HOW FAST PACE OF INNOVATION IS TRANSFORMING INVESTING
Changes in the technological ecosystem are shaking up traditional business models
One of my favourite courses in university was the Anthropology of Technology: how new technological introductions have profoundly impacted human culture and helped shape the core of societal development.
At the time, I would have never have guessed that it would have such an important role to play in my investment career, especially when it comes to understanding markets and economies that are now being influenced by a pace of innovation never seen before in history.
The increased pace and, along with it, the rapid evolution of the technological ecosystem makes this decade very different from others in the past. This ecosystem accelerates the implementation of even newer technology, which, in turn, quickly builds upon itself.
Ray Kurzweil summarizes this in his book The Singularity is Near by saying: “The first computers were designed on paper and assembled by hand. Today, they are designed on computer workstations with the computers themselves working out many details of the next generation’s design, and are then produced in fully automated factories with only limited human intervention.”
The introduction of the smartphone was a key development, creating one giant ecosystem connecting all of us and our personal data. The race is on to analyze this data in the best way through cognitive computing and artificial intelligence while integrating it with the deployment of robotics and automation.
The changes have also caused a shift in traditional business models, with the primary focus now on how to get immediate access to all these connected devices. Products and services are given away at or below cost in hopes of establishing an extensive network of client data to use in order to introduce an additional premium product or service for a fee.
Consequently, a successful model rapidly grows user counts before progressing to annual recurring revenue and, eventually, profitability.
This has created a huge improvement in the deployment of new products while driving costs down and lowering prices for consumers. Amazon.com Inc.’s acquisition of Whole Foods Market Inc. and its immediate announcement of a 40-per-cent cut in many of its food prices is a great example of this.
As a result, we get economic growth without the traditional inflationary cycle, which can seem very confusing to the baby boomer generation that currently sets economic fiscal and monetary policy.
Each generation has seen an increasing pace of technological development, but those running central banks today are sticking to policies that are no longer relevant, causing all kinds of distortion in risk parameters.
For example, there’s US$8trillion worth of global bonds with negative yields, and European junk bond yields are trading near U.S. Treasury yields of similar duration. At the same time, equity markets such as the S&P 500 have been bid up to the highest level ever from a median price-to-revenue basis while U.S. credit volatility is at its lowest point in 20 years.
The belief in cryptocurrencies as the future has sent Bitcoin rocketing with a market capitalization now larger than 88 per cent of the companies on the S&P 500, according to Charlie Bilello of Pension Partners.
Not surprisingly, the techheavy Nasdaq 100 has followed course, setting 61 all-time highs this year.
It’s only one more day away from the annual record of 62 set in 1999, according to LPL Financial Research.
From this gen-Xer’s perspective, it is a strange environment indeed, with economic growth being masked by moderating consumer prices and low levels of inflation.
Throw in record low interest rates, investors disregard for risk and the stampede into anything technology related and you have a distortion approaching very concerning proportions.
Financial Post Martin Pelletier, CFA is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgarybased private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.