• The trade war is like a huge exogenous shock inflicted on the economy – the equivalent of a ‘surprise’ tax hike on consumers that in turn damages sentiments, investments and thus global economic growth. Fully-fledged trade wars are rare in economic history, but two reasons make this one particularly unnerving: (1) the erratic behaviour of the US President – creating a fear that a new front might open anywhere anytime (with Europe in particular) that has a paralysing effect on confidence and investment decisions, (2) the fact that there is no end in sight – the trade war is just the opening act in an on-going struggle between the US and China for global prominence.
  • The current convulsions in the currency market are not only caused by monetary policies being loosened globally, but also by the uncertainty created by the trade wars and tensions. There is a risk of the trade war morphing into a currency war. Just as for a trade war, a currency war has no winners. The possible benefits of depreciating a currency (like the hope of boosting growth) are small and elusive, while the risks are considerable (a spiral of capital flows and further depreciation). To date, exchange rates volatility is ‘only’ hurting investment and productivity, but beware of competitive currency depreciations that would set into motion a “beggar-thy-neighbour” tit-for-tat with devastating fallout for the global economy and polity.
  • Like for the weather, the new economic normal is full of abnormalities. Consider this: for the first time in history and despite the (apparent?) strength of the US economy, the yield of the US 30-year Treasury bond just fell below 2%. Or this: over USD 17 trillion of bonds around the world trade with negative yields, including 1 trillion of corporate bonds. We could go on, but the point is this: these are symptoms of adaptation to the new economic normal – a world of much lower GDP growth than in the past decades. Current policies exacerbate this new ‘normal’, but it is fundamentally driven by a long-term trend upon which governments have little or no control: declining populations (in many countries around the world) and ageing. Therefore, obsessing about lower GDP growth is senseless because it’s almost a fatality (demographics is ‘destiny’ and a crucial driver of GDP). What will then define economic success? GDP and income per capita (which can increase as long as the economy shrinks less rapidly than the population) and various indicators of wellbeing (consumerism is out of favour).
  • A recent UN report puts the threat that climate change poses for food production into stark perspective: increasingly, extreme weather events are disrupting and shrinking the global food supply (even though global warming entails greater agricultural yields at higher latitudes). Soil is being lost between 10 and 100 times faster than it is forming and 500 million people live in places that are now turning into desert. The key consequences are twofold: (1) food shortages will become a source of conflict and will lead to cross-border migration; (2) the pressure to change behaviour and to invest in risk mitigation strategies (making the food system more efficient and less wasteful) will increase dramatically.
  • The point above suggests that the universe of what constitutes a stranded asset will be much broader than previously assumed (coal, oil & gas, etc.). Beef is a case in point. Its environmental footprint is such that the much more environmentally aware younger generations will substitute cattle with “Alt-Meat”. An Impossible or Beyond Meat burger uses 87% less water, 96% less land and produces 89% fewer greenhouse-gas emissions than a beef-burger. No surprise then that the stock price of Beyond Meat is up 136% since it was listed last May (Kraft Heinz returned minus 20.5% during the same period). This shift towards meat-free burgers will inevitably accelerate and deprive the beef industry of its price advantage and heighten the risk of its assets becoming stranded.
  • The point above highlights the radical changes that concerns about climate change will entail at the industry level. It will be the same at the macro level, as shown by Macron’s threat during the G7 to spike a major European trade deal with Brazil if Bolsonaro did not address seriously the Amazon fires. In the future, perceived threats to the climate may unleash the same tools of leverage and sanctions that are currently applied to violations of territorial sovereignty and human rights. Climate will reshape politics. There isn’t a single climate solution, so expect tomorrow’s world to be messy.
  • The US Business Roundtable just declared that increasing shareholder value is no longer the unique business objective of its members. Those who denounce the move as symbolic and political pandering miss the big underlying trend: a “regime change” is fundamentally altering the way in which companies do business and how investors look at corporates. Companies are increasingly aware that they must measure the externalities they produce, ranging from CO2 emissions and pollution to social inequalities, their impact on community welfare and even on human rights. When they are not (aware), investors and activists will unashamedly jog their corporate memories – negatively impacting value. Sustainability is not a luxury or nice-to-have anymore, but a financial obligation.
  • The common wisdom purports that democracies are dying and that the future is in autocracies, but current evidence suggests the opposite – it may well be the authoritarian idea that is becoming obsolete. Recent demonstrations in Hong Kong and Moscow have turned economic and political grievances into demands for full democratic elections. Watch this space.
  • For the first time, a research paper establishes a causal link between Brexit and a deteriorating economic output. It shows that since the referendum (June 2016), the process of exiting has reduced UK productivity by between 2 to 5%, while the resulting uncertainty has brought investment down by about 11%. A hard Brexit is now the most likely outcome, but whichever way forward emerges, the scars will be visible for years to come – with the economy poorer, politics more polarized and society more divided (plus the breakup of the Union now a real possibility).
  • All the above is a mile-wide and an inch deep. For the opposite: a mile deep and an inch wide, real-time, in-depth analysis of any of the bullet points above, please contact us and gain access to an unrivalled network. To join an insightful conversation about some of these issues, participate in a Summit of Minds.