Why the world is in a "geopolitical recession"

The key to being a great investor # # --------------------------------------------------------------- The key takeaways today: - A credibility crunch in a volatile world - How work-from-home policies have changed consumer behavior - KKR's Henry Kravis reveals the key to being a great investor - The third-party wild card in the US presidential election - The surprising thing about the global oil supply - Briefings Brainteaser: A mammoth year for global elections --------------------------------------------------------------- Uncharted territory: Navigating a 'geopolitical recession' A [global credibility crisis]( among world leaders is making it difficult for policymakers, companies, and investors to operate in today's environment, say Jared Cohen, president of Global Affairs at Goldman Sachs, and Ian Bremmer, president and founder of Eurasia Group and GZERO Media, on the [Goldman Sachs Exchanges]( podcast.  “When the entire world goes off script, you end up with these very volatile inflection points, and all of the sudden, forecasting becomes much more difficult,” Cohen says. “And the volatility and uncertainty around geopolitics end up impacting business more than [at] any other time in history.”  “It's what I consider a geopolitical recession,” Bremmer adds. “The institutions that we have globally, [which are] meant to create a level of governance, no longer align with the underlying balance of power of the world,” he says, adding that the same institutions also no longer align with the world's policy or leadership needs. As a result, businesses need to be much more thoughtful about how they operate on both sides of geopolitical tension, Cohen adds. “They're going to have to get much more sophisticated at forecasting and looking around the corner," he says. "It's going to be very hard to do things kind of quarter by quarter. And businesses are going to have to build the geopolitical machinery in-house to be able to navigate this.” --------------------------------------------------------------- How the shift toward remote work has changed consumption Remote work appears likely to be the most persistent economic legacy of the pandemic, according to Goldman Sachs Research.  The share of US workers working from home at least part of the week has stabilized at around 20-25%, below its peak of 47% at the start of the pandemic but well above the pre-pandemic average of 2-3%, [Chief US Economist David Mericle and Chief US Political Economist Alec Phillips write in a report](. This shift to remote work is likely the key driver of the large gap between goods and services consumption, which has persisted even as fears of the coronavirus have diminished. Real goods consumption was already growing more quickly in the pre-pandemic years and is now about 7% above trend, while real services consumption is still about 1% below trend. Metro-level credit card data show that remote workers spend less on office-adjacent services (such as transportation) and more on home office and recreation goods. This suggests that much of the shift in consumption patterns is likely to last. --------------------------------------------------------------- KKR's Henry Kravis on private equity, culture, and global markets When Henry Kravis and his co-founders George Roberts and Jerry Kohlberg set out to found KKR in 1976 with just $120,000, they had hoped to last maybe five years and do a couple of deals. Instead, they ended up pioneering the private equity industry and reshaping the global financial landscape. The opportunity at the time was to better align the interests of management and shareholders, says Kravis, co-founder and co-executive chairman of KKR, on an episode of [Goldman Sachs Exchanges: Great Investors](. “If we could hold management accountable and have an alignment of interests where…they put up capital so they have something to lose — just like we, as shareholders, have something to lose — we thought we would get more out of them than what we were seeing in companies on their own. And that's exactly what happened.” In the following decades, KKR expanded into private credit and built up its businesses in real estate, infrastructure, and insurance. The firm now manages nearly $520 billion in assets. Kravis says the secret of the firm's success has been its focus on culture. “We wanted a culture where everybody participated in everything you did,” he says. “If everyone was running around and saying, 'That's my idea,' or 'That's my deal,' and that's how they really thought about it, then what you would end up with is no one helping each other.” Today, Kravis says he and his co-founder (and first cousin) George Roberts are focused on ensuring a smooth leadership transition to co-CEOs Joe Bae and Scott Nuttall, while continuing to bring in new business, meet with clients, and mentor the next generation of employees. Having lived through multiple ups and downs in the market, Kravis says the key to being a great investor lies in what you do during market downturns. “Everybody looks smart when markets are going up. Just ride the wave and you'll do just fine,” Kravis says. “The key for a good investor is: How do they do in these downturns? George's view and my view has always been: Lean in.” During the 2008-2009 financial crisis — when the future of the financial industry was in doubt — "the message that George and I kept telling everyone, because everyone had fear at that time, is: Focus on what you can control.” --------------------------------------------------------------- The road ahead for the US presidential election As the nomination contests for the Republican and Democratic US presidential candidates kick off this month, the early consensus view is that President Joe Biden has locked up the Democratic nomination, as is typical for incumbents, and that former President Donald Trump will be the Republican candidate. But even after the candidates are confirmed — which could happen in a matter of weeks — the outlook for the presidential election is far from certain, say Goldman Sachs' Joe Wall and Alec Phillips on [Goldman Sachs Exchanges](. One wild card is the strength of third-party candidates in the current election, says Wall, a managing director in Goldman Sachs' Office of Government Affairs. " We're in a circumstance with the third-party dynamic where the winning candidate, if you just want to think about the national vote, very well may be in the low 40s, high 30s, not near 50% like we're used to,” he says, noting that third-party support typically declines closer to the election. “And so, in that dynamic, I think that worries Democrats a lot, just given that Trump's base of support is very sticky.” --------------------------------------------------------------- And while economic growth is holding up, inflation hasn't come down as quickly as expected, which may be hurting support for the Biden administration, says Phillips, Goldman Sachs Research's chief US political economist. “The best guess is that we probably will see some improvement in consumer confidence and probably some improvement in voter sentiment around the economy only as those higher prices become more normalized and [as] the strong inflation that we've seen is further in the rear-view mirror.” --------------------------------------------------------------- Oil prices may stay low in 2024 amid surprisingly ample supply The demand for crude oil was stronger than expected in 2023 — but prices remain low because the growth in supply was surprisingly robust, [says Sarah Kiernan, head of Americas Commodities Sales]( in Global Banking & Markets at Goldman Sachs. “Most of the focus, if you go back a year ago, was: soft landing or no soft landing? What would demand look like?” Kiernan says in an interview. “Demand actually delivered — but the supply really outpaced it.” She points out that US producers aren't reinvesting capital like they used to, but they're still looking to grow. Production cuts by some OPEC members, meanwhile, don't appear to be as deep as feared. In 2024, there could be more of the same. Kiernan says prices may well be lower than many in the market expect. --------------------------------------------------------------- Briefings Brainteaser: The campaigns begin In 2024, a mammoth election year around the world, 76 countries will go to the polls. Which of these countries is not holding a general election this year? A) Canada B) South Africa C) Mexico D) The UK [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( January 5 [Inflation's soft trajectory could spur Fed rate cuts by March, says Goldman Sachs' Hatzius (4:01)]( [CNBC]( January 8 [We are clearly moving into a different super cycle, Goldman Sachs analyst says (3:09)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this newsletter or to its recipient. 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