Inflation trade taking Wall Street by storm in 2021. What about the deflation trade?
The hottest investment strategy among high profile investors this year seems to be the inflation trade: An investment strategy to profit from rising price levels. In a previous article I discuss some options investors can take to combat rising prices. As investors are fleeing to successful brand name foreign companies, commodities, gold, and cryptocurrencies the latest meeting with Jerome Powell and the Fed gave us a bit more information on possibly another investment option. Lets explore why growth tech stocks may return to favor. And, how this all has to do with deflation.
In the most recent Fed meeting Jerome Powell makes attempts to calm the markets woes of oncoming inflation by citing deflationary trends over the past 25 years. Globalization, technology, automation, etc have all led to massive reductions in the costs to do business. Because of the 2020 pandemic and historic low interest rate plus QE federal policies tech in particular saw massive upticks in valuations which have recently fell off a cliff. There were concerns about inflation eroding future earnings. The economy opening up. To big to soon moment in valuations harking back to the Dotcom bubble. The recent G7 meeting to agree to make attempts to establish a global tax on big tech. Over leverage in the market driving up tech stocks subject to being margin called at a moments notice.
But, wait! Let’s not forget that many of these growth tech companies are deflationary in nature. Jerome Powell in his most recent Q&A acknowledges that the Fed is at least relying in some way on there being deflationary forces in the market to help combat obvious rising inflation. Inflation does erode future earnings which affects valuation models today, but it also raises the cost to do business for companies that will be forced to liquidate and exit the market which drives down prices. This destructive side of inflation is not as much a burden for growth tech stocks as they are the ones competing with older establishment companies that rely much more on lower costs to do business. The economy is opening up, but there is not a return to the norm pre 2020. Work from home is here to stay. Ghost kitchens and food delivery are still as popular as ever. At home offices are the new at home gym renovation trend. Todays tech companies are far more adaptive than those 20 years ago and largely incomparable. It is a mystery as to how the G7 is going to convince the EU tax arbitraging banking countries and labor market dependent Asian nations to agree to a standardized global tax on big tech. And, due to recent large declines in growth tech stocks leveraged money in the market has spread to other sectors with more favorable valuations.
Although many growth tech stocks are still highly overvalued. Jerome Powell and the Fed seem to have began to admit that without deflationary trends in the market they have no hopes of combating inflation. Combine all that with a turn away from globalization this may spell a resurgence in growth tech stocks in a tag team battle with the Fed against inflation.
