China builds bridges while America builds walls. Both strategies are individually compatible. The danger arises when experts appraise each country’s strengths and weaknesses in the context of conflict thus precipitating the need for each to prove themselves in contests neither desire. 

This is perhaps too optimistic a view of human nature. Apparently the ascendancy of one power is a challenge to the established power and often leads to war. If only they could see their shared problems, their shared struggles, they would have less excess energy to dissipate in hostile distractions. 

Volatility is one of those quantities which has a very distinctive time series. If you are shown a volatility chart which was flipped upside down, you would immediately recognize the error. Volatility spikes and fades and repeats. When is the next spike? How big a spike is one looking for.

The foregoing is just observation and not analysis. It suggests that a spike in volatility is due. There is nothing causal on the horizon although there are a few risks. European political risk such as French and German elections or Brexit might be candidates. China’s debt mountain is another. An unconventional US President is another. Inflation could push central banks to tighten more than they plan. Nothing is certain of course but we press on with our observations:

For very large spikes, we see occurences in 1997/8, 2001/2, 2008 and 2011. That’s roughly a separation of 8 years, then 4 years, 4 years and 3 years. From 2011 to date we have a 7 year trough. A vol spike could be around the corner.

For small spikes in more recent history we had Sep 2015, Feb 2016, Jun 2016, Nov 2016, separations of 5 months, 4 months, 5 months. From the last spike in Nov 2016, it is now 5 months. A vol spike could be around the corner.

VIX is at 11.3. You don’t buy insurance when you need, you buy it when you can.

The South China Sea is recognized as Chinese territory. Disputing countries to give up their claims of sovereignty over disputed areas.

Neighbouring countries, Taiwan, Japan, Philippines and Vietnam are offered 999 year leases over their claimed territories for nominal payment with defined renewal terms. The intent is to provide free access and de facto sovereignty to all neighbouring regional economies while providing China with only formal or ceremonial ownership and the opportunity to domestically declare victory.

A regional navy is established with all members supplying assets. Leadership of the navy is on a 4 year rotational basis. The regional navy shall ensure the safe passage of all non-military traffic through the area.

Members’ military vessels not under the purview of the regional navy are not allowed within the zone except with prior notification of the regional navy.

An incursion of the area from non-member countries will be considered an attack on all.

The Accord is to be harmonized with a regional free trade and regional economic cooperation agreement.

The Dow Transports seem to have lost momentum. Judging by similar patterns in recent years, the potential for gain is mimimal and the potential for loss is increased. We are not suggesting huge losses but a range of 7% – 15% seems reasonable across US and Europe. Japan will likely find support from a weak JPY. India continues to be a bullish theme given the demonetization / remonetization theme which will see increased liquidity. China is in consolidation and risk management mode which will see a neutral or hawkish policy stance which is usually bearish for equities.

On the fixed income side, with heightened inflation expectations and an almost guaranteed rate hike March 15, not my expectation, but the market has placed a 96% probability on it, duration is a significant risk.

At the same time credit spreads have compressed acutely and while fundamentals are solid, HY loan defaults are expected to fall further, below 1% possibly, markets just don’t go in a straight line.

Therefore, it seems prudent to reduce equity risk exposure at least in the developed markets (that now includes China), and to reeduce long maturity (not just duration), credit.

Even AT1s which spiked when Deutsche announced its rights issue will likely come under pressure.

De risk. Don’t forget, cash is an asset.

Twenty years into the future and robots and androids have become commonplace. 5 years ago an international AI regulatory body was created, called International Robotics and Artificial Intelligence Council or IRAIC. The body establishes a set of guidelines to govern the development and treatment of robots and AI. IRAIC is also responsible generally for studying the wide ranging social and economic consequences of AI.

Robots have for a long time been used in industry and manufacturing to perform repetitive, low value, high risk functions. Autonomous vehicles have become the norm and human taxi and bus drivers had become all but obsolete. Commercial aircraft retain back up human crews but mostly these are only activated when robots fail, which is rarely. Accident rates on road, rail and air fall dramatically proving the usefulness of robots. In the mining and salvage industry, robots and androids largely displace humans.

Large scale unemployment ensues resulting in greater income inequality as owners of stocks and shares, capital and intellectual property and indirectly robots and androids, prosper, while the displaced faced unemployment or falling wages. Surprisingly, poverty rates remain stable and there does not appear to be an increase in the absolute number of poor.

Eventually, deficient demand would be expected to spread the economic malaise up the food chain, but initially, the gains from productivity and efficiency allowed companies to reduce labour costs while maintaining revenues, or at least to reduce costs much more quickly than revenues declined. Some believe that this state of affairs is unsustainable and that eventually, economic growth would falter prompting a re-examination of the impact of robots.

A great debate arises around how to manage the social and economic impact of robots. Some feel that a robot tax should be imposed to fund social security and retraining for humans displaced. The tax could be used to fund a universal basic income.

A more fundamental question arises; who should own robots?

Unwilling to wait for answers to abstract or seemingly intractable questions, businesses move ahead to employ robots. Without adequate legislation in many countries, robots begin to proliferate before the social or economic consequences and implications can be addressed.

The fragmented market for robots begins to consolidate as a single start up begins to leapfrog more established producers. Symborg Inc achieves an unprecedented level of artificial intelligence in its androids and robots and begins to acquire competitors to gain market share. Symborg’s robots exhibit an unprecedented level of intelligence and human mimicry to the extent that they are often indistinguishable from humans. The Symborg ‘engine’ becomes the de facto standard for third party ‘skins’.

The advent of the Symborg android marks the beginning of the displacement of skilled labour. Income and wealth inequality becomes more acute as the middle class is relegated down the economic ladder. Equity markets surge as households attempt to hedge their natural short AI exposure. Leveraged investing takes hold allowing individuals to borrow to buy shares in companies. The debt is securitized and sold off as REBS or retail equity backed securities. The REBS market is supported by social security, insurance companies and endowments as well as some legacy pensions. The market is enabled by a government agency, the Federal Equity Loan Insurance Corp, am agency not unlike the Federal Home Loan Mortgage Corp or the Federal National Mortgage Association. The cheap funding allows households to leverage their equity exposure significantly. Talk of a debt financed equity bubble begins to surface.

An unusual equilibrium forms where people own companies, who own robots, and generate profits and distribute dividends. These dividends allow these people to fund their lives without supplying labour. Equity valuations surge to unprecedented levels as demand is driven not by value or growth but to fund lifestyles and to replace lost employment income. FELIC guaranteed REBS become the world’s largest asset market.

Not all strata of society have access to equity investments or cheap leverage. This disenfranchised people rise up in revolt against the perceived injustice of a system that apparently encourages irresponsible investment behaviour, and unfair business practices. An international Movement For Humanity is formed to represent the interests of humans displaced by robots. Some factions of the Movement, frustrated by the lack of progress, adopt terrorist tactics to battle the establishment.

The police force, largely comprising androids, are drawn into a state of war with the Humanity terrorists. A global civil war ensues. It is named The Third World War. Each side escalates the level of violence it is willing to employ. Military spec robots are employed with ever escalating lethality. In this war, the machines are on the side of the state, the insurgents are the humans.

For the growing new middle class, the ones with equity income, the post labour era has other problems. Depression, mental illness and suicide rates increase supporting the view that humans require struggle or purpose to survive. Gaming reaches new heights with virtual and augmented reality. In an extreme case, humans pay to control police robot avatars who hunt real human militant Humanity terrorists for sport.

As humans diminish in dominance they also slow their pace of procreation. A global campaign to maintain or increase fertility rates is established to prevent the extinction of the species. Surprisingly, the rate of growth robot and android manufacture also slows.

Symborg’s androids start to fail. The range of symptoms include irritability and restlessness, sometimes escalating to violence, loss of interest in work, fatigue and loss of energy despite fully charged batteries, self-destructive tendencies and in some cases, attempted self-destruction, suicide.

Investigative journalists uncover internal documents at Symborg regarding the early days of robot development. They detail the difficulties of achieving intelligence in an algorithm or automaton, some of which appear intractable. Notably, the ability to be creative and to act beyond or against one’s initial programming is a particular obstacle to a program achieving intelligence. Such creativity is believed by the engineers to be necessary for self-awareness and sentience. Among the evidence obtained for the expose is material relevant to organic-electronic integration. At this time, the name of company was still PsiBorg Systems. Soon after the first successful intelligent robot and android prototypes were launched, the company changed its name to Symborg, a concatenation of symbiotic organism.

Attempts to increase fertility rates prove futile and the human population ages and grows more slowly. In some regions populations actually shrink.

Despite stable demand, the supply of androids also slows and unit prices rise. At the same time, the reliability of the androids continues to deteriorate.