The coming long-run slowdown in corporate profit growth and stock returns
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&#x27;t going to end, but it&#x27;s going to compartmentalize, and that&#x27;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.<p>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.<p>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&#x27;t have to believe AI labor substitution is going to happen (I&#x27;m not totally confident it will), all you have to believe is that it&#x27;s our only out for structurally higher interest rates.<p>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&#x27;s the right move.<p>EDIT:<p>Totally separately, i&#x27;d like to quibble slightly with this bit of analysis:<p>&gt; 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&amp;P 500 nonfinancial firms over the past two decades (1.8 &#x2F; 5.4 = 1&#x2F;3). This is a very substantial contribution<p>This isn&#x27;t quite accurate. Cheap debt decreases the hurdle rate for capital investment. In other words, if rates weren&#x27;t so low, much of this debt wouldn&#x27;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&#x27;re painting a bit, and likely reduces the true number here somewhat, but doesn&#x27;t alter the broader story.