2009 inevitable surprises
DESCRIPTION
Presentation delivered by Peter Schwartz to IE Singapore's senior management on 23 July 2009TRANSCRIPT
Peter SchwartzJuly 23, 2009
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SHORT TERM SHOCKS
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The global financial system went thru a shock and appears to have stabilized
Dec-06 Feb-07 Mar-07 Apr-07 Jun-07 Jul-07 Aug-07 Oct-07 Nov-07 Dec-07 Jan-08 Mar-08 Apr-08May-08 Jul-08 Aug-08 Sep-08 Oct-08 Dec-08 Jan-09 Mar-09 Apr-090
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Chart TitleThe TED Spread Through the Financial Crisis
Sep. 15-17, 2008 Lehman Bros. goes bankrupt AIG is rescued money market stress leads to
further liquidity interventions by the Fed
Feb. 7, 2007HSBC says it set aside
$10.6bn for bad loans, including subprime
Aug. 17, 2007Fed cuts the rate it lends to banks the so-called discount
rate to 5.75%
July 31, 2007Two Bear Stearns
hedge funds file for bankruptcy
Oct. 24, 2007Merrill Lynch announces $7.9bn in subprime write downs for the
third quarter, eclipsing Citi’s $6.5bn
Note: The TED spread is calculated as the difference between the 3-month T-bill interest rate and 3-month USD LIBORSource: British Banking Association, Federal Reserve, Businessweek, washingtonpost.com, Monitor analysis
Oct.3, 2008The US House of Representatives approves the $700bn economic
rescue package
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
Dec,12, 2008The White House says it
will consider tapping TARP funds to aid the
automakers.
Oct. 13, 2008 US Financial institutions accept
$250bn direct equity investment from TARP
European governments put hundreds of billions of dollars into banks
Dec,17, 2008Fed cuts rate to
virtually zero
Mar. 11, 2008Fed agrees to lend troubled banks as much as $200bn
Mar. 16, 2008JPMorgan offers to buy Bear for $2 a
share; discount rate cut to 3.25%
Elevated risk premium, what
is the new normal?
80 bps
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What appeared as a mini-crisis in U.S. subprime housing…
Percentage of U.S. Delinquent Mortgages by Mortgage Type, 1998-2007
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Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-0925,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
55,000,000
60,000,000
65,000,000World Stock Market Capitalization, US$ Tr
Source: World Federation of Exchanges
Grew into a worldwide systemic crisis
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What happened? Explosive growth in financial, facilitated by an expansive shadow banking system…
2000 2001 2002 2003 2004 2005 2006 2007 20080
0.20.40.60.8
11.21.41.61.8
2Total hedge fund assets, in US$ trillions
Source: World Federation of Exchanges, Hennessee Group, Commodity Futures Trading Commission, Pimco
2000 2001 2002 2003 2004 2005 2006 2007 20080
1
2
3Open 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
August 20072003-2007Forward
Minsky Journey
Credit grows rapidly, with shadow banking system in the lead
Asset prices – houses, buyout valuations , etc. – inflate
Quality of loans made
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Now the great deleveraging is underway
Source: Pimco, J.P. Morgan
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
August 20072008 - ?Reverse
Minsky Journey
Reflation
August 20072008 - ?Reverse
Minsky Journey
2001 2002 2003 2004 2005 2006 2007 20080
100
200
300
400
500
600
Collateralized loan obligation issuance, in $USbn
Asset backed securitized loan issuance
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The decline appears to be easing
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q0911,00011,50012,00012,50013,00013,50014,00014,50015,000
Global GDPCu
rren
t $
(bn)
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%
QoQ Global GDP change
QoQ
gro
wth
(Sea
sona
lly a
djus
ted,
cur
rent
U
S$)
Source: bea.gov
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Boosted by unprecedented levels of economic stimulus
Size of stimulus packages
U
S$
Bn
Note: What constitutes additional stimulus vs regular budget spending is defined differently by various studiesSource: HSBC global research, International Institute of labor studies
0
200
400
600
800
1,000
1,2001,124
Asia
1,008
EuropeAmericas
634
China
Japan
US
OtherEU
Germany
Italy
1.3
1.5
1.8
2.2
2.5
2.9
3.1
3.4
3.5
4.3
4.4
5.2
5.5
5.6
6.5
8.6
12.1
16.0
0 5 10 15 20
Australia
Phillipines
Argentina
Germany
Hungary
United Kingdom
Japan
Canada
Chile
Thailand
Saudi Arabia
China
Indonesia
South Africa
United States
Malaysia
New Zealand
Mexico
Percentage of GDP
5% of annual world GDP will be injected over the next few years as economic stimulus
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… and robustness in developing economies
Source: imf.org, CEIC, SCB Global Research
Contribution to Global GDP growth, PPP Basis (3year moving averages)
…but from a relatively small baseDeveloping nations still growing in 2009
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
US IndiaChinaJapanEU
Gross Fixed Capital Formation
Private Consumption (2008 GDP component)
U
S$ B
n
4
2
0
1970 2000 201019901980
Rest of the worldChinaUnited StatesOther advanced economies
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World Natural Resource Prices, 2007-2009
Source: U.N. Food and Agriculture Organization, U.S. Energy Information Agency
0
20
40
60
80
100
120
140
160
0
50
100
150
200
250
Oil Price
FAO Food Price Index
Oil
Pric
e, $
per
bar
rel
Food
Pric
e In
dex
(200
0-20
02 =
100
)
Commodity prices are up, in part in anticipation of future growth
Jul-09
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More shocks quite plausible
Housing Market Economic ConditionsFinancial System
More interdependencies emerge and unravel
Unexpected further debt write downs
$ deflation or hyperinflaitonNational 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
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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
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US home prices have further to fall
Source: www.econ.yale.edu/~shiller/data
US Months Supply
4
5
6
7
8
9
1999 2004 20093
Mill
ion
11
10
12
US Existing Home Sales
1999 2004 2009
Mill
ion
445
5.0
5.5
6
6.5
4.0
7
7.5
120
140
160
180
200
220
1950 1970 1990 2009
100
Real
Hom
e Pr
ice
Inde
x (1
990=
100)
US Home prices need to fall another 13% to reach trend line
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US job losses continue to outpace recent recessions, can Europe continue to cushion the blow?
Source: Bureau of Labor Statistics, bea.gov
US Unemployment rate compared to other recessions
US vs EU-27 Unemployment
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
0 5 10 15 20 25 30 35 40 45 50
2007-present
2001
1990
1981-3
1980
1974-6
9.5% in June
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
7/1/08 1/1/091/1/08 7/1/09
EU-27
US
Une
mpl
oym
ent R
ate
(inde
x 1=
peak
em
ploy
men
t bef
ore
rece
ssio
n)
Une
mpl
oym
ent R
ate
(inde
x N
ov 2
007)
Quarter after employment peak
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80
100
120
140
160
180
2009200820072006200520042003200220012000
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”
Source: Netherlands Bureau for Economic Policy Analysis, Findata
Wor
ld T
rade
Vol
umes
(200
0 av
erag
e =
100)
World Trade
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Significant financial reregulation policy initiatives
Source: Financial Times
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
US Ideas EU Ideas
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Not necessarily with the appropriate level of international alignment
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New financial scenarios for the next 2-3 years
Facilitation of globalization
More Shocks
De-globalization
No more shocks
Scenario 4:All in this Together
Scenario 3:Depressionary
Scenario 1:Looking after No. 1
Scenario 2:The Long Boom 2.0
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Pandemic Food shockTerrorist attack
Cyber attack Geo-political tension Explosive clean energy growth
Other possible short term shocks
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Food shocksThe world population is growing rapidly
We are one of the few generations to witness a doubling of population in our lifetime
2000 2050190018001750
8
6
4
2
0
Source: UN population division
…UN median projection is 9.2 billion people by 2050, from 6.7 billion now
Global Population, 1750 - 2050Estimates and projections (billions)
Developed nations
Developing nations
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Food shocks…our diets change as we get richer
Meat consumption and per capita income, 2002
1965 1998 2030
Calories consumed per day, 1965 – 2030
2500
2000
1500
Source: FAO 2008, FAOSTAT 2009, World bank 2006
1000
500
0
Highest growth
20k10k 40k30k0
40
80
120
2002 US$ Purchase power parity
kg
Americans eat 2.5 times as much meat as the average Chinese person
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Food shocksNumber of food crises rising globally
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Cyber attackInternet security is increasingly threatened
Source: 2007 McAfee Criminality Report
124 countries use the Internet for web
espionage operations
26
Climate change will remain a dominant issue
27
Recent observations suggest greater climate sensitivity than IPCC projections
Source:, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions; NSTC, Global Climate Change, Impacts in the US
Arctic sea ice (annual minimum)
1979
2007
Global sea level change (cm)
Recent observations
IPCC envelope
Observed long term trend
-4
-2
0
2
4
6
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
1970 1980 2000 20091990
28
The Climate Will Be increasingly Variable and Extreme
29
Water will be the key factorWater 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
30
Water for food: how much does it take?
1 kilo of clean wool 170,000 liters of water
1 kilo of grain-fed beef
50,000 – 100,000 liters of water
1,650 – 2,200 liters of water
1 kilo of soybeans
Source: Commonwealth Scientific and Industrial Research Organization
31
Developing world has surpassed the developed world in CO2 emissions…and is growing rapidly
1 1012 kgSource: Netherlands Environmental Agency
CO2 Emissions from hydrocarbon use and cement production by country/region (1990, 2000, 2007, 2008)
AnnualEmission(Pg1)
0
2
4
6
8
10
+6%
+7%+2%
+5%
0%
-2%
-3%
ChinaIndiaRussiaBrazilJapanEU15USA
2000
1990
2008
2007
CAGR
32
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
0
200
400
600
800
1000
1200
1400
1600
IEA New Coal Forecast
New Coal--BAU CCS Coal--BAU
GW
BAU CCS schedule won't produce usable re-sults before 2020. Result: 1205 out of 1391 GW of forecast new coal plants will likely be
built with conventional coal technology.
CCS?
Conventional Coal
BAU means carbon lock-in
33
Source: Monitor Analysis; solveclimate.com; EPA.gov, LA times, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions
Copenhagen– “Mitigation Agreement” on long term objective but misalignment on short term path
Communicated 2020 Annex 1 reduction targets (compared to 1990 emissions)
Long term global emissions trajectories for energy-related CO2 emissions
International alignment to limit warming to 2°C at recent G8 meeting in Italy requires emissions to
peak before 2020
Probability that warming is contained to 2°C:
-50%
-40%
-30%
-20%
-10%
0%
10%
India
-40%
China
-40%
Aus. (Joint)
-25%
Aus.
-5%
Japan
-8%
USA
-4%
EU (Joint)
-30%
EU
-20%
Considerations Demands
IPCC target range
-10
0
10
20
30
40
50
60
70
80
90
2000 2020 2040 2060 2080 2100
400ppm-eq
450ppm-eq
550ppm-eq
Baseline
Long-Term Goal
Gt C
O2/
yr
Negative Emissions
~15%
~50%
~75%
Difficulty in securing sufficient developed nation reduction commitments and in agreeing on the
nature of short term responsibilities for developing nations
34
Cap and trade compromise winds its way through US Congress
Note: The Act will have to approved in the Senate as well and be signed by the president before becoming lawSource: Breakthrough.org
Gig
aton
s CO
2
US Domestic CO2 emissions – American Clean Energy and Security (ACES) Act
0
5,000
10,000
20502015 20402025 2030 20352020 2045
2005 baseline
1990 baseline
Emissions with ACES Act
2011
4% below 1990(17% below 2005)
83% below 2005
Allowed leeway for reducing domestic emission by making maximum use of international offsets, reserves and other “safety valves”
35
China recognizes the climate change threat and has taken action in the last 2 to 3 years
Source: Center for American progress, reuters
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
37
The next scientific revolution
More Scientific AnomaliesNew Tools & Computing Power
More Scientists More Funding
0.5 1 1.5 2 2.5 3 3.5 4 4.50
20
40
60
80
100
U.S
.
Finland
France
S. K
orea
U.K
.
Spain
Japan
Germ
any
Mexico
China
0
5
10
15
20
1975
2000
Science Degrees per Capita
Note: Natural Science and Engineering Degrees per 100 24 Year Olds
38
The great leap in biology…new human biology
Year
s, a
t Dea
th0.01
0.1
1
10
100
Cost per Base Sequenced
Cost of Short Aligo Synthesis
Cost of Gene Synthesis
Cost per Base of Sequencing and Synthesis
Cost
per
Bas
e Sy
nthe
size
d (U
SD)
1985 1990 1995 2000 2005 2010
Year
1950-1955
1955-1960
1960-1965
1965-1970
1970-1975
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
2000-2005
2005-2010
2010-2015
2015-2020
2020-2025
2025-2030
2030-2035
2035-2040
2040-2045
2045-2050
50
60
70
80
90
Males Females
U.S. Life Expectancy
Source: Robert Carlson Source: UN Data World Population Prospects 2006, medium variant
39
The great leap in biology… synthetic biology and regenerative medicine
Synthetic Biology
Regenerative Medicine
Human Enhancement
40
Interesting Problems: Intellectual Challenges
– Dark Energy– Complexity– Meaning of DNA– The Brain, etc.– Human psychology and behavior
41
NRC Report on Grand Challenges
42
The frontiers of information technology
• Souped-up laptops, PDAs• Totally new computer
paradigms
• Medical tools• All optical computing• Extreme bandwidth
communication
• New forms of semiconductor/magnetic storage
• New architecture for computer storage/logic combined “O” latency
• Write nanoscale lithographic lines
• Sense single molecules• All Optical transistor
• Megamode fibers—1010
increase in bandwidth
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
SCIE
NCE
TECH
NO
LOG
YAP
PLIC
ATIO
NS
TIME
• 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
MRAM
• Very hard problems inaccessible to conventional computer
• Factoring machine image and signal processing
• Drug design—”very large molecules”
• Molecular structure~100 Qubits—condensed matter physics
• Quantum strategy-coordinator games —”2bit Qubit” (1-3 Qubits)
• Repeater long distance (3 Qubits)• QKD—superposition
• Coherence and entanglement purification
• High fidelity Qubits—99.99% visibility• Robust Qubits
43
Geo-engineeringBroad range of ideas have been created so far
Source: United Nations Environment Program, Wired Vision, Scientific American, Bioenergy News
Sulfur Injection
Venetian Space Blinds Seawater Alkalization
Synthetic TreesArtificial Cloud
Recombinant Forest
Antarctica Wrapping
Radiation Angle Varier
Non-Methanation Fodder
HOTTOPIC!
Ocean SeedingHOT
TOPIC!
Sunlight Control CO2 Level Control
44
Geo-engineeringSunlight control
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?
Sulfur Injection
1 Sulfur DioxideSource: United Nations Environment Program, Wired Vision, Scientific American, Time Magazine, Monitor Analysis
Venetian Space Blinds
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?
Cost: USD 5 trillion
HOTTOPIC!
Cost: USD 2~3 billion per year
45
Geo-engineeringCO2 level control
Ocean Seeding
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?
Alkalized Seawater
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 AcidSource: United Nations Environment Program, Wired Vision, Scientific American, Living on Earth
Cost: USD 20 million
HOTTOPIC!
47
The rise of Asia is the greatest force at work in the world today…China
Source: “Report on a study of contemporary China’s social state,” January 2002
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Un/underemployed
Composition of China’s Workforce, %
Administrative/office/Business/service
Owners of private enterprises
Manufacturing workers
Agricultural workers
Technicians/Specialists
1952 1958 1988 1999
48
1985 1995 2005 2015 2025
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
Note: Annual Household Income Bracket, Rupees, 000s, 2000 pricesSource: McKinsey Global Institute
500-1000
>1000
90-200
200-500
<90
49
The impact of the next two billion middle class consumers… on energy and environment
1970 1980 1990 2000 2010 2020200
300
400
500
600
700
800
Qua
drill
ion
Btu
Forecast Annual Global Energy Consumption
High economic growth
Loweconomic
growth
Average Annual Growth (%) in CO2 Emissions 2005-2030
Reference
Source: 2005-EIA International energy Annual 2005 (June-October 2007); 2030-EIA, World Energy Projections Plus (2008)Source: US EIA
U.S.
OECD Europe
Japan
China
India
Brazil
Middle East
Russia
Africa
0.50%
0.40%
-0.20%
3.30%
2.60%
2.30%
1.90%
0.90%
1.80%
50
The role of crime and illicit activities
Parasitical autonomous zones. Illicit drug, organ, waste, and wildlife trade
Hezbollah
Movement for the Emancipation of the
Nigerian Delta
Taliban
Sinaloa & Gulf Cartels
Ogaden Guerillas
Primeiro Comando da Capital (PCC)
Fuerzas Armadas Revolucionarios de
Colombia (FARC)
Source: Transparency International, Corruption Perceptions Index 2007
51
More and more products are becoming free
222223
212 221
181
128
3717
2008
18
2007
18
2006
20
200520042003
Global mp3 player shipments, millions
Global recorded-music sales, US$ bn
474747
32%
2008
40%
35
2007
22%
42
2006
30%
49%
20052004
Source: International Federation of the Phonographic Industry, iSuppli Corp, US Newspaper Association of America , Pew Internet & American Life Project Survey
Users of online classified ads sites in US (% of internet users)
US newspaper advertising revenue, US$ bn
Free MP3 Downloads
Music Industry Revenues
Free Online Classified Ads Sites
Newspaper Ads Revenuesvs. vs.
52
Falling marginal costs of business
Source: Anderson, Chris – “Free! Why $0.00 is the future of business? “
Cross-subsidizing
Falling marginal cost of doing business1895 2009
+ + +
FREE FREE FREE
ExpensiveExpensive
Expensive
Free Mail Storage
Free Directory Assistance
Free Air Travel?
Free DVR /CDs?
54
Possible climate deal
Business as usual
450 ppm
Vs.
Great geopolitical uncertaintyRising BRICs Shocks (finance,
food, cyber security)New actors (NGOs, terrorists, criminals)
Protectionism Extreme integration
55
The privatization of foreign policy
BillGates
RichardBranson
LarryPage
SergeyBrin
GeorgeSoros
PierreOmidyar
56
What about international institutions, non-state actors, NGOs, and others?
57
Chinese Holdings of U.S. Assets (November 2008)In US$ billions
$1.7 TRILLION
Net Purchases of Long-Term U.S. Securities – In US$ hundred millions
A rebalancing of power
39
140
588
860
68
Short-term bank
deposits
Treasury bonds (incl. short term)
Agency bonds (incl. short term)
Corporate bonds
Equities
Source: U.S. TreasurySource: CFR working paper, ‘China’s $1.7 trillion bet.’ Numbers come from CFR estimates, U.S. Treasury International Capital, and People’s Bank of China
2005 2006 2007 2008
-2
-1
0
1
2
3
Europe Asia
58
Nigeria vs. Singapore: a resource vs. knowledge economy
Republic of Singaporefounded
GDP per Capita (1990$), 1950-2005
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Singapore
Nigeria
Source: "The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007 (Geary Khamis methodology)
59
ReligiousExtremism
CarryingCapacity
SocialStresses
Global/Regional Plague
Financial Crisis
Knowledge driven growth predetermined
Knowledge Driven Growth
Better Governance
Prosperity & Shared Interests
IncreasingScience & Technology
MoreIntegration
Collapse of Socialism/market reform
NetworkedIT
60
Resilience
Pote
ntial
Connectedness
Critical Uncertainty 1 - Era of ShocksComplex, closely coupled systems may be shock prone
Source: Homer-Dixon, Our panarchic future; Bank for international settlements;
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
Back to stability and resilience
Actors disappear, new ones emerge •Example; deleveraging
61
Critical Uncertainty 2 - Form of International RelationsEbb and flow
Foundation of the United
Nations, World Bank
Interests & Alliances
Laws & Institutions
WW 1
IMF, IRBD & GATT founded at
Bretton Woods
Geneva Convention
WTO emerges
from GATT
International Criminal
Court
US signs bilateral
nuclear deal
Kyoto protocol
US does not ratify Kyoto
protocol
North-Korea withdraws from
NNPT
Berlin Wall torn down
Warsaw Pact
EU Expands to 27 member countries
West Germany enters NATO
US intends to never join ICC
Doha rounds break down
WW 2
NATO
European Economic
Community, precursor to
EU
1900 2000‘20 ‘40 ‘60 ‘80
Nuclear non-proliferation
treaty
62
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
Note: Modernization is not synonymous to WesternizationSource: Ronald Inglehart , Christian Welzel, How Development Leads to Democracy, What We Know About Modernization
Growth of the Middle Class
Sense of security, focus shifts to
self-expression
Postindustrial, knowledge society promotes independent thinking,
appreciation of free choice
Difficult to avoid democratization,
repressing calls for openness becomes increasingly costly
Industrialization
Economic growth
Shift from traditional to
secular-rational
63
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?
0.00
0.05
0.10
0.15
0.20
0.25
0.30
98765432
1China [2007], Russian Federation [2006], Sweden [2006], United States [2006]Source: Worldvaluessurvey.org
Russian Federation
China
Sweden
United States
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
World values survey respondences1 to statement “Hard work brings success”
64
Critical Uncertainty 4 – Role of the U.S. in the world
US recovers US in Decline
InnovationFlexibilityEntrepreneurshipTop universitiesNew leadership
DeficitsEducationInfrastructureMilitary overstretch
America’s perception China’s perception
US balance on the current account ($Bn)Real GDP growth forecasts (%)
-4
-2
0
2
4
6
8
Source: imf, bea.gov
1980 2014
200
-200
-400
-600
0
-800
1980 2010
65
Possible scenariosThree main possibilities
Interests and
Alliances
Lawsand
Institutions
Modern Non-Democratic States
Modern Democracies
U.S. Recovers
U.S. in Decline
Continuous Evolution
New Game
Both / And
World of alliances Modern non-
democratic states U.S. in decline
World of laws and institutions
Modernization and democracy go hand-in-hand
U.S. recoversNote: Source:
66
New GameShocks
NoShocks
Possible scenariosWith the additional possibility of shocks
Interests and
Alliances
Lawsand
Institutions
Modern Non-Democratic States
Modern Democracies
U.S. Recovers
U.S. in Decline
Continuous Evolution
Note: Source:
Both/And
Shocks No Shocks
ShocksNo
Shocks
67
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
68
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
69
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 [email protected] Here
BACK UP
72SH
ORT
TER
M S
HO
CKS
Government is expanding
“At this particular moment, only government can break the vicious cycle that is crippling our economy.”
- President Barack Obama
$10.8 TRILLION
Total federal spending, in FY200 US$ bn
Total amount allocated for economic rescue
Source: Outlays from FY 2009 Historical Tables, Budget of the United States Government, Table 8.1
73SH
ORT
TER
M S
HO
CKS
Exacerbated by the economy is a highly interconnected system
Housing Market Economic Conditions
Financial System
74SH
ORT
TER
M S
HO
CKS
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
75SH
ORT
TER
M S
HO
CKS
Tight surplus production in OPEC led to high oil prices
0 1 2 3 4 5 6 7 8$0
$20
$40
$60
$80
$100
$120
Jul 99 - May 04 Jun-04 - Apr 08
July 1999 - April 2008
Source: John Cook, Director, EIA Petroleum Division, “Next Stop for Oil Prices: $100 or $150?”, June 11, 2008
76SH
ORT
TER
M S
HO
CKS
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
77
Food prices and food emergencies are on the rise
As global food prices have risen 83% over the last three years…
Food prices are likely to increase in the next decade
Source: FAO; Chatham House
2006
2007
2005
2008
2002-2004=100
FAO food price index
…Over 60 countries faced food emergencies
Causes of food emergencies, 1981 - 2007FAO food price index
78
New coal plant emissions equal all historic coal CO2
Series1120
130
140
150
143145
27% of remaining budget for 450 ppm
Source: ORNL, CDIAC; IEA, WEO 2004
1751-2000 Total Coal New Coal Plants Lifetime Emissions
– China, India, and U.S.
79
Technologies of Today: Pacala & Socolow
Pacala and Socolow demonstrated in their seminal work that currently available technologies could help dramatically reduce GHG emissions
1. Efficient vehicles
2. Reduced use of vehicles
3. Efficient buildings
4. Efficient baseload coal plants
5. Gas baseload power for coal baseload power
6. Capture CO2 at baseload power plant
7. Capture CO2 at H2 plant
8. Capture CO2 at coal-to-synfuels plant / Geological storage
9. Nuclear power for coal power
10. Wind power for coal power
11. PV power for coal power
12. Wind H2 in fuel-cell car for gasoline in hybrid car
13. Biomass fuel for fossil fuel
14. Reduced deforestation, plus reforestation, afforestation, and new plantations.
15. 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
80
To achieve low carbon economic growthCleantech will have to live up to its promise
Source: cleanedge.com; cleantech venture network; UNEP, Global Trends in Sustainable Energy Investment 2009
Global investment in Clean Energy ($USbn)
.. but growth rate slowed from 59% to 5% impacted by the macro economical climate
0
50
100
150
200
S/RP, corp RD&D, gov R&D
Third PartyInvestment
2008
155
2007
148
2004
22
35
2003
27
2002 2006
93
2005
60
25% 29% 73% 54% 59% 5%
Cleantech VC investment by Technology
0%
10%
20%
30%
40%
50%
Q209Q109Q408Q308Q208Q108Q407
Solar
Transportation
Biofuels
WindSmart GridWaterAgriculture
Smart money moving to transportation and demand side technologies
81
Green stimulus as government initiated growth measure
Total additional spending of $430bn, 2.5x the total 2008 sector investment
Green Stimulus Regional Spending ($US Billions)
Green Stimulus by Region US green stimulus
China green stimulus
221
112
31
23
14
12
7
3
2
2
0 50 100 150 200 250
China
US
S. Korea
EU
Germany
Japan
France
Canada
Australia
UKLow Carbon
5%Rail
9%Grid
11%
Water Waste14%
Renewable
29%
Energy Efficiency32%
Green Stimulus Breakdown(TARP & American Recovery Plan) USD112bn
8%9%
Port
2%
Environment
Airport
Highway 14%
Housing
20% Rail
22%
Grid
25%
Stimulus Package Breakdown (RMB4 Trillion)
Source: HSBC
82
Sovereign Wealth Funds
41%
19%
2Q080%
100%
20%
40%
60%
80%
17%
31%
40%
$58 billion
1Q08
43%
8%
$79G7
$1,400Middle East
$700Asia Pacific
$360Other Europe
$110Rest of World
$590BRIC
SOVEREIGN WEALTH FUNDS, IN US$ BILLIONS
TOTAL$3.2
TRILLION
Rest ofWorld
Middle East &Africa
Asia Pacific
Europe
NorthAmerica
Europe
Asia Pacific
SWF DEALS BY TARGET REGION – 2008
$26 billion
Source: European Institute, Sovereign Wealth Funds Survey 2008, Oliver Wyman, Monitor Group
83
The Future of SWFs
Fixed Income
2007
2012
Cash
20%
5%
1%
Other Alternatives
5%4%
Real Estate
15%16%
Private Equity
12%
32%
27%25%
Equity
38%
SWF asset allocation: 2007 and 2012 (forecasted)
Source: European Institute, SWF Institute, OECD, Oliver Wyman, Bloomberg
84
Growing complexity and evolution to fill new economic niches
Source: The Origin of Wealth, Eric D. Beinhocker, 2007
Complexity Economics
Traditional Economics
Dynamics Open, dynamic, nonlinear systems, far from equilibrium
Closed, static, linear system in equilibrium
Evolution The evolutionary process of differentiation, selection, and amplification provides the system with novelty and is responsible for it’s growth in order and complexity
No mechanism for endogenously Creating novelty or growth in order and complexity
85
What will it take for Latin America and Africa to get on the wave?
Corruption Perception Index, 2007
86
The new physics/chemistry
Dark Energy
Physics of the Very Small
Precision Chemistry
87
Tools
– Recent past• Hubble Telescope• Atomic Force Microscope• MRI machines
88
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
89
Biology
Fundamental Shift from Empirical to Rational Science
It’s all Physics + Water !
Genetics
Systemic science of disease
Neurobiology
Synthetic biology
Stem cells
Mathematical biology
WH
Y S
CEN
ARIO
S
WHY SCENARIOSWHY SCENARIOS
WH
Y S
CEN
ARIO
S
The Role of Mental Maps
WH
Y S
CEN
ARIO
S
Intended strategy
Emergent strategy
EnvironmentForces
Emergent Strategy
WH
Y S
CEN
ARIO
S
IBM projections
WH
Y S
CEN
ARIO
S
Spirit of surprise
96
Scenario planning is rooted in the concept of Multiple Possibilities
97
Test of a Good Scenario
Not right or wrong
Leads to better decisions
98
Strategic conversation creates these flows and keeps these relationships healthy as an art,
not a science
Scenarios
KnowledgeCreation
DecisionMaking
ExistingStrategies
EmergentStrategies
The Strategic Conversation and Strategic Options
99
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
100
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
101
Steps to Developing Scenarios
Focal Question
Scenario Stories
Implicationsand Options
Indicators and Signposts
Key Factors &Environmental Forces
ScenarioFrameworks
CriticalUncertainties
102
What are Indicators and Signposts?
Signposts can take the form of either current observables or plausible future indicators … the best scenario approaches and indicator systems examine and employ both.
… 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
103
Core
Robust
Bet the
Farm
Four approaches to placing Betsacross the Scenarios
Satellite
Satellite
Satellite
Scenario A
Scenario D Scenario C
Scenario B