The Efficient Market Hypothesis considered a source of cognitive dissonance

So nobody really believes the EMH. Everyone wants to feel good about spotting something that the rest of the market has overlooked.

Nobody wants to believe Cramer, or the dull analyst reports from the bulge bracket banks. But, on the whole, they prove pretty accurate; of course they sometimes prove spectacularly wrong, and a few Cassandras point out how they were right all along. But as long as more money flows into equities, and dilution is kept modest by buybacks undoing the dilutive impact of CEO option grants, I am not sure there is — even now — any strong case of a major correction.

Of course, events like 1987, 1992, 2000 and 2008 seem very scary at the time. But, in retrospect, it really is the case that buying the dip in the share prices of dull, well capitalized, profitable, conservatively managed companies will have produced a better return than calling and shorting the market immediately prior to the crash. Of course, the two strategies are not incompatible, but even someone like me, who is a terminal bear, must acknowledge this.

Transparency in public life

An article in Private Eye pointed out that a lot of the beneficiaries of the hugely generous terms given to PPE suppliers under the PPE scramble a year ago went to small companies which would make use of the reduced disclosure rules for filing accounts at Companies House.

I am a great fan of the Norwegian system in which all tax returns are available for public scrutiny. Nobody has to look if they do not want to. The logic of having a public register of companies is to allow creditors to evaluation their credit standing. An abbreviated balance sheet is simply not enough for this. If people do not want their profit and loss statement made public, they can operate as a sole trader.

I run a number of companies, and I am always surprised by the fact that accountants do not even give me the option of filing full accounts, assuming that all their clients will want to have as little information on the public record as possible.

In fact, my material creditors expect me to provide vastly more detail than a mere P&L statement, but it would be a start. Councils regularly contract with suppliers who supply the sketchiest detail about their financial activities, with the result that in a number of cases these suppliers go bankrupt before delivering on their contract. I can understand the under-capitalized company wanting to hide its precariousness from public view, but I do not understand why more solid businesses are so coy about their financial affairs. Apart from anything else, it would allow customers to see to what extent they are being ripped off. On average, anyway.

This dovetails into another hobby horse of mine: hidden cartels. It’s quite clear that very high returns on investment, or very high payments to the board are a sure sign of monopolistic profits, which we are supposed to regulate away.

Wrap

Today was another extremely dull day. The only asset that seems to have anything resembling a well defined trend is gold, although that is not exactly strong. I believe that real stresses in the financial system will show up first in currencies. Today the dollar index, $DXY, moved by 3bp. Crises seem remarkable by their absence.