As is now customary ahead of Davos week, the latest World Economic Forum report on global risks was released and the usual graphic of the top 5 global risks in terms of likelihood and impact are reproduced below. Environmental risks and technology risks again dominate the likelihood list which is indicative of the current consensus. As this post highlights, the likelihood of irreversible climate change within the next 10 to 20 years is the short, medium and long-term issue of our times.
Although the report does state that “geopolitical and geo-economic tensions are rising among the world’s major powers” and that these “tensions represent the most urgent global risks at present”, I was somewhat surprised to see that geopolitical risk did not make the top 5 likelihood list this year. Despite the current market (wishful in my view) thinking of a kick the can down the road fudge outcome, Brexit in 2019 may result in a constitutional crisis in the UK or the possibility of a large portion of the population being alienated by a possible rushed outcome this Spring (e.g. hard Brexit or permanent custom union). His Orangeness and his ability to flame division, whether internally in the US after a bad Mueller report or against China to deflect from his pitiful negotiating style, are ever present possibilities for 2019 (if not hopefully remote ones). Although maybe somewhat alarmist, I can’t but help worry that his reign may end with some form of violent turmoil, he will not go quietly!
As an aside, the wonderful TV show “Brexit: The Uncivil War” from the UK’s Channel 4, which I think is on Netflix now, does raise the issue of how democracies will operate in a world where all sides can use technology to manipulate a (potentially decisive) disengaged minority to the political extremes. If the long-term success of democracy is dependent upon compromise, then we may be in trouble. Pundits say the implications of Brexit politics is a break from the traditional left/right or conservative/liberal divide, into a much more complex mixture of differing tribes. In fact, I would highly recommend this video from Dominic Cummings, the main subject of the show, who ably explains the parameters of the new political landscape (if you don’t have the time to watch it all, watch a few minutes after the 15-minute mark on how they did it).
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One other item that caught my attention in the WEF report, in section 6 called Open Secrets, was the assertion that when “the huge resources being devoted to quantum research lead to large-scale quantum computing, many of the tools that form the basis of current digital cryptography will be rendered obsolete”. The article further asserts that “public key algorithms, in particular, will be effortlessly crackable” and, under certain scenarios, “a collapse of cryptography would take with it much of the scaffolding of digital life”. Do I hear a new arms race approaching? The report predicts “as the prospect of quantum code-breaking looms closer, a transition to new alternatives—such as lattice-based and hashbased cryptography—will gather pace” although “some may even revert to low-tech solutions, taking sensitive information offline and relying on in-person exchanges”. Imagine having to rely on people meeting other people to get things done……..unthinkable!
Posted in General
Tagged black swan, Brexit, Chinese economy, climate change, CO2 emissions, conservative liberal, cyber crime, cyber terrorism, cybersecurity risk, Davos 2019, digital cryptography, disruptive technology, Dominic Cummings, economic slowdown, elevated indebtedness, environmental risk, extreme weather, global financial system, global risks, global risks survey, global trends, globalization, grey rhino risks, hash based cryptography, income inequality, lattice based cryptography, nationalism, Paris Agreement, political tribes, quantum code breaking, quantum computing, technological change, The Uncivil War, traditional left/right, uncertainty, unsustainable asset prices, US equity markets, voter manipulation, World Economic Forum
This year’s Davos gathering is likely to be dominated by Donald Trump’s presence. I look forward to seeing him barge past other political and industry leaders to get his prime photo opportunity. As US equity markets continue to make all time highs in an unrelentingly fashion, it is scary to see the melt-up market been cheered on by the vivacious talking heads.
Ahead of Davos, the latest World Economic Forum report on global risks was released today. 59% of the contributors to the annual global risks survey point to an increase in risks in 2018, with environmental and cybersecurity risks continuing their trend of growing prominence, as can be seen below.
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Undoubtedly, environmental risks are the biggest generational challenge we face and it is hard to argue with the statement that “we have been pushing our planet to the brink and the damage is becoming increasingly clear“. That said, what is also striking about these assessments (and its important to remember that they are not predictions) is how the economic risks (light blue squares) have, in the opinion of the contributors, receded as top risks in recent years. The report does state that although the “headline economic indicators suggest the world is finally getting back on track after the global crisis that erupted 10 years ago” there is “continuing underlying concerns”. Amongst these concerns, the report highlights “potentially unsustainable asset prices, with the world now eight years into a bull run; elevated indebtedness, particularly in China; and continuing strains in the global financial system”.
A short article in the report entitled “Cognitive Bias and Risk Management” by Michele Wucker caught my attention. The article included the following:
Risk management starts with identifying and estimating the probability and impact of a given threat. We can then decide whether a risk falls within our tolerance limits and how to react to reduce the risk or at least our exposure to it. Time and again, however, individuals and organizations stumble during this process—for example, failing to respond to obvious but neglected high-impact “grey rhino” risks while scrambling to identify “black swan” events that, by definition, are not predictable.
One of the most pervasive cognitive blinders is the availability bias, which leads decision-makers to rely on examples and evidence that come immediately to mind. This draws people’s attention to emotionally salient events ahead of objectively more likely and impactful events.
I do wonder about cognitive blinders and grey rhinos for the year ahead.
Posted in General
Tagged black swan, Chinese economy, climate change, CO2 emissions, Cognitive Bias, cyber crime, cyber terrorism, cybersecurity risk, Davos 2018, disruptive technology, economic slowdown, elevated indebtedness, environmental risk, extreme weather, global financial system, global risks, global risks survey, global trends, globalization, grey rhino risks, income inequality, meltup market, Michele Wucker, nationalism, Paris Agreement, technological change, unsustainable asset prices, US equity markets, World Economic Forum
The latest World Economic Forum report on global risks is out today and, as usual, it reflects current concerns rather than offering any predictions for 2017. To be fair to WEF, the top risk for 2012 to 2014 inclusive in their survey was income disparity which is commonly viewed as one of the factors behind the rise in populism.
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The report states the obvious about the impact on global risks following 2016, specifically that “societal polarization, income inequality and the inward orientation of countries are spilling over into real-world politics” and that “decision-making is increasingly influenced by emotions” due to the increase in nationalism. Where this year’s report is spot on, in my view, is in relation to the top 5 global trends that will determine global developments over the next 10 years, as below.
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The report also states that “although anti-establishment politics tends to blame globalization for deteriorating domestic job prospects, evidence suggests that managing technological change is a more important challenge for labour markets” and that “we are in a highly disruptive phase of technological development, at a time of rising challenges to social cohesion and policy-makers’ legitimacy”.
Among the many risks highlighted in the report is a reduction in geopolitical co-operation which is likely to be detrimental to global growth, action on global indebtedness, and climate change. It’s particularly depressing to think that even if the commitments under the Paris agreement were delivered, which now looks doomed after the election of Trump, the United Nations Environment Programme (UNEP) estimates the world will still warm by 3.0°C to 3.2°C, still far above the 2°C limit where scary and irreversible stuff happens.
Another worrying risk is the possibility of a new arms race in an era of rapid advancements in a technology which also has a retrograde feel, especially “while risks intersect and technologies develop quickly, too often our institutions for governing international security remain reactive and slow-moving”.
All pretty cheery stuff! And on it goes.
As I write this, I’m watching reports on Mr Trump’s press conference today, and although there is no doubt that our world is riskier as we enter 2017, it will be entertaining to see this guy as the leader of the free world. Hopefully good entertaining, not depressing entertaining!
Posted in Climate Change, General
Tagged 5th IPCC assessment report, Chinese economy, climate action plans, climate change, cyber crime, cyber risk, cyber terrorism, disruptive technology, economic slowdown, extreme weather, geopolitical cooperation, global emissions, global risks, global trends, globalization, income inequality, indebtedness, international security, nationalism, Paris Agreement, Risky World, social cohesion, social unrest, societal polarization, technological change, UNEP, United Nations Environment Programme, water supply issues, World Economic Forum
The latest World Economic Forum report on global risks reflects the common concerns of its almost 750 global contributors across multiple disciplines. Such reports are often poor predictors of issues (e.g. the emergence of the migrant issue in Europe) but do reflect current thinking as the graphic below on the changing risks by likelihood and impact illustrates.
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It’s interesting that China hasn’t made it onto either list since 2010. The report has the following to say about a slowing Chinese economy:
The government faces a dilemma. If it tightens credit conditions, it could reduce investment more quickly than consumption can increase to compensate, and cause massive defaults among struggling and heavily leveraged companies. This could mean a much more severe economic slowdown, potentially causing a surge in unemployment and social unrest. However, if the government lets more credit flow to avoid these destabilizing defaults, it risks further increasing the indebtedness of underperforming industries and creating bigger problems down the line.
Unsurprisingly, different regions in the world have different concerns and it’s interesting to compare and contrast each.
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Climate change, extreme weather and water issues are ever present risks. At least it’s reassuring to see that the 5th IPCC assessment report (as per this post) does seem to have moved the debate on from whether we humans are impacted climate to the speed of implementing the mitigation and adaption actions required. As the WEF report states, the Paris Agreement reached last December is a positive step although “to date, nearly 190 governments have submitted their climate action plans, covering over 95% of total global emissions” and “these efforts alone will not suffice as even the most optimistic estimates suggest that these pledges taken together would contain warming only to 2.7°C above pre-industrial levels.” Over 2.0°C is commonly believed to be the point where things could get extremely unpredictable. The Paris Agreement is however better than previous efforts and therefore represent progress.
Posted in Climate Change
Tagged 5th IPCC assessment report, Chinese economy, climate action plans, climate change, economic slowdown, extreme weather, global emissions, global risks, massive defaults, Paris Agreement, Rating Risks, social unrest, water supply issues, World Economic Forum