Efficient Market???
Chris Laird
You know, many times I have heard all kind of wise adages, and somehow I
felt uncomfortable with them. I think its because I don't like
oversimplifications. When I was in junior high school...they told me that in
English I was in the top 1 percent in a district wide vocabulary test..
which surprised me because I was not a scholar...lol. One time when I was
teaching, I told this principal he was disingenuous. He asked me what does
that mean. So I told him and he got madder than sh*!
Well, back to market adages. We hear ALL the time, well the 'markets are
efficient, 'its discounted into the market', and so on. People believe the
adages. People think they are self evident. Virtual scientific facts. I
heard, everywhere, recently, that the no vote in France for the Euro
constitution, was already discounted into the market...
So, then a week or two later, that's why gold is up 10 to 15 dollars right?
And why the USDX is up 2 points right? And, oh the relationship between the
Euro and gold has changed, they aren't following one another now like they
have the past few years... and oh look!.. the dollar and gold are not moving
inversely anymore either!
Oh yes, this was all 'clearly discounted' by the gold markets, the FX
markets, and even the Euro gold and Dollar gold trends all having been
reversed... it was all just the efficient markets at work. Right? WRONG.
This adage about markets being efficient is going to burn many fortunes in
the next 5 or ten years. Also, I'm going to say something that is going to
piss off some people. The concept that markets are efficient is most
definitely is a paradigm behind chartwork. And chartwork does work
sometimes, as long as markets are efficient too... and chartwork has worked
somewhat ok in the past. I use it a tiny bit myself, but never to make
calls. I use FA only for that.
Now that we have seen the momentous implications of the EU quandary, and the effect it is having on the Euro, the Dollar, and gold... I think we can
agree that the paradigm of efficient markets can be said to not be in play
as much any more. Now then, in my first Gold-Eagle editorial Brave New
World, I said that neither the Fed nor the gold markets know what is coming, because there is now so much complexity in the markets that they cannot know. And we have new changing paradigms too. Changing market paradigms, and changing geo-political paradigms. And changing economic paradigms.
These changing paradigms are why Buffet goes into Euro denominated assets in a big way, and then he finds himself decidedly on the wrong side a year or
so later. Same issue with Pimco's Gross, who finds he cant find any decent
yield... and everybody all over the globe is chasing yield, but in the ENTIRE world yield is not to be found now... and wont be for a while to come either. As a matter of fact, the Euro is only a few years old... and do you think the very diverse Euro nations are going to stay together with their socialistic economies? No, I don't think so, and I would not have much if anything in Euro assets now, and I'm going to repeat, I would keep my money here in the US, and find some way to do that, see my article World hostility and Your assets.
In my work, I have come to notice a number of these changing paradigms, and I find myself working these into my thinking. I didn't deliberately go
looking for them, but they are appearing to me. If I was going to put them all into a nutshell, it would be that the paradigms of the past are ALL
changing, and economic thinking still using the old ones are doomed to fail,
and cost people and nations using them a lot of money. And the worst thing
about it is when paradigms change, often they don't just disappear entirely
but continue to give small echoes of themselves as the new paradigms come
into play. Which is why it is all so confusing.
These things are a major reason why I have said that no one should be
speculating right now, because speculation depends upon a level of
prescience not very widely available now. Its getting to a point, really,
where just getting some yield around 6 percent is a huge challenge!
And all these hedge funds! They are going to find themselves in deep stormy
waters like right quick! .. for the reasons specified above. They are going
to find that their hedging models don't work because the modeling is using
paradigms and assumptions of the past, that are not operating like they
thought. And like a bad calculation, they will all of a sudden find they are
losing figures with lots and lots of zeroes. Same for nations and economies,
and currencies. There are a lot of reefs out there. New uncharted waters
indeed.
I'm going to be launching my newsletter, at prudentsquirrel.com I know, I
said this before, but now I am ready to do it, and it will be up in a week
or two. You can go there now and indicate if you are interested, it is not a
free newsletter, but I have priced it right.
Chris Laird
tec_10000@yahoo.com
June 16, 2005
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