From the Office of the CEO
Fear factors and rays of hope
America is upside down these days, and it’s not just the political climate. Los Angeles last week was cool and wet, while the east coast basked in California-style conditions.
The weather disturbance was a fitting backdrop for the Milken Institute’s annual MI Global conference, which draws more than 4,000 investors, money managers, corporate executives and government leaders from around the world.
The markets left the crowd feeling pretty good about 2018, and a little bit beyond. The general sentiment: the U.S. economy is in better shape, the global economy is looking good, geo-political risks are manageable, and China and Washington — despite the political theatre — will work out their differences. There’s also so much innovation taking hold — in transportation,food, energy, even space travel — that we may be poised for more decades of advancement in the human condition.
But for all the economic sunshine at Milken, there are plenty of concerns on the horizon, too, including storm clouds of debt, hostile trade winds and worries about the sun setting on democracy in much of the world.
Here are some of the takeaways:
1. Trump’s view: Sanctions work
Wilbur Ross and Steve Mnuchin stopped at Milken before heading to Beijing to challenge the Chinese on trade. Their message: Tough talk works. They believe sanctions are squeezing rogue states and erratic trade partners. And they’ll continue to apply Art of the Deal negotiating tactics. According to Ross, Donald Trump likes to size up what the other party has to lose — and if it’s more than America, he goes hard at them. The trade mission returned from China on the weekend, without a whole lot to show for their effort, which Ross seemed to be expecting anyway. The administration wants Americans to dig in for a war-like restructuring of global trade, and that may require a wartime stomach for trade conflicts. “If you don’t take some risks, and be willing to absorb a bit of pain, how will you get things changed?” Ross put to the Milken audience. The strategy seems unpredictable but Tony Blair had one of the better assessments of the Trump approach: “Sometimes unpredictability can turn into a strategy.”
2. China’s view: Democracy doesn’t
The Milken crowd used to think China’s middle class — now 450 million strong and surging — would demand some form of democracy, and the rest of the developing world would follow. Something different may be underway. Xi Jinping has brought in a stricter regime than China has seen in years, without much evidence of public resistance. And that’s catching the eye of lawmakers from the Philippines and Malaysia to Hungary and Brazil. The former U.S. military commander David Petraeus was sober in his assessment: “The other system is doing rather well. The West has to get its act together.” Peter Mandelson, the former British cabinet minister who is now chair of the firm Global Counsel, said he looks at the West and feels the “international liberal order” is no longer in the ascendency. “Our public believe in only one of those words — and it’s not ‘liberal’ or ‘international’.”
3. In China, worries about legal gridlock
The emerging Chinese model of authoritarian capitalism could challenge the West on at least three commercial fronts: intellectual property rights, contract law and capital controls. On intellectual property rights, the Trump administration is demanding Chinese reforms, so as to protect American tech firms, but there’s no sign of give. Carlos Gutierrez, the business executive who served as Commerce Secretary under George W. Bush, told Milken China’s ambition to be a global tech leader by the end of the next decade is greater than any desire to be part of a U.S.-shaped trading order. “We’re not going to make China look like the U.S.,” Gutierrez said. A test case is emerging in China’s massive Belt and Road Initiative, which aims to cover 68 countries and 60% of the world’s projected GDP. How will member countries — and participating companies and investors — resolve disputes over contracts or property rights? If China succeeds in making the BRI the biggest commercial initiative in history, it may have to come up with its own system of commercial law that works for China and for the world.
4. In America, worries about political gridlock
If America was once a beacon for the world, Washington is making every effort to dim the light. The bipartisan divide seems to be worsening, and will likely continue through this fall’s midterms. Republican pollster Frank Luntz told Milken, “This is not a political America we can be proud of.” He thinks the Democrats have a “fair chance” of regaining control of Congress, and the damage to America’s budget process could be lasting. The GOP is trying to push through legislation to make tax cuts permanent before summer, while the Democrats show no sign of bending on the fiscal books, especially on mandatory spending. And so the gridlock worsens. The federal budget’s so-called “entitlements” are projected to grow from $2.5 trillion (US) in 2017 to $4.2 trillion (US) in 2027, taking the fiscal imbalance with it. A decade out, Washington’s debt could reach $27 trillion. Maya MacGuineas, a balanced budget advocate, said a new Congress will have to consider harsh options such as raising the retirement age for government benefits. She’s just not sure there will ever be enough bipartisan cooperation to make any change lasting.
5. And in cities everywhere, climate gridlock
Al Gore managed to escape LA’s legendary traffic to bring his climate change slides to Milken. There’s no shortage of weather disasters for him to document, from record heat waves in Iraq and Pakistan, to above-freezing temperatures in February at the North Pole, to a California fire season that’s 105 days longer than in the 1970s. Gore is focusing these days on what he says is a four-fold increase since 1980 in precipitation bombs — the sudden onslaught of rain, snow and sleet that have been hitting every corner of the world, and cities the hardest. It’s one reason U.S. cities are leading the climate charge to ensure their country meets its Paris commitments, Trump notwithstanding. Some 67 cities have signed a Chicago Climate Charter to commit to their share of the Paris targets that the Obama administration agreed to. Leading the charge is Los Angeles mayor Eric Garcetti, a possible contender for the Democratic nomination in 2020, who came to Milken to welcome the audience and introduce Gore. LA has reduced its emissions to 20% below its 1990 baseline, and is more than halfway to its 2025 goal. And its economy is growing. Employment in California’s advanced energy industry grew 18 percent in 2015, six times the rate of statewide employment growth.
6. In an energy economy, gas pains
The recent surge in world gas prices speaks to a strong global economy and a lack of new energy supplies. The U.S. is the only country increasing its output in a big way, and it’s not nearly enough to replace the 15 million barrels of daily production that’s expected to be retired in the next five years. The supply constraints will worsen if Venezuelan turmoil continues and the U.S. pushes for sanctions on Iran. As for demand, BP projects that by 2040, the number of kilometres driven globally will double. “It’s hard to see peak demand in the next 30 years,” Joshua Harris, cofounder of Apollo Asset Management, told Milken. Electric vehicles to the rescue? The most bullish projections see the global e-fleet growing from 2 million today to 1 billion in 2040. Even then, the world might still need as many gas-burning vehicles as there are now. Add maritime ships, heavy trucks, trains and air fleets, and the world’s carbon consumption will be hard to curtail. Renewables aren’t growing fast enough to replace fossil fuels, even with the projected decline of coal, which in the developing world is being replaced by natural gas. In other words, lower carbon, but not no carbon.
7. In a digital economy, labour pains
You can’t cross the street in LA, or any American city, without bumping into the skills crisis. Without more immigration, the U.S. needs a massive retooling of its education system, to keep up with the Baby Boom’s retirement and the rapid shift in demand for talent. Unfortunately, only 35% of young adults in America (under 35) have a college degree. Chuck Schumer, the Democrats’ Senate minority leader, spoke of a “desperate shortage” of welders in upstate New York, and not because of a lack of people. The welders of tomorrow need new skills like algebra and digital awareness to be relevant. It’s one reason there are 6.5 million unfilled jobs in the U.S. Mike McNamara, the CEO of Flex Manufacturing, spoke of today’s cell phones, which require 3,000 parts, compared to 800 just a few years ago. Neither a machine nor a person can make the phones on their own, and that won’t change, he said, as electronics get more complicated. While the challenge is clear, the solutions are not. Only 11% of U.S. CEOs have confidence in the education system to meet these changing needs. Schumer thinks business has to play a greater role in education, especially for lifelong learning. He says that if we don’t get it right, more populism can be expected, perhaps from all those unemployed welders.
8. Siri, call the DoJ
While concerns about Big Tech aren’t new, the emerging conversation at Milken was about Big Tech’s power in voice technology — and the fact that regulators don’t know how to respond. As we move from a world of text-based search to voice-based and semantic search, results could change drastically. Think of a typed Google query that delivers pages of results. You’ll probably scour at least the top half dozen. Ask the same question to Alexa or Siri, and you may get only one answer. Can advertisers influence Alexa’s preference? Or will the algorithm have biases we don’t know about that benefit Amazon? “They’re controlling the arena and they’re also playing the game,” warned Sally Hubbard, an anti-trust expert at The Capitol Forum. Makan Delrahim, the U.S. Department of Justice’s point person on technology, said Washington is still reluctant to go after firms just because of their size or the potential for predatory behaviour. It acts only on provable acts against the law, he said. On voice, there’s no clear evidence yet of consumer harm, but the debate is coming.
9. Alexa, send more strawberries
Agriculture output blossomed during the chemical revolution in the 1940s and again during the genetics revolution in the 1980s. Scientists are now turning their sights to a molecule revolution, not so they can grow more but so we can waste less. A third to half of all produce is thrown away, largely because of spoilage. Apeel, one of the food startups presenting at Milken, wants to change the skin molecules of avocados, strawberries and bananas to double or triple their shelf life. Such a breakthrough could revolutionize food shipping, with less need for costly air freight and cold-chains. Another favourite food innovator, Plenty, is experimenting with vertical farming — controlled climates, in effect — to replicate a Mediterranean climate in a condensed indoor area. And the shifts are not just about efficiency; Tina Sharkey of Brandless said millennials are increasingly looking to the “how” more than the “what” of a product. “Brands are broken,” she said. “Millennials don’t want to buy the brands their parents did. They want to live with purpose and meaning.”
10. Africa, the next frontier
Between now and 2050, two billion people will be born in Africa. And by then, more than one third of the world’s population under 18 will live on that continent. Jim Yong Kim, president of the World Bank, believes it’s one of the greatest tech opportunities on the planet, with lots of commercial potential to go with it. Although Africa’s economy today is about the size of France’s, it’s the world’s second-fast growing region, with annual growth of 4.3%. The continent is already delivering innovations in off-grid power (Kenya) and the transportation of blood by drone (Rwanda). Kim came to Milken to unveil the Disruptive Technologies for Development (DT4D) Fund, to generate investment and enterprise to scale such innovations across Africa. He thinks institutional investors, who are struggling to maintain returns globally in a low-yield era, may want to rethink the potential of African innovation as a long-term play. And he wants African governments to see the potential of technology to help the continent leapfrog a generation of development. The goal: end poverty by 2030.
11. Space, the final frontier
Leave it to Wilbur Ross for the Milken mic-drop moment. The 80-year-old Commerce Secretary came to talk about trade wars and left with a message about space exploration. He explained that Trump has shifted the space file into Ross’s portfolio, to ensure the U.S. doesn’t lose a new space race that’s emerging with China and Russia. Unlike in the last space race, America’s next moon shot will be driven by the private sector, with Washington’s support. Some 1,500 space companies were created last year, Ross explained. He’s especially fascinated with those focusing on the moon as a giant refuelling station, where rockets can fill up with fuel made from its hydrogen and oxygen stashes, and then relaunch for Mars and beyond. Ross didn’t explain how he’d resolve trade disputes on Mars, but he did offer up one of the best lines of the week: “Some in the media think the whole administration is in outer space. So it’s only natural that we’d want to commercialize it.”