Who would have believed the blog would still be here, 7 years after it began with a post from Thailand in June 2007? Who would have believed the range of developments that have appeared for it to discuss over this period?
It started at the end of the SuperCycle as central banks pumped cash into the global economy, and prices soared along with demand. It was a lonely voice in the wilderness, worrying about US subprime loans. Then we had the Crisis itself, famously forecast by the blog and memorialised in the article ‘The Crystal Blog’ in November 2008.
Nobody wanted to learn the lesson that you can’t create sustainable growth by increasing debt levels. Instead, we had the central banks and governments pumping unheard-of amounts of cash into the global economy. China decided to launch the biggest credit bubble in history. Unsurprisingly, much of this stimulus, as in China, has actually made matters worse, not better. And since 2011, growth has actually begun to weaken.
In the middle of this second period, the blog began to publish its view of the outlook with fellow-blogger John Richardson. ‘Boom, Gloom and the New Normal’ argued the seemingly obvious point that:
- Economic growth is dominated by personal consumption, usually 60%+ of developed economies
- In turn, consumption and wealth creation is primarily dependent on the generation aged 25 – 54 years
- Their earnings increase as their careers progress, whilst they spend more as their children grow up
- As a result, growth was now inevitably slowing due to ageing populations and low fertility rates
It then developed its view of how this New Normal would force businesses to refocus their activities. And it described what this would mean for manufacturing, the commercial world, and research, as well as for political stability. Its summary of the likely outlook for the world in 2020, published 3 years ago, has clearly stood the test of time:
“The New Normal World in 2020
“All of us would love to be able to see into the future. Chapter 4 of our new eBook, ‘Boom, Gloom and the New Normal’, does just this. It offers 10 predictions about how the world will look in 2020:
- A major shake-out will have occurred in Western consumer markets
- Consumers will look for value-for-money and sustainable solutions
- Young and old will focus on ‘needs’ rather than ‘wants’
- Housing will no longer be seen as an investment
- Investors will focus on ‘return of capital’ rather than ‘return on capital’
- The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels
- Trade patterns and markets will have become more regional
- Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities
- Taxation will have been increased to tackle the public debt issue
- Social unrest will have become a more regular part of the landscape
“The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners. The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.
“Companies will need to refocus their creativity and resources on real needs. This will require a renewed focus on basic research. Industry and public service, rather than finance, will need to become the destination of choice for talented people, if the challenges posed by the megatrends are to be solved. Politicians with real vision will need to explain to voters that they can no longer expect all their wants to be met via endless ‘fixes’ of increased debt.”
The blog’s readership has proved amazingly loyal over the past 7 years. Readership has grown steadily, as shown in the map, with the majority reading the blog on a more or less daily basis.
Readers are also very keen to promote the blog to their friends and colleagues. As a result, the blog has had the privilege of speaking at a wide range of events around the world, including major conferences, Board Retreats, business meetings and industry events. It also writes regularly for the Financial Times and presents 6-monthly webinars for the American Chemical Society.
The blog is very grateful to its readers for their support, and to all those at ICIS for their encouragement and assistance. Thank you all very much.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 3%. “Due to worsening market conditions, several PTA makers have either kept their PTA units shut or were operating at lower run rates”
US$: yen, down 3%
Brent crude oil, up 4%
Naphtha Europe, up 6%. “Improved ethylene margins in turn could encourage producers to ramp up cracker run rates, boosting demand for feedstock naphtha”
S&P 500 stock market index, up 7%
HDPE US export, up 7%. “Prices just slightly too high to garner much interest from the international market”
Benzene, Europe, up 9%. “Limiting the increases downstream on styrene are market fundamentals, with downstream demand weak, supply plentiful and spot prices little changed since early June.”
Different times demand different skills. During the SuperCycle, one could assume growth was a constant. So forecasting meant a focus on better understanding developments down the value chain in the relevant product silos. Then managers could be set ‘stretch targets’ to ensure they met expectations for revenue and profit growth.
But today, as the blog has argued in the previous posts in this series, the idea of constant growth has become an illusion. Instead, we are moving into a VUCA world where, as Unilever CEO Paul Polman has warned, Volatility, Uncertainty, Complexity and Ambiguity will dominate.
Thus in the political arena it is clear that the major G-20 economies are now increasingly pursuing different goals, and have given up the effort to co-ordinate policy seen when the Crisis began in 2008/9. Whilst today’s gradual bursting of the asset bubbles their stimulus programmes created is leading to increased uncertainty in financial markets, and confusion over the outlook for interest rates.
This has the potential to create enormous volatility in the short-term, as it means that markets will gradually resume – rather shakily, and uncertainly at first – their role of price discovery.
In turn, this brings us back to the issue of the inventory cycle with which this series of posts started on Tuesday. Today’s higher interest rates and tighter credit markets make it even more expensive and difficult to finance inventory. But once companies reduce inventory, they also immediately reduce demand. Suppliers then notice a lack of orders and also cut back production. Similarly bankers begin to have sleepless nights about whether they will get their money back, and so tighten lending standards. We have already seen this cycle turn in financial markets, where new issues of stock and bonds have gone out of favour.
This means there is a growing risk that when executives return from their holidays in September, they will find the sustained growth promised by policymakers has once again failed to appear. Whilst oil prices, still supported by central bank liquidity, may well still be at levels which have led to demand destruction.
History, as US humourist Mark Twain once wrote, “may not repeat, but it does rhyme”. We are therefore unlikely to see a repeat of Q4 2008. Instead individuals, companies and governments will need to readjust their thinking to the world of the New Normal. The key need is to develop their own VUCA:
- Developing a road-map for the future requires Vision
- A strategic Understanding of the changes underway is essential
- The planning process requires Clarity over implementation issues
- Agility will be required to cope with unforeseen events
Today’s VUCA world is thus very different from that of yesterday’s SuperCycle. It requires us to expect challenges rather than confirmation of existing plans. As Quality guru W Edwards Deming wrote:
“If you wait for people to come to you, you’ll only get small problems. You must go and find them. The big problems are where people don’t realise they have one in the first place.”
Thus the philosophy of Managing by Walking About, rather than by email circulars, is once again likely to be key to future success. Personal contact with fellow employees, customers, investors and other stakeholders will be the best way to survive the transition to the New Normal that is now well underway.
“Everybody knows” that full economic recovery is inevitable. And today, everybody absolutely knows that it must now be very close. After all, it has now been 4 years since the crisis began.
This expectation is understandable, as anybody who began work from 1983 onwards has only ever known constant growth. There might have been the odd short-lived downturn, but global GDP growth averaged a steady 3.5%/year between 1983-2007.
The blog however has an alternate view. It believes this 25-year period was actually an economic SuperCycle, which will never be repeated in our lifetimes. The chart above illustrates its argument, using the US S&P 500 stock index (the world’s most important index), adjusted to reflect inflation by Prof Robert Shiller.
The analysis is based on work originally published by leading investor (and EPCA speaker) Marc Faber on the life cycle of emerging markets. He argued in Barrons (July 13 1992) that markets had a common life cycle, divided into 6 different Phases. He thus headed his article “a time to buy, and a time to sell“. Below, the blog applies his concept to the S&P 500 as follows:
• The green line represents monthly movements in the S&P 500 since 1980
• The blue line shows Faber’s Life Cycle trend applied to the S&P 500
• This trend is then used to identify the 6 Phases of the lifecycle
Phase 1. The 1970s saw major dislocation. The BabyBoom generation (born 1946-70) created a major increase in demand as they grew up, unbalancing overall supply/demand. But slowly the balance began to improve as more Boomers joined the Wealth Creating 25-54 age group, and moved into their most productive years
Phase 2. The average Boomer joined the Wealth Creators in 1983, and now supply began to increase quite dramatically. Interest rates and inflation fell, allowing companies to invest in new capacity. Businesses became optimistic, as they saw new opportunities everywhere
Phase 3. Nervousness appeared as we approached the millennium. People worried that the dot-com phenomenon highlighted how the availability of easy credit was leading to excess capacity being put in place. The oldest Boomers were also beginning to join the New Old 55+ group
Phase 4. The economy seemed to recover in the early 2000s after the dotcom crash and the horror of 9/11. But China began to expand capacity, just as more and more Boomers were leaving the Wealth Creator cohort. Equally, the stock market crash led many Boomers to decide housing should become their pension fund
Phase 5. 2008 saw a greatly increased risk of deflation, car/house sales collapsed, whilst corporate profits declined along with stock prices. Until this moment, we were exactly following Faber’s model. However, from March 2009 central banks have intervened on an unprecedented scale, pumping cash into the economy in all major regions
Today. The Boomers represent the largest and wealthiest generation that has ever lived and now have the benefit of the longest life expectancy. But retirees only need replacement products, and have to survive on a pension, not a salary.
As the chart shows, we are now at the parting of the ways. One can believe, with the blog, that the central bank intervention has delayed the inevitable. Or, one can join the consensus that assumes growth must be just about to restart. Readers, as always, will make their own choice.
The key issue is whether today’s financial market recovery will translate into a recovery in the real economy, where we all live and work. If it does, then growth will in the end, ensure the cost of the central bank interventions since 2009 can be repaid. But if not, as the blog fears, then investors and companies will find they have been pursuing a false dawn.
Phase 6. If the blog’s analysis is correct, investors will eventually give up on stocks; currency wars will break out as countries fight to maintain employment; and protectionism will become a real risk. At worst, as Unilever CEO Paul Polman has warned last month “the biggest issue in Europe (and perhaps worldwide) is going to be social cohesion”.
The blog would be delighted if its analysis is wrong. But just as in September 2008, it feels the need to set out the risks as clearly as possible. It fears that time spent preparing your business’s response to this Scenario might well prove by year-end to have been time well spent.
Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments are below:
PTA China, down 11%. “Persistently weak demand from the downstream polyester industry”
Naphtha Europe, down 11%. “Trading activity has been limited this week due to IP Week”
HDPE USA export, down 10%. “One trader expects December/January premiums to reduce”
Brent crude oil, down 7%
Benzene NWE, up 5%. “Producer margins in Europe are weak, so many have scaled back production”
US S&P 500 stock market index, up 11%
The 2012-14 Budget period offers great opportunities, as well as great challenges.
Will companies continue to focus on short-term developments in financial markets? Michael Porter’s Shared Value concept instead offers us a powerful model for creating future growth.
Will policymakers stop focusing on the 24 hour news cycle and instead begin to set out the bigger picture? We need a vision for the future, and a clear idea of how to get there.
Are these decisions hard to take? No.
Has the world the resources to start in this new direction? Yes.
Would we enjoy the challenge? Yes
Can we start today? Yes.
We all know that companies are going to have to set difficult budgets for the next few years. They will also have to deal with continued uncertainty. We cannot rely on wise and all-seeing policymakers to lead us forward. They may well decide to do more of the things, such as Quantitative Easing, that will make the situation worse instead of better.
But larger companies, in particular, could also start to examine how to expand long-term R&D. And every company could add a future dimension to its Budget in respect of the opportunities that will arise from the new markets being created by today’s demographic and societal changes:
• Nearly a third of the Western population is now in the 55+ age bracket. They have the incredible benefit of an extra decade of life expectancy, compared to previous generations. And they have money – maybe not a lot, but enough to buy useful products and services. Yet they remain woefully underserved and often unrecognised by most companies.
• People in emerging economies are starting to move out of poverty in large numbers. This ‘bottom of the pyramid’ market represents a wonderful opportunity to develop new products and services. Millions now have some money to spend for the first time in their lives.
The great megatrends of the future also offer vast opportunities for future growth. These involve the need to increase food production, improve water availability and reduce carbon footprint. They are vitally important, and also offer the potential for profitable future growth. So, of course, do the opportunities associated with increasing life expectancy.
Companies therefore have a clear choice as we move into the Budget period. The blog believes a New Normal lies ahead, as it is describing in its new Boom, Gloom and the New Normal eBook, co-authored with John Richardson.
Winners will accept the challenges that it offers, and begin to move in a new direction. Losers, however, will remain frozen in the headlights, unable to take the first steps that will lead them to success.
Collectively, as the world’s 3rd largest industry, chemical companies have enormous potential to do good at this most difficult time. But progress depends on each of us as individuals being prepared to adopt a positive outlook in the face of the problems with which we are surrounded.
As always, of course, the blog will be delighted to help any company that wishes to accept the challenges that offered by the transition to the New Normal. It is confident that they will discover a potential to be successful beyond their wildest dreams.
The 2012-14 Budget period offers great opportunities, as well as great challenges.
In the short-term, the challenges may well seem more important.
But they should not blind companies to the fact that the opportunities have probably never been greater.
Of course, it is hard to be very optimistic about the shorter-term outlook for the global economy and chemical demand:
• Oil prices are at levels that have always led to recessions in the past
• Western governments are cutting back on spending and raising taxes
• Emerging economies are raising interest rates to contain inflation
• Individuals are suffering from squeezed incomes and job insecurity
• Too many people are retiring with inadequate pension provision
The short-term risks are also more weighted to the downside:
• Many people still need to adjust to working in a more turbulent world. The BabyBoomer SuperCycle of demand meant the major economies suffered only 16 months of recession in 25 years between 1982-2007
• Governments have failed to recognise the impact on demand of demographics and the ageing western populations. They have raised debt levels via stimulus programmes for no real gain
• The banking system remains under severe strain:
o It is dramatically undercapitalised in Europe
o USA banks face problems if property prices weaken again
o China’s banks face losses from non-performing loans after the credit bubble of the past 3 years
And then, of course, there are the risks of rising social unrest in many countries as austerity programmes bite. Equally, the current generation of politicians has failed to display any real leadership that would help to move us beyond today’s more difficult times. And, as always, there remain geo-political threats, such as the potential for Middle East wars.
Thus the blog feels there is only one possible title for this year’s Outlook, ‘Budgeting for Austerity, and New Opportunities’. This is because the real question, of course, is what happens next?
As individuals, will we lapse into apathy, and just give up in the face of the perceived difficulties? Or will we do as previous generations did, and confront today’s problems with a view to setting out in a new direction?
The blog will discuss these opportunities in more detail tomorrow.
The global economy does not seem to be in good shape.
Policymakers seem to fail to grasp the importance of the demographic changes that are underway in both the Western and emerging economies.
Yet demographics drive demand.
The result of this failure by policymakers is that the world seems to be heading towards a period of austerity.
In the short-term, there is probably little than any of us can now do to change this outcome. So companies need to prepare themselves to survive what might happen next.
But they also need to remember that the greatest opportunities come at the time of greatest challenges.
Two vast, and virtually unserved markets are now opening up. And they will continue to grow, no matter what happens in financial markets.
This is the wonderful thing about population data – we already know within reasonable accuracy how many people will be alive in 5 and 10 years time, and how old they will be. The reason for this accuracy is that most of them have already been born.
So forecasting has a sound basis from which to work.
It tells us that in 2015, for the first time ever, there will be 300 million western BabyBoomers (those born between 1946-70) in the 55+ age group. They will have money to spend, and an extra decade of life expectancy ahead of them, compared to earlier generations.
Separately, hundreds of millions of people in the emerging economies will be moving out of poverty. They will have small amounts of money to spend for the first time. They will want to spend it on critical needs, and in a sustainable fashion.
The chemical industry is key to ensuring that the needs of these two growth markets are met. This is the great opportunity of the New Normal.
Budgeting for the 2012-14 period is therefore even more complex and critical than usual. Tuesday’s blog will discuss the Challenges we may face as a result of a slowing global economy and rising austerity. Wednesday’s blog will then highlight the Opportunities in more detail.