Archive for the Category Efficient markets hypothesis


My critics in 2012: “See Sumner, housing prices were way too high in 2006”

Real house prices are still well below the peak, but nominal prices hit a record high in September:


The 2006 period may have been a bubble, but as of today is seems far less irrational than it seemed in 2012.  (This recovery also makes Kevin Erdmann’s arguments look even stronger.)

The world’s full of uncertainty and markets are volatile.  Get used to it.

PS.  UK house prices (green) took a dip after 2006, but are now well above 2006 levels (and equal to 2006 prices in real terms).  Australia (blue) and Canada (pink) are much higher in both real and nominal terms.

What goes up must eventually . . . go up even more!


So the US is down in real terms, the UK is even, and Canada and Australia are up in real terms.  Isn’t that sort of consistent with the EMH?

Sure, those prices will dip at some point in the future.  That’s what efficient markets do, they go up and down.


Rational expectations and betting markets vs. polls and models

I don’t have strong views on who’s going to win the election.  Clinton seems more likely to win, but by how much?  Earlier today I defended 538, which gives Trump a (fairly good) 35% chance.  That’s more than the betting markets.  Now I’ll present the opposite argument, and then try to tie it in to monetary policy, which is what this stupid blog is supposed be about—right?

To see the argument for Trump having a good chance, check out this map, from RealClearPolitics.  It shows all states colored, based on poll averages, no matter how narrow the margin:

screen-shot-2016-11-05-at-8-23-13-pmThat seems like a pretty decent margin for Hillary–so why do I say it’s good news for Trump.  Because (blue) Florida is really close, has 29 electoral votes, and would put Trump up to 270 if it flipped.  That brings back memories of 2000, when a very close Florida put Bush up to 271.  And just as in that case, if Trump narrowly wins with 270 electoral votes, he’ll likely lose the popular vote—too many wasted Hillary votes in California and New York.  My hypothetical is identical to 2000, except Iowa, Virginia and Colorado flip.

I think this path to victory is semi-plausible, which is why Nate Silver’s 538 gives Trump a 35% chance.  But if he loses any of these states, no matter how small, then he falls short unless he can pick up another state.  And that’s where things get tougher. He’d need Pennsylvania, Colorado, Michigan or some place like that.  Those are tougher than Florida.  (I’m from Wisconsin, and have confidence in my fellow cheeseheads.)

To me, the most interesting event in the past 24 hours is the sharp fall in Trump contracts in the betting markets, to 22%.  AFAIK, that’s 10 points down from a couple days ago.  What’s going on?  The polls have not changed dramatically.  I’m not sure, but I suspect Nevada:

And now that Nevada early voting has come to a close, Ralston isn’t mincing words about how he sees Trump’s prospects. “Trump is dead,” Ralston tweeted Saturday. He elaborated on his blog that from the early voting numbers so far, the GOP nominee would need a “miracle” to win Nevada at this point.

The polls have tended to put Nevada as a pure toss-up state, and a few recent ones have even shown Trump ahead there. Accordingly, it hasn’t generally been considered part of Clinton’s swing state “firewall.”

But Nevada is a famously difficult state for national pollsters to get right. Its population is transient and many work at night. Furthermore, its population is over one-quarter Hispanic, and it’s often challenging for English-language polls to sample Hispanic voters accurately.

Does anyone know where Nevada was two days ago in the betting markets?

In the past, polls in Nevada have been less accurate than in other states:

So in previous years, analysts like Ralston have found success in reading tea leaves from Nevada’s early voting numbers instead. And all week, Ralston has been warning of danger signs for Trump. The partisan and geographic breakdown of early voting turnout has looked similar to 2012, when Barack Obama won the state by 6 and a half points. But the final day of early voting Friday was, Ralston writes, “cataclysmic” for Republicans.

.  .  .

Though the statewide early voting numbers aren’t yet finalized, Ralston estimates that registered Democrats will have a 6 point lead on registered Republicans among early voters. Since registered partisans tend to overwhelmingly vote for their own party, Trump probably either needs to dominate among early voters associated with neither party or else make up the gap on election day.

But how important is the early turnout?  This important:

But ballots equivalent to well over two-thirds of the total 2012 turnout in Nevada have already been cast. So if Trump has indeed fallen significantly behind in the early vote, it will be very challenging for him to catch up.

Experts warn that early vote totals can be misleading.  But they are not meaningless.  At a minimum, we actually have some HARD DATA.  We know that Dems in Nevada are turning out in large numbers.  That doesn’t mean Hillary will win the state; I could image Trump doing well among working class Dems.  But it tells us something–maybe that GOTV is working.  It’s no longer just polls.  My hunch is that 538 is ignoring this data, because early voting isn’t always reliable, but the betting markets are concluding that Hillary is very likely to win Nevada. Indeed while RCP (i.e. polls) give Nevada narrowly to Trump, the betting markets show a very strong 77% for Hillary.  I know of no other state with such a huge gap.

Rational expectations say that investors look at everything when making a forecast, including decisions on asset valuation.  Thus while experts might have said (in the weeks after Brexit) that “it’s too soon to say how it will impact the UK economy” the markets sniffed out that the UK was holding up better than expected, and UK stocks rallied quite a while ago.  Economists wait for data like GDP and employment, which comes out with a lag.  As another example, I think the markets sniffed out that slow RGDP growth and “lower for longer” interest rates were the new normal long before the Fed figured that out.  The Fed relies on models where 3% trend RGDP growth and 5% T-bill yields are “normal”, and it took them a long time before they downgraded those forecasts.

So while 538 is a great site, and I love their thoughtful statistical analysis, you could argue that it’s more driven by “models” than a pure rational expectations forecast would imply.  That is, it might not put enough weight on tea leaves like the Nevada early vote, because of its unreliability in other contexts.

I don’t want to make too much of this difference, as 22% isn’t that different from 35%.  Even after the election we won’t know for sure which approach was “right”, especially if Hillary wins.  I suppose if Trump wins then 538 will look good, as its numbers for Trump have been higher than elsewhere.  But even then it won’t be a crowning victory, after all, 538 is predicting a Hillary victory.  Michael Moore won’t be impressed.  You’d need lots of repeated tests to establish whether rational expectations beats really good models.

I believe it does, which is why I prefer NGDP futures markets to Lars Svensson’s suggestion that the Fed target its own internal forecast, based on structural models.  So there, a Trump Derangement Post that actually had implications for monetary policy!

PS.  Here is the betting market map:screen-shot-2016-11-05-at-8-58-28-pm

Notice that they have Hillary winning New Hampshire and North Carolina too.

PPS.  Not enough derangement in this post?  I love this Matt Yglesias post on that disgusting illegal immigrant Melania:

So there’s really nothing so surprising about the Melania story. Trump doesn’t like immigrants who change the American cultural and ethnic mix in a way he finds threatening and neither do his fans. Europeans like Melania (or before her, Ivana) are fine. I get it, David Duke gets it, the frog meme people get it, everyone gets it.

But it does raise the question of why mainstream press coverage has spent so much time pretending not to get it. Why have we been treated to so many lectures about the “populist appeal” of a man running on regressive tax cuts and financial deregulation and the “economic anxiety” of his fans?

Slovenian models include anorexics, prima donnas, former porn stars, and some, I assume, are good people.


Canada is also stagnating

I’ve been blogging long enough to know that people will defend almost any proposition, no matter how outlandish.  So it’s no surprise that a few commenters wished to defend Peter Thiel’s claim that America is stagnating today because of a housing bubble that burst 10 years ago.

Here’s Canada’s housing prices:


Canada has also had very weak GDP growth since 2007, especially per capita:

screen-shot-2016-11-02-at-9-57-08-pmThe graph only goes up to 2015, but 2016 is expected to be another sluggish year for Canada.  I’m not certain, but I believe that 2016 Canadian per capita real GDP will be only about 3.5% above 2007 levels.  Can someone confirm?  America’s RGDP/person is up about 4.1% over the past 9 years.  Places like Europe and Japan are also growing very slowly, even though they mostly avoided housing crashes (with a few exceptions like Spain and Ireland.)

So no, it’s not about bursting housing bubbles; the causes go much deeper.

When I started doing EMH posts back in 2010, I pointed out that housing “bubbles” in Canada and Australia had not burst (as in the US).  Commenters told me “you just wait”.  I’m still waiting, and both countries have prices well above 201o levels,  So even if there were a 20% crash tomorrow, the Canadian bubble-mongers would have been wrong in 2010.  Prices were not too high at that time.


In praise of trolls

People who think they are good trolls, usually are not.

I have many people who leave troll-like comments in my blog.  Years ago I stopped reading Major Freeman, as he was so tiresome.  Flow5? Perhaps the only commenter who fails the Turing test.  Gary is one of those sad cases that doesn’t even know that he is a troll.  I keep poking fun at Ray Lopez’s comments, because Ray is perhaps the best villain in the blogosphere—possessing an almost Trump-like perfect storm of bad characteristics.

Now Bob Murphy is bragging about how good a troll he is, and he cites a comment that he left at my blog.  Let’s see why Bob has an inflated opinion of his trolling:


I’ve got another great example of a patently absurd statement that violates the EMH:

“The easiest short sales I’ve ever had in my life were the stocks and bonds of Donald J. Trump’s companies. … It was like numerous ocean liners hitting many icebergs repeatedly.” — Jim Chanos, Kynikos Associates

And some economists hate Trump so much that they are repeating the above absurdity to their readers without commenting on how ridiculous it is. Can you imagine?!

I guess Bob’s point was that there is some sort of contradiction.  My post defended the EMH, and he cited an earlier post where I quoted Jim Chanos in a way that seemed to violate the EMH.  Chanos seemed to think that he could predict asset price movements.

And yet of course there is no contradiction.  When a blogger quotes someone, they don’t necessarily agree with everything in the quote.  This was merely a throwaway joke at the end of a long post, pointing out that many of Trump’s companies had done poorly for their investors.  That’s simply a factual claim, which in no way depends on whether the EMH is true or not.  I don’t care if Chanos is smart or lucky (I’m pretty sure he’s lucky—as he’s been predicting doom in China for years, and . . . well . . .  how’s that forecast working out?)  I’m like an intellectual magpie; I select what I want from others, and ignore the rest.  I wanted dirt on Trump’s record—how well he had done for those who trusted him—and Chanos provided it. On the other hand, Trump is very loyal to the people around him, or at least so claims his third wife.

Trolls love to look for contradictions.  “He said something good about country X, but in the past he said something bad about country X”.  Or “He said the Wicksellian equilibrium rate is useless, now he’s using that concept in a post.”  Or “He said income is a useless concept, but he favors targeting NGDP.”  Each time I have to patiently explain why there is no contradiction.

I do feel honored to have so many trolls, which is why I don’t cut them off.  They claim no one cares about my blog, but the hundreds of hours they spend on comments suggests otherwise.  In total, Major Freeman’s comments far exceed the length of all my posts—and think how long winded I am!  If published as a book, his comments would exceed the length of the IRS tax code.

PS.  Who knew?

Magpies are birds of the Corvidae (crow) family, including the black and white Eurasian magpie, which is considered one of the most intelligent animals in the world, and the only non-mammal species able to recognize itself in a mirror test[1](though a recent study suggests that giant manta rays can also recognize their own reflection[2])

With the exception of Bob, my trolls are generally not able to recognize themselves in the mirror.  And Bob’s not really a troll–he needs to be much more prolific to earn that honorary title.

Another anti-EMH argument bites the dust

When I started blogging I would occasionally defend the EMH.  A number of anti-EMH arguments were offered in response.  One by one they’ve all fallen by the wayside.  People who predicted the 2008 crash have done poorly since.  Hedge funds were held up as a way of earning excess returns—and they’ve done poorly in recent years.  I was told Australian house prices would crash any day now, and am still waiting.  Bitcoin was a “bubble” when the price hit $30—what’s the price today?  Shanghai house prices were a bubble—now I’d love to buy in at 2009 prices.  Oh wait, “if I just wait long enough, prices will fall”.  Is that so Sherlock?  Highly volatile asset prices occasionally go down?

And I was told that the smart guys who ran the Harvard endowment could consistently outperform the market . . .

. . . until they couldn’t.  Tyler Cowen directed me to this from the student newspaper:

Harvard faces numerous pressing issues: a suboptimal social scene, growing competition from other universities for talent, and critical challenges to diversity and inclusion. Unfortunately, last week brought another, this time in the form of a renewed challenge to the endowment’s stable growth. Specifically, Harvard Management Company announced a $2 billion loss for fiscal year 2016.

Let’s not mince words: this is unacceptable.

Over the past several years, Harvard’s endowment returns have failed to keep pace with peer schools’ returns. In fiscal year 2015, Harvard ranked penultimate among Ivy League institutions, with Princeton besting Harvard Management Company by nearly seven points. At the time, University President Drew G. Faust referred to these poor results as “concern[ing].” This year’s loss is only the culmination of this underperformance since the financial crisis.

When I was in college the “Daily Cardinal” protested against the military, racial injustice, limits on free speech, etc.  Now college students find it “unacceptable” that the rich aren’t getting richer at the pace they had grown accustomed to.

PS.  It appears their recent underperformance is more about picking the wrong markets (EMs) rather than the wrong stocks.

PPS.  I see Bitcoin is now over $600.  That means if you invested in 10 such markets back when bitcoin was $30, and nine subsequently crashed to zero, while the other went up 20 fold, then the 9 that crashed would not have been bubbles, or at least there is no evidence that they would have been bubbles.  And yet I’m quite certain that the people who claimed those 9 were “bubbles” , would have felt vindicated.  I don’t know of any area in the social sciences where cognitive illusions are more powerful, and more misleading.