Dear Friends and Partners,
Many of you might enter the 2021 end-of-season festivities with mixed feelings. Bank accounts are loaded, profits from the never-ending investment boom got harvested and secured, black Friday shopping has pleased your loved ones and booster shots make you feel invincible. Only weaklings would care about the cough and sneeze around the corner with a triple Pfizer defense line in their bodies. Despite all the doomsters, scaremongers, and conspiracy preachers we can summarize, that traveling is once again possible, stock markets have not crashed, Governments have not gone bankrupt, Boris Johnson has not yet sunk the United Kingdom in the Irish Sea, Joe Biden is still alive and, believe it or not, even your Swiss banker produced this year more profits than fees. The Rolex well-being index of the rich and pretty, measured by the time and premium you have to swallow to get your hands on a Daytona, Batman, or Patek Nautilus is at an all-time high. Your neighbors and friends are boasting with the fortune they have spent for a plane ticket and a water bungalow to escape from lockdowns to a six-star Maldives beach resort. Yet, somehow between the Omicron déjà-vu, the saber-rattling of the US-China-Russia magic triangle and inflation rates of our forefathers, it also feels like the dance on a volcano, like a foreboding of a tectonic shift in the economic fault lines, like a devilish party without a moral foundation, responsibility, empathy, and heartfelt joy. Where will this lead us?
Whether 2022 will bring a continuation of the sweet song of need and greed or an abrupt end to the party, nobody knows. However, history and Newton tell us, that what goes up must come down. Here we are to share with you the areas of risk, concern, and hope for the coming months, the potential sparks to light the fire. We feel the pressure in the global kettle is rising:
- Covid Reloaded: While we are writing this, countries are closing up again to a rising Omicron mutant risk and people ask themselves whether the covid shit show will ever end. Tired from lockdowns, travel restrictions, closure of our favorite waterholes, and the stubborn failures of governments to prepare better for the next wave of infections, we rub our eyes in disbelief. Get prepared for worse than expected forecasts in case that Omicron will break our vaccine defense perimeters with all the consequences and be sure that the taxman’s hand grabbing into your pockets will grow much bigger to finance the government goodies for the covid tired population and businesses.
- The Eco Revolution: It is the economy, stupid! 2021 has shown us, that the business world will save us from ecological disaster on this planet. Forget the COP and Greta song and dance shows. TESLA today is valued higher than all big traditional car companies together – with a fraction of their production and assets. Big finance and business are investing heavily into new green and blue tec, logistics, and transportation will revolutionize in the coming decade, healthy food is everywhere. And the consumers are asking for more and faster. Savings through energy efficiency, energy recycling, and decentral management systems are just starting. Investments in this area (next to space) will be one of the huge growth, innovation, and wealth drivers of the next 10 years.
- Space Race: The space cowboy contest between Musk, Bezos, and Branson has initiated a global space race, that will bring not only humanity to a new level of interstellar reach but also set the foundation for the future trillionaires. The take-off reminds us of the first big issues of shares in Anglo and Dutch trading, shipping, and rail companies during the colonialization. The speed of the colonialization of space that has started will attract billions of investments from private and government entities. Mining of comets and asteroids by robots will create unseen wealth, next-generation weapons and spacecraft, housing and infrastructure, energy production and transport to Earth, space engineering, space services, and tourism, you name it. Get prepared to participate in the space boom and business. And do not forget: The nation that controls space and commands the biggest space armada will logically dominate our home planet.
- Inflation, Wage Growth, and the End of Free Money: Finally, inflation has arrived. Whoever believes this is temporary, will be proven wrong. The time for holding back inflation has long passed for central banks and most governments will silently welcome it to deflate their legacy debt mountains. Whether it is big wage rises, shortage of labor, supply crunches: everywhere prices are rising, and the famous inflationary spiral has started. The overlaying developments of a) the de-globalization of value chains and end of deflationary effects through cheap China production, b) the abrupt end of the peace yield after the collapse of the Soviet Union, c) the additional eco premiums for clean and healthy production and living conditions, they all add up to a systemic return of substantial inflation. Interest rates might rise much faster than everybody believes now and will finally bring back sound investment reflections and herald the exit of zombie businesses. Change your mortgages for fixed rates now.
- The Big China Experiment: In a surprise move and not really noticed by many China has started a huge re-distribution experiment of wealth and business power, aimed at achieving a broader distribution of wealth, limiting the influences of individual tycoons, communicating a clear message that there is no alternative to total obedience and China First & Only doctrine, and to cement the power and authority of the communist party for the coming decades. Anything unclear, look at the fate of the Hongkong opposition. Whether this experiment will work, and business and innovation continue to prosper in this setting, will be seen. If not, China will lead the global economy into a serious downturn with a further significant revaluation of Chinese property and financial assets and major turmoil in the corporate landscape. Next to geopolitical risk, further motivation to be defensive with China engagements in 2022.
- End Game of Unchained Capitalism (on Earth): The golden trio of cheap and excess money, massive tax loopholes/free capital flows, and cheap labor have led to an enormous redistribution of global wealth to the top 1% earners and investors, to the emersion of a rapidly growing and crowded group of billionaires, who grow – sustained by national banks in any crisis – richer by the hour. The wealth and health gap (measured with life expectancy) between the poorest and richest of our countries is wider than at any time since WW2 and reminds us of the 1920s. Societies pay for this development with the erosion and destruction of their middle classes, polarization/anger/hate, hopelessness for many, exploitation of nature and infrastructure, sub-potential growth. The end of this unchained capitalism has come. Inflation is putting an end to cheap money, Governments are rediscovering taxation to finance infrastructure rejuvenation and ecological reforms, tax loopholes are addressed or closed, labor shortages will lead to significant pay rises.
On the political side, unfortunately, things have turned ugly in 2021 and the risk of a severe political crisis or even armed conflict with the involvement of major military powers is higher than ever since the end of the cold war. We are witnesses to the launch of an epic battle between the US and China for the future dominance of the world order. Russia, though out of the game, is trying with shady means to secure as much influence or control on its neighbors, for now trending more towards China than the US. The main inflection points for a potential eruption are:
- Eastern Europe: Russia has amassed assault troops on the Eastern border of Ukraine, in Donbas and Crimea, and in Belorussia. The ambition to re-integrate large parts of Ukraine into a larger Russian empire is well known and clearly directed against any self-determination of the Ukrainian state and people. Aggression will start the very moment, any weakness in the Western alliance to stand by Ukraine is shown and tips the balance of the risk/reward calculation of the Kremlin. With North Stream 2 getting operational and the resulting control of the European gas market Russia has already acquired a powerful economic weapon. The resulting self-confidence of Russia with continued hybrid and cyber-attacks and constant escalation of red lines in its communication does not bode well in that regard. Any aggression will turn bloody this time as Ukraine is much better prepared than in 2014. But in the end, neither the US, NATO, or the EU is ready or able to block any aggression by military means. Also, watch out for developments in Belorussia – will Lukachenko repeat the survival miracle of Assad in Syria or go down? – and in the Balkans, where political heat in the relation between Serbia, Bosnia, and Kosovo has gone up to levels close to armed escalation.
- China/US: With the open support of Taiwan by the US and the stubborn defense of the South China Sea by the US and its allies against Chinese hegemony, the reality of an Asian Pacific cold war has arrived. An enormous arms race between Korea, Japan, and Taiwan on the one hand and China, on the other hand, will be with us over the coming years. Too late did the West and its Asian allies wake up to the enormous economic powerhouse they helped to build with the rise of China, which will even dwarf the economic size of the United States in the near future. Now, the containment might be too little and too late. Any global disruption or show of weakness might tip the balance for China to think that the golden moment for a Taiwan grab has come. Generals already stare in disbelief at the speed, size, and capabilities of new generations of arms in China and the political leverage on third countries that have been built over the last decade. Technological innovation and winning the space race will be key for the West to stay relevant in this competition.
- Iran: The coming months will show, whether any revival of the JCPOA is possible or not. While severely hit by sanctions and covid, the regime has used the absence of international unity due to the unilateral cancellation of the JCPOA by the Trump administration to increase its nuclear and ballistic capabilities and to escape from international oversight and control. Very soon the World will see a North Korea scenario in case that there is no success of the rebooted talks in Vienna. The options are clear: peaceful settlement or pre-emptive strikes of Israel and potentially the UAE against Iranian nuclear and military facilities with all the ugly consequences of a regional war involving Iran, Iraq, Lebanon, Syria, Jordan, and Israel – and more migration to come.
- Cyber: We continue to believe that one of the biggest global escalation risks stems from attacks on critical IT infrastructure, both on national assets or on business players with critical importance for a country through sabotage, disruption, piracy, data theft, and blackmail. First, most countries have no experience in handling and reacting to these kinds of attacks, and there are no clear chains of command and de-escalation between countries. Often, attacks are too late identified, and the originator cannot be proven. Second, and driven by this feeling of not being held responsible, players could overplay their hand and provoke harsh and asymmetrical reactions, and third, countries in many cases utilize hackers and assets outside of government structures to be able to deny any responsibility for any attack (the Wagner factor), but these hackers and assets might develop separate and additional activities, often greed-driven and outside of any government control, which again can lead to unwanted damage and reactions. The IT attacks and demands for ransom payments on businesses and influential or famous individuals are exploding. It is shocking to see how many companies are entirely relying on their external IT providers and naively approach this mission-critical issue, while a critical data leak can upend the strongest business, especially in trust-based industries.
- Migration: Last, but not least, images from the border between Belarus and Poland, and heated discussions between France and the UK on Channel crossings have brought back the urgency of migration from poverty and crisis regions. It is obvious that thanks to climate change and political chaos in post-war regions from Iraq to Afghanistan, Syria, Africa, South, and Middle America migration levels will once again rise. The border wall lobby is cheering, yet next to the human tragedy, there is no systematic and convincing answer drafted or even in the discussion. The distribution of covid vaccines in the world demonstrates strongly that solidarity and global thinking are non-existent. It is therefore inevitable, that very soon we will see the same or bigger refugee streams than in 2015, probably with more casualties, more ugly scenes, and more conflicts between nations and within societies of how to cope with the streams. Be prepared for more polarization, hate, and right-wing propaganda.
2022 is promising to be a dynamic and super volatile year with lots of opportunities and strong risks to watch out for. Be strong.
We wish you and your loved ones wisdom, health, and luck for the coming months and a joyful start into the hugely successful Year 2022
Dr. Marc-Milo Lube
Smartcom Holding GmbH