Record low rates go hand in hand with record high asset valuations, via the portfolio substitution effect. Say in normal times bonds yield 4% and the equity risk premium is 4%, so the average P/E is 12.5x. If bond yields drop to 1%, the same ERP implies a much higher multiple, 20x. Nominal wealth increases a lot — more than 50% in this example — and so does wealth inequality, by definition.
But unless wealth is actually spent (assets sold), what matters more is income, which is unchanged. Income generated from the assets, whether rents or corporate profits, is what makes wealthy rentiers better off than the working masses, and what ultimately drives inequality.
There's a caveat: cheap borrowing against rising asset prices. But debt ultimately has to be repaid or supported by rising income. If the underlying income doesn't grow into a rising valuation and debt has merely supported consumption, there will eventually be a deleveraging to undo it.
Long ago, before public markets were so prevalent, rich business owners and landlords measured their wealth in annual income generated. If rates decreased and valuations increased but annual profits remained unchanged, they weren't actually richer.
The rentier thought experiment
Say you're a rich rentier. Your income comes from your assets, and it's more than enough to cover your expenses, so a lot of it gets reinvested into more assets. If rates rise and valuations fall, are you better or worse off — in absolute and in relative terms?
Conventional wisdom says you'd be worse off; the flip side of having benefited from low rates and high valuations for years. Conventional wisdom also says that recent valuation increases have led to increased income inequality. Conventional wisdom is wrong on both counts. It makes the mistake of comparing stock (wealth) to flow (income). If we compare income, valuations don't matter. If we compare wealth, then we should be discounting the NPV of employment income too — not just capital.
That last point is worth dwelling on. When people point to the pandemic-era stock market surge as evidence that fiscal and monetary policy widened wealth inequality, they're usually overlooking the fact that a job is itself a financial asset. Much like a bond, or a stock with a growing dividend, you could in principle put an NPV on your job — how much someone would need to pay you right now to get you to quit and let them take it. We do this routinely for stocks; we just don't think about employment the same way. The NPV of that employment income stream rose for exactly the same reason every other financial asset did: the collapse in interest rates. None of this means there's no inequality — there is, and it's large. The point is about the direction of travel, not the existence of the gap.
Back to the rentier
So: you're a rich rentier, rates rise, and valuations collapse. Your income is unaffected, and you have excess savings to invest in more assets. You end up better off — in both absolute and relative terms — because you acquire more assets in the process. Valuations will have collapsed, and income inequality will have increased as a result. You'll be further ahead of the working stiff, even though it won't make headlines the way “XYZ made so many billions” would.
This assumes you're not levered, and that the relative value of your assets hasn't fallen compared to the market portfolio or the economy as a whole. But that's broadly true in aggregate. If anything, the working class is more levered, usually via mortgages, than the top 0.1%.
The general principle: if your passive income covers your expenses, so you're a net buyer of assets, you should prefer lower valuations. The same logic explains why shareholders of companies doing buybacks should prefer lower valuations too.
Are there exceptions?
Yes. If you need or want to sell assets. Or if you don't rely on your assets' income to cover expenses but instead on increasing debt against their rising value. Periodically there are washouts that cleanse the worst such offenders. But for the truly uber-wealthy, these episodes aren't threats; they're opportunities to increase their distance from everyone else.
There's another reason they should welcome them. As everyone obsesses over valuations and net worths, the risk of social unrest — and of policy responses like wealth taxes — rises along with asset prices hitting new records, since inequality is perceived to be increasing. A good crash fixes that.