Stuff I thought about last week, 1/6/19
[Please read important disclaimer at the bottom of this post]
Greetings to everyone! Welcome to the first “Stuff I thought about last week” (aka SITALWeek) newsletter of 2019 - this week’s note is quite a bit longer than usual (sorry!) as it covers many of the topics that I thought about over the last several weeks while SITALWeek was on hiatus. It was so long in fact that I separated two lengthier segments on healthcare and behavioral bias and put them at the end of the note. SITALWeek is now being managed by an email service, and there is an unsubscribe link at the bottom for when you’ve had enough of me! Feel free to share the newsletter to anyone you think would enjoy it. As always I welcome comments, especially if you disagree with anything I say...off we go, Happy New Year!
Stuff about Innovation and Technology
Drones! Delivering goods while scaring dogs. We’ve taken to practicing evasive drone chasing and escaping in the yard at our house to get ready for the future.
Cameras with Google Lens are getting very smart, I find myself using it a lot more for things like snapping an image of text to do a search (like snapping an image of a UPS tracking number automatically pulls up the UPS tracking info for it). This is a cool, futuristic augmented reality tool that you can use now.
During the few days after Christmas the number one app on the Apple app store was Amazon Alexa. This should be a wake up call for Apple as they stare down a shift in computing platforms from multi touch to voice and AI, but so far they seem to believe smart speakers aren’t a real product category and they continue to lag far behind in AI. (no link on this one, just something I saw on the app store.)
Related: Alexa skills double in 2018 to over 50,000!
Pro video gamer Ninja hauls in $10M in 2018, though the burnout risk of starring in your own reality show seems quite high:
“Ninja mans that "coffee shop" for 12 hours a day, he estimates, working out to nearly 4,000 hours of Fortnite this year alone, the equivalent of more than 140 days. Each and every time he's away from the shop, Blevins and wife/manager Jess are calculating how many subscribers they're losing, and how much money they're not earning. While the couple does carve out time for one another each day, their last vacation was their honeymoon eight years ago. And even that trip, long before Fortnite, was still cut short for professional gaming.”
A topic covered here many times before: the delicate balance between freedom and control of speech in online platforms. All of these companies are free to have their own rules and enforce them, it’s not a freedom of speech issue, but it is an issue of where people choose to conduct their business and whether US Internet users want a Disneyland version of the Internet or a real world version. This time it's Patreon that stumbles with its creatively minded customer base.
A good read on the new NFLX Black Mirror choose your own adventure movie Bandersnatch - what’s most intriguing to me is the psychological data NFLX collects based on the decisions you make as you watch it!
And, here is the decision path to unlock the secret ending:
Related: Birdbox on NFLX was watched in 45M+ households shortly after it was released. It’s not fair to compare that to a box office equivalent for a variety of reasons, but needless to say, movie consumption is changing dramatically. This will accelerate in 2019 and 2020 as DIS+FOX shift a lot of theatrical releases to the new Disney+ streaming platform - this could be the start of an accelerating erosion of the movie box office.
The steady erosion of the “middle-man” economics of the 1800s and 1900s continues. Below are three good recent examples. The main takeaway is that if your business is largely built off the success of other people’s products, or if you rely on other sources for data that you don’t own, you won’t survive in the information economy. The Information Age will take down every legacy business model that does not maximize non-zero sumness (see investing framework linked at the bottom of SITALWeek for more on NZS if it’s not a familiar term). Here are the 3 examples:
NFLX bypasses Apple’s distribution fee saving hundreds of millions a year and adding to the rising questioning of whether app stores are platforms or not: https://venturebeat.com/2018/12/28/netflix-permanently-pulls-itunes-billing-for-new-users/
CBS negotiating against Nielsen since they don’t technically need them any more given the ability to gather and leverage their own data:
Scientific journals built on the work of others are losing their role completely to the detriment of RELX’s journal division.
The non-linear growth in TSLA units is remarkable. From prior work on power laws we know this leads to either complete collapse, or a major phase shift creating a whole new dynamic for a company or industry - to be determined!
FB still seems to be facing a culture problem, starting at the top.
Aluminum will be a huge investing mega trend as PET dies in developed markets.
The failure of GE to pivot from an industrial age company to a digital company with network effects and platform economics despite a massive and well done effort to try is the failure of every company built before 1990 - these legacy cultures don’t allow a transition from widgets to platforms.
With Huawei and ZTE out of global developed markets, NOK and ERIC are in a potentially interesting spot - global duopoly with future pricing power going into a huge 5G upgrade cycle. Yet, Samsung is also very well positioned in 5G, so the situation requires a deep dive to understand better.
Sports rights continue to be more valuable at home and abroad - BABA signs up for NFL rights in China.
The weirdness of healthcare software company Epic Software seems to create some dissonance - for such a supposedly different and creative company, why have they completely failed to provide any benefit to the healthcare crisis plaguing the US - all they have done is make it harder for people to get better by having a closed system and not creating a platform for doctors and patients to collaborate on for positive outcomes. This private company could be an epic zero at some point. What a truly bizarre story...
As covered here many times - gaming is the new mall for social hanging out, just as FB replaced malls, gaming is replacing FB.
Space-time appears that it could be a quantum error correcting code - similar to problems quantum computer researchers are trying to tackle. (somewhat technical read here)
Here is yet another example of the “Truman Show” effect: the rising popularity of farmers live streaming in China.
Seems odd to me that the legalization of hemp farming in the US isn’t getting much attention.
DoD studies TM for PTSD with great results that match the previous gold standard in treatment:
Over the holiday I read Kurt Vonnegut’s first novel “Player Piano.” Written in 1952 it takes place in an alternate post war world where machines have been elevated to all decision making and humans become for the most part increasingly useless. It’s an obvious parallel to the issues facing humans today as AI takes over more and more jobs. One of the book’s insights is that it’s human nature to destroy the things we’ve built, so we can build them back up again. Humans are tool and technology building machines - it’s where the fitness function of natural selection landed our mind-bodies after millions of years. To rail against technology platforms of the 21st century is to rail against the wheel, fire, spears, etc. It’s the same story, different century in human progress - this decade it’s all about AI turning on humans.
Related - attacks on self driving cars in Phoenix: https://www.nytimes.com/2018/12/31/us/waymo-self-driving-cars-arizona-attacks.html
Also related: a recent interview with YNH that mostly rehashes things covered before, but is still a good refresher:
“We will shift authority to [artificial intelligence]. In most science-fiction movies, the robots rebuild themselves and try to kill the humans. And the humans must fight back and destroy the robots. This is a very comforting myth. It tells humans that nobody can do a better job than you. If you rely on the robots, it will end in disaster. The far more frightening scenario is that the robots will make better decisions than us. Then the question is, “What is human life all about?” For thousands of years we have constructed this idea of human life as a drama of decision-making. Life is a road with many intersections, and every couple of days or months or years, you need to make decisions.”
Finding more and more stem cells throughout the body that have an amazing capacity to self-heal with the right ingredients:
Rethinking Efficiency - it was remarkable to see HBR run 3 articles on complexity science since HBR is by every measure the antithesis of modern thought on the biological nature of the economy. It’s also remarkable that the CEO of Ford has so internalized complexity science given there may be no other other company more challenged for the coming changes in their end market than a legacy auto maker. Car companies will see so much change adaptability may not even matter. So, I guess if he really internalized complexity he’d be looking for another job! A really interesting point in one of the 3 articles is that power laws (also covered in the Complexity Investing paper linked at the bottom of SITALWeek) might be creating the distrust in liberal democracies - it’s a provocative thought without a solution at hand.
Stuff about Geopolitics, Economics, and the Finance Industry
Taiwan’s independence continues to be at the heart of the potential for a major WWIII like conflict - these recent remarks, despite the context, remain disturbing.
“Xi called for efforts to deepen the integrated development across the Taiwan Strait to consolidate the foundation of peaceful reunification, adding that "Chinese people should help each other."”
“Forced unification is a folly. #Taiwan is a free & democratic country where #HumanRights are protected. Only its 23 million people can decide their own destiny. The leader of #China must join the rest of the global community & respect this reality.”
The greatest issue that continues to plague investor returns is fear and short term focus - it’s very hard to be greedy when others are fearful - but things always get better over the long term. Retail fund flows are unfortunately often counter-cyclical destroying hope for most investors in the market.
Taxes matter when managing a mutual fund!
“The Men's Underwear Index, which was proposed by former Federal Reserve chairman Alan Greenspan, purports to measure how well an economy is doing based on the sales of men's underwear. It suggests that declines in the sales of men's underwear indicate a worsening state of the economy, while upswings in underwear sales predict an improving economy.”
More and more hedge funds shutting down:
Population consternation continues in the developed world - without a growing population base, the economy needs a new way to define growth and capitalism in the next 10-30 years.
The demographic time bomb:
Is there a healthcare recession coming? Here is a narrative mainly to be provocative and cause us all to think through whether healthcare over the next 10-20 years looks like what happened to retail and media over the last 20 years in the information age:
-without the mandatory aspect of ACA, more and more young people or middle aged people will drop out starting on 1/1/19. That raised the costs in 2019 even more for people staying in who are higher risk. So, many people and employers will see 10-25% insurance increases on top of similar moves last year. Anecdotally we have a healthy employee who has seen their insurance go up 50% over 2 years even taking advantage of exchanges and collective bargaining. 100% increase for this person over the last 5 years to $16k/year for one healthy individual thanks to the low participation rates of ACA.
-therefore, healthcare activity (doctor's visits, elective visits etc) will decline in 2019 - you'd want to be short or unexposed to anything transactional in h/c - this could hit the hospitals and drug companies a lot as well as doctor's offices, etc.
-And, this might also go ahead and drag the entire US into a recession as people face loss of discretionary spending to pay for insurance while companies raise prices on goods to maintain their margins (While also having to raise wages with low unemployment, etc.). Inflation pressure combined with decreased discretionary spending would explain a lot of the stock and bond markets today.
-This should all cause the big h/c companies- all of whom suffer here - insurance companies, medtech, drugs, hospitals - not to mention large employers - to lobby for significant change in D.C.
-The options become much more binary now that quasi single payer has failed - you either bust up and go back to a marketplace with lots of uninsured people, or you migrate to single payer. (most provocative point is this one - likely it’s grey and not black and white).
-Likely this is solved with a massive technological rewrite of the entire h/c system lead by employers who can get their employees to opt in in return to much better benefits (becomes a real competitive advantage, especially in a tight labor market with a population that is no longer growing). Obviously the AMZN+JPM+BRK joint venture is a clear sign of panic and desire to change the system via technology from treatment to prevention.
------>Or, forget all of this because it's a big complex adaptive system and this may end being a small part of a much different narrative over the next 24 months. But, I like that fact that it seems like a huge, real impact, and no one seems to be paying enough attention to it. On a 10-20 year basis it feels like huge chunks of the current h/c stocks fade away.
Behavioral Economics: As many you know behavioral economics is of significant interest to me...This interview with one of the founders of the field Daniel Kahneman really depressed me, I almost couldn't finish the interview, and I can't really suggest you actually listen to it except as a human interest story. I've watched/listened to nearly every interview that was posted with Kahneman since he wrote “Thinking Fast and Slow” 10 years ago, and I've mentioned this once or twice over the last couple of years in SITALWeek - he seems to have arrived at a pessimistic, fatalistic view of humans. He is disappointed that a lot of what was in “Thinking” has been overturned and not been replicatable by academia. He stands by the idea that Type 1 and Type 2 are intuitively correct even though much of the underpinning has been hard to prove in experiments (I agree with him, I would just define them differently, and there are ways to prove this out with a different framework). In this interview he talks about pessimism as his main lens on the world and he says he is optimistic about absolutely nothing. Kahneman’s work on behavioral economics has lead him to conclude there is no hope for humans - we are just a mess, and we can't make any correct decisions so everyone may as well let the machines do it all for us. One of the things I've concluded over the years on cognitive bias work (which features prominently in our investment paper Complexity Investing linked at the end of SITALWeek) is that it's all nearly 100% informed by Westerners and Western philosophy - it's the sort of stuff that drove Pirsig (“Zen and the Art of Motorcycle Maintenance”) insane - all Greek logic and reason predicated on the false assumption that mind and body are separate entities (DesCartes view of the world). A thimble full of Eastern philosophy poured into Kanemen's ocean of deeply biased Western view of humans might turn him from pessimist to optimist. Instead of bias, we should focus on reflecting on our thoughts - once we know the brain is out to fool us constantly, we can call it out and try to interrupt biased decision making from happening. I am tempted to downplay the concept of "bias" and focus more and more energy on the ability to constructively intercept the moment between thought and action. Bias might be an artifact of Western ideology that you can greatly reduce with contemplative practices - get to know your own biases and avoid them to make better decisions. Also this quote from the previously linked above interview with YNH in Nautilus ties in nicely here: “I will summarize my view of the world in three simple statements. Things are better than ever before. Things are still quite bad. Things can get much worse. This adds up to a somewhat optimistic view because if you realize things are better than before, this means we can make them even better.”
Nothing in this newsletter should be construed as investment advice. I may own long or short positions in stocks discussed in this newsletter. 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. I may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny - sorry.
I was the portfolio manager of the Janus Henderson Global Technology products (ticker: JAGTX) from May 2011 to November 2018. Prior to that I held various roles as an analyst and portfolio manager at Janus Henderson Investors for most of the period starting as a summer intern in 1998 up until the end of 2018. I graduated from Williams College in 2000 with BAs in Economics and Astrophysics. A complete resume can be found at www.linked.com/bradsling
Investment framework co-authored with Brinton Johns “Complexity Investing” can be found here: http://www.evolusophy.com/complexityinvesting/
If you have any articles of interest, comments or questions please send them by responding to this email. I will generally try to read and respond to your comments or questions, but may not always be able to in a timely manner, for which I apologize in advance.
Copyright © 2019 Brad Slingerlend, All rights reserved.