On mean reversion, well draw the trend through any random walk and it will look like the series mean reverts even when we know it doesn’t. There’s still not really a sound explanation for why shares have returned such a high premium historically over risk-free assets, it’s not implausible that people could gradually overcome their risk aversion, driving down shares’ risk premium and pushing up the prices and p/e ratios.

If I had total faith in mean reversion of yield ratios I would be pretty scared about NZ house prices right about now…

Peoples determination to explain all upward shifts in growth on supply side effects drives me nutty – no doubt supply side shifts are a major driver, but a business cycle will always exist.

“this time it’s different”

I find that statement annoying as well Richard. Its not wrong, things are always different, but what people mean when they say it is often bull.

While I agree with CPW’s point that the norms can change in the long-run, statements of the ilk of those you’ve listed are attempting to explain things that have so far only proven to be short term phenomena.

1. – Not certain what this means? That an inverted yield curve always signals recession? Trueish in the US but a complete fiasco in the NZ context, so I don’t know if I would say this utterly wrong.

2. – I’m not aware of economic models suggesting that there is a long-run value (as a share of GDP) that earnings must revert to. Normal technological shocks or shocks to labour supply could permanently shift the share.

3. – Not defeated but the fact we’re living in the the “great moderation” is conventional wisdom still I believe.

4. – Consumer confidence has a little bit of predicative power, but is hardly the be-all and end-all.

6. – As per 2, mean reversion in p/e (or similar) ratios has been a stylised fact of historical equity market data, but there is no reason that structural shifts couldn’t occur.

7. – I wouldn’t agree to this but would add the the words “at prevailing tax levels” for clarity.

8. – Dow theory is the usual technical analysis mumbo jumbo, with very little evidence to support it whatsoever. You’d have a much harder time finding an economist who didn’t agree with this statement.

9. – The fed model is just another way of justifying the belief that p/e ratios earnings mean revert, so this isn’t consistent with 6 really. Of course the fed model doesn’t prove that shares are underpriced, it suggests that either shares are underpriced or earnings are overestimated. Looks like the latter right now…

10. – Plenty of economists are satisfied with the evidence that short-term price movements in volatile components like commodities don’t have any predictive power for future inflation, and hence should be ignored (by looking at core inflation). So not an outrageous position at all, unless commodity price changes are undergoing a longer term trend. But even then, if commodities are imported, is there any value in trying to push the non-tradable sector into deflation to offset the tradable inflation?

On another note, just because there has been a business cycle historically doesn’t mean we should be relaxed about recessions. I still think they’re a complete waste, with very few benefits. I’m not even convinced the US needs to undergo much in the way of reallocation of resources, the decline in building is (probably) mostly over already. It strikes me that a US recession would be a completely pointless Keynesian-type demand slowdown, for no good purpose (unless you think Americans should be saving more…).