The tech sector has grown increasingly complex over just the past few years. From massive changes within the global supply chain to the impact of higher interest rates to the emergence of artificial intelligence, technology remains a cornerstone of growth & innovation, but faces numerous challenges. Dan Niles, Senior Portfolio Manager of the Satori Fund, an “all-weather” long-short equity fund, has specialized in managing money through the evolution of the tech sector and joins the ETF Think Tank to offer his take on the state of the global economy and financial markets.
Starting at a high level, Niles doesn’t view the current interest rate environment as terribly restrictive or necessarily a headwind to further tech innovation. If you look at 10-year yields, Niles notes that they’ve averaged 2.4% over the past 15 years but have averaged 5.9% over the past 60 years. By historical standards, this is nowhere near low. While tech keeps getting cheaper, there’s a trio of reasons why Niles sees higher inflation for longer. First, the supply of cheap emerging markets labor is disappearing. Second, companies are starting to near-source and bring production back home, which should increase the cost of components and end products. Third, cheap energy has been pervasive, but the transition to clean energy is going to be expensive. These trends aren’t going away anytime soon and are likely to outweigh the advantages.
Another topic that’s come up a lot lately related to this is wage inflation. Niles believes that we haven’t seen a recession yet because there are still 40% more job openings out there than people looking. As long as that trend continues, we’ll see a stickiness in wages that probably remains until that job opening to people looking ratio moves back closer to 1-to-1. Wage growth and interest rates will stay higher for longer as long as the supply/demand imbalance is in place.
Niles thinks that real estate will be another trouble spot and could potentially create a bottom for inflation. Real estate prices had gone completely out of control during COVID and a lot of people became renters over buyers. Niles says that he’ll be bearish on real estate for a long time. The bank failures in March showed that there’s risk and many banks will need to expand loan loss reserves. Residential real estate sales are low, but available properties are really low. CRE will have a problem for a long time. Niles sees people slowly starting to come back to the office and he’s really curious to see how this plays out. RRE has little supply, but CRE has a lot of supply. We’ll find out what shape the real estate market is in when we get the next big unemployment spike.
Other key takeaways:
- Niles says that when the facts change, you should change. If one of his positions within the portfolio looks like it’s wrong, he trades it. He doesn’t worry about justifying it. You have to admit when you get something wrong.
- People may be putting too much faith in the consumer. Niles says that Apple, for example, has been lowering top line revenue estimates in every quarter this year. They started at 5% revenue growth year-over-year, and they revised lower down to flat. Excessive savings and a lack of student loan payments could be contributing factors, but now they’re running out of that net savings position. The high end is also experiencing downturns.
- We made a mistake by weaponizing the dollar during Russia/Ukraine. Russia, China, and others are already trying to get off of dollar dependency. It seems likely that over some period of time, the dollar could slowly decline and lose its reserve currency status.
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