The Reverend Dr. Thomas Robert Malthus FRS (13 February 1766 – 23 December 1834) was a British scholar, influential in political economy and demography. Malthus popularized the economic theory of rent. Malthus has become widely known for his analysis according to which societal improvements result in population growth.
Malthus thought that the dangers of population growth would preclude endless progress towards a utopian society: "The power of population is indefinitely greater than the power in the earth to produce subsistence for man".[i]
You are reading this correctly. Malthus, who was a great economist, thought that the world was going to starve as population grew. Malthus made a huge mistake; and in doing it, bequeathed a legacy to all economists who followed him. He totally missed the possibility of technology innovation transforming the world he lived in. Agricultural advances and the onset of the industrial revolution changed that world. Anyone who looks at the world today has to look at the possibility of things changing radically as technology evolves.
Technology changes the world as it evolves, and as technological innovations are created they are adopted and become widespread across the world’s population. We are again in the middle of an explosion of both new technological innovations and the widespread adoption of the last few decades’ innovations.
Picture in your mind’s eye a village in Africa. Picture a small dish antenna on a tent providing a shared cell phone service to anyone in the village who wants to buy a call, one call at a time. Think about how that changes the dynamics of life. Someone who left the village could never communicate with their family or friends without returning. Now they can. Think of an African farmer who never had any knowledge of what the weather might bring to his crops, and who now texts “weather” and receives a forecast that allows him to plan.
Extrapolate that functionality to the hundreds of millions of rural and nomadic workers who have moved to work in cities in China. Each of these workers is one of the five hundred million cell phone owners already in place in China who can keep in contact with their family. The very existence of cell phone service in China makes their continuing plans to bring more workers into the city, and thus the economy, viable.
Technology companies are already doing very well in this business cycle recovery. Earnings are growing. Revenues are growing. Cash is quickly building on balance sheets. Technology companies are high ROE animals. Having a lot of cash on the balance sheet hurts their profitability in a zero interest rate environment. CFOs and CEOs really only have three choices on what to do with growing cash hoards. Any of the three are good for investors:
1. They can raise dividends or pay special dividends.
2. They can buy back stock.
3. They can buy companies that fit strategically.
We’ve turned to our investment team and asked them to highlight things that are happening in technology today that they find interesting. I asked Andy Corn, Emily Needell and Sam Fraenkel to opine independently. They all came back with one technology innovation that will drive huge changes over the near to intermediate term: Cloud Computing. For those of you who are not technology aficionados, network engineers and IT professionals often draw network diagrams that connect things through the Internet. In these drawings the internet is depicted in a shape that looks like a cloud. Hence the term cloud computing relates to functions that are done via the Internet that further the computing power of your desktop or laptop.
All three of our investment people believe Google (GOOG) will be a big winner in the “cloud” given that it is one of the most prominent suppliers of cloud tools currently in use. Emily also believes that Microsoft (MSFT), with the announced availability of its Azure platform, has a serious stake in the cloud. Sam highlights Rackspace Hosting (RAX). Rackspace provides managed hosting and cloud hosting. Their blade servers are kept in highly secured Racks, hence their name.
Andy is excited about some tech developments out of the cloud on the ground. He points to Intel’s (INTC) smallest and fastest processors, the Atom and the Core, as standout products. He also likes VanceInfo Technologies (VIT), which does IT and R&D outsourcing from their Chinese base.
From our vantage point, technology is not just limited to IT and electronics. I still expect some of the breakthrough, life changing innovations to come from the materials science arena and the biotechnology arena. Re-engineering some of the basic materials we use daily through the application of nanotechnology and physics can change cost and scarcity parameters for some of the most basic inputs into the world’s economies. Also, the seemingly impossible job of controlling healthcare costs against a backdrop of aging populations can be surprisingly positively impacted by biotechnological engineering of cures to diseases that now seem only treatable.
Our main point is that investors should expect amazing things from new technologies. Technology has changed the world, and will continue to change the world. When the question becomes, How will the world get through a specific set of problems? Most of the time the answer is technology.