Low interest rates and high asset prices

By
Robert J Shiller writes:

Asset prices—stocks, commercial real estate, and even oil—are, historically, at high levels around the world. Although history is often a good predictor of future trends, every now and then something fundamental changes that makes for a new pattern. The important question now is whether today’s high asset prices are the result of some such fundamental development, or whether bubbles have formed. One oft-heard justification for high asset prices is that real (inflation-adjusted) long-term interest rates are very low. But investors should be wary of this argument. It may sound plausible, but it is hardly conclusive. And, more important, it certainly does not tell us that high prices are sustainable.

To summarise, we simply shouldn’t read too much into the decline in real long-term interest rates over the past 20 years. Historically, real rates have jumped around a lot, showing little correlation with asset prices. Whatever their other benefits, the low rates we see around the world now hardly amount to insurance against future drops in asset prices.

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