Tech Rise Is Not A Bubble, But A Change In Leadership

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Includes: AAPL, AMZN, DDD, F, FB, FSLR, GM, GOOG, GOOGL, JPM, KMI, SLB, SPWR
by: Dana Blankenhorn

Summary

Resources are giving way to human capital as a gating factor in growth.

Money is flooding into computing because it lacks other places to go.

The search for those other places will create booms and busts. Look beyond them.

Analysts who think tech stocks are in a "bubble" like that of 1999 don't understand a change in market leadership when they see it.

For a generation wealth has been defined by resources, principally oil. Energy even led the U.S. economy out of the last recession.

But while first natural gas, then oil, went into glut, and stocks based on those commodities rolled over, the market has continued to move ahead on the strength of technology. There may soon be another leg down in oil, as we're running out of room to store it. The Federal Reserve "beige book" paints a bleak picture of the sector going forward. Moves like these are the reverses on the "oil shocks" experienced during the 1970s, they're a trend and not crises.

We have seen such changes before. Before oil came to define wealth in the 1970s, manufacturing defined it. What was good for General Motors (NYSE:GM) was good for the USA. Before that dependable output from utility infrastructure - electricity, phones, transport - defined what companies like Ford (NYSE:F) could do. Before that bankers like JP Morgan (NYSE:JPM) controlled limited capital. Change in economic leadership, in short, is the one constant in our economy.

Right now most tech money liberated by the energy glut is going into computing stocks, because investors don't see any other place for it to go. It's going into Google (NASDAQ:GOOG) (NASDAQ:GOOGL), into Facebook (NASDAQ:FB), into Apple (NASDAQ:AAPL) and Amazon.Com (NASDAQ:AMZN). Valuations on some appear stretched. We can argue whether top-line growth, on an absolute or relative term, justifies the prices. But we can't deny the shift in economic power from Houston to San Jose.

Behind computing are a host of other technology sectors, from 3-D printing [3D Systems (NYSE:DDD)] to virtual reality, from new kinds of cars to the Internet of Things. Each of these areas, along with biotech, aging technology, space, and more, ride on the back of this new computing power, and the human imagination needed to use it effectively.

Renewable energy from companies like First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) still represents a small part of the energy mix, but that portion is rising, and will keep rising. Costs per watt are falling, and will keep falling. The cheapest renewable energy of all, efficiency, will also keep a thumb down on oil demand going forward.

Market leadership, in short, has undergone a permanent change in the last year. Oil prices will continue to fluctuate, and international tensions may even return them to previous lofty levels for a time. But the underlying trends are clear. Human capital, not resources, are now the gating factor for economic growth. It's what your people can and are willing to do, not the resources your money or troops can command, that controls how fast an economy can grow.

This is not a new trend. The success of cities like Singapore, Hong Kong, New York, San Francisco and London, of countries like Israel, Switzerland and the Netherlands, is not new. What is new is the power such centers have relative to economies based on resources, through the application of abundant computing power and highly-motivated, talented human capital.

This should now define how you invest. De-emphasize holdings in energy stocks, even infrastructure plays like Schlumberger (NYSE:SLB) and Kinder Morgan (NYSE:KMI), except as defensive plays. Look to intellectual capital for growth. Within that area you will find booms, and busts, but you'll also find enduring change that takes us beyond where we are, and real value.

Disclosure: The author is long KMI, AAPL, GOOG, GOOGL, AMZN.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.