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 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 then 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 4567 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 2021-11-03 -20.794206 2.890907 0.9783698
2021-11-04 2022-11-02 48.979096 -4.003492 0.7594891 

## calculating recursion for 4567 datapoints
Log SP500 to Log NGDI 7 Years Forward
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2008-09-12 2021-11-04 -20.787155 2.8901954 0.9783181 3299
2004-09-20 2008-06-26 -7.899221 1.5809544 0.7520440 960
2021-11-04 2022-11-02 48.979096 -4.0034923 0.7594891 254
2008-06-26 2008-09-12 6.883840 0.0271914 0.0000671 53 

## calculating recursion for 4567 datapoints
Log DJIA to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-09-12 -5.821299 1.591054 0.6614463
2008-09-15 2021-10-21 -16.165618 2.642291 0.9802201
2021-10-22 2022-11-02 38.630716 -2.780486 0.7122401 

## calculating recursion for 4567 datapoints
Log DJIA to Log NGDI 7 Years Forward
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2008-06-25 2021-10-25 -15.888499 2.614307 0.9776056 3345
2004-09-20 2008-06-25 -6.885991 1.703210 0.7199815 959
2021-10-25 2022-11-02 38.773505 -2.794543 0.7119900 262 

## calculating recursion for 4567 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 2021-11-24 -18.41131 2.590645 0.9360881
2021-11-26 2022-11-02 51.85745 -4.363221 0.6921140 

## calculating recursion for 4567 datapoints
Log W5000 to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-09-15 -6.418804 1.666795 0.7336494
2008-09-15 2021-11-02 -18.312217 2.876794 0.9737255
2021-11-02 2022-11-02 56.366638 -4.503903 0.7919880 

## calculating recursion for 4567 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 2020-01-16 -47.98798 5.207852 0.9332058
2020-01-16 2022-11-02 -25.60435 3.024697 0.8364541 

## calculating recursion for 4567 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 2022-11-02 -21.83482 2.722403 0.9615987 

## calculating recursion for 4567 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 2021-08-30 -74.964055 7.9722348 0.9657415
2021-08-30 2022-11-02 67.641511 -6.1803468 0.6738006 

## calculating recursion for 2640 datapoints
Log META to Log NGDI
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2009-02-26 2014-06-16 -32.37351 3.779593 0.7804208 1936 days
2004-09-20 2009-02-26 -114.24731 12.089568 0.9294870 1620 days
2014-06-16 2015-03-20 148.51958 -14.111760 0.7469881 277 days 

## calculating recursion for 4567 datapoints
Log MSFT to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2013-09-10 -9.439328 1.297498 0.4184556
2013-09-10 2020-01-17 -61.998889 6.695340 0.9838411
2020-01-17 2022-11-02 -15.769959 2.111850 0.7145360 

## calculating recursion for 4567 datapoints
Log BA to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-06-04 -35.99837 4.192374 0.8862423
2008-06-04 2020-11-17 -46.39583 5.219149 0.9143062
2020-11-17 2022-11-02 36.86354 -3.126231 0.5953367 

## calculating recursion for 4567 datapoints
Log JPM to Log NGDI
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2005-10-19 16.92534 -1.457537 0.7162704
2005-10-19 2007-10-31 -45.42329 5.105334 0.8417527
2007-10-31 2022-02-28 -31.51392 3.618083 0.9305102
2022-02-28 2022-11-02 56.03281 -5.044281 0.4693615 

## calculating recursion for 4567 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 2008-08-12 290.24163 -29.914120 0.7650155
2008-08-12 2008-10-06 129.10495 -13.134702 0.4233494
2008-10-06 2022-11-02 -25.16303 2.843423 0.7261084