METALS SERVICE CENTER INSTITUTE (MSCI) EVENT, Carlsbad, CA – FEBRUARY 16, 2012
INTRODUCTION BY BOB WEIDNER:
It is now my pleasure to welcome back to MSCI a friend of ours, although this is his first Carbon Conference, but he is certainly not a stranger to our community as he has addressed the Specialty Metals Group as well as the Aluminum audience in previous years - Jeff Garten is a distinguished professor in the practice of international trade, finance and business at the Yale School of Management and he was named to that position in 2005. During the previous decade at Yale’s business school, he was the dean and under his leadership it created many improvements, new programs and he grew their endowment. Prior to Yale, Dr. Garten was the undersecretary of commerce for international trade in the first Clinton administration, where he focused on promoting American business interests in Japan, Europe, and many emerging markets like China, India and Brazil. He was deeply involved in the conclusion of the Uruguay round of trade negotiations and in helping the United States and China negotiate Beijing’s entry into the WTO. 1979-1992 he worked on Wall Street as Managing Director of several firms. From 1973-1978 he served on the White House Council on international economic policy in the Nixon administration and on the policy planning staffs of Secretary of State Henry Kissinger and Secretary of State Cyrus Vance in the Ford and Carter administrations, respectively. He is the author of several publications; he holds a bachelor’s degree from Dartmouth College and received his doctorate from the School of Advanced International Studies at Johns Hopkins University, where he specialized in international economics and international organizations. He has also served our country with distinction as a Lieutenant in the 82nd Airborne Division, a captain in the United States Army Special Forces and has served as a military advisor to the Royal Thai Army.
One of the things those that have heard Jeff speak before will attest that the perspective he brings on what’s happening on the world around us and while we may not be thinking of how it impacts our businesses today, whether we’re a mill or a service center, I think the lens through which he looks at the future for all of us in the western world in manufacturing and certainly the metals supply chain, is both going to be insightful, provocative, and thought-provoking to all of you. Please join me in welcoming Dr. Jeffrey Garten. Jeff, welcome back.
* * *
New World Order
By
Jeffrey E. Garten
Thanks a million, Bob. When I was in the Clinton administration, we used to sit around and ask the question, “When is the best time to speak to an audience?” And some of us would prefer to do it at breakfast. Everybody was up and it was the beginning of the day. And some preferred to do it at the end of the day when everybody was relaxed and had dinner, a drink, and was laid back. Lunch was okay, too, but the worst was after lunch. And I find myself thinking about exactly how to do that because I want to talk to you about some very serious things, but I also recognize that if I were sitting where you were, especially after such an energetic interesting presentation that we just heard, you may not be in the mood for some really serious stuff. So I’m going to do my best. I also start with a sense of some intimidation by this audience because whenever I have addressed one of Bob’s groups, I have found out that I am talking to a group of people who not only knows their industry inside and out -- as you would think -- but who has been very thoughtful about the context of that industry. Moreover, I know -- just from talking to some of you here earlier today and from things that I’ve read -- that the steel industry is really at the forefront of businesses that are constantly reinventing themselves. So to the extent I can make a contribution to your thinking, and it would be with the thoughts of someone who has been in lots of different professions and in different places. After all, my time in Wall Street was spent not only in the US but in Japan and in Europe, and in Latin America, and I’ve been in four presidential administrations, and I’ve spent a lot of time at Yale where it’s kind of a crossroads of people with lots of different ideas. I’d like to think that that’s some contribution because we are living in a very unique period. Anyone who says that they know what’s going on, anyone who feels that they can really predict what the world is going to be like six months from now, let alone five years from now, you’d really have to take it with a grain of salt. So I’m bringing a perspective that may or may not overlap with yours, but it’s a perspective born of a lot of different perspectives that I have had the fortune to have.
I know that this industry is extremely diverse as well and that a lot of the things that I might say might be relevant to one part of it and not necessarily to the other. But I do think that everybody in this room has a few things in common and I just want to be explicit about that, because that’s part of my framework. You’re all in a highly, I would say hypercompetitive, situation. You’re all strongly influenced by global trends. If you didn’t take a step outside the US you would still be influenced by the competitive forces. There is not one person in this room who would like merely to react to competition; you want to be out in front of it. You want to set the bar for innovation -- whether or not you can, that’s another story -- but certainly that’s your aspiration. And finally, for everybody here, talent and technology and organization is at the center of what you think about all the time. So I feel like I am talking to a group that has some great commonality, even if the details of your business are a little different.
And to simplify things, I hope to make only one point this afternoon. And that point goes like this – the world is changing at warp speed. The thing about these changes is that there are many, many changes and they’re all happening simultaneously. It’s too complex for me to understand or for anyone in this room to understand. The best you can do, and this itself is a very tall order, is 1) to develop a framework for thinking about change; two, to ask yourself the question, if I have that framework, how do I operationalize it? How do I go from the idea or the recognition of what I think is happening to the everyday decisions of running a business? And three, how do I get the talent and the technology and how do I design the organization to respond?
What I want to do today is to talk about three different things.
The first is I want to talk about some key pressures that I believe we’re all under right now. I think I have to do that because if I skip just to the longer term, it will feel very theoretical and disconnected.
But the heart of what I want to talk about is five trends which I think are going to rock your world in a way that you can hardly anticipate.
And then finally, I’d like to link that to what I think are some of the implications for your business
Current Pressures.
So let’s start with the present. I’m not going to dwell on this, but I want to tell you what I think the framework is for right now and let’s say the next 18 months. We are living in the wake of a financial debacle and a great recession. Until a month ago, virtually all reputable projections about how the world economy is faring were being revised downward almost every six months. That is, the sense that we were recovering, and when I say we, I’m talking about the whole world, recovering from the financial crisis and the recession, that sense was “yes we are, but at an increasingly slower and slower rate.” And there was a lot of talk about a double digit global recession. Some of that negativity has been reduced by new optimism about the US which I’ll come back to, but if you take this whole situation, there is somewhat disparate trends within it. For example there’s quite robust growth in emerging markets, particularly in Asia, although you’re beginning to see a number of problems that are occurring with these countries that make you think some of the prospects are likely to have been hyped. That’s one trend. But in Europe it’s near recession, bordering on recession, accentuated by a horrendous debt crisis that as I will say later is going to be with us for at least a decade.
And then we come to the US where without doubt there have been some really positive stirrings over the last couple of months. You can see it in the numbers; you can see it in developments like unemployment statistics; you can see it in some projections for GDP. But I think anyone really looking at that situation really has to be very sober about it. Because whatever’s happening is not a result of any fundamental change in the underpinnings of the economy. We’ve really done nothing from a policy perspective to insure that so many of the jobs that have been lost can come back because the ground has shifted in terms of the requirements, what kind of requirements those jobs will need. There’s been nothing done about building the infrastructure of the country which every year falls further and further behind what it should be. There’s been nothing done about education and there’s been nothing done about the fiscal situation. And so whatever you want to think about the current where we are right now -- and I hope like everyone else this is the beginning of some kind of turnaround – my guess is it’s going to be fairly modest. In addition, there is no scenario for the United States to grow in a robust way without being able to export far more than anything that has been contemplated. And how we do that in the face of a Europe which is likely to be in recession and Asia where the growth rate is healthy, but not what it was over the last couple of years, that’s a really big question.
My own view is that in the next few years, just sticking with the short-term, we have huge risks to the downside. I’m not predicting a calamity, but I think that the prospects for a very lackluster global economy punctuated by a lot of different crises, is very likely. Here are some of the things that I worry about:
First, I worry about a financial system that does not regain its footing. As Bob said at the outset, we will be digesting a spate of regulation that is enormous by any standards. Regardless of whether you feel that legislation is justified or not, it was done very quickly, it’s massive, and it’s inconsistent both within the US and as other countries enact similar legislation, it’s inconsistent globally. So the financial system which we relied on to pump out money, to take risks -- maybe too much risk at one point -- but nevertheless we need a financial system to do that. That is a big question mark.
A second reason I worry is that I’m willing to take bets that there will be a Greek default. Sometime in the next 18 months, I predict that we will see a declaration of one kind or another that a huge amount of the Greek debt just has to be written off. There is no arithmetic solution to the problem that they’re wrestling with because the numbers can’t work unless the economy itself is restructured for growth. It can’t just be austerity. And there is no restructuring like that in sight.
A third reason I worry is that I think we’re going to see some significant setbacks in China. And I go to China a couple of times a year; I teach a course on China in the global economy. What China has done over the last 30 years has been nothing short of miraculous, but no country can defy gravity forever. And there are an enormous number of pressures built up in that system. And the big problem in my view is that it is an authoritarian centralized government attempting to run an economy which is big, complex, increasingly tied to other economies and you just can’t do it that way. There has to be more decentralization, there has to be more market oriented orientation, no matter how good the Chinese government is, and it may be very, very good, no one can run an economy that is big and complex and is so tightly controlled from the center.
And fourth, I worry about a major geopolitical event. Now you can worry about it or not worry about it, you can predict it or not predict it, but the one thing we have seen over the last ten years is an increasing number of events that have been like putting a wrench in a wheel where people were saying was once every 50 years, is now suddenly much more frequent. And whether you call it geopolitical or whether it’s a natural disaster, or whether it’s a manmade disaster, we can go through the litany of things that will happen. But we’re very close to a few of them now. We’re so close that it’s not even going to be a surprise. We’re close to a war with Iran; I’m not saying it’s going to happen, but we could wake up tomorrow and we could find out that Iran has been bombed and that the Straits of Hormuz have been closed. And the impact of oil prices and the cascading of that around the world would be quite dramatic and have major economic consequences. We’re only a hair’s width away from a very significant cyber-attack. I believe the capability exists, but it won’t take all that much to paralyze the energy grid or the financial grid. If one cyber-attack closed the New York Stock Exchange, the reverberations, the financial reverberations, the undermining of confidence would be so great, that all of the predictions that everybody is making would have to be thrown out of the window.
I worry about these things not only because I think they may happen, but because of something bigger. And that is that the context in the international community is one of enormous weariness of fighting additional crises. This financial crisis that we’ve had or let’s call them sub-crises like the crisis in Japan with the tsunami and the radiation, or the crisis in Europe which is just every single day, this has taken all the air out of the balloon of the people who normally would be the ones we look to to get to take charge. And I’m afraid that two years ago when I spoke at one of these conferences, I could say that there is more and more attention, more and more interest internationally, in fighting crises. I wouldn’t say that right now. Instead, I would say that everyone’s tired and they’re more interested in their own country than any notion of international cooperation. So we’ve got a really big problem in terms of the mechanism, the will to fight, the capability to fight, and the international perspective. And one area where that is true for sure which wouldn’t have been true in the past, is in the financial arena. All the central banks, which are the real firefighters, have basically expended all the real ammunition that they have – they can’t make interest rates any lower in the States, can’t make it any lower in the EU, Japan just said it was lowering interest rates to a little above zero. Same is going to happen in China. So we’re in a very difficult position in a world of recurrent crises and whether the ones I pointed to happen or another one comes from left field, the mechanism to deal with it, in my view, has been substantially weakened.
Now I can give you another scenario -- a more positive scenario. I don’t think it’s likely, but let me give you a positive scenario for the US. We have our election and at the end of this year, a few things are going to happen no matter what. The Bush tax cuts are going to expire. The sequestering of half a trillion dollars because of the failed budget agreement comes into effect. And it would take an active, positive vote of congress to prevent these things from happening. And maybe we just have such gridlock that in fact the congress won’t act at all. And overnight, we would find that our fiscal problems have almost disappeared. Without the Bush tax cuts and with the sequestering, we’re in a totally different position, not because anyone had the courage to take steps, but because the dysfunction made it so we couldn’t do anything. And the natural expiration of these deadlines takes hold. And at the very same time, the business community takes heart, well we got our fiscal stuff under control and there is a massive amount of cash as everybody knows, on the balance sheets of corporate America, and suddenly there’s a feeling that this is a good time to invest. You know investment as a percentage of GDP in the US hasn’t been this low in 60 years. So there is a tremendous pent-up possibility of an investment boom in the United States corporate leg. There’s a scenario and since the US is so very keyed to the world economy, you could see this having a reverberating effect everywhere.
Another thing that could happen is that Europe, for reasons I can’t describe, really gets its act together, doesn’t let Greece fall, puts up more money, and they really get serious about having a political and financial union and its clear that this crisis has mobilized them to a level of action that no one ever thought. That too would have a real catalytic effect.