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Efficient or Innefficient Markets - Which One Is It?

What Is the Efficient Market Hypothesis (EMH)? Is it True or False, Half-True or Half-False?

The efficient market hypothesis (EMH), also known as "efficient market theory" states that share prices reflect all known information in the current moment and that ergo they are valued fairly. This in turn infers that consistent alpha generation cannot be achieved and that it is also fruitless to try and beat or out-perform the markets.

According to the EMH, stocks always trade at their fair value. Therefore, expert stock selection or market timing is a myth being chased by investment bankers, analysts and brokers at the expense of investors. Why should Wall Street be paid high fees if they are not outperforming the market. EMH states that the only way an investor can potentially beat the market is by making riskier investments. A low cost ETF or balanced fund that tracks the market is all that most investors need.

EMH or efficient market hypothesis fails however to take one key factor into account, namely human beings. Human beings are not rational. Stock market or housing or art bubbles and busts are littered along the path of progress in human history. They come and go. They repeat, again and again. We can probably go back a lot further in history to illustrate this point but we will start with what was referred to and more commonly known as "The Dutch Tulip Mania" in the 17th century when tulips reached absurdly inflated prices and then collapsed in 1637. Fast forward to the roaring 1920's and crash of 1929 and then to the dot.com bubble leading up to 2000 and the housing bubble of 2007. You get the point. Every one of these bubbles was fuelled by human "greed" and an infinite supply of hope that things would keep getting better or that stocks or property would go higher and higher. Not exactly rational given that the battle hardened and tested "theory-not" of "market cycles" which states that all markets whether it be commodities, stocks and collectables move in cycles.

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US - China Tensions. The Battle For Global Supremacy, Security & Influence

China USA TensionsGlobal tensions between the USA and China were already a "thing" prior to the Coronavirus rearing its ugly head. However, in a post-coronavirus world that has severely impacted economies, supply chains and trade, the sheer extent to which countries - in particular the USA - are dependent on vital goods such as key ingredients for pharmaceuticals, medical equipments and auto-parts for example, has been highlighted in dramatic fashion. Significant sectors of US industry have sacrificed "price advantages" over "security" in a long established US led transition of exporting manufacturing and jobs to China.

In a world where China and American trade relations may continue to sour and worsen, such dependency can no longer be viewed as a smart play. China has never been viewed as a fair player. They play to win at all costs. The mis-handling of the coronavirus outbreak has not endeared China to the world. The US which has suffered the worst impact of the coronavirus worldwide and where the governement was slow to take it seriously, has decided to blame the WHO (World Health Organization) for not being more circumspect about what was happening in China and more suspect about information regarding the outbreak and therefore wasting precious time.

The US pulled its funding from the WHO much to the chagrin of its allies while China was more than happy to cough up a couple of billion dollars to plug the funding gap and win more favor. An investigation is now underway within the WHO. It's fair to say that very few countries were prepared for a pandemic. It was never a matter of "if' but "when" and most of the world chose to ignore the matter of preparedness. That changes only in the instance of a pandemic hitting and by the time that happened - as we have all witnessed - it was already too late.

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Are The Markets Disconnected From Reality or Ahead of It?

For most people looking at the stock market it's hard to understand how the US stock markets keeps trending up when -as of this week - almost 40 million people, that is 1 in every 5 people in the USA are now claiming unemployment. It's hard to comprehend. 40 million people is almost 73% of the entire population of England or 4x the entire population of Switzerland.

Yet, the US stock markets -the DOW, the Nasdaq and so forth - keep trending up. Is the economy going to be back to normal in 6 months time? Are 90% of the population who are claiming unemployment going to be back at work in 6 months time? Are we going to have an approved successful vaccine in 6 months time that has been distributed to 350 million people in the USA? And if a vaccine is not ready or still in the process of being proven out, is the coronavirus going to disappear in the winter of 2020/2021? You will be hard-pressed to find a virologist in the USA that is not saying that it is inevitable that the coronavirus will re-surface in the winter of 2020 and that is even if it recedes during the summer which is not necessarily the case on a regional level, where patchworks of outbreaks will vary regionally as the virus migrates as it will with passage made easier in states with looser restrictions.

Is the massive government and fed stimulus enough to prop everything up indefinitely. There will be more. It may take time for the next round to be passed by the house and senate but the commitment to do so, if it is necessary, is there.

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When The Chairman of the Federal Reserve & Prominent Investor Billionaires Speak - The Markets Listen!

As unemployment crosses the 36.5 million mark and economic data indicates a more protracted recovery timeline, not to mention the guaranteed re-surfacing of the coronavirus in the fall, the Federal Reserve Chairman, Jerome Powell along with a handfull of billionaires begin to speak out about their outlook for the US economy.

Its a more sobering assessment than the markets hope for a "V" shaped recovery trajectory. When the Chairman of the Fed and a handful of uber-successful billionaire investors speak, the markets take notice and listen.

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A Buffet of Hope & Realism

"NEVER BET AGAINST AMERICA" !! Warren Buffet spent the first 45 minutes of the Annual Berkshire Hathaway Meeting last Saturday on May 2nd providing a summary historic analysis of the United States Economic growth story.  Since its inception around 1776, with a population that represented a tiny fraction of the global population, no one at that time could have foreseen what America was going to become in just 244 years. Using a crude calculation based on the 1815 sale of Louisianna to the USA for a mere $15million icluding mineral rights (3cents an acre) Buffet estimates the total worth of the US to have been $1billion in 1815. That total worth has mushroomed to over $150 Trillion in just 234 years. That is a staggering 150,000% growth. No wonder Buffet calls America "An Economic Miracle"!

During this time America has withstood a civil war, the 1918 flu pandemic, the great depression and two world wars. Take a look at this chart documenting major crisis and the stock markets growth. It is staggering to think what America has accomplished and it is on this factual basis that Buffet's opening takeaway was "Never, Never Bet Against America"! 

A strong opening statement that was followed by the reality that we are living in uncertain times with the Coronavirus Global Pandemic and that no-one really knows how this is going to unfold. Scientists have been warning for years that it was not "if" but "when" a global pandemic would hit. Berkshire Hathaway's philosophy is to be prepared. Always hold a lot of cash on hand, not only for potential business opportunities but also for weathering uncertain economic times. With 120 Billion cash on hand, Berkshire Hathaway is in a good position to withstand the current economic shock even with the significant losses its businesses are facing.

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1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
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Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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