I posted a graph a while back showing how home prices for the 100 years leading up to the mid 1990s showed no growth, but fluctuated around a mean. Seems home prices are heading back there now.
And the fall in the price of oil from mid-2008 levels ought to put a lid of the "peak oil-ers".
So maybe mean reversion is the best way to model and forecast home and commodity prices. Is it also the best way to forecast the growth in the value of equities? Mankiw posts the following picture:
And the fall in the price of oil from mid-2008 levels ought to put a lid of the "peak oil-ers".
So maybe mean reversion is the best way to model and forecast home and commodity prices. Is it also the best way to forecast the growth in the value of equities? Mankiw posts the following picture:
Yes, but Mankiw posted this picture under the caption of "Why Warren Buffett is Buying Equities." This implies that there is an assumed new mean in equity prices/GNP that is above its long-term mean of the 70 years between 1920 and 1990. Mankiw (or maybe Buffett) is saying that now is the time to jump back into equities because we are currently at the trough.
My read of the picture above and your statement about mean reversion is that we are still just getting back to the mean, and the recession probably still has some room to run.
I'm just not sure Mankiw's title and Warren Buffet are right. Its hard to know a structural break until way after the fact. Sure there were advances in the securities market since the late 90s, but I'm going to need a couple more decades of data before I'm convinced stocks will be valued at more than 70% of GNP.
This actually made me think back to a comment you made in Fall 2007. You said that stocks are way overvalued. At the time I didn't buy it, but this graph is great support for your case.
Despite my fear of making a dumb comment, I think it would be interesting to look at what % of GNP is driven via publicly traded companies vs. the % of GNP generated via private companies over a similar timeline. Has the ratio of production been fairly constant over the years, or has it changed dramatically? Does this have an effect on how the public is willing to speculate on stocks across the board well beyond the earning potential of the composite index of all companies.
Wow, Romney. That is a great question. I'm not sure how you would decompose the contribution to GDP from public vs. private companies, but that question is interesting. There is going to be different levels of risk aversion in those two groups, and I'm sure they will behave differently in a downturn or in a bubble.