(This is Part 7 of a series. Go back to Part 6.)
The following principle had been mentioned above. Now let's look into it a little further:
Anything that is allowed to go to an extreme will sooner or later produce the opposite extreme.
Notice that this principle is not the same as reversion to the mean. Things that deviate from the average have a well-known tendency to revert to it. But this principle is
a little different: What it's saying is that if an extreme is reached then there will not be just a reversion to the mean but a journey to the opposite extreme.
I first learned this in observing financial markets. Perhaps the most famous example occurred in 1929. After rising steadily for most of the '20s, the U.S. stock market began accelerating upward in 1927, 1928 and 1929.
By August of 1929 the market had reached dizzying heights far beyond anything seen before—not only in price, but also in price compared to earnings, dividends, income, GDP and lots of other things. This ensured that when it finally fell, the stock market would fall not just
to its average value during the '20s, but far below.
Another example: After fluttering near $20 for a decade or so, oil finally sank to only $11 a barrel in 1998. Oil was cheap. The world was awash in oil. Naturally, the oil companies sharply reduced investment in new capacity, because it became increasingly uneconomic to build a new refinery or drill in harsh terrain, etc.
The predicable result is that the world has now reached a point where demand is beginning to outstrip supply—as evidenced by oil's recent price of $70 a barrel.
There's a saying in markets: "The cure for low prices is low prices; the cure for high prices is high prices." The current high price of oil has stimulated intense efforts to locate and produce more oil. Auto manufacturers are racing to produce more fuel-efficient vehicles, research
on alternative energy has redoubled and so on.
It takes time: So the fruits of these efforts are still years
in the future, but sooner or later they will have an effect. Meanwhile, high oil prices are having a decelerating effect on economies around the world. All of this will eventually bring oil prices down again (in real terms), though they may very well go higher first.
Keeping this Law of the Extreme in mind—and because so many things have reached extremes now—we're able
to make some predictions that, at this moment in time, may seem almost hallucinatory:
–The extreme complacency that exists now will become extreme panic;
–The extremely spendthrift U.S. government will become bankrupt within a few years;
–The extreme emphasis on credit will turn to an emphasis upon savings;
–The extreme housing market will fall 90% in real terms;
–The extreme profligacy that exists now will turn to an emphasis upon sustainability in all areas;
–The extremely overweight U.S. public will become thin;
–The extreme materialism that exists now will turn to a tremendous emphasis upon spirituality.
And now, among the predictions listed above, let's take a look at that last one:
(This is the end of Part 7. Go to Part 8.)
—jim sloman, 9.13.05
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