It is clear that we are now living in a bipolar economy, with a traditional economy at one end and an autonomous economy at the other. The former is prone to inflation, while the latter is prone to deflation. Though it will take some time, the emerging autonomous economy is rewriting the economic rules. Labor shortages, supply chain issues, and margins are plaguing nearly every industry, and the only clear way out of the mess may be for companies to adopt technology and automation as quickly as feasible. Simultaneously, the down market is giving investors a welcome opportunity to consider companies that deliver these necessary technologies at a discount. We believe it’s shaping up to be an investor’s perfect summer storm.
Interestingly, our economic systems were not built for today’s world where technology is driving growth while prices continue to fall. In contrast, these systems were built for a distinctly pre-technology era in which labor and capital were inextricably linked, that counted on growth and inflation, and where money was made from scarcity and inefficiency. That era is over, yet the majority of investors and even some economists remain under the illusion that the economic systems of the past are still at work. In the real world, the price of technology is decreasing at an exponential rate1, just as it continues to transform the way enterprises operate and individuals think, work, and play. The result: the more consumers use digital goods and services, the lower the cost becomes.
Technology is deflationary for two primary reasons:
- Technology reduces the demand for labor. Technological innovation leads to automation that make industries more efficient and eliminates a variety of jobs. Robots replace humans in factories. Microsoft’s Azure service reduces the need for companies to hire data center engineers. Self-service checkout lanes and in-store kiosks lead to layoffs of retail workers. The result is a downward pressure on wages and employment levels which, in turn, reduces demand for goods and services because of the simple fact that workers have less money to spend.
- Technological innovation affects the supply of goods and services. Technology is enabling a growing number of businesses and industries to cross an important inflection point. More than ever before, the production of goods and services is scaling faster than consumer demand. Evolving technology is lowering production costs, increasing the speed at which goods and services can be produced, and making it easier to satisfy consumer demand for certain types of goods. When the supply of goods consistently meets demand, there is no room for price increases, making deflation inevitable.
One of the best examples of this reality in action is the Software as a service (SaaS) sector. The market has correctly identified that SaaS companies are capable of achieving high sales and earnings multiples, in part because of their ability to scale efficiently and add new customers virtually for free. Zoom became the perfect poster child at the start of the pandemic when thousands of companies around the globe were forced to move to remote work in a very short period of time, driving extreme demand for remote conferencing tools. Zoom was able to ramp up to meet that unexpected acceleration—without the need to increase the price of its service.
Source: Inflation Calculator, 1983 Motorola DynaTAC was $3,995
SaaS is no outlier. Innovations in the commodity space are making it easier for producers to close supply gaps quickly and efficiently. Fracking technology, more sophisticated methods of detecting new oil reserves, and improvements in wind and solar are all combining to lower the overall cost of energy. Farmers are achieving record yields and dairy farmers have moved from milking cows by hand to building robotic milking parlors that can milk dozens of cows simultaneously to multiply output. Streaming services for film, television, and music have dramatically cut the cost of media consumption and allowed new market participants to scale and compete more efficiently.
It is alarming that economists have yet to create a metric to study the effects of technology on the economy. Despite having vast amounts of economic data at their fingertips, they have not found any evidence to support the fact that technology investments increase productivity. Basic business principles dictate that capital investments improve profitability by reducing costs and/or enabling expansion into new markets. No one invests in technology to increase labor costs, shrink profit margins, or inflate prices on current goods or services. In contrast, the goal is to strike the balance between higher profit margins and lower prices. As technology continues to fuel the trend of increasing competition to lower prices, deflation is becoming clearer. Surely economists will soon uncover the economic evidence to better understand the connection between investments in technology and the boost in productivity that supports deflation.
Ubiquitous automation is just around the corner. AI training costs have been dropping between 40% and 70% annually, creating a record-breaking deflationary force that is likely to transform every sector over the next decade. The deflation to come may potentially benefit many—particularly investors who can see past the old models to grasp the opportunity that lies ahead.
Examples of Potentially Deflationary Companies in the ROBO Global ETFs:
ROBO ETF (Robotics & Automation)
- Manhattan Associates Inc - unified omnichannel commerce & digital supply chain
- Fanuc Corp – factory automation dramatically reduces the cost per product
- Deere & Co – autonomous farming solutions help address high costs for farmers
THNQ ETF (Artificial Intelligence)
- Jd.com – ease of e-commerce shopping lowering the cost of products for consumers
- Salesforce – CRM & SaaS models reduce overhead for businesses on all ends from IT costs to costly infrastructures
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Samsara - provides a means to better track vehicle fleets, leading to operational improvements and cost savings that pass on to consumers.
HTEC ETF (Healthcare Tech)
- Twist – synthetic biology for half the costs
- Health Catalyst – analyze hospitals and medical data to better organize the structure and increases productivity, real-time accessed data
- Teladoc – virtual medical visits drastically reduce healthcare costs, according to Teladoc the average visit leads to a cost savings of about $472
1 Moore’s Law, https://www.investopedia.com/terms/m/mooreslaw.asp#:~:text=Key%20Takeaways,cost%20of%20computers%20is%20halved.
ROBO Top Ten Holdings, HTEC Top Ten Holdings, THNQ Top Ten Holdings