No. of Recommendations: 9
The value of an equity is a function of its future trajectory of real owner earnings.
Agreed. But what are these future earnings worth now? I hope you agree that they need to be discounted back to present using an appropriate discount rate.
Money I have now can be invested in treasury bonds that earn near risk-free interest. It seems logical that future earnings are worth less if interest rates are high, as I can earn more interest between now and when these earnings arrive with money I already have. If interest rates are super-low, the value of future earnings is very close to money that I hold now, so the discount rate shall be low.
IMHO Buffett is very right that low interest rates drive up *values* (and vice versa), as discount rates must take the interest environment into account.
