Following on from last month`s missive on financial bubbles we will explore the theory that is mean reversion.
Mean reversion? No, it`s nothing to do with a fiscally careful man trying to drive his car backwards but rather a concept that analysts use to consider future pricing trends. With that poor attempt at humour out the way let`s get on with the show.
In summary mean reversion is a theory that suggests that prices and levels of return eventually move back towards the mean or average. The concept can be applied to various prices or values including equity indices, commodity prices or economic growth rates.
As falling house prices and tightening credit squeeze America’s economy, some worry that the country may suffer a decade of stagnation, as Japan did after its bubble burst in the early 1990s...
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