In this post, I am going to discuss the Efficient Market Hypothesis that applies to the stock market.  I hope to show that the people who believe this hypothesis unquestioningly and the people who do not believe in this hypothesis at all are  both wrong, and for the same reason.

First of all, two definitions, that at least one of which you might decide is a fair description.

First WikiPedia’s definition:

In finance, the efficient-market hypothesis (EMH), or the joint hypothesis problem, asserts that financial markets are “informationally efficient”. In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.

Next is a  definition from Investopedia:

An investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

I think these two definitions are consistent enough that we can conclude that there is little controversy about the definition.

With the recent history of the world-wide financial collapse, there are now many doubters who claim that the Efficient Market Hypothesis is ridiculous.  All the economics professors and trading professionals who have built a huge theoretical structure and numerous computer programs around the theory are obviously fools according to the many dissenters.  Both the true believers who think that there is a universal rule that says markets are efficient and the doubters that say there is no such thing as an efficient market are both forgetting something.

There is a reason why the market has been fairly efficient for almost 50 years or more since the Great Depression, but has not been so efficient lately.

After the collapse of the Great Depression, laws were enacted and strictly enforced that required stock markets in this country to be open about all important information relating to the investments sold in these markets.  Rules mandating disclosure of all relevant facts about an investment and rules against insider trading using any facts that had not been disclosed to the trading public have made these markets fairly transparent in the time frames most important to investors.

Before the Clinton administration and culminating in the repeal of the Glass-Steagal act in that administration, these rules which made for an efficitient market have been chipped away.  Where the rules were not being chipped away, the enforcement of the rules that were still on the books was weakened and weakened.

If you need any proof of this, there is no greater expert than William Black.  See the latest installment of words of wisdom from him in the previous post, Documents in JPMorgan settlement reveal how every large bank in U.S. has committed mortgage fraud. Funny that they could send Martha Stewart to jail for insider trading, but have not been able to do so for the really big fraudsters.

The lesson to be learned is that the fact of efficient markets is not some immutable law of the universe.  To the degree that markets are efficient, they get that way through human effort to make them that way.  It makes sense to offer up theories on the consequences of efficient markets, how to make the most of them, and how to set up an economy that depends on them.  However, you must remember that efficient markets are created, and their efficiency can be destroyed.

The naysayer who believe there is no such thing as an efficient market, forget how such a market was created after the Great Depression.  They want to get away from a market system, despite the proof that it can be made to work well for long periods of time.

So, I urge both sides to understand the basic history of the successes and failures of markets in order to resurrect an efficient market that can serve the economy well.

December 1, 2013

In response to some comments on Facebook by JoãoG, I thought an addendum would be appropriate.  The above definitions of the Efficient Market Hypothesis has gotten me into the trap that is a common problem in Economics.  Let me restate one of the definitions in a way that will help us avoid the trap.

The Efficient Market Hypothesis states that if a stock market is 100% efficient, then it is impossible for an investor to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

So the real question is not whether or not the market is efficient.  The real question ought to be, is the market efficient enough?  Of course, there is another flaw in the definition of the EMH.

According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

What makes a market is that some people want to buy at a given price and some other people want to sell at that price.  Otherwise there could be no transaction.

Why the seeming difference of opinion if the market is so efficient?  Different investors have different goals at any given moment.  What suits the buyer’s goals is not what suits the seller’s goals, so they can make a transaction that satisfies both of their goals.

Taking the Efficient Market Hypothesis into account, my investment goal has never been to “beat the market”.  My goal has always been to do well enough to support my family’s life style.  However, the investment strategy that I have adopted is one in which I buy a stock when it is undervalued, and sell it  when it starts to get to overvalued.  The EMH seems to say that this is impossible.  Well, all I can say is that I buy it when it is undervalued for my goal, and I sell it when it is overvalued for my goal.  My goal is to generate a steadily rising dividend stream to support my current retirement.

Before my retirement, I had a different goal of wanting to build a nest egg that would be large enough to support me in retirement.  During that phase of life, using dollar cost averaging into an index fund would have worked well enough.  Such a strategy only depends on the long history of the U.S. stock market of rising at an average rate of 10% a year over long periods of time.  That strategy does not violate the simply stated EMH.

There is no exact analog to dollar cost averaging when you want to take money out of your investments during retirement.  That is why I settled on the dividend strategy for retirement.  Of course, my current strategy does allow for portfolio growth over the long haul, without interfering with a steadily growing dividend stream as long as I don’t try to milk my nest egg for too high a dividend stream.  That and Social Security helps a lot.

The Real News Network has the video interview Documents in JPMorgan settlement reveal how every large bank in U.S. has committed mortgage fraud  with William Black.

So the first thing that we have is that there are admissions not just as to JPMorgan in this statement of facts, but also as to Bear Stearns and Washington Mutual. And collectively, of course, we’re talking about three of the largest and most elite financial institutions in the world. And the Justice Department says each of these engaged in fraud, which ought to be sort of the headline news, right, that three of the largest financial entities in the world engaged in pervasive fraud.

The cover-up that is going on here is probably as serious as the cover-up of the Saudi involvement in 9/11. The violence done in mortgage fraud is much more subtle, but it has many more direct victims than 9/11.

In looking for a sign for the Walmart protest, I found the following at the web site of The United Food & Commercial Workers International Union.

I was lonely at Walmart today

The Levy Institute has the one pager Exit Keynes the Friedmanite, Enter Minsky’s Keynes by Robert J, Barbera co-director of the Center for Financial Economics at the Johns Hopkins University.

Brad DeLong recently reposted his 1996 review of John Maynard Keynes’s A Tract on Monetary Reform(1924). DeLong makes the case, quite compellingly, that Keynes, in this book, provides us with the best monetarist monograph ever written. DeLong leads, however, with a sentence that, in 2013, he might want to alter: “This may well be Keynes’s best book.”

It was the complete failure of the monetarist framework that led Keynes to deliver his General Theory in 1936. Quite sadly, in 1996 the Washington Consensus had effectively embraced the minimalist view of monetary policy responsibilities articulated by Keynes in 1924. And in so doing they set the world up for a 1929-style financial crisis in 2008–9

Finally, I understand why I was more right about the economy from Bill Clinton’s administration through the current moment than most of the economics professors of recent years.  I learned my economics in the early 1960s.  I was not lulled into the nonsense that the professionals fell into around 1996.  The explanation of the two parts of Keynes’ career explains how two people can come to very different conclusions about what Keynes’ said.

I learned the Keynes that was based on what he learned during the depression.  I didn’t realize that what he learned from the depression refuted a lot of what he thought before then.  Of course it is silly of me to not have realized that a well respected economist having learned something from an experience must have meant that he didn’t know this before he had his great epiphany.  If he didn’t know it before, then he must have thought something else before.

It is so clear when someone explains it to you.

The Real News Network has the video Revealing the 9/11 Conspiracy Would Undo the Entire US-Saudi Alliance – Sen. Bob Graham on Reality Asserts Itself pt2.

I was going to just add this segment to my previous post, Investigating the Saudi Government’s 9/11 Connection, but I felt this was too important to let it get buried as part of an older post.

GRAHAM: Well, what I’ve been thinking a lot about recently–and we’re going through the period recognizing the 50th anniversary of the assassination of President Kennedy–a lot of this discussion has gone back to various theories about how was Oswald able to do this. Was he helped by the mob, by the Cubans or somebody? My question is: what difference does it make? If you’d found out that, yes, there was such a conspiracy, how is that relevant to any decision that we would be making today?

In contrast, the issue of whether the 19 hijackers acted alone or whether they had a support network has enormous current consequences. If in fact the Saudi government was the source of financial, logistical support, provision of anonymity that allowed these people to stay in the country such a long time and go undiscovered, if they were part of the system that made that happen, think of what it would mean to U.S.-Saudi relations today. It would be a complete overturning of the premises upon which we have been dealing with Saudi Arabia, that it was a loyal ally of the United States to now being seen as a country which was prepared to sell its soul to the worst in the world, even if that meant putting the United States in jeopardy and the loss of life of 3,000 people.

Graham doesn’t even get to the half of the issue. What if the Saudi’s perpetrated 9/11 in order to get us to attack Iraq? Might they not do a similar thing to get us to attack Iran?

You can look up a Walmart protest near you on the web page, Attend a Black Friday Protest Near You! Just plug in a different zip code.

November 29, 2013• 12:30 PM

Walmart 2797• 100 Charlton Rd, STURBRIDGE, MA 01566

The Daily Kos has the reason you might want to join the protest. If You Aren’t Sure Walmart Needs to Pay Higher Wages, This Photo Will Erase All Doubt.

Truthout has the article Without Reagan’s Treason, Iran Would Not Be a Problem.

Carter was confident that with Bani-Sadr’s help, he could end the embarrassing hostage crisis that had been a thorn in his political side ever since it began in November of 1979.
But Carter underestimated the lengths his opponent in the 1980 Presidential election, California Governor Ronald Reagan, would go to screw him over.

Behind Carter’s back, the Reagan campaign worked out a deal with the leader of Iran’s radical faction – Supreme Leader Ayatollah Khomeini – to keep the hostages in captivity until after the 1980 Presidential election.

This was nothing short of treason. The Reagan campaign’s secret negotiations with Khomeini – the so-called “October Surprise” – sabotaged Carter and Bani-Sadr’s attempts to free the hostages. And as Bani-Sadr told The Christian Science Monitor in March of this year, they most certainly “tipped the results of the [1980] election in Reagan’s favor.”

Not surprisingly, Iran released the hostages on January 20, 1981, at the exact moment Ronald Reagan was sworn into office.

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A long-term Iranian nuclear deal would be a once in a generation chance for the United States to rethink its foreign policy. President Obama should go for it. But he should watch his back. Because if history tells us anything, it’s that Republicans are more than willing to betray their country for a little short-term political gain.

I am hoping that forewarned is forearmed. If we can make abundantly clear that we are aware of the back-stabbing that is being planned, maybe we can scare off the perpetrators or at least foil they plots if they aren’t scared off. Surely the NSA knows what is being planned. If we can’t at least get some benefit from giving up our privacy, then why did we give it up in the first place?

The Real News Network has the series starting with Investigating the Saudi Government’s 9/11 Connection and the Path to Disilliusionment – Sen. Graham on Reality Asserts Itself pt 1.

Here is an except talking about the report on 9/11 from the commission  that Senator Graham lead.

GRAHAM: There were 28 pages in the final report, out of over 800 total, which were totally censored from–that were word one to the end of that chapter. That was the chapter that largely dealt with the financing of 9/11, who paid for these very complex and in many instances expensive activities that were the predicate for 9/11. I was stunned that the intelligence community would feel that it was a threat to national security for the American people to know who had made 9/11 financially possible. And I am sad to report that today, some 12 years after we submitted our report, that those 28 pages continue to be withheld from the public.

JAY: Now, it’s fairly clear from your book what’s in the 28 pages, I mean, in general terms. The L.A. Times did a report on those 28 pages. A journalist for The L.A. Times spoke with someone who’d actually seen the 28 pages–didn’t reveal the name. But apparently it’s the actual names of the people in the Saudi government and Saudi royal family that are in on financing 9/11 conspirators. And your book makes it pretty clear that that’s what it’s about.

First of all, who ordered the redaction, that you weren’t allowed to say this?

GRAHAM: First, I’m going to have to withhold my comment on what you have just said. I am under the strictures of classification. I have–although it was written in 2002, I still have a reasonably good remembrance of what was in those 28 pages, but I’m frustrated because I can’t talk about it.

JAY: I know. And that’s why I quoted The L.A. Times and didn’t ask you.

This is much more than of historical interest. The very sources you hint at in this interview are probably now throwing great resources into getting us to go to war with Iran. I’d hate to think that the attack that gave Bush/Cheney what they needed to justify the war in Iraq will be repeated in order to get us to attack Iran.

Let us all make it clear that we see what is coming, and maybe that will discourage the people planning it.

It is galling to think that information is being kept from the American public that is absolutely vital for them to know as they make choices as to what actions this government should take in the near future.

Perhaps there ought to be a people’s filibuster until we find out what is in that 28 pages that we are not allowed to see.

I had not even seen this interview before I wrote my previous post Obama Rebukes Israeli-Saudi Attack on Iran Nuclear Deal.

See the second part of the interview in the subsequent post Revealing the 9/11 Conspiracy Would Undo the Entire US-Saudi Alliance.

Why Would Saudi Arabia Support the 9/11 Conspirators, Why Would the US Gov. Cover it Up? – Sen. Graham on Reality Asserts Itself pt3

Former Senator Bob Graham, co-chair of the 2002 Joint Congressional Inquiry into 9/11, believes that the Saudi government “had a high and what has thus far turned out to be credible expectation that their role” in 9/11 “would not be exposed” by the U.S. government.

Senator Graham had talked to the other co-chair of the Congressional Joint Inquiry and the two chairs of the citizen’s 9/11 commission about the possibility of the 19 hijackers acting independently.

“All three of them used almost the same word—implausible—that it is implausible that that could have been the case. Yet that has now become the conventional wisdom to the aggressive exclusion of other alternatives,” says Graham.

Here is the fourth and final piece of the interview – The 9/11 Conspiracy: Did Bush/Cheney Create a Culture of Not Wanting to Know? – Sen. Bob Graham on Reality Asserts Itself pt4.

On RAI with Paul Jay, Senator Bob Graham says there was a pervasive pattern in police and intelligence agencies and “you don’t have everybody moving in the same direction without there being a head coach somewhere who was giving them instructions as to where he wants them to move”

The Real News Network has the interview Obama Rebukes Israeli-Saudi Attack on Iran Nuclear Deal with Robert Parry.

PARRY: Well, the neoconservatives continue to want to see more wars in the Middle East. That’s what they’ve been pushing for now for 20-some years, going back to the ’90s, when they began to lay out this idea that the only way for Israel to maintain its security is through having regime change in a variety of countries–Iraq first, Syria, and Iran being a third. So that idea from the neocons hasn’t really shifted. And they remain a very influential force in Washington, particularly at places like The Washington Post. And so they’re continuing to push this idea that the way you get security in the Middle East is by going to war with and ultimately overthrowing governments that have difficult or hostile relations with Israel.

President Obama and the people in Congress who want peace are going to have some very powerful foes in Congress, in the news media, and in the leadership of Israel, and lobbyists for oil interests.

It will be impossible to stop the drum beat for war without massive support from the grass roots before the opponents even get full momentum behind their push. Keep watching for any opportunity you have to voice your opinion.

I just received this email – Update: Improvements to HealthCare.gov

View in browser | This newsletter created and distributed by Centers for Medicare & Medicaid Services Update: Improvements to HealthCare.gov We’ve been working hard to fix the technical problems that some users have encountered on HealthCare.gov, and we’re happy to report that 90 percent of users are now able to create accounts. Click here to visit HealthCare.gov and fill out an application right now. If you’re looking for other ways to apply, here are three other options: – Call our Marketplace Call Center at 1-800-318-2596 and begin your application over the phone with one of our trained Call Center representatives, available 24 hours a day, 7 days a week. TTY users should dial 1-855-889-4325. – Visit a trained counselor to apply in person. Find one in your area here. – Download a paper application form and mail it in. If you want coverage that will start as early as January 1, 2014, the application deadline was recently extended to December 23, 2013. Don’t miss your opportunity to get the quality, affordable coverage you need. Use one of the methods above to apply today.

Strangely, the email is better formatted than the web site.