Eoin Treacy's view

From that perspective there are only two sectors. The first relates to manipulating the physical world like mining, forestry, fishing and property. The second relates to deploying the mind to solve problems. That includes banking, communication, energy, technology and industrials.

There is no clear divisible line between the two, but the broad strokes of how revolutionary thinking can shape the economy are obvious. I think of this subject in how value is accreted in the economy. Some companies have reliable cashflows and submit readily to the dividend discount model. High growth companies may not be profitable for years but they are creating whole markets and that is also value creation.

In the financial markets you need the steady flow of new money and a potent new investment story to drive a big bull market.

Over the last 15 years, quantitative easing has delivered low rates and abundant liquidity. That has been the fuel to drive concurrent bull markets in the bond, property and technology sectors. The argument around technological innovation driving a new industrial revolution has been based on how successful companies have been in leveraging 4G internet connectivity. The hype-based argument is we are entering a technology led environment where every sector will submit to digitization.

The buzz word of the 1990s was disintermediation. It might have been better to think of it as concentration. The largest companies now occupy a large swathe of the global market and have disrupted several industries around the world. That has been most particularly true for communication and retail and they will never again be the same.

Concurrently, the development of remote computing power (cloud), which is also delivered over the internet, has created new business models, and also allowed for scaling that was not previously possible. The subscription business model also freed software companies from the cyclical nature of software development so they can deliver incremental change regularly. 

The basic assumption is technological innovation allows us to do more with less. The reason we have had such an impressive bull market in the technology sector over the last 15 years is because companies have, for the most part, delivered on that promise.

The challenge in the energy and financial sectors is the solutions being proposed do less with more. The promise of abundance relies on spare capacity to free up room for innovative thinking and greater standards of living. The challenge for many countries is standards of living went down after the global financial crisis, even while technology was delivering on innovation.

The chief objection to quantitative easing was it disadvantaged savers relative to risk takers. The boom in asset prices for everything from property to collectibles, and equities to bonds came at the expense of depriving conservative savers of income. At the same time the cost of everything jumped with asset prices.

The conclusion is simple. A secular bull market, in a systemically important sector, is enough to boost prices, but not enough to improve the human condition. That’s the real distinction between an industrial revolution and a secular bull market.

The trend of improvement from biomass to wood, coal, oil and gas and nuclear all delivered higher  energy output than deployed in development. Wind and solar are intermittent and rarely deliver on the headline energy production touted when capital is being raised. Moreover, they require backup power to deliver when they can’t.

With the global population approaching 8 billion, there is an acute need for reliable, cheap, clean energy. The only possible way that can be delivered is with a massive technological leap forward in energy storage. The chief benefit of oil versus wind is oil’s specific energy. Wind is weather dependent so it is impossible to store. Oil only needs to be burnt to release its energy.

Significant investment in battery technology only began about a decade ago. Solid state batteries have been promised repeatedly but are not yet commercial. They purport to have more energy density, charge quicker and last longer but they do not exist.

Small modular reactors are being constructed today. NuScale’s first reactor will deliver electricity in 2027 or 2028, if everything goes according to plan.

The ITER fusion project will be completed some time in the early 2030s. Meanwhile an alternative method has proven net energy is possible over the last six months. This is a major breakthrough but the time to commercialisation could stretch into decades.    

Innovations in wave power, geothermal or orbital solar are all also promising but do not exist.

In the financial sector, innovation has most often been associated with reframing how risk is apportioned. That’s true of limited partnerships, futures, options, ETFs, crowd funding etc. The crypto currencies sector acts more like a new asset class because it focused more on accumulating assets than defraying risk.

The underlying blockchain aims to defray risk by creating an unalterable ledger of activity. However, the technology is still clunky and the arguments for why it is better are mostly contrived.

The biggest financial innovation of the last 15 years has been quantitative easing, followed closely by the return of fiscal stimulus. The latter was instrumental in reigniting inflationary pressures in much of the global economy.

Markets don’t care about where the money comes from provided it is cheap and available. However, creating an economic environment where savers are rewarded depends on positive real rates of interest being sustained for a lengthy period.

The biggest challenge for countries today is high debt levels and unfunded obligations. Much higher productivity is required to realign income with expenditure. Hopes currently rest on artificial intelligence to solve this problem. Large language models are promising but require more work, autonomous driving is improving but is not ready. The most productive areas where deep learning and artificial intelligence are being used are healthcare and materials sciences. This has been underway for at least the last decade while large language models are much more recent. The volume of computing power required to deliver the promise of these sectors is orders of magnitude greater than what exists today.

The alternative would be a debt jubilee where debts are forgiven and balances are reset to zero. These kinds of event are only adopted as a last resort and generally only happen following a major war, like following World War II.

The pace of technological innovation and the financial cycle are not always in line. For the last 15 years we had benign monetary conditions and rapid technological innovation. Today, inflationary pressures are elevated and geopolitical tensions are rising. The trend of rising political populism is still very much in evidence and is likely to intensify as debt issues continue to pressure government balance sheets. This is a recipe for shorter sharper cycles rather than the consistent trends of the last 15 years.

A clear innovation in the energy sector could change that conclusion because it would immediately allow us to do more with less, but until then the most likely scenario is leveraged business models will be difficult to sustain and market volatility will be elevated.

For now, yield curves are inverted and market valuations are elevated. Whan economic activity moderates, valuations will be reset and monetary conditions will ease. That will spur both asset price appreciation and reignite inflationary pressures. The lesson of the last 15 years has been buy and hold is best and private assets are the most productive. The next decade will be more about honing one’s trading instinct.