Valuation-Informed Indexing #589: Interest Rates Would Stabilize If Shiller’s Research Were Discussed More Openly

I’ve posted Entry #589 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Interest Rates Would Stabilize If Shiller’s Research Were Discussed More Openly.

Juicy Excerpt: These things are all connected. The inflation rate doesn’t really make sense. Today’s interest rates don’t really make sense. But the core irrational thing is the CAPE value. We like high stock prices. They provide the illusion of wealth. So we will do just about anything to keep high stock prices high. If it takes pushing interest rates down to absurd lows, we will do that. 

But these things can’t last forever. Low interest rates keep stock prices high temporarily (by making non-stock asset classes less appealing relative to stocks). But in the long run low interest rates increase the risk of a price crash. When stock prices are depending on low interest rates to maintain their height, that’s one more thing that could cause a collapse. Stock prices can always fall because of bad economic news or because investors lose confidence in the bull market. When interest rates are low, they can fall because of a rise in interest rates as well.