It seems just like old times for SocGen’s (now disbanded) top-rated strategy team of James Montier and Albert Edwards at SocGen.
Montier quit SocGen last month to join US investment manager Grantham Mayo Van Otterloo & Co, just after the duo won the Thomson Extel European analysts’ award last month as the top global strategy tream. There had been an increasing divergence of views between the two – as the FT noted in its People column, “Montier was always more bullish than his other half at SocGen” – but the parting of ways was entirely amicable.
“We will miss him”, said Edwards in a recent note to investors. “James and I have been a Global Strategy duo for some eight years. It is a bit like breaking up Butch Cassidy and the Sundance Kid, Abbot and Costello or maybe even Laurel and Hardy. We wish James well. ”
In fact, Butch and Sundance – or is it the uber-bull and the perma-bear? – have continued to publish as a team on areas of common agreement.
And no market-related topic seems to bring them together as neatly as the subject of efficient markets hypothesis – the theory that the price os an asset is rationally determined and encapsulates all known information. In a full-frontal attack on the subject in last month’s FT, Montier argued that just like Monty Python’s dead parrot, EMH was dead – not just “resting”:
“No matter how much you point out that it is dead, the believers simply state that it is just resting. In part this is testament to the high degree of inertia that academic theories enjoy… It is bad enough that the EMH exists as an academic theory (filling student’s heads with utter garbage) but the very real damage it does comes from the fact that as Keynes opined “practical men are usually the slaves of some defunct economist”. The EMH has left us with a long litany of bad ideas that have influenced the very structure of our industry.
Now, they are getting their teeth into a new but related field of debate: adaptive markets hypothesis. In a letter in Friday’s FT, the pair revisit their earlier arguments and take on MIT professor Andrew Lo, who earlier this week penned an FT article on AMH.
Lo notes that the increasingly fierce debate over EMH – which implies that regulation is largely unnecessary because markets allocate resources and risks efficiently via the ‘Invisible Hand’ – may well help determine the new regulatory landscape. But markets, he concludes, are not always efficient, nor are they always irrational – they are adaptive.
This “adaptive markets hypothesis” – essentially what Lo calls an evolutionary biologist’s view of market dynamics – is at odds with economic orthodoxy, which has been heavily influenced by mathematics and physics. If you recognise the influence of adaptive behaviour, he concludes, the solution is to “design equally adaptive regulations to counterbalance human nature”.
Not according to Montier and Edwards.
The AMH theory may seem superficially attractive, “especially to economists who like to link their models to those of biological evolution” (ouch). They say:
However, we are less convinced that AMH is a terribly useful concept. As we understand it, the AMH provides a halfway house where sometimes markets are irrational and sometimes they are rational. We would argue that the amount of time that markets are rational is near negligible. Instead markets seem to be in a constant state of disequilibrium – moving from boom to bust and back again, rarely if ever stopping off at “normal”.
If, as one of us has recently argued (Insight, June 25), the efficient markets hypothesis is the financial equivalent of a dead parrot, then the AMH may be a dodo.
Ride on, Montier and Edwards…
So farewell – and stay safe! – Albert Edwards, SocGen
What can replace efficient markets theory? – FTfm
Efficient markets theory is not to blame – FTfm
Monty Python’s Dead Parrot – YouTube