Trends 2019

This is a piece that the team at Davidson Investment Advisors puts together annually and is meant to provide some insight into exciting, disruptive, or otherwise new developments we anticipate being impactful to businesses, consumers and society.

Cloud Gaming

As we saw with the eSports trend we cited last year, video gaming is going more and more mainstream. According to industry tracker Newzoo BV, the global games industry is on track to reach $134 billion in annual revenues this year while growing faster than the broader entertainment sector. The cloud is the future for video gaming and promises to expand the addressable market for an already enormous business. Pricey hardware may no longer be necessary for top-tier games when streaming via the Internet (i.e., the cloud) allows users to access vast computing power online using smartphones and smart TVs. According to Barron’s, the number of households that own either a dedicated console or high-end gaming PC is estimated at 300-400 million worldwide, whereas the universe of all gamers (including the casual ones who play on their phones) numbers in the billions.

Cloud Gaming can also mean “Gaming-asa-Service“ (GaaS) and could potentially lead to steady and more-predictable recurring subscription revenues like the monthly fees that Netflix and Spotify collect for video and music services. However, there are unique challenges to streaming games. Unlike movies and music, games are interactive and can involve sophisticated real-time rendering of images and latency issues. If successful, cloud gaming could lead to more engagement and competition for consumers’ time, diverting more hours away from movies, music and other media. With a convergence of technologies and new business models ahead, Ken Moss, Electronic Art’s Chief Technology Officer predicts, “There’s going to be more change in video games in the next five years than there has been in the past generation.”

Deep Fakes

In an era of “fake news,” who can you trust? Unfortunately, the answer no longer includes your own eyes. Deep Fakes are an artificial intelligence-based synthesis of a video superimposed on a real video, usually of a famous person, presenting the speaker as saying or doing something in the video that they have not actually said or done in reality. The simulated videos are stunningly realistic, with lip movements and voice modulation of the target being synched to the speech of the perpetrator in real-time, allowing the deep fake creator to impersonate presidents, celebrities, or business executives for interviews or speeches.

Deep fakes have been used to spoof President Trump speaking about climate change in a commercial in Belgium that fooled many viewers. Actor Jordan Peele worked with Buzzfeed to create a viral President Obama deep fake to demonstrate the power of the technology. A deep fake hobbyist used images of Carrie Fisher to create a more convincing version of her younger self in a recent Star Wars film than Hollywood was able to produce using the resources of Disney. Numerous Hollywood stars have been the victims of a deep fake sub-genre that creates pornographic content using their faces. Now, deep fakes have gone mainstream, with apps available to every smart phone owner to create their own content, similar to face swapping technologies or adding “dog ears” as an Instagram filter. With a big enough data set of images, the app can create a deep fake of anyone.

Deep fakes pose real-world risks, as the technology can be weaponized to violate privacy, norms, and to influence behavior. Imagine seeing a video of a President declaring war on North Korea that later turned out to be fabricated. Or a political ad that comes out just before an election, of a candidate “saying” something deeply racist. There are no libel or defamation laws that comfortably address deep fakes, and it will be up to the courts and lawmakers to confront this new un-reality.

Playing with Fire

The new wave of spending less and saving more prioritizes time and experiences over income and things. Financial frugalness is gaining traction among a small but growing cohort of primarily millennial households’ intent on “hacking retirement” by substantially increasing their savings rate in an effort to be Financially Independent and Retire Early (FIRE). In some cases, adopters of the FIRE movement look to save over 50% of their annual income, invest aggressively and find new ways to minimize expenses.

While the desire for financial independence isn’t new, the motivation for living a life of experiences and having control of your own time - rather than consumerism and things - is more unique to the current wave. Often, this means downsizing houses/cars/etc., moving to cheaper neighborhoods/cities, and generally cutting back on expenses to maximize savings rates in a battle against lifestyle creep and the stresses that can come with it. Many who pursue this path are tired of high-stress jobs, or places where they feel unfulfilled – and they’re not willing to “grind it out” for a good paycheck. They choose to live well below their means in a life rich on time, but short on other luxuries.

Sex Recession

The U.S. is in a birth recession. Since 2010 the total number of births has declined almost every year. According to The Atlantic Magazine, there were some 500,000 fewer American babies born in 2017 than in 2007, even though more women were of prime childbearing age. The birth rate set a new record low, dropping 3% to 60.3 births per 1,000 females aged 15- 44. The total fertility rate, which estimates the number of births a woman would have over her lifetime, dropped to 1.77 children per woman (below the replacement rate of 2.1). However, it is important to note that the United States has been below this theoretical rate since 1971.

So, why the decline? The December 2018 issue of The Atlantic may shed some light on this question. They conjecture the U.S. is in the midst of a Sex Recession. Despite the changes in society’s view of sex or the general perception that people are having more sex, they are in fact, not. In addition, fewer people are marrying and those that do are marrying later. According to anthropologist Helen Fisher, who conducts Match.com’s annual “Singles in America” study, young people are dating less, resulting in a decline in couple hood.

Why is this important to investors? One of the simplest constructs of economic growth is: Gross Domestic Product growth = (population growth) x (productivity). Population growth is the combination of immigration growth and birth rates. If we assume immigration and productivity stay constant, declining birth rates could, theoretically, have a detrimental impact on GDP growth. In addition, declining birth rates means lower household formation, which in turn could negatively impact housing demand. Social benefits, like Social Security and Medicare, depend in part on a young, vibrant working population. Finally, families are the bedrock of society. According to a Pew Research Center survey, one-in-ten Americans say they feel lonely or isolated from those around them all or most of the time, resulting in weak communal ties. This feeling is consistent across most major demographic groups, except one -- those who are married.