QQQ - Reset And Regenerate: Themes After The Fed Conference (Video)

2023-06-02 05:00:00 ET

Summary

• The forces of tech disruption and the energy transition dominate my investment portfolio.
• The AI day of last week reflects a market resetting itself post-pandemic - that shock that keeps on giving.
• The energy transition is looking more nuanced than even six months ago.
• From a Richmond Federal Reserve conference, I share my learnings.
• Legacy energy systems do not vanish that easily, and infrastructure assets are long-lived.

After attending the Richmond Federal Reserve conference, with the Dallas and Atlanta Fed districts, Michael Hopkins and I download key findings that lend themselves to investment themes. Topics covered include the macroeconomy, tech-enabled disruption and the energy transition. The districts of the conference included the 5th, 6th and 11th districts.

Link to: "From Generative AI to Regenerative Energy: Afterthoughts from a Fed Conference" Video

During one panel, an executive from the semiconductor industry suggested that two-thirds of the economy is impacted by tech disruption. From this, one can glean that capital and investment is reshuffling to meet that ongoing saga. The rise of NVIDIA ( NVDA ) last week was a reminder of how quickly disruption can happen, but also how a technology’s application and use cases emerge over an unknown time horizon, sometimes rather fast.

Topics that resonate with me now include:

• Uncertainty and risks: Technology, geopolitical and time horizons

• Impact of artificial intelligence and its churn in productive factors

• How supply chains are shifting in tech and energy

• And the energy transition's phase

Reset, rebuild

In this post-pandemic era, we are still working out what forces are taking hold in the economy in technology and energy, and all that connects to it. But these are underlying forces with their own drivers. Given the lagging effects to be revealed from interest rate hikes — the new driving speed of the economy — what is yet to be seen? This year to date, over 400,000 layoffs have happened, and 5,000 in May owing to "artificial intelligence" rationales.

My theme of rebuilding relates to the re-industrialization underway in the U.S. Three bills were passed that have incentivized the changes to supply chain routes and the continued transformation of the energy mix. (See video "Reset...:Part I" in the playlist below.)

In the 5th district, electrification and the EV scene was more of a focal point than the 11th district, per se . The reasons are largely from the different energy mixes by state, resource availability and policy. The graphic below shows how EV sales look relative to new car sales. Roughly 10% of new car sales are EVs, with up to 20% expected, and thereafter it gets harder, an EV academic expert noted.

In the video I discuss the distribution of new power generation across the United States, much of it solar, with nuclear, gas and wind in the mix too. Also, natural gas use and increased LNG stood out as themes that speak to the continued need for and use of fossil fuels. The developing world will require natural gas and oil for a long time, as will many advanced economies. Legacy systems do not vanish that easily. Infrastructure assets are long-lived. Electrification is not sufficient unto itself as a goal, and more ways to power economies will emerge - both fuels and grids, the natural world too.

In terms of regeneration, U.S. majors and other energy firms are increasingly decarbonizing. With greater minerals requirements of electrification and tech gadgets, as well as optimizing grids and the connection to cleaner energy sources, more inflationary forces are upon us. Conceivably, with the advent of greater AI use cases and other technological applications, productivity and efficiency can be a countervailing force, just as globalization held inflation in check in the first decades of the 21st Century. That was partly a combination of reduced labor costs, as well as technologically-induced efficiency. In the 2020s, these equations are altered.

Having said all that, the U.S. shale plays are themselves an under-recognized energy transformation, one that has yet to be fully digested globally. So, while de-globalization and decarbonization are generally inflationary, new ways to produce and consume more efficiently are the domains of technology and the disruption occurring — Schumpeter's concept of creative destruction.

As an investment case, the trends in tech disruption and the energy transition warrant shorter-term investment horizons. Think a five-year outlook that stretches to 10 years (plus or minus), but then an updating and critique of the portfolio in an ongoing manner.

One also cannot underestimate the role of human capital in the energy transition and drive toward sustainability This is quite apparent from the many conferences I have attended, my walkabout of listening and learning from firms, start-ups and capital looking for new markets and opportunities. And this is in parallel to the projections of AI's effect.

Generative AI will soar to become a $1.3 trillion market in 2032 from just $40 billion last year, Bloomberg Intelligence estimates. Compound annual growth over the period could be 42%, driven by systems like OpenAI’s ChatGPT and Google’s Bard. The “explosion of growth” will change industries such as advertising, customer service and banking.

The following chart speaks to the vacillating nature of technology stocks and energy at points in time. (The video offers more detail as does Part II in the playlist below.)

Exxon Mobil (XOM) has been rewarded for its focus on core competencies and transitioning conservatively within its capabilities, which are quite expansive.

A good deal of re-evaluation of the energy transition is underway. The lagging effects of interest rate hikes are filtering through sectors and sub-sectors in the energy transition and the various related assets. From the pandemic reset, one never knows what might shift again.

Additionally, since the "AI day" market revelation, numerous firms have made announcements to ride that train. The timing of its evolution will be something to watch. The AI expert at the conference said both to not overestimate or underestimate the impact of AI. So technology risk is an added factor for portfolio considerations, alongside energy transition risk. The most actionable investment step for me has been to add more discrete tech ETFs to complement my overweight of energy and infrastructure stocks.

Related very recent articles:

Market Celebrates Artificial Intelligence (Video)

Innovation Economy: Tectonic Shifts And Use Cases?

Playlist of Fed conference videos

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