Unfashionable as it sounds, I’m still just about in the Roaring Twenties camp. I think the 2020s will prove to be a momentous decade in which we’ll see a whole number of technological transformations help push productivity rates much higher.
Without going into the debate in too much detail, we’re seeing a whole bunch of labour-saving technologies emerge which will combine with an enormous state R&D drive led by China and the US. In a future post I’ll return to this theme, but today I wanted to emphasize one key point.
One can believe in the Roaring Twenties conjecture and also concede that we’ll be facing a difficult inflationary decade.
I’m still not entirely convinced that we’ve seen the last of the deflationary pulses going through the system but I’m also a realist and accept that many of the technological changes coming our way may boost both productivity AND inflation.
A great way of thinking about this comes by peering inside Cathy Wood’s holdings for her Ark Innovation ETF. Stone X’s Vincent Deluard has done precisely this and I quote from his most recent note which makes the point that many of the technologies she’s backing are not deflationary. One could make the same point for the Scottish Mortgage portfolio as well.
“The fund’s largest holding, Tesla, manufactures cars which start at $43,990 after massive production subsidies. There are a thousand good arguments for owning a Tesla, but price ain’t one of them. The fund’s second largest holding, Coinbase, builds the infrastructure for the crypto-economy. The blockchain and decentralized finance are fantastic technological breakthroughs but they are not cost-cutters. Bitcoin mining consumes more electricity than Argentina and seven times more than Google’s global operations. More generally, the problems which the blockchain solves, custody and record-keeping, are not high-cost activities. There are good philosophical reasons to move these activities outside of the traditional financial system, but overall savings will be very limited.
Going down the list of ARKK’s holdings, Roku and Spotify provide great entertainment and variety, but they are new ways to spend. The quantity and quality of the shows offered by Netflix, Amazon, HBO, Youtube Premium, Spotify, and Disney Plus is infinitely superior to the old cable or satellite bundles, but overall home entertainment budgets are rising.
Turning to ARKK’s fintech holdings, Square has become the most convenient payment processor for small merchants but its standard processing fee is 2.6% + 10 cents, which is actually more than Visa’s interchange fees.
Similarly, Shopify’s main appeal is not that it is cheaper than its rival Amazon (it is not), but that it gives merchants more control over their data. Turning to ARKK’s software holdings, Zoom’s positive effect on productivity has probably already been harvested after a year of lockdowns. Similarly, cybersecurity providers represent an added (and necessary) cost of doing business in the digital age.
It seems to me that healthcare has the biggest potential for breakthrough innovation: telemedicine, genome editing, and juvenescence could radically transform a sector which consumes closes to 18% of US GDP. However, cutting cost has proved almost impossible in a dysfunctional system with little competition and high regulatory barriers to entry. Last, healthcare innovation may save costs in the short-term, but this spending is postponed, rather than eliminated, as we must all die, eventually”.