The $160bn Bridgewater hedge fund produced a chart last year about modern politics that was alarming for at least two reasons. First, the number crunching revealed that the proportion of votes garnered by populist, anti-establishment candidates in the west, such as US President Donald Trump, France’s Marine Le Pen and Jeremy Corbyn, leader of the UK Labour party, exploded from 7 per cent in 2010 to 35 per cent in 2017.
The $160bn Bridgewater hedge fund produced a chart last year about modern politics that was alarming for at least two reasons. First, the number crunching revealed that the proportion of votes garnered by populist, anti-establishment candidates in the west, such as US President Donald Trump, France’s Marine Le Pen and Jeremy Corbyn, leader of the UK Labour party, exploded from 7 per cent in 2010 to 35 per cent in 2017.
Second, the chart showed that the only time an increase of this magnitude occurred in recent memory was in the 1930s, when another financial crisis led to populism. That time, the swing prefigured the rise of nationalism and led to war. Could history repeat itself?
The global elite increasingly fears so. The World Economic Forum on Wednesday released its annual survey of the main concerns of its members.
Economic and financial risks used to be at the forefront of delegates’ minds. At the start of this decade, for example, issues such as banking crises, rising debt and slow growth topped the rankings.
Yet in 2018 those financial risks no longer appear on the dashboard; or certainly not close to the top. Instead, business executives, financial titans and political pundits fret about the issues that emphatically cannot be solved — or even modelled — by economists and financiers.
WEF members fear that inequality is sparking dangerous social fractures and the populism revealed by the Bridgewater chart. They are deeply concerned about “extreme weather events”, “natural disasters” and “failure of climate change mitigation”.
Yet the other threat cited is one that barely rated a few years ago: war. The biggest perceived danger of 2018, in terms of impact, is that somebody uses weapons of mass destruction. There is also rising concern about its digital proxy: cyber attacks.
Nearly all — 93 per cent — WEF members think that political and economic conflicts between countries will increase this year; 79 per cent believe there is a rising danger of military conflicts; and 78 per cent expect that large countries will be drawn into regional battles. Unsurprisingly, this leaves two-thirds of WEF delegates nursing the gloomy conclusion that the world will be riskier in 2018 than last year.
It is entirely possible that this perception is wrong. One longstanding joke about the WEF, which will undoubtedly surface again at next week’s summit, is that investors should treat the Davos debate as a contra-indicator, as it usually tends to miss the important issues of the day.
Although charts such as Bridgewater’s are fascinating, the 1930s is not the only decade that investors need to study. In the late 19th century (before electoral data could be compiled), the US also had a financial crisis that created populism; but that time it did not lead to war.
Even if the WEF survey is crude, it does reflect a consensus towards more conflict that is already entrenched. There is a cloud of speculation in Washington that Mr Trump is considering unilateral action against North Korea, even as Saudi Arabia sucks America into a war with Iran, and tension escalates between China and the US.
Next week, Mr Trump will travel to Davos and, undoubtedly, will try to extend some olive branches. But he will face deep scepticism: a Gallup poll published on Thursday shows that confidence in US leadership has collapsed around the world in the past year. Fractures abound.
Even if Davos can sometimes operate as an echo chamber, the WEF survey should give investors pause for thought, particularly when they look at the sky-high level of asset prices in western markets, despite low levels of volatility. It should also spur debate among investment committees and executives about whether they can create hedges to cope with this deeply fractured — and potentially dangerous — world.
Traditionally, the answer has been “no”. Investors are bad at preparing for tail risks; war is not an environmental danger that can be modelled. But it is a fair bet that 2018 will be a year when the financial industry scrambles to offer a plethora of Armageddon hedges; indeed, the sales pitch will undoubtedly start in Davos next week.
We should hope — and pray — that this chatter helps to focus minds among the global elite in a way that at least delays the impending apocalypse.
In the meantime, keep a close eye on what Davos is not worrying about enough this year: that pesky matter of global finance, particularly in places such as China.
