Positive Momentum, SceneScript, Nuclear

Positive Momentum

The outlook on US markets remains surprisingly optimistic. I say “surprisingly” because it’s unusual to have such a prolonged increase in valuations without any dips or pauses. The consumer and the largest tech companies have successfully adjusted to life with higher rates. The concerns about a hit to earnings did not materialize, mostly due to layoffs and a return to cost-conscious operations. It seems likely that the positive momentum in the mega-cap cohort will trickle down into the rest of the economy, which includes small-cap public companies that have lagged for a very long time.

Commercial real estate, venture capital and regional banks have been hit extremely hard by rising interest rates. Those sectors are still digesting the worst-case scenarios of a permanent loss of equity value. At the same time, the US stock market added $14 trillion to its total market cap over the past 18 months. That magnitude of an increase over a short period adds tremendous economic confidence to all participants, from retirees to pensions to global sovereign wealth funds.

When markets converge on a single dominating factor, they become inherently unstable. The Covid shutdown, dramatic stimulus from the Fed, and rate hikes are examples of single dominant market factors. For the first time in four years, global equity markets are now influenced by a diverse set of factors. The positive factors center around generative AI and cloud computing, while the concerns center around geopolitical tensions with Russia and China, higher rates, runaway government spending, and inflation. At this stage, generative AI is no longer a new investment concept, and the stocks related to that industry are priced accordingly. We still don’t quite know where AI will ultimately impact earnings, and I don’t see any end to the demand for major global cloud computing services like Google Cloud, Amazon’s AWS or Microsoft’s Azure.

SceneScript

Meta’s list of side projects continues to impress. I recently came across their new AI model, SceneScript, which can scan a room to generate a 3D representation of the dimensions and the objects. The model was trained on a dataset of 100,000 synthetically generated unique rooms with labeled objects. Experiments like this open doors for architects, designers, furniture retailers or real estate developers. Generating a quick 3d model via a scan would allow you to virtually rearrange a room or replace furniture with other virtual copies.

In the early days of Airbnb, the company would pay local professional photographers to catalog your listing to make it look nice. Integrating a model like this into AirBnb units to tour each one with high fidelity would be a neat upgrade. That would also apply to rental or sale listings. Matterport has done something similar for virtual 3d tours of physical spaces, but the experience is nowhere near this sophisticated.

Nuclear

As a quick follow-up to my last two pieces about the green energy transition, I wanted to add a final note about nuclear power. Societal progress and quality of life benefit tremendously from cheap and abundant energy. Nuclear is a clear answer to our future energy needs. People are hopeful that a nuclear renaissance will allow the sector to finally reach its potential. Small modular reactors are not a reality today, but the concept is relatively straightforward. Small modular nuclear reactors could be fabricated in a central facility and distributed. Also, changes in the price of uranium have little to no impact on the cost of energy generation. Natural gas costs represent roughly 40-70% of the operating cost of a natural gas power plant. For nuclear, it’s just 5-10%. The efficiency is just too good to ignore. It will happen. It just takes time.

Nuclear fusion will be a game changer when it finally works, but we are still a decade or two away from the first working fusion power station.