No wonder investors don't take economists seriously. Or if they do, they shouldn't. Since Richard Nixon interrupted Hoss and Little Joe on a Sunday night in August 1971, it's been one boom and bust after another. But don't tell that to the latest Nobel Prize co-winner, Eugene Fama, the founder of the efficient-market hypothesis.
The efficient-market hypothesis asserts that financial markets are "informationally efficient," claiming one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.
"Fama's research at the end of the 1960s and the beginning of the 1970s showed how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day's or a week's time," said Peter Englund, secretary of the committee that awards the Nobel Prize in Economic Sciences. "That shows that there is no point for the common person to get involved in share analysis. It's much better to invest in a broadly composed portfolio of shares."
Fama is not just a Nobel laureate. He also co-authored the textbook, The Theory of Finance, with another Nobel winner, Merton H. Miller. He won the 2005 Deutsche Bank Prize in Financial Economics as well as the 2008 Morgan Stanley-American Finance Association Award. He is seriously a big deal in the economics world.
So if Fama has it right, investors should just throw in the towel, shove their money into index funds, and blissfully wait until they need the money. Before you do that, read what Fama had to say about the 2008 financial crisis.
The New Yorker's John Cassidy asked Fama how he thought the efficient-market hypothesis had held up during the recent financial crisis. The new Nobel laureate responded:
"I think it did quite well in this episode. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient."
When Cassidy mentioned the credit bubble that led to the housing bubble and ultimate bust, the famed professor said:
"I don't even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning."
No matter the facts, Fama has his story and he's sticking to it.
"I think most bubbles are 20/20 hindsight," Fama told Cassidy. When asked to clarify whether he thought bubbles could exist, Fama answered, "They have to be predictable phenomena."
The rest of us, who lived through the tech and real estate booms while Fama was locked in his ivory tower, know that in a boom people go crazy. There's a reason the other term for bubble is mania. According to Webster's, "mania" is defined in an individual as an "excitement of psychotic proportions manifested by mental and physical hyperactivity, disorganization of behavior, and elevation of mood."
Financial bubbles have occurred for centuries. In January 1637, the price of the common Witte Croonen tulip bulb rose 26 times, only to crash to 1/20th of its peak price a week later.
Eighty years later in France, John Law flooded the French economy with paper money and shares of the Mississippi Company. The public went wild for stock in a company that had no real assets. The shares rose twentyfold in a year, only to crash. Law, a hero in the boom, was run out of France in disgrace.
At the same time across the channel, the British public bid up South Sea Company shares from ?300 to ?1,000 in a matter of weeks. Even the brilliant Sir Isaac Newton was caught up in the frenzy. He got in early and sold early. But he then jumped back in near the top and went broke in the crash.
In the modern era, booms and busts are too numerous to count: Japanese stocks and property, real estate (multiple times), stocks, commodities, stocks again, farmland (multiple times), and art are just a few. Yet the newest co-Nobelist denies the existence of booms and busts and advises you to put your money in index funds and hope for the best.
However, investor returns have not been the best. The last complete calendar decade for stocks ending in 2009 was the worst in history. The Wall Street Journal reported, "Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade."
When you adjust that for inflation, the results were even worse, with the S&P 500 losing an average of 3.3% per year.
This decade, stocks have been on a tear—as have bonds, farmland, and art. At first glance, it's nonsensical that the price of virtually everything is rising. But when you remember that the Federal Reserve's cheap money has flooded Wall Street but hasn't come close to Main Street, it becomes clear. The money has to go somewhere.
If Fama were correct, there would be no legendary investors like Doug Casey or Rick Rule. There would be no opportunities for ten-baggers and twenty-baggers in resource stocks.
Fama is like the economist in the old joke who sees a hundred-dollar bill on the ground but doesn't pick it up. "Why didn't you pick it up?" a friend asks. The economist replies, "It's impossible—a hundred-dollar bill would have already been picked up by now."
Of course savvy investors know there are hundred-dollar bills to be picked up in the market. With tax-selling season upon us, now is the time to be shopping for bargains.
Doug's friend Rick Rule often says, "You can either be a contrarian or a victim." Taking Fama's advice will make you a victim. The path to wealth is to run against the herd, not with it.
Learn how to be a contrarian… how to make handsome gains from the best precious metals, energy, and technology stocks… how to find investment opportunities even in the most unlikely places… how to recognize profitable trends before they start. Read all this and more in our free daily e-letter, the Casey Daily Dispatch—click here to get it now.


if you believe market is efficient then bubble is impossible ...
A bubble obviously exists between Fama's ears.
"Doug's friend Rick Rule often says,.. ["blah, blah, blah"]"
We've been Rick Rolled by another Nobel Prize winner.
Should change his name to Ofama.
Or FOMO.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013...
Steven King, 'The Stand', Part 1: "The Plague".
"Captain Trips DOES, NOT, EX, IST."
Sorry, the 4-part teleplay is about 6 hours long (The hardback book is over 800 pages), but you can watch the movie here:
http://www.youtube.com/watch?v=BBbQ3k9I24U&list=PLD14A16F067D2DFE0
Nobel Laureates in their ivory towers of isolation and theory do not understand...
BUBBLES DO, NOT, EX, IST (and radiation is good for you).
His assumptions are correct that no bubbles exist assuming markets are truly free and fair. Since most markets tend to be neither, it is all hot air. This is the ramblings of an educated idiot.
"With tax-selling season upon us, now is the time to be shopping for bargains."
LOL. Of course. If market efficiency has been destroyed, the obvious conclusion is to listen to shills and buy stocks. Just the right shills, mind you.
This article is full of egregious bullshit that I can't be bothered refuting right now. So I guess I'll sign up for the shill's newsletter and buy some bargain stawkz.
.
We've been rickrolled by Sveriges Riksbank because there is no Nobel Prize in economics and no economist is a Nobel Laureate.
The "Sveriges Riksbank Attempt to Purchase Legitimacy for the Economic 'Sciences' by Deceptively Associating Itself with the Nobel Prize" award is a clever charade, but is nothing more than a strapon trophy for a pseudoscience.
http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences
Might as well be handing out a "Nobel Prize" for astrology or phrenology.
Bankers giving out economics prizes? Foxes giving out chook management prizes? Why should the chooks applaud?
TheFourthStooge-ing,
Correct.
He's in good company (sarc) alongside our favourite, Paul Krugtron.
DavidC
I agree with Fama. Bubbles don't exist. Fed only creates an illusion of wealth and prosperity and puff its gone. We call the puff of smoke a bubble. Nobel laurettes and economists call it the "Ass Fucking of the Common Man" (in their private gentleman's lounge while drinking fine port and smoking their pipes).
10E-07 Tor
Hurry up and go parabolic damn it
Wish this bozo had gone First Class on the last crossing of the Hindenburg.
"Efficiency" in the strict market sense has existed for a long time now. Gone are the days you can get the news in NY and buy stocks in SF before others clue in. That type of "efficiency" is now measured in single-digit miliseconds.
Stupidity and corruption.... well, now, that's a whole different kettle of fish.
Buy Park Place and boardwalk be a savy investor. Subscribe to my newsletter.
DUUURRRRRRR
Of course there are $100 bills laying all over the place when the $100 is the new $5........
This all misses the point. When I learned efficient market theory in school, it was theoretically based on a free market not this crap we have now with the Fed ZIRPing us to death and printing $85 billion a month to buy whatever it wants to reset prices.
EMT can't exist in a world where the central bank is a buyer at any price of unlimited size. It has nothing to do with efficient markets because IT'S NOT A FREE MARKET.
If the Fed buys $500 trillion of bonds a week and prices for all assets skyrocket is that a bubble? Who the fuck cares what you call it, it's insane and prices have nothing to do with the reality of any real market.
Couldn't agree more. We've done a good job making the market "efficient," by which I mean "fast to digest new information," but widespread corruption and manipulation pretty much invalidates whatever minor advantages even the highest degree of "efficiency" affords.
Thank you. It's like the whole world has gone crazy. After an epic stock bubble in the late 90s and an epic real estate and credit bubble in the 2000s, that they can sit around saying stupid stuff like one can only know a bubble after it pops, there are no bubbles, blah, blah is insane. Then, the Fed tells us they are going to keep rates at zero for like at least 10 years AND starts printing money like crazy to supress long term bond rates. Asset prices do exactly what you would expect given those circumstances and start going parabolic and everyone sits around saying how cheap everything is as it keeps rising at 10x the underlying rate of economic growth.
For this, you get a Nobel prize?
I guess this is what we should expect from a world that decides to ban soda and cigarettes, while legalizing marijuana. Hey Jimmy, you're invited to Tommy's smoke free organic vegan birthday party where we won't let you drink any of that bad pop while you eat your hash brownie. Someday, you can go to an Ivy league school and do harder drugs there before they name you Fed Chairman so you can fuck up the world.
EMT is total rubbish. Insider trading is profitable since there exists information NOT already priced into an equity/bond/option. And even *free* markets aren't stable...so whether the fed is in or out, there will still be asset bubbles and busts which will discount publicly available information.
The real winners in this fed debt fraud are gov't workers and the defense contractors/employees as well as anyone getting money right now (like the jokers making the health care site). Those of us getting nothing are getting f*ked over. Oh wait, I forgot...we aren't getting nothing...the gov't is protecting us by spying on the German chancellor since, you know, that's where the real danger is.
Agreed that we don't need the Fed for bubbles and busts, humans are susceptible to greed and fear and can do it all for themselves. The fact that people are like lemmings once a trend gets going allows it to feed on itself and turn into a bubble or crash. I don't want to let the Fed off, though. They seem to be purposefully creating the preconditions for bubbles time and time again.
All this gobbledy-gook like EMT is pure rubbish meant to distract even those who choose to get a higher education in business. They can't teach intelligent MBA students about the evils of a pure-fiat currency under a fractional reserve currency system (after all, the professors are all funded by Fed grants), so they teach BS like EMT. It is a total scam, real "1984" Orwellian brainwashing.
OBVIOUSLY, the main enabler of sizable asset price bubbles is keeping the real price histories seldom seen.
http://patrick.net/forum/?p=1230886
Let Prof Fama loudly show Real Homes and Real Dow on his website until the Dec. 10, 2013 Nobel ceremony/speeches -- and look for effect!
There was a time when the Nobel committies would at least try to give awards to someone credible and not give the awards as some laughable propagandist effort.
Da peeps got ol' Satan's numbo. He no foolin us no mo.
Bubbles don't exist, huh? In that case perhaps Mr. Fama would like to buy my JDSU stock for $1530/share (its price in 2000 after accounting for the 1:10 reverse split in 2005).
But after awarding the Peace Prize to Arafat and Obama ("the Drone King"), what do you expect?
Alas you did not share the "It's a bubble" sentiment of a number of JDSU folks I knew who retired in 2000.
Has anyone noticed that we continuously idolize and place people in positions of power who do nothing but fuck us?
Insightful! Have you any view on my comment as DOGGONE, a few minutes ahead of yours ...
Fama's research at the end of the 1960s and the beginning of the 1970s showed how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day's or a week's time
when jamie Dimon, lloyd blankfein and george soros read this they will wet their pants with laughter.
Famateur
Fama "advises you to put your money in index funds and hope for the best."
and not just any index funds...Dimensional Fund Advisor index funds where Fama is on the Board....
I am having a laugh. 'Hope for the best'? Great anti-rational advice.
Easy explanation to his remarks--Nobel prize is going through a bubble right now as well.
Given awards by Deutsch Bank, Morgan Stanley, and the Nobel Committee, eh?
What else do you need to know than that he is lauded for the erroneous ideas and theories that make parasitic banksters a lot of coin?
Yes, unhinging currency from the Gold Standard has allowed 40+ years of tomfoolery, skulduggery, currency debasement, offshoring of career employment, and the increasing debt serfdom of normal citizens.
A genius that one; just like Pandora and the inventor of TNT.
Yah, the "efficient market" says if you see a hundred dollar bill on the sidewalk it can't really be there because someone would already have picked it up.
Does anyone know any rich economists?
No, but I do know a lot of rich marxists.
Keynes in his day was a successful investor; he got rich. Perfect example of a middle class man who practiced what he preached in the market.
Here is something on that : http://www.maynardkeynes.org
and on his personal wealth : http://www.maynardkeynes.org/john-maynard-keynes-reparations-probability...
It is plainly obvious that bubbles are getting bigger and bigger due to private banks having the power to make money out of nothing. It may be seen as human nature, in the sense that the biggest bullies tend to be able to dominate society, and become perversely popular. The banksters are the currently most significant gang of criminals, which have taken over the powers of government, which legalized the counterfeiting of the public money supply. AFTER that happened, then ordinary people have no choice but to participate inside that system, no matter how insane is actually is. The banksters benefit from being the ultimate insiders, who cause the bubbles to be blown, and can predict when they will pop better than anyone else.
Since there is a system which has privatized making money out of nothing as debts, every possible excuse is always found which is possible to do more of that. Inevitably, that "irrational exuberance" goes too far, and POP! Of course, no economist who wins a so-called "Nobel Prize" would ever address the issue of the way that the public money supply has been captured by the application of the methods of organized crime to the political processes, in order to privatize the powers of government, by legalizing lies, and legalizing the violence to back up those lies, in the form of the monetary system, and the taxation system.
Of course, the ups and down of lies, backed by violence, along with the human emotions of fear and greed, have existed from before civilization developed. However, legalized lies, backed by legalized violence, driving fear and greed into hyperbolic excesses, took advanced technology to make possible! To really understand the social status of prize winning economists, one should look at the biggest bullies, who are the most powerful, and paradoxically popular, figures. The economists that say things that those bullies like have the best careers, due to the little indirect trickle downs of benefit, from the ways that the biggest bullies run the overall social systems of organized lies, operating organized robberies.
Blowing bubbles by making money out of nothing, until they pop, is an art and a science, done by the private banks, for their benefit. Given that they are a collectively a group of trillionaire mass murderers, ordinary people can not actually operate contrary to that system, because it not possible for them to really get out of that system. Understanding that the biggest gangsters are the banksters does not actually change that they are the best at being dishonest, and backing that up with violence. I suppose that one can learn better to time the blowing of the bubbles, by watching the banksters, and understanding them more, and therefore, being able to get into and out of the blowing bubbles better. However, we are ALL trapped inside of the collective social insanity of that overall system, which is automatically getting exponentially worse, faster.
How many times do I have to repeat this:
There is no Nobel Prize in Economics
Alfred Nobel himself refused to setup a Nobel Prize for Economics, since he though (rightly, IMHO) that Economics is not a Science.
All there is a is a prize from the Swedish Central bank in honor of Alfred Nobel, which is as much a Nobel Prize as a Prize for Trash Collection Sciences in honor of Alfred Nobel would be.
So, anybody sporting a "Nobel Prize" in economics might just as well wear an "I'm a fraud" tatoo in the forehead.
Long Term Capital Management gave Eric Rosenfeld and 1997 Nobel Prize-winning Economists Scholes and Merton chance to prove Fama right......but the world would not play along
Voted Poor for calling it Nobel Prize.
Speaking of Nobel charlatans, fuck you Gore. There, I feel better.
They are predictable, if you're not statist fuck that ignore opinions that threaten your cushioned position from doing some actual work.
Eugene Fama is a pseudonym .
More precisely, FAMA is an acronym and it stands for
Federal Anti-emergency Management Agency .
You didn't mention 2000s gold mania in the article. I remember many guys 2-3 yrs ago, predicting $5000 gold by 2012, or $35 000 by 2013.
"I think most bubbles are 20/20 hindsight," Fama told Cassidy. When asked to clarify whether he thought bubbles could exist, Fama answered, "They have to be predictable phenomena."
By this logic, earthquakes do not exist.
When you're an amoeba living on the student loan bubble, it's hard to see bubbles.
Efficient markets have been replaced by BTFD.
BTFD is at least more realistic as to what we have, and it ain't efficient markets.
If you research it, you will find that there is no Nobel Prize in economics. It was a scam set up by the Swedish central bank in the 1960's. It should be referred to as the Faux Nobel in Economics. But there is a "real" Nobel Peace prize. Between Obumma and Kissinger, it has becomes so discredited, that I look at the chemistry and physics prizes with snake eyes as well.