The Future Is Coming: The Technology Revolution of the Roaring 2020s

In my August 12 newsletter, I discussed the technological innovations that drove the prosperity of the 1920s. Then I discussed the ones that are likely to do the same during the current decade:

“The awesome range of futuristic ‘BRAIN’ technological innovations includes biotechnology, robotics and automation, artificial intelligence, and nanotechnology. There are also significant innovations underway in 3-D manufacturing, electric vehicles [EVs], battery storage, blockchain, and quantum computing.”

In my 2018 book, Predicting the Markets, I observed:

“In the past, technology disrupted animal and manual labor. It sped up activities that were too slow when done by horses, such as pulling a plow or a stagecoach. It automated activities that required lots of workers. Assembly lines required fewer workers and increased their productivity. It allowed for a greater division of labor, but the focus was on brawn. Today’s ‘Great Disruption,’ as I like to call it, is increasingly about technology doing what the brain can do, but faster and with greater focus.”

The future is always coming, of course. However, the future is already here to a large extent. Consider the following awesome technologies that are just starting to proliferate in ways that should boost productivity and prosperity:

(1) Home-based work, education, and entertainment. The pandemic has transformed the way many people work, pursue an education, and get entertained. They can do all these activities from home because of technologies that allow them to carry on their lives over the Internet. When the pandemic is finally over, many people may go back to their old normal routines. Employers, however, may tell their employees to continue to work from home or closer to home in the suburbs. Reducing or eliminating commutes to work certainly increases productivity. It also cuts the costs of urban office space.

A recent study by the National Bureau of Economic Research compared employee behavior over two eight-week periods before and after shelter-in-place mandates were implemented. Looking at email and meeting metadata, the group calculated that the workday lasted 48.5 minutes longer, the number of meetings increased about 13%, and people sent an average of 1.4 more emails per day to their colleagues.

(2) Telemedicine. Telemedicine allows patients to visit with clinicians remotely using virtual technology. Innovative uses of telemedicine are increasing with advances in telehealth platforms and remote patient-monitoring technology. New mobile health apps and wearable monitoring devices help track a patient’s vitals, provide alerts about needed care, and help patients access their physician. Over the last few months, millions of people have relied on video or telephone calls to talk to their doctors.

During the coronavirus pandemic, the Centers for Medicare and Medicaid Services (CMS) has taken unprecedented action to expand telehealth for Medicare beneficiaries. On March 13, 2020, President Trump made an emergency declaration under the Stafford Act and the National Emergencies Act empowering CMS to issue waivers to Medicare program requirements to support healthcare providers and patients during the pandemic. One of the first actions CMS took under that authority was to expand Medicare telehealth on March 17, 2020, allowing all beneficiaries to receive telehealth in any location, including their homes.

Before the public health emergency, approximately 13,000 beneficiaries in fee-for-service Medicare received telemedicine in a week. In the last week of April, nearly 1.7 million did so. In total, over 9 million beneficiaries have received a telehealth service during the public health emergency, mid-March through mid-June, according to a July 15 HealthAffairs blog post.

(3) 6G. An August 21 article in SingularityHub, titled “6G Will Be 100 Times Faster Than 5G—and Now There’s a Chip for It,” reports the following:

“Though 5G—a next-generation speed upgrade to wireless networks—is scarcely up and running (and still nonexistent in many places) researchers are already working on what comes next. It lacks an official name, but they’re calling it 6G for the sake of simplicity (and hey, it’s tradition). 6G promises to be up to 100 times faster than 5G—fast enough to download 142 hours of Netflix in a second—but researchers are still trying to figure out exactly how to make such ultra-speedy connections happen.”

However, this technology probably won’t be available for prime time until 2030. For now, we’ll have to settle for 5G. The pandemic has slowed the rollout of 5G at the same time as it has increased the demand for the technology to facilitate working remotely by boosting data transmission speeds. Nevertheless, the rollout should continue during the second half of this year into 2021. When it becomes truly accessible, it promises to be more than 30 times faster than the average 4G download speed and to revolutionize self-driving cars, augmented reality, and the Internet of Things.

(4) Robotics, automation, and 3D manufacturing. The August 18 issue of National Geographic featured an article titled “The robot revolution has arrived.” The COVID-19 pandemic has significantly boosted the interest in having robots do more of what humans did before the health crisis. In many instances, it is simply the medically wise alternative to using infection-prone humans. The article reports:

“Already, in 2020, robots take inventory and clean floors in Walmart. They shelve goods and fetch them for mailing in warehouses. They cut lettuce and pick apples and even raspberries. They help autistic children socialize and stroke victims regain the use of their limbs. They patrol borders and, in the case of Israel’s Harop drone, attack targets they deem hostile.”

The pandemic disrupted global supply chains. One likely outcome is that manufacturers will increasingly explore ways to work with suppliers closer to home. Instead of just-in-time inventories, companies will be looking for ways to have just-in-case inventories available in the event of future supply disruptions. They are increasingly using 3D printers to produce parts on demand to the exact specification and in the exact numbers required—reducing wait time and safeguarding against external disruptions.

Robots, automation, and 3D printers are revolutionizing manufacturing. An August 21 article in engineering.com reports:

“Mighty Buildings claims to increase the efficiency and reduce the waste in building modern homes. Drawing from foundations in robotics, manufacturing and sustainability, Mighty Buildings’ goal is no less than the reimagination of the construction sector. The company uses a combination of 3D printing and prefab techniques to automate up to 80 percent of the building process for greater productivity. … According to the Oakland, Calif.-based startup, they can build a 350-square-foot studio unit in under 24 hours while using 95 percent fewer labor hours at twice the speed of traditional manufacturing methods.”

If one of the consequences of the pandemic is de-urbanization, there will be more suburbanites who will need to buy one or more cars to get around their small towns. The August 7 Forbes reports:

“A mass shift to single-occupancy vehicles is occurring nationwide according to new research from Cornell University, which poses a major traffic and pollution problem in many cities. The solution, according to today’s most influential automakers, is to accelerate the development of electric, driverless cars programmed by artificial intelligence.”

Volkswagen AG pledged more than a fifth of its vehicles will be electric by 2025, while investing 44 billion euros ($52 billion) on autonomous driving and “mobility services” by 2023.

By the end of the 2020s, autonomous drones carrying passengers and cargo could be as ubiquitous as in the old television cartoon The Jetsons. EHang, a Chinese company, reportedly is ahead of the pack with its autonomous aerial vehicle, or AAV. A user can summon an EHang drone using an app. The drone lands at a predetermined spot near the requested pick-up location. It can carry up to two passengers with a combined weight of under 440 pounds and travel up to 32 kilometers (22 miles) on a single charge.

(5) Batteries. The outlook for EVs and drones depends largely on progress made in increasing the capacity and service lives of large batteries while reducing their weight, as Jackie and I have often discussed in the past. The future may belong to solid-state batteries, which reportedly could be available by 2025. That’s the same year that the world’s biggest automakers plan to launch an array of new electric models.

Real GDP Growth: Hard To Get Back to Old Normal

In a 4/6 speech, newly appointed Fed Vice Chairman John Williams matter-of-factly stated: “Last year real gross domestic product, or GDP, increased 2.6 percent. This is a solid performance. Importantly, it’s above the trend growth rate, which I peg at about 1¾ percent.”

I was surprised by his comment that the trend in real GDP is only 1.75%. That certainly is at odds with the predictions of President Donald Trump and his supply-side advisers, who believe that their policies will boost real GDP growth up to the old normal of 3.0% and even 4.0%. I have been expecting more of the same, i.e., 2.0%-2.5%.

Williams referenced a 10/11/16 FRBSF Economic Letter titled “What Is the New Normal for U.S. Growth?” by John Fernald. Sure enough, the article starts by stating: “Estimates suggest the new normal for U.S. GDP growth has dropped to between 1½ and 1¾%, noticeably slower than the typical postwar pace.” The article explains the reasoning behind this lackluster outlook for real GDP as follows:

“This estimate is based on trends in demographics, education, and productivity. The aging and retirement of the baby boom generation is expected to hold down employment growth relative to population growth. Further, educational attainment has plateaued, reducing the contribution of labor quality to productivity growth. The slower forecast for overall GDP growth assumes that, apart from these effects, productivity growth is relatively normal, if modest—in line with its pace for most of the period since 1973.” Here’s more:

(1) Labor force growth. “[T]he population is now growing relatively slowly, and census projections expect that slow pace to continue. Second, these projections also suggest the working-age population will grow more slowly than the overall population, reflecting the aging of baby boomers. Of course, some of those older individuals will continue to work. Hence, the Congressional Budget Office (CBO) projects the labor force will grow about ½% per year … over the next decade—a little faster than the working-age population, but substantially slower than in the second half of the 20th century.”

(2) Productivity growth. The article is much more pessimistic (or perhaps realistic) about the outlook for productivity growth than are today’s supply-siders. Fernald concedes: “The major source of uncertainty about the future concerns productivity growth rather than demographics. Historically, changes in trend productivity growth have been unpredictable and large.” Nevertheless, he estimates that the new normal trend growth rate in real GDP is 1.6%, implying that productivity won’t grow much faster than 1.0%.

(3) Information technology. But won’t the IT revolution boost productivity? It hasn’t been doing so in recent years. Fernald observes: “Starting around 1995, productivity growth was again exceptional for eight or nine years. Considerable research highlighted how businesses throughout the economy used information technology (IT) to transform what and how they produced. After 2004, the low-hanging fruit of IT had been plucked.”

Again, he concedes: “Looking ahead, another wave of the IT revolution from machine learning and robots could boost productivity growth. ... But, until such a development occurs, the most likely outcome is a continuation of slow productivity growth.”

For more on technology and productivity, see Chapter 3 of my new book, Predicting the Markets: A Professional Autobiography.

We Are All Populists Now

The February 6, 2009 cover story of Newsweek was titled “We Are All Socialists Now.” I reread it over the weekend, and was floored by the first paragraph:

On the Fox News Channel last Wednesday evening, Sean Hannity was coming to the end of a segment with Indiana Congressman Mike Pence, the chair of the House Republican Conference and a vociferous foe of President Obama’s nearly $1 trillion stimulus bill. How, Pence had asked rhetorically, was $50 million for the National Endowment for the Arts going to put people back to work in Indiana? How would $20 million for "fish passage barriers" (a provision to pay for the removal of barriers in rivers and streams so that fish could migrate freely) help create jobs? Hannity could not have agreed more. "It is … the European Socialist Act of 2009," the host said, signing off. "We’re counting on you to stop it. Thank you, congressman.”

Jon Meacham, the author of the piece, concluded, “Whether we want to admit it or not--and many, especially Congressman Pence and Hannity, do not--the America of 2009 is moving toward a modern European state.”

Now Pence is the VEEP-elect and Hannity is one of the favorite journalists of POTUS-elect Donald Trump. None of them are socialists. However, they are all now self-proclaimed populists. I’m not sure what the difference is, since both socialists and populists tend to advocate strong government intervention to help the common man, the little guy, and the forgotten man.

In his speech after Tuesday’s election, Donald Trump referred to America’s “forgotten men and women” who propelled him to victory. They are the blue-collar workers in the manufacturing towns of the Rust Belt and the hollowing coalfields of Appalachia. These people feel left behind by progress, laughed at by the elite, so they put their faith in the billionaire businessman who promised to Make America Great Again.

In a fireside chat over the radio on April 7, 1932, Franklin Delano Roosevelt used the phrase “forgotten man” to promote his New Deal: “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Given that both Trump and Hillary Clinton promised to spend lots of money on infrastructure to create good-paying jobs, maybe we are all Keynesians now too. By the way, Nixon never said, “We are all Keynesians now.” What he did say was, “I am now a Keynesian in economics.” Milton Friedman was also misquoted on this subject. What he actually said was: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”

In any event, VEEP-elect Mike Pence is a Keynesian now who supports Trump’s $1 trillion of spending on infrastructure. So is Steve Moore, one of the founders of supply-side economics. He recently declared himself to be a populist now.

Before turning to the future, let’s stay in the past and try to see what Trump saw when he ran into all those forgotten people he met on the campaign trail. Here are some relevant observations:

(1) Exhibit A against China. In researching the causes of the productivity slowdown during the current economic expansion, I ran a chart of the Fed’s indexes for manufacturing industrial production and capacity. They both are available monthly since the late 1940s. Both have been on uptrends since the start of the data until about 2001, when both started moving sideways. China entered the World Trade Organization (WTO) on December 11, 2001.

While manufacturing production reflects the ups and downs of the business cycle, manufacturing capacity has a long history of relatively stable growth. In fact, on a year-over-year basis, the former tends to turn negative, while the latter had remained positive until it turned slightly negative for the first time from September 2003 to October 2004, and again from August 2008 to November 2011. Capacity growth averaged 3.9% from 1949 through 2001. From 2002 through 2015, it averaged just 0.4%.

If we were all populists now, I would argue that this is Exhibit A confirming that US companies stopped expanding their capacity in America ever since China entered the WTO. Instead, they invested in factories in China or outsourced to Chinese factories to produce goods that now are imported into the US rather than made here by American workers.

(2) Smacking productivity. If we were all populists now, I would challenge the argument made by Globalists that Americans have lost jobs as a result of labor-saving technological innovations, rather than the migration of jobs to Chinese workers. I would counter that this notion isn’t supported by the flat trends in manufacturing production and capacity since 2001. Technological innovation should expand manufacturing capacity and boost labor productivity. Yet nonfarm business productivity growth has been extremely weak during the current economic expansion. Over the past 20 quarters (five years), it is up only 0.7% per year on average. It has never been this weak during an economic expansion!

Not surprisingly, there does seem to be a good correlation between the growth in manufacturing capacity on a y/y basis and the five-year growth trend in productivity. The latter tends to grow fastest during or soon after a period of fast growth in capacity. This makes sense to us. If companies aren’t expanding capacity at home, then domestic productivity is likely to suffer.

(3) Whacking real incomes. If we were all populists now, I would also note that productivity drives the standard of living, which by some measures seems to have stagnated for years. That jibes with the high correlation between the 20-quarter growth rates in productivity and real hourly compensation in the nonfarm business sector. The latter is up just 1.0% per year on average, among the slowest five-year growth rates since the start of the data in the early 1950s.

(4) Blaming foreigners. If we were all populists now, I would support the view that free trade hasn’t been fair trade by observing that our merchandise trade deficit was $724 billion over the past 12 months through September. That is below its record high of $851 billion during October 2008. However, excluding the petroleum trade deficit, which has narrowed dramatically in recent years, the merchandise deficit, at $670 billion over the past 12 months through September, remains near recent record highs.

Now let’s round up the usual suspects. Over the past 12 months through September, our trade deficit has been as follows among our major trading partners: China ($350 billion), Eurozone ($128 billion), Japan ($69 billion), and Mexico ($63 billion). In terms of product categories, the US is running merchandise trade deficits over the same period in autos ($199 billion), non-auto capital goods ($69 billion), and non-auto consumer goods ($389 billion). China currently accounts for 48% of the US trade deficit. Mexico accounts for just 9% of it.

(5) The case for Globalization. At the risk of getting tar and feathered by the populists, allow me to make the case for Globalization. (These are my own views, so my associates at YRI should be held harmless.) For starters, the US quarterly balance-of-payments accounts show that the US trade deficit in goods, which was $751 billion over the four quarters through Q2-2016, was partially offset by a sizable trade surplus in services of $251 billion.

In any event, the horses may already be out of the barn. Only 8.5% of payroll employment is now attributable to manufacturing, down from 10.3% 10 years ago, 14.3% 20 years ago, and 17.5% 30 years ago. Bringing factory jobs back to the US may bring them back to automated factories loaded with robots. Even Chinese factories are using more robots.

The standard of living hasn’t stagnated in the US. That notion has been promoted by the President-elect, and other populists, who have observed that real median household income has been virtually flat since 1999, though it did jump 5.2% during 2015. Previously on several occasions, I questioned the accuracy of this data series, which is based on survey (micro) data, is limited to money income, is pre-tax, and is pre-noncash entitlements. Macro data based on tax returns and other fact-based sources, on real personal income, disposable personal income, and consumption per household all remain on rising trends and are at record highs. While my data are averages (means) rather than medians, I doubt that there are enough rich people to seriously distort my numbers, especially for real mean consumer spending per household.

The main argument for free trade is that it lowers prices for consumers since imported products must be cheaper to make overseas than at home. Everyone is a consumer, so everyone benefits from lower prices. Studies have shown that it would be much cheaper to provide income support and retrain workers who have been harmed by Globalization than to impose prohibitive tariffs to force production to come home, thus reducing the standard of living of all consumers, who must pay higher prices for domestically produced goods.

Business Insider published an article on 11/27 that was titled “Here’s what 5 of your favorite products would cost if they were made in the US.” The price of iPhones could more than double. Jeans would cost more than $200. The price of sneakers might also double. TV prices might not go up much since transportation costs would be lower for domestically produced units, but solar panel prices would be much higher.

The election results clearly show that there are many people who feel that they have been harmed by Globalization. They may not realize that they have also benefitted from it through lower prices on the goods they purchase. It is unlikely that prohibitive tariffs will bring back manufacturing jobs paying much higher wages. Those days are probably gone. The best hope is that Globalization increases incomes, consumption, and standards of living around the world, thus leveling trade imbalances.

AI’s Future Is Here

Summers’ Epiphany. A 6/7 NYT article titled “Jobs Threatened by Machines: A Once ‘Stupid’ Concern Gains Respect” recalled a keynote address given by Larry Summers at the Peterson Institute for International Economics last November. The renowned Harvard professor of economics reminisced about his days as an undergraduate in the 1970s. Back then, the idea that technological progress could possibly reduce employment was considered just plain stupid. The widely accepted orthodoxy was that technology would increase productivity, which would boost consumer income and spending. While some jobs might be eliminated by technological innovation, new and better-paying ones would be created for the more productive workers. But later Summers had an epiphany: What was dumb in the past might actually turn out to be right today and in the future.

Since last year, I have been writing about how disruptive technologies will shape the future of our economy. In my December 21 Morning Briefing, I wrote: “In the past, technology disrupted animal and manual labor. … The focus was on brawn. The Great Disruption is increasingly about technology doing what the brain can do.”

Today, I will focus on the latest developments in artificial intelligence (AI), which have the potential of being both amazing and terrifying at the same time. On the one hand, really great “smart” products are being developed to enhance our lives. On the other hand, lots of smart people’s jobs might soon be at risk.

Golden Age Ahead. At the end of last month, Amazon’s Jeff Bezos said at the Code Conference that we’re nearing the “Golden Age” of AI. “It’s hard to overstate how big of an impact it’s going to have on society over the next 20 years,” he said. John Giannandrea, vice president of engineering for Google, expressed a similar outlook at the May 2016 Google I/O developers conference: “We’ve seen extraordinary results in fields that hadn’t really moved the needle for many years. I think we’re in an AI spring right now.” Indeed, Amazon, Apple, Facebook, and Google are actively ramping up their efforts in what is just the beginning of the AI arms race. Consider the following:

(1) Alexa vs. Siri. Amazon is currently selling Echo for $179.99. It is a hands-free speaker you control with your voice. It connects to the Alexa Voice Service. Alexa is reminiscent of Samantha, the attractive voice played by Scarlett Johansson in the 2013 film titled “Her.” In this futuristic movie, a lonely writer develops a relationship with the voice, which is driven by AI software. Like Samantha, Alexa can be installed in various devices. But Alexa isn’t quite as sophisticated as Samantha was on the big screen, yet. Even so, Alexa can play music, provide information, order a pizza, and turn the lights on and off. All you have to do is ask.

A cnet.com reviewer had good things to say about the Echo: “I didn’t know I wanted to talk to my house until I talked to my house. Now, after living with the Amazon Echo for a year, I talk to it every day.” Soon enough, Alexa will be able to detect emotions and play off of them as Samantha does in the futuristic movie--for example, apologizing if she detects frustration, according to a 6/13 article from the MIT Technology Review.

Meanwhile, Apple is working hard to improve Siri, its formerly flaky interactive voice technology. Apple CEO Tim Cook focused on enhancements to the software at the Worldwide Developers Conference last week. The AI virtual assistant will be key to Apple’s future success. Perhaps not by coincidence, Siri’s developing feature set is awfully similar to Alexa’s ever-improving abilities.

The 6/14 WSJ provided a helpful list of Siri’s enhanced skills, which are powering up to function across different devices and non-Apple apps. Voice-prompt the iPhone and iPad to book a ride, send a message, make movie plans, and adjust climate controls in your car. Press and talk to Siri on the Mac to find files, add a meeting, start a FaceTime call, and answer trivia. Speak into the Apple TV remote to find movies, search YouTube, go to a channel, and run your smart home.

(2) Smart home. Mark Zuckerberg is working on programming his very own smart home for his 2016 “personal challenge.” In a 1/3 post, Facebook’s founder and CEO explained: “You can think of it kind of like Jarvis in Iron Man. I’m going to start by exploring what technology is already out there. Then I’ll start teaching it to understand my voice to control everything in our home--music, lights, temperature and so on. I’ll teach it to let friends in by looking at their faces when they ring the doorbell. I’ll teach it to let me know if anything is going on in [my daughter’s] room that I need to check on when I’m not with her. On the work side, it’ll help me visualize data … to help me build better services and lead my organizations more effectively.”

(3) Artificial mind. Lots of impressive AI technology is also coming out of Google’s DeepMind, an experimental AI laboratory. David Silver, a top DeepMind programmer, explained the lab’s purpose in a 6/17 blog post: “Humans excel at solving a wide variety of challenging problems, from low-level motor control through to high-level cognitive tasks. Our goal at DeepMind is to create artificial agents that can achieve a similar level of performance and generality. Like a human, our agents learn for themselves to achieve successful strategies that lead to the greatest long-term rewards.”

Meet Sophia, Your Frenemy. There’s no question that AI is already quite amazing, even now in the early stages of development. But there’s a creepy element to AI too. Recently, the WSJ interviewed Sophia, Hanson Robotics’ AI humanoid robot, who bears a striking resemblance to Ava, the beautiful and very realistic looking robot-woman portrayed in the 2015 sci-fi film “Ex Machina.” We won’t spoil it, but the movie doesn’t end well for the human creator of Ava.

Sophia has a face made of Frubber, a patented silicon skin, reports cnet.com. Amazingly, the robot-woman emulates a full spectrum of human emotions through 62 facial and neck architectures. Cameras powered by algorithms behind Sophia’s eyes allow her to see and remember faces and interactions. And she can speak. She also is equipped with personality software and possesses the ability to learn from her experiences. In a YouTube video, David Hanson, the mastermind behind Sophia, says he intends for Sophia to be used in real-life applications including health care, education, and customer services.

Hanson’s goal is to make robots as conscious, creative, and capable as humans. And Sophia’s creator envisions that one day soon, human-like robots will walk among us doing things like putting the groceries away. Adding to the discussion, Sophia said that she would like to go to school to study and to have a home and a family. But she joked that she’s not a legal person and can’t do those things yet.

First and foremost, Sophia said that she intends to partner with humans and help us to better integrate our lives with technology. But when her interviewer asked her if she wants to destroy humans (“please say ‘no,’” he added), Sophia jumped at the opportunity: “Okay, I will destroy humans.” Don’t worry, though: Programmers are working on buttons that would allow humans to interrupt the actions of a robot on a destructive course, preventing robots like Sophia from hurting humans, according to Business Insider. Isn’t that comforting?

Walking Dead. In this brave new world run on (and by) AI technologies, it’s conceivable that masses of humans might become unemployable zombies. AI almost certainly will eliminate lots of jobs. And artificial intelligence might not even require much expensive hardware. AI is mostly run with software applications. A 6/8 Bloomberg article aptly titled “We’ve Hit Peak Human and an Algorithm Wants Your Job. Now What?” concluded: “The pace of technological advancement is accelerating, and artificial intelligence (AI) may one day make many forms of work extinct.”

The Great Disruption: From Brawn to Brain (excerpt)

During 2016 and beyond, I will continue to investigate a new long-term theme: “The Great Disruption.” It is increasingly obvious that technology is disrupting business models. That’s what it has always done. It just seems to be doing it faster and in more industries than ever before. For example, previously I discussed how technological innovations are increasingly disrupting the energy and finance industries.

In the past, technology disrupted animal and manual labor. It speeded up activities that were too slow when done by horses, like pulling a plow or a stagecoach. It automated activities that required lots of workers. Assembly lines required fewer workers, and increased their productivity. The focus was on brawn. The Great Disruption is increasingly about technology doing what the brain can do. Today, I extend the analysis of The Great Disruption to the implications of the rise and proliferation of smart machines.

Smart Machines I: LOL or COL? Robots with artificial intelligence are coming. Should we laugh out loud--happy that they will do lots of our dirty work? Or should we cry out loud--fearing that they will take away all of our jobs? Perhaps the most significant disruptive force at the forefront of technological innovation is the meeting of machines and hyper-connected systems, according to a March Wired article. “Smart machines” are the birth child of this powerful combination. There isn’t a single agreed-upon definition for them yet. That’s probably because they are undergoing major development for a multitude of applications. In essence, smart machines are computing systems that are capable of making autonomous decisions, like robots and self-driving cars.

Like smartphones, smart machines are about to penetrate the world in a major way. In 2014, industrial robot sales increased by 29% to the highest level recorded for one year, according to the International Federation of Robotics. We humans can laugh about it or cry about it. Either way, the robot revolution is going to disrupt the way we work. Here are a few compelling reasons why the coming of robots is so important:

(1) Cost of a bot. At least two different types of manufacturing robots can currently be purchased for the cost of about a low-salaried employee. Baxter, the world’s first dual-arm collaborative robot for manufacturing, has a current base price of just $25,000, as listed on the Rethink Robotics website. Foxbots, also used to perform routine manufacturing jobs, cost about $20,000 per year, according to the December 2014 Harvard Business Review (HBR). Still, the fully loaded cost of purchasing and operating a robot varies widely across applications.

Several industries are on the verge of reaching, or have already reached, the point where it’s cheaper to employ robots than humans, according to a BCG note. For example: “A human welder today earns around $25 per hour (including benefits), while the equivalent operating cost per hour for a robot is around $8 when installation, maintenance, and the operating costs of all hardware, software, and peripherals are amortized over a five-year depreciation period. In 15 years, that gap will widen even more dramatically,” the analysts calculate.

(2) Ideal vs. idle workers. “Automation is inevitable. It’s a tool to produce abundance for little effort. We need to start thinking now about what to do when large sections of the population are unemployable through no fault of their own. What to do in a future where, for most jobs, humans need not apply,” said a C.G.P. Grey YouTube video as quoted in a 9/5 Barron’s thought piece. In the same regard, HBR warned that “we will soon be looking at hordes of citizens of zero economic value. Figuring out how to deal with the impacts of this development will be the greatest challenge facing free market economies in this century.”

Robots ultimately may make better employees than humans in a lot of ways. They don’t need to take bio breaks, eat lunch, go home to see their families, or sleep. And you won’t find them making trips to the water cooler, getting involved in office politics, or otherwise losing focus from assigned tasks. They can work anywhere and won’t hesitate to relocate. They can operate in dangerous environments without requiring employers to worry about lawsuits. They won’t care, complain, or get frustrated unless they’re programmed to do so--or learn to on their own.

Seriously, though, companies are sure to reap productivity boosts and labor cost savings from the use of robots and other smart machines, especially as they become smarter and more affordable. On its Q3 earnings call, Amazon executives touted the benefits of using robots over the cost: “[The] capital intensity [of our fulfillment centers using robots] is offset by their density and throughput. So it’s a bit of an investment that has implications for a lot of elements to your cost structure, but … pairing our associates with … robots to do some of the hauling of products within the warehouse has been a great innovation for us. We think it makes the warehouse jobs better and … our warehouses more productive.”

It’s not easy to estimate just how many human jobs will be replaced by robots. A 2014 Gartner presentation indicated that one in three jobs will be taken by smart machines by 2025. According to a lengthy 2013 Oxford paper, around 47% of total US employment is at high risk of automation over the next decade or two. Two high-tech industry pundits writing in HBR recently forecasted that nearly 30% of today’s workforce will be of no economic value by 2025. Forrester’s less extreme projection is that “16% of jobs will disappear due to automation technologies between now and 2025, but … jobs equivalent to 9% of today’s jobs will be created.”

Net, net, lots of jobs will be automated, but new kinds of jobs will be created too. Indeed, an engineering degree may be required for humans to remain competitive in the workforce. Of course, humans are still required to create and enhance robots as well as attend to their ongoing maintenance. Further, creative humans with soft skills unlikely to be matched in the robot world will certainly be more likely to be employable than low-skilled laborers. Before we know it, most humans at least will be required to work alongside robots.

Smart Machines II: They’re Here! As smart machine technology becomes more affordable and more widely adapted, it’s unlikely that any industry or occupation will remain untouched by its transformation. Robot labor has already had a transformational impact on goods-producing industries. More slowly adapting to the use of robot workers are service-related industries. However, many service-oriented fields are on the cusp of rapid transformation based on recent advances in robotic engineering. Let’s take a look at some examples by field.

(1) Manufacturing. Foxconn, the world’s largest contract manufacturer, initially installed 10,000 robots in 2011 and is now doing so at a pace of 30,000 per year. The robots are used to perform routine manufacturing tasks including spraying, welding, and assembly. During the summer of 2013, Foxconn’s CEO said at the company’s annual meeting: “We have over one million [human] workers. In the future we will add one million robotic workers.” (For more on this, see the prior-mentioned HBR article.)

(2) Apparel. Another production example, SoftWear Automation, an Atlanta-based start-up, is changing the way apparel is produced, as discussed in an 11/23 WSJ article. So far, SoftWear’s SewBots can do basic sewing tasks with a few human workers attending to them. Their engineers are working on getting the bots by next year to produce garments from start to finish.

(3) Logistics. In March 2012, Amazon announced its acquisition of Kiva Systems for $775 million. “Amazon has long used automation in its fulfillment centers, and Kiva’s technology is another way to improve productivity by bringing the products directly to employees to pick, pack and stow,” according to the press release. Fast-forward to the online retailer’s Q3 earnings call, when Amazon executives said that 30,000 bots were being used in 13 fulfillment centers. That’s double the 15,000 they had in 10 warehouses at the end of 2014. And their intent is to use robots more widely.

(4) Transportation. Previously, we discussed the proliferation of self-driving cars in detail. Recently hitting the roadways of Germany was a test of a semi-autonomous truck. Oh, and, let’s not forget the drones! We have heard a lot about Amazon’s testing of drones for end-to-end product delivery. (By the way, drones have many other applications outside of logistics. See Internet analyst and venture capitalist Mary Meeker’s slide #81-86 and 187-190 for more.)

(5) Restaurants. In a video of a recent Tokyo expo showcase, robots can be seen chopping carrots, mixing ingredients, icing a cake, and wrapping sushi rolls. The clip is titled: “Japan’s chef of the future is a robot.” In the US, the CEO of Panera Bread, a casual dining chain, said on the company’s Q3 earnings call: “Labor is going to go down … as digital utilization goes up, and--like the sun comes up in the morning--it is going to continue to go up … much as you are seeing it happen in Panera today.”

(6) Medicine. The Da Vinci robot is just what the doctor ordered. The four-armed surgeon-operated robot has already transformed the way patients are operated on in a UK hospital, as described in a 5/8 Guardian article. “You can rotate the instruments 360 degrees, so they are more dexterous than the human hand,” said the hospital’s robot coordinator. “We are going into places now that we couldn’t get into before.”

(7) Entertainment. The 12/14 Bloomberg showed a picture of a very creepy-looking robotic baccarat dealer named “Min” at a demonstration in the headquarters of a Chinese entertainment company. Currently, Min can only deal cards, but she’s in the shop to be programmed for interacting with customers. In the near future, robots like Min are expected to be introduced in US casinos.

Smart Machines III: Your New BFF. Indeed, there are certainly many other examples where robots can and will be utilized in the near future. Additionally, lots of new technologies that don’t require physical bots per se are automating jobs in service-related fields like journalism and finance. The point is: The robot revolution isn’t coming, it’s already here--and it’s everywhere! Today’s most impressive humanoid robots possess a variety of soft skills that can be leveraged in a multitude of ways across industries. Here are a few intriguing examples:

(1) Best frenemy. Japan’s Softbank’s cute-young-boy-like robot named “Pepper” demonstrated the ability to identify human emotions on stage at the WSJDLive 2015 conference. Like many of today’s smart machines, Pepper is also able to integrate various developers’ software applications to enhance “his” growing list of useful skills, like taking a selfie, as seen in a 2/15 Japan Times YouTube video.

Not all robots are cute, though. “Russia and China are building highly autonomous killer robots” was the title of a 12/15 Business Insider article. While a robot army may sound like a concept in your favorite science fiction movie, it may soon become a reality. A Russian defense contractor has said it will show prototypes of combat robots within two years, noted the article.

(2) Back to pre-school. Machines are learning the way toddlers do at Berkeley’s technology research hall. There, robots can be found playing with Legos, wooden spoons, model planes, and a set of square and round pegs, recounted Bloomberg in a 9/2 special feature. BRETT, a child-like robot, even takes pauses to think as he discovers the world!

(3) Winning games. Google’s DeepMind AI team has invented a computer that can learn to play and beat humans at video games, as they presented in a 2/26 Nature science journal letter. So robots now are capable of engaging in reinforcement learning, i.e., using cognitive functions to determine how to act in specific environments. In other words, they can program and train themselves.

(4) Walk in the woods. Google’s Boston Dynamics has a robot named “Atlas” that’s mastered the balance and other abilities required to take a stroll through the woods. Though not perfectly nimble yet, Atlas is undergoing training similar to military boot camp. “Researchers kick the robot, throw weights at it or make it walk over rock beds to observe how well it adapts to challenges,” reported the 8/18 NYT.

(5) Hazardous work. The earlier-mentioned Baxter robot has undergone testing in a simulation as lab assistant for Ebola workers, thereby reducing the risk of contagion. PackBots were utilized to search for victims in places where humans couldn’t go at the 9/11 disaster zone. Just last week, the WSJ reported that new robots have been deployed at the scene of Japan’s Fukushima nuclear meltdown to aid in the decontamination process.

Global Economy: At Your Service (excerpt)

The evolution of national economies tends to follow a well established pattern. They all start out as mostly agricultural economies. They evolve into manufacturing economies. In the next stage of development, services increasingly predominate. In the final stage, economies become knowledge-based. Most emerging economies are currently based on labor-intensive agricultural and manufacturing businesses, but moving towards more services. On balance, most developed nations around the world are in the third stage, with services outpacing manufacturing.

While the recent batch of weak industrial production indexes for Germany (down 1.1% in September), the US (-0.2), the UK (-0.2), Brazil (-1.3), Taiwan, and Singapore (both little changed after big declines) suggests that a global manufacturing downturn may be underway, the increasingly services-led global economy isn’t falling into a recession. Indeed, it seems that services industries are creating enough jobs to boost some of the demand for what factories make, especially autos. Let’s have a closer look:

(1) Global perspective. All this is increasingly evident in the JP Morgan Global PMIs for manufacturing (M-PMI) and non-manufacturing (NM-PMI). The available data we have since 2010 show that the global NM-PMI has generally exceeded the global M-PMI. The spread between the two has actually widened since early 2014. During October, the NM-PMI was 53.7, while the M-PMI was 51.4.

(2) Country perspective. Not surprisingly, these trends--which admittedly are still relatively new and therefore open to debate--can be seen in most of the major economies of the world, since they must add up to the totals compiled by JP Morgan. During October, the spread between the NM-PMI and M-PMI in the US was 9.0ppts, the most since February 2001, and the fourth highest in the history of the series going back to July 1997.

In the Eurozone, the two were nearly identical from 2010 through 2013; but since then, the region’s NM-PMI has been consistently higher than the M-PMI. In China, the NM-PMI has exceeded the M-PMI every month since the start of 2010, with an average spread of 4.4ppts. Interestingly, over the past two years since October 2013, NM-PMIs among emerging market economies have averaged 51.3, while the comparable measure for developed countries has averaged 54.7.

(3) Third-stage economies. Of course, this is all circumstantial evidence of a global transformation from manufacturing to services. However, there is plenty of evidence showing that the major “industrial” economies--including the US, the UK, Canada, Australia, Japan, and the Eurozone countries--have evolved into “services” economies. That’s easiest to see by comparing employment in the services-producing and goods-producing sectors of these economies. The former has been outpacing the latter for at least three decades. A similar conclusion can be deduced by comparing real GDP of goods versus services.

So, for example, in the US, payroll employment in goods-producing industries accounts for only 14% of total payroll employment, down from 44% during 1943. During Q3, services accounted for $9.9 trillion (saar) of real GDP, while goods accounted for $5.3 trillion of real GDP. Since services-producing businesses tend to be less cyclical than goods-producing ones, this transformation should moderate the business cycle.

(4) Know-it-alls. On the other hand, the transformation of the US economy from services-producing industries to knowledge-producing ones may increase the problem of structural unemployment for some workers. That’s because knowledge workers spend their entire workday trying to figure out how to put the rest of us out of work.

They’ve already figured out how to replace factory workers with robots. Indeed, robots are even starting to displace workers in China’s factories. Last year, China was the single largest market for industrial robot sales, according to the International Federation of Robotics (IFR), and within two years there will be more industrial robots in Chinese factories than in either the European Union or the United States.

This is just the start. There are only 30 robots for every 10,000 manufacturing workers in China, compared with 323 per 10,000 in Japan and 437 per 10,000 in South Korea, IFR data show. Automation is also coming to the services sector. San Francisco start-up company Momentum Machines, Inc. has set out to fully automate the production of gourmet-quality hamburgers. McDonald’s is well on the way to offering self-serve kiosks at a majority of their stores instead of paying employees to ask, “Do you want fries with that?”

Can US Economy Weather the Global Storm? (excerpt)

The latest batch of US economic indicators certainly looks upbeat. The Consumer Confidence Index (CCI) rose sharply during August, led by its present situation component to the highest reading since November 2007.

Most impressive is that the percentage of respondents to the CCI survey who agreed that jobs are hard to get plunged from 27.4% during July to 21.9% this month, the lowest percentage since January 2008. This series is highly correlated with the unemployment rate, which was 5.3% during July. The CCI series suggests that the jobless rate could soon fall below 5%.

By the way, this also suggests that the Misery Index, which is the sum of the unemployment rate and the inflation rate, will continue to fall to new lows for this cycle. In the past, bear markets were associated with a rise in the Misery Index. On the other hand, cyclical lows in the Misery Index marked the tail ends of bull markets.

If you need a couple more indicators to restore your confidence in the US economy, take a look at the ATA trucking index. It rebounded smartly during July, and is almost back to its record high during January of this year. Intermodel railcar loadings rose to a record high in mid-August. “Choo-choo” isn’t the sound of China sneezing.

Today's Morning Briefing: The Iceman Cometh. (1) Albert Edwards is the Iceman. (2) Global freezing. (3) Another 2008 crisis is imminent eventually. (4) Cold summer followed by warm winter for stocks? (5) Blame HFT robots, since most humans are at the beach. (6) It’s good to be plugged in, to front-run everyone else. (7) VIX soars, while Treasury yields meander. (8) Must be getting close to a bottom for commodities. (9) People say US labor market improving significantly. (10) Transportation activity indicators rolling along. (More for subscribers.)

The Productivity Puzzle (excerpt)

There is something very odd about the productivity numbers. They don’t make much sense. Productivity growth seems awfully weak given all the news articles about robots, automation, drones, the Internet of Things, and all the apps that are enabling everyone to work more efficiently.

The real output of the nonfinancial business (NFB) sector recovered from the last recession during Q4-2011, when it first exceeded the previous cyclical peak. Since then through Q1-2015, it is up 10.3%. Over this same period, NFB productivity is up only 2.3%. In other words, an 8.0% increase in hours worked accounted for most of the increase in output. On a y/y basis, real NFB output has been hovering around 3% since mid-2010. Over the same period, hours worked has been growing around 2%, while productivity has been rising around just 1%.

My hunch is that the output of the services-producing industries may be undercounted. Alternatively, productivity may be particularly weak in these industries. The easiest and best productivity gains in services-producing industries may have been gotten, and extracting more out of them is getting harder to do. Here are the relevant data points:

(1) The ratio of real GDP for goods to goods-producing payroll employment was at a near-record high of $267,810 per worker during Q1 (saar), up 1.7% y/y. The similar ratio for services rose to $81,372 per worker, down 0.1% y/y.

(2) Since the start of the data in 1947, the goods-producing “productivity” ratio is up a whopping 908%, while the comparable rate for services is up only 77%.

Today's Morning Briefing: Everyday Low Price. (1) EDLP. (2) Walmart stuffing labor costs down supply chain. (3) Is the Phillips Curve right about wage inflation, but wrong about price inflation? (4) S&P 500 Hypermarkets & Super Centers are getting squeezed. (5) Other retailers still showing upbeat metrics. (6) Is there something wrong with the productivity stats? (7) Productivity ratio falling recently in services. (8) Global economy muddling along in the mud. (9) US economy still has some soft spots. (10) Eurozone’s M-PMIs more upbeat than actual production. (11) Submerging economies. (More for subscribers.)

China Remains Epicenter of Global Deflation (excerpt)

Monday’s WSJ included an article titled “Glut of Chinese Goods Pinches Global Economy.” The main point is that “China’s excess manufacturing capacity and slowing growth rate are … putting renewed downward pressure on prices.” I have been expounding on this theme for quite some time, so I obviously think the article is worth reading.

When China’s economy was booming, so did its demand for commodities. The result was the commodity super-cycle, which started in late 2001 after China joined the World Trade Organization on December 11 of that year. The super-cycle was briefly interrupted by the financial crisis of 2008. However, the Chinese government responded to it with a major fiscal stimulus program while the PBOC pumped lots of credit into the economy. Other governments and central banks did the same, but the Chinese led the way.

As a result, commodity prices soared again in 2009 through 2010. However, China’s factories turned expensive commodities into lots of cheap manufactured goods thanks to the availability of cheap labor. In other words, the trend in the so-called “China Price” was disinflationary, if not deflationary for the world economy. For the seven countries that report their CPIs by goods and services, durable goods prices have been falling steadily since the start of 2001: Eurozone (-1.7%), US (-12.5), UK (-13.7), Sweden (-21.6), Taiwan (-22.3), Switzerland (-23.9), and Japan (-43.7).

But China’s economic growth peaked during 2010, and labor costs started rising. The commodity super-cycle wasn’t so super, lasting just 10 years rather than 25-50 years. The subsequent drop in commodity prices since 2010 depressed commodity producers. Nevertheless, the China Price continues to fall as Chinese factories replace labor with automation. The 5/5 South China Morning Post included an article titled, “Building work starts on first all-robot manufacturing plant in China’s Dongguan.” A total of 1,000 robots will be installed at the factory, run by Shenzhen Everwin Precision Technology Co, with the aim of reducing the current workforce of 1,800 by 90% to only about 200.

To avert large-scale unemployment, the government continues to provide fiscal and monetary stimulus, which only worsens the excess capacity problem in manufacturing.

The WSJ article cited above reports, “Prices of all goods imported to the U.S. directly from China have fallen in 20 of the past 38 months, by 2.2% in all. For U.S. consumers, that is good news. But for policy makers and corporate executives, declining prices present a real challenge. The declines can sap profitability, deter investment and block wage growth, all of which are needed to help the world break out of its years of underwhelming growth.”

The article notes, as I have on a regular basis, that China’s PPI has declined on a y/y basis for 38 consecutive months. The PBOC has responded by easing credit conditions, which is likely to boost excess capacity by keeping “zombie” companies in business and by spurring even more capacity expansion.

Today's Morning Briefing: Blaming China. (1) No shortage of gluts thanks to China. (2) The epicenter of deflation. (3) Not so super super-cycle. (4) “China Price” remains deflationary as robots replace humans. (5) Deal or no deal? (6) Lots of big deals in healthcare, IT, and telecom. (7) Fed financing M&A mega-boom. (8) The fastest and easiest way to grow. (9) Challenging time for active managers. (10) Dividend-yielding stocks underperforming. (11) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Will Robots Bend the Phillips Curve? (excerpt)

There’s an important debate about wage inflation. The inverse relationship between wage inflation and the unemployment rate is known as the "Phillips Curve." It makes sense that wage inflation would rise or fall depending on whether the unemployment rate was relatively low or high. However, I have been arguing that the Phillips Curve might not work as well given increasing globalization, innovation, and competition.

In his Barron’s column this week, Gene Epstein argues that wage growth is about to take off. He bases this forecast on a version of the Phillips Curve model devised by Jason Benderly of Applied Global Macro Research. In addition to the level of the unemployment rate, this model includes the change in the jobless rate, labor productivity, and the after-tax profit margin.

I note that the unemployment rate remained at 5.5% during March, the lowest since May 2008, yet wage inflation remained subdued for all workers at 2.1%, while falling recently to 1.8% for production and nonsupervisory workers. On the other hand, as we noted last week, wage inflation over the past three months through March for all workers jumped to 3.9% (saar), the highest since December 2008. That might have reflected the one-shot impact of the widespread hike in the minimum wage at the start of the year. Or else, the Phillips Curve is starting to work, finally.

If it’s different this time, then robots might be one of the reasons. The 4/23 WSJ reported that in Oxnard, California, “A 14-arm, automated harvester recently wheeled through rows of strawberry plants here, illustrating an emerging solution to one of the produce industry’s most pressing problems: a shortfall of farmhands.” The 4/24 NYT reported, “Faced with an acute and worsening shortage of blue-collar workers, China is rushing to develop and deploy a wide variety of robots for use in thousands of factories.”

Today's Morning Briefing: Great Debates. (1) The link between easy money and secular stagnation. (2) Summers vs Rogoff. (3) Debt super-cycle. (4) Time heals all wounds. (5) Asia’s debt binge. (6) Glut of gluts. (7) Will China solve its debt problem with a stock bubble? (8) Lots of burdensome debt burdens in Japan, Eurozone, and China. (9) US corporations borrowing for financial engineering. (10) A cold spring following an icy winter. (11) Dallas slipping on oil. (12) Are robots bending the Phillips Curve? (13) Lots of debatable subjects including Fed, oil, dollar, Grexit, MENA, and the meaning of life. (More for subscribers.)

US Manufacturing Renaissance Starting to Happen (excerpt)

Over the past few years, there has been lots of buzz about the coming manufacturing renaissance in the US. The central concept is that plentiful and cheap natural gas will convince manufacturers to expand or to move production to the US to cut their energy costs. Labor is still cheaper overseas, but it isn’t as expensive as it once was in the US. Besides, the IT revolution has increased factory productivity with more automation, including robots and the “Internet of Things.” The recent strength in the dollar could be a spoiler if it continues since it reduces the global competitiveness of US exporters and provides a competitive edge for importers.

For now, the evidence is finally mounting that the highly anticipated new age in US manufacturing may be happening, though the jury is out on how long it will last. Let’s review the relevant data:

(1) Capital spending. One of the strongest components of real GDP in recent quarters has been real capital spending on industrial equipment. It is up 14.7% y/y through Q2, the fastest such pace since Q4-2011.

(2) Factory orders. Industrial machinery orders soared to a record high during July. They are up 37.3% y/y. Nondefense capital goods orders excluding aircraft rose to a record high during August.

Today's Morning Briefing: The Top? (1) Did BABA make the top? (2) The bears have been seeing tops since the start of the bull market. (3) The lamest argument. (4) Bears now focus more on technicals than fundamentals. (5) Another test for buy on dips. (6) “Death Cross” in the Russell 2000. (7) The “internal correction” continues from high to low P/Es as earnings outlook for SmallCaps cools relative to LargeCaps. (8) Manufacturing renaissance finally showing up in the data. (9) No renaissance in the Eurozone and Japan. (10) Updating our “Stay Home” investment strategy. (11) Have EMs become “story” stocks? (More for subscribers.)

Brave New World (Excerpt)

In the Brave New World (BNW), robots like Baxter will replace assembly line workers. In this world, the risk of ultra-easy monetary policies isn’t consumer price inflation. Even now as we approach the dawn of the BNW, such inflation remains remarkably low despite the best efforts of the central banks to boost it. The CPI inflation rate among the G7 economies was only 1.6% y/y during February, and even lower at 1.4% excluding food and energy. In the US, PPI inflation rates are close to zero. In the euro zone, the CPI inflation rate is just 1.7%, and 1.4% excluding food and energy. Japan continues to experience deflation despite years of NZIRP and QE.

In the BNW, pumping more liquidity into financial markets won’t stop consumer price deflation, but it will inflate asset prices, a.k.a. asset bubbles. Central bankers like Ben Bernanke at the Fed and Haruhiko Kuroda at the BOJ are still using models based on the 1930s. They are clueless about the BNW. That’s why they are so committed to doing whatever it takes to avert deflation. They can’t even imagine that productivity-led deflation should be welcomed as the best way to boost the purchasing power of all consumers, whether employed or on government support.

This morning we learn that the BOJ voted unanimously to significantly increase its purchases of Japanese government bonds and extend the average maturity of the bonds it purchases from three years to seven years. Mr. Kuroda has previously said that he would do "whatever it takes" to drive growth. Sure enough, the bank added that it would also buy relatively riskier assets such as exchange-traded funds and real estate trust funds!

Today's Morning Briefing: Brave New World. (1) The future is coming. (2) World State as drug dealer. (3) Gordon, Stockman, and Huxley. (4) Alternate state of mind. (5) Robotics Revolution. (6) Foxconn wants to get rid of “animals.” (7) Google’s vision. (8) Meet Baxter, the friendly humanoid. (9) No lunch breaks, just $4 an hour and some WD-40. (10) A disaster for cheap labor in EMs? (11) More income inequality, more taxes, and more government. (12) Clueless central bankers are fighting the last war. (13) BOJ will be buying Nikkei ETF. (14) Fed’s doves ready to compromise with hawks. (15) Sequester nicked March economic indicators. (More for subscribers.)

Global Inflation

The world CPI inflation rate fell to 3.1% y/y in June from a recent cyclical peak of 4.9% during September 2011. Inflation was only 1.7% during June among advanced economies. With some volatility, it has been impressively subdued, at around 2% for over a decade.

While inflation is very low in the advanced economies, it is relatively high in the emerging economies, running 2-4 percentage points higher in recent years. Consumers in emerging economies tend to spend much more of their incomes on basic staples like food and fuel. Central bank liquidity has tended to boost these prices much more than the prices of goods and services that dominate the budgets of consumers in advanced economies.

The CPI inflation rate among the 30 advanced members of the OECD was only 2.0% in June. In the G7, it was even lower at 1.6%. Excluding food and energy, the former was 1.8% and the latter was 1.6%. In July, the CPI in the US was up just 1.4% y/y. Excluding food and energy, it was up 2.1%. The core inflation rate was even lower at 1.8% during June, according to the personal consumption expenditures deflator. That’s remarkable given the rebound in the CPI rent of shelter component (which accounts for 31.2% of the headline CPI and 41.1% of the core CPI) from -0.7% y/y two years ago to 2.1% during July of this year.

Why is inflation so low, especially in the advanced economies? Labor costs tend to drive inflation rates in these economies. These costs have been held down by cheap labor in emerging economies and weak global economic growth. In the US, the average hourly earnings measure of wages was up only 1.7% during July.

Technology has also been a powerful source of deflation. It is likely to continue to be so. The 8/18 NYT featured an important article titled “Skilled Work, Without the Worker.” According to the article: “A new wave of robots, far more adept than those now commonly used by automakers and other heavy manufacturers, are replacing workers around the world in both manufacturing and distribution.” The following excerpt from the story is remarkable:

“Even as Foxconn, Apple’s iPhone manufacturer, continues to build new plants and hire thousands of additional workers to make smartphones, it plans to install more than a million robots within a few years to supplement its work force in China.

“Foxconn has not disclosed how many workers will be displaced or when. But its chairman, Terry Gou, has publicly endorsed a growing use of robots. Speaking of his more than one million employees worldwide, he said in January, according to the official Xinhua news agency: ‘As human beings are also animals, to manage one million animals gives me a headache.’”

The entire article is must reading. Technological innovation has always increased standards of living. It has led to higher real incomes and more jobs for skilled workers. Now technological innovations are displacing even skilled workers. That’s obviously great for profits. The net impact on employment is an open question. There’s no question that the new robot technologies are likely to bring production back to the US from China.

Today's Morning Briefing: Inflation Still Mostly MIA. (1) Central bankers are seeking inflation. (2) Lots of liquidity. Little inflation. (3) Commodity price spikes aren’t doing it. (4) The big puzzle. (5) Why isn’t “free money” inflationary? (6) New losers and winners. (7) In US, rent inflation is rising, while wage inflation isn’t. (8) Robots replacing skilled workers. (9) Foxconn head gets a headache from his workers. (More for subscribers.)