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Very interesting paper. > I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period

Very interesting paper. > I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. It's interesting that they've shown this to the exclusion of other narratives, mainly frontier markets like semiconductors and software allowing "easy" creation of value. I think this is partially why investors are so eager to dump so much cash into AI/why Zuckerberg has been so focused on VR/AR—they're looking not just for a solid investment, but an opportunity to get into the rent-seeking class on the ground floor. Why would you invest in a piece of software when you could invest in a "platform" (aka privately-owned market) instead? Of course, we can't just create these platforms out of nowhere—they require enormous moats like exclusive access to IP or regulatory capture or enormous production capacity or some sort of similar gimmick, and there's only a finite number of these. It seems like this is also a significant reason why growth isn't infinite and should be expected to slow and even reverse in time. I haven't finished the paper but I eagerly look forward to reading it in full later. EDIT: spelling, wording, I'm done editing; apologies.

VirusNewbie 2y ago
well, they're looking at earnings growth, not profit margins. You could have a company that increases profitability YoY and not grow revenue as well. It's less typical, but certainly possible with technology companies. I think this paper misses that fact.
- nine_k 2y ago
  This is fair. But the theoretical maximum of profitability is 100% of revenue. A company that increased their revenue 10x while keeping the same 10% profit margin (both numbers quite normal) achieved the same profit as if it kept the revenue the same and grew profitability to 100% (pure fantasy). Also, larger streams of money create the economic multiplier effect.
nostrademons 2y ago
Semiconductors and software have created enormous amounts of value for the companies that own them, but the Fed usually thinks in macroeconomic terms. For the macro economy, the effect of technical development on overall corporate profits is much more muted. Creative destruction destroys old industries as much as it creates new ones. For example, there's a TV show "Mad Men" about the dominance of Madison Avenue advertising firms; Google and Facebook have completely destroyed this industry. Berkshire Hathaway annual reports from the 1970s and 1980s used to say that the local newspaper for each major metro area was a natural monopoly and reliable source of corporate profits; now, this industry has been reliably commoditized by the Internet. Of course, the creative destroyers in question would much rather focus on the "creation of value" narrative, because it avoids attracting attention (and competition or regulation) from the industries that they're about to destroy. So there are pretty significant information distortions in the popular narrative. Interest rates and corporate taxes have the property that they affect the whole market, which makes them much more useful to the Fed. If you bought NVidia in 2022 or Apple in 1998, congrats, you made a good investing call. But if you bought the S&P 500 in 2009 and are congratulating yourself on your 600% returns over the decade, you should know that most of that is because of low interest rates, and if the low interest rate environment unwinds, so will your stock portfolio.
- psunavy03 2y ago
  Interest rates have been all over the map over the last 60 years, including double digits in the 80s, and yet low-cost index funds have been a reliable driver of wealth that entire time.
  - nostrademons 2y ago
    "That entire time" only holds if you're looking at 20+ year time horizons, and zooming in shows the effect of interest rates. If you bought the S&P 500 in November 1968 and sold it in July 1982, you lost money in nominal terms, despite the CPI nearly tripling during that time period (so in real terms, you lost 2/3 of your investment). During that time period, interest rates went from 6% to 19%, also roughly tripling. Then if you held from 1982 to 1987, the S&P 500 nearly tripled, despite low inflation and relatively few major technological changes. What was the difference? Interest rates went from 19% to 6%. A useful lens with which to view this and other phenomena is "Which factors cancel out, and under what timeframes?" Technological development leads to large microeconomic winners and losers but little macroeconomic effect under short time frames, less than the business cycle, because the mechanism by which it increases overall welfare is to put workers out of work and firms into bankruptcy, freeing up those workers and that capital to be invested in new enterprises. Interest rates have a large effect over that timeframe, because they affect all firms in the economy equally. Over long time frames (multiple business cycles), the effect of interest rates washes out because they go up and then they go down and eventually they equilibrate near the long-term average. Technological development dominates then because you've given the economy a chance to adapt to new production methods and re-employ workers in obsolete jobs.
fnordpiglet 2y ago
I call bullshit. Tax rates and interest rates certainly help spur investment and expansion of production but it’s hard to look at the world we live in today, with electric cars that can self drive and hand held devices connected to natural language comprehending oracles of knowledge, JIT industries end to end, starships to mars for colonization in mid to late stages, etc, and think “yep the only value is the value the federal reserve has created” as a federal reserve economist posits.
- crystalmeph 2y ago
  https://en.wikipedia.org/wiki/Productivity_paradox https://en.wikipedia.org/wiki/Productivity_paradox. "You can see the computer age everywhere but in the productivity statistics." There are definitely companies that are winning from the tech you pointed out, sure. The companies that make robotaxis and the companies that sell AI subscriptions are going to make bank. But at an aggregate level, that robotaxi means a human tax driver is no longer working, and if every sales person has their own personal robot translator for talking to foreign clients, then none of them has a competitive edge over the others, they've just had to invest that money in order to avoid giving up a competitive edge. That OP paper's argument is basically that the only rising tide that truly lifts all economic boats is being able to keep more of the money you make instead of having to spend it on interest or taxes. So the age-old wisdom of "just buy an index fund" may have run its course, and you will actually have to pay attention to valuations instead of just blindly buying the market going forward.
  - ryandrake 2y ago
    > So the age-old wisdom of "just buy an index fund" may have run its course, and you will actually have to pay attention to valuations instead of just blindly buying the market going forward. The efficient-market hypothesis would probably disagree. If "paying attention to valuations" ever consistently produces greater returns, then index funds will start weighting their holdings in such a way to capture that value. If it produces greater returns, but not consistently, then we're back to gambling and things like technical analysis and trying to time the market.
  - 2y ago

VirusNewbie 2y ago

well, they're looking at earnings growth, not profit margins. You could have a company that increases profitability YoY and not grow revenue as well. It's less typical, but certainly possible with technology companies. I think this paper misses that fact.

nine_k 2y ago
This is fair. But the theoretical maximum of profitability is 100% of revenue. A company that increased their revenue 10x while keeping the same 10% profit margin (both numbers quite normal) achieved the same profit as if it kept the revenue the same and grew profitability to 100% (pure fantasy). Also, larger streams of money create the economic multiplier effect.

nostrademons 2y ago

Semiconductors and software have created enormous amounts of value for the companies that own them, but the Fed usually thinks in macroeconomic terms. For the macro economy, the effect of technical development on overall corporate profits is much more muted. Creative destruction destroys old industries as much as it creates new ones. For example, there's a TV show "Mad Men" about the dominance of Madison Avenue advertising firms; Google and Facebook have completely destroyed this industry. Berkshire Hathaway annual reports from the 1970s and 1980s used to say that the local newspaper for each major metro area was a natural monopoly and reliable source of corporate profits; now, this industry has been reliably commoditized by the Internet. Of course, the creative destroyers in question would much rather focus on the "creation of value" narrative, because it avoids attracting attention (and competition or regulation) from the industries that they're about to destroy. So there are pretty significant information distortions in the popular narrative. Interest rates and corporate taxes have the property that they affect the whole market, which makes them much more useful to the Fed. If you bought NVidia in 2022 or Apple in 1998, congrats, you made a good investing call. But if you bought the S&P 500 in 2009 and are congratulating yourself on your 600% returns over the decade, you should know that most of that is because of low interest rates, and if the low interest rate environment unwinds, so will your stock portfolio.

psunavy03 2y ago
Interest rates have been all over the map over the last 60 years, including double digits in the 80s, and yet low-cost index funds have been a reliable driver of wealth that entire time.
- nostrademons 2y ago
  "That entire time" only holds if you're looking at 20+ year time horizons, and zooming in shows the effect of interest rates. If you bought the S&P 500 in November 1968 and sold it in July 1982, you lost money in nominal terms, despite the CPI nearly tripling during that time period (so in real terms, you lost 2/3 of your investment). During that time period, interest rates went from 6% to 19%, also roughly tripling. Then if you held from 1982 to 1987, the S&P 500 nearly tripled, despite low inflation and relatively few major technological changes. What was the difference? Interest rates went from 19% to 6%. A useful lens with which to view this and other phenomena is "Which factors cancel out, and under what timeframes?" Technological development leads to large microeconomic winners and losers but little macroeconomic effect under short time frames, less than the business cycle, because the mechanism by which it increases overall welfare is to put workers out of work and firms into bankruptcy, freeing up those workers and that capital to be invested in new enterprises. Interest rates have a large effect over that timeframe, because they affect all firms in the economy equally. Over long time frames (multiple business cycles), the effect of interest rates washes out because they go up and then they go down and eventually they equilibrate near the long-term average. Technological development dominates then because you've given the economy a chance to adapt to new production methods and re-employ workers in obsolete jobs.

fnordpiglet 2y ago

I call bullshit. Tax rates and interest rates certainly help spur investment and expansion of production but it’s hard to look at the world we live in today, with electric cars that can self drive and hand held devices connected to natural language comprehending oracles of knowledge, JIT industries end to end, starships to mars for colonization in mid to late stages, etc, and think “yep the only value is the value the federal reserve has created” as a federal reserve economist posits.

crystalmeph 2y ago
https://en.wikipedia.org/wiki/Productivity_paradox https://en.wikipedia.org/wiki/Productivity_paradox. "You can see the computer age everywhere but in the productivity statistics." There are definitely companies that are winning from the tech you pointed out, sure. The companies that make robotaxis and the companies that sell AI subscriptions are going to make bank. But at an aggregate level, that robotaxi means a human tax driver is no longer working, and if every sales person has their own personal robot translator for talking to foreign clients, then none of them has a competitive edge over the others, they've just had to invest that money in order to avoid giving up a competitive edge. That OP paper's argument is basically that the only rising tide that truly lifts all economic boats is being able to keep more of the money you make instead of having to spend it on interest or taxes. So the age-old wisdom of "just buy an index fund" may have run its course, and you will actually have to pay attention to valuations instead of just blindly buying the market going forward.
- ryandrake 2y ago
  > So the age-old wisdom of "just buy an index fund" may have run its course, and you will actually have to pay attention to valuations instead of just blindly buying the market going forward. The efficient-market hypothesis would probably disagree. If "paying attention to valuations" ever consistently produces greater returns, then index funds will start weighting their holdings in such a way to capture that value. If it produces greater returns, but not consistently, then we're back to gambling and things like technical analysis and trying to time the market.
- 2y ago