Investment Perspectives- An Economic Renaissance and an Innovation Cycle
After suffering through a prolonged period of a command and control economy characterized by excessive regulation, high taxation, artificial interest rate manipulation, and arrogant government intervention, the US economy has finally been unleashed. Reversing eight years of bad economic policy, business confidence is zooming, capital expenditures are increasing, and consumer confidence is growing. In short, the “animal spirits” that often accompany, or lead to new innovation, are back. All of these factors are propelling a bull market in equities, even before the results of trade negotiations with various partners are finalized (presumably with terms more favorable to US companies). Yet all is not “hearts and flowers”, global industrial growth was slowing even before the initiation of various tariff wars, interest rates are expected to rise, and some inflation may be percolating. In short, investors have the opportunity to climb the investment wall of worry.
Against this economic backdrop, seeds that were planted many years ago are beginning to germinate. And we may be in the early stages of a dramatic innovation cycle. Both traditional silicon-based technologies; notably software, and carbon-based technologies; notably biotechnology, offer the potential for radical change. Change that leads to upending existing industries, catalyzing the development of new industries, and offering astute investors substantial opportunity.
Every decade or so, information technology evolves to a new topology, promising adopters some combination of better information access and cost reduction. We’ve seen the industry evolve from centralized mainframe computing, to distributed minicomputer implementations, followed by the impact of the personal computer, leading to client/server computing, and more recently, subscription-based cloud computing. So what’s next? Well the seemingly constant security breaches suffered by our leading institutions- retailers, banks, and the like suggest something different must be implemented. And this comes at a time when very promising technology has been deployed as the fundamental architecture of various cryptocurrencies. More specifically, a technology referred to as block chain serves as the underpinning for these cryptocurrencies making them exceedingly difficult to hack. This technology uses a highly distributed ledger to record transactions rather than a central repository making unauthorized access very difficult. We believe this very technology will be applied to all sorts of applications solving a number of problems, not the least of which is the security issue. So what to expect? We believe over the next several years we will get a wholesale rewriting of standard applications as well as the development of new applications. It should also be noted that this distributed technology requires enormous compute power, so not only will software be rewritten, but basic infrastructure, including hardware and various semiconductor technologies will be required as well. All of this should lead to a prolonged infrastructure upgrade cycle that more than rivals the cycles we’ve the seen in the past.
The changes coming in healthcare may be even more dramatic. Personalized medicine is evolving through various techniques where alterations to an individual’s immune system, or even genetic makeup, may be used to combat various illnesses. Early successes in this regard involve altering different cell types that then target specific cancer cells. Thus far the clinical trial results have been extremely impressive enabling a meaningful percentage of very sick patients to enjoy varying degrees of cancer remission. These are patients that heretofore had very discouraging prognoses. At the same time, new biologics are being developed that are changing the standard of care. Perhaps most exciting, and even a little disconcerting, are new techniques for gene editing and gene therapy. Here a change is made either to delete a defective gene or insert a missing gene in an attempt to change the protein level that the specific gene is supposed to code for. Sometimes these changes are made outside the body, inserted in a virus vector and then infused into the patient. Another approach has been to alter the genetic makeup of the patient directly inside the body rather than through a virus vector. One of the more interesting aspects of these genetic approaches is the potential for permanent cures. Another interesting factor is the notion of “one and done”. Juxtapose this with the traditional business model of pharmaceutical companies enjoying the benefits of selling drugs for chronic care. Naturally, if successful, not only will these new approaches offer dramatic patient benefits, but they are likely to disrupt a number of industries, as well as require a rethinking of how very expensive “one and done” therapies are paid for. The potential for change and disruption is so acute that it reminds one of the early 1990’s and the emergence of the internet. All good news for proactive investors.
The combination of a better economy and an exciting innovation cycle offers investors a very promising environment. Notwithstanding the political caterwauling, we would encourage staying focused on these fundamental changes and assuming risk. The bull market is alive and well!
Michael P. De Santis – General Partner
Bruce M. Lupatkin – General Partner