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Stockholm sent a mixed message this week when it awarded the Nobel Prize to three American economists, two of them University of Chicago professors. One was the U. of C.'s Eugene Fama, who says the market is smarter than your broker. The Tribune explained, in an editorial applauding him:
"Fama, 74, is best known for a theory he developed in the 1960s and 1970s that is simple to express, which has made it all the more controversial: Markets are efficient. They are accurate. They take into account all available information at all times. Whatever investors know about a stock or bond is already reflected in its price, and prices respond instantly to newly available information. As a consequence, no one will consistently beat the market."
But while Fama's "seminal theory of rational, efficient markets"—to quote the New York Times—"inspired the rise of index funds and contributed to the decline of financial regulation," his critic, Robert Shiller of Yale University, another winner, "carefully assembled evidence of irrational, inefficient behavior and gained a measure of fame by predicting the fall of stock prices in 2000 as well as the housing crash that began in 2006."
(The third winner was Lars Peter Hansen, also of the U. of C., who developed a statistical method of testing economic models.)
What message was the Royal Swedish Academy of Sciences sending investors with these choices? Here's my takeaway: don't trust the experts, trust the market—but don't trust the market either.
I had all this in mind as I switched on CNN Wednesday. The screen said "Dow Jumps on News of Deal" and host Ashley Banfield was telling us, "Breaking news at this hour here in the United States of a Senate agreement to avoid that debt default, and the Dow couldn't be happier, jumping over 200 points, actually a little earlier in the program, we're settling right now at 177. But there is a lot of movement based on this news and the deal isn't even final yet, and with the risk of default still with us . . ."
What disasters could default inflict? The screen offered a list:
Global stock market crash
Run on the banks
Some financial institutions may fail
Lending seizes up
Then business correspondent Richard Quest came on to—as Banfield put it—"cut through all the financial jargon."
Quest: But what we are seeing at the moment, and this is really fascinating, the Dow Jones—
Banfield: What is going on? This is a— There's not even a deal! There's no vote! We've been in this boat before.
Quest: We saw this last week. The market is so much of a pressure cooker at the moment, and so concerned about this, that the mere scintilla of a deal, the mere suggestion, has sent the Dow up the best part of 150 points this morning, and now over 200 points come back off the top. But I caution, this is a bit like Scotch mist. It could disappear very quickly. If a deal disappears you will see this reversal.
Nothing was settled. Nobody knew what the House would do. Nobody knew if Ted Cruz would try to gum up in the works in the Senate. But the Dow was off and running. With the baseball playoffs in the back of my mind I thought of a base runner taking off at the crack of the bat, hoping to God the ball wouldn't be caught and he wouldn't be doubled up.
Rational? I don't think so. But what a joy to light out! Sometimes the stock market beats like the heart on the sleeve of America.