There Sumner Goes Again: The EMH Canard

      He has chutzpah I'll give him that. He has a post out today entitled, "Are there any good arguments against the EMH?" Well actually yes. There are many.

      The better question would be "Are there any good arguments for the EMH?" to which the answer is "If there are he didn't mention them in this post."

      http://www.themoneyillusion.com/?p=12801#comments

       Sumner's whole argument here amounts to claiming that the year after year rate of returns of hedge funds are not very high. As if the only way you could possibly refute EMH are if hedge fund rate of returns are very high.

       For one thing if EMH was such a good theory why can't he offer any maroceconomic cases for it, the best he can do is the very crude comparison of the hedge fund rate vs. the S&P? To say that the S&P rate is 10% proves nothing either.

       It surely doesn't mean that everyone, or even most people who get into equities will realize a 10% return. Let's listen to his "irrefutable argument" for EMH:

       "Over the years I’ve swatted away lots of arguments against the Efficient Markets Hypothesis.  The question is not whether the EMH is “true,” how could it be?  Almost no economic model is precisely true.  The question is whether it is useful.  I find the EMH useful, and anti-EMH models to be almost completely worthless.  I’m still looking for the model that will tell me how to beat the stock market.  Just when I was starting to warm up to Shiller’s model, he missed the huge bull market of 2009-11."

      He finds it useful-for what exactly he never tells us. He says no economic model is precisely true but he doesn't even give it any economic analysis just claims that as Shiller didn't beat the market, EMH must be true. Very weak argument. Is Sumner himself a market participant? If not what use is he getting from EMH?

      Does he mean useful as a market participant or an economist?

       "There is no doubt that hedge-fund managers have been good at making money for themselves. Many of America’s recently minted billionaires grew rich from hedge clippings. But as a new book* by Simon Lack, who spent many years studying hedge funds at JPMorgan, points out, it is hard to think of any clients that have become rich by investing in hedge funds (whereas Warren Buffett has made millionaires of many of his original investors). Indeed, since 1998, the effective return to hedge-fund clients has only been 2.1% a year, half the return they could have achieved by investing in boring old Treasury bills."

       Since the top of the bull market in 2000 the S&P adjusted for inflation is actually lower now and the Nasdaq is of course much lower. I feel that that there are two different levels that he blurs the lines on-the EMH as a theory useful for economic models-his stock and trade-and as useful for a market participant-as far as I know not his stock in trade.

      Yet he argues that it is useful and doesn't explain how but the argument he employs is all about market returns not economic models.

      As is typical for Scott he is seizing on one thing-this time hedge fund returns-and assuming he can make his entire point from this one premise not realizing that even if we grant it to him he is far from in pay dirt.

      He did this when he was arguing against MMT-claiming that without the Quantity Theory of Money (QMT) you can't explain the price level-ergo QMT must be right and MMT must be wrong. Only problem is that MMT actually does believe in QMT-of a type; for them it holds but only over the long run-so even if we grant him that QMT is the only way to explain the price level he still hasn't laid a glove on MMT.

     So it is here that whatever you make of hedge fund returns this hardly proves EMH. As someone who has played the market both as a buy and hold investor at times and as a trader at times, I doubt you will find many on the trading floor who believe in EMH.

     I will say this about the two strategies-here implicitly Sumner is assuming that a successful buy and hold strategy proves EMH. You can't get rich playing buy and hold as even if you get the 10% return Sumner wants you to think you can this is not going to make anyone rich. At best it is a high yield savings account, but with considerably more risk.

     On the other hand you can make a lot of money at trading, you can in fact get rich, In 2008 it was possible to make a lot of money quickly going short the banks, etc. Since then starting in March, 2009 it has been a time of buy and hold. Still this is a strategy that few without deep pockets have been able to afford during this period.