From Economic Scenarios to Informed Guesses

Defining a long term investment strategy build on one chosen economic scenario is reckless.

As crystal ball gazing is no option, defining strategies on more (multi based) economic scenarios makes more sense, but often ignores the underlying forces that drive those economic developments.

And precisely these elemental forces are the drivers for a dynamic investment strategy.

Informed Guesses
What remains as next best solution, is to define an investment strategy on basis of what is called 'Informed Guesses'.

This implies that a strategy is not just build on professional guessing (statistical & actuarial modeling; Monte Carlo, etc). The key to success in the approach is this word 'Informed'...

As board members of financial institutions can not delegate or outsource their investment strategy, they have no other option than to inform themselves about the economic, social,  psychological, financial and statistical underlying forces and to formulate a dynamic investment strategy based on those basic forces.

 

Global Trends 2030

An excellent example of mapping these future driving forces is a December 2012 report published by the U.S. National Intelligence Council (NIC) called 'Global Trends 2030: Alternative Worlds'.

The NIC report does not seek to predict the future, which would be an impossible mission. Instead, it provides a framework that stimulates thinking about our world's rapid and vast geopolitical changes. Resulting in possible global future directions and implications during the next 15-20 years. 

The report defines 4 mega trends and 4 potential worlds:

Mega Trends 

1. Individual Empowerment and the growth of a global middle class 
2. Diffusion of Power from states to informal networks and coalitions
3. Demographic changes, growing urbanization, migration, and aging
4. Increased demand for food, water, and energy. 

Potential Worlds

1. Stalled Engines
   Most plausible worst-case scenario: Increasing risks of interstate conflict. The Us draws inward and globalization stalls. 
2. Fusion Most plausible best-case outcome. Collaboration of China and the Us, leading to broader global cooperation.
3. Gini-Out-of-theBottle
   Inequalities explode as some countries become big winners and others fail. Inequalities within countries increase social tensions. Without completely disengaging, the Us is no longer the “global policeman.” 
4. Nonstate World World driven by new technologies, nonstate actors take the lead in confronting global challenges

 

Let's take a look at some interesting charts from this report:

I. Asia's dominant growing consumer power...

 

II. U.S.-Asia's  combined World Power...

III. Europe, GDP Dominant in 2030 ?

IV. U.S.GDP, Any way : Going down...

Conclusion

"Global Trends 2030"is an interesting and relevant document for investment planning, that I would recommend to read, to draw your own conclusions.

A more general conclusion - as stated by NIC - could be that we are heading for a transformed world, in which “no country – whether the US, China, or any other large country – will be a hegemonic power.”

No matter what trend or potential world, one thing seems inevitable:
the influential power of the U.S. that's vital for our world's economy will decline.....

Success with defining new investment strategies!

Bye the way.... Actuaries help you out on your investment strategy:

Sources/Links:

- Escher Image from Freakingnews
- Escher: Hand with Reflecting Sphere (1935)
- Zero hedge: The world in 2030
- World in 2030 (original report (2012)