Global Market Comments
December 28, 2017
Fiat Lux
SPECIAL ISSUE ABOUT THE FAR FUTURE
Featured Trade:
(PEAKING INTO THE FUTURE WITH RAY KURZWEIL),
(GOOG), (INTC), (AAPL), (TXN)
Global Market Comments
December 28, 2017
Fiat Lux
SPECIAL ISSUE ABOUT THE FAR FUTURE
Featured Trade:
(PEAKING INTO THE FUTURE WITH RAY KURZWEIL),
(GOOG), (INTC), (AAPL), (TXN)
This is the most important research piece you will ever read, bar none. But you have to finish it to understand why. So, I will get on with the show.
I have been hammering away at my followers at investment conferences, webinars, and strategy luncheons this year about one recurring theme. Things are good, and about to get better, a whole lot better.
The driver will be the exploding rate of technological innovation in electronics, biotechnology, and energy. The 2020s are shaping up to be another roaring twenties, and asset prices are going to go through the roof.
To flesh out some hard numbers about growth rates that are realistically possible and which industries will be the leaders, I hooked up with my old friend, Ray Kurzweil, one of the most brilliant minds in computer science.
Ray is currently a director of Engineering at Google (GOOG) heading up a team that is developing stronger artificial intelligence. He is an MIT grad with a double major in computer science and creative writing. He was the principal inventor of the CCD flatbed scanner, first text-to-speech synthesizer, and the commercially marketed large-vocabulary speech recognition.
When he was still a teenager, Ray was personally awarded a science prize by President Lyndon Johnson. He has received 20 honorary doctorates and has authored 7 books. It was upon Ray’s shoulders that many of today’s technological miracles were built.
His most recent book, The Singularity is Near: When Humans Transcend Biology, was a New York Times bestseller. In it, he makes hundreds of predictions about the next 100 years that will make you fall out of your chair.
I met Ray at one of my favorite San Francisco restaurants, Morton’s on Sutter Street. I ordered a dozen oysters, a filet mignon wrapped in bacon, and drowned it all down with a fine bottle of Duckhorn merlot. Ray had a wedge salad with no dressing, a giant handful of nutritional supplements, and a bottle of water. That’s Ray, one cheap date.
The Future of Man
A singularity is defined as a single event that has monumental consequences. Astrophysicists refer to the big bang and black holes in this way. Ray’s singularity has humans and machines merging to become single entities, partially by 2040 and completely by 2100.
All of our thought processes will include built-in links to the cloud making humans super smart. Skin that absorbs energy from the sun will eliminate the need to eat. Nanobots will replace blood cells, which are far more efficient at moving oxygen. A revolution in biotechnology will enable us to eliminate all medical causes of death.
Most organs can now be partially or completely replaced. Eventually, they all will become renewable by taking one of your existing cells and cloning it into a completely new organ. We will become much more like machines, and machines will become more like us.
The first industrial revolution extended the reach of our bodies, and the second is extending the reach of our minds.
And, oh yes, prostitution will be legalized and move completely online. Sounds like a turn-off? How about virtually doing it with your favorite movie star? Your favorite investment advisor? Yikes!
Ironically, one of the great accelerants towards this singularity has been the war in Iraq. More than 50,000 young men and women came home missing arms and legs (in Vietnam these were all fatalities, thanks to the absence of modern carbon fiber body armor).
Generous government research budgets have delivered huge advances in titanium artificial limbs and the ability to control them only with thoughts. Quadriplegics can now hit computer keystrokes merely by thinking about them.
Kurzweil argues that exponentially growing information technology is encompassing more and more things that we care about, like healthcare and medicine. Reprogramming of biology will be the next big thing and is a crucial part of his “singularity.”
Our bodies are governed by obsolete genetic programs that evolved in a bygone era. For example, over millions of years, our bodies developed genes to store fat cells to protect against a poor hunting season in the following year. That gave us a great evolutionary advantage 10,000 years ago. But it is not so great now with obesity becoming the country’s number one health problem.
We would love to turn off these genes through reprogramming, confident that the hunting at the supermarket next year will be good. We can do this in mice now which, in experiments, can eat like crazy but never gain weight.
The happy rodents enjoy the full benefits of caloric restriction with no hint of diabetes or heart disease. A product like this would be revolutionary, not just for us, health care providers, and the government, but, ironically, for fast food restaurants as well.
Within the last five years, we have learned how to reprogram stem cells to rebuild the hearts of heart attack victims. The stem cells are harvested from skin cells, not human embryos, ducking the political and religious issue of the past.
And if we can turn off genes, why not the ones in cancer cells that enable them to pursue unlimited reproduction until they kill its host? That development would cure all cancers, and is probably only a decade off.
The Future of Computing
If this all sounds like science fiction, you’d be right. But Ray points out that humans have chronically underestimated the rate of technological innovation.
This is because humans evolved to become linear thinking animals. If a million years ago we saw a gazelle running from left to right, our brains calculated that one second later it would progress ten feet further to the right. That’s where we threw the spear. This gave us a huge advantage over other animals and is why we became the dominant species.
However, much of science, technology, and innovation grows at an exponential rate and is where we make our most egregious forecasting errors. Count to seven, and you get to seven. However, double something seven times and you get to a billion.
The history of the progress of communications is a good example of an exponential effect. The spoken language took hundreds of thousands of year to develop. Written language emerged thousands of years, books in 100 years, the telegraph in a century, and telephones 50 years later.
Some ten years after Steve Jobs brought out his Apple II personal computer, the growth of the Internet went hyperbolic. Within three years of the iPhone launch, social media exploded out of nowhere.
At the beginning of the 20th century, $1,000 bought 10 X -5th power worth of calculations per second in our primitive adding machines. A hundred years later a grand got you 10 X 8th power calculations, a 10 trillion-fold improvement. The present century will see gains many times this.
The iPhone itself is several thousand times smaller, a million times cheaper, and billions of times more powerful than computers of 40 years ago. That increases the price per performance by the trillions. More dramatic improvements will accelerate from here.
Moore’s law is another example of how fast this process works. Intel (INTC) founder Gordon Moore published a paper in 1965 predicting a doubling of the number of transistors on a printed circuit board every two years. Since electrons had shorter distances to travel, speeds would double as well.
Moore thought that theoretical limits imposed by the laws of physics would bring this doubling trend to end by 2018 when the gates become too small for the electrons to pass through. For decades, I have read research reports predicting that this immutable deadline would bring an end to innovation and technological growth, and bring an economic Armageddon.
Ray argues that nothing could be further from the truth. A paradigm shift will simply allow us to leapfrog conventional silicon-based semiconductor technologies and move on to bigger and better things. We did this when we jumped from vacuum tubes to transistors in 1949, and again in 1959 when Texas Instruments (TXN) invented the first integrated circuit.
Paradigm shifts occurred every ten years in the past century, every five years in the last decade, and will occur every couple of years in the 2020s. So fasten your seatbelts!
Nanotechnology has already allowed manufacturers to extend the 2018 Moore’s Law limit to 2022. On the drawing board are much more advanced computing technologies including calcium-based systems using the alternating direction of spinning electrons, and nanotubes.
Perhaps the most promising is DNA-based computing, a high research priority at IBM and several other major firms. I earned my own 15 minutes of fame in the scientific world 40 years ago as a member of the first team ever to sequence a piece of DNA which is why Ray knows who I am.
DeoxyriboNucleic Acid makes up the genes that contain the programming that makes us who we are. It is a fantastically efficient means of storing and transmitting information. And it is found in every single cell in our bodies, all 10 trillion of them.
The great thing about DNA is that it replicates itself. Just throw it some sugar. That eliminates the cost of building the giant $2 billion silicon-based chip fabrication plants of today.
The entire human genome is a sequential binary code containing only 800 MB information which after you eliminate redundancies, has a mere 30-100 MB of useful information, about the size of an off-the-shelf software program like Word for Windows. Unwind a single DNA molecule and it is only six feet long.
What this means is that, just when many believe that our computer power is peaking, it is in fact just launching on an era of exponential growth. Supercomputers surpassed human brain computational ability in 2012, about 10 to the 16th power (ten quadrillion) calculations per second.
That power will be available on a low-end laptop by 2020. By 2050, this prospective single laptop will have the same computing power of the entire human race, about 9 billion individuals. It will also be small enough to implant in our brains.
The Future of the Economy
Ray is not really that interested in financial markets or, for that matter, making money. Where technology will be in a half-century and how to get us there are what get his juices flowing. However, I did manage to tease a few mind-boggling thoughts from him.
At the current rate of change, the 21st century will see 200 times the technological progress that we saw in the 20th century. Shouldn’t corporate profits, and therefore share prices, rise by as much?
Technology is rapidly increasing its share of the economy and increasing its influence on other sectors. That’s why tech has been everyone’s favorite sector for the past 30 years and will remain so for the foreseeable future. For two centuries, technology has been eliminating jobs at the bottom of the economy and creating new ones at the top.
Stock analysts and investors make a fatal flaw in estimating future earnings based on the linear trends of the past, instead of the exceptional growth that will occur in the future.
In the last century, the Dow appreciated from 100 to 10,000, an increase of 100 times. If we grow at that rate in this century, the Dow should increase by 10,000% to 1 million by 2100. But so far, we are up only 6%, even though we are already 18 years into the new century.
The index is seriously lagging but will play catch up in a major way during the 2020s when economic growth jumps from 2% to 4% or more, thanks to the effects of massively accelerating technological change.
Some 100 years ago, one-third of jobs were in farming, one third were in manufacturing, and one third in services. If you predicted then that in a century farming and manufacturing would each be 3% of total employment and that something else unknown would come along for the rest of us, people would have been horrified. But that’s exactly what happened.
Solar energy use is also on an exponential path. It is now 1% of the world’s supply but is only seven doublings away from becoming 100%. Then we will consume only one 10,000th of the sunlight hitting the earth. Geothermal energy offers the same opportunities.
We are only running out of energy if you limit yourself to 19th-century methods. Energy costs will plummet. Eventually, energy will be essentially free when compared to today’s costs, further boosting corporate profits.
Hyper-growth in technology means that we will be battling with deflation for the rest of the century, as the cost of production and price of everything fall off a cliff. That makes our 10-year Treasury bonds a steal at a generous 2.60% yield, a full 460 basis points over the real long-term inflation rate of negative 2% a year.
US Treasuries could eventually trade down to the 0.40% yields seen in Japan only a couple of years ago. This means that the bull market in bonds is still in its early stages, and could continue for decades.
The upshot for all of this these technologies will rapidly eliminate poverty, not just in the US but around the world. Each industry will need to continuously reinvent its business model, or disappear.
The takeaway for investors that stocks, as well as other asset prices, are now wildly undervalued given their spectacular future earnings potential. It also makes the Dow target of 1 million by 2100 absurdly low, and off by a factor of 10 or even 100. Will we be donning our “Dow 100 Million” then?
Other Random Thoughts
As we ordered dessert, Ray launched into another stream of random thoughts. I asked for Morton’s exquisite double chocolate mousse. Ray had another handful of supplements. Yep, Mr. Cheap Date.
The number of college students has grown from 50,000 to 12 million since the 1870s. A kid in Africa with a cell phone has more access to accurate information than the president of the United States did 15 years ago.
The great superpower, the Soviet Union, was wiped out by a few fax machines distributing information in 1991.
Company offices will become entirely virtual by 2025.
Cows are very inefficient at producing meat. In the near future, cloned muscle tissue will be produced in factories, disease free, and at a fraction of the present cost without the participation of the animal. PETA will be thrilled.
Use of nanomaterials to build ultra light but ultra strong cars cuts fuel consumption dramatically. Battery efficiencies will improve by 10 to 100 times. Imagine powering Tesla Model S1 with a 10-pound battery! Advances in nanotube construction mean the weight of the vehicle will drop from the present 3 tons to just 100 pounds but will be far safer.
Ray is also on a scientific advisory panel for the US Army. Uncertain about my own security clearance, he was reluctant to go into detail. Suffice it to say that the weight of an M1 Abrams main battle tank will shrink from 70 tons to 1 ton, but will be 100 times stronger.
A zero tolerance policy towards biotechnology by the environmental movement exposes their intellectual and moral bankruptcy. Opposing a technology with so many positive benefits for humankind and the environment will inevitably alienate them from the media and the public who will see the insanity of their position.
Artificial intelligence is already far more prevalent than you understand. The advent of strong artificial intelligence will be the most significant development of this century. You can’t buy a book from Amazon, withdraw money from your bank, or book a flight without relying on AI.
Ray finished up by saying that by 2100 humans will have the choice of living in a biological, or in a totally virtual, online form. In the end, we will all just be files.
Personally, I prefer the former, as the best things in life are biological, and free!
I walked over to the valet parking, stunned and disoriented by the mother load of insight I had just obtained, and it wasn’t just the merlot talking, either! Imagine what they talk about at Google all day.
To buy The Singularity is Near at discount Amazon pricing, please click here. It is worth purchasing the book just to read Ray’s single chapter on the future of the economy.
Mad Hedge Technology Letter
November 13, 2018
Fiat Lux
Featured Trade:
(NO BIWEEKLY STRATEGY WEBINAR FOR WEDNESDAY NOVEMBER 14)
(WHY I HATE CHIP STOCKS)
(AAPL), (CY), (TXN), (LRCX), (KLAC), (LITE), (QCOM), (MU), (SWKS), (LSCC)
Now that the midterm elections are behind us, Congress will be gridlocked for the next two years portending well for tech stocks as a whole.
However, the gridlock will exacerbate negative sentiment in one small group of technology – the semiconductor chip sector.
I have been staunchly bearish on this cohort since the outset of the trade logjam with China and I recommend readers to avoid these stocks like the plague.
The split Congress could fuel an even more rigid stance towards the complicated tech situation, further clamping down on foreign IP theft and technological forced transfers.
Either way, there is no end in sight and as this administration is concretely in place for the next two years, doubling down on foreign policy wins could be the Republican party’s path to victory heading into the 2020 election.
This could mean the rhetoric towards China could ratchet up a few levels.
Soon enough, the tariffs levied on Chinese imports is set to increase to 25% in January.
Even before January, a planned meeting between Trump and Chairman Xi in Buenos Aires on Nov. 29 will take place and is creating a swirling tornado of uncertainty around chip sentiment that is on tenterhooks.
Any chance to resuscitate the sentiment in the industry could come and go with another gut-churning leg down in chip shares.
Unfortunately, the sword of Damocles hanging over the chip sector could drop in 2019 slashing profit margins, revenue, and damaging the all-important guidance.
Even if individual chip companies determine that the trade friction is too much to stomach, it would be expensive and lengthy to transfer an entire supply chain to Vietnam or Indonesia, hitting current R&D budgets and damaging future innovation affecting the pipeline of fresh products.
Time is not a friend to the chip sector.
If the China leveraged chip companies were to wait out this trade war, they risk further being enveloped into the eye of the trade storm if no quick agreements can be made.
They might have to wait a while as Beijing views waiting out Trump and dealing with the next administration in charge as the ideal option.
Chairman Xi conveniently removed term limits in the last congress, meaning he is in his job until death which could be another 40 years or so.
That is the time horizon the Chinese are playing with.
The timing couldn’t have been worse for the chip sector after a slew of weak guidance from upper management painted a downbeat picture for the sector as we inch towards 2019.
Texas Instruments (TXN) Chief Executive Rich Templeton started off his earnings report admitting, “demand for our products slowed across most markets.”
He later admitted that the semiconductor market is grappling with an imminent “softer” market.
Following up a growing chorus of chip executives flashing dangerous warnings signs, Lattice Semiconductors (LSCC) lamented that it was seeing slowness in the industrial and consumer markets in Asia as a result of macroeconomic conditions and tariffs.
Cypress Semiconductor (CY) also chimed in saying it was coping with “softness across the board.”
Making matters worse, Beijing has been showering capital on the local chip sector aimed at nurturing and developing Chinese chip companies poised to compete on the global stage.
Recently, Chinese state-backed semiconductor maker Fujian Jinhua Integrated Circuit was indicted by the U.S. Justice Department for industrial espionage.
The company allegedly stole trade secrets from Boise-based Micron (MU).
Micron could now become the first piece of collateral damage to the snarky trade war threatening huge swaths of American chip company's revenue.
And with the affected American chip companies waded in a quagmire, and chip market softness on the near horizon, semiconductor equipment firms have borne a good amount of the damage this year with Applied Materials Inc (AMAT), KLA-Tencor Corp (KLAC), and Lam Research Corp (LRCX) getting hammered.
Chips tied to Apple’s (AAPL) iPhone are also in for a drubbing with Apple suddenly announcing in their most recent report they would stop offering the unit sales of iPhones, creating more uncertainty around units sold for a massive end-market for global chip companies, adding to the swirling uncertainties overall Chinese chip revenue face.
Apple proxy chip stocks who lean on Apple for a big chunk of revenue such as Skyworks Solutions (SWKS) are getting crushed.
Skyworks was downgraded last week by Citigroup based on underperforming iPhone XR sales.
The rapid rush of chip downgrades has been fast and furious.
Skyworks will have pockets of strength when 5G is fully rolled out because they will supply critical components installed in this new technology for the new era of internet speed and performance.
But that pocket of strength is not now and will not happen tomorrow.
It’s time to duck out of Skyworks and I have been convincingly downbeat on this particular name since the inception of the trade war.
Today crawled in the next batch up negative chip news from Lumentum Holdings (LITE) who supplies 3D chips for Apple iPhone's facial recognition system.
Management reported that sales would be $20 million lower than originally forecasted because of a sudden reduction in shipments from an unnamed customer.
Another ongoing headache is the Qualcomm (QCOM) versus Apple marriage or divorce, depending on how you look at it.
They have been mired in a prolonged court case against each other, and Qualcomm’s share price has been dismal as of late.
Qualcomm recorded zero licensing revenue in the quarter from Apple who is withholding royalty payments from Qualcomm in a dispute over the company's licensing practices.
The move damaged quarterly licensing sales sliding 6% to $1.14 billion.
Qualcomm has lashed back at Apple pointing the finger at Apple for transferring its intellectual property to Intel (INTC) who is supplying chips for new-model iPhones which is possibly part of the reason they lost this contract.
Losing the iPhone contract to Intel is the main factor in Qualcomm expecting modem chip shipments to decline 22% to about 185 million units.
The fight has no end in sight but like Skyworks Solution, Qualcomm is on the forefront of the 5G revolution and provides a silver lining to embattled revenue growth that has been dragged down with the China mess.
At the end of the day, companies have less resistance when they aren’t belligerently brawling with their biggest purchasers.
Biting the hand that feeds you is a poor strategy that cuts across any industry.
Avoid chip companies for the short term and wait for sentiment to reverse course.
Mad Hedge Technology Letter
May 23, 2018
Fiat Lux
Featured Trade:
(WHY THE BIG DEAL OVER ZTE?),
(MU), (QCOM), (INTC), (AAPL), (SWKS), (TXN), (BIDU), (BABA)
Here's the conundrum.
Beyond cutting-edge technology, there's nothing that China WANTS OR NEEDS to buy from the U.S. China's largest imports are in energy and foodstuffs, both globally traded commodities.
China is playing the long game because it can.
Earlier this year, China altered its constitution to remove term limits and any obstacle that would hinder Chairman Xi to serve indefinitely.
If it's two, four, eight or 10 years, no problem, China will wait it out.
As it stands, China is enjoying the status quo, which is a robust economic trajectory of 6.7% economic growth YOY and at that rate will leapfrog America as the biggest economy in the world by 2030.
China does not need handouts.
It already has its mooncake and is eating it.
The Chinese are also betting that Donald Trump fades away with the passage of time, possibly soon, and that a vastly different administration will enter the fray with an entirely different strategy.
The indefinite "hold" pattern is a polite way to say we surrender.
ZTE Corporation is a Chinese telecommunications equipment manufacturer and low-end smartphone maker based in Shenzhen, China.
This seemingly innocuous company is ground zero for the U.S. vs China trade practice dispute.
The U.S. Department of Commerce banned American tech companies from selling components to ZTE for seven years, crippling its supply chain after violating sanctions against Iran and North Korea.
ZTE uses about 30% of American components to produce its smorgasbord of telecom equipment and down-market cell phones.
What most people do not know is that ZTE is the fourth most prevalent smartphone in America, only behind Apple, Samsung, and LG, commanding a 12.2% market share, and its phones require an array of American made silicon parts.
In 2017, the company shipped more than 20 million phones to the United States.
The ruling effectively put ZTE out of business because the lack of components shelved production.
Low-end smartphones account for almost one-third of total revenue.
ZTE could very well have survived with a direct hit to its consumer phone business, but the decision to ban components made the telecom equipment division inoperable.
This segment accounts for a heavy 58.2% of revenue. Therefore, disrupting ZTE's supply chain would effectively take down more than 91% of its business for a company that employs 75,000 employees in over 160 countries.
Upon news of ZTE's imminent demise, the administration made a U-turn on its initial decision stating "too many jobs in China lost."
The reversal made America look bad.
It shows that America is being dictated to and not the other way around.
When did it become the responsibility of the American administration to fill Chinese jobs for a company that is a threat to national security?
The Chinese refused to continue talks with the visiting delegation until the ZTE situation was addressed.
Treasury Secretary Steve Mnuchin and company were able to "continue" the talks then were politely shown the door.
Bending the rules for ZTE should have never been a prerequisite for talks, stressing the lack of firepower in the administration's holster.
However, stranding the delegation in Chinese hotel rooms for days waiting in limbo, without offering an audience, would have caused even more humiliation and anguish for the administration.
China is not interested in buying much from America, but one thing it needs -- and needs in droves -- are chips.
Long term, this ZTE ban is great for China.
I believe China will use this episode to rile up the nationalistic rhetoric and make it a point to wean itself from American chips.
However, for the time being, American chips are the most valuable import America can offer China, and that won't change for the foreseeable future.
The numbers back me up.
Micron (MU) earns more than $10 billion in revenue from China, which makes up over 51% of its total revenue.
Qualcomm (QCOM), mainly through its lucrative licensing division, makes more than $14.5 billion from its Chinese revenue, which comprises over 65% of revenue.
Texas Instruments (TXN) earns more than 44% of revenue from China, and almost a quarter of Intel's (INTC) revenue is derived from its China operations.
The biggest name embedded in China is Apple (AAPL), which earned almost $45 billion in sales last year. Its China revenue is three times larger than any other American company.
In less than a decade, China has caught up.
China now has adequate local smartphone substitutes through Huawei, Oppo, Vivo, and Xiaomi phones.
Skyworks Solutions (SWKS), a chip company reliant on iPhone contracts, is most levered toward the Chinese market capturing almost 83% of revenue from China.
You would think these chips would be the first on the chopping block in a trade war. However, you are wrong.
China needs all the chips it can get because there is no alternative.
Stopping the inflow of chips is another way of stopping China from doing business and developing technology.
The Chinese economy has been led by the powerful BATs of Baidu (BIDU), Tencent, and Alibaba (BABA) occupying the same prominent role the American FANGs hold in the American economy.
They are not interested in digging their own grave.
To execute the 2025 plan to become the world leaders in advanced technology, they need chips that power all modern electronic devices.
The most likely scenario is that China maintains development using American chips for the time being and slowly pivots to the Korean chip sector, which is vulnerable to Chinese political pressure.
Remember that South Koreans have two of the three biggest chip companies in the world in Samsung and SK Hynix. China has used economic coercion to get what it wants from Korea in the past or to prove a point.
Korean multinational companies, shortly after the Terminal High Altitude Area Defense (THAAD) installation on the Korean peninsula, were penalized by the Chinese government shutting down mainland Korean stores, temporarily banning Chinese tourism in South Korea, and blocking K-pop stars from performing in the lucrative Chinese market.
The Chinese communist government can turn the screws when it wants and how it wants.
Therefore, the next battleground for tech could migrate to South Korean chip companies as China is on a mission to suck up as much high-grade tech ingenuity as possible while it can.
China has some easy targets to whack down if the administration forces it into a corner with a knife to its throat.
Non-tech companies are ripe for massacre because they do not produce chips.
Companies such as Procter & Gamble, Starbucks, McDonald's, and Nike could be replaced by a Chinese imitation in a jiffy.
Apple is the 800-pound gorilla in the room.
An attack on Apple would hyper-accelerate tension between two leaders to the highest it's ever been and would be the straw that breaks the camel's back.
Technology has transformed the world.
Technology also has been adopted by nations as a critical component to national security.
Nothing has changed fundamentally, and nothing will.
China will become the biggest economy in the world by 2030.
China will kick the proverbial can down the road because it can. It never has to cooperate with America again.
Contrary to expectations, American chip companies are untouchable, and investors won't see Micron suddenly losing half its revenue over this trade war.
Until China can produce higher quality chips, it will lap up as much of Uncle Sam's chips until it can force transfer the chip technology from the Koreans.
American chip companies can breathe a sigh of relief.
_________________________________________________________________________________________________
Quote of the Day
"If we go to work at 8 a.m. and go home at 5 p.m., this is not a high-tech company and Alibaba will never be successful. If we have that kind of 8-to-5 spirit, then we should just go and do something else." - said Alibaba founder and executive chairman Jack Ma.
This is the most important research piece you will ever read, bar none. But you have to finish it to understand why. So, I will get on with the show.
I have been hammering away at my followers at investment conferences, webinars, and strategy luncheons this year about one recurring theme. Things are good, and about to get better, a whole lot better.
The driver will be the exploding rate of technological innovation in electronics, biotechnology, and energy. The 2020s are shaping up to be another roaring twenties, and asset prices are going to go through the roof.
To flesh out some hard numbers about growth rates that are realistically possible and which industries will be the leaders, I hooked up with my old friend, Ray Kurzweil, one of the most brilliant minds in computer science.
Ray is currently a director of Engineering at Alphabet (GOOG), heading up a team that is developing stronger artificial intelligence. He is an MIT grad, with a double major in computer science and creative writing. He was the principal inventor of the CCD flatbed scanner, first text-to-speech synthesizer, and the commercially marketed large-vocabulary speech recognition.
When he was still a teenager, Ray was personally awarded a science prize by President Lyndon Johnson. He has received 20 honorary doctorates and has authored 7 books. It was upon Ray?s shoulders that many of today?s technological miracles were built.
His most profound book to date, The Singularity Is Near: When Humans Transcend Biology, was a New York Times best seller. In it he makes hundreds of predictions about the next 100 years that will make you fall out of your chair.
I met Ray at one of my favorite San Francisco restaurants, Morton?s on Sutter Street. I ordered a dozen oysters, a filet mignon wrapped in bacon, and washed it all down with a fine bottle of Duckhorn Merlot. Ray had a wedge salad with no dressing, a giant handful of nutritional supplements, and a bottle of water. That?s Ray, one cheap date.
The Future of Man
A singularity is defined as a single event that has monumental consequences. Astrophysicists refer to the big bang and black holes in this way. Ray?s singularity has humans and machines merging to become single entities, partially by 2040 and completely by 2100.
All of our thought processes will include built in links to the cloud, making humans super smart. Skin that absorbs energy from the sun will eliminate the need to eat. Nanobots will replace blood cells, which are far more efficient at moving oxygen. A revolution in biotechnology will enable us to eliminate all medical causes of death.
Most organs can now be partially or completely replaced. Eventually they all will become renewable by taking one of your existing cells and cloning it into a completely new organ. We will become much more like machines, and machines will become more like us.
The first industrial revolution extended the reach of our bodies, and the second is extending the reach of our minds.
And, oh yes, prostitution will be legalized and move completely online. Sound like a turn off? How about virtually doing it with you favorite movie star? Your favorite investment advisor? Yikes!
Ironically, one of the great accelerants towards this singularity has been the war in Iraq. More than 50,000 young men and women came home missing arms and legs (in Vietnam these were all fatalities, thanks to the absence of modern carbon fiber body armor).
Generous government research budgets have delivered huge advances in titanium artificial limbs and the ability to control them with only our thoughts. Quadriplegics can now hit computer keystrokes merely by thinking about them.
Kurzweil argues that exponentially growing information technology is encompassing more and more things that we care about, like health care and medicine. Reprogramming of biology will be the next big thing and is a crucial part of his ?singularity.?
Our bodies are governed by obsolete genetic programs that evolved in a bygone era. For example, over millions of years our bodies developed genes to store fat cells to protect against a poor hunting season the following year. That gave us a great evolutionary advantage 10,000 years ago. But it is not so great now, with obesity becoming the country?s number one health problem.
We would love to turn off these genes through reprogramming, confident that the hunting at the supermarket next year will be good. We can do this in mice now, which in experiments can eat like crazy, but never gain weight.
The happy rodents enjoy the full benefits of no caloric restriction, with no hint of diabetes or heart disease. A product like this would be revolutionary, not just for us, health care providers, and the government, but, ironically, for fast food restaurants as well.
Within the last five years, we have learned how to reprogram stem cells to rebuild the hearts of people who have suffered heart attacks. The stem cells are harvested from skin cells, not human embryos, consequently circumventing the political and religious issues of the past.
If we can turn off genes, why not the ones in cancer cells that enable them to pursue unlimited reproduction, until they kill its host? That development would cure all cancers, and is probably only a decade away.
The Future of Computing
If this all sounds like science fiction, you?d be right. But Ray points out that humans have chronically underestimated the rate of technological innovation.
This is because humans evolved to become linear thinking animals. If a million years ago we saw a gazelle running from left to right, our brains calculated that one second later it would progress ten feet further to the right. That?s where we threw the spear. This gave us a huge advantage over other animals and is why we became the dominant species.
However, much of science, technology, and innovation grows at an exponential rate, and consequently is the reason we make our most egregious forecasting errors. Count to seven, and you get to seven. However, double something seven times and you get to a billion.
The history of the progress of communications is a good example of an exponential effect. Spoken language took hundreds of thousands of year to develop. Written language emerged in thousands of years, books in a 100 years, the telegraph in a century, and telephones 50 years later.
Some ten years after Steve Jobs brought out his Apple II personal computer, the growth of the Internet went hyperbolic. Within three years of the iPhone launch, social media exploded out of nowhere.
At? the beginning of the 20th century, $1,000 bought 10 X -5th power worth of calculations per second in our primitive adding machines. A hundred years later a grand got you 10 X 8th power calculations, a 10 trillion-fold improvement. The present century will see gains many times this.
The iPhone itself is several thousand times smaller, a million times cheaper, and billions of times more powerful than computers of 40 years ago. That increases price per performance by the trillions. More dramatic improvements will accelerate from here.
Moore?s law is another example of how fast this process works. Intel (INTC) founder Gordon Moore published a paper in 1965 predicting a doubling of the number of transistors on a printed circuit board every two years. Since electrons had shorter distances to travel, speeds would double as well.
Moore thought that theoretical limits imposed by the laws of physics would bring this doubling trend to an end by 2018, when the gates became too small for the electrons to pass through. For decades I have read research reports predicting that this immutable deadline would bring an end to innovation and technological growth, resulting in economic Armageddon.
Ray argues that nothing could be further fr
om the truth. A paradigm shift will simply allow us to leapfrog conventional silicon based semiconductor technologies and move on to bigger and better things. We did this when we jumped from vacuum tubes to transistors in 1949, and again in 1959, when Texas Instruments (TXN) invented the first integrated circuit.
Paradigm shifts occurred every ten years in the past century, every five years in the last decade, and will occur every couple of years in the 2020s. So fasten your seat belts!
Nanotechnology has already allowed manufacturers to extend the 2018 Moore?s Law limit to 2022. On the drawing board are much more advanced computing technologies, including calcium based systems, using the alternating direction of spinning electrons and nanotubes.
Perhaps the most promising is DNA based computing, a high research priority at IBM and several other major firms. I earned my own 15 minutes of fame in the scientific world 40 years ago as a member of the first team ever to sequence a piece of DNA which is why Ray knows who I am.
Deoxyribonucleic Acid (DNA) makes up the genes that contain the programming which makes us who we are. It is a fantastically efficient means of storing and transmitting information. And it is found in every single cell in our bodies, all 10 trillion of them.
The great thing about DNA is that it replicates itself. Just throw it some sugar. That eliminates the cost of building the giant $2 billion silicon based chip fabrication plants of today.
The entire human genome is a sequential binary code containing only 800 MB of information which, after you eliminate redundancies, has a mere 30-100 MB of useful information which is about the size of an off-the-shelf software program, like Word for Windows. Unwind a single DNA molecule, and it is only six feet long.
What this means is that, just when many believe that our computer power is peaking, it is in fact launching on an era of exponential growth. Super computers surpassed human brain computational ability in 2012, computing about 10 to the 16th power (ten quadrillion) calculations per second.
That power will be available on a low-end laptop by 2020. By 2050, this prospective single laptop will have the same computing power as the entire human race which is comprised of about 9 billion individuals. It will also be small enough to implant in our brains.
The Future of the Economy
Ray is not really that interested in financial markets or, for that matter, making money. Where technology will be in a half century and how to get us there are what get his juices flowing. However, I did manage to tease a few mind-boggling thoughts from him.
At the current rate of change, the 21st century will see 200 times the technological progress that we saw in the 20th century. Shouldn?t corporate profits and, therefore, share prices rise by as much?
Technology is rapidly increasing its share of the economy, and increasing its influence on other sectors. That?s why tech has been everyone?s favorite sector for the past 30 years, and will remain so for the foreseeable future. For two centuries, technology has been eliminating jobs at the bottom of the economy and creating new ones at the top.
Stock analysts and investors make a fatal error estimating future earnings based on the linear trends of the past, instead of the exceptional growth that will occur in the future.
In the last century, the Dow appreciated from 100 to 10,000, an increase of 100 times. If we grow at that rate in this century, the Dow should increase by 10,000% to 1 million by 2100. But so far, we are up only 8%, even though we are already 16 years into the new century.
The index is seriously lagging, but will play catch up in a major way during the 2020s, when economic growth jumps from 2% to 4% or more, thanks to the effects of massively accelerating technological change.
Some 100 years ago, one third of jobs were in farming, one third were in manufacturing, and one third in services. If you predicted then that in a century farming and manufacturing would each be 3% of total employment and that something else unknown would come along for the rest of us, people would have been horrified. But that?s exactly what's happened.
Solar energy use is also on an exponential path. It is now 1% of the world?s supply, but is only seven doublings away from becoming 100%. Then we will consume only one 10,000th of the sunlight hitting the earth. Geothermal energy offers the same opportunities.
We are only running out of energy if you limit yourself to 19th century methods. Energy costs will plummet. Eventually, energy will be essentially free when compared to today?s costs, further boosting corporate profits.
Hyper growth in technology means that we will be battling with deflation for the rest of the century, as the cost of production and the price of everything falls off a cliff. That makes our 10-year Treasury bonds a steal at a generous 2.60% yield, a full 460 basis points over the real long term inflation rate of negative 2% a year.
The upshot to all of this, these technologies will rapidly eliminate poverty, not just in the US, but around the world. Each industry will need to continuously reinvent its business model or it will disappear.
The takeaway for investors is that stocks, as well as other asset prices, are currently wildly undervalued given their spectacular future earnings potential. It also makes the Dow target of 1 million by 2100 absurdly low, and off by a factor of 10 or even 100. Will we be donning our ?Dow 100 Million? hats then?
Other Random Thoughts
As we ordered dessert, Ray launched into another stream of random thoughts. I asked for Morton?s exquisite double chocolate mousse. Ray had another handful of supplements. Yep, Mr. Cheap Date.
The number of college students has grown from 50,000 to 12 million since 1870s. A kid in Africa with a cell phone has more access to information than the president of the United States did 15 years ago.
The great superpower, the Soviet Union, was wiped out by a few fax machines distributing information in 1991.
Company offices will become entirely virtual by 2025.
Cows are very inefficient at producing meat. In the near future, cloned muscle tissue will be produced in factories, disease free, and at a fraction of the present cost, without the participation of the animal. PETA will be thrilled.
Use of nano materials to build ultra light, but ultra strong, cars will cut fuel consumption dramatically. Battery efficiencies will improve by 10 to 100 times. Imagine powering a Tesla Model S1 with a 10-pound battery! Advances in nanotube construction mean the weight of the vehicle will drop from the present 3 tons to just 100 pounds but will be far safer.
Ray is also on a scientific advisory panel for the US Army. Uncertain about my own security clearance, he was reluctant to go into detail. Suffice it to say that the weight of an M1 Abrams main battle tank will shrink from 70 tons to 1 ton, but will be 100 times stronger.
A zero tolerance policy towards biotechnology by the environmental movement exposes their intellectual and moral bankruptcy. Opposing a technology with so many positive benefits for humankind and the environment will inevitably alienate them from the media and the public who will see the insanity of their position.
Artificial intelligence is already far more prevalent than you understand. The advent of strong artificial intelligence will be the most significant development of this century. You can?t buy a book from Amazon, withdraw money from your bank, or book a flight, without relying on AI.
Ray finished up by saying that by 2100, humans will have the choice of living in a biological or, in a totally virtual, online form. In the end, we will all just be files.
Personally, I prefer the former, as the best th
ings in life are biological and free!
I walked over to the valet parking, stunned and disoriented by the mother load of insight I had just obtained, and it wasn?t just the merlot talking either! Imagine what they talk about at Alphabet all day.
To buy The Singularity Is Near at Amazon, please click here. It is worth purchasing the book just to read Ray?s single chapter on the future of the economy.
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