Capitalistic Musings | Page 9

It is not clear why should fundamental analysis be considered superior
to its technical alternative. If prices incorporate all the information
known and reflect it - predicting future prices would be impossible
regardless of the method employed. Conversely, if prices do not reflect
all the information available, then surely investor psychology is as
important a factor as the firm's - now oft-discredited - financial
statements?
Prices, after all, are the outcome of numerous interactions among
market participants, their greed, fears, hopes, expectations, and risk
aversion. Surely studying this emotional and cognitive landscape is as
crucial as figuring the effects of cuts in interest rates or a change of
CEO?
Still, even if we accept the rigorous version of market efficiency - i.e.,

as Aswath Damodaran of the Stern Business School at NYU puts it,
that market prices are "unbiased estimates of the true value of
investments" - prices do react to new information - and, more
importantly, to anticipated information. It takes them time to do so.
Their reaction constitutes a trend and identifying this trend at its
inception can generate excess yields. On this both fundamental and
technical analysis are agreed.
Moreover, markets often over-react: they undershoot or overshoot the
"true and fair value". Fundamental analysis calls this oversold and
overbought markets. The correction back to equilibrium prices
sometimes takes years. A savvy trader can profit from such market
failures and excesses.
As quality information becomes ubiquitous and instantaneous, research
issued by investment banks discredited, privileged access to
information by analysts prohibited, derivatives proliferate, individual
participation in the stock market increases, and transaction costs turn
negligible - a major rethink of our antiquated financial models is called
for.
The maverick Andrew Lo, a professor of finance at the Sloan School of
Management at MIT, summed up the lure of technical analysis in lyric
terms in an interview he gave to Traders.com's "Technical Analysis of
Stocks and Commodities", quoted by Arthur Hill in Stockcharts.com:
"The more creativity you bring to the investment process, the more
rewarding it will be. The only way to maintain ongoing success,
however, is to constantly innovate. That's much the same in all
endeavors. The only way to continue making money, to continue
growing and keeping your profit margins healthy, is to constantly come
up with new ideas."
The Merits of Inflation
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
In a series of speeches designed to defend his record, Alan Greenspan,
until recently an icon of both the new economy and stock exchange
effervescence, reiterated the orthodoxy of central banking everywhere.
His job, he repeated disingenuously, was confined to taming prices and
ensuring monetary stability. He could not and, indeed, would not
second guess the market. He consistently sidestepped the thorny issues

of just how destabilizing to the economy the bursting of asset bubbles
is and how his policies may have contributed to the froth.
Greenspan and his ilk seem to be fighting yesteryear's war against a
long-slain monster. The obsession with price stability led to policy
excesses and disinflation gave way to deflation - arguably an economic
ill far more pernicious than inflation. Deflation coupled with negative
savings and monstrous debt burdens can lead to prolonged periods of
zero or negative growth. Moreover, in the zealous crusade waged
globally against fiscal and monetary expansion - the merits and benefits
of inflation have often been overlooked.
As economists are wont to point out time and again, inflation is not the
inevitable outcome of growth. It merely reflects the output gap between
actual and potential GDP. As long as the gap is negative - i.e., whilst
the economy is drowning in spare capacity - inflation lies dormant. The
gap widens if growth is anemic and below the economy's potential.
Thus, growth can actually be accompanied by deflation.
Indeed, it is arguable whether inflation was subdued - in America as
elsewhere - by the farsighted policies of central bankers. A better
explanation might be overcapacity - both domestic and global -
wrought by decades of inflation which distorted investment decisions.
Excess capacity coupled with increasing competition, globalization,
privatization, and deregulation - led to ferocious price wars and to
consistently declining prices.
Quoted by "The Economist", Dresdner Kleinwort Wasserstein noted
that America's industry is already in the throes of deflation. The
implicit price deflator of the non-financial business sector has been -0.6
percent in the year to the end of the second quarter of 2002. Germany
faces the same predicament. As oil prices surge, their inflationary
shock will give way to a deflationary and recessionary aftershock.
Depending on one's point of view, this is a self-reinforcing virtuous - or
vicious cycle. Consumers learn to expect lower prices - i.e., inflationary
expectations fall and, with them, inflation itself.
The intervention of central banks only hastened the process and