The Light Era
Coming to grips with the “Light Era”
I wrote this in early 2019 to share with investors on my outlook for 2019 and 2020. I believe that COVID-19 has drastically accelerated this era.
A historian will likely use the introduction of the iPhone as the beginning of a new economic era, which for lack of a better term, I will refer to as the “light era.” The light era is the manifestation of the investments made by the post industrial society (“Knowledge economy) which have begun to produce entirely new business models made uniquely possible by technology and networks. I believe that looking back on the light era, it will be known most as a destructive force responsible for the rapid destruction of value of historically prized assets and commodities.
About a decade since they were first founded (both within 24 months of the iPhone being released), AirBnB and Uber, two of the companies that define this “light era” are expected to go public in 2019. Despite Tesla selling only a fraction of BMW’s annual volume of cars, Tesla is currently worth more than BMW and almost double that of Ford. The automative industry is one of the best examples of what it will take for incumbent companies to thrive: Bold acquisitions like that of Cruise by General Motors, well-placed strategic investments in venture-stage companies, and proactive business development to open up new markets. A question I always ask myself is “which companies and or organizations does this potential investment threaten by its success?” both to help build a map of potential exit outcomes and to gauge the potential for its true disruptive potential.
I remember a couple of years ago being with some mid level GE execs at a HR conference where they were bragging about their digital transformation through “lean” innovation methods and it all just rang so hollow because disruption rarely happens from a defensive stance. Most often, the people that attack the incumbents are those with nothing to lose. To be clear, I’m not saying that GE’s stunning decline in value stems from a lack of entrepreneurial capability, but I do think that most companies whose greatest value was created before the beginning of the light era will hold on to their assets and act more defensively, and so as we enter the 11th year of the light era, there are plenty of disruptive opportunities left for us to invest in new startups that can destroy entrenched value especially in industries like healthcare that are too addicted to the status quo and the revenue that comes with it, or too dependent on the channels that they dominate (like CPG) to cannibalize revenues or profits necessary to reinvent themselves to thrive in the light era.
The light era has always been sold as being the great democratizer, but this has proven and will likely continue to prove a fallacy. Today, the world’s data and an overwhelming share of digital transactions are transacted by less than 100 companies, so much so that I am betting that we will see attempts at increasing regulation that could significantly reshape our digital economy. Our investment in Ride Report is part of a continued effort on my behalf to find companies that help c governments enforce regulation (and potentially tax) on digital disruptors.
There are good reasons for governments to enact regulation. The increasing vilification of Facebook, Amazon and Google in particular, make easy targets and the penalties imposed can be meaningful windfalls for governments in need of servicing overwhelming debt. I expect GDPR like laws that have already passed in California (very haphazardly) to spread throughout the United States. India just enacted seemingly onerous laws against foreign eCommerce companies bringing their monopolistic models to that country, and many other Governments are reviewing similar legislation. I believe that the single greatest threat to the technology industry overall is a very significant shift in government regulations targeting technology companies.
The Light Era is also partly responsible for a profound reallocation of productive human capital.
I have long argued that in the United States in particular, we are going to see increasing consolidation of the population in very few economic mega cities with rings of density around these mega cities serving as “feeder cities” leaving large swaths of the country with big labor gaps and therefore significant city and state income loss. The desperation evident with many cities’ truly reckless Amazon bids makes this plain to see, as does the fact that an increasing number of cities are outright paying people to move to their cities. Within these clusters of economic activity, there is already significant mobility of workers between these cities and investments this year in both Darwin Homes and Oliver Space are representative of the “mobility of the empowered worker” thesis of mine. What’s happening is that this relocation of labor is catching cities unprepared and in most cases inflating real-estate (residential especially), causing geographic expansion of more nearby feeder cities.
Speaking of empowerment, as I wrote about in this year’s Q2 update around the “Three Economies” part of the outlook, I think we will see increasing amounts of economic pressure on both the “trapped class” and the “mobile middle”, or more simply put, almost everyone that isn’t part of the Top 10% of economic mobility in America. Our investments in HoneyBee and Possible Finance are part of an ongoing search to find companies that can provide meaningful financial ladders for these people, making great businesses but without coming close to being usury.
The trend of companies taking on more responsibility for the care of their workforce will increase significantly across labor types, investing particularly in healthcare and the management of financial benefits on behalf of their employees as a means of investing in both retention and productivity and I believe there are significant investment opportunities here. Hint is one such investment we made last year that allows health providers to contract directly with employers.
Let’s not forget that the Light Era will ultimately continue to “eat jobs” and continue to move more people off of company payrolls towards the “gig economy.”
Confronting Reality
The Light Era is starting to make plain that a lot of what is produced is neither needed, nor particularly wanted. This does note bode well for public markets that punish anything that doesn’t deliver quarter over quarter growth. I believe that we will continue to see more activist investors, more of a revolving door of CEO’s, more attempts to fix the machine, but many of these machines are simply beyond repair.
Nowhere is this trend more evident than in CPG. In my own local grocery store, I counted 14 different Mayonaises and 16 different Ketchups for sale. Some of these brands have spent billions in advertising, to convince us to be the one we pick, but in the Light Era, we are less involved in the preparation of our food than at any time in human history, and for many, the brand doesn’t matter at all. Product attributions determine what gets bought for many (organic, cruelty-free and, increasingly, local).
Everything that defined the American dream (home and car ownership as two prime examples) increasingly are seen as neither desirable (who wants to stay in one place?) and in some cases, nor responsible, leaving aside another incredibly important discussion around affordability in the areas of greatest economic activity. Desperate for growth, companies have loaded up on cheap debt at alarming rates (representing 45% of GDP).
It’s estimated that US corporate debt is close to $3 trillion dollars and last year, Goldman estimated that more than $1 trillion was to be spent on share buybacks, outpacing capital spending. We should see this for what it often is: Ineffectual leadership unable to find ways in which to reinvent themselves.
Like a Tsunami, the catastrophic event has already happened, it’s simply a matter of time before it hits shore.
I have long believed that China’s house of cards will come crashing down, and they are in the midst of trying to clean-up the incredibly toxic mess of debt that has fuelled their economic expansion, and they are in full-blown intervention at the moment. It’s possible that the full extent of their failure will remain hidden from view, at least from where we sit, but foreign investors will inevitably get the short-end of the stick.
Whether it’s China or the United States first, the everything bubble is ready to burst. The feeling of that inevitability is already creating incredibly choppy waters and it’s entirely possible that it remains turbulent but not catastrophic this year. My bet is that the catastrophe happens sometime after the US Presidential Candidate debates in 2020 for the simple fact that the vast majority of people aren’t paying attention to how bad things are and won’t until the next debates.
