(In)efficient Markets

I know I could break you down
But what good would that do?
I could surely never know
That what you say is true
--Information Society

The 'efficient market' hypothesis (EMH) posits that investors process new information quickly and accurately, resulting in prices that quickly adjust to the news. In fact, that news is often anticipated in advance of it actually happening.

There are several problems with the EMH. One is that it treats investors as a monolithic entity rather than segments and individuals who tend to process information differently. Fund managers, for example, are likely to process new financial information differently than retail investors.

Another problem is that the effect of new information may be difficult to determine. Is, for example, the Fed's recently announced initiative for combating inflation bullish or bearish for stocks? Moreover, is it likely that the Fed will actually follow through on what it says, or is this merely another example of the 'open mouth committee?'

A third problem relates to how long it takes to process information. Some information may be complex, taking a long time to chew through before actionable conclusions can be drawn. Consequently, considerable lags might precede market price movements. 

Immediately after the FOMC's announcement yesterday, for instance, gold didn't move much. However, this morning the metals and miners are ripping higher. Perhaps investors needed time to digest the announcement overnight in order to come to judgment about the macroeconomic implications of the news before acting.

These problems have prompted some theorists to posit that markets are only 'semi' efficient. Perhaps, but semi efficiency vs outright inefficiency seems only a matter of degree.

position in gold