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

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In today’s post: transformer models show potential to replace traditional software and change the way we interact with technology; autonomous crime-prevention drones; more disruption for traditional distribution; what our distant past might teach us about valuing privacy over accountability; crossing the comedic line; jury instructions help us avoid pride; as the buy side withers, the game changes from exploiting bias in other humans to exploiting bias in machines, which might extend the time it takes for a stock to reflect its future cash flows; TSMC's struggles in the US highlight the scarcity of resources to (re)build global capacity domestically; and, much more below...

Stuff about Innovation and Technology
DTC Caskets
Last week, I talked about how many traditional distribution businesses are threatened by digital disruption by highlighting car dealerships. In a win for bereaved family members and vampires everywhere, Titan Casket is shaking up the high-priced casket market, which has been traditionally controlled by mortuaries and a small number of slumber-chamber makers. I remember first learning about the restricted-distribution industry structure on a trip to Batesville, Indiana twenty years ago. Disruption can take a long time, but, eventually, it’s coming for every traditional business. Titan recently raised $3.5M in venture funding for the BYO-casket market, reporting 400% growth in 2021.

Transformer Models to Replace Software?
Google’s new text-to-image algorithm, Imagen, is capable of creating some rather strange but accurate representations, such as a “photo of a panda wearing a cowboy hat riding a bike on a beach”, or oil paintings of equally silly scenarios in the style of any artist. While the model has reached a breakthrough in language interpretation, the team is not releasing it to the public due to various ethical concerns over potential misuse. However, you might have a shot at creating your own weird art mashups using OpenAI’s Dall-E (Dalí + Wall-E), which is allotting access to 1,000 new users a week. Dall-E’s creators also have ethical concerns about how such models reflect society’s ingrained biases (e.g., CEOs are more likely to be imaged as male) or whether or not images should represent more idealized views of the world. These models are part of a broader set of transformer AI engines attracting a lot of attention and funding. After reading this Verge review of Dall-E, I can't help but wonder if programs like Photoshop, Canva, etc. will lose the majority of their design value when you can just say what you want and get it instantly. Could this eventually happen with not just images, but video? Give me a 90-minute rom-com starring Jeff Goldblum and Annette Bening with a spy thriller sub plot set in Berlin in 1983 with the style of Werner Herzog. It feels like we may be getting much closer to the computer interface in Star Trek being a reality. Could transformer models also ultimately replace other traditional apps beyond design software? What about architecture and engineering? Design me a three-bedroom house out of concrete and wood in the style of... Obviously the data and answers don't exist for many applications beyond images today, but it seems plausible given enough time. As I've noted in the past, context and the ability to analogize is key for AI, and maybe it's just a gimmick that is fooling us, but there seems to be some element of higher level interaction in these transformer models. Paradoxically as these new models allow us to tinker, rather than remove agency and human influence, they might actually increase our ability to articulate more accurately what we envision in our heads.

Shock Bots
Taser-maker Axon found itself enmeshed in controversy after a proposal to create drones with tasers for deployment against gunmen in schools caused nine members of its board of ethics to resign. Much like sharks with laser beams, I suppose the question is: “what could go wrong?” While there do seem to be numerous open questions, and a lot of thought would be required for conscientious product development (for the taser-toting drone, I mean, we should obviously equip sharks with lasers), the instinct to create a non-lethal defense against deadly, illegal activity has a certain logic. Or, is it too dystopian and fraught with unknowns and potential abuse to even consider? AI could allow a drone to easily identify authorized law enforcement, but it might be harder for it to distinguish “good guys with guns” from bad ones. And, as I always ask whenever it comes to autonomous drone innovations: can we also use it against racoons? Maybe shock drones are just a dangerous step toward those shock collars that blow up your head if you break the rules, as featured in Rutger Hauer’s 1991 violent movie Wedlock. But, maybe technology could play a bigger role defending against crime and violence. Regardless, the technology to create such a product is off the shelf, so it’s only a matter of time before it exists, whether society wants it to or not. 

Farmer Bot
In somewhat lighter drone and laser news, farmers in Brazil are deploying advanced technology to fight rising fertilizer prices. Drones use cameras to determine precisely which plants need fertilizer, while lasers are used in lab analysis of soil. The technology could significantly reduce the need for fertilizer globally in the future. 

Privacy vs. Accountability?
Once upon a time, there was no (or at least very little) privacy. Humans lived in small tribes (or close-knit groups) with a high mutual dependency for survival. Reciprocal altruism dominated relationships, and good actors were rewarded and cheaters punished. I suspect it was hard to get away with anything nefarious for very long. Of course, there were surely downsides, and primitive human tribes probably could have used an anonymous suggestion box or a whistle-blower corkboard to great effect. Today, humans are obsessed with both privacy and spying. We don’t want anyone to know anything about us (and yet we let the entire world know everything, as we explicitly allow the big tech platforms to buy and sell our identities hundreds of times daily! See: Privacy Not Included). We want to pretend we are entirely anonymous and self-sufficient and don’t need everyone else in our complicated, interconnected world to survive. Maybe going from 50 people to billions increased the importance of privacy, or maybe we’re just wrong about privacy. Maybe our superficial sense of anonymity is the reason behind many of the challenges the world is facing right now. It’s perhaps harder to feel responsible when you think you are anonymous and unaccountable – at least until you are featured in a viral TikTok caught on someone’s doorbell cam. 

Tim Cook, appearing at the Time Magazine Time100 Summit, said he fears the loss of privacy because people will begin doing less and thinking less. Well, right now we only have a thin veneer of privacy, and we seem to be thinking and doing very little already, so maybe that’s true. But, isn’t the opposite more likely? If our thoughts and actions were as open to the world now as when we lived in small groups, might we feel more responsible to do good and come up with creative solutions for the problems we face together on this planet? In the same interview, Cook went on to say that losing some of his own privacy, in coming out as gay in 2014, was good because he thought his loss of personal privacy on this topic might help other people. I guess that’s my point: in aggregate, complete anonymity and privacy may not be the best path for human societies (obviously this applies only to countries/regions with protected human rights). When we prevent ourselves from experiencing and enriching our common culture by receding into tiny, private, one-person bubbles, we lose the ability to understand and relate to each other. Is giving up some anonymity while preserving free speech and living with accountability too much to ask? As Kurt Vonnegut wrote: “Human beings will be happier, not when they cure cancer or get to Mars, but when they find ways to inhabit primitive communities again.” Technology like Apple’s should perhaps be used to build transparency at scale rather than privacy at scale, e.g., by giving users complete control over how and when their opt-in data are collected, used, and shared. However, Apple’s creating neither transparency nor privacy; the secret Cook wants to keep private is that he would like you to reveal all of your secrets to Apple instead of his competition.

Miscellaneous StuffComedic Heart
After reading Maureen Dowd’s interview with Netflix CEO Ted Sarandos, it’s been nagging me that Sarandos defended much of his editorial decisions on what constitutes comedy by saying: “the only way comedians can figure out where the line is, is by ‘crossing the line every once in a while. I think it’s very important to the American culture generally to have free expression.’” It grates on me because I generally agree with the sentiment, but I also think testing the line needs to come from a place of curiosity rather than arrogance or ignorance. Comedy is a mixture of objective and subjective punchlines, and, obviously, not everything is funny to everyone. And, no one should be canceled for a joke, no matter how unfunny it is. If I try to write a joke and I am not sure where the line is – but the drive to shine a light on the topic comes from the heart – then the attempted comedy seems like a worthwhile exercise. If I cross a line because I think I know something other people don’t, or I think people who disagree with me are wrong, the intended comedy can open the door for hate, condescension, or, at the very least, land me in hot water for making fun of something I don’t fully understand. As I wrote in Laughter Is the Best Medicine: 
Laughing at the worst of the human condition is how we beat the worst of the human condition. When you can turn what seems like the most horrible tragedy into a smart and funny commentary on the challenge of just getting up every morning and trying to make it through the day, then you’ve beat that absurdity for at least another 24 hours. It’s possible that comedy is the only reason to try to actually make it through that next rotation of the planet – to laugh at how absurd it is that we even try, knowing how badly it could go. To find uplifting humor in the darkness is to overflow with empathy. Sometimes jokes lack empathy (i.e., that critical aspect of putting yourself in the shoes of the target of your joke) and/or spotlight one absurdity while ignoring another greater darkness. 
Rather than constructing a joke by saying one group of people is wrong, it’s far funnier to me if the joke asks questions about whose view is right or wrong and makes fun of both sides equally. Trying to derive comedy by saying everyone on one side of the line is wrong seems to come from a place of fear rather than love.

Stuff about Geopolitics, Economics, and the Finance Industry
First-World Labor Problems
The FT reports on the labor challenges facing TSMC as it attempts to add leading-edge capacity in the US – its first such foray off the island of Taiwan. From difficulty in finding construction workers in Phoenix to potential challenges in recruiting chip engineers, the problems represent a microcosm of what any industry would face trying to build out capacity in developed countries. There simply aren’t the people or resources to deglobalize (or, in TSMC’s case, globalize). Like it or not, for every day that goes by, the world is more globally interconnected than ever.

Withholding Judgment
A common jury instruction is to not announce your position until you’ve heard all other arguments from other jurors because doing so might allow a “sense of pride” that would keep you from abandoning your view should it prove false. This advice equally applies to many high- and low-stakes situations. The best course of action is to try to not even have an opinion at the onset, or at least dissociate from whether your opinion is relevant (see also last week’s letter #348). Instead, let the evidence speak for itself, and, if you aren’t sure, the ultimate way forward is to simply say: I don’t know. In a group discussion, it’s always best to hold conclusions until all the objective debate points have been exhausted. This is a really hard muscle to build, but it’s vital for investors and managers driving portfolio and business decisions.

Buy-Side’s Blunted Influence
Three current investing trends seem to have some connection to the goings on in the stock markets. First, the FT reports on the markets’ declining liquidity, which began following the 2008 financial crisis. Second, the FT separately notes that passive funds in the US are now 16% of the market, surpassing active mutual funds for the first time. Active funds now stand at 14% (and it’s hard to argue that all of that 14% is truly active and not just sticking close to a benchmark, which would make it indistinguishable from passive in aggregate). Overall, the combination of passive and active funds has remained ~30% of total stock ownership over time (see page 27 in the ICI 2022 report; the other ~70% of stock ownership is a combination of direct ownership by households, pensions, insurance companies, sovereign funds, and hedge funds, the latter of which is only around 2% of equities globally at $4T). However, ten years ago, active managers were three times the size of passives. Further, today’s biggest active managers are gaining share amongst the shrinking pie, and, by definition, the larger you get, the less active you can be (especially when combined with the drop in liquidity). And, third, large institutional investors, like pensions, continue to chase private market returns (with potentially dubious disclosures, as the WSJ points out), shifting allocations away from liquid stocks and bonds. In the context of these three trends, what we traditionally refer to as “the buy side” – the aggregate ability of active, professional investors to influence the value of stocks – is steadily evaporating. Some days it feels like that influence is already completely gone for all practical purposes.

Being a successful investor over the long term requires a framework that, in most cases, exploits some bias in the market. Ultimately, that success relies on the bias being remedied – a corrective action on the part of the “market”. Historically, that has meant other humans with an active view of the value of a security coming around to your view, and by “your view” I mean the potential for the investment to generate a certain level of free cash flow. Whether this human-driven corrective mechanism will be important in the future is hard to say. It seems more likely that allocations into and out of various groups of stocks based on algorithms – with diminishing human input/oversight and increasing reliance on macro data points and machine-red press releases – will be more and more dominant.

Ultimately, because investing lays claim to the underlying free cash flow of a business, logic demands that stocks will eventually trade at a multiple of their free cash (in a range depending on the long-term interest rate environment). However, the waning of human-controlled corrective mechanisms might make the path stocks travel more volatile. And, volatility is opportunity. So, if you understand how the mechanisms for correcting misvalued securities are evolving (from human bias to algorithmic bias), then you can also create more opportunities to exploit algorithmic biases. However, as algorithms experiment with trying to outsmart one another, the time it takes to see stocks converge on fair values may extend out. As such, you may need to take a critical eye to the resilience of your framework to ensure survival on the chaotic, non-ergodic path from today to a more logical future. If there comes a day when all of the caddies are replaced with golf carts, and those golf carts are programmed by machines without human input, then all bets are off. In the meantime: have patience – the end destination will be the same, but, with AI at the wheel, the path to get there may be bumpier.

✌️-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. 

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