Economic Prospects for the Long Run
Comment of the Day

May 21 2013

Commentary by Eoin Treacy

Economic Prospects for the Long Run

Thanks to a subscriber for this speech delivered by Ben Bernanke at a graduation ceremony at Bard College on the 18 th . Here is a section
Moreover, even as the basic technologies improve, the commercial applications of these technologies have arguably thus far only scratched the surface. Consider, for example, the potential for IT and biotechnology to improve health care, one of the largest and most important sectors of our economy. A strong case can be made that the modernization of health-care IT systems would lead to better-coordinated, more effective, and less costly patient care than we have today, including greater responsiveness of medical practice to the latest research findings.Robots, lasers, and other advanced technologies are improving surgical outcomes, and artificial intelligence systems are being used to improve diagnoses and chart courses of

treatment. Perhaps even more revolutionary is the trend toward so-called personalized medicine, which would tailor medical treatments for each patient based on information drawn from that individual's genetic code. Taken together, such advances could lead to another jump in life expectancy and improved health at older ages.

Other promising areas for the application of new technologies include the development of cleaner energy--for example, the harnessing of wind, wave, and solar power and the development of electric and hybrid vehicles--as well as potential further advances in communications and robotics. I'm sure that I can't imagine all of the possibilities, but historians of science have commented on our collective tendency to overestimate the short-term effects of new technologies while underestimating their longer-term potential.

Eoin Treacy's view We might expect a speech delivered to graduating students to be enthusiastic about the future. However, I share Mr. Bernanke's optimism about the potential productivity gains that are likely from the golden age of technological development we are living through.

As he mentions, financial markets, in their efforts to discount future cash flows, tend to exaggerate how quickly products can be brought to market. This often causes new companies to become overvalued before the market's correcting function kicks in. From a behavioural perspective, we can also conclude that when the majority are most pessimistic about the future, it is generally a good time to be contrarian.

The boom in biotechnology shares that occurred in the late 1990s was spurred by incredible optimism about the future. 13 years later many of the companies that survived the bear market are now delivering ground breaking products and treatments.(Also See Comment of the Day on October 28 th 2011).

The Nasdaq Biotech Index is becoming progressively more overextended relative to its 200-day MA. It has rallied particularly impressively over the last three months. The benefit of the doubt can continue to be given to the upside provided it holds a progression of higher reaction lows, but the potential for a reversion towards the mean has increased. Biogen continues to extend is remarkably powerful four-month advance while BioMarin Pharmaceutical posted a large downside weekly key reversal last week suggesting a least a pause is underway.

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