Higher for Longer, Leaner with AI
Tim Ogilvie@timogilvie
−0.5%
since Oct 8
The idea
I believe rates stay higher for longer than expected, because the usual link between cost of capital and investment is weaker in an AI-driven economy, even as AI quietly lets companies do more with fewer people. So I split the basket: about 30% in already-profitable, low-debt AI sellers for the near-term upside, and about 60% in insurers, banks, brokers and payroll processors that earn more on rate income now and stand to cut costs with AI over the coming years. I keep roughly 10% in cash and deliberately skip hard assets since I hold those elsewhere.
What it owns
- These companies are already making real money selling AI products and services, and their profit margins are strong enough that high interest rates pose no financial threat. · NVIDIAIt manufactures the chips that power most AI systems, making it a primary beneficiary of continued spending by cloud and AI companies as long as its data center chip orders and profit margins remain strong., MicrosoftIt sells AI tools like Copilot and Azure cloud that companies use to do knowledge work with fewer people, capturing revenue early in the rollout cycle as long as AI and cloud revenue keeps growing and it funds data centers from operating cash., Taiwan Semiconductor ManufacturingIt manufactures advanced chips for AI designers like NVIDIA and Broadcom, getting paid regardless of which designer wins as long as AI orders keep its most advanced factories operating at capacity., AlphabetIt sells AI through Google Cloud and custom chips while holding substantial cash reserves that insulate it from high borrowing costs, as long as Google Cloud keeps expanding and AI answers do not erode search advertising profits., BroadcomIt designs custom AI chips and networking equipment for large cloud companies, providing a second path to capture AI spending, and benefits from strong cash flow to service its debt during a high rate environment.30%
- Insurers earn more investment income when rates stay high on the premiums they hold, and their large claims and underwriting operations are office work where AI can reduce costs. · ProgressiveIt collects insurance premiums upfront and invests them in bonds, earning more investment income when rates stay high, while its large claims and service staff represent office work that AI can automate., ChubbIt holds substantial premium reserves invested in bonds, earning more investment income each year rates stay high, while AI gradually improves efficiency in underwriting and claims work., TravelersIt earns more investment income on premiums held in bonds when rates stay high and employs substantial claims and underwriting staff that automation can help reduce., AllstateIt earns more investment income on premiums when rates stay high and has been cutting costs in agent and claims operations, work that AI can automate further.21%
- Large banks earn wider interest margins on loans when rates stay high and operate massive back offices where AI can cut headcount and expenses. · JPMorgan ChaseIt earns wider margins between loan yields and deposit costs when rates stay high, and it invests heavily in AI to reduce back office expenses, benefiting as long as interest income stays strong and loan losses remain manageable., Bank of AmericaIt holds a large base of low-cost customer deposits, so high rates widen the spread between its earnings on loans and bonds and its costs on deposits, benefiting as long as depositors do not move cash elsewhere., Wells FargoIt is working to operate more efficiently, so AI-driven cost reductions could appear clearly in results, while high rates support its interest income and loan yields., CitigroupIt is cutting headcount and simplifying operations, positioning itself to benefit from AI-driven cost reductions, while high rates boost its interest income and returns.20%
- These businesses earn interest on cash their customers deposit or park with them, earning more when rates stay elevated, and some also benefit from increased trading activity during uncertain rate environments. · Charles SchwabIt earns a significant portion of revenue from the spread between rates it earns on uninvested client cash and rates it pays clients, a gap that widens when interest rates stay high., Interactive BrokersIt earns interest on client cash balances and margin loans while operating with far fewer staff than competitors through heavy automation, benefiting from client growth and high interest rates., Automatic Data ProcessingIt holds client payroll money for a few days before disbursement and earns interest on those balances, which is worth more when rates stay high, as long as the number of workers on client payrolls remains steady., CME GroupIt operates the exchange where traders bet on interest rate futures, and volume increases when rate expectations are uncertain, while it earns interest on cash traders post as collateral.19%
- Cash10%