2009 Inevitable Surprises
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2009 Inevitable Surprises

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Presentation delivered by Peter Schwartz to IE Singapore's senior management on 23 July 2009

Presentation delivered by Peter Schwartz 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

2009 Inevitable Surprises 2009 Inevitable Surprises Presentation Transcript

  • Peter Schwartz
    July 23, 2009
  • SHORT TERM SHOCKS
  • 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
    • Fed and European Central banks coordinate emergency rate cut
    • Dow Jones has worst week in its 112 year history
    Oct. 13, 2008
    • US Financial institutions accept $250bn direct equity investment from TARP
    • 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
    • AIG is rescued
    • 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 $200bn
    Note: The TED spread is calculated as the difference between the 3-month T-bill interest rate and 3-month USD LIBOR
    Source: British Banking Association, Federal Reserve, Businessweek, washingtonpost.com, Monitor analysis
  • What appeared as a mini-crisis in U.S. subprime housing…
    Percentage of U.S. Delinquent Mortgages by Mortgage Type, 1998-2007
  • World Stock Market Capitalization, US$ Tr
    Source: World Federation of Exchanges
    Grew into a worldwide systemic crisis
  • 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
    • Speculative units: Cash flows can meet interest payments only
    • Ponzi units: Cash flows are insufficient to cover the repayment of either principal or interest
    • Credit grows rapidly, with shadow banking system in the lead
    • Asset prices – houses, buyout valuations , etc. – inflate
    Source: World Federation of Exchanges, Hennessee Group, Commodity Futures Trading Commission, Pimco
  • Now the great deleveraging is underway
    Collateralized loan obligation issuance, in $USbn
    August 2007
    2008 - ?
    Reverse
    Minsky Journey
    August 2007
    2008 - ?
    Reverse
    Minsky Journey
    Reflation
    Asset backed securitized loan issuance
    • Inflated asset prices become clearer and values decline
    • Credit growth reverses (flow) and deleveraging begins with fire sales of existing assets (stock).
    • Monetary authorities try to reflate the economy by stepping into credit provision and low interest rates
    Source: Pimco, J.P. Morgan
  • The decline appears to be easing
    Source: bea.gov
  • Boosted by unprecedented levels of economic stimulus
    • Size of stimulus packages
    • Percentage of GDP
    1,124
    Saudi Arabia
    China
    1,008
    Malaysia
    Mexico
    United States
    China
    New Zealand
    • US$ 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
  • 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
  • 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
  • More shocks quite plausible
    Housing Market
    Economic Conditions
    Financial System
    • More interdependencies emerge and unravel
    • Unexpected further debt write downs
    • $ deflation or hyperinflaiton
    • National debt levels proof to be unsustainable
    • Prolonged high unemployment in US / EU
    • Effectiveness of auto bail-outs
    • Sudden commodity price hike squashing recovery
    • Effectiveness of stimulus
    • Further drop in U.S. housing prices below trendline
    • Rapid drop of other asset classes; Commercial real estate, credit cards
    External Factors
  • 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
  • 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
  • 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
  • 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
  • Significant financial reregulation policy initiatives
    EU Ideas
    US Ideas
    Systemic risk
    • Fed with an oversight board monitors large interconnected financial institutions
    • Creation of a systemic risk council to provide oversight
    Bank capital
    • Wondering whether to run stress tests similar to the US
    • Higher capital requirement and tighter international regulation
    Consumer protection
    • Creation of consumer financial protection agency
    • Stricter rules of custodians of retail investment funds
    OTC derivatives
    • Considering letting “standardized” OTC contracts go through clearing house
    • Expected changes broadly in line with Washington
    Hedge funds
    • Require managers to register with the SEC
    • Considering imposing strict new disclosure rules
    Source: Financial Times
  • Not necessarily with the appropriate level of international alignment
  • 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
  • Other possible short term shocks
    Pandemic
    Food shock
    Terrorist attack
    Cyber attack
    Geo-political tension
    Explosive clean energy growth
  • 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
  • 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
  • Food shocksNumber of food crises rising globally
  • Cyber attackInternet security is increasingly threatened
    124countries use the Internet for web espionage operations
    Source: 2007 McAfee Criminality Report
  • Climate change will remain a dominant issue
  • ,
    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
    • 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
  • The Climate Will Be increasingly Variable and Extreme
  • 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
  • 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
  • %
    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
  • BAU means carbon lock-in
  • 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
  • ,
    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
  • China recognizes the climate change threat and has taken action in the last 2 to 3 years
    • Renewable electricity standard
    • Goal is to generate 10 percent of its electricity renewably by 2010, and 15 percent by 2020
    • Emission cuts
    • Planning to reduce GDP energy intensity by 20 percent below 2005 levels by 2010, the effort has fallen behind schedule
    • Investments in energy technology
    • Invested $12 billion in renewable energy in 2007, second only to Germany
    • 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
    • Energy-efficiency initiatives
    • Accounted for 2/3rd of world demand – 40 million units - for solar-water heaters in
    • Transportation
    • Plans to spend more than $1 trillion to expand its railway network by 50% by 2020
    • 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
  • 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
  • 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
  • The great leap in biology… synthetic biology and regenerative medicine
    Regenerative Medicine
    Synthetic Biology
    Human Enhancement
  • Interesting Problems: Intellectual Challenges
    Dark Energy
    Complexity
    Meaning of DNA
    The Brain, etc.
    Human psychology and behavior
  • NRC Report on Grand Challenges
  • The frontiers of information technology
    • Very hard problems inaccessible to conventional computer
    • Factoring machine image and signal processing
    • Drug design—”very large molecules”
    • Medical tools
    • All optical computing
    • Extreme bandwidth communication
    • Souped-up laptops, PDAs
    • Totally new computer paradigms
    APPLICATIONS
    • New architecture for computer storage/logic combined “O” latency
    MRAM
    • Megamode fibers—1010 increase in bandwidth
    • Molecular structure~100 Qubits—condensed matter physics
    • Quantum strategy-coordinator games —”2bit Qubit” (1-3 Qubits)
    • Repeater long distance (3 Qubits)
    • QKD—superposition
    • Write nanoscale lithographic lines
    • Sense single molecules
    • All Optical transistor
    TECHNOLOGY
    • New forms of semiconductor/magnetic storage
    Nanophotonics
    • Low loss propagation of light on silicon chip—new dielectric waveguides
    • Plasmonics—Optical frequencies with X-ray wavelengths - match wavelength to device size on silicon
    • Scaling magnetic bits to dimensions less than 30 nanometers
    • Use magnetic domain walls for very high density magnetic storage
    • Utilizing novel properties of spin momentum transfer to generate microwave sources of electromagnetic radiation 10’s to 100’s of GHz
    • Coherence and entanglement purification
    • High fidelity Qubits—99.99% visibility
    • Robust Qubits
    SCIENCE
    TIME
  • 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
  • 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
    • Reenact volcano eruption of Mt. Pinatubo
    • Unknowns:
    • Is ongoing injection of particles feasible?
    • What are impacts beside scattering sunlight?
    • Places trillions disk fliers in solar orbit, avoiding tampering with the earth’s atmosphere
    • Unknowns:
    • As fixed-satellite, on which part of orbit do we place disks?
    • 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
  • 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
    • CO2 will be trapped inside dead planktons
    • Unknowns:
    • Risk of acidizing ocean due to huge amount of CO2 consumption?
    • Best location - coast line filled with red wave?
    • Split seawater into NaOH3 (leave in ocean) / HCl4 (store on land)will result seawater becoming more alkaline causing more CO2 dissolution into water
    • Unknowns:
    • 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
  • %
    • 1952
    • 1958
    • 1988
    • 1999
    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
  • 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
  • The impact of the next two billion middle class consumers… on energy and environment
    • Forecast Annual Global Energy Consumption
    • Average Annual Growth (%) in CO2 Emissions 2005-2030
    • High economic growth
    • 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
  • 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
  • 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
  • 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 $0.00 is the future of business? “
  • Great geopolitical uncertainty
    Rising BRICs
    Shocks (finance, food, cyber security)
    New actors (NGOs, terrorists, criminals)
    Possible climate deal
    Extreme integration
    Protectionism
    Business as usual
    Vs.
    450 ppm
  • The privatization of foreign policy
    RichardBranson
    PierreOmidyar
    GeorgeSoros
    Sergey
    Brin
    Larry
    Page
    BillGates
  • What about international institutions, non-state actors, NGOs, and others?
  • -103,842
    A rebalancing of power
    Chinese Holdings of U.S. Assets (November 2008)
    In US$ 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 $1.7 trillion bet.’ Numbers come from CFR estimates, U.S. Treasury International Capital, and People’s Bank of China
    Source: U.S. Treasury
  • Nigeria vs. Singapore: a resource vs. knowledge economy
    GDP per Capita (1990$), 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)
  • 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
  • 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;
  • 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
  • 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
  • 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;
    • Open
    • Meritocratic
    • Competent and
    • Participatory
    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
  • ,
    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
    • Innovation
    • Flexibility
    • Entrepreneurship
    • Top universities
    • New leadership
    • Deficits
    • Education
    • Infrastructure
    • Military overstretch
    America’s perception
    China’s perception
    Source: imf, bea.gov
  • Possible scenariosThree main possibilities
    Modern Non-Democratic States
    • World of alliances
    • Modern non-democratic states
    • U.S. in decline
    New Game
    U.S. in Decline
    Both / And
    Interests and Alliances
    Laws
    and
    Institutions
    • World of laws and institutions
    • Modernization and democracy go hand-in-hand
    • U.S. recovers
    Continuous Evolution
    U.S. Recovers
    Modern Democracies
    Note:
    Source:
  • 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:
  • Continuous Evolution
    • US recovers
    • China rises and moves toward democracy
    • New institutions arise such as GEPA, Asian Economic Community
    • Robust growth
    • Few shocks -> slow evolution
    • Many shocks ->rise to the challenges
  • New Game
    China
    • US in decline
    • China as a modern non-democracy
    • Regional alliance of China and India
    • Near anarchy globally
    • Booms & busts
    • Few systemic shocks -> China centric World
    • Many Shocks -> high potential for conflict
  • Both/And
    • US recovers and authoritarian China rises
    • New international laws but no new institutions
    • Strong growth with intense competition
    • Little global collaboration
    • Few Shocks -> constant rivalry
    • Many Shocks -> great potential for conflict
  • Peter Schwartz
    Peter_Schwartz@gbn.com
    Logo Here
  • BACK UP
  • *
    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
  • Exacerbated by the economy is a highly interconnected system
    Housing Market
    Economic Conditions
    Financial System
  • 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
  • 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
  • Threats to globalization
    • Protectionism
    • Further pressure on the auto industry or other national champions could increase internal protectionist pressures
    • The DOHA rounds could stall/fail again despite recent G8 pledge in Italy to reach an agreement
    • 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
    • Further decline of trade volumes
    • World trade has dropped more precipitously than GDP, over 20% from its peak. Further declines could reduce the importance of trade in national economies
    • Re-calibration of global supply chains
    • Supply chains could become more local as a result of protectionist barriers and/or higher transportation cost due to higher energy/carbon prices
    • International coordination financial industry regulation falters
    • Ambitions plans have been announced to reshape financial regulation, there is a risk for these measures not to be well internationally coordinated
    • 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
  • 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
  • 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
  • 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
  • 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 $430bn, 2.5x the total 2008 sector investment
    20%
    Rail
    Housing
    Source: HSBC
  • Sovereign Wealth Funds
    SOVEREIGN WEALTH FUNDS, IN US$ 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
  • 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
  • Growing complexity and evolution to fill new economic niches
    Source: The Origin of Wealth, Eric D. Beinhocker, 2007
  • What will it take for Latin America and Africa to get on the wave?
    Corruption Perception Index, 2007
  • The new physics/chemistry
    Physics of the Very Small
    Dark Energy
    Precision Chemistry
  • Tools
    Recent past
    Hubble Telescope
    Atomic Force Microscope
    MRI machines
  • 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
  • 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 !
  • WHY SCENARIOS
  • The Role of Mental Maps
  • Emergent Strategy
    EnvironmentForces
    Intended strategy
    Emergent strategy
  • IBM projections
  • Spirit of surprise
  • Scenario planning is rooted in the concept of Multiple Possibilities
  • Test of a Good Scenario
    Not right or wrong Leads to better decisions
  • 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
  • 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
  • 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
    • Key Factors &
    Environmental Forces
    • ScenarioFrameworks
    • CriticalUncertainties
    Steps to Developing Scenarios
    • Focal Question
    • Indicators and Signposts
    • Implicationsand Options
    • 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.
  • Core
    Robust
    Satellite
    Satellite
    Satellite
    Four approaches to placing Betsacross the Scenarios
    Bet the Farm
    Scenario A
    Scenario B
    Scenario D
    Scenario C