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Are Markets Wise — or Probabilistic?



Are crowds collectively “smarter” than any one individual? Are markets all that efficient? How much does Mr. Market actually know about the future?

Investors have wrestled with those questions with limited success for a long time. The current sell off and recovery put these questions into even sharper focus.

In his book “The Wisdom of Crowds,” James Surowiecki described how large groups of people appear to be “smarter” than an elite few (no matter how brilliant) at challenges such as solving problems, reaching good decisions, or even predicting the future.

It makes for a fun narrative, but I suspect it overstates the case. Crowds often can and do make better decisions than individuals. However, to be superior requires a lot of factors to be working just right together. Lots of circumstances can occur where those factors are not present or in conflict, and market efficiency fails.

Perhaps the issue lay with the framing. Is it that crowds are wiser than individuals? It smacks somewhat of hindsight bias and narrative fallacy. Perhaps there are more nuanced to observations than what we tend to be implied by the standard “anthropomorphized” narratives. A more precise way to describe this:

Markets are probabilistic mechanisms, collectively allocating capital with imperfect information about an inherently unknowable future.

It Is not wisdom, but rather a statistical assessment of probable outcomes relative to asymmetrical payoffs. In other words, markets are risk-weighted betting machines.

Consider the complex system underlying stock markets: The “wisdom of crowds” is a colloquial way of describing market efficiency. When specific conditions exist – research shows this includes broad diversity of thought, widespread information dissemination / aggregation, and financial incentives – markets tend to be at their most efficient. When other conditions emerge – emotions, exogenous shocks, or randomness, markets become less efficient or can become derailed from underlying values. The betting goes haywire. (Note we also see this in prediction markets, which have had a rather mixed track record).

Hence, why I say markets are kinda-eventually-sorta-mostly-almost efficient.

This inherent tension between market efficiency and when humans derail that was perfectly recognized by the Nobel Prize committee in 2013. By awarding the Sveriges Riksbank Prize in Economic Sciences to both Eugene Fama and Robert Shiller, Stockholm recognized this schism. Fama’s thesis was pricing mechanism of markets were so efficient that they were difficult (if not impossible) to beat; Shiller’s data overwhelmingly showed that markets were often as irrational as the humans who traded them. Bubbles form, prices detach from reality, then crash back to Earth.

Which brings us back to the recent market action…

We need to be mindful of both hindsight bias and narrative fallacy as we describe what occurred after the fact in neat, easy to digest stories.

Instead, consider the external shock of the Coronavirus: It led to the fastest bear market in history and a wild snapback; consider it in a different framework, thinking in terms of a probabilistic mechanism allocating capital (described above). It makes more sense to me than the wisdom of crowds narrative.



The kinda-eventually-sorta-mostly-almost Efficient Market Theory (November 20, 2004)

How Shiller helped Fama win the Nobel (October 26, 2013)

MIB: Gene Fama & David Booth (November 9, 2019)

Prediction Markets


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Recessions, Bear Markets Need Time to Develop



Is this a Dead Cat Bounce or End of the Bear market?

My method for understanding which is admittedly peculiar: I concoct a novel, often unpopular narrative whose construction yields insight into what is unfolding. It helps if this “variant perspective” is both plausible and not widely held. The less people who share this particular view, the more likely it is not reflected in market prices.

Step two considers the opposite point of view:  What if the counter to this outlook is more accurate, and the entire prior thesis is incorrect? As is so often the case, the truth may be found somewhere between these extremes.

Last week, we considered one scenario: perhaps the Coronavirus didn’t end the bull market. The drawdown is merely a counter-trend rally within a longer secular bull market; it is similar to the 1987 crash, a temporary setback within the longer 1982-2000 secular bull market. If the economy is merely experiencing a temporary contraction, once shelter-in-place orders are lifted, it will quickly recover. Pent up demand will send 330 million Americans, all with a bad case of cabin-fever, out to shop, dine, play and celebrate! Companies will rehire 10 million+ workers. The bull resumes its prior trend, eventually making new all-time highs. Happy happy, joy joy!

My colleague Batnick is somewhat incredulous about this thesis. But our investigation does not end there. Step two in our methodology is to consider the opposite position: What if the economic expansion is over, and the secular bull market is dead?

We have had prior crashes, economic collapses, and recoveries before. Winding our way through this unprecedented period of 10 million jobs lost in a month, and a 35% collapse in market prices (plus the recent 21% recovery), there is simply nothing comparable in prior experience. Pearl Harbor? Stagflation? Tech Wreck? GFC?  None are parallel, but the one commonality in these prior events is time.

These events all unfolded over a long period, both in the run up to- and the subsequent recovery from- each.

As an example, the diplomatic, trade, and economic factors that preceded the Pearl Harbor Attack, bringing the United States into World War 2, were years in the making. The 1960s and 70s bear market had multiple price shocks, high inflation and high unemployment that unfolded against a decades long malaise of the Viet Nam war and the Watergate scandal. Or consider the dotcom boom – by many measures, the market was overvalued years before the peak. The “irrational exuberance” speech  by Fed Chief Alan Greenspan was in 1996. The causations of the GFC were literally decades in the making.

Time might just be the most important, yet least well-understood aspect impacting how investors behaved during these prior market crashes.

We are pattern-recognizing creatures, looking to make sense out of a jumble of confusing and often contradictory information. Out of the chaos, the human primate confabulates a comforting narrative (as I try to do above). We are so uncomfortable with the idea that our lives are random, we desperately seek a storyline that is cohesive, understandable, and fair. We collectively lose our minds when some form of rationality is not present.

We find repeatable patterns.

Our psychology is such we keep doing what works until it no longer does. Since the end of the great financial crisis in 2009, the “Buy the dip” mentality has been amply and consistently rewarded. Every pullback has eventually led to new highs; each 10, 15, 20% drop has proven temporary, at least so far.

Traders recognize this pattern, whether it turns out to be random, temporary, or destined to eventually fail. When confronted with what trade set ups that have worked in the past, we mice run through the maze to get our pieces of cheese. This behavior is unlikely to stop until the behaviors stops getting rewarded.

Consider what traders did following the tech peak in March 2000. It took several years to see the dip buying behavior end. Before that top there was nearly two decades of new all-time highs. (Even the 1987 crash was a temporary 31% setback within the longer 1982-2000 secular bull market). When the Nasdaq peaked at 5100, the subsequent fall saw repeated recover attempts. The Nasdaq 100 Index, a popular trading ETF of the era, fell 30% from 107 to 75, rallied back 30% to 101, fell 15%, then rallied 18% to 102, before saw-toothing all the way down to a ~80% drawdown at $22 in October 2002.

Hope springs eternal among those who have been rewarded in the past for their faith. It takes time to break those money-making habits.

It is unclear if this has occurred yet.

The speed of this collapse is part of the reason why. Psychological damage that occurs in “normal” bear markets typically takes time to surface. Consider the Great Financial Crisis (GFC). U.S. equity markets peaked in October 2007; they made their final lows in March 2009. Over the course of those 18 months, investors became worn down by a relentless flow of bad news. Banks were imploding, massive layoffs were being announced, mortgage defaults were exploding. It really felt like the economic world was ending. But that did not happen in a month – it took 18 months before investor negativity turned into panic, culminating in capitulation. The definition of the word capitulation is surrender: Investors simply give up. They had to do something, anything, to stop the pain. This exhaustion of sellers is how lasting bottoms are made.

We have yet to see anything remotely like that in 2020.

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The COVID-19 Fraud – It’s Massive




Whenever the government creates a program, they alter the incentives within society. I mentioned I have a friend in London whose mother went to the hospital and he knew she was near death. After two days, the hospital claimed she died of the Coronavirus. He said how since she did not go in with that? The joke in London is that COVID-19 is the miracle cure. Nobody in London has died from a heart attack, only COVID.

Senator Dr. Scott Jensen of Minnesota came out to expose how the AMA is encouraging American doctors to overcount coronavirus deaths across the US. He showed a 7-page document coaching him, as a doctor, to fill out death certificates with a COVID-19 diagnosis without a lab test to confirm the patient actually had the virus. Why? Because of the package for this relief, hospitals are paid more to attend this virus. NOBODY is dying of the flu any more – only COVID-19

The numbers will then be used to justify keeping the money flowing to misrepresent this as an epidemic. This fraud will then come back to justify keeping the economy locked down longer and the AMA is now contributing to the destruction of everyone’s livelihood, pension, and this exposes the corruption that always emerges with government programs.

This is when the lawyers need to see the dollar floating in the air. It is time for a class-action lawsuit against the AMA for misrepresenting this virus which is destroying small businesses and drastically increasing unemployment. Come on – we have plenty of lawyers reading this. Now’s the time to do something constructive. What the AMA is encouraging is FRAUD and to classify a death to COVID-19 without testing is actionable FRAUD. This is no different from Medicare Fraud which is a crime – For Medicaid and Medicare fraud, federal law establishes (1) a civil statute of limitations of six years (42 U.S.C. § 1320a-7a(c)(1)), and (2) a criminal statute of limitations of five years (18 U.S.C. § 3282).

Student Loans are a classic example. If you want to become a billionaire, it is simple. Create a product that is ABSOLUTELY worthless, nobody will ever use, get politicians to support it, and then claim it is so vital to the future that the fools who sign up can never go bankrupt on it and will have to pay for the rest of their lives.

This is how our future is utterly destroyed by the corruption inspired by such governmental programs.

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The next coronavirus relief package must include funding to safeguard our democracy



An essential component of any ‘phase four’ coronavirus relief and recovery package must be additional investments to protect our right to vote. Lawmakers must act now to establish safe, alternative voting methods—like vote by mail and online voting—especially before November’s general election.

The CARES Act included $400 million in “election security grants” to prevent, prepare for, and respond to the coronavirus domestically for the 2020 federal election cycle. This is far less than fair election advocates argued was necessary to protect our elections during the pandemic. The Brennan Center for Justice, for example, released a plan calling for a $2 billion investment to ensure that the 2020 election is free, fair, accessible, and secure.

As more states explore alternative ways of casting ballots, Congress must provide resources responsive to the magnitude of the challenge. A failure to provide sufficient investments to safeguard elections is the most successful effort at voter suppression and disenfranchisement since the expansion of the franchise. We must demand investment in our democracy infrastructure and more voting options.

While most people think of voter suppression as voter ID laws, felon disenfranchisement, and gerrymandering, our archaic voting system also routinely suppresses votes. As our ancestors have done for hundreds of years, we are required to vote in person, despite many other aspects of our lives being updated to include newer and more convenient methods. We can complete the 2020 Census survey online or by mail. We can order groceries online and have them delivered. We can file our taxes or deposit checks from our smartphones. We can have prescriptions refilled by mail.

Yet, some politicians—like Republican lawmakers in Wisconsin—want us to risk our health in order to have a chance to cast a ballot. It shouldn’t have taken a global pandemic for us to realize that we need more accessible voting methods.

One promising alternative method is a vote-by-mail system. Five states—Colorado, Hawaii, Oregon, Washington, and Utah—already conduct their elections through mail. Several voting rights groups have expressed support for a vote-by-mail system for the general election. Democrats included a proposal for a national requirement of 15 days of early voting, no-excuse absentee voting, and mailing ballots to all registered voters during an emergency in their relief bill. However, Republicans blocked consideration of the measure.

Online voting must also be considered. While online voting may seem farfetched, it has already been successfully implemented in some U.S. elections. For example, earlier this year, the greater Seattle area held the first election in U.S. history where all voters could cast a ballot by smartphone, while West Virginia has allowed voters living overseas to vote using a mobile app. Given that 81% of Americans own smartphones, studies show that online voting could dramatically increase voter turnout.

So, why have these voting methods not been implemented? The most prevailing and unfounded belief is these methods are risky and fraudulent. But these methods have already been implemented in various states with no evidence to support a claim of greater risk. Instead, this unsubstantiated narrative has kept Americans with limited voting options, all while voter rolls are purged, long lines form in primary elections during a global pandemic, and economic policies are enacted that do not benefit all Americans.

Some politicians believe it is risky to make voting easier. Last week, President Donald Trump admitted that if voting were easier “you’d never have a Republican elected in this country again.” But it shouldn’t matter which party Americans vote for. What matters is that we have a healthy electorate that represents all Americans.

Congress must include investments in our archaic voting system to make it easier for everyone to participate in our democracy, and funding for a vote-by-mail system and other alternatives must be included in a ‘phase four’ recovery and relief package. A failure to do so amounts to voter suppression.

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