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Investment Climate May 2018: A Changing Of The Guard

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(Disclaimer: Mr. Frigon and his firm, Taylor Frigon Capital Management and Taylor Frigon Capital Partners LP, own shares in Nvidia, Inc. and ASOCS, Ltd. Mr. Frigon serves on the Board of Directors of ASOCS, Ltd.)

Markets have been correcting in relatively volatile fashion thus far in 2018 after establishing strong new highs in the month of January. This has left the markets flat to down through the first four months of the year. I believe this is ultimately healthy and sets the stage for a resumption of the positive trend for equity markets later in 2018. There are plenty of worries for the market to digest currently, like the domestic political environment, threats of a trade war and global geopolitical tensions. Financial markets have weathered many similar circumstances over the decades and there is no reason to believe they won’t do so again with respect to all these concerns. Generally, the investment climate remains favorable for equity investors.

I believe, more importantly, that a sea change in computing architecture is taking shape — one that stands to disrupt the status quo in the technology sector.

Over the decades, computing architecture has undergone many radical changes. During the late 1980s and 1990s, the computing platform based on the centralized mainframe that ruled in the heyday of IBM, Digital Equipment and Burroughs gave way to the distributed systems of the PC from Microsoft and Apple: a radical change. Over the past 15 to 20 years, that newer computing architecture itself underwent a radical change with the rise of cloud computing, as well as a return to centralized architectures housed at giant datacenter companies, such as Google, Facebook and Amazon, which we now access from anywhere using our laptops or mobile devices.

However, I see signs that this cloud model and the centralized structure it represents will be challenged by distributed ledgers and a new decentralized computing architecture based on Graphics Processor Units (GPUs) from chip giant Nvidia and Modem Processor Units (MPUs) from the private Israeli company ASOCS, Ltd., once again rearranging the entire computing landscape.

The new computing architecture is based on that which blockchain is based. The most important aspect of the Bitcoin phenomenon is not simply digital currencies (which I believe to be a significant disruption in how we think of money) but the decentralized blockchain on which it was built. The Bitcoin blockchain is a distributed ledger system, which provides secure, transparent yet anonymous transactions dependent not on servers sitting in a central data center, but rather on thousands of distributed computers, or “miners,” out in the world, who verify the transactions in order to “earn” bitcoin for their efforts. I do not intend in this update to get into a deep dive on blockchain and its merits, or on bitcoin. In fact, it isn’t even blockchain itself but distributed ledgers that are most crucial in this new paradigm.

Currently, the primary economic power resides in the “hyper-scale” data center companies. The biggest and purest cloud-like data center companies are Facebook, Google and Amazon. These companies are completely based on a closed, centrally-controlled silo, which is not secure enough, has significant privacy issues, concentrates control in a frighteningly few hands and has become perilously intertwined in crony-like regulatory quagmires. Two of them, Google and Facebook, have relied completely on the concept of “the free,” in that their primary users do not pay for the services they receive from these companies. However, Google and Facebook still make billions of dollars — and they do it by delivering those “free” users to advertisers, who can use data analysis to target selected demographics. Therein lies a primary problem for these companies and how they manage their infrastructure. Since they are giving away their product, there is no price discovery mechanism to regulate demand for the services, thereby leaving these companies with an ever-elusive determination of how much infrastructure they need. This is problematic.

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