Does it matter if your boss is an algorithm?

There are some people who are worried about we may be ruled by computer algorithms in the near future. They complain about how machines start to rule our lives and work. Such life has already started. In the trading market, computer algorithms start to play the role of traders. In the market research area, firms collect the data and run algorithms to analyze the data and use the result for their future product investment. In the daily life, people who go online frequently are analyzed by the companies like Google, they have been delivered with the results that the Google search engine, which is an algorithm, thinks are best suit you. There are countless examples of how computer algorithms "rule" our lives. Because it happens everywhere in our lives, it seems a bit scaring; moreover, some people's benefits have been hurt by such an environment.

Some workers complain because of the apps invented like Uber, Deliveroo, Dididache, their incomes have fallen significantly. Moreover, once these apps become more popular, the workers who work via these apps will receive lower payments from working for these apps, as the number of workers increases and the competition increases, so the income will decrease. Moreover, some people hate the feeling of being ruled by algorithms. However, people may need to start to get used to such working under such environment. When we look at how our working environment changes over time, we can see that we had a period of only using machines as tools, then currently some of us work along with machines as partners, it is not surprising if one day the machines become the boss of some of us. Each stage has an improvement of productivity and faces criticisms. In the past, the Japanese first brought sewing machines into their country, some people feared the sound of the machines could damage their souls. Later, when people work along with machines, some people now still believe we are losing the craftsmanship and people's intelligence and ability are always better than the capability of the machines.

Having an algorithm as a boss has its unique benefit. It never makes a biased decision, if the designer of the algorithm is unbiased. So having an algorithm as your boss, you do not need to worry about racism, sexism or etc. In addition, the speed of making decisions is much faster. Maybe people are more flexible when making their decisions and could do better when facing some complex issues. However, computers can run algorithms to solve many simple issues, and that speed is impossible to be achieved by a human being.

I think that maybe you dislike having a robot boss, but in some industries, which work on repeated matters and has limited requirement of innovation and invention,  it is very likely for you to have a robot boss.

What can the inflation-linked gilts offer

The inflation linked gilts are not new since the UK government began issuing the inflation linked gilts in 1981. There is a big change in the inflation linked gilts this year after the Brexit referendum as the inflation-linked gilts have delivered a 28.5 per cent return according to Bank of America Merrill Lynch indices. Since the Brexit referendum, the securities that hedge against the risk of the UK economy falling into a recession become very popular, as we can see that not only the inflation linked gilts become very popular, but the prices of the regular gilts and gold increase.

What is the benefit of owning the inflation-linked gilts rather than the regular gilts? If you expect there will be an inflation in the future in general and the inflation may be slightly higher than the market expectation, then it is a great opportunity to own the inflation-linked gilts. It may have more risks than the regular risks. As it is linked to the inflation rate, when there is a deflation, the return of such gilts can be much lower than the return of the regular gilts. Moreover, in most cases, if there is an increase in the inflation rate, the economy is more likely to be in a boom. When experiencing an economic boom, there are more great investment opportunities other than the inflation-linked gilts, which offer higher returns than the inflation-linked gilts.

Usually people who like buying inflation-linked gilts are very risk averse and worried even when the economy is in a good shape and they want a certain return in the future in real terms. However, currently more people are attracted to this field, because of the today's special environment. People are uncertain about the UK economic future when Britain leaves the European Union and the central banks around the world are taking very aggressive monetary policies, which creates the best environment for buying inflation-linked gilts, as the inflation rate may increase in the future due to the aggressive monetary policies and the future economy is increasingly uncertain.

To conclude, the inflation linked gilts are a very good option currently due to the very special and rare economic situation, but in general it is not necessarily as good as the regular gilts.

Should the UK recession forecast be scrapped?

Morgan Stanley and Credit Suisse have scrapped their forecasts that the British economy will fall into a recession after the Brexit reference. However, in fact, they have not scrapped their forecasts completely, they just delay the coming of the possible UK recession. They seem to hold their belief that the UK economy may not survive outside the European Union.

However, I actually hold a different view and become more optimistic than I was when the result of the referendum first released. Some surprisingly decent economic data brightens many people's expectations about the future of the UK economy. Although the UK economy could be actually affected once the Article 50 is triggered, that will be a few years later. Time matters a lot here. The result of the referendum has surprised many people, under such situation, the market will definitely overreact to the referendum, just as the market did at the end of June. However, as we see that the market is moderating itself, though some people may choose to ignore the fact of Britain is leaving the European Union, as it does not happen immediately, some people believe that Britain and the European Union could negotiate well and deliver a new agreement which is the best for the mutual benefits.

Britain and the European Union definitely want to trade with each other, as from many data, they have very large shares in each other's markets. Moreover, the European Union itself is progressing some free trade deals with other countries, like Canada and Australia, which means after Britain leaves the European Union, it does not stop Britain from being a free trade partner of the European Union. As the time passes, the public and the politicians are much less emotional, so a revengary action is less likely to be taken. Based on the above reasons, I think Britain can make a nice trade agreement with the European Union.

To conclude, I am not saying the British economy is unlikely to fall into the recession, I am saying that leaving the European Union is not going to the cause which drags the British economy into a recession.

Is the Bank of Japan's monetary policy heading down a dead end

The Bank of Japan is insisting on its aggressive monetary policy and its governor, Haruhiko Kuroda, promised on Monday that the Bank would continue its aggressive monetary policy until the inflation target of 2.0% is achieved. The inflation rate of last month has not been released yet, but according to the forecast, the inflation rate is expected to be at -0.4%, which is equal to the inflation rate in July 2016. If the forecast is right, the inflation rate in Japan will stay in the negative zone for five straight months, showing the ineffectiveness of the central bank's policies.

Such low inflation rate has been a long problem in Japan, according to its economic problems and its cultural facts. The Prime Minister of Japan, Shinzo Abe, was elected because of his "Abeconomics", as he promised monetary easing, fiscal stimulus and structural reforms. However, so far, it has not shown much success yet. Moreover, Japan recorded its government debt reached 229.20 percent of its GDP in 2015, which was beyond the danger level that the government has to reduce its spending and lower its debt to GDP ratio. This could let the Japanese economy lose the stimulus from the fiscal policies. While the structural reform is complicated and takes much longer time to finish and make an impact on the economy, the only hope of the Japanese economy seems to depend on the monetary policy, this is why the Bank of Japan is so insisting on its aggressive monetary policy.

However, though many countries have been using aggressive monetary policies through the first half of 2016, the effectiveness of these policies seems poor. The reason is the increasing uncertainty in the markets and the current extremely low interest rate affecting the effectiveness of lowering base rates further. The problem facing the Bank of Japan as well as many other central banks, including the European Central Bank, is continuing the current monetary policy may not stimulate the economy, but stopping such policy could actually hit the markets. Therefore, they are forced to insist on their current aggressive monetary policies, maybe they are not achieving anything, but doing nothing could hurt more.

Would the emerging markets become the new center of the markets?

I read an article called "Global activity now led by the emerging economies" by Gavyn Davies (https://www.ft.com/content/30b50798-dce3-30de-a931-91a1b2d4e141). The author suggests that though technically speaking, the global activity is not led by the emerging economies, the importance of the emerging economies is increasing over time. However, in terms of market, the financial markets in the emerging economies are still partially isolated from the global market, which is formed by the financial markets of the developed economies.

Undeniably, there is a barrier between the financial markets of the emerging economies and the financial markets of the developed economies. The barrier is partially built by the conservative regulations. Because many emerging economies lack experience of regulating modern financial markets, some of them put restrictions on investors, including foreign investors, so the foreign investors are repelled away by these regulations which increase the foreign investors' costs, while some of the emerging economies have very open financial markets but lack necessary regulations on the markets, the chaos due to the lack of regulations repels investors away.

Therefore, when comparing the emerging markets and the developed markets, the emerging markets have not figured out the balance between openness and regulation. Being the center of the markets has to be available to be accessed from all over the world with orders. Moreover, when institutions are used to operating mainly in the developed markets, it has to give very attractive bonus profits to these institutions for switching their operation focuses to the emerging markets. Last time, the US replacing the UK as the center of the global financial market was definitely partially contributed by the two world wars. If any of the emerging markets wants to become the next center of the global market, it has to take much more effort and time to achieve this goal. I would say it could take at least a century to complete such change if no miracle happens.

What is the bad news?

151000 work positions were added in the US last month, missing the estimate. The number of jobs created in July is 271000, so the economists forecasted 180000 jobs could be added to the economy in August. The jobless rate remains at 4.9 percent for three months in a row. Missing the estimate could be a piece of bad news; however, I do not really view it as bad news. Yes, the estimate was missed; however, the news of missing the estimate should be expected, as the current unemployment rate is historically low already. It is not just my opinion, the US stock market index turns green today, as S&P 500 is up by 0.42%.

What is really bad news for the markets as well as the economy? The worst news has the lowest probability to happen. If something bad has 50% chance to happen, then roughly half of the people can see its coming and prepare for its coming, which means only around half of the people will actually lose. Such probability is acceptable. However, once the probability decreases, for example, the probability drops to 1%, maybe there could be 1% of the population wanting to get ready for its coming, fewer then 1% of the population would actually get themselves ready, due to the pressure from the mainstream (the state of 99% probability), then when the event with 1% actually happens, much fewer people are actually preparing for its coming and the consequence to the whole society could be very damaging.

In the past, we often see that some economists and othe experts saw the coming of the financial crisis before it actually came, but it seemed the majority of the financial sector did not see its coming, especially all the big investment banks had suffered huge losses in the last crisis. Did they really know nothing about the coming of the financial ciris? I certainly think at least some people in the industry did know the danger of what they were doing and this group of people might be larger than what we expect. Why did they speak out about the weakness in the system? The answer is simple, the risk was too high for them to speak out about the weakness. Imagine if they talked to their investment banks that the banks should short mortgage-backed securities and collateralized debt obligations, firstly it was not easy to stop the trading immediately, secondly the crisis could come later than their expectations, which could let the banks doubt about the credibility of their warning, thirdly if the crisis did not come, then it could cost their careers. However, when they did not warn their institutions, and the crisis hit the industry, they could blame each other, and some might have to leave their jobs and when the economy recovers they can come back to their previous positions. Therefore, the best strategy for them is not to warn the institutions about the danger with a very small probability.

Overall, the really bad news is often hidden inside the market and whispered by a small group of people but never has been spoken out to the public or even their employers.

Can London stay as one of the global trading centres

London has been one of the global trading centres for centuries and had been the top one on the list. However, since the rise of the US, Japan, China and some other economies, London's importance and dominance have been diminishing. Even worse, after the Brexit referendum, though Britain has not officially left the European Union yet, the companies and individuals are preparing themselves for Britain leaving the EU, as we can see the price fluctuations in the British markets., including the London real estate market. There are some more serious moves taking place in the British financial sector. London's position as the global foreign exchange trading centre has been hit by the fall in the UK's capital share in the business, while Tokyo, Singapore and Hong Kong have taken much of the London's loss and increased their combined share to 21 per cent from 15 per cent. More than foreign exchange trading, many investors would also expect the volumes in commodity trading and security trading will diminish after the Brexit, which we still need to wait for some official reports to prove the argument but I think is very likely to happen.

Once Britain leaves the European Union, in terms of the financial industry in Europe, some institutions may decide to stay in Britain, as Britain holds the majority of their assets and moving their assets across countries has very high costs. Some institutions have already spoken that they would move their European head offices to the countries like France and Germany, these institutions are multinational operations and have more activities in the rest of Europe than in the UK.

Despite these facts, I think London can still remain one of the global trading centre, as London has its own advantage in terms of being a global trading centre. Firstly, London has been the global trading centre for centuries, it has all the facilities a global trading centre needs and many young graduates have already been trained to be capable to work in the industry, which reduces the cost of training. Secondly, the language used in Britain, English, has been widely spoken. Thirdly, the culture of London is very open to foreigners. The British population did vote to leave the European Union, but the majority of the Londoners voted to stay in the European Union. Fourthly, we are still uncertain about the new trade deal between Britain and the European Union, we could be more optimistic. Fifthly, Britain has established some close relationship with the US, China and many other countries, including the Commonwealth countries. Such foreign policy could benefit the financial industry, as the cost of transaction could be lower than other areas.

To conclude, I expect the financial activities in London would decrease after Britain officially leaves the European Union, but London could still remain as one of the most important global trading centres at least for the rest of this century.