Financial meltdowns are generally not caused by completely unexpected shocks. Typically, warning signals are visible to those close to the action who know where the fragilities are. The problem is that we may not know how to act pre-emptively, or don’t want to move first for fear of disproportionately adverse outcomes for our business, sector, or nation. Often, we simply don’t want to think about potential problems and disasters as we are not so well equipped to navigate through them. So, there can be a tendency to ignore or wave away warning signals and those who raise them. As futurists, our role is to help leaders address these issues by exploring the factors shaping the future, thinking the unthinkable about potential shocks, and examining how these might all combine into different scenarios.
Here, we deliberately focus on potential shock factors that could combine and accelerate, leading to a financial Armageddon scenario. We go on to explore actions financial advisors can take to help prepare and protect their clients.
New Systemic Risks
The 2007-08 meltdown led to a raft of new legislation and controls. However, while some high-risk products and questionable practices may have been stamped out, there are concerns that a range of even more devastating financial timebombs lie ticking under the surface. These start with relatively well-known concerns like unserviceable personal, corporate, and national debt, heavily debt-exposed banks, and pension fund deficits.
The challenges extend to newer and more exotic flavors of risk emerging from artificial intelligence (AI) and blockchain-based products and services that are difficult to comprehend and regulate. These include highly complex algorithmically generated and traded assets and volatile, bubble-like markets for cryptocurrencies, initial coin offerings (ICOs), tokenized asset offerings, and entirely digital decentralized autonomous organization (DAO) trading entities that currently seem to lie beyond the comprehension and control of many financial regulators.
The Rush to FinTech
An economic downturn could see accelerated movement of funds into the new asset classes and digital product and service platforms emerging across financial sectors. The FinTech boom is accelerating and expanding its focus from platforms to new asset classes as outlined above, attracting billions of dollars from traditional investors and newcomers. The mainstream financial services sector has been left somewhat flat footed by FinTech and is seeing competitors offering traditional services at a fraction of the cost. The spectrum of offerings gaining traction include algorithmic hedge funds (e.g. Numerai), crowdfunded corporate debt (WiseAlpha), peer-to-peer lending (Lending Crowd, Zopa), digital banks (Monzo, N26), financial advice (Pefin), robo-trading (Collective2), and copy trading (Covesting).
Trade Wars, Sanctions, and a Global Stock Market Meltdown
A significant expansion of the trade conflict between the USA and China could lead to dramatic revenue reduction, stock market collapses, and job losses in both economies and spread globally. This could be exacerbated through wider sanctions against Russia, Iran, Qatar, and other nations challenging the “world order.”
Escalation of Armed Conflict and Instability
International and intranational conflicts appear to be on the rise. Several potential flashpoints could disrupt energy and raw material supplies and spook global markets. Key here are tensions between the UK, USA, and NATO and Russia; Saudi Arabia and Iran; and Gulf coalition countries and Qatar. While armed engagement in the South China Seas seems lower on the risk register, there is still significant potential for flashpoints between the USA and China that could set the world on edge.
Brexit Downturn
While peace may break out between Britain and the EU over the terms of the exit, the medium- to long-term outcomes remain uncertain. A poorly managed Brexit could be calamitous, triggering a prolonged global recession. Through the exit and transition period, the UK could become mired in the change process. Most government departments will have to focus on extraction from the European Union (EU) and put in place mechanisms to replace those of the EU. The costs of withdrawal, implementing new systems such as customs, and recruiting staff into government could result in cuts in spending in several areas such as welfare payments and infrastructure development.
Foreign companies may accelerate withdrawal of key operations from the UK and automation may accelerate as firms reduce risks by cutting staff costs—swapping machines for humans. Markets may be further unsettled by transition uncertainties and an extended rebalancing period for the economy. The outcome could see massive public and private sector job cuts, rising import costs, significant declines in government tax revenues, consumers switching from spending to saving, and higher levels of personal debt. Uncertainty could also drive more company failures, declining corporate investment, a growing number of empty commercial buildings and retail outlets, falling domestic and commercial property prices, rising poverty levels, and higher social welfare costs. In response, share indices could fall 20% or more, with GDP collapsing by 6-10%, the pound reaching dollar parity, and unemployment hitting 20%. The UK economy could nosedive into a multi-year recession.
Global Economic Slowdown
Since the financial crisis, many economies have stabilized, enjoying increasing GDP, rising employment, and stock market growth. However, the factors above could trigger abrupt global retrenchment. Furthermore, contagion effects from the Brexit scenario could engulf the planet, fueling further chaos. Additional contributory factors could include rising nationalism, and more widespread tariff barriers. Domestic debt problems, declining consumption, and tougher export markets could also hamper global growth engines like China, India, Indonesia, Germany, Mexico, the Philippines, and Malaysia.
Technology Sector Collapse
A technology backlash could lead or amplify global market reverses and economic decline. Apple, Alphabet (Google), Amazon, Microsoft, and Facebook are the five most valuable public companies on the planet by market capitalization. The uplift in global stock indices in recent years, can in part be attributed to growing dominance of these players in consumer and business markets. Furthermore, most growth predictions for the future place a significant emphasis on technology sector expansion and exponential growth of new entrants, sectors, products, and services. Some believe the pushback is already happening. For example, President Trump’s hostility toward Amazon is adding to rising public anger fueled by Facebook’s privacy issues, the growth of surveillance capitalism, and mounting concerns over the potential adverse economic impacts of AI.
AI and Cliff Edge Automation
Exponential automation technologies such as AI, robotics, blockchain, cryptocurrencies, autonomous vehicles, and 3D/4D printing could drive rapid replacement of humans—a process that has already started in several sectors such as retail, logistics, and financial services. This might catalyze a near-term collapse in consumer spending and tax revenues, while driving up unemployment benefit and welfare claims. For the medium to longer term, it is almost impossible to make meaningful predictions of the impacts, because it is unclear whether we will see displaced jobs replaced in full by new opportunities. The hope is that jobs will emerge in renewable energy, green and autonomous transport, synthetic biology, distributed micro-manufacturing, human augmentation, and new service sectors. However, they may be several years off and will require considerable workforce retraining.
The near-term concern is that physical robots and smart software could replace vast quantities of jobs in sectors like manufacturing, warehousing and logistics, transport, retail, construction, customer service, finance, and administration. Typically, these technologies are deployed in “cliff edge” implementations where 50% or more of the workforce could be rendered unnecessary overnight through automation.
Collapse of Major Businesses Across Sectors
A cluster of major businesses failing could lead to a domino effect that pulls others under and wreaks havoc in the economy and public markets. Recent failures of firms like Carillion, Maplin, and ToysRUs, have reinforced concerns that no business is immune from change or too big to fail. A rash of store closures by retailers such as Marks and Spencer and New Look in the UK also highlight the growing struggle firms face to compete in the new economy. Internet competition, new business models, high overheads, growing debt obligations, closed mindsets, and outdated assumptions could drive many to the brink. Nervous lenders and investors could pull the plug on “at risk” firms. This could drag down those further from the edge as their financiers become more risk-averse in their outlook.
Occupy V2.0—Social Upheaval
Collectively the factors outlined above might drive social unrest. This might take the form of boycotts of brands perceived to be automating in an insensitive manner, occupation protests, crippling cyber strikes, and physical attacks. Prime targets might include financial institutions and others considered to be profiting massively while others are driven to the breadline. A second wave of disruption might come from professions who feel public budget cutbacks have rendered their services untenable. Unrest is clearly starting to rise among groups as diverse as doctors, nurses, teachers, the military, police, and fire services.
A third and perhaps surprising shock might be a growing and progressively more disruptive challenge from women in the workforce to be treated as equal in every regard, immediately. There is growing frustration—from #metoo and #timesup—to appalling gender pay disparities revealed in company disclosures. The World Economic Forum estimates it will take 217 years to reach gender equality on pay and opportunities at current rates of progress. Indeed, that figure has worsened by 47 years in just one year. Concerted disruptive action by women across society could impact every sector, with serious economic consequences.
Five Key Actions
For advisors, such uncertainties pose immense challenges. As futurists, we suggest five key actions:
- Track a wide range of risk factors and provide regular client updates and commentaries on developments and possible directions of travel. Hosting, regular physical networking events would allow you to stay close to clients, hear their views on emerging issues, learn about their investment strategies and what opportunities they are seeing, and create collaboration opportunities between clients—all of which help raise your value to them.
- Become historians and do the analysis to see which asset classes, sectors, and geographic markets have fared best in past crises.
- Investigate emerging FinTech platforms and asset classes to understand how they work, risk factors, potential returns, and influencing forces.
- Test and adopt smart online tools to scan the marketplace continuously—providing clients with information on everything from bond rates to new ICO and IPO announcements.
- Investigate creating your own pooled investment fund using a publicly available platform. This would allow clients to invest in each other’s businesses and participate in their third-party investments.
Positioning for Persistent Volatility
Immense volatility is likely to be the overriding backdrop for the UK and global economies for the decade ahead and beyond. The next two to three years could perhaps be the most uncertain with the interplay of factors such as trade tensions, a tech backlash, Brexit, the spread of AI, and automation. Developing an anticipatory radar, proactive options, and new approaches to adding value are likely to help ensure the best advisors survive and thrive the risks of financial Armageddon.
- What do you see as the most potentially impactful and uncertain shocks and what scenarios might play out?
- How resilient is your strategy to the emergence of potentially disruptive factors?
- Which are the shock factors you and your organization are aware of and have preparedness for?
A version of this chapter was originally published in Financial Times Adviser.