It is perhaps an exaggeration to say that Europe is “dying” when “stagnating” might be a fairer description. The chart below isn’t adjusted for inflation, so the European market is more or less flat in purchasing power while the investor in the U.S. market has done nicely.
All of Europe’s challenges and advantages were known to investors in 2008. Ditto for the U.S. The Efficient-Market Hypothesis, therefore, would suggest that the above situation shouldn’t have happened. Returns to the European stock market should have been about the same as returns in the U.S. market unless something dramatic occurred. Perhaps we could say that Russia’s attack on Ukraine in 2022 was an unforeseen dramatic event, but it looks as though the divergence between the markets happened well before that.
The EU is structurally inefficient compared to the U.S., and furthermore there are no accountable political bodies acting in the interests of the EU as a whole.
Noticed all the east european gootubers now live in posh accomodations while all the amerikan gootubers live in vans. They had an even bigger quantitative easing program than US, but it seemed to be more efficiently distributed. It could be argued that stonks are due for an 80% collapse but many indexes have different ratios. Most amerikans are actually manely invested in their houses & not stonks. Houses in Calif* only tripled in that time. To buy a house in 2009, you had to ignore the media & put everything into the dying real estate market instead of stonks.
The Efficient-Market Hypothesis does not propose that different markets provide identical returns. It states that it is impossible for investors to purchase overvalued or undervalue stocks since their prices reflect all available information. In the same way a given American stock can outperform a different one, the European markets can register lower returns than American ones. Where is the contradiction? The EMH does not say that when you buy a stock it will perform like the average or like any other stock. It says that you cannot beat the market. Could you have predicted that American markets will out-perform the ones in Europe? That is the key question here.
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I’m pretty sure that’s exactly the point of the sentence preceding his chirping at the EMH:
“All of Europe’s challenges and advantages were known to investors in 2008.”
A fully rational investor back then would have seen it based only on public data. All the fundamentals were there. No new information was revealed since 2008. We knew Europeans were dying, over-regulated and encouraged to lean towards idleness/leisure, yet prices of stocks back then did not reflect it (arguably, they would reflect it more now after stagnating for so long).
I think where you are onto something is that the EMH basically only says “there’s no arbitrage to be had” and to a large extent that was true during the period of interest if you take the perspective of investors. As unproductive as Europe is, it is home to a lot of capital and has the ability to prevent that capital from being moved around efficiently (sometimes to a glaringly ridiculous extent, e.g., the mere existence of negative nominal interest rates for a while). If large pools of capital can easily be coerced into accepting a negative rate of return, then it’s not a stretch to think they can be steered away from higher-but-arguably-riskier assets.
Arbitrage on different commodities or stocks allowed to exist theoretically. Arbitrage on same securities or commodities theoretically allowed only for brief time intervals, in free markets. Show me 100% free markets.
Why would decisions of investors and traders 16 years ago and now about variety of geographicall and legally distinct markets contradict EMT?
This. Exactly this.
If anything the chart you (Philip) show indicates the US market contradicts EMH – it has had much more volatility and price adjustment since the starting point of the series. Shouldn’t investors have know it was worth so much way back when?
In any case EMH is a useful framework for thinking about things but our many bubbles and crashes are proof enough that there are plenty of moments and even prolonged periods when the market behaves inefficiently.
There is nothing “efficiently market” about European government idiocy in imposing harsh trade prohibitions (aka sanctions) on trade with their main supplier of cheap energy, agricultural goods, and metals.
All the money poured into defense companies was stimulative?
EU is being forcibly de-industrialized; while the USA is also being de-industrialized, more of USA’s exports are digital or made in China but sold by American companies. Plus the Fed is pumping money into US stocks and not EU ones.
Why is the US and EU getting deindustrialized and who is pushing for it and why? Is it a conspiracy or is it simply because China is simply more competent and is putting US and EU manufacturers out of business?
Is the U.S. really thriving or is that just inflation? It doesn’t feel thiving
“Europe is dying”. The good news for Europeans is that it takes a lot longer to die in Europe than in the US (much higher life expectancy).
Anon: You don’t need to go to Europe to live longer. You can just be a rich American: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4866586/
Men in the bottom 1% of the income distribution at the age of 40 years had an expected age of death of 72.7 years. Men in the top 1% of the income distribution had an expected age of death of 87.3 years, 14.6 years (95% CI, 14.4–14.8 years) higher than those in the bottom 1%. Women in the bottom 1% of the income distribution at the age of 40 years had an expected age of death of 78.8 years. Women in the top 1% had an expected age of death of 88.9 years, which is 10.1 years (95% CI, 9.9–10.3 years) higher than life expectancy for women in the bottom 1%.
The theory that Phil seems to be advancing is that because the financial markets did not accurately predict the future performance of European financial markets the financial markets are not “efficient.” But if that is your theory, why not just look at the price of any stock that this minute it is this and the next minute it is that – I mean you cannot predict the price of IBM stock five minutes from now by what the price is at the moment? And the knuckleheaded mathematicians and economists who developed the theory never noticed that prices change continually?
Philg
I don’t dispute your data. However, take a look a t this interesting fact, in the US Hispanics live longer than whites. They are not wealthier or more educated.
https://www.prb.org/resources/exploring-the-paradox-of-u-s-hispanics-longer-life-expectancy/
https://www.cdc.gov/nchs/data/vsrr/vsrr015-508.pdf
That’s amazing. Eat Mexican food and live longer. That’s not fair! I’m eating more Mexican henceforth.
One thing the honest professors tell medical students is that genetics has a vastly greater influence on health and longevity than medicine. So to the extent that humans can be divided up into distinct genetic groups it makes sense that some will have a big longevity advantage (we see the same thing in canines). Unless you’re Rachel Dolezal, though, it is easier to change income/wealth level than to change genetic group.
Philg
The life expectancy in Spain or Japan was a lot lower than in the US in the 50s.
https://en.wikipedia.org/wiki/List_of_countries_by_past_life_expectancy
Now it is much higher.
https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy
I don’t think the DNA of the people in Spain and Japan has changed that much. One explanation is better health care.
Note: my favorite explanation for the “Hispanic longevity paradox” is self-selection (many immigrants, you don’t see that many people on wheelchairs crossing the border).
According to this ranking, Madrid has three hospitals among the best 100 in the world.
https://www.newsweek.com/rankings/worlds-best-hospitals-2024
It also has the longest life expectancy of all EU regions.
https://en.wikipedia.org/wiki/List_of_European_regions_by_life_expectancy
The quality of health care matters.
Anon: Imagine that you have a population with genetics that prevent death from the 10 most common diseases and disorders. A hospital serving that population will be ranked #1 in the world! None of their cardiac or cancer patients died!
“Quality” in health care is difficult to define and measure.
Years ago my hospital at the time was recognized by US News and World Report for its excellence in Neurology when we actually had no neurologists. I asked admin how that happened, and they said it was because we had one spinal orthopedist who did good work. Admin still sent out an email congratulating themselves for out excellent neurology.
Philg
You are right. However, since that population does not exist (perhaps I just don’t know about it), it is a good idea to have good hospitals. By the way, the quality of a hospital is not measured by health of the population it serves. Many great US hospitals serve populations that are far from healthy.
Spain leads the world in organ transplantation. If you need new kidneys, you are far better off in Madrid than in Miami.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10249502/
How does it influence life expectancy of US Hispanics? Is every US Hispanic allotted free medical care in Madrid? I’ve heard that Spain is very conservative in granting citizenship to Spanish-speaking people of Latin America, they had to prove deep Spanish roots.
Or do you imply that there is medical induction, good treatment in Madrid hospitals influences health outcomes or all Spanish speakers or people with Spanish genes?