Connect with a teletype (Turing writes in 1950 and still can't use Siri) with a human and a computer locked in another room and unable to communicate with each other. Ask both of them the same question and wait for their answer. When you are no longer able to distinguish which of the two answers was given by man and which by the machine, it will mean that artificial intelligence it will have reached the level of the natural one. Thirty years later, in 1980, the philosopher John Searle tries to resize the Turing test and proposes the thought experiment of the Chinese Room. I'm locked in a room, says Searle, and on my computer screen I see a message in Chinese followed by a question mark. I am completely ignorant of Chinese, both written and spoken, but I have a notebook of rules at my disposal which explains that to a certain set of ideograms drawn in a certain way I have to respond with a certain other set of ideograms. If I copy the answer and send it, the other room will think that I know Chinese well, because I understood the question and gave a good answer.
In reality, however, I don't have the faintest idea of what I was asked, let alone what the answer I sent means. Artificial intelligence, therefore, is not true intelligence, because it does not understand meaning. It is syntax, but not semantics. From 1980 to today, the Chinese Room test has been the subject of furious controversy in the rarefied worlds of philosophy of mind, cognitive science and artificial intelligence. Searle's critics argue that we too are nothing but machines and that the ability to contextualize, a typical human characteristic, can very well be taught to machines. Searle, for his part, maintains his positions firm. In the world of financial markets, artificial intelligence has made considerable progress.
Computers are now predominant in gold trading and have conquered the central hours of trading on the New York Stock Exchange. The humans intervene in the opening and closing and leave the rest of the session to the machines. Machines, however, still fail the Turing test. You don't even need a trained eye to understand, by looking at the graph of any day's market movements, when the machines are in action and when humans intervene. In fact, machines produce curious convolutions and arabesques interspersed with abrupt vertical ascents and descents, humans create more rounded and irregular movements.
The pertinence area of computers in the markets is certainly bound to expand further, but the identification of the big picture, the switchboard. Unfortunately at this moment it is precisely on the general picture that confusion reigns supreme. The party of the imminent explosion of prices and that of the deflationary implosion have been fighting over inflation for years, with those who argue that everything will remain largely under control. Also on growth there are analogous alignments. For some we are always on the verge of global acceleration thanks to expansionary monetary policies, for others we will never be able to recover again, because the debt continues to grow, productivity has collapsed to zero and population growth is increasingly low o even negative.
For the optimists, shares, although quite expensive, will be better than the fixed rate. For the pessimists, quality bonds will soon shine again, while high yield and equities will soon decline. These are often divisions with an ideological or even a political background. In America, the Republicans have been asking for years to abandon the zero rate line, while the Democrats would like to extend it as long as possible. Beyond the ideologies and factions that remain immobile in their positions, the reality, in these months that we are experiencing, is however structurally changing and requires new reflections.
The moments of difficulty that we have experienced in the markets in these years of recovery, from 2009 to today, have been, on closer inspection, limited and not systemic. We got scared in 2010 and 2012 for Greece, in 2011 for Libya, for Fukushima and for crude oil at 120 dollars, again in 2011 for Italy and for some years for disputes over the US budget and risk of default on US debt. Apart from Greece, which is still with us as a problem, the other fears, seen with today's eyes, seem groundless to us. But now something structural and serious is happening, something that will remain in the air for years and not for weeks. America, the lead economy, is running out of unused resources at the disposal of its economy. Unemployment is rapidly being reabsorbed and even young people, the elderly and women who usually stay halfway between the labor market and non-employment and who constitute a kind of extra reservoir, are running out. Unused resources are an extra gear available to the economy because they allow the central bank to keep rates extraordinarily low (and to print money through quantitative easing) without this creating inflation. By the end of this year, this additional gear will no longer be available. The GDP of a country, simplifying, depends on the number of people who work and their productivity.
If the number of people in work can no longer increase (except as a result of weak population growth) and if productivity growth is low or zero, the GDP, beyond the fluctuations from quarter to quarter, cannot increase much. The estimates of many authoritative economists place the potential long-term growth for the United States at 1.75 percent, with downside risks. Quite a dismal level, especially when compared with the 3-plus percent we were promised for this year and the next by many, including the Fed. With slack running out by the end of this year , the Fed faces a major dilemma that is also its moment of truth. Apply the manual and raise rates, hitting already mediocre growth to keep inflation from rising above 2 percent, or push things and purposefully go for 3 or 4 percent inflation? Yellen continues to recite the mantra of 2 percent inflation targeting at every turn, but does she really mean it in her heart? Recall that this Fed has a decidedly Democratic political coloring and an absolute preponderance of dovish. Let us also recall that there is a perhaps debatable but not necessarily political or ideological argument for chasing higher inflation. In fact, having prices at 3-4 per cent would mean, in the next recession, not immediately falling into deflation, as would happen if prices started from 2 per cent. It could be the difference between a manageable recession and an even more severe depression than 2008.
The Fed will most likely make an intermediate choice. Its board members are cautious people and prefer to avoid being accused of giving Hillary Clinton too much by buying a little more employment in exchange for too high inflation. In practice, the Fed will raise rates within this year and a hike will be enough to silence many of its critics for some time. Later it will raise them again, but in line with inflation or less than inflation. Short-term real rates will in any case remain at zero or negative, while the manual would prescribe positive real rates at this point in the cycle. An intermediate choice would also have the advantage of preventing the formation of a serious equity bubble (which would occur if rates remained at or near zero for too long) and of containing the bond bear market to manageable proportions (which would instead become heavy and risky, for America and for the world, if rates were raised to the levels prescribed by the manual).
So let's get ready for a modest further decline in bond prices this year and next, for a flat US equity for 2015 and for a European equity that will be able to revise the highs of early April by the end of the year, but not to go much higher in there. In short, the world is Ok, but not in the sense that we give Ok (good) but in what we give it in English (good).
