The Inflation Argument Calling for Another Good Decade for Tech Investment

TuSimple, part-owned by UPS, makes self-driving trucks, a technology that may be among the innovations to help reduce long-term inflation in the transportation sector.

Source: TuSimple

As inflation continues to flirt with 40-year highs, we know what the Fed is doing to fight back: raising interest rates. But what can companies do to fight back beyond raising prices for customers?

That question is again relevant with latest inflation data on Wednesday. It was a sign that the economy is progressing against inflation. The Labor Department said consumer prices rose 8.5 percent during the 12 months ending in July, representing a much better stabilization of inflation than in recent months, driven by the fall in the price of the gasoline after an increase that began in December 2020. Gasoline prices fell nearly 8 percent in July. The inflation rate excluding the volatile food and energy segments rose 0.3 percent, down from 0.7 percent in June.

But can US companies and markets count on the inflation lull to last?

“This is a much better report than I expected,” former Obama administration chief economist Jason Furman told CNBC’s Squawk Box on Wednesday. “This could easily be the false dawn we saw in September 2021, but for now I’ll take it as a tick in the right direction.”

Ann Milleti, director of active equities at Allspring Global Investments, told CNBC on Wednesday that there is a sense of relief with the latest inflation data, but overall, she cautioned that inflation is here to stay. “What you want to have are companies that can outperform, management teams that have been through previous cycles, cycles that are changing,” she Milleti said. “Regardless of what the Fed does, we know rates are going up. We know inflation is likely to be higher than it was over the last decade in the next decade. So you want to pick companies that are better positioned for that kind of environment than the previous environment that we’ve lived in.

Companies will spend more on technology

One set of responses to the longer higher inflation argument circulating on Wall Street comes from Morgan Stanley, in the form of a 60-page report published this summer called “The Enablers of Deflation.” Led by industry research director Josh Pokrzywinski, the report argues that a big shift in the way corporations think about capital allocation is coming after the end of the era of low interest rates.

“The cost of capital is on the rise, which we believe will push companies to invest for future growth rather than corporate buybacks and other financial engineering,” the Morgan Stanley report says. “Physical [capital spending]when executed correctly, it tends to be deflationary.”

This belief led a team of 31 credentialed analysts to devise a series of investments that companies — and investors — should focus on as executives allocate more spending to boost productivity and reduce inflation in years to come.

Morgan Stanley’s report is dominated by technologies whose names have become familiar: artificial intelligence, clean energy, robotics, software innovation, and even advances in clean commercial heating and cooling that can quickly pay for themselves in efficiency savings. All of these technologies are rapidly falling in price and becoming more efficient, meaning that the goods and services made with them will be significantly cheaper in the coming years.

Some of the examples Morgan Stanley cites are familiar; others much less.

AI, for example, is of underappreciated importance in accelerating the advancement of biotech and pharmaceutical development, according to Morgan Stanley analyst Vikram Purahit, allowing companies to quickly weed out unpromising experiments and perfect compounds faster. that are clinically promising, reducing the time for preclinical drug preparation. development by up to 75% and cutting early-stage development costs by up to half.

Another is in the seemingly low-tech business of long-distance trucking. Labor and fuel costs have driven freight costs to new highs. The Department of Labor reported that the costs of delivery services such as United Parcel Service Y FedEx They have risen 14 percent in the last 12 months and wages in the sector have accelerated amid a shortage of drivers.

But trucks using self-driving technology and electric motors can solve both problems, according to Ravi Shankar, an analyst at Morgan Stanley. Nearly fully autonomous driving should be available late next year from San Diego-based TuSimple, which went public in 2021 and is part-owned by United Parcel Service. Fred Smith, president of FedEx he told CNBC’s Jim Cramer in March that his company wants to introduce driverless trucks in 2022, and Fedex announced a pilot AV program In May.

“We believe that 70 percent of cost savings are at stake from adopting these technologies together,” Shankar wrote, adding, “We hope that at least some of these will be passed on to carriers.”

But the biggest bucket of investment to fight inflation may occur in energy.

There is an emerging divide between “inflationary” traditional energy and “deflationary” clean energy, wrote Stephen Byrd, a utilities analyst at Morgan Stanley, a division highlighted by this year’s rise in oil and natural gas prices. Case in point: Futures prices for electricity supplied to Texas in 2023 are up 65 percent this year, while fuel cell maker flowering energy is cutting manufacturing costs by as much as 10 percent a year. Electricity supplied by Bloom to business customers is now nearly 20 percent cheaper than the national average, Byrd said.

Similarly, the energy generated by SunrunCalifornia rooftop solar systems are now cheaper than local utility juice, thanks to a huge jump in utility inflation in the past year. The new inflation data showed no slowdown in utility prices, in part because the market price of natural gas remains three times higher than pre-pandemic levels, complicated by Russian supply disruptions.

“Clean energy can, in the long run, be disruptive to traditional electricity providers, especially utilities with high and rising customer bills, higher-than-average exposure to the physical risks of climate change, and challenges in ensuring adequate power supply to its customers,” Byrd. wrote.

Arguing inflation and productivity gains

The report received a mixed reaction from outside experts. The basic idea is well known to those who follow innovation: technology is deflationary by nature.

“[It’s an] interesting piece,” said Michael Mandel, chief economist at the Progressive Policy Institute and lead author of its Innovation Heroes reports, which spotlight companies that invest heavily to pursue productivity gains. “[It] fits very closely with our Investment Heroes report, and [with] Low inflation in the digital sector”.

Mandel argues that inflation has skyrocketed in part due to underinvestment by corporations during the Covid pandemic.

But less impressed was Robert Cantwell, a portfolio manager at the Compound Kings ETF in Nashville, who believes Morgan Stanley analysts went too far in the number of technologies cited.

“Deflationary advances are not coming from capital-intensive activities like the renewable energy transition or electric vehicles,” Cantwell said. “Capital-light technology like card networks and social media have deflationary potential, but it’s really hard to measure.”

None of this means that policymakers and markets can ignore short-term inflationary pressures, said Sylvia Jablonski, chief investment officer at Defiance ETF, whose funds focus on disruptions including quantum computing and hydrogen energy.

“Politics, Washington and the Federal Reserve have possibly the biggest impact on the state of inflation, and this cannot be ignored,” Jablonski said. “However, there are many factors that can contribute to demographic trends, lead to a technological revolution and really change the way the economy and society operate.”

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