In 1800 the weather remained a mystery. The sky was the last part of nature to be classified: a relic of the arcane, chaotic world that had existed before Newton and the Scientific Revolution. ... Very few in scientific circles would have heard of William C. Redfield’s name before the publication of his storm paper in 1831. A New York businessman, he had made his name with his Steam Navigation Company. Redfield’s steamers plied up and down the Hudson, from New York to Albany, carrying passengers and freight. Redfield’s success had come through his natural instinct for innovation. In the 1820s, the early years of steam, passengers had been wary of traveling too close to the engines, worried that they might explode—as they often did. Redfield’s solution to the problem had been simple but effective. He had designed “safety barges” for the passengers to travel in, precursors of the railway carriages of the future, drawn in strings behind the steamer. Over time, as safety standards had improved and passengers had become more confident, he had switched his tactics: moving the passengers back into the steamer and filling the barges with cargo. ... But Redfield was more than a wily businessman. He had worked as a mechanic in his youth in small-town Connecticut, and he had retained his interest in engineering. ... Traveling on a steamer from New York to New Haven one day in 1831 Redfield chanced to meet Denison Olmstead, professor of mathematics and physics at Yale. Spotting Olmstead on deck he had approached and “modestly asked leave to make a few inquiries” about a paper Olmstead had recently published on hailstorms in the American Journal of Science. Soon Olmstead and Redfield were talking about storms and it was then, for the first time, that Redfield unveiled his theory of whirling winds. It was a pivotal moment in the history of meteorology. ... Redfield’s idea of circular winds was clearly perplexing. Espy could find no reason why winds should dart about the central axis of a storm. Eventually he concluded that Redfield was wrong. A more logical answer, Espy reasoned, was that winds rushed toward the central column at the core of the storm as air in a room would be drawn in toward a burning fire—cool air from beneath replacing the warm heat traveling upward. The science behind this idea was sound. In a powerful storm, Espy thought, the effect would simply be magnified.

Why shrinking populations may be no bad thing ... FATHER, mother and two children: surely the perfect family size. For those concerned, it is neither too big nor too small. For the national economy, it ensures that two new workers will replace the parents in the labour force. And eventually the children will have children of their own and keep the population stable. ... For that happy state to be achieved, the “total fertility rate” (a measure used by demographers for the number of children a woman is likely to have during her childbearing years) needs to be above two: around 2.1 in the rich world and more in poorer countries, because some children, particularly in the developing world, die before adulthood. For many years the United Nations’ population forecasts—the gold standard in the demography business—have assumed that, in the long run, fertility the world over would converge on the replacement level and populations would stabilise. But fertility rates everywhere have been declining for decades. Even in Africa, where large families are still the norm, the number of children per woman in 2010-15 is forecast to fall to 4.7, compared with 5.7 in 1990-95. Global average fertility is already down to about 2.5.

And predicts the rise and fall of nations. ... Sometimes art imitates life; some games do so as well. In the case of chess especially, the parallels with power politics are many and uncanny, persisting over the centuries. Originating on the Asian subcontinent, chess moved to Persia ("checkmate" comes from shah mat, "the king is dead") but really began to diffuse widely during the great age of Arab conquest, starting in the 7th century of the Common Era. The structure and rules of the game remained consistent for centuries within Muslim domains, but in Christian countries to which chess spread, innovations emerged.

Google has always been an artificial intelligence company, so it really shouldn’t have been a surprise that Ray Kurzweil, one of the leading scientists in the field, joined the search giant late last year. Nonetheless, the hiring raised some eyebrows, since Kurzweil is perhaps the most prominent proselytizer of “hard AI,” which argues that it is possible to create consciousness in an artificial being. Add to this Google’s revelation that it is using techniques of deep learning to produce an artificial brain, and a subsequent hiring of the godfather of computer neural nets Geoffrey Hinton, and it would seem that Google is becoming the most daring developer of AI, a fact that some may consider thrilling and others deeply unsettling. Or both.

Intelligence quotient (IQ) and rationality quotient (RQ) are distinct. Think of IQ as the horsepower of an engine and RQ as the output. ... We share the results of a classic test of calibration, which is an important facet of rationality. Well calibrated people know what they know and know what they don’t know. ... Consistent with past research, we find that participants overestimate their accuracy as their subjective probability estimates tend to be higher than the actual percent correct. ... Investors and executives can improve their rationality by keeping score, asking about others, using base rates, and updating probabilities. ... A large-scale forecasting project has shown that the best forecasters use inductive and numerical reasoning, have cognitive control and a growth mindset, and are open-minded and effective working as part of a team.

It has always baffled me how the financial industry in general, and financial newspapers in particular, appear to be hell-bent on forecasting this or that in early January. I actually find it outright laughable when someone projects the FTSE100 to be at 7,000 by Christmas time, or for the U.S. 10-year T-bond to hit 2.5% by midsummer. How on earth do they know? The generally poor predictive record proves they don’t, I suppose. On the other hand, that is perhaps what the majority of investors want. If you belong to that majority, there is no need to read any further. You will be wasting your time. ... If you see any forecasts from me (and you do), you will note that (i) they are very long term in nature, and (ii) they are based on structural trends, not tactical (cyclical) trends. Why is that? Partly because I think short-term forecasting is a sucker’s game, and partly because I know for certain that the structural trends that we have identified will happen. It is only a question of when, but more about that later. ... You can hardly open a newspaper these days without some commentator looking to buy fame by attempting to predict the next crisis but, as I just pointed out, the last one isn’t over yet. Therefore a far more relevant question is: What is likely to be the next leg of the GFC? ... I think three topics are particularly likely to steal the limelight in 2016:
- All sanctions against Russia to be lifted and trade relationships to be normalised.
- The EM crisis widens as commodity prices continue to fall.
- The credit market is spoiling the party again.

Economists are always right, even when they are not, aren’t they? Fat chance. The reality is very different. Writing these letters is akin to being constantly exposed, and – at times - looking rather silly. But I still enjoy it, so allow me to stick my neck out again and go against the consensus, because that is, at the end of the day, how you make money in this industry. ... The broad consensus is that DM countries are finally returning to some sort of normality (often called the New Normal), following years of Zombie-like conditions. There is, admittedly, a growing recognition that GDP growth is likely to disappoint for quite a while to come, but I believe that ‘quite a while’ should be measured in decades and not, as most seem to believe, in years ... In the following, I will argue that GDP growth will disappoint for a very long time to come, and that will obviously have an effect on corporate earnings growth as well. As I see things, most investors are still way too optimistic on GDP growth and corporate earnings growth for the next many years. ... There are in reality not one but at least four reasons why returns on financial assets will1 disappoint in the years to come, and they are (in no particular order):
1. Regulatory changes.
2. The end of the debt super-cycle.
3. Wealth-to-GDP to normalise.
4. A deteriorating demographic outlook.

His latest venture, Human Longevity, Inc., or HLI, creates a realistic avatar of each of its customers – they call the first batch ‘voyagers’ – to provide an intimate, friendly interface for them to navigate the terabytes of medical information being gleaned about their genes, bodies and abilities. Venter wants HLI to create the world’s most important database for interpreting the genetic code, so he can make healthcare more proactive, preventative and predictive. Such data marks the start of a decisive shift in medicine, from treatment to prevention. Venter believes we have entered the digital age of biology. And he is the first to embark on this ultimate journey of self-discovery. ... His critics call him arrogant but, having talked to him on and off for more than two decades, I think Venter has earned the right to be bullish about his abilities to build a biotech venture from scratch. ... So far, HLI has amassed the sequences of around 20,000 whole genomes, says Venter (he won’t be drawn on whether it is the biggest cache – probably, but he adds that it depends on the details and that “all kinds of people make all kinds of claims”). But, of course, he wants even more. The company has room for more sequencing facilities on its third floor and is considering a second centre in Singapore, planning to rapidly scale to sequencing the genomes of 100,000 people per year – whether children, adults or centenarians, and including both those with disease and those who are healthy. By 2020, Venter aims to have sequenced a million genomes. ... in about a month, each Illumina sequencer can tear through 16 human genomes at the same coverage in just three days. Each week, these machines pump terabytes of data into the cloud run by Amazon Web Services. ... Venter says their findings have changed his static view of the genome. For instance, he has been able to compare his 2006 genome with today’s, using three different sequencing technologies. “One of the findings that would have shocked me and the rest of the world 15 years ago is that our genome is continually changing,” he says. “We can relatively accurately predict your age from your genome sequence, or at least the age when the sample was taken.” ... Targeted initially at self-insured executives and athletes, a full health scan will be priced at $25,000.

Some aches and pains are constraining the global economy, with more severe strains occurring in the emerging world. We believe contagion to the US and Europe will be limited in 2016, and expect their consumer revivals to continue, courtesy of low inflation, low commodity prices, central bank intervention and reduced fiscal austerity. However, above-average equity valuations, peaking corporate earnings momentum and stagnant productivity growth will likely result in a year of modest single- digit returns on diversified portfolios. ... This year’s cover art transforms some well-known aches and pains: exhaustion, tinnitus, periodontitis, bronchitis, acid reflux, hangovers, restless leg syndrome, appendicitis, conjunctivitis, anemia, mononucleosis, E. coli infections, iron deficiency, narcolepsy, macular degeneration and altitude sickness. These aggravating but generally not life- threatening conditions are meant to convey a slow growth world, but not one on the precipice of collapse or recession. Competitive devaluations are unlikely to alleviate these aches and pains; successive rounds of currency depreciation in Europe and Asia mostly redistribute income across countries, rather than boost aggregate demand. ... Most of these conditions are homegrown: Latin American and Australian overexposure to commodity prices, weak consumer activity in Japan, economic dissonance across countries in the Eurozone, a surge in dollar-borrowing emerging economies and slowing corporate profits growth in the US. However, some conditions are the result of contagion: “ECBotulism” refers to the impact of ECB policy on countries like Sweden that are forced to engage in destabilizing quantitative easing, or lose export market share (see page 15 for more details). As for Canada, there was no need to transform the name of an illness for our cover: “Dutch Disease” refers to an economic condition in which one sector of the economy (in this case, oil and gas) drives the currency to such a high level that it causes medium-term damage to the rest of the country’s export sectors.

Houston is the fourth-largest city in the country. It’s home to the nation’s largest refining and petrochemical complex, where billions of gallons of oil and dangerous chemicals are stored. And it’s a sitting duck for the next big hurricane. Why isn’t Texas ready? ... Such a storm would devastate the Houston Ship Channel, shuttering one of the world’s busiest shipping lanes. Flanked by 10 major refineries — including the nation’s largest — and dozens of chemical manufacturing plants, the Ship Channel is a crucial transportation route for crude oil and other key products, such as plastics and pesticides. A shutdown could lead to a spike in gasoline prices and many consumer goods — everything from car tires to cell phone parts to prescription pills. ... After decades of inaction, they hoped that a plan to build a storm surge protection system could finally move forward. ... Several proposals have been discussed. One, dubbed the “Ike Dike,” calls for massive floodgates at the entrance to Galveston Bay to block storm surge from entering the region. That has since evolved into a more expansive concept called the “coastal spine.” Another proposal, called the “mid-bay” gate, would place a floodgate closer to Houston’s industrial complex. ... The 10 refineries that line the Ship Channel produce about 27 percent of the nation’s gasoline and about 60 percent of its aviation fuel ... Flooding is the most disruptive type of damage an industrial plant can experience from a hurricane. Salty ocean water swiftly corrodes critical metal and electrical components and contaminates nearby freshwater sources used for operations.

Immune Engineering: Genetically engineered immune cells are saving the lives of cancer patients. That may be just the start.
Precise Gene Editing in Plants: CRISPR offers an easy, exact way to alter genes to create traits such as disease resistance and drought tolerance.
Conversational Interfaces: Powerful speech technology from China’s leading Internet company makes it much easier to use a smartphone.
Reusable Rockets: Rockets typically are destroyed on their maiden voyage. But now they can make an upright landing and be refueled for another trip, setting the stage for a new era in spaceflight.
Robots That Teach Each Other: What if robots could figure out more things on their own and share that knowledge among themselves?
DNA App Store: An online store for information about your genes will make it cheap and easy to learn more about your health risks and predispositions.
SolarCity’s Gigafactory: A $750 million solar facility in Buffalo will produce a gigawatt of high-efficiency solar panels per year and make the technology far more attractive to homeowners.
Slack: A service built for the era of mobile phones and short text messages is changing the workplace.
Tesla Autopilot: The electric-vehicle maker sent its cars a software update that suddenly made autonomous driving a reality.
Power from the Air: Internet devices powered by Wi-Fi and other telecommunications signals will make small computers and sensors more pervasive.

What is the future of finance? Will Silicon Valley challenge Wall Street? Can China build global banks? ... There are few better places to contemplate such questions than Jamie Dimon’s office, high in JPMorgan Chase’s headquarters in New York City above Park Avenue. It’s now more than three decades since Dimon, the son and grandson of stockbrokers, teamed with Sandy Weill at American Express. Together they helped transform the financial industry—first at Travelers and then with Citigroup. Ousted by his mentor, Dimon became chief executive officer of Bank One, which he later sold to JPMorgan. In Dimon’s 10 years as CEO, JPMorgan Chase has delivered a higher total return than every major American bank except Wells Fargo. Dimon has also endured setbacks, such as the huge trading losses run up by the “London Whale” and more than $36 billion in settlements and fines since the financial crisis. ... In this interview, Dimon reflects on the arc of his career, names his biggest mistakes, argues that banks are more moral than markets, and looks to the future—one in which he expects to compete with fintech companies as well as the Chinese, but where he also expects banks like his own to flourish.

People tell me about miniaturization, about electric motors the size of the nail on your finger. There is a device on the market by which you can write the Lord's Prayer on the head of a pin. But that's nothing. That's the most primitive, halting step. ... Why not write the entire 24 volumes of the "Encyclopaedia Britannica" on the head of a pin? ... Let's see what would be involved. The head of a pin is a sixteenth of an inch across. If you magnify it 25,000 diameters, the area of the head of the pin is equal to the area of all pages of the encyclopedia. All it is necessary to do is reduce the writing in the encyclopedia 25,000 times. Is that possible? One of the little dots on the fine halftone reproductions in the encyclopedia, when you demagnify it by 25,000 times, still would contain in its area 1,000 atoms. So, each dot can easily be adjusted in size as required, and there is no question that there is enough room on the head of a pin to put all of the "Encyclopaedia Britannica."

The past five years have been challenging for long-term value-based asset allocation. We do not believe this constitutes a paradigm shift, dooming such strategies in the future. The basic driver for long-term value working historically has been the excessive volatility of asset prices relative to their underlying fundamental cash flows, and recent history does not show any evidence of that changing. Outperforming the markets given that pattern requires either betting that the excessive swings will reverse over time or accurately predicting what those excessive swings will be. The former strategy amounts to long-term value-based investing, while the latter requires outpredicting others as to both what surprises will hit the markets and how the markets will react to them. Our strong preference is to focus on long-term value, despite the inevitable periods of tough performance that strategy will entail. ... The volatility of U.S. stocks since 1881 has been a little over 17% per year. The volatility of the underlying fair value of the market has been a little over 1% per year. Well over 90% of the volatility of the stock market cannot be explained as a rational response to the changing value of the stream of dividends it embodies. This means that the volatility is due to some combination of changing discount rates applied to those cash flows, and changes to expectations of future dividends that turned out to be incorrect. It is difficult to determine exactly which has been the driver at any given time, but there doesn’t seem to be a lot of evidence for changing discount rates having been a major force. Even in the most extreme overvaluation in U.S. stock market history, the 1999-2000 internet bubble, none of the investors we heard explaining why the stock market was rational to have risen to such giddy heights explained it on the basis that future returns should be lower than history.

In 1978, the United States Geological Survey (USGS) allocated over half its research budget ($15.76 million) to earthquake prediction, a level of spending that continued for much of the next decade. Scientists deployed hundreds of seismometers and other sensors, hoping to observe telltale signals heralding the arrival of the next big one. They looked for these signs in subterranean fluids, crustal deformations, radon gas emissions, electric currents, even animal behavior. But every avenue they explored led to a dead end. ... Since the early 20th century, scientists have known that large quakes often cluster in time and space: 99 percent of them occur along well-mapped boundaries between plates in Earth’s crust and, in geological time, repeat almost like clockwork. But after decades of failed experiments, most seismologists came to believe that forecasting earthquakes in human time—on the scale of dropping the kids off at school or planning a vacation—was about as scientific as astrology. By the early 1990s, prediction research had disappeared as a line item in the USGS’s budget. ... Defying the skeptics, however, a small cadre of researchers have held onto the faith that, with the right detectors and computational tools, it will be possible to predict earthquakes with the same precision and confidence we do just about any other extreme natural event, including floods, hurricanes, and tornadoes. The USGS may have simply given up too soon. After all, the believers point out, advances in sensor design and data analysis could allow for the detection of subtle precursors that seismologists working a few decades ago might have missed. ... At a time when American companies and institutions are bankrolling “moonshot” projects like self-driving cars, space tourism, and genomics, few problems may be as important—and as neglected—as earthquake prediction.

Mass, who is 64, has become the most widely recognized critic of weather forecasting in the United States — and specifically the National Oceanic and Atmospheric Administration, which manages the National Weather Service and its underling agencies, including the National Centers for Environmental Prediction, where the nation’s weather models are run. Mass argues that these models are significantly flawed in comparison with commercial and European alternatives. American forecasting also does poorly at data assimilation, the process of integrating information about atmospheric conditions into modeling programs; in the meantime, a lack of available computing power precludes the use of more advanced systems already operating at places like the European Center for Medium-Range Weather Forecasts, based in Reading, England. And there are persistent management challenges, perhaps best represented by the legions of NOAA scientists whose innovations remain stranded in research labs and out of the hands of the National Weather Service operational forecasters who make the day-to-day predictions in 122 regional offices around the country. ... accuracy is everything, often the difference between life and death, given that extreme weather ... Industries like shipping, energy, agriculture and utilities lose money when predictions fail. Even slightly more precise wind-speed projections would help airlines greatly reduce fuel costs. ... the Weather Service interface was so primitive — the protocol was originally designed for the telegraph — it could only accommodate uppercase type.

Scientists are beginning to understand why these ‘mini Wall Streets’ work so well at forecasting election results — and how they sometimes fail. ... Experiments such as this are a testament to the power of prediction markets to turn individuals’ guesses into forecasts of sometimes startling accuracy. That uncanny ability ensures that during every US presidential election, voters avidly follow the standings for their favoured candidates on exchanges such as Betfair and the Iowa Electronic Markets (IEM). But prediction markets are increasingly being used to make forecasts of all kinds, on everything from the outcomes of sporting events to the results of business decisions. Advocates maintain that they allow people to aggregate information without the biases that plague traditional forecasting methods, such as polls or expert analysis. ... sceptics point out that prediction markets are far from infallible. ... prediction-market supporters argue that even imperfect forecasts can be helpful. ... People have been betting on future events for as long as they have played sports and raced horses. But in the latter half of the nineteenth century, US efforts to set betting odds through marketplace supply and demand became centralized on Wall Street, where wealthy New York City businessmen and entertainers were using informal markets to bet on US elections as far back as 1868. ... Friedrich Hayek. He argued that markets in general could be viewed as mechanisms for collecting vast amounts of information held by individuals and synthesizing it into a useful data point — namely the price that people are willing to pay for goods or services.

Given today’s low yields and high valuations across almost all asset classes, there are no particularly good outcomes available for investors. We believe that either valuations will revert to historically normal levels and near-term returns will be very bad, or valuations will remain elevated relative to history. If valuations remain elevated indefinitely, near-term returns will be less bad but still insufficient for investors to achieve their goals. Furthermore, given elevated valuations in the long term, long-term returns will also be insufficient for investors to achieve their goals. It would be very handy to know which scenario will play out, as the reversion versus no reversion scenarios have important implications both for the appropriate portfolio to run today and critical institution-level decisions that investors will be forced to make in the future. Unfortunately, we believe there is no certainty as to which scenario will play out. As a result, we believe it is prudent for investors to try to build portfolios that are robust to either outcome and start contingency planning for the possibility that long-term returns will be meaningfully lower than what is necessary for their current saving/ contribution and spending plans to be sustainable. ... By now some of our clients are probably thoroughly sick of hearing about the topic, but this piece is going to delve into it yet again, because the question of whether we are in Purgatory or Hell is a crucial one, not only for its implications for what portfolio is the right one for an investor to hold at the moment, but also for the institutional choices investors have to make that go well beyond simple asset allocation. ... In the long run, we can hope that valuations fall to historically normal levels, because only if that happens will the institutional business models and savings and investing heuristics that institutions and savers have built still be valid.

In the industries where there’s rapid productivity growth, everybody is freaked out, because what are people going to do after everything gets automated? In the other part of the economy, that second part, health care and education, people are freaked out about, "Oh my God, it’s going to eat the entire budget! It’s going to eat my personal budget. Health care and education is going to be every dollar I make as income, and it’s going to eat the national budget and drive the United States bankrupt!" And everybody in the economy is going to become either a nurse or teacher. It’s really funny, both sides of the economy get polar opposite emotional reactions.  ... We are very much not present, in what we would consider to be a healthy way, in education, health care, construction, childcare, senior care. The great twist on that is that second category — that’s most of the GDP. Most of the spending is most of the GDP, and these are the areas where we have not yet been able to crack the code. ... How audacious or insane is it to think that you could bring tech to health care or education? It’s probably 50/50. ... What’s interesting is there are probably more new computer companies in the valley today than there were probably since 1982 — it’s just that the products are all these different shapes, sizes, and descriptions. ... Basically, the entire way we live today is a consequence of the invention of the automobile. Because, before that, people just never went anywhere. Therefore, everything that you travel to is a consequence of the automobile.

It’s been six years since we first wrote about the coming G-Zero world—a world with no global leader. The underlying shifts in the geopolitical environment have been clear: a US with less interest in assuming leadership responsibilities; US allies, particularly in Europe, that are weaker and looking to hedge bets on US intentions; and two frenemies, Russia and China, seeking to assert themselves as (limited) alternatives to the US—Russia primarily on the security front in its extended backyard, and China primarily on the economic front regionally, and, increasingly, globally. ... These trends have accelerated with the populist revolt against “globalism”—first in the Middle East, then in Europe, and now in the US. Through 2016, you could see the G-Zero picking up speed ... with the shock election of Donald Trump as president of the US, the G-Zero world is now fully upon us.
1.   Independent America: Trump rejects the comparative weakness of the presidency, and he wants to more directly project American power in service of US national interests
2.   China overreacts: Xi will be extremely sensitive to external challenges to his country’s interests at a time when all eyes are on his leadership
3.   A weaker Merkel: Could the Europeans have resolved their financial crises without the Germans forcing a solution?
4.   No reform: The reform needle won’t move in 2017. Save for a few bright spots, money won’t know where to flow
5.   Technology and the Middle East: Technology, a force for economic growth and efficiency, also exacerbates political instability
6.   Central banks get political: In the US, there’s risk of an open conflict between the Federal Reserve and the White House
7.   The White House versus Silicon Valley: Technology leaders from California, the major state that voted in largest numbers against Trump in the election, have a bone to pick with the new president
8.   Turkey: Ever-fewer checks on executive power will leave the private sector vulnerable to political whims
9.   North Korea: It’s making consistent progress on an intercontinental ballistic missile capability that would allow it to hit the West Coast of the US with a nuclear weapon
10.   South Africa: South Africa’s political infighting will undermine the country’s traditional role as a force for regional security
Red Herrings: US domestic policy, India versus Pakistan, Brazil

1.   Still brooding about his loss of the popular vote, Donald Trump vows to win over those who oppose him by 2020.  ...
2.   The combination of tax cuts on corporations and individuals, more constructive trade agreements, dismantling regulation of financial and energy companies, and infrastructure tax incentives pushes the 2017 real growth rate above 3% for the U.S. economy.  Productivity improves for the first time since 2014.
3.   The Standard & Poor’s 500 operating earnings are $130 in 2017 and the index rises to 2500 as investors become convinced the U.S. economy is back on a long-term growth path.  ...
4.   Macro investors make a killing on currency fluctuations.  ...
5.   Increased economic growth, inflation moving toward 3%, and renewed demand for capital push interest rates higher across the board.  The 10-year U.S. Treasury yield approaches 4%.
6.   Populism spreads over Europe affecting the elections in France and Germany.  ...
7.   Reducing regulations in the energy industry leads to a surge in production in the United States. Iran and Iraq also step up their output.  ...
8.   Donald Trump realizes he has been all wrong about China.  Its currency is overvalued, not undervalued, and depreciates to eight to the dollar.  Its economy flourishes on consumer spending on goods produced at home and greater exports.  Trump avoids punitive tariffs to prevent a trade war and develops a more cooperative relationship with the world’s second largest economy.
9.   Benefiting from stronger growth in China and the United States, real growth in Japan exceeds 2% for the first time in decades and its stock market leads other developed countries in appreciation for the year.
10. The Middle East cools down.  ...

The opinions of experts concerning the future are accorded great weight ... but they’re still just opinions. Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it. ... A lot of people's lives would be more tranquil and more productive if they accepted that what the media says about an upcoming event - and whether you watch of not - won't have any impact on the outcome. ... Today many analysts seem preoccupied with central bank behavior, government actions, trends in interest rates and currencies, and the movement of markets, as opposed to the fortunes of individual companies. … Most people don’t want to tempt fate by saying things will go well forever, and in fact they know they won’t. It’s just that they can’t decide what it is that will go wrong. The truth is that while I can enumerate them, the obvious candidates (changes in oil prices, interest rates, exchange rates, etc.) are likely to already be anticipated and largely priced in. It’s the surprises no one can anticipate that would more markets most if they were to happen. But (a) most people can’t imagine them and (b) most of the time they don’t happen. That’s why they’re called surprises. ... People began to ask me what inning we’re in during the financial crisis of 2008, and they’ve continued ever since.

Two groups of true believers are driving changes in the developed world. The first: single-minded central bankers who spent trillions of dollars pushing government bond yields close to zero (and below). While this unprecedented monetary experiment helped owners of stocks and real estate, its regressive nature did little to satisfy the second group: voters who are disenfranchised by globalization and automation, and who are on the march. What next? The fiscal experiments now begin (again). ... why do we see 2017 as another year of modest portfolio gains despite the length of the current global expansion, one of the longest in history? As 2016 came to a close, global business surveys improved to levels consistent with 3% global GDP growth, suggesting that corporate profits will start growing at around 10% again after a weak 2016. More positive news: a rise in industrial metals prices, which is helpful in spotting turns in the business cycle ... Furthermore (and I understand that there’s plenty of disagreement on the benefits of this), many developed countries are transitioning from “monetary stimulus only” to expansionary fiscal policy as well. Political establishments are aware of mortal threats to their existence, and are looking to fiscal stimulus (or at least, less austerity) as a means of getting people back to work. The problem: given low productivity growth and low growth in labor supply, many countries are closer to full capacity than you might think. If so, too much fiscal stimulus could result in wage inflation and higher interest rates faster than you might think as well. That is certainly one of the bigger risks for the US.

Global Trends and Key Implications Through 2035
- The rich are aging, the poor are not.
- The global economy is shifting.
- Technology is accelerating progress but causing discontinuities.
- Ideas and Identities are driving a wave of exclusion.
- Governing is getting harder.
- The nature of conflict is changing.
- Climate change, environment, and health issues will demand attention.
These trends will converge at an unprecedented pace to make governing and cooperation harder and to change the nature of power—fundamentally altering the global landscape. Economic, technological and security trends, especially, will expand the number of states, organizations, and individuals able to act in consequential ways. Within states, political order will remain elusive and tensions high until societies and governments renegotiate their expectations of one another. Between states, the post-Cold War, unipolar moment has passed and the post-1945 rules based international order may be fading too. Some major powers and regional aggressors will seek to assert interests through force but will find results fleeting as they discover traditional, material forms of power less able to secure and sustain outcomes in a context of proliferating veto players.

We view Donald Trump’s ascendancy to the Presidency of the U.S. as confirmation of a political and economic paradigm shift that started with Brexit but is likely to continue for the foreseeable future, including elections across Europe in 2017. Consistent with this view, we believe that there are four major potentially secular changes that all investment professionals must consider: fiscal stimulus over monetary, domestic agendas over global ones, deregulation over reregulation, and a broadening of outsized volatility from the currency markets to include global interest rate markets. The good news is that many of our highest conviction investment themes for 2016, including the ongoing slowdown in global trade, had already begun to capture this sea change in macro and geopolitical trends. At the same time, however, in certain areas our macro preferences have evolved of late in response to the “new” reality that we now live in. As such, we have used this outlook piece to challenge conventional investment wisdom, and in some instances, “adjust our sails.” In terms of asset allocation preferences for 2017, we are still probably most excited by what we see in Private Credit on a risk-adjusted basis. We also believe that Real Assets, particularly those with yield and growth, can prosper in the macro backdrop that we envision. Meanwhile, we are now balanced in our outlook on Equities versus Credit, but in both asset classes, we continue to suggest selling Simplicity and buying Complexity. Overall, though, we do not lose sight of the fact that we are undergoing a paradigm shift, and often these types of regime changes do not always transition smoothly. As a result, we maintain our long-held approach of seeking to monetize aggressively the periodic dislocations that inevitably occur in a world of increasing geopolitical uncertainty and macro instability.