EIEIO...The Circle Of Life
By: Michael Moe, CFA, Brent Peus, Owen Ritz
“By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” – Paul Krugman, Nobel Prize Winning Economist
“You get better or you get worse. You don’t stay the same.” – Lou Holtz
“Yes, Simba, but let me explain. When we die, our bodies become the grass, and the antelope eat the grass. And so we are all connected in the great Circle of Life.” – Mufasa, The Lion King
Since the invention of fire disrupted the monopoly that vegetarian chefs had on cooking, new technology has been impacting the Future of Work.
While the characters are different, the plot is the same. Exciting new technology is introduced, skeptics call it a fad, enthusiasts say how everything’s changed and how the new technology will take over the world. Alarmists fret the disruption of zillions of jobs.
As Bill Gates puts it, we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.
Over the last 100 years, we’ve seen the commercial adoption of the airplane, automobile, mass adoption of electricity, medical technology and pharmaceuticals, the Internet, social media, mobile phones…all vastly improving society’s quality of life.
Despite all of these new technologies, since 1920, US GDP Per Capita has increased over 10x from $6,460 to $71,343, population has grown 3x from 106 million to 327 million, and jobs have grown nearly 4x from 41 million to 155 million.
The below chart from Scott Galloway tells the story: innovation doesn’t destroy jobs…it creates them.
While the chart moves up and to the right, progress does not come without pain along the way. It even has a name: creative destruction. Economist Joseph Schumpeter coined the term for the process where the economy grows via innovation and the disruption of incumbents.
The impact of creative destruction has been enormous, and staying power is hard to come by: since 2000, 52% of Fortune 500 companies have gone bankrupt, been acquired, or ceased to exist.
Those who find themselves on the wrong end of creative destruction often reach their eventual demise by trying to do the impossible: fight gravity.
Major technological disruptions are like gravity – there is no stopping them. Whether it was the rise of e-commerce, the move to the cloud, or the proliferation of social media, many companies eventually sank as a result of spending too many years swimming upstream.
Members of the Fortune 500 in the Year 2000 that have died (or are on life support)
Here’s one example of creative destruction that you might not know: the story of J.M. Lapeyre, the man who came up with the idea for the Automated Shrimp Peeling Machine while sitting in church at age 16 in 1943.
Before his invention, human workers peeled shrimp by hand, often 1) letting the smaller, harder to peel shrimp pass them by on the assembly line and 2) missing out on a portion of the shrimp meat due to human error.
J.M.’s machine could peel 1,000 pounds of shrimp per hour - equivalent to hand-peeling by 150 experienced shrimp peelers. The machine had a significantly larger yield of shrimp per barrel, because it would recover 5-10% more meat.
This led to lower overall processing costs, allowing shrimp to be sold at a reduced price to a larger market and expanding shrimp processing from a local operation to a global one.
This invention birthed J.M.’s company, Laitram Corporation, which today employs nearly 4,000 people across 11 global locations.
J.M. Lapeyre’s original Shrimp Peeler patent. Laitram now holds over 1,300 active patents
Many of the jobs replaced by disruptive innovation were often the least glamorous (i.e., professional shrimp peeler), as technology has unlocked more fulfilling and meaningful work.
Think of how many jobs today – SEO Marketer, Social Media Specialist, Cloud Architect, Podcaster – have been created in the past 25 years alone…which brings us to the “gravity” of the day: Generative AI and ChatGPT.
The optimists are predicting a revolution for how we write, learn, and earn; the pessimists are predicting the end of original and creative thinking; the alarmists are betting that millions of jobs will be destroyed.
As clickbait-y and alarmist as these headlines may sound, they are evidence of history “rhyming” once again. The US labor force has proven time and time again that it is willing and able to upskill and re-skill in order to remain valuable contributors to the market.
At a macro level, there is historical precedent in the United States for shifts of the entire labor force. In 1880, agricultural workers comprised half of the US workforce. In 1981, that number was reduced to 3%.
People were incentivized to do the training, reskilling, and upskilling required to move away from the backbreaking work of pre-industrial revolution farming, and they did just that. Enabled by machine-augmented productivity gains, people were able to pursue different careers and reduce the length of their work weeks by ~20%, from 53 hours in 1900 to 42 hours in 1999.
When the Model T was invented, it turned the horse-drawn carriage industry upside down. Stablemen, leatherworkers, and blacksmiths were shocked by the arrival of a full-blown replacement of what their livelihood revolved around – the horse.
However, these workers re-skilled in order to adapt to the new economy forming around the automobile – leatherworkers shifted from making saddles to making car seats, and blacksmiths from horseshoes to auto parts. As for stablemen, well, they could join one of the new lines of work created in the wake of the automobile invention – such as the car wash (can’t be too different from washing a horse, can it?).
There are plenty of modern examples of companies refusing to pick a fight with gravity, and one such example is Sony. The company has officially stopped selling its iconic DSLR camera, apparently instead leaning in on its efforts in providing sensors for phone cameras - including the iPhone, as was revealed in a rare confirmation of component parts by Tim Cook in December. If you can’t beat ‘em, join ‘em.
We’ll have more to say on all things AI next week, but one thing is for sure…the same ingenuity and creativity that gave us cars, bikes, and shrimp peelers isn’t going anywhere.
Market Performance
In spite of BEARISH sentiment, or maybe because of BEARISH sentiment, stocks continued to “climb a Wall of Worry.” NASDAQ continued to lead up 2.6%, the S& P 500 advanced 1.9% and the Dow increased 1.7%. The 10 Year Note’s yield was a fraction under 4%.
In Tech World, layoffs and buybacks are the catalyst for stocks going higher, not necessarily growth. Salesforce’s stock gained nearly $25 last week to $186 boosted by the profitability gain from 8,000 people let go. Zoom’s stock zoomed after letting go 15% of its workforce. Snowflake’s stock fell with guidance of growth slowing down to 40% but also announced a $2 billion buyback.
The other ingredient investors can’t get enough of is ChatGPT plays. In addition to super impressive growth numbers last week with revenues increasing 42% YoY and MAU’s over 60 million, Duolingo announced ChatGPT virtual chat features for its language learning games. Duolingo stock advanced 35% for the week.
To find growth, investors need a different playbook than glamming onto the large cap Megastocks of Apple, Amazon, Alphabet, Microsoft and Meta…collectively, the Big 5 grew 1% in the Fourth Quarter. For stocks to have a sustained upward direction, the Market needs fresh blood that historically has come from IPO’s. We were encouraged to see our friends at Public Sq. announcing it was going Public thru a SPAC and we know many other high growth enterprises are evaluating going public now.
While uncertainty is certain, and volatility is likely to increase, it’s a great environment to be a stock picker and a long term investor. Over time, growth drives stock prices and it’s better to buy swimsuits in the Winter.
GSV’s Four I’s of Investor Sentiment
GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed last week:
#1: Inflows and Outflows for Mutual Funds & ETFs
Source: Yardeni
#2: IPO Market
The US IPO market remains frozen, but this week Arm picked the US for its rumored IPO later this year. Meanwhile, the Abu Dhabi IPO Market remains red hot: G42 is considering at least six IPOs this year.
Source: Renaissance Capital
#3: Interest Rates
Follow the Money? Traders are now pricing in a 5.5% Fed Funds Rate by September. Meanwhile, Neel Kashkari shared that he’s “open to” either a 25 or 50 bps rate hike in March.
Source: Twitter
#4: Inflation
On Friday, the Federal Reserve reiterated their commitment to returning inflation to its 2% target…but spending is outpacing inflation.
Source: Bloomberg
Chart of the Week
Chuckles of the Week
EIEIO…Fast Facts
Entrepreneurship: 8% — percent of venture capitalists that are women (Source)
Innovation: 90%— reduction in cost for ChatGPT since December (Source)
Education: 40% — percent of liberal professors that are afraid of losing their jobs over a misunderstanding (Source)
Impact: 481,831 – amount of Arizona families who can’t afford a $500k house, but could afford a $300k house (Source)
Opportunity: 40-60% – US office occupancy versus pre-pandemic levels, compared to 70-90% in Europe and 80-110% in Asia (Source)
Connecting the Dots & EIEIO…
Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.
One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!
Make Your Dash Count!
-MM
Sources
https://blog.hubspot.com/marketing/jobs-artificial-intelligence-will-replace
https://blog.hubspot.com/marketing/jobs-artificial-intelligence-will-replace
https://www.cbinsights.com/research/generative-ai-funding-top-startups-investors/
https://www.theinformation.com/articles/eight-research-papers-behind-the-ai-boom
https://americanshrimp.com/the-history-of-the-lapeyre-shrimp-peeling-machine/#.ZAN6tuzMI6E
https://www.bls.gov/opub/mlr/cwc/american-labor-in-the-20th-century.pdf
https://www.thoughtco.com/history-of-american-agriculture-farm-machinery-4074385
https://www.theverge.com/2022/12/13/23506978/apple-iphone-sony-camera-sensor-confirmation