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The inflation story: moving beyond the noise

09 September 2022

The market is blinded by inflation and the reaction of central banks, but the experience of the early 1980s when inflation was brought back under control is that over time many other factors drive the economy. It was the time of the rise of computers, automated machines, software and an eventual rapid rise in productivity. In an ecosystem of perpetual renewal like this, we see many losers and winners. Amid the ongoing Tech revolution, the question is which companies and styles will determine our future and, crucially, is the price right?

Fed and ECB still tightening monetary policy

The market has been extraordinarily focused on the actions of the ECB and Fed as they try to bring inflation under control. Eventually this will change and the investment horizon will lengthen considerably. For now though, the market has good reasons not to. Inflation saps consumer confidence and overtightening could send the European and US economies into a recession. Indeed, the cost of inflation is so high with companies overpricing their goods that the US has been in a technical recession for two quarters, while Europe might approach a recession next year. The question now is how high short-term interest rates will have to go; and the answer is unclear. For now, hiring is still strong in the United States whereas in Europe companies are far more concerned. It will take many months to figure out the path of growth and inflation.

Results rather than stories will eventually tell

For many years, an era of cheap financing driven by salesmanship and good story-telling has helped to drive Unicorns to extreme valuations. The “old economy” continues to dominate though with weak productivity. In other words, if the likes of Apple were fundamentally transforming our economy we would all be much richer. This is not the case. Productivity has slowed considerably from the time when computers and software bolstered the economy in the 1980s and 1990s. While Microsoft and Excel changed everything from a growth perspective, Apple did something in part different such as creating new markets and matching far better and faster demand and supply. Over time, this quest to gain new markets especially in the old economy is likely to gather force. Hence, the advent of new very complex technologies such as AI, Quantum Computers and Green technologies will eventually determine much of our future. In this upcoming race, the likes of Apple and many others could be the leaders.

What does it mean?

This transformation of the old economy should happen amongst a multiplicity of dimensions which are along existing and future styles. Within the sustainability one, infrastructure and real estate will need to see significant evolutions in the coming decades to cope with climate change and a changing economy. Infrastructure and real estate have the advantage of offering long-term contracts with fairly stable cash flows which make them more immune to noise.

 

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