We’ll regress to (and through) the mean

Whether or not you’ve had time yet to plow your way through David Collum’s excellent 2017 Year in Review, our annual podcast with Dave always brings additional color to light — and this year’s is no exception.

My model going forward predicts the next recession is going to be a real butt-kicker. That’s why the Feds are so terrified. I think they realize that we’re going to end up with a vicious cycle kicking into gear that the Feds aren’t going to be able to control. They’ve already proven that they can’t do much for the economy: someone tallied the annual GDP growth from 1930 to 1939 and then they tallied GDP growth from 2007 to 2016 and they’re identical when annualized. So we’ve been tracking the Great Depression in terms of GDP growth.

So, you can be thrilled about the fact your 401K has appreciated — but it’s sitting on a pocket of air because nothing is improved underneath the surface.

Over-valuation is appreciation pulled forward. And undervaluation is appreciation deferred. Once you’re 2X overvalued, no matter how many more gains you get, you’re just pulling form the future — and you’re going to give them all back, either by price or by time or a combination of the two. You’re going to regress to the mean.

You can pretend you’re never going to die. But it’s simply not avoidable. We will regress to and through the mean at some point. And when you’re 2X overvalued, that means it is going to take either 30 years like with the Nikkei (in Japan), or massive, massive price adjustments. Neither one appeals to me. 

Click the play button below to listen to Chris’ interview with David Collum (72m:36s).