Guest Post: Everything You Know About Markets Is Wrong?

Tyler Durden's picture




 

Submitted by Eric L. Prentis,

The financial elite—using academe for intellectual cover—want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). My research strikes down this hoary old EMT economic dogma, used by duplicitous bankers and hedge fund managers to con US politicians and 99% of Americans.

The Efficient Market Theory (EMT) is a significant foundation theory in economics. Prove the EMT wrong, and economics becomes largely an empty shell. Therefore, the EMT is the most important fundamental issue in economics and for America.

US politicians mistakenly use EMT based economic theories to pass laws favorable to Wall Street. First causing and now worsening the credit crisis. Examples of credit crisis enabling legislation include:

  • Gramm–Leach–Bliley Financial Services Modernization Act of 1999
  • Commodity Futures Modernization Act of 2000
  • Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
  • Jumpstart Our Business Startups (JOBS) Act of 2012

Three tenets define the EMT.

  • The first tenet—that markets are in equilibrium and if unexpected events cause disequilibrium, it is only temporary because markets are self-equilibrating—is disputed in the literature. A stock market always in equilibrium and efficient is impossible because traders have different endowments, beliefs and preferences. In addition, arbitrage costs throw markets out of equilibrium.
  • The second tenet—that stock prices “fully reflect” all information—has long been challenged in the literature, with many inconsistencies reported. Tenet number two goes on to say asset prices properly represent each asset’s intrinsic value, and as a result, prices are always accurate signals for capital allocation. Researchers in behavioral economics find fault with this EMT assumption, because it does not account for human nature and inherent herding behavioral instincts of market participants. EMT theorists—Eugene F. Fama and Burton G. Malkiel—claim assuming market equilibrium is close enough to reality, and that research into EMT tenet two contests only the semi-strong form of efficiency. That is, where earning higher returns than the stock market, with lower risk, is not achievable by knowing all publicly available information. EMT theorists continue to support the EMT and say, “If you want to do better than stock market returns, you have to take on more risk than the stock market.”
  • EMT tenet number three is most important—that is, stock prices move randomly or are uncorrelated with, if not independent of the prior period’s price change. Therefore, earning higher returns than the stock market, with lower risk, is impossible to achieve using only past prices (i.e., technical analysis stock trading rules or stock charts). Empirically prove EMT tenet number three wrong— because it tests the weak form of market efficiency—and the EMT is wrong, period!

EMT theorists specify two methods to test EMT tenet number three. The first method is statistical inference. Calculate serial correlation coefficients of stock price changes. If the serial correlation coefficients are zero or close to zero, this supports assuming serial independence in the price data. Therefore, one can infer that technical analysis stock trading rules cannot work. The second method requires using a technical analysis stock trading rule predictive model that forecasts the future, based solely on past prices—where expected profits are greater and risk lower than they would be under a naïve buy-and-hold policy.

 

Research that supports the EMT makes one-or-all of the following mistakes:

  • Using the wrong data—Systemic market risk and random unsystemic risk make up individual company stock price movements. As much as 50% of a company’s stock price actions are random unsystemic risk variations associated with the internal circumstances within that particular company. The remaining 50% of a company’s stock price movements represent the systemic risk of the overall market. The random unsystemic risk is the chaotic portion of the stock price data—that if removed leaves only the systemic market risk of the overall market, which may then be analyzed. Most EMT research studies day-to-day stock price movements of individual companies, which is mistaken. Granted, this unsystemic and systemic, day-to-day individual company data look random, but it is the wrong data to analyze to determine overall, long-term market trends.
  • Using the wrong method to analyze the data—Most researchers use statistical inference to test tenet number three. However, there is a serious problem with using statistical inference to test whether stock price data are independent. That is, it is difficult to distinguish between a rootless series and one where the systemic quality is faint. Research shows that five-thousand years of data are needed to identify independence in stock price data using statistical inference. However, these data do not exist. Consequently, statistical inference is not the correct method to use to test tenet number three.
  • Jumping to mistaken conclusions based on half-truths—Statistical inference tests using day-to-day individual company data report serial correlation coefficients that are close to zero. This supports assuming serial independence in the price data. Therefore, one can infer that tenet number three is valid. Unfortunately, this proves nothing of the sort. Analyzing the wrong data over an inadequate number of years simply gives a false positive.

 

What day-to-day stock price movements are for individual companies is the wrong research question. Instead, we want to know what the overall stock market is doing over the long term. The correct way to look at market data follows.

 

Using correct data—Individual company stock price behavior, which includes the randomness of unsystemic risk, is not evaluated. Instead, only systemic market risk is analyzed in my published journal research—please see here and here—by comparing only systemic market risk of two well-diversified S&P 500 Index portfolios. S&P 500 Index portfolio B is for active trading and S&P 500 Index portfolio A is the benchmark portfolio. Focusing only on systemic market risk in the data studied, removes much of the random or chance stock market price behavior of individual companies.

When investing over 1, 2, 3, 4, 5 years or more—day-to-day stock price movements are immaterial to trading success and may be thought of as just daily market chatter. Concentrating on daily price movements of individual company stock or the stock market as a whole is not the correct question. Day-to-day stock price action is volatile. To dampen out this daily chatter and give perspective to what is occurring long-term in the stock market, S&P 500 Index “monthly price data” are used to smooth out stock price volatility.

Monthly price data are important in dampening out day-to-day price movements. However, using last month’s price to predict next month’s price is also not conducive to long-term trend development. To further smooth price variations and focus on systemic stock market risk. Nine and two-month simple moving average (SMA) trend lines are fit to the S&P 500 Index monthly price data for actively managed portfolio B. Smoothing out data volatility, which gives an overall view of the long-term stock market trend. This is the third step in removing much of the random stock market price behavior from the research data.

Focusing only on systemic stock market risk in the monthly data and smoothing stock price volatility using nine and two-month SMA trend lines for the well-diversified S&P 500 Index portfolio B—to lessen random variations—is a major difference between my research and other EMT research in the literature, and a major reason the results are so significant.

My research covers 1871-through-2008, 138 years. All available Standard & Poor’s (S&P) 500 Index data are included in this research study, making it the longest duration and complete in the literature.

 

Using the correct method to analyze the data—Fama’s approved second method for testing the EMT, requires using technical analysis. Fama says to develop and test, over both good and bad economic conditions, a technical analysis stock trading rule predictive model that forecasts the future, based solely on past prices—where expected profits are greater and risk lower than they would be under a naïve buy-and-hold policy.

My empirical research method directly tests stock market price independence of EMT tenet number three, using a new technical analysis stock trading rule predictive model. To test whether expected profits are greater and risk lower than a benchmark naïve buy and hold policy, which Fama calls, “an equally valid scientific method versus statistical inference.”

 

Empirical results—In my US stock market research, the relative maxima and minima stock trading rule S&P 500 Index portfolio B—by $495,360 dollars (i.e., $580,423 - $85,063)—makes +582% more money than buy-and-hold S&P 500 Index portfolio A—and is only 64% as risky over 138 years—from January 1871 through December 31, 2008.

 

The new technical analysis relative maxima and minima stock trading rule predictive model makes substantially more money at significantly less risk than the naïve buy-and-hold policy. EMT theorists say this thorough beating of the US stock market should be impossible to achieve using only technical analysis. Thus, tenet number three and the weak form of the EMT are invalid, making the Efficient Market Theory wrong, period!

 

Discussion

 Neoliberal economic philosophy, starting around 1980 and now mainstream in academe and American politics, promotes laissez-faire economic policies of reducing the size of government, deregulation and privatization of government services. Neoliberal economists base this philosophy on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”—my research shows the EMT is dead wrong.

Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” 

Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Big market players easily manipulate markets. For example, by changing accounting laws so banks no longer have to mark-to-market, High Frequency Trading (HFT) front running, and multinational companies buying back their common stock shares, along with favorable huckstering of stock positions on CNBC—owned by Comcast and General Electric. In addition, Chairman Bernanke, because of his Quantitative Easing II, takes credit for the Russell 2000 Index of small company stocks reaching an all-time high of 860.37.

The Federal Reserve (Fed) talks of added quantitative easing (QE), but this would mainly help the richest 1% of Americans and hurt the “real economy,” with higher gasoline and food price inflation. Unfortunately, QE only helps overinflate the stock and commodity markets by manipulating prices. Despite Fed programs QE I&II and Operation Twist, America is experiencing the worst economic recovery from a recession, ever! President Obama, if he wants to lose the 2012 election, will let Bernanke electronically print more QE money and make the “real economy” worse than it otherwise would be.

The continuing credit crisis is serious—with the world economy poised for a double-dip recession. The current US government policy of increasing the national debt by $5 trillion dollars over the past four years, keeping insolvent banks from going bankrupt, a Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt (which is what tin-pot dictators do just before they are forced to flee the country) with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.

 

The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. Instead, the financial elite are just protecting themselves with outlandish pay bonuses, based on cooked books; while the “real economy” flounders with high unemployment, unsustainable budget deficits, a struggling real estate market, and low capital formation, crumbling infrastructure and high gasoline and food price inflation.

 

Conclusion—this is what to do:

  1. Reenact the Glass-Steagall Act. Allowing investment banks to speculate with savers’ money is criminal.
  2. The daisy-chained, unregulated $707 trillion dollar OTC Derivatives market will bring down the world economy, when it goes bust. JP Morgan’s recent huge OTC Derivative trading losses are a prelude to this eventuality, with many more instances to come. Start unwinding the OTC Derivatives market now, before it is too late.
  3. Insolvent banks are a drain on the “real economy.” Force insolvent banks to go bankrupt. TBTF is an irrational policy. Allow capitalism to work for the 1%.
  4. Public and private debt to GDP is about 360%, and 30% of Americans are being hounded by bill collectors for unpaid debts. Americans can no longer service their massive debt loads. Allow debt forgiveness for the 99% and institute austerity for the 1%—they can afford it.
  5. ZIRP is destroying capital formation and savers. Allow interest rates to rise, which will increase consumer demand. The Fed’s manipulation of capital markets causes malinvestment—resulting in crippling long-term penalties for the “real economy.”
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Mon, 06/11/2012 - 21:22 | 2516602 Boxed Merlot
Boxed Merlot's picture

Everything You Know [About Markets] Is Wrong?...

 

Don't crush that dwarf, hand me the pliers.

Georgie Tirebiter

Tue, 06/12/2012 - 00:46 | 2517045 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

I thought it was Porgie who said that, about his entrenching tool. "We're marching marching to Shibboleth, with the Eagle and the Sword (eagle and the sword) SWORD!"

Anyway, Eugene Fama, who invented the Efficient Markets Hypothesis, finally admitted "it's never been an empirical success." 'Nuff said.

Mon, 06/11/2012 - 21:51 | 2516676 Eric L. Prentis
Eric L. Prentis's picture

A great deal of ground is covered in this article, but it holds together if studied carefully. The article is a summary of my published research disproving the EMT. Please see here and here.

Mon, 06/11/2012 - 21:05 | 2516547 Zero Govt
Zero Govt's picture

Mmmm?! 

interesting article until you became a politician yourself with your 5 Point Plan

you may disagree with Efficient Market Hypothesis but surely you must understand people pretending they can order the market and economy about, like meddling politicians, is as bigger 'No No' as thinking you can explain markets with a single theory ...yes?

the key to the free market is that it's free (of all rules, Govt and political intervention) and free of people 'from above' who think they can resolve non-issues with rules or laws or other worthless philosophical crap like that

hope we're all crystal clear now, we all mind our own business and let the market work its wonders

 

Mon, 06/11/2012 - 21:39 | 2516636 r00t61
r00t61's picture

The author correctly identifies sociopaths in government, working in concert with powerful monied private interests, in a giant circular continuum of corruption and bribery, as central causes of the the world's economic ills, and then proposes solutions that would require that same sociopathic government to intentionally and deliberately reign in the power and reduce the wealth of the monied interests,

Is this hopium, or did the author forget his /sarc tag?

If he wants to ding EMT or neoliberal eCON, whatever, more power to him.  Me, I'm going to ding his belief in the magical power of government to somehow right wrongs and do good for "the little guy."

As Rothbard once said, "Government is nothing more than a criminal gang, writ large."

Mon, 06/11/2012 - 22:01 | 2516699 Eric L. Prentis
Eric L. Prentis's picture

I do not discuss the ideal of free markets in the article. I only say that markets are not efficient, as defined by the EMT.

 

Elected politicians are charged with managing the economy for the benefit of most people. No one else or nothing else should take their place.

Mon, 06/11/2012 - 22:30 | 2516773 Matt
Matt's picture

Managing the economy? Please clarify what you mean by "managing".

Also, please share the formula to get +562% returns with 62% risk, thanks.

Tue, 06/12/2012 - 09:23 | 2517594 Eric L. Prentis
Eric L. Prentis's picture

Matt says “Also, please share the formula to get +562% returns with 62% risk, thanks.”

Please see my published journal research— here and here.

Tue, 06/12/2012 - 08:38 | 2517429 BigJim
BigJim's picture

 I do not discuss the ideal of free markets in the article. I only say that markets are not efficient, as defined by the EMT.

Well, you've got yourself a conundrum then, haven't you Eric? As we don't have anything like a free market, you can't disprove EMT by looking at how our 'markets' operate.

Elected politicians are charged with managing the economy for the benefit of most people. No one else or nothing else should take their place.

Another conundrum! Yes, elected politicaians are charged with managing the economy, which is exactly the problem. They're utterly incapable of doing any such thing, which is why 'nothing' is exactly what should take their place.

The rule of law should keep the markets free by punishing fraud and preventing force. The invisible hand will take care of the rest, far more efficiently than a bunch of political hacks and their chosen technocrats could ever do.

In our majoritarian democracies, the politicians are merely the enablers of what has become a system of negative-sum coercive transfers of wealth between the poltically-favored and the politically not-so-favored. Take away their power to distort markets and you take away the power of the oligarchs who use them as cat's-paws.

Tue, 06/12/2012 - 08:51 | 2517470 GeneMarchbanks
GeneMarchbanks's picture

'Another conundrum! Yes, elected politicaians are charged with managing the economy, which is exactly the problem. They're utterly incapable of doing any such thing, which is why 'nothing' is exactly what should take their place.'

How ‘free’ a market is cannot be
objectively defined. It is a political definition. The usual claim by
free-market economists that they are trying to defend the market
from politically motivated interference by the government is false.
Government is always involved and those free-marketeers are as
politically motivated as anyone. --Ha Joon Chang

'Nothing' is the answer the corpo-fascists would love for you to believe. Unfortunately this has now fully infiltrated 'libertarian' ideology furthering the confusion which is slowly leading to absolute chaos. Market Nihilism I like to call it.

You have to stop and reflect here.

 

Tue, 06/12/2012 - 09:35 | 2517639 Zero Govt
Zero Govt's picture

there are many free markets humming along day after day, turning over $billions, supplying happy consumers, progressing every year, not a regulation, Law or lawyer in sight

it's called the Black Market

and it works brilliantly as (nature) intended because the free market has its own mechanisms for improving/change. It's called competition and consumer choice. It doesn't need a windbag (politician) to work nor does it require a pompous bunch of frozen turkeys (the legal system) to sort its issues out

if consumers are unhappy they walk, to a competitor. That is the market mechanism. 

and these free markets work around the clock, no pension entitlements, laws or other absolute State bollocks required. In fact they not only work, they work despite the State trying to oppress them, and run rings around the State while they're at it (not a single jail in the West is free of drugs etc)

the free market, taking the piss out of the retarded State for centuries.. and all the better for it

Tue, 06/12/2012 - 09:51 | 2517697 AnAnonymous
AnAnonymous's picture

Quite a romantic view on the black market.

Tue, 06/12/2012 - 19:54 | 2519975 Zero Govt
Zero Govt's picture

not romantic at all, reality

the drugs market works day in day out and turnsover $100's of Billions more than pretty much any other market in the 'official' regulated economy

how's the US housing market doing, that public-private partnership of DC and WS ?

despite decades of failed State oppression the drugs supply hasn't had a blip at anytime... the US housing market is a disaster, the healthcare market is an expensive joke, highly regulated pensions and banking industries are falling apart at the seems

drugs just keep on rolling, because it's a free (from Govt) market

Wed, 06/13/2012 - 12:52 | 2522214 Matt
Matt's picture

And there is no fraud, violence or exploitation in the Controlled Substance Market at all!

Tue, 06/12/2012 - 23:41 | 2520347 Flying Tiger Comics
Flying Tiger Comics's picture

Black market wonk!

 

That I should live to see the day.

 

The arms trading, whores, drugs and slavery- all just necessary byproducts of the pure market one supposes.

Tue, 06/12/2012 - 11:45 | 2518194 BigJim
BigJim's picture

 'Nothing' is the answer the corpo-fascists would love for you to believe.

As usual, you conflate a minimal (and essential) role for government preventing force and fraud, with our current full blown oligarch-enabling regulatory regime.

Where's your buddy LetThemEatRand with her usual Statist strawmen? She should be all over this page like a rash.

 

Mon, 06/11/2012 - 21:03 | 2516552 eddiebe
eddiebe's picture

All the conclusions are of course correct and would be effective, but they have no chance of being implemented because it would reverse the flow of money from the top to the bottom.

Mon, 06/11/2012 - 21:14 | 2516576 Paul Atreides
Paul Atreides's picture

What if the bottom were all armed, desperate and pissed off?

Mon, 06/11/2012 - 21:23 | 2516604 Zero Govt
Zero Govt's picture

if the bottom are all armed, desperate and pissed off it's precisely because the rules, laws, legislation and regulation does not work and have taken it into their own hands because the Law has never worked as a system of 'justice'

Feel any benefits from Franken-Dodd yet?

Nor the fuck will you ...2,800 worthless pages of dross if ever there was

The law can't even enforce basic theft Law in the Corzine scandal it's that pathetic and corrupt

Tue, 06/12/2012 - 08:03 | 2517350 Bob
Bob's picture

Government is like a gun.  It can used for good or evil.  Expecting it to be perfect is as absurd as condemning it as inherently destructive for its inevitable shortcomings and compromises.   

Guns don't kill people.  People do. 

As if we don't know who controls this government or how. 

Hint: It ain't the 99%. 

Tue, 06/12/2012 - 09:27 | 2517613 Zero Govt
Zero Govt's picture

Yes Govt is like a gun. When it works it is destructive, it's only safe position is not working with the safety catch full-on

Govt is entirely destructive, it's only true source of revenue is productive enterprises and productive people. All other taxes raised is fake wealth hanging off productive wealth

so by its very nature Govt is a mis-direction of productive wealth, from productive people who know how to use it for further/future productive gain into the hands of the unproductive (parasites of society: politicos)

what is wrecking economies from Japan to Europe to America? Govt, the most diabolical and destructive institution ever erected. Govt is garbage, period. 

Tue, 06/12/2012 - 10:24 | 2517828 Bob
Bob's picture

That's entirely by your definition . . . which relentlessly proves either that you're absolutely right without any qualification whatsoever or that your argument is merely internally consistent. 

Those of us who see power as the threat, rather than the costume it wears, will see it differently from you. 

In this inconveniently gray world, money equals power.  I think you know this.  After all, what harm could a government without money do? 

Yeah, I'm a "statist" I guess. 

My consolation is that I have, in theory at least, some recourse against sociopathic abuse of power/money apart from a shotgun blast to the face of the perpetrator. 

Government is hardly the only predator in the world I know.  Getting rid of it would give us open season for the warlords, regardless of the rhetorical world it happens in. 

The fact that they've managed to corrupt that potentially positive force of government changes nothing about the threat they represent to everybody if left unchecked. 

Mon, 06/11/2012 - 22:17 | 2516735 msjimmied
msjimmied's picture

If you"ve noticed, they have not mentioned "trickle down" in a very long time.

Tue, 06/12/2012 - 08:17 | 2517386 Bob
Bob's picture

It's been rebranded with the rhetoric of . . . "Job Creators."  LOL. 

Mon, 06/11/2012 - 21:05 | 2516557 m111ark
m111ark's picture

There is but one problem, and none of those "solutions" will solve that problem.  Even at that, implement all of them and nothing will change.  You must do the following:

1,  the source of the banksters power is their ability to create money - that must be removed.

2.  Government must SPEND it's own money into existence.  Government MUST NOT ever borrow money.

Now, how many hundreds of years must pass before the majority of Americans can be trusted with printing their own money.  Might not even be us that finally sees the light.

 

 

 

 

Mon, 06/11/2012 - 21:45 | 2516652 Freewheelin Franklin
Freewheelin Franklin's picture

So, where does government get this money to spend? They do not produce anything of value. Everything they have, they have to take from somebody else, or force people to comply with monopolistic services.

Mon, 06/11/2012 - 22:32 | 2516777 Matt
Matt's picture

Something tells me allowing Congress to create as much money as they want each year for spending above what they take in, in taxes would have horrible consequences.

Mon, 06/11/2012 - 23:49 | 2516980 Poor Grogman
Poor Grogman's picture

Governments "spending money into existence" is an ASININE notion.

very closely related to the notion that government can "create wealth"

It is just another form of FIAT money that you are talking about, a fiat money who's creation would soon fall into "independent" hands after the first government abuses were documented.

The answer to the problems of fiat money, is real money, and this can only emerge unhindered from the private sector. Real money would curb the excesses of government by restricting it's ability to borrow and spend thereby preventing it from dominating the economy.

The authors of the constitution understood money and especially fiat money's power to corrupt.

Mon, 06/11/2012 - 21:06 | 2516560 Fix It Again Timmy
Fix It Again Timmy's picture

Let interest rates rise?  Let us not go there, let us not even think about that......

Mon, 06/11/2012 - 22:03 | 2516703 HellFish
HellFish's picture

Yeah seriously, instant US debt default.  Sorry the non-ZIRP world is over.

Mon, 06/11/2012 - 21:11 | 2516575 slewie the pi-rat
slewie the pi-rat's picture

i read this whole thing and then i get to "re-enact glass/steagall"!

pretty funny! 

Tue, 06/12/2012 - 01:32 | 2517102 if
if's picture

Apparently, markets should not exist (ban OTC derivatives).  That amazing conclusion is drawn by applying free market theories to markets carefully regulated for the benefit of a select few.  Which then proves a bandaid is better than capitalism.

Mon, 06/11/2012 - 21:11 | 2516577 LawsofPhysics
LawsofPhysics's picture

Wait, wait, wait. Where is this "market" they speak of?

Mon, 06/11/2012 - 21:13 | 2516580 Downtoolong
Downtoolong's picture

The recent debacle of the Facebook IPO stands as an open admission of how broken and faulty our markets are at setting fair and efficient stock prices. The intermediaries now suing the NASDAQ seem to be arguing that they lost money because, if the NASDAQ hadn’t malfunctioned the price of the stock would now be higher (or at least they would have remained above $38 long enough for them to  liquidate their inventory at a profit). That’s like saying that a bad performance of a play means the script is lousy, or that a flat tire on a car implies it is poorly designed. These companies are effectively arguing that the price of Facebook stock could be anywhere now between its low of around $26 to some hopeful high around $60+ depending solely on how well computer controlled HFT was able to manipulate market prices in the first few hours of the IPO launch. If that’s true, it hardly describes a fair market that allocates capital efficiently. And the fact that these firms seem to think their practices represent an acceptable standard of excellence is one scary thing indeed.

Mon, 06/11/2012 - 21:14 | 2516583 q99x2
q99x2's picture

Wait just one minute.

#1 has to be "Prosecute FRAUD." Without doing that first nothing will change until a total collapse.

#2 Move the current monetary system to an open source bitcoin style closed monetary system.

You do those two things and humanity will make it all the way to a class 2 civilization.

The indirect functions of #2 will remove war, facism, crooked politicians and the elite ruling class. It will also restore an effective democratic process to decision making.

Mon, 06/11/2012 - 21:46 | 2516658 e_goldstein
e_goldstein's picture

I agree with #1.

You need to have a lot of faith that the power grid will stay up to support #2.

Mon, 06/11/2012 - 21:15 | 2516584 bigwavedave
bigwavedave's picture

"Forgive me O' Benanke; for I have Borrowed"

Mon, 06/11/2012 - 21:16 | 2516590 TooBearish
TooBearish's picture

Soros agrees with the author but took 200 pages to droll on and on about "reflexivity"...and this dood does away with EMT in a few paragraphs...brilliant!!!

Mon, 06/11/2012 - 21:16 | 2516591 Yen Cross
Yen Cross's picture

At First, I thought this post was a joke. Then I realized, I'm a lot smarter than I thought!

Mon, 06/11/2012 - 21:19 | 2516597 max2205
max2205's picture

Long term = one day hour 5 min 1 min or 1 Nano second?

Please 1986 SPX = 250. That's up I think

Mon, 06/11/2012 - 21:24 | 2516607 Cabreado
Cabreado's picture

The Conclusion is good, but does not jive with "This is impossible because the trust is gone. The same sociopaths control the economy."

The Great Big Disconnect between rational/humble/Truth and the Self-Absorbed (in Control) is in full play.

So then, the "collapse" is in full swing...

No matter how you thought it would feel.

 

Mon, 06/11/2012 - 21:25 | 2516610 Unbezahlbar
Unbezahlbar's picture

'If you play the music too loud, you won't hear the train rushing toward you.'

 

That's what my Dad used to say.

Mon, 06/11/2012 - 21:27 | 2516611 SKY85hawk
SKY85hawk's picture

Your Conclusion is almost complete.  If Glass/Stegall can be re-enacted, then Frank-WTH should be repealed.

I suggest a clear statement that BUY-n-HOLD is dead.  You clearly have put tremendous effort into this writing.

I would like to offer my starve the beast plan for your consideration.  I am unable and unqualified to produce a public product that people would find useful.  If you find some of my ideas to be worth sharing with your audience, feel free to use them as if in the public domaign.

Why not follow "the trend is your friend"?

By that i mean, put some 401-k money in a Roth-Ira every year.

If you're not working, you'd be surprised how much can be transferred each year.  Conversion Taxes get consumed by Deductibles & other stuff.  

!NOT FOR BUY AND HOLD!!!!

THEN study 4 ETFs.  ERX (long energy) ERY (short energy)

                    AND   FAS (long finance) FAZ (short finance)

                              move in opposite directions!

Now, ERY & FAZ are trending up.

I use Bollinger bands to make Buy/sell decisions. 

ie. When ERX's Bollinger is on the low side, ERY's is near the top.  Buy ERX and Sell ERY.   there are times, like now, when ERY is rising and keeps on going.  You can't be right all the time. 

I set Limit Sells at 25% gain for half of each position. 

Use Economic Order Quantities & Take short term profits, frequently.  There's nothing wrong with taking 'small' profits.

When you're over 59.5 you COULD have lots of tax free income!

At 59.5+ you can put in 6,000 also!

STARVE THE BEAST!

There are many other leveraged ETFs, I just like the way these things flow.  

Tue, 06/12/2012 - 08:48 | 2517459 BigJim
BigJim's picture

The banks are already insolvent, even by the ridiculous double standards that applied to institutions with banking licences before they were suspended to hide the rot.

Re-enacting Glass-Steagal would take away thier remaning capital base and result in instant collapse.... unless of course the Fed stepped in and re-capitalised them. Then we're back where we started.

The problem is the current money-out-of-nothing cartel. Markets will not recover until this regime is dismantled.

Mon, 06/11/2012 - 21:29 | 2516615 Lucky Guesst
Lucky Guesst's picture

6. Let heads roll, vigilante style justice.

Mon, 06/11/2012 - 21:35 | 2516628 Marty Rothbard
Marty Rothbard's picture

We don't have a free market.  In a free market, if you make a bad bet, at 40:1 leverage, you go broke.  It's a free market in this way, for you and me.  If we bet it all on heads, and tails comes up, we are in the poorhouse.  This teaches us, and others by example, that betting everything on one throw is not good.  The whole problem, is that in 2008, the TBTF were not allowed to go broke, which would have discharged the debts they generated, when the market cleared the assets of the failed corporations, and the bankruptcy court divided up the remains.  Until these assets are priced, and sold, at prices that people are willing to pay for them, and corporations are allowed to stand or fail on their merits, nothing will change.   Take your choice Obama, and the rest, let the banks die, as they should have, or figure a way to avoid the blame, when people start going hungry.  They can't all be fed with food stamps, because there will not be enough wealth left for the government to steal.  The choice is up to you.

Mon, 06/11/2012 - 21:37 | 2516631 daveeemc2
daveeemc2's picture

It is difficult to get a man to understand something, when his salary depends on his not understanding that.

Politics is money - PAC committees etc - all money.  Everyone is in perpetual re-election mode, stuff the political war chest so you can be re-elected, all the time.

Want to talk to a politician? Donate to his re-election campaign.

Business wants influence over policy? PAC money first, then we talk.  And their interest is only as rich as your donation.

Based on the above, what gives you the faintest clue that government, clearly in the hands of big business - and especially big finance - really cares about how YOU think the show should be run?

Mon, 06/11/2012 - 21:40 | 2516640 johnberesfordti...
johnberesfordtiptonjr's picture

One of the best articles ever to appear on Zero. Note the dismal real world failures of academics who promulgated EMT... The Myth of the Rational Market

Mon, 06/11/2012 - 21:56 | 2516653 Dr. Engali
Dr. Engali's picture

 "Neoliberal economic philosophy, starting around 1980 and now mainstream in academe and American politics, promotes laissez-faire economic policies of reducing the size of government, deregulation and privatization of government services"

Can somebody please point me to a laissez-faire market and a smaller less intrusive government..

The problem is that we have the government and corporations walking hand in hand. To me the government gets too involved with the " managing of the economy". The regulation that the government writes forces industries to consolidate as the cost burdens are too much for a small to mid size company . Why do you think the lobbiysts help write the regulations?
In a laissez-faire market we would have a couple less car companies and a lot less banks. Failure would be an option and the strong hands would pick up the assets from the dead companies. What we have now is a system where the incompetent are rewarded at the expense of the tax payer and the competent. It's the exact opposite of a laissez-faire market.

On one hand the author argues against the effectient market then at the end bullet point number 5 is to allow the effecient market to work and let interest rates rise.
How can you argue for more government "management " in the economy then argue for the markets to be allowed to function when it comes to rates?

Mon, 06/11/2012 - 23:00 | 2516854 Matt
Matt's picture

Wouldn't free markets inevitably result in monopolies by the successful?

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