Market inefficiency is situational

 

“Market inefficiency is mostly cyclical now. In the past it was structural.” - Howard Marks 

It used to be that smart investors could create an information advantage to beat market efficiency. Either information could be gathered faster and more efficiently, or information could be processed better than other investors in order to generate an edge.  Those days are mostly behind us. Market efficiency is a dynamic process. Investment edges are lost. Traders get smarter, buy better information, and use new technology. What was cutting edge becomes common place. 

This does not mean that information advantages cannot be created. It does mean that converting any piece of information into higher returns is hard work. Many structural advantages have been reduced; however, in the current environment market inefficiencies can be viewed as cyclical. The environment changes and market efficiency changes. This efficiency dynamic will especially occur during transitions between regimes.  

Inefficiencies will be abundant during periods of market stress and crises. Rationality will decline during stress. Changes in the business cycle will create dispersion of opinions and dislocations from efficiency.  Periods of transition increase hedging which may not be profit maximizing. Hence, there is market friction between trading groups and a decrease in market efficiency. 

Why bring this up now? Global reopening, greater dispersion in government policies, bond sell-offs, large Treasury auctions, and EM dislocations all create market environment changes that change the level of efficiency. The efficient unprofitable environment may be profitable tomorrow. Efficiency is not static. Market fluctuate between levels of efficiency and economic agents have different abilities to exploit inefficiencies.