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

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In today’s post: repurposing retired EV batteries for grid storage; the evolution toward short-from storytelling; the regulatory capture of regulating big tech; when AI feels real, it can force us to confront many questions; molecular electronics; the breaking point of rising rates against the long arc of rising leverage; and, much more below...

Stuff about Innovation and Technology
Car-to-Grid Battery Recycling
By 2030, around 1.7M EVs will be aged out of usefulness, but their batteries will still be worth around $3,000 each, according to data from the International Energy Agency cited by the WSJ. Nissan and Renault, among other automakers, are increasingly repurposing batteries from retired vehicles for large-scale grid energy storage systems. The batteries can still be useful for grid storage for another 10-15 years after their EV mileage has degraded. In 2030, there should be around 107 gigawatt hours of retired car batteries, which would translate to around one hour of power for 80 million US homes for each discharge.

Recent Recency Bias
A couple weeks ago, I wrote about recency bias and how it can negatively affect decision making. In that post, I used Amazon’s overbuilding of pandemic ecommerce capacity as an example. Last week, the WSJ wrote a long and informative article on what went wrong with Amazon’s forecasting of pandemic demand: “Part of Amazon’s e-commerce challenges today stem from a piece of technology long prized during Mr. Bezos’ tenure as a secret weapon, an internal forecasting system called Supply Chain Optimization Technologies, or SCOT. It was designed to incorporate a multitude of factors and spit out projections for product demand and the growth in logistics needed to fulfill it.
Amazon’s SCOT forecasts produced low, medium and high estimates. Because of unprecedented volume in the early days of the pandemic, Amazon executives including Mr. Clark repeatedly chose the higher end of SCOT’s estimates, said people who used the tool and worked on the SCOT team at the time. Those estimates meant that the company needed many more fulfillment centers and other infrastructure to keep up.”
This is a great lesson that not only are we humans subject to recency bias, but when we program algorithms or models to make predictions, we can imbue them with the same problem of overweighting recent data points, compounding a very human error.

Bite-Sized Storytelling
At NZS, we like to think about the world in terms of broad vs. narrow predictions. Broader predictions are more likely to happen regardless of which path the unknown future takes. For example, a broad prediction is: “items that would benefit from being connected to the Internet will be connected to the Internet”. One consequence that follows from that prediction is that semiconductor utilization by objects/services will continue to grow. Another example: “payments will increasingly transition from analog to digital”.  In contrast, narrow predictions require specific future scenarios to play out. Using the payments example, more narrow predictions might involve which platform will gain share in digital payments or what role smartphone operating systems will play vs. digital wallet providers. Some narrow predictions become parlay bets with increasingly unlikely outcomes, which are especially dangerous. Ideally, we avoid narrow predictions – or at least match position size to the breadth of assumptions needed for a positive long-term outcome. A broad prediction for the media industry is: “storytelling is an important part of human nature and will always play a key role in the content we consume”. Another broad prediction – which now seems to be slipping – is: “long-form storytelling (e.g., books, television series, movies, professional sports*) will remain a primary way we get our storytelling fix”. When you look at the complicated, interwoven storylines of something like the Marvel Universe, you can see a prime example of our connectedness to deep storytelling. There are only a handful of storytelling patterns that tend to appeal to most of us (Kurt Vonnegut has an excellent and hilarious lecture on this topic). The breadth of this assumption on long form storytelling, however, is being heavily tested with the accelerating popularity of short-form video. Revolutionized by TikTok, desperately copied by Meta, and now sweeping YouTube with 1.5B monthly active Shorts users, scrolling through short videos is shifting our attention away from long-form storytelling. That said, if you follow one short-form content creator for a long time, you are still tracking a long-form story of that person and their life (and/or the stories they are telling). Short-form video consumption could be either a transient experiment or a major cultural/consumptive co-evolution of our brains with technology.

Like our penchant for telling stories, humans also like to analogize. The analogy that comes to mind for me is the shift from desktop to mobile that started, in earnest, around ten years ago. At the time of the Meta IPO, a major concern was whether Facebook could make the transition from desktop to mobile, and, if they could, would it be monetizable? Then the newsfeed was born and the rest is history. In addition to social networking, mobile accelerated growth for many desktop-based activities like ecommerce and media consumption. And, although desktop Internet still exists, its growth pales in comparison (and in some categories is down) vs. mobile. This too seems to be the case with video and media consumption in general. Our viewing of long form is shrinking slowly in minutes per day as short form grows dramatically. Over the next decade, it might be an increasingly narrow prediction to assume that long-form media will be more valuable to consumers than it is today. Is the shift to shorter and shorter bites of media inevitable in a digital, always connected world? If so, does this shortening have implications for other consumer/worker behavior? Which assumptions should be tested, and which predictions are narrowing, and thus leading to a wider and more uncertain range of outcomes? I’ve left out other forms of media for simplicity in this story that I’ve just told – notably video gaming (which is perhaps going through a similar transition, with mobile gaming tending towards shorter bursts of playtime), with mobile growing far faster than console and desktop gaming. 
*RE sports: Teams dressing up in costumes with underdogs and season-long story arcs...sports are just stories where the actors are extremely talented athletes and the directors are coaches – most just aren’t quite as choreographed as WWE.

Wrangling Big Tech: Unenforceable Laws and Regulatory Capture
The American Innovation and Choice Online Act is said to have bipartisan support to pass both the House and Senate and likely become law. The primary goal of the act is to keep big tech companies from preferencing their own products and/or decreasing choice of alternatives. It’s hard to say how the actual regulation and changes would play out. Will Amazon not be allowed to feature their own brands in search listings – even when they are the highest quality choice at the best price? Will Google be forced to decouple maps from their other services? The act also restricts tech companies from using the data their own platforms generate. What’s the point of being in business if that’s the case!? At some level, it’s completely impractical at this point and would do far more consumer harm. It’s hard to argue people can’t go find Spotify on their own in app stores. Of course, there are elements that might make sense. In particular, bundled services that make competitor options less favorable to consumers, as well as in-app store fees, which allow big tech platforms a free ride while the competition gets charged fees that render their business model impossible, are ripe for regulation. One thing we know with certainty is that when the government regulates big companies, it adds to regulatory capture (see How I Learned to Stop Worrying and Love the Monopoly), cementing and growing the power of incumbents. 

Semi Sentience
The Washington Post highlighted a Google researcher who internally raised concerns that a new conversational engine was sentient. According to a Google spokesperson, “AI doesn’t need to be sentient to feel real”. I wonder if it ever crossed their mind that, while they might feel real themselves, how would they know for sure?! Human consciousness is certainly special (and perhaps unique in the Universe), but it’s also just a lucky outcome of natural selection – a trick played by our genes to keep their replication going. When we feel aware that we are special, we want to create more “special” consciousnesses (until recently at least, when other distractions – see above short-form video discussion! – and stressors have overwhelmed the power of consciousness to keep the species going, contributing to worldwide declines in birth rates). The point is, of course, that highly advanced AI interactions designed to mimic humans are going to be just as real as the real thing. The world of Blade Runner is here already. We grant rights to fellow humans (in some countries) because they seem real. Logic follows we should grant rights to anything that seems real. Consciousness and sentience are just an illusion, after all. After watching the AlphaGo documentary (moved to YouTube from Netflix), I noted, way back in #221, what a gut punch it can be when humans realize that AI can not only be smarter, but also more creative. It really shakes the ground under our feet. It’s not just about fry-making robots replacing humans, it’s about confronting what it means to be human. My favorite movie that tackles the question of what it would mean for AI to become sentient is Her (see #332). With larger and larger neural nets and advancing transformer models, it does feel like a milestone is approaching. We’ll be confronting many of these “we’re not special” situations at an escalating pace in the coming years. I think the key for the species will be to not get lost in the disillusionment of our natural-selection programming, but rather to focus on creating things and connecting with each other, trying to do something truly unique and special. I am reminded of a quote I cite often from Vonnegut: “The arts are not a way to make a living. They are a very human way of making life more bearable. Practicing an art, no matter how well or badly, is a way to make your soul grow, for heaven’s sake. Sing in the shower. Dance to the radio. Tell stories. Write a poem to a friend, even a lousy poem. Do it as well as you possibly can. You will get an enormous reward. You will have created something.”

Miscellaneous StuffReviving Molecular Electronics
Biomolecule-based chips are designed to detect interactions with specific analytes via electronic signaling. One use case would be virus detection via interaction with antibody molecules attached to the chip. This article discusses the molecular electronics startup Roswell: “Let’s say Roswell wanted to create that 200+ virus chip. Their engineers would build sensor probes tipped with engineered antibodies like those the human body makes to identify and fend off, say, the SARS-CoV-2 virus that causes COVID-19, or the rhinovirus circulating in your daughter’s daycare—plus the many variants of those viruses and dozens of others. When an infected person blew into the straw and expelled virus onto the sensors, the antibody molecules would react by producing a distinct chemical-electric signal picked up by the chip’s electronic circuits. Software would then translate the signal almost instantly into a ‘positive’ or ‘negative’.” It will be a huge breakthrough if the Roswell team can successfully commercialize this type of biological sensor technology, which has been an elusive dream for decades.

Stuff about Geopolitics, Economics, and the Finance Industry
Chit Chat Cloudflare Part Two
Following up on his first discussion of zero-trust security and Cloudflare on Chit Chat Money, part two of the interview with Joe can be found here.

The Point at Which Higher Rates Collapse the Economy
The US private equity market stood at $7T in assets in 2020, with public and private US pension funds comprising just under half of the investors. That $7T asset total (up from $1T in 2005) was quite eye-catching given the high degree of leverage on PE assets – 53% average loan-to-value for 2020 – and the suddenly rising rate environment we now find ourselves in. According to Mother Jones, PE accounted for 6.5% ($1.4T) of the US economy ($23T total) in 2020, and their relative debt exposure is higher than the rest of corporate America. Leveraged private companies is just one risk in the economy to think about as rates march ever higher.

One theory on rates that I generally hold to be true (until proven otherwise) is the following: as economies layer on more and more debt, the natural, necessary direction of rates is falling or flat. One person’s (or company’s or government’s) debt is another person’s (or company’s or government’s) asset. As debt rises, the money to service the debt is covered by economic expansion (including population and/or productivity increases), or declining/steady rates (or, in the special case of governments, printing money to cover interest payments). Rate hikes hurt companies/individuals by not only increasing the financial burden of servicing the debt, but by reducing revenues (and worker income and employment) by forcing economic contraction. So, rising rates are a double whammy to those with leveraged assets, and the resulting defaults and bankruptcies can have a multiplicative ripple effect across the whole economy – taking down not only the indebted, but those holding the debt. In the case of PE, that includes the public and private pensions holding nearly half of those assets. Prior to the pandemic, we were on a steady course of low rates and economic/population ebb, which may be the natural end-state for a highly leveraged economy (not dissimilar to Japan’s situation of the last few decades). However, pandemic over-stimulus, supply chain shutdowns, and subsequent war in Ukraine caused an artificial, inflationary diversion, and the government is now haplessly trying to fix their own, short-term mistake by raising rates at the risk of causing debt to default (which is akin to causing assets to lose their value). In the case of a highly levered economy, the cure for inflation is worse than the disease if rates rise to a point where debt service is unachievable and debt cannot be rolled forward when it comes due. We might rather be happier with inflation (of course the Fed's real goal is protecting the dollar).

Accelerating technological progress can fix inflation in the long term (as continually providing more for less affords natural deflationary/disinflationary pressure), but there’s no easy recovery from mass bankruptcies and layoffs. What if pensions, which have been so eager to invest in PE of late, lose value because these rate hikes bankrupt their highly leveraged assets? Will the Fed then have to bail them out by writing checks, thus injecting even more money into the economy!? The current, precariously levered situation merits treating the sources of inflation rather than using the blunt tool of rate hikes to cause extreme economic contraction. Coupled with external sources of inflation (e.g., brought about by global conflict and extreme weather), higher rates could be especially damaging to huge swaths of low- and middle-income households – in some cases tragically. And, if rates cause sufficient damage to merit government bailout, we will ironically be in the same inflationary environment as we are in today. Rate hikes can essentially start a vicious cycle in an over-leveraged economy if they go high enough. The good news is that the scenario I’ve just walked through is highly unlikely to come to pass for two reasons: 1) the economy is self-correcting and is already taking steps to heal inflation on its own; 2) faced with higher rates and weakening demand, companies will turn to accelerated technology investments, which will be disinflationary in due time. Further, as more industries become digital and more middlemen are cut out of the economy, information will be available sooner for companies to react to changing demand (this is already evident with many direct companies cutting expenses and headcount). If we can achieve modest economic contraction before the Fed has a chance to raise rates further, we will, with a bit of luck, be just fine.

✌️-Brad

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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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