|
EFFICIENT MARKETS
May 28th, 2001
When it comes to the Efficient Market Theory, most investment veterans
would go along with the "trading floor cynic". He always thought
it was a crock with enough fantasies to distract academics from more
important matters such as who is selling what to whom and why? – sort of
the opiate of intellectuals.
Recently much has changed with the revelation that not only does the
theory work but it is even more efficient than it used to be – quite
likely due to the economies of scale attendant to the biggest financial
mania in history.
For example, employment figures have been dropping much faster than
during the 1990-1991 recession. Moreover, durable goods orders are
plunging at a rate more than twice the consensus forecast. Now that's
getting to be a pretty good bang for the research dollar.
Signs of even more dramatic improvements in market efficiencies are
becoming apparent in the stock market. Following the climax of the last
New Era in 1929, it took almost two years and fully 8 discount rate cuts
for the Dow to collapse 68% to May, 1931.
Following speculative exhaustion of our New Era in March, 2000, it took
only one year and only 4 discount rate cuts to accomplish a 68% crash in
the Nasdaq. The cynic is impressed with the efficiency and now a true
believer, but he thinks "they" have overdone it a little. However, you
can't hold back progress and perhaps other sectors can become more
efficient as well.
|
