SITALWeek #190 4-28-19

SITALWeek #190

Stuff I thought about last week 4-28-19

Greetings – Yuval Noah Harari sits down with Mark Zuckerberg in a fascinating and disagreeable conversation; Goldman’s Uber convertible bond from 4 years lags the market by quite a bit, at least for now; some good insights from a long Buffett interview this week including his contrarian belief that capital will once again become scarce at some point; and facial recognition is slowly showing up all over the place in the US.

[Please read important disclaimers at the bottom of this post]

Stuff about Innovation and Technology

This week the classic Western view of “I think therefore I am” clashed with the classic Eastern view of nondualism as Mark Zuckerberg sat down with historian Yuval Noah Harari for a fascinating 90 minute conversation. What struck me was the back and forth that seemed to take the following pattern: Zuckerberg repeatedly saying problems with extremism around the world were the result of public policy failure, while YNH continually emphasized that it’s much more likely a problem with the social networking technology itself. I came away from the conversation (with admitted classic confirmation bias) that Zuckerberg still hasn’t come close to understanding the problems with social networking and continues to blame government and policy instead. The bedrock question as YNH puts is: in the Information Age, does the voter still know best, and do people know what they want and what is good for them? Zuckerberg continuously reiterated that he believes people generally know what they are interested in and what they like.YNH continued to reiterate that people are highly susceptible to outside influence that can alter their views, and that humans are subject mind control by Internet platforms. Given how easy it is for social media to influence people the question for Zuckerberg is “how do you know for sure that you, Mark Zuckerberg, aren’t a Russian agent?” I don’t think it’s possible for anyone that is regularly exposed to algorithmic content to honestly answer a question like that.

The analogy that Netflix has essentially been a drug dealer to traditional media is not a new one – Hollywood studios like Disney, CBS, Fox, NBC Universal, Warner Media etc. got hooked on ever-rising cash payments from Netflix to the point where getting unhooked became an existential crisis. Disney went to rehab and weaned off Netflix crack as they launch Disney+ later this year. Warner Media is trying to go clean, but had to keep getting that Netflix hit when they recently licensed the resurgent Friends series to Netflix for another year, despite it being a critical tentpole for their own streaming service. And, recently, NBC (owned by Comcast) seems to be indicating they could keep licensing The Office to Netflix instead of detaching themselves as they try to launch their own streaming service. It’s worth it to Netflix to keep paying (or even overpaying) for these tentpole shows just to keep the addiction struggle going for their potential streaming rivals! Meanwhile, Comcast said in its earnings report this week that their customers data growth on cable modems was up 34% y/y, largely driven by video streaming, and the company is staking out a smart strategy of integrating the streaming platforms into their X1 cable service.

Amazon’s $1B investment to go from 2-day to 1-day shipping for Prime members pales in comparison to the $1.7B they spent in the quarter on Prime video content (which was up 13% from the prior year). Personally, I’d much rather have the shipping improvements (though I am eagerly anticipating Neil Gaiman and Terry Pratchett’s Good Omens next month, so maybe it’s worth it!). In related news, all Kohl’s stores will now accept Amazon returns: Trojan Horse or another test before Amazon buys Kohl’s outright?

In more dystopian Amazon news, the company is reportedly using AI to track and automatically fire employees for low productivity without human involvement. This hits on a primal fear of loss of control to technology that I think leaves most people, right or wrong, extremely indignant. (Amazon indicated that supervisors can override the AI if they want to, for now.)

I am a fan of the EDA sector – the software tools used to design and simulate complicated semiconductors. Over the years, more systems companies like Apple and cloud companies like Google, Amazon, and others have begun designing their own custom chips, increasing the size of the industry. This article makes some further good points that the trend will be favorable for EDA pricing and packaging. EDA is dominated by two companies – Cadence and Synopsis – and the semi industry wouldn’t exist without them.

Speaking of systems companies making their own chips, this week Tesla announced what Elon called “objectively” the best semiconductor ever – here is a good take on the chip. There is a fundamental rift between two camps in self driving: those (Tesla) who think you can do it all with machine vision and everyone else who thinks it requires LIDAR and other sensors. Following on my rant last week about US companies needing to make advanced semis on US soil, I was most intrigued that this chip will be made in Texas by Samsung.

It’s hard to believe it’s been 13 years since Brinton and I rode in a BYD EV in Shenzhen when we met with founder Chairman Wang. Here is a thorough article on the largest EV maker in the world (bigger than TSLA!). With 65GW of battery capacity by 2020, the company (which is rooted in battery tech) can also start supplying competitors.

Healthcare has underperformed tech in the US by around 2500bps ytd. Here is some good insight from the Janus h/c team on what has transpired.

Spielberg walked back his negative comments on streaming (after all, Apple just recently hired him to create streaming content!), but he also made a really nice point in doing so:

“I want people to find their entertainment in any form or fashion that suits them,” Mr. Spielberg said in an email in response to queries from The New York Times. “Big screen, small screen — what really matters to me is a great story and everyone should have access to great stories.

“However, I feel people need to have the opportunity to leave the safe and familiar of their lives and go to a place where they can sit in the company of others and have a shared experience — cry together, laugh together, be afraid together — so that when it’s over they might feel a little less like strangers. I want to see the survival of movie theaters. I want the theatrical experience to remain relevant in our culture.”

Facial recognition being used to board international flights raises some questions. It does feel like we’ve got some gateway drugs into facial recognition and, in the very near future, it will be used for everything everywhere. Maybe buy some stock in sunglasses and hat makers! Here is another terrifying example: software that reads the emotions of job seekers in interviews.

Smart phone app dip.io receives FDA Class II clinical grade approval for at-home urine testing:

“The first commercial deployment of a system that transforms an ordinary smartphone camera into a laboratory-grade scanning device could help. A home urine-testing kit developed by Tel Aviv–based Healthy.io could save health providers hundreds of millions of dollars a year by detecting disease in time to prevent kidney failure. Dip.io, as it’s called, should also save pregnant women and those with UTIs time and discomfort with instant analysis, avoiding the need for a doctor’s appointment.

Students walk out in Kansas to protest the excessive use of technology in the classroom following implementation of Zuckerberg’s initiative Summit Learning. “Myriland French, 16, a student at Wellington’s high school, said she had developed eye strain and missed talking to teachers and students in class. “Everyone is more stressed now,” she said.”

China’s video game market is finally getting back on track after the government tightened restrictions on game content to eliminate blood and dead bodies and incorporate emphasis on traditional Chinese culture. Other measures to regulate addiction and mobile games come with the new rules. It is welcome clarity for some big game makers and platforms.

Miscellaneous Stuff

Increasingly accurate measurements of the Hubble Constant – the rate at which the Universe we live in is expanding – are inconsistent with the cosmic microwave background, which predicts a slower acceleration rate from the Big Bang. Physicists continue to look for the cause of the increased acceleration over time:

“Various scenarios have been proposed to explain the discrepancy, but there is yet to be a conclusive answer. An invisible form of matter called dark matter may interact more strongly with normal matter than astronomers previously thought. Or perhaps dark energy, an unknown form of energy that pervades space, is responsible for accelerating the expansion of the Universe.”

6th Circuit US Appeals Court says using chalk on tires for parking enforcement violates 4th amendment rights! (At least if you live in Michigan, Ohio, Kentucky, or Tennessee.)

Stuff about Geopolitics, Economics, and the Finance Industry

A little over four years ago, GS raised a convert for Uber that was said to convert at a 20-30% discount to the IPO price. From what I’ve heard, investors in that deal would effectively receive a 40% return over the four years since the deal was completed. That return lags the S&P500 by about 700 bps, and it’s far less than the 100%+ that tech indices have produced over the last four years. The shares are locked up for six months after the IPO – if the deal trades below pricing, this ends up as a terrible investment. But, if priced right and the deal does well, GS clients will be happy – GS is of course the bank leading the pricing for the Uber IPO, whose recently announced range was below what many were expecting.

Here is a great, long FT piece from an interview with Buffett this week. Most of it covers familiar topics, but there are some nuggets. I am keenly interested in the failure of Kraft Heinz in the marketplace, and Buffett seems to confirm my suspicions that it’s a classic example of Buffett believing in moats and Porter’s Five Forces competitive advantage analysis – a framework that I personally believe has zero value in the Information Age (which is dominated by a transparency that 20th century business operators still don’t understand). Buffett commented on the deal: “...the problem was not under-investment, but overestimating the strength of the Kraft Heinz brands and their power with retailers.” Classic distribution power and power over customers is rarely a competitive advantage anymore, and, in fact, can be a competitive weakness compared to the alternative of maximizing value for customers.

I think the most controversial statement from the Buffett interview is the idea that capital will at some point be scarce once again – that’s a hard future to see in a world of technology-driven, structurally low rates:

Buffett is confident that the time will come again when good companies will need capital, and have to buy it from Berkshire, on Berkshire’s terms. “We will get the calls again. This is a place that can commit $10 or $20 or $30bn, and it’s done.

“People get smarter but they don’t get wiser. They don’t get more emotionally stable. All the conditions for extreme overvaluation or undervaluation absolutely exist, the way they did 50 years ago. You can teach all you want to the people, you can tell them to read [Buffett mentor] Ben Graham’s book, you can send them to graduate school, but when they’re scared, they’re scared.”

Lastly from the interview, I just love this: “Along with the usual in- and out-trays, there is a third one on Buffett’s desk marked in big letters: ‘too hard’.”

“China might intensify psychological warfare for elections.”

Bayer’s shareholder meeting sounded like a load of fun this week:

Earlier, Wenning and his protege Baumann sought to reassure stockholders even as hundreds of protesters outside erected the CEO’s effigy from bales of hay and shouted “shame on you.” Inside, investors demanded explanations, with one likening the company to “a pile of broken glass.”

Disclaimers:

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.