Subject: Re: OT: Equity Risk Premium
Here's Buffett, maybe:

"Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe."
"If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that's a huge gravitational pull on values."

It's a great quote, but (sorry) it's one of those times, as with trade deficits (aka capital account surpluses), that Mr Buffett is flat out wrong. (if taken too literally)

Prevailing interest rates can certainly (though irrationally) have a strong effect on equity *prices* sometimes. But as I'm sure Mr Buffet would be the first to agree, prices are not the same as values. Value is what you get. Prevailing interest rates do not affect equity values. I think that in most quotes from Mr Buffet about interest rates affecting stock valuations, he would of course agree that his comments are about prices and likely forward market returns, not at all about true value, i.e. future owner earnings.

The value of an equity is a function of its future trajectory of real owner earnings. The existence of current alternatives with higher or lower real returns is not an input to that. If person A is currently willing to pay a million bucks to person B for financial security C, that does not affect the intrinsic value of my equity share D. It might affect the market price of D, or might not, but I still get my claim to owner earnings either way.

Jim