What I Learned This Week: Bernard Baruch Elbert Hubbard

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WHAT I
LEARNED
THIS
WEEK
®
January 11, 2018
Millions saw the apple fall, Pray that success will not Scholars at Duke University
but Newton was the one come any faster than you are studied 11,600 forecasts by
who asked why. able to endure it. corporate chief financial
Bernard Baruch Elbert Hubbard officers about how the
Standard & Poor’s 500-stock
index would perform
He who has the confidence When we are born we cry over the next year. The
in himself will lead the rest. that we are come to this correlation between their
Horace great stage of fools. estimates and the actual
William Shakespeare index was less than zero.
Nothing is more humiliating David Brooks, The New

than to see idiots succeed To win without risk is to York Times, October 23,
in enterprises we have triumph without glory. 2012
failed at. Pierre Corneille, Le Cid
Gustave Flaubert A friend cannot be known
When a man gets up in the in prosperity: and an
If nobody ever said anything world, people want to down enemy cannot be hidden in
unless he knew what he was him; when he gets down in adversity.
talking about, a ghastly the world, people want to The Apocrypha,
hush would descend upon help him. Ecclesiasticus 6:14
the earth. Edgar Watson Howe
Alan Herbert
What you cannot see
Some men succeed by what
in the world is far more
I have noticed that nothing they know; some by what
I have never said, did me they do; and a few by what powerful than anything
any harm. they are. you can see.
Calvin Coolidge Elbert Hubbard T. Harv Eker
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WHAT I LEARNED THIS WEEK

January 11, 2018
Contributors
Kiril Sokoloff
Publisher
Chairman & Founder
Jay Sellick, CFA Woody Preucil, CFA

Senior Managing Director Senior Managing Director
Arvind Sachdeva, CFA Kate McClure-Sokoloff

Senior Managing Director—Global Senior Managing Director
Market Strategy
Anurag Bansal Lei Yang, CFA

Managing Director—East Asia/ Senior Managing Director—Asia
Central Asia
Trevor Noren
Damaris Colhoun
Managing Director
Managing Director
Peng Zhou Tamra James

Managing Director—China Associate Research Analyst
Ankit Bansal Dora Pang

Senior Research Analyst—East Asia/ Associate Research Analyst—China
Central Asia
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January 11, 2018
Table of Contents
01 What would confound market participants 07 The largest unregulated social experiment
the most in 2018? Rather than issue another of all time is going on right now. P.26
forecast in a sea of thousands of forecasts, we
analyze what are the markets telling us and
then combine that with the consensus and the
big surprise. P.4 08 Will blockchain reinvent social media? Can
it decentralize Facebook’s control? P.30
02 Is China exporting inflation? China’s real

interest rate has fallen into negative territory
again. P.7 09 The U.S. is losing its lead to China in the
technologies that will define the 21st
century. Will the wake-up call be heard?
03 Emerging market stocks and many “The difference is that China seems to think it’s
reflation-markets will accelerate their a race and America doesn’t.” P.34
gains if the U.S. dollar’s 15-year down cycle
accelerates. P.11
10 “2018 will be the year of microprocessor
vulnerabilities, and it’s going to be a wild
04 Longevity science approaches “escape
ride.” This is what security expert Bruce
velocity.” Are you ready? P.16
Schneier wrote on his blog last week about the
two hardware-based cyber-attacks Meltdown
and Spectre. P.39
05 The coming twilight of the petrodollar
(continued). Profound shifts in the market
for crude oil and the U.S. currency could
open another trap-door for the dollar. The 11 The best innovations are guided by
prospective loss of a major bidder for U.S.
beauty and informed by both science and
Treasuries raises the likelihood that the three-
humanism. The new biography of Leonardo
decade-plus bull market in fixed income is
da Vinci by Walter Isaacson could change the
finally ending. P.20
world if enough people learn its essential
message. P.43
06 A buy signal for oilfield services and
equipment: the ratio of low-beta to high-
beta energy stocks is breaking-down from
a two-decade high. Will 2018 be the year
that positive stock-price performance will be
sustained for the oilfield service sector? P.22
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January 11, 2018
1
What would confound market participants
the most in 2018?
Rather than issue another forecast in a sea of thousands of forecasts, we analyze
what are the markets telling us and then combine that with the consensus and
the big surprise. The big surprise might be “is the S&P 500 close to peaking”?
The following signals may be providing important clues.
On January 3, 2018, perma-bear Jeremy Grantham of GMO wrote a client memo

entitled “Bracing Yourself for a Possible Near-Term Melt-Up”. “I find myself”,
he wrote, “in an interesting position for an investor from the value school. I
recognize on one hand that this is one of the highest-priced markets in U.S.
history. On the other hand, as a historian of the great equity bubbles, I also
recognize that we are currently showing signs of entering the blow-off or melt-
up phase of this very long bull market…A melt-up or end-phase of a bubble
within the next 6 months to 2 years is likely, i.e., over 50%.” (Yesterday,
Charlie Munger, vice chairman of Berkshire Hathaway, said there was too much
money in venture capital, Silicon Valley is a bubble and compared the current
environment to the dot-com bubble in 2000.)
Sentiment has been a useless indicator in this central-bank-fueled equity boom

since 2009. However, capitulation by noted market participants has been
extremely helpful. We received a major buy signal on crude oil on August 3,
2017, when “oil-god” trader and perma-oil bull Andy Hall closed his hedge
fund. At the time, Brent was selling for $52.40 and today trades at $69—an
increase of 32%. We also received a buy signal on natural gas on March 2, 2016,
the day of Aubrey McClendon’s tragic death. The next day U.S. natural gas prices
bottomed at $1.61—their lowest price since the early 1990s. February 2018
natural gas is currently selling for $3.02. The few great value investors who were
left during the internet bubble of the late 1990s closed their funds just as the IT
bubble was ready to burst in the first quarter of 2000. Many commodity hedge
funds closed in 2015, the year that commodities were making a major low. It’s a
painful but frequent occurrence at market extremes.
Another useful and one of our highly-original indicators is what we call

“buy when they give it away”—the ultimate capitulation. In 1977, at the
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January 11, 2018
bottom of the New York City real estate market, a triplex on East End Avenue,
sold for $1 because the $3,000 a month maintenance fee was “depleting the
value of the estate”.
Another example is the collapse in commodities in the early to mid-

1980s. A friend of ours was the controller of a major oil company, which had
purchased at very high prices, a number of aluminum and base metal assets
during the hyperinflation of the late 1970s. By the mid-1980s, these assets were
hemorrhaging losses and my friend was able to purchase from his employer
an aluminum property in the West at zero cost. Within a few years, that
aluminum smelter was generating profits of $100 million a year.
In the October 14, 2002 WILTW, we wrote as follows: “Saints Ventures, LLC
reports that sellers are now liquidating venture investments at 80% to 90% of
the original investment. Certainly not free, but close enough to be interesting.”
In the June 25, 2015 WILTW, we received the ultimate capitulation on the
commodity sector. A few months early for short-term traders, but for asset
allocators that move tens of billions of dollars into various asset classes, the
timing was excellent as many beaten-down commodity equities have generated
astronomical returns since early 2016.
We quote as follows:
Last week, Glencore sold the Cosmos nickel mine for AU$24.5 million. In
2008, Xstrata Plc paid AU$3.1 billion for Jubilee Mines to gain control of
Cosmos—the Perth-based company’s flagship operation. Last year, Glencore
sold the secondary Sinclair project to Talisman Mining for $8 million plus a
$2 million contingency. While full accounting is not so straightforward, in
simplest form, the properties were bought and resold 7 years later at a
99% loss. Xstrata, which was purchased by Glencore in 2013, acquired Jubilee
when nickel was selling for about $32,000 a metric ton—2.5 times higher than
where it now trades. Bloomberg recently noted that Rio Tinto Group similarly
sold Mozambique coal assets last year that it bought in 2011 with the AU$3.9
billion takeover of Riversdale Mining. The selling price? $50 million.
For what it’s worth, Javier Blas tweeted this week that, based on data from Citi
Research, 90% of all M&A that miners did since 2007 has been written off.

January 11, 2018
The only other sentiment indicator that has been recently helpful has been
Investors Intelligence, a 64-year old survey of investment newsletters. The
January 10, 2018 publication revealed extremes that are worth noting. We
quote as follows:
The bulls ended at 64.4%, rebounding from 61.9% last issue…It was the 13th
consecutive reading in the “danger zone” of 60% and higher. They call for
defensive measures…Late Jan/early Feb-17 also had lofty bull levels, including
a peak at 63.1%, so excessive optimism held for much of 2017. Sentiment
readings have roughly followed their 1987 pattern…History shows tops
form slowly, often over many months. That is certainly the case over the
last year.
For months, we have been warning that inflation is coming, commodities

are heading higher, and bond yields are going to rise globally. Evidence
continues to mount as we demonstrate in section 3. No one seems to be paying
attention to soaring crude oil prices, nor the growing geopolitical risks in MENA
(see sections 5 and 6). In section 2, we discuss a view we have had for some
time, namely that China is exporting inflation and it could be a shock to
market participants who believe China is still an exporter of deflation.
Mutual fund managers are holding the lowest amount of cash on record.
Stocks as a percentage of financial assets are at the second highest level in
history, only exceeded by the peak of the internet bubble in 2000. Individual
investors, as calculated by AAII, hold the least amount of cash since 2000.
U.S. stock market capitalization as a percentage of GDP is at its second highest
in history, only exceeded by the 2000 internet bubble. The NYSE reports that
margin levels are at record levels on an absolute basis, and as a percentage of
GDP, has hit historic highs. A University of Michigan survey last October found
that nearly 65% of those polled expect the stock market will rise in the next
12 months—the highest on record. The S&P 500 has gone 386 trading days
without a drop of 5%, the longest since 1996. The Wall Street Journal reports
that “many investors have decided that spending cash to hedge against big
declines is a waste of money.” And, while investor confidence appears to be at
its height, the tide of “free money” from the major central banks—which helped
draw so much investor capital into the markets looking for a decent return—has
begun to recede.

January 11, 2018
Markets are Machiavellian and behave in a way to confound the greatest

number of market participants. Here is a truly-Machiavellian market outlook.
First, equities are in a secular bull market, but are headed for a sharp decline
in 2018 that could begin at any time (no one believes this). Second, the U.S.
dollar could fall against the euro by 15-25% with a target exceeding $1.40 at the
end of 2018 (no one believes this). Third, the dollar’s significant decline means
that equities outside the U.S. will continue their outperformance of U.S. equities.
Fourth, the dollar has entered its fourth 15-year down cycle. On average,
according to research by A.G. Bisset, the dollar dropped 39% against the
euro in the first three years of the 15-year cycles that began in 1971, 1985
and 2001. A 39% decline is equivalent to the euro rising 64% against the dollar.
Fifth, given the risk of a big drop in the dollar versus euro and U.S. equity prices,
A.G. Bisset suggests this is “the riskiest investment climate in 45 years for
euro-based investors.”
At times like this, it may be wise to remember the words of Nathan Rothschild,
1st Baron Rothschild: “I never buy at the bottom and I always sell too soon.”
2
Is China exporting inflation?
Over the past 18 months, we have warned repeatedly about the growing risk
of China exporting inflation to the rest of the world. For instance, in WILTW
September 1, 2016, we wrote: “[G]iven China’s position as the world’s largest
commodity-consumer and global-manufacturing hub, China is in a position to
spread inflation globally, as it did during the post-crisis period between 2009
and 2012, and in a fashion similar to the deflation it spread in the years after
that…If China is able to spread deflation so effectively, then it should be
able to spread inflation when the cycle kicks-in.”
Then, in WILTW September 7, 2017, we wrote: “China’s experience in aluminum

could portend a tidal wave of price hikes from many China-based producers.
For many years, China was criticized by the West for adding enormous amounts
of industrial capacity, such as steel, aluminum, cement, and home appliances,
while at the same time the West was enjoying the low costs enabled by the
same excess capacity they were criticizing. Now, Beijing appears set to deliver
what the West has long wanted, namely, the prohibition of industrial capacity

January 11, 2018
additions that might cause further unnecessary harm to the environment…

the days of the world free-riding China’s industrial capacity are over and
perhaps will never return.”
Finally, in WILTW November 9, 2017, we noted that since China’s labor surplus
has turned into a secular labor shortage, it is highly likely the China-driven
deflation that swept across the globe has run its course. Therefore, China’s
demographic profile supports the notion that it will export inflation to the rest
of the world.
In addition to widely-reported price hikes for coal and steel, there are many
other examples of burgeoning inflationary pressures that have not made
headlines. These include the following:
Pork prices have risen for eight consecutive weeks, according to data from
the Ministry of Agriculture, registering a total gain of 8%. (Please see WILTW
August 24, 2017, for a more detailed analysis of China’s pork price gains.)
Last week, The Civil Aviation Administration of China, which regulates

domestic airlines, said that it would allow air carriers to set their own prices
on domestic routes that have at least five competing carriers, with the
restriction that price increases would be limited to 10% during each travel
season. The liberalization of airfares helped push the share prices of major
Chinese airlines toward 30-month highs. (Please see WILTW September 14,
2017, for more discussion of the airline sector).
Last December, Kweichow Moutai (600519 CH, CNY 785.71), a major premium
liquor producer, announced that it would raise prices by around 18%, the
company’s first price hike in more than five years. This week, the total market
value of Moutai reached 987 billion yuan (€127 billion), which is higher than
the market value of LVMH Moet Hennessy Louis Vuitton (MC FP, €244.80),
which now stands at €125 billion EUR. To our knowledge, this is the first
time that the market value of a Chinese consumer brand exceeded
market value of an established global competing brand.
Could this mark the beginning of the ascendancy of Chinese brands on the
global stage? We expect more stories like this to come out of the Middle
Kingdom in the future.

January 11, 2018
Last week, most major Chinese breweries announced price hikes for the
first time in a decade. The announcement drove the share prices of major
Chinese beer makers, such as Tsingtao Brewery (600600 CH, CNY 42.81; 168
HK, HKD 45.80) and China Resources Beer (291 HK, HKD 30.30), to 30-month
highs.
On top of all this, China is now enduring its most severe winter in many
years. More than 20 people died in the cold front that hit most parts of the
country last week. The China Meteorological Administration said this week
that six provinces in Central and Eastern China will have another freezing week
ahead, as a fresh cold front is approaching. Major cities in these regions are
expected to register the lowest temperatures in decades.
Inflation often spikes higher following extreme-weather conditions. One

prominent example is the winter of 2008, when most parts of East and South
China were hit by the worst winter storm in 50 years, which paralyzed the power
grids in those regions and pushed consumer prices to multi-year highs during
the ensuing spring. Will this year’s cold winter exert a similar impact on future
inflation readings? Only time will tell, but we would not bet against it.
Diana Choyleva, chief economist at Enodo Economics, wrote an article on the

topic in the December 27th Financial Times, headlined “Don’t Rejoice when
China Exports ‘Bad’ Inflation.” We quote:
China’s inflation story…is also driven by a large overhang of money that has
been injected into the economy since the global financial crisis. The ratio of
broad money to gross domestic product surged to 244% at the end of 2016
from 174% in 2008. Through strict enforcement of capital controls since the
end of 2016, Beijing has forced households…and, increasingly, companies…
to bottle up their money at home yet again. A recent pick-up in the velocity
of money (the speed at which money changes hands in the economy) could
be a pointer to an acceleration of inflation in coming quarters…
By our calculations, Chinese export price inflation in renminbi accounts for

one-fifth of the variation in the common inflation trend in rich countries. The
common trend itself explains about two-thirds of the average rate. So the

January 11, 2018
overall impact of Chinese export price inflation on global inflation is about

13%. This is not negligible. A mild inflationary jolt from China could give
central banks in advanced economies the push they need to wind down
their super-loose monetary policies.
A trusted friend sent us an email on this topic, which stated: “China has a
massive amount of domestic deposits that are stuck, and we are seeing early
signs those deposits are starting to move and get spent. At the same time
the credit channel is being used to support demand and constrain supply
which is inflationary. And as inflation picks up, real yields go more negative
and domestics are more likely to spend these savings. This can become
reflexive…”
December’s year-over-year CPI rose 1.8%, versus 1.7% in the prior month.
The real interest rate, calculated as the one-year bank deposit rate minus
CPI growth, fell into negative territory again. Real interest rates have been
hovering around zero in China over the past several months, as shown in
the following chart. And, it would come as little surprise if real interest rates
remained below zero for the most of this year.
China’s Real Interest Rate, Jan. 2012 – Present
Source: Wind Info. & 13D Research

January 11, 2018
3
Emerging market stocks and many reflation-
markets will accelerate their gains if the
downturn in the U.S. dollar’s 15-year cycle
accelerates.
As shown in the table below, emerging market stocks and many reflation-
markets out-performed the S&P 500 and the MSCI World Index during the last
two years.
Market/ Indicator 2016 2017

MSEMF +8.58% +34.35%
Copper +17.35% +31.73%
Industrials Metals Index (GYX) +18.90% +30.95%
Brazil Bovespa +38.93% +26.86%
Metals & Miners Index (XME) +106.04% +21.17%
Euro -3.08% +14.07%
Gold +8.60% +13.68%
WTI Crude Oil +44.92% +12.47%
EM Currencies Fund (CEW) +4.11% +11.09%
Australian Dollar -0.92% +8.33%
Canadian Dollar +2.89% +7.36%
Gold Bugs Index (HUI) +63.98% +5.48%
Japanese Yen +2.84% +3.80%
CRB Index +9.21% +0.70%
USD Index (DXY) +3.59% -10.23%
MSCI World -0.13% +21.03%

MSCI World (in EUR) +3.05% +6.10%
S&P 500 +9.54% +19.42%
S&P 500 (in EUR) +13.02% +4.69%

January 11, 2018
Market-action and technical clues almost always lead economic and

fundamental evidence. Last year’s strong performance in many of the markets
that historically benefit from the global reflationary forces, and have traded
inversely with the U.S. dollar, suggest that global economic-growth and
inflation are likely to continue to surprise to the upside.
Capital rotation in the reflation-markets during the last two years caused many
market participants to question the durability of the global reflationary-forces.
However, nearly every reflation-market and related indicators now appear to be
signaling the following message:
Synchronized global growth for the first time since 2007.
Global inflation is heading higher.
Commodities—led by the energy sector in 2018—are heading higher.
Global bond yields—especially those that are behind the curve such as
German and Japanese bond yields—are heading higher.
Global capital-dispersion into the longest-depressed markets is poised to

accelerate further.
Central banks are falling behind the curve.

January 11, 2018
CHART A: Pring Inflation Index [top]. SPDR Metals and Mining ETF (XME)
with iShares TIPS Bond ETF (TIP) vs. iShares 7-10 Year Treasury Bond ETF
(IEF) – Weekly. As noted in the charts, the Pring Inflation Index and the XME
have surged to new bull-market highs. Historical correlations suggest that
the TIP-to-IEF ratio is also likely to register new highs—which would indicate a
break-out in the bond-markets’ inflation expectations.
Source: StockCharts.com

January 11, 2018
CHART B: Reuters/Jefferies CRB Index with DJ Australian Small Cap Index

[top]. CRB Index with GSCI Industrial Metals Index (GYX) vs. UST 10-Year
Note – Weekly. The Aussie small caps and the CRB-to-Industrial Metals ratio
have advanced sharply to new bull-market highs. The large divergence versus
the CRB Index warns that this broad commodity benchmark is likely to break out
and rally sharply.

January 11, 2018
CHART C: Oil Services Index (OSX) vs. S&P 500 [top]. Materials Select
Sector SPDR (XLB) vs. Consumer Staples Select Sector SPDR (XLP) with
Energy Select Sector SPDR (XLE) vs. XLP – Weekly. As noted in the first chart,
the OSX-to-S&P 500 ratio appears to be in the process of breaking-out from a
multi-month base. The rising lines in the ratios shown in the lower chart indicate
rising investor confidence toward commodity-related equities. The XLE-to-
XLP ratio has formed a large divergence versus the XLB-to-XLP ratio. Historical
correlations suggest that energy stocks appear poised to rally sharply.

January 11, 2018
4
Longevity science approaches “escape
velocity.” Are you ready?
We have tracked developments in life-extension science since 2001, and the
sector now appears to be rapidly approaching a major inflection point. The
world is poised to make as much progress biologically in the next 10 years as it
has made in the last century, underscored Peter Diamandis in a recent webinar.
Aubrey de Grey championed the term longevity “escape velocity,” the point at
which increases in life extension will catch up and exceed the passage of time.
Ray Kurzweil believes that we will reach life extension “escape velocity”
in a decade—when science will add over a year to your life for every year you
are alive. Kurzweil says: “I predict it’s likely just another 10 to 12 years before the
general public will hit longevity escape velocity. At that point, biotechnology is
going to have taken over medicine.”
Biohacker Serge Faguet made the case in the webinar that we may have
already reached “escape velocity.” Summarizing Faguet: The average person in
relatively well-off countries dies at about age 93 today, with consistent gains in
life expectancy over the last 40 years in wealthy countries—except the U.S.—
adding about 2.5 years per decade to life expectancy. Extrapolating these
trends, even without exponential technology, indicates that we are on-track to
live to about 120. Imagine the progress that will be made over the next 65
years—the remaining lifespan for the current middle-aged population.
Rapid advancements in life-extension research are transforming healthcare

from a symptom-based reactive model to a predictive medicine, value-
based structure. Driving the change are the convergence of low-cost DNA
sequencing, AI, big data, and the emergence of “Quantified Life” healthcare
(see WILTW July 12, 2012). The technologies are being applied to directly attack
the three major causes of death: heart disease, cancer and neurodegenerative
diseases. AI is helping to create new drugs, find new uses for existing drugs and
discover new biomarkers.
Over 30 new anti-aging therapies that slow down or reverse aging in

laboratory animals have been developed, and are moving toward clinical
trials, calculates the American Federation for Aging Research. The coming
disruption to the $3 trillion healthcare market and $4 trillion global insurance

January 11, 2018
sector will create new winners and losers. Scarcity-minded governments will
react saying, “Social Security will be destroyed,” notes Diamandis and Kurzweil,
while “the more abundance-minded will realize that extending a person’s
productive earning lifespan from 65 to 75 or 85 years old would be a
massive boom to the GDP.”
Numerous breakthroughs have been made since our last memo on longevity
science (WILTW January 19, 2017), including the identification of the first
anti-aging gene. Discovered in a small Amish community in Indiana, the gene
mutation provides a 10% longer lifespan over the general Amish population.
Rapamycin, a bacterial agent used in organ transplant and made by Novartis

AG (NOVN SW), has been shown to extend the lifespan of mice by 25%, while
also protecting against cancers. A key recent finding is that rapamycin extends
life in mice even at fairly advanced ages—the human equivalent of 70 years—
indicating longevity treatments can have a meaningful impact even later in life.
A few people have already begun taking rapamycin and are participating in
informal clinical trials. The chart below highlights potential transformative life-
extension technologies:
Source: Josh Mitteldorf blog

January 11, 2018
Three areas that show promise are senolytic drugs that remove senescent cells,
NAD+ supplementation, and stem cell therapy.
Senescent Cells – have been implicated as a significant cause of chronic

diseases of old age, including kidney dysfunction and type 2 diabetes.
Until recently there has been no way to remove them, notes a recent
LongevityFacts.com analysis. However, a Mayo Clinic experiment in mice
showed that a group of drugs called senolytics were able to kill 50-70% of
senescent cells without harming healthy ones. A second study used genetic
engineering to remove the senescent cells. In both cases the treated mice
saw a 20-30% jump in lifespan, better health, stronger kidneys/hearts, and
less cancer.
Another study by Professor Lorna Harries at the University of Exeter

discovered a new way to rejuvenate senescent cells, using a novel
formulation of resveratrol.
Nicotinamide Adenine Dinucleotide (NAD+) – is a naturally occurring

coenzyme that helps to maintain cellular functions. By age 50, humans have
about half as much NAD+ as they did when they were 20 years old. Low
levels of NAD+ have been linked to numerous diseases, including multiple
sclerosis, Alzheimer’s and cardiovascular disease. NAD+ is also involved in
numerous cellular repair processes, and promotes the repair of damaged
DNA2.
However, NAD+ cannot by itself enter cells, so injections or taking a pill

won’t work. But, the compound nicotinamide mononucleotide (NMN) can
penetrate human cells and transform into NAD. Multiple trials of NMN have
shown it “reanimated” brain, skin and muscle stem cells. Human trials are in
progress. There are also numerous physicians who have begun to administer
NAD+ as an intravenous infusion, notes Dr. Terry Grossman. Individuals
often report improved energy, memory, mental focus and concentration.
Stem Cell Therapy – Stem cells are the repairmen of the human body and
replicate to produce new young cells when needed. The most common
present-day use of stem cells is in the treatment of degenerative joint
disease. Using stem cells derived from a patient’s own bone marrow, fat
and/or blood has helped thousands avoid major surgeries such as knee
replacements. Two promising new stem cell therapies include:

January 11, 2018
√√ Stem cell brain implants. Implants of stem cells that produce fresh
neurons in the hypothalamus—a region that produces hormones and
signaling molecules—slowed aging in older mice. The implants kept
them more physically and mentally fit for months—extending their
lives by 10-15%. Human trials are planned, highlights an analysis in The
Guardian. “Of course, humans are more complex,” noted Dongsheng Cai
of the Albert Einstein College of Medicine. “However, if the mechanism
is fundamental, you might expect to see effects when an intervention is
based on it.”
√√ Specialized stem cells may rejuvenate aged hearts. Cedars-Sinai Heart
Institute researchers showed that injecting aged rats with specialized
stem cells from the hearts of newborns rejuvenated the older animals. It
also improved heart function, increased exercise capacity, and reversed
biomarkers of aging, notes a Medical News Today report.
Gene editing is an emerging transformative tool for longevity science.
CRISPR CAS9 provides a way to alter gene expression in specific cells,
with numerous applications under development (see WILTW August 10,
2017). Harvard geneticist George Church is using CRISPR and other gene
editing techniques to grow human organs inside of pigs for transplantation,
transforming wild species to become resistant to Lyme disease and malaria, and,
soon to potentially reverse aging in dogs. Startup Rejuvenate Bio plans to begin
aging reversal tests in dogs in 2019, with human trials to follow in 2022.
The nascent longevity sector represents an opportunity to invest in

an emerging industry that ultimately may become one of the largest
commercial markets ever. The Global Longevity Thematic Index (ILNGR)
broke out to a new all-time high last week, but is still trading only at about
19.8x consensus cash flow, below its long-term median of 23x. Although full
immortality may remain elusive, technology advances could provide significant
additional productive years—uncovering cures and treatments for numerous
chronic illnesses.
Peter Diamandis, who has started three longevity companies, divides the
equation into three phases: (1) the fundamentals—eating healthy, sleep, and
exercise; (2) digitizing the body to understand what’s going on—"if you can’t

January 11, 2018
measure it, you cannot impact impact it”—in order to not die prematurely from
something preventable before we reach life-extension escape velocity; and (3)
regeneration by applying the new technology breakthroughs.
Immediate action steps individuals can take include: (1) monitoring sleep
quality using the Oura Ring at night; (2) eliminating all forms of sugar, as cancer
cells feed on glucose; (3) supplementing diet with metformin (available by
prescription from an anti-aging physician) to reduce the amount of sugar in
the bloodstream; (4) incorporating intermittent fasting to reduce caloric intake
(a 20-40% reduction is proven to increase lifespan and improve health); and (5)
generating a model of the inner workings of the body (Diamandis recommends
the Viome kit). A comprehensive review of Serge Faguet’s regimen can be found
here.
Diamandis emphasizes four mindsets that are critical for longevity: (1) maintain
an inner focus for a long healthy life—“if you believe you’re going to die, you
will”; (2) have a constant excitement and curiosity for tomorrow because
we are living in a world of miracles; (3) bring love and gratitude into every
aspect of your life; and (4) when you run into a problem, solve it—refuse to let
the problem slow you down.
5
The coming twilight of the petrodollar
(continued). Profound shifts in the market
for crude oil and the U.S. currency could
open another trap-door for the dollar.
Yesterday, Bloomberg reported that Chinese officials are considering either
slowing or halting their purchases of U.S. Treasuries, which caused ten-year UST
yields to spike to their highest levels since March 2017. Combined with the
global retreat from QE among the major central banks, the prospect of the loss
of a major bidder for Treasuries raises the likelihood that the three-decade-
plus bull market in fixed income is finally ending. Bond guru Bill Gross
tweeted the following on Tuesday: “Bond bear market confirmed today. 25 year
long-term trendlines broken in 5 (year) and 10 (year) maturity Treasuries.”

January 11, 2018
Although this may turn out to be political grandstanding on Beijing’s part,

the previously-reported move to denominate oil trading in yuan and other
currencies appears to be anything but politics-as-usual. In WILTW October 19,
2017, we wrote: “If China is successful in forcing oil producers to accept payment
in yuan, it would ultimately gain more global economic control and some
of the benefits the U.S. has enjoyed from the dollar’s status as the global
petrocurrency. From the U.S. perspective, such a transition would remove
one of the important sources of dollar demand that has underpinned the
currency for decades.”
As we wrote three months ago, China and Russia have been leading the
charge to break the greenback’s hold on the global oil market. Venezuela
and Pakistan are also making similar moves. And, given the growing likelihood
that Washington will impose new sanctions on Iran in the near future, there is
a growing likelihood that Tehran will also move toward yuan-denominated oil
trade.
Bjarne Schieldrop, Chief Commodities Analyst at SEB, the Swedish banking

group, was recently quoted by oilprice.com, as follows: “Potential consequent
reactivation of sanctions may cause Iran to export oil using the Chinese
Yuan denominated contract [on the Shanghai Futures Exchange], which
launches on 18 January. This may spark a move away from the present long-
established U.S. Dollar-denominated oil trading regime…While the USD will
not be replaced overnight as the world’s reserve currency nor as the one most
commonly used for crude oil trading, it will be negative for the greenback,
which will cease to be the crude oil market’s only ruling currency.”
For years, we have written how emerging markets in general, and China in
particular, have become the major drivers of the global oil market. In 1974,
when Washington and Riyadh reached a secret “oil-for-Treasuries” deal, the
U.S. accounted for over 30% of global petroleum demand, which was greater
than the emerging market share of 28% and far greater than the Chinese
share of 2.4% at the time, according to the BP Statistical Review. By 2016,
however, emerging markets accounted for 52% of global demand—more
than double the U.S. share of 20.3%—while China’s share grew more than
fivefold over four decades, to 13.2%.

January 11, 2018
Sooner or later, the U.S. dollar is going to have to reflect the reality of this
changing mix of consumption, and as that transition takes place, the oil-
driven demand for the dollar is going to recede. The fact that this transition
may take place at a time when Beijing may attempt to scale-back its U.S.
Treasury purchases could create a double-whammy that opens another
trap-door for the U.S. dollar. Furthermore, this could lead to upward surprises
in the level of inflation and interest rates that most market participants have not
experienced during their careers.
6
A buy signal for oilfield services and
equipment: the ratio of low-beta to high-beta
energy stocks is breaking-down from a two-
decade high.
We have written about the following chart many times over the past six months,
noting that it registered a two-decade extreme high, which has often preceded
sustainable bull markets in oilfield service and equipment stocks. The chart,
showing the ratio of the NYSE Arca Oil Index (XOI, 1388.58) to the Philadelphia
Oil Services Index (OSX, 159.39), typically rises when the oil outlook is bearish
and falls when it is bullish. In WILTW December 7, 2017, we noted that the
recent extreme high—which is normally bearish, as it signals capital is fleeing
the riskier oil service and drilling companies—was accompanied by a bullish
divergence in the Relative Strength Index—a sign that the capital exodus from
oilfield service shares was finally running out of steam. Since then, the OSX
index has appreciated 20.6%, as tax-loss selling waned and oil prices broke-out
to the upside. Will 2018 be the year that positive stock-price performance will
be sustained for this group?

January 11, 2018
Ratio of NYSE Arca Oil Index (XOI) to the Philadelphia Oil Services Index (OSX)
Oilfield capital and service costs are rising in the U.S., which will hinder the
return-on-investment that shale oil can generate. The producer price index
(PPI) for oil and gas drilling in the U.S. has risen 6% since January 2017, while the
BofAML BBB corporate effective yield has risen nearly 30 basis points since the
September 2017 low. The end of “free money” from the Fed could be the most
profound change to hit the U.S. oil sector since the Global Financial Crisis, as the
recent breakout in oil prices attests. If incremental production and capital-cost
increases are sustained, and capital discipline improves in the oil patch, future
investments in shale oil (beyond the widely-advertised drilled-but-uncompleted
wells) could slow markedly.
BofAML BBB effective yield (blue, lhs) vs. PPI for oil and gas (red, rhs)
Source: St. Louis Fed

January 11, 2018
The recovery in oilfield service costs has contributed to a two-quarter

uptrend in oilfield service revenues, according to the Rystad Energy chart
below. The fact that the industry was able to register 7% sequential quarterly
growth in Q3-2017, despite the sluggish oil-price environment, augurs well for
the sector’s future. The Wood Mackenzie consultancy recently estimated that
exploration spending in 2018 will be more than 60% below 2014 levels, but this
sharp decline could translate into a stronger-than-expected exploration cycle
later on.
Source: Rystad Energy
Another oil supply crisis appears to be forming, and this one could be more
serious than the price spikes which occurred during the Global Financial Crisis
and the Arab Spring. Late last month, Rystad Energy said that 2017 marked yet
another record low for global oil discoveries, with discovered volumes of
oil and gas replacing only 11% of production, compared to more than 50%
five years earlier.
Sonia Mladá Passos, Senior Analyst at Rystad Energy, elaborated: “While there
have been some notable successes this year, we have to face the fact that the
low discovered volumes on global level represent a serious threat to the supply
levels some ten years down the road.” It should be noted that the IEA has
previously said that a supply crisis could emerge as soon as three years from
now, while Suncor Energy recently said that output deficits could emerge as
early as next year.

January 11, 2018
In addition to the historically-low level of new discoveries, the next crisis could
be exacerbated by rising, instead of falling, OECD consumption. Developed-
world oil consumption fell by over 4 million bpd between 2007 and 2012,
primarily as a result of the Great Recession and the eurozone sovereign debt
crisis. However, OECD oil consumption has been on an uptrend since 2014—
rising by just over 1 million bpd in total. Although this recovery may only
be modest, the swing from OECD consumption decrement to consumption
increment could take the market by surprise.
Any future boost in OECD demand would hit at the worst possible time, because
the U.S. dollar could be entering a multi-year period of weakening, which will
have a positive impact on emerging-market oil demand. It is noteworthy that
during the last major dollar bear market, from 2002 to 2008, non-OECD
demand grew by a cumulative total of 8 million bpd.
The dark red line in the chart below shows that crude oil inventories have
fallen sharply since early 2017, and while they are still above-average
in terms of days of supply, the excess has been cut by more than half.
Meanwhile, with the futures curve in backwardation, as the front-month WTI
price is now over $7 above the December 2019 contract price (which itself has
risen over 15% since August), the excess inventories are likely to drain even
faster.
Source: Princeton Energy via The Wall Street Journal

January 11, 2018
The social unrest spreading throughout the Middle East and other oil
producing states, such as Venezuela, could be a wild card for the oilfield
service sector’s performance in 2018. Even if there is not a full-scale
meltdown or major supply outage, the fear alone could be enough to boost
their performance this year. Coming off a two-decade extreme, the OSX Index
could provide an excellent geopolitical hedge.
7
The largest unregulated social experiment of
all time is going on right now.
Society discusses and amends the appropriate age to begin driving a car,
drinking alcohol, voting in state and federal elections, getting married and
joining the military. And, yet, society does not appear ready to have this
conversation: How is technology changing human behavior and society?
What is the long-term impact of babies receiving less eye contact from birth?
Of toddlers habituated to the adults around them compulsively checking their
mobile devices? How can we expect adolescents to develop a healthy identity
when they are forever juggling two selves—the real one and the cyber one?
There are a terrifying number of unknowns.
While some countries have moved towards regulating the use of electronics in
schools (France) and even fining parents for not monitoring their children’s use
at home (Taiwan), there still are no campaigns to alert parents to the dangers of
their wandering attention spans. The reality is that mobile phones should come
with multiple warnings, including this one: WARNING: Not looking at your
baby could cause significant developmental delays, and possible emotional
and behavioral problems.
Few have studied how technology is impacting the development of our children
more than forensic cyberpsychologist, Dr. Mary Aiken. After recently reading
her book, The Cyber Effect, we have elected to completely disable the Wi-Fi
in our home. We are not reacting to our daughters’ behavior—they are not
allowed any screen time except on long flights—but to our own. Even if we
check our mobile devices a mere fraction of the much-touted average—1,500
times a week—there are still implications, digital fingerprints. We are not
waiting for warning labels to be put in place.

January 11, 2018
One of the key points Aiken underscores is that cyberspace is a distinct

place—a seemingly obvious, but critically underappreciated fact. Every
time we go online, we need to re-orient. And, every time we return to the real
world, we need to re-orient again. Every visit online is a unique visit requiring a
re-orientation of our awareness or consciousness, our emotions, our responses
and our behavior. As difficult as it is for a mature person to find his or her “sea
legs”, imagine the challenge for a developing child.
Aside from the continual emotional and behavioral rebalancing, the online world
has been exquisitely engineered to take advantage of this cyber disorientation.
Our instincts were trained and honed for the real world, and in the absence
of real-world cues and other subtle pieces of information—facial expressions,
body language, physical spaces—we aren’t able to make fully informed
decisions. And because we aren’t face-to-face when we are communicating
and interacting with others online, we can be anonymous, or, more important,
we feel we are. People can lose their inhibitions and in a way “act drunk”
because, for some, being in the cyber environment can impair judgment and
increase impulsivity, somewhat similar to the way alcohol can.
…Another powerful factor comes into play, which I have studied and written
about—online escalation. It is a construct or concept that I use to
describe how problems become bigger—or amplified—online, as many
of us have already witnessed in everything from super negative exchanges via
flaming emails, aggressive texts and offensive posts to comment threads that
are meant to provoke.
Another key observation about the cyber effect: the tendencies and
vulnerabilities that cause the most distress in real life may become even
more of a battle online. That goes for any behavior. Aiken gives the example
of a sexual predator. While a stalker in the real world typically focuses on one
victim at any given time, a cyberstalker can stalk multiple victims simultaneously
because technology makes that possible. “Cyberstalking is considered a
breeding ground for mutations. Real-world behavior migrates there and
escalates or accelerates.”
Online fetishes become “normalized”—a well-known reality but one which

bears repeating. Twenty or thirty years ago, a person with a fetish or a guilty

January 11, 2018
pleasure of his or her own had to dig around the public library for a copy of the
Marquis de Sade’s writings, or go to an art-house cinema to see Luis Buñuel’s
1967 classic, Belle du Jour. Enter the internet. As Aiken writes: “How else do
we explain the wild popularity of Fifty Shades of Grey? Since its release in 2011,
and the publication of its many sequels, it has become the bestselling book
of all time excluding the Bible, with sales now exceeding 100 million copies
worldwide.” The book introduced a couple of serious paraphilias, sexual
sadism disorder and sexual masochism disorder, to the general reading public
as a fun and fascinating pastime.
If a series of books romanticizing Sadomasochism is setting records on The New

York Times best seller list, think what is unfolding in the darkest corners of the
web? The cyber effect amplified by the mathematics of the internet means
aberrant behaviors are potentially compounding.
The most important take-away from Aiken’s book—what we say, do, think
and see online is not compartmentalized in cyberspace; there are real
world implications, mutations and consequences. As Aiken writes: “In terms
of human behavior, what happens online is a little like one of those evolving
flu viruses or Ebola. Once behavior mutates in cyberspace, where a significant
number of people participate, it can double back around and become a norm in
everyday life. I call this cyber-migration. This means that the implications of the
online experience and environment are ever evolving and profound, and impact
all of us—no matter where we live or spend time.”
In the real world, children have visible parents, caretakers, older siblings,
teachers, friends, and police to defend and protect their rights. But, very little,
if any, of this authority is visible in cyberspace. As Aiken discusses, most
parents are simply overwhelmed with the rapidity of changing technologies,
passwords, filtering software and so on. Children take advantage of their
parent’s limited focus, lack of tech acumen, and lack of time. Aiken cities one
study in which 69% of young people admitted to hiding their online activity
from their parents.
In the frantic rush for new technology, children have been forgotten. Over
the weekend, we read a book with our 8-year old that talked about building
demolition. We wanted to show her a picture of a wrecking ball. But if you type
“wrecking ball” into Google, the site delivers hundreds of images of a naked,

January 11, 2018
gyrating Miley Cyrus, an American pop star. If your child is looking over your
shoulder, how do you explain the image? Or more problematically— how do
you quell the curiosity that has undoubtedly been piqued?
As Aiken explains: “Search algorithms are designed to speedily deliver listings of

the most frequently searched phrases. Extreme content and scary scenarios,
which always draw the most adult eyeballs, can be presented first—
regardless of the searcher’s age—due to the popularity of the sensational
information.” Kids are performing searches on Google all day, every day.
Prior to the internet, that nine year old child might have gotten his hands on a
Playboy—such a magazine would have contained a total of 60 images or fewer
which would have been, relatively speaking, fairly benign. But as Aiken writes:
“Now in the time it once took to turn a page, there are thousands of websites
with million of images.” According to the Internet Filter Review, in early 2016
there were 4.2 million pornographic sites and 68 million daily pornographic
search engine requests—or, roughly, one quarter of all online searches. Of
course children are seeing these images.
As Aiken reports:
A child helpline in the U.K. survey in 2015 reported that one in ten children
who were twelve to thirteen years old were “worried they might be
addicted to porn.” One in five of those who were twelve to seventeen said
they had seen pornographic images that had shocked or upset them, and
disturbingly 12 percent said they had taken part in, or had made, a
sexually explicit video.
…Back in 2010, when I was researching online child abuse material, I came
across interesting information in the studies. An “inappropriate sexualized
event” in early childhood has been reported by most online offenders. This
alone makes me seriously concerned about children looking at adult material
online, because I would argue that the viewing of inappropriate content itself
qualifies as an “early inappropriate sexualized event.” It so, the potential
consequences could be tragic.
Over the weekend, activist investor, Jana Partners LLC and the California State
Teachers’ Retirement System, or Calstrs, sent a letter to Apple urging the iPhone

January 11, 2018
maker to take more steps to understand the impact of youth overuse on mental
health. A step in the right direction, but how quickly and effectively will
Silicon Valley respond? Or will it just steamroll forward?
As Maya Kosoff opined earlier this week for Vanity Fair:
While we sour on the smartphone era, the tech world is already moving
onto the next thing. Apple is among several major companies developing
augmented-reality eyewear that will layer digital information over your field
of vision. This week’s Consumer Electronics Show is expected to focus heavily
on smart-home and voice-controlled technologies that investors hope will
make handheld devices unnecessary. Eventually, speaking to the artificial-
intelligence assistant in your car, television, or wristband will begin to seem
so natural that it won’t feel like you’re interacting with technology at all. An
unseen universe of sensors and wireless devices will connect every movement,
thought, and interaction with an array of servers somewhere in the Arctic
Circle. We’ll be more reliant than ever on Silicon Valley, and even less
capable of unplugging.
8
Will blockchain reinvent social media?
Will blockchain-based social networks do to today’s internet giants what
Facebook, Amazon and Google did to the gatekeepers of the past? Will they
be a bulwark against censorship and fake news, decentralize Big Tech, and give
users the chance to monetize their data? In short, can blockchain fix social
media’s problems? Last year, as cryptocurrencies became a legitimate threat
to central-bank-issued currencies, and Facebook’s toxic power was exposed
in one headline after another, these questions began to percolate in the spirit
of revolution. A new crop of platforms emerged with the aim of fighting the
giants by decentralizing control. Powered by blockchain technologies, they
started building alternative models: decentralized, peer-to-peer ledgers that
eliminate the hubs responsible for privacy breaches and censorship, while
paying users for what they create. onG.Social, for example, has built a social
media network where users can reward other users with digital tokens for
posting real news. Cryptocurrency can then be exchanged for fiat currency—
dollars, pounds, euros, etc. Users have the opportunity to make money by
curating and sharing real news and rejecting fake ones.

January 11, 2018
As Fortune observed: “In today’s world, you don’t have rights to your own
content and images. onG.Social’s mission is to change the paradigm to
a state which social network users actually own their own data and get a
chance to monetize it.”
Startup Steemit has three virtual coins attached to its social network, including
Steem Dollars, and rewards content creators when their work gets “upvoted”,
setting out to democratize the flow of value online. Akasha, which is powered
by Ethereum, is “a decentralized Twitter”. Kik, a messaging app that is popular
among teens and is also built on Ethereum, launched a cryptocurrency payment
service last year.
As opposition to Big Tech’s power intensifies, the concept of building a new

backbone for social media is taking hold. Indeed, blockchain is shaping up
to be the biggest social trend of 2018. Earlier this month, when Don Tapscott,
founder of the Blockchain Institute, laid out his top ten cryptocurrency
predictions for 2018 for Quartz, cracking the “walls of digital feudalism” topped
the list, as did creating an “internet of value”:
Under the feudal system, landlords owned vast amounts of land. Serfs worked
the lands to create value but had most of the value confiscated by the landlord.
Today the new asset class is data—created by us but captured by our
digital landlords (social media companies, search engines, governments,
banks, etc). We need to recover this data—our “digital identity—and manage
it responsibly in our own interests.
With blockchain, people (along with physical and digital objects) can
possess unique, immutable identities in a “digital black box.” It will
capture data that we can each monetize, use to plan our lives and protect our
privacy.
But do not expect the incumbents—Facebook, Apple, Amazon, and Alphabet—

to take the move towards decentralization lying down. Tapscott also predicts
the “digital conglomerates” will “wade in”, as a matter of survival:
There’s no doubt that blockchain technology poses an existential threat

to the world’s largest digital conglomerates. But in the coming year, we

January 11, 2018
will see these companies embrace crypto-currencies, and even many of the
other applications of blockchain technology. Get ready for the Empire to
Strike Back.
Google is already the second largest investor in blockchain technologies

(Goldman Sachs is the largest). And in December, Amazon announced a
partnership with R3 to allow its platform Corda to become one of the first-
ever distributed ledger technologies on Amazon Web Services. “Is this a
sign of things to come from Amazon, who stands to lose tremendously to
blockchain-based retailers? Absolutely,” Tapscott writes.
Facebook is wading in, too. On December 12, 2017, it was announced that David
Marcus, head of Messenger at Facebook, would join Coinbase’s board. This
prompted a flurry of speculation that Facebook was exploring a cryptocurrency
initiative within its Messenger platform, and possibly eyeing an acquisition. The
speculation ramped up again this month, when Mark Zuckerberg published his
annual New Year’s post to Facebook. In it, he called the push and pull between
centralization and decentralization one of the most interesting questions
in technology today (see WILTW, Sept. 21, 2017). What he wrote next put the
tech world on high-alert:
With the rise of a small number of big tech companies—and governments

using technology to watch their citizens—many people believe technology
only centralizes power rather than decentralize it.
There are important countertrends to this—like encryption and

cryptocurrency—that take power from centralized systems and put it
back into people's hands. But they come with the risk of being harder to
control. I'm interested to go deeper and study the positive and negative
aspects of these technologies, and how best to use them in our services.
Zuckerberg clearly recognizes the threat these technologies pose to his platform,
and in typical Zuckerberg fashion, he’s heading them off by embracing them.
There are powerful incentives to do so. On the upside, integrating blockchain
technologies could help Facebook court a new generation of users worldwide
who place a premium on privacy and security. With its own cryptocurrency,
Facebook could build a social commerce empire to rival the likes of its
Asian competitors. And by endowing its users with digital black-box identities,

January 11, 2018
Facebook could, in theory, circumvent international censors and penetrate

new markets. Embracing these technologies could play hugely to Facebook’s
advantage, so long as regulators give it a pass.
On the other hand, a decentralized, peer-to-peer ledger, free from corporate

governance, is antithetical to Facebook’s model. If Facebook cannot access
user data, how can it leverage it with advertisers? Armed with its own
cryptocurrency and internal system of payments, what's to stop Facebook from
consolidating its power as a financial institution and going after the banks?
How will regulators respond then? Meanwhile, as Zuckerberg cuts deals with
governments around the world, often censoring users in exchange for market
access, blockchain is rewriting the rules of the attention economy by
redistributing profits and power. How will Facebook thread this needle? How
open and decentralized is it actually willing to be? The answer could determine
its future, as well as the futures of startups like Steemit. Will these newcomers
wither and die, or will they be snapped up by the giants? Is a Napster-like coup
even possible, given Facebook’s scope and power?
Blockchain networks are not immune to the forces of centralization either.

They still require a certain degree of centralization in order to develop, adapt,
and survive. Those risings costs inspire centralization. And while such platforms
are based on distributed ledgers, they are also created by groups of people
(and increasingly corporations and governments) who have decided to use the
technology a certain way.
It remains to be seen if networks like Akasha and ongG.social will catch on in

the way that Facebook and Twitter have done. And yet their traction is raising
eyebrows. When it launched in 2016, Steemit saw its user-base grow 1600% in
its first month of operation. As of this month, the network reports 43,552 active
users daily. Its virtual currency, Steem Dollars, was recently dubbed the “next
bitcoin” by Motley Fool.
Which raises the specter of new flows of power corrupting. The hope is that
Blockchain’s incentivizing structures will help these new platforms self-regulate.
But what’s to stop Steemit’s growing user-base from rewarding “fake news”
over “real news”? How do you solve the problem of information silos and
political polarization if users only incentivize the news they want to hear?

January 11, 2018
Decentralizing social media is a worthy, inspiring goal. It may even inject new
life into economies. But at what social cost? In the absence of meaningful
oversight, could these platforms merely fuel a more anarchic form of
capitalism? Others fear the opposite: that instead of defanging repressive
regimes, distributed ledgers could become the ultimate tool of corporate
and authoritarian control. In a society run by blockchain, personal rights,
financial assets, voter registration, ethnic origins, and identity records,
could all be massively consolidated.
With Big Tech companies and governments colluding more closely than ever,
decentralization is riding a major tailwind. Steemit knows it. Zuckerberg
knows it. Authoritarians know it, too, and will use it as a reason to consolidate
their power. In the process, a new generation of social media networks is
wriggling to life and disrupting the disrupters.
9
The U.S. is losing its lead to China in the
technologies that will define the 21st century.
Will the wake-up call be heard?
When we look back a decade from now, 2017’s most historically-important
moment likely didn’t involve a Donald Trump tweet or a North Korean missile
test, but rather a July speech by Xi Jinping. In it, China’s president laid out a
three-step roadmap to artificial-intelligence dominance and declared the intent
to spend billions to achieve it: develop homegrown AI that rivals the West by
2020; “major breakthroughs” by 2025; and global AI leadership by 2030.
We have often dissected why AI is the most-significant enabling technology

since the internet. No one has put the technology’s power in clearer terms than
Vladimir Putin, telling a group of Russian students in September: “Whoever
becomes the leader in this sphere will become the ruler of the world.” For
many pundits, politicians, and technologists around the globe, 2017 was an
awakening: China is rapidly gaining ground on the U.S. and may be the leading
bet to be that ruler.
But is Chinese AI dominance more hype than inevitably? The answer lies
in the three-ingredient recipe for machine learning: the talent that creates the

January 11, 2018
code; the data that educates that code; and the computing power that processes
that data. Evidence today suggests China leads the U.S. only in computing
power. However, with America taking a regressive stance—whether research
funding, immigration policy, or the abdication of regulatory leadership—its
supremacy in talent and data appears more tenuous than ever.
No doubt China’s ascendancy is not assured. Its AI policy of “military-civil fusion”

may hinder its ability to recruit top foreign talent and cause politicians in the
West to erect barriers against Chinese technological supremacy. However, the
advantage that could assure Chinese victory in the “tech cold war” is clear. As
James Lewis, a senior fellow at the Center for Strategic and International Studies,
told The New York Times in May: “The difference is that China seems to think
it’s a race and America doesn’t.”
In a report released in December, the Eurasia Group breaks down “China’s

Artificial Intelligence Revolution”, offering clear evidence China is gaining
ground on the U.S.. With the technology a national priority, Chinese talent
has flooded to machine learning. China’s Microsoft Research Asia alone has
trained over 5,000 AI professionals. The results of this talent boom is reflected in
the escalating quantity and quality of Chinese research output:
Source: Sinovation Ventures AI Institute

January 11, 2018
This talent spike has, in turn, fueled the Chinese AI startup ecosystem. Between
the beginning of 2012 and 3Q17, investors poured roughly $4.5 billion into
more than 200 Chinese AI startups. Over half of that investment has been
made in just the last two years:
Source: Eurasia Group
Marquee advances have already resulted from that investment. This year,
a prominent Chinese startup, Beijing-based Face++, beat teams from Google,
Facebook, Microsoft, and Carnegie Mellon to take first place in three computer
vision challenges, a prowess that earned the company the largest-ever AI
venture capital round—$460 million—in early November.
By all accounts, this rapid Chinese AI progress has caught the U.S. off guard,
too blinded by its past technological dominance to recognize the threat to
its future. As former Alphabet chairman Eric Schmidt said at a tech summit in
November: “Weren’t we the ones that invented this stuff? Weren’t we the ones
that were going to go exploit the benefits of all this technology for betterment
and American exceptionalism, in our own arrogant view…Trust me, these
Chinese people are good.”
As we read the landscape today, the three primary advantages currently

possessed by each country break down as follows:

January 11, 2018
The U.S.
The top AI talent: Google alone employs roughly 50% of the world’s top
100 AI scientists, according to the Eurasia Group.
Established global networks: Google, Facebook, and Amazon all possess

far more total active users from far more countries than their Chinese
counterparts. This is both an advantage in data aggregation and leveraging
existing consumer, business-to-business, and government relationships in
the transition from the platform era to the AI era.
Data privacy: Despite the Snowden leaks and the recent Meltdown and
Spectre revelations, consumers and governments still place more trust
in U.S companies to protect privacy and allow personal freedoms. China’s
strict cybersecurity law implemented last year reinforced concerns about
Chinese government control of data. These concerns will influence AI
talent recruitment, consumer adoption of Chinese AI products, and foreign
openness to Chinese AI systems.
China
Government leadership: From spending on research support and domestic

talent cultivation to clear policy priorities that provide a unified roadmap to
success, China is far ahead of the U.S.
Hardware: China now possesses 202 of the top 500 supercomputers, while
the U.S. has 143. It has the most-prolific manufacturing ecosystem on the
globe. China appears best-positioned to be the world’s leading provider of
the computing power necessary to support AI systems.
Domestic data prowess: According to Goldman Sachs: “China…generates

(about) 13% of the digital information globally. By 2020, we expect this to
grow to around 20% to 25%.” This provides a more secure data stream than
the U.S.’ cross-border data dependence, which can not only be disrupted by
consumer demand, but political headwinds.
Given each country’s advantages, we see an AI duopoly as a likely outcome—

influence split between the U.S. and China, with each nation leading in different

January 11, 2018
applications of the technology. The global AI ecosystem could therefore

fragment, split based upon regional consumer demands, political alliances, and
privacy standards.
We are already seeing these lines drawn. Along with China, Russia has
implemented tough cybersecurity laws and erected barriers to cross-border
data flows. This will make the two countries—along with others prioritizing
strict control of information flows—more aligned in the consumer AI
products they allow and how they apply AI technologies to govern their
nations.
Meanwhile, we’re seeing U.S. and European resistance to Chinese tech

infiltration. The Trump Administration has cracked down on foreign direct
investment in U.S. technology sectors, and urged European allies to do the
same. Germany acted in July, becoming the first E.U. country to tighten rules on
foreign corporate takeovers. As Eurasia Group writes in its recent report on the
top risks facing the globe in 2018: “as China's products become ever-better…
Europeans and others begin to question the security challenges of doing
tech business with Beijing.”
However, while an AI duopoly appears most-likely, more and more evidence is

emerging that the U.S. may squander its AI advantages. The U.S. has failed to
build legal and regulatory frameworks capable of meeting the challenges
of the platform era. This was laid bare in 2017 by Russian election meddling
and escalating global concern about Silicon Valley’s platform monopolies.
Why should governments around the globe look to the U.S. to lead in the AI
era given its floundering in the platform era? For one example of what this
could mean, Europe has become increasingly concerned about data ownership,
which could lead to regulations that could prevent tech giants from leveraging
valuable data assets. Given the U.S.’ waning credibility in tech issues, it may have
less ability to influence E.U. policy and protect its data interests.
However, the regression goes beyond international politics. The U.S. seems
willing to sacrifice its advantages in order to satisfy short-term domestic
political whims. From research funding cut proposals to immigration policy to
electric vehicle subsidies, the Trump Administration has demonstrated that AI
dominance is not a priority. Consider the potential consequence of the U.S.’s
retreat from alternative energy. AI will be used to determine optimal energy

January 11, 2018
generation and distribution, therefore maximizing efficiency across a

nation’s web of traditional and alternative energy sources. The further the
U.S. falls behind China in deploying new energy technologies, the more decisive
China’s data advantage will be in educating those systems:
Source: Axios
If the U.S. continues to regress while underestimating China’s escalating

capabilities, a winner-take-all victory could be the result. And the cost of
squandering the AI-opportunity cannot be overstated. As Eurasia Group
president Ian Bremmer writes: “AI will shift the balance of power in both the
global economy and international relations, because the countries that
master AI first will have a crucial strategic advantage in writing the rules
for the next global order.”
10
“2018 will be the year of microprocessor
vulnerabilities, and it’s going to be a wild
ride.”
This is what security expert Bruce Schneier wrote on his blog last week about
two hardware-based cyber-attacks, dubbed Meltdown and Spectre. The arrival
of side-channel attacks aimed at microprocessor hardware is a disturbing
development, and the ramifications may be long lasting.
Meltdown can now be fully patched against, but Spectre will much harder
to mitigate. Both of these exploit classes use side-channel attacks to break

January 11, 2018
the fundamental isolation of data between separate programs running on a

computer, allowing eavesdropping on what should be private memory. This
can lead to leaked passwords and encryption keys, which could then lead
to full-scale system breaches.
Side-channel attacks are qualitatively different from traditional cyber-attacks

in that they involve the indirect monitoring of the behavior of mechanical and
electronic systems. A historic example would be in the 1980s when Soviet spies
installed listening devices in the typewriters of the U.S. Embassy in Moscow.
These devices reported the electromagnetic disturbances created by the
typewriter mechanism in order to recreate the messages typed on it. Such side-
channel attacks are indirect and are notoriously finicky and hard to pull off, but
they can yield valuable intelligence for those motivated to make the effort. Up
until now, such attacks have traditionally been consigned to the spy-craft of
nation states, but they may now become more commonplace in a modern IT
landscape that is filled with valuable data and rife with vulnerabilities.
As side-channel attacks, Meltdown and Spectre work by measuring the response

time of certain operations to infer what is in microprocessor-cache memory.
Cache memory is shared resource, but it is not supposed to allow one program’s
data to be shared with another. This potential loss of isolation and privacy
on shared memory resources is particularly troubling for cloud services
companies and large data centers, where multiple virtualized machines run
on common hardware.
These new classes of side-channel attacks are made possible by the increased
density and complexity of modern microprocessor architecture. The market
expectations of improved computer performance have largely been shaped
by Moore’s Law: that computers will get smaller, cheaper and faster with each
successive generation.
However, speed was never part of Moore’s Law. And speed was one of the
first industry benchmarks to run up against the immutable laws of physics.
Semiconductor switches can only operate so fast within the power and scale
limitations of today’s increasingly-denser microchips.
In order to keep pace with the expectations for faster computers, fundamental
design innovations like multi-threading and multi-processing have been

January 11, 2018
introduced into computer architecture over the past few decades, allowing for
parallel processing. This permits multiple computer programs to be split into
multiple parts and worked on simultaneously. However, to take full advantage
of the shared resources of these new architectures, new optimizations needed
to be put in place; techniques such as speculative execution and branch
prediction, where shared cache memory within the CPU is filled with the results
of possible operations in anticipation of what might be needed next by a
program. While this has led to improved performance, it has also gradually
eroded the security barrier between separate programs, leaving such
computers vulnerable to new exploits such as Meltdown and Spectre.
While Meltdown can now be fully patched against, patching against Spectre is
proving to be much more difficult. Spectre represents a wide class of hardware-
based exploits at the software level, and mitigating the numerous vectors for
such attacks will require multiple security updates, ranging from firmware to
operating systems to applications. But the only true fix will be changes in the
design of future generations of microprocessors—something that is years
away. As the official website for these vulnerabilities states: “Spectre will haunt
us for quite some time.”
Even when new chipsets are made available that are immune to these threats,
there will still exist a bigger underlying problem: that our information ecosystem
is continuing down a path towards a monoculture that lacks heterogeneous
resiliency to viral attacks across the network medium. Industry
consolidation, and uniformity in design, has simply left too many critical eggs in
too few vulnerable baskets. This means that far too many future hardware and
software exploits will be global pandemics and not local outbreaks.
Furthermore, there is concern that, in the short term, the medicine may be too
painful to be fully employed. Spectre will require multiple patches on a range
of software products, and many of these patches will lead to performance
loss because they are reversing the very techniques that have led to
performance gains over the years.
Mitigation efforts have already gotten off to a rocky start, as some customers
have already experienced problems with Microsoft’s new security update, which
have left their computers in an unbootable state. These resulting losses in
productivity, combined with performance losses once the updates are installed,

January 11, 2018
has led many security researchers to worry that many systems may not get
fully patched. However, not updating can lead to far worse problems, as it will
leave systems vulnerable to attack. It should be remembered that failure to
update and patch against a known exploit led to last year’s Equifax breach
of over 140 million SSNs.
Beyond the immediate problems of patching, updates, and mitigation, are the
long-term implications of these new classes of attack. A troubling proof-of-
concept exploit from the Spectre research paper involves a website running
JavaScript code inside a victim’s browser that can read data from a different
website within that same browser. This opens up a whole can of worms, because
web-pages are no longer simple static pages of data, but are often dynamic
programs that actively run on a visitor’s computer. These programs are meant
to be securely sandboxed within the user’s web-browser, but hardware exploits
such as Spectre may allow them to break out, steal data, and possibly even
harm other programs on that computer.
And this is the larger danger, that we will see more and more side-channel
exploitation of hardware weaknesses, and that some of these attacks may be
very destructive. A few years ago, a new type of side-channel exploit called Row
Hammer emerged.
Row Hammer took advantage of weaknesses in the density of modern high-

speed memory, by repeatedly storing data in certain memory locations until
neighboring locations began to leak and alter their contents. One analyst
likened Row Hammer to breaking into an apartment by repeatedly
slamming the neighboring door until the vibrations opened the door you
wanted. Row Hammer can also be destructive by altering the contents of
neighboring memory, and destructive attacks are particularly troubling given
the increasingly-important role that information technology now plays in our
global economy.
Destructive cyber-attacks are occurring with more regularity on the global

stage. Some of the notable incidents we have written about over the years
include the Shamoon attacks against Saudi Aramco and RasGas in 2012, where
tens-of-thousands of computers were rendered inoperable, and last year’s

January 11, 2018
Petya attacks in Ukraine, in which collateral damage to the computer systems

of several multinational corporations, including Merck pharmaceuticals and
Maersk shipping, cost hundreds-of-millions of dollars in lost productivity.
As computer architecture becomes increasingly dense, pushing the boundaries

of physics, and as it becomes more and more complex in order to gain
maximum performance, more potential weaknesses at the hardware level
will emerge. These weaknesses will be exploited for both theft and sabotage,
and this represents a fundamental insecurity at the very foundations of our
information-based economy.
11
The best innovations are guided by beauty and
informed by both science and humanism.
The new biography of Leonardo da Vinci by Walter Isaacson could change the
world if enough people learn its essential message: Leonardo created the two
most famous paintings in history, but in his own mind he was equally a man of
science and engineering.
Isaacson writes that what distinguishes Leonardo’s genius is his universal nature.
His curiosity drove him to know all that was known about everything that
could be known and that he tried to understand all of creation, including
how we fit into it. “ Leonardo’s [notes] were like nothing the world had ever, or
has ever, seen. His notebooks have been rightly called ‘the most astonishing
testament to the powers of human observation and imagination ever set
down on paper.’”
Isaacson is also the author of the world-acclaimed best-sellers on Steve Jobs

(WILTW December 1, 2011), Albert Einstein (WILTW May 10, 2007), Benjamin
Franklin and Henry Kissinger. We quote as follows from da Vinci:
One purpose of these notebooks was to record interesting scenes,

especially those involving people and emotions. “As you go about
town,” he wrote in one of them, “constantly observe, note, and consider the
circumstances and behavior of men as they talk and quarrel, or laugh, or come
to blows.” For that purpose, he kept a small notebook hanging from his belt.
According to the poet Giovanni Battista Giraldi, whose father knew Leonardo:

January 11, 2018
When Leonardo wished to paint a figure, he first considered what social

standing and emotion it was to represent; whether noble or plebeian,
joyful or severe, troubled or serene, old or young, irate or quiet, good
or evil; and when he had made up his mind, he went to places where
he knew that people of that kind assembled and observed their faces,
their manners, dresses, and gestures; and when he found what fitted his
purpose, he noted it in a little book which he was always carrying in his
belt.
These little books on his belt, along with the larger sheets in his studio,
became repositories for all of his manifold passions and obsessions,
many of them sharing a page. As an engineer, he honed his technical skills
by drawing mechanisms he encountered or imagined. As an artist, he sketched
ideas and made preparatory drawings. As a court impresario, he jotted down
designs for costumes, contrivances for moving scenery and stages, fables to be
enacted, and witty lines to be performed. Scribbled in the margins were to-do
lists, records of expenses, and sketches of people who caught his imagination.
Over the years, as his scientific study got more serious, he filled pages
with outlines and passages for treatises on topics such as flight, water,
anatomy, art, horses, mechanics, and geology. About the only things
missing are intimate personal revelations or intimacies. These are not Saint
Augustine’s Confessions but rather the outward-looking enthrallments of a
relentlessly curious explorer...
The more than 7,200 pages now extant probably represent about one-
quarter of what Leonardo actually wrote, but that is a higher percentage
after five hundred years than the percentage of Steve Jobs’s emails and
digital documents from the 1990s that he and I were able to retrieve.
Leonardo’s notebooks are nothing less than an astonishing windfall that
provides the documentary record of applied creativity…
Early on, Leonardo primarily recorded ideas that he considered useful to his
art and engineering. For example, the early notebook known as Paris Ms. B,
begun around 1487, contains drawings of possible submarines, black-sailed
stealth ships, and steam-powered cannons, as well as some architectural
designs for churches and ideal cities. Later notebooks show Leonardo

January 11, 2018
pursuing curiosity for its own sake, and that in turn evolved into glimmerings
of profound scientific inquiry. He became interested not only in how things
work but why.
Because good paper was costly, Leonardo tried to use every edge and corner
of most pages, cramming as much as possible on each sheet and jumbling
together seemingly random items from diverse fields. Often he would go
back to a page, months or even years later, to add another thought, just as he
would go back to his painting of Saint Jerome, and later his other paintings, to
refine his work as he evolved and matured.
The juxtapositions can seem haphazard, and to some extent they are; we
watch his mind and pen leap from an insight about mechanics, to a doodle
of hair curls and water eddies, to a drawing of a face, to an ingenious
contraption, to an anatomical sketch, all accompanied by mirror-script notes
and musings. But the joy of these juxtapositions is that they allow us to
marvel at the beauty of a universal mind as it wanders exuberantly in
free-range fashion over the arts and sciences and, by doing so, senses
the connections in our cosmos. We can extract from his pages, as he did
from nature’s, the patterns that underlie things that at first appear
disconnected.
The beauty of a notebook is that it indulges provisional thoughts, half-finished

ideas, unpolished sketches, and drafts for treatises not yet refined. That, too,
suited Leonardo’s leaps of the imagination, in which brilliance was often
unfettered by diligence or discipline. He occasionally declared an intent to
organize and refine his notebook jottings into published works, but his failure
to do so became a companion to his failure to complete artworks. As he did
with many of his paintings, he would hang on to the treatises that he was
drafting, occasionally make a few new strokes and refinements, but never see
them through to being released to the public as complete.

January 11, 2018
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What I Learned This Week: Bernard Baruch Elbert Hubbard

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January 11, 2018

Nothing is more humiliating David Brooks, The New

WHAT I LEARNED THIS WEEK

Jay Sellick, CFA Woody Preucil, CFA

Arvind Sachdeva, CFA Kate McClure-Sokoloff

Anurag Bansal Lei Yang, CFA

Peng Zhou Tamra James

Ankit Bansal Dora Pang

WHAT I LEARNED THIS WEEK

02 Is China exporting inflation? China’s real

WHAT I LEARNED THIS WEEK

On January 3, 2018, perma-bear Jeremy Grantham of GMO wrote a client memo

Sentiment has been a useless indicator in this central-bank-fueled equity boom

Another useful and one of our highly-original indicators is what we call

WHAT I LEARNED THIS WEEK

Another example is the collapse in commodities in the early to mid-

WHAT I LEARNED THIS WEEK

For months, we have been warning that inflation is coming, commodities

WHAT I LEARNED THIS WEEK

Markets are Machiavellian and behave in a way to confound the greatest

Then, in WILTW September 7, 2017, we wrote: “China’s experience in aluminum

WHAT I LEARNED THIS WEEK

additions that might cause further unnecessary harm to the environment…

 Last week, The Civil Aviation Administration of China, which regulates

WHAT I LEARNED THIS WEEK

Inflation often spikes higher following extreme-weather conditions. One

Diana Choyleva, chief economist at Enodo Economics, wrote an article on the

By our calculations, Chinese export price inflation in renminbi accounts for

WHAT I LEARNED THIS WEEK

overall impact of Chinese export price inflation on global inflation is about

China’s Real Interest Rate, Jan. 2012 – Present

Source: Wind Info. & 13D Research

WHAT I LEARNED THIS WEEK

Market/ Indicator 2016 2017

MSCI World -0.13% +21.03%

WHAT I LEARNED THIS WEEK

Market-action and technical clues almost always lead economic and

 Synchronized global growth for the first time since 2007.

 Global inflation is heading higher.

 Commodities—led by the energy sector in 2018—are heading higher.

 Global capital-dispersion into the longest-depressed markets is poised to

 Central banks are falling behind the curve.

WHAT I LEARNED THIS WEEK

WHAT I LEARNED THIS WEEK

CHART B: Reuters/Jefferies CRB Index with DJ Australian Small Cap Index

WHAT I LEARNED THIS WEEK

WHAT I LEARNED THIS WEEK

Rapid advancements in life-extension research are transforming healthcare

Over 30 new anti-aging therapies that slow down or reverse aging in

WHAT I LEARNED THIS WEEK

Rapamycin, a bacterial agent used in organ transplant and made by Novartis

Source: Josh Mitteldorf blog

WHAT I LEARNED THIS WEEK

 Senescent Cells – have been implicated as a significant cause of chronic

Another study by Professor Lorna Harries at the University of Exeter

 Nicotinamide Adenine Dinucleotide (NAD+) – is a naturally occurring

However, NAD+ cannot by itself enter cells, so injections or taking a pill

WHAT I LEARNED THIS WEEK

The nascent longevity sector represents an opportunity to invest in

WHAT I LEARNED THIS WEEK

WHAT I LEARNED THIS WEEK

Although this may turn out to be political grandstanding on Beijing’s part,

Last week, The Civil Aviation Administration of China, which regulates

Synchronized global growth for the first time since 2007.

Global inflation is heading higher.

Commodities—led by the energy sector in 2018—are heading higher.

Global capital-dispersion into the longest-depressed markets is poised to

Central banks are falling behind the curve.

Senescent Cells – have been implicated as a significant cause of chronic

Nicotinamide Adenine Dinucleotide (NAD+) – is a naturally occurring

Established global networks: Google, Facebook, and Amazon all possess

Government leadership: From spending on research support and domestic

Domestic data prowess: According to Goldman Sachs: “China…generates