An End to Efficient Market Theory 13 comments
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This year has already proven to be one for the record books in several ways. To summarize, we’ve seen:
- An end to the investment bank business model.
- An end to any delusions of the “free market.”
- An end to the dollar (this will take some time to play out).
- An end to the notion of regulatory bodies as protecting shareholders.
We’re adding a new chapter to this book or horrors this week with the end of the “efficient market theory” [EFT].
If you’re unfamiliar with EFT, it basically assumes that at any time, the market has already discounted the knowledge of its participants. Thus, at any moment the market is presenting the real “value” of a business based on all there is to know about it.
The EFT really holds no sway over anyone with a brain. It’s largely upheld today by academics. However, this week is the final nail in the coffin for anyone who believes the market has any clue how to discount anything.
The issues that are unfolding today — the collapse of Fannie Mae (FNM), investment banks, AIG (AIG), etc — have been staring everyone in the face for months if not years. It was obvious that investment banks were overleveraged and essentially insolvent. I knew it. Anyone who looked at their balance sheets knew it. The talking heads and “analysts” who called a bottom in financials were either liars or idiots — neither of which inspire confidence.
Yet, today investors are “stunned” and “surprised” that investment banks and other financial firms are going under. They’re surprised that the stock market is collapsing. They’re surprised that stocks don’t go up forever. That bad business decisions and investments can come back to bite you in the tail.
The S&P 500 has now fallen 10% this week as investors finally get the message. Granted it took a 2X4 — two investment banks going under and the largest insurance company on the planet begging for a $80 billion bailout — but they got the message.
The message?
This financial crisis is the worst since the 1930s. The only thing stopping the market from a full blown collapse has been regulators turning their backs on the very people they were meant to protect — shareholders and the American public — to bail out overpaid idiots who used fancy language to cover up the fact that they had rendered their firms insolvent and had openly fudged their accounting in order to achieve salaries more suited for a financial genius.
The message?
That saving nothing and spending beyond your means is no way to arrange your personal finances, let alone a country’s economy. That surpluses are not a problem. And yes, deficits DO matter.
Wall Street has been pursuing reckless business practices for years. Alan Greenspan, under oath, told Congress not to regulate the development of derivatives and structure investment vehicles because these guys allegedly knew what they were doing. They didn’t. And neither did Greenspan.
I would not be surprised to see a full blown crash in the coming weeks. Anyone who tells you there is great opportunity right now is lying. Yes, many great businesses are trading at fantastic prices. But buying now doesn’t do you a lick of good if the share price collapses another 20%.
My advice? Move everything that you can into cash. The world is going to be one giant garage sale in the coming months. You’ll want dry powder handy to buy whatever it is you’re looking for — fancy cars, homes, or top quality stocks — when this happens.
Protect yourself and your family. We are in a period of massive wealth destruction. It’s no longer about making big gains, it’s about NOT LOSING MONEY.
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This article has 13 comments:
Yes, I'll be missing the bounce, but there's no way to know when that will start or where it will stop. Since the long term trend seems pretty clear, it's time to develop some patience.
Take a look at the historic actions taken by the Fed, then ask yourself if you really think your being on the sidelines will cause you to miss out on the next bull market. I think not.
Everyone knows, but no one is saying, that the way to stop this meltdown is for the financials to reveal their books and show us just how healthy they really are. Since none are doing that, but merely talking their fine conditions, everyone believes them to be dead men walking. A market that is healthy does not need $250 Billion liquidity injections overnight. The obvious is getting more obvious.
But this is nowhere near panic. The patient needs bigger and bigger doses of cash to keep it alive. Soon it won't matter, and then, and only then, will you experience genuine market panic.
We still have looming CDS settlements on Fannie / Freddie, and AIG, probably not to occur until next month. I am starting to wonder if we get that far.
How is this smarter than calling the bottom in July?
...Oh wait...let me check that...I'll get back to you...
It sounds as if several contributors are, today, trying to blame Obama for ?? something ?? involved in the histrionics we are all watching at the moment. Pay attention, he, also, was not in charge???
Could we try realism? This is supposed to be communications between and among rational folks who are trying to understand the bases for a most undesirable situation.
I thought Capital Research has been holding piles of stocks of these companies?