And happy Friday!

A few weeks ago, I had a discussing about the next global conflict with a friend as a follow-up to this graph found on Twitter:

The chosen metrics are a bit random, but the idea of the post was to compare this to US vs. China.

My hypothesis is that, whether we are facing WW3 or Cold War 2, superpowers will aim to stack the odds in their favour by:

1. grabbing as much control over natural resources as possible - the key ones being oil & gas & coal, cereals, iron & copper, rare earth & silicon, uranium, and microchips (not natural I know…)

2. getting as much control over maritime routes/chokepoints as possible

As a refresher before the cool, exclusive data, I already wrote on both these point quite extensively, and all of them are still as relevant today as they were a couple years ago, if not more:

1. grabbing control over natural resources

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2. control on maritime routes/chokepoints

Now, I had the exact same thought about World War II back when Russia invaded Ukraine, since nazi Germany fought for Eastern Europe territories mostly to maintain their access to key steel alloy metals such as molybdenum, nickel, manganese, chromium and tungsten; and German military industry collapsed when they finally lost control over these territories. Similarly, one of Japan’s first move had been to invade South East Asia to secure their access to oil and rubber.

I did the analysis at the time, but never published it.

So, as an exclusive chart built from data manually extracted from League of Nations annual reports PDF scans… this is the share of 1939 production capacity between Allies, Axis, and “disputed”:

I think the data speaks for itself.

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My friend then smartly went straight into second-order thinking, and highlighted that he could test my hypothesis by checking the overlap between the location of recent conflicts/tensions and that of resource-rich/strategic “non-aligned” territories.

This is what the bingo card heatmap looks like:

I clearly spent way too much time on it, but again I think the data speaks for itself - what do you think?

Thanks for reading, and have a resourceful weekend ahead,

Val

A few weeks ago, I discovered the hypothesis that, 6 million years ago, the whole of the Mediterranean sea dried out then, 700,000 years later, filled up again in about 2 years thanks to a waterfall 1.5 km high and 5km wide. That’s the Zanclean Megaflood Hypothesis:

This reminded me that, a few years ago, I discovered that some crazy engineers had had the crazy idea to flood 2% of Egypt to generate electricity from water evaporation.

The idea would be to flood the Qattara Depression, dig a canal to the Mediterranean sea, wait for the depression to fill up into an artificial sea, build a hydroelectric power plant on the canal, and wait for the evaporation to create a constant - and powerful - influx of water into the depression.

My problem was nobody seemed to mention what the power generated would be.

Now, if you know me, you know I had to do the math:

The answer is about 900MW.

That’s about the output of an average nuclear reactor. Just through evaporation.

This project might not be happening, but the 6,500MW Grand Ethiopian Renaissance Dam (GERD) on the Nile, is.

It took 3 years to fill despite the Nile’s incredible water flows:

And sparked strong geopolitical tensions with Egypt.

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Thanks for reading, and have a energy-filled week ahead,

V

And happy Monday!

I recently listened to this Tim Ferriss podcast on AGI with Eric Schmidt, Google’s CEO from 2001 to 2011.

They discuss the theses that Eric Schmidt develops in the new book he wrote in collaboration with Henry Kissinger, the 100-year-old giant of US geopolitics for close to a decade during the Cold War.

The book itself only features a 3.43 rating out of 5 on Goodreads, so it does not make my (ruthless) cut, but the podcast was insightful nonetheless.

I’ll share the key insights while strictly focusing on the points that were significantly contrarian and/or impactful enough from a geopolitical standpoint - not to bore you (and myself) with mainstream AI knowledge.

Artificial General Intelligence (AGI)

Despite how impressive ChatGPT can prove itself, we are still far from an Artificial General Intelligence (AGI). This would require the ability for such a model to set its own goals and make active decisions. Current models need to generate a vast universe of options then select from those options. This require hardware orders of magnitude more powerful than the ones existing models currently run on.

The strategic significance of AGI lies in its potential to surpass human capabilities in complex decision-making, strategic planning, and creative problem-solving. It suggests that nations possessing AGI capabilities can gain a competitive advantage in various sectors, influencing economic growth, healthcare, and defense. The ability of AGI to enhance strategic thinking will become a key driver of geopolitical influence and leadership.

However, nations or organizations aspiring to attain AGI capabilities must be prepared for the considerable costs associated with its development.

Quantum computing could expedite AGI development. Therefore the potential synergy between quantum computing and AGI represents a strategic advantage for nations navigating the evolving landscape of artificial intelligence.

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Military Deterrence and AGI Disparities

AGI will be a potential game-changer in military deterrence. A nation possessing AGI could gain a substantial advantage in strategic planning, decision-making, and adapting to dynamic scenarios on the battlefield.

The development of AGI introduces concerns about a potential "AGI gap" between technologically advanced nations and others. Schmidt emphasizes the need for international collaboration to establish guidelines and prevent AGI from becoming a tool of dominance, ensuring a more equitable global landscape. Now we all know how world equity usually turns out - not being cynical, just realistic. Probably better for nations to have their own AGI strategy as early as possible since even a few months (weeks? days?) of AGI gap could be hard to bridge.

AGI's role in military applications extends beyond traditional warfare to cyber warfare, autonomous systems, and information warfare. Combined with nuclear deterrence or even less powerful mass-destruction weapons, it is difficult to anticipate how AGI-powered weapon systems could try to front-run each other and how long it might take to reach escalation at a scale too large for us to reverse.

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Thanks for reading, and have a technology-light weekend ahead,

V

And happy last 36h of 2023!

With the number of interstate and intrastate conflicts on the rise over the past two years, the overall trend towards deglobalisation, and the increased tension about natural resources in parallel, I have realised how little I actually knew/understood about the international governance of the sea, ~70% of the Earth surface.

We have all heard about Exclusive Economic Zones (EEZ) and Territorial Waters of course, but would we be able to explain their governing principles to a curious child? The kind of child who asks you why? and how? 5 times in a row? I realised I could not, and that it actually prevented from truly understanding how some situations were permissible, such as this map:

Or how a clear murder case law from 1970, United States v. Escamilla, would not get sorted out until 1984 after a trial, appeal, and retrial where the defendant was acquitted because the murder had happened floating island that didn't technically belong to any nation.

So I went down a Wikipedia rabbit - as happens way too often! - and thought I would share with you an abridged, illustrated summary of my key learnings. (I still could not make it fit into a Gmail-sized email, so please do not forget to open this post in your browser it ends up truncated.) Let’s dive in!

The concept of territorial waters began to take shape in the early 17th century, with the idea that coastal states should have sovereignty within certain limits only.

In parallel arose the regulation of the high seas as a global commons, where all states enjoy freedoms like navigation and fishing - in darkest blue below:

As concerns about security and customs enforcement grew after World War II, the international community recognized the need for an additional “contiguous” zone. This zone, extending up to 24 nautical miles from baselines, allowed coastal states limited control for security purposes. The Cold War era further emphasized the importance of maritime security, influencing the establishment of the contiguous zone.

The United Nations Convention on the Law of the Sea (UNCLOS), adopted in 1982, marked a significant milestone. It introduced the Exclusive Economic Zone (EEZ), granting coastal states exclusive rights to explore and exploit marine resources within 200 nautical miles. This extension of coastal state rights responded to emerging challenges and the growing importance of ocean resources.

This competition for exclusive rights to marine resources is the root cause of many disputes between nation-states, as illustrated by the most recent revival of the Venezuela vs. Guyana territorial claims.

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Territorial Waters

UNCLOS also addressed the geopolitical implications of rights of passage through territorial waters and international straits. It sought to balance the interests of coastal states with the need for uninterrupted maritime transit, with hightened complexity with the extension of territorial limit standard from 3 nautical to 12 nautical miles.

• UNCLOS defined the principles of Innocent Passage, allowing vessels to traverse another state's territorial waters without prejudicing its peace, security, or environment. This addressed concerns of coastal states while ensuring freedom of navigation, contributing to a balance between maritime security and global transit rights.

• Transit Passage, applicable to straits used for international navigation, guaranteed the right of ships and aircraft to pass through without interference. This ensured unimpeded access to strategically important straits, reducing potential sources of conflict and maintaining global maritime connectivity.

This is what makes this map possible:

Enables Russia to leverage its Kaliningrad enclave to access the Atlantic ocean through the Baltic sea…

… and the Mediteranean through the Black Sea:

However this still creates critical tensions when superpowers feel like their territorial safety is at risk, like Russia (above), or China (below)

(For new subscribers: I already wrote a dedicated piece about China’s specific concerns and aspirations)

Because despite international treaties, in case of international conflict, might remains right and a few countries have the tactical ability to choke most of the maritime traffic that fuel the global economy:

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EEZs

The establishment of EEZs raised geopolitical issues related to resource exploitation, especially in areas with overlapping zones. Competing claims in shared or adjacent EEZs underscored geopolitical challenges, necessitating diplomatic solutions for resource management and conflict prevention.

Some countries, like France and the UK, enjoying “disproportionately” large EEZs from islands from their past colonial empires in comparison with their land areas:

Disputes

UNCLOS also established dispute settlement mechanisms, recognizing the potential for conflicts arising from differing interpretations of maritime rights. These mechanisms, geared toward peaceful resolution, contributed to stability in geopolitical relations among coastal states.

Despite this framework, a significant number of disputes remains:

One of the most explosive one being the well-known South China Sea.

At first sight it does look like some countries claims are simply unreasonable…

… especially when compared with expected UNCLOS-prescribed EEZ limits.

But when looking at the root of the problem, i.e. EEZ-granting island territorial claims, one can at least understand why some mess is expected.

With global ratification, UNCLOS became a foundational framework for international maritime relations. Its widespread acceptance reflects a shared commitment to rules-based governance, fostering stability and cooperation in the geopolitical landscape of ocean governance.

It is important to note that despite the US not having signed/ratified UNCLOS, they still follow all of its principles apart from the high-seas as global commons principle.

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Thanks for reading, and have an insightful year ahead!

V

And merry Christmas!

First, I would like to apologies for letting all of you hanging for 2 years. Those last two years have been quite intense to say the least, and I needed some time to regroup. I’ll share a bit more at some point, but let’s dive straight in - I missed writing to you guys.

I recently read Atlas Shrugged, by Ayn Rand. It is an exceptional book.

London-based, and most of my friends being European, my struggle has been to find someone to discuss it with: it is a monument of American literature, but virtually unknown in Europe. It tells the story of a dystopian socialist→communist society in which a small group of industry captains (think Elon Musk) literally go on strike to build their own utopian ultra-capitalist community.

Before I share more of my thoughts on the story and its lessons for modern geopolitics, I want to share the following caveats: the purpose of this piece is not to start a political debate. Atlas Shrugged is obviously pro-capitalism/pro-libertarianism. I am personally pro-libertarianism, but the story is not realistic anyway in the sense that the heroes are too “perfect” and their ideal of society unviable. If you are interested in accurate material about libertarianism, I strongly suggest you read Nozick’s Anarchy, State and Utopia and/or Hayek’s Road to Serfdom: they are unavoidable readings on the topic. If you are in a more musical/esoteric mood, I suggest you go for Keynes vs. Hayek - The Original Economics Rap Battle! and Keynes vs. Hayek - Economics Rap Battle Round Two: refreshinglygly accurate!

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The reason why I found Atlas Shrugged terrifyingly relevant is that it depicts an accurate evolution of how mass movements are born and grown. It immediately made me parallel it to Hoffer’s True Believer - Thoughts on the Nature of Mass Movements, one of the books I find most intellectually towering and that I have recommend/gifted the most along the years.

Ayn Rand was born “Alisa Zinovyevna Rosenbaum” in 1905 imperial Saint Petersburg, and fled Soviet Russia in her early 20s, a few years after communism took over as a mass movement.

Eric Hoffer was born working class in the US in 1902 and spend a good part of his life loading and unloading ships on the San Francisco docks.

Ayn Rand published Atlas Shrugged in 1957.

Eric Hoffer publiches The True Believer in 1951.

In my opinion, Atlas Shrugged is (partly) a fictional take on the non-fiction theories exposed in The True Believer. What Hoffer explains through flawless critical analysis, Rand brings to life through poignantly unsettling dialogues between the leaders of her finctional mass movement and the industrial elites struggling to stand up to them.

Rand’s deeply uninspiring character James Taggart could be summarised in this single quote by Hoffer: "Passionate hatred can give meaning and purpose to an empty life."

We could even make a fun game out of it: can you guess who wrote each of these quotes?

1. "The act of self-denial seems to confer on us the right to be harsh and merciless toward others."

2. “I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine.”

3. "The readiness for self-sacrifice is contingent on the imperviousness to the realities of life. [...] Thus the effectiveness of a doctrine should not be judged by its profundity, sublimity or the validity of the truths it embodies, but by how thoroughly it insulates the individual from his self and the world as it is."

4. "Failure in the management of practical affairs seems to be a qualification for success in the management of public affairs."

5. “There are no evil thoughts except one; the refusal to think.”

Answer: 1. Hoffer 2. Rand 3. Hoffer 4. Hoffer 5. Rand

Now, (I hope) by this stage you’d be asking me: “What’s your point? How is this pertinent to a newsletter focused on geopolitics?”

I think that as we get more and more into deglobalisation, states will have to rely more and more on mass movements to mobilise their populations towards self-sacrifice strategies. This is exactly what happened pre WWII. Both Russia and Ukraine are capitalising on their respective mass movements. Middle-Eastern non-state organisations have been doing so for decades now. And the Western world is getting on the bandwagon.

If one is to understand what is happening in the world right now and how things might evolve and in the next months, years, and decades, I strongly believe those two books are absolute must-reads.

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Hope you enjoyed reading this nearly as much as I did writing it… now go and read Atlas Shrugged: infinitely better writing than mine!

Thanks for reading, and have a festive week ahead,

V

If we have recently seen that Europe is largely a straw man from a military perspective, it remains today an economic power of similar size as the US and China.

When we look at main trading parters, this 2021 map shows that the trading world is rather divided between Europe and China rather than between the US and China:

If we look at main source of imports (in 2019) rather than overall trade, the picture changes a bit, but the overall message remains the same:

But the key difference between the 3 economic powers is that China is generating an evergrowing, mindblowing trade surplus (those are monthly amounts!):

And it reinvests these surpluses into a global trade infrastructure centered on itself, therefore pulling the cover from the hegemonic balance the US had take from Europe during WWII:

China is more than happy to see as many countries as possible accept its investment ties, as most developping countries do (in 2019):

This leads to high levels of capital dependency across the world (2018):

Especially in Africa (2021):

This strategy is old as the world, and not some original evil plan designed by expansionist China.

With a very large pinch of salt, it could even be compared to the Marshall Plan:

In any case, when you have your hands on such an incredible flow of capital surplus, it is hard to find a better ROI than that of investing in even higher future trade dividends.

China will also need a correspondingly global military reach, especially its navy, but we already discussed that point extensively. If you have not read that analysis yet, you can find it here, in 3 parts:

• Macromegas #21 - China: The Planned Superpower (Part 1)

• Macromegas #22 - China: Dreaming of a Blue-Water Navy (Part 2)

• Macromegas #23 - China: Territorial and Moral High Ground (Part 3)

But once the USSR had fallen in 1991, the only hyperpower left became the US, which leveraged this status with the most exhaustive military coverage the world has every seen:

But in the past 2 decades, Russia has been pushing for a more control over two natural-resources-rich regions.

The Arctic

With climate change quickly making the Artic waters navigable (for suitable ships), Russia is positioning itself to control both newly accessible natural resources, and new trade routes:

Africa

With Africa’s colonial history, it is no surprise that former European superpowers keep strong military presence on the continent to preserve their interests. France far ahead, but the UK, Italy and Spain as well.

American presence is strong as well, but again, this is true everywhere.

China is mostly taking the economic approach, while India is focused on regional control over the Indian Ocean.

But, let’s not forget Russia.

All of Russia’s 6 overseas military bases currently in construction are locate in Africa:

And beyond permanent military bases, Russia is miltiplying military cooperation opportunities (similar to France or the US):

Samilarly to France and the US, Russia is interested in fascinated by Africa’s wealth of natural resources:

Moreover, because Russia does not bother much about public opinion, they are adopting a sensible full nuclear policy (Macromegas #50 - The Future is Nuclear).

First, for themselves: Russia's most recent Federal Target Program projected a 25–30% nuclear share in electricity supply by 2030, 45–50% by 2050 and 70–80% by the end of the century.

But also as a global technological leader, as explained by the International Atomic Energy Agency (IAEA):

Today the Russian Federation is leading in new nuclear construction abroad. [...] The competitive strength of the Russian Federation’s proposals can be attributed to the advanced technologies and latest know how developed by the country’s scientists and designers. All design projects meet modern international requirements and IAEA recommendations.

The last 3 maps are all from this excellent piece by the Institute for the Study of War (ISW).

I strongly believe that beyond the invasion of Ukraine and its consequences on global food security (Macromegas #49 - Russia, Ukraine, Wheat & Global Food Security), these two Russian regional priorities are fundamental to understand Russia’s vision of a future resources-scarce world.

In such a world, controlling natural resources while enjoying the sanctity of nuclear weapons deterrence will translate into phenomenal leverage on the international scene.

I do not know anyone with a serious scientific background who disagrees with this statement.

Not one.

Nuclear is by far the safest energy out there:

But… Chernobyl! Fukushima!

Chernobyl was the result of a flawed reactor design that was operated with inadequately trained personnel in falling-USSR Ukraine.

And it still only lead to a few thousands deaths:

The United Nations Scientific Committee on the Effects of Atomic Radiation has concluded that, apart from some 5000 thyroid cancers (resulting in 15 fatalities), "there is no evidence of a major public health impact attributable to radiation exposure 20 years after the accident."

Focusing on Chernobyl is neither relevant nor intellectually honest.

For example, why is no one aware of the 1963 Vajont dam disaster in Italy?

• Government incompetence and irresponsibility lead to the death of 1,900-2,500 people.

• The impact of the artificial tsunami left a crater 80m wide and 60m deep.

• “Responsible” officials attributed the catastrophe only to “natural causes and God's will”!

Or the 1959 Malpasset dam disaster in France, which drowned 453 people?

Don’t get me wrong: hydropower is amazing. It is the only renewable energy that is truly safe in the long-run, and does not require too much fossil fuel to mitigate output volatility.

Why do people base their fear of nuclear energy over Fukushima and its 1 radiation-exposure death?

Because most people are biased towards the sensational…

… and the media is only reinforcing this bias:

If people were rational, they would obsess over the fact that an estimated 21.5% of all deaths globally are caused by air pollution.

21.5% of all human deaths. You read that right.

And that’s not even counting indirect deaths caused by climate change: 3 Overlooked Consequences of Climate Change that will happen in Our Lifetime.

Source: Vohra et al., Global mortality from outdoor fine particle pollution generated by fossil fuel combustion

Further deep-dives:

Nuclear power may have already saved 2 million lives otherwise lost to fossil fuels.

It may save up to 7 million more.

Meanwhile, “renewables” are an ecological nonsense:

1. They require insane amounts of limited (& often green-gas-emitting) raw materials:

2. No one knows how the lead and cadmium used in solar panels will be recycled come their end-of-life:

• Whose waters will be polluted by those toxic heavy metals?

• They can’t easily be isolated like ultra-compact nuclear waste.

• And unlike nuclear waste, they never stop being toxic.

3. Nuclear is energy-dense - wind and solar are enery-diffuse.

• This is not somethign technology can solve: it is a physical limitation.

• Wind and solar destroy thousands of hectars of wildlife-inhabited soil (solar) or seafloor (offshore wind) while nuclear plants require an infinitesimal fraction of the ecological footprint.

4 . People and industries need consistant, reliable energy:

• Wind and solar output are volatile and need to be combined with… gas turbines!

• This is why oil & gas companies lobby for renewables:

  • as a full, perfect replacement, nuclear is a true threat to them…

  • … while wind and solar ensures they keep selling for at least a few more decades

5. They are not a path to geopolitical independence:

• 100% renewables is not achievable (see point 4 above)

• This means that countries who go for renewables will always remain dependent on gas imports… the past few weeks should have been a memorable lesson

• 100% nuclear is perfectly realistic, and it means 100% gas-independence

If you are still not convinced, you may be persuaded by previous renewable-advocates who realised renewables could never be the solution:

Beyond the obvious benefit of keeping our planet habitable, this should be part of every reasonable long-term investment thesis.

Economies that invest in the right energy sources will be the great winners of this deglobalising century.

Economies that miss that critical turn will pay the price later… with heavy interests.

• Everyone following what is happening in Ukraine is aware of the dilemma caused by Europe's dependence on Russian gas imports.

  

• This dependence could have been prevented if European countries such as Germany had not halted their civil nuclear programs, thereby both crippling their own energy independence and letting their carbon footprint balloon.

  

But even before energy, the world depends on food.

• Roman Emperors leveraged Egypt - and Sardinia - to control up to half the global population of the time.

• The fast-growing global population and climate change are making that problem even worse.

  

• The world has to feed its population on a constantly shrinking agricultural area per capita.

  

• Some countries are more challenged than others, and many have already reached their limits.

  

Most of the world's population still gets most of its energy intake from cereals.

• High-income countries enjoy a more diversified diet, but low- & middle-income populations' diets are based on cereals, from 50% to as high as 80%.

  

• On average, globally, 80%+ of cereal consumption is shared about 50/50 between rice and wheat.

  

The "Russian" - and Eastern European - plains are the second largest agricultural region globally.

• It happens that the Eurasian plains are the second largest agricultural region globally, after the Mississippi basin. Far before the 3rd and beyond.

  

• Their fertility cannot easily be artificially reproduced anywhere else: it is a given from a geopolitical perspective.

  

• Beyond its incredible cereal production potential in absolute value, this region is not as densely populated as the other agricultural basins.

  

• This is why Russia and Ukraine collectively represent 25%+ of global wheat exports.

  

• Because yield is still much lower than in other regions (and because their populations are not growing much), Russia & Ukraine (CIS on the chart) still have tremendous potential to increase their share of global wheat exports.

  

• And they are already doing so.

  

• Russia also has the optionality to increase cultivated area since it currently controls about 25% of all arable lands globally. The only barrier to this increase is profitability depending on world market price.

  

• It is worth noting that ~40% of all wheat consumed globally is exported (based on 70kg annual consumption per capita and a $200 price per ton). Thus we are not talking of marginal exports vs. largely self-sufficient countries, but rather some excedent countries feeding large chunks of the world.

This allows Russia - and Ukraine - to literally feed the world.

• At an average 70kg average of annual wheat consumption per capita, an average weight of 40% for wheat in the global cereal consumption mix, and an average world market price of $200 per ton of wheat, Russia & Ukraine's combined wheat exports feed 300,000,000+ people globally. Not even including their large exports in corn and other cereals. 4% of the world.

• And considering their agricultural potential vs. world population growth, they might be feeding twice that share in a decade or two.

  

• Most of this wheat-exports-dependent population lives in climate challenged (Africa, Middle-East) or space-constrained (South-Asia) regions.

  

• Most of those countries are low-/middle-income, and some are very dependent on those cornered wheat exports.

  • Egypt

    

  • Turkey

    

  • Bangladesh

    

  • Nigeria

    

  • Indonesia

    

• Their combined population also represents a large and growing share of the global population (10%+ and growing).

  

• Naturally, due to their fast-growing population and limited agricultural potential, their demand for Russian & Ukrainian wheat is exploding.

  • Russian Wheat

    

  • Ukrainian Wheat

    

How can the world adapt to such life-threatening dependence?

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And happy Saturday!

Having majored in economics, I have always lamented about the way it is taught, especially macroeconomics: starting with Keynesian and inflation models is too abstract.

The first book I read that really anchored capital, labour, and productivity into the reality of history was Piketty’s Capital in the Twenty-First Century.

Even though I do not agree with most of Piketty’s ideology, I could not but admire his work as far as this book was concerned.

One of his most insightful analyses consists of charts such as these ones:

His “value of national capital / GDP” ratio is an eye-opener.

It is the basis for understanding yield, social mobility, and productivity.

I was delighted to discover that McKinsey’s MGI was copying this approach in their new report: The rise and rise of the global balance sheet - How productively are we using our wealth?

Let me put it this way: if I had to teach a Macro 101 course, I would most likely use this report as sole material. Any addition would be noise.

The full report is nearly 200-page long, but definitely worth a read (or several!) if you are interested in understanding the basics of how our economy works.

I highlighted the best parts for you below:

Real estate accounts for two-thirds of real assets.

Among the four sectors of the economy, households control 95 percent of net worth:

• A national balance sheet is the sum of the individual balance sheets of four sectors: households, governments, corporations, and financial institutions including central banks. Size and composition vary significantly

• Households control the bulk of net worth, governments the small remainder.

• Because non-financial and financial corporations have equity as a liability that largely corresponds to their net asset holdings, they do not have material net worth.

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Each sector owns a mix of assets and owes liabilities according to its function in the total economy.

Germany, Mexico, and Sweden are at the lower end of household net worth, due to lower real estate and equity holdings - NOTE: this is Piketty’s approach 2.0.

Household real estate accounted for almost half of global wealth growth, and corporate assets added a quarter.

The next and last 5 insights below are perfectly in line with Piketty’s core thesis: a higher “value of national capital / GDP” implies lower capital productivity (everything else remaining equal). The share of income returning to capital (vs. labor) is an important force in the evolution of this ratio.

If net worth were to revert to its historical average relative to GDP, it would decline by one-third on average.

Capital creates returns and supports productivity and wages.

Capital productivity is highest in Canada, the United Kingdom, and the United States, while operating returns are highest in Mexico.

Return differences across countries are sustained even when adjusting for industry mix, asset mix, and differences in real estate yields.

Differences in asset stock and portfolio mix explain most of the difference in labor share of income across countries.

McKinsey shares many further insights on real estate valuations and productivity metrics, but I can’t share everything here and still call it highlighting.

If you are interested in discussing further, please comment below.

Leave a comment

Thanks for reading, and have a productive weekend,

V

And happy Friday!

Today, a macro view of global economic value creation that only McKinsey does so well.

Originally a 9min read, synthesised in 4min below:

The role of companies in the 21st century economy and their responsibilities to stakeholders

• We have evidence all around us that societal expectations of business are shifting. I found it striking that 87 percent of people who were asked about the role of companies declared that they should create value for multiple interests, not just make profits. Understanding these shifts is particularly important in the context of Generation Z, who are polarized on these questions, both as consumers and employees.

• When a corporation creates $1 of value, where does it go?

  • We looked at 5,000 companies with revenues above $1 billion over a 25-year period.

• In Organisation for Economic Co-operation and Development [OECD] countries, $61 trillion of gross value is added every year; $44 trillion of that, or 72 percent, is generated by the business sector.

  • That value represents the revenue minus intermediate costs to produce the products and services.

  • While the share of total value that businesses add varies between 70 percent and 75 percent among different countries, the essential picture has been remarkably stable over time.

• The percentages are higher for some economic benefits.

  • Business, for example, contributes 85 percent of lab or productivity growth and 85 percent of technology investment.

  • Between 1995 and 2018, the contribution of large corporations to their home countries’ economies rose by ten percentage points in terms of share of GDP.

• The value flows from corporations to households through eight different pathways.

  • If you take a dollar of revenue that the average corporation generates, 25 cents of that flows through as lab or income: wages, salaries, and other benefits to employees.

  • Seven cents of that dollar goes to capital income, meaning dividends, share buybacks, and interest payments to debtholders.

  • Six cents goes to investment—earnings that are retained to be invested in new productive assets—and four cents to production and corporate taxes.

  • The remaining 58 cents goes to supplier payments, which then result in lab or income, capital income, investment, and tax pathways for those supplier companies.

• There are three additional pathways.

  • One is consumer surplus, which represents consumers’ willingness to pay higher prices than companies charge them for goods and services. That value is an additional 40 cents per dollar of revenue, so a very substantial contribution to households.

  • Then you have two sets of spillovers beyond the purely economic.

    • Negative spillovers include, for example, carbon emissions, land use, and impact on biodiversity.

      • Of course, there are positive spillovers as well, such as productivity gains in the broader economy when a company’s innovations become more widely adopted.

• That productivity rate has slowed down materially, from a 1.1 percent annual increase for the 1995–2005 decade to 0.2 percent for the more recent decade.

  • The world has become less effective at combining capital and lab or in innovative ways to create economic gains, but this is a subject of debate among economists.

  

• The most striking is the declining share of value going to lab or income versus capital income. It’s a trend we have observed for quite some time.

  • In addition, capital income is usually concentrated in top-income households.

• Another change I would highlight is the reduction in supplier payments to small and medium-size enterprises.

  • Small and medium-size enterprises [SMEs] account for a lot of employment in local communities.

• On the plus side, the consumer surplus that almost everybody, in all income brackets, has benefited from has increased.

  • However, we also have price increases—as much as 50 percent relative to inflation in some areas—that are putting education, healthcare, and some other services out of reach of lower-income households.

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• We ran an analysis that clustered 150 sub sectors of companies into eight archetypes of companies that do similar things and have similar impact on the world.

  • You have the Discoverers—companies that push the scientific frontier.

    • They have high R&D expenditure, a lot of intangible capital, and high capital-income pathways.

    • Think pharmaceutical firms, but also household-product companies with differentiated offerings and innovation-driven brands.

  • Next are the Technologists.

    • This group includes internet, media, and retail companies as well as hardware and software.

  • The Experts are businesses that harness human capital more than anything else to deliver services and on average offer higher wages than a typical corporation.

    • These include business-services companies as well as private hospitals and education institutions.

  • The Deliverers are retailers, distributors, restaurant chains—businesses that take inputs from elsewhere and sell them widely.

    • The rise of these institutions has had a significant societal impact.

  • The Makers are relatively capital-intensive manufacturers that nonetheless account for a large share of employment: aerospace, defense, and automotive, but also construction and engineering companies.

  • The Builders create, use, and operate the physical infrastructure the world revolves around and include utility and mining companies.

  • The Fuelers are predominantly oil, gas, and coal producers.

  • The Financiers are banks, insurance, and real-estate companies that price assets and provide capital.

• They have a different presence around the world.

  • Makers are more prevalent in Germany and Korea than in most other OECD countries.

  • Technologists are more prevalent in the US.

  • The UK has numerous Financiers, Fuelers, and Discoverers relative to the average OECD economy.

• The most striking element is the relative decline of Makers, which have been the preeminent archetype in the OECD.

  • They represent 30 percent of the total lab or income, so they are central to employment, and 26 percent of R&D, so the decline of Makers may be part of the reason for the rise of capital income over lab or income.

  • We see a big global shift of Makers to non-OECD economies.

• The growth is coming from the Financiers, Experts, Deliverers, and Technologists. This reinforces two messages we have tried to convey:

  • Rising capital income, which comes from Financiers and Technologists.

  • A polarization of wages because Deliverers provide the lowest wages.

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Thanks for reading, and have an increasingly productive weekend,

V

And happy Friday!

In the past, we talked about How the US Made the Most of Their Unique Territorial Potential to become an “Inevitable” Empire.

We then discussed how China had been planning its way into a US-rival superpower, how its main military gap was its lack of a Blue-Water Navy, and how it was working militarily, economically, and politically towards a global reach.

Well, earlier, this week, this ambitious plan has been materially confirmed by the satellite discovery of 2 US aircraft carriers replicas… in the Chinese desert!

Oh, and some destroyers as well:

There is a clear connection between those mock targets, and the recent test of hypersonic missiles by China a few weeks ago.

Even though not strictly new technology - Russia is already supposed to have some deployed - this is a pain in the 11-aircraft-carrier-strong US blue-water navy since those missiles would be near impossible to intercept with enough reliability to protect strategic assets such as $10-15bn aircraft carriers requiring 5-10 years to build.

This new competitive advantages bypasses the capabilities of defense infrastructure such as Reagan’s Strategic Defense Initiative - aka "Star Wars program"

Or Israel’s Iron Dome

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Now, why would China be specifically keen on destroying US aircraft carriers?

First, because the US invested A LOT in a reliable defense system

and the idea of making such a multi-decade defense mega-project obsolete is an ideological victory.

But most importantly, because of Taiwan, both for its microchip industry and its strategic geographic location as a gate to the Pacific in the 1st Island Chain:

We already discussed the strategic importance of microchips in this cold-war-like confrontation.

After the way China handled the Hong Kong reunification, no one expects Taiwan to willingly accept to get reunited with mainland China. If it ever happens, some amount of coercion is to be expected.

However, as Peter Thiel explains in this excellent brainstorming with senior US officials, modern warfare is virtually impossible to anticipate.

Still, this outstanding interactive article by Reuters illustrates 6 scenarii for a potential forced reunification between China and Taiwan, from the mildest to the scariest.

This excellent thought experiment also illustrates the extent to which cyber warfare could disrupt military conflict as we conventionally imagine it.

Again, as we already discussed, the issue of any degree of escalation between the US and China seems nearly impossible to imagine in our globally-integrated economy.

Experts seem to think the US would still have the upper hand on most aspects: military, supply chain, economy, and political influence. I would tend to agree.

But the balance is evolving very fast. What’s your take on this complex question?

Leave a comment

Thanks for reading, and have a secure weekend,

V

And happy Friday!

A few months ago, I shared a very positive outlook on the artificial/cultivated meat industry.

However, I recently read a very thorough technical analysis which made me change my mind on the subject.

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This was the very visual McKinsey study (15min) that I initially took at face-value:

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Now for the fascinating deep-dive into the economics & technological feasibility of artificial meat at scale.

The full essay is 40min-long, but I summarized it into a 16min-read for you below - most likely the only thing you’ll have to read on the industry, until the next major breakthrough - if any.

(You’ll notice that the $4 cost-basis on which the McK study is based is being challenged as overly optimistic, to say the very least.)

Lab-grown meat is supposed to be inevitable. The science tells a different story.

The Problem

• Rather than raise entire animals, we might only grow the parts we eat. Why spend energy growing the complex, sentient structures we call cattle—complete with bones, horns, hooves, and vital organs—when we only want the finished steak? Cultivating meat inside bioreactors eliminates those inconveniences, doing away with the troublesome task of growing a body, of sustaining a consciousness.

• Gram for gram, animals are a wildly inefficient vehicle for producing edible protein (as advocates for cultured meat like to point out).

  • Cattle consume roughly 25 calories of plant material for every calorie of edible protein they produce, according to some estimates.

  • Even chickens, the most efficient form of livestock from a feed perspective, eat 9 to 10 calories of food for every calorie of edible protein produced.

    • Friedrich, the director of GFI, has said that’s like throwing away 8 plates of pasta for every one plate we eat.

  • He’s right—though it’s not only wasteful. Our over-consumption of meat is inherently linked to the global over-production of grains, one of the primary drivers of deforestation and biodiversity loss worldwide.

    • Next time you’re wondering why Brazilian farmers are burning down the rainforest to plant more soy, think of the world’s 1 billion cattle, each one eating many times its weight in grass, legumes, and grain over the course of its short life.

• In contrast, the disembodied economics of cultivated meat could allow for huge production advantages, at least theoretically.

  • According to the Open Philanthropy report, a mature, scaled-up industry could eventually achieve a ratio of only three to four calories in for every calorie out, compared to the chicken’s 10 and the steer’s 25.

  • That would still make cultured meat much more inefficient compared to just eating plants themselves; we’d dump two plates of pasta for every one we eat.

Controversy

• In March #2021, the Good Food Institute (GFI), a nonprofit that represents the alternative protein industry, published a techno-economic analysis (TEA) that projected the future costs of producing a kilogram of cell-cultured meat. Prepared independently for GFI by the research consulting firm CE Delft, and using proprietary data provided under NDA by 15 private companies, the document showed how addressing a series of technical and economic barriers could lower the production price from over $10,000 per pound today to about $2.50 per pound over the next nine years—an astonishing 4,000-fold reduction.

• David Humbird, the UC Berkeley-trained chemical engineer who spent over two years researching the report, found that the cell-culture process will be plagued by extreme, intractable technical challenges at food scale. In an extensive series of interviews with The Counter, he said it was “hard to find an angle that wasn’t a ludicrous dead end.”

  • Humbird likened the process of researching the report to encountering an impenetrable “Wall of No”—his term for the barriers in thermodynamics, cell metabolism, bioreactor design, ingredient costs, facility construction, and other factors that will need to be overcome before cultivated protein can be produced cheaply enough to displace traditional meat. 

    • “And it’s a fractal no. You see the big no, but every big no is made up of a hundred little nos.”

• This would explain why cultivated meat companies have repeatedly missed product launch deadlines.

The Imagined Manufacturing Infrastructure

• GFI’s imagined manufacturing facility would be both unthinkably vast and, well, tiny.

  • According to the TEA, it would produce 10,000 metric tons—22 million pounds—of cultured meat per year, which sounds like a lot.

    • For context, that volume would represent more than 10 percent of the entire domestic market for plant-based meat alternatives (currently about 200 million pounds per year in the U.S., according to industry advocates).

  • And yet 22 million pounds of cultured protein, held up against the output of the conventional meat industry, barely registers.

    • It’s only about .0002, or one-fiftieth of one percent, of the 100 billion pounds of meat produced in the U.S. each year.

    • JBS’s Greeley, Colorado beefpacking plant, which can process more than 5,000 head of cattle a day, can produce that amount of market-ready meat in a single week.

• And yet, at a projected cost of $450 million, GFI’s facility might not come any cheaper than a large conventional slaughterhouse.

  • With hundreds of production bioreactors installed, the scope of high-grade equipment would be staggering.

    • According to one estimate, the entire biopharmaceutical industry today boasts roughly 6,300 cubic meters in bioreactor volume. (1 cubic meter is equal to 1,000 liters.)

    • The single, hypothetical facility described by GFI would require nearly a third of that, just to make a sliver of the nation’s meat.

The Imagined Manufacturing Process

• The manufacturing process, according to GFI, would begin with a 1.5-milliliter vial of production-optimized animal cells (the report doesn’t specify which livestock species).

• Those cells would be used to inoculate a 250-ml flask, a vessel smaller than a can of soda.

  • The rest of the flask would be filled with a specially formulated growth medium, a nutrient-dense broth of purified water, salts, glucose, amino acids, and “growth factors”—the hormones, recombinant proteins, cytokines and other substances that regulate cell development and metabolism.

  • In a sense, the role of this liquid is to approximate good old-fashioned blood, the fluid that delivers nutrients and hormones to cells inside a living animal’s body.

• Slowly, the initial seed cells would begin to multiply.

• After 10 days, according to GFI, the cells graduate to their first bioreactor, a small, 50-liter model.

• In another 10 days, they would move to a much larger, 12,500-liter stirred batch reactor, the kind of steel vessel you might expect to see in a brewery, capable of holding the same volume as a backyard swimming pool.

• This gradual progression is necessary; you can’t just throw a small amount of cells into a large bioreactor and hope they’ll start dividing.

  • Cells are “fastidious,” Hughes told me, and have strict metabolic requirements for growth, including oxygen tension.

  • Because of this characteristic, more fluid is pumped into the reactor as cells multiply, maintaining a specific ratio of fluid to cells.

  • Any cultured meat facility, real or imagined, will likely need to operate this way: with a graduated series of ever-larger reactors, like a sequence of Russian dolls.

The 5 Key Challenges

• 1st Challenge - Profitability

  • If cultured protein is going to be even 10 percent of the world’s meat supply by 2030, we will need 4,000 factories like the one GFI envisions, according to an analysis by the trade publication Food Navigator. To meet that deadline, building at a rate of one mega-facility a day would be too slow.

  • All of those facilities would also come with a heart-stopping price tag: a minimum of $1.8 trillion, according to Food Navigator. That’s where things get complicated. It’s where critics say—and even GFI’s own numbers suggest—that cell-cultured meat may never be economically viable, even if it’s technically feasible.

  • Humbird worked off the assumption that the industry would grow to produce 100 kilotons per year worldwide—roughly the amount of plant-based “meat” produced in 2020.

    • He found that even given those economies of scale, which would lower input and material costs to prices that don’t exist today, a facility producing roughly 6.8 kilotons of cultured meat per year would fail to create a cost-competitive product.

    • Using large, 20,000 L reactors would result in a production cost of about $17 per pound of meat, according to the analysis.

    • Relying on smaller, more medium-efficient perfusion reactors would be even pricier, resulting in a final cost of over $23 per pound.

  • And if $17 per pound doesn’t sound too high, consider this:

    • The final product would be a single-cell slurry, a mix of 30 percent animal cells and 70 percent water, suitable only for ground-meat-style products like burgers and nuggets.

    • With markups being what they are, a $17 pound of ground cultivated meat at the factory quickly becomes $40 at the grocery store—or a $100 quarter-pounder at a restaurant. Anything resembling a steak would require additional production processes, introduce new engineering challenges, and ultimately contribute additional expense.

  • By GFI’s own admission, the challenges are serious—current costs are 100 to 10,000 times higher than commodity meat, according to the CE Delft analysts.

  • Despite that forbidding premise, GFI’s TEA doggedly shows a path forward, dropping the cost of producing a kilogram of cultured meat from a current-day high estimate of over $22,000 to a goal of $5.66 by 2030.

• 2nd Challenge - Hygiene

  • Cultivated meat production will need to take place in aseptic “clean rooms” where virtually no contamination exists.

    • For his cost accounting, Humbird projected the need for a Class 8 clean room—an enclosed space where piped-in, purified oxygen blows away threatening particles as masked, hooded workers come in and out, likely through an airlock or sterile gowning room.

    • To meet international standards for airborne particulate matter, the air inside would be replaced at a rate of 10 to 25 times an hour, compared to 2 to 4 times in a conventional building.

    • The area where the cell lines are maintained and seeded would need a Class 6 clean room, an even more intensive specification that runs with an air replacement rate of 90 to 180 times per hour.

  • The simple reason: In cell culture, sterility is paramount.

    • Animal cells “grow so slowly that if we get any bacteria in a culture—well, then we’ve just got a bacteria culture,” Humbird said.

    • “Bacteria grow every 20 minutes, and the animal cells are stuck at 24 hours. You’re going to crush the culture in hours with a contamination event.”

  • Viruses also present a unique problem.

    • Because cultured animal cells are alive, they can get infected just the way living animals can.

      • “There are documented cases of, basically, operators getting the culture sick,” Humbird said.

      • “Not even because the operator themselves had a cold. But there was a virus particle on a glove. Or not cleaned out of a line.

    • The culture has no immune system. If there’s virus particles in there that can infect the cells, they will. And generally, the cells just die, and then there’s no product anymore. You just dump it.”

      • We’re saying, guys, it has to be pharmaceutical-grade because the process is going to demand it,” Wood told me.

      • “It’s not whether someone will allow you to run at food-grade specs. It’s just the fact you can’t physically do it.”

  • But if aseptic production turns out to be necessary, it isn’t going to come cheap.

    • Humbird found that a Class 8 clean room big enough to produce roughly 15 million pounds of cultured meat a year would cost about $40 to $50 million dollars.

    • That figure doesn’t reflect the cost of equipment, construction, engineering, or installation. It simply reflects the materials needed to run a sterile work environment, a clean room sitting empty.

  • According to Humbird’s report, those economics will likely one day limit the practical size of cultured meat facilities:

    • They can only be big enough to house a sweet spot of two dozen 20,000-liter bioreactors, or 96 smaller perfusion reactors.

    • Any larger, and the clean room expenses start to offset any benefits from adding more reactors.

    • The construction costs grow faster than the production costs drop.

  • "You can make a big plant, or you can make a clean plant,” he told me.

    • “So if you want to feed millions and millions of people, it’s got to be big.

    • But if you want to do it with animal cells, it’s got to be clean.

    • We need both, and you can’t do that.”

• 3rd Challenge - Ethics

  • What is FBS?

    • When cattle are processed at a slaughterhouse, workers will sometimes cut open a cow’s body and discover a fetus.

    • A technician will be called in who can perform euthanasia and, from there, extract the fetus’s blood.

    • The resulting substance, known as fetal bovine serum (FBS), amounts to a final gift for humanity.

  • FBS would be a perfect ingredient to include in cultured meat growth media, because it contains key proteins and vitamins that cells need to maintain health and stability.

    • In fact, it can be hard to make cells grow properly without FBS. “In many common culture media, the sole source of micronutrients is fetal bovine serum (FBS),” according to a 2013 article in the peer-reviewed journal BioMed Research International.

  • For cultivated meat, though, FBS is anathema.

    • Cultured animal protein can’t really be “meat without slaughter” if it’s dependent on an ingredient that’s intertwined with the current, grim realities of commodity beef production. So cultured meat startups also face the challenge of growing their cells in FBS-free media—though that’s not going to be easy.

  • In order to be viable, cultured meat companies will need to find ways to produce large amounts of product without FBS.

  • For now, though, serum-free media can be both hugely expensive and challenging to develop; in CE Delft’s estimation, its use can ratchet up the cost of cultured meat to well over $20,000 per kilogram.

    • "They say, oh, but these costs are just going to go away in five years or 10 years. And there’s no explanation as to how or why.”

• 4th Challenge - Amino

  • There’s another issue: In focusing on micronutrients as the primary cost driver, GFI may have underestimated the cost and complexity of providing macronutrients at scale.

    • Just like other living animals, cultured cells will need amino acids to thrive.

    • In Humbird’s projection, the cost of aminos alone ends up adding about $8 per pound of meat produced—already much more than the average cost of a pound of ground beef.

    • GFI’s study, on the other hand, reports that the cost of aminos may eventually be as low as 40 cents per kilo.

  • Why the discrepancy?

    • A footnote in the CE Delft report makes it clear: the price figures for macronutrients are largely based on a specific amino acid protein powder that sells for $400 a ton on the sprawling e-commerce marketplace Alibaba.com.

    • That source, though, is likely not suitable for cell culture.

    • Via a chat tool, I asked the Alibaba vendor if the product would be acceptable for use in pharmaceutical-grade applications.

    • “Dear,” she wrote back, “it’s organic fertilizer.” (In other words, it would not be.)

  • We already have a food system where people with enough means can pay for meat from “happy” animals.

  • Smaller-scale cultured meat would likely only extend that logic: You can pay extra to know your meat never lived at all.

• 5th Challenge - Opportunity Cost

  • Cell culture facilities are resource-intensive—and critics argue that, if powered by fossil fuels, their environmental footprint could be even worse than that of traditional meat. GFI’s own life-cycle analysis found that cultivated meat could have worse climate impacts than some forms of chicken and pork if conventional energy is used.

  • “It is a zero-sum game, to a certain extent.” Money we spend chasing cultured meat is money we can’t use on converting coal plants to biomass, or scaling [nuclear], solar and wind, or modernizing concrete and steel.

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Thanks for reading, and have a science-rich weekend,

V

And happy Friday!

I have been writing about Facebook investing in becoming (one of) the future metaverse platforms for a few months now:

• Macromegas #42 - Facebook, Roblox: a virtual life better than the real thing?

• Macromegas #35 - Aging & Entertainment

• Macromegas #27 - NFTs & Metaverse II

• Macromegas #25 - Voltaire, NFTs & Metaverse

And yesterday, Facebook announced it rebranding to “Meta”.

Check out their new website: meta.com

Clearly more than I expected, I would never have anticipated such a bold rebranding.

The company’s vision is now deadly focused:

Today, I’ll be sharing all the best resources for you to learn everything about this new -FAANG- MANGA company.

Disclaimer: I am long -$FB- $MVRS

Intro:

• Meta’s press release 2min

• Meta’s vision for the metaverse 8min

• Mark’s “Metaverse explainer” video 3min - make sure you are seated, this is intense!

• Benedict Evans’s thesis for the Metaverse, including gaming & NFTs 4min

• A comparison of 3 existing Metaverses: The Sandbox, Decentraland, and Enjin 4min - Disclaimer: I own a minor amount of each of their disinflationary currencies

• Twitter thread on $FB long-term bull thesis 3min

• Twitter thread on $FB risks 2min

• Twitter thread on $FB’s advertising moat 2min

• Twitter thread on FB’s investment in Internet infrastructure 4min

• Twitter thread on FB’s ideology 2min

• 2010’s essay on why Facebook is incredibly overpriced at a $33bn valuation (sic!) 4min

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Intermediate:

• Ben Thompson’s reaction essay on Meta 9min

• Packy McCormick’s long-form Facebook teardown 21min

• Matthew Ball’s intro to the Metaverse 28min

• Ben Thompson’s synthesis of Facebook’s political problems 15min

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Advanced:

• Packy McCormick’s analysis of the open Metaverse 29min

• Ben Thomson’s interview of Mark Zuckerberg about the Metaverse 26min

• Colossus’s podcast on Facebook’s business breakdown 74min

• Matthew Ball’s full “Metaverse Primer” hours

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Now, let’s just hope the future does not end up like this:

Thanks for reading, and have a virtually perfect weekend,

V

And happy Friday!

Last newsletter of the summer: I’m taking a break from publishing and coming back to you in September.

Today, an excerpt of a very insightful report by Natixis (not investment advice).

Retail investors expected return for their investments is nearly 10pts/3x higher than experts estimates:

The gap varies across countries, but the overall trend is very consistent:

While both fundamentals and monetary mass are both peaking, investors expectation keep rising:

Macroeconomics remains clear that valuations can’t keep going up and decorrelate themselves from productivity/GDP growth at an accelerated pace without being brought back to correlation at one point or another… but it seems like everyone is thinking that this won’t happen in the years to come.

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Finally, it does seem that investors remain aware (and worried) by the underlying causes for a potential debt crisis… but irrationally ignore it when estimating their own risk/return expectations.

What do you think?

Thanks for reading, and have wealthy summer,

V

And happy Friday!

In case you really did not follow tech news, Facebook & Mark are in the news again about their Metaverse project.

But this time, big announcement. Facebook officially stated it would be spending “billions” annually in the development of its Metaverse.

The headlines are entertaining to say the least:

As you might have noticed in previous issues of this newsletter, I do like sharing about this topic:

• Macromegas #25 - Voltaire, NFTs & Metaverse

• Macromegas #27 - NFTs & Metaverse II

• Macromegas #35 - Aging & Entertainment

Let’s start with a recent essay by the one and only Ben Thompson (Stratechery).

The theses: Roblox, a social gaming platform of which GenZs are particularly fond of, is very well positioned to build its own Metaverse.

Disclaimer: I am an investor both in Facebook and Roblox.

The Roblox Microverse 10min

• The Evolution of Video Games

  • "An average of 36.2 million people from around the world come to Roblox every day to connect with friends. Together they play, learn, communicate, explore, and expand their friendships, all in 3D digital worlds that are entirely user-generated, built by our community of nearly 7 million active developers. We call this emerging category “human co-experience,” which we consider to be the new form of social interaction we envisioned back in 2004. Our platform is powered by user-generated content and draws inspiration from gaming, entertainment, social media, and even toys." - Roblox S-1 Reports

  • The most obvious difference between Clubhouse and podcasts is how much dramatically easier it is to both create a conversation and to listen to one. This step change is very much inline with the shift from blogging to Twitter, from website publishing to Instagram, or from YouTube to TikTok.

  • More importantly, that graphic was about creation, not consumption, and in that regard, video games fit quite nicely:

    • Step 0 — Pre-Internet: The primary way to distribute video games was on consoles, which were controlled by the console makers; computer gaming was more open, but still required significant distribution capabilities. This was the newspaper era of video game publishing.

    • Step 1 — Democratization: The Internet made it possible to distribute games directly, meaning that anyone could be a publisher; over time the increase in broadband penetration made casual cloud-gaming (originally via Flash and later on Facebook) much more accessible.

    • Step 2 — Aggregation: Mobile dramatically increased the market for video games by ensuring nearly everyone had a video game device in their pockets. Note that this increased the market in two ways: first, there were more potential players, and two, all potential players had more opportunities to play games. Mobile, though, meant App Stores. This was a boon in that it made it easy to distribute video games in a way that customers were willing to trust and experiment with, and built-in payments unlocked entirely new ways of making money. It also meant that App Stores were the only way to reach customers, and you had to pay 30% for the privilege (these advantages and disadvantages are, of course, the exact same).

    • Step 3 — Transformation: This step is when the medium in question becomes something fundamentally different because of the Internet. I explained in Clubhouse’s Inevitability:

• The Metaverse

  • "Some refer to our category as the metaverse, a term often used to describe the concept of persistent, shared, 3D virtual spaces in a virtual universe. The idea of a metaverse has been written about by futurists and science fiction authors for over 30 years. With the advent of increasingly powerful consumer computing devices, cloud computing, and high bandwidth internet connections, the concept of the metaverse is materializing." #Roblox #[[S-1 [[Reports]]]]

  • The Roblox Platform has a number of key characteristics:

    • Identity: All users have unique identities in the form of avatars that allow them to express themselves as whoever or whatever they want to be. These avatars are portable across experiences.

    • Friends: Users interact with friends, some of whom they know in the real world and others who they meet on Roblox.

    • Immersive: The experiences on Roblox are 3D and immersive. As we continue to improve the Roblox Platform, these experiences will become increasingly engaging and indistinguishable from the real world.

    • Anywhere: Users, developers and creators on Roblox are from all over the world. Further, the Roblox Client operates on iOS, Android, PC, Mac, and Xbox, and supports VR experiences on PC using Oculus Rift, HTC Vive and Valve Index headsets.

    • Low Friction: It is simple to set up an account on Roblox, and free for users to enjoy experiences on the platform. Users can quickly traverse between and within experiences either on their own or with their friends. It is also easy for developers to build experiences and then publish them to the Roblox Cloud so that they are then accessible to users on the Roblox Client across all platforms.

    • Variety of Content: Roblox is a vast and expanding universe of developer and creator-built content. As of September 30, 2020, there were over 18 million experiences on Roblox, and in the twelve months ended September 30, 2020, over 12 million of these were experienced by our community. There are also millions of creator-built virtual items with which users can personalize their avatars.

    • Economy: Roblox has a vibrant economy built on a currency called Robux. Users who choose to purchase Robux can spend the currency on experiences and on items for their avatar. Developers and creators earn Robux by building engaging experiences and compelling items that users want to purchase. Roblox enables developers and creators to convert Robux back into real-world currency.

    • Safety: Multiple systems are integrated into the Roblox Platform to promote civility and ensure the safety of our users. These systems are designed to enforce real-world laws, and are designed to extend beyond minimum regulatory requirements.

  • Growth at Roblox has been driven primarily by a significant investment in technology and two mutually reinforcing network effects: content and social.

  • In short, Roblox isn’t a game at all: it is world in which one of the things you can do is play games, with a persistent identity, persistent set of friends, persistent money, all disconnected from the device that you use to access the world. That is the transformational change.

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Now, you’ll be telling me: but who will prefer spending most of their waking hours in a virtual world rather than in real life?

For one, younger generations are already doing so.

Then, we explored why the demand is far from negligible in older generations throughout Macromegas #35 - Aging & Entertainment.

Last, the demand should be highest amongst low-income populations. This is what a16z’s Marc Andreessen is arguing in his brilliantly non-politically-correct personal style.

The Dubrovnik Interviews: Marc Andreessen - Interviewed by a Retard 25min

• This is a paraphrase of a concept articulated by Beau Cronin: "Consider the possibility that a visceral defense of the physical, and an accompanying dismissal of the virtual as inferior or escapist, is a result of superuser privileges." A small percent of people live in a real-world environment that is rich, even overflowing, with glorious substance, beautiful settings, plentiful stimulation, and many fascinating people to talk to, and to work with, and to date. These are also *all* of the people who get to ask probing questions like yours. Everyone else, the vast majority of humanity, lacks Reality Privilege -- their online world is, or will be, immeasurably richer and more fulfilling than most of the physical and social environment around them in the quote-unquote real world.

• The Reality Privileged, of course, call this conclusion dystopian, and demand that we prioritize improvements in reality over improvements in virtuality. To which I say: reality has had 5,000 years to get good, and is clearly still woefully lacking for most people; I don't think we should wait another 5,000 years to see if it eventually closes the gap. We should build -- and we are building -- online worlds that make life and work and love wonderful for everyone, no matter what level of reality deprivation they find themselves in.

• Here's a thought experiment for the counterfactual. Suppose we had all just spent the last 15 months of COVID lockdowns *without* the Internet, without the virtual world. As bad as the lockdowns have been for people's well-being -- and they've been bad -- how much worse would they have been without the Internet? I think the answer is clear: profoundly, terribly worse. (Of course, pandemic lockdowns are not the norm -- for that, we'll have to wait for the climate lockdowns.)

Genuine request: if you are sick and tired of the Metaverse already, simply let me know by answering this email, and I’ll try not to write about it for a week or two.

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Thanks for reading, and have a real good weekend,

V

And happy Friday!

The adoption curve keeps getting steeper.

It took many decades for innovations such as electricity or the telephone to reach 80% adoption.

It took years for more recent products such as the VCR or the cellphone.

This week, we are looking into 3 perspective of this adoption curve.

All of them based on the fact that demand grows as cost decreases.

Cultivated meat: Out of the lab, into the frying pan 15min

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How much does it cost to send stuff to space?

Richard Branson recently flew to space thanks to his Virgin Galactic space tourism company.

Jeff Bezos followed suit shortly after thanks to his Blue Origin space travel company.

This is happening because the cost of throwing things into space has been drastically decreasing in the past 6 decades.

Largely thanks to the increased time pressure created by Elon Musk through SpaceX and Starlink, this trend has even accelerated over the past few years.

The Future of Space, Part I: The Setup 8min

In the next decades, further innovation and scale might bring us to a point where sending payload to space will not be incredibly more expensive than airfreight.

How do you think it will disrupt the world as we know it?

More advanced readings:

• The SpaceX Starship is a very big deal 24min

• Artemis can succeed using Starship 10min (already shared in a previous newsletter)

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Finally, a brilliant piece by Matt Levine shared in his “Money Stuff” email newsletter.

I love putting finishing with it and putting it in perspective with the above two disruptive innovations we just explored.

Sometimes, the most profitable innovation is absolutely boring.

Google and accidents 2min

• Imagine being omniscient. You know everything that is happening in the world, as it happens, and you can synthesize all that massive data in useful ways that allow you to understand it at a deep level. How would you use all that knowledge and understanding to make money?

• This is a financial column, and I assume that the most obvious answer is that you’d use your omniscience to buy financial assets that are going to go up. Investing seems like the most straightforward and lowest-effort way to transform information and understanding into money. Buy the stock of the biotech company that has found a miracle cancer cure but not announced it yet, buy the cryptocurrency that’s about to take off, whatever.

• But maybe that’s wrong. Knowing and understanding everything that is happening might not give you perfect foresight into the future, and some strands of the efficient market hypothesis claim that you can’t beat the market even with good inside information. Maybe there are better ways to use your omniscience.

• You could have a very very very stylized model of Google that says that it is in the business of knowing and understanding everything in the world — “Our mission is to organize the world’s information and make it universally accessible and useful,” it says — and that it is about as good as anyone at that business. It is not omniscient, but it is a reasonable approximation of omniscience. It does not know my most private thoughts, for instance, but it does know what I write in emails, which is pretty close.

• I have always found it weird that the modern companies that approach closest to omniscience seem to be mainly in the business of ad sales? Like, it turns out that the most economically valuable human activity — the one that gives you the most leverage on omniscience — is tailoring advertisements to internet users? Alphabet Inc., Google's parent company, had $182.5 billion of revenue last year, of which $146.9 billion came from Google advertising.

• I can sort of see it? The thesis is something like “we know everything that happens and what everyone wants, so if you are selling something we can get it to the people who will buy it; we are in the business of organizing and intermediating commerce, and we take our commission in the form of ad revenue.” Amazon.com Inc., another big omniscience company, is not really in the ad business, but is in this business of organizing and channeling all of commerce. And “all of commerce” is a reasonable answer for “what is the most economically valuable place to apply omniscience?”

• Still. Ads. Weird.

• Anyway Google is now in the business of helping insurance companies sell insurance by predicting who will hurt themselves in buildings, I dunno:

• Google is aiming to help small-business insurers more accurately measure occupancy of buildings where they are on the hook for slip-and-fall accidents and other risks.

• The endeavor is part of a partnership between Google Cloud and Menlo Park, Calif.-based BlueZoo Inc. … Under the BlueZoo and Google Cloud partnership, small sensors in buildings listen for Wi-Fi probes spontaneously emitted by mobile phones. The sensors encrypt and compress these probes and forward them to analytics servers in the cloud, the companies said. BlueZoo arranges for the installation, often on ceilings.

• It just feels so miscellaneous, you know? “We have built computers and sensors that understand physics and human nature so well that we can map out the future course of everyone’s life and predict to the minute when they will die, and we’re gonna use that godlike ability to calculate really accurate corporate property-and-casualty insurance premiums.” I mean, okay, whatever.

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Thanks for reading, and have an innovative weekend,

V

And happy Friday!

40th issue already.

Huge thanks to each and every one of you for being part of the adventure.

This special issue is dedicated to my dad, who always pushed me to ask painful questions.

Therefore, today we talk history.

Pearl Harbor & Napoleon’s failed invasion of Russia.

Pearl Harbor III

First essay: how the attack on Pearl Harbor had been simulated not once, but twice before it happened in real life. The beautiful storytelling is a bonus.

We Only Ever Talk About the Third Attack on Pearl Harbor 10min

• It was February 1932 – WWII was more than half a decade away – and it was the first time that Pearl Harbor lost the annual simulated military games meant to test the island’s defenses.

  • The military men on the island were completely demoralized.

    • Their vessels and military structures were covered in flour — from “flour bombs” meant to simulate the real things.

    • There were also dead flares that needed to be cleaned up, another form of simulated aircraft-delivered explosive that had been dropped on them.

  • Rear Admiral Harry E. Yarnell of the U.S. Navy had exposed a serious weakness in their defenses and won the simulated attack.

    • And he had done it by going against the prevailing views of military leaders across the U.S. — he believed that in the future, a country’s navy would be successful only if its air capabilities matched its seagoing strength.

• As expected, this embarrassment didn’t go over well with the rest of the Navy’s admirals.

  • While immediately after the drills, Admiral Yarnell was declared victorious and military strategists across the United States knew something major had just happened that needed an appropriate response, politics got in the way.

  • Eventually, Admiral Yarnell’s victory was declared void due to complaints that he had acted in an unfair manner – that if there had been a state of war, the element of surprise would not have been a factor.

  • Thus, the Navy administration voted down the idea of reorganizing itself around the importance of air power.

  • In fact, it was even written in a report that followed that “It is doubtful if air attacks can be launched against Oahu in the face of strong defensive aviation without subjecting the attacking carriers to the danger of material damage and consequent great losses in the attack air force.”

  • Essentially, the military was arguing the exact opposite of what had actually happened.

• So it was tried again.

  • In 1938, the same wargames were being played again to test Pearl Habor’s defenses.

  • The attacking force was led by Admiral Ernest King, and Admiral Yarnell was working in the background to run the experiment a second time.

  • King took a single aircraft carrier escorted by destroyers to attack Pearl Harbor from the air.

  • Coming in over the Koolau Range, he surprised the military base and won a decisive victory – just as Admiral Yarnell had done so in 1932.

• However, once again, politics and dismissal of “unfair” tactics led to a lack of bolstered defense at Pearl Habor and an unwillingness to restructure the U.S. Navy.

• Unbeknownst to the U.S. military at the time, we now know that Japan had been watching Admiral Yarnell’s 1932 mock attack with keen interest.

  • Tokyo’s spy organization in Oahu had observers across the island that relayed information back to Japan – which studied and absorbed the lessons the U.S. Navy failed to learn.

  • Admiral Isoroku Yamamoto was convinced that the future attacking power of a navy should be built around air power as opposed to surface strength – and so that is what he did with the Japanese navy.

• As WWII got underway in the Pacific, Japan knew that it could not fend off a full-on assault by the U.S. Navy if the U.S. entered the war. Instead, they needed to launch a pre-emptive strike and hobble the U.S.’s ability to interfere with Japanese operations in the Pacific.

• Thus, on December 7th, 1941, Japan’s Admiral Yamamoto pulled out the same military plans that Admiral Yarnell used almost 10 years before and launched his own assault on Pearl Harbor. This time, however, his planes would not be carrying “flour bombs” and flares.

• That Sunday morning, Yamamoto’s planes burst through a wall of clouds over the Koolau Range — and its fighters strafed the U.S. airfields before bombers descended on the island — and only then did the U.S. Navy accept that it should have paid heed to Admirals Yarnell and King when slight embarrassment was the only price it needed to pay.

The result? (remember that battleships used to be the Queen on the chess board in those days, and that virtually any loss was a good trade to take even one of them out)

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Napoleon vs. Россия

Our second essay? Napoleon’s tentative to invade Russia.

This is a famous (and superb) representation of what happened to the Grande Armée:

(notice the temperatures at the bottom)

For English-speaking enemies of Napoleon, here is a translated - and more readable - version:

98% losses. When we talk about a disaster, French people still call it “la Berezina”. 200 years later.

I’m only sharing the most relevant extract because the whole essays is nearly an hour-read.

Everything You Need to Know About Napoleon Bonaparte 50min

• Roberts describes a scene in 1812 when Emperor Napoleon is at the height of his power and success, and he’s sitting at a giant table in a palace in Paris with all of his political, diplomatic, and military advisors trying to figure out what to do with this Duchy of Warsaw situation. Russia had annoyingly dragged its feet on previous diplomatic commitments, having failed to effectively join Napoleon’s boycott of Britain, and now it was making demands that mighty France relinquish its influence over tiny Warsaw. Emperor Napoleon’s inclination was to amass France’s unstoppable army, steamroll across Russia’s richest regions, win a quick battle or two, and establish a more favorable long-term treaty with the second biggest European power.

• Nearly all of Napoleon’s advisors said this was a horrible idea. His political advisors pointed out that France had been at war for nearly seven years straight and the people wanted to stop paying the high taxes and seeing their sons die across the continent. His diplomatic advisors said that the Duchy of Warsaw was a poor little plot of land on the other side of the continent and it wasn’t worth making a fuss over. His military advisors said that invading Russia was impossible, that they could never feed their army over there, and that the 400,000 Russian troops were nothing to scoff at. Napoleon had a few supporters here and there, but the mood in the room was clear… we can’t do this.

• In hindsight, it’s easy to see how dumb of a decision Napoleon made. But as Roberts points out, Napoleon’s sentiment after hearing all of his advisors’ concerns was, I’ve heard this many times before, and I’ve always been proven right.

• And it was true. On the eve of many wars and battles, Napoleon’s very talented advisors warned against his plans, and then Napoleon’s judgement and skill proved superior in the end. This happened over-and-over again until Napoleon went from being a random artillery colonel to basically the Emperor of Europe. Thus it might have been entirely rational for Napoleon to discount the judgements of others in 1812 when he proposed invading Russia. This wasn’t like Hitler moronically trying to micromanage Operation Barbosa because he made a few lucky calls during the early days of WW2, this was a true master of military strategy looking at the facts and making an informed decision. And it always worked! Until it didn’t.

Russia has a wonderfully immersive museum to celebrate their crushing victory on Napoleon. Because he could not accept his limits.

(a bit weird to visit for a Frenchman)

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The lessons learnt?

1. Cherish painful feedback.

   • Don’t try and find excuses. No one cares about excuses. People only care about outcomes.

2. Don’t get cocky.

   • Overconfidence kills. Napoleon, Hitler, Crassus… but also aggressive founders or investors on a winning streak.

3. Fail early.

   • It’s less painful when the stakes are small. And you learn faster when your mental models are not yet frozen in carbonite.

Hope you enjoyed this anniversary issue. If you did, do not hesitate to share with like-minded people who love to learn about macro-trends, geopolitics, tech and investing.

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Thanks for reading, and have a lessons-rich weekend,

V

And happy Friday!

In the past 10 years, the financial impact of climate change is already amounting to several hundred billion of dollars.

Experts agree that this is just a tiny beginning.

But I still think some incredibly high-magnitude consequences are currently overlooked.

Asian populations will be flooded by 2050

Asia currently represents 60% of the global population.

Even more striking: this population is largely concentrated in a smallish area. We have all seen this map:

To top it all, this population is partially concentrated in coastal cities:

This explains why Asia will bear most of cost of climate change by 2050:

If we only focus on rising sea levels for now, this is scary:

Look at this (poor) overlap of the 2 maps:

Notice any pattern?

By 2030, some megacities GDP could already be wiped out:

I don’t think most people realise the magnitude of the catastrophe. Beyond the impact on people’s lives, the financial impact on a global economy that relies on Asia as its main growth engine will be devastating. For everyone.

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The world might run out of food before 2050

This is where we grow our crops:

This is where working outside in summer will become deadly:

Let’s overlap?

I’ll let you draw your own conclusions.

Remember that most farmers do not own air-conditioned agricultural machinery.

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African & Indian temperatures will become lethal by 2100

Africa’s population is rising at an incredible pace:

It will slow down, like the rest of demographic-transitioned countries:

And the world population will plateau, around 2100:

But by then, Africa and Asia will collectively represent 80%+ of global population:

This population will largely live in megacities of 25-100 million people (which I can hardly imagine the looks of):

Now, this looks awfully concentrated between the tropics.

According to expert predictions, this will most likely destroy any hope of serious economic growth for these populations:

Last overlap for today?

Yep.

That’s awful.

What troubles me the most is that no one really seems to think of the magnitude of this impact.

It is bound to transform any geopolitical balance we are currently familiar with. Not to explicitly mention never-ending wars.

Just wanted to make sure that at least you guys understood what current predictions agree might happen.

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Thanks for reading, and have a cool weekend,

V

And happy Friday!

A short history of private property

Mankind started evolving the notion of private property when we shifted from a hunter-gatherer society to an agricultural one.

• Before we settled down as species, it made little sense for us to fight for more possessions than we could physically carry around.

• Power struggles were still omnipresent, but mostly for status and the reproduction advantage it entailed (similar to chimpanzee tribes nowadays, chimpanzees even waging wars on each other (Gombe Chimpanzee War)).

Permanent settlements made the upside of controlling more physical possessions virtually unlimited, from city-states to continent-spanning empires.

• Controlling populations became a necessity as well: large wealth attracting competition from other rulers, each one needed to draft armies to protect their "belongings" or steal others'.

• However, full private property remained the privilege of rulers and their nobility for a very long time, individual "commoners" never truly owning any land (let's not even mention slaves).

According to Ron Davison (The Fourth Economy: Inventing Western Civilization), private property (of land) as a social invention occurred very late in our shared history: "It was not until the twelfth century that the Catholic Church accepted the legitimacy of private property.".

• This, combined with other socio-political factors such as plagues and famine decimating the workforce, triggered a progressive social shift towards individual rights.

• Private entrepreneurship could now happen: people could start working towards creating wealth for themselves and their families, rather than for it to be confiscated by the ruling class.

• Of course, this right was far from universal, non-existent in most countries, and took centuries to take hold. But it had started.

• It ultimately resulted in the Industrial Revolution, populist movements across Europe (to acquire more freedom), and the rise of democratic nation-states.

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Fast forward to today: most of us are now lucky enough to live in a society where our private property is assured by stable nation-states who can enforce it according to the rule of law.

• However, those private property rights, the foundation of any wealth, have several limitations people are not usually aware of.

Implications for physical goods

Even today, the whole notion of private property relies on social consensus.

First, taxation: a majority of the population can decide to forcefully confiscate the wealth of a minority.

• Most of the time, the system is not abused, but this remains an eventuality that can happen in perfect legality.

Second, actual abuse by governments.

• In Russia, it is common for members of the "administration" to confiscate real estate or business assets without any legal recourse for the spoiled citizen.

  • The threat of being jailed in awful conditions without any more recourse is usually bad enough to ensure people cooperate.

  • The only real deterrent (besides being on the "good" side of the stick) is "key-man" insurance: if your business relies mostly on your know-how, expertise, and/or personal connections, then it becomes worthless if you are no longer part of it.

• China might be yet another level: according to this article by Ray Kwong, a Chinese billionaire dies every 40 days. You don't want to have so much wealth that the Chinese government wants to control it itself.

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This limitation on physical property goes back to the very fundamental principles of nation-states. I can't recommend enough for anyone to read at least the first half of Anarchy, State, and Utopia by Robert Nozick but, if you won't, this is a brilliant summary in his own words:

• The self-interested and rational actions of persons in a Lockean state of nature will lead to single protective agencies dominant over geographical territories; each territory will have either one dominant agency or a number of agencies federally affiliated so as to constitute, in essence, one.

• And we have explained how, without claiming to possess any rights uniquely, a protective agency dominant in a territory will occupy a unique position.

• Though each person has a right to act correctly to prohibit others from violating rights (including the right not to be punished unless shown to deserve it), only the dominant protective association will be able, without sanction, to enforce correctness as it sees it.

• Its power makes it the arbiter of correctness; it determines what, for purposes of punishment, counts as a breach of correctness.

In summary, as far as states are concerned, might is always right.

The only ways to avoid this hard truth are former feudal systems - that is, if you are lucky enough to be the local lord controlling the area - or frontier regions such as the Wild West: if you are the state or if there is not state, the above cannot apply. But might remains right and you are on your own to secure and defend your private property.

The only exception I can think of is the concept of trusts: putting your assets in a vehicle you are neither directly owning nor even controlling, and often in a jurisdiction out of reach of the state you leave in.

• But the said state usually remains capable of preventing you to enjoy the benefits of that wealth, ultimately by imprisonment if it deems fit.

In the next issues, we’ll explore:

• Implications for dematerialised goods

• Lessons from history

• The case for crypto & decentralisation

Don’t forget to subscribe to receive the other parts if you are not already:

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Thanks for reading, and have a weekend full of freedom,

V