Subject: Re: OT: Equity Risk Premium
Buffett's comments do point to some sort of relationship between interest rates, value, and prices, though; and I think it is true that the elasticity of that relationship is one reason why value is not always accurately reflected in price.

For sure. Currently prevailing interest rates (whether rationally or not) certainly affect asset valuations much of the time, largely on the competing asset theory, but also because many buyers are irrational sometimes.

I merely assert that interest rates don't affect the *value* of equities, only perhaps the prices. Once the clouds and storms of current interest rates pass, whatever real earnings were to come will still be there.

e.g., the average US cyclically adjusted equity earnings yield in the summer of 1982 was about 16% and was in effect entirely inflation protected---the high interest rates of the day didn't make that worth nothing. Indeed, they were perhaps a buying signal: with anomalously high nominal interest rates you tend to see (irrationally) anomalously cheap equity valuations like that.

Admittedly there is some meaning to the observation at the margin, but it's the tail, not the dog. If companies have a lot of debt and their real (not nominal) interest rates go up as they roll debts over, their real earnings will take a hit. But this true hit is tiny compared to the price swings you see all the time.

Jim