Stuff I thought about last week 4-21-19
Greetings – the Brave web browser has launched a new crypto-currency based system to link publishers, advertisers, and web surfers and it works great; AI bots are negotiating down your cable bill; Active ETFs are coming to the mutual fund industry; and, is Taiwan having its Trump moment?
[Please read important disclaimers at the bottom of this email]
Stuff about Innovation and Technology
Using Amazon’s Rekognition facial recognition software, in one day A New York Times reporter was able to identify over 2,000 faces using publicly-available New York City park camera feeds at a cost of only $60. In related news, IARPA, the advanced research division for US intelligence agencies, has a facial recognition tool called “Janus” whose database is available for others to use including China’s SenseTime. Fidelity, Sequoia, and Qualcomm, amongst other US venture investors, seem to have no comment on their large investments in SenseTime, whose technology is being used for racial profiling. Facial recognition is becoming a big issue globally as the usage spreads far ahead of its regulation, and investors would be wise to scrutinize the use of AI at the companies they are investing in – seeking truth should trump making money in the case of rapidly evolving technology.
TikTok, the Chinese social app for kids in the US is going crazy in the US. Formerly known as Musical.ly, the app was renamed TikTok by its new owner ByteDance (which has previously come under scrutiny from CFIUS, the Committee on Foreign Investment in the US). The company is expecting $18B in revenues this year (most of that from its app in China) and is currently buying more than 10% of all of the ads on Facebook being served to Android users. In other words, they are funneling a lot of that revenue into growing users. TikTok faces similar issues to Snapchat in the US, as video social networks are more expensive to run than image- or text-based apps, and when ads are targeted at kids (who, as a whole, have relatively low discretionary income), the ad dollars don’t seem to cover the costs.
I’ve promoted the Brave web browser a lot in the past, and this week I started using their Basic Attention Token blockchain system to pay publishers in Ethereum-based payments. You also earn the crypto tokens by agreeing to watch ads in some cases, which you can then spend on other content you think is worth supporting. It seems very futuristic and revolutionary to the online ad ecosystem, and I love it so far. Your private user data never leaves your device, and money is earned based on users’ actual attention to content.
Hollywood directors are building sets and directing in VR on video game platforms like Unity and Unreal. Here is a fascinating chat (for movie geeks) between directors Favreau and Cameron:
“So in Lion King, we set up the animation using the game engine Unity. We built all the sets first, and then we would go in VR to the environment. So we could actually walk around and would do scouts together, all in VR, in the real environment.”...
“that was Unity on The Mandalorian...we ended up using an Epic game engine with these new Nvidia video cards for gaming. There's enough processing power to get all of these lighting effects so that you're actually seeing [it] in camera.”
(I still argue that Disney is one of the most advanced tech companies and platforms in the world!)
The startup Trim, which scours your credit card bills for recurring/subscription charges so you can cancel the ones you don’t need or have forgotten about, now has an AI bot that will negotiate down your cable bill on your behalf. This made me think about combining Google’s Duplex (the voice AI that will call restaurants and make reservations for you) with an algorithm that called all your recurring service providers and negotiate your bills down. This is another example of the deflationary impact of technology – enabling identification of excess margin in the economy and negotiating it down. Imagine this tech in the business world negotiating with suppliers for discounts...
Apple has a robot that can take apart 15 models of iPhone at a rate of 200/hour to salvage and recycle parts and materials.
Qualcomm is set to see a much-expanded, addressable market as Apple declared this week that 5G is wicked hard and only Qualcomm can do it right. As this market goes from billions of smartphone units to 100Bs of connected IoT devices, at least for now, Qualcomm is sitting pretty. This smart take on what happened between Apple and Qualcomm is down in the weeds in terms of detail, but it’s an interesting read for folks tracking the semiconductor industry.
If a cyber attack against your company is part of an “act of war,” your insurance might not cover it!
Amazon has faced increasing problems competing in emerging markets. News this week that they are exiting China is not a surprise – it’s a market they’ve likely lost billions in over the years. I’ve noted in the past the problems they are facing in India as well. As they exit emerging markets and re-focus on their developed-world business, it will be yet another tailwind to margins. The only question is what will the powers that be(zos) spend that margin on in the US and Europe – a major physical retail expansion or a string of acquisitions? If they don’t reinvest the rising profits, then we could see a major expansion of margins as the topline growth slows down, which is often a tricky threading-of-the-needle for a stock – slowing growth with rising margins (and possible increasing regulation at the same time).
The Chinese way of running the Internet is spreading throughout Southeast Asia, and there are signs of influence in many other countries as China increases its investment in global undersea cabling and technologies. The South China Morning Post, owned by Alibaba, suggests Western companies can learn a lot from the way China controls the Internet.
Niantic (a Google spinout) is creating a Real World Platform for augmented reality. Described by the founder as a ‘once every 10-20 year’ platform shift, there is a lot of exciting developments coming to mixed reality platforms, which will be accelerated by 5G deployments.
Drones discover rare flower thought to be extinct in Hawaii.
The ridiculous trend of Stoicism-gone-wrong amongst Silicon Valley execs gets a smart take from this columnist in The Week who suggests the starvation- and pain-focused interpretation of the ancient Greek philosophy is self-penance for tech having failed to save the world, and, at least short term, is making the world worse. Stoicism has some value as a philosophical perspective – expect the worst and you won’t be disappointed when it happens – but it’s fundamentally a sour, sad, and pessimistic view of human life on planet earth. Stoicism is cynical. I’d rather see the folks creating our tech-dominated future being optimistic, not self-torturing and cynical.
And speaking of technology’s negative influence – apparently smartphone apps are able to hijack more people’s brains into believing in astrology and horoscopes nonsense...This is discouraging...
This article on Colorado’s first “build-for-rent” community, targeted at people who could probably buy houses but would rather rent, is interesting. Home ownership has lagged household growth significantly since the 2009 recession, and the number of renters continues to rise. We’ve also seen the concurrent trend of investors buying hundreds of thousands of single-family homes (millions maybe?), and now we have the iBuyer phenomena of Zillow, Opendoor, and others buying houses, often with the purpose of conditioning and flipping them to those same investors. One interesting trend that could come out of this shift away from home ownership is more regulation to protect renters. Sorry to be cynical, but when more affluent voters are renters, politicians may be incentivized to pay more attention to protecting those renters like they’ve promoted and protected home ownership in the past. I’d suggest we might see limits on the number of homes a company/investor can own in each zip code or regulation of the pace of rent increases.
Stuff about Geopolitics, Economics, and the Finance Industry
Active ETFs are heating up with new rules that allow managers to report holdings and trades with a lag as opposed to in real time. Because of the tax benefits of ETFs over mutual funds, as these actively managed ETFs launch, it makes no sense for typical investors to invest in a mutual fund inside of a taxable account (the benefit would be less in a retirement account that isn’t paying taxes on mutual fund gains). Active ETFs seem like an important development as passive investing approaches its theoretical limit over the next couple of years. I’ll admit my ignorance of the nuances of the business side of active ETFs, but it strikes me that active ETFs can also have much lower fees than active mutual funds because there is no account maintenance or commissions/kickbacks. So, if investors can have the same outcome for lower fees and a more favorable tax setup – why would mutual funds still exist after these roll out? And, if the SEC were to allow performance-based fees on these products, it would create even more win-win for investors and fund managers.
Fink sees a “melt-up” (sounds delicious) with record cash sitting on the sidelines.
Wall Street is underpricing climate change risk...and the largest money manager in the UK is warning on climate change and becoming much more active in voting against certain managements and boards as a result.
Taiwan might be having its “Trump moment”:
Billionaire Foxconn founder and CEO, Terry Guo, suddenly quit and announced that Mazu, the Chinese Goddess of the Sea, inspired him to run for president of Taiwan. Guo will run on the KMT (The Chinese Nationalist Party) ticket and expresses a desire to be friendlier with China. Foxconn makes all of Apple’s iPhones amongst other various consumer and enterprise hardware. You might also remember Guo from his chummy unveiling of a big investment in Wisconsin with Trump, which has now completely derailed. On the surface, this feels like China manipulating the Taiwanese election like Russia did with Trump, and social media could play a big role in getting one of the China-backed candidates like Guo into the presidency. If a China-friendly candidate is elected, then re-unification with the mainland will be essentially voluntary, and it will be difficult for the US and Japan to intervene.
The Taiwanese election has important ramifications for semiconductors. Recall that Taiwan sees almost 70% of all chips pass through the island, and TSM is the world’s largest semiconductor foundry. Will NVIDIA, Qualcomm, Broadcom, Apple, Google, and others that have TSM fabricate their leading-edge AI, data center, and smartphone chips feel comfortable that TSM (who also recently saw the retiring of its long-time founder Morris Chang) will keep their chip designs secret? Will semi equipment companies such as ASML and Lam Research be forced to “partner” with local Chinese chip companies in order to sell to TSM? Essentially, could “friendly” reunification force Western companies to help build the Chinese semi ecosystem so that China is no longer dependent on US chip companies? To put a finer point on this: Apple just saw its long-time ally suddenly quit as Foxconn CEO to run for president of Taiwan with the goal of friendlier China relations, potentially leading to Apple’s primary chip maker, TSM, collaborating with Chinese chip companies; it seems like Apple might want a Plan B for who makes their phones and chips. Should this power shift happen, it would put Samsung, the only other foundry for leading-edge chips in the world, in a potentially very good position.
It’s hard to go against China who is an increasing customer for most Western companies. Just this week, I was surprised to see this apologetic release from ASML defending and promoting China despite a significant IP theft by 6 Chinese engineers. And, though politically more complicated, we also saw Germany back Huawei this week. One interesting and provocative solution I would propose is that a group of leading-edge semi designers form a foundry JV on US soil. It would take several years to get off the ground, but Apple, NVIDIA, Qualcomm, Amazon, Google, Facebook, Microsoft, Broadcom and others that rely almost exclusively on TSM for their leading-edge chip manufacturing could easily fund $100B foundry startup in the US. This is clearly a very complex situation, and what I speculate on in these last few paragraphs has a low, albeit rising, probability of coming to pass. Here is a good perspective that contradicts me from a smart Bloomberg columnist, and, of course, a Communist Party advisor in Beijing was quick to say that Guo’s chances are slim, which they likely are.
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.