This is scary…
This is scary…
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).
click to enlarge
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!
As we enter a week where further market turmoil is likely against a background of further tensions between the US and China over the Huawei arrest, the climax of the Brexit debacle, and the yellow vest protests in France. All these issues can and will be resolved eventually but they pale in comparison to the political inaction over the latest climate change reports.
The US government, in the form of the United States Global Change Research Program (USGCRP), in a report in November concluded that “the evidence of human-caused climate change is overwhelming and continues to strengthen, that the impacts of climate change are intensifying across the country, and that climate-related threats to Americans’ physical, social, and economic well-being are rising” and warned that “these impacts are projected to intensify—but how much they intensify will depend on actions taken to reduce global greenhouse gas emissions and to adapt to the risks from climate change now and in the coming decades”. Of course, the Orange One again demonstrated his supreme myopic attitude with the dismissal “I don’t believe it”.
We now have the black comedy of oil producing states such as the US, Russia and Saudi Arabia arguing over whether to “welcome” or just “note” the latest IPCC report this week at the UN climate talks, known as COP24. The IPCC report on the impacts of a temperature rise of 1.5°C was launched last October and is a sobering read. The IPCC again states with a high level of confidence that “human activities are estimated to have caused approximately 1.0°C of global warming above pre-industrial levels, with a likely range of 0.8°C to 1.2°C” and that “global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate”.
In order to avoid warming above 1.5°C, the world needs “global net anthropogenic CO2 emissions decline by about 45% from 2010 levels by 2030 (40–60% interquartile range), reaching net zero around 2050 (2045–2055 interquartile range)”. For limiting global warming to below 2°C, emissions need to “decline by about 25% by 2030 in most pathways (10–30% interquartile range) and reach net zero around 2070 (2065–2080 interquartile range)”.
Let’s face it, given the current political leadership across the globe, such declines are just fantasy. And I find that really depressing. The plea of David Attenborough at COP24 last week for leaders in the world to lead looks set to fall on deaf ears. Attenborough worryingly stated that “the continuation of our civilisations and the natural world upon which we depend, is in your hands (i.e. our leaders)”.
We’re pretty much toast then….
It’s been over a year since I posted on climate issues (last post here after Trump’s withdrawal from the Paris Agreement). A recent study by a group of scientists warned that even if the carbon emission reductions called for in the Paris Agreement are met, there is a risk of Earth entering “Hothouse Earth” conditions. A “Hothouse Earth” climate will in the long term stabilize at a global average of 4-5°C higher than pre-industrial temperatures with sea level 10-60 m higher than today according to the scientists.
“Human emissions of greenhouse gas are not the sole determinant of temperature on Earth. Our study suggests that human-induced global warming of 2°C may trigger other Earth system processes, often called “feedbacks”, that can drive further warming – even if we stop emitting greenhouse gases,” says lead author Will Steffen from the Australian National University and Stockholm Resilience Centre, adding that “avoiding this scenario requires a redirection of human actions from exploitation to stewardship of the Earth system”.
The best-selling author of “Sapiens” and “Homo Deus”, Yuval Noah Harari, makes the observation that “the hand of the market is blind as well as invisible, and left to its own devices, it may fail to do anything at all about the threat of global warming or the dangerous potential of artificial intelligence”. This is one of the themes he returns vigorously to in his new book “21 Lessons for the 21st Century”, a collection of previously published essays.
It is therefore heartening to see such an influential and intelligent financial professional as Jeremy Grantham of GMO pushing the issue as an important one for investors to consider in our daily activities. This talk from Grantham and the accommodating presentation are well worth spending some time on. His arguments are articulated further in this August GMO white paper, The Race of Our Lives Revisited, an update on his 2013 paper.
Grantham states that “the truth is we’ve wasted 40 or 50 years since the basic fact about manmade serious climate damage became known” and “we’re moving so slowly that by the time we’ve fully decarbonized our economy, the world will have heated up by 2.5ºC to 3ºC, and a great deal of damage will have been done”.
Grantham highlights the declining costs of alternative energy like solar and wind and the advances made in battery costs. Notwithstanding these advances, progress is too slow, as the graphs below show.
Depressingly Grantham concludes that “in all probability we will reach our 2ºC target by 2050, and we will be fighting tooth and nail – with any luck, with carbon taxes and an improved attitude – to keep it below 3ºC by 2100”. Compounding the climate issue is continued population growth, declining agricultural productivity and increased soil erosion.
Like Harari, Grantham argues that “the greatest deficiency of capitalism is its complete inability to deal with any of these things that we are talking about even though it can handle the millions of more mundane factors that go into producing a workable economy, far better than planned economies”. Grantham makes a passionate argument for investors to divest themselves of negative climate impact firms, such as the oil producers, and to do more in our personal lives to promote green changes, like buying electric cars.
In the absence of real political leadership in our world, which looks likely to continue for some years yet as the populist and nationalistic political dead end we are currently travelling on plays out, voting with our actions seems the only thing we can do. As Grantham concludes, we all need to “get to it”.
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.
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.