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The Ivory Tower

The World Economic Forum is a non-governmental organization that holds annual conferences for the world’s leading economists, heads of corporations and of course political leaders. These gatherings are hosted in Davos, a small city with a population of only 10,000 people, located in the Swiss Alps at an elevation of 1,500 metres (or 5,000 feet). It’s a clean and orderly place where almost every building has a rich history, making it the perfect venue for the global economic and political elite to rendezvous in seclusion from the rest of the world.

The goal of these meetings discuss the economic and political issues of our time, by analyzing and evaluating these processes as they play out across the world. Politicians receptive to these ideas are able to interact directly with various activists and many Nobel Prize winning economists who are able to share their honest thoughts in a setting not restrained by political niceties. Attending the event is considered a sign of prestige, so those who get invited rarely miss out on it. This year the list of quests included President Trump and German Chancellor Angela Merkel. It’s worth paying attention to the event, if only because the speeches and presentations held there are often a sign of important economic and political decisions to come.

The main theme of this year’s conference was climate change and reducing carbon emissions. Many of the speakers went even further, calling for corporations to move away from what they call “shareholder capitalism.” The argument here is that despite the immense and undeniable prosperity created by the model of shareholder capitalism, the resulting negative externalities make it fundamentally unsustainable in the long term. Furthermore they claim that the extent of environmental damage being done now exceeds the value of new wealth being created.

These statements are an obvious criticism of both China and the US. Very few countries in the world give as much free reign to consumerism and the pursuit of capital gains as the world’s two largest economies. Regardless of how well the speakers presented these ideas, it’s still fundamentally a socialist economic concept. The only question is whether it’s a complete pipe dream or the culmination of an economic vision that’s been growing since the mid-19th century.

Given the sentiments of the other attendees, it should be no surprise that President Trump was not the most popular person at the event. Most of them expressed a bleak outlook, advocating the necessity of urgent international cooperation and drastic intervention to stop climate change. Meanwile, President Trump on his arrival boldly declared that this “not a time for pessimism” as he boasted about the booming US economy. His statements are backed by a strong show of positive macroeconomic indicators. Even the general population’s perception is that the economy is doing great and things seem to be getting better every day. The other attendees, however, did not share his optimism.

Many heads of corporations pointed to significant ongoing changes in consumer habits. This argument is not one that can be easily dismissed, since in the end it’s always consumers whose votes, either by ballot or by dollar, are what keeps these elites in power. So far these changes in consumer preferences are only being felt in Europe, however the same sentiment is slowly creeping into major US cities as well. This tendency suggests that it may become increasingly difficult to win elections for politicians who fail to at least play lip service to regulating unrestricted capitalism.

Beyond just the political implications, the Davos vision also includes the possibility of shifting investor preferences. Placing a heavy regulatory or tax burden on industries (especially manufacturing and the energy sector) with an outsized environmental impact would certainly cut into their bottom line, perhaps discouraging potential investors. The proposals listed also included various government spending initiatives focused on protecting the environment and reducing polution. If the world’s economic and political leaders really are forced to move in that direction physical industries become constrained, the only way out will be digital space. There’s a growing virtual economy with an immense and still largely unrealized potential for economic growth with minimal environmental impact. If virtual goods become the driving force of the economy then there’s a possibility that GDP growth can be sustained even with all the limitations on the actual physical economy.

From an investors point of view, this means that one should carefully consider the risks of placing long term positions on shares of companies in these high-emission sectors. Although there’s no clear tipping point in sight, there’s a mounting pressure on classic heavy industry and chemical industry companies that should make anyone looking to invest in them think twice.

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