Technological innovation has slowed recently, with new products providing only incremental improvements over previous generations. This slowdown, along with emerging market industrialization and resource constraints, may spur higher inflation globally. In an inflationary environment, investment strategies yielding strong recent returns would become ineffective. Instead, a balanced portfolio should include stocks poised to benefit from potential deflation, established consumer brands, high-growth stocks if inflation persists, and environmentally-focused companies. Rather than assume unending technological progress, savvy investors notice subtle signals of change missed by most and adapt their strategies accordingly, viewing inflation not as a crisis but an opportunity.
Technological progress, while accelerating for decades, may be approaching physical and engineering limits, potentially slowing future advancements. Economic growth, especially in developing nations, relies on new technologies and productivity enhancements, but persistent inflation can undermine consumer purchasing power and business investment. Some economists believe advanced economies have reaped most productivity benefits from information technology, and further innovation might offer diminishing returns without new general-purpose technologies. Predicting future discoveries' pace and impact is challenging, and policymakers face complex challenges in promoting prosperity amid these countervailing forces. Slow tech progress In the modern global economy, consistent economic growth has become crucial for nations due to the deep integration of national economies. This interdependence means that events in one country can significantly impact others, as seen during the 1997 Asian Financial Crisis. The shift towards valuing intangible assets like intellectual property over tangible assets has increased market volatility. Additionally, high consumer debt and rising income inequality pose risks to economic stability. Consequently, achieving yearly GDP growth targets is essential to avoid financial crises. Companies that leverage intangibles or can quickly adapt to market changes have a competitive advantage. Economic policymakers and central bankers are under intense scrutiny to ensure growth, while financial markets face increased volatility due to fluctuating growth expectations. Failure to meet growth targets can lead to widespread economic instability. Global growth needs Investors who view inflation as a relic may be overlooking emerging pressures. The stable inflation of the 1990s was partly due to temporary factors, such as delayed wage growth and the outsourcing of production to lower-cost countries. However, the global supply of cheap labor is diminishing, and any resurgence in Asian economies could push commodity prices and inflation up. Additionally, political motives can lead to understated inflation data. As these factors converge, the risk of inflation grows, particularly if economic growth falters. This potential volatility suggests that companies with the ability to raise prices or those with assets that benefit from inflation may be better investment targets. While growth companies can still succeed in a robust economy, the absence of a "landing gear" means there's no smooth transition if expansion slows, making inflation a lurking danger that could resurface with a slowdown in growth Rising prices Despite technological advancements, U.S. productivity is not uniformly increasing, particularly in the service sector where measurement is complex. Productivity and efficiency, often used interchangeably, diverge in meaning within services. Efficiency means doing more with less—time, money, labor—where technology can drive gains. However, productivity in services improves only if the quality or quantity of services increases, satisfying more customers, and is less dependent on technology. For instance, a writer using a word processor instead of a typewriter is more efficient, but only more productive if their work sells better. Technology doesn't inherently enhance the talent of service providers, and satisfaction with services has not necessarily risen with technological integration. The service sector is splitting into "superstars" with rare talents and a larger group of specialized workers enabling efficient operations. While the Internet has allowed businesses to cut costs, significant year-over-year efficiency gains are unlikely without major technological breakthroughs. This situation affects business dynamics, including pricing power, skepticism towards productivity claims, computer pricing, company performance, and valuations of internet companies. Falling productivity Despite technological advancements, productivity in the U.S. service sector, which employs about 75% of the workforce, is not keeping pace due to the difficulty in measuring improvements where quality trumps quantity. Unlike manufacturing, where productivity and efficiency are often synonymous, in services, they diverge. Efficiency means doing more with less, while productivity hinges on delivering more or better services. Technology alone doesn't guarantee better service; it's the human skills that count. For instance, a writer's productivity isn't about using a computer over a typewriter, but rather if more people buy their work. Service industries rely on the unique talents of a few to drive productivity, supported by staff who ensure efficiency. Internet-related efficiency gains are significant but typically one-off, as ongoing cost reductions are not sustainable without continuous innovation. Consequently, companies with pricing power are better positioned, skepticism towards productivity claims is warranted, and technology firms may face tougher growth prospects. Ultimately, enhancing human skills is key to boosting productivity in the service economy.
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