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

Click HERE to SIGN UP for SITALWeek’s Sunday Email.

In today’s post: powering electronics with waves; machines coding machines; the good types of price increases versus the bad ones; is the lauded creator economy just another way to feed the advertising algorithm? companion chatbots, algorithms, and free will; finding common cultures on late-night talk shows; the stock market's nervous breakdown; and much more below.

Stuff about Innovation and Technology
Wave Power
Flexible triboelectric nanogenerators (TENGs) mimic how seaweed moves underwater to harvest wave energy for powering maritime devices like coastal sensors and lights. “To make the triboelectric surfaces, the researchers coated 1.5-inch by 3-inch strips of two different polymers in a conductive ink. Then a small sponge was wedged between the strips, creating a thin air gap, and the whole unit was sealed, creating a TENG. In tests, as the TENGs were moved up and down in water, they bent back and forth, generating electricity.” We will continue to find novel ways to harvest energy from the natural environment as intelligent sensors proliferate.

Competitive Cyber Coder
Google’s Deepmind has a new AI called AlphaCode that can achieve the same performance as a median-ranked human coder in code competitions. The Codeforces competitions emphasize novel problem solving, so success in this venue is a milestone achievement for a non-human coder. AlphaCode joins GitHub’s Copilot (see #320) and other new tools aimed at improving coder productivity. I feel obliged to point out that, in the near future, the machines will be coding themselves.

Pricing-Power Pitfalls
There is a common love of, or perhaps obsession over, “pricing power” amongst most investors. We are not most investors when it comes to loving pricing power. As we wrote in Complexity Investing nearly a decade ago, in the Information Age, increasing prices without providing as much or more value is a bad, rather than good, omen. As the pace of disruption increases, if you are charging more for the same (or, as we occasionally see, less), you are offering an umbrella for your competitors to come in with a better value proposition. With the transparency of the modern world, companies can’t as easily obfuscate their sources of profits. It’s easier than ever to start new businesses, and many Industrial Age “moats” are nothing more than streams for today’s digital entrepreneurs to step over. In the current era, taking advantage of customers by constantly ratcheting prices without providing more value only works long-term if you are insulated by layers of regulatory protection (as with US healthcare). That’s not to say that all price increases are a bad omen – there are numerous examples of price increases that are powering a better customer experience. For example, Netflix increasing prices at first seems like a vulnerability given how much cheaper rival streaming services are (not to mention free social apps like TikTok), but they are funneling all of that into bigger (and hopefully better) content for their global users. Only around one quarter of video viewing in the US takes place on streaming, and the vast amount of money spent on television still goes to traditional distributors, so streaming providers may have a long way to go on pricing. Amazon announced a $20 annual price increase for Prime last week (on average, Amazon has raised Prime membership $5/yr since 2014 to $139 today in the US). However, this increase follows 18 months of unprecedented capex spending (more than the prior 3-year period combined; see #317 for the numbers). The company doubled employees to 1.6M over the last two years. That’s an astonishing investment that directly benefits customers – both buyers and sellers on the platform. Even some of the truly rare, one-of-a-kind companies like ASML, maker of advanced lithography tools for chip manufacturing, collaborate with their customers to improve their products rather than arbitrarily raising prices. The heart of the issue is whether a price increase is non-zero sum: are all constituents better off than had there been no price increase? Is a company providing more value than it takes, and are they sharing what they take with all of their constituencies, including employees, suppliers, and investors? Using this framework, one company that is creating future fragility through price increases is UPS (previously discussed in #320). Through its “Better not Bigger” strategy, the company is intentionally forgoing investments in new delivery capacity while Amazon and other startups take share of delivery, putting a hard curb on UPS’ unit growth. Instead, UPS is raising prices. The CEO has been wholeheartedly congratulated for this strategy by the stock market because the “better” pricing is disproportionately going to investors. You can price yourself out of business – it’s surprisingly easy to overestimate your value to your customers. And, if you do raise prices and you don’t redistribute the wealth in the form of product innovation, capacity increases, or employee salaries, you are soon likely to find that you have very little reason to exist. Amazon has proven that it’s possible to recreate UPS and FedEx, and I suspect the ecommerce giant will develop sortation facilities for accepting packages upstream as well, fully replicating the capabilities of the legacy shippers. Delivery is still a growing business, and companies like UPS and FedEx have the cover to raise prices right now because of inflationary pressures, but it’s a far better strategy to leverage technology to decrease prices or provide more value in exchange for price increases. We think this applies to all industries, yet very few management teams outside the technology sector have internalized this concept.

Democratized Creator Economy’s Algorithmic Fodder
Over the last few years, there has been a popular sentiment supporting the creator economy and, more recently, its democratization. It’s captured here in this recent Satya Nadella interview regarding the Activision acquisition with the FT: “the way we will even approach the system side of what we’re going to build for the metaverse is, essentially, democratize the game building...and bring it to anybody who wants to build any space and have essentially, people, places, [and] things digitized and relating to each other with their body presence.” I think access to tools for all sorts of creative and other pursuits should be democratized to avoid the “lost Einsteins” phenomenon, or maybe in the case of art and design it should be the “lost Picassos”. However, it feels like this call for a metaverse creativity blitz is just another way to get users to create more content to feed algorithms to drive more usage, while the platform itself disproportionately benefits at the expense of its participants. In other words, declaring everyone is going to be a game maker sounds a lot like social networking's call to make everyone a photographer. We might get some rare instances of great art on social media, but ultimately it's a means to an end, and that end is selling ads. It’s not clear to me that the creator movement will lead to more, better art as long as the intention behind the movement is for big tech platforms to exploit creators.

Back to the Satya interview, he also has a vision of bringing Microsoft’s core productivity tools into the metaverse with a focus on 9-to-5 avatars that mimic our facial expressions. I struggle to reconcile Satya’s bullishness on the metaverse with Microsoft fumbling the HoloLens, perhaps changing directions to work with Samsung instead. Microsoft has long had the second-best AR technology, and now Magic Leap, with its impressive ML2 headset, is the solo outperformer in the market. For now, I still see the next shift to spatial computing as iterative and additive, and only applying to certain aspects of our tech-mediated experiences rather than being an all-immersive reality. It's possible that there’s something happening with the metaverse that’s more substantial, and I am too old to understand it or embrace it...I do worry about being left behind. However, I still think we have a huge Meta-mess to solve before we can actualize a virtual world of any quality or beauty that improves what we have now. In the meantime, I expect we will continue to hear these grand visions from tech leaders touting democratization and opportunity, when, in reality, they’ve convinced themselves of a profitable lie.

Miscellaneous Stuff

Digital Erosion of Privacy and Free Will
Last week, I wrote about the rise of AI chatbots as personal companions, and how they might become our nexus for interacting with our increasingly digital world. I discussed the arms race for massive language models and how augmented reality will bring these companions to life. As the week went on, I had this nagging feeling I had missed a key point, but I couldn’t put my finger on it. The connection finally hit me: the rise of AI companions is closely related to our algorithm-driven loss of free will, a topic I wrote about in more detail in Algorithmic Threat to Illusion of Free Will, discussing how our time, actions, and opportunities are increasingly controlled by algorithms, often hidden from our knowledge. I am a little reluctant to keep sharing dystopian examples of algorithm-mediated abuse happening all around us, but sometimes I find the practice so alarming that I have to mention it. Politico reported on the non-profit Crisis Text Line, a leading resource for suicide prevention, that was sharing data from conversations with a for-profit company, Loris, that was in-part owned by the nonprofit. Subsequent to the story breaking, the company discontinued the data sharing with Loris, whose business model is to “increase empathetic conversation by customer service reps”. Although the data is said to be anonymized, oftentimes anonymous data can be eventually linked to individuals (recall how I noted in my post on algorithms that churches and rehab centers were bidding on people’s data to target folks in times of crisis). In another example, PE shop Vista has rolled up a collection of software companies with extensive information on students, including family wealth, religious and sexual preferences, drug use, etc. Despite the impossibility of accurately predicting someone's future, these companies use models to create risk profiles that can algorithmically impact a child's path through school, sometimes in a negative way. Shunting a student down one path vs. another (e.g., steering them away from a particular college major) based on algorithmic prediction of their graduation potential seems unfathomable. The presence of intimate, lifelike companions with a bounty of personal knowledge about each of us and how our brain operates, potentially starting in childhood, will increasingly feed algorithms that in turn influence our decisions over the course of our lives. I am not saying anything groundbreaking here, others have noted similar concerns. But, I hadn’t quite gotten my own brain over the hurdle of understanding how slippery this coevolution of humans and companion bots is going to be as it relates to our already tenuous sense of agency and free will.

Searching for Common Culture: Nostalgia and Late Night
In an interview promoting his upcoming New Worlds film (a documentary of Bill Murray and cellist Jan Vogler’s eponymous live concert in Greece), Murray lamented our increasing lack of common culture and shared his solution: “There’s so much noise out there. There are so many sources. What do we all even agree about? We don’t even watch the same television shows. We don’t read the same magazines or newspapers. We don’t see the same movies anymore. So, how do you get a shared learning experience? You can get it from going back.” By “going back” Murray is referring to New Worlds’ combination of historic American literature and music. That strategy might work for a little bit longer, but it’s harder and harder to find even common nostalgia to unite people as we increasingly fragment our attention (a concern that I explored in Digital Tribalism).

Recently, I have gotten back in the habit of watching American late-night talk shows. With the great interface on YouTube TV, I can get through four hours of late night in around 90 minutes (more or less, depending on the guests). Here too we see evidence of the fragmentation of common experiences. The Tonight Show Starring Johnny Carson would get around 9M viewers on a good night, while views for the current ratings leader, Stephen Colbert, have fallen to under 3M. What I like about late shows is the recipe has stayed consistent for nearly sixty years. They are a combination of commentary on current events, topical guests, and skits, with the show writers and hosts all working against a ticking clock, counting down to the deadline when they have to put their pencils down, walk through a curtain, and put on a live show every weeknight (the inner workings of these shows are brilliantly explored in Garry Shandling’s The Larry Sanders Show, which is still available on HBO Max). Late shows create something that at least tries to track the day-to-day movements in common culture through the great unifier of comedy. Last week, I was thrilled to see David Letterman appear for the 40th anniversary of Late Night, now hosted by Seth Meyers. There is a special magic that happens when a guest nails their segment, and the former host was in perfect form in his inverted role as guest. If you would enjoy a trip down late-night memory lane, here are the YouTube clips of Letterman’s appearance: part 1; part 2.

Stuff about Geopolitics, Economics, and the Finance Industry
Stock Market’s Nervous Breakdown
Last week, the US markets saw the largest one-day decline and one-day gain by single stocks, with Meta plunging $250B and Amazon soaring nearly $200B. In my twenty-four years of professional investing, this has been one of the stranger periods that I recall. If you just glance at the headline numbers – the S&P 500 and many diversified global indices are only down between 5-6% and the Nasdaq is down 9.7% in 2022 – it appears to simply be a healthy market correction of prior excesses. However, there are 875 Nasdaq stocks, or 27% of the total index, that are down over 20% year to date. While the drawdown is not being universally felt, the wild daily volatility is being endured by all. Stock prices at any given time are the average of all of the opinions of the people and robots who buy and sell stocks. Typically, that average isn’t too far from a consensus of the value of an asset in the short term. But, lately, violent mispricings and stock reactions to new information give the appearance that the market is unable to reach consensus on a plethora of stocks. If I could come up with one word to describe the emotion many investors were feeling last week in the face of volatility, it would be paralysis.

In our Q4 letter, I discussed the market and its attempts to find a level of homeostasis:
All biological systems exist in an ongoing effort to achieve homeostasis – a perfect level of nourishment and comfort for the organism to optimally survive and procreate. The stock market, like the global economy, is analogous to a living organism in that it is constantly seeking homeostasis, i.e., some sort of balance between supply and demand that manifests as the price of a stock and of the overall valuation of the market. Living organisms and the stock market are also both complex adaptive systems, and that means that disequilibrium is generally the equilibrium state. In other words, we are always shuffling one way or another to try and achieve homeostasis, drifting through – but never maintaining – that ideal state...
When the market has wide divergence in opinions on things like long-term interest rates, or when there are a lot of shocks to the system, its struggle to find homeostasis tends to become more dramatic. In other words, the typical disequilibrium operates in a wide band as price levels are more volatile than when the market can agree on a tighter range of future scenarios for variables like interest rates. This is an overly elaborate way of saying more unknowns create more volatility, but the key point I want to make is that thinking biologically can give you more context for how markets behave over time.

Since I wrote that, the market has acted like an anxious drug addict looking for its next score – an earnings report, a signal from the Fed, a sign from Russia, a sneeze from the latest Covid variant. Just give it to me now, so I can react to it! Using my biological homeostasis analogy, the market is fumbling around looking for nourishment in the form of information to reach a consensus on the value of assets. I can imagine reasons for this fumbling – uncertainty over rates, geopolitics, viruses, etc. – but really it’s just some combination of unknown reasons. Both Bloomberg and the FT report on the rise in options usage and how that appears to be accentuating the market's dissociative temper tantrums. And, often, there are diametrically opposing views on market antics, with Bloomberg saying liquidity is back and institutional investors are taking the market back from retail meme investors, while the FT says that liquidity is gone and the market is dysfunctional. Nobody knows!

We believe volatility creates opportunities for long-term investors. The best thing to do when markets are volatile is match your position sizes in a portfolio to the range of potential outcomes. As I wrote a couple weeks back in Investing Platitudes for a Down Market:
I like to look at the reasons for why the market is down (or why people think the market is down), and then ask: are these reasons widening, narrowing, or keeping the range of outcomes the same for a given stock? If the reasons are real and caused the long-term range of outcomes to actually widen, then the stock should have gone down. The question then becomes: has it gone down enough to account for the wider range of outcomes?
I also noted five things to keep in mind that we generally follow at NZS Capital. Two of those strategies that I think are broadly useful for most investors are to slow down time – do whatever you can to create space and get perspective from the day-to-day noise – and to stay optimistic. If you are a long-term investor, by default you are assuming things get better over time, at least for some businesses, so that should always be your starting point. When stocks are going down and markets are vulnerable, we have no choice but to believe the future will be better, or at least that’s what the algorithms have convinced my brain to believe.

Market Moves and More
Jon and I were on The Acquired Podcast on January 27th, where we discussed, among other things, the market volatility and what guacamole vision means for the semi industry. Our thanks to Ben and David for hosting us again. Here is one of my comments on the cognitive dissonance of market corrections:

"I think, these psychological factors are the hardest to overcome for all investors and, I think, for everyone making business decisions as well. A couple of things that we say: One is we're never as smart as we look when stocks are going up, and we're never as dumb as we feel when stocks are going down. Another way to think about that is when stocks are going up, you want to have humility, and when stocks are going down, you want to have confidence in your process. Yet another way of saying the same thing is that you want to have some skepticism when things are going well and some real optimism when things are going badly.

That's what I think is this tension a lot of investors and decision-makers have. They're looking at the stock market. They're reading the headlines. We're just bombarded with how bad things could be or are. But we know that's not how it works. We know over time that the optimists are always right, the cynics are always wrong. That can be flipped over the short term, but it's always true in the long term. It comes back to, I think, really just the ingenuity, innovation of humans, and knowing that we'll solve these problems. It's sort of watching as bad as things are and [then saying], this makes me optimistic. That's a really hard thing to get your brain to hold on to."

✌️-Brad

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. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital, LLC has no control. In no event will NZS Capital, LLC be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.