It’s all about conflating risks. A lacklustre global economy. Don’t bank on too many rate cuts.  Geopolitics:escalating? The dangers of climate ‘inactivism’. The potency of the three “Ps”, aided and abetted by AI & disinformation. The US – fractured.  Beware the demographics.

  • IT’S ALL ABOUT CONFLATING RISKS. In the coming months and years, the combination of (1) over-indebtedness and higher interest rates, (2) geopolitical turmoil, and (3) environmental shocks will drag growth down. This, in turn, will fuel political volatility. If in doubt, take it from the WEF survey conducted among 1,500 global leaders and experts. Over the next two years, 54% of respondents “anticipate some instability and moderate risk of global catastrophes, while another 30% expects even more turbulent conditions.” Within a 10-y time horizon, the outlook is markedly more negative, with nearly 2/3 of respondents expecting “a stormy or turbulent outlook”.
  • A LACKLUSTRE GLOBAL ECONOMY. We should expect a third consecutive year of mediocre growth. In 2024, the global economy looks likely to expand by just 2.4% (according to the World Bank), versus 2.6% in 2023, 3% in 2022 and 6.2% in 2021. The IMF is more optimistic, forecasting 3.1% this year and 3.2% in 2025. So far, the US economy is the outlier with an outstanding performance – annualized growth at 3.3% in Q4, inflation tamed, unemployment at an almost 50-y low and real wages rising. Conversely, China is the greatest concern. As its growth outlook deteriorates, it endangers the ability to service the debt that is much higher than most analysts realize (according to Li Daokui, a former adviser to China’s central bank).
  • RATE CUTS: TIME TO DAMPEN DOWN EXPECTATIONS. Markets are anticipating multiple rate cuts this year (up to six in the US). They are utterly out of synch with central bankers and many financial senior executives who express their disbelief (on and off the record) at investors aggressive bets on rate reductions. Barring a severe economic shock, rapid cuts priced in by the markets won’t happen.
  • GEOPOLITICS: ESCALATION? The international scene is consumed by two wars that have no end in sight and the potential to escalate. After 3 months fighting Hamas, Israel has neither a clear path to victory nor a feasible exit strategy, and its government in turmoil. This could result in a multi-front escalation across the Middle East. The attack on US troops stationed in Jordan with ten countries already dragged into the conflict is an ominous sign. While in Ukraine, Putin is doubling down for a long war (also a proxy contest with the West) that could grind on for years.
  • GROWING ANTI-ESG SENTIMENTS. At a time when climate and nature action are most needed, climate change denial is gaining traction. But rather than outright denial (now impossible) it’s taking the form of “inactivism” by deploying the five Ds: deflection, delay, division, despair and doomism (too late to do anything). Meanwhile, anti-ESG ‘everything’ is on the rise in business, financial and political circles. The recent WEF meeting in Davos (a proxy for global sentiments among decision makers) made this clear by putting climate on the back burner and revealing the abyss that exists between what global finance is saying and the capital actually flowing into green projects.
  • THE THREE “PS” of (1) populism, (2) post-truth and (3) polarization – define the world we live in. This is largely caused by the conjunction of (1) declining per capita incomes (hovering around 1% in most OECD countries) and (2) the nefarious effect of social media. A majority now feels that the system is rigged by the elites, and fewer than half expects “to be better off in five years” (Edelman, 2023). These sentiments of hopelessness underpin structural trends like the rise of Trump and of the far right in Europe, as well as occasional outbursts of social turmoil. The current farmers’ protests across Europe are a sign that ‘ungovernability’ is more of an issue than leadership, and that implementing green policies is an uphill struggle.
  • AI AND DISINFORMATION. “AI will reshape everything” was the mantra at this year’s WEF meeting. It looked like an “AI conference” (in the words of a participant) where the spectre of Hal (the ‘evil’ AI device in “2001: A Space Odyssey”) was ever present. Let’s not fall victim to the fallacy of equal parts. The many benefits of AI adoption – for the economy and productivity, our health, the fight against climate change, and so on – do not cancel out its nefarious effects. AI industry leaders in Davos warned about AI changing “the course of history, but not necessarily for the good.” Case in point: the Global Risk Report ranks disinformation as the most severe global risk anticipated over the next 2 years. It relentlessly feeds into the 3 Ps, can alter the course of elections, and exacerbate existing political and societal divides.
  • THE FRACTURING OF US SOCIETY. The US epitomizes what the 3 Ps and the malevolent power of disinformation do to polity and the political discourse. As a second Trump presidency looks increasingly possible, investors must start pondering (1) How much more radical would Trump be (a lot!)? (2) How would he deal with the US federal deficit and how would this affect the USD? (3) What US retrenchment would mean for global security and trade issues? (4) How would the erosion of global rules and the rule of law affect US assets and global companies?
  • DEMOGRAPHICS – LONG-TERM INVESTORS: BEWARE! Fertility rates are declining everywhere and “nobody really knows what’s going on” (according to Anna Rotkirch, a demographer). This is happening in all societies (conservative and liberal, young and old, big and small, rich and poor); and doesn’t seem to be driven by economics or family policies, but more by cultural, psychological, and biological factors. Demographic change is slow, but this downward trend has been so sudden and so pronounced that the peak in the world population might be imminent, with the rest of this century seeing a decline. The effect on those with a short-term horizon (like the financial markets) will be minimal, but not so for everybody else, especially governments. The conjunction of ageing societies and plummeting fertility rates will put public finances under great pressure, leaving policymakers with the choice between more borrowing and higher interest rates, or letting high inflation sort out the problem. On the upside, a global shortfall of labour could unleash a wave of innovation.
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