SITALWeek #186 3-31-19

Stuff I thought about last week 3-31-19

Greetings – Steve Jobs “finally cracked” video 8 years ago, but apparently he never told Apple what the solution was - instead video innovation is coming from outside the system; Taiwan is at the center of the semiconductor war - China can’t afford to let it remain independent and the US can’t afford to let China take control of it; low rates are indicative of tech driven deflation and actually represent hope for the future, not despair. As always, reply back with any comments.

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Stuff about Innovation and Technology

UPS will start a trial to administer vaccines at your house...does UPS have an advantage in home healthcare because they deliver packages? If so, then I guess we should expect Amazon to soon be dispatching nurses to our houses as well!

Speaking of Amazon, their fulfillment division shut down their last Oracle database this week – arguably the most sophisticated and efficient global logistics network can now run completely on AWS, and it was a migration of legacy Oracle databases...if you look closely you’ll see the Oracle pinata and giant bat ready for the ceremony!

Activision’s Overwatch can’t keep up with the pace of content creation that you see in newer games like Fortnite. Ongoing story evolution has become more important than game play for video games, and that’s likely to accelerate until these games become living breathing Universes of their own with a combination of AI- and human-driven plot developments. The legacy video game platforms geared toward less frequent story and content changes will need a cultural shift to keep up.

8 years after Steve Jobs declared he “finally cracked” the TV problem in Walter Isaacson's biography published in 2011, it appears Apple has made no progress. The company announced their long awaited video product this week: Apple will offer a copycat cable TV bundle available on other company’s hardware like the Roku or Amazon Fire TV. The only “fresh” thing Apple is trying to bring to the table is a new user interface for browsing traditional channels of content (or apps of the same video content). It reminded me of Steve Jobs’ comments at the AllthingsD conference in 2010 (this youtube link should take you right to the point on TV at 1h:32m into the video) when he declared the pay TV ecosystem as “Balkanized” and unsolvable. Obviously, Apple has been working to create a new UI and distribution platform for video content for a decade or more with no progress. Their finally announced solution mirrors other efforts out there like YouTube TV and Hulu, which also combine original content with a new UI and streaming platform for broadcast and cable networks. Creating a new version of the “TV Guide” to discover and watch content really isn’t the problem that needs to be solved, and you can’t extract much value from the video ecosystem with a new “guide” for consumers. The two lessons for me are: 1) this is a reminder of how complex existing ecosystems are, and how long it takes to change them; 2) actual change comes from innovation outside the complex ecosystem – in this case, NFLX won by vertically integrating content (there's that Information Age theme of vertical integration again like I’ve discussed previously!) AND by establishing all direct consumer relationships without a middleman. Now all the content producers (traditional media) understand this playbook – now Disney wants a direct relationship with my house, they don't want or need Apple to insert themselves into that equation. Innovation in video today is in a few areas: 1) originals dominated by Netflix and Amazon, 2) direct customer relationships (again dominated by Netflix, Amazon, Hulu and the coming Disney+), 3) bundling like Amazon video with Prime or Spotify with Hulu, and 4) advertising – using data to lighten the ad load like Amazon’s Freedive app. Apple’s video solution is yet another example of their failure to take risks and innovate.

Speaking of video innovation: Magic Leap announced some cool new apps this week, including a new NBA app that allows you to watch multiple live and on-demand games alongside augmented content and replays; they also announced (through their partnership with AT&T/WarnerMedia) that their headsets will be available in AT&T stores, as well as a new Game of Thrones immersive experience.

Here’s an interesting take on the problems with the Boeing 737 Max, which implies it’s not just a software problem, but perhaps a broader engineering and cultural problem at the company.

NVIDIA and Intel discussed the evolution of AI chip architectures at an MIT event this week. Big trends include the shift to heterogeneous, custom chips in the cloud and in devices. NVIDIA discussed the potential to use analog chips instead of digital for AI, which is a fascinating trend I have been seeing pop up more and more:

“Dally mentioned that Nvidia is now experimenting with analog computation. Computers store almost all information, including numbers, as a series of 0s or 1s. But analog computation would allow all sorts of values—such as 0.3 or 0.7—to be encoded directly. That should unlock much more efficient computation, because numbers can be represented more succinctly, though Dally said his team currently isn’t sure how analog will fit into the future of chip design.”

Google has rebooted its robotics effort after selling off the assets it acquired several years ago. The new focus is on machine learning and robots that can figure things out rather than be taught. We are a long way from useful robots, but I suspect we will see a ton of tiny automations and calls to action from IoT connected devices in the future.

Are Internet speeds responsible for piracy? There is a pretty crazy lawsuit from the music labels suing Chartered Communications because high speed Internet causes piracy.

Huawei is making progress in Europe despite increased pressure from the US on foreign allies, but problems clearly exist: “Mr Xu also revealed that Huawei would spend more than $2bn to restructure the code used in its telecoms services worldwide after a series of “confrontational” meetings with Britain’s cyber security agency over the issue.”

13 million “discredited individuals” in China who have low social credit scores for a variety of reasons, including things like jaywalking, may also get special labels like forced ringtones to identify them as discredited. Meanwhile, China is cracking down on videos with men wearing earings, people with tattoos and other fashion trends that threaten the totalitarian regime while actors are reiterating their love of country. In other news, I heard Communist leaders are scared of this new fangled “Rock ‘n Roll” music the kids are listening to.

China’s rising attempts to break Taiwan’s independence and the importance of semiconductors: it’s hard to believe I first wrote about this topic in January of 2016, but, fast forward 3 years, and things are really starting to heat up – in a bad way. China’s control over the Internet and its citizens increasingly relies on AI and chips from US companies such as NVIDIA. China has tried and failed for nearly 15 years to build a robust home-grown semiconductor ecosystem; it has done well in areas like 5G hardware at Huawei and smartphone hardware, but these still rely heavily on chips from US and Korean companies. Taiwan is home to the strongest global semi maker in the digital chip sector with TSM, and nearly 70% of all semis in the world are either made or pass through Taiwan in their production! China needs leverage over the Western chip makers so the US doesn’t cut them off from NVIDIA or other key tech suppliers (not to mention the equipment and software companies that help semis get made like Cadence and Lam Research in the US or ASM Lithography in the Netherlands). The US and Europe also cannot afford to lose Taiwan’s supply chain (while Samsung in South Korea is a clear alternative over the long term, short-term disruptions in Taiwan would grind the global economy to a halt). So, it’s still a standoff, but China is increasingly and worryingly looking to control Taiwan. This WaPo opinion column does a good job of recapping recent developments:

“Next year’s election might be the last meaningful election in Taiwan. After that, it will be a Hong Kong-style election,” said Chen Ming-Chi, deputy minister of the Mainland Affairs Council. If China succeeds in returning the Beijing-sympathetic Nationalist Party (KMT) to power, that could be the tipping point after which Taiwan can never again exert its own sovereignty, he said. “2020 would be the beginning of the reunification.”

So, China needs Taiwan and the West needs Taiwan. The West can scramble to build semi fabs, packaging, and testing facilities on US and European soil. For China, they need Taiwan at all costs as leverage. Will the US enter a war to save Taiwan’s sovereignty, or will we instead rely on Korea, Japan, and our semi companies in the US? Even if China takes control of Taiwan’s supply chain, they need design software from Cadence, Synopsis, and Mentor (A Siemens company) and the equipment to make chips, which is all made by US and European companies. It’s a mess, and it’s going to get messier! The important takeaway for investors is that semis are the heart of the future of AI, IoT, 5G, etc. – i.e., central to the entire digital economy – and they are only becoming more vital and valuable with accelerating profit pools.

Miscellaneous Stuff

Your brain has to run at incredible speeds to synthesize all the sensory input and simulate the world around you. This is a great article on how that works and how the brain is often wrong and fooled by reality. It’s also of note that this process creates a lot of computational loopholes that augmented reality systems take advantage of. What we think is the current moment actually happened at least 1/10th of a second ago – think about that next time you are in conversation with a group of people: you all think it’s right now, but actually you’re on a synchronized delay! “The world that you are now perceiving is the world that your visual system has predicted to be the present in the past.”

Neurons also communicate via electromagnetic waves, not just across the synapse – this is a very cool discovery (and no, this is not how Uri Geller does his fake spoon bending trick!). “That surprise peaked during a series of experiments in which Durand and his team observed a wave “leap” across a cut they had made in brain tissue slice—a phenomenon they conclude could only be explained by the electric field coupling.”

“A 30-year-old mystery has finally been solved after conservationists found the source of plastic Garfield phones that have been washing up on French beaches.”

More on the unfounded war on screen time for kids: be involved and don’t sweat it if your kids use technology.

Synthehol is on its way, but I bet chief engineer Scotty still won’t like it. And of course this might be a dead end as the FDA has fast tracked psychedelic clinical trials...and, investors are looking for ways to profit – if you are looking at investing in cannabis, you might be missing the yellow submarine! Also, here was a good podcast this week: the 2nd round of Michael Pollin discussing psychedelics with Tim Ferris.

Stuff about Geopolitics, Economics, and the Finance Industry

Schwab is moving its robo-funds to a subscription from a percentage fee. As a result, you now need at least $125k in the product for that fee change to crossover into saving you money on an ongoing basis. However, there is also a $300 up-front fee in addition to the $30/month. So, amortizing that $300 over 3 years, for example, you would need $165,000 in the account to breakeven compared to the old 28 bps. Of course at $1M you’d be paying only 5 bps for the robo-service, including access to a Schawab advisor, amortizing that up front over 3 years. This change seems obviously targeted at garnering $1M+ accounts, and leaves the small investor once again sadly looking for cost effective ways to beat the market.

“Fund managers turn activist to prove worth.”

The paradox of low long-term rates: one way to interpret low, long-term rates is a representation of humanity’s (as represented by bankers and governments!) low confidence in the future: low rates traditionally meant a low amount of hope (*). Conversely, Higher rates meant higher hope because you believe dollars in the future will be worth more than dollars today, so you’d pay higher rates to borrow today because your money would be worth even more in 10 years. In classic economic theory, there is an important connection between future expected inflation and rates - if you expect higher inflation your dollars will be worth less in the future, and so you need a higher interest rate to cover inflation when debt is repaid. However, I think the world is mistakenly stuck on this idea that inflation equals higher rates, so no inflation means lower rates, which signals despair about the future. I think that logic is a mistaken holdover from Industrial Age economics. Instead we have a wonderful paradox: the future, because of technology, can be bright without inflation. At 25+ years into the Information Age, we should start seeing incredible productivity gains (**) and another step-up in tech-driven, global prosperity. As an investor, in order to see low rates as a positive harbinger of the future, I need a few basic things: 1) population growth, even if it’s at a very low or slowing pace (which it is, but it could concerningly turn negative soon), 2) companies that are investing productively in innovation around their own business, 3) investment in companies that are creating the future and avoidance companies that are victims of technology, 4) avoidance of a mass extinction of the species (but, if that happens, who cares whether we had good investment returns, so #4 doesn't even count! Note: our foundation of NZS based investing tries to keep #4 from happening). This isn't a comment on whether we will have a recession soon, which is impossible to know; rather, this is a comment that, over the next 10-20 years, low rates don't mean despair, they just mean hope for the future that doesn't depend on inflation, but instead depends on tech-driven innovation, which stems inflation. So, “borrow” now, remain optimistic, and invest in innovation, and you will crush it over the long term.

* Low rates might also be a signal of the abundance of capital from the Information Age which tends to produce value with less capital deployed. In general, there is capital sloshing around everywhere looking for a home, and that in turn will drive down expected returns and discount rates.

** “Multifactor productivity — again, the part of productivity growth accounted for by technological progress rather than better-trained workers or more buildings and software — rose by 1.0 percent in 2018, the strongest gain since the current expansion began in 2010.”


Nothing in this newsletter should be construed as investment advice. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. 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.