Summing up Davos 2016

By Alpha Beta Strategy and Economics

DAVOS 2016

The mood in Davos this year was mixed. Many of the World Economic Forum sessions felt like a tug-of-war between fear and optimism, reflecting deep uncertainty for what 2016 may bring.

On one side, pessimists warned of a slowdown in China, deepening geo-political crises and plunging commodity prices. On the other side, optimists pointed to stronger US growth and the opportunities afforded by rapid technological progress.

Perhaps the ambivalent mood was best summed up by legendary investor George Soros. Asked for his outlook on global growth Soros said “I see light at the end of the tunnel,” but, “I just don’t know how to get there.”

The notes below summarise some of the main comments, ideas and fears heard at Davos this week.

BIGGEST FEAR

Donald Trump wasn’t at Davos, but he hung over the conference like a cloud. Six months ago, his surprise ascendancy in the Republican presidential race was fodder for late-night comedians, but now it’s a top concern in the corridors of global power.

“He’s presenting himself to the American people as a ‘turnaround CEO’”, said veteran political observer David Gergen from Harvard. Gergen, and many others in Davos, now believe Trump to be the most likely candidate to win the Republican nomination, and do not rule out his ability to win the Presidency.

Whether he wins or not, Trump has already changed the game by defining the issues this campaign is being fought on and forcing the rest of the political field to respond. From the refugee crisis, to Iran, to global trade agreements – the Trump effect is everywhere.

BIGGEST (SURPRISE) STAR

Bono, Leonardo DiCaprio and Kevin Spacey, all added their star power to the Davos scene, but (for me) the surprise star was a politician from Estonia, little-known in Australia.

While every politician talks about reform and embracing the future, Estonian President Toomas Hendrik Ilves, has done it. Estonia is perhaps the most digital country in the world. Every citizen has a unique digital identifier and can bank, start a business, sign contracts, pay taxes and even vote from their mobile phone. Digitisation delivers huge efficiencies to the health and education system. Even non-Estonians living anywhere in the world can apply for e-residency, enabling them to start a business, open a bank account and make payments online.

For Ilves, digital government is not just a policy, it’s a political philosophy centered around inclusion, competitiveness and opportunity. Watch this space.

BIGGEST DEBATE

Delegates arrived in Davos fresh from a stock market conflagration that has wiped more than $3 trillion from global stock markets. The big debate: Are we facing another global economic meltdown akin to 2007-2008?

A number of participants warned that markets are pricing in dark facts about the global economic outlook that we may be yet to fully understand. “Market turmoil can be a harbinger that something is wrong and, even if it is irrational, can have real consequences,” said Nobel-prize winning economist Joe Stiglitz.

Raghuram Rajan, the governor of India’s central bank, said low interest rates had only served to lift asset prices to unrealistic levels and that there could be a day of reckoning if fundamentals don’t improve. The Fed has signaled up to 4 rate increases this year, potentially spelling more pain for equities.

Others were more optimistic. Mary Erdoes who manages more than $2.4 trillion for JP Morgan said the market volatility would be short-lived and the conditions are in place for a recovery: “There is cash in every pocket in the world, waiting for confidence in the system before they invest.” There is $2 trillion of cash on the balance sheet of S&P500 companies.

Even Nouriel Roubini – Davos’s own doctor doom and the economist who predicted the last crash – doesn’t think 2016 will bring a deep crisis. “It is not going to be like 2008-09. There is not the excessive leverage in the financial system that there was last time.” That’s about as positive as Roubini gets.

ZEITGEIST MOMENTS

The World Economic Forum’s conference theme was the”Fourth Industrial Revolution” – the WEF’s catch-all term for the technological changes nibbling away at the structure of our economies. “Automation”, “collaboration”, “disruption” all featured heavily in the program.

Just to rub the point in, the Infosys cocktail party featured a robot serving beer. Another robot conspicuously read the newspaper in the main conference centre. And just opening up your Uber app revealed the sharing economy Davos-style: #UberChopper.

But behind the gimmicks there were serious discussions about the impact of technology on our economies. Some participants worried that the growth of automation and the sharing economy would worsen inequality (“what does a minimum wage mean for an Uber driver?”), weaken working conditions (“how does parental leave work for freelancers?”) and reduce job security (“what will happen to all the bartenders, if robots can pour a beer?”).

General-Secretary of the International Trade Union Confederation, Sharon Burrow said: “So, the real question is whether the wealth will be shared. Our fear is not that technology will displace jobs, our fear is that technology will be used by the few to create enclaves of greater wealth and further marginalisation and conflict.”

On the other side of the debate, ‘techno-optimists” like Vishal Sikka, CEO of Infosys, pointed out that we have dealt with huge employment transitions in the past: agricultural employment was 97% of the population just over a century ago. Today it’s 3% in advanced economies, but the world isn’t full of unemployed farmers. Sikka said: “the tasks that humans can occupy themselves with are limited by imagination, not automation.”

PREDICTIONS FOR 2016

The IMF started the week by predicting lower global growth in 2016, cutting their forecast to 3.4 per cent (down from 3.6 per cent in October). “This coming year is going to be a year of great challenges and policy makers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects,” IMF chief economist Maurice Obstfeld said.

A number of business figures were equally gloomy. The new normal is a low-growth world,” echoed Davos’s plutocrat-in-Chief Martin Sorrell, chairman of UK-based advertising giant WPP.

Others pointed to positive signs on the horizon, including the emergence of a durable recovery in the United States and a clear commitment from European policymakers to support growth in the Eurozone. Most of the slowdown in growth is due to deceleration in China, but even 6 or 7% growth for China’s economy today is a bigger dollar number than 10% growth in China’s economy ten years ago.

RISKS FOR 2016

One thing that seemed to generate consensus, is that most risks in 2016 are weighted to the downside. These include:

The potential for a sharper-than-expected slowdown in China. A series of policy missteps in the last few months have undermined confidence in Chinese authorities and precipitated heavy falls in equity markets. But the point made over and over this week is that China’s stock market is a sideshow: less than 1 in 30 Chinese people own stocks. The real problems to watch in China are: an extremely unbalanced economy, wasteful investment, chronic over-capacity and high debt. Emboldened by the recent weakness, China bears were out in force in Davos. Professor Kenneth Rogoff of Harvard said: “Anyone who is still telling the ‘this time is different’ story for China has their head in the sand”. George Soros said “A hard landing is practically inevitable. I’m not predicting it, I’m observing it.” But he also said “China can manage it. It has resources and policy latitude, with $3 trillion in reserves.”

Trouble in emerging markets. In recent years emerging markets companies have dramatically increased their dollar-denominated debts. The Bank for International Settlements calculates this now stands at $4 trillion for emerging markets as a whole, four times higher than in 2008. Now companies holding these debts are being hit by the double whammy of rising interest rates and the rising dollar. Concerned investors withdrew $52 billion from emerging market equity and bond funds in the last three months – the largest quarterly outflow on record. “Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem,” said William White of the OECD.

Geopolitical risks. An escalation of ongoing geopolitical tensions in a number of regions – Syria, North Korea, Russia, cyber-security – are affecting confidence. These risks have the potential to disrupt global trade, financial, and tourism flows.

The concern is that if any of these risks materialize, governments have few tools to respond now that fiscal space is exhausted and monetary policy has reached its limits. According to Nobel laureate Professor Michael Spence of the Stern School of Business at New York University, “it is a fragile and deteriorating situation globally, with little in the way of effective counter-measures”.

αlphaβeta is a strategy advisory business serving clients across Australia and Asia from offices in Singapore and Sydney

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Comments

    • At the World Economic Forum, keynoter Joe Biden warned global elites that the unraveling of the middle class in America and Europe has provided “fertile terrain for reactionary politicians, demagogues peddling xenophobia, anti-immigration, nationalist, isolationist views.”

      Evidence of a nationalist backlash, said Biden, may be seen in the third parties arising across Europe, and in the U.S. primaries.

      But set aside Joe’s slurs — demagogues, xenophobia.

      Who really belongs in the dock here? Who caused this crisis of political legitimacy now gripping the nations of the West?

      Was it Donald Trump, who gives voice to the anger of those who believe themselves to have been betrayed? Or the elites who betrayed them?
      Can that crowd at Davos not understand that it is despised because it is seen as having subordinated the interests of the nations and people in whose name it presumes to speak, to advance an agenda that serves, first and foremost, its own naked self-interest?

      The political and economic elites of Davos have grow rich, fat and powerful by setting aside patriotism and sacrificing their countries on the altars of globalization and a New World Order.

      No more astute essay has been written this political season than that of Michael Brendan Dougherty in “This Week,” where he describes how, 20 years ago, my late friend Sam Francis predicted it all.

      In Chronicles, in 1996, Francis, a paleoconservative and proud son of the South, wrote:

      “[S]ooner or later, as the globalist elites seek to drag the country into conflicts and global commitments, preside over the economic pastoralization of the United States, manage the delegitimization of our own culture, and the dispossession of our people, and disregard or diminish our national interest and national sovereignty, a nationalist reaction is almost inevitable and will probably assume populist form when it arrives. The sooner it comes, the better.”

      What we saw through a glass darkly then, we now see face to face.

      Is not Trump the personification of the populist-nationalist revolt Francis predicted?
      And was it not presidents and Congresses of both parties who mired us in wars in Afghanistan, Iraq, Libya, Syria and Yemen, and negotiated the trade deals that have gutted American industry?

      The bleeding of factories and manufacturing jobs abroad has produced the demoralization and decline of our middle class, along with the wage stagnation and shrinking participation in the labor force.

      Is Trump responsible for that? Is Socialist Bernie Sanders, who voted against all those trade deals?

      If not, who did this to us?

      Was it not the Bush Republicans and Clinton Democrats?

      Americans never supported mass immigration.

      It was against their will that scores of millions, here legally and illegally, almost all from Third World countries, whose masses have never been fully assimilated into any western nation, have poured into the USA.

      Who voted for that?

      Religious, racial, cultural diversity has put an end to the “bad” old America we grew up in, as we evolve into the “universal nation” of Ben Wattenberg, who once rhapsodized, “The non-Europeanization of America is heartening news of an almost transcendental quality.”

      James Burnham, the ex-Trotskyite and Cold War geostrategist whose work Francis admired, called liberalism “the ideology of Western suicide.”

      If the West embraces, internalizes and operates on the principles of liberalism, Burnham wrote, the West with meet an early death.

      Among the dogmas of liberalism is the unproven assumption that peoples of all nationalities, tribes, cultures, creeds can coexist happily in nations, especially in a “creedal” nation like the USA, which has no ethnic core but rather is built upon ideas.

      A corollary is that “diversity,” a new America and new Europe where all nations are multiracial, multiethnic, multicultural and multilingual, is the future of the west and the model for mankind.

      Yet, large and growing minorities in every country of Europe, and now in America, believe that not only is this proposition absurd, the end result could be national suicide.

      And when one considers the millions who are flocking to Trump and Sanders, it is hard to believe that the establishments of the two parties, even if they defeat these challengers, can return to same old interventionist, trade, immigration and war policies.

      For Trump is not the last of the populist-nationalists.

      Given his success, other Republicans will emulate him. Already, other candidates are incorporating his message. The day Francis predicted was coming appears to have arrived.

      Angela Merkel may have been Time’s Person of the Year in 2016, but she will be lucky to survive in office in 2017, if she does not stop the invasion from Africa and the Middle East.

      Yet Joe Biden’s dismissal that it is reactionaries who oppose what the progressives of Davos believe is not entirely wrong. For as Georges Bernanos wrote, when Europe was caught between Bolshevism and fascism:

      To be a reactionary means simply to be alive, because only a corpse does not react any more — against the maggots teeming on it.

      Pat Buchanan.

      • Thanks Igor. Previously if anyone had quoted Pat Buchanan I would have run a hundred miles away. But I read it, thought about it, could see his perspicacity, and now have his columns blog bookmarked for further reading and reflection.

        That’s what’s great (or can be) about MB – not just the usefulness and insight of the posts but the variety of ideas expressed in the comments. Ideas that can challenge one’s world-view and therefore lead to growth in understanding and, dare I say it, a little “wisdom”.

        A good community we have here despite our differences.

      • Norway has not had mass immigration in the last 50 years.

        Neither did Finland, Iceland, Russia, Japan, and I suspect Hong Kong, Singapore.

        Only the corrupt English-speaking nations went for mass immigration to slash the wages of their own voters.

      • It is not liberalism driving the decline of the West. It is, as skippy likes to point out time and time again, corporatism (/fascism).

        Mass immigration is not being facilitated to bring everyone together into a big happy circle to pass the bong. It’s being facilitated to suppress wages and increase profits.

  1. “agricultural employment was 97% of the population just over a century ago. Today it’s 3% in advanced economies, but the world isn’t full of unemployed farmers. ”
    No, Vishal, the displaced farmers got jobs selling the products of the industrialisation – cars, washing machines, and dare I say it, houses. They became Service Industry clones of law and accountancy. A displaced farmer could sell a Westinghouse fridge in Harvey Normans etc. and a clever one could read an Excel spreadsheet. But what does that same salesman and his progeny do when even that job is automated? More importantly; what is he needed to do? Nothing.

    • then only two options are left:
      1. Hunger game scenario/system.
      2. Capitalism falls and there is universal acceptance that as humans we don’t need to base our economies on greed. Barnaby (and rest of the Neanderthals) will find this hard to comprehend but who cares. New system is developed where robots do lot of the work for the humans. Humans can still do lot of work where human intervention is required but will work shorter hours (3 day week). Unemployed still engage in contributing to the economy by getting trained for other skills in product design, research, science etc.
      Industries and companies will not be valued based on how much product they sell but but how good their products are and how long they last. Lot of people will say that will slow down innovation but not true. It will just stop cosmetic innovation that we have now.
      Open source and no more proprietary patents. Screw you Microsoft and Apple and Google and all pharma and rest.

      • I prefer freedom to greed. In your new world order economic paradise, what would we actually do Nikola? I think I’ve got it, talk of Australia’s got talent, the Big Bash, how wonderful life is? How we are unified but diverse? How we can all live in harmony and forget that some people hate us and then deem the hate crime onto the dwindling WASP’s? Awesome!

      • @ Igor
        Somebody will have to work out details. lol

        Alternative is WW3 and followed by 1. or just reset the excel (chose who wins and who loses), start new bubble and in 10-15 years reset again and so on. We have been doing it for while so why not for the rest of our existence?

      • Sounds like a plan Nikola – I think so many can see the problems, but implementing solution’s ? Good luck with that!

      • Nikola. I have been hearing various versions of your second scenario since the mid 1960’s, but have only ever watched the reality swing the other way. eg. Can you remember a thing called the 40 hr week? How about a real middle class, or a time when people were able to leave the monthly milk bill, in cash, in an empty bottle by the front gate? Your utopia aint gunna happen. I do hope however, that your first scenario is not the only other option. If the world swings towards greater fascism, as we seem to be seeing across the board, then we are heading into interesting times indeed.

    • Or they write business blogs…… what is it about this demand to have lots of unskilled jobs for workers to be on an assembly lines etc. using their hands, i.e. other people but for not for ourselves?

      Misrepresents the majority, most us are working in services and taking careers and employment seriously from health care to IT etc…. so we don’t have to physically toil, why is that bad? At best it shows a very restricted outlook on the world…..

    • This was written prior to Davos. And yes, they discussed inequality. As the middle class is absorbed into the other class things will become a lot more equal for a lot more people…

      • Settle Chuck. Just saying that ‘inequality’ within the masses will even out to a large degree. Most will not enjoy this newfound ‘equality’ because it will not be in the direction desired. Elites, techno-elites and governmental quasi governmental will be exempt.

  2. The Davos World Economic Forum is “Committed to Improving the State of the World,”
    So when the “State of the World” is clearly not improving, but getting markedly worse,(just ask all the youngsters) what in the name of Jack Frost is going on. The concerns of 2014-15 have become reality in 2016. We have debt crisis-hit European countries with soaring unemployment like Greece and Spain. We have the rise of the National Front, The Soldiers of Odin , the Golden Dawn in patriotic response to the flood of rapefugees??
    And, we have the situation where Britain will vote to leave the E.U. this year.
    From the USA, the NRA making a move to rearm us Strayan patriots (just in time).
    The Davos bankers and policymakers aren’t even faking it any more, they have no clothes. OPEC (Saudi) has put them all to the sword. They will not admit that they have no idea what’s happening and no idea what to do about it except to ensure any tough times happen to others outside their network.

  3. If isis were looking to hasten the decline of western civilisation then Davos would have been a great place to start.
    If I see Bono arrive at another one of these things, before retreating to his castle, I’m going to vomit. Leonardo Dicaprio? Kevin Spacey? And these people are somehow our betters?
    This is a giant pisstake.

  4. I don’t understand why people think automation will result in net job loses. People have to develop, build and support everything that is automated. What we’re seeing is a great need in the upskilling of humanity.

    • ADZ, mate one of the first jobs for automated machines will be to get the population back to manageable levels, about half the current no, based on that tried and tested Union concept of last on first off. No conscience problems with that outsourced strategy.

    • What are truck drivers meant to do.

      Forklift drivers.

      Hotel porters.

      Just about every expert says there will be big job losses when robots get smart enough to drive trucks at night in the rain/snow.

      Robots can already drive trucks in the sunshine.

      • Forklifts have been competing against automated guided vehicles for a couple of decades now .
        This might not have lead to wholesale job losses, but has probably constrained growth in the demand for drivers.
        It’s way easier to replace a forklift with a robot of some sort in a controlled environment as the majority of warehouses are, compared to trucks which need to go on the open road. If you are building a new warehouse in 2016, you’d have to at least consider how to build it in a way that made it as friendly as possible for automated forklift alternatives, keeping the number of humans needed to an absolute minimum.

    • People have to develop, build and support everything that is automated.

      Once. Then it’s automated and doesn’t have to be done again. That’s kind of the point of automation.

      What we’re seeing is a great need in the upskilling of humanity.

      To do what ? Almost any job involving mechanical skills is ripe for takeover by robots. Almost any job involving repetitive, predictable, or rules-based tasks is ripe for takeover by AI.

      The robot and AI revolution will certainly create new jobs. But not nearly as many as it displaces.

    • J good in theory, but, the wealthy have all the money off the table.
      They are the least likely to be willingly helicoptering it out.

      • helicoptering it out? What does that mean.

        Most people in Finland want UBI. The PM of Finland wants UBI.

        I hope that the PM is not a lying bastard like the ones AUS got: Rudd, Gillard, Abbott, Turnbull.

  5. Summing up BREXIT.
    Brexit is not getting much of a run in the Aussie MSM, probably because of the implications for immigrants, and all those who are feasting at the immigrant table. Here is a bit of an update.

    This flood of African immigrants into Europe is sharpening the thinking for the British move out of the European Union. Some of the major points are:
    Britain’s demand to curb/ cease, benefits for 4 years, for migrant workers from EU countries, in a bid to persuade Britons to stay in the European Union, but
    43% want out, anyway.
    36% wish to stay ??
    20% undececided, but closely watching the immigrant traumas that Europe is undergoing.

    Most Poms say Britain would prosper outside the bloc, and Brexit would be a triumph for the French Front National Leader, Marine Le Pen.
    A British exit would shake the cosy party of the Union to its core, severing its second largest economy and one of its top 2 military powers. (the Poms and the Krauts still argue over who is no 1)
    For the Poms, blood is thicker than water on these issues, and national interest trumps ideological affinity. Merkel is aware the damage that Brexit would inflict. It would change the balance of power in the EU, and not in her favour.
    As well the Poms want; recognition that the Euro is not the only currency of the Union, and, the UK wants safeguards that it will not have to contribute to future Euro Zone bailouts.
    For the Poms it seems there is no downside to a Brexit and plenty of problems to be avoided if it leaves. My call is for a Brexit.
    And we should follow the Pom guidelines to curb/cease, benefits for 4 years, for migrants, full stop… Maybe our Strayan economy collapse will force that anyhow.

  6. Iran and Saudi, both suffereing from decreased oil revenues as a result of lwo prices decide to have a troop build up and start showing muscle to each other. The moment the US rig count starts going up they cease and desist, engage in detente and let prices fall again. After frightening US frackers and their bankers and bond holders half to death again, they have another confrontation. Rinse and repeat!

  7. Bitcoin could totally transform the world for the better, much more than the corrupt parasites at Davos. It has a much more mathematical foundation than any of the worlds national fiat currencies and its masters who attend Davos. Most of our currency is totally digital now anyway and unbanked by anything except faith in our indebted governments. To sum it up another way, Bitcoin is like Uber and Davos is like the Taxi Drivers Association. Even if you put 0.5% of your portfolio into it, or 1 hour of your time in education it would be well spent.