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The abstract does a great job of summarizing the OP's findings: > I show that the decline in interest rates and corporate tax rates over the past three decades

by cs702 2y ago

The abstract does a great job of summarizing the OP's findings: > 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. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever- declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future. Great paper, very though-provoking. Thank you for sharing it on HN!

deleted 2y ago
[deleted]
yieldcrv 2y ago
I think more stock traders should be bond traders, or learn how that seemingly boring market works. Too many people are stuck on technical analysis concepts from the 1980s because their first exposure was related to them. The bond market is such a larger market than the entire stock market that its very easy to quantify the money flows out of the central banks, into that market and to other markets such as the stock market. How people are aiming to frontrun central bank behaviors. Then it no longer matters if a PE ratio doesn't match your historical sector expectations, it no longer matters if an RSI is in overbought territority for longer than you thought. You dont have to rationalize your inadequate trades as “the market being irrational longer than you can remain solvent”, you can just make better trades understanding where the money is going, how it behaves.
wiz21c 2y ago
> decline in interest rates and corporate tax rates mechanically explain over 40 percent of the real growth I interpret that as : "capitalists have taken over the control of our governments"... Is that right ?
- WJW 2y ago
  That's what you want to read. All the paper says is that interest rates and corporate tax rates have fallen over the past three decades. There were a variety of reasons for that, only some of which had anything to do with capitalists in the government.
- deleted 2y ago
  [deleted]
- AndrewKemendo 2y ago
  That is correct. Well documented and the Princeton oligarchy study [0] cemented what left wing authors have pointed out for decades. [0] https://www.bbc.com/news/blogs-echochambers-27074746.amp https://www.bbc.com/news/blogs-echochambers-27074746.amp
  - carapace 2y ago
    From the abstract of the paper: > Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. https://www.cambridge.org/core/journals/perspectives-on-politics/article/testing-theories-of-american-politics-elites-interest-groups-and-average-citizens/62327F513959D0A304D4893B382B992B https://www.cambridge.org/core/journals/perspectives-on-poli... However, it's not correct that "capitalists have taken over the control of our governments" (unless you're speaking as British royalty of the American Revolution, eh?) rather they set up the governments in the first place.
    - AndrewKemendo 2y ago
      I’m totally on board with the idea that we were never a valid democracy - and effectively a defacto oligarchy - to begin with
      - lurking15 2y ago
        Oligarchy is the unavoidable state of human society, even in communism as it’s ever been instantiated you have oligarchy
AnimalMuppet 2y ago
Higher returns because of higher profits due to decreasing interest rates, and higher P/E due to decreasing interest rates. But it can't keep going like that in the future, because interest rates have very little room to decrease further. Therefore stock prices cannot keep going according the trend we've seen in the last 40 years. Makes sense to me. It was a really nice ride. Kind of a drag for the next generation, though. I wonder if this explains some of the increasing inequality. Those who have stocks are getting outsized gains; those who don't, aren't. If so, then inequality may not continue growing the way it has been.

by cs702 2y ago

deleted 2y ago

[deleted]

yieldcrv 2y ago

I think more stock traders should be bond traders, or learn how that seemingly boring market works. Too many people are stuck on technical analysis concepts from the 1980s because their first exposure was related to them. The bond market is such a larger market than the entire stock market that its very easy to quantify the money flows out of the central banks, into that market and to other markets such as the stock market. How people are aiming to frontrun central bank behaviors. Then it no longer matters if a PE ratio doesn't match your historical sector expectations, it no longer matters if an RSI is in overbought territority for longer than you thought. You dont have to rationalize your inadequate trades as “the market being irrational longer than you can remain solvent”, you can just make better trades understanding where the money is going, how it behaves.

wiz21c 2y ago

> decline in interest rates and corporate tax rates mechanically explain over 40 percent of the real growth I interpret that as : "capitalists have taken over the control of our governments"... Is that right ?

WJW 2y ago
That's what you want to read. All the paper says is that interest rates and corporate tax rates have fallen over the past three decades. There were a variety of reasons for that, only some of which had anything to do with capitalists in the government.
deleted 2y ago
[deleted]
AndrewKemendo 2y ago
That is correct. Well documented and the Princeton oligarchy study [0] cemented what left wing authors have pointed out for decades. [0] https://www.bbc.com/news/blogs-echochambers-27074746.amp https://www.bbc.com/news/blogs-echochambers-27074746.amp
- carapace 2y ago
  From the abstract of the paper: > Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. https://www.cambridge.org/core/journals/perspectives-on-politics/article/testing-theories-of-american-politics-elites-interest-groups-and-average-citizens/62327F513959D0A304D4893B382B992B https://www.cambridge.org/core/journals/perspectives-on-poli... However, it's not correct that "capitalists have taken over the control of our governments" (unless you're speaking as British royalty of the American Revolution, eh?) rather they set up the governments in the first place.
  - AndrewKemendo 2y ago
    I’m totally on board with the idea that we were never a valid democracy - and effectively a defacto oligarchy - to begin with
    - lurking15 2y ago
      Oligarchy is the unavoidable state of human society, even in communism as it’s ever been instantiated you have oligarchy

AnimalMuppet 2y ago

Higher returns because of higher profits due to decreasing interest rates, and higher P/E due to decreasing interest rates. But it can't keep going like that in the future, because interest rates have very little room to decrease further. Therefore stock prices cannot keep going according the trend we've seen in the last 40 years. Makes sense to me. It was a really nice ride. Kind of a drag for the next generation, though. I wonder if this explains some of the increasing inequality. Those who have stocks are getting outsized gains; those who don't, aren't. If so, then inequality may not continue growing the way it has been.