What if the cost of capital never rises again? (Josh with Ben)

Josh and Ben discuss the prolonged underperformance of value stocks in the shadow of an era characterized by inexpensive capital. They explore how this environment has fostered the rise of disruptive companies that have capitalized on their agile, asset-light structures, while traditional firms, burdened by their physical assets, have struggled to keep pace. The conversation highlights a shift in market dynamics where recurring revenue models and tech-driven businesses have captured significant market cap, leaving value investments trailing.

Ben raises a thought-provoking point inspired by a conversation with economist William Bernstein about the potential permanence of low interest rates. They explore historical precedents of prolonged periods where the 10-year yield remained low, pondering what this could mean for future economic conditions, including inflation and asset returns. The discussion addresses whether such a scenario could reshape fundamental investment strategies and valuations.

With the backdrop of historically low interest rates, Josh and Ben discuss how traditional investment rules may need reevaluation. They consider the implications of continued low bond yields, challenging the notion that investors inherently deserve certain returns for low-risk investments. This section delves into the modern investment landscape where older strategies may no longer hold true, particularly in the context of how newer market realities have evolved.

The duo examines the disinflationary effects of technological advancement on capital costs and borrowing dynamics. They discuss how technology can make borrowing easier and assess creditworthiness more effectively, potentially leading to a more consistent low cost of capital. This could fundamentally shift how investors approach asset allocation and capital deployment in the long term.

Josh and Ben contemplate the ramifications of easy capital access for entrepreneurs. While a lower cost of capital can fuel innovation and disrupt established markets, it also raises concerns about long-term sustainability and the potential for over-leveraged business models. They analyze the duality of benefits for consumers and risks for business health, ultimately questioning whether this leads to a viable economic future.