Mark Rzepczynski, Author at IASG

Managed futures showed strong performance in January from a variety of asset classes. Many managers were able to continue to take advantage of the trend in US equities, albeit with a giveback of some profits at the end of the month. Global bonds generated gains from short positions as a significant sell-off accelerated through the month. The dollar decline made trading currencies also profitable. The trend in oil and refined products also continued although a surprise inventory increase at the end of month added volatility. Selective trading in precious and base metals also added to performance. There were also commodity opportunities from newly formed trends.

January performance was a good start to the year for many trend-followers. Our sector trend measures suggest a good performance month that looks to continue into February. The fundamental themes concerning growth and inflation at the beginning of the year continue although with different levels of intensity.

With continued euphoria about global growth and growing fears of inflation, the large cap and international stock investors saw strong gains while bondholders were hit with loses. Markets in January saw extremes in what were identified as the core themes for the year, growth plus inflation. Now, there may be stagflation holdouts, but growth indicators are still strongly positive albeit there are signs that the trends in positive economic surprises last quarter will be more tempered.

The relationship between growth and equity market returns is not always direct. Equities can move higher because of an increase in earnings growth or from an increase in valuation. Market earnings should increase with economic activity but they may vary across the cycle. Similarly, the relationship between growth and nominal yields also can be variable albeit generally positive. Higher growth may lead to higher real rates, higher expected inflation or a change in monetary policy. The problem is that actual economic growth often has reporting delays so the link with market prices is mixed. The link between prices and fundamentals should focus on leading or forward-looking indicators.

No one wants to be the holding a bubble asset when the market breaks. It is not pretty given the potential for sharp corrections, but it is hard to say when it is time to leave the party. You could just say you don’t want to play the game, but the opportunity cost can be high because the time between bubbles begin and the market reverses can be measured in years. Additionally, with bubble language surrounding equity and bond markets as well as some real estate markets, the world could either be filled with bubbles or the term is being used so loosely that it does not have meaning.

There is the potential for a major agricultural price dislocation if a strong La Nina effect lasts through the summer. It is unclear whether the current La Nina effects will continue, and current expectations are that it will dissipate in the spring, but history suggests that ENSO effects can disrupt many major commodity prices including corn, soybeans, wheat, coffee, and sugar. So how can investors take advantage of this uncertain opportunity?

As someone who is biased toward quantitative work, it has been difficult to judge the impact of political rhetoric and conflict on market behavior. Market uncertainty should increase when there are more partisan conflicts which should translate into higher market risk premiums. Nevertheless, if there is no measure of conflict, this idea cannot be put to a test.

What has been the biggest change in thinking about global macro investing in the last ten years? Some could say it is the “anything is possible” view toward central banks. There is now nothing like normal central bank behavior. Others could say that it just the change in macro relationships which has made looking at old price relationship suspect.

Volatility in commodities as measured by their dispersion in returns is high, so it is hard to characterize the behavior of the commodity sector. The periodic table of annual returns highlights the varied behavior of these markets. This list does not even include softs, tropicals, or livestock commodities and is tilted to the base metals; however, the story would still be the same.

Knowledge is the Treasure, but Judgment is the Treasurer of a Wise Man. He that has more knowledge than Judgment, is made for another Man’s use more than his own.
-William Penn 

My father used to tell me that brains are like muscles: they can be hired by the hour. It is character and judgment that are not for sale.
-Antonin Scalia

A year ago the market was concerned about global credit risks. The sovereigns with a negative outlook were high and the number of positive outlooks was low, but that has changed in one year given the improvement in global growth. The number of negative outlooks is at post Financial Crisis lows, the positive outlooks are high and the balanced outlooks are positive for the first time. The balance has improved markedly across regions but especially in Europe and the Middle East. The chance of default risks has fallen given credit quality is improving.

Faced with two competing hypotheses, we are likely to choose the most complex one. That’s usually the option with the most assumptions and regressions. As a result, when we need to solve a problem, we may ignore simple solutions — thinking “that will never work” — and instead favor complex ones.
-Farnamstreetblog.com Complexity Bias: Why We Prefer Complicated to Simple

Global financial markets performed very well but you could not tell by looking at the volume of trading on futures exchanges around the world. The year-end numbers from the Futures Industry Association (FIA) show that futures trading volume was down over 6%. Options volume was up 11% and overall futures and options volume was flat for the year.