cbworker, you raise a lot of good points. But I have a couple clarifications:
1. I definitely did not say “valuation always falls back to the mean.” I dedicated several paragraphs to factors that could keep valuations elevated, and ended that section with: “The best approach is probably to allow for the possibility that valuations have permanently shifted to some degree, but not to depend on it.”
That’s not really central to your argument, but I wanted to clarify for anyone who is reading this post but didn’t read the piece I wrote.
2. Also a tangent and not related to your central point, but: I would not characterize it that Grantham is questioning mean reversion. His argument was that profit margins for US corporations may remain elevated for much longer than usual (due to monopolies, regulatory capture, etc.). That’s different than questioning mean reversion of valuations. And even more tangentially, fwiw… that viewpoint is not shared by the actual portfolio managers at GMO. (At least, not to the degree that it makes them want to have any US stock exposure).
Anyway. I think you make some good arguments and I particularly think your point 1 is valid and very important.
Where we part ways is your certainty that it will necessarily continue. I believe there are too many moving parts to know for sure. For example, there is a lot more going on than the internet. And some of the factors that have widened the income gap have already gone into reverse (a major example being globalization).
So my view is that it’s impossible to know for sure where valuations will go. But I do think you raise some good ideas.
