I am not interested in debating whether or not this particular bubble will revert to mean. Regression to mean is a very powerful tool and one ignores it at one’s peril; I never indicated that I was in disagreement with you of this phenomenon. Nor do I appreciate being categorically lumped in with the mouth-breathing Visigoths who are unable to appreciate history as an educational tool. However being short of time, I will offer the following analogy:
The seasons turn in order from spring, to summer, to fall, to winter. There is a great deal of historical evidence to agree with the prediction that this cycle is a powerful one and is likely to continue into the foreseeable future. Any fool who watches the season turn from spring to summer and then declares a permanently high plateau of summertime temperatures would rightly be regarded as a fool. As would the person who asks what the mean yearly temperature is in Wisconsin; the answer would be, it depends on the season.
However, evidence that there has *always* been a cycle of seasons tells us nothing about the effects, if any, of global warming on the extremities of temperatures on each season. Human activities may be causing an changes in the mean temperatures in any given season from this point forward. Another example is that the climate of the Sahara has undergone enormous variation between wet and dry over the last few hundred thousand years, give an ice age or two and discussion the mean temperature of the Sahara over that time frame is meaningless. This evidence is not mutually contradictory with the force of yearly seasonal changes — rather, it is merely a matter of difference of scope (kinetics vs. thermodynamics). My suggestion of examining larger effects is neither a contradiction or a challenge to your analysis of kinetic effects, which I affirm in the highest — I agree with your identification of the kinetic main effects. I just would feel remiss in not adding to your analysis with this addition of scope.
Using evidence that fall and winter will surely follow the summer (which no reasonable person would dispute) cannot say anything about what the future long-term trends will be on any given season based purely on the information that the seasons change and they always follow that cycle. Perhaps an ice age is coming. Perhaps not. Of course Rich’s graph shows a situation so extreme that even returning to just the historical mean would be extremely painful, let alone overshooting. If we put a pencil with one end at the earliest time point on his graph so that it sits in the centre of the cycles, we can see that whatever points are furthest out in time (the future) will affect the angle of the pencil the most (points far out on the y axis have the greatest leverage on the linear regression). But it is such a huge distortion of prices over the past few years that maybe a better characterization of the system would be to break your pencil into line segments where each segment covers a full cycle. Then each mean for each cycle would be somewhat different. And your judgement about where to break your pencil (the edges of what you consider a cycle) could radically affect your conclusions.
The way to study longer term questions would be to examine the edges and the extremes of the seasons and try to identify what changes are due to causes that had not existed previously, whether or not those causes are likely to persist (credit liquidity, the game theory involved with international economic factors/trading incentives, saber rattling, etc), and even then there would be a great deal of uncertainty in the prediction.
And as in any chaotic system quantitative, specific predictions are hard to make with any reliability. Picture the gazelle that has been gravely wounded by the lion and then somehow managed to get free (eg the housing market wounded by change in sentiment), only to find itself now faced with a circle of jackals (inflation, monetary policy determined by a new Fed, credit liquidity, changes in the Bretton-Woods agreement (our currency is no longer gold backed and other countries may decide to stop pegging their currencies to ours)) — it may very well be impossible to judge which particular jackal leaps for the throat of the gazelle to make the final killing blow. So while it might be interesting to line up potential “jackals”, no one of them might be obviously strong enough to deal the killing blow — but the combination of them might be. Or there might be few enough jackals at the moment and the gazelle might manage to escape one more time, for now — and everyone who might benefit from eating gazelle tonight goes hungry for another day.
