From the University of Chicago's Booth School of Business' Capitalisn’t podcast, June 19:
Are financial markets becoming less efficient? Clifford S. Asness of AQR Capital Management certainly thinks so. In a paper published last year, “The Less-Efficient Market Hypothesis,” Asness argues that social media and low interest rates, among other factors, have distorted market information so that stocks have become disconnected from their true values. This distortion has directed funds toward undeserving assets and firms and staved off necessary market corrections.
Asness joins Bethany McLean and Luigi Zingales to discuss how the market has fundamentally changed due to new technologies and macroeconomic trends and how investment strategies must adapt, what these changes mean for long-term productivity and growth, how researchers and investors should think about emerging market factors like tariffs and artificial intelligence, and why he’s not investing in US President Donald Trump’s memecoin anytime soon.
Cliff Asness: Our goal is to make our clients money, not to make markets more efficient. That is a lovely secondary thing that I believe we help with, I hope we help with, but we don’t wake up every day saying, “Our job today is just to make markets better.” I probably should not have admitted that on a major podcast.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: From my very early days as a journalist, I remember the famous investor Cliff Asness, not just because he was a hugely successful quant—meaning someone who invests not so much on the fundamentals of a company but, rather, due to quantitative factors in the market—but because he was willing to say things other people weren’t and in such a memorably biting way.
In 2000, he published a piece called “Bubble Logic,” which exposed the fallacies being used to justify crazy stock prices like that of Cisco. Then, in 2004, he wrote a piece entitled “Stock Options and the Lying Liars Who Don’t Want to Expense Them.” Cliff now manages $128 billion across various strategies, and those who follow him on X know that he’s as outspoken on lots of issues as ever before.
When fellow billionaire Bill Ackman described Trump’s tariff policy change as brilliantly executed, Asness replied: “One of the main benefits of making some money is not having to wear a gimp suit for anybody. To each his own.”
Cliff later apologized for the language, but he still said Ackman was being illogical, and he said: “It may or may not have been good negotiating, but the man clearly feels any trade deficit with any country is stealing from us and has believed this for 40 years. So, there’s clearly some idiocy about the actual topic at hand to go with potential luck or brilliance.” Wow, certainly outspoken.
Luigi: Indeed. He also wrote a fascinating paper arguing that the market is less efficient than ever before, in part due to the rise of social media, about which he says, “Has there ever been a better vehicle for turning a wise, independent crowd into a coordinated, clueless, even dangerous mob than social media?”
Bethany: He’s also willing to be colloquial and experimental with ideas in a way that I don’t think are typical of University of Chicago finance types. Sorry, Luigi.
Another factor he thinks explains the growing inefficiency of markets is these several decades of super-low interest rates, and he wrote this: “Well, perhaps super-low interest rates for a long time make investors go cray-cray. Yes, I know cray-cray is not covered in the standard CFA exam and rarely the result of formal analysis, but it seems at least possible to me.”
Luigi: The reason we wanted to have Cliff on the show is precisely because he’s so opinionated, and it’s so refreshing to see him attacking left and right. He’s not somebody who is in a position trying to push something. He’s really a free spirit. He once described himself as a part-time Republican, a full-time libertarian, and he has been outspoken in his defense of capitalism as leading to a better living standard for everyone: “If you go by living standard, you cannot escape that things are wildly better. I will attribute most of that to capitalism.”
Bethany: Cliff has no shortage of things to say for himself, so we’ll stop waxing on and start talking to him. He is the founder, managing principal, and chief investment officer at AQR Capital Management. And a quick disclosure we need to make, which is that Chicago Booth a year and a half ago received a $60 million gift from Cliff Asness and John Liew to name its Master in Finance program.
One of the things you’ve been talking about a lot recently is your less-efficient market theory, and I think, the market is reasonably close to efficient, but there are lots of little inefficiencies. Anyway, you’ve argued that for a bunch of reasons, the markets have gotten less efficient.
You wrote this in one piece, “Hence, if those prices don’t reflect reality, there are real consequences to long-term productivity and growth.” How much do you worry about that? How important is it that the market actually does reflect back real-time information about prices?
Cliff Asness: Well, you started out with a hard one. First, let’s back up. It’s a total straw man that markets are perfect. Literally, no one believes that.
I was Gene Fama’s TA for two years. The first two weeks of class he teaches us what the efficient market hypothesis is, and the third week of class he says something like, “Markets are assuredly not perfectly efficient,” and you get a gasp, which you get nowhere else in the world. The rest of the world either has no idea what you’re talking about, but if they do, they’re like: “Of course it’s not perfect. Perfect is silly.”
Gene, I’m pretty sure he thinks they’re more perfect than I do—and I might think they’re more perfect than many others—but once you acknowledge they’re at all imperfect, the questions of how imperfect, and has that changed over time, become still very hard to answer, but very legitimate questions to ask.
We are mostly, in the piece I wrote . . . I start out at the very beginning saying this is a highly opinionated piece. There’s not a lot of hard data. It’s life experience and a few vignettes of some huge things that I would call bubbles. That’s not a word Gene Fama likes, but it’s my contention that markets have gotten materially . . . In the piece I think I kept saying less efficient. After writing it, I decided it would be more accurate to say “prone to bouts of extreme inefficiency.”
I have two periods I really point to. What we’ve lived through always carries more weight with us than what we can look at in the CRSP data going back to 1926. But the dot-com bubble at the end of the ’90s—I reveal my opinion by even calling it the dot-com bubble. Gene Fama would call it “the time the dot-coms were priced as very low-risk assets to a very low expected return.” It rhymed more than it didn’t but also was not perfectly the same.
But 2019 and 2020 culminating in COVID—COVID was not the sole thing, but even before COVID, we saw models for what we considered spreads between cheap and expensive stocks getting to at least tech-bubble-like levels. They were getting there before COVID, but then COVID kicked them up to, as they say in Spinal Tap, “They kicked it up to 11.”
You remember COVID, when all you were supposed to own was Tesla and Peloton? We didn’t see that stuff, at least in the data, if you measure things similarly for the prior, call it 50 years. The dot-com bubble was the largest event in this disparity we look at, ever in the data. You can argue with how good the data is as you go back in time. You can literally go back to the ’20s. I’d probably go back to the ’50s, where I feel like I’m at all confident in it.
But it was the biggest by far we’d ever seen, and you could say that was a once-in-a-lifetime event, and then, almost exactly 20 years later, it became a twice-in-a-lifetime event. That sent me down a road of thinking, “I probably can’t solve this, I can’t put three decimal points on it, but what might have changed to cause this?”
Like everything else in our field, it can be completely random, and we could all be trying to explain randomness, but I’m of the belief that we have seen at least two . . . You could say the GFC was one also, though the GFC was probably more of an economic event that became a market event, as opposed to just a pure euphoric mispricing. But call it two-and-a-half-times in my career that we’ve seen craziness that I didn’t expect to see more than once every 50 years.
Luigi: Bob Schiller, in his book Irrational Exuberance, has a very interesting observation that bubbles—and he does believe in bubbles—got started with the beginning of media....
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Here's a prior visit to Capitalisn't (one of many) that stood out, March 2024:Another Look At John Coates' "When a Few Financial Institutions Control Everything" With Bethany McLean and Luigi Zingales
A very sharp little discussion group....
Okay, one more:
Is Short Selling Dead? Luigi Zingales and Bethany McLean Interview Jim Chanos