Posts Tagged ‘Efficient Market Hypothesis’

Breaking the Guild of Macroeconomists

Tim at The Psy-Fi Blog compares the science of economics, or actually the pseudo-science, with medical theory in the days of Galen, the ancient Greek physician:Galen

Galen contributed a substantial amount to the Hippocratic understanding of pathology. Under Hippocrates’ bodily humors theory, differences in human moods come as a consequence of imbalances in one of the four bodily fluids: blood, yellow bile, black bile, and phlegm. Galen advanced this theory, creating a typology of human temperaments. An imbalance of each humor corresponded with a particular human temperament (blood-sanguine, black bile-melancholic, yellow bile-choleric, and phlegm-phlegmatic). Individuals with sanguine temperaments are extroverted and social. Choleric people have energy, passion and charisma. Melancholics are creative, kind and considerate. Phlegmatic temperaments are characterized by dependability, kindness, and affection.

While that theory proved wrong, Galen made some interesting contributions to medical science:

Galen’s principal interest was in human anatomy, but Roman law had prohibited the dissection of human cadavers since about 150 BCE. Because of this restriction, Galen performed anatomical dissections on living (vivisection) and dead animals, mostly focusing on pigs and primates. This work turned out to be particularly useful because in most cases, the anatomical structures of these animals closely mirror those of humans. Galen clarified the anatomy of the trachea and was the first to demonstrate that the larynx generates the voice. Galen may have understood the importance of artificial ventilation, because in one of his experiments he used bellows to inflate the lungs of a dead animal.

Among Galen’s major contributions to medicine was his work on the circulatory system. He was the first to recognize that there were distinct differences between venous (dark) and arterial (bright) blood. Although his many anatomical experiments on animal models led him to a more complete understanding of the circulatory system, nervous system, respiratory system and other structures, his work was not without scientific inaccuracies. Wikipedia. 

- Ilene

Breaking the Guild of Macroeconomists

Courtesy of Tim at Psy-Fi Blog 

Playskool's Mrs. Potato Head and Jeep, portraying Marmaduke, cross paths at the BlogHer '10 conference in New York, August 6, 2010. Hasbro and Fox Home Entertainment are both participating sponsors at this year's blogger conference. REUTERS/Ray Stubblebine/Hasbro/Handout  (UNITED STATES - Tags: SOCIETY)

Economic Entertainment

In an entertaining piece Economics is Hard. Don’t Let Bloggers Tell You Otherwise Kartik Athreya of the Fed in Richmond has suggested that financial bloggers are a mentally incontinent bunch, pathologically incapable of stopping themselves from opining on financial matters on which they actually offer no insight. Now, leaving aside the question of whether we want our professional economists to be entertaining, this opens up the question of whether untrained commentators can…
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Reich Levels Broadside at Greenspan, Rubin, and Summers, and Phony Financial Reform

I posted this article earlier, but now Jesse writes a great intro. – Ilene

Reich Levels Broadside at Greenspan, Rubin, and Summers, and Phony Financial Reform

Courtesy of JESSE’S CAFÉ AMÉRICAIN

Robert Reich is exactly correct. Back in 1999 I started questioning what Robert Rubin might have said to Alan Greenspan in a private meeting in 1997 to reverse his policy bias after his famous "irrational exuberance" speech and embrace the monetary easing that led to the tech bubble, and to join the fight against regulation, resulting in the repeal of Glass-Steagall in which the Fed was absolutely instrumental.

PBS Frontline – The Warning: The Roots of the Financial Crisis

This was no accident, in my opinion. This was no misplaced belief in ‘the efficient market hypothesis.’ This was not the culmination of the neo-liberal fascination with a mythology of human nature that would make Rousseau blush in its unthinking naiveté. And for Greenspan to say now, I am sorry, I guess I was mistaken, is more prevarication from the master dissembler.

There were plenty of enablers to this financial fraud. There always are many more people who do not act out of principle, or inside involvement and knowledge, but out of their own selfish bias and greed or craven fear that compels them to ‘go with the flow.’

And there is little better example of this than the many people who are even now turning a willful eye away from the blatant government manipulation of the stock and commodity markets, in particular the silver market. They do not wish to believe it, so they ignore it, and even ridicule it depending on how deeply it affects their personal interests. But the overall body of evidence is compelling enough to provoke further investigation, and the refusal to allow audits and independent investigation starts to become an overwhelming sign of a coverup. I am not saying that it is correct, or that I know something, but I am saying to not investigate it thoroughly and to air all the details, is highly suspicious and not in the interests of the truth. I did not know, for example, that Madoff was conducting a Ponzi scheme, but the indications were all there and a simple investigation and disclosure would have revealed the truth, one way or the other.

"Fiat justitia ruat caelum." Let justice be done though the heaven’s fall. This is the principle…
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Efficient Market Hypothesis: True “Villain” of the Financial Crisis?

This article discusses Robert Prechter’s view of the Efficient Market Hypothesis. For more from Elliott Wave International, download this free 10-page issue of Robert Prechter’s Elliott Wave Theorist.

Efficient Market Hypothesis: True "Villain" of the Financial Crisis?

economy lessons, gravity lessonsBy Robert Folsom, courtesy of Elliott Wave International

When a maverick idea becomes vindicated, there’s a good story to tell. It usually involves a person (or small group of people) who courageously challenge the orthodoxy of the day — and, over time, the unorthodox yet better idea prevails.

A "good story" of this sort has surfaced during the current financial crisis. A chapter of the story appeared in a recent New York Times article, "Poking Holes in a Theory on Markets." The theory in question is the efficient market hypothesis (EMH), which the article suggested is so hazardous that it "is more or less responsible for the financial crisis." This quote tells you most of what you need to know:

"In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum."

In case your Latin is rusty, Quod erat demonstrandum means "which was to be demonstrated." Its abbreviation (QED) appears at the conclusion of a mathematical proof. In this case, the massive financial bubbles of recent years are the proof that refutes the efficient market hypothesis, which argues that markets move in a "random walk" and are not patterned.

Similar articles in the financial press have reported the demise of the EMH. Just this week an Economist magazine blog included this bold declaration:

"No one has yet produced a version of the EMH which can be tested and fits the evidence. Thus, the EMH must logically be discarded, as a valid hypothesis must be testable."

QED, indeed — I agreed years ago that the random walk was implausible. But I didn’t come to this view because of behavioral economists, although their work…
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Six Impossible Things Before Breakfast

"Science advances one funeral at a time." Max Planck

Six Impossible Things Before Breakfast

six impossible things before breakfastCourtesy of John Mauldin

In this issue:
Six impossible things before breakfast, or how EMH has damaged our industry
The Dead Parrot of Finance
The Queen of Hearts and impossible beliefs
Slaves of some defunct economist
Prima facie case against EMH — Forever blowing bubbles
The EMH ‘Nuclear Bomb’

The Efficient Market Hypothesis, according to Shiller, is one of the most remarkable errors in the history of economic thought. EMH should be consigned to the dustbin of history. We need to stop teaching it, and brainwashing the innocent. Rob Arnott tells a lovely story of a speech he was giving to some 200 finance professors. He asked how many of them taught EMH – pretty much everyone’s hand was up. Then he asked how many of them believed it. Only two hands stayed up!

And we wonder why funds and banks, full of the best and brightest, have made such a mess of things. Part of the reason is that we have taught economic nonsense to two generations of students. They have come to rely upon models based on assumptions that are absurd on their face. And then they are shocked when the markets deliver them a "hundred-year flood" every 4 years. The models say this should not happen. But do they abandon their models? No, they use them to convince regulators that things should not be changed all that much. And who can argue with a model that was the basis for a Nobel Prize?

I am again out of town this week, but I have been saving a speech done by my friend James Montier of Société Générale in London on the problems with the Efficient Market Hypothesis (EFM). While parts of it are wonkish, there are also parts that are quite funny (at least to an economist).

Ideas have consequences, and bad ideas usually have bad consequences. The current maelstrom from which we are emerging (finally, if in fits and starts) has many culprits. A lot of bad ideas and poor management that came together to create the perfect storm. Today, we look at some of the ideas that are part of the problem but are too often glossed over


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The psychology of economic forecasting

The psychology of economic forecasting

Courtesy of Edward Harrison of the site Credit Writedowns.

During the last generation, the economics profession has veered toward a ‘science’ model of economics and finance. The intellectual underpinnings for this development began with the Efficient Market Hypothesis (EMH) and has continued in no small measure due to what is often termed ‘University of Chicago School Economics.’  If you are looking for a good read on what is wrong with the EMH view of the world, you should get ready for Justin Fox’s “The Myth of the Rational Market” which is coming to a bookstore near you.

My own view is that many economists today are really frustrated scientists looking to ply their science and math craft in economics. In reality, economics is a social science with large influences from psychology and the scientific view ignores this.  However, the fact that psychology plays a large role in economics is something that is increasingly appreciated, as the Nobel Prize received by Daniel Kahneman attests.

So, I am not going to discuss EMH or rational markets.  Rather I want to delve into the psychology of economic forecasting and why economists act as they do.  Late last month, I posted an article with an attached video in which Marc Faber made the very astute comment, “it’s very tough for a forecaster who was ultra-bearish to stay bearish, because if he’s wrong he has a reputational risk.”  What I believe Faber was saying is this: an economist who is proved wrong is an economist who loses credibility.  This statement is at the heart of economic forecasting.

What Faber is giving voice to is the very real concern that any economic forecaster feels in making a prediction. If one is proved right, then plaudits will follow.  If one gets it wrong, the Bronx cheer is what you are likely to get. This is true for macroeconomists as much as for Wall Street analysts.  I will give you two examples from Wall Street to illustrate my point.

Henry Blodget: Amazon to $400

In October of 1998, Blodget predicted that Amazon’s stock would soar to $400 a share.  At the time, he was a little known analyst at Oppenheimer, the same company for which Meredith Whitney worked until recently.  His Amazon prediction propelled…
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Phil's Favorites

The US government has huge debts, and House Democrats could lead the way on solutions - an economist explains how

 

The US government has huge debts, and House Democrats could lead the way on solutions – an economist explains how

Democrat Nancy Pelosi spoke in D.C. the night of the midterm elections. Reuters/Jonathan Ernst

Courtesy of Laurence J. Kotlikoff, Boston University

Now that Democrats control the House, the question on many minds is what they will do with it.

Incoming Majority Leader Nancy Pelosi s...



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Zero Hedge

PG&E Plummets After Drawing Down Billions On Its Revolvers

Courtesy of Zero Hedge

Two days after California utilities PG&E and Edison crashed, losing a third of their market cap in 48 hours amid investor fears over their exposure to the devastating California fires which are still raging, moments ago PG&E stock tumbled over 20% in premarket trading after the company disclosed it has fully drawn down its revolving credit facilities, in anticipation of soaring liquidity needs.

In an 8-K filing this morning, PG&E and its subsidiary, Pacific Gas and Electric Company, announced they had drawn the full $3.3 billion available ...



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Kimble Charting Solutions

Stock Market Correction Lingers As 800 Pound Resistance Levels Hold

Courtesy of Chris Kimble.

Key stock market indices continue to struggle beneath 800-pound Fibonacci extension levels (resistance).

In today’s “6-pack” chart, we illustrate these key bull/bear lines for investors – see below. The Dow Jones Industrials, Transports, S&P 500, and Nasdaq 100 are all experiencing weakness and selling pressure at long-term Fibonacci extension levels each at (1).

But the overhead resistance spreads to other key sectors like the Banks and Semiconductors. The Banks are experiencing weakness at the 2007 highs at (2) and the Semiconductors are experiencing weakness at the 2000 highs at (3).

Expect market weakness (or consolidation) to continue until these stock indexes and key market sectors breakout above resistance. Stay tuned!

6-Pack of Stock Market Indices –...



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Insider Scoop

BTIG Research: Etsy Is Online Leader In Handmade, Artisanal Goods

Courtesy of Benzinga.

Related ETSY Is Etsy A Better E-Commerce Play Than Amazon? 88 Biggest Movers From Yesterday ...

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Members' Corner

NY Times: OPERATION INFEKTION

 

This is a three-part Opinion Video Series from NY Times about Russia’s meddling in the United States’ elections as part of its "decades-long campaign to tear the West apart." This is not fake news. Read more about the series here.

OPERATION INFEKTION

RUSSIAN DISINFORMATION: FROM COLD WAR TO KANYE

By Adam B. Ellick and Adam Westbrook

EPISODE 1

MEE...



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Chart School

Weekly Market Recap Nov 11, 2018

Courtesy of Blain.

This past week was saw another positive move up by bulls – especially in the Dow and S&P 500; the NASDAQ was not quite as enthusiastic.   Wednesday’s rally was on the legs of an election that was seen as market friendly or at least not as bad as it could have been.   Essentially – paying people a lot of money to get nothing done the next 2 years – woo hoo!

The market is interpreting Wedneday’s result as insuring that “no big things will get done,” in Washington between now and 2020, Craig Birk, chief investment officer at Personal Capital told MarketWatch. “The market appreciates the relative certainty of the slow legislative agenda.” he said.

“As President Trump plans his 2020 reelection campaign, a gridlocked Congress is unlik...



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Digital Currencies

Bitcoin's high energy consumption is a concern - but it may be a price worth paying

 

Bitcoin's high energy consumption is a concern – but it may be a price worth paying

Shutterstock

Courtesy of Steven Huckle, University of Sussex

Bitcoin recently turned ten years old. In that time, it has proved revolutionary because it ignores the need for modern money’s institutions to verify payments. Instead, Bitcoin relies on cryptographic techniques to prove identity and authenticity.

However, the price to pay for all of this innovation is a high carbon footprint, created by Bitc...



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ValueWalk

Vilas Fund Up 55% In Q3; 3Q18 Letter: A Bull Market In Bearish Forecasts

By Jacob Wolinsky. Originally published at ValueWalk.

The Vilas Fund, LP letter for the third quarter ended September 30, 2018; titled, “A Bull Market in Bearish Forecasts.”

Ever since the financial crisis, there has been a huge fascination with predictions of the next “big crash” right around the next corner. Whether it is Greece, Italy, Chinese debt, the “overvalued” stock market, the Shiller Ratio, Puerto Rico, underfunded pensions in Illinois and New Jersey, the Fed (both for QE a few years ago and now for removing QE), rising interest rates, Federal budget deficits, peaking profit margins, etc...



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Biotech

Gene-editing technique CRISPR identifies dangerous breast cancer mutations

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

 

Gene-editing technique CRISPR identifies dangerous breast cancer mutations

Breast cancer type 1 (BRCA1) is a human tumor suppressor gene, found in all humans. Its protein, also called by the synonym BRCA1, is responsible for repairing DNA. ibreakstock/Shutterstock.com

By Jay Shendure, University of Washington; Greg Findlay, ...



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Mapping The Market

Mistakes were Made. (And, Yes, by Me.)

Via Jean-Luc:

Famed investor reflecting on his mistakes:

Mistakes were Made. (And, Yes, by Me.)

One that stands out for me:

Instead of focusing on how value factors in general did in identifying attractive stocks, I rushed to proclaim price-to-sales the winner. That was, until it wasn’t. I guess there’s a reason for the proclamation “The king is dead, long live the king” when a monarchy changes hands. As we continued to update the book, price-to-sales was no longer the “best” single value factor, replaced by others, depending upon the time frames examined. I had also become a lot more sophisticated in my analysis—thanks to criticism of my earlier work—and realized that everything, including factors, moves in and out of favor, depending upon the market environment. I also realized...



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OpTrader

Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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