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

The Idolatry of Interest Rates Part II / The Idolatry Companion

Financial Heresy / Potential Utility in an Equity Risk Premium Framework

James Montier and Ben Inker
GMO, 2015
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Editorial Rating

8

Qualities

  • Innovative

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.

Take-Aways

  • According to investment expert James Montier, 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.
  • Various academic attempts to calculate the equity risk premium (ERP) and the real interest rate have produced substantially different estimates than those that standard economic models commonly employ.

About the Authors

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

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