Recall that I wrote about how the Bureau Labor Statistics (BLS) completely made up data regarding the number of Americans who filed for new unemployment benefits. The data showed an “unexpected” decline in new claims filed mostly thanks to the BLS claiming that there were major declines in the number of new claims filed in three of the worst state economies in the U.S.: California, Michigan, and Illinois (no data was reported by these states because of the Labor Day holiday so the BLS made up their own numbers for these states and six other states that also did not report data).
Wall Street and the media cited the data as the reason why the stock market was up on Thursday and cited the data to argue that the U.S.’s unemployment situation was not nearly as bad as people feared. For instance, here is a Bloomberg video where the reporter naively trumpets the faulty jobless claims data as 100% fact and reason for people to remain optimistic about the so-called “economic recovery” in the U.S.
When I saw Wall Street and the media treating this false information as truthful information and saw how this information became an excuse to buy stocks, I realized that there is something wrong with how the stock market is valued.
Many academics argue and teach to students that the stock market is efficient (I have firsthand experience of this because I had to read several tedious academic research articles on the subject in graduate school). An efficient market is a market whose asset values accurately reflect all the information available to the public. Therefore, an efficient stock market is a market whose value accurately reflects all the information available to us. As a consequence, the stock market never becomes overvalued or undervalued if it is an efficient market. Consequently, you cannot consistently make more than the rate of return of the stock market because there is no mispricing that you can exploit in the market.
The news about how the BLS presented phony jobless claims data was not a state secret protected by the CIA. The news was reported by Zero Hedge, which is a major financial news website, and was one of the top headlines on the Drudge Report, which is a news aggregator website that receives over 20 million page views a day on average. Furthermore, my dad told me that Rush Limbaugh, America’s highest-rated radio talk show host, spoke about the faulty numbers on his show. Despite this information being widely-known by the public, the stock market ignored the facts and behaved like the false information presented by the BLS was 100% fact. Essentially, the stock market’s movement yesterday was based on a lie, which means that the stock market is mispriced because its value does not reflect all the information that is available to the public.
The issue is then how often does the stock market move on false information. I suspect it is quite often because the BLS often releases manipulated data about inflation, economic growth, and unemployment. Even if yesterday’s stock market action was an anomaly, it disproves the idea that the stock market is an efficient.
I am not saying that the stock market is a place that people should always avoid. The stock market can sometimes be a place where you can earn a return on your money. I am saying that you should be aware that the stock market’s value does not always represent reality because it sometimes moves on false information and false assumptions about reality. There is practically no such thing as a risk-free investment (some financial advisors will tell you that U.S. government debt is risk-free, but there’s always the risk of the U.S. government repaying the money they owe you with worthless dollars), so beware of the risks when you make an investment decision.
