‘Like the internet, Bitcoin is a platform. It’s less what can it do today, more what can it do in the future. Digital cash, digital keys, digital voting, digital stocks, digital bonds…Bitcoin could basically reconstruct the financial industry in an untrusted peer-to-peer environment. This is why all the technologists look at it and get excited.’
Internet pioneer and venture capitalist Marc Andreessen speaking recently
- Last week on my visit to Silicon Valley, digital currencies were the recurrent subject of conversations with VC investors, academics and tech start-ups – achieving a breakthrough appeals to the overwhelmingly libertarian instincts of the (surprisingly small and incestuous) West Coast tech elite. I’m now even more convinced that the financial sector faces significant disruption over the next 5-10 years as peer-to-peer online financial exchanges gradually move into the mainstream. Regardless of whether Bitcoin or its successors ever gain mass acceptance for transactional purposes, this uniquely secure architecture based on massive computational power means that a highly distributed alternative to the centralized and costly infrastructure of Wall Street banks is within reach. As I pointed out in the recent sharing economy note, the bedrock of economic exchange is trust, and technology now allows a reliable degree of trust to be established between total strangers in order to share resources and securely arrange complex financial transactions, all of which has profound implications for investors.
- Google was holding its annual developers conference in SF while I was there, focused on spreading Android far beyond smart phones into home appliances and wearable devices; the city was full of out of town software geeks navigating the endless street sleepers (many of the latter with serious mental health issues but then many of the most creative tech innovators have been on the spectrum – visionary oddballs thrive in a way culturally impossible in Asia). The event was packed, unsurprising when Google has shelled out $5bn over the past year on its independent developers compared to $2bn the year before, and scale is becoming critically important in mobile – for smaller companies, carving out a niche within the distinct ‘ecosystem’ of a giant like Google or Tencent is the only rational business model.
- I was struck repeatedly on my trip by the innovative ways US service sector companies are using technology to boost efficiency to an extent rarely seen in Europe or Japan (although those markets are where the margin windfall upside from adopting US best practice will ultimately be greatest). The ability to quantify productivity at the micro level within companies is clearly surging even as the macro stats struggle to capture the impact. Indeed, after the Q1 GDP revision to -2.9% against the backdrop of a solid labour market, US productivity in the conventionally calculated GDP/hours worked calculation has collapsed in recent months, falling 5-6% y/y in Q1. However, that approach as noted previously works in a ‘heavy’ economy with predominantly tangible output like China, but is struggling to cope with a digitized and dematerialized one, where the biggest investment is in intellectual property products. When your marginal cost and labour input both approach zero for an increment of output (helping explain the astronomic valuations for companies like Uber and AirBnB) your productivity gain approaches infinity. Of course, in the more mundane world of physical infrastructure, the US is chronically under investing and remains backward in using public-private partnerships to fund toll roads, airports etc. as is common from France to China.
- Productivity on a top down basis is basically a residual within the economic system and the more appropriate metric is now corporate margins/profitability (and indeed very modest wage pressures). As for the Q1 GDP revision, one key factor was a dramatic reduction in estimated consumer spending on healthcare as Obamacare went live; I highlighted a disinflationary trend in the bloated US healthcare sector in a recent note (inflation at the lowest since 1981 etc.) and near term this has an adverse impact on GDP but has to be a good thing – soaring benefit costs since the mid-1990s suppressed wage growth and diverted potential discretionary spending. The bottom line for investors is that profound structural shifts in the global economy driven by both technology and demographic trends will make the macro data unusually confusing (e.g. 20somethings who own little more than a laptop and phone being the biggest age cohort in the US right now, China’s deposit growth ebbing with the working age population). Optimization is the buzzword I kept hearing from both the money men and engineers and it captures the macro impact of tech innovation – ironically, the Soviets with their ‘cybernetics’ initiative in the 1960s to boost productivity (and a wonderful book on the subject is ‘Red Plenty’) were the first to attempt the use of algorithms to optimize resource use but of course the huge perverse economic incentives within the communist system, political sclerosis as well as contemporary technology limitations made it a hopeless dream. However, it’s perhaps no coincidence that a disproportionate number of the leading software engineers in Silicon Valley are mathematically gifted Russian dreamers.