The Future of Almost Everything, page 3
Strategies overtaken by events
Speed of change will be a huge challenge for every leader. All strategies of large corporations will be at risk of being overtaken by events. Your world can change faster than you can hold a board meeting. Expect growing emphasis on leadership agility, dynamic strategy, adaptive organisations, contingencies and risk management.
Most managers struggle even to keep up with the few technologies they have today. They stumble from one new App or online tool to the next, feeling the pressure of information overload. Success will mean faster integration of next-generation tools, finding better ways to make sense of the constant barrage of information.
Most medium-sized or large companies will fail to cross the bridge from old to new: they will shrivel and die over the next two to three decades, driven out of business by leaders who are techno-blind, and uncomfortable with the speed of radical change. It is confusing for people who have spent an entire decade or more in the same industry.
Reaction against constant change
In a constantly changing world, things that do not change will gain value. Expect more listed buildings and preservation orders on bits of towns, government buildings, churches, mosques, temples and monuments. Expect growth of traditions that remind us of a familiar past to grow in popularity.
Ancient trees will be even more respected, together with unspoiled moorlands and forests. Old houses will continue to be popular, for those who can afford to live in them, and convert them to comply with energy saving regulations.
Wild Cards: 40-year impact in 20 seconds
Our world is now so joined up, interconnected, and interdependent that small events can rapidly trigger giant convulsions.
Single events can become defining moments – such as the collapse of communism and the end of the Cold War 25 years ago. We can still feel the follow-on impact today across the world, in hundreds of different ways.
A few seconds can be long enough to change history. An earthquake lasting less than a minute triggered a crack in a Japanese nuclear reactor in Fukushima Daiichi district. As a result of intense public anxiety, Germany and Japan abandoned nuclear energy, which will impact global energy markets for more than 40 years. Yet, at the same time, the UK and China embarked on a nuclear boom. As I have said, emotional reactions to events are often far more important than events themselves.
The sudden retaking of Crimea by Russia (granted to Ukraine in 1957) was triggered by anxiety that their naval port would be lost to NATO, following chaotic scenes during the 2014 Ukraine revolution that toppled an elected president. The invasion led to immediate steps across the EU to reduce dependence on Russian gas supplies over the next 50 years. It inflamed conflicts elsewhere in Ukraine, and started what many feared could become a new Cold War, while sanctions damaged both Russia and the EU.
The global alliance against terrorism that was formed after the World Trade Center attacks in New York in 2001 led to two international wars and continues to feed bitter anti-American anger across parts of the Middle East, Afghanistan and Pakistan.
Hundreds of risks
In every large business there are many low probability but potentially high impact risks or Wild Cards. And if you have a list of 400 risks, each of which has only a 1% chance of actually happening in any year, then by the law of averages, you will see 4 major events each year. In some years there will be none, and at other times you may see several in the same month.
But in our globalised, ultra-connected world, every risk can connect to many other risks in ways that may not be obvious, and so it is even more important to prepare for combinations of risks.
Consider this before turning the page for the answers:
What do you think is the risk of 2 people in 10 having the same birthday? Or the risk of 2 people in 70?
The answer is: Risk of 2 in 10 people having same birthday is 10%; 2 in 23 is 50%; 2 in 70 is 100%. Far higher than most people would guess. I call it coincidental risk, and the figures are based on a well-researched statistical challenge called the Birthday Paradox.
Why benchmarking is so dangerous
Every large corporation is required to manage risks and report on them to shareholders. Unfortunately, as we saw in the economic crisis of 2008, banks can employ hundreds of risk managers, and still be destroyed. Why is this?
For years, many companies relied on ‘benchmarking’ – how we are doing when measured against the competition or our industry as a whole. Profitability, growth rates, rates of pay, terms of employment, staff turnover, customer satisfaction, appetite for risk-taking, and so on. However, the whole approach is often a fast-track to disaster, leading an entire industry to march blindly in step together, lemming-like, over the same cliff.
Risks of following the crowd
A year or two before the sub-prime crisis, I gave a lecture to several hundred senior risk managers from the world’s largest banks. I explained how worried I was that major risks in banking were not being properly addressed.
Afterwards, I was approached by several risk managers. They said that I was right to be worried, and explained why they were unable to act. If they advised their boards, for example, that they needed to be more cautious about certain types of packaged loan products, the answer invariably would be something like:
‘But as benchmarking shows, we are taking similar risks to the entire industry, and regulators are not objecting. If we take a more cautious line, our financial returns will be lower next year, analysts will criticise us, and our share price will fall.’
Risk managers have to be independently minded, with a broad, rigorous view, informed by trends outside their industry, not institutionally blinded, and with the courage to be literally ‘eccentric’, to stick out from the crowd, take a different view.
Examples of major Wild Cards
viral plague – rapidly spreading, cases in every continent
Chinese unrest – political/economic instability or meltdown
North Korean collapse – huge migration and social chaos
eurozone breakup – after another huge global economic crisis
sustained cyber-attack – paralysing government, telecom, utilities, transport, banks for several weeks
major, sustained military action against Israel
threat to a major city from terrorists with likely nuclear capability or some kind of ‘dirty weapon’
series of attacks similar in impact to 9/11
solar geomagnetic storms that knock out telecoms/IT
huge volcanic eruption that affects earth temperature
massive failure of an investment institution, affecting over $4 trillion in assets
miscalculation by a powerful nation leading to sustained regional conflict
large meteor strike on a major city – like that which flattened 830 square miles of Russia in 1908, or the one which hit Russia again in 2013, with kinetic energy greater than the atomic bomb dropped on Hiroshima.
Short-termism will destroy corporations
Many global corporations are run from one 12-week period to the next with very little regard to the longer term. Business leaders are drawn down this route by legal requirements to report profitability every quarter, and are expected to provide profit warnings if any significant adverse event should occur.
So, as we have seen in many recent scandals, decisions are inevitably linked to issues of timing: how to delay investment into another quarter so as not to damage analyst ratings, or other ways to massage the figures. It can be almost impossible to make large-scale strategic moves, which may deliver profits only in 5–10 years’ time.
This problem of short-termism has been made even worse by huge annual bonuses paid on the previous year’s results. And when you add in all kinds of other linked incentives such as share options that may be about to be cashed in, the result is a toxic mix. Expect more interference by regulators, forcing listed companies to pay bonuses based on performance over several years.
And of course, CEOs can be forced rapidly into the wilderness. The average length of tenure in America for a CEO of a large corporation is only 5 years, or 7 years across the EU.
In stark contrast, I have also worked with many family-owned corporations – or ones where the family has a controlling interest even though the company is listed on the stock exchange – and the conversations are often shockingly different. ‘Our company was started by my grandfather over 80 years ago, and every day I worry about what kind of company I will hand over to my grandchildren.’ You see decisions made with a 30–50 year time-horizon, by family leaders who have been at the helm for a decade or two.
Such companies often have a strong sense of direction and purpose, command loyalty from staff, and stay in business for many decades. And yes, of course, there are downsides to family ownership, including time-expired leaders who refuse to step aside for the next generation, and lack of talent, ambition or even vague interest among younger family members.
I have talked to a number of senior leaders of publicly listed companies who wish that they also were ‘privately owned’, and who have considered ways to delist. Expect more such conversations, looking to different models of ownership, including private equity – although I know that such a route can also bring ruthless and soul-destroying time pressures, depending on the investors. Some companies such as Unilever have already stopped producing detailed quarterly reports, in a bid to restore sense and sanity.
Future of the global economy
The first decade and a half of the third millennium was a highly embarrassing time for the academic discipline of economics, and for economists generally. So many economics professors failed to see the gathering crisis, or to predict accurately how long it would last.
Old-school economics is dead
Before the crash I lectured widely on, and wrote about, huge and growing risks from poorly understood global trades in complex financial instruments such as derivatives, and risks from ever more powerful yet lightly regulated hedge funds, in the context of wide-ranging global trends. I also warned of instabilities in global markets to come, severe runs on currencies in some emerging markets, and of deflationary shocks, which I predicted would be so powerful that inflation targets of 2% would look dangerously low at times, with no cushion in severe downturns.*
We saw many of these things unfold following the collapse of Lehman Brothers in September 2008, as part of the sub-prime lending crisis. However, I failed to see how deep the global crisis would turn out to be, wiping out government solvency as well as banks, and how long the crisis would last.
Here are the major factors that are likely to shape the global economy over the next decade:
Global economy survived better than many thought. Thanks to emerging markets, the global economy grew in every year of the crisis except 2009. Growth in China slowed but never below 7% a year. A short-term fall in oil prices will also help growth.
Global corporations with trillions to spend. Throughout the crisis, the world’s multinationals saved huge amounts of cash. By 2014, the largest were holding total balances of more than $2.8 trillion, of which over $450bn were in international accounts of six large West Coast American companies like Google and Apple. Expect large-scale spending of cash mountains over the next 5–10 years.
Growth in Sovereign Wealth Funds – ready to invest. By 2014, Sovereign Wealth Funds of countries like China, Norway, United Arab Emirates, Saudi Arabia and Singapore were worth more than $6 trillion. China alone owned more than $4 trillion, much of which was in US government bonds. Expect rapid diversification into real estate, commodities, mining, infrastructure, health care, logistics, technology companies and a wide range of other sectors, to secure China’s future.
Growth in value of privately owned property. In the UK alone, private real estate was worth over $6 trillion by 2014, with rising house prices, and low interest rates. People aged over 65 are sitting on more than $2 trillion of tax-free capital gains made since 1980. A significant amount will pass down generations, or become available using equity release products, over the next 10–15 years. Expect the same in a number of other countries.
Central banks will take a more relaxed view of inflation. Fears of deflation will mean banks will err more towards stimulation until they are certain that a robust recovery is underway. This is despite fears in countries like Germany of hyper-inflation, because of its own history in the 1920s. Inflation rates in some developed nations will fall almost to zero, or slip into deflation, at some point by 2020. Europe is badly prepared for further shocks, such as more extreme Russian sanctions, major conflict in the Middle East, or rapid slowdown in China. Countries like the UK are particularly likely to encourage higher inflation – helpful in reducing national debt, as many bonds are fixed at low interest. In contrast, inflation will be a significant worry in many emerging nations, as shortages emerge of skills and local resources, and as middle-class demand rises.
Over 500 million new middle-class consumers have been created by economic growth since the new millennium, and will drive demand.
Booms and busts in huge cycles. The world’s biggest and longest bust in generations will most likely be followed at some point in 5–10 years (after trillions spent in stimulus) by one of the world’s greatest booms, unless there is a major event, such as viral pandemic, or regional conflict, or a further economic crisis, which postpones the eventual mega-boom and mega-bust. Expect larger and longer economic cycles until well beyond 2035.
Further risks of mass defaults on debt. Despite new regulations, risky financial deals are already growing rapidly again, exploiting gaps in laws, with ever more complex and cunning financial products, sold mainly by shadow banking (clusters of companies carrying out bank-like activities, without being regulated as banks). These are likely to create future economic shocks. In 2014, global debt was more than twice the size of the entire global economy. Among many nations, China will be vulnerable, with over-stimulation of the economy, low borrowing costs, and unsustainable debt – even though government debt is very low compared to many developed nations. Total debt in China jumped from 140% to 220% of GDP in 6 years, to around $25 trillion, if we include debts of private companies, state-owned enterprises, and individuals as well as central and regional government debts. That total is more than the size of the entire US and Japanese banking sectors combined. The UK, Japan, Sweden, Canada and America had total national debts from all sources amounting to over 250% of their GDPs. In the past, debts on this scale have usually been dealt with by encouraging inflation and allowing currencies to slide.
Economic stimulation from next-generation technologies such as the Internet of Things, Smart Homes, Smart Grids, Green Tech, Biotech, Robotics and Nanotech are likely to boost the global economy by $70 trillion by 2040. Spending on everything related to green tech and energy saving will itself exceed $40 trillion during the same period. This will be encouraged by oil prices, likely to be above $125 for much of the period, despite falls to below $70 from time to time in response to overproduction in global downturns, and to growth in green tech.
By 2030, Asia’s combined economic output will be greater than that of Europe and America combined. This single fact will dominate most other trends in this book. Asian growth will be accelerated by aggressive and ambitious government policies, mobilising nations for innovation in key sectors. For example, China will dominate global wind turbine production, and South Korea will invest heavily in digital and biotech.
Correcting a 1000-year cycle
We are witnessing a fundamental re-balancing of wealth across global populations. In the year 1500, India and China represented more than 50% of all global output. By 1900 this had dropped to only 17%, outpaced by industrial revolution in Europe. So the process we are seeing today is part of a 500-year correction in a 1000-year cycle.
However, here is a short-term reality check: the EU and US still account for 60% of global GDP, 33% of global trade, and 42% of global sales of services.
During this period of re-adjustment globally, North–South tension is likely to increase as more emerging economies find that abolishing all trade and currency restrictions in a rush for growth also places their countries at the mercy of rumours, moods, hunches and opinion in the chaotic, global, gambling den of market traders.
I have sat in UN-related and World Economic Forum meetings where the most senior leaders of emerging nations have been systematically bullied into scrapping regulations, in order to become more globalised. But they have been rewarded sometimes by what some in their nations would regard as the rape of their own economies.
Unstable and chaotic markets
Expect an even greater backlash against globalisation in some nations, who may feel that they are being reduced to ‘economic slavery’ by massive, destabilising currency flows, and by other market forces. Over $5.3 trillion of currencies are traded every day, yet nations like the Philippines, Peru, Poland or the UK hold less than $80bn in reserves to defend against speculators. Enough to last only a few days.
I remember lecturing in Turkey one day in February 2001, during which the currency fell more than 10%, interest rates soared to 3,000%, and the central bank lost $5bn. The Bank of England was also hammered in a single day in September 1992. At one stage the Bank was buying £2bn an hour to prevent devaluation, and lost £3.4bn before conceding defeat. Meanwhile George Soros made £1bn selling pounds to the Bank that he did not even own. We have seen similar events in Russia more recently.
More attacks on central banks and currencies
Expect more such attacks as large investors continue to make (and lose) huge fortunes trying to outguess volatile markets, at times hoping to undermine one central bank after another. We will see similar speculative attacks on commodity prices, short-selling stocks of companies, and attacks on the stability of entire stock exchanges. Expect new regulations to try to contain some of this, for example forcing investors to disclose major positions in the market, or trying to slow down the velocity of hyper-trading linked to computers.
