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Convergence to the mean

March 31, 2009

John Maynard Keynes, the famous English Economist whose theories are back in vogue, wrote: “In the long run, we are all dead.”

Rocky Humbert, the obscure American curmudgeon and speculator, writes: “In the long run, prices revert to their long-run mean.”

This morning’s Case-Schiller Housing Index (-19% annualized) shows that housing continues to revert to its long-run mean.

This chart shows the major asset classes since 1987. Black=Housing. Red=CPI. Yellow=stocks. Green=commodities.

Asset class convergence

Asset class convergence

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  1. Sam
    March 31, 2009 at 3:25 pm

    James Grant pointed out that over all the historical data available housing appreciates at the rate of inflation +25bps on an annual basis. For what it’s worth.

  2. March 31, 2009 at 4:04 pm

    Sam:
    Thanks for your comment!

    In “theory,” Grant’s statement is interesting.

    In “practice,” it’s about as useful as Rocky’s chart (i.e. not very), since real estate is a local, non-fungible market. Also, one needs to predict the future course of CPI, which is extraordinarily difficult too.

    Rocky canceled his subscription to Grant’s Interest Rate Observer many years ago. He found it useful fodder for cocktail party chatter, however, Grant’s ideas (despite being intelligent and provocative) never made Rocky any money. [Also, Rocky insulted so many people, that he no longer gets invited to any cocktail parties, anyway.]

    Rocky’s criticsm of Grant is also borne out by Grant’s Japanese Hedge Fund, which, net of taxes and fees, consistently fails to beat a passive Japanese index fund.

    In contrast, Rocky’s useless pontifications, predictions, and insults are available to all — at no charge whatsoever.

  3. Sam
    March 31, 2009 at 10:09 pm

    Point taken. I am still young and impressionable so I must admit I still read it. However, I will agree it has never made me any money.

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