Investors and corporate financiers use present value analysis to determine the intrinsic value of any asset. Specifically, the intrinsic value of an asset today is equal to the current value of the cash flows generated by that asset.
In today’s video, Mike & Mark discuss the relationship between interest rates and equity values. In doing so, they discuss the relationship between inflation and interest rates. The implication is clear. Inflation plays a role in equity values.
Mark shows that the inflation rate is likely to be far from a transient phenomenon. Far from it. The amount of monetary inflation unleashed on the global economy is expected to produce close to double-digit inflation for years to come. A sharp fall in asset prices is probably the only force to get in the way of higher consumer prices in the near term.
However, the Fed wants to avoid sharply lower asset prices as it might jeopardize financial institutions. The Fed is trying to thread the needle. Lower the inflation rate while minimizing the impact on asset prices. Time will tell if they will be successful.
In this video, Mike & Mark get a bit wonky on rates and equity valuations, but we think it provides insights you probably have not seen before.
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