Peter SchwartzJuly 23, 2009

2SH

ORT

TER

M S

HO

CKS

SHORT TERM SHOCKS

3SH

ORT

TER

M S

HO

CKS

The global financial system went thru a shock and appears to have stabilized

Dec-06 Feb-07 Mar-07 Apr-07 Jun-07 Jul-07 Aug-07 Oct-07 Nov-07 Dec-07 Jan-08 Mar-08 Apr-08May-08 Jul-08 Aug-08 Sep-08 Oct-08 Dec-08 Jan-09 Mar-09 Apr-090

50

100

150

200

250

300

350

400

450

500

Chart TitleThe TED Spread Through the Financial Crisis

Sep. 15-17, 2008 Lehman Bros. goes bankrupt AIG is rescued money market stress leads to

further liquidity interventions by the Fed

Feb. 7, 2007HSBC says it set aside

$10.6bn for bad loans, including subprime

Aug. 17, 2007Fed cuts the rate it lends to banks the so-called discount

rate to 5.75%

July 31, 2007Two Bear Stearns

hedge funds file for bankruptcy

Oct. 24, 2007Merrill Lynch announces $7.9bn in subprime write downs for the

third quarter, eclipsing Citi’s $6.5bn

Note: The TED spread is calculated as the difference between the 3-month T-bill interest rate and 3-month USD LIBORSource: British Banking Association, Federal Reserve, Businessweek, washingtonpost.com, Monitor analysis

Oct.3, 2008The US House of Representatives approves the $700bn economic

rescue package

Oct. 6-11, 2008 Fed will buy debt to fund operations

of banks and ordinary businesses Fed and European Central banks

coordinate emergency rate cut Dow Jones has worst week in its 112

year history

Dec,12, 2008The White House says it

will consider tapping TARP funds to aid the

automakers.

Oct. 13, 2008 US Financial institutions accept

$250bn direct equity investment from TARP

European governments put hundreds of billions of dollars into banks

Dec,17, 2008Fed cuts rate to

virtually zero

Mar. 11, 2008Fed agrees to lend troubled banks as much as $200bn

Mar. 16, 2008JPMorgan offers to buy Bear for $2 a

share; discount rate cut to 3.25%

Elevated risk premium, what

is the new normal?

80 bps

4SH

ORT

TER

M S

HO

CKS

What appeared as a mini-crisis in U.S. subprime housing…

Percentage of U.S. Delinquent Mortgages by Mortgage Type, 1998-2007

5SH

ORT

TER

M S

HO

CKS

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-0925,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

55,000,000

60,000,000

65,000,000World Stock Market Capitalization, US$ Tr

Source: World Federation of Exchanges

Grew into a worldwide systemic crisis

6SH

ORT

TER

M S

HO

CKS

What happened? Explosive growth in financial, facilitated by an expansive shadow banking system…

2000 2001 2002 2003 2004 2005 2006 2007 20080

0.20.40.60.8

11.21.41.61.8

2Total hedge fund assets, in US$ trillions

Source: World Federation of Exchanges, Hennessee Group, Commodity Futures Trading Commission, Pimco

2000 2001 2002 2003 2004 2005 2006 2007 20080

1

2

3Open interest in crude oil futures & futures-

equivalent options, in millions Hedge units: Cash flows of the

borrower are sufficient to repay principal and interest on the loan

Speculative units: Cash flows can meet interest payments only

Ponzi units: Cash flows are insufficient to cover the repayment of either principal or interest

August 20072003-2007Forward

Minsky Journey

Credit grows rapidly, with shadow banking system in the lead

Asset prices – houses, buyout valuations , etc. – inflate

Quality of loans made

7SH

ORT

TER

M S

HO

CKS

Now the great deleveraging is underway

Source: Pimco, J.P. Morgan

Inflated asset prices become clearer and values decline

Credit growth reverses (flow) and deleveraging begins with fire sales of existing assets (stock).

Monetary authorities try to reflate the economy by stepping into credit provision and low interest rates

August 20072008 - ?Reverse

Minsky Journey

Reflation

August 20072008 - ?Reverse

Minsky Journey

2001 2002 2003 2004 2005 2006 2007 20080

100

200

300

400

500

600

Collateralized loan obligation issuance, in $USbn

Asset backed securitized loan issuance

8SH

ORT

TER

M S

HO

CKS

The decline appears to be easing

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q0911,00011,50012,00012,50013,00013,50014,00014,50015,000

Global GDPCu

rren

t $

(bn)

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%

QoQ Global GDP change

QoQ

gro

wth

(Sea

sona

lly a

djus

ted,

cur

rent

U

S$)

Source: bea.gov

9SH

ORT

TER

M S

HO

CKS

Boosted by unprecedented levels of economic stimulus

Size of stimulus packages

U

S$

Bn

Note: What constitutes additional stimulus vs regular budget spending is defined differently by various studiesSource: HSBC global research, International Institute of labor studies

0

200

400

600

800

1,000

1,2001,124

Asia

1,008

EuropeAmericas

634

China

Japan

US

OtherEU

Germany

Italy

1.3

1.5

1.8

2.2

2.5

2.9

3.1

3.4

3.5

4.3

4.4

5.2

5.5

5.6

6.5

8.6

12.1

16.0

0 5 10 15 20

Australia

Phillipines

Argentina

Germany

Hungary

United Kingdom

Japan

Canada

Chile

Thailand

Saudi Arabia

China

Indonesia

South Africa

United States

Malaysia

New Zealand

Mexico

Percentage of GDP

5% of annual world GDP will be injected over the next few years as economic stimulus

10SH

ORT

TER

M S

HO

CKS

… and robustness in developing economies

Source: imf.org, CEIC, SCB Global Research

Contribution to Global GDP growth, PPP Basis (3year moving averages)

…but from a relatively small baseDeveloping nations still growing in 2009

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

US IndiaChinaJapanEU

Gross Fixed Capital Formation

Private Consumption (2008 GDP component)

U

S$ B

n

4

2

0

1970 2000 201019901980

Rest of the worldChinaUnited StatesOther advanced economies

11SH

ORT

TER

M S

HO

CKS

World Natural Resource Prices, 2007-2009

Source: U.N. Food and Agriculture Organization, U.S. Energy Information Agency

0

20

40

60

80

100

120

140

160

0

50

100

150

200

250

Oil Price

FAO Food Price Index

Oil

Pric

e, $

per

bar

rel

Food

Pric

e In

dex

(200

0-20

02 =

100

)

Commodity prices are up, in part in anticipation of future growth

Jul-09

12SH

ORT

TER

M S

HO

CKS

More shocks quite plausible

Housing Market Economic ConditionsFinancial System

More interdependencies emerge and unravel

Unexpected further debt write downs

$ deflation or hyperinflaitonNational debt levels proof to

be unsustainable

Prolonged high unemployment in US / EU

Effectiveness of auto bail-outs

Sudden commodity price hike squashing recovery

Effectiveness of stimulus

Further drop in U.S. housing prices below trendline

Rapid drop of other asset classes; Commercial real estate, credit cards

External Factors

13SH

ORT

TER

M S

HO

CKS

At best half of estimated financial sector losses have been realized, how that does happen will be crucial

Total loss forecasts Realized losses to date

3.5x

2x

Source: Goldman Sachs, IMF, RGE Monitor, Bloomberg Finance L.P, T2 Partners

14SH

ORT

TER

M S

HO

CKS

US home prices have further to fall

Source: www.econ.yale.edu/~shiller/data

US Months Supply

4

5

6

7

8

9

1999 2004 20093

Mill

ion

11

10

12

US Existing Home Sales

1999 2004 2009

Mill

ion

445

5.0

5.5

6

6.5

4.0

7

7.5

120

140

160

180

200

220

1950 1970 1990 2009

100

Real

Hom

e Pr

ice

Inde

x (1

990=

100)

US Home prices need to fall another 13% to reach trend line

15SH

ORT

TER

M S

HO

CKS

US job losses continue to outpace recent recessions, can Europe continue to cushion the blow?

Source: Bureau of Labor Statistics, bea.gov

US Unemployment rate compared to other recessions

US vs EU-27 Unemployment

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

0 5 10 15 20 25 30 35 40 45 50

2007-present

2001

1990

1981-3

1980

1974-6

9.5% in June

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

7/1/08 1/1/091/1/08 7/1/09

EU-27

US

Une

mpl

oym

ent R

ate

(inde

x 1=

peak

em

ploy

men

t bef

ore

rece

ssio

n)

Une

mpl

oym

ent R

ate

(inde

x N

ov 2

007)

Quarter after employment peak

16SH

ORT

TER

M S

HO

CKS

80

100

120

140

160

180

2009200820072006200520042003200220012000

Globalization has suffered a set-back

Monthly World Trade Volumes

“Trade volumes have fallen much faster than in the Great Depression and it’s unclear exactly why”

Source: Netherlands Bureau for Economic Policy Analysis, Findata

Wor

ld T

rade

Vol

umes

(200

0 av

erag

e =

100)

World Trade

17SH

ORT

TER

M S

HO

CKS

Significant financial reregulation policy initiatives

Source: Financial Times

Systemic risk• Fed with an oversight board

monitors large interconnected financial institutions

• Creation of a systemic risk council to provide oversight

Bank capital• Wondering whether to run stress

tests similar to the US• Higher capital requirement and

tighter international regulation

Consumer protection• Creation of consumer financial

protection agency• Stricter rules of custodians of

retail investment funds

OTC derivatives• Considering letting

“standardized” OTC contracts go through clearing house

• Expected changes broadly in line with Washington

Hedge funds• Require managers to register

with the SEC• Considering imposing strict new

disclosure rules

US Ideas EU Ideas

18SH

ORT

TER

M S

HO

CKS

Not necessarily with the appropriate level of international alignment

19SH

ORT

TER

M S

HO

CKS

New financial scenarios for the next 2-3 years

Facilitation of globalization

More Shocks

De-globalization

No more shocks

Scenario 4:All in this Together

Scenario 3:Depressionary

Scenario 1:Looking after No. 1

Scenario 2:The Long Boom 2.0

20SH

ORT

TER

M S

HO

CKS

Pandemic Food shockTerrorist attack

Cyber attack Geo-political tension Explosive clean energy growth

Other possible short term shocks

21SH

ORT

TER

M S

HO

CKS

Food shocksThe world population is growing rapidly

We are one of the few generations to witness a doubling of population in our lifetime

2000 2050190018001750

8

6

4

2

0

Source: UN population division

…UN median projection is 9.2 billion people by 2050, from 6.7 billion now

Global Population, 1750 - 2050Estimates and projections (billions)

Developed nations

Developing nations

22SH

ORT

TER

M S

HO

CKS

Food shocks…our diets change as we get richer

Meat consumption and per capita income, 2002

1965 1998 2030

Calories consumed per day, 1965 – 2030

2500

2000

1500

Source: FAO 2008, FAOSTAT 2009, World bank 2006

1000

500

0

Highest growth

20k10k 40k30k0

40

80

120

2002 US$ Purchase power parity

kg

Americans eat 2.5 times as much meat as the average Chinese person

23SH

ORT

TER

M S

HO

CKS

Food shocksNumber of food crises rising globally

24SH

ORT

TER

M S

HO

CKS

Cyber attackInternet security is increasingly threatened

Source: 2007 McAfee Criminality Report

124 countries use the Internet for web

espionage operations

26

Climate change will remain a dominant issue

27

Recent observations suggest greater climate sensitivity than IPCC projections

Source:, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions; NSTC, Global Climate Change, Impacts in the US

Arctic sea ice (annual minimum)

1979

2007

Global sea level change (cm)

Recent observations

IPCC envelope

Observed long term trend

-4

-2

0

2

4

6

Sea level rise of 3.1 mm/yr, could rise 1m (+-0.5m) by 2100, double IPCC projections

Arctic sea ice coverage decreased an unprecedented 2 million km2 in 2007

1970 1980 2000 20091990

28

The Climate Will Be increasingly Variable and Extreme

29

Water will be the key factorWater problems could affect up to 250 million people in Africa by 2020 and

more than one billion people in Asia by 2050.

Tibetan Plateau Water System

Source: Center for environmental systems research, University of Kassel

30

Water for food: how much does it take?

1 kilo of clean wool 170,000 liters of water

1 kilo of grain-fed beef

50,000 – 100,000 liters of water

1,650 – 2,200 liters of water

1 kilo of soybeans

Source: Commonwealth Scientific and Industrial Research Organization

31

Developing world has surpassed the developed world in CO2 emissions…and is growing rapidly

1 1012 kgSource: Netherlands Environmental Agency

CO2 Emissions from hydrocarbon use and cement production by country/region (1990, 2000, 2007, 2008)

AnnualEmission(Pg1)

0

2

4

6

8

10

+6%

+7%+2%

+5%

0%

-2%

-3%

ChinaIndiaRussiaBrazilJapanEU15USA

2000

1990

2008

2007

CAGR

32

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

0

200

400

600

800

1000

1200

1400

1600

IEA New Coal Forecast

New Coal--BAU CCS Coal--BAU

GW

BAU CCS schedule won't produce usable re-sults before 2020. Result: 1205 out of 1391 GW of forecast new coal plants will likely be

built with conventional coal technology.

CCS?

Conventional Coal

BAU means carbon lock-in

33

Source: Monitor Analysis; solveclimate.com; EPA.gov, LA times, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions

Copenhagen– “Mitigation Agreement” on long term objective but misalignment on short term path

Communicated 2020 Annex 1 reduction targets (compared to 1990 emissions)

Long term global emissions trajectories for energy-related CO2 emissions

International alignment to limit warming to 2°C at recent G8 meeting in Italy requires emissions to

peak before 2020

Probability that warming is contained to 2°C:

-50%

-40%

-30%

-20%

-10%

0%

10%

India

-40%

China

-40%

Aus. (Joint)

-25%

Aus.

-5%

Japan

-8%

USA

-4%

EU (Joint)

-30%

EU

-20%

Considerations Demands

IPCC target range

-10

0

10

20

30

40

50

60

70

80

90

2000 2020 2040 2060 2080 2100

400ppm-eq

450ppm-eq

550ppm-eq

Baseline

Long-Term Goal

Gt C

O2/

yr

Negative Emissions

~15%

~50%

~75%

Difficulty in securing sufficient developed nation reduction commitments and in agreeing on the

nature of short term responsibilities for developing nations

34

Cap and trade compromise winds its way through US Congress

Note: The Act will have to approved in the Senate as well and be signed by the president before becoming lawSource: Breakthrough.org

Gig

aton

s CO

2

US Domestic CO2 emissions – American Clean Energy and Security (ACES) Act

0

5,000

10,000

20502015 20402025 2030 20352020 2045

2005 baseline

1990 baseline

Emissions with ACES Act

2011

4% below 1990(17% below 2005)

83% below 2005

Allowed leeway for reducing domestic emission by making maximum use of international offsets, reserves and other “safety valves”

35

China recognizes the climate change threat and has taken action in the last 2 to 3 years

Source: Center for American progress, reuters

Renewable electricity standard– Goal is to generate 10 percent of its electricity

renewably by 2010, and 15 percent by 2020 Emission cuts

– Planning to reduce GDP energy intensity by 20 percent below 2005 levels by 2010, the effort has fallen behind schedule

Investments in energy technology– Invested $12 billion in renewable energy in 2007,

second only to Germany – In addition to the already approved $221bn cleantech

stimulus, rumored to unveil additional spending ($440bn - $660bn) dedicated entirely to new energy development over the next decade

Energy-efficiency initiatives– Accounted for 2/3rd of world demand – 40 million

units - for solar-water heaters in Transportation

– Plans to spend more than $1 trillion to expand its railway network by 50% by 2020

– Fuel economy standard of 36.7 miles per gallon and is considering raising it to 42.2 mpg by 2015

37

The next scientific revolution

More Scientific AnomaliesNew Tools & Computing Power

More Scientists More Funding

0.5 1 1.5 2 2.5 3 3.5 4 4.50

20

40

60

80

100

U.S

.

Finland

France

S. K

orea

U.K

.

Spain

Japan

Germ

any

Mexico

China

0

5

10

15

20

1975

2000

Science Degrees per Capita

Note: Natural Science and Engineering Degrees per 100 24 Year Olds

38

The great leap in biology…new human biology

Year

s, a

t Dea

th0.01

0.1

1

10

100

Cost per Base Sequenced

Cost of Short Aligo Synthesis

Cost of Gene Synthesis

Cost per Base of Sequencing and Synthesis

Cost

per

Bas

e Sy

nthe

size

d (U

SD)

1985 1990 1995 2000 2005 2010

Year

1950-1955

1955-1960

1960-1965

1965-1970

1970-1975

1975-1980

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

2035-2040

2040-2045

2045-2050

50

60

70

80

90

Males Females

U.S. Life Expectancy

Source: Robert Carlson Source: UN Data World Population Prospects 2006, medium variant

39

The great leap in biology… synthetic biology and regenerative medicine

Synthetic Biology

Regenerative Medicine

Human Enhancement

40

Interesting Problems: Intellectual Challenges

– Dark Energy– Complexity– Meaning of DNA– The Brain, etc.– Human psychology and behavior

41

NRC Report on Grand Challenges

42

The frontiers of information technology

• Souped-up laptops, PDAs• Totally new computer

paradigms

• Medical tools• All optical computing• Extreme bandwidth

communication

• New forms of semiconductor/magnetic storage

• New architecture for computer storage/logic combined “O” latency

• Write nanoscale lithographic lines

• Sense single molecules• All Optical transistor

• Megamode fibers—1010

increase in bandwidth

Nanophotonics• Low loss propagation of

light on silicon chip—new dielectric waveguides

• Plasmonics—Optical frequencies with X-ray wavelengths - match wavelength to device size on silicon

SCIE

NCE

TECH

NO

LOG

YAP

PLIC

ATIO

NS

TIME

• Scaling magnetic bits to dimensions less than 30 nanometers

• Use magnetic domain walls for very high density magnetic storage

• Utilizing novel properties of spin momentum transfer to generate microwave sources of electromagnetic radiation 10’s to 100’s of GHz

MRAM

• Very hard problems inaccessible to conventional computer

• Factoring machine image and signal processing

• Drug design—”very large molecules”

• Molecular structure~100 Qubits—condensed matter physics

• Quantum strategy-coordinator games —”2bit Qubit” (1-3 Qubits)

• Repeater long distance (3 Qubits)• QKD—superposition

• Coherence and entanglement purification

• High fidelity Qubits—99.99% visibility• Robust Qubits

43

Geo-engineeringBroad range of ideas have been created so far

Source: United Nations Environment Program, Wired Vision, Scientific American, Bioenergy News

Sulfur Injection

Venetian Space Blinds Seawater Alkalization

Synthetic TreesArtificial Cloud

Recombinant Forest

Antarctica Wrapping

Radiation Angle Varier

Non-Methanation Fodder

HOTTOPIC!

Ocean SeedingHOT

TOPIC!

Sunlight Control CO2 Level Control

44

Geo-engineeringSunlight control

Injects SO21 particles into stratosphere to

scatter sunlight, preventing from reaching the surface– Reenact volcano eruption of Mt. Pinatubo

Unknowns:– Is ongoing injection of particles feasible?– What are impacts beside scattering

sunlight?

Sulfur Injection

1 Sulfur DioxideSource: United Nations Environment Program, Wired Vision, Scientific American, Time Magazine, Monitor Analysis

Venetian Space Blinds

Places trillions disk fliers in solar orbit, avoiding tampering with the earth’s atmosphere

Unknowns:– As fixed-satellite, on which part of orbit

do we place disks? – How can we collect disks if low or no

efficacy vs. additional space debris?

Cost: USD 5 trillion

HOTTOPIC!

Cost: USD 2~3 billion per year

45

Geo-engineeringCO2 level control

Ocean Seeding

Fertilize ocean with Fe1 or CO (NO2)22 will

generate artificial red tide to consume CO2

– CO2 will be trapped inside dead planktons

Unknowns:– Risk of acidizing ocean due to huge

amount of CO2 consumption?– Best location - coast line filled with red

wave?

Alkalized Seawater

Split seawater into NaOH3 (leave in ocean) / HCl4 (store on land) will result seawater becoming more alkaline causing more CO2 dissolution into water

Unknowns:– Effects on marine life or current?

1 Iron, 2 Urea, 3 Sodium Hydroxide, 4 Hydrochloric AcidSource: United Nations Environment Program, Wired Vision, Scientific American, Living on Earth

Cost: USD 20 million

HOTTOPIC!

47

The rise of Asia is the greatest force at work in the world today…China

Source: “Report on a study of contemporary China’s social state,” January 2002

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Un/underemployed

Composition of China’s Workforce, %

Administrative/office/Business/service

Owners of private enterprises

Manufacturing workers

Agricultural workers

Technicians/Specialists

1952 1958 1988 1999

48

1985 1995 2005 2015 2025

The rise of Asia is the greatest force at work in the world today… India

Indian Population by Income Bracket, Rupee 000’s, 2000 prices

Note: Annual Household Income Bracket, Rupees, 000s, 2000 pricesSource: McKinsey Global Institute

500-1000

>1000

90-200

200-500

<90

49

The impact of the next two billion middle class consumers… on energy and environment

1970 1980 1990 2000 2010 2020200

300

400

500

600

700

800

Qua

drill

ion

Btu

Forecast Annual Global Energy Consumption

High economic growth

Loweconomic

growth

Average Annual Growth (%) in CO2 Emissions 2005-2030

Reference

Source: 2005-EIA International energy Annual 2005 (June-October 2007); 2030-EIA, World Energy Projections Plus (2008)Source: US EIA

U.S.

OECD Europe

Japan

China

India

Brazil

Middle East

Russia

Africa

0.50%

0.40%

-0.20%

3.30%

2.60%

2.30%

1.90%

0.90%

1.80%

50

The role of crime and illicit activities

Parasitical autonomous zones. Illicit drug, organ, waste, and wildlife trade

Hezbollah

Movement for the Emancipation of the

Nigerian Delta

Taliban

Sinaloa & Gulf Cartels

Ogaden Guerillas

Primeiro Comando da Capital (PCC)

Fuerzas Armadas Revolucionarios de

Colombia (FARC)

Source: Transparency International, Corruption Perceptions Index 2007

51

More and more products are becoming free

222223

212 221

181

128

3717

2008

18

2007

18

2006

20

200520042003

Global mp3 player shipments, millions

Global recorded-music sales, US$ bn

474747

32%

2008

40%

35

2007

22%

42

2006

30%

49%

20052004

Source: International Federation of the Phonographic Industry, iSuppli Corp, US Newspaper Association of America , Pew Internet & American Life Project Survey

Users of online classified ads sites in US (% of internet users)

US newspaper advertising revenue, US$ bn

Free MP3 Downloads

Music Industry Revenues

Free Online Classified Ads Sites

Newspaper Ads Revenuesvs. vs.

52

Falling marginal costs of business

Source: Anderson, Chris – “Free! Why $0.00 is the future of business? “

Cross-subsidizing

Falling marginal cost of doing business1895 2009

+ + +

FREE FREE FREE

ExpensiveExpensive

Expensive

Free Mail Storage

Free Directory Assistance

Free Air Travel?

Free DVR /CDs?

54

Possible climate deal

Business as usual

450 ppm

Vs.

Great geopolitical uncertaintyRising BRICs Shocks (finance,

food, cyber security)New actors (NGOs, terrorists, criminals)

Protectionism Extreme integration

55

The privatization of foreign policy

BillGates

RichardBranson

LarryPage

SergeyBrin

GeorgeSoros

PierreOmidyar

56

What about international institutions, non-state actors, NGOs, and others?

57

Chinese Holdings of U.S. Assets (November 2008)In US$ billions

$1.7 TRILLION

Net Purchases of Long-Term U.S. Securities – In US$ hundred millions

A rebalancing of power

39

140

588

860

68

Short-term bank

deposits

Treasury bonds (incl. short term)

Agency bonds (incl. short term)

Corporate bonds

Equities

Source: U.S. TreasurySource: CFR working paper, ‘China’s $1.7 trillion bet.’ Numbers come from CFR estimates, U.S. Treasury International Capital, and People’s Bank of China

2005 2006 2007 2008

-2

-1

0

1

2

3

Europe Asia

58

Nigeria vs. Singapore: a resource vs. knowledge economy

Republic of Singaporefounded

GDP per Capita (1990$), 1950-2005

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Singapore

Nigeria

Source: "The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007 (Geary Khamis methodology)

59

ReligiousExtremism

CarryingCapacity

SocialStresses

Global/Regional Plague

Financial Crisis

Knowledge driven growth predetermined

Knowledge Driven Growth

Better Governance

Prosperity & Shared Interests

IncreasingScience & Technology

MoreIntegration

Collapse of Socialism/market reform

NetworkedIT

60

Resilience

Pote

ntial

Connectedness

Critical Uncertainty 1 - Era of ShocksComplex, closely coupled systems may be shock prone

Source: Homer-Dixon, Our panarchic future; Bank for international settlements;

Specialization and interconnection to maximize efficiency

and utilization•Example; Financial derivatives grew 9.5x to over 12x world GDP in 1998-’08

Shock•Example; the collapse of Lehman Bros

Back to stability and resilience

Actors disappear, new ones emerge •Example; deleveraging

61

Critical Uncertainty 2 - Form of International RelationsEbb and flow

Foundation of the United

Nations, World Bank

Interests & Alliances

Laws & Institutions

WW 1

IMF, IRBD & GATT founded at

Bretton Woods

Geneva Convention

WTO emerges

from GATT

International Criminal

Court

US signs bilateral

nuclear deal

Kyoto protocol

US does not ratify Kyoto

protocol

North-Korea withdraws from

NNPT

Berlin Wall torn down

Warsaw Pact

EU Expands to 27 member countries

West Germany enters NATO

US intends to never join ICC

Doha rounds break down

WW 2

NATO

European Economic

Community, precursor to

EU

1900 2000‘20 ‘40 ‘60 ‘80

Nuclear non-proliferation

treaty

62

Critical Uncertainty 3 - Structure of national powerIs democracy inevitable as countries modernize?

New modernization1 theory suggest that economic and technological development bring a coherent set of social, cultural, and political changes that are particularly conducive to democratization

Note: Modernization is not synonymous to WesternizationSource: Ronald Inglehart , Christian Welzel, How Development Leads to Democracy, What We Know About Modernization

Growth of the Middle Class

Sense of security, focus shifts to

self-expression

Postindustrial, knowledge society promotes independent thinking,

appreciation of free choice

Difficult to avoid democratization,

repressing calls for openness becomes increasingly costly

Industrialization

Economic growth

Shift from traditional to

secular-rational

63

Critical Uncertainty 3 - Structure of national power…or is the modern non-democratic state possible

What if non-democratic states are able to offer a climate that is; Open Meritocratic Competent and Participatory

and thus gain legitimacy and satisfy needs for self-expression?

0.00

0.05

0.10

0.15

0.20

0.25

0.30

98765432

1China [2007], Russian Federation [2006], Sweden [2006], United States [2006]Source: Worldvaluessurvey.org

Russian Federation

China

Sweden

United States

In the long run, hard work usually brings a better life

Hard word does not generally bring success, it’s more a matter of luck and connections

World values survey respondences1 to statement “Hard work brings success”

64

Critical Uncertainty 4 – Role of the U.S. in the world

US recovers US in Decline

InnovationFlexibilityEntrepreneurshipTop universitiesNew leadership

DeficitsEducationInfrastructureMilitary overstretch

America’s perception China’s perception

US balance on the current account ($Bn)Real GDP growth forecasts (%)

-4

-2

0

2

4

6

8

Source: imf, bea.gov

1980 2014

200

-200

-400

-600

0

-800

1980 2010

65

Possible scenariosThree main possibilities

Interests and

Alliances

Lawsand

Institutions

Modern Non-Democratic States

Modern Democracies

U.S. Recovers

U.S. in Decline

Continuous Evolution

New Game

Both / And

World of alliances Modern non-

democratic states U.S. in decline

World of laws and institutions

Modernization and democracy go hand-in-hand

U.S. recoversNote: Source:

66

New GameShocks

NoShocks

Possible scenariosWith the additional possibility of shocks

Interests and

Alliances

Lawsand

Institutions

Modern Non-Democratic States

Modern Democracies

U.S. Recovers

U.S. in Decline

Continuous Evolution

Note: Source:

Both/And

Shocks No Shocks

ShocksNo

Shocks

67

Continuous Evolution

US recovers China rises and moves

toward democracy New institutions arise such

as GEPA, Asian Economic Community

Robust growth– Few shocks -> slow

evolution– Many shocks ->rise to

the challenges

68

New Game

China

US in decline China as a modern non-democracy Regional alliance of China and India Near anarchy globally

Booms & busts– Few systemic shocks -> China centric

World– Many Shocks -> high potential for conflict

69

Both/And

US recovers and authoritarian China rises

New international laws but no new institutions

Strong growth with intense competition

Little global collaboration– Few Shocks -> constant

rivalry– Many Shocks -> great

potential for conflict

Peter SchwartzPeter_Schwartz@gbn.comLogo Here

BACK UP

72SH

ORT

TER

M S

HO

CKS

Government is expanding

“At this particular moment, only government can break the vicious cycle that is crippling our economy.”

- President Barack Obama

$10.8 TRILLION

Total federal spending, in FY200 US$ bn

Total amount allocated for economic rescue

Source: Outlays from FY 2009 Historical Tables, Budget of the United States Government, Table 8.1

73SH

ORT

TER

M S

HO

CKS

Exacerbated by the economy is a highly interconnected system

Housing Market Economic Conditions

Financial System

74SH

ORT

TER

M S

HO

CKS

U.S. Housing Market: Reset Schedule will Test Prices Further

Monthly Mortgage Rate Resets (First reset in Billions of USD)

Source: IMF Financial Stability Report, April 2008, Credit Suisse

75SH

ORT

TER

M S

HO

CKS

Tight surplus production in OPEC led to high oil prices

0 1 2 3 4 5 6 7 8$0

$20

$40

$60

$80

$100

$120

Jul 99 - May 04 Jun-04 - Apr 08

July 1999 - April 2008

Source: John Cook, Director, EIA Petroleum Division, “Next Stop for Oil Prices: $100 or $150?”, June 11, 2008

76SH

ORT

TER

M S

HO

CKS

Threats to globalization Protectionism

– Further pressure on the auto industry or other national champions could increase internal protectionist pressures

– The DOHA rounds could stall/fail again despite recent G8 pledge in Italy to reach an agreement

– Countries could impose tariffs on imports from regions with perceived laxer carbon regulation, as is currently written into the US House of Representatives ACES Act

Further decline of trade volumes– World trade has dropped more precipitously than GDP, over 20% from its peak.

Further declines could reduce the importance of trade in national economies Re-calibration of global supply chains

– Supply chains could become more local as a result of protectionist barriers and/or higher transportation cost due to higher energy/carbon prices

International coordination financial industry regulation falters– Ambitions plans have been announced to reshape financial regulation, there is a risk

for these measures not to be well internationally coordinated Renewed volatility in energy and other commodity prices

77

Food prices and food emergencies are on the rise

As global food prices have risen 83% over the last three years…

Food prices are likely to increase in the next decade

Source: FAO; Chatham House

2006

2007

2005

2008

2002-2004=100

FAO food price index

…Over 60 countries faced food emergencies

Causes of food emergencies, 1981 - 2007FAO food price index

78

New coal plant emissions equal all historic coal CO2

Series1120

130

140

150

143145

27% of remaining budget for 450 ppm

Source: ORNL, CDIAC; IEA, WEO 2004

1751-2000 Total Coal New Coal Plants Lifetime Emissions

– China, India, and U.S.

79

Technologies of Today: Pacala & Socolow

Pacala and Socolow demonstrated in their seminal work that currently available technologies could help dramatically reduce GHG emissions

1. Efficient vehicles

2. Reduced use of vehicles

3. Efficient buildings

4. Efficient baseload coal plants

5. Gas baseload power for coal baseload power

6. Capture CO2 at baseload power plant

7. Capture CO2 at H2 plant

8. Capture CO2 at coal-to-synfuels plant / Geological storage

9. Nuclear power for coal power

10. Wind power for coal power

11. PV power for coal power

12. Wind H2 in fuel-cell car for gasoline in hybrid car

13. Biomass fuel for fossil fuel

14. Reduced deforestation, plus reforestation, afforestation, and new plantations.

15. Conservation tillage

While some technologies are far from the commercialization phase, most of them are already available for scaling up and deployment

Source: “Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies,” Pacala & Socolow, Science, 205, 968 (2004); Wikipedia

80

To achieve low carbon economic growthCleantech will have to live up to its promise

Source: cleanedge.com; cleantech venture network; UNEP, Global Trends in Sustainable Energy Investment 2009

Global investment in Clean Energy ($USbn)

.. but growth rate slowed from 59% to 5% impacted by the macro economical climate

0

50

100

150

200

S/RP, corp RD&D, gov R&D

Third PartyInvestment

2008

155

2007

148

2004

22

35

2003

27

2002 2006

93

2005

60

25% 29% 73% 54% 59% 5%

Cleantech VC investment by Technology

0%

10%

20%

30%

40%

50%

Q209Q109Q408Q308Q208Q108Q407

Solar

Transportation

Biofuels

WindSmart GridWaterAgriculture

Smart money moving to transportation and demand side technologies

81

Green stimulus as government initiated growth measure

Total additional spending of $430bn, 2.5x the total 2008 sector investment

Green Stimulus Regional Spending ($US Billions)

Green Stimulus by Region US green stimulus

China green stimulus

221

112

31

23

14

12

7

3

2

2

0 50 100 150 200 250

China

US

S. Korea

EU

Germany

Japan

France

Canada

Australia

UKLow Carbon

5%Rail

9%Grid

11%

Water Waste14%

Renewable

29%

Energy Efficiency32%

Green Stimulus Breakdown(TARP & American Recovery Plan) USD112bn

8%9%

Port

2%

Environment

Airport

Highway 14%

Housing

20% Rail

22%

Grid

25%

Stimulus Package Breakdown (RMB4 Trillion)

Source: HSBC

82

Sovereign Wealth Funds

41%

19%

2Q080%

100%

20%

40%

60%

80%

17%

31%

40%

$58 billion

1Q08

43%

8%

$79G7

$1,400Middle East

$700Asia Pacific

$360Other Europe

$110Rest of World

$590BRIC

SOVEREIGN WEALTH FUNDS, IN US$ BILLIONS

TOTAL$3.2

TRILLION

Rest ofWorld

Middle East &Africa

Asia Pacific

Europe

NorthAmerica

Europe

Asia Pacific

SWF DEALS BY TARGET REGION – 2008

$26 billion

Source: European Institute, Sovereign Wealth Funds Survey 2008, Oliver Wyman, Monitor Group

83

The Future of SWFs

Fixed Income

2007

2012

Cash

20%

5%

1%

Other Alternatives

5%4%

Real Estate

15%16%

Private Equity

12%

32%

27%25%

Equity

38%

SWF asset allocation: 2007 and 2012 (forecasted)

Source: European Institute, SWF Institute, OECD, Oliver Wyman, Bloomberg

84

Growing complexity and evolution to fill new economic niches

Source: The Origin of Wealth, Eric D. Beinhocker, 2007

Complexity Economics

Traditional Economics

Dynamics Open, dynamic, nonlinear systems, far from equilibrium

Closed, static, linear system in equilibrium

Evolution The evolutionary process of differentiation, selection, and amplification provides the system with novelty and is responsible for it’s growth in order and complexity

No mechanism for endogenously Creating novelty or growth in order and complexity

85

What will it take for Latin America and Africa to get on the wave?

Corruption Perception Index, 2007

86

The new physics/chemistry

Dark Energy

Physics of the Very Small

Precision Chemistry

87

Tools

– Recent past• Hubble Telescope• Atomic Force Microscope• MRI machines

88

Tools

– New Space Telescopes– Large Hadron Collider and its successors– Imaging live cells?– Quantum Computers

• New ways of asking questions– Metagenomics– SETI at home

• Petabytes and beyond– Manipulating very fast things– Many new forms of sensors

89

Biology

Fundamental Shift from Empirical to Rational Science

It’s all Physics + Water !

Genetics

Systemic science of disease

Neurobiology

Synthetic biology

Stem cells

Mathematical biology

WH

Y S

CEN

ARIO

S

WHY SCENARIOSWHY SCENARIOS

WH

Y S

CEN

ARIO

S

The Role of Mental Maps

WH

Y S

CEN

ARIO

S

Intended strategy

Emergent strategy

EnvironmentForces

Emergent Strategy

WH

Y S

CEN

ARIO

S

IBM projections

WH

Y S

CEN

ARIO

S

Spirit of surprise

96

Scenario planning is rooted in the concept of Multiple Possibilities

97

Test of a Good Scenario

Not right or wrong

Leads to better decisions

98

Strategic conversation creates these flows and keeps these relationships healthy as an art,

not a science

Scenarios

KnowledgeCreation

DecisionMaking

ExistingStrategies

EmergentStrategies

The Strategic Conversation and Strategic Options

99

How Scenario Thinking is Used

A tool for strategic alignment and communication across the organization

A means of improving the “strategic conversation”

A means of refining and testing assumptions for quantitative modeling decision making

A “windtunnel” for existing strategy

A means of developing and ranking strategic options

100

Scenario Thinking to overcome decision Traps

Over confidence

Thinking inside out

Not seeing the whole story

Framing the problem wrong

Not asking the right questions

101

Steps to Developing Scenarios

Focal Question

Scenario Stories

Implicationsand Options

Indicators and Signposts

Key Factors &Environmental Forces

ScenarioFrameworks

CriticalUncertainties

102

What are Indicators and Signposts?

Signposts can take the form of either current observables or plausible future indicators … the best scenario approaches and indicator systems examine and employ both.

… events or developments that can be measured and monitored, and which are thought to be indicative of a particular path, dynamic, or scenario outcome evolving

103

Core

Robust

Bet the

Farm

Four approaches to placing Betsacross the Scenarios

Satellite

Satellite

Satellite

Scenario A

Scenario D Scenario C

Scenario B