The worst inflation in four decades is here … five reasons to look for it pulling back in 2022 … the sector poised to benefit the most
We’re dealing with the worst inflation in four decades.
It’s been so persistent that the Fed even retired use of “transitory” to describe it, subbing in “elevated.”
Plus, on Wednesday, the Fed signaled that it’s a near certainty that it will be raising rates next year in an effort to snuff out inflation.
Wednesday’s decision was hardly a surprise after Powell’s “entrenched” comment late last month that spooked investors:
We know that high inflation takes a toll on families, especially those less able to meet the higher cost of essentials like food, housing and transportation. We’ll use our tools to support economy and labor market and prevent higher inflation from becoming entrenched.
Yes, inflation is here, real, and negatively impacting family budgets. But if you’re banking on elevated inflation becoming the “new normal” as you plan your market approach for next year, hold on.
On Wednesday, our hypergrowth specialist, Luke Lango, laid out five reasons why 2022 will be the year that inflation eases, rather than explodes. And that will have profound implications for tech stocks, which have been suffering through a season of inflation-inspired weakness (as well as a painful last couple days).
Today, let’s review Luke’s thought process to find out why he expects select tech stocks to roar next year as elevated inflation levels finally ease.
***Global supply chain headaches will resolve
For newer Digest readers, Luke is our hypergrowth expert, and the analyst behind Hypergrowth Investing. His specialty is finding market-leading tech innovators that are pioneering explosive trends, capable of generating outsized investor wealth.
Obviously, this focus on tech innovators means Luke has been studying today’s inflationary environment closely – what has caused it, what’s likely to end it, and when that might happen.
On that note, let’s jump into Luke’s first reason why we’re closer to the end of this bout of elevated inflation than the beginning – namely, the end of supply chain headaches:
A large driver of inflation in 2021 has been supply chain constraints brought on by the Covid-19 pandemic. Throughout the past year, emerging market manufacturing activity has been hampered by social distancing policies, the likes of which have created massive supply shortages.
However, the Manufacturing Purchasing Managers Indices in Russia, India, China, Indonesia, Japan, Malaysia, and Vietnam have all improved dramatically over the past few months, signaling improving manufacturing capacity in those emerging markets at the same time that social distancing policies have eased.
We believe this trend of improving emerging market manufacturing activity will persist in 2022, and will set the stage for supply chain normalization, which will remove one of the biggest inflationary pressures from the global economy next year.
This focus on emerging markets is because these countries are responsible for the majority of global manufacturing. The graphic below is a bit dated, but it gives you a sense for this.
Look at how just three of the countries that Luke highlighted – China, India, and Japan – account for nearly 40% of all global manufacturing.
***The rock-bottom inflation comparables of 2020 will burn off
If supply chains ease as Luke suggests, it’s going to bring down prices. And that works hand-in-hand with Luke’s next point – an updated set of comparables that reduces headline inflation numbers.
Back to Luke:
Throughout 2021, inflation has been running red-hot on a year-over-year basis, but at the same time, the comparable periods have been very easy.
That is, throughout 2020, inflation was averaging below 2%. When lapping against sub-2% inflation, it is easy to put up big headline numbers.
However, starting in the second quarter of 2022, inflation will be lapping against the red-hot 4%-plus inflation numbers we’ve seen throughout 2021.
It is much harder to put up big headline numbers against 4%, 5%, and 6% inflation comparables than it is to do it on 2% inflation comparables.
***Luke’s third reason why inflation will recede in 2022 is something we discuss regularly in the Digest…automation
From Luke’s issue:
In the wake of escalating wage pressures, many companies have turned toward automation.
According to a recent Deloitte survey, around 73% of companies have embarked on a path toward intelligent automation – a stunning 58% jump from the number reported in the 2019 survey.
And this comes from The Wall Street Journal:
“With labor shortages throughout manufacturing, logistics and virtually every industry, companies of all sizes are increasingly turning to robotics and automation to stay productive and competitive,” A3 President Jeff Burnstein said…
Robotics orders by North American companies are on track for their biggest year, according to an industry group.
Total robotics sales for the first nine months of the year were $1.48 billion, topping a previous record of $1.47 billion set over the same period in 2017, according to the Association for Advancing Automation, or A3. Sales rose from $1.09 billion in the first nine months of last year.
Automation and a robotic workforce eventually translate into significant cost savings for companies. And reduced costs are, by definition, a deflationary influence.
Back to Luke:
Automation is on the rise throughout the enterprise, and that is an enormous deflationary force which should reduce costs and improve productivity.
We expect 2022 to be a year wherein a lot of these new automation deployments start to yield deflationary effects.
***Fourth, the velocity of money is still barely registering a heartbeat
Here’s Luke to explain “velocity of money” for any readers less familiar with it:
One of the biggest drivers of deflation over the past three decades has been a drop in the velocity of money – i.e. companies have been spending money less quickly due to a proliferation of productivity-boosting technology.
This secular trend has not reversed course.
Despite the red-hot inflation of 2021, the velocity of the M2 money stock in this country has continued to drop.
Therefore, once short-term supply chain pressures ease, we fully expect declining money velocity pressures to kick back up and continue to pull prices lower.
Below, we look at a chart of the Velocity of M2 Money Stock from the Federal Reserve Bank of St. Louis from 1980 through today.
Notice how the last time velocity was increasing on a sustained level was the 1990s. With just a few exceptions, it’s been falling since 2000. And look what happened thanks to the pandemic – velocity went over a cliff and hasn’t recovered.
***Finally, Luke points toward technology as a reason we haven’t seen sustained inflation in 40 years
Luke writes that inflation has not sustainably broken above 2% since the dawn of the internet in the 1990s.
Why?
Because the internet has birthed multiple cost-cutting and productivity-boosting technologies which have worked to create a secular drag on inflation.
Now, think about the decade in front of us. Actually, let’s pare it back since we’re focusing on 2022. Think about just the next 12 months.
Is it more or less likely we’ll continue to see innovations that cut costs and increase productivity over this period?
I can’t imagine anyone saying it’s less likely. And so, if lower costs and greater productivity are our future, isn’t that just a continuation of these decades of lean inflation?
Back to Luke:
We believe those cost-cutting and productivity-boosting technologies – like workflow automation, warehouse robotics, self-driving delivery cars, and more – will continue to proliferate across society, and continue to create deflationary forces in the economy long after today’s supply chain disruptions pass.
There you have it – five reasons why Luke believes inflation will ease next year.
***The question becomes how do you play this?
It’s not surprising that Luke is eyeing elite technology companies. They’ve been beaten up in recent months as anxious investors rotated into bonds and defensive sectors. That rotation has intensified yesterday and today given expectations for rate hikes next year.
But as inflation worries ebb and growth resumes in 2022, Luke believes “risk on” sentiment will roar back, acting as a huge tailwind for top technology stocks.
Back to Luke:
In 2021, high-flying tech stocks got crushed. In 2022, they’ll soar back to life.
And, even if you don’t believe me there, maybe you should believe history. The last time the Fed entered a rate hike cycle was between late 2016 and late 2018. Going into that rate hike cycle, growth stocks struggled – but once the rate hike cycle kicked off, growth stocks surged.
From December 2016 to December 2018 – while the Fed hiked rates eight different times – the ARK Innovation ETF rose more than 90%, while the rest of the market rose just 9%.
History is repeating itself. High-flying tech stocks are going to surge again in 2022. The question is: Are you going to be on the right side of history?
Luke laid out much of his case in our recent Early Warning Summit 2022 event.
If you missed that event, Luke sat down with Louis Navellier and Eric Fry. The three expert analysts discussed the major issues facing investors today and what’s coming in 2022 – inflation, Fed policy, the pandemic’s impact on growth, and far more.
Best of all, they gave away the tickers of four different stocks poised to soar in 2022. One in particular is a stock that all three analysts believe could be 2022’s top-performer.
If you missed the event, you can watch the replay by clicking here.
Bottom line, yes, inflation is here. But as Luke points out, there’s a strong case to be made for easing conditions next year. And that could be huge for tech stocks.
We’ll continue to keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
