Podcast: Things Past and Things to Come December 19 2022
Another sad week in the markets as the Fed’s determination to fight inflation with rate increases seems firm, even though rates were raised less in December than in past months. What’s happening down the line? Our podcasters will also look at tech, at SEC regulations, crypto regulations, and specifically at what a Deutche Telecom announcement it was picking up Juniper’s SD-WAN and Mist AI technology for a managed SD-WAN service.
Transcript of Podcast:
01-Nigel: Hello, I’m Nigel Hardwicke and this is Things Past and Things to Come, a TMT Advisor podcast of CIMI Corporation. Welcome!
We have a lot to talk about, as usual, and we’ll start with the economy as usual. Inflation numbers released last week were better than expected, and I think this validates our view that the inflation issue is moderating. We don’t yet have any firm signals for what the fourth quarter earnings reports will look like, but I think they’ll again be better than expected.
The Fed, though, seems to expect to hold interest rates above average through all of 2023, with the likelihood of raising another three-quarters of a percent to a full percent. Given a half-point increase in January is pretty baked in, that would mean another two quarter-point increases. That’s also consistent with our view that be done with increases likely by May. The announcement the Fed made on Wednesday sent markets down, and futures were off on Thursday morning. During the day stocks continued to sell off, and the averages were off sharply at end of day.
Friday, futures were off again, and markets opened lower, with the NASDAQ doing the best of the three indices. They ended lower again, but Friday was an options expiration, the so-called “triple witching”. Still, I think that we’re seeing an extreme reaction to the fact that the Fed might continue rate increases longer than the Street had hoped it would. But did they really hope, or was the upswing in stocks the demon hedge funds covering their shorts a bit, then shorting again?
Maven I’m sure you have a view on all of this!
02-Maven: I sure do. I have to admit that the unexpectedly large dip in retail sales in November could suggest some broad economic risk, and thus a risk to stocks. Some of the dip might have been caused by pulling holiday purchases into October because sales were already in the offing. Some might have been caused by pushing purchases into December in the hope of further price drops. We’ll have to wait to see what gets reported.
Thursday and Friday trades were an interesting validation of my views on demon short sellers. Futures were off before the market opened on Thursday, and the market sold off sharply at the open. Interestingly, volumes were very low and the biggest trades were buys that created a temporary upward move. All this says that there’s no buying conviction yet so even small short sales can drive things down. Friday was hard to analyze because of options expirations but I think the trading was consistent with a market that’s been oversold.
All the Wall Street data I’ve seen tells me that hedge funds and short sellers are still pounding stocks to drive them down, with the knowledge that the uncertainty of the current situation and their own behavior this year is dampening buyer conviction. The question is when the buyers decide that uncertainty is past. We don’t have to see interest rates go down to have a market recovery. We only have to see them stop going up, and that’s likely as Nigel said by May. Even before then, in February, we should see the rate on increases drop to a quarter point. And of course we’ll have corporate earnings for the final quarter coming along in January. That will likely cause another pop in stocks, just as the Q3 reports did. The question is whether that buyer conviction Nigel mentioned will return in January and February, or whether demon short-selling hedge funds will keep on doing their dastardly deeds.
Speaking of which, we had the SEC announce what it thinks are revolutionary new rules that level the playing field for individual investors, and there’s congressional interest in regulating crypto. Nigel what do you make of all of that?
03-Nigel: I agree with your economic and market comments, but I want to add something. There is always a risk that bad news validates itself. I agree that the fundamentals of the economic situation are much better than the media would suggest, but what the media suggests is what a lot of people believe. There are pressures created on consumer spending by higher interest rates, and inflation does impact consumers. Add to these real issues, even if they’re not as dramatic as some suggest, the fact that some are suggesting things are bad and maybe getting worse, and you raise the risk people will believe it and start pulling back.
On the regulations side, I’m disappointed. Improving the pricing individual investors get on trades isn’t, in my view, going to change the balance of power between individuals and hedge funds much at all. What the SEC should have done was to address the short selling. You have to look at 2022, which is surely the worst stock crisis since 1929, and ask what regulations could have mitigated the drop. The answer is regulations that would limit predatory short-selling.
Maven you’re the crypto expert so how about commenting on that one?
04-Maven: OK Nigel. The problem with crypto is that it was a bubble from day one. If you have something you can trade that has no backing, no value behind it, then the only thing that moves it is sentiment. That’s a bubble. From the first, there should have been regulatory intervention to block any form of crypto because without real backing it’s a bubble, and with full backing it’s really redundant. You could just buy the asset that’s backing it. But regulators didn’t do that, and now we have a market where people have invested fortunes in. Can regulators take steps now to bar crypto, and make all those sunk investments fall to zero? Obviously not, so what they have to do is tiptoe around the issue, which means they won’t really be able to do anything.
The good news is that if there’s enough skepticism raised on crypto’s future, people will bail on it gradually and maybe eventually you can stamp it out. The bad news is that the market loves bubbles, and if regulators don’t take broad steps against bubbles as a concept, we’ll just see one crop up somewhere else.
But let me move on to a broader tech point. Netflix says that it will allow advertisers to recoup ad payments where audiences fell below the level the advertisers’ agreements set. Does this mean that people are watching less Netflix, that less people are subscribing? We may be seeing a validation of our concerns about the ad sponsorship service model emerging.
Tom you’ve been quiet so far. Is there something going in in tech you think we should be talking about?
05-Tom: There are a couple of things, Maven, and both are in the area of network operator—telco, if you prefer—infrastructure.
The first thing is carrier cloud, or telco cloud. There have been a number of analyses released on telco cloud progress, but none of them seem to have captured the biggest point, which is that the biggest impact of a carrier cloud strategy would be to deploy assets that could be used for edge computing. The target of carrier cloud is the hosting of service features, including some specific 5G elements and some potential general function hosting associated with NFV. The actual changes created by that simple mission wouldn’t mean much for the network, cloud, or computing markets. If that mission were to create a pool of edge assets it would have a major impact.
If you assess carrier cloud in that light, then none of the current models of deployment really move the ball. There isn’t enough function hosting demand to justify much resource pool deployment, absent any explicit edge computing connection. Some operators are looking at, or actively engaging, public cloud providers for their hosting needs, which essentially eliminates any incremental edge resource deployment. The book isn’t closed on carrier cloud, but we can see the covers moving together.
The next area is business VPNs. Deutche Telecom announced it was picking Juniper as its first technology partner in its Magenta Business Networks SD-X initiative for secure SD-WAN. I don’t usually talk about wins like this, but I’m making an exception here because the deal could be the start of a seismic shift in VPN strategy.
Juniper’s SD-WAN technology is in my view the best in the industry but it’s gotten less ink than less worthy competitors, and this announcement also features Juniper’s Mist AI, which is the best of the AI strategies for network operations out there. The combination of the two in the SD-X deployment could be an indication that DT is going to push SD-WAN hard, perhaps hard enough to actually target replacement of MPLS VPNs. Europe is a VPN challenge because most enterprises there will be operating over all of Europe. SD-WAN, done right, could address that, and DT could change the game if they press hard with their new strategy.
06-Maven: I have a few questions. Most SD-WAN is sold as a managed service, at least worldwide, isn’t it? Managed service providers have been successful, so why is the fact that a communications service provider, a CSP, getting into the game so important, and why is the Mist AI integration a big thing?
07-Tom: All good questions. Yes, today most SD-WAN is probably sold via MSPs, but enterprises also buy a fair amount of SD-WAN products directly. The advantage of the MSP route is that the MSP provides support for the remote sites, which is a benefit to the user, particularly if the network spans multiple countries or even continents.
The Mist AI integration by DT is part of the managed service story. Management is expensive. Even with service provider economies of scale, the cost of management can easily be a quarter to even a half of the total cost of a managed SD-WAN service. Mist AI does a great job of reducing the human effort needed to manage an SD-WAN network, and it can even extend onto the premises of these small SD-WAN-supported sites. It doesn’t eliminate human attention, but it sure reduces the amount of attention needed, and the fact that you can see onto the small sites’ LANs means that you may actually improve overall network reliability by identifying local problems that would otherwise be missed by the management systems.
07-Maven: Tom I know virtual networking is one of the trends you think will be critical in 2023. Another is what you’ve called “metro”, which I think you mean the evolution of edge computing sites located in major metro areas and combining with the edge-to-core-network transition point. What’s going on there?
08-Tom: Not as much as I’d hoped, I’m sad to say. Obviously we don’t have that sort of metro model in place today, so you have to ask not only how it’s built in a technical sense, but why it’s built in an economic and profit sense. 5G mandates some function hosting, but does it mandate enough to create a real resource pool in the metro area? It hasn’t so far. Edge computing would do the job, but we have the classic chicken-and-egg problem there. If we had edge computing in place we could foresee applications that would eventually consume it. If we had applications that would immediately consume the edge resources we deployed, we’d have deployments. We have to expect to lurch forward here, and it’s not happening quickly. That may be due in part to the uncertainties in the broad economy.
As for the technical transformation, the question is whether metro is mostly a network, mostly a data center, or some new hybrid that would best be served by a new technology model. Do you have a 5G Core gateway, which is the Cisco model, do you have a data center fabric with stuff stuck onto it, or do you have something like a cluster router model, which DriveNets offers? Since we’re not really accepting the notion of a metro model yet, we don’t have vendors pushing their positions in the competitive field of the market.
Well, this has run a bit long, but we won’t be podcasting again until after the first of the year; specifically on January third. Until then we all want to wish our listeners a Happy Holiday Season and a prosperous and exciting new year.