Archives

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.

The new paper, The Rate of Return on Everything, 1870-2015, a tremendously informative research piece on long-term rates of return also happens to address one of the key issues concerning the cause of inequality discussed by Thomas Piketty in his book Capital in the Twenty-First Century. Piketty draws the provocative conclusion that inequality grows over time because the rate of return on wealth is higher than the growth of GDP. Wealth accumulates to those that have it and not to those that try and ride the wave of GDP growth. Given the positive discrepancy between “r”, the return on wealth, and “g” the growth in GDP, the gap of inequality will only grow over time.

The new paper The Rate of Return on Everything, 1870-2015 is a mammoth piece of research on gathering information on rates of return back through history. It seems like such a simple issue but producing this work required painstaking and diligent focus on obscure databases. This work is not often rewarded in the economics profession yet has powerful use.

Inflation is becoming a greater concern with many investors, but forecasters are more mixed with their views. The latest CPI number posted a 2.1% year over year change and the core CPI showed a 1.8% change. CPI has been above 2% for 8 of the last 12 months; however, both the CPI and core CPI changes were higher last January. These numbers are stabilizing at a higher level around 2% although there is not a run-away threat with the actual numbers or market expectations.

We didn’t exactly believe your story, Miss O’Shaughnessy. We believed your 200 dollars. I mean, you paid us more than if you had been telling us the truth, and enough more to make it all right.
-The Maltese Falcon 

IASG Inc. in collaboration with AMPHI Research & Trading will have a discussion with EMC Capital Advisor’s President John Krautsack Thursday January 18th at 11:00 AM EST. Hear about the EMC Alpha Plus Program’s unique portfolio construction, model design and why it has built a three-year track record of superior risk-adjusted returns versus other global macro […]

There are seasonal weather patterns that will ebb and flow during the year bringing volatility to agricultural markets at regular times. However, the longer-term impact on supply can at times be limited. There is noise around production numbers but inventory can serve as a cushion.

I love this reformulated graph on the old work by Sherman Kent on the potential futility when using language to describe probabilities. There is a lot of ambiguity in the meaning of certain terms. One man’s doubt is not another’s “little chance” and one man’s “likely” is not another’s “probable”. If you use words, back them up with some numbers.

The 60/40 stock/bond blends both domestic and international generated double-digit returns on strong equity performance. The majority of the risk came from the stock allocation which make them sensitive to any market reversal.

A year-end performance review of styles, sectors, and country index ETFs shows the peaks and valleys for 2017 and what may be ahead in 2018. Overall, this was an especially good year for international investing and holding exposure in emerging markets. Large cap US which has strong international earnings also did well in 2017. Mid and small cap US underperformed during the year in spite of the resurgence in economic growth. The worst performing style was defensive dividend focused. Value underperformed growth by a wide margin.

There were some trend surprises in markets near the end of the year; the upward price movement in both precious and base metals and the weather shock in the natural gas market and to a lesser extent oil product markets. The question for the beginning of the year is whether these trends will only be short-term in nature. Strong price spikes, especially weather related, are often reversed.