Last month’s award of the Nobel Price in economics set off a great deal of chortling because one of the three recipients, Eugene Fama, received the award for saying that markets are efficient at capital allocation and another, Robert Schiller, received the award for saying they are not....
To me, much of the argument about whether or not markets are efficient misses the point. There are conditions, it seems, under which markets seem to do a great job of managing risk, keeping the cost of capital reasonable, and allocating capital to its most productive use, and there are times when clearly this does not happen. The interesting question, in that case, becomes what are the conditions under which the former seems to occur.Michael Pettis jumps into the fray.
China Financial Markets
When are markets “rational”?
Michael Pettis
6 comments:
I'd argue they are irrational on an individual level & rational in aggregate as the random irrational factors in both directions cancel eachother out between individuals, but irrational when certain individuals such as presidents, monopolists and central bank chairmen have so much power that no one can counterbalance their biases.
hey this is worth a look:
The Kalecki profit equation derived, explained, tested: 1929-2013
http://philosophicaleconomics.wordpress.com/2013/11/24/cp/
Markets appear to be efficient in the sense that they are hard to beat. At the macro level, this shows up in the form of "melt up" dynamics, which people call bubbles after the fact.
As Keynes, Kalecki and Minsky (amongst others) observed, this optimism drives investment, which drives profits. This means that the bubble looks rational, as it appears justified by higher profits.
As such, Michael Pettis' view that "value investors" can determine the fair value of investments in the abstract seems unlikely.
The basis of Michael Pettis's critique of China is institutional. China has not yet developed institutions capable of supporting healthy financial markets. Instead they are dominate by speculation, hence, highly volatile, which is a sign of market inefficiency at price discovery relative to actual value. Actual value is not that volatile.
In a developed society and economy, there is a balance among (LT) value investors, relative value investors (arbitragers), and speculators (traders). Each plays a role in price discovery relative to actual value.
When that balance is disturbed, then market anomalies occur. The question is how the balance becomes disturbed, e.g., is this cyclical like Minsky's financial cycle?
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