5: There was a huge EMH failure w/r/t C19, and it hasn’t been explained away AFAIK.
I would like to hear what he is talking about here.
Perhaps he is thinking that free individuals cannot solve the problem and governments can?
Some arguments against this
1. The pandemic started in a country ruled by the Communist party. The CCP has in recent years has become more authoritarian, limited free speech, censored the internet, punished and silenced whistle-blowers, thrown our foreign journalists etc.
2. Early efforts in the US were stymied by incompetence and over-zealous regulation by the FDA and CDC. The CDC distributed faulty tests but would not allow other tests to be used, Manufacturers who wanted to make masks and other protective equipment were told that approvals would take months.
3. In a number of cases, government officials—including health officials—gave false assurances of safety and low risk e.g. the advice that it was safe to attend the NYC Chinese New Year celebrations.
4. No serious economist actually believes in the Efficient Markets Hypothesis. So why would it be true?
Some arguments for it:
1. Cruise ships, which largely operate outside meaningful regulation, have been a big problem. Over 25% of cases in Australia came from cruise ships, for example. Social distancing is very difficult on cruise ships and poor quality filtering of recycled air conditioning seems also to be a factor.
2. Collective action in the face of externalities (such as the risk of infecting other people) is difficult without some form of mandated collective action.
3. Border controls appear to have been a big factor in reducing the importation of cases to many countries. As one example Australia closed borders to China earlier than to the US and Europe, and apparently this is why Australia had few case imported directly from China. Most libertarians support national borders and quarantine measures, but not all do.
Or maybe he is arguing that the markets responded to the pandemic irrationally.
I don’t know how you could know this right now. There has been great uncertainty about the course of the pandemic, its health effects, the responses by governments, money printing etc. We are in the fog of war, flying largely blind.
I invite anyone who thinks markets are obviously irrational to exploit their superior insights by making billions of dollars by trading. If you can outperform the market consistently by 2% per annum, rich people will beg you to charge them high fees for managing their money for them. You might find it is harder that it looks. Having one successful trade (e.g. buying bitcoin at some point) is not much evidence of superior skill.
6b: Stock prices take into account the next 15+ years of earnings. The real C19 shock only damages the next 2 years of earnings. A financial recession would damage many more years. Stock prices mainly reflect central bank policy, not C19.
This is a bit over-simplified. Past pandemics have actually damaged the economy well past the duration of the pandemic. Many businesses will go under, which is a permanent loss. There is potential serious damage to supply chains and webs of interlinked businesses. Young people who fail to get a job early on (e.g. in the depression) have in the past suffered long term damage to their prospects.
I agree central bank and government policy is a huge factor for any investor. And it is vexing because it is so hard to predict. How could you predict that they allowed Lehman to go under, but not others? Valuations pre this pandemic were high, on the premise that central banks would print money on the first sign of trouble. Without central bank support, almost all existing banks would be out of business within days. Back in the 1920s banks would typically operate at leverage ratios of 2:1 to avoid bank runs. These days 10:1 is considered conservative. The central banks have enabled in many ways a massive ramp up in financial risk.
Ah yep, as Oli says, I’m afraid this wasn’t Eliezer’s point.
The main case Eliezer has previously said was very surprising was from our very own Wei Dai. Wei Dai bought puts, and their positions went up 1500% and 2300%. He unfortunately did not sell them before the US Govt announced a $6 trillion stimulus package, but AFAIK that doesn’t imply that he made any mistakes in correctly noticing the market had not reacted to the oncoming catastrophe.
I think Michael’s position doesn’t have much to do with covid, but a lot to do with 6b. The crisis is a coordination point for bursting a bubble. 6b says that there is very little new information, but the stock market is acknowledging a large backlog of negative news. The whole market was a bubble, but Boeing was the worst of the bubble (plus covid is news specifically about transport). In some sense this is a very strong rejection of EMH, but, “the market can stay irrational,” “noise traders,” etc.
I am very confident he is referring to the markets responding extremely late, when there was already a lot of information available on the likely risk from the pandemic.
I would like to hear what he is talking about here.
Perhaps he is thinking that free individuals cannot solve the problem and governments can?
Some arguments against this
1. The pandemic started in a country ruled by the Communist party. The CCP has in recent years has become more authoritarian, limited free speech, censored the internet, punished and silenced whistle-blowers, thrown our foreign journalists etc.
2. Early efforts in the US were stymied by incompetence and over-zealous regulation by the FDA and CDC. The CDC distributed faulty tests but would not allow other tests to be used, Manufacturers who wanted to make masks and other protective equipment were told that approvals would take months.
3. In a number of cases, government officials—including health officials—gave false assurances of safety and low risk e.g. the advice that it was safe to attend the NYC Chinese New Year celebrations.
4. No serious economist actually believes in the Efficient Markets Hypothesis. So why would it be true?
Some arguments for it:
1. Cruise ships, which largely operate outside meaningful regulation, have been a big problem. Over 25% of cases in Australia came from cruise ships, for example. Social distancing is very difficult on cruise ships and poor quality filtering of recycled air conditioning seems also to be a factor.
2. Collective action in the face of externalities (such as the risk of infecting other people) is difficult without some form of mandated collective action.
3. Border controls appear to have been a big factor in reducing the importation of cases to many countries. As one example Australia closed borders to China earlier than to the US and Europe, and apparently this is why Australia had few case imported directly from China. Most libertarians support national borders and quarantine measures, but not all do.
Or maybe he is arguing that the markets responded to the pandemic irrationally.
I don’t know how you could know this right now. There has been great uncertainty about the course of the pandemic, its health effects, the responses by governments, money printing etc. We are in the fog of war, flying largely blind.
I invite anyone who thinks markets are obviously irrational to exploit their superior insights by making billions of dollars by trading. If you can outperform the market consistently by 2% per annum, rich people will beg you to charge them high fees for managing their money for them. You might find it is harder that it looks. Having one successful trade (e.g. buying bitcoin at some point) is not much evidence of superior skill.
This is a bit over-simplified. Past pandemics have actually damaged the economy well past the duration of the pandemic. Many businesses will go under, which is a permanent loss. There is potential serious damage to supply chains and webs of interlinked businesses. Young people who fail to get a job early on (e.g. in the depression) have in the past suffered long term damage to their prospects.
I agree central bank and government policy is a huge factor for any investor. And it is vexing because it is so hard to predict. How could you predict that they allowed Lehman to go under, but not others? Valuations pre this pandemic were high, on the premise that central banks would print money on the first sign of trouble. Without central bank support, almost all existing banks would be out of business within days. Back in the 1920s banks would typically operate at leverage ratios of 2:1 to avoid bank runs. These days 10:1 is considered conservative. The central banks have enabled in many ways a massive ramp up in financial risk.
Ah yep, as Oli says, I’m afraid this wasn’t Eliezer’s point.
The main case Eliezer has previously said was very surprising was from our very own Wei Dai. Wei Dai bought puts, and their positions went up 1500% and 2300%. He unfortunately did not sell them before the US Govt announced a $6 trillion stimulus package, but AFAIK that doesn’t imply that he made any mistakes in correctly noticing the market had not reacted to the oncoming catastrophe.
(Of related interest, Michael Vassar seems to have made a substantial amount of money betting against Boeing being able to deal with the catastrophe, a corporation he thinks is especially corrupt. As far as I’m aware he basically has been going off public information (I believe they had multiple plane crashes in the last year or so), which is of some interest to the EMH, although not super related to covid in particular.)
I think Michael’s position doesn’t have much to do with covid, but a lot to do with 6b. The crisis is a coordination point for bursting a bubble. 6b says that there is very little new information, but the stock market is acknowledging a large backlog of negative news. The whole market was a bubble, but Boeing was the worst of the bubble (plus covid is news specifically about transport). In some sense this is a very strong rejection of EMH, but, “the market can stay irrational,” “noise traders,” etc.
I am very confident he is referring to the markets responding extremely late, when there was already a lot of information available on the likely risk from the pandemic.