The “Buffet Rule” has that equity market value can be considered by the ratio of current equity value to GDP current dollars or E/GDP. GDP current dollars is NGDP.

The Buffet Indicator is related to “Tobin Q” where the equity value should be equivalent to the replacement cost of the assets. The Q Ratio being the market value divided by the replacement cost of the firms assets.

The Buffet Indicator is applied to the most broad based equity index, the Wilshire 5000, which has a current value of approximately $40 Trillion, in excess of the NGDP level of approximately $27 trillion.

The R package “dpseg” is used to find the longest and highest segments of (x) NGDP level to (y) W5000 for the period of 1989 to 2023. This is shown below in a table with two segments of 1995 t0 2000 and 2008 to 2022 identified as having r^2 over .95. The 2008 to 2022 segment is used with an r^2 of .96 and also it is in context of the current Fed regime that uses the Woodford Neo Wicksell thesis, a great change from the 1995 to 2000 Fed era which used Friedman monetarism introduced by Volcker in 1979.

The Neo Wicksell thesis first identifies a Fed Funds equilibrium “natural rate” and then any level of Fed Funds over that natural rate is a tightening by the Fed Funds and any Fed Funds rate below that natural rate is an easing. The tightening or easing is brought about by a “cumulative process” that sits somewhere in the system banks which then ends in contraction of the NGDP or expansion of NGDP.

Since 2014 there has been no sign of the cumulative process, and therefore no change in inflation and NGDP. And there has been no sign of a cumulative process in Japan since 1994. This means that the Neo Wicksell thesis is inapplicable in changing inflation and thereby NGDP.

The following report shows that while the market believes otherwise, a large divergence between the value of equity in relationship to change in NGDP from the immense covid fiscal funds applied since 2021, and the current pricing. The market obviously believes strongly in the Neo Wicksell thesis.

This report suggests that the broad market value is likely cheap by as much as 50%, anticipating a large rally once the market realizes that Neo Wicksell thesis does not “work” and the Fed is incapable of altering inflation and thereby NGDP surge. Then equity values will resume the relationship that was prior to NGDP level.


## calculating recursion for 8578 datapoints
Log W5000 to Log NGDP
Start_Segment End_Segment Intercept Slope r2
1995-06-20 2000-05-15 -21.562096 3.3786218 0.9692466
2008-06-23 2022-04-26 -18.851769 2.9359070 0.9559698
2003-04-23 2008-06-20 -5.865739 1.6119142 0.9123939
2000-05-16 2003-04-22 67.721105 -6.3032397 0.8888571
1989-01-12 1995-06-19 -5.895431 1.6146568 0.8725591
2022-04-27 2023-01-27 17.519657 -0.6840289 0.0719948 

## calculating recursion for 8578 datapoints
Log W5000 to Log NGDP
Start_Segment End_Segment Intercept Slope r2
1989-01-12 2023-01-27 -5.573098 1.58719 0.9153352 

## calculating recursion for 8578 datapoints
Log JPM to Log NGDP
Start_Segment End_Segment Intercept Slope r2
1990-03-02 2000-04-26 -42.296352 4.971941 0.9439451
2013-01-29 2021-10-19 -37.716482 4.252818 0.9434951
1989-01-12 1989-10-12 -47.222569 5.631740 0.8922631
1989-10-13 1990-03-01 121.122329 -13.849282 0.8779065
2021-10-20 2022-10-20 62.657899 -5.710267 0.8714646
2000-04-27 2013-01-28 -6.454552 1.017525 0.3880372 

## calculating recursion for 8578 datapoints
Log JPM to Log NGDP
Start_Segment End_Segment Intercept Slope r2
1989-01-12 2023-01-27 -19.18146 2.371133 0.902764