A Portfolio for the Great Flattening

Among the producers of horse-drawn carriages to enter the automobile industry, the most notable and successful example was Studebaker, one of the world’s largest producers of horse-drawn carriages and wagons. It had a well-developed distribution network and proved to be one of the few traditional technology companies to make a transition to the new technology.

Nairn, Engines that Move, 2002

Today, I want to touch on a few distinct but related topics: flattening, inflation, war, bitcoin (I’ve changed my view), and portfolio construction. You also should have recently received a podcast, here.

The Flattening

The blogger Ben Thompson posted a piece about Apple’s most recent advertisement that supposedly “backfired,” meaning it hurt the feelings of creators who are said to be Apple’s diehard fans. The advertisement is here and shows a compactor crushing multiple creator tools (mostly musical) and replacing them with an iPad. While Apple pulled the ad, it hit the truth spot on. I would not call it a flattening, however, more electronic de-middlemanization. It is a helpful framework for understanding not just iPads but inflation, conflict, and Bitcoin.

Each wave of technology (canals, steam, combustion, electricity, computer, internet, AI) destroys one hierarchy and creates another (robber barons earlier or Apple, Google, etc. now). Railways slashed an urban corridor through rural, at times medieval communities, forcing change. Before trains, no one wore a watch because one did not need to know precisely what time it was. I suspect the 1917 Russian Revolution was related to the introduction of trains (1860s). Russian peasants learned, for instance, that Europe had done away with absolute rule many years previous. Who needs a Tsar?

It’s harder to understand technology while it is occurring, rather than in retrospect. But it’s clear the internet, computers, and AI are flattening entire industries. Take what I am doing right now, writing an essay for you. The middlemen are my Apple computer, the internet, Substack, and Stripe. The typewriter, New York Times editor, copy editor, HR, legal, paper producers, printing plant, commercial real estate, and delivery truck are no longer needed.

Billy Eilish made it big on YouTube, owned by Google, not a traditional studio. The same thing is happening in book publishing. I know that first-hand.

To understand today, we must sift the winners and losers. Who is in the AI crosshairs? A lot of people. Travel, real estate, literary or insurance agents, actual assembly line workers, or information assembly line workers like headline writers, and entire industries, like combustion-driven cars. Visualize self-driving cars. We will look back 50 years from now on our current time as a period when tens of thousands of people died in automobile accidents (because humans are terrible drivers) as an era of barbarity akin to drawing and quartering convicts. As self-driving cars proliferate, there will be less work for insurance agents, undertakers, and grief counselors.

Apple didn’t get it wrong, they touched a nerve because change this drastic is scary.

Inflation

This week we had an inflation report and market analysts are focussing on month-to-month differences. But we can use the framework above to look ahead. The internet + AI + computers create an incentive structure to disrupt that is deflationary. If you successfully disrupt an industry, you get rich. The path there is lower prices.

So far, this is mostly impacting goods prices. For example, next week, I am attending a wedding, a multi-day affair with outfit changes. A request was made by Mission Control (my wife) to get a cool pair of dress sneakers. She found them on eBay for $34, a transaction that helps explain why so many stores in my town have gone out of business.

However, certain areas of the economy have been virtually immune from this creative destruction, like medicine and education. But both are vulnerable. Education is among the most conservative and outmoded institutions that exist. Harvard costs $344,152. An excellent (better?) education could surely be created for a fraction of the price (state school is a start).

Medical disruption can happen in many ways. AI can diagnose better (certainly cheaper) than a doctor, like a radiologist. Amazon is experimenting with One Medical, which may upend the primary-care businesses. I now buy medicine at full price from an online pharmacy that costs less than buying at CVS with insurance. This explains why CVS stock is off 30%. There are armies of venture capitalists seeking to flatten medicine and, as they do, inflation is likely to fall further. Yes, building data centers creates a squeeze in the other direction but the overall impact is likely deflationary.

War

The great flattening also relates to geopolitics. We are in the midst of hot wars between less hierarchical societies (the West) and more hierarchical ones, like Soviet spinoffs. Russia and China are rigidly hierarchical, top-down, so too is Hamas and Iran.

One of the most fascinating stories I heard about abductions in both China and Russia is that the decision to take Canadian Michael Kovrig hostage and arrest American Michael Calvey came directly from the top. Xi and Putin signed off personally. You can’t get more top-down than that.

Many of the people these regimes are trying to control hate this type of vertical control. In both countries, people are risking their lives to escape. In Ukraine, tens of thousands are dying to prevent themselves from getting forced back into a hierarchical structure. This is also tied to the internet.

For instance, Ukrainian software developers may work on Russia’s borders, but they are plugged into the beating heart of Silicon Valley via fiber. The internet is today’s “urban corridor,” except that rather than have a wristwatch, the developers want clean government. So they protest. On the street, throwing rocks and begging to be let into the European Union. For this, the Kremlin thinks they must be killed.

I suspect long-term, both Xi and Putin will lose the same way real estate agents and literary agents will lose, as they are fighting a technology-driven flattening, the same way bridal makers fought a technology-driven flattening. And, by the way, judge Xi by the company he keeps. This week he is feting a war criminal.

Bitcoin

(THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH. )

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