Excellent article that paints a grim picture in an understated way. To put it differently:
We've seen a huge run-up in the stock market thanks to cheap domestic and cheap foreign labor, globalization, historically low interest rates and historically low corporate taxes.
Interest rates are rising massively and globally to combat inflation.
Labor prices are increasing, globally.
There is a global decoupling thanks to the Russia/Ukraine situation and the China/Taiwan tension. This is bringing the era of globalization to its end.
Corporate US taxes have been as low as they'll get for a long time due to the TCJA and will most likely only go up from current rates.
Given all these factors combined, it's unlikely that price/earnings will hold at the current high ratio i.e. stock prices have a long way to fall still. This article was published almost two months ago, but I believe it will be relevant for the next several years. We're in for a long slow decline and then a plateau. The era of cheap labor, free money, low taxes and open global markets has come to an end.
You're sort of describing the current conditions without any analysis of how those conditions are likely to change. For example, the high interest rates right now are due to central banks looking at the rising labor prices and inflation and probably overreacting. It is very likely that the next step is going to be a massive global slowdown.
You're also very likely massively overstating the case that Russia and Taiwan mean that "globalization has ended".
I do think there's important secular changes happening (the tight labor market and inflation are very obviously something new that hasn't happened in 30 years), but I strongly doubt the idea that everything has turned on a dime 180 degrees to the opposite.
The market usually bottoms when everyone shares this doom and gloom scenario.
Part of why it's so hard to buy at the bottom is that it looks like there's no path forward, but then there always is.
- Globalization hasn't and won't end. For sure there are more tensions now but China needs to be able to sell its goods/services worldwide.
- Russia/Ukraine isn't that great but on the bright side it's reminding us again that the use of force can result in unforeseen consequences. I think this will diminish China's appetite to take over Taiwan by force despite the rhetoric.
- Inflation may have peaked. Certainly certain items (like gas prices and house prices) appear to have peaked.
If that's the case we are very very far away from the bottom as my feed is full of posts of.people saying now is the time to buy, never been so cheap, only upside from now etc.
How can this be? The world still seems flooded with cash, huge populations still aren’t industrialized and want development, there’s shortages of products and services in demand by middle classes. Why wouldn't this point to more growth?
> The era of cheap labor, free money, low taxes and open global markets
and continued economic growth.
Likewise, there is a difference between growth in stock prices and economic growth. Stock prices have been growing much faster than GDP for a long time now, like 20-30 years. The S&P could be flat for 10 years or more before US GDP gets high enough to justify the price level (using a historical level).
So yes, the US economy can continue to grow. And "emerging market" economies can grow and their stock markets could do extremely well over the next decade. And the SP500 could be flat over that same decade. All of these could happen.
The one thing that the article might be underestimating is that solar/wind energy and battery prices will continue to fall exponentially. The high energy costs are an anomaly right now. This might change the equation.
That is unlikely. The rapid price reductions in those areas have been due to technological maturation of the underlying technologies and scaling of the manufacturing processes. These processes are likely to complete soon, if they have not already, and future developments will likely have more modest effects. Additionally, factors such as increasing demand for both these products and underlying material resources are likely to cause an upwards pressure on the price.
Technological improvements will likely continue to exert some downward pressure on prices. This might result in a modest reduction in price over time. I personally think that increasing raw material prices will be a greater influence and costs will trend up, but I am not an expert.
The current reckless course has us replacing stable base load with intermittent sources before we have any storage solution. That means you need to massively overbuild generation and transmission capacity to meet reliability requirements.
Electricity prices are set to greatly increase if we stay on the same path.
Of course, your friendly regulated utility loves this as they make a set % on assets they own. They could careless about efficient generation. More assets = better returns for their investors.
It's very much following the same exponential decay cost as microchips, probably because solar panels are also semiconductors. We put in solar a couple years ago; our neighbors put it in about 10 years ago; our array covers half the roof area that theirs does (and only about 20% of our roof, despite living in close to a worst-case lot for solar). Payback period was about 9 years when we put it in, but with recent rises in energy costs we're looking at a 4-5 year payback period.
I expect a lot of pain this decade with switchover costs - it takes a big capital investment to switch all our energy infrastructure over from fossil fuels to electric, and there are still some unsolved problems like producing batteries (or other energy storage) at scale. But in terms of both physics & economics, renewables do have the potential to solve our energy problems.
Is that wholesale price for solar panels? I don't know of anywhere I can buy a 100W panel for $36. Cheapest I've seen is just under $100 and they have been in that range for years.
I assume it's wholesale and it's per cell, not the finished panels. Alibaba has a bunch of wholesale bulk solar cells at about $0.19/cell, indicating continued price declines (roughly consistent with the existing cost curve):
This is not my area, but I do wonder about the long term trends on interest rates, because not all that long ago, it seems like serious people were discussing the idea of "ultra-low" rates being not just the new normal, but the continuation of a very long downward trend. The phrase "historically low" does evoke the idea that there's a "normal" range from which we can deviate but will generally return to.
I hope the current era ends. Ukraine/Russia and China/Taiwan is resolved (relatively) peacefully in a way that maintains the norm of wars-of-conquest-don’t-work. And we get a resurgence of immigration and trade. I am heartened that a big cause of inflation, housing prices in the US (particularly California) may be addressed by recent reforms.
California is broadening its housing crisis to the rest of the United States via remote working NIMBYs. It's a national problem now and it deserves a federal response. A century of property rights erosion has made it extremely difficult to erect the wide variety and large quantity of residential structures needed to serve demand. Congress needs to legislate away the Euclid v. Ambler decision pronto.
Ffs, if housing demand increases by epsilon due to a handful of relocating SF people, your housing market has bigger problems to begin with...
55k people left SF during the pandemic, 20% of whom stayed in the Bay Area, with many more moving as far away as Sacramento. New York was the largest destination outside California, with 1.7% of SF evacuees landing there.
CA is much bigger than SF and is estimated to be short 3-4 million homes[0]. The state's population has been in net decline for the last two years, primarily resulting in domestic outmigration[1]. The entire US had around 142 million homes in 2021[2]. Based on jobs/housing starts it looks like much of the US is in the hole, but the west coast as a region is far, far worse[3].
Globalization probably can’t ever end at this point now that the cat is so far out of the bag. The factories that used to produce local or regional goods simply no longer exist in many cases.
No. I've found that an individual investor betting against a highly incentivized and much larger group of people in a corporation or a government is a bad idea. I short by sitting it out.
europe doesnt want to increase salaries and blocks countries that want to do it to do so. so at least in europe we will get the inflation but our salaries will remain the same. that will lead us to lower qualified immigration, poorer population and going back to a few decades in terms of social progress. america definitly won
> The difference between EBIT growth and sales growth (3.6 percent vs. 2.0 percent) can be attributed to an improvement in profit margins. In other words, costs grew at a slower rate than sales. Some of the improvement in profit margins may have come from sourcing cheaper inputs from abroad, enabled by increased globalization. Moreover, for output produced within the U.S., growth in labor productivity—i.e., real output per hour worked—exceeded real wage growth since the mid-2000s.9 This means that, for a given cost of labor, firms were able to produce more output, which would also likely have contributed to the improvement in profit margins.
Stagnation in real wages goes well beyond the mid-2000s. It starts in the late 1970s [1].
Another way to put the author's thesis is that interest rate costs have gone about as low as they can. Another part is by depressing real wages. The only way for profit growth to continue on this model is to further depress real wages.
Exponential growth cannot continue forever. Consider the metric of net profit per employee [2]. Why is it the employees cannot share in the success of the enterprise that simply cannot exist without them?
We saw this again recently with the averted rail workers strike. Rail companies were freaking out at giving 125,000 "essential" rail workers paid sick leave, the cost of which would've been 3-3.5% of profits.
> interest rate costs have gone about as low as they can. Another part is by depressing real wages. The only way for profit growth to continue on this model is to further depress real wages.
The third variable is taxes -- we could always reduce sales/income taxes, and replace them with economically efficient taxes like the land value tax.
One of the charts in the submission shows that effective corporate tax rate continues to drop (from ~30% to ~15% over the last 2 decades). How much lower do you want it to go?
Also, if you replace the method of taxation (eg sales/income to land value use as you suggested), that's still a tax, meaning the only way to lower taxes is to... lower taxes. Changing the method of taxation doesn't inherently do that.
> Changing the method of taxation doesn't inherently do that.
Yes it does.
Different taxes have variable economic effects -- a tax on cigarettes is different from a tax on yachts is different from a tax on rent. Some taxes are inherently inefficient and put downward pressure on GDP. Others, like LVT, incentivize economic efficiency and achieve better equality by preventing exploitative rent seeking.
It sounds like we could finally see some movement on wage stagnation then, right? If so this seems like a good thing, even if my portfolio takes a hit. Most good for the most people, etc.
"The coming long-run slowdown in corporate profit growth and stock returns"
And yet the S&P and DJIA posted one of the biggest weeks ever last week. Huge companies like McDonald's and Microsoft making record profits to no end, and I see no reason for this to change. This means more $ for shareholders even if interest rates rise. Stock did well in the 1980s and 1990s despite even higher interest rates than today. Not that his report is wrong, but experts , such as in 2009 or 1982, have a long history of making such predictions and being wrong. Being invested tends to pay off based on history.
It could be a bear market rally, which would not be too unusual [0]. Jamie Dimon (JPMorgan) says the market could drop another 20% before we hit bottom [1]. Then there’s OPEC threatening to cut supply. So, there’s certainly a chance of more pain to come in the stock market, but it’s impossible to predict a bottom.
I do agree with your overall sentiment though. After this economic storm passes there will likely be good times ahead for the US. There are lots of great companies selling at a discount right now and there will be more in the near future. It’s a great time for long-term investors to buy. (Apple is looking great!)
With that being said, this may represent a permanent change in the tech industry. Especially for startups and private, VC-backed companies. Last year we saw private SaaS companies raise at 100x ARR. Those multiples have dropped back down to 8-10x and may never reach similar heights again.
This could even be the end of the Unicorn era. We’ve had near 0% interest rates since 2008. This was the primary driver of high tech valuations and the proliferation of Unicorns. Now with rates closer to normal, profitability will be expected sooner from tech companies and startups.
In fact, Bessemer is trying to retire the term “Unicorn,” which is valuation-based, and replace it with “Centaur,” which is ARR-based (ARR>=$100M) [2]. It hasn’t caught on yet, but I’m a fan of the punnier spelling (CentARR).
In the very long run, the growth rate of any subcomponent (publicly traded companies) of the economy must be smaller than the growth rate of the entire economy (GDP, which is ~3% in developed economies). It's not a question of if, but when.
One thing to keep in mind is that post-tech crash in 2001, there was consensus (among many investment firms) that the future growth of the US economy going out decades would be lower than the 90’s, think a drop from 6-7% annual returns to 3-4%.
Piketty has a whole thing about this. When the return on capital is higher than the growth rate of the economy, that capital owns the whole economy in the long run.
That was Bernake's innovation. Artificially low interest rates allowed stocks to grow faster than the economy for decades.
However, it may be that stocks now need to re-value to match the value of the economy, i.e. give up that ~5% delta that they've compounded over the last few decades.
This is easy to explain. Stocks prices are in large part dictated by corporate profits, which is not the same as GDP. Profits are returned to shareholders, GDP is not.
> Stocks prices are in large part dictated by corporate profits
I've also worked for a company with negative profits and a positive stock price which is also one of those things that tends to confuse me. (I'm aware that I'm pretty obtuse, but it's not all an act - I really don't get how much of the modern economy works.) I understand that the expectation is that profits will turn positive/grow over time, but that would seem to require the ability to accurately forecast the future, which seems problematic.
Way too much of the modern economy looks to me like the South Park "Underwear Gnomes" model which you see memeified sometimes - the step 1: steal underpants, step 2: ?, step 3: profit, thing.
They predicted that companies will be able to extract more value from workers in the future. In other words, they think that the top 1% will continue to get relatively richer at a faster rate, as long as that is true profits can improve without the economy improving.
The 2% economic growth rate is an average. It might be the case that the average worker's real wage grows 0% (this is basically true [1]), while corporate profits, which make up ~10% of the U.S. economy [2], grow 20%/year.
It means other parts of the economy must shrink. Population is no longer increasing which means every percentage of growth in one sector is offset by losses in another. There are only finitely many people and each person can only be in one sector at a time vs the previous regime where population growth meant every sector could grow concurrently by hiring from a growing population.
Modern capitalism requires an infinite supply of people to maintain economic growth. The model is entirely busted because it is at odds with physical constraints and dynamics of a finite planet. I personally consider the whole thing a collective delusion because infinite growth on a finite planet is a logical and physical impossibility. Unless everyone decides to live in VR where nothing matters then the economic models must at some point make a connection with reality and at that point it becomes obvious that the capitalist model of infinite growth is untenable unless there is a supply of people growing at a faster rate than whatever economic metrics are used to measure the real economy.
Do you think the economy is zero sum? Go back 50k years, all the current wealth must have been distributed among a mere 50k cavemen. Were they all billionaires? Quality of life must have been amazing for them.
When you go into the woods and stack rocks into a house, you created value. What part of the economy shrank?
How many jobs do you have? Like as a professional in some sector of the economy, how many sectors do you personally occupy? Are you a farmer that also writes iOS software? No, obviously not. Whatever job you do is fixed and it contributes a finite amount of economic value. Since the population is now decreasing there are fewer people, which means if all the economic value from everyone is added up then the total contribution will be less than another population with more people.
It doesn't make sense to talk about zero-sum economics because economics is always a positive sum arrangement of work and specializations. The number of workers is the main limiting factor in any productive economy, every other measure is essentially an approximate proxy of that.
The financial sector on the other hand is indeed a zero-sum system. If someone is making money then someone else must be losing it because there is a finite supply of dollars in the economy at any given moment so if the supply is fixed then the monetary economy is a zero-sum game.
All of this is derivable from first principles but for some reason most people are constantly parroting some nonsense about wealth and zero-sums.
Even finance isn’t zero sum. The money supply is literally something that is managed. When you take a loan, the bank has created money, since the deposits are still on the books. When you buy insurance, you are getting security, insurance company is getting a premium, and you are both happy.
When you take a loan and start a business, the bank makes money on the interest, and you (hopefully) make money because your business is providing more value than it was. You bought a new machine and make widgets 10x faster, etc.
Also, people confuse money and wealth. One is bandwidth, the other is data. You use bandwidth to transfer data, which is what you care about, and its possibility for creation is basically limitless.
You probably should spend some more time thinking about how that all fits together because saying that the bank creates money from interest rates means that the central bank sets the rate according to what economic growth they're expecting. If the rate is decoupled then it stops tracking real economic productivity as I've defined it. The obvious logical conclusion is that raising rates will lead to a recession because economic productivity has been stagnant for some time now. So if the rate is above actual economic productivity then that will reduce the total money supply and this seems to be their main goal. There is no way to reduce inflation without destroying money.
> There is no way to reduce inflation without destroying money.
Of course there is. When inflation is caused by supply restrictions, increasing supply will reduce the rate of inflation. Inflation is about prices, it's not about the money supply per se.
You've been making some weird personal attacks and telling people they need to "spend some more time thinking" and you should really stop doing that.
> If someone is making money then someone else must be losing it because there is a finite supply of dollars in the economy at any given moment so if the supply is fixed then the monetary economy is a zero-sum game.
That is simply untrue. The money supply is not fixed.
In a sense it is if it's tied to value, you can print trillions of empty dollars but the ratio will be the same if there will be no growth behind it, now instead of 1$ you will pay 10$ for something, so maybe amount is not fixed but representation or ratio or how you want to call it seems to be.
People conflate money and value / wealth. We can individually create things of value: food, art, services, inventions, shelter. There is no practical upper bound. Money is a medium of exchange from one to another. Having more money in the system means it’s easier to get bandwidth to transfer that data between interested parties. Without it, you are inefficiently bartering to exchange value.
Value existed long before money, and its potential for creation is not dependent on it.
This is entirely mistaken. Wealth creation is not zero-sum. Per-worker productivity is not static. The carrying capacity of the planet is not static either.
Have you personally done any work to increase the planet's carrying capacity? More specifically, what is its current capacity and how is it calculated? Seems like you would know this based on what you have stated.
Bonds are back. TIPS bonds are now yielding around 2% real (not nominal). Treasury bills/notes are yielding above 4% nominal across much of the yield curve.
Do you not look around at the world and see problems in need of fixing? Spend your money on fixing them because then you get to live in a world with fewer problems (it's called investing).
I see a real big problem that needs fixing: How do I save enough to retire and make sure I don't have to work until I die? That problem kind of dominates all other problems for me.
And this is why stock market will keep going up- every two weeks millions of people- and their proxies, via index funds and pension plans- go out and say "welp let's buy some more stocks so we can retire".
This seems like sarcasm, but I believe this is ultimately the goal.
Call it Star Trek post scarcity, or fully automated gay space communism, or the Culture.
People only work if they choose. Not everyone who wants one gets major capital investment (like a starship) without demonstrating competency but otherwise everyone benefits from the collective automated bounty.
If equities are really just shares of ownership in the means of production, it's basically everyone owning some portion of the means of production. I wonder if anyone thought of that system before?
- spend the majority of my life making things worse so that I can afford retirement, and then spend my retirement dealing with the consequences of having ignored "all other problems"
- die while saving up for my nth attempt to make things better
the social contract used to be: each generation nurtures a new one and cares for the old one.
obvious problems with childlessness, infertility, accidents, bachelors, orphans.
assuming you live in the US one obvious solution is to move somewhere with a better pension system
the economic trend is that the things needed to live get cheaper (and we constantly raise the bar for what's considered "needed") still as long as efficiency gains are left (and we are veeeeery far from nowhere to look for more gains) it's likely that basic necessities will continue to be provided with higher efficiency.
the question is what society optimizes for? more suburban sprawl, spending more of our economic surplus on building more hard to maintain, hard to heat/cool houses? spreading the population even more thin, requiring even more inefficient cars, more and more miles of pipes, roads and whatnot, or ... (and I'm not saying to have cheap retirement we need to live in a Borg cube).
I agree that it is morally good and proper that you seek to take care of yourself and not be a financial burden to others. "Life, Liberty, and the pursuit of property/happiness" (the original wording debated the two versions).
May I ask an add-on? Do you also want to provide for your children?
And as an extension of that, would providing for them include leaving them with a habitable planet?
I'd rather not answer any personal questions, but basically the benefit of not selling out on that front doesn't seem justified, given my marginal impact. My point is not so much everyone should share my position, merely make it clear my belief that the majority of people think the way I do, and any plan without acknowledging that reality is doomed to fail. Doesn't matter how charismatic a leader or airtight scientific studies you show, you are asking a LOT in terms of opportunity cost if you are recruiting for an organization trying to "solve a problem" without a potential windfall at the end of it and you should realize that.
Yeah, I realize that my position goes against the grain in a rather extreme way. But I think that as time goes on it'll become obvious that some problems just can't be solved in a way that culminates in a windfall, and if we leave those problems unaddressed we're doomed anyway.
Alternatively, maybe I'm wrong and some business genius figures out how to monetize the necessary work after all. Who are they gonna invest in, the guy who has been working at it for years even though maybe he'll die a pauper, or the guy who hasn't started because he can't see the payoff yet?
I don't see problems that can be fixed by buying something. Or rather, by buying abstractions in hopes of being able to sell them for more more later on (i.e. gambling).
Personally, I think that the declining state of privacy is increasingly incompatible with democracy. I want to live in a democracy when I'm old, so I'm saving up to take a few years "off" and work on some ideas that I have which I think will help.
So I suppose I will be buying things along the way. Food. Healthcare. Energy. Internet access. But I'll be doing it because I want to live in the world that I'll be creating (i.e. I'm investing time in creating that world). Not because I think I'll end up with more money when it's all said and done.
So maybe I'm putting words in ferdowski's mouth here but I really think that by "buy" they meant "allocate my money under the expectation that it will grow without me having to do any extra useful work along the way".
There is also an interesting relationship between government surplus/balance sheet and corporate profits.
If you are non-cynical about it, and consider a theoretical model (closed system), then from basic economics if one actor is running a surplus than another actor must be running a deficit, otherwise the accounts don't balance.
And while true, "it's only a model" (in the immortal words of John Cleese, looking at the model of Camelot in "MP and the Holy Grail"), if you chart the two against each other it holds up relatively well in reality.
This is relevant because the Fed is also committed to shrinking its balance sheet, which, if that model holds, will also shrink corporate profits.
Higher cost of capital, higher taxes, and less money in the pot. We've had a good run the last 40 years, the next 7 might not be so rosey.
The zero-sum model bears no relation at all to reality.
Consider the total planetary economy. We get many inputs from outside. We get free sunlight powering some solar panels and the whole ecosystem. We tap that ecosystem for many valuable resources. We get vast troves of pre-existing minerals that can dig up at will.
We also have innovators that come up with inventions and systems and are compensated for their contributions, but never to the full extent that they benefit society. (Nobody can capture all of the value they add.)
You might be right, and I was clear that it was only a model.
This gives a starting point. You can then measure the value added by the externalities you mention.
Or, as the author of the source article did, you can also measure the value added by low interest rates and low tax rates, then make some guesses as to what happens when those reverse.
Fair enough. I think interest rates cannot add value; the stability that makes low rates possible is the thing that adds value. I’m no economist though
I saw a long-term study of interest rates, going back hundreds of years (like to the 1300s or so). The long-term trend is for a decline, and probably due to the increasing stability reducing risk, thus the loans get a lower premium.
Interest rates don't add value; they are the cost of money.
Money should be expensive enough that it is encouraged to only use it on investments which are likely to add value. When money becomes too cheap, it is "worth it" to invest in things with very little real chance of payout.
I should add, we are hysterically bad at predicting innovation (or predictions in general). We seem to repeatedly do things that the far most experts in that field would have angrily rejected for sounding preposterous. Perhaps not often enough but we do see those things regularly on the HN front page.
> We've had a good run the last 40 years, the next 7 might not be so rosey.
The "good run" also relied on that identity. The national income accounting identity tells us that if we run massive trade deficits for 40 years, we get a massive trade debt that has to be borrowed in foreign currencies. It can be either borrowed by the government, or individuals/businesses. The government can't cut national debt without reducing (or better, reversing) the trade deficit, so what it's actually doing is shifting that borrowing to the private sector.
So ultimately reduction of government spending amounts to selling the private sector to pay off government debt, which imo is not good. We shift from owing other countries paper that we have an infinite supply of, to owing them actual parts of the economy.
We need to be shifting spending from all of the direct subsidy to the wealthy of course, but we shouldn't be reducing anything. Turns out that giving money to rich people isn't a good investment because they steer most of it to financial scams and rent-seeking ploys. The government needs to spend in a way that targets lowering the trade deficit, and that means investing in things with a return. Part of that should be trying to shift the debts of normal individuals to government, where they can be more strategically invested in a way that will reduce imports or increase exports.
The debts of normal individuals are mostly wrapped up in housing, healthcare, and education. So we should be subsidizing those rather than the stock market.
The debts of normal individuals are mostly wrapped up in housing, healthcare, and education. So we should be subsidizing those rather than the stock market.
The subsidization, or more specifically the removal of individually driven feedback mechanisms, is what caused the prices of these things to skyrocket in the first place.
The modern university isn’t basically the same as the 1970s university except post Baumol's cost disease. The budget looks dramatically different.
> The modern university isn’t basically the same as the 1970s university except post Baumol's cost disease. The budget looks dramatically different.
Agreed. Look at ratios of professors to non-academic staff.
"The number of non-academic administrative and professional employees at U.S. colleges and universities has more than doubled in the last 25 years, vastly outpacing the growth in the number of students or faculty, according to an analysis of federal figures."
https://hechingerreport.org/ranks-of-nonacademic-staffs-at-c...
> The subsidization, or more specifically the removal of individually driven feedback mechanisms, is what caused the prices of these things to skyrocket in the first place.
No, it's that the subsidy was done through middlemen and rent-seekers instead of direct provision of free healthcare, education, and housing. Giving people earmarked funds is just direct subsidy to the people who control pricing.
The expanding and shrinking of the Fed's balance sheet over period of time is neither a surplus nor a deficit, because there's no spending involved.
The Fed expands is balance sheet by purchasing interest-bearing government/agency obligations (bonds) with non-interest-bearing government obligations (money), and shrinks it by selling the interest-bearing obligations in exchange for non-interest-bearing ones. The balance of government obligations (issued bonds + issued money) remains the same. There's no spending involved.
It's not really a model, it's accounting. The reason it holds up well is because it's an identity. If you represent all the flows they must sum to zero by definition. Those that ignore that (most people) miss some fundamental truths, which you allude to. No idea why you should be voted down other than to think those truths break much cherished dogma.
I have a belief that interest rates will be structurally higher for the entire world over the next decade, higher than the market currently expects. World population is declining in the countries that generate most current GDP, and are likely to in the future. China, in particular. Trade is fracturing, world trade isn't going to end, but it's going to compartmentalize, and that's going to make it less efficient at the margin. Energy is going to get more expensive as we address climate change, making everything else more expensive along with it.
All of these things cause structural inflation, and thereby necessitate structurally higher interest rates. Not to mention the fact that at the very least, the tailwind of globalization is over, which means that the ultra low rate regime we have enjoyed over the past few decades absolutely cannot be sustained. Inflation is back as a problem for the fed unless and until we got another sustained source of cheap growth.
There is one, and only one plausible such source imo, and that is powerful AI labor substitution. Hence the solution: Go long high interest rates, and make a levered long term bet on AI. These two things hedge each other. You don't have to believe AI labor substitution is going to happen (I'm not totally confident it will), all you have to believe is that it's our only out for structurally higher interest rates.
A portfolio constructed to benefit in the right proportions from these two things is currently cheaper than it ought to be, in my opinion. I expect this bet to play out roughly over the next 10-15 years, and I am still not decided on exactly how I want to construct it in terms of specific assets. But broadly I think it's the right move.
EDIT:
Totally separately, i'd like to quibble slightly with this bit of analysis:
> This suggests that, if interest and tax expenses had not declined as a share of EBIT (as shown in Figure 1), then the real growth rate of corporate profits would have been almost 2 percentage points lower each year (5.4 – 3.6 = 1.8 percentage points). In other words, the relative decline in interest and tax expenses is responsible for a full one-third of all profit growth for S&P 500 nonfinancial firms over the past two decades (1.8 / 5.4 = 1/3). This is a very substantial contribution
This isn't quite accurate. Cheap debt decreases the hurdle rate for capital investment. In other words, if rates weren't so low, much of this debt wouldn't have been taken out, and only the higher returning projects on average would have been invested in. Stated another way, as interest rates decline, the profitability of the marginal debt-financed investment declines along with it. It can also lead to anti-productive debt-financed market share wars between companies, etc (think of the vc battles between uber and lyft). This complicates the picture they're painting a bit, and likely reduces the true number here somewhat, but doesn't alter the broader story.
"Go long high interest rates, and make a levered long term bet on AI."
The challenge with levered long bets on technology is that most foundational technologies undergo waves of innovation, growth, replacement, and bankruptcy. You could've been totally right about social networking by betting on Xanga in 1999, and still gone bankrupt because they were long gone by the time Facebook ultimately won the market. Same with betting on Altavista for Search in 1995, WebVan for e-commerce in 1999, BlackBerry for smartphones in 2002, etc.
If you're looking to make a levered long-term bet on technology, often the smartest thing is to bet your career on it. The skills you personally hold will survive multiple generations of companies, and then you can seek out whoever happens to be hiring at a given point in time for the technology that you think will be huge.
> The challenge with levered long bets on technology is that most foundational technologies undergo waves of innovation, growth, replacement, and bankruptcy. You could've been totally right about social networking by betting on Xanga in 1999, and still gone bankrupt because they were long gone by the time Facebook ultimately won the market. Same with betting on Altavista for Search in 1995, WebVan for e-commerce in 1999, BlackBerry for smartphones in 2002, etc.
Ya, that's why it's a hedge, not an isolated bet. The idea is that one of two things has to happen: high interest rates, or strong AI labor substitution. You construct a portfolio to benefit from either outcome.
My expectation would be that the AI bets would lose money and the interest rates bets would make money, on average. However, in the case where AI really does undergo a miracle in the next decade sufficiently profound to lower interest rates, my portfolio would be hedged to that.
The challenge is that the eventual winner in the AI space might not be a company that exists today. Say that you build a portfolio that's 60% interest rate swaps and 10% each into DeepMind & 3 other hot AI companies of the moment. In 10 years, we've solved the labor shortage, but the eventual winner is a company named ConvBrain, founded 2028. All the capital you allocated to the AI space is tied up in DeepMind and the three other incumbents, so unless you're watching the space like a hawk (in which case you might as well be employed in it), you would've missed the ascendancy of ConvBrain and picked the losers despite the space as a whole being a winner.
Agree. You would have to keep up with changes in the space, and accept the possibility that you even if you're right about it strategically, you aren't able to make the appropriate bet, because e.g. the company that succeeds is private.
However, you could try to think about ways to hedge that risk, by thinking about who benefits in ancillary ways. E.g. for instance, which firms are likely to benefit most from AI labor substitution (whether developed in house or not). There are no certainties here, of course.
Betting on higher rates can be done using interest rate futures: https://www.cmegroup.com/markets/interest-rates.html These are fairly complicated instruments though so you'll want to do a bit of reading in order to be sure you're making the bet you want to make.
Betting on AI is more complicated: Obviously chip makers are likely beneficiaries, along with tech giants, in particular Google via Deepmind appears to be a leader in this area. But there are other ways for this sort of thing to play out, a lot of companies HNers probably never think about are investing in AI automation for their factories and automation in various ways. One possible future is that Deepmind builds The General AI Solution, and then licenses it to everyone. Another possible future is that the tech becomes so easy to build that each company just builds its own tailored solution for its particular problem.
I think I find the latter solution somewhat more plausible, but both are definitely in play. How you invest to benefit from that is tricky. It's likely in that scenario that some big companies will develop solutions in house, and others will buy startups that you'll never have a chance to invest in. Your job as an investor at this stage would be to figure out which big companies that you can invest in are likely to be the ones who do this successfully.
And when I talk about big companies here I don't necessarily mean the big tech companies. I mean companies like Tyson that makes chicken, or chemical companies, or firms like Accenture, etc. This is the harder side of the bet, because it's going to play out over quite a while, and there is a lot of uncertainty about exactly how.
Moreso than AI, ML will continue to integrate into business and improve overall productivity. I don’t worry so much about monopolies in AI, because compared to the business solutions from ML — which are often much smaller, boutique models that perform more efficiently than large, general purpose models.
I believe the soon to be realized lesson is that solving one specific problem is significantly cheaper than trying to leverage much more expensive models built to solve a great many problems.
There’s still a lot of runway left in “small” models (eg BERT) that are still being researched and augmented to solve common business problems. 10 years from now, I believe some form of the current models will become industry standards as methods for solving specific problems.
Yep, I totally agree, as a median forecast. But the future is always uncertain, and it is possible the things we're seeing now will hit some sort of wall, where only large companies will be able to build highly general models and everyone else will be left licensing from them. I think that's unlikely, but I just wanted to enumerate it as a possibility. And when you're constructing portfolios for long time scales, you want to think about all the likely paths things might take and try to roughly assign a weight to them and construct your portfolio accordingly.
A healthy economic system does not need a constant supply of "economic steroids" or a manufactured crisis every few years to sustain. The negative effects of "economic steroids" would indicate that 2022 is just another hangover from a bender. Its easier to call it maff, since they obviously got two "F's" in the subject.
The graph of "Federal Deficit Trends Over Time, FY 2001-2022" clearly shows the manufactured housing crisis and covid spending. REITs, foreign buyers and BnB's scooped up the scraps after 2008 and 0% efficacy with new covid variants have become more of a comedy than any rational thinking.
The timeline(s) for healthy growth favor 21st century lean approaches, which don't move the graphs as much as "economic steroids".
Mixing money with fabricated integers does not seem prudent in 2022. Libor rate much?
Day traders and high frequency trading changed the variables of the stock market quite a bit already. Only the underfunded pensions and underfunded retirement accounts are still holding.
Based on some comments in this post and the posted article, it seems we are assisting to a power shift, I wonder who will replace the US and how long will it take.
Takes a bit of reading before the primary issue gets mentioned:
> "Some of the improvement in profit margins may have come from sourcing cheaper inputs from abroad, enabled by increased globalization. Moreover, for output produced within the U.S., growth in labor productivity—i.e., real output per hour worked—exceeded real wage growth since the mid-2000s. This means that, for a given cost of labor, firms were able to produce more output, which would also likely have contributed to the improvement in profit margins."
I's rewrite the introductory sentence for this article as follows:
"Over the past two [four] decades, the corporate profits of stock market listed firms have been substantially boosted by ~~declining interest rate expenses~~ [outsourcing manufacturing abroad to sweatshop zones] and ~~lower corporate tax rates~~ [importation of cheap and often undocumented labor from poor countries]."
That's the essence of what its dectractors (including myself) call the neoliberal economic model.
Such a textbook example of confirmation bias. You have certain conviction, and you dig deep until you find some references to it, and then declare that your conviction is vindicated.
My conviction is that the growth in corporate profits is driven primarily by technology advance and globalization. And no, globalization is not a one way street, only benefiting corporates. China achieve their economy growth and their status as superpower, lifting a billion people out of poverty, thank in no small part to the large and rich market of developed countries they've been able to access.
The growth is slow down because temporary roadblocks such as the pandemic and financial measures countries adopted to counter it. Geopolitics also play a role. Globalization is well and alive still, and while it will evolve, it is not reversible. We will not go back to the world pre-1990s.
> "This note's key finding is that the reduction in interest and tax expenses is responsible for a full one-third of all profit growth for S&P 500 nonfinancial firms over the prior two-decade period"
Even if accurate, where is the other 2/3 coming from? You'd think the primary issue would be more explicitly noted. As far as China, their escape from famine-level poverty took place well before the neoliberal outsourcing program adopted China as one of its preferred sweatshop zones (along with Mexico, Indonesia, India, Philippines, Bangladesh, Honduras, etc.) - it really began with importation of ammonia fertilizer factories in the 1970s under the Nixon agreements, which really ended the famine era. The big change wrt the USA and China took place in 2000-2001, with WTO membership. While NAFTA had already been gutting the US manufacturing sector for the past half-decade, the explosion took off after that (just look at any major box store and count the items with 'made in China' labels).
Fundamentally, the neoliberal project is all about 'liberating' international pools of capital from the restrictions (tariffs, sourcing requirements, capital transfer fees, etc.) imposed by nation-states, as a means of putting more and more wealth and power in fewer and fewer hands. It's profoundly anti-democratic in nature, and should be ended.
> Even if accurate, where is the other 2/3 coming from? You'd think the primary issue would be more explicitly noted.
It is explicitly accounted for, in TFA. ~30% (1.6%) is coming from cost cutting --so potentially sweat shops, but also productivity gains--and another ~37% (2%) is coming from an actual increase in sales, i.e. GDP growth.
It's funny that that anti-globalists like to frame it as them caring about the "poor sweatshop workers" without considering the sentiments of those workers. They think that taking away the little economic choice that these people have would be a great boon for them.
Globalization isn't just good for developing nations, it benefits developed ones as well. American's dominance in technology, finance, and entertainment would not be possible to sustain without it.
> American's dominance in technology, finance, and entertainment would not be possible to sustain without it.
Yes, without it, other nations could develop competitive industries at the top of the food chain and their citizens would have options other than working in sweatshops.
Globalization comes packaged with many demands that primarily benefit Western corporations and make it very difficult to rise above subservience.
(China rose largely because they ignored these demands, violated Western intellectual property laws, restricted the transfer of money in and out of the country, heavily regulated foreign companies, and had enough strength not to be sanctioned, invaded, or overthrown for doing so.)
Is Asia just a made up continent? How do you expect the child of an uneducated subsidence farmer to become a programmer when they live in a poor country, and you're blocking means of external investment? What people don't seem to realize is that it's impossible to transition a place with incredibly shitty living conditions to good living conditions, without reaching a midpoint of moderately shitty living conditions.
The thing is, is that those "shitty" conditions may well be a de facto, silently elected choice (conservative). The whole globalist ideal is that their paradigm of civilizational excellence is the only answer but it isn't, not by a long shot. Read Huxely's Island.
Moreover the effects of capitalist-globalism have, I would posit, given rise to poverty in many instances with first-movers advantage, selectively shunting trade into some nations and away from others. If one nation elects to adopt the Western zeitgeist, and their neighbors neglect it, their neighbors will suffer as a product of their lack of technology. This will decrease the proportion of product to labor, increasing production cost (including non-monetary expense). [This creates huge reserves of impoverished people, otherwise known as cheap labor] pidgeonholing them into deals with the devil. At which point more developed nations can either strongarm them into really shitty compromises or just outright implant leaders. Haiti is a really stunning example of this, where France levied a huge debt against the newly independent nation. Or we can point at Madagascar where the IMF discredited them, eventually forcing them into a position where they couldn't fund malaria vaccines (or anything else for that matter).
On Madagascar from David Graeber's Debt: the First 5,000 Years:
"France invaded Madagascar, disbanded the government of then–Queen Ranavalona III, and declared the country a French colony. One of the first things General Gallieni did after “pacification,” as they liked to call it then, was to impose heavy taxes on the Malagasy population, in part so they could reimburse the costs of having been invaded, but also, since French colonies were supposed to be fiscally self-supporting, to defray the costs of building the railroads, highways, bridges, plantations, and so forth that the French regime wished to build. Malagasy taxpayers were never asked whether they wanted these railroads, highways, bridges, and plantations, or allowed much input into where and how they were built."
On Haiti from David Graeber's Debt: the First 5,000 Years:
"Haiti was a nation founded by former plantation slaves who had the temerity not only to rise up in rebellion, amidst grand declarations of universal rights and freedoms, but to defeat Napoleon’s armies sent to return them to bondage. France immediately insisted that the new republic owed it 150 million francs in damages for the expropriated plantations, as well as the expenses of outfitting the failed military expeditions, and all other nations, including the United States, agreed to impose an embargo on the country until it was paid. The sum was intentionally impossible (equivalent to about 18 billion dollars), and the resultant embargo ensured that the name “Haiti” has been a synonym for debt, poverty, and human misery ever since."
The whole angle of dragging a people up is bullshit. The US alone has installed leaders and toppled parties repeatedly to maintain our status quo, and historically empires just do this. And it's always justified with some magical self-righting pretense. We do as much damage on a cultural scale as we do good on an economic one - when we're not doing damage to both, which I think is certainly the most frequent case. And let's not get started on the various military interventions over the history of the US...
> The US alone has installed leaders and toppled parties repeatedly to maintain our status quo, and historically empires just do this.
It's almost as if... protectionism is bad. Colonialism and imperialism are inherently protectionist. No matter how talented they were, a Madagascan was prohibited from pursuing the same desirable administrative jobs that were available to the French elite. The French elite prohibited their competitors from offering from offering the Madagascans a better deal.
Is colonialism not the precondition for "neo-liberal globalism"? In any case I would argue in any case the logical conclusion of colonialism is globalism, a lever arm and a gear acting on the same system. I would also posit in just about any form it's a bad idea, Neo-liberal or Communist...
Not to mention the fact that the IMF (International Monetary Fund) is the posterchild institution forwarding the Neo-liberal Gloablist agenda.
I’m no expert on this (don’t know if I believe it) but the argument I’ve heard framed is that the neo-liberal approach is a direct reaction to colonialism. So in that sense sure it’s a precondition. Like being sick is a precondition for getting cured.
The idea being that global trade should act as a mutually beneficial agreement without needing force of arms, trade protection or extractive colonial policies. Rather than 1 party sucking all the resources from another in a zero sum way.
It's "extractive colonial policies" obfuscated through tools of finance, where force of arms has been a reality in some cases, in others there are different but nonetheless serious coercive threats, sometimes a little bit of both (plausible deniability, nice). As far as determining whether or not it's single sided, if you're calculating with something as primitive as Pareto efficiency or something equally hamfisted, yes, sure, everyone benefits, some by literal pennies and others by many millions of dollars. It's very much one sided from any [reasonable] moral perspective, at least any moral perspective that hopes to treat humans with any semblance of dignity.
A lot of the pretenses developed nations use to intervene in the affairs of the "Global South" have their roots in colonialism as evinced by the grandparent.
Old laptops are cheap. And piracy is non-issue. Learning to program is not rocket science. And that is pretty easy to learn too nowadays, just a bit harder to practice.
Many of the subsistence farmers have a crapton of knowledge about their environment and how to make stuff grow. Many of them are pretty good at basic redneck engineering too. That's a pretty good background to get hold of basic programming which is not that far off.
When I got my first laptop I didn't magically learn programming. That bit took me several years of learning, trying, forgetting, getting confused, re-learning... All of that would have not been possible if not for my parents providing for me.
If I absolutely had to work full days ( which incidentally isn't limited to 8 hours a week in all countries in all jobs) to make ends meet, my chance of finding my calling would have been pretty slim.
In other words, just the learning tools are not enough, it's but one of the necessary resources, and for some people spare time or strength can be very difficult to find.
Personally I learned programming in the evenings after school when I was 12-15. Sure that counts as „parents providing for me“ and my parents weren't farmers. But even in farming it's not like you work 24/7. And when air is crap or it's a slow season in between crops etc there's plenty of time off.
And many farmers (labour, whatever) do know how important it is to give kids time to study things. TBH for me parents who drive kids around to all sorts of extra-curriculum activities for me seem to be much worse than free-range parents who just ensure that kids have time to pursue things they like. Just with some navigation to ensure they don't spend all the time partying. Which is also important though.
Ok thats just wrong. Many asian countries developed their own competitive industries because the west outsourced some labor there. India/China both followed the same path
Also, have you considered the opinion of the "sweatshop" workers because for them the options are "sweatshop" or not working at all
Citing China as an example of the success of globalism and free trade is an interesting choice.
They have a protectionist economy, and it was the most successful economy over the last forty years. China seems to have proven the benefits of protectionism.
And I'm arguing that sweatshop workers would have options other than "'sweatshop' or not working at all" if free trade weren't killing any opportunity they might have to develop local industries.
Their situation is not entirely unlike a small town in America when a WalMart opens, kills the local businesses, and the only remaining jobs are at WalMart.
Subsistence farming is what lot of these workers come from. The factories or even sweatshops might not be perfect, but with increased population they are preferable to working fields with all the risks that involve.
As a citizen of „2nd world“ country that had (and still has to some extent) it's share of being a sweatshop...
I'd rather say globalization is good for developing nations and the rich of the developed. It brings the middle class and labour of the world close together. Dragging down developed world a bit and enriching developing world a ton.
Now is the most interesting phase when developing world has developed somewhat, local elites grew up and now they'll start challenging „developed“ world elite.
It will be most interesting to watch developed world non-elites. Developing world is very happy with improvements and have the momentum. Meanwhile developed world is slowing down and it will be damn hard to turn the tide.
That happens every time an empire declines. The Roman empire had a globalized economy, and that ended up collapsing into the medieval period of hyper-localization. The collapse of the Dutch and British empires had similar results. The American empire is collapsing now, and globalization is the first casualty.
Fun fact: Victorian England even had several very successful uber-like businesses (phone ordering aggregators in this case).
The problem is not really globalization, the problem is reliance on china, Russia, the saudis, etc for critical parts of the economy. That reliance was made possible by globalization, but the reason to reduce reliance on them is not because of increased efficiency but increased security and independence.
Why must everything always be only one thing? Why not both?
The decline in taxes and interest rates mechanically account for 1.8% points of the 5.4% net income growth in the SP500 since 2004. This is not in dispute, unless you don't trust the numbers.
Outsourcing and cost cutting account for some of the difference between sales growth (2%) and EBIT growth (3.6%), or 1.6% growth. Basically if you only sell a little bit more, but your costs go down, you can take home more earnings. But it's not a given that 100% of this 1.6% gap comes from sweatshops, there have been some legitimate reductions to cost of labor domestically, unless you think literally nothing has changed about productivity in the last 18 years.
So sweatshops account for a maximum of 1.6% of returns, likely less, while taxes and cheap credit account for 1.8%. Outsourcing is not "the primary issue", mathematically.
> That's the essence of what its dectractors (including myself) call the neoliberal economic model.
The impact of "cheap and often undocumented labor from poor countries" is minuscule, especially considering the sectors that have the highest profit margins aren't low-skill manufacturers, but rather finance, tech, real estate, private equity, and so on.
There are two main issues at play here: corporate debt levels, and interest rates. The article does a pretty good job of covering both, and trying to spin the past few decades as some sort of "corporate colonialism" is missing the forest for the trees.
Finance and private equity gets much higher returns from its investments in technology, agribusiness, construction, the service industry, the big chain stores etc. because those subsidiary entities have vastly reduced labor costs via exploiting neoliberal government policies, both abroad (outsourcing) and domestically (labor importation).
As far as real estate, that's been highly manipulated (tax havens, money laundering etc.) as well as heavily subsidized (in favor of large owners) by the federal government (i.e. subprime bailouts, etc.).
The profit margins in finance and real estate were only possible because "corporate colonialism" prevented wages and consumer prices from rising along with asset prices.
If real consumer prices hadn't been driven down by reduced manufacturing costs, then the lower interest rates that drove up asset prices would have led to consumer inflation and wouldn't have been politically viable.
And if American labor had been able to demand a greater share of the wealth created over the past forty years, then corporate profits would have been far lower.
> easy money policies that were only possible because..
I would push back a bit. First, I think these easy money policies are basically "possible" whenever the Fed mandates them (and the markets simply react accordingly). My point here is that they actually don't have to be rooted in any kind of fundamentals. Even now, the Fed is basically willing to blow up foreign markets (which might seem irrational) because it doesn't want Americans to go through inflation.
Second, while I do agree that cheap labor has enabled some of this, it's mostly due to China's insistence on treating its citizens like chattel; and, yes, to some extent the West being complicit, though calling it colonialism deflects blame from the true architects of this evil: the CCP.
> and if American labor had been able to demand a greater share of the wealth
The way I see things, wealth demanded is a function of leverage. American labor has no leverage when compared to Chinese labor (maybe apart from quality), and therefore always loses out.
> Even now, the Fed ... doesn't want Americans to go through inflation.
Exactly. The Fed's current behavior shows that they probably would not have lowered interest rates so much if the resulting inflation hadn't been countered by lower manufacturing costs.
> American labor has no leverage when compared to Chinese labor
Yes, and this was, I believe, that issue that
photochemsyn was referring to. If all manufacturers making products for the American market had to obey American labor laws (and other regulations), then American labor would at least be competing on equal footing.
Excellent analysis!
I would add investment in low risk high returns ventures like software as opposed to high risk lower returns ventures like brick and mortar factories.
Calling things neoliberal isn’t an incisive economic analysis, it’s a way to get upvotes from people in SF who claim to be Marxists and whose parents are rich landlords.
Many of the “neoliberal” things that supposedly happened did not actually happen.
I wouldn't strike through those two factors to be honest. Monetary policy since 2008 has benefited capital and harmed labour. And the ideologically driven cut on corporate tax (and on the highest bracket income tax marginal rates as well) since the 1980s has also had a similar effect (see how CEO pay has skyrocketed)
I think the author 100% knew what he was doing by not mentioning QE directly at any point. It isn't just since 2008, the cut in 03-04 to 1% was basically why synthetic CDOs were invented...it is amazing that this happened twenty years ago, and there is still a "debate" about the long-term financial consequences of very low interest rates/QE.
Also, the issue with corporate taxes has been more to do with European tax havens. Places like Netherlands, Ireland, Luxembourg got very aggressive in offering corporations bilateral deals (i.e. bespoke deals on corporation tax outside the legal framework that applied to domestic companies). The US tax rate in the early 2010s was still 35%, it was only when revenue began moving offshore that the US felt the need to cut (not just the US, the same thing happened in the UK). The global minimum corporation tax deal is supposed to tackle this but, to be honest, the US should have cracked down on individual countries far sooner.
> Figure 2 makes clear that a key driver was the decline in corporate interest rates—which itself largely reflects the steady, decades-long march down in Treasury yields.
Corporations do not pay taxes - their customers or their employees do.
The only way that a corporate tax is better for the worker than not a corporate tax is if that money will be better spent by the government. We cannot show this to be true, because very often government funds are utilized to fund programs and projects that are primarily ideologically motivated instead of mere improvements to facilities and entitlements we all use.
Additionally sectors that have largesse of government spend (Medicare, military procurement, California HSR) start to morph to maximally abuse procurement bureaucracy and obtain monopoly power rather than provide service.
These problems are solvable to be clear, but it doesn't strike me as obvious that the money Amazon makes is spent better by Congress than by Amazon in every possible case.
Look at companies with enormous stockpiles of cash, or doing stock buybacks. They're just sitting on it, when some of it could be better spent on crumbling infrastructure that their delivery vehicles drive on, for example.
> outsourcing manufacturing abroad to sweatshop zones
> importation of cheap and often undocumented labor from poor countries
> That's the essence of what its dectractors (including myself) call the neoliberal economic model.
This is the economic nationalist (i.e. Trumpist) critique dressed up for polite company. You and the rest of the economic nationalists have no plan to make the lives of people in “sweatshop zones” or those desperately escaping them to the west, better. You are attempting to exploit pathos on their behalf to make their lives actively worse by shutting down the movement of goods and labor.
Your counterpoint assumes there’s a win-win that’s possible. But sometimes that’s wishful thinking. Imperialists have always convinced themselves that they’re actually helping the peoples they intervene on, but they’re often wrong.
Hopefully this does not come across as whining (as i managed to escape the debt cycle), but this really seems like they're saying "the investment money train is over", which is just another slap in the face to my generation, who were already dealt a pretty crummy hand.
Unless you're unlucky enough to have a short life, you're going to live through several boom and bust cycles, so get used to it. I've personally lived through the collapse of the LTCM hedge fund and Russian economy while I was at Credit Suisse in 1998, the dot-com bust while I was at eToys.com in early 2000s ($6Bn market cap then delisted from Nasdaq and sold for $2MM to KB Kids), the housing bust of 2007/8, and now the current stock market collapse which is just getting started.
Every crisis presents opportunity, provided you're not just spending your life riding everyone else's coat tails. Busts are particularly good for entrepreneurs because we don't have to compete with all the stupid money out there feeding the swarming incompetents. A bust is a time for true innovators to rise from the ashes.
There's asset price inflation, productivity growth, technological growth, and population growth.
I'm not sure why anyone thinks we need more people.
Humans make up 34% of all land biomass.
There are physical limits to technological growth. We're already getting close to the physical limits for how good a lot of things can get. Short of living in a fairytale, I'm not sure what people are hoping for.
Productivity growth is predominately going to come from technological growth. However, much of the world is ridiculously under-invested in. We have generations of growth left here. Why do we need more people when ~70% of the world is ridiculously under-invested in?
Asset price appreciation is good if you own assets - bad of you want to buy them. In an ideal world, I think assets would be valued based on some kind of sense - not whatever central banks decide.
That's technically not true if you're running a DCA model (which most people do when they invest in the stock market - they invest a percentage of their earnings), since the price at which you invest is better under a bust scenario than a protracted run of zero growth.
When was there near zero growth? The last decade has seen a boom of VC investment and startup growth. There was the Great Recession before that, following the post 9/11 growth spurt. It seems like the last time there was no growth was perhaps the late 70s?
There's bound to be people lived through the 1906 SF earthquake as a kid, the trenches of WW1 as a young adult (1917), then the Spanish Flu (1918) and then once things started looking up for them, either the 1929 stock market crash and/or the dust bowl came and took it all away again.
Of course on the other hand, just because someone has had it worse doesn't make things not bad.
How about being born in 1890 in China? If you lived until 80 you’d have gone through: the first Sino-Japanese war, the Boxer Rebellion, the 1911 Revolution, the Warlord Era, the Northern Expedition and Chinese Civil War, the Second Sino-Japanese War, the second part of the Chinese Civil War, the Communist Purges, the Great Leap Forward, and the beginning of the Cultural Revolution.
Its really not that crummy a hand. Maybe it’s not as good as being born in 1948, though they had to deal with medical issues that you never will, not to mention the military draft. But that’s not the only point of comparison ever. The destruction in Europe created a period of unprecedented prosperity in the US.
The student debt that is endlessly whined about has been transformed over the last decade from real debt to a marginal tax on income. This is the same system that’s used in Australia and the UK.
Then there’s the run up in house prices. A real phenomenon but this idea that home ownership is the sine qua non of a happy life is a transitory culture artifact, not any kind of human universal.
Yes, I am not one of those people who is foolish enough to think that it would have been better to have been born in 1940 than today. Of course quality of life and real incomes are higher.
But I think in the microscale, it might have been better to be able to invest in this most recent bull run when housing was also lower cost than the next decade or so.
It's a crummy hand when the cause is increasing wealth gaps. The money was there and is there. Policy has shifted how much of it the middle class ends up with. That's crummy.
I admit I don’t get the obsession with inequality when the absolute numbers are so high. It feels like a generation is treating envy as a virtue rather than a vice.
Some people are contributing to making that pie bigger and a lot of people aren’t. Why should the people whose contribution is steady or negative get a fixed fraction of the pie? What’s fair about that exactly?
What's fair about Zuckerberg becoming billionaire by basically pure luck? There are millions of people more hard working and more intelligent than him but they were unlucky. If not Zuckerberg then someone else would create Facebook, he was surprised by how successful FB was. Calculus was discovered independently in the late 17th century by two mathematicians and it would be discovered if they both would die before doing it. It's all statistics, you can have the best idea in the world but be in a wrong place at the wrong time and you will fail.
Seems like a straw man, it's like asking - I'm not husband of this woman but I could, so should she split this kid with me if I want to?
This is different to sharing wealth, we already tax people so we share their wealth with the rest of the society but we don't share other people kids, wives or Air Force One.
No, it's the rich who want our money. And they were getting better at taking it. With the labor shortage working class folks are starting to realize no one gets rich if there are no workers and people are demanding better pay. Good for them.
It’s the same topic. Lots of middle class professionals have essentially the same output as their forebears did 40 years ago. They are not expanding the pie. They are nonetheless richer in absolute terms, but have pulled away in relative terms from those that are much more productive than their fore-bearers. This is perfectly fine but for envy.
> Lots of middle class professionals have essentially the same output as their forebears did 40 years ago.
No, they have much higher output.
> They are not expanding the pie.
They are.
> They are nonetheless richer in absolute terms
They are not. It takes two incomes to do what one income used to pay for. Lots of middle class people cannot afford to even buy a house. Something most of their parents managed to do at a young age.
> but have pulled away in relative terms
Yes, this has also happened.
> those that are much more productive than their fore-bearers.
Much more productive? That's also not true.
> This is perfectly fine but for envy.
If it were envy, the middle class wouldn't be asking for better wages. They would be asking to become rich. It's not envy.
I assume you’re fairly young. I know things look pretty grim at the moment, but in the longer term the younger people are going to be in the driver’s seat like few generations before. The demographic trends in most countries forecast aging populations that will face serious labor shortages. So the younger generations should be able to leverage that into better economic outcomes. But the tricky part will be in getting around the institutional barriers that the older generations have and will continue to put up in order to maintain the economic upper hand.
That makes sense on the surface, but often times it’s not the case. Turns out in a democracy where everyone thinks only of themselves the older and more numerous generations vote for their own pensions and protections and stiff the younger generations.
People always only think of themselves, democracy or not. That's been true since the dawn of time. That's why I said the younger generations will need to overcome some of the institutional barriers. Nothing is going to be just handed to them.
This is incorrect, it is a cultural phenomenon. There has always been a balance between doing constructive things for others depending on how close they are socially and caring for themselves. You have all the emotions, you know how it works.
There are tribes where no one cares who gave birth to the kids. We did countless wars and profited at the expense of others but if you fail to account for the soldiers moral it kinda not makes sense for them to make the ultimate sacrifice. We had many religions and some political ideologies where selfishness was not just not admired but frowned upon and undesirable. Most of our quality of life comes from previous generations doing the hard work for us, often intentionally. Try starting from scratch on the "only think of myself" principal and you get something nonsensical like Liberland.
Almost everything was just handed to you. You got a good hand of cards. Almost nothing was the result of you taking care of you.
So do what the boomers did and form unions. Working together, you can collectively demand higher wages, or shit does not get done. This has been proven out in practice to work - that's why the boomers did it in the first place. Is it perfect? No. But it gets you closer to where you want to go instead of bitching about wages being too low, then following it up with American Individualism and Exceptionalism.
And overcoming self imposed barriers, like investing in crypto and avoiding equities. It will be harder to overcome an older generation that owns all the means of production.
Can you cite a source? Every generation for the last 200 years has felt this way, and I was taught from an econ degree years ago that historic averages turned out to be ~1.2 jobs created for every job lost to automation. Economies also tends to be self balancing which further lends credance to the idea that it’s really hard not have an employed work force. I think the bigger problem isn’t automation, it’s the way we treat capex vs opex in corporate accounting. We’d go a long way to make paying someone more tax beneficial than to go the ludite route.
(I also don’t mean to downplay the pain if displacement from automation, it’s a very real problem and a reason I’m a big fan of social safety nets)
We are about to have a demographic crunch where we will have massive worker shortages. That is inherently inflationary, and we will need automation which is inherently deflationary if we want to keep the lifestyle we have.
that is not possible. it's like asking a plant to thrive in toxic soil
but humans are not like plants, they move and immigrate. look at southern europe for an example. Democracy serves a bad deal to younger generations and they know it
Funnily enough, I can't guess what generation you are in based on this comment. I'd argue it's pretty bad -- but not the end of the world -- for everyone from Zoomers to Gen X.
Are we supposed to feel bad for the Americans with a crummy hand? To most of the rest of the world it sounds like if Prince Harry laments he's not in as high of a point of succession as his father was.
People are complaining that entities in their government are favoring older generations over theirs. The government should not be discriminating based on age when it manipulates the financial markets to benefit retirees over the rest of the population.
The current conditions favoring the elderly were the policy decisions that quintupled the value of those houses.
For me the mistake is that the elderly aren't being favored at all, but the wealthy. The elderly are held up as helpless examples of the wealthy that need to be protected. But instead of protecting the elderly by directly taking care of them, which is obviously communism, it's important to protect the elderly by protecting the wealthy in general.
Nobody cares about the broke baby boomers. They get to work at McDonald's until they are automated into homelessness.
It’s getting to the point where it isn’t the boomers but their heirs that will benefit. The least we could do is eliminate the step up basis at death rule …
In a way though this fucks boomers pretty hard, if they didn’t invest very responsibly and have their money out of stocks in time. The stock market is down 20% this year and unlikely to recover (if you believe the idea of the article) let alone return to long-run >10% growth like previously.
Similarly we may be heading for a housing price crash at some point and that kinda screws boomers who hoped to use it as a piggybank.
None of this in any way offsets the incredibly sweetheart deal that boomers received and then voted to deny to future generations, however. Almost free college, houses that pentupled in price, a stock market that averages 10-11%, generous social benefits, etc.
If someone born in 1955 who started working in 1980 and then started saving money and investing into a diversified stock portfolio the current downturn sucks but isn’t the end of the world. Plenty of time in the market.
Sure, it always sucks if you are entering retirement when there’s a downturn (which someone born in 1955 would do right about now) but I wouldn’t even see the point in completely pulling out of stocks now.
I would say that if the prediction that returns will be lower in the future is true then this sucks for everyone not entering retirement right about now. They still need and want time in the marke
That's not any better, really. If you know what it's like to be impoverished (and I certainly do), it's very easy to commiserate with people who experience a substantial loss of means.
You aren't really whining, governments 20 years ago were worrying about "boom and bust" cycles but it feels like we only get "bust and bust" cycles at the moment.
The current boom cycle has been juiced for so long that there’s a whole generation of working people who have no idea what a bust looks like. My wife is one of them, and when I describe to her what things looked like after 2008, she thinks I’m just trying to scare her.
given the Federal reserve handling of the 2008 crisis by re-selling those bad debts and the time they had to do that was infinite everyone had enough of a warning already that when they got to the end of that selling of bad debt the returns on all other asset would be lower as the Federal Reserve tool used implies that economic aspect.
This is why the market was turning to real estate past the 2008 crises in the first place, especially among hedge funds in particular.
"Companies have been pumping and dumping for years, buoyed by cheap labor, and have not been intelligent enough to invest long term. And now, they're sad."
Rich countries have had very myopic development strategies for the past thirty to forty years. I could blame incompetence but I think it’s mostly because it allowed some happy few to make good money and they don’t really care about the citizenry at large.
My own country in Europe decided they were going to bet everything on high-end services and R&D while outsourcing all production. Apparently it wasn’t obvious to them that when you don’t produce you lose the culture and knowledge base necessary to do good R&D and that the countries they were outsourcing to would develop and stop relying on us.
This is because we've decided short term local optimization is somehow optimal. Just let every business maximize profits and everything will be good. Mention externalities and people will deny they exist, or try to tell you they're already accounted for.
> Just let every business maximize profits and everything will be good
Not quite right. You should have said maximize short-term profits.
As an example from forestry. If you manage sustainably, such that cutting resembles natural loss, your forest produces high-quality wood for centuries and also provides revenue from i.e. lodges, salmon, and carbon offsets.
So profit from that land over 100 years is X
Or you clear-cut it, and realized 1/10th of X in 5 years. And make the land very low value for the remaining 95.
The issue is short-term local optimization, as you claim.
What bothers me is someone will claim that cutting the whole forest is the best thing to do, because if it wasn't, the market would have done something else, like run it sustainably.
Nobody points out that management does what it is incentivezed to do, and that those incentives ought to be fair game for negotiation. Or at least for commentary.
I’ve been in meetings where rich elders openly admit to ageism; who cares about the problems this will create, they said, they’ll be dead by then!
This was back in the 00s before the last decade plus of expanded info awareness.
Scientific measure of fossil fuels impact on environment was achieved in 1860s. How long the runway is before catastrophe has been modeled and then hidden away over and over.
There is absolutely no reason to bequeath immense influence on human agency to the aristocrats. One small time polluter in the middle of BFE has nothing on Intel and Apple.
The stock market has many stocks. Many will crumple and suffer from higher interest rates, less globalization, etc. However people who got used to investing in the market easily are not going to move their money elsewhere for a while if at all. Instead it seems like many are pulling money out of index and small cap and moving them into a handful of monopoly stocks, thus concentrating the gains and potentially creating FOMO. Some stocks do well even in down markets and with high interest rates on real estate, they seem an easy target.
Real terms only work in the past. These are future predictions about interest rates staying high. They would need to be making estimates about future inflation then and if history is any indication the fed always gets it wrong.
Remember, inflation has been extremely low during the period of low interest rates as well which they are referring to. If inflation stays high, even with high interest rates, that will make a big difference.
> "I argue that the boost to corporate profits from lower interest and tax expenses is unlikely to continue, indicating notably lower profit growth, and thus stock returns, in the future."
Given the author's CV this argument feels at least 10 years too late.
That is, aren't the organizations (e.g., The Fed) accountable for considering the impact of their decisions, as well as the broader context? That is, aren't they responsible for anticipating?
This sounds like too little too late. More CYA than sincere insights. And while from early Sept, appropriately timed for early November impact.
I think you are right to criticize chiefalchemist, the comment is more snark than substance.
The argument, as far as I understand it, is that if the Fed knew/believed in the arguments in the linked article, they would or should have acted differently over the last 10 years.
The argument falls apart because no reason is given for the Fed acting differently. The Fed does not have a mandate to maintain corporate profitability nor does it set tax rates. They are surely aware that their actions have impacts on corporations, and they surely do consider this, but their mandate is clear:
The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
All of the things mentioned in the article impact the Fed's mandate.
It is like saying that the GFC didn't impact the Fed's mandate...but, ofc, we know it did because they cut rates to zero and gave hundreds of billions out. Funny how that works: the Fed has no responsibility when stock prices go up, but when they go down...immediate action.
And 2008 happened, in part, because of the cut to 1% in 03-04 (no-one understand this today, synthetic CDO issuance pre that cut cycle was non-existent and suddenly went to tens of billions overnight because there was insufficient AAA securities with yields that could fund liabilities). We are just going through the same stuff over and over.
These things have very real economic effects, they lead to massive volatility in employment, instability in prices, and have led to financial distortions that undermine basic aspects of how an economy functions (interest rates/the price of money no longer means anything outside of what the govt says it does, the result has been the most epic misallocation of capital in the history of the US economy).
The Fed has A LOT of power and influence both in the direct impact of its actions, as well as the leadership and "culture" it establishes among its group-think peers. You're naive to think otherwise.
Why are you making excuses for them? Instead of holding them to the higher standard they claim to be.?
He's not making an argument. He's stating the obvious. With zero sense of shame and humility. Right? So to what end? FFS, this isn't a random fluff piece on Medium. It's from the most power financial organization in the world. And we're supposed to get just nod and get behind this?
I'm not speaking to the individual per. He's simply another (over-educated) representative of a mindset that creates more problems than it solves. The Fed coming out in Sept of 2022 and proposing the "argument" is comical at best. Apparently, not a single history course is requited to get those flashy degrees, nor is staying up on current events. Instead, they toss this out as something insightful and profound in a "oh we didn't see this coming sorta way"? Only the naive would buy this.
The bottom line: The Fed is making decisions without a sense for the broader context and/or broader impact is negligent and irresponsible. This is too little too late.
We don’t know that. The Fed has been saying since 2021 they were going to raise rates. Thousands of people who get paid billions of dollars mostly missed it. Powell is either going to go down in history as someone who successfully transitioned to more normal rates or he wrecked the economy. This article isn’t the commentary of the FRB
> Thousands of people who get paid billions of dollars mostly missed it.
Did they? In the 2007 sense? Where are the suicides? Where are any similar indicators? Anyone who didn't recognize the signals and the pressures being created is then highly overpaid.
But being overpaid seems to be what happens when you happen to be in the right place at the right time.
Regardless of what we don't know. We do know the income inequality gap keeps increasing. We do know more wealth is being concentrated in fewer hands. Well, we know this. Apparently the Fed likes to pretend otherwise.
Where is the data that says thousands missed it? Sure it might not be the super easy money model the Fed shamelessly provided. But I don't see anyone leaving Wall Street, etc. cause the compensation and opportunity sucks.
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We've seen a huge run-up in the stock market thanks to cheap domestic and cheap foreign labor, globalization, historically low interest rates and historically low corporate taxes.
Interest rates are rising massively and globally to combat inflation.
Labor prices are increasing, globally.
There is a global decoupling thanks to the Russia/Ukraine situation and the China/Taiwan tension. This is bringing the era of globalization to its end.
Corporate US taxes have been as low as they'll get for a long time due to the TCJA and will most likely only go up from current rates.
Given all these factors combined, it's unlikely that price/earnings will hold at the current high ratio i.e. stock prices have a long way to fall still. This article was published almost two months ago, but I believe it will be relevant for the next several years. We're in for a long slow decline and then a plateau. The era of cheap labor, free money, low taxes and open global markets has come to an end.