04 Jan 17 Developments To Watch Over The Next Five Years
What a year we just completed! Slow growth and widening inequality spurred populist uprisings around the world. Globalization is in retreat. Europe continued to crumble and the US Dollar strengthened, dampening the price of gold and other commodities. Bitcoin rose as the global scramble for non-printable currencies accelerated. And of course, it’s impossible to talk about 2016 without discussing the unprecedented US election. On the back of Donald Trump’s ascension as the 45th president of the United States, pundits now describe a “post-fact” world in which every possible idea, no matter how preposterous, can find validation somewhere.
Radical uncertainty abounds, conflicting realities are everywhere, and seemingly structural trends appear to have reversed on a dime. How can we possibly navigate this chaotic world? As I mentioned in last year’s version of this post, some use a Magic 8 ball, while others turn to Ouija boards. I strive to be more self-reliant. Despite the inherent uncertainty, I believe that if one considers scenarios on a five-year view, it is easier to accurately predict change. Analyzing structural signals offers hope. In January 2015, I made 15 Predictions for 2015-2020. And in January 2016, I made 16 Predictions for 2016-2021. It’s too early to tell how these predictions have fared. But as noted by the late Yogi Berra, “The future ain’t what it used to be!” So although I’ve kept a handful of my predictions from the last two years, I’ve also updated some and added others.
- As inequality increases, the global wealthy voluntarily adopt massive redistribution policies (socialism lite) in a quest to keep capitalism alive. Labor markets remain stubbornly stagnant in the face of continued technological progress, leading to discussion of when and how to implement basic income schemes. After years of retreating, globalization returns with a vengeance as citizens everywhere learn it’s hard to lift one’s boat when the tide is going out.
- The Fed continues to raise rates, driving the US dollar to disruptive heights and tipping the US economy into a recession. (That’s because higher rates draw more investors to put their money into dollar-denominated assets like US bonds and stocks.) The recession ends when the Trump-promised infrastructure boom takes hold in the United States, funded by global capital. But as capital heads to America, it leaves several emerging market in crises and lowers global growth. US multinationals report disappointing earnings and profitability sputters, revealing overly optimistic stock market valuations. European financial systems are tested.
- The Defense Industry booms as tensions mount in the Middle East, the South China Sea, Turkey, and the Arctic. The militarization of space accelerates as China deploys increasingly capable anti-satellite technologies; the US Navy is seen as prophetic for having retaught celestial navigation to its officers. North Korea’s supposedly primitive missile technology proves adequate for threatening an EMP attack on Japan, China, or the United States.
- Global warming reveals toxic and potentially lethal pathogens (such as anthrax, the Spanish flu, smallpox, or the bubonic plague) from a prior era as long-frozen permafrost melts. Water wars spur the development of a multi-billion dollar commercial freshwater-gathering industry that uses Siberia, Canada, and the Antarctic as their primary sources of supply. Desalination alleviates some pressure, but only for those countries with plentiful access to cheap energy.
- Animal protein demand skyrockets as an emerging global middle class adopts increasingly Western diets. For economic reasons, edible insects, lab-produced meats, and genetically engineered animals become a part of global diets. The combination of growing developing market protein consumption and an aging developed world population drives cardiovascular disease and diabetes rates ever higher, leading to a flood of medical tourists.
- Saudi Arabia teeters on the edge of instability as Mohammed bin Salman attempts to wean the kingdom off of oil. Domestic unrest and regional conflict lead to an increasingly militaristic approach to both internal and external matters. The country’s military budget, which was larger than Russia’s in 2015, contracts briefly before again expanding.
- Cyber risks become the top concern for global boardrooms. Financial regulators mandate independent information audits comparable to today’s financial audits. Mass consolidation takes place in the cyber security market and several dominant players emerge, focused not just on prevention, but also on quick identification and rapid containment of cyber breaches.
- In the face of persistently anemic economic growth, governments everywhere begin relying on fiscal stimulus to drive their economies. Debt levels skyrocket, leading to increasingly unsustainable debt levels. The fiscal gap in the United States rises above $215 trillion. Ratings agencies downgrade the United States, paradoxically leading to buying binge of US treasuries as investors scramble for “safe” assets.
- South Africa endures a multi-year economic recession that generates domestic unrest and a political crisis that removes the once dominant ANC from power. Platinum markets are disrupted, sending prices to all-time highs. Capital leaves South Africa for Zimbabwe, where economic reforms in the post-Mugabe era lead to 10%+ annual economic growth.
- Currency wars intensify, leading to a global investor stampede for non-printable currencies like gold and Bitcoin, both of which surge to all-time highs. The Chinese yuan plunges against the dollar while the Japanese yen steadily depreciates. Italy reintroduces the lira.
- Latin America rebounds on the back of a boom in agricultural commodities. As the global population exceeds 8 billion, the Pacific Alliance, a trading bloc centered on Colombia, Chile, Mexico, and Peru, emerges as Asia’s preferred economic entry into Latin America. The ending of Colombia’s 50+ year civil war spurs an infrastructure and tourist boom, while Chile’s economy rebalances as the demand for fish, lithium, and wine outpace copper markets.
- Technological innovation accelerates. The sharing economy vertically integrates as Uber builds a fleet of driverless cars, Facebook begins producing content, and AirBNB buys buildings. Drones become commonplace. Virtual and augmented reality, led by Florida startup Magic Leap, enters the mainstream, destroying demand for physical goods. As a result of cyber security concerns, the Internet of Things grows more slowly than expected.
- China’s economy continues to decelerate while the fragility of its financial system gains increasing global attention. The One Belt, One Road development programfails to fully utilize the extra capacity in China’s steelmaking and construction sectors, but it does provide strong support to industrial commodities such as iron ore, lead, copper, and zinc. Domestically, decreased economic opportunity generates increasing labor unrest, creating an existential threat to the Chinese communist party.
- Superbugs are acknowledged as the single most serious threat to global health, representing a $100 trillion risk. Public health officials mandate doctors to explore treatments other than antibiotics (including diligent monitoring) before prescribing them. Consumers begin demanding livestock be raised without the use of antibiotics.
- Rapidly rising populations in Africa and India threaten to derail per capita economic gains. Despite widespread beliefs that a democratic nation would never do so, India implements demographic constraints (a one-child policy?) to contain its runaway population, while some African governments mandate family planning education in elementary schools. The rapidly shrinking population of Japan, however, enables the rapid adoption of automation without displacing workers.
- OPEC agrees to again cut oil production, and tensions escalate in the Arctic over seemingly large resources. Fusion emerges as a viable niche-application alternative energy source, and the rapidly plunging cost of accessing methane hydrates presents the possibility of energy prices staying low for hundreds of years.
- The meteoric rise of passive investing strategies continues to unsustainable heights. Passively managed assets under management exceed those that are actively managed. Asset prices move in lockstep with fund flows, negating the very price mechanism upon which passive strategies rely. Passive investing begins losing its appeal as active managers take advantage of these distortions to outperform indices.
A final word of caution, however. Every time I make predictions, I recall the prescient words of John Kenneth Galbraith: “There are two types of forecasters: those who don’t know and those who don’t know they don’t know.” I’ll let you decide which I am, but if nothing else, I do hope the very act of considering possibilities helps generate thought!