The Economic Myth of “Efficient Markets”

What took Wall Street so long to figure out something I’ve been saying for months?

Six months ago, even before the presidential election in November, I began warning my readers that Joe Biden was going to double the capital gains tax.

It wasn’t a difficult prediction. Biden said so himself in his campaign website as one of a long list of policy proposals.

Of course, the mainstream media didn’t report this because they were all-in for Biden and were determined to beat Donald Trump (remember how they covered up the Hunter Biden laptop report?).

The media were careful to cover-up any Biden policies that might prove unpopular with voters. Still, Democratic Party progressives knew about the plan and were all for it.

One Simple Rule

My rule for making policy forecasts is simple. If a politician tells you he’s going to do something, believe him.

Policies don’t drop out of the sky. They’re the result of intense internal debate and compromise by competing factions. Once a policy makes it to a candidate’s website, you can bet they will try to deliver.

This doesn’t mean that every proposal becomes law because there can be opposition in Congress and the courts. However, it does mean the politician will work to achieve his stated goals.

With the White House and both houses of Congress in the Democrat’s hands, the odds of this doubling of the capital gains tax becoming law look very good.

Despite my forecasts (which fortunately left my readers well-prepared), Wall Street didn’t seem to pay attention until last Thursday, when the Dow Jones index plunged 210 points in a matter of hours after the Biden tax plan was formally announced.

That’s a good example of how so-called “efficient markets” are not efficient at all.

Not so Efficient After All

Mainstream economists have insisted for decades that markets are highly efficient, and they do a nearly perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information.

In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient.

Markets can be rational or irrational. Markets can be volatile, irrationally exuberant, or in a complete state of panic depending upon the emotions of investors, herd behavior, and the specific array of preferences when a new shock emerges.

If markets were so efficient, why was Wall Street surprised when it was obvious to anyone paying attention that Biden was going to raise the capital gains tax?

The capital gains tax increase information had been there for all to see for six months, but it took a press release to get Wall Street to sit up and take notice.

It should have been priced in long before, and the announcement just would have confirmed market expectations.

So the next time you hear about efficient markets, take it with a large grain of salt.

But my forecast from six months ago was wrong in one respect.

Even Worse Than I Thought

I said the tax rate on capital gains would almost double from 20% to 39.6%. It turns out [ … ]

What do you think?

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Posted by thorny

Andrew Cuomo will get away with it all

Death of Hitler: How the world found out from the BBC