On Nov 22, 2006, at 2:50 PM, Keith Nybakke wrote:
> "All manias end with a reverting past the mean - falling to levels
> seen before the bubble started."
>
> I ran across this statement while looking at several housing bubble
> blogs. It was repeated, in some form or another, several times.
>
> Is it a valid truism?
It's usually thought to be, by people who believe in bubbles. People who believe that markets are rational and/or random would reject that. But the existence of bubbles has more adherents now than in the heyday of efficient market theory in the 70s and 80s, thanks in no small part to Robert Shiller's work. For a stock market example, see <http://www.econ.yale.edu/~shiller/online/jpmalt.pdf>, exhibit 4.
The US stock market bubble of the 1990s reverted to mean, but never really went beyond that. So there's reason to believe the fat lady is still just warming up.
Doug