Saturday, December 02, 2017


JOHN AUTHERS  posts (1 December) on Financial Times HERE 
Momentum and Value keep markets randomly efficient
Are markets efficient? And if so, in what way? Some will find this question irritating. This week saw the world’s biggest stock markets hit fresh all-time highs, despite widespread perceptions that the economy is in miserable shape. Stocks have trundled upwards in an almost straight line all year, oblivious to the alarm in the world. Efficient?
And there is the rise of bitcoin, the digital currency. It has no intrinsic value. And yet the price of one bitcoin has passed $10,000 this week, having risen more than 1,000 per cent in 12 months. It then went on to pass $11,000, before taking a dive towards $9,000. In what possible way is this efficient?
There is also irritation with academics’ efficient markets hypothesis (EMH). Easily made to sound ridiculous, EMH holds in its strongest form that markets go on a “random walk”. The market swiftly assimilates all known information about a stock, so that share prices simply walk randomly in response to news. The price is always right. Friday’s very sharp response across global markets to a report that the former national security advisor Michael Flynn was prepared to testify against President Donald Trump rammed home that markets move very swiftly to discount any news. 
In its hard form, EMH does not pass muster. The big US tech companies that have led the world for years dipped by almost 4 per cent on Wednesday, when there was no new news. The price could not have been right at all times. And nobody could possibly claim that the market for bitcoin is efficient.
In the absence of strong fundamental anchoring forces, investors tend to under-react to news and/or take cues from past price changes.
But market efficiency has more to be said for it than that. First, it implies that it is impossible to beat the market. And experience shows that beating the market is indeed very difficult.
Second, in the very long term markets do get the price right. Historians have shown that over the decades, the returns on stock markets move roughly in line with the growth in the economy.
And if markets are so inefficient, why is it that the invisible hand seems to do a better job than government planners have yet managed to do?
What a lot of agonising over not very much at all. Moreover, ending with a speculation based on a fantasy that the mysterious non-entity of an imaginary ‘invisible hand’ does what it is believed to do, so it doesn’t matter anyway.
Highly-paid, highly-talented and highly-trained mathematicians pore over the data looking for that competitive edge to beat their rivals to the, hopefully, predicatable influence that can make them even richer, or worthy of a Nobel Prize - until somebody comes up with better equations.

Is this the best use of an economist’s time?


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