Technology is the Best "Inflation Trade"

As you know, we are about a month out from the Federal Reserve’s decision to pump additional funds into a slow US economy. Of course, this decision has been controversial. Many people think that it might ignite an inflation bomb. Couple this with the more recent bailout of Irish banks (and speculation about more euro dominoes about to fall) and lots of folks are pretty scared.

For the long-term technology investor, however, I don’t think it really matters. From an orbital perspective, these panics come and go. They always have. The technological arc of human history, however, can be seen to move in only one direction, and that is upward.

Granted, over the short term, it might have some negative effect, but even that remains to be seen. Breakthrough technologies, however, are an excellent way to weather an inflationary storm. We could even call breakthrough technology the ultimate hedge against inflation.

Microsoft, for example, was founded in 1975, when inflation averaged over 9%. Granted, it wasn’t publicly traded back then, but there were private investors. Imagine what a dollar invested in Microsoft in 1975 would be worth today. Just since its IPO in 1986, the company has turned a (split-adjusted) share price of 10.1 cents into over $26.

That is a gain of more than 26,000%. Even with the dollar losing about half of its purchasing power since 1986, that is still an inflation-adjusted gain of 13,000%. I can live with that. The point is that early investing in companies that will transform the market will beat any devaluation caused by inflation.

What kinds of technologies transform the market? Essentially, what we look for in Technology Profits Confidential are transformational innovators that reduce costs by making things cheaper and better. This investment theme extends to a wide variety of fields, from agriculture, to alternative energy, to computers and semiconductor fabrication. In the medical field, too, emerging technologies are going to reduce the cost of existing therapies. At the core of everything is materials science. In this, all the fields are converging on the basic building block of matter itself – the atom.

Of course, there is a double benefit in the case of breakthrough medicine, too. Even if the overall measurable economic cost of health care increases, there is an unmeasurable noneconomic windfall, and this is human life itself. Better therapies improve the quality and enjoyment of our lives, as well as extend them. It is difficult to attach a price tag to this, but isn’t all economic activity ultimately reducible to improving life in some perceived way?

The famous quote (erroneously attributed to Emerson) that applies here is: “Build a better mousetrap and the world will beat a path to your door.” This remains true during good or hard times. All that “door traffic” is lucrative, since people reward things of value. Investors that acquire ownership positions in the builders of better mousetraps stand to reap hefty profits, whether in good times or bad.

Just this week, for example, IBM’s global research labs revealed a new semiconductor technology that combines current electronic computing technology with optical technology. Optical circuitry, also called photonics, uses pulses of light, instead of electrons, to work. Photonic circuit elements can accomplish the same tasks as electronic ones while being smaller and faster. Power consumption could also be reduced to a fraction of what an equivalent electronic computer requires.

Called CMOS Integrated Silicon Nanophotonics, IBM’s tech would increase the processing speeds of the fastest computers from petascale to exascale. Petascale computers, which are currently the world’s fastest supercomputers, can execute instructions at the rate of multiple petaflops (a quadrillion floating point operations per second). For example, China’s current record holder, Tianhe-1, can do slightly more than 2.5 petaflops. Exascale computers, on the other hand, would be 1,000 times faster than that.

We’ve already seen photonics revolutionize telecommunications over the last several decades. If you are reading this alert online, the data was delivered to you via fiber-optic links over large segments of the delivery route. We wouldn’t have the modern Internet without this early photonics application.

Just as recently as last December, exascale supercomputers were not expected for another eight years. IBM, however, says that the new technology will enable it to up the ante and ship out the first exascale chips in five years. This advancement is partly because IBM has figured out how to build integrated electronic/photonic circuits using conventional fabrication technology. Both types of circuits can be built on a chip at the same time. The recent eight-year estimate may prove to be just another case of underestimating the acceleration of technological change!


Ray Blanco
for The Daily Reckoning

The Daily Reckoning