The Capital Note

The Capital Note: Semiconductors, Social Distancing & Scientific Stagnation

A social distancing marker on the USC campus in Los Angeles, Calif., August 17, 2020 (Lucy Nicholson/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: semiconductors, social distancing & scientific stagnation.

Nvidia
Moore’s Law, according to which computing power doubles roughly every two years, has long been the backbone of technological innovation. Smartphones and lightweight laptops were made possible by the steady downsizing of microchips, and, more recently, computationally intensive artificial intelligence-algorithms have gained widespread use thanks to advances in computing power.

While Gordon Moore was referring to central processing units (CPUs), the growth in computing power over the past decade has been driven by graphics processing units (GPUs). Initially intended for graphics-intensive games, GPUs now have the processing power needed for a wide range of AI applications and have thus displaced older chip technologies.

Naturally, the two GPU producers — Nvidia and AMD — have profited handsomely.

Now, Nvidia has agreed to a $40 billion purchase of Arm Holdings, a British chip designer owned by Softbank. Arm designs smartphone processors for Apple, Samsung, and a number of chipmakers.

The deal amounts to a coup in the ever-important microchip industry, as a dominant manufacturer will have its hands on the processor designs used by numerous competitors.

In a letter to the Financial Times, Arm’s founder objected to the deal:

Firstly, it will lead to inevitable job losses in Cambridge, where 2,500 people are employed, as the HQ will move to Silicon Valley. Nvidia bought the Bristol-based company Icera in 2011 and subsequently in 2015 sacked all 300-plus UK-based staff.

Secondly, it will destroy Arm’s neutrality and even-handedness to over 500 licensees all over the world, including European companies which are competitors of Nvidia.

Thirdly, it will make Arm a division of an American company to which the US Cfius regulations apply. This means that the American president can decide which companies Arm is allowed to sell to worldwide. This raises the vital issue of technology sovereignty which the UK and Europe have suffered from for many years.

It remains to be seen how British regulators will respond. The French government recently stepped in to bail out LVMH of its acquisition of Tiffany; Downing Street could follow suit to protect one of its national champions in tech.

In any event, Arm will change hands in the near future. After the ill-fated WeWork IPO, Softbank needs the cash.

— D.T.

Work from Home
In yesterday’s Capital Note, I wrote how JP Morgan Chase had found that working from home came with a productivity cost, notably (mysteriously!) on Mondays and Fridays.

What I didn’t add (but could have) was that the bank had told senior employees in its sales and trading operation that they and their teams must return to the office by September 21.

Not long after I had written that, this was revealed (via ABC):

A number of JPMorgan Chase traders have been sent home after employees tested positive for COVID-19, less than a week into the bank’s push to start bringing its workers physically back into the office.

JP Morgan has been “managing individual cases (of employees testing positive) across the firm over the course of the last few months and following appropriate protocols when they occur,” bank spokesman Brian Marchiony said Tuesday. He declined to say how many had tested positive.

New York-based JPMorgan has been insisting its traders and senior management return to their physical offices, setting a required start date of Sept. 21.

President Donald Trump last week tweeted congratulations to the bank for its push, saying that it was ordering “everyone BACK TO OFFICE.” JPMorgan, however, never had plans to reopen its entire office or return all workers to a physical location.

Marchiony declined to say whether JPMorgan would continue its push to reopen the offices or what percentage of its workforce of about 257,000 was now working physically in branches and offices.

Looking at the details of the story, it involves positive tests “over the course of the last few months,” so, presumably, from a period largely preceding the more general “back to the office” instruction, which, of course, doesn’t formally take effect until September 21, although doubtless it will have been anticipated by quite a few staff.

I suspect that this is what the new normal will look like for a while. People will start returning to work in greater numbers, and while companies will (for reasons of self-interest and, I would hope, more) have a strong reason to take steps to protect their employees, there will, in the end, only be so much that can be done. There are going to be outbreaks from time to time, which will then have to be managed.

This is what working with the coronavirus is going to have to look like. Shutting down large swaths of the economy until a vaccine is widely available is not a viable option, and working from home will, in many cases, prove increasingly impractical for business as time goes by.

Meanwhile The Economist has taken a look at the future of the office. Some of the data are interesting:

Some 84% of French office workers are back at their desks, but less than 40% of British ones are. Jack Dorsey, the head of Twitter, says the company’s staff can work from home “forever” but Reed Hastings, the founder of Netflix, says home-working is “a pure negative”.

In The Economist’s view, Germany might provide a clearer indication of what lies ahead:

The best available guide is from countries where the virus is under control. There the picture is of an “optional office”, which people attend, but less frequently. In Germany, for example, 74% of office workers now go to their place of work, but only half of them are there five days a week, according to surveys by Morgan Stanley. The exact balance will depend on the industry and city. In places with easy commutes more workers will go to the office; megacities with long, expensive journeys may see fewer.

But:

There is a risk that over time a firm’s social capital erodes, creativity flags, hierarchies ossify and team spirit fades, as Mr Hastings fears. The answer is more targeted staff interactions, with groups gathering at specific times to refresh friendships and swap information. New technologies that “gamify” online interactions to prompt spontaneity may eventually supersede the stilted world of Zoom.

“Targeted staff interactions.” Group gatherings to “refresh friendships and swap information.” Gamifying “online interactions to prompt spontaneity.” Suddenly, a new vision of hell, presided over by David Brent from the U.K.’s The Office, comes into view. Count me a little skeptical.

In yesterday’s Note I also added that, for all my belief that the death of the office had been overstated, “we could see a future where much more employment is transformed into, essentially, piecework from home”. But that, I argued, was “a dystopia for another day.”

That’s so, in my view, but I couldn’t help noticing this from Business Insider today:

Payments company Stripe has reportedly started offering a new deal to its employees based in major cities: move out of New York, Seattle, or the Bay Area and take a pay cut — but also receive a $20,000 bonus.

That’s according to a report from Bloomberg’s Anders Melin, who reported that Stripe employees may see as much as a 10% cut to their base salary for relocating, and that the offer will be available to anyone who decides to move before the end of 2020.

A spokesperson for Stripe did not immediately respond to Business Insider’s request for comment.

Several other tech companies have started examining employee pay as more workers leave expensive cities like San Francisco for places with a lower cost of living and more space. Software company VMware, which has said its employees may work remotely on a permanent basis, has decided to reduce the salaries of those who have moved to less expensive cities by as much as 18%, according to a recent Bloomberg report.

Hmmm…

— A.S.

Around the Web
The elusive V (continued)…

Yelp on Wednesday released its latest Economic Average Report, revealing business closures across the U.S. are increasing as a result of the coronavirus pandemic’s economic toll.

As of Aug, 31, 163,735 businesses have indicated on Yelp that they have closed. That’s down from the 180,000 that closed at the very beginning of the pandemic. However, it actually shows a 23% increase in the number of closures since mid-July.

In addition to monitoring closed businesses, Yelp also takes into account the businesses whose closures have become permanent. That number has steadily increased throughout the past six months, now reaching 97,966, representing 60% of closed businesses that won’t be reopening.

“Overall, Yelp’s data shows that business closures have continued to rise with a 34% increase in permanent closures since our last report in mid-July,” Justin Norman, Yelp’s vice president of data science, told CNBC.

Argentina’s neo-Peronist government is increasing its efforts to keep dollars in the country:

“It’s a negative signal mostly because it shows desperation,” said Alejo Costa, chief Argentina strategist at BTG Pactual in Buenos Aires. “When under pressure, they double down on restrictions and financial repression.”

The measures announced by the government of President Alberto Fernandez are similar if not more restrictive than those implemented by Cristina Fernandez de Kirchner, currently his vice president, during her second mandate in the past decade.

Going forward, Argentines seeking to purchase dollars for savings will need to pay a new 35% tax on top of the previous 30% so-called solidarity tax, and they’ll still be limited to buying no more than $200 a month. The extra levy will also affect credit-card purchases in dollars.

The central bank also asked the country’s securities regulator to raise the minimum holding period on dollar assets received from abroad to 15 working days. The holding period, known locally as “parking,” will no longer be required for sales of dollar-denominated assets that settle in local currency.

Fernandez’s administration is seeking to reduce the gap between Argentina’s official exchange rate — where $1 fetches about 75 pesos — and that on the black market, where a dollar costs about 130 pesos. The previous restrictions weren’t enough to shore up dollar reserves, which Credit Suisse estimates have dwindled to a net $6 billion.

The peso’s collapse against the “Blue Dollar” (dólar blue) (the free market price of the dollar) as traded on the street or in a not entirely respectable forex shop (cueva) has been remarkable. The official price of the peso has moved from around 60 to the dollar at the end of 2019 to about 75 today. Meanwhile the Blue Dollar has moved from about 70 to some 145 today.

This isn’t going to end well.

Amazon, flying high…

The airline industry may be reeling from the coronavirus pandemic, but Amazon’s air cargo business has rapidly accelerated in recent months.

Between May and July, Amazon added nine planes to its Amazon Air fleet, “the most it has added over a three-month span since its inception,” said the report issued Thursday by DePaul University’s Chaddick Institute for Metropolitan Development.

“Amazon Air expanded rapidly during summer 2020, a period otherwise marked by sharp year-over-year declines in air-cargo traffic,” the report states.

Amazon Air now includes about 70 planes and the fleet is expected to grow to more than 80 by 2021, Amazon said in June. That’s up from the 50 planes it counted in February 2019.

Amazon’s air fleet, launched in 2016, is a critical part of its push to provide one- and two-day delivery. The company still relies on outside carriers for a significant share of its deliveries, but it has gradually moved more of its logistics operations in-house, allowing it to better control costs and delivery speeds. Analysts believe Amazon’s air fleet, combined with its massive network of airplanes, truck trailers and vans, could one day position it to rival UPS and FedEx

Random Walk
Tech has powered the U.S. economy in recent decades, but numerous observers have questioned the rate of technological progress. Robert Gordon, Peter Thiel, and Tyler Cowen, among others, have noted a decline in the returns to scientific research. Meanwhile, tech has lost its “disruptive” ethos as a handful of companies has come to dominate the market. Indeed, the rate of startup formation has significantly declined since the late 1990s.

One theory is that science is simply becoming harder. The corpus of scientific knowledge is now so large that small teams are increasingly unlikely to make a dent. A recent NBER working paper lends credence to this theory:

We argue and find that an increasing burden of knowledge also leads to fewer high-tech high-opportunity startups. We argue and find that it also leads PhDs to amass greater work experience before becoming a founder, to shoulder more R&D tasks as founders, and not being rewarded for that extra work. Working for existing firms has, therefore, become considerably more attractive…

We find that the number of different R&D tasks has increased more for founders than for workers. And the returns to experience have increased over time for founders but not for workers, highlighting the increasing need for a single person––the founder––to cope with the burden of knowledge in startups. Workers at established firms have, instead, comfortably narrowed their span of control, employed more people indirectly under their control to support their work, and kept administrative duties low.

— D.T.

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