Mean reversion

We believe a number of economic and financial developments can be predicted on the basis of the idea that some variables will inevitably revert to mean. This applies for example to: The ratio of wealth to GDP, which cannot diverge. If it is too high, financial or real estate asset prices will fall; The ratio of the real wage to productivity. If it is abnormally low, wages must grow faster in the future; The ratio of debt to GDP for all possible debt types: if it is too high, then there will have to be deleveraging; The ratio of share prices to earnings or house prices to rents: if they are too high, there will be a fall in share or real estate prices.