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 NGDP + Inflation, all instantaneous, is brought forward for 7 years. The Atlanta Fed “GDPNow” is used to have best efforts of current NGDP annual change of current dollars, which is NGDP .

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

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 NGDP.

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

## calculating recursion for 4568 datapoints
Log SP500 to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-06-19 -7.221409 1.510369 0.7887712
2008-06-20 2021-11-01 -21.238484 2.937921 0.9716184
2021-11-02 2022-11-03 47.181345 -3.829938 0.7867533 

## calculating recursion for 4568 datapoints
Log SP500 to Log NGDP 7 Years Forward
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2008-06-19 2021-11-02 -21.232229 2.937288 0.9715905 3355
2004-09-20 2008-01-16 -9.876491 1.789934 0.8942766 851
2021-11-02 2022-11-03 47.181345 -3.829938 0.7867533 257
2008-01-16 2008-06-19 -16.864665 2.506785 0.2255396 104 

## calculating recursion for 4568 datapoints
Log DJIA to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-06-19 -6.721695 1.686487 0.8123473
2008-06-20 2021-10-14 -16.646627 2.692875 0.9748901
2021-10-15 2022-11-03 37.334298 -2.655212 0.7365991 

## calculating recursion for 4568 datapoints
Log DJIA to Log NGDP 7 Years Forward
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2008-06-19 2021-10-15 -16.638220 2.692020 0.9748527 3343
2004-09-20 2008-06-19 -6.721695 1.686487 0.8123473 955
2021-10-15 2022-11-03 37.334298 -2.655212 0.7365991 269 

## calculating recursion for 4568 datapoints
Log R2000 to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2007-12-31 -13.54510 2.111041 0.8698990
2008-01-02 2021-11-24 -19.15539 2.667621 0.9286025
2021-11-26 2022-11-03 48.66098 -4.052132 0.7055706 

## calculating recursion for 4568 datapoints
Log W5000 to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-01-16 -9.351447 1.976583 0.9159041
2008-01-16 2008-06-26 -16.840439 2.745007 0.2395928
2008-06-26 2021-10-26 -18.784874 2.926639 0.9659448 

## calculating recursion for 4568 datapoints
Log AAPL to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2012-12-05 -115.79770 12.231355 0.9596838
2012-12-05 2020-01-09 -46.69275 5.080324 0.9221501
2020-01-09 2022-11-03 -25.71640 3.038055 0.8306745 

## calculating recursion for 4568 datapoints
Log BRK to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2004-10-20 53.39350 -5.229508 0.8382162
2004-10-20 2005-03-15 -36.11973 4.250173 0.8183007
2005-03-15 2022-06-16 -22.91421 2.834636 0.9650973 

## calculating recursion for 4568 datapoints
Log AMZN to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2021-07-06 -79.66671 8.454155 0.9668535
2021-07-06 2022-11-03 58.74242 -5.308774 0.6968453 

## calculating recursion for 2641 datapoints
Log META to Log NGDP
Start_Segment End_Segment Intercept Slope r2 Segment_Length
2008-12-31 2014-06-16 -32.80222 3.825054 0.7963459 1993 days
2004-09-20 2008-12-31 -114.85908 12.164761 0.9284344 1563 days
2014-06-16 2015-03-23 133.10972 -12.606374 0.7325892 280 days 

## calculating recursion for 4568 datapoints
Log MSFT to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2013-04-23 -7.590564 1.104224 0.3078815
2013-04-23 2020-01-13 -58.858105 6.382756 0.9832731
2020-01-13 2022-11-03 -16.060514 2.142255 0.7231388 

## calculating recursion for 4568 datapoints
Log BA to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2008-01-07 -38.84573 4.494970 0.9504832
2008-01-07 2021-03-01 -45.91642 5.172265 0.9034606
2021-03-01 2022-11-03 53.72533 -4.793414 0.7732260 

## calculating recursion for 4568 datapoints
Log JPM to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2005-10-21 19.18595 -1.696674 0.6987841
2005-10-21 2007-07-19 -40.27700 4.573112 0.9112869
2007-07-19 2022-02-28 -32.49930 3.720513 0.9385770
2022-02-28 2022-11-03 50.01031 -4.455365 0.4876139 

## calculating recursion for 4568 datapoints
Log BAC to Log NGDP
Start_Segment End_Segment Intercept Slope r2
2004-09-20 2007-11-01 -14.17960 1.859967 0.7501832
2007-11-01 2008-06-04 93.26883 -9.354994 0.5085918
2008-06-04 2008-07-15 -1142.25818 119.182846 0.9307915
2008-07-15 2008-07-17 9899.49674 -1030.163747 0.9937215