The efficient market theory is long dead, according to Bloomberg's Richard Breslow.
It was a brilliant academic construct. It fit the needs of those who wanted to explain markets to freshmen, make econometric models or make money from the knowledge that it wasn’t reality. An unfortunate problem arose, however, from how the counter-argument was framed. If markets weren’t efficient they must be irrational or biased. The truth is something very much in-between.
Recognizing that there is mostly gray rather than the polar opposites black and white is even more vital in a world where exogenous shocking (including central banks) and systemic distortions (computer algos) have made if-then statements decidedly precarious.
If there is one asset where forecasting has proved time and again, over a long period of time, a fool’s exercise it’s oil. This has been demonstrably true for industry experts, policy makers and traders. Don’t protest, it’s a fact. We can only take an educated stab at guessing where this commodity will be priced a year from now.
We then use this enormously important input in pricing everything else. That’s neither efficient or biased: it’s just the best we can do. It’s what makes markets. And, worryingly, policy.
I’ve always been skeptical of the very notion of using long- term market measures of inflation expectations. It seems like a disturbing mis-match of ’’how ya feeling now’’ with “where does it all end.” Belatedly, with great angst, policy makers are realizing that blind faith in a measure which really is just an oil forecast proxy has been misguided.
I was fretting over this while reading yesterday’s release of the minutes from the ECB’s January meeting. It broadly hinted at further easing. After all, oil prices had continued to fall. Nice substitution of oil prices for inflation-linked swaps.
But the conclusion is the same and, ultimately, the driver is the same and unforecastable.
via Zero Hedge http://ift.tt/20JaRuM Tyler Durden