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Friday, August 17, 2012

Wheat Prices, Sunspots, and One-Dimensional Theories

I meant to post a link to this article on the increase in grain prices a couple weeks ago. It is still an important article especially from a critical thinking point of view. The author begins by noting the assertions by many in the media that the reason for higher grain prices is drought caused by global warming. He then goes on to say:
A better explanation for the drought, and the ensuing spike in grain prices, is that this is all part of the normal 11-year sunspot cycle.  But to find that relationship in the data is what the story is about. 
Given the data presented in the article, I would have to say the information is compelling. But, that is not the point of my post. I have little knowledge of what causes grain prices to fluctuate. In fact, that lack of knowledge is my point. So often people are willing to hurriedly, lazzily, and/or sloppily accept what sounds good. This, of course, can lead to an imperfect idea as to what will happen. What you think may happen, might happen for some time; but then, when the premise on which you built your theory continues to hold (e.g. global warming, drought, etc) but the underlying asset fails to continue its path, you will find that your single loose premise is not much help. Yes, global warming may be a cause, but perhaps it is merely an auxiliary cause of some greater impetus.

Abstract lessons learned in one area and apply to other investments and trades. Grow and profit.

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