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Randall Haerdt is a student of finance and economics; an advocate of sustainable economy development, natural capitalism and economic science; with interests in global governance, sustainable local economies, and international development. His educational background is from The Elliott School of... More
  • Defending the Efficient Markets Hypothesis... 1 comment
    Aug 9, 2009 12:44 PM

     Many people keep harping on the argument that the Efficient Markets Hypothesis is dead.

    This is utter stupidity.

    You can't claim that a theory is dead when you are testing it in a filthy laboratory. The United States economy, and the global economy (which is based strongly on the US as a center of consumption), has of late not been fertile ground for efficient markets. In fact, one could make the argument that efficient markets have not existed for several decades. There has been too much government action, from laws being enacted and repealed to the Fed wading in and stirring up the waters.

    With numbers being massaged, skewed, and falsified everywhere; politicians and sectors of corporate America (financials, automobiles, energy) sleeping together; and international trade so badly NOT a free market, OF COURSE MARKETS WON'T EFFICIENTLY PRICE IN NEW INFORMATION.

    New information is spun in all sorts of ways that investors have no idea what to base their decisions on, so no decisiosn will seem rational. With the data available, given the arguments posed by the array of political and economic commentators, I could make any decision you make seem irrational. And I could get people to believe. Then, I could sell them a financial product, and make a buck. 

    In the long run, markets are always efficient. There will be a correction. Somewhere down the line, information will diffuse and reality will dawn.  Just as markets are self correcting, as is society. When assessing this situation, you have to realize that power holders can almost indefinitely game the system when they've got the gun and it's implicitly pointed at Americans' heads. Either Americans will wake up and realize that the government reallly can't pull the trigger without shooting itself in the leg, or they'll starve to death on their knees. 

    People fail to realize that if you play the wrong notes, then the music's not going to sound right. With tuning and accuracy in decision, we can make markets efficient. Unfortunately, markets today aren't listening to any easy tune. Today they are blasted by hundreds of instruments, all in different keys, playing different songs. The loudest one wins in the short term, and the loudest instrument right now is Team Bernanke-Geithner. 

    Maybe their piece sounds nice through all the static, so the market will hum along, but it's only a matter of time until realization dawns on just how out of tune to reality it is.

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  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
     
    The "strong form" of the efficient markets hypothesis postulates that the market will "see through" all information, both good and bad, both public and non public.

     

    That's ridiculous, of course. Which is why the strong form doesn't work.

     

    You may be making an argument about the "semi-strong" form. I'm inclined to doubt you, but if your argument is that it hasn't had a "fair test," that's an argument worth debating.
    9 Aug 2009, 01:12 PM Reply Like
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