In the first part of this essay, James Montier builds on some of the ideas that were developed in his last essay, specifically as they pertain to thinking about asset markets. The most obvious place to start is with the idea that the natural rate of interest is a myth. Accepting this idea has many ramifications for the way in which one conducts asset pricing.
In the second part of this essay, Ben Inker shares his thoughts on James’ section of the paper. Ben agrees that James makes a number of good points leading to a logical conclusion. It’s not the same logical conclusion that the rest of the Asset Allocation team arrives at, but it is an important enough challenge to how both we at GMO and investors generally tend to think about the role of interest rates in equity valuations that it seemed a very worthwhile white paper to have him write. What follows is not so much a rebuttal as an explanation for why Ben finds the construct of an equity risk premium (ERP) to be a useful one, despite some of the problems that James so ably points out.
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