Baltimore — (TFN): How efficient are the markets? It is like asking how smart is the human race We all know the answer, but few of us are willing to suck in our pride and admit there are a few dim bulbs among us.

Judging by the sudden rise in fame of Levi Johnson or Balloon Boy’s antics, the human brain is far feebler than we give credit.

And so are the markets.

If you have taken a basic finance class anytime between 1965 and the present, you have likely studied Eugene Fama and his efficient market hypothesis.

Essentially, the University of Chicago professor created a cult-like following of investors and academicians that believe markets entirely reflect all known information and instantly react to new information.

For example:

When I told my ever-optimistic, ever-“hopeful” colleague, Laura Cadden, the news the majority of Obama’s infrastructure stimulus would finally be doled out sometime early next year

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By Robert Folsom

Editor’s Note: The following article discusses Robert Prechter’s view of the Efficient Market Hypothesis. For more information, download this free 10-page issue of Prechter’s Elliott Wave Theorist.

When a maverick idea becomes vindicated, there’s a good story to tell. It usually involves a person (or small group of people) who courageously challenge the orthodoxy of the day — and, over time, the unorthodox yet better idea prevails.

A “good story” of this sort has surfaced during the current financial crisis. A chapter of the story appeared in a recent New York Times article, “Poking Holes in a Theory on Markets.” The theory in question is the efficient market hypothesis (EMH), which the article suggested is so hazardous that it “is more or less responsible for the financial crisis.” This quote tells you most of what you need to know:
“In the last decade, the efficient market hypothesis, which had …

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also add the links to any other thought-provoking articles you would like to share to the comments section.

• Nouriel Roubini (Forbes): Are there bright spots amid the global recession?, August 6, 2009. A snapshot of the better economies.

• Gillian Tett (Financial Times): The liquidity pipes remain clogged, August 6, 2009. Banks seem unwilling to use spare liquidity to engage in activity that regulators or shareholders might deem risky.

• Joseph Stiglitz (Project Syndicate): Keep shovelling that stimulus, August 7, 2009. What is needed now is another dose of fiscal stimulus. If that doesn’t happen, we can look forward to an even longer period in which the economy operates below capacity, with high unemployment.

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Highlights include D.R. Horton, Inc. (DHI), Whirlpool Corp. (WHR) and Fortune Brands, Inc. (FO).A recent academic paper by Atif Mian and Amir Sufi, both of the University of Chicago and the NBER, took a very close look at the effect of mortgage equity withdrawal on the overall economy during the housing bubble. "Mortgage equity withdrawal" is the more technical name for the housing ATM.It was very actively pushed by the banks during the housing bubble, with ads showing money hidden in people's houses that they were not taking advantage of. I knew it was significant, but this paper indicates that it was even more important than I thought it was. Here is an abstract from the paper:"Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by ...

HIDDEN VALUE

Dear Reader,

There’s a “great miracle” playing out right before your eyes.

It seems that in the face of one of the worst financial failures in history… one that has obliterated consumer spending… and brought economic titans to their knees… Keynesianism economics is making everything okay again.

Bloomberg reports that China’s own stimulus package is working.

Asian stocks have hit four-month highs. And… hallelujah… banks are lending again.

This from Bloomberg:

Chinese banks may have offered a record 1.2 trillion yuan of new loans in January, the China Securities Journal reported today, citing people it didn’t identify.

The four biggest state-owned banks completed 20 percent of their full-year target, with the majority of the loans lent for railways, highways, electricity grids and other infrastructure projects.

Of course, one thing China doesn’t have to bother about is

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Key News• The euro fell below $1.28 for the first time since November 2006 and the pound tumbled to a five- year low on speculation European central banks will cut interest rates as the global economy heads for recession.• Russian companies may default on almost a third of local-currency bonds as soaring borrowing costs make it ``impossible'' to refinance the debt, according to the Bank of Moscow.Key Reports Due (WSJ):No major economic indicators scheduled. 

Quotable "A major source of objection to a free economy is precisely that... it gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself. The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for

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Early August marked the first anniversary of the credit crunch. The infant that arrived unheralded and unwelcome on the doorstep of the financial world is now, believe it or not, just over one year old. While we all hoped that its unhappy life would be a short one, it now seems as though this unwanted foundling is going to be with us for a while yet. And, by all accounts, it is going to cause us a lot more sleepless nights before it goes away.

If the credit crunch were a storm we might now be in its eye – that expanse of uneasy calm in the storm’s centre, which whispers to the unwary that the worst is behind them. No chance, I’m afraid, if we listen to the utterances of

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Brazil's state-owned National Supplies Co. will auction 55,000 metric tons of rice today, the country's ministry of agriculture said yesterday. The government currently has a stock of 1.4 million tons of rice, equivalent to 10 percent of Brazil's annual consumption. The stocks to be auctioned are held in Rio Grande do Sul and Santa Catarina states.The measure is an attempt to keep prices down and establish a reference price for rice, the statement said, citing Paulo Morceli, basic foods manager of Conab, as the supplies company is known. According to information on the Conab Web site, the rice will be auctioned at 28 reais ($16.98) for a 50-kilogram bag.The most recent decision of the Brzilian government is just one more example of the way national governments are coming under pressure to offer a response to what is now a global problem: the rising demand for energy ...