The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023) | Hacker News Reader

The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

federalreserve.gov

132 pointsluu142 comments

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!

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.

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.

> 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 ?

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.

No, not really --it means financial engineering became more important than actual engineering for stock valuations.

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

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-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.

I’m totally on board with the idea that we were never a valid democracy - and effectively a defacto oligarchy - to begin with

Depends on what you mean by "valid". King George probably thought we weren't but not in the way you mean, eh?

We could draw a line from the Magna Carta to the Equal Rights Amendment.

Democracy is a work-in-progress.

Moreso the 3/5ths compromise means the republic didn’t actually represent a significant portion of their claimed collective territories inhabitants. The articles of confederation was a business arrangement primarily to consolidate a market with similar laws for the ability to monopolize the cotton market. Of which Britain was largest purchaser btw.

So yes, from the beginning the Americas were a free “wilderness” that economic colonialism torched through. The Holocaust of first nations is just not even recognized as anything worth mentioning it seems.

So yeah - as KRS One would say: “you can’t have justice on stolen land.”

I bring up the genocide of the First Nations a lot. Slavery too.

The point of the Revolution wasn't that the USA became a utopia instantly, the point is that they threw out the king and then didn't make themselves kings.

Establishing and extending freedom and human rights has been and continues to be a slog, a hard-fought and ongoing battle.

In re: the original statement, the capitalists didn't take over the government, they started it, and we the (rest of the) people are taking it over from them.

I’d generally agree here - though frankly I don’t think it’s as notable as the “founders” want it to be that they didn’t immediately declare themselves lords (despite doing that for 100 years prior)

I currently live in “Prince William” County. Take that for what you will but it’s not cause lordships weren’t around

I don’t think anyone should get points for not behaving like a psychopath

Yeah I think we're in general agreement. Cheers.

> I don’t think anyone should get points for not behaving like a psychopath

Absolutely, but what counts as psychopathy has changed over time.

We're getting away from the main thread here, but uh, one of my personal favorite historical ideas is that the modern political concepts of freedom and democracy come from the Iroquois:

> Historians in the 20th century have suggested the Iroquois system of government influenced the development of the U.S. government,[293][294] although the extent and nature of this influence has been disputed.

https://en.wikipedia.org/wiki/Iroquois#Influence_on_the_Unit...

In any event, it seems to me that we are recovering from some trauma in the past (I like the Younger Dryas for this but it doesn't really matter what the disaster was) and most of the psychopathy we see today is the residue of trans-generational PTSD.

> “Prince William” County

I guessed before checking that that's in Virginia. I haven't read it yet but "Albion's Seed" makes some interesting points (IMO):

> Albion's Seed: Four British Folkways in America is a 1989 book by David Hackett Fischer that details the folkways of four groups of people who moved from distinct regions of Great Britain (Albion) to the United States. The argument is that the culture of each of the groups persisted, to provide the basis for the political culture of the modern United States.[2] Fischer explains "the origins and stability of a social system which for two centuries has remained stubbornly democratic in its politics, capitalist in its economy, libertarian in its laws and individualist in its society and pluralistic in its culture."[3]

> The four migrations are discussed in the four main chapters of the book:

> ...

> The South of England to Virginia - The Cavaliers and Indentured Servants (Gentry influenced the Southern United States' plantation culture)[5]

> ...

https://en.wikipedia.org/wiki/Albion%27s_Seed

In Virginia exiled British nobility did their best to carry on with the strict social hierarchy of lords and serfs.

All around agreement - though I’d nitpick the degree to which psychopathy was pervasive, accepted, recognized and promoted

Namely it seems to be very rare in hunter gatherers and highest in “advanced” economies

You can read my theory on the original resource trauma was here: https://kemendo.com/Myth-of-Scarcity.html

Yd might be causal to the loss of megafauna, but ultimately my claim is that was the loss of megafauna and resulting requirement to change society in the neolithic to domination based agrarianism

Riane Eiseler documented most of this in Chalice and the blade

That's a fascinating idea! The original trauma could just be when humanity reached the ecological limits of the Earth and the fundamental nature of life changed from Eden-like simplicity to competition with others for limited food/space.

(As an aside, you use "flywheel" as a metaphor for positive feedback loops, please don't do that. Flywheels are batteries not feedback loops. It's a pet peeve of mine, sorry.)

It gets a little ranty at the end, which I enjoyed, but you might want to separate out the paper from the rant?

In any event the population leveling out is a very good thing, as so many of our other problems stem directly from population pressure. However, don't forget the Amish! They are among the best farmers on the planet, they have huge families, and they don't fight nor do they use computers or high technology. I say it as a joke but there's some truth to it: the Amish are the meek who inherit the Earth.

In re: AI, the question of "what is good?" is open-ended, the AI force us to confront this question but AI (no matter how intelligent) cannot answer it for us. (cf. Wendel Berry's essay "What are People For?") In other words, Douglas Adams was right: the Earth and humanity are a computer calculating the answer the ultimate question of life, the Universe, and everything: "What is good? What are we for? Where shall we have lunch?"

In the meantime, I follow Bucky Fuller's ideas of the World Game and Design Science Revolution: apply our technology and resources to meet human needs efficiently without "disadvantaging anyone" and nobody has to get nailed to anything.

Politics is group therapy. Since there's enough to go around we don't have to fight each other anymore, we just have to flip back to the community and sharing mode from the competition and hoarding mode, which should be easy as the former is much more fun and fulfilling than the latter, eh? Graeber and Wengrow in "The Dawn of Everything" quote at length a letter from Ben Franklin:

> When an Indian Child has been brought up among us, taught our language and habituated to our Customs, yet if he goes to see his relations and make one Indian Ramble with them there is no persuading him ever to return, and that this is not natural merely as Indians, but as men, is plain from this, that when white persons of either sex have been taken prisoner young by the Indians, and lived awhile among them, tho’ ransomed by their Friends, and treated with all imaginable tenderness to prevail with them to stay among the English, yet in a Short time they become disgusted with our manner of life, and the care and pains that are necessary to support it, and take the first opportunity of escaping again into the Woods, from whence there is no reclaiming them. One instance I remember to have heard, where the person was to be brought home to possess a good Estate; but finding some care necessary to keep it together, he relinquished it to a younger brother, reserving to himself nothing but a gun and match-Coat, with which he took his way again to the Wilderness.

This was a Wilderness that had hosted large cities and civilizations that were swept away by diseases brought by the Spanish a few centuries earlier. ("1491" https://www.theatlantic.com/magazine/archive/2002/03/1491/30... https://en.wikipedia.org/wiki/1491:_New_Revelations_of_the_A... ) After the destruction of N. Am civilizations by plague things might have perhaps been a little bit like the old times before the Quaternary Megafauna Extinction, at least for a couple of centuries before the next wave of Europeans arrived.

Anyway, politics is group therapy: we can help people heal from the mal-adaptive mode to normal kindly mode with any of a number of therapies, provided of course that their other needs are satisfied (meaning the lower levels of Maslow's hierarchy. There has to be a context of safety and abundance to for community and sharing to be rational, eh?)

Oligarchy is the unavoidable state of human society, even in communism as it’s ever been instantiated you have oligarchy

This claim is historically inaccurate

Do you have an epistemological elucidation of your claim?

I don't know look at any organization in humanity, the most obvious one is what happened with the Democrat party, Biden is undeniably feeble and there was an entire oligarchic effort to deny that reality even during his 2020 campaign. We're told democracy is in peril if Kamala doesn't win when she's never been successfully entertained in a primary, in fact she's only lost with near zero support. That's apparently "popular will" when it's by now obviously nothing more than manufactured consent.

If you want more rigorous work, read up on Elite theory: https://en.wikipedia.org/wiki/Elite_theory

It's "the unavoidable state of human society" because there is a theory in philosophy, political science, and sociology, and that theory has some people advocate for that theory? That's not evidence. There are multiple other, conflicting, schools of philosophy and sociology, all of which have people that advocate for them.

Got any evidence?

So when I say - point at any organization even supposedly egalitarian ones and you'll see oligarchy. There are rulers and the ruled, rulers are abnormally competitive and willing to use deception and other underhanded tactics that normal people will not. Therefore in any organization of considerable power, rulers establish themselves, this has always happened in communism too. Unions devolve into the same power structure they seek to fight.

Have any evidence of an exception?

You made the claim. Evidence is the job of the one making the claim.

But, consider a good sports team. The coach is not chosen because he used underhanded tactics to triumph over other coaching candidates, but because he has a track record of being able to coach. The players are chosen, not because they win political contests, but because they're better at playing the game. The starters are chosen, not because they used deception, but because they're actually better players than the ones who are not starters.

And yes, I know you can find teams that are power structures rather than meritocracies. They tend to be the worst teams, though.

A sports team isn't a political body like a government or union. It's entertainment and performance can't be faked.

The Quakers.

https://en.wikipedia.org/wiki/Consensus_decision-making

I think it's really naive to think that Quakers were somehow immune to basic power structures found in every society. Even emphasizing consensus as an ideal or practice doesn't mean there aren't the same oligarchic structures and power brokers you find everywhere else.

Clearly you've never hung out with Quakers.

You asked for a counter-example, I provided one, you dismiss it with no evidence.

Truly has it been said, "You can lead a horse to water but you can't make it drink."

I’ve found in this debate - and most - that almost nobody holds a position from first principles but rather an experience they had.

Not possible to reason someone out of a position they didn’t reason into

There’s a certain sort of left leaning person who’d be triggered by reading about elite theory and oligarchy and I suspect that’s what I’m up against but sure impugn me as unprincipled.

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.

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.

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.

"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.

Broad index funds are indeed recommended to be held for a very long time for maximum yield. Continuous investment over at least 15 years is better precisely because it spans multiple business cycles and allows taking advantage of the lower prices during dips and recessions. But that's completely fine for those that want to save up for retirement.

The US population today is twice what it was in 1960. I know I am oversimplifying, but so much of the the history of long term growth could be intepreted as older people benefitting from progressively larger younger generations. More people = more production and more consumption = growth. I really wonder if this is sustainable with the projected future of population decline.

https://fred.stlouisfed.org/series/DGS10/

Zoom out to "Max" to get the full 60 year history. You can clearly see a full four decades of declining interest rates running from 1981-2020. That very neatly corresponds with the amazing stock market growth most HN readers, myself included, have grown up with.

The stock market growth is neatly correlated with declining interest rates, not with the actual value of the interest rates currently. That is, until the interest rates can't go any lower. The 10-year yield got as close as I hope it will ever get to zero back in 2020. There's nowhere to go but up from there.

For myself, I'm dusting off the old magic - a 60/40 stock/bond portfolio, with the stocks focused on value funds, plus a relatively small amount in "breakout" funds that could multiply a few times if technology goes the way I think it will. Maybe if interest fall a little bit I'll dial it to a 70/30 mix, but bonds are definitely part of the equation now.

But if interest rates rise, bonds lose too. That is, the bonds you hold today lose market value (the value you could get if you sold them today). The longer the duration of the bond, the more they lose. So if you expect interest rates to rise, I'm not sure holding bonds (especially long bonds) is the protection you want.

On the other hand, I may be missing something. Ray Dalio's All Weather Portfolio is 55% bonds, and it's supposed to be safe-ish for any market conditions.

They lose in the short term, but if you're buying and holding to maturity, you get that money back. If you're worried about losing "market value" in a rising interest rate regime, buy shorter-term bonds. You can buy short-term bond funds, or buy bonds individually on Fidelity, Vanguard, etc.

Google, Facebook and other internet platforms destroyed the viability of the industry previously providing the advertising mediums, which were newspapers/magazines. They didn't completely destroy the ad agencies creating the advertising. Large advertising firms are still responsible for many ads seen on YouTube, tv, billboards or on static Google/Facebook ads.

> Creative destruction destroys old industries as much as it creates new ones.

Yes, of course, but this frequently comes with significant productivity benefits. This is what I'm referring to when I say "creating for free". These marginal productivity improvements are going to be harder and harder to come by over time. Huge fan of Schumpeter, btw.

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.

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.

> 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.

I’d argue productivity measured in economic activity is measuring the wrong thing. Looking at my personal life I have paid about the same amount for an iPhone since they came out, and probably less on computing hardware YoY over my life time. However it’s impossible to say my iPhone today is equivalent to the iPhone I bought 15 years ago, even though the nominal price is the same. What these nominal values fail to price is the “quality” of stuff improving while prices and demand for “more shit” doesn’t keep up. At some level we have enough shit, and we expect things to be about the same price year over year for something that has improved materially over that time. Where does this get valued?

I also think a goal of full employment naturally leads to a flattening of productivity. We hire a lot of people to do work that isn’t super productive because we consider employment more important than raw numerical superiority. We probably could let go many people and improve productivity at a great expense to social cohesion. This doesn’t seem like progress to most people if we had 30% unemployment. To the papers point low interest rates and reducing taxes creates a lot of space for inefficient employment. There even might, if you get particularly breathless, be a time post scarcity when employment itself is anachronistic. But as we have no method of social or communal distribution today in capitalists societies, we would need to find a way to keep people pecking for food pellets. Productivity would fall off a cliff at that point.

I thing what this paper illustrates more than anything is that productivity as a measure of value is pre-automation industrial thinking that we largely stick with because it’s really a lot harder to measure anything else. Valuations in the stock market IMO have decoupled from traditional economic measures because those measures are flawed and don’t explain how we value things in modernity.

> 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.

I agree that we're still producing new technology, but just because a certain technology is impressive doesn't mean it's going to yield a lot of value to investors or yield a lot of marginal improvement to productivity. Perhaps I'll be demonstrated wrong when we start mining asteroids and flooding the market with massive productivity shifts again, but there's not exactly any sign this is right around the corner. There's certainly no reason to assume growth as a market invariant just because of technological development has led to growth in the past.

The best writing on economics I have ever read is in the book Chance and Chaos by David Ruelle.

Ruelle gives some thoughts on economics but ultimately concludes something like "we don't currently have the tools needed to properly study this subject".

> starships to mars for colonization in mid to late stages

?? Did I miss a news article?? I know we've successfully landed on the moon, but we don't have reliable ways of commuting there let alone setting up a colony.

I even hear about astronauts stuck in orbit for months at a time.

mars is just a little bit further away and has similar atmosphere problems as the moon.

I don't think that's the claim. The claim is that the stock market outperforming the historical trend is due to declining interest rates.

I mean, there was value created in the 1960s and 1970s, too - computers! Minicomputers! Microcomputers! Transistor radios! Walking on the moon! 747s! Much better railroad engines! The start of the internet! The interstate highway system! And on and on. But it wasn't showing up in the stock market. Why not? Because the interest rates were rising, and almost all of the gains were disappearing into that headwind.

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.

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.

Quite a few authors have pointed out that the "financialization" of American businesses, with a focus less on innovation or investing in their workforce and more on massaging their numbers to meet shareholder expectations, has created a lot of short-term enrichment for the super-wealthy while absolutely destroying the middle class as we know it. This seems like more fuel for that fire.

Businesses are primarily valued based on their discounted future cashflows. American businesses are worth much more than their European counterparts because investors (correctly) expect that American businesses will more aggressively seek profit. By contrast, businesses that don’t make money and that are not expected to make (much) money in the future are worth nothing.

In most countries the stock market doesn’t go up. European stock markets needed ~15 years to recover from the 2008 highs because European businesses don’t make money. The Japanese stock market has languished for 30 years. Chinese businesses that get too cocky get the Jack Ma treatment. Turkey and Venezuela had their currencies collapse.

American financialization has its downsides for sure. Some American businesses will do grossly immoral things for profit. But nonetheless having a functioning stock market that rewards good capital allocation is a great thing. Otherwise all money will just end up in real estate and that is way worse for society.

European companies can be very profitable but they aren't growing.

Tesla vs all other car manufacturers is a great example. Most car manufacturers have higher profits than Tesla, still the market cap of all car companies combined is challenged by Tesla alone.

Really, anyone with a 401k or similar investments has benefited from this. That's a lot of middle class folks. Your parents, your grandparents, and very likely you. It's far from limited to the super-wealthy.

The 401k is an invention that is yet to prove its efficacy. The first 401ks were opened in 1978, so if you were entering the workforce then you’d be retiring this decade!

So, we will see if this privatization of pensions really benefits us all or merely enriched a generation of asset managers while absolving the corporate and the government from providing pensions for workers.

Traditional pensions are fundamentally unsustainable endeavors under modern demographics. You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population. As we've seen, all retirement funds, even the remaining pensions, have largely switched their investments to the stock and bond markets in the vain hope that this fundamental conundrum will be solved through moonshots and financial tricks. The 401(k) is just one piece of a much bigger puzzle.

I agree with your general idea here but could it not be argued that pensions are just an abstraction on top of 401ks in the sense that if the demographics are shifting such that non-producers outweigh producers then you would expect the economy and business profits to suffer. These effects would cause broad slow growth or even reductions in business valuations, and therefore poor performance in investment accounts broadly.

Yes, and I think that describes the past few decades in Japan (among other factors).

Other options included pensioners taking a haircut and/or workers taking a paycut, neither of which is particularly palatable and still runs us into the ground eventually. Increasing corporate taxes could square the circle for a little while, but then corporations would slowly move more operations offshore, decreasing tax revenues eventually anyway. There's also the option of cutting other government expenditures, but eventually that stops working and at least some of the things that were cut can't stay un(der)funded forever.

The only other (distantly) feasible idea I can think of would be, again with an eye to Japan (of the past), near-total isolation from other countries economically, but that would have an even more substantial stagnating effect.

> You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population

How does this jibe with ever-increasing profits?

An S&P 500 index fund has an average annualized rate of return of about 8% over the past 50 years. It is barely beating inflation but if you can accept the risk that you might be in a -10% year at any given time instead of a +20% year then it's the best place to put your money. This is where those profits are going, and that long-term rate of return hasn't moved much.

A traditional pension fund cannot afford that kind of risk without a massive cash buffer and could not have captured that value anyway because it cannot cover its own firm's losses with some other firm's gains. After all, it's not like the same 500 companies are occupying the index as decades ago, and even those that stick there have changed relative positions a lot.

The only thing that could have conceivably replaced traditional pensions and captured all of this value and given it to the workers "fairly" without suppressing the factors that made it possible would have been a sovereign wealth fund run passively but competently by the government, but such a thing is in and of itself a moonshot.

I don't have the references on my finger tips, but basically I recall 401ks to be a bad deal for most employees because of mismanagement by the account holder, high fees, ill timed trades, etc. A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds, contributed regularly and avoided moving money around at the wrong time or at all.

No doubt there is a history of shenanigans in 401ks, especially early on. But if you're dollar-cost averaging into low-cost index funds, you should avoid that.

> A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds

I think it's more than "a few". For one thing, many 401k-equivalent funds that government employees can make contributions to are low cost index funds, and there are lots of government employees. For another thing, most 401ks offered by large corporations also offer low cost index funds, which many employees contribute to because they're usually the default that you get if you don't pick something else, and there are lots of employees of large corporations.

Low-cost index funds don't protect you from ill timed trades. I remember reading during the 2008 financial crisis that many account holders basically bailed into much more conservatively allocated funds as they watched there net worth plummet and were not able to benefit when the markets rebounded. They bought high and sold low. Most people do not have the stomach to watch their retirement savings quickly evaporate, unfortunately.

> Low-cost index funds don't protect you from ill timed trades.

Nothing can protect you from ill timed trades.

However, trades can only be ill timed if they are made. If you just pick an index fund with an appropriate time horizon for your planned retirement and then leave it alone, you don't have to worry about ill timed trades because you aren't making any trades at all.

It's a lot, but still it's only ~50% of US households[1]. So the other 50% are not benefiting at all from a rising stock market, except very indirectly (companies with happy earnings reports less likely to lay them off). And even that indirect benefit is not a given.

1: https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...

Yep.

But I'm so extremely skeptical the "your 401k will always go up by 10%" argument is going to continue to hold for more decades.

Eventually the blood they are squeezing out from companies and consumers will run out...

If the US economy keeps growing then American businesses will do well and the stock market will reflect that. It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity.

> It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity

I don't understand this viewpoint - this seems like the obvious end result of the last 50 ish years of tomfoolery.

The US doesn't make anything anymore, our economy is purely theoretical. We're lying on a huge scale and scamming, and that's how we have our economy. We gave up entire industries - and almost all of them - to foreign countries. China, Korea, Japan, Bangladesh and on and on.

Yes, these companies are "American". In name only. All the capital, all the means of production - which is the actual "economy" here - is being held by not us. We literally just gave up our means of production.

What we did then is made up a bunch of fake jobs to justify these companies in the US and to extract money from these developing countries.

It's only a matter of time before they wisen up and realize they have all the capital.

Granted, not all industries are like this. Just most.

Maybe if prices doubled over a few years, housing was out of reach, and salaries were stagnant it would be harder to buy stuff and the economy would suffer.

Whoops!

If the US economy grows 5% and stocks grow more, then there must be a reckoning coming at some point.

If it is 5 years or 10, nobody knows.

Not quite. This behavior leads to firing of middle-class workers. John Deere just laid off 300 workers, moved the factory to Mexico, engaged in buyback, and gave the CEO a huge pay.

So, yeah, it helps your 401k, but in the mean time you don't have a job. And if you do have a job, your salary is not increasing in line with inflation...

Companies should be prohibited from doing buybacks for, say, 5 years, after any layoff.

Just straight up ban them. Have to pay taxes on investment due to dividends? Well too bad for you.

Just tax them, they'll disappear.

Tax what? The buy back? How does that work? The seller is already paying capital gains tax.

That doesn't require that the government don't tax the profit that allowed the buyback.

The US taxing almost no kind of corporate profit is an oddity, and they can carve more exceptions to any kind of reinvestment they decide.

I recently learned that buybacks and short selling historically have not been legal, its only in recent history that they've been standard practice en large (1982 is when buybacks were legalized, I think)

It’s part of Reaganomics. Buybacks weren’t explicitly illegal beforehand though, it just wasn’t clear when they would count as stock price manipulation.

401k's are a lot like a bunch of ranchers granting their herds 0.01% of their Cattle futures portfolios.

Less hyperbolic - the existence of large pools of capital without a voice on the boards is partly responsible for the management-led short-termism mess we're in.

Only if it's still high when you go to retire. It probably will not still be high when you go to retire, because the very act of many people drawing on their stock portfolios to fund retirement will put downward pressure on stock prices.

Ironically, if you happen to have made lots of money in the stock market over the last 10-15 years, your best strategy may be to retire now, mid-career, even if you don't have enough to last the rest of your life. Basically you're arbitraging the large labor force of today to fund your time off through high stock values. Then when the market crashes, the recovery will likely be in all-new firms in all-new industries, so you reinvent yourself to capitalize on the labor shortage then. Or even better, start one of those new firms and capitalize on all the workers who need to go back to work because they can't afford their retirements.

You can't do that with a 401k, though, it'd have to be a taxable investment account that you can withdraw at will.

The problem with this theory is that by most metrics the middle class in America is doing very well. Homeownership rates are high (significantly higher than Europe), incomes are higher (again, median income in the US significantly higher than even wealthy European countries like Germany), and consumption of things like cars and other manufactured goods is higher than ever.

The financialization theory doesn't exclude those outcomes, quite the opposite in fact. The basic concept is that Corporate managers have taken primarily stock based compensation for themselves and gutted large companies in an effort to increase stock value at all costs. They then issue large buybacks (and to a lesser extend dividends), but they leave before the the repercussions hit the company.

Example article: https://www.marketwatch.com/story/heres-how-share-buybacks-g...

From a UK perspective, the problem with this comparison is that a) our businesses are also going through this "financialisation", and b) homeownership is very dependent on how much space and political impetus you have to build new homes.

> Homeownership rates are high (significantly higher than Europe)

What's your data source for that if you recall, just curious?

This dataset suggests that it's around 65.7%, higher than the 62.9% in 1965 but lower than the 2004 peak of 69.2%: https://fred.stlouisfed.org/series/RHORUSQ156N .

Not sure that "consumption of manufactured goods" is a particularly good metric for measuring wellbeing, though.

That covid spike in 2020 is pretty interesting. Probably the percentage of people that rent something close to their workplace and could move home when WFH became a thing.

> The homeownership rate is the proportion of households that is owner-occupied.

I suppose there probably aren't better metrics available, but someone who lives in a rented out penthouse that's being financed by owning 20 rented out apartments wouldn't show up as a homeowner under this which is hilarious.

From what I can find [0] homeownership rates in the EU are typically north of 70%, and up to to 90% in some countries. Germany seems to be a real outlier at only 50%.

[0] https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.h....

Yes, I'm not surprised that OP's comparison fails to hold up especially against the central/eastern European countries. The website you link is using a slightly different definition of homeownership but at 90% it must carry over to be more than the US. Which I guess just means it's a poor metric for anythig really.

I’ve shared this opinion for a while, and would love to hear more informed opinions. Do you have any links to articles you’d recommend reading?

Trade Wars are Class Wars: https://www.amazon.com/Trade-Wars-Are-Class-International/dp...

I'm currently reading "When McKinsey Comes to Town" and just finished "The Man Who Broke Capitalism" about Jack Welch and GE.

thank you for this comment. this one needed to be said

It's worth noting this is just one person's opinion, it's not an opinion of the Fed itself. The paper analyzes corporate profits on the basis of interest and tax rates alone, but ignores other monumental shifts in global markets over the past few decades like globalized supply chain networks. It's probably true that the efficiency gains from globalization have already passed their peak, but that would have as much of an impact on declines in profit growth rates as any other factor.

The article also ignores technology as a factor. If globalization is at its peak, automation is probably still in its infancy. Robotics and AI are rapidly advancing and it's going to have a substantial impact to supply chains and labor markets over the coming decades, regardless of what happens with interest rates.

>Robotics and AI are rapidly advancing and it's going to have a substantial impact to supply chains and labor markets over the coming decades, regardless of what happens with interest rates.

It will be short-lived unless its applied to make necessities as cheaply as possible. Otherwise none of us will have enough money for many luxuries.

> efficiency gains from globalization have already passed their peak

Is this true? Aren't there a ton of developing nations that have rapid debelopment that will increase efficiency of different industries as they grow?

There aren't a lot of Indonesias left.

Sure there are, plenty of low income countries with fledging industries, but the governments get more and more risky to deal with the further down in income you go.

Passing peak globalization might contribute to declining corporate profits from say 2020 onward; not sure that 2020 is peak globalization, but it is in the ballpark.

Under standard assumptions of a capitalist economy, a new factor such as "technology" should not drive aggregate higher profits. Because companies don't exist in a vaccuum. Technology may allow a company to produce a good for lower cost, but it also allows that company's competitors to produce the similar good for a similarly lower cost.

So of course the article ignored it, it is a non-factor in aggregate corporate profits.

So "technology" can increase aggregate wealth of society (I'm a big fan of indoor plumbing) but it is not going to increase AGGREGATE corporate profits.

Also, it isn't clear how the specific technology you point towards, "automation", is structurally different from earlier technologies such as i.e. railroads or containerized shipping or telephones or ...

Look, obviously only aggregate corporate profits. Some companies made tremendous money off of the "railroad" technology, others went out of business because of it. Likewise, some companies made enormous profits off of computer chips, office software, etc, but the article is about aggregate profits, the economy as a whole, not individual companies.

I could be mistaken but using the S&P500 index might be slightly problematic in that the companies that compose this index change all the time. This almost guarantees that the index increases in value over time as high performers are added and low performers are removed. There is an upward bias.

I don't doubt that overall, on average, much growth has come from a 40 year decline in interest rates and a consistent lowering of corporate taxes, but new companies in new industries will continue to be founded and feature explosive growth. We aren't stuck with a static set of companies.

The companies that compose the entire stock market also change all the time, and follow the same pattern (winners rise, losers go bankrupt). So the S&P 500 is still a good benchmark of overall stock market performance.

So as long as innovation is outgrowing stagnation then returns should continue to outpace typical zero risk interest. In essence if you believe the stock market will fail to exhibit growth you’re betting against technological progress and productivity gains. Bad bet I’d say.

> returns should continue to outpace typical zero risk interest. In essence if you believe the stock market will fail to exhibit growth

Who are you arguing against? The paper linked talks about "significantly lower profit growth and stock returns in the future" not about decreasing earnings and negative returns.

You are correct that even if the US stock market flatlines for the next 20 years, there will be individual companies which do extremely well, and others which die.

That's not what this article is about. The article is about average corporate profits in the current-to-the-point-in-time largest US companies. And using the SP500 allows the analysis to be consistent even as the mix of the SP500 changes.

And no, changing the mix does not guarantee that the index increases in value over time. Plenty of periods of 10 years or more where the SP500 flatlined. Also, economies in other countries have extended periods where the index of their top companies flatlined.

Further, the explosive growth which you hope to find is generally not in the SP500 companies. The explosive growth is what puts a company INTO the SP500.

I don’t know - Apple joined awhile back and exploded and recently Nvidia.

Yes, the S&P500 could in a sense be said to implement a momentum based trading strategy.

This seems to have proven that growth leads to higher earnings and equity prices.

Of course less taxation and a drop in interest rates will lead to more earnings over time and higher valuations. The crux is that he frames the drop in interest rates as a matter of "luck", as if the government just happened to be dropping them, as opposed to the government reacting to the drop in good/service prices by lowering rates, as a result of innovation, to maintain price stability and the 2% inflation target.

Company A makes more of Good #1 for less money due to Innovation X, and can charge less money. When this occurs across the entire economy, the fed has to drop rates to prevent broad deflation in prices. Lower rates show up as more earnings. The alternative with fixed rates would be that Company A's revenue, after its impressive innovation, would remain roughly the same (or fall) while its competitors' revenues fall (more). The real (adjusted) growth in equity prices, earnings, and revenue would still be going up at the same rate IMO.

It's entirely possible (maybe not likely) that a landmark innovation could deflate prices for most goods in the future and bring us back to low or even negative rates, which would (per his measurements) show up as higher earnings and equity prices.

Maybe I don't know what I'm talking about, but this paper seems circular to me. What would be more compelling is an analysis on the future of goods/services availability, as interest rates and taxation are downstream of those. For example, what does China's potential decline forebode for good availability? What about the hyped up potential panacea of AI?

There was an economist who predicted this in the 19th century https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...

From the abstract, the paper’s argument looks to be entirely different and reaches different conclusions than a Marxian TRPF argument. This paper claims that net profit margins have increased over the past few decades (which is certainly true at least for S&P 500 companies) and that the increase is mostly driven by lower interest expense and lower corporate taxes. If interest rates and tax rates can’t or won’t fall any further, then they won’t provide a tailwind to margins, and so corporate profits will grow much more slowly (not necessarily decline!) over the next few decades.

Marxian economists generally speak of the TRPF as a decline in return on invested capital, which doesn’t come into play in this paper at all AFAICT, but they also have a bad habit of confusing ROIC with profit margins, which is what the paper is all about.

I believe in almost no predictions that assert a change from the existing regime. Regime shifts of this scale (a stop to equity growth) are extremely rare. But nobody publishes papers on why the existing status quo will continue. The show will go on, technology will be deflationary, which will support interest rate drops. Inflation will get sucked out of the economy, and life will go on.

Anyone that ever acted on advice like in this paper lost insane amounts of money.

If the pandemic didn't bring real a new world order to the economy I don't know what else would honestly.

Data is based only on non-financial firms; I wonder what is the effect size of this exclusion. Economy said to be migrating up the value chain to financial services and using pervasive financial engineering, in GE, pharma, fintech, etc. The prospect of higher interest and more taxes would drive more such engineering.

Another question is the stock value loss attributable to dwindling market competition depressing innovation and demand.

Another is demand for stock: P/E multiples going up while most people are under increasing economic stress and lower investment puts all the burden on current stock owners to reinvest, but asset-weighted individual investors might be aging out.

Again, unclear effect size to all this. Hard to imagine being an economist.

But in any case signaling that US stocks long-term are likely to be bad seems counter-productive except as a threat to the incoming administration against increasing rates and taxation.

The exclusion of financial firms is standard in economics literature. The usual reason is that their financials are inverted. The money YOU hold in a bank is an asset to you, the money the BANK holds in the bank is a debt to you.

I kinda wonder how much of this is chicken vs egg. Was corporate profit growth only what it was because of long term low interest rates? Or did low interest rates encourage passive investments and low innovation?

Also, the elephant in the room is retirement. Aging populations represent a huge slowdown across the economy - and every year brings the highest percentage of non-working adults humanity has ever seen. For all the ink spilled over innovation and growth and etc this is going to be the real market wrecker.

This seems like an overall good thing, since a lot of the effect of these essentially artificially inflated growth numbers has been investors' expectations becoming tied to an unsustainable and unrealistic expectation of growth year over year, and this has a myriad of downstream negative consequences for the actual operation of businesses, which has in turn wreaked havoc on the real economy. Maybe this can trigger a sort of reset of those expectations

(2023)

Overview page: https://www.federalreserve.gov/econres/feds/end-of-an-era-th...

Some previous discussion: https://news.ycombinator.com/item?id=33394486

I know nothing - but my girlfriend worked for more than a decade with financial groups essentially betting on economic downturns. Started ok around 2000 but most were eventually sold at rebate to a larger firm's lately - and these aren't really in a comeback.

Let's just say most outlook on the past 25 years has been generally positive and should get better in the next 25. These "negative" aren't really popular currently, but I'd be surprised if they ever are.

I know nothing - just sharing from people who actually played billions into these downturns articles for multiple decades...

It'll be interesting to see what this analysis looks like today, considering there have been 2+ years of substantially higher interest rates since this paper was published.

In five years you might be able to start teasing out the effects of the sudden rise in interest rates. Right now, we're still feeling echoes of the pandemic and subsequent "snap-back" in economic activity.

Look at https://fred.stlouisfed.org/series/CCSA, set the units to "percent change from year ago," and zoom out to "Max". The pandemic effect dwarfs anything else in the entire history of the unemployment program. I think future economic research may well have to discard the years 2020-2024 because the circumstances were so unique and the distortions were so severe.

(2023) should be added to title.

Stock returns grow because that's where people and institutions put their money.

If stock return growth slows (assuming they aren't talking only about dividends), that means either there's less money in general or it's being parked elsewhere. Which is it?

Or do I misunderstand what stock growth is?

The two aren't conflicting ideas. Stock returns are directly tied to dividends and buybacks and indirectly tied to profits and overall company performance. If I think a company isn't returning enough, I'll invest my money elsewhere, and its share price will go down. If I think the stock market isn't returning enough, I'll invest my money in bonds or commodities or foreign countries or Bitcoin or cash under my mattress, and the entire market will go down.

The money doesn't get "parked" in stocks. It's sent to a company, that will use it.

Anyway, the idea is approximately right. When there's more money on the economy than stuff to buy, you get inflation, and the extra money gets places to go. Alternatively, yes, the amount of money and the number of time it transacts both change all the time.

> It's sent to a company, that will use it.

So if I sell a share of Microsoft and you end up buying it, market makers get some of that and your broker might too, but I would get most of the money.

This fits well with some of what Ray Dalio has been saying. The are business cycles and also cycles of those business cycles. At this time we appear to be in a long term transition downward following a long period of relatively strong upsides.

So can the fed keep interest rates high for long? I think they can't.. because then government debt is too expensive. Pushback from treasury will be intense.

There's no need to. High rates only exist to combat inflation.

I'm sure absurd parasitic government interference, lawfare, and shareholder activism in public corporations has nothing to do with all the good companies going private, ergo smart people telling the lawyers to go to hell, old people with pensions hardest hit.

At this point, I'm not sure why you'd want to go public unless it's simply to cash out ASAP. Everything you just described seems like major hell to deal with.

The usual reason would be because you need a large infusion of capital to expand your successful business into a major corporation. Slow growth might be a slow death if some other bigger company gets into the space and eats your lunch. I don't disagree that too many companies go public with little plan beyond "make lots of money for the founders", but there is a time and place for it.

I'm a founder, and I have zero intention of ever going public for these exact reasons.

I think we just call that a small business owner.

I would not consider Stripe to be a small business, an enterprise not considering going public (but still providing liquidity to those seeking it) [1]. Do you want to be beholden to public shareholders and potential activist investors if your money printer works without need for them? Perhaps it is more optimal to remain in control vs cashing out and have your control potentially diminished. It is okay to leave money on the table (by not going public in an attempt to maximize gains on shares held through potential public market exuberance) depending on what you are optimizing for.

[1] https://www.axios.com/2024/02/29/payments-stripe-never-go-pu...

Going private means they don't have to disclose their financials...this is not the positive you think it is.

Heh, we (a manufacturing facility of specialized devices), just got acquired by a public company.

Due to the utter hell it's already been for meeting accounting standards they need for their financial disclosures like inventory count of fucking 1 cent screws in the warehouse needing to be perfect. Even the engineering staff had to be on hand to take part in warehouse recounts for the auditors.

The heads are already talking of cutting the entire 500 person manufacturing staff and outsourcing the manufacturing. Just because the accounting requirements are huge to run your own manufacturing as a public company.

It's easier for a public company to just outsource anything with annoying requirements to a private company who can handwave behind some paperwork.

Public companies are one reason manufacturing in the US died.

>Due to the utter hell it's already been for meeting accounting standards they need for their financial disclosures like inventory count of fucking screws in the warehouse needing to be perfect.

Surely this is done on a monthly or quarterly basis instead of a daily basis, right? As in, on day X at XX:XX time you count the screws, and call it good? Or is it more detailed than that?

Does it matter? It's a wasteful process, and not the only one that has been introduced into the parent commenter's workflow.

In a private company, you can just say "I don't care if we lose 1-cent screws, just order more when we open the last big box of them." You don't ever have to count them, unless you notice that you're spending an awful lot of money on replacing them.

In a public company that is legally required to keep track of its assets, you have to keep track of stuff that is really not worth keeping track of. Even if that's only on a periodic basis, there are literally dozens, probably hundreds of new "just one more things" you have to spend time on in a public company.

Yes, all those "one more things" keep you honest and accountable, but it has real, and rising, costs that can distort rational economic decision-making.

>it has real, and rising, costs that can distort rational economic decision-making

I'm not saying it doesn't, I'm just wondering how often it has to happen. If it's just a snapshot of inventory on one day and everything pans out, then great. If it's something that has to be tracked 365 days a year because the taxman will audit all 365 of those days, then that's a lot of effort that's being spent on something for seemingly very little benefit.

It's inventory balance. The best practice used to be that you did it yearly, but nowadays it is that you do it once, and then only when you have some reason to suspect you lost track of it.

I don't know if the US tax code is modern enough to require the new practice.

Can you be more specific about what government interference would prevent a company from wanting to go public?

The paper emphasizes that much of the extraordinary stock market performance since 1989 was driven by "good luck" rather than compensation for risk, and future returns will likely be more modest unless structural changes occur.

This perspective underplays the role of innovation, globalization, and technological advancements.

Of course nothing on the money supply or the Fed's Balance Sheet. They're not allowed to admit what they've done.

It won't last, the algos ran by the billionaires will demand growth.

Reply on news.ycombinator.com