Hello Mohammed,

Thanks for your feedback - much appreciated.

You asked how this changes how you would conduct a valuation. I think this depends entirely on what you feel is a valid proxy for the lowest availalbe risk expected rate of return, and which financial asset you were trying to value. If you feel, as I do, that aggregate productivity is a valid proxy then that would be your starting rate. You would add on top of that the spread between a government bond with a duration/avg. maturity that matched your investment time horizon and that was issued by a low-risk sovereign (say Switzerland, Sweden, U.S., etc.). If your valuation is for a piece of fixed income then you would add any non-systemic risk spread you feel is appropriate to this base number. Now discount those anticipated cash flows and tweak for anything you anticipate happening in the intervening time frame (e.g. yield curve steepening). If you are valuing a piece of equity issued by this same credit then you would add the equity risk premium you feel is approrpiate to this number, and then discount those cash flows back to present value.

One interesting thing about using productivity as your foundational cost of capital is that it highlights that bond yields of less than productivity strongly indicate, to my mind, a bubble.

With smiles!

Jason