Moore’s Law creates accelerating deflation.
Faster computers and bigger clouds mean that learning of all kinds is sped up. Human talent becomes the gating factor to growth. Science finds or creates new materials. Engineering also accelerates, enabling replacement of what’s scarce with things that are more abundant.
This isn’t news, but with the economy growing rapidly, and inflation rising, it’s easy for investors to forget the fundamental facts of today’s economy.
Since the start of the year tech stocks have been moribund. Many of the biggest names have been down. Apple is down.
Why? Mainly because there are other ways to make money. Investors, and speculators, buy the rumor and sell the news. What works for speculators is usually what might work, and what might work right now are old-fashioned industrials and basic material stocks.
Many stocks you never heard of with names like Deere (DE), Stanley Black & Decker (SWK) and United Rentals (URI), are having fabulous years. Meanwhile Amazon.Com, whose business is fabulous, has barely budged. The ARK Innovation ETF (ARKK), which buys bleeding edge tech names like Tesla (TSLA) and Shopify (SHOP), is down by a third in 2021.
During the pandemic year, the government created a ton of money but there was no way to invest it profitably. Investors piled into anything that worked. They were paying 100 times earnings for Amazon, and nearly 40 times for Apple. Now there are other things that are working – Royal Caribbean (RCL) has doubled over the last year, even before it gets back to sailing. But that money must come from somewhere. Some of it is coming out of those pandemic year winners.
If you’re an investor rather than a speculator, this is good for you. It means good companies are worth buying again. Apple is already down below 29 times earnings. That price to earnings ratio may go down further even if the stock stays where it is because Apple’s earnings keep going up.
The fundamentals remain intact. Technology will keep taking costs out of making things and running markets. We need more demand. We need to find new things for money to do to keep deflation at bay. If we overshoot that’s OK. It’ll settle down. Technology will make it settle down.
Let it settle, prepare your buy list, and nibble on tech that looks interesting. That’s how you win at this game.
