Are you paying enough attention to the risks on people’s minds? Are they priced in to the market or are there opportunities? If you lead an organization or make policies, have you protected yourself and your constituents from being sideswiped?
Many “Top Risks” and “Predictions” lists are formulated to convince you of the strength of their analysis of what may be coming down the road. Others come from surveys of specific groups to find out their interests and worries.
This fourth annual Top Gray Rhinos list is closer to the latter, though much broader in scope. It is a meta-analysis of concerns relevant to policy makers, businesses, investors, and citizens affected by obvious but unresolved risks: the “gray rhinos” in the list title.
We aim to get a broader sense of what keeps people up at night, and use that to inform your own strategies, circling back throughout the year to check reality against expectations.
Another goal is to make it harder for anyone to use the “black swan” cop-out that has become so popular since the 2008 financial crisis: “Nobody saw it coming.”
We’ve sorted through four dozen annual top risks and predictions analyses made from the end of 2018 through March 2019 –enough to capture the whole predictions season.
Without further ado, here are the Top Gray Rhino Risks of 2019:
1) US-China Tensions
At the top of this year’s risks are US-China tensions, taking many forms: trade and protectionism; shifting great-power politics leading to greater geopolitical instability; the potential for US-China tensions to get in the way of cooperation in the event of a financial crisis; and, to a lesser extent, more traditional “hard” security concerns over Asian waterways.
The Economist Intelligence Unit and Control Risks placed US-China trade tensions atop their lists. The EIU also included concerns about China’s economy and potential South China Sea conflicts among its top issues. Eurasia Group put the US-China relationship as its second highest risk, after its top one—geopolitical “bad seeds,” or budding problems arising from tensions within and between traditional alliances—a category that also has China implications.
Stratfor, which doesn’t rank its top risks, noted concern over intensifying great power competition. Citing the tendency of public emotions to run high and make situations worse, Breakingviews highlighted US-China tensions as one of its “High Anxiety” Predictions for 2019, also not ranked in order.
2) Economic and Financial Fragilities
The global economy is closely intertwined with geopolitics, so it’s no wonder that financial fragilities also generated many mentions this year. Broken down, that includes trade and protectionism slowing growth at the end of the business cycle, as well as worries over debt, markets, and constraints on potential policy responses should things sour quickly.
Nomura listed a “big market quake” among its top risks. The Economist Intelligence Unit cited the US corporate debt burden, and its potential to turn an economic downturn into a full-blown recession, as its second-highest risk. The World Economic Forum flagged asset bubbles in a major economy.
Interestingly, the top 2018 gray rhino risk, monetary policy errors, fell way down in the number and priority of mentions this year, although it was implicit in some of the risk descriptions. But the main reason, in my view, is that markets now believe that interest rates will stay low and may even go lower.
But that doesn’t mean anyone gets off scot free, by any means. Low interest rates mean investors aren’t worried enough about the debt that is continuing to pile up, making an eventual problem harder to solve.
The always prescient John Mauldin reflects on the pickle global central banks –and by extension the global economy- are in: “The extraordinary measures central banks took to get us out of the last crisis could make the next one even worse.”
Many analysts worry about Euro-area economies slowing further, and in turn creating pressures on the region’s banks. Mentions of Italy, in particular, as a potential trouble spot, were up this year.
3) Geopolitical Uncertainty: the Sum of the First Two
PWC’s CEO Survey noted policy uncertainty as second on its list, following a perennial top concern, over-regulation.
Several organizations and analysts cited broader uncertainty over geopolitical tensions and populism. Speaking at a panel at the Annual Meeting of the World Economic Forum in Davos in January, Bridgewater’s legendary Ray Dalio pointed out how low interest rates drive financial asset prices higher, and in turn creates socio-political tensions: “It creates also a polarity, a populism and an antagonism… These types of political issues are now very connected to economic issues in policy.”
The unpredictability of the US administration made a muted appearance, mainly between the lines and in the context of tensions with China. Though Nouriel Roubini mentioned US dysfunctional politics and Control Risks noted American political gridlock, it was interesting that US politics didn’t get nearly the attention they did in 2016-2018. Have analysts just gotten used to the current administration as “the new normal”? Have they focused on trade wars and China tensions as the most concrete example of US policies that keep them up at night? I don’t know the answer.
Ben Hunt of Epsilon Theory warns of geopolitics as one of three key drivers of the biggest risk he sees for investors: a change in the zeitgeist: “Cooperative and multi-play games in both international politics and domestic politics, now 70+ years old, are becoming competitive and single-play games.”
Martin Wolf of the Financial Times points out how geopolitics and financial fragilitiescould collide: “The biggest negative risk is that it would be impossible to mount a co-ordinated and effective response to a severe global economic slowdown….It is the political and policy instability, combined with the exhaustion of safe options for credit expansion, that would make handling even a limited and natural short-term slowdown potentially so tricky.”
Michael Lebowitz worries that “The trade war with China, and to a lesser degree Europe, could flare up on a single tweet or statement and cause market and economic disruptions.”
Niels Jensen warns that if the trade war between China and the US escalates, it could kickstart the next recession.
The main geopolitical worry involved the big powers, particularly the US and China. However, this year’s lists included a few other mentions: Koreas (a 2018 top risk), Nigeria, Yemen and Syria. Surprisingly, there was not a single top-line mention of Venezuela. Not surprisingly, there were a few mentions of the Brexit/no Brexit situation, a situation that hopefully will clarify itself in coming weeks.
4) Cyber Security/Data Integrity
I was relieved to see cyber security rising on the list, hopefully playing catch-up with the number of incidents in the news. Of course, this doesn’t mean that I’m happy to see the potential for more hacks, but rather that people are paying more attention following my worries in 2018, when I noted that worries were muted compared to the number of cyber insecurity headlines.
Risks in this area took several forms: data integrity, regulatory challenges, failure to keep up with new technologies, hacking and data compromise, data fraud or theft, and a newly appearing topic: failure to use analytics optimally.
Conflicts over data standards tied in to the third biggest risk this year, geopolitical uncertainties. Control Risks hits spot-on the challenge of reconciling regulation issues across the US, EU and China: “The stand-off between the three domains of data regulation will present a new level of risk for the international business in 2019. For China, data is something to be controlled; for the EU, data is something to be protected; the United States sees data as something to be commercialised. Brace for the challenge of collecting, storing and transferring data within and between these three domains against a backdrop of inconsistent enforcement and escalating cyber security threats.”
5) Climate Change, Extreme weather, and Natural Disasters.
There was a modest increase in concern over climate change, extreme weather and natural disasters. It will be interesting to see how this plays out over the coming year, in the context of the Green New Deal trial balloon in the United States.
The United Nations Inter-governmental Panel on Climate Change “Doomsday Report” issued in October 2018 may have played a role in boosting attention to this issue. David Wallace-Wells’ popular book, Uninhabitable Earth, also has contributed to the mood; he argues that media coverage has under-played the issue and that yes, we are overdue to go into full panic mode.
Climate related issues made up an impressive seven of the World Economic Forum’s top ten risks seen as most likely, and five of the most impactful (six if you include epidemics/pandemics, which have some elements related to changing temperatures).
Also, a number of lists included business disruption as a major concern –something that touches on both the cyber issues mentioned above and the extreme weather and natural disasters that climate change brings.
What’s Not on the List?
But this year, the pattern of worries was much different: so many issues were related to each other and together made up the majority of mentions. The risks that didn’t fall into the top five buckets were so far below in the intensity of levels of concern that none merited mentions of their own.
So this year, I’m only listing five top risks. As I have done in past years, I’ll circle back over the summer and in the fall to see how these risks and perceptions of them shift over time.
I’d love to hear how these stack up against what keeps you up at night.
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