In my final blog post, it seems sensible to pull together some of the key themes of the past 2 years, and use this perspective to look forward at the likely outlook for 2017 and beyond.
I have argued that ‘demographics is destiny’ (ACS blog, June 2016). In a consumer-led economy such as the USA, today’s ageing society means that we are seeing a secular change in the economic and political landscape. Growth is inevitably slowing, and sustainability is moving up the agenda to replace globalization as a key drive for the economy. We can summarize what this means by bringing together two models which have stood the test of time:
- Elizabeth Kübler-Ross developed her ‘Paradigm of loss’ model in 1969, where she described the process by which people come to terms with loss
and death. It has since been widely applied to financial market developments, and we can see that it fits very well with the post-2008 experience
- Bob Farrell is a member of Institutional Investor’s all-time Hall of Fame He realized early in his career that “If the majority of economists agreed on something, I knew I had to watch for something different”, and was an early advocate in the 1990s of seeing ageing populations as an investment theme
We are now 8 years later from the start of the financial crisis in 2008, and it is clear that this was not a “normal” downturn, swiftly followed by recovery. Yet it does seem to be following the patterns described by Kübler-Ross and Farrell. Trump’s victory, and the Brexit vote, suggests that we have finally left Denial behind and are now moving into the Anger stage of Kübler-Ross’ sequence, and Farrell’s Drawn-out Downtrend:
- Denial.Pipes remain clogged even as liquidity is pumped in”), they were convinced that the crisis had been caused by a lack of financial liquidity, and were confident that quantitative easing and stimulus policies would quickly “unblock the plumbing of the financial system”:
“As I look at these endeavors, what springs to my mind is a vision of a plumber trying to force water into a domestic waterflow system whose pipes are badly clogged, if not broken.”
In terms of Bob Farrell’s concept, the Denial stage also encompassed the first two phases of a typical bear market in financial markets as he described it:
“Bear markets have 3 stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend (with intermittent rallies)”.
Farrell’s “sharp down” period after the start of the Financial Crisis was duly followed by a “reflexive rebound”, which then ended in August 2014 with the start of the Great Unwinding of policymaker stimulus.
- Anger. It therefore seems likely that we are still only at an early stage in the “drawn-out fundamental downtrend”. This will become more apparent as we go into 2017, as the global economy seems likely to move into recession. Further support for this analysis comes from the fact that we are also still early in the Anger stage, which only became more widely apparent with the Brexit vote in June. Trump’s election confirms that it has spread across the Anglo-Saxon world, and the recent Italian referendum result means that the same issues are likely to impact the Eurozone during 2017.
- Bargaining. This is the next stage of Kübler-Ross’ ‘Paradigm of Loss’. It is important to remember that her analysis was never meant to assume the existence of water-tight compartments between the 5 stages. Instead, she believed that people were likely to fluctuate between them, as they tried to mitigate the pain they were feeling by testing out possible new ways forward. Thus after 2008, some countries such as Greece moved between Denial, Anger and Bargaining. President-elect Trump’s 100-day plan, announced at Gettysburg in October), suggests that the US is now likely to see the same pattern develop, with some still in Denial, and others in Anger, whilst he makes some preliminary moves into the Bargaining phase.
- Depression and Acceptance. We are clearly a long way away from reaching the final 2 stages of Kübler-Ross’ analysis, even if it turns out that Trump’s policies do mark the start of a successful Bargaining stage. It therefore seems likely that Farrell’s “drawn-out fundamental downtrend” may well continue for perhaps a decade, albeit with “intermittent rallies” along the way.
This is not a comfortable outlook. But I would argue it is better to look facts in the face and prepare accordingly. The alternative, of wishful thinking followed by an abrupt awakening, is likely to prove far more painful. The other advantage of this approach is that it highlights the need to look forward and try to identify the opportunities which will likely develop in this New Normal world. My view of these is summarised in the second chart.
Essentially what I am suggesting is that the successful businesses of the future will be those that move from providing products to supplying services – where the value proposition is based on the value provided, rather than just the physical product. Instead of buying a car, for example, more and more people will buy a service that provides them with mobility – which may come from a car-sharing service, or from an Uber-type taxi service, or from autonomous vehicles or public transport.
In turn, this means that companies will move towards being designers of materials and solutions, rather than simply supplying a physical product.
Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.