When things are relatively quiet is the best time to step back and take stock of where you are. So this is a great time to take a fresh look at this year’s top Gray Rhino risks –a meta analysis of various top risks lists from various perspectives– and track how the most obvious yet unresolved risks have evolved. Along with my mid-year update, I’ve embedded links to articles with helpful insights on these top risks.
Most risks lists appear once a year and are promptly forgotten. But that’s a huge mistake. I can’t say enough how important I believe it is to keep ongoing tabs on risks and how effectively those with the power to head them off are doing that, or not. All too often, when a crisis erupts, we hear “nobody could have seen it coming,” when actually many people could, and did, but those with the power to do something about it just sat on their hands. This tracking effort is my way of calling them out.
Monetary policy errors, the top worry of analysts as 2018 began, continue to deserve top billing. The likelihood of asset bubbles popping is increasing as more and more market participants who may once have insisted “this time is different” are paying attention to warning bells. In particular, they are looking at signs of a flattening yield curve and possible inversion –a measure of the difference between short and long term borrowing costs that market veterans look to as a recession red flag. Rising interest rates will put pressure on government finances -particularly in the United States after the tax reform that takes a big bite out of revenues– and have already shaken emerging markets. But not tightening monetary policy merely postpones the reckoning day for corporate debt and asset bubbles -and the longer we wait, the more painful the eventual bursting will be. Along these lines, I wanted to share a thoughtful essay by John Hussman of the Hussman Investment Trust on the Arithmetic of Risk, with some important insights on what to watch for in days ahead.
Gray rhino risk number two, geopolitics, has increased as the current occupant of the White House has taken a sledgehammer to the rules-based global order, alienating allies, breaking US commitments, and chest-thumping. Protectionism is no longer a hypothetical, but a reality amid a trade war led by Washington (though a softening of the tone on Europe, and the possibility of an agreement with China, have re-emerged as possibilities). Iran, on which rhetoric from the White House has heated up, has taken on more urgency in recent weeks. (On Iran, this new article by my former Chicago Council on Global Affairs colleague Saeid Golkar is definitely worth a read.) The European Union is dealing with new fracture lines and increasing seismic pressures.
The third highest gray rhino risk, North Korea, has fallen in urgency following the recent Singapore summit and easing of twitter hostilities; it could probably stand to be wrapped in among other geopolitical risks. But the summit merely papered over wide gaps between what Washington and Pyongyang believe to be appropriate definitions of denuclearization. New reports of missile development work in North Korea only underscore that reality. For insights into the Korean Peninsula, I recommend a new book, South Korea at the Crossroads, by my college classmate, and fellow former editor of the Rice student newspaper, Scott Snyder, of the Council on Foreign Relations.
Gray rhino risk number four, the impact of technology on skills needs and economic disruption, continues to be important, though under-appreciated in the West, especially by policy makers. Technologies can create a lot of good, as this article on robot-assisted surgery argues. But they also can be double-edged swords, like the social impact of “deep fake” technologies that can be used to confuse reality and fiction, weighed against the good the same technology can do by helping people to prepare to reconstruct their speech virtually when they know they are likely to lose it to conditions like, say, Lou Gehrig’s disease. Academics, the tech community, and the business community are paying attention to the questions of how to enhance the positives and minimize the negatives of technology change. But it’s not enough.
Five, extreme weather. I was just reading that the volume of rain during increasingly intense storms has increased significantly across the United States -particularly in Great Lakes states. “The amount of rain during the most extreme storms in the Northeast has risen 71 percent since 1958; in the Midwest, heavy rain has increased 37 percent; in the Southeast, it’s up 27 percent,” the Washington Post reported.
Finally, it’s worth a return to a risk that was high on many of the 2016 and 2017 lists I analyzed, but that virtually disappeared from this year’s lists: rising populism and political instability and uncertainty in the United States. But given the upcoming midterm elections, the rising tension between the White House and the business community, a series of political surprises in recent primaries and special elections, the trade war’s impact on Trump supporters, and new data showing that wages are falling and lower income Americans continue to struggle, we are in for some rough weather of the metaphorical kind.
This article has been adapted from the July/August issue of the Gray Rhino Tracker newsletter, which appears monthly except for combined July/August and November/December issues. To get regular insights in your email box before they appear publicly, you can subscribe HERE.