Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, soft-shelled eggs, 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 huge wearable health monitor market; Uber’s food Catch-22; Facebook’s shift to payments and commerce from news feed; Information-Age utilities; The Dude talks complex systems; the nutty physics of N95s; inverting the relationship between debt and interest rates; and lots more below...

Stuff about Innovation and Technology
Over-Engineered Eavesdropping
Researchers came up with a way to listen in on conversations by sensing minute changes in the surface of a lightbulb – using a telescope and a $400 electro-optical sensor and inexpensive analog-to-digital converter – from hundreds of feet away. On the list of extreme ways to eavesdrop, this ranks up there with Van Eck Phreaking (interpreting the electromagnetic radiation from displays), and seems especially unnecessary when Alexa and Siri can eavesdrop for free😉.

TikTok Catching YouTube
Kids in the US spent 97 min/day watching YouTube, with TikTok quickly gaining eyeball share at 95 min/day, according to a new study covering the early part of virus sheltering (mid-March through April). Of note, the game sensation Roblox was played by over half of US kids, averaging 106 min/day.

Rx Gaming
In related news, the FDA has approved a new video game titled EndeavorRx as a prescription to treat children with ADHD. “Selective Stimulus Management engine (SSME)...presents specific sensory stimuli and simultaneous motor challenges designed to target and activate the neural systems that play a key role in attention function while using adaptive algorithms to personalize the treatment experience for each individual patient.”

Aqueous Air Battery
A battery startup backed by Bill Gates, Form Energy, is targeting grid storage and has a new contract to supply a 1MW/150MWh system to Minnesota-based Great River Energy. Little is known about the so-called aqueous air batteries; they may use a combination of water and sulfur (or another equally abundant and cheap element), and are reported to be dischargeable for 150 hours – a vast improvement over lithium ion cells, which use expensive metals and can only discharge for a few hours. 

Tesla Taps Chinese Talent for next EV
Hyping their new Chinese design and engineering center, Tesla is taking design submissions from the country’s designers (both pro and amateur) for its planned smaller EV. As I mentioned a few weeks ago, I think a smaller, shorter-range Tesla EV would do very well globally. In other Tesla news, the car company can finally sell vehicles to people in Michigan after overcoming anti-consumer blockades from the dealer networks of the increasingly little “Big 3” Detroit automakers. Also helping out Tesla are the continued stumbles of legacy auto makers when it comes to next-gen tech development: VW has encountered problems because it outsources 90% of its software development to Continental, but will try to get to 60% internal code by 2025. Meanwhile, BMW and Mercedes are abruptly ending their autonomous development partnership less than a year after it was conceived. Is there any car company besides Tesla that isn’t changing their strategy every six months!?

Wearable Health Monitoring: a new $100B+ Market
Smart-ring maker Oura is back in the spotlight with the NBA’s plan to equip players with the wearable health devices to monitor temperature, respiratory function, and heart rate (I still love my Oura, although SITALWeek’s Editor is currently having a technical problem with hers, which the Finnish company has been keen to solve). Las Vegas Sands, owner of The Venetian and Palazzo, is purchasing 1,000 Oura Rings to early detect illness, and has plans to equip all 9,300 employees if the initial test goes well. The cost to effectively test and monitor people in situations that require gathering in close proximity is simply going to be too high without this kind of wearable tech. For example, Universal is spending $5M to monitor actors and crew working on the final production of the latest Jurassic Park movie – that’s just a partial production for one movie! It’s becoming more obvious that networked, wearable sensors will be the route every company takes, and most people will want them for themselves as well. As wearables go deeper into becoming fashion/jewelry accessories, they will be an enormous market...quite possibly a billion annual units at anywhere from a hundred dollars to thousands of dollars each with $50-100+ of semiconductors and sensors. And, your future wearable might be powered by your own sweat, if this company is successful in using the enzymes found in sweat to power a biofuel cell “patch”.

Amazon is Afraid of Who’s Reading Your Email
I was wondering why Amazon stopped listing ordered items in their confirmation emails. It turns out it was likely a response to the rising use of email scraping tools to gather all sorts of competitive intelligence.

Walmart Expands 3rd-Party Marketplace via Shopify
Walmart is continuing its ecommerce strategy of “throwing stuff against the wall to see what sticks” by partnering with Shopify to power their third-party marketplace. This is one of many on-again, off-again, largely unsuccessful attempts by Walmart to boost selection on its website, including the $3.3B purchase of marketplace Jet.com, which was subsequently shut down. I am a bit amused by the irony of Walmart, who has driven many small businesses out of town over the last few decades (see South Park S8E9: 'Something Wall-Mart This Way Comes'), now trying to enable small-business ecommerce on Walmart.com. And so it goes. From Shopify’s perspective, Walmart is just another channel they enable for the platform’s growing list of online stores.

Uber Gives Up The Ghost (Kitchen)
Last week, I discussed the Catch-22 of Instacart: they probably need to vertically integrate with their own grocery warehouses in order to build a sustainable, profitable business; however, if they do vertically integrate, they will surely lose deals with the retailers they depend on. As UberEats exits the cloud kitchen business, I am reminded of the same Catch-22. In my view, this is a black eye for Uber’s ability to build a long-term, profitable food-delivery business; but, perhaps it was too big of a threat to those restaurants they rely on today? It’s certainly no feather in their cap, and it’s part of a broader pattern of Uber eliminating the potential Optionality around their core business, which is the opposite of what we prefer companies to do, especially in downturns. I mentioned at the end of my 2019 essay, the Evolution of the Meal, that I’d take a Bayesian approach and adjust my theories on the highly complex situation of the evolving food supply chain, and these recent developments make my theories on vertical integration seem further away. And yet, none of these developments are moving anyone any closer to a profitable, at-scale food delivery business for either grocery or dining. 

Social Network Transformation and Monetization
I think public broadcast social networks, like Facebook and Instagram, will eventually fade in favor of more private messaging (Zuckerberg agrees – he said this same thing last year in his essay “A Privacy-Focused Vision for Social Networking''). But, there’s reason to believe that private social networks are still subject to the same problems as the public ones. Wired reported last week on the eye-opening problems with Facebook groups, which have been elevated on the social network over the last year. In particular, the groups are easily exploitable by bad actors and appear particularly conducive to the spread of misinformation and hate. In essence, humans just aren’t ready to communicate at the speed – or with the anonymity – of the Internet from a social, biological, or evolutionary perspective. That means most online communication may revert back to small, established social groups with real-world ties. This evolution would stall the news-feed advertising business, which is the main business of Facebook today. Private communication is inherently less monetizable via ads without crossing privacy boundaries, and it’s difficult to make ads non-intrusive in private communication – does anyone really want to see a video ad for food delivery while they are in the middle of chatting with someone about where to eat dinner? Anyone want an ad for a hip and hilarious t-shirt interstitially inserted into a chat with friends or family? There will be some ad-based monetization of private social communication, but it’s unlikely to be a larger market than it is today, and it could be much smaller. 

There are, of course, alternative revenue sources. For a decade, Facebook has been focused on building a payment-based business with little to show for it, going all the way back to charging users for virtual sheep in Zynga’s FarmVille. It’s been fits and starts for Facebook, even after bringing over David Marcus of PayPal several years ago. WhatsApp’s stronghold in emerging markets (outside of China) is the primary vector for Facebook in payments. Payments is likely a key driver behind Facebook’s investment in Reliance Jio, India’s largest cell phone service provider (now under review by Indian regulators). Meanwhile, Facebook has launched WhatsApp payments in Brazil by leveraging Facebook Pay. The basic logic is to try and recreate the success of Tencent’s mega app in China that does social, gaming, payments, and pretty much everything else, which developed somewhat organically under protection of the Great Chinese Firewall. However, outside of China there’s no shortage of payment platform choices already. In Brazil, the idea is to wedge payments into WhatsApp messaging already taking place between consumers and businesses. It’s not clear to me why payments will take place in a messaging app around the world. From a regulatory perspective – if the Libra currency fiasco is any indicator – it’s too late for Facebook to try and buy an existing at-scale platform like Square or PayPal. And, could Facebook make one payment option exclusive in WhatsApp, or would US and EU regulators declare that as anti-competitive and force integration of PayPal and other wallets? The other way to grow beyond advertising is commerce – with Facebook’s apps becoming digital versions of the Home Shopping Network as a million influencers sell to 1,000 customers each, and/or perhaps big brands will be able to reach their customers on the platform. Facing an advertiser boycott this July, whether it’s ecommerce, payments, or something else, Facebook has a significant business model transition to make in the coming decade away from the hate-filled misinformation that drives its core business today.

Big Tech: Utilities of the Information Age 
I’ve covered the problems with excessive app store fees in the past more than once, so I won’t spend a lot of time on them again despite the headlines last week (David Hansson’s appearance on CNBC’s Squawk Alley was a good explainer as well). One of the funnier stories last week was Microsoft President Brad Smith declaring “some app stores create a far higher barrier to fair competition and access than Microsoft’s Windows did when it was found guilty of antitrust violations 20 years ago.” One of my guideposts continues to be the view of Epic’s Tim Sweeny that 12% is a good fee for an app store. An app store processes credit cards, handles fraud and refunds, in some cases vets apps for problems and security, and has some degree of involvement in delivery of the app. Apple is known for being stubborn and difficult to work with, but the uneven app store policies, in particular, express an unrivaled naivete and arrogance. An app store charging 30% – and forcing in-app payment – would be like Google charging 30% of revenue generated by each search click and mandating that all sites use Google for payments. It’s illogical. The highest non-zero-sum model for an app store is a fee that covers the basics, with a robust, quality-oriented advertising model to drive incremental revenue for the platform. Companies like Apple, Google, Amazon, and Facebook are the “utilities” of the Information Age. As such, they will likely be given government-granted monopoly status and regulated – just like Industrial-Age utilities (e.g., power companies, phone companies, and railroads). This monopoly status will be reinforced by regulatory capture and the associated extreme costs of dealing with regulatory requirements. Under this hypothetical framework, Amazon is an ecommerce and computing utility, Facebook is a social utility (I am loosely applying “utility” in Facebook’s case!), Google is a search utility, and Apple is a mobile computing utility. The government would set caps on rates and rate increases while requiring open access to the platforms and the data they collect (somewhat analogous to the telecommunications law changes in the 1990s for those utilities). Sadly, I can’t take any credit for this framework, it’s inspired by this quote from Jeff Bezos in a 2008 Wired magazine interview about AWS: “You don't generate your own electricity, why generate your own computing?" Indeed. This doesn’t necessarily mean these will be bad businesses or bad stocks; utilities serve a purpose and generate positive economic returns for their investors. But, it does likely mean they will be less able to innovate, acquire, or grow at the same rates they enjoyed over the last couple of decades...they may not generate the same amount of non-zero sum in the coming years, but the companies that tap into these utilities to build new businesses may do very well.

Miscellaneous Stuff
N95 Masks are like Multi-Layered, Electretized, Spider Webs
Minute Physics has a new YouTube video on the surprisingly complex workings of N95 masks, which rely on molecular-scale stickiness, the Brownian motion of the smallest interloping molecules, and layers of electric-field-emitting plastic fibers (a.k.a. “electrets” – electrostatic “magnets”), to trap particles.

The Dude on Complexity
When The Dude writes an article about complex systems, it’s a very safe bet to assume I’ll include a link in SITALWeek! So, here is Jeff Bridges discussing his documentary ‘Living in the Future’s Past’ in an insightful and moving short essay in Spin Magazine: 
“Big changes are needed, and we all know there is just so much you can do to make the world go where you would want it to go. It is a complex system. No one can predict what might emerge from the spontaneous actions of the many for good or bad. Emergence is interactive. Physicists like to talk about emergence as appearing as the result of the interaction of smaller and simpler elements. Think of yourself as a small but crucial element capable of moving our super-organism in a better direction. The super-organism is, after all, a system of relationships and we, as a species, are interlinked with all of the other members of our Earth’s household. As we examine the effects of our decisions, let’s not confuse what we need with what we desire, and what we desire, with what we need. One thing that is constant in history is that everything changes. Sometimes the changes are so fast that we experience change as a disaster...Traits like ingenuity, inventiveness and creativity are in our DNA and they hold the key to our continued existence on this small blue dot, this spaceship Earth. But ⁠— it’s just our opinion, man.”

Which Came First, the Hard- or Soft-Shelled Egg?
Most of the fossil record of dinosaur eggs consists of hard-shelled eggs, like those laid by modern-day dinosaurs (a.k.a. birds), so the general assumption was that all dinosaurs were hard-shelled egg layers. However, the facts didn’t all fit that theory, as hard-shelled egg fossils had only been found for the most recent (Cretaceous) period of dinosaur existence, and their morphology varied widely. New evidence published in Nature suggests that the early dinosaurs laid soft-shelled eggs, from which hard-shelled eggs evolved three separate times. This theory would explain both the varied microstructures of hard-shelled eggs, as well as their absence in the fossil record from the earlier (Triassic and Jurassic) periods, as the more fragile, soft-shelled progenitors would have been ill-preserved, and thus absent or overlooked. This theory might also shed some light on the origins of a giant soft-shelled egg found near Antarctica from a species dubbed Antarcticoolithus, described in the same issue of Nature. While it’s possible a giant marine reptile laid the egg (which would overturn the theory that all ancient marine reptiles bore live young) it’s possible it originated, instead, from a surviving lineage of soft-shelled-egg-laying dinosaurs.

Stuff about Geopolitics, Economics, and the Finance Industry
NZS Talks Tech on Squawk Alley
I was on CNBC last Monday talking tech stocks and the market. They put the segment behind their CNBC “PRO” paywall, unfortunately, but here is a link if you happen to have access and don’t get enough of me already. And, thanks to Dex McLuskey for helping me with the a/v setup. I don't usually mind trekking over to the studio in San Francisco, but I could definitely get used to broadcasting from home!

Which Came First, Low Rates or More Debt?
Back in May, Buffett sat by himself in an empty, 19,000-seat arena and wondered aloud: if rates can stay low forever, then why didn't civilization figure that out 2000 years ago? Over the last 20 years, there’s been a persistent fear that ever-rising credit cycles will create ever-bigger crashes, like we saw in 2009. One might expect a major shock to the global economy to pop a credit bubble created by artificially low rates; but, this spring we got the biggest shock of them all, yet it appears the economy could eventually exit the pandemic reasonably intact. However, the unevenness of the recovery – with inequality rising even more appallingly as a result of the pandemic – needs to be addressed (a point I’ll come back to shortly). Do low rates and seemingly infinite government monetary and fiscal stimulus perversely mean that shocks make the economy stronger? But, what about inflation!? Surely the flood of money will drive up prices and cause rates to jump higher, thus popping the giant credit bubble. But this hasn’t been the case, despite being decades into the steadily declining rate trend and monetary stimulus. Related to this, NZS Capital’s President and resident finance Lecturer, Adam Schor, reminded me of the collapse 49 years ago of Bretton Woods, the post-WWII global agreement to tie currencies to gold (if you’re like me, you may have napped during that macroeconomics class in college; as I’ve said before, I’m not an expert here, so it’s a good thing NZS’s investment philosophy doesn’t rely on successfully predicting the future – macroeconomic or otherwise!). Following the extreme inflation of the 1970s, rates began a steady, 40-year, downward march – which the termination of Bretton Woods likely facilitated. No longer tied to gold, central banks had flexibility to increase monetary supply and interest rates with much more flexibility. 

Did low rates increase debt, or did debt demand low rates? As an economy grows and debt increases, the borrowers – those people who need to make the interest payments and eventually return the principle – tend to be disproportionately less-wealthy, while the people who lend money out and make a return on it tend to be wealthier. As time goes on, the wealth of the wealthier is more and more tied to the interest payments from the less wealthy – one person’s indebtedness is another person’s asset. And, as inequality marches higher, the less wealthy have an ever-rising debt burden that can only be maintained by perpetually lowering interest rates. It’s in the best interest of the lenders to lend at lower and lower rates to preserve their assets. I want to point out that this explanation is somewhat at odds with the general narrative – that lower rates are the driving force behind rising debt. While I will certainly grant that lower rates allow rising debt, the common view misses the crucial point that increasing debt necessitates lower rates – which actually has mathematical support. Indeed, I’ve previously explained this theory in reference to the 2017 essay by mathematician and SFI External Professor Ole Peters, who provides an explanation for sustainable, low rates that relies on this relationship between borrowers and lenders. (Another term for this idea that debt necessitates low rates is ‘indebted demand’; the researchers behind this paper explain the idea further using a different strategy than Ole Peters, but arrive at a similar conclusion.) As well as allowing rising financial inequality to go unaddressed and unchecked, I believe decreasing rates have been one of the hidden deflationary forces in the economy, along with the shift from an asset-heavy Industrial Age to a data-heavy Information Age. Indeed, with a large number of people with rising indebtedness and stagnant incomes operating in an economy with technology-driven deflation, it’s hard to imagine what could create sustainable inflation. 

Now, if we think about this trend of falling rates and rising debt continuing into perpetuity, then we will need infinitely-negative rates and, in the end, one person will have 100% of the wealth while everyone else will be indebted to them. Thus, we find ourselves back in that empty, dark arena in Omaha, kindred spirits with Buffett in our puzzlement. Perhaps there is a solution to this quandary – one that almost seems demanded by the current, pandemic-exacerbated inequality of the world – redistribution. As I’ve written in the past, economist and SFI External Professor Brian Arthur calls this the “distributive era”. To paraphrase: we have created a lot of wealth in the global economy; now, it’s time to focus on increasing who has access to it. Distributing money to more people who are on less-certain financial footing is going to stabilize, or possibly reverse, the deflationary trend. However, it’s important to avoid excessive inflation and rising rates that would further burden the borrowers who are helped by redistribution. It seems like a hard needle to thread, but not one with an impossibly small eye through which to navigate. Why? The deflationary pressure from the tech sector is going to step up dramatically as we move into the “AI Age” over the next century and every part of the economy becomes tech enabled, starting from less than 10% digital today. So, we probably have a wide berth to drive a little inflationary pressure and maintain low rates.

That’s a neat and tidy story, right? It’s one possible explanation, and, moreover, it suggests that redistribution could be a way out of our current socio-economic quandary. But, we live in a world dominated by complex adaptive systems, which means that predicting the future isn’t so neat and tidy. Or, as Jim Goff said in one of our team meetings last week, “Just when you think you have something figured out, that’s when the market kicks you in the teeth”. The theory relies on smart redistribution by governments, and, if we’ve learned anything from the last few years, then we probably shouldn’t bank on smart decisions by governments around the world. 

And, the economy remains extremely vulnerable to inflationary shocks. Where might those come from? A multi-year drought driving up food prices dramatically could easily be in the cards. An oil price shock is possible over a short time period, but every decade that goes by has the world less reliant on commodities in general. Labor inflation is a real possibility, particularly if redistribution is successful and it pulls too many people out of the workforce (on the other hand, if that coincides with rising AI, it’s less of a long-term issue as well). And, I certainly think there is risk of inflation from a loose-money/excess-liquidity spiral, especially when I read that CalPERS is levering up 20% of the largest public pension in the US and investing in increasingly risky, illiquid assets that are also massively levered; or when I see that the Ford Foundation, a charitable organization, is taking on $1B in 30-50 year debt to hand out money to other charities. Other foundations, including MacArthur, Kellogg, Mellon, and Doris Duke, raised an additional $700M in the offering, all with the goal of helping other foundations who have taken a hit during the pandemic. The idea is to give more away now without selling foundation assets in a volatile market. But how are these institutions planning to pay their debt off, perhaps with more debt in the future at even lower rates? 

Well, as you can see, some mental gymnastics and willing suspension of disbelief are called for in the world today as the human super-organism (to borrow The Dude’s term) continues to evolve. Perhaps Buffett can keep a seat warm for us in that arena.

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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 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. Often I try to make jokes, and they aren’t very funny – sorry. 

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