Dana Blankenhorn

How to Adapt to Accelerating Change

The chief theme of my working life has been the pace of change accelerating, under Moore’s Law.

We’ve all had to get used to it, but until this decade economists didn’t.

Now they must.

The pandemic has shown just how quickly economic behavior can change, and how inadequate our tools are for adjusting to it.

Just since the start of 2021, we’ve seen a tech-driven work-from-home economy replaced by a great reopening, followed by huge demand for goods, then workers, and now a giant stop sign as markets have saturated. But fears of recession may be overdone as services are replacing goods in the family shopping cart.

Worthless, Worth Less, or Bargain?

There are three types of tech stocks today.

Companies that aren’t doing anything real are worthless. I’m talking about crypto and NFTs, I’m talking about all the metaverse stocks without a business model. For these companies it’s 2000, it’s Gotterdammerung. Just as was the case then, there’s a lot of stuff that was valued based on the assumption of no limits.

It was easy to find the moment it all came crashing down last time. It was January of 2000, when Time Warner “bought” AOL in a deal that gave AOL shareholders more than half the resulting stock. This put an upper limit on the value of Internet stuff. It was all downhill from there.

The big moment this time was the Crypto SuperBowl. Matt Damon read a ridiculous script that equated buying cryptocrap with going to Mars. It was at that moment, during a game played in SoFi Stadium (another name due to crash) that we realized how artificial it all was. Smart people got out.

What To Buy Today

If you have money to invest, here’s an obvious truth.

We’re at or near the bottom of a bear market.

Everything is down. Some stuff has been crushed. Some of my stuff has been crushed.

But don’t despair, friend Investor. Bear markets end. Even with the worst of them, the average stock has gotten back to even in just a few years.

If you have taxable income you want to hide, and a taxable investment account, then feel free to dump your garbage. Anything that won’t come good in 3-4 years – take the loss. Dump the SPACs, dump the crypto, dump the stuff that’s losing money faster than it’s growing, or that lacks the cash to wait 2 years for another injection of money.

Now, because I write for Investorplace I’m going to tell you what to buy.

The Way to Wealth is Tolerance

There’s nothing wrong with wealth.

Wealth is supposed to create a sense of responsibility. Andrew Carnegie understood this after he sold his Carnegie Steel in 1901.  Thereafter he devoted himself to giving all his money away. MacKenzie Scott, formerly Mrs. Jeff Bezos, is doing that today. Bill Gates and Warren Buffett have promised to do that.

They do it to protect the system. In The Wealth of Nations, Adam Smith defended capitalism by positing that wealthy people would be inclined toward the common good. Some are. Others are not.

For every Carnegie there’s a Vanderbilt. The good news is that, after a few generations of profligacy, even a Vanderbilt fortune can run dry. Anderson Cooper is the son of Gloria Vanderbilt but he’s not a rich man. That’s a hopeful story.

The good news is that, so far, 2022 is giving me an 1898 feeling. David Traxel’s book on 1898  describes a nation facing a Populist uprising amid a progressive ferment. It describes a war that was blissfully short, a turning point because it brought to power a man who would get along with Wall Street.

The Progressive movement and Wall Street’s self-interest lined up perfectly. Few people understand this, even today. Utilities for electricity, telephony, for transport, for water and for natural gas, could only be created through regulated monopolies. The late 19^th century’s efforts to create them in other ways failed. J.P. Morgan portrayed the evil trust king in the popular imagination, and Theodore Roosevelt the benevolent trust-buster. But they were working toward the same end. The result was today’s American cities.

The Streaming Crash

A small fall in subscriber numbers sent Netflix stock down 25% overnight in what stock market observers are calling the “streaming crash.”

All the companies involved in streaming crashed in sympathy. Paramount was down 11%. Warner Discovery dropped 5%. Disney was down 4% and even Amazon lost 2%.

As usual I was early to this. I wrote about the streaming crash in 2019.  “The limits to the streaming market are time and, to a lesser extent, money,” I wrote. If you were reading closely, you’d know the most important limit is time.

Metaverse From the Bottom Up

There’s an enormous amount of capital going into what’s called the metaverse today. An awful lot is being written about it. The vast majority is being wasted.

I know this because Moore’s Law has been around for almost 60 years. Two generations. We know how a change like this occurs.

It occurs from the bottom up.

It was start-ups that forced IBM into mini-computers and, later, into PCs. Digital software natives Microsoft and Apple eventually pushed IBM aside entirely and let its own bureaucracy devour it. The same was true with networking. If we waited for AT&T to build the Internet, we’d still be waiting. It was the government’s insistence on open standards, driven largely by the needs of national defense, that drove the model in the 1990s.

Dawn is Coming

We’re approaching one of the biggest snap back rallies Wall Street has ever seen.

Once Putin’s War is over, everything’s going up. How much depends on the result.

Right now, signs are good. Israel has joined the sanctions regime. China is only going to sell stuff to Putin for cash. But China is in worse trouble than we are. They’re still fighting COVID with lockdowns. Their stock market is a mess. Their property magnates are collapsing. Hong Kong has created a brain drain. Shared prosperity is becoming shared misery. I expect a slow policy readjustment.

Once the war is over inflation will decline. Not magically. Prices are always sticky downward. You don’t cut your price based on costs. You do it when your rival cuts theirs.

Technology remains our best weapon against inflation. My long-term concern remains deflation, and how the gains of technology are apportioned. Fortunately, all those forces who sided with Russia, including our worst oligarchs, are being discredited by events. No one in Washington can see this because they only see today.

Facebook’s Bigger Problem

Meta Platform (uh, Facebook’s) market cap has dropped 38% since its “disappointing” earnings release. The numbers weren’t all that bad. They make the shares look cheap, a price to earnings ratio under 14.

But before you run to your bookie, Facebook has a bigger problem than metaverse software, Europe’s privacy laws or media schadenfreude.

Its cloud is not set up to do what its software proposes to do. And it seems to be doubling down on that bad design.

I call Facebook a “Cloud Czar” because it has 15 hyperscale data centers around the world. They’re bought with cash flow. Once open, they drop its hardware and scaling costs to near-zero. You can count the companies sharing this advantage on one hand – Apple, Microsoft, Google, and Amazon.

Beyond Even the Cloudless Cloud

The impending failure of the “Cloud Gaming” movement points toward the end of the cloud decade.

Google’s “Stadia” cloud gaming service is proving a technical failure. The company claimed it would reach hundreds of countries. It reached fewer than two dozen. The company claimed it would solve the game latency problem. It didn’t.

It turns out that for a low latency application like gaming to work, content must be cached close to every player. If it’s centralized, then some players have advantages that render the game worthless. Or you can create a delay, making the whole game worthless.

Forced delays happened over a decade ago, in stock trading. A trading platform found that, by putting their data center close to the Hudson River, it could act on orders from Wall Street before centers further away, based on the speed of light.

Saving Facebook (Uh, Meta)

Shares in Facebook, uh Meta Platforms, continued to fall on February 7.

The most recent price, about $230/share, is just 16 times last year’s earnings. Considering that the average stock in the S&P 500 now has a PE of over 25, and that Facebook is bringing a quarter of its revenue to the net income line, that’s absurdly cheap.

It’s cheap because analysts are reading a shortfall in growth as a harbinger of doom. The three main apps – Facebook, Instagram, and WhatsApp – are losing popularity because people don’t trust the company. A lot of its future gains are going into “metaverse” software that analysts don’t understand.