RETURNS REINVENTED 2021 GLOBAL INVESTOR CONFERENCE ...

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R E T U R N S R E I N V E N T E D202 1 G LO BA L I N V E STO R CO N FE R E N C E

Ascending with Waxed Wings: Inflation & the Tech ‘Bubble’

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• Inflation dominates the macro discourse, but markets seem almost exclusively focused on tech-enabled productivity growth and the digital businesses that facilitate it. This disconnect makes sense if inflation is “transitory,” as seems likely, but it also creates danger, especially for portfolios aggressively adding exposure to those assets that surreptitiously embed the most inflation risk.

• Inflation risk is not restricted to fixed income markets, nor is it an industrial or “old economy” problem. The valuations most exposed to higher interest rates are those of tech-enabled digital assets whose free cash flow arrives furthest into the future and is therefore most heavily discounted.

• It is neither the time to fly too low and bet against tech-enabled productivity growth, nor the time to fly too high, hubristically putting all of one’s eggs into that basket. Diversified portfolios that treat “technology” as a value-added input rather than an asset class are likely to exhibit the most impressive risk-adjusted performance.

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Of the many twists and turns in the

macroeconomic data since the start of

the pandemic, two stand out: the surge

in productivity and spike in inflation. Both

phenomena have been especially evident in the

United States, and both appear to be the product

of a “high-pressure” economy characterized

by increasingly digitized processes, speedier

execution, and a sense of pervasive shortages

(materials, semiconductors, labor, etc.). While the

former drives near-term market movements, the

latter dominates market conversations.

Since March 2020, labor productivity in the U.S. has

grown at a 3.7% annual rate (Figure 1), nearly 4x the

annual average of the past decade, and almost

3x the 1.3% annual growth observed between 2014

and 2019.1 When translated into company financial

ratios, these gains are even more impressive:

economy-wide revenue-per-worker has increased

by more than 12% (Figure 2) and operating margins

are up 24% (Figure 3) relative to pre-pandemic

levels. These efficiency gains have helped to

validate much of the run-up in asset prices in 2020

and fueled added gains this year.

1 U.S. Bureau of Labor Statistics, August 2021. Figure 1. Source: Carlyle Analysis; Bureau of Economic Analysis of Portfolio Data; Bureau of Labor Statistics.

August 2021. There can be no assurance these market conditions will continue to be achieved.

Figure 1. U.S. GDP-Per-Worker Up 6% Since 2019

Disconnect Between Market Discourse & Market Prices

T R A D E S E C R E T & S T R I C T L Y C O N F I D E N T I A L

Figure 1: U.S. GDP-Per-Worker Up 6% Since 2019

Source: Carlyle Analysis; Bureau of Economic Analysis of Portfolio Data; Bureau of Labor Statistics. August 2021. There can be no assurance these market conditions will continue to be achieved.

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PRODUCTIVITY GROWTH

4Figure 2. Source: Carlyle Analysis; Bureau of Economic Analysis of Portfolio Data; Bureau of Labor Statistics. August 2021.

There can be no assurance these market conditions will continue to be achieved.Figure 3. Source: Carlyle Analysis; Bureau of Economic Analysis of Portfolio Data; Bureau of Labor Statistics. August 2021.

There can be no assurance these market conditions will continue to be achieved.

Figure 2. Revenue-Per-Worker Up 12% Since 2019

Figure 3. Profit Per Unit of Value-Added up 24%


Figure 2: Revenue-Per-Worker Up 12% Since 2019

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Figure 3: Profit Per Unit of Value-Added up 24%


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Figure 4. Inflation Dominates Public Discourse

Figure 5. Inflation Risk Premia Near All-Time Lows

T R A D E S E C R E T & S T R I C T L Y C O N F I D E N T I A L 4

TTM MENTIONS OF “INFLATION” & “PRODUCTIVITY” SCALED FREQUENCY OF ARTICLES ON INFLATION PRODUCTIVITY

Source: Carlyle Analysis of News Website Text; Google News. August 2021. There can be no assurance these market conditions will continue to be achieved.

Figure 4: Inflation Dominates Public Discourse

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Figure 5: Inflation Risk Premia Near All-Time Lows

Source: Carlyle Analysis, FRED Data. August 2021. There can be no assurance these market conditions will continue to be achieved.

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5Yr Forward Real Inflation Risk Compensation 10Yr Term Premium

Yet, it seems that all anyone wants to talk about is

inflation. Over the past year, inflation has garnered

nearly 12x more mentions than productivity in major

financial news outlets (left panel of Figure 4). Across

all news sources, stories on inflation have grown

70% more numerous while productivity articles

run only when quarterly data are released (right

panel of Figure 4). Markets have been surprisingly

unperturbed by the suffocating attention the

topic receives; measures of inflation risk premia2

extracted from Treasury yields remain near all-time

lows (Figure 5).

2 As opposed to inflation breakevens, the term premia measure the compensation for unexpected inflation over the next 10 years.Figure 4. Source: Carlyle Analysis of News Website Text; Google News. August 2021. There can be no assurance these market conditions will continue to be achieved.Figure 5. Source: Carlyle Analysis, FRED Data. August 2021. There can be no assurance these market conditions will continue to be achieved.

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Markets embrace the Fed’s mantra that inflation

is likely to prove “transitory.” Indeed, markets

may be more convinced of this than the Fed itself.

“Hawkish” June rhetoric from the Fed, motivated by

concerns that inflation may prove more persistent

than expected, was met with a sharp drop in long-

term bond yields and an upward adjustment in the

foreign exchange value of the dollar (Figure 6). If

anything, these price movements are suggestive of a

central bank potentially overreacting to

inflation risk.

There is good reason to suspect that the market has

this priced correctly. Today’s elevated inflation has

its origin in temporary, pandemic-induced supply-

Inflation’s Origin: ‘If You Don’t Make Stuff, There is No Stuff’3

demand imbalances that nearly every household

has experienced in some form or another over the

past 18 months.

Starting in the middle of 2020, cash-rich but locked-

down households channeled the savings from

sharply reduced spending on travel, leisure, and

live events towards durable goods. Sales of new

and used cars, boats, pools, pianos, motorcycles,

personal water craft, hot tubs, and construction

materials all boomed at never-before-seen rates.4

Overall consumption soon recovered to pre-

pandemic levels, but its composition had shifted

massively, with durable goods spending running

about 30% above prior trends (Figure 7).

Figure 6. Inflation Risk Perceptions Fall in Response to Fed


Figure 6: Inflation Risk Perceptions Fall in Response to Fed


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3 Elon Musk on Joe Rogan Experience, May 2020.4 Carlyle Analysis of Bureau of Economic Analysis Data, August 2021.Figure 6. Source: Carlyle Analysis, FRED Data. August 2021. There can be no assurance these market conditions will continue to be achieved.

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Figure 7. Durable Goods Spending Rises 30% Above Prior Forecasts


Figure 7: Durable Goods Spending Rises 30% Above Prior Forecasts

Source: Carlyle Analysis; St. Louis Federal Reserve, July 2021. There can be no assurance these market conditions will continue to be achieved.

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Unfortunately, capacity in most of these product

markets only exists to meet unit sales growth of 1% to

3% per year. In other words, there are no factories

sitting idle, waiting to be turned on to accommodate

a sudden surge in orders. And due to the lockdowns

and management conservatism, manufacturing

output actually dropped by -6.5% through Q1-2021,

leading to a massive supply-demand gap (Figure 8)

that not only led to shortages of finished goods, but

also the components, parts, semiconductors and

other intermediate goods that go into them.

Inflation rates have largely tracked the size of the

gap, peaking at a 0.9% monthly rate in Q2-2021 and

declining to 0.3% in July as manufacturing output

rebounded and consumption rotated back towards

services like travel and live events.5 In total, durable

goods prices rose at a 16.8% annual rate in Q2-2021,

accounting for virtually all of the excess inflation

observed this year (Figure 9).6

5 BLS, August 2021. Inflation refers to the monthly percentage change in the core CPI index.6 Carlyle Analysis; BEA, Q2-2021 GDP Report.Figure 7. Source: Carlyle Analysis; St. Louis Federal Reserve, July 2021. There can be no assurance these market conditions will continue to be achieved.

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Figure 9. Durable Goods Prices Drive Overall Inflation


Figure 9: Durable Goods Prices Drive Overall Inflation

Source: Carlyle Analysis of BEA Data, August 2021. There can be no assurance these market conditions will continue to be achieved.

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Services Durable Goods

Figure 8. Source: Carlyle Analysis, FRED Data. August 2021. There can be no assurance these market conditions will continue to be achieved.Figure 9. Source: Carlyle Analysis of BEA Data, August 2021. There can be no assurance these market conditions will continue to be achieved.

Figure 8. Durable Goods Supply-Demand Imbalance


Figure 8: Durable Goods Supply-Demand Imbalance


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Inflation Atmospherics & Confirmation BiasIf pinpointing inflation’s origin is so straightforward,

easy to document, and consistent with virtually

everyone’s lived experience, both in terms of changed

consumption patterns and extended delivery times

and backorders, why has the topic commanded

so much attention? The inflation debate seems far

livelier than merited by the facts surrounding it.

The answer lies in the atmospherics surrounding

the issue. To many observers, the pandemic seems

to have unlocked changes in attitudes, behaviors,

and expectations that all point in the direction of

higher prices. Elevated inflation provides empirical

validation for this supposition, irrespective of its

actual origin.

For example, consider the scale of the attitudinal shift

among policymakers. As laid out explicitly in the new

policy strategies of the Fed7 and European Central

Bank (ECB),8 and implicitly through enacted and

proposed deficit spending (especially in the U.S.),

imprudence seems to have become the default

fiscal and monetary policy setting. If you worried

that $6 trillion in new federal spending funded

by printed money would inevitably lead to higher

inflation, a 5.4% annual increase in the consumer

price index would provide powerful confirmation

of those fears.

And it’s not as though policy has played no role

stoking inflation. While shortages and concomitant

inflationary pressures were likely to manifest

themselves given the scale of the shift in spending

from “experiences” to “stuff,” fiscal transfers boosted

purchasing power at precisely the time output

was still constrained by the virus and supply-chain

disruptions. U.S. inflation is higher largely because

its fiscal transfers were larger (Figure 10).

Figure 10. Fiscal Deficits & Inflation Rates


Source: IMF WEO Database as of April 2021 and The Federal Reserve St. Louis. There can be no assurance these market conditions will continue to be achieved.

Figure 10: Fiscal Deficits & Inflation Rates

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7 FOMC Statement on Longer-Run Goals and Monetary Policy Strategy, August 27, 2020:8 The ECB’s monetary policy strategy statement, July 8, 2021:Figure 10. Source: IMF WEO Database as of April 2021 and The Federal Reserve St. Louis. There can be no assurance these market conditions will continue to be achieved.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm

https://www.ecb.europa.eu/home/search/review/html/ecb.strategyreview_monpol_strategy_statement.en.html

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Likewise, elevated inflation is exactly what one

would expect if pervasive “worker shortages”

were forcing businesses to “pay up” massively to

fill positions. Never mind that real wages have

actually declined this year, or that labor shortages

don’t look as acute as they’re portrayed – job

vacancies remain 14% below pre-pandemic levels

when measured relative to the pool of people

seeking work (Figure 11).9 Something has changed in

worker attitudes, likely due to some combination

of health risk perceptions, self-discovery, and

fiscal transfers, and it has not only left jobs

unfilled but also created new vacancies as people

leave existing jobs at elevated rates (Figure

12). Academics have dubbed it the “Great Post-

Pandemic Resignation Boom,” and believe it

reflects many workers’ unwillingness to return to

work-life as it existed in January 2020.10

Figure 11. Worker Shortages in Context


TOTAL JOBS (FILLED + UNFILLED) DOWN 2.5% FROM PRE-PANDEMIC LEVELS

JOB VACANCIES-TO-UNEMPLOYED PEOPLE

Source: Carlyle Analysis, FRED Data. July 2021. There can be no assurance these market conditions will continue to be achieved.

Figure 11: Worker Shortages in Context

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9 BLS, August 2021. U.S. jobs (workers on payrolls plus unfilled positions) sits 2.5% below pre-pandemic levels even as the prime working-age population (25-45) has grown by 175,000 since then. The total work-eligible population is up over 1.8 million since February 2020.

10 “How to Quit Your Job in the Great Post-Pandemic Resignation Boom,” Bloomberg.Figure 11. Source: Carlyle Analysis, FRED Data. July 2021. There can be no assurance these market conditions will continue to be achieved.

https://www.bloomberg.com/news/articles/2021-05-10/quit-your-job-how-to-resign-after-covid-pandemic

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Finally, those who expect that inflation will prove

transitory anticipate a return to the status quo

ante, as global value chains scale up production

and household spending rotates back from durable

goods towards experiences. But what if that doesn’t

happen, either because new variants of COVID

depress services consumption and labor supply for

much longer than supposed, or because governments

and multinational corporations decide to scale back

cross-border production processes in light of the

vulnerabilities exposed by the pandemic?

The longer elevated inflation persists, the more

it shapes our expectations. Today, confirmation

bias leads analysts to overlook elevated inflation’s

concrete origins in favor of their preferred abstract

narrative. But should inflation persist, initial

conditions will matter much less as convictions harden

over time and perceptions become reality.

Figure 12. Resignations Rise 34%; Interest in Quitting Doubles


Figure 12: Resignations Rise 34%; Interest in Quitting Doubles

Source: Carlyle Analysis of News Website Text; Google News. August 2021. There can be no assurance these market conditions will continue to be achieved.

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Google Search Intensity (Left Axis) Quits Rate

Figure 12. Source: Carlyle Analysis of News Website Text; Google News. August 2021. There can be no assurance these market conditions will continue to be achieved.

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So while inflation has begun to abate, it seems hardly

the time to be cavalier about this risk, especially

considering the extent to which asset prices embed

expectations of low inflation. And that extends well

beyond fixed income or industrial businesses exposed

to rising input prices. Indeed, more dangerous

than the risk of inflation itself may be the failure to

perceive where that risk manifests itself. For many

portfolios, elevated inflation may prove to be less of

a surprise than the specific categories of assets that

get clobbered by it.

If high inflation persists, nominal and real interest

rates will have to increase, especially at longer

maturities where the risk of real capital losses is

greatest.11 Since Treasury yields constitute the

base rate used to discount all future cash flows,

economy-wide valuation ratios fall as interest rates

rise (Figure 13). While asset prices depend on a host

of other factors, including growth expectations,

time-varying risk premia, and liquidity flows,

yields on corporate bonds, equity, and real estate

all tend to correspond, over time, to long-term

interest rates (Figure 14).

Looking for Inflation Risk in the Right Places

Figure 13. Valuation Ratios Move Inversely with Interest Rates


Figure 13: Valuation Ratios Move Inversely with Interest Rates

Source: Carlyle Analysis; CRSP Database, U.S. Treasury. August 2021. There can be no assurance these market conditions will continue to be achieved.

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11 Nominal rates will rise with inflation expectations and real rates will have to increase to bring inflation back down towards target. Longer-term rates will also likely rise further as interest rate risk premia increase to account for the uncertain size of the adjustment in policy.

Figure 13. Source: Carlyle Analysis; CRSP Database, U.S. Treasury. August 2021. There can be no assurance these market conditions will continue to be achieved.

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Figure 14. Corporate Earnings Yields & Bond Yields


Figure 14: Corporate Earnings Yields & Bond Yields

Source: Carlyle Analysis; S&P Capital IQ; Federal Reserve Board of Governors. July 2021. There can be no assurance these market conditions will continue to be achieved.

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CORREL: 65.5%

2021

The impact of higher rates will not be uniform across

assets, however. As is well known in bond markets,

the sensitivity of an asset’s price to a change in

interest rates depends on the duration of its cash

flows. The further into the future cash flows arrive,

the more heavily they’re discounted and therefore

the more sensitive to a change in rates. A $100

payment due in 10 years is worth $82 when rates

are 2% but just $60 if rates rise to 5% (-27% lower);

the same $100 payment due in 30 years is worth

$55 today if rates are 2% but only $21 if rates are 5%

(-61% lower). This impact is not limited to bonds; all

assets are exposed to the same risk. But rather than

calculated based on a schedule of coupons and

principal payments, equity duration depends on the

timing of a company’s free cash flow.

Figure 14. Source: Carlyle Analysis; S&P Capital IQ; Federal Reserve Board of Governors. July 2021. There can be no assurance these market conditions will continue to be achieved.

14

While the effective duration of corporate assets

cannot be observed directly, because their free

cash flow is not fixed like bond coupon payments, it

can be approximated using an algorithm calibrated

to current valuations, growth rates, and profit

margins.12 No surprise that the assets with the

highest implied duration tend to be fast-growing

businesses with large near-term operating losses

and the highest valuation ratios (enterprise value

Estimating the Duration of Free Cash Flow relative to sales or book value). Effectively, all

of the enterprise value of these businesses is

embedded in their terminal value, which is the

discounted present value of all of the free cash

flow expected to be generated outside of the

10-to-15 year underwriting window (see illustrative

case, Figure 15). The lower the equivalent duration

Treasury yield, the more people are willing to pay

for that terminal value.

Figure 15. Illustrative Annual Free Cash Flow by Asset Type


10-YEAR UNDERWRITING WINDOW FUTURE GROWTH IMPLIED BY TERMINAL VALUE

Source: Carlyle Analysis; For illustrative purposes only. August 2021. There can be no assurance these market conditions will continue to be achieved.

Figure 15: Illustrative Annual FCF by Asset Type

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12 The basic idea is that businesses with the high market valuations (relative to current sales) tend to have cash flows weighted more to the future, the precise timing of which can be estimated based on sales growth and current profit margins. This algorithm was first proposed in Dechow, P., R. Sloan, and M. Soliman. (2004), “Implied Equity Duration: A New Measure of Equity Risk,” Review of Accounting Studies. C.f. Dechow, P., et al. (2021). “Implied Equity Duration: A Measure of Pandemic Shutdown Risk,” Journal of Accounting Research. An industry-specific algorithm was introduced in Fullana, O., J. Nave, and D. Toscano. (2016), “The Implied Equity Duration When Discounting and Forecasting Parameters are Industry Specific,” Accounting & Finance. Finally, the higher covariance of growth stocks and discount rates is presented in Lettau, M. and J. Wachter. (2007), “Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium,” The Journal of Finance.

Figure 15. Source: Carlyle Analysis; For illustrative purposes only. August 2021. There can be no assurance these market conditions will continue to be achieved.

15

Figure 16. Long Horizon Equity 5x as Sensitive to Bond Yields

Figure 17. Record Dispersion in Valuations Between Top & Median


ROLLING 5YR AVERAGES IN YIELDS & VALUATIONS ROLLING 5YR AVERAGES IN YIELDS & VALUATIONS

Figure 16: Long Horizon Equity 5x as Sensitive to Bond Yields

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Figure 17: Record Dispersion in Valuations Between Top & Median


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Figure 16. Source: Carlyle Analysis; CRSP Database, U.S. Treasury. August 2021. There can be no assurance these market conditions will continue to be achieved.Figure 17. Source: Carlyle Analysis; CRSP Database, U.S. Treasury. August 2021. There can be no assurance these market conditions will continue to be achieved.

Since these businesses’ expected free cash flow

arrives furthest into the future (a discounted

weighted average of 35 years at the 95th

percentile), their valuations tend to be far more

sensitive to interest rates than those of the median

company (18-20 years duration). This is evident if

one looks at the time series evolution of market-

to-book ratios and bond yields (Figure 16): while

the valuation of the median-duration company

has doubled over time as rates have declined,

the valuations of the longest-duration businesses

have risen more than 5x. It also helps to explain

why the highest-priced 5% of businesses now sell

for 8x the median company, an all-time high in

terms of price-to-adjusted earnings (Figure 17).

16

‘You Might Not Be Interested in Inflation, But It’s Interested in You’

By measuring the duration of free cash flow, one

can see how inflation risk may have surreptitiously

embedded itself into portfolios of investors that had

no idea they were assuming this risk. Fast-growing

but loss-making businesses do not “look like a bond,”

nor do they typically have to worry about the rising

costs of copper, trucking, or corn. But persistently

high inflation will inevitably lead to higher nominal

and real interest rates that are likely to impact these

businesses disproportionately. As Trotsky said of the

dialectic: you might not be interested in inflation but

inflation is interested in you.

Using available data for more than 6,500 stocks from

1963-2011 as a guide, the valuations of the top 5% of

businesses by duration have proven to be about 60%

more sensitive to movements in the 10-year Treasury

yield than the median business, and 2.5x as sensitive

to movements in the 30-year yield over time (Figure

18). Part of that may reflect the low correlation

between tech sector revenues and consumer

price inflation, which means that increases in rates

would not likely translate to faster nominal growth

rates.13 And when segmenting data by time periods,

one can infer how convexity causes interest rate

sensitivity to increase as valuations rise.14 When

controlling for other factors, like market-wide

returns, company growth differentials, profitability

ratios, and company size, a 100bp increase in

the 10-year yield would reduce valuations of the

longest-duration businesses by more than 25%

today, a magnitude that’s increased 3x over time

as nominal rates and term premiums have trended

towards zero (Figure 19).

13 The idea that higher inflation, realized or expected, will translate into faster revenue growth on anything like a 1:1 basis is wishful thinking. Nominal revenue growth for the IT and software business sector has been only 25% correlated with consumer prices at an annual or quarterly frequency since 1990. For the most “disruptive” businesses with the most idiosyncratic growth trajectories the correlation is likely to be even lower. Note, moreover, that the rate adjustment will not just be expected inflation, but also the real rate (to bring inflation back down to target) and the inflation risk premium, all of which have declined since 2011.

14 If the relationship between interest rates and earnings yields, for example, is linear then the effect on valuations (the reciprocal) is nonlinear. For example, if a 100bp increase in rates causes a 50bp increase in earnings yields, valuations will decline by 14% if the initial earnings yield is 3% but by just 7% of the initial earnings yield in 7%.

17

Figure 19. Sensitivity of Valuations to 100bps Increase in 10 Year Yield


Figure 19: Sensitivity to 100bps Increase in 10 Year Yield


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Post GFC (2009-2021) 2013-2021 (QE Era) Full Data Set (1963-2021)

Figure 18. Source: Carlyle Analysis; CRSP Database, U.S. Treasury. August 2021. There can be no assurance these market conditions will continue to be achieved.Figure 19. Source: Carlyle Analysis; CRSP Database, U.S. Treasury. August 2021. There can be no assurance these market conditions will continue to be achieved.

Figure 18. Free Cash Flow Duration & Interest Rate Sensitivity


SENSITIVITY TO 10-YEAR YIELD BY FCF DURATION SENSITIVITY TO 30-YEAR YIELD BY FCF DURATION

Figure 18: FCF Duration & Interest Rate Sensitivity


34.4%

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18

Implications for Investors’ PortfoliosThe point of making this risk more visible is not

to encourage investors to run from it, but to

contextualize past returns and emphasize the

importance of diversification moving forward.

Many technology-focused funds, public and private,

have performed so well over the past several years

partly because they hold long-duration assets whose

terminal values spike when long-term interest rates

fall. The average price-to-book ratio of the top

5% of stocks by FCF duration has been more than

80% correlated with the market value of the 50-

year Austrian bond issued January 2012 (Figure

20). Before doubling down on such allocations,

investors worried about inflation risk should

consider how much exposure they’d like to call

options written on government bonds maturing in

the 2050s and 2060s.

Figure 20. Terminal Values Depend on Long-Term Bond Prices


Figure 20: Terminal Values Depend on Long-Term Bond Prices

Source: Carlyle Analysis; CRSP Data, August 2021; Bloomberg. There can be no assurance these market conditions will continue to be achieved.

6.0x

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Figure 20. Source: Carlyle Analysis; CRSP Data, August 2021; Bloomberg. There can be no assurance these market conditions will continue to be achieved.

19

The only zero duration asset is cash, but there are

alternative non-zero-yielding inflation hedges,

including floating-rate loans, many types of real

estate and infrastructure assets, as well as unloved

but cash-generative corporate assets whose

enterprise value depends disproportionately on

near-term FCF. Relatively low valuations and interest

rate risk sensitivity make traditional buyouts of

such businesses attractive portfolio additions in the

current environment.

But investors will have to continue to add exposure

to fast-growing, nearly infinitely scalable digital

businesses concentrated in the technology and

health care sectors because that’s where the growth

is. If inflation moderates, as expected, and interest

rates remain in the current range, today’s sky-high

valuations could persist. And even if they don’t, the

faster idiosyncratic growth of these assets will offset

some of the loss on terminal value.

Much of the productivity growth observed over

the past year reflects the conscious desire of

management teams to make better use of available

technology to get to the future faster than their

competitors.15 It has never been easier for digital

software and automation solutions firms to get

in front of prospective customers. “Workers

shortages” only increase the attractiveness of such

technology.16 It is neither the time to “bet against”

tech-enabled productivity growth nor to put all of

one’s eggs in that basket.

15 C.f. “When the Future Arrives Early,” Carlyle, September 2020.16 BCG, 5Yr Average of Total Factor Productivity and Cyclical Tightness in Labor Markets.

20

Conclusion The market does not seem to share the market commentariat’s obsession

with inflation. That makes sense, in that elevated inflation is a temporary

phenomenon tied to pandemic-specific supply-demand imbalances that

should ease over time. But it also accentuates risk, as valuations provide little

compensation for the chance that inflation proves more enduring, especially

for the long duration assets most sensitive to an increase in interest rates.

In this environment, investors should heed Daedalus’ advice to Icarus. Avoid

flying “too high” by hubristically accelerating deployment into early-stage

digital assets that have benefitted disproportionately from the fall in rates

and surreptitiously embed the most inflation risk. But also avoid flying

“too low” by becoming consumed with risk aversion and losing sight of the

tech-enabled productivity boom and its potential extension to businesses

operating in a broader set of industries and geographies.

Till swollen with cunning of a self-conceit,His waxen wings did mount above his reach,And melting, heavens conspired his overthrow

Chorus of Marlowe’s Doctor Faustus

21

Jason Thomas

Jason Thomas is the Head of Global Research at The Carlyle Group, focusing on economic and statistical

analysis of Carlyle portfolio data, asset prices and broader trends in the global economy. He is based in

Washington, DC.

Mr. Thomas serves as Economic Adviser to the firm’s Global Private Equity and Global Credit Investment

Committees. His research helps to identify new investment opportunities, advance strategic initiatives

and corporate development, and support Carlyle investors.

Prior to joining Carlyle, Mr. Thomas was Vice President, Research at the Private Equity Council. Prior to

that, he served on the White House staff as Special Assistant to the President and Director for Policy

Development at the National Economic Council. In this capacity, Mr. Thomas served as primary adviser

to the President for public finance.

Mr. Thomas received a BA from Claremont McKenna College and an MS and PhD in finance from George

Washington University, where he studied as a Bank of America Foundation, Leo and Lillian Goodwin

Foundation, and School of Business Fellow. Mr. Thomas has earned the chartered financial analyst

designation and is a Financial Risk Manager certified by the Global Association of Risk Professionals.

HEAD OF GLOBAL [email protected] / (202) 729-5420

Economic and market views and forecasts reflect our judgment as of the date of this presentation and are subject to change without notice. In particular, forecasts are estimated, based on assumptions, and may change materially as economic and market conditions change. The Carlyle Group has no obligation to provide updates or changes to these forecasts. Certain information contained herein has been obtained from sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used herein, The Carlyle Group and its affiliates assume no responsibility for the accuracy, completeness or fairness of such information. References to particular portfolio companies are not intended as, and should not be construed as, recommendations for any particular company, investment, or security. The investments described herein were not made by a single investment fund or other product and do not represent all of the investments purchased or sold by any fund or product. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of The Carlyle Group. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors.

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