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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.

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