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2009 Inevitable Surprises

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Presentation delivered by Peter Schwartz, Chairman, Global Business Network, to IE Singapore's senior management on 23 July 2009.

Presentation delivered by Peter Schwartz, Chairman, Global Business Network, to IE Singapore's senior management on 23 July 2009.

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  • “SOFT” INTRODUCTIONThe global financial systems appears to have stabilized after having been very close to the brinkThere is a new normal with a structurally higher premium for risk in developed marketsFor developing countries, the new normal is less clear since risk premiums were also high a decade ago on the tail end of the currency crisis and the market is less liquid as a whole
  • Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to ‘roll over’ their liabilities (e.g., issue new debt to meet commitments on maturing debt).…For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principal or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes.…It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and -containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.”
  • The rate of economic decline is slowingThis is in line with recent IMF statements:““The recovery is coming,” said Olivier Blanchard, IMF chief economist. But he cautioned “it is likely to be a weak recovery” and said policy-makers needed to guard against ongoing economic and financial risks”“The IMF now forecasts global growth of 2.5 per cent next year, up from 1.9 per cent in April, led by strong growth in China and India, a rebound in Japan and positive but sub-trend growth in the US. It upgraded its forecasts for Europe too, but still expects the eurozone to contract 0.3 per cent next year, with Germany declining 0.6 per cent.The Fund inched down its forecast for global growth this year to minus 1.4 per cent.”
  • POSSIBLE QUESTIONS FOR VOICE OVER:Definition of Stimulus – as used by HSBC – is additional programs dedicated to economic recovery. Some Mena government are spending more to stimulate economy but that’s not labeled Stimulus
  • A significant number of assets on balance sheets are still overvaluedThis is a key uncertainty and possible source of future shocksIf Goldman Sachs is right the banking system may be able to absorb these further writedowns with recapitalization and future retained earningsIf Roubini is right, further losses may exceed the capacity to cope -> further shock Latest statement by IMF in FT (07/07/09) when adjusting guidance for 2010 upwards:“The IMF did not update its estimates for losses facing banks. However, José Viñals, IMF financial counsellor, said it would be reasonable to guess that the figures would end up being lowered. He said markdowns on securities “would be likely to be somewhat better now” following the improvements in financial markets”
  • Liquidity is picking up but conventional wisdom is that prices have at least another 10% to dropWill the prices overshoot the trend line is another critical uncertaintyIf they do’ we’re in for another shock
  • US job losses are outpacing previous recessions.Two weeks ago was a disappointing jobs report, anotherJob losses have been relatively contained in Europe to date due to active policies like furlows, labor time reduction, etc but if the recession last longer the blow may still come (reference to economist article 06/20/09)
  • It is more likely than not that we’ll see more shocks, given all the uncertainties with regards to (a) unrecognized losses on the bank’s balance sheets, (b) bottom of the housing market (c) level and new role of speculation (d) other, yet undiscovered, financial interdependencies and liabilities (e) possibility of other shocks (food, pandemic, geo-political,…)The jury is out with regards to globalization, although there have been few outright protectionist measures there has definitely been (a) a protectionist slant to stimulus measures (b) a precipitous drop in trade and (c) the process of coordinated new regulation appears to be stalling
  • Note: A PUP (potentially unwanted program) includes spyware, adware, and dialers.Source: 2008 McAfee Virtual Criminology Report
  • Note: The range of numbers represents variations of the environment, harvesting method, and methods of water delivery
  • Chart on left:U.S. long-term securities include U.S. Treasury and Government agency bonds and notes, and U.S. corporate bonds and stocks as reportedto the Treasury International Capital (TIC) reporting system. Europe does not include the United Kingdom.Asia includes: China Mainland; Hong Kong; India; Indonesia; Japan; South Korea; Malaysia; Philippines; Singapore; Taiwan; Thailand
  • Transcript

    • 1. Peter Schwartz
      July 23, 2009
    • 2. SHORT TERM SHOCKS
    • 3. The global financial system went thru a shock and appears to have stabilized
      The TED Spread Through the Financial Crisis
      Oct. 6-11, 2008
      • Fed will buy debt to fund operations of banks and ordinary businesses
      • 4. Fed and European Central banks coordinate emergency rate cut
      • 5. Dow Jones has worst week in its 112 year history
      Oct. 13, 2008
      • US Financial institutions accept $250bn direct equity investment from TARP
      • 6. European governments put hundreds of billions of dollars into banks
      Aug. 17, 2007Fed cuts the rate it lends to banks the so-called discount rate to 5.75%
      Oct.3, 2008The US House of Representatives approves the $700bn economic rescue package
      Feb. 7, 2007HSBC says it set aside $10.6bn for bad loans, including subprime
      Dec,12, 2008The White House says it will consider tapping TARP funds to aid the automakers.
      Oct. 24, 2007Merrill Lynch announces $7.9bn in subprime write downs for the third quarter, eclipsing Citi’s $6.5bn
      Sep. 15-17, 2008
      • Lehman Bros. goes bankrupt
      • 7. AIG is rescued
      • 8. money market stress leads to further liquidity interventions by the Fed
      July 31, 2007Two Bear Stearns hedge funds file for bankruptcy
      Dec,17, 2008Fed cuts rate to virtually zero
      Elevated risk premium, what is the new normal?
      80 bps
      Mar. 16, 2008JPMorgan offers to buy Bear for $2 a share; discount rate cut to 3.25%
      Mar. 11, 2008Fed agrees to lend troubled banks as much as $200bn
      Note: The TED spread is calculated as the difference between the 3-month T-bill interest rate and 3-month USD LIBOR
      Source: British Banking Association, Federal Reserve, Businessweek, washingtonpost.com, Monitor analysis
    • 9. What appeared as a mini-crisis in U.S. subprime housing…
      Percentage of U.S. Delinquent Mortgages by Mortgage Type, 1998-2007
    • 10. World Stock Market Capitalization, US$ Tr
      Source: World Federation of Exchanges
      Grew into a worldwide systemic crisis
    • 11. What happened? Explosive growth in financial, facilitated by an expansive shadow banking system…
      Total hedge fund assets, in US$ trillions
      August 2007
      2003-2007
      Forward
      Minsky Journey
      Quality of loans made
      Open interest in crude oil futures & futures-equivalent options, in millions
      • Hedge units: Cash flows of the borrower are sufficient to repay principal and interest on the loan
      • 12. Speculative units: Cash flows can meet interest payments only
      • 13. Ponzi units: Cash flows are insufficient to cover the repayment of either principal or interest
      • 14. Credit grows rapidly, with shadow banking system in the lead
      • 15. Asset prices – houses, buyout valuations , etc. – inflate
      Source: World Federation of Exchanges, Hennessee Group, Commodity Futures Trading Commission, Pimco
    • 16. Now the great deleveraging is underway
      Collateralized loan obligation issuance, in $USbn
      August 2007
      2008 - ?
      Reverse
      Minsky Journey
      August 2007
      2008 - ?
      Reverse
      Minsky Journey
      Reflation
      Asset backed securitized loan issuance
      • Inflated asset prices become clearer and values decline
      • 17. Credit growth reverses (flow) and deleveraging begins with fire sales of existing assets (stock).
      • 18. Monetary authorities try to reflate the economy by stepping into credit provision and low interest rates
      Source: Pimco, J.P. Morgan
    • 19. The decline appears to be easing
      Source: bea.gov
    • 20. Boosted by unprecedented levels of economic stimulus
      • Size of stimulus packages
      • 21. Percentage of GDP
      1,124
      Saudi Arabia
      China
      1,008
      Malaysia
      Mexico
      United States
      China
      New Zealand
      • US$ Bn
      Hungary
      Phillipines
      634
      Argentina
      US
      Australia
      Germany
      Other
      EU
      Thailand
      Chile
      Japan
      Canada
      Germany
      Japan
      Italy
      United Kingdom
      South Africa
      Indonesia
      Asia
      Europe
      Americas
      5% of annual world GDP will be injected over the next few years as economic stimulus
      Note: What constitutes additional stimulus vs regular budget spending is defined differently by various studies
      Source: HSBC global research, International Institute of labor studies
    • 22. a
      … and robustness in developing economies
      …but from a relatively small base
      Developing nations still growing in 2009
      Contribution to Global GDP growth, PPP Basis (3year moving averages)
      4
      • US$ Bn
      2
      0
      1970
      2000
      2010
      1990
      1980
      Rest of the world
      China
      United States
      Other advanced economies
      US
      India
      China
      Japan
      EU
      Gross Fixed Capital Formation
      Private Consumption (2008 GDP component)
      Source: imf.org, CEIC, SCB Global Research
    • 23. Commodity prices are up, in part in anticipation of future growth
      World Natural Resource Prices, 2007-2009
      Food Price Index (2000-2002 = 100)
      Oil Price, $ per barrel
      FAO Food Price Index
      Oil Price
      Jul-09
      Source: U.N. Food and Agriculture Organization, U.S. Energy Information Agency
    • 24. More shocks quite plausible
      Housing Market
      Economic Conditions
      Financial System
      • More interdependencies emerge and unravel
      • 25. Unexpected further debt write downs
      • 26. $ deflation or hyperinflaiton
      • 27. National debt levels proof to be unsustainable
      • 28. Prolonged high unemployment in US / EU
      • 29. Effectiveness of auto bail-outs
      • 30. Sudden commodity price hike squashing recovery
      • 31. Effectiveness of stimulus
      • 32. Further drop in U.S. housing prices below trendline
      • 33. Rapid drop of other asset classes; Commercial real estate, credit cards
      External Factors
    • 34. At best half of estimated financial sector losses have been realized, how that does happen will be crucial
      Total loss forecasts
      Realized losses to date
      3.5x
      2x
      Source: Goldman Sachs, IMF, RGE Monitor, Bloomberg Finance L.P, T2 Partners
    • 35. US home prices have further to fall
      US Months Supply
      12
      11
      10
      US Existing Home Sales
      US Home prices need to fall another 13% to reach trend line
      9
      7.5
      8
      Million
      7
      220
      7
      6.5
      6
      200
      5
      6
      Million
      4
      180
      5.5
      3
      1999
      2004
      2009
      5.0
      Real Home Price Index (1990=100)
      160
      445
      140
      4.0
      1999
      2004
      2009
      120
      100
      1950
      1970
      1990
      2009
      Source: www.econ.yale.edu/~shiller/data
    • 36. US job losses continue to outpace recent recessions, can Europe continue to cushion the blow?
      US Unemployment rate compared to other recessions
      US vs EU-27 Unemployment
      1974-6
      EU-27
      9.5% in June
      1980
      US
      1981-3
      1990
      2001
      2007-present
      Unemployment Rate (index 1=peak employment before recession)
      Unemployment Rate (index Nov 2007)
      7/1/08
      1/1/09
      1/1/08
      7/1/09
      Quarter after employment peak
      Source: Bureau of Labor Statistics, bea.gov
    • 37. Globalization has suffered a set-back
      Monthly World Trade Volumes
      “Trade volumes have fallen much faster than in the Great Depression and it’s unclear exactly why”
      World Trade
      World Trade Volumes (2000 average = 100)
      2009
      2008
      2007
      2006
      2005
      2004
      2003
      2002
      2001
      2000
      Source: Netherlands Bureau for Economic Policy Analysis, Findata
    • 38. Significant financial reregulation policy initiatives
      EU Ideas
      US Ideas
      Systemic risk
      • Fed with an oversight board monitors large interconnected financial institutions
      • 39. Creation of a systemic risk council to provide oversight
      Bank capital
      • Wondering whether to run stress tests similar to the US
      • 40. Higher capital requirement and tighter international regulation
      Consumer protection
      • Creation of consumer financial protection agency
      • 41. Stricter rules of custodians of retail investment funds
      OTC derivatives
      • Considering letting “standardized” OTC contracts go through clearing house
      • 42. Expected changes broadly in line with Washington
      Hedge funds
      • Require managers to register with the SEC
      • 43. Considering imposing strict new disclosure rules
      Source: Financial Times
    • 44. Not necessarily with the appropriate level of international alignment
    • 45. New financial scenarios for the next 2-3 years
      No more shocks
      Scenario 1:
      Looking after No. 1
      Scenario 2:
      The Long Boom 2.0
      De-globalization
      Facilitation of globalization
      Scenario 3:
      Depressionary
      Scenario 4:
      All in this Together
      More Shocks
    • 46. Other possible short term shocks
      Pandemic
      Food shock
      Terrorist attack
      Cyber attack
      Geo-political tension
      Explosive clean energy growth
    • 47. Food shocksThe world population is growing rapidly
      …UN median projection is 9.2 billion people by 2050, from 6.7 billion now
      Global Population, 1750 - 2050
      Estimates and projections (billions)
      8
      6
      4
      2
      Developed nations
      Developing nations
      0
      2000
      2050
      1900
      1800
      1750
      We are one of the few generations to witness a doubling of population in our lifetime
      Source: UN population division
    • 48. Food shocks…our diets change as we get richer
      Meat consumption and per capita income, 2002
      Calories consumed per day, 1965 – 2030
      kg
      120
      2500
      Highest growth
      80
      2000
      40
      1500
      1000
      40k
      30k
      20k
      10k
      0
      2002 US$ Purchase power parity
      Americans eat 2.5 times as much meat as the average Chinese person
      500
      0
      1965
      1998
      2030
      Source: FAO 2008, FAOSTAT 2009, World bank 2006
    • 49. Food shocksNumber of food crises rising globally
    • 50. Cyber attackInternet security is increasingly threatened
      124countries use the Internet for web espionage operations
      Source: 2007 McAfee Criminality Report
    • 51.
    • 52. Climate change will remain a dominant issue
    • 53. ,
      Recent observations suggest greater climate sensitivity than IPCC projections
      Arctic sea ice (annual minimum)
      Global sea level change (cm)
      1979
      Recent observations
      Observed long term trend
      2007
      IPCC envelope
      1970
      1980
      2000
      2009
      1990
      • Sea level rise of 3.1 mm/yr, could rise 1m (+-0.5m) by 2100, double IPCC projections
      • 54. Arctic sea ice coverage decreased an unprecedented 2 million km2 in 2007
      Source:, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions; NSTC, Global Climate Change, Impacts in the US
    • 55. The Climate Will Be increasingly Variable and Extreme
    • 56. Water will be the key factor
      Water problems could affect up to 250 million people in Africa by 2020 and more than one billion people in Asia by 2050.
      Tibetan Plateau Water System
      Source: Center for environmental systems research, University of Kassel
    • 57. Water for food: how much does it take?
      1,650 – 2,200 liters of water
      1 kilo of soybeans
      50,000 – 100,000 liters of water
      1 kilo of grain-fed beef
      170,000 liters of water
      1 kilo of clean wool
      Source: Commonwealth Scientific and Industrial Research Organization
    • 58. %
      Developing world has surpassed the developed world in CO2 emissions…and is growing rapidly
      CO2 Emissions from hydrocarbon use and cement production by country/region
      (1990, 2000, 2007, 2008)
      1990
      2000
      +5%
      2007
      2008
      CAGR
      -3%
      Annual
      Emission
      (Pg1)
      -2%
      +2%
      +7%
      0%
      +6%
      China
      India
      Russia
      Brazil
      Japan
      EU15
      USA
      1 1012 kg
      Source: Netherlands Environmental Agency
    • 59. BAU means carbon lock-in
    • 60. a
      Copenhagen– “Mitigation Agreement” on long term objective but misalignment on short term path
      International alignment to limit warming to 2°C at recent G8 meeting in Italy requires emissions to peak before 2020
      Difficulty in securing sufficient developed nation reduction commitments and in agreeing on the nature of short term responsibilities for developing nations
      Communicated 2020 Annex 1 reduction targets (compared to 1990 emissions)
      Long term global emissions trajectories for energy-related CO2 emissions
      Long-Term Goal
      450ppm-eq
      Baseline
      400ppm-eq
      550ppm-eq
      -4%
      -5%
      -8%
      Gt CO2/yr
      Probability that warming is contained to 2°C:
      -20%
      -25%
      IPCC target range
      -30%
      ~15%
      ~50%
      -40%
      -40%
      Considerations
      Demands
      ~75%
      Negative Emissions
      India
      China
      Aus. (Joint)
      Aus.
      Japan
      USA
      EU (Joint)
      EU
      Source: Monitor Analysis; solveclimate.com; EPA.gov, LA times, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions
    • 61. ,
      Cap and trade compromise winds its way through US Congress
      • US Domestic CO2 emissions – American Clean Energy and Security (ACES) Act
      Emissions with ACES Act
      2005 baseline
      1990 baseline
      4% below 1990
      (17% below 2005)
      Gigatons CO2
      Allowed leeway for reducing domestic emission by making maximum use of international offsets, reserves and other “safety valves”
      83% below 2005
      2011
      2050
      2015
      2040
      2025
      2030
      2035
      2020
      2045
      Note: The Act will have to approved in the Senate as well and be signed by the president before becoming law
      Source: Breakthrough.org
    • 62. China recognizes the climate change threat and has taken action in the last 2 to 3 years
      • Renewable electricity standard
      • 63. Goal is to generate 10 percent of its electricity renewably by 2010, and 15 percent by 2020
      • 64. Emission cuts
      • 65. Planning to reduce GDP energy intensity by 20 percent below 2005 levels by 2010, the effort has fallen behind schedule
      • 66. Investments in energy technology
      • 67. Invested $12 billion in renewable energy in 2007, second only to Germany
      • 68. In addition to the already approved $221bn cleantech stimulus, rumored to unveil additional spending ($440bn - $660bn) dedicated entirely to new energy development over the next decade
      • 69. Energy-efficiency initiatives
      • 70. Accounted for 2/3rd of world demand – 40 million units - for solar-water heaters in
      • 71. Transportation
      • 72. Plans to spend more than $1 trillion to expand its railway network by 50% by 2020
      • 73. Fuel economy standard of 36.7 miles per gallon and is considering raising it to 42.2 mpg by 2015
      Source: Center for American progress, reuters
    • 74.
    • 75. The next scientific revolution
      More Scientific Anomalies
      New Tools & Computing Power
      More Funding
      More Scientists
      Science Degrees per Capita
      Note: Natural Science and Engineering Degrees per 100 24 Year Olds
    • 76. 100
      10
      1
      0.1
      0.01
      The great leap in biology…new human biology
      Cost per Base of Sequencing and Synthesis
      U.S. Life Expectancy
      Years, at Death
      Cost per Base Synthesized (USD)
      1990
      1995
      2000
      2005
      2010
      1985
      Year
      Cost per Base Sequenced
      Cost of Short Aligo Synthesis
      Cost of Gene Synthesis
      Source: Robert Carlson
      Source: UN Data World Population Prospects 2006, medium variant
    • 77. The great leap in biology… synthetic biology and regenerative medicine
      Regenerative Medicine
      Synthetic Biology
      Human Enhancement
    • 78. Interesting Problems: Intellectual Challenges
      Dark Energy
      Complexity
      Meaning of DNA
      The Brain, etc.
      Human psychology and behavior
    • 79. NRC Report on Grand Challenges
    • 80. The frontiers of information technology
      • Very hard problems inaccessible to conventional computer
      • 81. Factoring machine image and signal processing
      • 82. Drug design—”very large molecules”
      • 83. Medical tools
      • 84. All optical computing
      • 85. Extreme bandwidth communication
      • 86. Souped-up laptops, PDAs
      • 87. Totally new computer paradigms
      APPLICATIONS
      • New architecture for computer storage/logic combined “O” latency
      MRAM
      • Megamode fibers—1010 increase in bandwidth
      • 88. Molecular structure~100 Qubits—condensed matter physics
      • 89. Quantum strategy-coordinator games —”2bit Qubit” (1-3 Qubits)
      • 90. Repeater long distance (3 Qubits)
      • 91. QKD—superposition
      • 92. Write nanoscale lithographic lines
      • 93. Sense single molecules
      • 94. All Optical transistor
      TECHNOLOGY
      • New forms of semiconductor/magnetic storage
      Nanophotonics
      • Low loss propagation of light on silicon chip—new dielectric waveguides
      • 95. Plasmonics—Optical frequencies with X-ray wavelengths - match wavelength to device size on silicon
      • 96. Scaling magnetic bits to dimensions less than 30 nanometers
      • 97. Use magnetic domain walls for very high density magnetic storage
      • 98. Utilizing novel properties of spin momentum transfer to generate microwave sources of electromagnetic radiation 10’s to 100’s of GHz
      • 99. Coherence and entanglement purification
      • 100. High fidelity Qubits—99.99% visibility
      • 101. Robust Qubits
      SCIENCE
      TIME
    • 102. Geo-engineeringBroad range of ideas have been created so far
      HOT
      TOPIC!
      HOT
      TOPIC!
      Ocean Seeding
      Sunlight Control
      CO2 Level Control
      Synthetic Trees
      Sulfur Injection
      Artificial Cloud
      Radiation Angle Varier
      Seawater Alkalization
      Venetian Space Blinds
      Recombinant Forest
      Antarctica Wrapping
      Non-Methanation Fodder
      Source: United Nations Environment Program, Wired Vision, Scientific American, Bioenergy News
    • 103. Geo-engineeringSunlight control
      Sulfur Injection
      Venetian Space Blinds
      HOT
      TOPIC!
      Cost: USD 5 trillion
      Cost: USD 2~3 billion per year
      • Injects SO21 particles into stratosphere to scatter sunlight, preventing from reaching the surface
      • 104. Reenact volcano eruption of Mt. Pinatubo
      • 105. Unknowns:
      • 106. Is ongoing injection of particles feasible?
      • 107. What are impacts beside scattering sunlight?
      • 108. Places trillions disk fliers in solar orbit, avoiding tampering with the earth’s atmosphere
      • 109. Unknowns:
      • 110. As fixed-satellite, on which part of orbit do we place disks?
      • 111. How can we collect disks if low or no efficacy vs. additional space debris?
      1 Sulfur Dioxide
      Source: United Nations Environment Program, Wired Vision, Scientific American, Time Magazine, Monitor Analysis
    • 112. Geo-engineeringCO2 level control
      Alkalized Seawater
      Ocean Seeding
      HOT
      TOPIC!
      Cost: USD 20 million
      • Fertilize ocean with Fe1 or CO (NO2)22 will generate artificial red tide to consume CO2
      • 113. CO2 will be trapped inside dead planktons
      • 114. Unknowns:
      • 115. Risk of acidizing ocean due to huge amount of CO2 consumption?
      • 116. Best location - coast line filled with red wave?
      • 117. Split seawater into NaOH3 (leave in ocean) / HCl4 (store on land)will result seawater becoming more alkaline causing more CO2 dissolution into water
      • 118. Unknowns:
      • 119. Effects on marine life or current?
      1 Iron, 2 Urea, 3 Sodium Hydroxide, 4 Hydrochloric Acid
      Source: United Nations Environment Program, Wired Vision, Scientific American, Living on Earth
    • 120.
    • 121. %
      The rise of Asia is the greatest force at work in the world today…China
      • Composition of China’s Workforce, %
      Owners of private enterprises
      Administrative/office/
      Business/service
      Technicians/Specialists
      Manufacturing workers
      Agricultural workers
      Un/underemployed
      Source: “Report on a study of contemporary China’s social state,” January 2002
    • 125. The rise of Asia is the greatest force at work in the world today… India
      • Indian Population by Income Bracket, Rupee 000’s, 2000 prices
      >1000
      500-1000
      200-500
      90-200
      <90
      Note: Annual Household Income Bracket, Rupees, 000s, 2000 pricesSource: McKinsey Global Institute
    • 126. The impact of the next two billion middle class consumers… on energy and environment
      • Forecast Annual Global Energy Consumption
      • 127. Average Annual Growth (%) in CO2 Emissions 2005-2030
      • 128. High economic growth
      • 129. Reference
      Low
      economic growth
      Quadrillion Btu
      Source: 2005-EIA International energy Annual 2005 (June-October 2007); 2030-EIA, World Energy Projections Plus (2008)
      Source: US EIA
    • 130. The role of crime and illicit activities
      Parasitical autonomous zones. Illicit drug, organ, waste, and wildlife trade
      Taliban
      Movement for the Emancipation of the Nigerian Delta
      Hezbollah
      Sinaloa & Gulf Cartels
      Fuerzas Armadas Revolucionarios de Colombia (FARC)
      Ogaden Guerillas
      Primeiro Comando da Capital (PCC)
      Source: Transparency International, Corruption Perceptions Index 2007
    • 131. More and more products are becoming free
      Free MP3 Downloads
      Music Industry Revenues
      Free Online Classified Ads Sites
      Newspaper Ads Revenues
      vs.
      vs.
      42
      20
      18
      18
      35
      49%
      221
      212
      40%
      181
      32%
      30%
      128
      22%
      37
      17
      2008
      2007
      2006
      2005
      2004
      2003
      2008
      2007
      2006
      2005
      2004
      Global recorded-music sales, US$ bn
      US newspaper advertising revenue, US$ bn
      Global mp3 player shipments, millions
      Users of online classified ads sites in US (% of internet users)
      Source: International Federation of the Phonographic Industry, iSuppli Corp, US Newspaper Association of America , Pew Internet & American Life Project Survey
    • 132. Falling marginal costs of business
      Cross-subsidizing
      Free Mail Storage
      FREE
      FREE
      FREE
      +
      +
      +
      Expensive
      Expensive
      Expensive
      Free Directory Assistance
      1895
      2009
      Falling marginal cost of doing business
      Free Air Travel?
      Free DVR /CDs?
      Source: Anderson, Chris – “Free! Why $0.00 is the future of business? “
    • 133.
    • 134. Great geopolitical uncertainty
      Rising BRICs
      Shocks (finance, food, cyber security)
      New actors (NGOs, terrorists, criminals)
      Possible climate deal
      Extreme integration
      Protectionism
      Business as usual
      Vs.
      450 ppm
    • 135. The privatization of foreign policy
      RichardBranson
      PierreOmidyar
      GeorgeSoros
      Sergey
      Brin
      Larry
      Page
      BillGates
    • 136. What about international institutions, non-state actors, NGOs, and others?
    • 137. -103,842
      A rebalancing of power
      Chinese Holdings of U.S. Assets (November 2008)
      In US$ billions
      Net Purchases of Long-Term U.S. Securities –
      In US$ hundred millions
      $1.7 TRILLION
      Short-term bank deposits
      Treasury bonds (incl. short term)
      Agency bonds (incl. short term)
      Corporate bonds
      Equities
      Source: CFR working paper, ‘China’s $1.7 trillion bet.’ Numbers come from CFR estimates, U.S. Treasury International Capital, and People’s Bank of China
      Source: U.S. Treasury
    • 138. Nigeria vs. Singapore: a resource vs. knowledge economy
      GDP per Capita (1990$), 1950-2005
      Singapore
      Republic of Singaporefounded
      Nigeria
      Source: "The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007 (Geary Khamis methodology)
    • 139. Knowledge Driven Growth
      Global/Regional Plague
      IncreasingScience & Technology
      Collapse of Socialism/market
      reform
      Carrying
      Capacity
      Religious
      Extremism
      NetworkedIT
      Social
      Stresses
      Financial
      Crisis
      MoreIntegration
      Better Governance
      Knowledge driven growth predetermined
      Prosperity & Shared Interests
    • 140. Critical Uncertainty 1 - Era of ShocksComplex, closely coupled systems may be shock prone
      Specialization and interconnection to maximize efficiency and utilization
      • Example; Financial derivatives grew 9.5x to over 12x world GDP in 1998-’08
      Shock
      • Example; the collapse of Lehman Bros
      Potential
      Back to stability and resilience
      Actors disappear, new ones emerge
      • Example; deleveraging
      Connectedness
      Resilience
      Source: Homer-Dixon, Our panarchic future; Bank for international settlements;
    • 141. 2
      Critical Uncertainty 2 - Form of International RelationsEbb and flow
      US signs bilateral nuclear deal
      North-Korea withdraws from NNPT
      Interests & Alliances
      West Germany enters NATO
      US does not ratify Kyoto protocol
      Berlin Wall torn down
      Warsaw Pact
      WW 2
      WW 1
      US intends to never join ICC
      Doha rounds break down
      NATO
      1900
      2000
      ‘20
      ‘40
      ‘60
      ‘80
      Laws & Institutions
      European Economic Community, precursor to EU
      WTO emerges from GATT
      International Criminal Court
      EU Expands to 27 member countries
      Foundation of the United Nations, World Bank
      Kyoto protocol
      Geneva Convention
      Nuclear non-proliferation treaty
      IMF, IRBD & GATT founded at Bretton Woods
    • 142. Critical Uncertainty 3 - Structure of national powerIs democracy inevitable as countries modernize?
      New modernization1 theory suggest that economic and technological development bring a coherent set of social, cultural, and political changes that are particularly conducive to democratization
      Industrialization
      Shift from traditional to secular-rational
      Difficult to avoid democratization, repressing calls for openness becomes increasingly costly
      Economic growth
      Growth of the Middle Class
      Sense of security, focus shifts to
      self-expression
      Postindustrial, knowledge society promotes independent thinking, appreciation of free choice
      Note: Modernization is not synonymous to Westernization
      Source: Ronald Inglehart , Christian Welzel, How Development Leads to Democracy, What We Know About Modernization
    • 143. Critical Uncertainty 3 - Structure of national power…or is the modern non-democratic state possible
      What if non-democratic states are able to offer a climate that is;
      and thus gain legitimacy and satisfy needs for self-expression?
      World values survey respondences1 to statement “Hard work brings success”
      United States
      Sweden
      China
      Russian Federation
      9
      8
      7
      6
      5
      4
      3
      2
      In the long run, hard work usually brings a better life
      Hard word does not generally bring success, it’s more a matter of luck and connections
      1China [2007], Russian Federation [2006], Sweden [2006], United States [2006]
      Source: Worldvaluessurvey.org
    • 147. ,
      Critical Uncertainty 4 – Role of the U.S. in the world
      US recovers
      US in Decline
      US balance on the current account ($Bn)
      Real GDP growth forecasts (%)
      200
      0
      -200
      -400
      -600
      -800
      1980
      2014
      1980
      2010
      America’s perception
      China’s perception
      Source: imf, bea.gov
    • 156. Possible scenariosThree main possibilities
      Modern Non-Democratic States
      • World of alliances
      • 157. Modern non-democratic states
      • 158. U.S. in decline
      New Game
      U.S. in Decline
      Both / And
      Interests and Alliances
      Laws
      and
      Institutions
      • World of laws and institutions
      • 159. Modernization and democracy go hand-in-hand
      • 160. U.S. recovers
      Continuous Evolution
      U.S. Recovers
      Modern Democracies
      Note:
      Source:
    • 161. Possible scenariosWith the additional possibility of shocks
      Modern Non-Democratic States
      New Game
      No
      Shocks
      Shocks
      U.S. in Decline
      Both/And
      Interests and Alliances
      Laws
      and
      Institutions
      No
      Shocks
      Shocks
      Continuous Evolution
      U.S. Recovers
      Shocks
      No Shocks
      Modern Democracies
      Note:
      Source:
    • 162. Continuous Evolution
      • US recovers
      • 163. China rises and moves toward democracy
      • 164. New institutions arise such as GEPA, Asian Economic Community
      • 165. Robust growth
      • 166. Few shocks -> slow evolution
      • 167. Many shocks ->rise to the challenges
    • New Game
      China
      • US in decline
      • 168. China as a modern non-democracy
      • 169. Regional alliance of China and India
      • 170. Near anarchy globally
      • 171. Booms & busts
      • 172. Few systemic shocks -> China centric World
      • 173. Many Shocks -> high potential for conflict
    • Both/And
      • US recovers and authoritarian China rises
      • 174. New international laws but no new institutions
      • 175. Strong growth with intense competition
      • 176. Little global collaboration
      • 177. Few Shocks -> constant rivalry
      • 178. Many Shocks -> great potential for conflict
    • Peter Schwartz
      Peter_Schwartz@gbn.com
      Logo Here
    • 179. BACK UP
    • 180. *
      Government is expanding
      “At this particular moment, only government can break the vicious cycle that is crippling our economy.”
      - President Barack Obama
      Total amount allocated for economic rescue
      $10.8 TRILLION
      Total federal spending, in FY200 US$ bn
      Source: Outlays from FY 2009 Historical Tables, Budget of the United States Government, Table 8.1
    • 181. Exacerbated by the economy is a highly interconnected system
      Housing Market
      Economic Conditions
      Financial System
    • 182. U.S. Housing Market: Reset Schedule will Test Prices Further
      Monthly Mortgage Rate Resets (First reset in Billions of USD)
      Source: IMF Financial Stability Report, April 2008, Credit Suisse
    • 183. Tight surplus production in OPEC led to high oil prices
      Source: John Cook, Director, EIA Petroleum Division, “Next Stop for Oil Prices: $100 or $150?”, June 11, 2008
    • 184. Threats to globalization
      • Protectionism
      • 185. Further pressure on the auto industry or other national champions could increase internal protectionist pressures
      • 186. The DOHA rounds could stall/fail again despite recent G8 pledge in Italy to reach an agreement
      • 187. Countries could impose tariffs on imports from regions with perceived laxer carbon regulation, as is currently written into the US House of Representatives ACES Act
      • 188. Further decline of trade volumes
      • 189. World trade has dropped more precipitously than GDP, over 20% from its peak. Further declines could reduce the importance of trade in national economies
      • 190. Re-calibration of global supply chains
      • 191. Supply chains could become more local as a result of protectionist barriers and/or higher transportation cost due to higher energy/carbon prices
      • 192. International coordination financial industry regulation falters
      • 193. Ambitions plans have been announced to reshape financial regulation, there is a risk for these measures not to be well internationally coordinated
      • 194. Renewed volatility in energy and other commodity prices
    • Food prices and food emergencies are on the rise
      As global food prices have risen 83%
      over the last three years…
      …Over60countries faced food emergencies
      FAO food price index
      Causes of food emergencies, 1981 - 2007
      FAO food price index
      2008
      2007
      2006
      2005
      2002-2004=100
      Food prices are likely to increase in the next decade
      Source: FAO; Chatham House
    • 195. New coal plant emissions equal all historic coal CO2
      27% of remaining budget for 450 ppm
      1751-2000 Total Coal
      New Coal Plants Lifetime Emissions
      – China, India, and U.S.
      Source: ORNL, CDIAC; IEA, WEO 2004
    • 196. Technologies of Today: Pacala & Socolow
      Pacala and Socolow demonstrated in their seminal work that currently available technologies could help dramatically reduce GHG emissions
      Efficient vehicles
      Reduced use of vehicles
      Efficient buildings
      Efficient baseload coal plants
      Gas baseload power for coal baseload power
      Capture CO2 at baseload power plant
      Capture CO2 at H2 plant
      Capture CO2 at coal-to-synfuels plant / Geological storage
      Nuclear power for coal power
      Wind power for coal power
      PV power for coal power
      Wind H2 in fuel-cell car for gasoline in hybrid car
      Biomass fuel for fossil fuel
      Reduced deforestation, plus reforestation, afforestation, and new plantations.
      Conservation tillage
      While some technologies are far from the commercialization phase, most of them are already available for scaling up and deployment
      Source: “Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies,” Pacala & Socolow, Science, 205, 968 (2004); Wikipedia
    • 197. 9
      To achieve low carbon economic growthCleantech will have to live up to its promise
      Cleantech VC investment by Technology
      Global investment in Clean Energy ($USbn)
      25%
      29%
      73%
      54%
      59%
      5%
      155
      Solar
      148
      Third Party Investment
      93
      Transportation
      Biofuels
      S/RP, corp RD&D, gov R&D
      60
      35
      27
      22
      Wind
      Smart Grid
      Water
      Agriculture
      2008
      2007
      2004
      2003
      2002
      2006
      2005
      Q209
      Q109
      Q408
      Q308
      Q208
      Q108
      Q407
      .. but growth rate slowed from 59% to 5% impacted by the macro economical climate
      Smart money moving to transportation and demand side technologies
      Source: cleanedge.com; cleantech venture network; UNEP, Global Trends in Sustainable Energy Investment 2009
    • 198. Green stimulus as government initiated growth measure
      Green Stimulus by Region
      US green stimulus
      Green Stimulus Regional Spending ($US Billions)
      Green Stimulus Breakdown(TARP & American Recovery Plan) USD112bn
      UK
      Low Carbon
      Rail
      5%
      Australia
      9%
      Energy Efficiency
      Grid
      32%
      Canada
      11%
      France
      14%
      Water Waste
      29%
      Japan
      Renewable
      Germany
      China green stimulus
      EU
      Stimulus Package Breakdown (RMB4 Trillion)
      S. Korea
      Port
      Environment
      US
      Grid
      Airport
      China
      25%
      2%
      14%
      Highway
      22%
      Total additional spending of $430bn, 2.5x the total 2008 sector investment
      20%
      Rail
      Housing
      Source: HSBC
    • 199. Sovereign Wealth Funds
      SOVEREIGN WEALTH FUNDS, IN US$ BILLIONS
      SWF DEALS BY TARGET REGION – 2008
      $58 billion
      $26 billion
      100%
      Rest of
      World
      $590
      BRIC
      8%
      North
      America
      80%
      40%
      $79
      G7
      Middle East &
      Africa
      43%
      $1,400
      Middle East
      60%
      $700
      Asia Pacific
      Asia Pacific
      Asia Pacific
      40%
      41%
      17%
      $360
      Other Europe
      TOTAL
      $3.2
      TRILLION
      20%
      Europe
      31%
      Europe
      19%
      $110
      Rest of World
      0%
      2Q08
      1Q08
      Source: European Institute, Sovereign Wealth Funds Survey 2008, Oliver Wyman, Monitor Group
    • 200. 2
      The Future of SWFs
      SWF asset allocation: 2007 and 2012 (forecasted)
      38%
      32%
      27%
      25%
      20%
      2007
      2012
      16%
      15%
      12%
      5%
      5%
      4%
      1%
      Fixed Income
      Cash
      Other Alternatives
      Real Estate
      Private Equity
      Equity
      Source: European Institute, SWF Institute, OECD, Oliver Wyman, Bloomberg
    • 201. Growing complexity and evolution to fill new economic niches
      Source: The Origin of Wealth, Eric D. Beinhocker, 2007
    • 202. What will it take for Latin America and Africa to get on the wave?
      Corruption Perception Index, 2007
    • 203. The new physics/chemistry
      Physics of the Very Small
      Dark Energy
      Precision Chemistry
    • 204. Tools
      Recent past
      Hubble Telescope
      Atomic Force Microscope
      MRI machines
    • 205. Tools
      New Space Telescopes
      Large Hadron Collider and its successors
      Imaging live cells?
      Quantum Computers
      New ways of asking questions
      Metagenomics
      SETI at home
      Petabytes and beyond
      Manipulating very fast things
      Many new forms of sensors
    • 206. Biology
      Fundamental Shift from Empirical to Rational Science
      Neurobiology
      Genetics
      Stem cells
      Synthetic biology
      Systemic science of disease
      Mathematical biology
      It’s all Physics + Water !
    • 207. WHY SCENARIOS
    • 208. The Role of Mental Maps
    • 209. Emergent Strategy
      EnvironmentForces
      Intended strategy
      Emergent strategy
    • 210. IBM projections
    • 211. Spirit of surprise
    • 212.
    • 213. Scenario planning is rooted in the concept of Multiple Possibilities
    • 214. Test of a Good Scenario
      Not right or wrong Leads to better decisions
    • 215. DecisionMaking
      Scenarios
      ExistingStrategies
      KnowledgeCreation
      EmergentStrategies
      The Strategic Conversation and Strategic Options
      Strategic conversation creates these flows and keeps these relationships healthy as an art, not a science
    • 216. How Scenario Thinking is Used
      A tool for strategic alignment and communication across the organization
      A means of improving the “strategic conversation”
      A means of refining and testing assumptions for quantitative modeling decision making
      A “windtunnel” for existing strategy
      A means of developing and ranking strategic options
    • 217. Scenario Thinking to overcome decision Traps
      Over confidence
      Thinking inside out
      Not seeing the whole story
      Framing the problem wrong
      Not asking the right questions
    • 218.
      • Key Factors &
      Environmental Forces
      • ScenarioFrameworks
      • 219. CriticalUncertainties
      Steps to Developing Scenarios
      • Focal Question
      • 220. Indicators and Signposts
      • 221. Implicationsand Options
      • 222. Scenario Stories
    • What are Indicators and Signposts?
      … events or developments that can be measured and monitored, and which are thought to be indicative of a particular path, dynamic, or scenario outcome evolving
      Signposts can take the form of either current observablesor plausiblefuture indicators … the best scenario approaches and indicator systems examine and employ both.
    • 223. Core
      Robust
      Satellite
      Satellite
      Satellite
      Four approaches to placing Betsacross the Scenarios
      Bet the Farm
      Scenario A
      Scenario B
      Scenario D
      Scenario C