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WilmotML Macro Advisory ∙ Machine Learning ∙ Investments

Populism, Robots and the Next Recession

Jonathan Wilmot

March 2017

WilmotML

Be Prepared To Change Your Mind

“One must learn to look at things all-sidedly… for good things can have bad results and bad things can have good results”.

Mao Ze Dong

The Little Red Book

2

WilmotML

Conventional Politics Has Failed

This is the first time in history that a true Populist has become President of the United States, still the most powerful country on earth…

For the first time in its 60 year history the EU looks like the problem not the solution…

3

WilmotML

Machine Intelligence

This is the first time in history that humans have had to contemplate the possibility that they will no longer be the most intelligent beings on the planet…

4

WilmotML

The Next Recession

This US expansion has just become the third longest in history, and is some 27 months shy of the all time record.

History suggests that we are due a recession before the end of President Trump’s four year term….

5

WilmotML

Trump Rally?

-10%

-5%

0%

5%

10%

15%

20

30

40

50

60

70

80

90

Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

IP vs ISM New Orders

Recession ISM new Orders Global IP Momentum

Source: Thomson Reuters All material contained in this slide is the intellectual property of Wilmot ML Ltd. Materials have been provided for the clients’ individual use. Past performance is no guarantee of future performance.

6

WilmotML

Poised for Secular Change?

0

2

4

6

8

10

12

14

Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 Jan-12 Jan-17

G3 10yr Yields


7

WilmotML

Ready for the Final Leg Higher?

5

10

20

40

80

160

320

640

1280

Jan-50 Jan-55 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

US Real Equity Returns

Recession Real Equity Returns


8

WilmotML

This Is Not a Recession Asset!

80

160

320

640

Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 Jan-12 Jan-17

US Real High Yield Returns

Recession Real High Yield Returns


9

WilmotML

6.1% 5.5% 5.1%

-5%

0%

5%

10%

1893-1900 1932-1939 2009-2016

US Real Bond Returns (CAGR)

-0.8%

-2.4%

-5%

0%

5%

10%

1900-1910 1939-1949 2016-2026

US Real Bond Returns (CAGR)

?

?

11.9%

19.1%

16.1%

0%

5%

10%

15%

20%

25%

1893-1900 1932-1939 2009-2016

US Real Equity Returns (CAGR)

5.7%

3.2%

0%

5%

10%

15%

20%

25%

1900-1910 1939-1949 2016-2026

US Real Equity Returns (CAGR)

Source: Credit Suisse GIRY, Thomson Reuters

Why Passive is Passé: Post-Crisis vs Next Decade

All material contained in this slide is the intellectual property of Wilmot ML Ltd. Materials have been provided for the clients’ individual use. Past performance is no guarantee of future performance.

10


Populism

WilmotML

What Is Populism?

“Populists claim that they, and only they, represent the people”

Jan-Werner Muller

What is Populism?

12

WilmotML

A Shock But No Surprise

Populism and low ultra-low interest rates go together…

It feeds on a sense of exclusion – cultural, economic, and political…

And usually manifests itself as resentment against elites and immigrants at home, and foreigners abroad.

But after the 1890s depression it didn’t produce disastrous results…

13

WilmotML

What is Needed Now?

Fiscal expansion plus deregulation and supply side reform was becoming the new consensus even before Trump was elected…

Both public and private sector investment are running at very depressed levels…

Do we need a big dose of “irresponsible” policy to properly re-energise animal spirits?

14

WilmotML

US inflation: PCE Deflator Way Below “Target”

80

160

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

US PCE Level US Target Level (2%)

4.3%


15

WilmotML

US Unemployment

0

2

4

6

8

10

12

14

16

18


U3 Unemployment U6 Unemployment


16

WilmotML

The Germans Should be Content…

2.2%

80

160


German HCIP Level German Target Level (1.5%)


17

WilmotML

But what if Germany Targeted 2% Inflation?

13.3%

80

160


German HCIP Level US Target Level (2%)


18

WilmotML

A Bigger Risk than Brexit

50

100

Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15

GDP per Capita

Germany Greece Italy


19 Source: Thomson Reuters

WilmotML

The Real Problem with Tax Reform

50

60

70

80

90

100

110

120

130

140

150

Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13

US Dollar Trade Weighted Index (Nominal)


20 Source: Thomson Reuters


Beyond Robots

WilmotML

The Future of Intelligence

“Intelligence measures an agent’s ability to achieve goals in a wide range of environments.”

Universal Intelligence: A Definition of Machine Intelligence

by Shane Legg and Marcus Hutter (2007)

“Eventually, I think most jobs will be replaced, like 75-80% of people are not going to work for a living…”

Gary Marcus, Professor of Psychology, New York University.

22

WilmotML

McKinsey’s 50 : 5 : 60

• 50%: activities that could be automated with currently viable technologies (worth $2.7 trillion in annual wages in the US). Mostly data analysis or routine physical activities.

• 5%: occupations that are currently easily 100% automatable.

• 60%: occupations where at least 30% of activities can be readily automated – underscoring the importance of humans working alongside machines.

23

WilmotML

Worldwide Automation

7%

14.0%

16.0%

12.0% 17.0%

16.0%

18%

Time Spent In US Occupations

Manage Expertise Interface Unpredictable Physcial Collect Data Process Data Predictable Physical

Easy to automate roles 51.0% of jobs


24 Source: Mckinsey Institute Global

WilmotML

Jobs and Automation

332

60

394

54

35

233

Labour associated with currently technically automatable activities (mn)

Rest of World USA China Europe 5 Japan India



WilmotML

Wages and automation

5.1

2.7

4.1

1.7

1.1

1.1

Wages associated with currently technically automatable activities ($tn)

Rest of World USA China Europe 5 Japan India



WilmotML

The Super Human

“Armed with machine learning, a manager becomes a super-manager,

a scientist a super-scientist, an engineer a super-engineer..”

Pedro Domingos

The Master Algorithm


27


The Case for Super-Full Employment

WilmotML

Extending the Recovery

Eight years into recovery inflation is way below “target” and the usual markers for

recession are largely absent (outside China)

Energy is in structural over supply

In the medium to long-run the machines are coming

Could there be a better time to aim for an extended recovery in which more

inclusive growth and rising real wages are favoured over short-term inflation

targets and fiscal consolidation?

A premature recession would fuel populist rage (and protectionism)

Perhaps “reckless” is the new prudence

29

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WilmotML NOTE - Credit Suisse · WilmotML But what if Germany Targeted 2% Inflation? 13.3% 80 160...

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