August 2021

The New AI Book that Investors are Scrambling For

A better headline for this piece would be “The Future of You,” as artificial intelligence is about to become so integral to your work, your investment portfolio, and even your very existence that you won’t be able to live without it, quite literally.

Well, do I have some great news for you. A blockbuster book about the state of play on all things AI will be released on September 25, and I managed to obtain and read an advanced copy. It is entitled: AI Superpowers: China, Silicon Valley, and the New World Order by Dr. Kai-Fu Lee.

The bottom line: The future is even more unbelievable than you remotely imagined. We are at the very early days of this giant megatrend, and the investment opportunities will be nothing less than spectacular.

And here is a barn burner. The price of AI is dropping fast as hundreds of thousands of new programmers pour into the field. Those $10 million signing bonuses are about to become a thing of the past.

Dr. Lee is certainly someone to take seriously. He obtained one of the first Ph.D.’s in AI from Carnegie Mellon University. He was the president of Google (GOOG) China and put in stints at Microsoft (MSFT) and Apple (AAPL). Today, he is the CEO of Sinovation Ventures, the largest AI venture capital firm in China, and is a board director of Alibaba (BABA).

AI is nothing more than deep learning, or super pattern recognition. Dr. Lee dates the onset of artificial intelligence to 1952, when an IBM mainframe computer learned to play checkers and beat human opponents. By 1955, it learned to develop strategies on its own.

Dr. Lee sees the AI field ultimately divided into two spheres of dominance, the U.S. and China. No one else is devoting a fraction of the resources needed to become a serious player. The good news is that Russia and Iran are nowhere in the game.

While the U.S. dominates in the original theory and algorithms that founded AI, China is about to take the lead in applications. It can do this because it has access to mountains of data that dwarf those available in America. China processes three times more mobile phones, five times more Internet customers, 10 times more eat-out orders, and 50 times more mobile transactions. In a future where data is currency, this is huge.

The wake-up call for China in applications took place two years ago when U.S. and Korean AI programs beat grandmasters in the traditional Chinese game of Go. Long a goal of AI programmers, this great leap forward took place 20 years earlier than had been anticipated. This created an AI stampede in the Middle Kingdom that led to the current bubble.

The result has been applications that are still in the realm of science fiction in the U.S. The Chinese equivalent of eBay (EBAY), Taobao, doesn’t charge fees because its customer base is so big it can remain profitable on ad revenues only. Want to be more beautiful in your selfies sent to friends? A Chinese app will do that for you, Beauty Plus.

The Chinese equivalent of Yelp, Dianping, has 600,000 deliverymen on mopeds. The number of takeout meals is so vast that it has been able to drop delivery costs from $6 a meal to 60 cents. As a result, traditional restaurants are dying out in China.

Teachers in Chinese schools no longer take attendance. Students are checked off when they enter the classroom by facial recognition software. And heaven help you if you jaywalk in a Chinese city. Similar software will automatically issue you a citation with a fine and send it to your home.

Credit card fraud is actually on the decline in China as dubious transactions are blocked by facial matching software. The bank simply calls you, asks you to look into your phone, takes your picture, and then matches it with the image they have on file.

Dr. Lee sees AI unfolding in four waves, and there are currently companies operating in every one of these (see graph below):

1) Internet AI

The creation of black boxes and specialized algorithms opened the door to monetizing code. This was the path for today’s giants that dominate online commerce today, Google (GOOG), Amazon (AMZN), JD.com (JD), and Facebook (FB). Alibaba (BABA), Baidu (BIDU), and Tencent followed.

2) Business AI

Think big data. This is the era we just entered, where massive data from online customers, financial transactions, and health care led to the writing of new algorithms that maximize profitability. Suddenly, companies can turn magic knobs to achieve desired goals, such as stepping up penetration or monetization.

3) Perception AI

Using trillions of sensors worldwide, analog data on any movement, facial expression, sound, and image are converted into digital data, and then mined for conclusions by more advanced algorithms. Cameras are suddenly everywhere. Amazon’s Alexa is the first step in this process, where your conversations are recorded and then mined for keywords about your every want and desire.

Think of autonomous fast food where you walk in your local joint and it immediately recognizes you, offers you your preferred dishes, and then auto bills your online account for your purchase. Amazon has already done this with a Whole Foods store in Seattle.

4) Autonomous AI

Think every kind of motion. AI will get applied to autonomous driving, local shuttles, factory forklifts, assembly lines, and inspections of every kind. Again, data and processing demand take an enormous leap upward. Tesla (TSLA), Waymo (GOOG), and Uber are already very active in this field.

The book focuses a lot on the future of work. Dr. Lee creates a four-part scatter chart predicting the viability of several types of skills based on optimization, compassion, creativity, and strategy (see below).

If you are a truck driver, in customer support, or a dishwasher, or engage in any other repetitive and redundant profession your outlook is grim. If you can supplement AI, such as a CEO, economist, or marketing head you’ll do fine. People who can do what AI can’t, such as teachers and artists, will prosper.

The Investment Angle

There have been only two ways to invest in AI until now. You can buy shares in any of the seven giants above, whose shares have already risen for 100- or 1,000-fold.

You can invest in the nets and bolts parts providers, such as NVIDIA (NVDA), Advanced Micro Devices (AMD), Micron Technology (MU), and Lam Research (LRCX), which provide the basic building blocks for the Internet infrastructure.

Fortunately for our paid subscribers, the Mad Hedge Trade Alert Service caught all of these very early.

What’s missing is the “in-between companies,” which are out of your reach because they are locked up in university labs or venture capital funds. Many of these never see the light of day as public companies because they get taken over by the tech giants above. It’s effectively a closed club that won’t let outsiders in. It’s a dilemma that vexes any serious technology investor.

When quantum computing arrives in a decade, you can take all the functionality above and multiply it by a trillion-fold, while costs drop a similar amount. That’s when things really get interesting. But then, I’ve seen trillion-fold increases in technology before.

I hope I live to see another.

Personally, I Prefer the Original

August 5, 2021 - Quote of the Day

Diary, Newsletter, Quote of the Day

“We do have a lot of momentum players in the market that are riding trends. As long as those trends are up it may be painful to be short,” said Jeremy Siegel of the Wharton School of Business.

August 4, 2021

Tech Letter

Mad Hedge Technology Letter
August 4, 2021
Fiat Lux

Featured Trade:

(FINTECH CONTINUES THE MOMENTUM)
(SQ), (AFTPY)

Fintech Continues the Momentum

Tech Letter

This guy leading Square, Jack Dorsey, has accomplished some phenomenal things during his tenure in San Francisco.

But with the fast-moving tech sector, he’s venturing into uncharted territory as his outfit purchased Australian buy now, pay later provider Afterpay (AFTPY) for $29 billion in stock.

This is the largest buy-out done by Dorsey signaling a large wager on Square’s ability to catch up with more established retail banks.

Afterpay offers its 16 million users a way to get their purchases right away and pay for it in four regular, interest-free installments.

What a great deal for the poorer Millennial generation!

This is just another tool that Square will be able to integrate on its interface as another way to pull in more users and capital.

It’s almost a credit card proxy.

If payments are missed, Afterpay levies a fee and locks their accounts.

These late-payment penalties, along with fees paid by merchants, form the main sources of revenue for Afterpay. The system is popular among young shoppers who make up the bulk of bad credit scores.

Square’s popular Cash app gets another notch in its belt as it competes with Affirm and Klarna.

A secret meeting in Hawaii consummated the deal with executives reasoning that speed is paramount - banks and new entrants are aiming for a bigger piece of the buy now, and pay later services.

These offerings have boomed in the past year, as homebound consumers used them to borrow and spend online during the coronavirus pandemic.

There are reports that Apple is in the process of building a buy now, pay later feature in coordination with Goldman Sachs.

These services usually mean up to a few thousand dollars, which can be paid off interest-free.

That means such providers are not required to run background checks on new accounts, unlike credit card companies, and normally request just an applicant's name, address, and birth date. Critics say that makes the system an easier fraud target.

Executives at Square and Afterpay shared a desire to expand access to customers globally and saw combining forces as the best way to take on competitors.

Ultimately, Square has been slowly morphing into a bank, and this acquisition accelerates the process.

Square’s banking ambitions were already becoming very clear on the merchant-facing side of its business.

The company first applied for a banking license in 2017, and last year, it received conditional approval from the Federal Deposit Insurance Corporation (FDIC).

The new bank, called Square Financial Services and based in Utah, was structured as a subsidiary of Square and started offering small business loans this past March.

Even before Square Financial Services went into operation in March, Square had been giving merchants small loans, using its detailed knowledge of transaction volumes to help approve applications quickly.

These loans, though, were disbursed through a partnership with another existing bank in a 10-K filing, Square revealed it collected on these loans by automatically deducting a fixed percentage of every card payment a merchant accepted.

In this way, Square had disbursed nearly $9 billion in loans before its small business loan and banking functions came online.

Square is diligently using its vast technology infrastructure build-out to maneuver into financial services.

They have been ahead of the curve in rolling out cutting-edge services such as its crypto offerings.

Retail banks will have a hard time competing with Square since they aren’t technology companies that think of challenges in terms of the technicalities of delivering a digital experience.

The problem with retail banking now is that the people who lead them are still bankers and not digitalists in a technology-first world.

Unsurprisingly, Square’s stock cheered the news and was up 10% on the news.

This move also continues the momentum of Square massively overperforming as a stock, management team, and business model in the past 18 months.

I have been highly bullish Square ever since the inception of the Mad Hedge Technology letter and the company has only validated my calls for outperformance.

The stock is somewhat volatile and prone to 5-7% pullbacks and I do believe those are precious opportunities to wade into Square with dollar cost averaging.

After pulling back to $200 in May, the strong lurch up to $270 needs time to digest, and readers just need to wait for the next consolidation.

square

Quote of the Day - August 4, 2021

Tech Letter

“An asteroid or a supervolcano could certainly destroy us, but we also face risks the dinosaurs never saw: An engineered virus, nuclear war, inadvertent creation of a micro black hole, or some as-yet-unknown technology could spell the end of us.” – Said Founder of Tesla Elon Musk

Trade Alert - (GS) August 4, 2021 - BUY

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

August 4, 2021

Diary, Newsletter, Summary

Global Market Comments
August 4, 2021
Fiat Lux

Featured Trade:

(WHERE THE ECONOMIST “BIG MAC” INDEX FINDS CURRENCY VALUE TODAY),
(UUP), (FXE), (FXY), (CYB)

August 3, 2021

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
August 3, 2021
Fiat Lux

FEATURED TRADE:

(SHAKING UP THE BIOTECHNOLOGY AND HEALTHCARE INDUSTRY)
(PSTX), (PFE), (NVS), (GILD), (GSK), (BLUE), (CRSP), (EDIT)

Shaking Up the Biotechnology and Healthcare Industry

Biotech Letter

With the advancement of biotechnology and healthcare, it’s not hard to imagine a future where drugs and therapies will be tailored to every person’s unique genetic profile.

Thanks to the continuous work on mass customization in the world of pharmaceuticals and even in whole genome sequencing, it’s only a matter of time before we can come up with a personalized pill for each popper.

Nowadays, robotics and automation have started to become tightly integrated with the medical arena. In fact, robotics in the field of pharmaceuticals is no longer anything novel.

The majority of drug manufacturers across the globe are already utilizing robots to address their needs, such as packaging and warehouse storage.

What interests me most, though, is how automation plays an active role in developing actual therapies. After all, doing this entails so much more than simply feeding codes to robots to teach them how to move test tubes around a lab.

One company that has been gaining traction in this space is Multiply Labs. Established in 2016 with roughly $22 million in funding thus far, this San Francisco company aims to be a force multiplier not only in creating personalized pills but also cell therapies.

Run by mostly MIT graduates, Multiply Labs started out by letting their robots take 24-hour shifts to quickly deliver biologic drugs needed for clinical trials.

That offers tremendously faster turnaround times and shorter waiting periods for researchers and pharmaceutical companies.

Since virtually perfecting that process, the company has decided to expand its focus to handle more challenging and complex work.

Now, it has set its sights on using its robotics platform to ease bottlenecks in the development of cell therapies.

As we know, cell therapies are regarded as powerful tools in the battle against cancer. However, the production process is extremely labor-intensive. This makes their development incredibly expensive.

Let’s take CAR-T cell therapy, which boosts the body’s immune system to help it fight off cancer, as an example.

In CAR-T cell therapy, scientists need to extract blood from the patient. Then they’d have to isolate the immune cells, which they would need to genetically engineer.

After that, they have to carefully grow the new cells. Finally, they’d inject these genetically engineered new cells back into the patient.

In most cases, every step needs to be repeated for individual patients.

What Multiply Labs is trying to do is automate several stages, such as genetically altering the harvested cells, which can only be performed by highly trained professionals.

Not only will they be able to cut down on the time needed to complete the procedures, they would also be able to reduce—if not completely eliminate—human error.

Aside from working with the University of California San Francisco, Multiply Labs has been collaborating with Cytiva, a subsidiary of Dannaher (DHR), to move their services closer to commercialization.

Apart from Multiply Labs, another San Francisco company has been working on improving the expensive, logistically complicated, and oftentimes error-filled cell therapy space: Cellares.

Unlike Multiply Labs, which aims to ease the bottleneck in the cell therapy creation process, Cellares’ goal is to handle the entire procedure on its own.

Dubbing its work as the “Cell Shuttle,” what Cellares offers is basically a “factory in a box” solution to the creators of cell therapies.

Basically, the “Cell Shuttle” is an end-to-end solution that comes in the form of a box designed to deliver an automated cell therapy platform. Cellares’ product handles everything from beginning to end, starting from taking in the cells of the patient to injecting the genetically engineered versions back into the individual.

Raking in roughly $100 million in funding so far, Cellares’ plan is to allow the pharmaceutical companies to scale and deploy the “Cell Shuttle” based on their needs.

To date, Cellares’ latest collaborator in this venture is Poseida Therapeutics (PSTX).

However, there are thousands of cell-based and cell therapy clinical studies conducted across the globe. The cell and gene therapy (CGT) sector is projected to be one of the fastest-growing markets in the healthcare sector, with the segment estimated to reach $14 billion by 2025.

Moreover, CGT offers promising treatments for severe and chronic conditions like obesity, diabetes, and, of course, cancer. It can also be the answer to rare genetic conditions and their related complications.

That’s why it comes as no surprise that Big Pharma names like Pfizer (PFE), Novartis (NVS), Gilead Sciences (GILD), and GlaxoSmithKline (GSK) are taking interest in this niche.

However, the progress of smaller companies, such as bluebird Bio (BLUE), CRISPR Therapeutics (CRSP), and Editas Medicine (EDIT), also offers incredible potential in this space.

And while Poseida Therapeutics may be the first to collaborate with the likes of Cellares and Multiply Labs, the rest would undoubtedly follow suit in integrating robotics and healthcare in the near future.

Trade Alert - (V) August 3, 2021 - BUY

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more