Summary of The Idolatry of Interest Rates Part II / The Idolatry Companion

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The Idolatry of Interest Rates Part II / The Idolatry Companion summary
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8 Innovation

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Recommendation

Depending on whether you trust in professional asset managers or in a combination of index funds and FinTech algorithms, you likely believe that investing is either complex or simple. In an industry in which past performance is no guarantee of future returns, it is helpful to understand on what those sober professionals and FinTech entrepreneurs are basing their decisions. Asset allocation experts James Montier and Ben Inker take opposing sides on two of the most hallowed investing concepts, the natural rate of interest and the equity risk premium. Though never giving investment advice, getAbstract suggests this intriguing though complex challenge to investors everywhere.

In this summary, you will learn

  • Why a natural equilibrium rate may not exist,
  • Why basing an investment plan on judging equity risk premiums is flawed and
  • What an alternative calculation of equity returns says about the wisdom of buying at current stock valuations.
 

About the Authors

James Montier works for investment management firm GMO, where Ben Inker is the co-head of asset allocation.

 

Summary

The real interest rate is a function more of central bank policy than of natural market forces. If no equilibrium real interest rate exists, any model of investment returns based on future interest rate developments is at a severe disadvantage. If interest rates don’t move toward equilibrium, then anticipating...

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