Presentation delivered by Peter Schwartz to IE Singapore's senior management on 23 July 2009

1. Peter Schwartz July 23, 2009

2. SHORT TERM SHOCKS

4. Fed and European Central banks coordinate emergency rate cut

7. AIG is rescued

8. money market stress leads to further liquidity interventions by the FedJuly 31, 2007Two Bear Stearns hedge funds file for bankruptcy Dec,17, 2008Fed cuts rate to virtually zero Elevated risk premium, what is the new normal? 80 bps Mar. 16, 2008JPMorgan offers to buy Bear for $2 a share; discount rate cut to 3.25% Mar. 11, 2008Fed agrees to lend troubled banks as much as $200bn Note: The TED spread is calculated as the difference between the 3-month T-bill interest rate and 3-month USD LIBOR Source: British Banking Association, Federal Reserve, Businessweek, washingtonpost.com, Monitor analysis

9. What appeared as a mini-crisis in U.S. subprime housing… Percentage of U.S. Delinquent Mortgages by Mortgage Type, 1998-2007

10. World Stock Market Capitalization, US$ Tr Source: World Federation of Exchanges Grew into a worldwide systemic crisis

12. Speculative units: Cash flows can meet interest payments only

13. Ponzi units: Cash flows are insufficient to cover the repayment of either principal or interest

14. Credit grows rapidly, with shadow banking system in the lead

15. Asset prices – houses, buyout valuations , etc. – inflateSource: World Federation of Exchanges, Hennessee Group, Commodity Futures Trading Commission, Pimco

17. Credit growth reverses (flow) and deleveraging begins with fire sales of existing assets (stock).

18. Monetary authorities try to reflate the economy by stepping into credit provision and low interest rates Source: Pimco, J.P. Morgan

19. The decline appears to be easing Source: bea.gov

23. Commodity prices are up, in part in anticipation of future growth World Natural Resource Prices, 2007-2009 Food Price Index (2000-2002 = 100) Oil Price, $ per barrel FAO Food Price Index Oil Price Jul-09 Source: U.N. Food and Agriculture Organization, U.S. Energy Information Agency

25. Unexpected further debt write downs

26. $ deflation or hyperinflaiton

27. National debt levels proof to be unsustainable

28. Prolonged high unemployment in US / EU

29. Effectiveness of auto bail-outs

30. Sudden commodity price hike squashing recovery

31. Effectiveness of stimulus

32. Further drop in U.S. housing prices below trendline

33. Rapid drop of other asset classes; Commercial real estate, credit cardsExternal Factors

34. At best half of estimated financial sector losses have been realized, how that does happen will be crucial Total loss forecasts Realized losses to date 3.5x 2x Source: Goldman Sachs, IMF, RGE Monitor, Bloomberg Finance L.P, T2 Partners

35. US home prices have further to fall US Months Supply 12 11 10 US Existing Home Sales US Home prices need to fall another 13% to reach trend line 9 7.5 8 Million 7 220 7 6.5 6 200 5 6 Million 4 180 5.5 3 1999 2004 2009 5.0 Real Home Price Index (1990=100) 160 445 140 4.0 1999 2004 2009 120 100 1950 1970 1990 2009 Source: www.econ.yale.edu/~shiller/data

36. US job losses continue to outpace recent recessions, can Europe continue to cushion the blow? US Unemployment rate compared to other recessions US vs EU-27 Unemployment 1974-6 EU-27 9.5% in June 1980 US 1981-3 1990 2001 2007-present Unemployment Rate (index 1=peak employment before recession) Unemployment Rate (index Nov 2007) 7/1/08 1/1/09 1/1/08 7/1/09 Quarter after employment peak Source: Bureau of Labor Statistics, bea.gov

37. Globalization has suffered a set-back Monthly World Trade Volumes “Trade volumes have fallen much faster than in the Great Depression and it’s unclear exactly why” World Trade World Trade Volumes (2000 average = 100) 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Source: Netherlands Bureau for Economic Policy Analysis, Findata

43. Considering imposing strict new disclosure rulesSource: Financial Times

44. Not necessarily with the appropriate level of international alignment

45. New financial scenarios for the next 2-3 years No more shocks Scenario 1: Looking after No. 1 Scenario 2: The Long Boom 2.0 De-globalization Facilitation of globalization Scenario 3: Depressionary Scenario 4: All in this Together More Shocks

46. Other possible short term shocks Pandemic Food shock Terrorist attack Cyber attack Geo-political tension Explosive clean energy growth

47. Food shocksThe world population is growing rapidly …UN median projection is 9.2 billion people by 2050, from 6.7 billion now Global Population, 1750 - 2050 Estimates and projections (billions) 8 6 4 2 Developed nations Developing nations 0 2000 2050 1900 1800 1750 We are one of the few generations to witness a doubling of population in our lifetime Source: UN population division

48. Food shocks…our diets change as we get richer Meat consumption and per capita income, 2002 Calories consumed per day, 1965 – 2030 kg 120 2500 Highest growth 80 2000 40 1500 1000 40k 30k 20k 10k 0 2002 US$ Purchase power parity Americans eat 2.5 times as much meat as the average Chinese person 500 0 1965 1998 2030 Source: FAO 2008, FAOSTAT 2009, World bank 2006

49. Food shocksNumber of food crises rising globally

50. Cyber attackInternet security is increasingly threatened 124countries use the Internet for web espionage operations Source: 2007 McAfee Criminality Report

52. Climate change will remain a dominant issue

54. Arctic sea ice coverage decreased an unprecedented 2 million km2 in 2007Source:, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions; NSTC, Global Climate Change, Impacts in the US

55. The Climate Will Be increasingly Variable and Extreme

56. Water will be the key factor Water problems could affect up to 250 million people in Africa by 2020 and more than one billion people in Asia by 2050. Tibetan Plateau Water System Source: Center for environmental systems research, University of Kassel

57. Water for food: how much does it take? 1,650 – 2,200 liters of water 1 kilo of soybeans 50,000 – 100,000 liters of water 1 kilo of grain-fed beef 170,000 liters of water 1 kilo of clean wool Source: Commonwealth Scientific and Industrial Research Organization

58. % Developing world has surpassed the developed world in CO2 emissions…and is growing rapidly CO2 Emissions from hydrocarbon use and cement production by country/region (1990, 2000, 2007, 2008) 1990 2000 +5% 2007 2008 CAGR -3% Annual Emission (Pg1) -2% +2% +7% 0% +6% China India Russia Brazil Japan EU15 USA 1 1012 kg Source: Netherlands Environmental Agency

59. BAU means carbon lock-in

60. a Copenhagen– “Mitigation Agreement” on long term objective but misalignment on short term path International alignment to limit warming to 2°C at recent G8 meeting in Italy requires emissions to peak before 2020 Difficulty in securing sufficient developed nation reduction commitments and in agreeing on the nature of short term responsibilities for developing nations Communicated 2020 Annex 1 reduction targets (compared to 1990 emissions) Long term global emissions trajectories for energy-related CO2 emissions Long-Term Goal 450ppm-eq Baseline 400ppm-eq 550ppm-eq -4% -5% -8% Gt CO2/yr Probability that warming is contained to 2°C: -20% -25% IPCC target range -30% ~15% ~50% -40% -40% Considerations Demands ~75% Negative Emissions India China Aus. (Joint) Aus. Japan USA EU (Joint) EU Source: Monitor Analysis; solveclimate.com; EPA.gov, LA times, U of Copenhagen, Climate Change, Global Risks, Challenges and Decisions

63. Goal is to generate 10 percent of its electricity renewably by 2010, and 15 percent by 2020

64. Emission cuts

65. Planning to reduce GDP energy intensity by 20 percent below 2005 levels by 2010, the effort has fallen behind schedule

66. Investments in energy technology

67. Invested $12 billion in renewable energy in 2007, second only to Germany

68. In addition to the already approved $221bn cleantech stimulus, rumored to unveil additional spending ($440bn - $660bn) dedicated entirely to new energy development over the next decade

69. Energy-efficiency initiatives

70. Accounted for 2/3rd of world demand – 40 million units - for solar-water heaters in

71. Transportation

72. Plans to spend more than $1 trillion to expand its railway network by 50% by 2020

73. Fuel economy standard of 36.7 miles per gallon and is considering raising it to 42.2 mpg by 2015Source: Center for American progress, reuters

75. The next scientific revolution More Scientific Anomalies New Tools & Computing Power More Funding More Scientists Science Degrees per Capita Note: Natural Science and Engineering Degrees per 100 24 Year Olds

76. 100 10 1 0.1 0.01 The great leap in biology…new human biology Cost per Base of Sequencing and Synthesis U.S. Life Expectancy Years, at Death Cost per Base Synthesized (USD) 1990 1995 2000 2005 2010 1985 Year Cost per Base Sequenced Cost of Short Aligo Synthesis Cost of Gene Synthesis Source: Robert Carlson Source: UN Data World Population Prospects 2006, medium variant

77. The great leap in biology… synthetic biology and regenerative medicine Regenerative Medicine Synthetic Biology Human Enhancement

78. Interesting Problems: Intellectual Challenges Dark Energy Complexity Meaning of DNA The Brain, etc. Human psychology and behavior

79. NRC Report on Grand Challenges

81. Factoring machine image and signal processing

82. Drug design—”very large molecules”

83. Medical tools

84. All optical computing

85. Extreme bandwidth communication

86. Souped-up laptops, PDAs

88. Molecular structure~100 Qubits—condensed matter physics

89. Quantum strategy-coordinator games —”2bit Qubit” (1-3 Qubits)

90. Repeater long distance (3 Qubits)

91. QKD—superposition

92. Write nanoscale lithographic lines

93. Sense single molecules

95. Plasmonics—Optical frequencies with X-ray wavelengths - match wavelength to device size on silicon

96. Scaling magnetic bits to dimensions less than 30 nanometers

97. Use magnetic domain walls for very high density magnetic storage

98. Utilizing novel properties of spin momentum transfer to generate microwave sources of electromagnetic radiation 10’s to 100’s of GHz

99. Coherence and entanglement purification

100. High fidelity Qubits—99.99% visibility

101. Robust QubitsSCIENCE TIME

102. Geo-engineeringBroad range of ideas have been created so far HOT TOPIC! HOT TOPIC! Ocean Seeding Sunlight Control CO2 Level Control Synthetic Trees Sulfur Injection Artificial Cloud Radiation Angle Varier Seawater Alkalization Venetian Space Blinds Recombinant Forest Antarctica Wrapping Non-Methanation Fodder Source: United Nations Environment Program, Wired Vision, Scientific American, Bioenergy News

104. Reenact volcano eruption of Mt. Pinatubo

105. Unknowns:

106. Is ongoing injection of particles feasible?

107. What are impacts beside scattering sunlight?

108. Places trillions disk fliers in solar orbit, avoiding tampering with the earth’s atmosphere

109. Unknowns:

110. As fixed-satellite, on which part of orbit do we place disks?

111. How can we collect disks if low or no efficacy vs. additional space debris? 1 Sulfur Dioxide Source: United Nations Environment Program, Wired Vision, Scientific American, Time Magazine, Monitor Analysis

113. CO2 will be trapped inside dead planktons

114. Unknowns:

115. Risk of acidizing ocean due to huge amount of CO2 consumption?

116. Best location - coast line filled with red wave?

117. Split seawater into NaOH3 (leave in ocean) / HCl4 (store on land)will result seawater becoming more alkaline causing more CO2 dissolution into water

118. Unknowns:

119. Effects on marine life or current?1 Iron, 2 Urea, 3 Sodium Hydroxide, 4 Hydrochloric Acid Source: United Nations Environment Program, Wired Vision, Scientific American, Living on Earth

122. 1958

123. 1988

127. Average Annual Growth (%) in CO2 Emissions 2005-2030

128. High economic growth

129. ReferenceLow economic growth Quadrillion Btu Source: 2005-EIA International energy Annual 2005 (June-October 2007); 2030-EIA, World Energy Projections Plus (2008) Source: US EIA

130. The role of crime and illicit activities Parasitical autonomous zones. Illicit drug, organ, waste, and wildlife trade Taliban Movement for the Emancipation of the Nigerian Delta Hezbollah Sinaloa & Gulf Cartels Fuerzas Armadas Revolucionarios de Colombia (FARC) Ogaden Guerillas Primeiro Comando da Capital (PCC) Source: Transparency International, Corruption Perceptions Index 2007

131. More and more products are becoming free Free MP3 Downloads Music Industry Revenues Free Online Classified Ads Sites Newspaper Ads Revenues vs. vs. 42 20 18 18 35 49% 221 212 40% 181 32% 30% 128 22% 37 17 2008 2007 2006 2005 2004 2003 2008 2007 2006 2005 2004 Global recorded-music sales, US$ bn US newspaper advertising revenue, US$ bn Global mp3 player shipments, millions Users of online classified ads sites in US
(% of internet users) Source: International Federation of the Phonographic Industry, iSuppli Corp, US Newspaper Association of America , Pew Internet & American Life Project Survey

132. Falling marginal costs of business Cross-subsidizing Free Mail Storage FREE FREE FREE + + + Expensive Expensive Expensive Free Directory Assistance 1895 2009 Falling marginal cost of doing business Free Air Travel? Free DVR /CDs? Source: Anderson, Chris – “Free! Why $0.00 is the future of business? “

134. Great geopolitical uncertainty Rising BRICs Shocks (finance, food, cyber security) New actors (NGOs, terrorists, criminals) Possible climate deal Extreme integration Protectionism Business as usual Vs. 450 ppm

135. The privatization of foreign policy RichardBranson PierreOmidyar GeorgeSoros Sergey Brin Larry Page BillGates

136. What about international institutions, non-state actors, NGOs, and others?

137. -103,842 A rebalancing of power Chinese Holdings of U.S. Assets (November 2008) In US$ billions Net Purchases of Long-Term U.S. Securities – In US$ hundred millions $1.7 TRILLION Short-term bank deposits Treasury bonds (incl. short term) Agency bonds (incl. short term) Corporate bonds Equities Source: CFR working paper, ‘China’s $1.7 trillion bet.’ Numbers come from CFR estimates, U.S. Treasury International Capital, and People’s Bank of China Source: U.S. Treasury

138. Nigeria vs. Singapore: a resource vs. knowledge economy GDP per Capita (1990$), 1950-2005 Singapore Republic of Singaporefounded Nigeria Source: "The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007 (Geary Khamis methodology)

139. Knowledge Driven Growth Global/Regional Plague IncreasingScience & Technology Collapse of Socialism/market reform Carrying Capacity Religious Extremism NetworkedIT Social Stresses Financial Crisis MoreIntegration Better Governance Knowledge driven growth predetermined Prosperity & Shared Interests

141. 2 Critical Uncertainty 2 - Form of International RelationsEbb and flow US signs bilateral nuclear deal North-Korea withdraws from NNPT Interests & Alliances West Germany enters NATO US does not ratify Kyoto protocol Berlin Wall torn down Warsaw Pact WW 2 WW 1 US intends to never join ICC Doha rounds break down NATO 1900 2000 ‘20 ‘40 ‘60 ‘80 Laws & Institutions European Economic Community, precursor to EU WTO emerges from GATT International Criminal Court EU Expands to 27 member countries Foundation of the United Nations, World Bank Kyoto protocol Geneva Convention Nuclear non-proliferation treaty IMF, IRBD & GATT founded at Bretton Woods

142. Critical Uncertainty 3 - Structure of national powerIs democracy inevitable as countries modernize? New modernization1 theory suggest that economic and technological development bring a coherent set of social, cultural, and political changes that are particularly conducive to democratization Industrialization Shift from traditional to secular-rational Difficult to avoid democratization, repressing calls for openness becomes increasingly costly Economic growth Growth of the Middle Class Sense of security, focus shifts to self-expression Postindustrial, knowledge society promotes independent thinking, appreciation of free choice Note: Modernization is not synonymous to Westernization Source: Ronald Inglehart , Christian Welzel, How Development Leads to Democracy, What We Know About Modernization

144. Meritocratic

145. Competent and

146. Participatoryand thus gain legitimacy and satisfy needs for self-expression? World values survey respondences1 to statement “Hard work brings success” United States Sweden China Russian Federation 9 8 7 6 5 4 3 2 In the long run, hard work usually brings a better life Hard word does not generally bring success, it’s more a matter of luck and connections 1China [2007], Russian Federation [2006], Sweden [2006], United States [2006] Source: Worldvaluessurvey.org

148. Flexibility

149. Entrepreneurship

150. Top universities

151. New leadership

152. Deficits

153. Education

154. Infrastructure

155. Military overstretchAmerica’s perception China’s perception Source: imf, bea.gov

157. Modern non-democratic states

159. Modernization and democracy go hand-in-hand

160. U.S. recoversContinuous Evolution U.S. Recovers Modern Democracies Note: Source:

161. Possible scenariosWith the additional possibility of shocks Modern Non-Democratic States New Game No Shocks Shocks U.S. in Decline Both/And Interests and Alliances Laws and Institutions No Shocks Shocks Continuous Evolution U.S. Recovers Shocks No Shocks Modern Democracies Note: Source:

163. China rises and moves toward democracy

164. New institutions arise such as GEPA, Asian Economic Community

165. Robust growth

166. Few shocks -> slow evolution

168. China as a modern non-democracy

169. Regional alliance of China and India

170. Near anarchy globally

171. Booms & busts

172. Few systemic shocks -> China centric World

174. New international laws but no new institutions

175. Strong growth with intense competition

176. Little global collaboration

177. Few Shocks -> constant rivalry

179. BACK UP

180. * Government is expanding “At this particular moment, only government can break the vicious cycle that is crippling our economy.” - President Barack Obama Total amount allocated for economic rescue $10.8 TRILLION Total federal spending, in FY200 US$ bn Source: Outlays from FY 2009 Historical Tables, Budget of the United States Government, Table 8.1

181. Exacerbated by the economy is a highly interconnected system Housing Market Economic Conditions Financial System

182. U.S. Housing Market: Reset Schedule will Test Prices Further Monthly Mortgage Rate Resets (First reset in Billions of USD) Source: IMF Financial Stability Report, April 2008, Credit Suisse

183. Tight surplus production in OPEC led to high oil prices Source: John Cook, Director, EIA Petroleum Division, “Next Stop for Oil Prices: $100 or $150?”, June 11, 2008

185. Further pressure on the auto industry or other national champions could increase internal protectionist pressures

186. The DOHA rounds could stall/fail again despite recent G8 pledge in Italy to reach an agreement

187. Countries could impose tariffs on imports from regions with perceived laxer carbon regulation, as is currently written into the US House of Representatives ACES Act

188. Further decline of trade volumes

189. World trade has dropped more precipitously than GDP, over 20% from its peak. Further declines could reduce the importance of trade in national economies

190. Re-calibration of global supply chains

191. Supply chains could become more local as a result of protectionist barriers and/or higher transportation cost due to higher energy/carbon prices

192. International coordination financial industry regulation falters

193. Ambitions plans have been announced to reshape financial regulation, there is a risk for these measures not to be well internationally coordinated

195. New coal plant emissions equal all historic coal CO2 27% of remaining budget for 450 ppm 1751-2000 Total Coal New Coal Plants Lifetime Emissions – China, India, and U.S. Source: ORNL, CDIAC; IEA, WEO 2004

196. Technologies of Today: Pacala & Socolow Pacala and Socolow demonstrated in their seminal work that currently available technologies could help dramatically reduce GHG emissions Efficient vehicles Reduced use of vehicles Efficient buildings Efficient baseload coal plants Gas baseload power for coal baseload power Capture CO2 at baseload power plant Capture CO2 at H2 plant Capture CO2 at coal-to-synfuels plant / Geological storage Nuclear power for coal power Wind power for coal power PV power for coal power Wind H2 in fuel-cell car for gasoline in hybrid car Biomass fuel for fossil fuel Reduced deforestation, plus reforestation, afforestation, and new plantations. Conservation tillage While some technologies are far from the commercialization phase, most of them are already available for scaling up and deployment Source: “Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies,” Pacala & Socolow, Science, 205, 968 (2004); Wikipedia

197. 9 To achieve low carbon economic growthCleantech will have to live up to its promise Cleantech VC investment by Technology Global investment in Clean Energy ($USbn) 25% 29% 73% 54% 59% 5% 155 Solar 148 Third Party
Investment 93 Transportation Biofuels S/RP,
corp RD&D,
gov R&D 60 35 27 22 Wind Smart Grid Water Agriculture 2008 2007 2004 2003 2002 2006 2005 Q209 Q109 Q408 Q308 Q208 Q108 Q407 .. but growth rate slowed from 59% to 5% impacted by the macro economical climate Smart money moving to transportation and demand side technologies Source: cleanedge.com; cleantech venture network; UNEP, Global Trends in Sustainable Energy Investment 2009

198. Green stimulus as government initiated growth measure Green Stimulus by Region US green stimulus Green Stimulus Regional Spending ($US Billions) Green Stimulus Breakdown(TARP & American Recovery Plan) USD112bn UK Low Carbon Rail 5% Australia 9% Energy Efficiency Grid 32% Canada 11% France 14% Water Waste 29% Japan Renewable Germany China green stimulus EU Stimulus Package Breakdown (RMB4 Trillion) S. Korea Port Environment US Grid Airport China 25% 2% 14% Highway 22% Total additional spending of $430bn, 2.5x the total 2008 sector investment 20% Rail Housing Source: HSBC

199. Sovereign Wealth Funds SOVEREIGN WEALTH FUNDS, IN US$ BILLIONS SWF DEALS BY TARGET REGION – 2008 $58 billion $26 billion 100% Rest of World $590 BRIC 8% North America 80% 40% $79 G7 Middle East & Africa 43% $1,400 Middle East 60% $700 Asia Pacific Asia Pacific Asia Pacific 40% 41% 17% $360 Other Europe TOTAL $3.2 TRILLION 20% Europe 31% Europe 19% $110 Rest of World 0% 2Q08 1Q08 Source: European Institute, Sovereign Wealth Funds Survey 2008, Oliver Wyman, Monitor Group

200. 2 The Future of SWFs SWF asset allocation: 2007 and 2012 (forecasted) 38% 32% 27% 25% 20% 2007 2012 16% 15% 12% 5% 5% 4% 1% Fixed Income Cash Other Alternatives Real Estate Private Equity Equity Source: European Institute, SWF Institute, OECD, Oliver Wyman, Bloomberg

201. Growing complexity and evolution to fill new economic niches Source: The Origin of Wealth, Eric D. Beinhocker, 2007

202. What will it take for Latin America and Africa to get on the wave? Corruption Perception Index, 2007

203. The new physics/chemistry Physics of the Very Small Dark Energy Precision Chemistry

204. Tools Recent past Hubble Telescope Atomic Force Microscope MRI machines

205. Tools New Space Telescopes Large Hadron Collider and its successors Imaging live cells? Quantum Computers New ways of asking questions Metagenomics SETI at home Petabytes and beyond Manipulating very fast things Many new forms of sensors

206. Biology Fundamental Shift from Empirical to Rational Science Neurobiology Genetics Stem cells Synthetic biology Systemic science of disease Mathematical biology It’s all Physics + Water !

207. WHY SCENARIOS

208. The Role of Mental Maps

209. Emergent Strategy EnvironmentForces Intended strategy Emergent strategy

210. IBM projections

211. Spirit of surprise

213. Scenario planning is rooted in the concept of Multiple Possibilities

214. Test of a Good Scenario Not right or wrong Leads to better decisions

215. DecisionMaking Scenarios ExistingStrategies KnowledgeCreation EmergentStrategies The Strategic Conversation and Strategic Options Strategic conversation creates these flows and keeps these relationships healthy as an art, not a science

216. How Scenario Thinking is Used A tool for strategic alignment and communication across the organization A means of improving the “strategic conversation” A means of refining and testing assumptions for quantitative modeling decision making A “windtunnel” for existing strategy A means of developing and ranking strategic options

217. Scenario Thinking to overcome decision Traps Over confidence Thinking inside out Not seeing the whole story Framing the problem wrong Not asking the right questions

220. Indicators and Signposts

221. Implicationsand Options

223. Core Robust Satellite Satellite Satellite Four approaches to placing Betsacross the Scenarios Bet the Farm Scenario A Scenario B Scenario D Scenario C