Eurozone Inflation Collapsing

Saturday’s Weekend Markets and Money speculated that the US Central Bank would not raise interest rates in 2015. That goes against the mainstream view, but they’ll come around eventually. The bond market, after all, is already pricing it in.

Check this out from the Financial Times:

US interest rate traders are betting sharply that lower oil prices, falling inflation and faltering wage growth will delay the arrival of Federal Reserve policy tightening this year. Interest rate futures rallied sharply last week, with the market focusing on falling wages rather than strong headline jobs growth for December.

Over in Europe, government borrowing costs are disappearing. Inflation in the UK is at a fifteen year low. The UK government can borrow money for five years at less than 1%. To put this in perspective, a few weeks ago the FT showed that in the years between the two world wars, debt interest in Britain accounted for more than 20% of UK spending. It’s now 6%.

German five year bonds are near zero. And Germany’s supply of bonds is actually about to shrink because the government actually managed to balance its budget for the first time since 1969. That means they’ll issue less bonds than forecast in the coming year.

You read that right — a Western government actually succeeded in not running a deficit. How did they do it? Germany is enjoying record employment levels, but the government in Berlin also saved an estimated 1.7 billion euros thanks to tumbling interest payments.

That’s not all. A little known statistic I don’t see mentioned in many places is that the world saving rate is at a historic high: 26% of global GDP. There is a huge amount of global capital looking for a home. All this combines to drive yields down, even into negative territory, depending on the time to maturity.

Inflation expectations in the Eurozone are collapsing. So the questions is — how will the European Central Bank react? Ambrose Evans Pritchard, writing for The Telegraph, quoted an RBS report that quipped that Europe is in the ‘Deflation Motel’ — you can check out anytime you like, but you can never leave. As a result, analysts at the RBS expect the ECB to expand its balance sheet by at least 2.3 trillion euros.

Pritchard went on:

It comes amid a blizzard of leaks from Frankfurt over the size and shape of QE as the ECB prepares for a pivotal decision next week. Most analysts say sovereign bond purchases are almost certain after the currency bloc slumped into deflation in December, though legal and political barriers complicate the picture.

Should this flood of money eventuate, it will boost asset prices when wages are stagnant and unemployment high, furthering the widening gap between the rich and the poor. We’ll have to wait and see what hand the ECB plays.

Perhaps Cepheus might be able to guess. Cepheus is a computer program with ability to win — he’s almost unbeatable really ¬— at two hand heads-up limit hold ‘em poker.

Will Your Next Poker Buddy Look Like This?

Source: Google

Poker has proved problematic for AI programmers because the game involves imperfect information. However, researchers at the University of Alberta believe they have broken through this barrier. If you fancy, you can play Cepheus online. Poker writer Christopher Hall, after 400 hands, says Cepheus’ weakness is he (it?) doesn’t adapt to changes of style.

But developments in artificial intelligence are moving rapidly. For investors, this is going to be a huge growth industry. Someone is going to make a staggering amount of money from this. Just this week, two universities came out and said they’ve built a computer model that’s a better predictor of a person’s behaviour than their closest friends and relatives.

According to the Financial Times, ‘Researchers at the University of Cambridge and Stanford University admitted the findings may be considered “creepy” by some but said they could also lead to technological advances, such as helping artificially intelligent (AI) machines better understand the emotional needs of their human creators.’

The model was built tracking Facebook ‘likes’, coupled with a psychology questionnaire.

This trend is not without its moral and ethical implications. Elon Musk, the entrepreneur behind SpaceX and Tesla, described uncontrolled artificial intelligence as ‘more dangerous than nukes’. Think Skynet from the Terminator franchise. Musk is part of a chorus calling for greater focus on its safety and social benefits of AI.

John Robb, at our World War D conference early last year, warned that 90% of jobs were at risk of automation by bots and artificial intelligence. It sounded slightly outlandish at the time. It doesn’t sound crazy at all at this point. Cepheus is already sitting across the table. Before long, he’ll know you better than you know yourself.


Callum Newman+
For The Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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