After rising at roughly a 5% rate for many years, the Fed brought growth in the monetary base to a complete halt between August 2007 and May 2008. That triggered the onset of recession in December 2007. Velocity actually rose during that 9 month period, but not enough to offset the Fed's tight money policyHome prices had been falling for nearly two years, relative to rents, when the Fed started pulling on the emergency brake, by the way. Emergency Unemployment Insurance was first instituted at the end of June 2008, while the Fed was still dithering, worried about potential inflation. (I don't mean to blame the Fed. There is only one way to provide the optimal quantity of an important commodity with dynamic demand, and it doesn't involve the creation of a Central <fill in the blank>. I have a very high opinion of my own market perspective, and if you put me and the 10 smartest people in the world in charge of allocating wheat production, good luck making it to next spring.)
Scott references an earlier piece he did that highlights some apparent contradictions within the standard stories. (here)
Scott frequently mentions his assent to the efficient market hypothesis, and I largely agree. At least in its weak form, EMH generally holds. But, this is where it gets muddy. What is information? Is it just bits and bytes, lines on a financial document, whispers about new contracts? Or does it include interpretations? Does it include conventional wisdom?
What does EMH mean, exactly? Does it mean that you can't systematically make excess profits where others are clearly being contradictory or dense? Why not? There are a number of consensus beliefs about the last decade that seem strange to me, in ways that I can trade against. Could there be a meta-weak form of EMH? It would say that you can't systematically beat the market unless you rebel against the consensus, but rebelling against the consensus is like eating from the tree of the knowledge of good and evil - not a history of good outcomes there, for a number of reasons.
For disagreement to be more than a rare occurrence, the human mind really has to be an instrument finely tuned for self-deception. The topics that people commonly disagree about aren't topics on which we tend to merge to a concensus of shared ambivalence and doubt. They are generally the topics that we all feel the most certain and exorcised about. And, we usually share these strongly held beliefs with some group of friendly believers. Empirically it is clear, even though there is no coherent way to admit it, collectively, to ourselves: The things we are most wrong about are - in fact, they have to be - the things we feel most strongly about.
We have a bias for the consensus. We have a bias for the omniscient designer. We have a bias for blaming powerful outsiders. We have a bias for defending the meek. To be otherwise is to be untrustworthy. I think the consensus about the causes of the Great Recession is riddled with logical and empirical errors, but what it has going for it are all the right biases - careless greedy bankers, helpless workers and homeowners, a Central Bank heroically pulling us through the dark times, policies of one political party that would have solved the mess years ago if the other party wasn't diabolical, a put-upon Main Street and a rapacious Wall Street, etc.
Being human means happily accepting the consensus when it is wrong. Beating the meta-weak efficient market means systematically seeing through the haze of contradictions of the consensus. But, we are such imperfect vessels in a highly complex world. As Walt Whitman said, "Do I contradict myself? Very well, then I contradict myself, I am large, I contain multitudes." If this can be said of us, it can certainly be said of the consensus. But, the consensus, imperfect as it may be, also serves as a disciplining force. For every contradiction that it feeds us, it corrects a hundred others. If we imagine ourselves above the consensus, judging its foibles, who do we allow to judge our own contradictions? With even a subtle lack of self-awareness, this becomes sociopathic. I submit that it is possible to walk this tightrope, but with many trips and falls along the way - too many pitfalls to disprove the null hypothesis.
We pooh-pooh the herd, even while we largely live inside one herd or another. We call them sheep, lemmings. But, herds survive. Zebras aren't playing stupid just to be with the cool kids. The herd serves us, even though there are large untrampled, bountiful meadows out there, just over the hill. You can have them all to yourself, and there usually aren't any lions around, until you're full and sated, almost, and decide to waltz out and dip your head under the tassels for one more scrumptious bite.
The other zebras are EMH'ers. They say, "There is no way that you can be sure to get to that meadow and get back here alive." But, I say, "The meadow is right there. It's gorgeous. I can see it. Surely I can go sneak a meal every now and then, if I'm careful." It doesn't take a genius to see that we're all trampling around in our own shit, does it?
I don't know if efficient markets will eventually force me to succumb to a final blow of bad fortune, but if they do, I can say with certainty that it will be over a position that I will have been very confident about, highly exorcised over, and insistent that it was logically sound and safe as can be. After the fact, I will say, "That doesn't prove the EMH. I was just being an idiot on this position. Man, I wish I had just managed to hold on to a few dollars so I could keep trading. Did you hear how wrong everyone on CNBC was this morning?"
The EMH says all available information has already been priced into the market. But, I think it's more a matter of having two choices, (1) believing all the insane, wrong stuff everyone else believes, or (2) believing in your own insane, wrong stuff. How could we expect any other choices? And, how do you plug that into a statistical model to confirm whether (2) can reliably succeed over (1)?