How the Technochasm Became an Abyss
 Eric Fry |
Dear Reader,
What is the "Technochasm", and why does it matter?
In a word, it's the "splitting" of America; it's the creation of "haves" and "have nots" right in front of our eyes. And it's driven by the ever-increasing speed, power, and progress of technology.
Because on one hand, America is a place of extraordinary wealth… a place where technology executives and investors see thousands-of-percent returns in their portfolios.
They can fly around in private jets and buy beachfront condos anytime they want – the American system is working great for these folks.
On the other hand, many Americans are struggling to make ends meet, no matter how hard they work. And to these folks, our system is a disaster.
In fact, a few years ago, a study found that Bill Gates, Jeff Bezos, and Warren Buffett have more wealth than the least wealthy 50% of Americans.
Let that statistic sit with you for a minute: THREE people have more combined wealth than 160 million Americans.
Unfortunately, most people don't know what's really causing this divide; they don't understand that no one – not you, not me – can stop this trend. Moreover, they don't know that the situation will only get worse over the coming years.
That's why it's critical for you to learn why technological progress is happening at a blistering pace…
And why you MUST learn how to structure your investments so you are on the right side of the "Technochasm."
And today, let's talk about how to do that.
The Great Divide
On the winning side of the Technochasm, we find thriving technology-powered businesses and professions.
On the other side, we find everything else.
And the COVID-19 pandemic has driven a massive wedge between these two sides to force them further apart than they've ever been.
The chart below tells the tale. The S&P 500 Software Index just hit a new all-time high, while U.S. employment plummeted from an all-time high to a 24-year low.
And the true employment picture is even uglier than the one above.
As the chart below shows, the percentage of the U.S. labor force that is currently employed just tumbled to its lowest level in at least 70 years.
Generally speaking, the 42 million newly unemployed Americans possess no techno-centric safety net. They cannot simply convert their bartending job, for example, into telecommute mode and serve virtual drinks until cyber-closing time.
Once the COVID-19 pandemic struck, nearly every industry or profession that involved direct human interaction found itself face to face with a shutdown order… and zero revenues.
From hairstylists to dentists, from cable installers to bowling coaches, the inability to transition from the normal, physical mode of business to a virtual mode caused a complete loss of livelihood.
Meanwhile, every individual who could shift to some sort of work-from-home lifestyle did so. Quite obviously, the types of businesses and professions that can operate out of a home office tend to be more technology-based than those that can't.
Our economy will always feature a wide array of enterprises – some of which require intense human interaction, and some of which require no interaction whatsoever.
A restaurant will always be a restaurant. It can't ever be a video game. A music festival will always be a music festival – never an iPhone app.
Farming will never become a virtual activity, no matter how technologically savvy we become. Perhaps squads of robots and drones will one day grow and harvest acres of corn, but they would still need seeds, soil, and water to do the job.
In other words, the Technochasm phenomenon does not imply that any one profession or industry is better than another; it merely highlights the vulnerability of non-tech-based professions and industries, relative to their tech-enabled counterparts.
The Technology Advantage
As a group, low-tech professions and industries are not as adaptable to economic shocks. Additionally, they cannot establish and fortify their competitive advantages as quickly or efficiently as their high-tech counterparts.
A low-tech company operating in the midst of rapid technologic innovation is like a human being swimming in the open ocean.
No matter how well that human might be able to muscle through the giant swells, a cruise ship can do it better… and faster… and more securely – while also serving up chardonnay and sushi.
The "cruise ships" of this metaphor are the companies that either develop new technologies or effectively integrate those technologies into their existing processes.
IndustryWeek observes:
The definition of a smart manufacturer can vary significantly from one organization to another. However, truly becoming a "smart manufacturer" often depends heavily on an organization's ability to seamlessly integrate the latest tools and technologies into existing production environments. And doing so in a manner that provides noticeable improvements in productivity, efficiency, and capability.
But integrating new technology is hard work, especially if you're a big, fat, happy U.S. corporation that has enjoyed decades of success. Often, the stewards of such corporations fail to recognize the competitive perils they face… and, therefore, fail to adapt quickly enough to save themselves.
Many great American success stories later become infamous American failure stories because they failed to innovate. As a result, they shuffled off into irrelevance and bankruptcy.
That ignominious list of companies would include names like:
Blockbuster Video, the titan of home movie and video game rental services, is one of the most spectacular – and ironic – of American success-to-failure stories. At its peak in 2004, Blockbuster employed 84,300 people worldwide and operated more than 9,000 stores.
Just four years prior to this peak of prosperity, an up-and-coming company called Netflix Inc. (NFLX) offered to sell itself to Blockbuster for $50 million. But then-CEO of Blockbuster John Antioco dismissed Netflix as a "very small niche business" and rejected the offer.
Two decades later, Blockbuster is an extinct B-school case study in corporate hubris and managerial myopia. Netflix is a $191.1 billion juggernaut.
Since Blockbuster's demise in 2010, the retailing landscape has become even more treacherous for brick-and-mortar retailers. In 2019 alone, an estimated 12,000 retail stores closed. And the tally of store closures continues growing by the day. Investment bank UBS estimates retailers will shutter another 75,000 physical stores across the United States by 2026.
And yet, even while thousands of U.S. retailing operations are pushing up daisies, a few tech-savvy retailers are growing like redwood trees. And their share prices are performing even better than many of the stock market's leading tech stocks.
Brick and Byte Retail
For example, even though the coronavirus pandemic has dealt a setback to the physical retail operations of Nike Inc. (NKE), Lowe's Cos. Inc. (LOW), and Lululemon Athletica Inc. (LULU), the shares of all three retailers are now trading at or near all-time highs.
That's because each of these companies has developed robust direct-to-consumer (DTC) sales channels that generated strong sales through the worst of the COVID-19 crisis.
Nike's DTC division, Nike Direct, produced almost a third of the company's global sales in 2019. And Nike expects to boost DTC sales by at least 50% over the next two years. Its stock has soared 20% over the last 12 months and is trading within a whisker of its all-time high.
Lowe's is another DTC success story. Although the company was late to the game of developing a strong DTC channel, that channel is now flourishing and contributing to a rapidly growing percentage of the company's overall sales.
Lowe's stock has soared 19% over the last 12 months and reached a new all-time high in mid-October 2021.
Lululemon may be the poster child of DTC know-how. It was one of the first major retailers to emphasize online sales in conjunction with a network of physical stores. The company has created a vibrant DTC sales and is reaping the rewards of that forward-looking strategy.
DTC sales account for more than one-quarter of the company's revenue and more than one-third of its operating income. Its stock has soared 83% over the last year and is currently trading near a new all-time high.
You see, no matter how "old school" an industry might be, companies within that industry can still put themselves on the winning side of the Technochasm, simply by applying technology intelligently.
The copper mining giant Freeport-McMoRan Inc. (FCX) is just one example.
No industry is more old-school than copper mining. And yet, Freeport-McMoRan has been developing a sophisticated artificial intelligence (AI), or "machine learning," process at its Bagdad copper mine in Arizona.
This machine learning model uses data from sensors around the mine to "tailor" the ore processing method to each of the seven distinct types of ore that come from the Bagdad mine.
This innovation has been "a remarkable success," Freeport CEO Richard Adkerson says. So the company is now planning to roll out this new technology across all of its operations in the Americas.
By doing so, Freeport expects to increase its annual copper production by 5%. That number might not seem significant, but in an industry where a few cents per pound in the change of copper prices can mean the difference between profits and losses, 5% is a big number.
Freeport's new AI technology could not shield its stock from the COVID-triggered plunge in copper prices. But this new tech will help the company maintain its competitive edge as one of the world's lowest cost copper producers.
Freeport's cash cost of copper production is currently $1.75 a pound, which is about 10% below the global average. But the company expects to drive that cost down below $1.35 over the next two years.
The stock has staged a nice recovery from its March lows, and I expect it to continue moving much higher over coming months. As a result, Freeport-McMoRan remains a good "Buy" up to $13.
The Takeaways
Putting yourself on the right side of the Technochasm doesn't mean you invest in every tech stock that pops up on the market.
It means extrapolating which companies are ready, willing, and able to adapt to the massive technological shift happening across the world. That's what I'm here for.
We are seeing firsthand just how essential technological prowess has become for most companies. The Technochasm is gaining strength, and as it sweeps through the global economy, it will continue to reward technologically savvy companies.
And for those that are slow to adapt…
Well, it will bring destruction.
Now tomorrow, we're going to talk about gold. Love it or hate it, it doesn't matter. It still has a lot of life left in it… and that is key.
Keep an eye on your inbox.
Regards,
Eric Fry
