Trends, Fluctuations and Having Skin in the Game

Anyone who has seriously invested in financial markets starts by learning to separate fluctuations from the trend. If you don’t, your life in the markets will be nasty, brutish and short. The same applies to any analysis of global temperature. You have a trend, principally driven by greenhouse gas concentrations in the atmosphere; and you have fluctuations, principally driven by the El Nino Southern Oscillation (ENSO) cycle.

When we are in the  El Niño phase, Pacific ocean temperatures are higher then average; in a La Niña phase, lower. The impact is significant enough to influence overall global mean temperature. Accordingly, if you wish to make a statement about the recent trend in global warming, start by adjusting for the ENSO fluctuation. Of course, many don’t. Indeed, the claim that global warming has ceased over the last decade is frequently aired in many a newspaper column (like this from the Wall Street Journal), not just the wackier end of the blogosphere.

Let us for a minute look at the distribution of El Niño and La Niña events over the last couple of decades. The excellent blog Skeptical Science does just that (here) and presents the following chart (click for larger image):

Temperature and ENSO jpg

The piece concludes with the following:

In short, global surface temperatures in the 1990s were mostly amplified by El Niños, while those in the 2000s and 2010s thus far have mostly been dampened by La Niñas – a recipe for a temporary surface warming ‘pause’.  But when we break the data into La Niña/El Niño/Neutral categories, or when we filter out their effects as Kevin C did, we see that the underlying global surface warming trend of approximately 0.16°C per decade remains beneath the short-term noise.

Here is a video by Kevin C of Skeptical Science breaking out the fluctuation—ENSO and other factors included—from the trend:

One can believe that such analysis is wrong; in short, that the fluctuation is the trend and there has been no global warming since 1998. Then my market response is: bet on it. I would be happy to take a bet that the global mean temperature will hit a new record high in the next 10 years. If we are seeing  a plateau in warming, then this claim will not be true. So for all “skeptics” out there, I say put some skin in the game. Bet against global warming. Let us separate out spin and speculation from the cold, hard calculus of probability.

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