Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, the Drake equation, and whatever else made me think last week.

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In today’s post: the collision betweendigital and analog as supply chains gear up to ruin Christmas; workers are increasingly monitored by AI; email privacy changes compound an already difficult holiday season for marketers; returning to White Sands to walk in our ancient footsteps; how fractals give life an extra dimension, and why sleep is for the brain; do advanced civilizations annihilate themselves, or do they fade away as technology supplants their usefulness? regulatory capture coming to crypto; and much more below.

Stuff about Innovation and Technology
Grinch Working Overtime to Steal Christmas
As commerce continues its pandemic-accelerated shift from analog to digital, we are experiencing the collision of bits with bricks. While there is no limit to how many times I can click the buy button on Amazon, there is a real world limit to how many container ships, port/warehouse workers, vans, and drivers are available to get me those shipments. Examples of the strain on the physical world abound. FedEx reduced its earnings expectations for their current fiscal year last week, citing the tight labor market. In discussing the FedEx shortfall, the WSJ pointed out that the US may exceed available shipment capacity by 4.7M packages per day in November and December. Vanageddon, as Scot Wingo calls it, may be with us for a while as services of all types struggle to locate new vans or parts to keep old vans running. The CEO of Flexport, Ryan Petersen, said on CNBC last week that around 20% of ships in the Pacific are in a holding pattern as they wait to load/unload in congested ports (largely due to labor shortage and compressed demand as the economy catches up from COVID). The WSJ puts the number even higher for all of North America, stating that 40% of all cargo ships are waiting to get to port to unload. Petersen deemed the situation a national security crisis and called on the government to help unload containers. With the holiday season coming soon, toy companies are increasingly using airplanes to bring products West. Nike lowered its guidance last week as COVID-related supply chain issues, largely in Vietnam, are causing a shortfall in shoe supply. Meanwhile, Costco is limiting purchase of paper and cleaning products as it deals with driver shortages and supply chain challenges (unlike last year’s hoarding, this appears to be more of a supply issue). Even the king of digital, Amazon, tacked on a $9.95 fee for Whole Foods grocery delivery for Prime members, attributing the change to increased costs. Unless there is a structural change like reduced consumerism, significant reshoring of manufacturing (see #245 for more on deglobalization), or increased wages to entice people back into the workforce, we are likely in for a long haul as the analog world struggles to keep up with the digital transition – not only in logistics, but across a multitude of sectors. This trend is likely to continue to lift up technology as the deflationary and efficiency solution to our analog hurdles. In the meantime, I think we are about to experience a very strange few months of random out-of-stock items leaving us all to exclaim in puzzlement: “we don’t make that in the US? And, it’s going to take how long before it’s available!?” Random holes are opening up in retail shelves across the country as the Grinch clasps his hands and looks eagerly down on Whoville.

Cruel AI Overlords
The usage of technology to manage employees is accelerating rapidly. Bloomberg reports that, since 2012, the number of workers per supervisor has doubled from ten to almost twenty as tech enables oversight. But becoming a slave to an increasingly algorithmic boss has its downsides: “In interviews workers describe feeling like cogs in a giant machine that can spit them out with little more than an automated termination email.” California passed regulations last week, targeted at Amazon, that limit the use of productivity quotas, which the state sees as driving up “workplace injuries and indignities”. The Occupational Safety and Health Administration said in June that Amazon had a higher rate of serious injury than other retail warehouse operators, according to WaPo. Vice reported on Amazon’s driver monitoring system that erroneously penalizes drivers for ‘distracted driving’ when checking their side mirrors or ‘failing to maintain a safe distance’ if another driver cuts them off. Despite the seeming unfairness of the technology, accidents involving Amazon drivers are said to be down 48% since usage began. WaPo noted Bezos’ defense of performance goals in his April annual letter to shareholders, and the new Amazon CEO claims worker safety is a priority, with over 6,000 safety professionals and $300M spent just this year on safety. In the meantime, the Bloomberg article on Amazon’s automation efforts says the ecommerce giant will still need humans for a while until robots get better at grabbing things. And, this is not just a blue collar AI-surveillance crisis, white collar remote work is bringing a lot of monitoring of every minute of work.

CCP Limits International Aspirations of Chinese Companies
The Lithuanian Defense Ministry warned that some Chinese brand smartphones are sending secret encrypted messages back to mainland China. Xiaomi phones also contained a censorship module for terms that scare the CCP, which could be turned on at any time without users knowing (the Chinese handset maker denied the accusations). Of Xiaomi’s 53M smartphones shipped in Q2, around 40M of them were sold outside of China. As I think back to only a few years ago, when markets expected China’s Internet giants and growing hardware companies to breakout of the mainland markets and gain a global foothold, it seems increasingly likely that the current trajectory of the CCP will relegate those companies to their home turf, significantly reducing a potential competitive threat to non-Chinese brands and platforms around the world.

Email Privacy Adds to Ad Conundrum
Apple’s privacy focus continues to have a wide ranging impact on companies that grew to depend on data from iOS. We’ve already heard about the app tracking constraints as a result of iOS 14, and Facebook even had to pour cold water on their guidance last week as those restrictions continue to hamper their business: “In a blog post Wednesday, Graham Mudd, Facebook’s vice president of product marketing, said the company has heard from many advertisers that privacy changes in the online advertising industry have had a greater-than-expected impact on their operations.” The new iOS 15, which launched last week, promises a similar level of disruption to the email industry, which relies on tracking data for email opens to demonstrate success of campaigns, particularly for ecommerce (Mailchimp had great timing for the $12B sale right before the iOS 15 launch!). The loss of key email data is landing at a particularly hard time with the holiday season coming up. Losing stats on email opens will put a greater emphasis on getting people to click on embedded links for tracking engagement. Apple’s changes are also hitting smaller online businesses quite hard as they see a drop in returns for their ad campaigns and will now have to deal with the lack of email visibility (and Vanageddon could hurt smaller online commerce businesses as well this holiday as they have fewer delivery options than larger companies like Amazon). Android and web browsers will no doubt follow the same trajectory towards privacy, so the entire ad industry really needs to hustle to cooperate and come up with alternative means of reaching customers that don’t just disproportionately favor Apple and Google, but also give consumers the benefits of having their data used smartly and anonymously.

Green Energy Follows Moore’s Law, Fossil Fuels Don’t
A new working paper published by the Institute for New Economic Thinking at the Oxford Martin School demonstrates how we are systematically underestimating the cost declines of green energy, leading to a significant underinvestment in renewables. The new analysis shows that solar, wind, battery, and hydrogen fuel cell tech follow a power/cost progression similar to Moore’s Law for chips. In contrast, fossil fuels have had a static efficiency output for more than a century. Consequently, speeding up the timeline of fossil fuel replacement could save trillions. Bloomberg published a summary article co-authored by Eric Beinhocker and one of the paper’s authors. One of the problems this new analysis overlooks is the human cost of the cheap solar, with half of the polysilicon material made in regions of China with human rights violations. In related news, IEEE reports on the rise of distributed power companies, such as Tesla and Octopus Energy in Germany.

Miscellaneous Stuff
Footprints in White Sands
Back in SITALWeek #266, I wrote about the discovery of ancient human footprints at the White Sands National Park in New Mexico from around 12,000 years ago: “a person carrying a child made their way hastily across a muddy flat in a straight, 1.5km+ journey, and then, several hours later, retraced their steps back, seemingly without the child (who was perhaps dropped off at another camp?). On the outward journey, sometimes the child walked for small stretches, and, at other times, the main tracks show evidence of a toddler-sized encumbrance. Perhaps they were in a hurry due to the area’s active megafauna, which included saber-toothed cats, dire wolves, bison, camels, mammoths, and giant sloths, some of which left tracks that crossed the trail of human footprints in between the outbound and return journeys. This remarkable record tells a story, but it mostly raises more questions about what life was like for these ancient humans. Another set of prints records children playing in the puddles formed by giant sloth tracks and jumping between mammoth tracks. Those images will be with me next time I see a kid splashing in a rain puddle.” White Sands was back in the news this week with a new find of decidedly older footprints, dating from ~21,000 years ago. While it will be debated for a while by anthropologists, it appears the evidence is solid that humans were in North America around 10,000 years before previously thought. The find could validate many debatable sites of older human evidence as well. One thing we know for sure is that natural selection certainly selected for wanderlust as a way to survive.

Sleep, Fractals, and Extra Dimensions
We’re big fans of Geoffrey West’s work and have often recommended his book Scale to people who ask us about complex systems and the Santa Fe Institute. In Scale, West describes how physiological characteristics of mammals follow quarter power scaling laws. For example, an elephant weighs 10,000x more than a squirrel and grows 10x slower, has a 10x longer gestation period, and lives 10x longer (10 being 10,000^¼). Because growth is dependent upon distributing nutrients to cells throughout the body, one might think that volumetric (a.k.a. weight in this case) differences would determine growth rates, giving third power scaling (since volume is three dimensional), which would correspond to 22x slower growth/gestation. Why is the elephant able to eke out a faster growth rate, and thus better reproductive fitness? The fascinating reason for this quarter power scaling is likely due to blood vessel and respiratory networks that have evolved through natural selection to maximize metabolic rates in the three-dimensional world we find ourselves in. The best way to maximize space in a 3D world is to use fractal, or self-similar, patterns. Fractals are so efficient that they essentially give a network, like blood vessels, an extra dimension, which is why the number four repeatedly shows up as a scaling factor – it’s three dimensions...plus one. In other words, a linear fractal is two dimensional, a surface area fractal is three dimensional, and a volumetric fractal is four dimensional. I just love that about nature. But, there is one standout exception to this metabolic scaling consistency, and that is the amount of sleep we need. It turns out that the larger the animal, the less sleep it needs (elephants only need 3-4 hours per night vs. 15 for squirrels). Based on quarter power scaling, we would expect the opposite – that an elephant would need 10x as much sleep as a squirrel. West and his collaborators have two theories to explain the divergence. First, sleep’s function is to counteract damage from energy production and process neural information into memory. Larger animals suffer less damage per fixed volume of tissue, so less time is required to repair the damage. The second reason appears to be related to relative brain size. It turns out it’s the amount of time needed to repair the brain that matters more than the overall body, and brain size scales more slowly as total body size increases. Lastly, the researchers looked at how sleep needs change as we age. Surprisingly, up until the age of about 2.5 years old, sleep is focused on neural reorganization more so than repair, abruptly shifting as the brain becomes less plastic.

Inspiration4 Makes History
I was inspired by Inspiration4’s first civilian crew to orbit the Earth for three days and happy to learn of their safe splashdown last weekend. There were apparently some not-as-inspired elements to the trip, such as the toilet, which Elon Musk proclaimed will be upgraded for future missions. The astronauts were also trained to use zip ties and sedatives in the unlikely event of a mental break during the journey. During the crew’s extensive five months of training, they ran a 30-hour flight simulation together in preparation for the mission inside the 328-cubic-foot Dragon capsule.

L: With a Whimper, Not a Bang
The Drake equation, proposed by Frank Drake in 1961 at the first SETI meeting, attempts to estimate the number of extraterrestrial civilizations with communications capabilities at any given time within the Milky Way Galaxy. While it was never meant to be rigorously scientific, it has, over the years, spurred many debates about the variables that might contribute to the number of intelligent civilizations in the Universe. The key inputs listed below, some of which we know and some of which we guess, are all multiplied together. Per Wikipedia:
R∗ (the average rate of star formation in our galaxy)
fp (the fraction of those stars that have planets)
ne (the average number of planets that can potentially support life per star that has planets)
fl (the fraction of planets that could support life that actually develop life at some point)
fi (the fraction of planets with life that actually go on to develop intelligent life)
fc (the fraction of civilizations that develop a technology that releases detectable signs of their existence into space)
L (the length of time for which such civilizations release detectable signals into space)

The variable that gets most attention is the one that has the widest (5-6 orders of magnitude) range of predictions: L, the length of time a communicative, intelligent species survives. It’s a ‘glass half full or glass half empty’ cocktail-party question: are you optimistic that a species of sufficient intelligence to develop radio technology will survive without catastrophically annihilating itself or its planet? I’ve thought about the equation frequently over the past quarter century (after learning of the Drake equation in Astronomy 101), and I often quote Carl Sagan’s line from Contact on this topic: “The Universe is a pretty big place. If it's just us, seems like an awful waste of space.” This last week, I was thinking about L in a different context: birth rates. I write often about human’s declining proclivity to procreate and how it impacts our economic growth ideology. On the one hand, there are positive reasons for declining birth rates (a more equitable society for women globally, improved child mortality rates, etc.), but, on the other hand, there is a certain lack of hope for future generations embedded in a declining birth rate. It represents an existential malaise – a slowly encroaching dread that much of our function in society is being replaced by machines of various types – leaving us as nothing more than inadequate cogs, woefully flawed by emotions, desires, and physical fallibility that interfere with the economic bottom line – until our AI overlords fully assume control. China’s plummeting birth rates could be a manifestation of a people losing their hope for the future. Perhaps, instead of annihilation via a catastrophic event, civilizations of intelligent, communicative species instead run out of hope and usefulness. Drake formulated this equation around the height of the baby boom in 1961, during the middle of the Cold War, which is likely why the L factor historically put the spotlight on annihilation rather than birth rates. If it’s declining birth rates that explain the Universe’s lack of little green men, then maybe the lack of hope stems from a loss of common culture as population growth creates more and more fractured tribes. Or, the absence of a common enemy, which would serve to unite a civilization, could be to blame. Alternatively, loss of hope could be a sign of a growing dysfunction of tribalism altogether – you can’t have culture without functional tribes (I noted that the pleasant tribal shift from politics to the relatively more benign sports as a good sign for humans). And, some companies feel like tribes – like they have built their own culture and optimism for the future. However, when those cultures sour, attitudes shift from optimism about growth to fear of stagnation. Sometimes entire industries die off as civilization marches on. I can’t help but reflect on Apple’s transformation from an engine of inspiration and innovation – creating technologies that changed the world under Steve Jobs – to a culture of fear under Tim Cook, where employees who leak dirty laundry are hunted down, the castle is defended by legal action rather than disruptive innovation, and they take more value for themselves than they create for the world. One could also make an analogy to governments as well: countries that favor fear and communism over democracy and entrepreneurism will be more likely to fail as their people – their economic engine – lose hope. We could easily look at the lifetime of companies and draw some parallels to the L in the Drake equation (indeed, the folks at the Santa Fe Institute have done just that). All of these signals of lost hope and stagnation are the reasons that the two key attributes we look for in our investments at NZS Capital are adaptability and non-zero sumness: to what extent can a company adapt to a changing future, and how much more value are they creating for others than they take for themselves. Well, I’ve rambled enough here, so I will conclude as I often do with a link to Carl Sagan’s Pale Blue Dot soliloquy, and I’ll continue to hope that the Universe is not a waste of space.

Stuff about Geopolitics, Economics, and the Finance Industry
Big Brother Hating on Crypto
Following recent crypto clampdowns to combat ransomware attacks, favor sovereign digital currencies, and facilitate a terribly misguided monetary policy (see the last sections of #313 and #314 for more context), China declared cryptocurrency transactions illegal last week. Meanwhile, US regulators are relying on colorful pioneering-era analogies, with the head of the SEC likening crypto to the ‘Wild West’ days and the ‘wildcat banking’ era, and the Acting Comptroller of the US Currency calling crypto a ‘fool’s gold rush’, according to WSJ. If governments and central banks are successful in regulating crypto currencies, without declaring them illegal to transact, then we will likely see regulatory capture: a very high cost of running regulated crypto exchanges and maintaining regulated protocols will enable a small number of digital currencies and a small number of trading platforms to dominate the industry.

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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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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