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Inflation Debate Inspires a Better Decade for Tech Investing




TuSimple, partly owned by UPS, makes self-driving trucks. This technology could be one of the innovations that could help contain long-term inflation in the transport sector.

Source: TuSimple

As inflation continues to hit 40-year highs, we know what the Federal Reserve (Fed) is doing to combat it. It’s an interest rate hike. But what can companies do to fight back other than raising prices for customers?

That question is newly related to Wednesday’s latest inflation data. This was a sign that the economy was making headway against inflation. Consumer prices rose 8.5% in the 12 months to July, according to the Labor Department. This indicates that inflation has leveled off more significantly than in recent months as petrol prices fell after the spike that began in December 2020. Gas prices fell nearly 8% in July. Excluding the precarious food and energy sectors, inflation rose 0.3%, down from 0.7% in June.

But can American businesses and markets expect inflation to continue to subside?

“This is a much better report than I expected,” former Obama administration chief economist Jason Furman told CNBC’s Squawkbox on Wednesday. It may have been a false dawn, but so far I think things are going in the right direction.”

Ann Milleti, head of active equity at Allspring Global Investments, told CNBC on Wednesday that the latest inflation data was reassuring, but warned the big picture was that inflation would continue. did. “You want to own a better performing company, a management team that has survived previous cycles and changing cycles,” Mr. Miletti said. “No matter what the Fed does, we know interest rates are going up. environment than the previous one.”

Businesses will increase spending on technology

A series of responses to the high and prolonged inflation debate circulating on Wall Street came in the form of a 60-page report released this summer by Morgan Stanley called “The Deflation Enablers.” Led by his director of industry research, Josh Pokrzywinski, the report argues that there has been a major shift in how companies think about capital allocation since the end of the low interest rate era.

According to a Morgan Stanley report, “The cost of capital is rising, and we expect companies to invest for future growth as opposed to share buybacks and other financial engineering.” [capital spending], when done correctly, tends to be deflationary. ”

This belief has led a team of 31 renowned analysts to come up with a set of investments that companies and investors should focus on. This is because executives allocate more spending to productivity gains, driving down inflation in the years to come.

Morgan Stanley’s report is dominated by technologies with familiar names, such as artificial intelligence, clean energy, robotics, software innovations, and even advances in clean commercial heating and air conditioning, which quickly pays off in efficiency savings. I can do it. All of these technologies are rapidly falling in price and becoming more effective. This means that goods and services created using them will become significantly cheaper in the years to come.

Some of the examples cited by Morgan Stanley are well known. others are not.

For example, according to Morgan Stanley analyst Vikram Plahit, AI has little recognition of its importance in accelerating progress in biotechnology and drug development. This allows companies to quickly weed out unpromising experiments, quickly tackle clinically promising compounds, and reduce preclinical drug time. Reduce development by up to 75% and cut early stage development costs by up to half.

Another is the seemingly low-tech business of long-distance trucking. Labor and fuel costs are pushing freight costs to new highs. The Labor Department reported that costs for delivery services such as the United Parcel Service and FedEx have risen 14% in the past 12 months, and wages in the sector are accelerating amid driver shortages.

But Morgan Stanley analyst Ravi Shankar said trucks using self-driving technology and electric engines could solve both problems. Nearly fully autonomous driving should be available by the second half of next year from his San Diego-based TuSimple, which will go public in 2021 and is partly owned by the United Parcel Service. FedEx Chairman Fred Smith told CNBC’s Jim Cramer in March that his company hopes to introduce driverless trucks in 2022, and FedEx announced a pilot AV program in May.

“We believe that 70% of the cost savings will be achieved by adopting these technologies together,” Shankar wrote, adding, “We hope that at least some of these will be passed on to shippers. I do,” he added.

But the biggest bucket of investment to combat inflation could come in energy.

Morgan Stanley utilities analyst Stephen Byrd writes that there is a new division between “inflationary” conventional energy and “deflationary” clean energy. One example: Futures prices for electricity supplied to Texas in 2023 are up 65% this year, and fuel cell maker Bloom Energy is cutting production costs by as much as 10% a year. Byrd said the electricity Bloom provides to commercial customers is now almost 20% cheaper than the national average.

Similarly, the electricity generated by Sunrun’s rooftop solar system in California is cheaper than juice from the local utility, thanks to a significant increase in utility inflation last year. New inflation data show no slowdown in utility bills. This is because the market price of natural gas remains three times his pre-pandemic level and is complicated by disruptions in Russian supply.

“Clean energy has the potential to lead to higher and rising bills from traditional electricity suppliers, especially customers, in the long term, greater than average exposure to physical risks from climate change, and ensuring an adequate supply of electricity to customers. It can have a disruptive impact on utilities that have challenges in doing so,” Byrd said. I have written.

Discuss inflation and productivity gains

The report received mixed reactions from outside experts. The basic idea is familiar to those who pursue innovation. Technology is inherently deflationary.

“[It’s an] Michael Mandel, chief economist at the Progressive Policy Institute and lead author of the Innovation Heroes report, highlights companies investing heavily in their pursuit of productivity gains .[It] In very good agreement with the Investment Heroes report, [with] Low inflation in the digital sector. ”

Mundell argues that one reason for the spike in inflation is the slowdown in corporate investment due to the coronavirus pandemic.

But Robert Cantwell, portfolio manager of Nashville’s Compound Kings ETF, was less impressed. He believes the number of technologies cited by Morgan Stanley analysts has gone too far.

“The increasing deflation does not come from a transition to renewable energy or capital-intensive activities like EVs,” Cantwell said. “Capital-light technologies such as card networks and social networks have deflationary potential, but it is very difficult to measure.”

None of this means that policymakers and markets can’t take their eyes off short-term inflationary pressures, said Silvia Jablonski, chief investment officer at Defiance ETF. The company’s funds focus on disruptions such as quantum computing and hydrogen energy.

“Politics, Washington and the Federal Reserve arguably have the greatest impact on the state of inflation, and this cannot be ignored,” said Jablonski. There are many factors that will bring about and actually change the way economies and societies operate.”




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