Mad Hedge Technology Letter
July 8, 2019
Fiat Lux
Featured Trade:
(YOUR UNCONSCIOUS FUTURE)
(FB), (GOOGL)
This might be one of the most important newsletters you will ever read.
Economies are mainly defined by seismic revolutions, for example, the industrial revolution that cut down simple, archaic jobs to machinery.
As we are on the verge of shuttering the technological revolution that brought us a party bag of treats like the internet, search engines, smartphones and the personal computer, we must brace ourselves for what is next.
Industry 4.0 is the concept of dazzling smart factories augmented by machines connected to a cloud network and software that processes the operations within the system.
The productivity enhancement will boost performance as machines will be able to visualize and surgically solve problems by applying the software that powers it.
Data exchange in manufacturing technologies which include cyber-physical systems (CPS), the Internet of things (IoT), the Industrial Internet of Things (IIOT), and cognitive computing are concepts that will define Industry 4.0.
As income inequality rears its ugly head and becomes center to what politicians run campaigns on, the world must brace for yet another tsunami of unrivaled job loss on levels that we have never seen before.
The social upheaval that economic chaos will create and offer investors monumental investment opportunities.
One of the manifestations of technological evolution is the optimization of business processes through automation, meaning less people are involved in the value creation process.
The global population is on the verge of mushrooming from 7.7 billion people in 2019 to 10.9 billion in 2100.
If you think overpopulation and sharing the world’s resources are a problem in 2019, then wait until 2050 when more people are squeezed out of revenue windfalls.
This effectively means the global middle class will accelerate its demise as the job market will bifurcate into a narrow sliver of clear winners and mostly losers and not the muddied version of what we have now.
The first Industrial Revolution also delivered uncertainty that hung over the whole job market, but the world was diverse enough and had ample resources to absorb the negative impact.
The global overpopulation is connected to the economy in the sense that most babies will be born outside of developed industrial economies and the world will see a fiercer rush to gain access to jobs in places such as London, Frankfurt, New York, Tokyo, and Silicon Valley.
The net effect of A.I. could be debated all day, specifically whether the absolute progress made in the development of industry and the products that revolve around it outweigh the torrent of human suffering that it will cause to billions of people who are not employable in that job market.
With exponential computational power to apply A.I., existing behavior will change in society and new cultures will be created because of it.
Economic value will not correlate to the amount of people like it once was, countries like Japan have dived headfirst into automating as much as possible with the best in class technology in robotics.
The world which we know it in 2019 is in the last legs of a nostalgic phase with baby boomers clinging on to what they know growing up in the 1950s.
Soon, that will be eradicated and Millennials will pour what they know and the fallacies they support into the system that is supported by algorithms and machine learning as the first human generation to be technology natives.
We are on the cusp of transformative shifts in the world.
In the next 25 years, technology will start migrating into the chambers of neuroscience.
Technology has discovered that more than 99.99% of human behavior happens at an unconscious level and that the unconscious brain is 10 times faster than the conscious brain.
While at any point of time, the conscious brain can focus only on one task, the unconscious can easily execute infinitely more.
The aspects of human behavior that the rational world has pinpointed is the conscious mind which is an ill-suited representative of human behavior.
The mechanics of the unconscious brain is stuff out of science fiction in 2019 but that will slowly change.
Consciousness has no understanding of what is happening in one’s own unconscious.
Science will be required to squeeze out a mechanism to discern the type of data humans can produce to mold this future subset of technology.
Modern qualitative techniques must be developed to be able to extract data from this important pool of knowledge.
Corporations are at the forefront of this trend and tech power brokers such as Co-Founder and CEO of Facebook Mark Zuckerberg hopes to one day install a chip into consumers' brain so that consumers can access the global network from the brain.
A scary thought but a thought gaining traction, nonetheless.
Ideally, the morally attuned stakeholders carry out the process of benefitting humankind instead of enriching a select few.
That will also be a battle that will define the next generation.
Increased focus on the unconscious processes will cause headaches for companies and there will likely be a numerical cost placed on the data it generates after companies like Facebook (FB) and Google (GOOGL) ran wild with abusing free personal data for decades.
Monitoring and managing the unconscious processes of consumers and employees will be hard at first and then society must assess if this violates privacy or not.
Unconsciousness works best when humans are sleeping or resting.
How can companies capture data on how well someone is using her unconscious brain?
This will befuddle tech companies until there is a solution.
Paradigm shifting scientific discoveries and human innovations have emanated from unconscious processes of the human brain in the past.
We still understand little about how powerful this data could become.
The current emergence of AI will be rooted purely in consciousness and the data that revolves around it, but the problem is that this data isn’t entirely accurate.
In capturing absolutes about complicated topics with current machine learning techniques, it doesn’t synthesize the fact that many areas of the human world deal in many shades of grey.
That is why A.I. is not that good today.
The next big find is if a company doubles down on the unconscious processes and that leads to groundbreaking discoveries in the understanding of accurate human behavior and thought.
“When you give everyone a voice and give people power, the system usually ends up in a really good place. So, what we view our role as, is giving people that power.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Global Market Comments
July 8, 2019
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
I believe that the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly.
This is not some pie in the sky prediction.
It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xers”.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, health care, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xers being chased by 85 million of the “millennial” generation trying to buy their assets.
By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.
The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.
The stock market rockets in this scenario.
Share prices may rise very gradually for the rest of the teens as long as tepid 2-3% growth persists.
After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030.
If I’m wrong, it will hit 200,000 instead.
Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well.
The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO).
Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.
This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.
Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low.
Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation by 2020.
I now have an all-electric garage with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow.
The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy with hugely positive implications for America’s balance of payments.
Eliminating our largest import and adding an important export is very dollar-bullish for the long term.
That sets up a multiyear short for the world’s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive. Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos.
But at the enterprise level, this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin.
Profit margins are at an all-time high.
Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.
When the winners emerge, they will have a big cross-leveraged effect on economy.
New health care breakthroughs will make serious disease a thing of the past which are also being spearheaded in the San Francisco Bay area.
This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented.
It raised $3 billion through a bond issue to fund its own research even though it couldn’t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.
What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for.
That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don’t need the maximum $30,156 annual supplement. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.
A Pax Americana would ensue.
That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache.
The national debt then comes under control, and we don’t end up like Greece.
The long-awaited Treasury bond (TLT) crash never happens.
The reality is that the global economy is already spinning off profits faster than it can find places to invest them, so the money ends up in bonds instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.
But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Dow Average 1900-2015
Another American Golden Age is Coming
"By historic, fundamental measures, stocks are extremely high. PE multiples are at 100-year highs. But if you look at stock prices relative to interest rates, they are exactly where they should be," said hedge fund legend, Stanley Druckenmiller.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Mad Hedge Technology Letter
July 5, 2019
Fiat Lux
Featured Trade:
(THE BALL IS IN NETFLIX’S COURT)
(NFLX), (DIS), (AAPL), (IQ), (KHC)
Being as volatile as it is, investors are afforded ample opportunity to get into one of the premium tech stocks in the land Netflix (NFLX).
Chasing this one higher is a dangerous thought, as habitual 30% dips is part and parcel of being attached to this supreme online streaming stock.
December of 2018 gave you that sinking feeling when Netflix dropped off a cliff dipping to $260 but spiking after the turn of the year as the Fed swiveled on a dime to save the equity market from implosion.
Let’s make no bones about it, the long-term narrative for Netflix is intact as it’s ever been.
The company simply makes a great product, period, and systematically taps endless demand.
What many cable companies don’t understand is that you cannot make a high-quality film product that wedges in annoying commercials and equally as obnoxious, dictate the window of time in which they should watch the content.
Optionality is value and Netflix has this spot on.
I know many Millennial consumers that would rather jump off a building than subject themselves to commercials.
These factors erode the quality of the product just as if an employer would dictate to one of his or her employees that wanted to take a vacation to Africa.
But the vacation to Africa would have some strings attached.
He or she would only be able to visit at the height of summer in 120-degree Fahrenheit weather while every activity he or she chose to do, would be pre-empted by numerous advertisements that he or she must be shown.
Consumers don’t need these sideshows anymore; the world has developed away from these models and corporates have lost this control.
The loss of corporate control of the consumers is because the internet gives consumers millions of different options at the tip of their fingers.
Tapping into the optionality and the habits that revolve around it is paramount to corporate America.
This is the same reason why big box food companies like Kraft Heinz (KHC) is getting smacked around, consumers have better options and are more aware of them because of technology.
Another example of corporate miscalculation comes in the form of supply chains being redirected from China to South East Asia.
It was clear as day that during my time in China that companies were making a terrible mistake going into China in the first place.
This shows how many corporates are dragged down by a lack of vision and do an awful job of anticipating paradigm shifts that are becoming more common because of the accelerating rate of change of the corporate climate, weather, technology, rule of law, and human migration.
Netflix is effectively blocked from China and China has its own Netflix called iQIYI (IQ), they had no chance from the beginning like Google, Amazon, Facebook, and the many other American tech firms.
Netflix’s business model now has scale working for them and growth numbers will be the main recipients going forward if they focus on high quality content.
That means expect high pay packages to the best media talent in the world.
They can afford to pay a tier 1 actor $50 million per movie because the data buttresses this strategy.
At the same time, Netflix is crushing competition by hoarding the talent with extraordinary pay packages while allowing these highly paid specialists 100% creative control over what they do.
Who would want to work for a company that paid more than double and whose management gave them free reign on creative decisions?
Sounds like an artist’s dream and it’s exactly that for actors like Will Smith who have signed onto Netflix’s project.
I would even suggest that Netflix needs to overpay actors just for the reason of taking them off the market for competitors.
This truly is the lucrative golden age for actors, producers, and directors who are the top 1% of their craft, but for everyone else, it’s a hard slog.
This usually means becoming a tier 1 actor before the migration to online streaming happened.
The picture I am painting is that Netflix’s success and future prospects aren’t about Disney or other competitors, but entirely about them.
He who has the most chips at the table with the best cards is in best position to win and the same goes for Netflix.
The rest of the bunch like Apple (AAPL) and Disney who are late to the party will be feeding off the rest of what Netflix cannot exploit and that’s the best-case scenario.
Disney should be able to have moderate success with its array of great movie, television, and sports content.
I’d be surprised if Disney failed because they possess the ingredients to concoct a delicious cocktail.
Apple has a harder proposition because of the lack of entertainment value in their content. They are still tied to the hardware sales and much of the service sales come from their app store and servicing the hardware.
But Apple does have money, and a lot of it to throw at the problem, but I don’t believe CEO of Apple Tim Cook is the right man to navigate through the travails of the online content world. He’s an operations guy and has never proved anything more than that.
Netflix still has substantial opportunity to grow its brand and the runway is long.
The demand for watching great original movies and television programs without commercials whenever consumers want is still in the first innings.
Even though Disney will remove some non-original content from Netflix’s platform, the content spend on a massive pipeline of new projects will more than fill the void left by Disney’s content.
In fact, Netflix should thank Disney for all those years that Disney allowed them to build their brand through 3rd party premium content like the television program Friends.
I believe Netflix does not need 3rd party content anymore, that is how much Netflix has bolted ahead in the past few years.
The company has introduced price hikes with its 4K premium package going from $14 to $16 per month.
But Netflix is still underpricing itself to the consumer to grab market share, and there is still pricing headway in the future if the company wants it.
In the coming months, Netflix plans to offer more detailed reporting on its metrics and the transparency will give investors even more insight into why this company is brilliant.
I believe the numbers will show that Netflix is absolutely killing it.
As for the trading, Netflix has settled in a range of $320 to $380 and any dips to the $340 range should be quite appetizing.
Add incrementally and use any large dip to drop your cost basis.
Stand aside if you cannot handle heightened volatility.
“Most entrepreneurial ideas will sound crazy, stupid and uneconomic, and then they'll turn out to be right.” – Said Founder and CEO of Netflix Reed Hastings
