A short editorial showing the unique bonding of BRK to SP500 to AAPL. This explains much of the current market richness. Below note the rich-cheap of AAPL.


Using the Fisher Effect, where Fed Funds ~ Real NGDI + Inflation, all instantaneous, is brought forward for 7 years. The Atlanta Fed “GDINow” is used to have best efforts of current NGDI annual change of current dollars, which is NGDI .

This in turn is applied to the last NGDI current dollars level and then this is disaggregated to a daily NGDI current dollars level. Using the Fisher Effect a forward annual change in NGDI current dollars, NGDI, is derived and this then is applied to the last NGDI current dollars levels to derive a 7 year forward NGDI current dollars level, or NGDI level.

Equity price is then compared or charted against this value to determine both relative rich/cheap and outright rich/cheap.

A problem this market presents to “asset liability managers” (ALM) is that the usual negative correlation between risky equity and risk free notes, strips, and bonds is approaching 0, and at times has been positive.

For instance in the 2008 to 2009 crash in risk assets, in equity markets, Us Treasurys soared in price with long duration increasing in price by 50% to 60%. This had large ALM problems survive.

Now, as correlation approaches 0, there is no offset.

A Markowitz type portfolio construct will not provide offset from riskless fixed income to equity declines.

The “risk premium” for risk free is derived, the increase in yield required to extend duration - per year in basis points.

The risk premium has been from 0 to 30 basis points usually, but now is crushed towards 0.

The term premium is almost 0.

The annual change in NGDI priced into the market is derived for that change in 7 years.

This can be seen as the growth potential in the US economy.

The US economy has, according to a forward Fisher Effect logic, increased as the Federal Reserve actions have raised long term rates. This rise has more than offset the drop in the term premium towards 0.

The change in NGDI level implicit in 7 years is not small.

This is in accord with Neo Fisherian logic that rates forced to be chronically well below the desired expected NGDI will drop NGDI annual change. This occurred from 2012 to January 2022 when it was obvious that ZIRP, ZLB, always well below a Taylor Rule rate, would be the mainstay of the Federal Reserve rate setting policy. Bernanke’s backing away from the rate rise from the “Taper Tantrum”, Yellen’s constantly citing a Neo-Wicksell logic, and the Powell declaring the end of normalization in December 2018, reinforced this view.

Covid panic further entrenched the Fed to this constant low Fed Funds policy. But the massive fiscal spends to remedy Covid stress (about 2.5 trillion in excess of what was required) ignited a strong shock rise in prices. The Federal Reserve was forced off chronic constant low Fed Funds and now seems set on changing back to a Fisher framing of setting Fed Funds.

This, if it is not reversed, will ignite nominal growth and likely, until Fed Funds are well above inflation, cause higher inflation. A good summary of this is Martin Uribe 2018 NBER paper: “The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models” .

The “basis” of NGDI for 7 years is netting NGDI level in 7 years to current dollars NGDI.

The basis is the implicit growth priced into the US economy.

The basis is given in both then current dollars and then in percentage of the current NGDI.

The current dollars instantaneous NGDI, the NGDI level expected in 7 years, and then the basis of that 7 year forward NGDI level is used to qualify equity values overtime.

## calculating recursion for 4539 datapoints
Log SP500 to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-09-12 -6.735111 1.458321 0.6672629
2008-09-15 2021-10-18 -20.867603 2.898583 0.9769357
2021-10-19 2022-09-23 25.758017 -1.710621 0.6949024 

## calculating recursion for 4539 datapoints
Log SP500 to Log NGDI 7 Years Forward
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2008-09-12 2021-10-19 -20.858527 2.8976635 0.9768808 3287
2004-09-20 2008-06-26 -7.899221 1.5809544 0.7520440 960
2021-10-19 2022-09-23 25.758017 -1.7106207 0.6949024 238
2008-06-26 2008-09-12 6.883840 0.0271914 0.0000671 53 

## calculating recursion for 4539 datapoints
Log R2000 to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-01-03 -13.79802 2.136456 0.8545813
2008-01-04 2022-01-14 -18.30929 2.580240 0.9395726
2022-01-18 2022-09-23 20.98961 -1.319706 0.3691106 

## calculating recursion for 4539 datapoints
Log W5000 to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-06-27 -7.493479 1.780009 0.7969730
2008-06-27 2008-09-04 28.172636 -1.950076 0.2453814
2008-09-04 2021-11-02 -18.335451 2.879386 0.9728900
2021-11-02 2022-07-20 42.280031 -3.110246 0.8703748 

## calculating recursion for 4539 datapoints
Log AAPL to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2012-11-07 -114.25582 12.071139 0.9386373
2012-11-07 2020-01-13 -48.26437 5.235999 0.9338748
2020-01-13 2022-09-23 -21.14708 2.580584 0.8040001 

## calculating recursion for 4539 datapoints
Log BRK to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2004-10-20 72.54458 -7.258696 0.8330054
2004-10-20 2005-03-14 -31.91102 3.805292 0.8305093
2005-03-14 2022-06-16 -22.26882 2.767299 0.9621564
2022-06-16 2022-08-19 -39.30758 4.404361 0.9010204 

## calculating recursion for 4539 datapoints
Log AMZN to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2007-04-24 3.744929 -0.3260598 0.0133550
2007-04-24 2020-04-06 -73.671037 7.8381099 0.9632784
2020-04-06 2022-04-29 -3.756776 0.8767753 0.3782654
2022-04-29 2022-09-23 -26.318722 3.0485649 0.3641331 

## calculating recursion for 2612 datapoints
Log META to Log NGDI
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2009-02-26 2014-06-16 -30.76465 3.618645 0.7622850 1936 days
2004-09-20 2009-02-26 -114.24693 12.089528 0.9294853 1620 days
2014-06-16 2015-02-09 46.44726 -4.046752 0.7661833 238 days 

## calculating recursion for 4539 datapoints
Log MSFT to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2013-09-10 -9.440416 1.297610 0.4185122
2013-09-10 2020-01-21 -62.653815 6.761947 0.9821635
2020-01-21 2021-10-26 -21.445905 2.681076 0.9087050
2021-10-26 2022-09-23 29.148005 -2.309186 0.7035161 

## calculating recursion for 4539 datapoints
Log BA to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-06-05 -35.95339 4.187638 0.8854726
2008-06-05 2020-06-12 -49.50113 5.539374 0.9441758
2020-06-12 2020-11-13 24.96927 -1.987064 0.4645320
2020-11-13 2022-09-23 29.04327 -2.348086 0.6151211 

## calculating recursion for 4539 datapoints
Log JPM to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2005-10-19 16.93423 -1.457535 0.7162705
2005-10-19 2007-10-31 -45.41441 5.105338 0.8416844
2007-10-31 2022-02-28 -31.47272 3.614929 0.9292693
2022-02-28 2022-09-23 25.20381 -2.002081 0.5939019 

## calculating recursion for 4539 datapoints
Log BAC to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2007-02-12 -13.31227 1.767529 0.6305079
2007-02-12 2008-08-12 290.24162 -29.914119 0.7650154
2008-08-12 2008-10-06 129.10478 -13.134684 0.4233488
2008-10-06 2022-09-23 -24.78534 2.804930 0.7185104