Mad Hedge Technology Letter
September 7, 2022
Fiat Lux
Featured Trade:
(JUST A BLIP)
(ISO), (TSLA)
Brushing your teeth will be the least of tech’s worries as California’s power grid operator declared a stage 3 energy emergency alert.
Rotating power outage warnings were “highly likely” as a bone-crushing heat wave descended on the Golden State and the American West stressing the electricity grid to the extreme limit.
I’ve never tried brushing my teeth in the dark, but I imagine it’s not easy.
Toothpaste dripping all over my pajamas is not what I imagine when I think about living the California dream.
Luckily, I installed my luxury solar panel system on my roof that fully charges my 2 Teslas in the garage for free.
Tough obstacles call for smart solutions.
For others, DEFCON 5 is front and center.
California Independent System Operator (ISO) tweeted to customers advising them to “please reduce your energy use.”
Some 67,000 Californians were without power Monday evening.
Tech CEOs are taking notice as Silicon Valley, although blemished from its golden and most lucrative years, is still a massive hub of tech entrepreneurship, innovation, and investment.
There are about half a million tech jobs in the greater San Francisco Bay Area, and it doesn’t take a genius to understand they need the light on to work.
Talking to tech CEOs, they are perplexed.
Various CFOs and CTOs are having private conversations about buying backup power generators to kick in if power fails at the office.
There are also newer conversations about investing in office space outside the San Francisco tech region, and naturally, those locations gravitate towards cooler regions with better access to water sources.
Tech CEOs that now mandate 100% remote work can sit back and relax knowing that even if a few get taken out, most of the staff will be online from somewhere somehow and someway.
The staff at Mad Hedge Fund Trader are employed over 13 different time zones around the world and boast a similar setup to mine, which are roof solar panels powering a fleet of Teslas. Throw in a satellite signal for broadband internet.
I don’t believe energy prices will factor into the tech earnings this upcoming quarter as electricity prices in California soared to their highest since California's electric grid operator imposed rotating outages in August 2020.
The last time the ISO ordered utilities to shed power was for two days in August 2020 when outages affecting about 800,000 homes and businesses lasted anywhere from 15 minutes to about two-1/2 hours.
At worst, there might be a mini footnote writing down a small sum for electricity bills. Remember that these behemoths earn billions upon billions of annual revenues.
At the individual level, however, convincing the incremental tech worker to move to Silicon Valley has been tough, this just made it infinitely harder.
In the bigger scheme of things, naturally, this is just a blip in the process of going green and for tech taking a larger part of the economic opportunities.
By 2035, the State of California will ban the new sale of gas-powered vehicles giving way to a beautiful renaissance of EVs helmed by the CEO of Tesla Elon Musk.
It’s likely that half of California residents will be driving a Tesla by 2035 and these energy breakages only speed up the process of adoption.
These same tech CFOs are already talking about outfitting their offices with an array of the best solar panels that money can buy as well as recommending that employees choose a more efficient fuel-consuming automobile to drive.
Adapt or stagnate.
Mad Hedge Technology Letter
September 2, 2022
Fiat Lux
Featured Trade:
(DON’T COMPROMISE)
(AAPL), (GOOGL)
A fresh analysis from the C-suite at the top 1,000 U.S. companies by revenue offers us critical insight into the direction of tech management.
It’s important to keep our finger on the pulse of what’s happening at the higher level of tech companies because these are the key people that drive the game-changing decisions.
It’s no surprise that the banking and financial services industry has the oldest average CEO age at 60, and the technology and energy sectors have the youngest CEOs at an average age of 57.
Technology companies harness new technologies that can lead to new businesses so that would usually trend younger.
Compared to other industries, tech companies also have a boom-bust element to them because technologies go extinct quicker, and refreshing a CEO is always on the table if the bust element creeps in.
Interestingly, the current tenure is down from an average of 8 years to 6 years, meaning that the leash for tech CEOs is getting shorter and shorter.
Much like highly paid professional athletes these days, there’s no learning on the job type of mentality. It’s overperform now or face the sack.
This mentality emphasizes short-term performance which revolves around the quarterly earnings report and stock-based compensation to employees.
Then add in the wild card of forced lockdowns and China’s increasingly aggressive attitude to politics and it’s simple to understand that boards need to quickly change management if they believe they cannot navigate these herculean tasks.
Just a few instances where critical decisions are being made can be seen in Apple when CEO Tim Cook yanked China production and moved factories to Vietnam.
Vietnam is becoming the new factory of the world for tech companies because costs and political risks associated with China are accelerating.
Now, throw in the Taiwan situation after top U.S. government officials chose to visit the island and tech companies are now worrying about their supply of Taiwan chips needed to harness artificial intelligence.
CFOs are usually the second most important person in a company behind the CEO because they guard the balance sheet and usually possess a strong accounting background.
Yet they can be disposed of quickly for bad performance which is why tech CFOs only tenure 4.1 years if we compare with other more stable industries.
The key findings here is that tech management has never been so prone to high turnover.
Due to the internet, competition has supercharged the fight for highly paid positions and data can be calculated in real time because of superior analytic platforms.
Management won’t be able to hide poor performance because of the close tracking.
As much as it’s difficult to make a famous name as a C-suite manager, tech CEOs with a proven track record can expect elevated attention which is why if guys who have built successful tech firms like Jack Dorsey reach out to investors, they will get whatever starting funds they need.
This builds on the winning take mentality in technology which has a few outsized winners among the crowd.
On the trading front, I would hesitate to buy tech stocks from management that is unproven.
I would urge traders to go into long-term bets on guys like Tim Cook, Sundar Pichai, and Elon Musk and don’t compromise on the quality of tech management because it makes a big difference in the future price of the stock.
“It's OK to have your eggs in one basket as long as you control what happens to that basket.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
August 31, 2022
Fiat Lux
Featured Trade:
(BACK TO THE OFFICE)
(COMPQ)
The writing is on the wall for in-person office attendance – it’s never coming back, and why should it?
Sure, the fathers with 3 young children love to go to the office to get away from the noise, but mostly everybody else likes to work from home.
That will not change.
Recent data points back to my thesis and show that the dispersion of young tech workers throughout the United States will alter the make-up of the tech industry.
First, it will make tech wage bills demonstrably lower since most companies have a policy of paying per local wage structure.
If workers move from Manhattan, New York to Boise, Idaho, tech workers will get paid a Boise wage.
The latest thwarted recall by New York state has fallen on deaf ears.
For instance, New York Mayor Eric Adams called on city residents to “get back to work” after the arbitrary lockdowns.
His call to action was met with a resounding thud and Adams recently acknowledged hybrid work may be here to stay.
Nearly one-quarter of workers are in the office twice a week, according to the survey, with that number dipping to 11% for four days a week.
Still, the share of employees who are working fully remote fell from 54% in October 2021 to 28% in late April, the survey said.
While the numbers show more workers are heading back to the office than a few months ago, the survey also unveiled that remote work is likely to persist, as 88% of employers have said a hybrid office model has a high chance of permanent existence.
Naturally, the percentage of fully remote workers was due to dip because the country opened back up, we simply aren’t locked up anymore.
However, I believe we will migrate into a binary world where high-production workers will be able to spell out the type of work environment they want, and low-production workers won’t have any negotiating power to dictate terms.
At the very worst, highly productive workers will be forced into in-person office work 1-2 times per week if they are alpha workers.
This shows the amount of leverage that tech companies have lost in their battle to retrench workers back into the old world that no longer exists.
The world has really changed since early 2020 and the tech industry is still fumbling through the fallout and unintended consequences.
Geographically, this is a disaster for tech strongholds like Silicon Valley and good for the low tax strongholds of Austin, Texas, and Florida.
On the bright side, this phenomenon will produce new, exciting, and successful tech companies from parts of the world we never heard of.
Lastly, for the thriving entrepreneur, these events mean that it has never been cheaper to create and maintain a tech company with no need to pay for office space and the ability to outsource work to an army of remote workers in different time zones.
The elevated job vacant numbers reveal that tech workers are being pickier in what job they want to do and increasingly choosy in what type of politics they hope their employer to have.
Outperformance has never been so important in 2022 and the treatment of top employees compared to low-level employees has never been starker and more polarized.
Essentially, I am highly bullish on the future of technology and it’s up to us to create this thriving environment.
WHO NEEDS THE OFFICE?
“Play by the rules, but be ferocious.” – Said Nike Co-Founder Phil Knight
Mad Hedge Technology Letter
August 29, 2022
Fiat Lux
Featured Trade:
(RING THE ALARM)
(FXI)
The backlash has been fierce, and this is just the beginning as Chinese tech companies decouple from the West and hard pivots to Russia.
My good friend, the Founder of Huawei Ren Zhengfei is at the forefront of Chinese tech and can feel this bullwhip effect the most because of his access to critical macroeconomic data at his fingertips.
China isn’t the roaring economic miracle it once was.
This time it's different.
At some point, building ghost cities leading to snazzy accounting tricks ends in a collapse like a house of cards.
Unproductive capital frittered to waste is actually coming back to haunt the Chinese tech sector.
The Chinese tech sector for decades was the bellwether for global economic growth as its tech giants like Alibaba and Tencent went from producing pitiful products to challenging the US for tech supremacy.
When Ren talks, we listen.
In a leaked memo, Ren confided to Huawei staff “the chill will be felt by everyone” and the company must focus on profit over cashflow and expansion if it is to survive the next three years, indicating further job cuts and divestments.
“The next decade will be a very painful historical period, as the global economy continues to decline.”
Instantaneously, revenue targets and margin expectations were pulled back.
The deep-seated panic within the highest levels of Chinese tech is a warning to the rest of the world.
When China sneezes, the rest of the world catches a virus, no sarcasm intended.
Ren’s talking points was rounded out by “we must make survival the most important guideline.”
If I read between the Hangzhou tea leaves, this most likely means massive job cuts in some of the best tech companies.
The likes of Baidu, Huawei, and Tencent have been trigger-happy cutting jobs as if it’s almost fun.
I can also surmise that his comments will lead to raising the price of existing Huawei products and avoiding big investments into new ideas.
Huawei has found the road to riches rocky as hell as nobody outside of China is willing to buy their smartphone now that Google’s array of apps is banned from Huawei’s operating system.
That means Westerners like me will not be able to use Gmail, Google Maps, Google search, Google Chrome, and Google Cloud.
Going from economic juggernaut to panic mode, “survival” is a huge fall from grace for the Chinese and its best company Huawei.
The country might not even be able to fake the annual pageantry of reaching its annual economic growth target which this year is 5.5%.
It’s that bad in the country that Mao and collectivization built.
Ren’s memo went viral on Chinese social media, shared and discussed by more than 100 million users which freaked out the population considering it's almost taboo to lose face in this biggest Asian nation.
China’s government this week announced a further $146bn in stimulus funding to possibly promote the building of more ghost cities that they can report as economic “growth.”
Youth unemployment reached an all-time high of 19.9% in July which could represent a bad omen to the future of Chinese workers.
It’s looking quite bleak in Asia, and this could be the precursor to the recession felt in the West that is on pace to hit sometime in 2023.
A global recession would decrease the aggregate revenue for American tech companies, meaning as the pie shrinks, there is less to eat.
