COM - Innovation Economy: Tectonic Shifts And Use Cases?

2023-05-25 15:49:13 ET

Summary

• At the Richmond Fed, a tech disruption conference was the theme alongside the energy transition.
• More certainty in interest rate rises is becoming clearer in the short term.
• The pace of greater adoption of artificial intelligence and its use cases are emerging. Innovation is moving fast in this space.
• The energy transition is displaying greater regional variation across the U.S.

After attending the conference “Technology-Enabled Disruption” at the Richmond, Va., Federal Reserve Bank, in conjunction with the Atlanta and Dallas Feds, I’m both amused and giving a nod to the Nvidia (NVDA) market moves. Topics that resonated with me included:

• Uncertainty: Interest rate path and inflation path

• Impact of artificial intelligence

• How supply chains are shifting in tech and energy

• How work is being re-thought owing to technology

• And of course, energy transition learnings from others’ perspectives, the pacing and perceptions.

There's markedly a shape-shifting nature to tech’s influence in the way in which we work, consume and relate. Back in 2005, I consulted with an organization on the impact of globalization and ow it's moving through the global economy. I described it as shape-shifting along with other metaphors and was absolutely slammed by this “learned person” as being unable to write or think. Fast-forward to today, the lead techy person at the Fed used that very word a couple of times — shape-shifting as descriptive. (I felt lousy for a decade about it. But my “failure” catalyzed action in interesting ways. LOL.)

Video link of Fed conference thematics and ideas

One presenter at the conference that was an expert about supply chains and tech discussed the geopolitics of semiconductors and the interdependencies inherent in them presently. This very idea plays out in energy in spades. From my thoughts, for all of the end products or firm operations and asset valuations, the materials and labor must come from somewhere. The market reaction to Nvidia , while justified in one sense, i.e., markets reacting to good news, in another, a re-settling will occur. (This relates to some of my past articles, c. Nov -Dec and videos.) You see things playing out in the energy transition and how fast or slow it's really moving. The timing of adoption and the ability for us to harness the resources needed to work out next generations in sectors is a real economy factor. And more sectors overlap in new and interesting ways - repackagings and recyclings.

Remember also, energy must be available to power all of these advances required for the computing power, data centers, and related support periphery, etc. And we want it to be clean; decarbonization can be inflationary in the present, as is de-globalization and electrifying more. The role of efficiency will be key in the future to accomplish all of this.

(Some research and ideas related to supply chains from 9/22/22: Supply Chain Risk: Unique Global Investment Thesis. )

This macroeconomy-tech-energy dynamic speaks to the sorting that the market does to identify and find value. A great sorting is still upon us as we move past the pandemic and the wake of its effects, plus Russia’s invasion of Ukraine in energy. The inflation rabbit hole is being tamed, but how it changes firm and consumer decisions more firmly is yet to be seen. While some trade routes change with oil and gas, optimal paths and energy mixes are still restructuring. The Putin "put" on energy is still moving about. More to come on that.

The allure of tech stocks is quite apparent from the market capitalizations represented here. Notably, Aramco (ARMCO and PetroChina (PCCYF) are trillion-dollar firms too. In looking at tech and energy stocks, some interesting dynamics are afoot when looked at through time: Five days, one month and one year.

Five days

One month

One year

As information filters through, some variation emerges. Energy, as represented by Exxon Mobil ( XOM ) and Clean Energy ( ICLN ), have differentiated performance, as expected. The market has not yet worked out the direction of the transition, though many participants have placed bets. There's a good deal of shape-shifting behavior occurring in energy. Nvidia’s outperformance is largely because of the prospects of artificial intelligence . As automation was to tasks of labor, AI may be to tasks of the office worker, and more. This was alluded to in a panel of business leaders in real estate, health care and banking. The way in which technology and the pandemic’s remaking of work intermingle were fascinating, real boots-on-the-ground reporting.

As for interest rates, the thinking about the Fed's data-driven approach was clear, and allowing time to reveal the lagging effects in the economy was a second pillar. Time will show how firms (supply), prices and consumption respond to reduce inflation. Ultimately, the goal is to offer as much certainty for "investors" to keep moving ahead. It feels like many playbooks are thrown out the window in predicting. The most apparent economic framing to me is creative destruction, the timing of which is challenging to predict.

And from my time in Richmond...

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