Icarus, Africa, Power & Germs

Early last week, I presented at a private dinner my list of non-obvious ideas for what the world would look like five years hence. The precondition of “non-obvious” was the hard hurdle. It requires variant perception on unpopular non-consensus views. But it has the added benefit that “prices” of those ideas, should you put your money where your mouth is, are likely to be low.

While Buffett noted you pay a high price for a cheery consensus, I note you pay a low price for a variant view because underappreciated means underpriced. I share with you my non-obvious ideas. Speaking of non-obvious ideas, Goldman Sachs, which was wrong on decoupling, wrong on $200 oil, wrong on $120-$140 oil, now believes that oil stays below $65 and has formally announced it has ceased making further guidance. Nobody knows nothing! So take my own self-assured prognostications with a nano grain of salt. In honor of Jared Diamond’s Guns Germs & Steel I dub it “Icarus, Africa, Power & Germs”.

I thought about abundance versus scarcity and distribution versus concentration. What will there more of or less of; and will it be in more of fewer hands. Further, what’s the probability and the size of impact. (Frequency vs. Magnitude). Here are 14 non-obvious predictions of the next five years.

1. There will be fewer capital exchanges. A combination of delistings and lower trading volume forces further consolidation of financial exchanges. A global coordinated 24-hour equity market emerges. (Medium probability, Medium impact)

2. There will be fewer charities; philanthropies merge. Buffett joined Gates by choice, others will do so by necessity. Redundant charities popped up when money sloshed around the system it gratified the ego of the elite to plant their own flag, but has resulted in inefficiency and zero-sum competition over donor dollars. (High probability, Medium impact).

3. There will be less aid to Africa which will actually create less corruption in Africa. I owe this one to my Lux Research colleague Ted Sullivan. I further predict Africa emerges as the new China with the lowest cost of labor and with southeastern and southwestern port cities (say Namibia & Mozambique) seeing development with the help of China with the former port cities serving the Americas and the latter Asia. (Medium probability, Medium impact)

4. Africa will become the main beneficiary of what will be deemed world’s greatest unintended philanthropy: the current capitalist pursuit of solar energy. Unsustainable valuations and too many companies in classic Schumpeterian creative destruction leaves most investors in solar startups taking a “flight of Icarus,” burned. Unlike information business where two people can have the same software at the same time, only one solar cell can be on one roof at a time. Marketing might trumps technological merit and solar cells metaphorically (and perhaps literally) are littered on side of Silicon Valley highways. A clever entrepreneur picks them up and creates AfricaEdison power. This yields the Rise of distributed and decentralized power for a distributed population with poor or no grid infrastructure. Solar makes perfect sense to heat some water and power lights so kids can read and learn at night but absolutely no sense for baseload power. (Medium probability, High impact).

5. What does make sense for base-load power is Nuclear. I predict a nuclear renaissance takes hold and the important waste and proliferation issue is solved through nanotech and safe chemistry. You may hear some exciting news shortly on this front. (High probability, High impact)

6. I predict the energy efficiency myth is busted. Here’s why: the more efficient we make something, the more energy we use, NOT LESS. Conventional wisdom is wrong. If we make our devices more efficient, any SINGLE device gets more efficient but in aggregate we get more of them and the total amount of energy goes up—always. Computers are 1 million times more efficient but we have 100 million more of them. The same with today’s refrigerators which are much more efficient, but now instead of just one fridge, everyone has one in their office, their dorm room, even their car. If you really want to change the world and decrease energy use, make things more INNEFICIENT. Instead of electrons think of bits—think of internet bandwidth. If I give you a fiber optic cable, you’ll suck down data through that fat pipe like a fat kid sucking down an egg-cream in 1950s Brooklyn. You’ll be pulling Bit Torrents while watching YouTube and Hulu and video-conferencing with friends over Skype. The more efficient the transmission of bits, the more you’ll suck down. If I really want to reduce your consumption of bits, I need to make the pipe more inefficient. I guarantee if I put you on a 2400 baud or 56k modem you’d maybe send an email a day. Efficiency is a misguided myth. (Low probability, High Impact)

7. All the talk of distributed power makes me predict something else that will be distributed: Germs. Watch out for pandemic flu or other viruses that we’ve become seemingly “attention-immune” from. How easily we get distracted. (Low probability, High impact)

8. I predict more distributed healthcare. With the digitization of medical records and networked diagnostics (watch Google and Microsoft make acquisitions and jockey for position and think: USB cartridges read by your laptop transmitted to doctors in India and diagnosis given to you instantly). Decentralizing healthcare to the “edge”, away from hospitals, cuts costs and the looming trillions required for Medicare. In five years, we will be five years into the retirement of the Baby Boomers. Consider this: Alzheimers for baby-boomers will cost the government $1.2 Trillion. If you could postpone the onset for five years you can halve the cost. What will we deem it worth to spend to save $600 Billion? (High probability, High impact)

9. I predict the rise of Distributed R& D. The further rise of Innocentive, Yet2 and Boliven. This means answers come not from US universities or corporate R&D labs but from the world over from Reykjavik to Russia.

10. Speaking of Russia: I predict more power for Russia and specifically that Iceland becomes the “Cuba of north”—not in communist ideology but in geopolitical jockeying. I predict Russia jockeys for arctic energy resources with $563B in currency reserves, loaning $5B to Iceland is smartest geopolitical investment nobody is talking about.

11. I predict inflation runs rampant. The emissions that really matter are not carbon kind that Greens have you believe but of the U.S. Dollar variety (also Green) being emitted from the Fed and all other central banks. In five years, I predict interest rates in the teens making a cheap TIPS inflation hedge the most undervalued investment thesis today when the cheery consensus sees nothing but deflation ahead.

12. Speaking of Teens, I predict within five years we will see a video game company gets big acquires large media company (this decades’ version of AOL Time Warner). My Lux partner Adam Kalish predicts wisely that Vegas invents new game (out of necessity) because it needs a new poker, his bet is Baccarat.

13. And finally: there is the classic five-year investment cycle whereby everyone wants to be investing today where they should’ve been invested five years ago. You should have been investing in banks in 1990 (not 1995). You should’ve been investing in the Internet in 94-95 (not in 99-00). You should’ve been in housing in 99-00 not in 2005 and Energy in 05 not now. I predict Venture Capital and early stage venture capital is the best performing asset class five years from now.

NanObama!

www.nanobama.com

Mourn Model Makers, Volatility & Aliens Cause Global Warming

As I always write: the only certainty is uncertainty. Paradoxically, the implied volatility today suggests that volatility will be stably-volatile for the foreseeable future (months ahead). You should expect periods of punctuated disequilibrium driven by fund redemptions in parallel with the transfer of ownership of common stock from short-term investors to long-term investors marked by high volatility and dramatic intraday reversals like yesterday.



The volatility isn’t coming from frenetic traders, but an ebb and flow of long-term investors providing liquidity to short-term investors, with the trend being exacerbated in either direction by many small daily momentum players.



Consider: yesterday closes higher. FIRST: this causes some hedge funds (without long-term lockups of capital and with monthly or quarterly LP liquidity) to decide its a good day to sell some positions to meet redemptions and hold only those positions that might pop on short-term news. SECOND: The correlated holdings overlap force other funds to sell. THIRD: Momentum investors pile on to clip a few basis points. FOURTH: Long-term, long-locked funds buy common stock from the short-term short-locked funds (because long-term capital cares less about daily or weekly price fluctuations. If meaningful mispricings exist, as they do, long-term holders will buy and plan to hold for 3 years. Mark this: The single greatest competitive advantage any fund can have is differing time horizon from a thundering herd of sellers being shepherded by short-term redemptions. As risk-guru Peter Bernstein has noted: throw away all the complex formulas, risk is not having cash when you need it.



This current environment is just this: hedge funds hanging on as long as they can, while bringing in their gross exposure because of deleveraging, cost of short borrow and redemptions. Most are unwinding (some faster than others) by size, staff or entire funds causing ownership stakes in companies (ie. “stocks”) to be transferred from short-term and momentum investors to long-term value investors.



Everyone now laments the model makers. Nassim Taleb, whose ideas I’ve pounded the table on in these columns for years has himself pounded the table on a recent Bloomberg interview calling for the heads of the academic curriculum that continue to teach erroneous ideas based on flawed assumptions of how markets or humans really work. “Messily” and “irrationally” is hard to capture mathematically—which is why finance professors and business schools still teach CAPM (capital asset pricing model), beta and other greek-letter nonsense. It’s like Charlie Munger’s story of the doctor who taught his students an incorrect procedure just because it was easy to teach.



Speaking of model makers, below as promised is the second installment of Michael Crichton’s outstanding wisdom, presented in a speech titled: “Aliens Cause Global Warming”. I first excerpt a favorite passage that relates to the current absurdity of model makers and the implausibility of linear prediction:

….Stepping back, I have to say the arrogance of the model-makers is breathtaking. There have been, in every century, scientists who say they know it all. Since climate may be a chaotic system-no one is sure-these predictions are inherently doubtful, to be polite. But more to the point, even if the models get the science spot-on, they can never get the sociology. To predict anything about the world a hundred years from now is simply absurd.

Look: If I was selling stock in a company that I told you would be profitable in 2100, would you buy it? Or would you think the idea was so crazy that it must be a scam?


Let's think back to people in 1900 in, say, New York. If they worried about people in 2000, what would they worry about? Probably: Where would people get enough horses? And what would they do about all the horseshit? Horse pollution was bad in 1900, think how much worse it would be a century later, with so many more people riding horses?



But of course, within a few years, nobody rode horses except for sport. And in 2000, France was getting 80% its power from an energy source that was unknown in 1900. Germany, Switzerland, Belgium and Japan were getting more than 30% from this source, unknown in 1900. Remember, people in 1900 didn't know what an atom was. They didn't know its structure. They also didn't know what a radio was, or an airport, or a movie, or a television, or a computer, or a cell phone, or a jet, an antibiotic, a rocket, a satellite, an MRI, ICU, IUD, IBM, IRA, ERA, EEG, EPA, IRS, DOD, PCP, HTML, internet. interferon, instant replay, remote sensing, remote control, speed dialing, gene therapy, gene splicing, genes, spot welding, heat-seeking, bipolar, prozac, leotards, lap dancing, email, tape recorder, CDs, airbags, plastic explosive, plastic, robots, cars, liposuction, transduction, superconduction, dish antennas, step aerobics, smoothies, twelve-step, ultrasound, nylon, rayon, teflon, fiber optics, carpal tunnel, laser surgery, laparoscopy, corneal transplant, kidney transplant, AIDS… None of this would have meant anything to a person in the year 1900. They wouldn't know what you are talking about.



Now. You tell me you can predict the world of 2100. Tell me it's even worth thinking about. Our models just carry the present into the future. They're bound to be wrong. Everybody who gives a moment's thought knows it.



I remind you that in the lifetime of most scientists now living, we have already had an example of dire predictions set aside by new technology. I refer to the green revolution. In 1960, Paul Ehrlich said, "The battle to feed humanity is over. In the 1970s the world will undergo famines-hundreds of millions of people are going to starve to death." Ten years later, he predicted four billion people would die during the 1980s, including 65 million Americans. The mass starvation that was predicted never occurred, and it now seems it isn't ever going to happen. Nor is the population explosion going to reach the numbers predicted even ten years ago. In 1990, climate modelers anticipated a world population of 11 billion by 2100. Today, some people think the correct number will be 7 billion and falling. But nobody knows for sure.”

LINK TO THE WHOLE SPEECH BELOW. ENJOY!
SPEECH: Michael Crichton - Part II - Aliens Cause Global Warming

Debut: Forbes Video Channel, Exclusive with Charlie Harris, and Crichton's Contrarianism

First I’ve launched a new show on the Forbes network. One of our first interviews is with fellow VC and tech investor, Charlie Harris.
Here's a short segment.

Second, as you've heard, Michael Crichton died this week. In his honor I offer you long weekend reading, sharing below, the first of two transcripts of speeches given by Michael Crichton. The first is on the failure of environmental groups to employ complexity theory. It's full of examples of what not to do. His contrarian thinking has deeply influenced my own. Enjoy!

SPEECH: Michael Crichton - Complexity Theory and Environmental Management