Scratchpad: A Five-Factor Stock-Market Model Is a Description of Failure Modes of the Efficient Market Hypothesis & Not a Confirmation of It!, & MOAR!: 2024-04-29 Mo
A scratchpad...
A scratchpad….
Economics: But this is not the Efficient Market Hypothesis!:
Market Sentimemnt: Alpha Letter #4: Factor Investing: ‘The current Fama French model is the combined effort of 40 years of research…. The past six decades of data show that five factors explain 95% of the differences in returns between diversified portfolios (all figures are annualized).
Market Risk (MKT-RF): The market beat one-month treasury bills by 5.37%.
Size (SMB — small minus big): Small stocks beat large stocks by 2.04%
Value (HML — high minus low): Value stocks beat growth stocks by 2.68%
Profitability (RMW — robust minus weak): Highly profitable companies outperformed weakly profitable companies by 2.8%.
Investment (CMA — conservative minus aggressive): Companies that were conservative in asset growth beat aggressive growers by 2.93%.
This shows us, in simple terms, that even if we believe in the Efficient Market Hypothesis, certain factors would get us better results through long-term exposure than if we just stuck to market-cap-weighted index funds… <public.hey.com/p/GBfPdtftX8QVccGVscvaD4…>
The EMH is that the market is efficient—given people’s rational preferences for more stuff with a declining marginal utility of wealth, the typical investor cannot boost expected returns above the market average without widening the distribution of their returns so much that declining marginal utility of wealth makes the game not worth the candle. The four additional factors—small vs. big, value vs. growth, profitable vs. not-so-much, & conservative vs aggressive asset growth—are not pieces of but rather modes of failure of the EMH.
And as for factor (1): market risk? This looks to me like the biggest failure mode for the EMH of all, although some people do contest it. More on that anon…
Neofascism: In the good state of the world come next January, the first item of business must be expanding the Supreme Court to fifteen justices. The second must be creating a Deputy Chief Justice who would be mandated by legislation to preside over meetings when the Supreme Court meets to discuss cases, and to assign the writers of majority opinions:
Josh Marshall: Peering into the Corrupt Court’s Pretensions and Corruption: ‘The display we saw yesterday was a vivid illustration of how the Court has gone thoroughly rogue, cutting itself off from even the appearances of the processes that give it legitimacy…. If… there might be some limited ways that official acts can’t be… crimes… trying to overthrow the government can’t be one of those official acts…. You say that there may be some cases where a very narrow kind of immunity applies. But what we have before us now certainly isn’t one of those cases. End of story. But that’s not what we got…. Perhaps this was all just the equivalent of the preposterous hypotheticals…. But let us be real. We know who these people are. They’re telling us. It’s a rogue court, a thoroughly corrupt one, one that is so far gone in its corruption that it feels free even from the practical obligation to clothe its corruption for the sake of appearances.… <https://talkingpointsmemo.com/edblog/peering-into-the-corrupt-courts-pretensions-and-corruption/sharetoken/mODEiFEfA3a3>
Economics: Barry Ritholtz looks through the lagged housing components of inflation and concludes that we are at the Fed’s inflation target right now:
Barry Ritholtz: March 2024 State Coincident Indexes Ease: ‘Q1 2024 [seasonally-adjusted Real] Gross Domestic Product expanded at a disappointing 1.6%… lagg[ing] economists’ consensus of 2.4%…. As Bill McBride pointed out in yesterday’s At the Money, lease renewals for rental apartments or homes… were signed either 1 or 2 years ago; Monetary policy doesn’t impact that that all. Swap out OER for the more timely Zillow Rent Index / Apartment List Index, you get a CPI with a 2 handle. Or, just back out lease renewals, and you get the same results. The economy remains robust, inflation is more of a housing issue with some services concerns thrown in. I believe if we had better and more timely CPI/PCE models, the Fed would already be cutting… <https://ritholtz.com/2024/04/march-2024-state-coincident-indexes-ease/>
Neofascism: Fred Clark hits one out of the park:
Fred Clark: Rural White MAGAs & What ‘Woke C.S. Lewis’ Got Wrong: ‘Most resentment doesn’t punch up. Most resentment punches down. The rich resent the poor. The hegemonic majority resents the disenfranchised minority. The enslaved resents the enslaved. The abuser resents the abused. The usurer resents the debtor. The powerful resent the powerless…. The “logical” form of resentment also exists…. But he poor fellow being choked and burdened… isn’t “utterly corrupted” by the “besetting sin” of resentment…. Mainly, overwhelmingly, his concern is simply getting this guy off his back. Tolstoy’s first-person oppressor here, however, is utterly corrupted and wholly consumed by his resentment of the very man he is, present-tense, exploiting and choking…. That perpetual need to keep saying that, to himself and to others, to have to repeatedly assert “I’m not a bad guy, really I’m not!” is, for this man, “some sort of negative experience.” And thus it seems, to him, that resentment is, as Jacobs says, “rational, a reaction based on some sort of negative experience.”… We resent those we have wronged. We resent those we have harmed. We resent those we are harming. If it weren’t for them, after all, we wouldn’t have to spend so much time and energy reassuring ourselves and others that we’re still good people. If it weren’t for our annoying, bothersome victims, we’d be so much happier…. And so we ask for mirth from those we torment, demanding that they “Sing us one of the songs of Zion!”… <https://www.patheos.com/blogs/slacktivist/2024/04/18/rural-white-magas-and-what-woke-c-s-lewis-got-wrong/>