Efficient Markets Hypothesis

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On The Wisdom Of Crowds (And Madness Of Mobs)





Fear, like greed, makes people, and that would include investors, behave irrationally. Two major equity bear markets in the last 13 years have traumatized investors. The belief in Modern Portfolio Theory in general and the Efficient Markets Hypothesis (EMH) in particular has been shaken and finance theory will have to be re-written. So, Absolute Return Partners' Niels Jensen asks, what is it specifically that has changed? Human behavior certainly hasn’t. Greed and fear have been factors to be reckoned with since day nought. When faced with the unknown, people (in this case, fund managers) will use whatever information they can get hold of. Hence we shouldn’t really be surprised that fund managers extrapolate current earnings trends when forecasting future earnings, despite the evidence that it is a futile exercise. Occasionally, the Wisdom of Crowds turns into the Madness of Mobs and all rational behavior goes out the window. History provides many examples of that. EMH is entirely unsuited to deal with froth. What made economists love the EMH is that the maths behind it is so neat whereas the alternative truth is a little messy.

 
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Head Of The Fed's Trading Desk Speaks On Role Of Fed's "Interactions With Financial Markets"





In what is the first formal speech of Simon "Harry" Potter since taking over the magic ALL-LIFTvander wand from one Brian Sack, and who is best known for launching the Levitatus spell just when the market is about to plunge and end the insolvent S&P500-supported status quo as we know it, as well as hiring such sturdy understudies as Kevin Henry, the former UCLA economist in charge of the S&P discuss the "role of central bank interactions with financial markets." He describes the fed "Desk" of which he is in charge of as follows: "The Markets Group interacts with financial markets in several important capacities... As most of you probably know, in an OMO the central bank purchases or sells securities in the market in order to influence the level of central bank reserves available to the banking system... The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions." In other words: if the SPX plunging, send trade ticket to Citadel to buy tons of SPOOSs, levered ETFs and ES outright. That the Fed manipulates all markets: equities most certainly included, is well-known, and largely priced in by most, especially by the shorts, who have been all but annihilated by the Fed. But where it gets hilarious, is the section titled "Lessons Learned on Market Interactions through Prism of an Economist" and in which he explains why the Efficient Market Hypothesis is applicable to the market. If anyone wanted to know why the US equity, and overall capital markets, are doomed, now that they have a central planning economist in charge of trading, read only that and weep...

 
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"The Boredom Discount": Why Greater Risk Does Not Lead To Greater Return





Confused by stock bubbles and furious episodes of manic market euphoria? SocGen's Dylan Grice explains it in one brief sentence: "we’re hardwired to overvalue excitement and undervalue boredom."

 
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