Mad Hedge Technology Letter
June 5, 2020
Fiat Lux
Featured Trade:
(EUROPE’S BIG TECH TAX GRAB),
(COMPQ), (NFLX), (APPL), (AMZN), (GOOGL), (MSFT)
Big Tech regulation gets the protection of the U.S. government.
The U.S. government has announced that it is looking into aggressive regulation originating from foreign countries that would die to have a FANG themselves.
This is just another salient data point to which tech will lead us through the maze of complexity that the world now finds itself in.
Many jumped on the bandwagon saying it was a matter of time before regulation destroys big tech, but I will argue that big tech has become too big to fail and the value generated from stock appreciation and tax revenue has become even more important.
Tech has been the only industry to not get pummeled by the coronavirus and the ramifications of social unrest.
The U.S. government doesn’t want to tip over the last remaining pillar the U.S. economy is clinging to, they are desperate to allow the U.S. tech models to stay intact.
The Federal and State budgets have massive holes in them and crushing tech’s contribution to the revenue coffers would be political suicide.
Understanding how the administration cherishes big tech means viewing them through the prism of how other countries treat U.S. tech companies hoping to take a piece of the pie themselves through clever “regulation.”
The European Union, the Czech Republic, and the U.K. plan to siphon off tax revenue from big tech even though confronted by possible trade sanctions from the U.S.
The U.S. probe also will look into the digital services tax plans of Austria, Brazil, Indonesia, Italy, Spain, and Turkey because they are all looking to skim some cash off of big tech’s cash cow.
To read more about the tax fiasco, please click here.
Europe and the emerging economies have been hit harder than the U.S., not in terms of deaths, but in relative economic terms because they don’t possess the rolodex of Fortune 500 companies that can just issue more corporate debt or a Fed central bank that is delivering trillions in liquidity that has saved the stock market.
Washington has specifically been eying up France for a section 301 investigation after it became the first country to fully implement a digital sales tax in July 2019.
France has been quite aggressive in calling out big tech for undermining and exploiting their economy by not paying tax due.
French Finance Minister Bruno Le Maire has been sharp-tongued criticizing America’s big tech companies for running wild in European markets.
A 3% digital sales tax was in the cards before the U.S. slapped on a counter tariff to French goods which delayed the frosty confrontation.
Europe’s vast network of splintered resources and unbalanced innovation combined with Europe’s infamous avalanche of bureaucracy meant that developing a famous tech company fell through the cracks.
Nothing even remotely close to Silicon Valley was ever conjured up inside the confines of the European Union.
The consequences have been costly with most Europeans relying on Apple cell phones, Google software, Netflix subscriptions, and Microsoft enterprise products to get them through the day just like most Americans.
The tax grab is out of desperation as the EU confronts a post-coronavirus world where they are increasingly controlled by decisions from the Communist Chinese and subject to a graying population that delivers a reduced tax revenue base.
The European Union is one of the biggest losers from the coronavirus.
The hands-off warning by the U.S. government on its own big tech companies puts a premium on their existence to the U.S. economy.
Instead of twisting their arm to squeeze every extra tax dollar out of them, they will most likely get more access to deliver the services most Americans are hooked on.
It’s not a secret that current U.S. President Donald Trump is hellbent on destroying big tech but there is no way to do it without destroying the U.S. economy and the U.S. stock market.
At this point, just a handful of tech companies comprises over 22% of the S&P and this will most likely continue as other industries are still licking their wounds with some analysts believing it will take 10 years to get back to late 2019 economic levels.
The most likely scenario for big tech is that the array of crises has delayed real regulation indefinitely and the U.S. will protect big tech from a tax grab abroad.
The best-case scenario is zero regulation leading to zero extra costs.
Either way, stock appreciation is in the cards for tech’s future.
The end result is that big tech could eventually comprise up to 30% of the S&P in the next 3 years which dovetails nicely with a recent analyst call that Microsoft will hit over $2 trillion in market capitalization in the next 2 years.
“Broadcast TV is like the landline of 20 years ago.” – Said Founder and CEO of Netflix Reed Hastings
Mad Hedge Technology Letter
June 3, 2020
Fiat Lux
Featured Trade:
(ABOUT YOUR RIOT-PROOF PORTFOLIO),
(COMPQ), (WMT), (APPL), (AMZN), (TGT), (JWN), (EQIX), (GOOGL), (MSFT)
Social unrest will have NO material effect on tech shares moving forward.
Some investors expected the Nasdaq (COMPQ) index to roll over big time, throttled by a national insurrection. Anti-police-violence protests, some becoming riots, have broken out in more than 60 cities.
However, it appears to be another false negative for the Nasdaq as it motors upwards acting on the momentum of outperformance during the coronavirus.
One thing that the coronavirus pandemic, as well as protests, have taught investors is the unwavering faith in technology’s strength will continue powering the overall market rebound.
Any social unrest will not stop tech shares because they simply don’t subtract from their revenue models.
This will perpetuate into the rest of 2020 and beyond.
Much of the public reaction from big tech has been paying some form of lip service about the national situation being untenable followed up with a small donation.
Apple (AAPL) says it's making donations to various groups including the Equal Justice Initiative, a non-profit organization based in Montgomery, Alabama that provides legal representation to marginalized communities.
To read more about big tech’s donations, click here.
Aside from some PR formalities, it will be business as usual after things settle down.
Apple might suffer some slight inconveniences of having some stores looted, but that doesn’t mean consumers can’t buy products online.
Tech companies simply contort to fit the new paradigm and that is what they are best at doing.
Apple has charged hard into the digital service as a subscription world that has served Amazon, Apple, Google (GOOGL), and Microsoft (MSFT) so well.
To read more about the robust performance of software stocks, please click here.
Many of these tech companies don’t need a physical presence to drive forward earnings, revenue models, and widen their competitive advantages.
That’s the beauty of it and their brands are so entrenched that it doesn’t matter what happens in the outside world at this point.
It’s true that a few tech companies might have to scale back or modify operations until the storm subsides but not at a great scale that will worry investors.
Amazon is reducing deliveries and changing delivery routes in some areas affected by the protests.
Big tech dodged a bullet with the majority of the financial burden falling on the shoulders of big-box retailers like Walmart (WMT) and Target (TGT) and city center-located businesses.
Walmart closed hundreds of stores one hour early on Sunday, but most are slated to reopen. Nordstrom (JWN) temporarily closed all its stores on Sunday.
Amazon (AMZN)-owned Whole Foods are often located in neighborhoods that are perceived likely to escape the bulk of the turmoil.
The events of the last few days will have significant side effects on the normalcy of society or the new normal of it.
Combined with the pandemic, consumers will opt for more spacious housing options in less concentrated areas of the U.S.
The social unrest once again delivers the goodies into the hands of e-commerce as people will be less inclined to leave their house to consume.
A stock that really sticks out during all of this is the leader in interconnected data centers Equinix (EQIX) because of the explosion of data being consumed from the stay-at-home revolution.
Sadly, the price of tech share does not account for life quality which is part of the reason we see stocks lurching higher.
By the time all the different crises, including coronavirus and protests, are snuffed out, we could be in a world where the only strong companies left are technology, "big tech".
They have an insurmountable lead at this point with guns still blazing.
When you add the windfall of trillions in cash the Fed has pumped out and unwittingly diverted into tech shares recently, it is hard to envision ANY scenario in which the Nasdaq will be down a year from now.
I am bullish on the Nasdaq index and even more bullish on big tech.
Even the supposed “rotation” to value has only meant that tech shares haven’t gone down.
A dip now in tech shares means shares dip for two hours before resurging.
Why would anyone want to sell the best and highest growth industry in the public markets with unlimited revenue-generating potential?
“I've done a lot of things I'm not proud of, such as getting my girlfriend pregnant when I was 23 and the way I handled that.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
June 1, 2020
Fiat Lux
Featured Trade:
(HOW DEEPFAKES WILL DOMINATE THE COMING ELECTION),
(DEEPFAKE TECHNOLOGY)
There is a dark side of technology that, if not tackled head-on, could result in the breaking of the internet.
That technology is deepfake.
Deepfakes are doctored media forms in which a person in an existing image or video is replaced with someone else's likeness.
To read up on examples of deepfake video content that inserts Leonard Nimoy in a 2009 movie, click here.
Sure, you might have heard about it before.
This is old news, right?
Photoshopping a friend’s face and repurposing onto a famous artist’s face is child’s play.
Or so you thought.
It’s all fun and games when doing it for a little laugh, but doctoring videos to spark a world war is another matter entirely.
So why do I bring up deepfakes now?
It just so happens that the development of deepfakes has accelerated to the point where the real and fake are just about indistinguishable.
The main machine learning methods used to create deepfakes are based on deep learning and involve training generative neural network architectures, such as autoencoders or generative adversarial networks (GANs).
Photo manipulation was developed in the 19th century and soon applied to motion pictures. Technology steadily improved during the 20th century, and more rapidly with digital video.
At the start of 2019, deepfakes were easy to spot, within 5 seconds, there was a high probability that something in the content tipped off its fakeness.
As we push against a point of no return with this specific technology, social unrest has exploded with over 75 cities mired in police protest and public trust at its lowest point in history.
Marry up the social chaos with an upcoming U.S. presidential election and one could understand how events could turn sour if ugliness is supercharged with deepfakes.
It is entirely possible that an offshore deepfake going viral on the internet could unlock the election stalemate.
It is truly a scary situation when doctored media has pulled itself up in quality and the average person does not know when reality stops and starts.
We have already seen a plethora of crude pornography harnessed by deepfake technology in the past two years and that is just the beginning.
With digital storage service space cheap and Facebook allowing any type of extreme content to go live on its platform, the wielding of deepfakes mixed with heavy investment could cause every negatives trend in business and U.S. society to supercharge.
The U.S. think tank The Brookings Institution summed it up concisely by listing the risks that deepfakes will pose: “distorting democratic discourse; manipulating elections; eroding trust in institutions; weakening journalism; exacerbating social divisions; undermining public safety; and inflicting hard-to-repair damage on the reputation of prominent individuals, including elected officials and candidates for office.”
How do tech companies make out in the deepfake world?
As long as Section 230 absolves big tech from content posted on their platform, several monopolistic platforms will come out winners.
Can you imagine Netflix and Apple Plus creating the majority of its content with computer software?
Well, content already exists in the form of Japanese anime, but Netflix will be able to double or triple the amount of software-generated content cutting back on the need to pay humans to produce content that is live in living flesh.
Hollywood and its human actors are already on the ropes, will there be any room for their existence in this deepfake social distance, remote office world?
As the global pandemic has exacerbated negative and positive trends in technology, the volume and quality of fake news will continue to explode to record levels.
This is just the tip of the iceberg.
As it stands, I can barely find what I need when I am searching on Google search anymore because of the clutter of marketing and clickbait that hinders my objectives.
Will users still go on Facebook and watch YouTube videos if the percentage of fake content goes from 10% to 90% because they are bombarded with institutional deepfakes?
I can tell you that these social media platforms aren’t investing in their defense of deepfakes even if they are already banned on their platform preferring to turn a blind eye.
The development of deepfakes is increasing at such a rate that it dwarfs the development of defending authentic content.
To read an instance when Alphabet’s YouTube refused to remove deepfakes of American rapper Jay Z, click here.
That is what happens when the monetary incentives are perverse with the goal of selling the technology to the highest bidder, whoever it may be.
This could truly be the technology that breaks the internet as the law cannot keep up with the pace of fast-developing technology as big tech runs in circles around the White House.
It will be interesting to see if big tech firms monetize it to the extreme or try to do what is best for society. My guess is that corporations will see this as a golden opportunity to get into the world of digital content with famous stars and athletes licensing out their faces.
DEEPFAKES ARE HERE TO STAY
“I know tech better than anyone.” – Said Current President of the United States Donald J. Trump on his Twitter Account in 2018
Mad Hedge Technology Letter
May 29, 2020
Fiat Lux
Featured Trade:
(TRUMP’S TWITTER ATTACK WILL GO NOWHERE),
(TWTR), (FB)