• Increasingly, CEOs, investors, and policy-makers confess they are ‘flying blind’ – no one really knows what’s coming next. This might explain why despite 0 or negative interest rates, business investment is falling in many countries around the world (now including in the US). What will happen when the next recession hits? Central bankers no longer have ‘lowering interest rate’ ammunition to deploy, and will be forced to “go direct” (as one central banker puts it). This will involve working in close coordination with the fiscal authorities before putting central bank money directly into the hands of the public and private sectors. Unprecedented!
  • Our warning last month about the likelihood of currency wars has since been given some credence by prominent policy-makers and analysts who benefit from the ‘insider view’. They place the risk of a global currency war as ‘very elevated’ and predict it will happen over the next two years.
  • A recent report from the US Census Bureau highlights the predicament of the US middle class and goes some way to explaining the concomitant political fallout. At year-end 2018, the median household income was USD 63,200. Adjusted for inflation, this is barely above the 1999 level and 135% above income levels of 30 years ago (a mere 14% in real terms) – this despite the economy growing by almost 50%. During the same period, nominal average house prices went up almost 200%, average tuition at public colleges more than 500% and average per capita health expenditures roughly 280%. Such an increase in costs for the three things that matter the most (health, housing, and education) helps explain why the US middle class is being hollowed out and efforts to stay in it result in indebtedness and associated anxiety. In addition, the US economy is being held back by this rising inequality.
  • The new IPCC “Special Report on The Ocean and Cryosphere” makes grim reading. The realization that climate change is accelerating and is worse than most of us assume will fundamentally disrupt many businesses. The airline industry is a case in point: most forecasts still predict that global air travel will double in the next 20 years, with companies planning accordingly. Yet, flight shaming will inexorably accelerate. In the light of this, some (albeit still very few) industry CEOs confess to a belief that segments of air travel may even face negative growth (not simply a deceleration).
  • The reason behind the drive for sustainability and the ensuing radical change across industries is easy to identify: the youth climate movement. Its icon may be Greta, a Swedish adolescent, but the movement is now global and unstoppable. The generational divide is such that many senior executives fail to understand it. As a result, the transition to a low carbon economy will be brutal for those ill-prepared: first gradual and then sudden. A disorderly, abrupt repricing of risks will happen in the immediate years to come (not in 2025 or 2030). This will be particularly ‘violent’ in the insurance and mortgage markets.
  • Environmental and social issues are on a collision course. The global drive towards decarbonisation means that the risk of a broad range of assets being stranded will increase and with it the risk of social and political turmoil. Stranded assets imply stranded workers and communities. Emerging countries whose development largely depends on carbon-emitting industries (like South Africa for mining or Kazakhstan for oil & gas) will be at a disadvantage.
  • All of the above suggests that the culture wars of the future will be fought over climate change rather than migration and refugees. Political cleavages and polarization will be centered around environmental policies.
  • A must-watch: whether the newly created “Business Avengers” group will succeed in fostering more rapid implementation of sustainability. The coalition of 17 global corporate titans (Google, Nike, Salesforce, Unilever, Coca-Cola, Microsoft, etc.) has committed to working with activists to hit the 17 UN Sustainable Development Goals’ targets by 2030 instead of… 2073 (the end-date at the current rate). There are similar initiatives, but the Business Avengers group has (1) critical mass (2) timing that coincides with mounting public pressure. If it gains traction and reaches a tipping point in the coming months, a snowball effect followed by an avalanche will ensue. Then, the laggards that do not embrace sustainability will be shamed and their value hit hard. The travel & tourism, fashion, food & beverage, technology, and finance industries are most at risk.
  • Some practical take-away for business and investors from the many sessions on sustainability at our recent Summit of Minds: (1) the pricing of environmental and possibly some societal externalities will become a reality; (2) supply chains will shorten (hyper-localisation and sharing platforms will become favoured themes); (3) sustainable healthy eating and “locavorism” will gain ground; (4) recycling and managing waste strategies will flourish. All businesses whose operations are underpinned by the ideas above will have strong macro wind in their sails.
  • WeWork’s decision to shelve its IPO and Peloton’s sluggish début (on its first day of trading, it closed 11.2% lower than its listing price) echo what happened with Uber and Lyft (trading respectively 30% and 42% lower than their IPO price). The ‘glorious’ days of lossmaking platform companies that prioritize growth over profitability seem numbered, and the bubble in tech start-ups is now deflating across the board.
  • On 1st October, President Xi celebrates the 70th anniversary of the People’s Republic reminding the world that he really is making China ‘great again’. However, being leader for life, President Xi will be held accountable for what happens next – the system has no safety valve. Here are some troublesome developments that could slow or even reverse China’s once inexorable rise: (1) the HK protests’ thorn, (2) Taiwan, (3) the trade war with the US, (4) an economic slowdown combined with the necessity of financial deleveraging.
  • For our many readers who did not get a chance to attend the Summit of Minds in Chamonix, a short, impressionistic report is available upon request (at carolina@monthlybarometer.com). Our conclusion: “We were pessimistic about the probabilities, and yet optimistic about the possibilities. We took our cue from Voltaire: The most important decision one can make is to be in a good mood”.