That’s what some people think. Because the housing market boomed and then busted, they claim that market efficiency has been disproven. “Economists believe that the market perfectly discounts future cash flows. How was the housing market perfect?” But efficient markets aren’t perfect; they’re just hard to beat.
Careful practitioners know this. They know that the market can get it wrong. But they don’t think that the alternative to “the market got it wrong” is “the government can put it right.” If investors are occasionally idiots, then so are bureaucrats and regulators. Lionizing Robert Shiller or Nouriel Roubini because they got it right the last time is no different than the crowd that worshipped Alan “Maestro” Greenspan before and now wants to throw him under the bus.
No, market efficiency is like democracy: it may be the worst way to price assets, except for every other way. Government fiat doesn’t work—communism showed that. But neither does regulation—Reg Q set the maximum interest rate banks could pay depositors during the ‘60s and ‘70s, and it inspired a host of ways to get around it.
Instability is part every living system. People walk by slowly falling forward and catching themselves. If the markets weren’t long-run efficient, investors couldn’t make money; if the markets weren’t short-run inefficient, advisors couldn’t help them.
Stability and equilibrium may make logical sense, but they don’t characterize living systems. Only dead ones.
Douglas R. Tengdin, CFA
Chief Investment Officer
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