test taking, which appears to involve a disturbing degree of privacy and security concessions. Schools aren’t alone as companies are increasingly using surveillance tools to monitor employees working from home, driving already high anxiety levels even higher. 

Uncertain Future for Discount Retailers
Discount retailers, like T.J. Maxx and Ross, have been considered a resilient offline retailing strategy despite the rapidly growing share of ecommerce in the apparel category. Historically, these companies, which have a unique ability to efficiently monetize overstock and mistakenly manufactured items, served an important and high-value role for fashion brands. However, these chains, which rely on a treasure-hunt-like in-store experience and never built out ecommerce strategies, are now adrift among lockdowns. Further complicating their outlook, with most other retailers canceling orders, there may not be much overstock with which to stock discount shelves later this year. Restructuring specialist Gordon Brothers is expecting 20,000-25,000 store closures, and excess merchandise could be out of season and out of fashion when the time comes to get rid of it. Treasure hunt shopping may be at risk as customers may be reluctant to dig through bins of items that many other shoppers have recently touched. Online overstock sites, like Amazon's 6pm.com, should fare better. In the physical world, diversified retailers, like Target and Walmart, which can stay open during lockdowns, stand to take market share in apparel – another example of the big getting bigger. This shift is reminiscent of the decline of department stores and general merchandisers, like JC Penny, Kmart, Sears, Ames, etc. Do the 5,500 discount-apparel retail stores in the US – accounting for over $100B in equity market cap – have a reason to exist in the future?

Computing Soup
Nvidia’s CEO gave a very insightful interview with Next Platform last week as the company closed the Mellanox acquisition. If you’re interested in AI and the evolution of data centers and serverless workloads, you will want to read the full interview.
“The onion, celery, and carrots – you know, the holy trinity of computing soup – is the CPU, the GPU, and the DPU. These three processors are fundamental to computing. And if you had if you had a world-class processor in each one, you’re going to have a really great computer.”
“Now in the case of Mellanox, it allows us to create something that the world doesn’t have. And you and I spent a lot of time talking about it already. This is the giant new architecture. The really exciting thing right now is not to build yet another server. The exciting thing for the world is the server is not the computing unit anymore. The datacenter is the computing unit. You are going to program a datacenter, not a server.”
In other Nvidia news, you can use the AI on your RTX chip to remove background noise when you are on video calls or gaming with friends (YouTube video).

Cloud CapEx Cyclicality
Cloud computing is faring well during the work-from-home and shelter-in-place trends, but capital spending on cloud infrastructure is looking less clear. Amazon saw 31% growth in AWS to $10B in the quarter; but, to me, that's a disappointing number – owing to weak demand in several sectors, including the travel industry. Google, Facebook, and Microsoft all reported strong usage growth; however, with construction stopped on new data centers, their spending is likely pushed out into 2021 (though Microsoft seems a notable exception, perhaps because they make use of more co-located data center space that can be more easily filled with servers).

AI for AI Chip Design
Using reinforcement learning, chip design software maker Synopsys saw projects completed 86% faster with 80% fewer engineers needed. 

Shopify’s New Shop Marketplace
Shopify announced a local merchant marketplace called Shop (from SITALWeek #242: “Shopify is a good candidate for such a marketplace aggregation service, especially as they expand further into payments and logistics.”). The app allows users to connect with Shopify merchants, including local businesses. Also, last week Shopify released new functionality for curbside pickup for local merchants. So far these are rudimentary, somewhat rushed product launches, but clearly represent an evolution of the platform. Shopify CEO Tobi Lütke also discussed his work-from-home life with Zendesk CEO Mikkel Svane in a video this week, including Tobi’s red-light system outside his home-office door for alerting his family that he’s on a video call (which, he explained to me on Twitter, is just a Hue light strip – great hack!).

Movie Theatres Hasten Their Own Demise
After Comcast’s Universal trolled theaters by digitally releasing “Trolls World Tour” – to a $100M streaming windfall – movie theater chains are drawing a line in the sand by refusing to show movies from any studios that plan to digitally release movies simultaneously with (or ahead of) the theatrical release. This is a prime example of theaters not putting customers first and not adapting to the decades-long evolution of movie viewing. I discussed the $11B US box office in more detail in SITALWeek #237, noting the risks involved for all parties in collapsing the various theater and rental windows. This overplayed hand from the theaters could greatly increase the risk that they all disappear. A Reuters poll revealed that only 27% of frequent movie goers plan to return to theaters before there is a vaccine, while 32% wanted to wait for the needle poke. The Oscars have relented and removed the 90-year-old requirement of theatrical release for award contenders this year. Meanwhile, Hollywood is sorting out how filming might resume, including more sound stages, less on-location filming, and no craft services tables.

Quarantine Couch Potato Binge Ebbs
American TV viewing peaked in late March at 41 hours per week per viewer, up from 33 hours in the same week for 2019 (and that’s despite no March Madness this year). However, the number has since dropped about an hour per week to 38. As the NYT commented, there’s only so much TV people can watch.

Hospital Revenues in Severe Decline
Hospitals are in dire straits, having lost most of their revenue due to cancellation/delays in elective surgeries and emergency room avoidance over coronavirus fears. Hospitals accounted for 40% of the Q1 estimated GDP decline in the US, according to the FT, and many hospitals are likely to file for bankruptcy later this year. The BBC reported on the large numbers of healthcare workers currently unable to work. Rural and smaller hospitals will be hardest hit, with the former already closing at a rate of one every three weeks before coronavirus hit. Hospitals are, so far, not being bailed out by fiscal stimulus, and if that doesn’t change, the virus could be a catalyst to reconfigure the entire US healthcare system. Or, given the messy quagmire of lobbying, regulatory capture, and competing political interests, healthcare could just become a bigger and more lethal problem for the citizens of the US. America still spends around 70% more as a percentage of GDP on healthcare than most other developed countries, with no better health outcomes to show for it. It’s a broken system, but can the coronavirus catalyze change?

Tesla Forging New Future, Ford Retreats
Tesla updated its self-driving software to function at intersections; commenting on the earnings call Musk said “We are collecting data from over 1 million intersections every month at this point. This number will grow exponentially as more people get the update and as more people start driving again. Soon, we will be collecting data from over 1 billion intersections per month.” This comes at a time when legacy automakers are struggling to make the transition to autonomous EVs: Ford canceled plans to launch an electric SUV on Rivian’s EV chassis and delayed autonomous plans, citing the pandemic environment. As the economy experiences accelerated transformation, this is exactly the wrong time to be slowing investment in the future.

Miscellaneous Stuff
7-Ton Semi-Aquatic Dino
Spinosaurus, a predatory dinosaur of comparable size – but longer than – T-Rex, appears to be the first example of an aquatic-adapted swimming dino (distinct from the swimming ichthyosaurs and plesiosaurs, which originated from another branch on the reptilian family tree). The new fossil evidence shows that Spinosaurus had a massive, paddle-like tail, and was superbly equipped for a semi-aquatic lifestyle. Spinosaurus possibly preyed upon giant crocodiles, in addition to car-sized fish, from the mid-Cretaceous period 95-100 million years ago.

Don’t Trust All-Purpose Glue
"68 bits of unsolicited advice" from Kevin Kelly, founding editor of Wired and all around predictor of the future, on his 68th birthday is a great read. 

Repatriation of Drugs a Monumental Task
As large drug makers traded resiliency for efficiency this century, 72% of ingredients needed for the manufacture of medicines are imported from outside the US, according to the FDA. NPR reports on the loss of facilities and knowhow in the US, with one expert saying it would take billions of dollars and a decade or longer to rebuild. STAT also reported on China’s 80% control of the global antibiotic supply.

Bill Gates: Pandemic & Vaccine Expert
This interview with Bill Gates is very insightful, as was his post on covid-19 vaccine potential. Gates has probably put more thought into pandemic risk and response than most, and he remains levelheaded and constructive as we think about moving forward on the long road to normalcy. While there is a lot of caution, there is also some optimism from Gates on prospects for a functioning vaccine that can treat billions of people within a couple of years.

Covid-19's Mysterious Manifestations
The Washington Post explains the stroke risk for young people from coronavirus. There seems to be some growing evidence that one of covid-19’s primary pathologies may be blood clotting. Although we should consider this anecdotal so far, the blood thinner heparin appears to significantly improve patient outcome. NY Mag also reported on the mysteries of how this virus works. In more puzzling virus news, The Telegraph reports that there are no known cases of children passing along the virus to an adult.

With Concentration Comes Fragility
The concentration of the meat processing industry – highlighted by recent forced closures – exposes a broader problem in the Information Age economy: power laws and market concentrations form more and more naturally in the modern world, creating extreme fragility to shocks.

Stuff about Geopolitics, Economics, and the Finance Industry
High Stakes Tit-for-Tat
As the Whitehouse plans an apparent retaliation against China, which could include a trillion dollars of new tariffs, it’s worth remembering how delicate the tensions were between the US and China even before the virus spread from the country. Our base case should be a stalemate, given that China needs US tech for their semiconductor-based surveillance economy, and the West needs antibiotics and PPE. Over time, however, antibiotics should be much easier to make in the US than semis will be to manufacture in China. 

Buffett’s Annual Q&A
Warren Buffett presented and answered questions for 4 1/2 hours in an eerily empty 19,000 seat arena in Omaha Saturday. Here are the comments that stood out to me - most of these are my interpretation of what was said, please do not misconstrue these comments as direct quotes in any way.

• Buffett remains very optimistic long term, always believing that, if you have a 20-30- year horizon, equities are the place to be; “never bet against America.” Capitalism needs some fine tuning, but it’s the best model out there. In response to a question from actor and Berkshire-shareholder Bill Murray about taking care of the new war veterans – healthcare workers – Buffett said the US needs to take better care of everyone, and we should hold ourselves to higher standards. “We have been going in the right direction in the US, but it's been awfully slow.”

• Berkshire is not investing its current cash balance of $137B because the pandemic has made the range of outcomes too wide; further, the risk of an event like a natural disaster on top of the pandemic calls for even more caution. Buffett didn’t detail what worries him because talking about it can increase the risk of it happening.

• The Fed stepping in was the right thing to do; central banks learned a lot of lessons from 2008/2009; thus, government intervention limited the opportunity to provide capital to distressed companies. Berkshire would still put $30-40B into a deal Monday if the terms were right.

• If rates can stay low/negative without consequences, then why didn’t civilization figure that out 2000 years ago? In other words, Buffett still believes low rates are unsustainable, and remains puzzled at the situation. If rates do stay low, then you better be in equities.

• I was personally bothered to hear Buffett once again talk about how bad credit cards are for people given that Berkshire owns over $60B of bank and credit card stocks, which compromise around one third of its equity portfolio. In my view, Berkshire still largely invests in companies with fragile moats from the 1900s, many of which are zero- or negative-sum businesses for society.

• Berkshire has sold all four of its airline investments, losing over $1B, because Buffett isn’t confident travel will be back to 2019 levels in a few years, which means there is an oversupply of planes which will hurt pricing for a long time. Buffett seemed amazed that airlines were able to raise equity.

• Buffett hasn’t had a haircut in seven weeks, and Saturday was his first day out of sweats!

Uncertainty is the Only Certainty in Complex Systems
The math of rates and expected returns makes it especially hard to know if the market is underpricing or overpricing covid-19 risk. Roughly speaking, before the global meltdown, “risk-free” government bond rates over 10 years were around 2-3%, bond yields were a bit higher, and the market multiple was ~20x forward earnings. Today, rates are down and earnings estimates are down, thus the market multiple is up. Global equity markets are down around 15% year to date. Absent the drop in interest rates and the fiscal stimulus, which has so far guaranteed almost all assets to be risk free (as the central banks continue to purchase nearly anything to provide liquidity and stabilization), that 15% drop seems to underprice the risk of 24+ months of rolling shut downs and fat-tail fallout from the pandemic. However, if you take those government efforts into account, it’s possible valuations for the market should be twice, or more, what they were before things went to hell in a handbasket. The penalty of holding cash at zero (or in some countries negative) rates is strong motivation to bid up riskier assets with higher return potential. Therefore, with zero rates and fiscal stimulus, the market might be overpricing the risk of the pandemic! The main points on the market today that I would make are:
1) The relative strength of equity markets is explainable in the context of fiscal and monetary measures.
2) Nobody knows what the future holds, but we are sure to have a chaotic outcome; in other words, the exact prevailing conditions when we exit the pandemic will greatly impact the long-term outcome of the economy.
3) Trends that were already underway before the pandemic are highly likely to accelerate coming out of it.
4) Like always, it’s critical to focus on the adaptability of the companies you invest in – which management teams would you hand your wallet to today and expect to get more money back over the next 5 to 10 years?
The longer term wild card is whether the stimulus liquidity will need to be vacuumed back out of the economy when things pick back up; if that happens, then you would expect rising rates, which would compress multiples on equities even if the economy is recovering. As always, the most important point when it comes to investing is that nobody knows anything, especially me. So, it's important to push your investment time horizon farther out and focus on adaptable companies.
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