21 Feb 2018
Asset Bubbles: Priced to perfection
- Posted by Dejan Pekic BCom DipFP CFP GAICD, Senior Financial Planner
Mean reversion is the theory of prices and returns eventually moving back toward their long term mean or average.
You can go back to 1864 for the G7 group of countries (Canada, France, Germany, Italy, Japan, United Kingdom and the United States) and you cannot see a bigger collapse in bond yields than over the immediate past four decades (refer Chart 1).
Consequently we have the highest bond prices in recorded human history fueled by Central Banks printing money which have ballooned their balance sheets to having in excess of US$15 trillion in IOUs (refer Chart 2).
This collapse in interest rates together with quantitative easing has helped the United States record its third longest period of business expansion over the past 164 years (refer Chart 3).
Click for Charts.
Financial assets are stretched, so remember, when fear and panic take hold during the next financial catastrophe, investors will be presented with the opportunity to buy more quality assets at discounted prices.
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