There has been a lot of uncertainty in the economy and a lot of volatility in the financial markets. Recently, that has been good; the bump after the fiscal cliff deal took us to a five-year high. Clearly, the expectation in the stock market is that uncertainty has been reduced, problems have been solved, and we have clear sailing ahead.

One question that has come up repeatedly when I talk with advisors and clients is whether inflation is coming. The answer is simple, if perhaps unexpected: hopefully, it is. What? Why on earth would we want inflation?

This is part two of how the world ends—at least according to those who want to make a buck off of someone else’s fears. Make no mistake, I am fully supportive of worrying about things—they don’t call me Eeyore for nothing—but if you’re going to worry, you need to be sure that it’s something actually worth worrying about.

I talked yesterday about how the government has better, or at least easier, options available than to confiscate private retirement accounts. Though it could conceivably happen—Argentina has done just that—it isn’t in the cards here because we have a much more robust political and legal infrastructure, as we have just demonstrated.

— Guest post from Peter Essele, senior investment research analyst

On November 13, I wrote about the richness of the closed-end marketplace due to strong investor demand. At the time, I mentioned that approximately 60 percent of taxable closed-end funds were trading at a premium to net asset value (premiums occur when the price paid in the open market for a particular fund is greater than the value of the underlying securities), which was the highest level ever recorded. In addition, the post stated that, based on historical relationships in this market, these aberrations often don’t persist for extended periods of time. My goal was to highlight the current dislocations that existed and to warn investors regarding a possible correction. Two days later, the number of funds trading at a premium in this particular market went from approximately 60 percent to less than 20 percent, as investors shed these securities at an aggressive pace. In some cases, investors lost more than 6 percent in a matter of days from securities that they believed to be high-yielding “bond” funds.

Guest post from Peter Essele, senior investment research analyst

I have been talking with advisors recently about alternatives. One of the points I always make is that the definition of alternative investments has varied significantly over time, so it’s important to be very specific about what you mean when you say alternative.

In the middle of the last century, for example, you could have made the case that stocks themselves were alternative. At the time, stocks had always yielded more than bonds and always would because they were riskier. Since then, of course, we have seen the opposite conclusion, that stocks are less risky than bonds over time, become the prevailing wisdom. Stocks, at the time, meant U.S. large-cap. Small-cap stocks were dangerous, risky, not for small investors. Until, of course, they weren’t, and now small-cap is a core part of most portfolios. Foreign stocks were dangerous, scary—they don’t speak the same language, so how can we trust their assets? Until they weren’t scary anymore, and again, foreign stocks are now part of many core portfolios. The same logic has played out with emerging markets, with high-yield bonds—formerly known as junk—and now with alternatives.

We have some more good charts from Pete Essele, data maven in our Asset Management and Research groups, this time about household debt and how we are paying (or writing) it off.

This post will be a bit different—I am writing it on the road, so I don’t have access to many of my usual resources and tools. I am therefore going to take the chance to talk about something nonquantitative that I find helpful in both an investment and a noninvestment context.

One of the significant perks of my position at Commonwealth is the ability to talk with a wide range of experts in a wide range of fields. A couple of years ago, at our Chairman’s Retreat, we had a speaker who was an expert in the field of happiness.

There was more in the papers today about Europe, as the situation continues to evolve amid lots of hand-wringing about what can be done to save the region. The problem is not going away. We are facing a continuing series of what will be perceived as crises—a “hurricane season”—that will result from each country’s decision about whether to remain in the eurozone, and give up much or all of its budgetary and fiscal sovereignty, or go independent. Some, like Greece, might not end up with the luxury of being able to make the decision for themselves.

Right now, we are seeing Hurricane Spain, which will be followed shortly by others. The UK is putting flood walls in place—to extend the metaphor—and reports are that central banks around the world are readying rescue operations in case the Greek elections result in even more political and financial turmoil. What we have learned at this point is that volatility will certainly continue.