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Move Over, Black Swan: Here Comes the Gray Rhino

June 14, 2016

Detail from book cover

Introduction

DEVIN STEWART: I'm Devin Stewart from Carnegie Council. I'm a senior fellow here at Carnegie Council.

It's a great pleasure to have Michele Wucker back here today at Carnegie Council. She is author of the books Lockout, Why the Cocks Fight, and The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore. That is the topic of her talk today.

She is also founder of Gray Rhino & Company, which helps decision-makers deal with obvious but ignored dangers. In 2009 she was named a Young Global Leader by the World Economic Forum. Also previously she was a journalist with Dow Jones and the International Financing Review. She also ran the New York City-based World Policy Institute, which she relaunched in 2007. Many of you probably know her in that capacity. She is coming here from Chicago to join us today. Her analyses, her comments, have appeared on a variety of news outlets, including NPR, CNN, and MSNBC.

Michele has also collaborated with us here at Carnegie Council several times, including some really fantastic projects, one of which was our ongoing annual "Top Risks" event with Ian Bremmer. Michele was one of the panelists on some of those events in New York City. She also came with me to Tokyo in 2009 for our very successful Immigration Policy Conference. It was a two-day conference.

It's just a real treat to have her here. Everyone, please welcome Michele Wucker.

Remarks

MICHELE WUCKER: Thanks, Devin. It's really great to be here and see so many friendly faces and new faces. It's always great to be back in New York. I have been in Chicago for almost two years now. It's a change of scene, but it's always wonderful to come back to my old stomping grounds. So thank you for being here today.

I wanted to start out by telling you a little bit about what a gray rhino is and how I came up with the idea and why I wrote the book; then talk about some of the top policy gray rhinos that we are facing around the globe today; and talk a little bit about some of the strategies at different phases of a gray rhino crisis; and then open it up for discussion, which I'm really looking forward to, because I know there are some amazing, insightful people in the room.

A gray rhino is a big, scary thing coming right at you. You have a choice: to do something or not. It's gray because when I came up with this image of a looming threat, I learned that there are black rhinos and there are white rhinos, but neither one is actually black or white; they are all gray. I didn't know anything about rhinos until I started the book. Now I know crazy things about rhino poop and all sorts of other rhino trivia that I won't bore you with.

But the thing I discovered was that black and white rhinos are both gray. It's the most obvious thing about them. They are right in front of you. Because we have other words for them, we distract ourselves and we miss the most essential thing about rhinos, which is that they are gray.

That's the central point of the book: When talking about the sort of looming threats that are right in front of you, that we are much worse than we might think at dealing with obvious threats, whether it's just because we are used to them being there, whether it's because we think we can't do anything about them, or whether it's just because we forget that they are there and we get excited about other things, perhaps sudden events or emotionally charged events. We really miss the most important thing that is in front of us.

The reason I came up with the image and wrote the book really had to do with a story that started way back in 2000-2001, when I was a financial journalist spending a lot of time in Argentina and writing about Argentina. I went down in early 2001, about nine months before the country collapsed, defaulted, devalued—just imploded, basically. The cover of one of the news magazines had a Hannibal Lecter picture on the front cover, saying, "Do we have to cannibalize the country in order to save it?" At the time, the debt was going up, GDP was going down, money was going out, reserves were going down. It was pretty clear that something big and very bad was going to happen.

I wrote about a proposal that was circulating around Wall Street for a 30 percent or so write-down of the debt. Argentina, for about a decade, had been the darling of emerging markets, didn't want to give up its reputation. Even though everybody knew the reality had changed, they just didn't want to recognize it. The banks had been addressing it through a series of very expensive restructurings that were not solving the problem and actually adding to the debt hundreds of millions of dollars of underwriting fees. That was not solving the problem. They didn't want to give it up. They had quarterly bonuses to worry about. They had all sorts of other reasons not to do anything.

So, of course, what happened was, instead of losing 30 percent, they lost more than 70 percent of their money. It was a real missed opportunity that I think people, in hindsight, could see, and the people who had seen it ahead of time were just not listened to.

So you fast-forward 10 years to 2011. You see a very similar situation in Greece, with the stakes being even higher. The whole euro was watching very closely what was happening and afraid that a collapse in Greece might lead to a collapse of the whole euro.

I wrote a paper at the time for New America and for the World Economic Roundtable at the World Policy Institute, which was a joint project, called "Chronicle of a Debt Foretold." I started my career in Latin America, and reading literature and García Márquez—I couldn't miss an opportunity to give a shout-out to García Márquez—but I basically wrote about the situation in Argentina and said, "Hey, Greece, here's an example. Don't make the same mistake that Argentina did." It took several months, and I noticed something very, very different from Argentina. When I was writing about Argentina, a number of bankers called me and said, "This proposal you're talking about is what everybody thinks needs to happen, but we can't say it publicly or we're going to be fired."

In Greece, by contrast, people were talking about it all the time—traders, bankers. It was in the financial press. It was actually being talked about instead of being completely denied. Early in 2012—it came right down to the last minute—the private creditors agreed to do a quite significant restructuring of Greek debt and pulled it back from the edge.

So I wanted to know what makes the difference between decision-makers who see a big looming crisis—a gray rhino—and do something about it and the ones who don't. So I started looking for gray rhinos, and realized that so many of the headlines are the result of many, many ignored warnings. You just can't look around—once you know gray rhinos are there, you see them everywhere. Obviously I come from a policy background and a finance background, so there are certainly some big, 30,000-foot global issues, which I will go through in just a moment. But there are also issues in companies, succession issues, disruptive technologies the companies aren't dealing with.

Kodak is one of my favorite examples as a cautionary tale. They invented the digital camera, didn't pursue it because it was going to cannibalize existing business, and it really did not work out very well for them. So it's really a cautionary tale for others.

But it is also relevant on the personal level. A friend of mine said to me when she learned about the book—she was a new friend—she said, "The end of my marriage was a gray rhino. All my friends told me it was right there in front of me, and I didn't want to see it."

Health issues—a certain former president who didn't want to give up his cheeseburgers. It took some pretty big health scares to change that.

So the concept is relevant on all different levels. I particularly mention the relevance on the personal level because when you take 7 billion-plus individuals who all have these problems dealing with what's right in front of them, you put them into organizations, which have a certain number of dynamics that magnify the hesitation to do anything, multiply that to cities, to bigger governments, and to the planet, you see the extent of the problem. The gray rhino joins a couple of other suspicious beasts. In fact, someone wrote about it last week as "the financial zoo." I wanted to mention two of them in particular.

The elephant in the room, the familiar big thing that's just standing there that nobody talks about. Obviously it's big. It's a pachyderm. I have learned since then that rhinos are more closely related to zebras than to elephants, but a little poetic license here. Big, neglected. The difference between the elephant in the room and the gray rhino is that you assume that nobody is going to do anything about the elephant in the room. That's the definition of it. It's something that nobody does anything about. And I felt that we needed a much more active term, something that gave us a choice and that celebrated people who recognize gray rhinos and do something about them and held accountable people who got trampled.

Then, of course, there is the black swan, which I know has been talked about many times here at Carnegie, the highly improbable, the thing that you just can't picture, that individually are very rare, doesn't happen very much, but as a group we get sideswiped by things we can't imagine much more often than we might think. Of course, the premise of the black swan was that everyone thought swans were white in Europe and so they couldn't imagine that black swans existed, even though they really did.

So I think of the gray rhino as the love child of the elephant in the room and the black swan. If you are going to talk about something really, really big and scary, you should have fun; you should make it accessible. So I think it's great that there is a "financial zoo" out there.

The black swan was very important in sounding a warning signal, saying, "Hey, look out for something you're not looking out for." But there were two problems with it.

The first was that you don't see black swans until they are in your rearview mirror. You only see them in hindsight. So there is a lot of rearview-mirror piloting there and "I told you so"-ing. There is also a lot of "I told you so," but people didn't really say so. And there is a lot of armchair quarterbacking and armchair black-swan spotting, even though the whole premise is that you can't see them coming in the future.

The other problem with black swans is that when bad things happen, people have used them very much as cop-outs—"Ah, nobody saw it coming. I'm going to wash my hands of it." I had a problem with that as well.

So the reason the gray rhino is here is to help people to draw attention to things that they know are right in front of them but that are not getting the attention that they need.

One of the first questions I always get asked is, what are some examples of gray rhinos? I want to focus today on some of the global policy gray rhinos that I have seen.

What's nice is that the first few months of every year a number of great organizations come up with lists of what they see as gray rhinos. The World Economic Forum does their Global Risks Report. Eurasia Group does this wonderful Top Ten Risks, and I know that they often will introduce them here at Carnegie Council, which is great. There are a number of insurance companies, banks, consulting firms, and a number of publications. Economist Intelligence Unit does one.

So I looked through all of those this year, as well, as some of my favorite analysts who sent out their newsletters, and created a chart. We wanted to see what the ones are that are recognized the most and where they are on a list—are they the top? Some of these lists also do really good things which are very important in analyzing gray rhinos. The World Economic Forum is great in that it looks at the connections among risks, which is one of the things that I look out for when I'm trying to figure out what to prioritize and how to think about dealing with things when you have to deal with more than one at once.

So I looked through these sources. I filtered them out. A lot of them were more business-oriented or markets-oriented. The Council on Foreign Relations' Preventive Priorities Project has one that is very geopolitical-focused and not as much of the economic side. So I tried to filter these together and put more emphasis on policy issues.

The top ones that I came up with are pretty much in this order:

The top one is the fragmenting of the European Union. That includes what has been going on around the refugee crisis; the Brexit, which is becoming more and more timely as the clock ticks; and the fact that there are huge economic imbalances within the European Union, Greece being another example, and that this year you are seeing some very, very serious tensions, even more than we have seen in the past, that might pull the European Union apart. What's scary about that is that the whole point for it existing was to bring countries together and to prevent any future wars. There seems to have been really a loss of perspective on that. Which is the biggest threat that we are dealing with? Is it scarier that our tax dollars might support a poorer country, or is it that really, really awful, unthinkable things could happen?

So I see that at the very top of the list. It has been interesting to see it. Some people talk about it just as the Brexit or just as the refugee crisis, which certainly in human terms is a huge gray rhino in and of itself. But I think the way these come together, the fragmentation of the European Union is a huge one.

The second one is financial markets, liquidity shocks. We have seen very, very low interest rates. We have seen some bubbles. I looked at how high the stock market is—more than double the low and still significantly above where it was before the 2008 crash. You have had shocks in oil prices. You have China, with a huge debt overhang, and worries about the currency, worries about how long their reserves are going to last. All of these are interrelated.

You look at the U.S. Federal Reserve trying to raise interest rates. That, to me, looks like a set of clashing rhinos. I very much appreciate the difficulty of trying to figure out what to do. On the one hand, you have speculation. You have the impact on savers. And then, on the other hand, you have the real threat of deflation. Having started my career in emerging markets, writing about the defaulted debt from the 1980s and restructuring of it, I'm very, very sensitive to the impact of interest rate changes on emerging markets. So on the one hand, if it seems like the U.S. economy is getting stronger and interest rates are going up, you are going to see a real hit in emerging markets. You are also going to see a hit in high-yield bonds and distressed debt, particularly some of the fossil fuel companies.

On the other hand, if economies stay weak, you are going to continue to see weakness in commodities, and that's a big blow on the other side for the emerging markets. That's part of a whole set of really serious possible liquidity shocks to the global economy. Every day I talk to someone else who makes me more and more scared.

The third one, the United States: the political instability here, the real fractures within both of the main parties, particularly the Republican Party; the real lowering of standards for political discourse and the hate that you see; and the political paralysis that has been going on for quite a long time—the political system that makes it very, very difficult to solve any number of other gray rhinos, particularly inequality, which has helped to lead to the political crisis that we have right now.

The fourth one, climate change. It was actually on the top of the World Economic Forum's Global Risks Report this year. It is an interesting one, in that we have finally started to see some action with the Paris accord. But nobody I have talked to thinks that is enough, nor even that everything that was promised is going to come together. So it's a very, very interesting example of some parties still in denial, some people with entrenched interests in not dealing with the problem; some action, growing momentum toward action, but still not quite enough.

The last one is the Middle East. It was very interesting to see how many different lists put emphasis on different countries. Obviously, Syria popped up in a lot of these different lists that you see. You see Iraq. You see Egypt. You see Saudi Arabia. I think that with the volatility in oil prices, you are going to see a lot of shocks there, with youth unemployment. Those have knock-on effects on refugee crises, on power struggles. What's interesting about the Middle East is that some of the different stakeholders define the problems very, very differently. When you don't have people agreeing on what the problem is, it becomes that much harder to solve it. 

So those are the top five global policy gray rhinos that I'm looking at. The analysis I did I think of as sort of a FiveThirtyEight for global risks.

I want to open this up for questions in a few minutes. But before I do, I want to just very quickly just bring you all through some of the stages of a gray rhino and, in turn, some very brief strategies—since obviously I can't solve them, certainly not in the time we have this evening, or even much longer than that—ways to start thinking about how to solve some of these things.

The first stage is denial. It's not completely a coincidence that there are five stages. When I started researching denial, I, of course, had to go and pick up Elizabeth Kübler-Ross's book on the five stages of grief.

What she had to say about denial was very interesting. She said it's a defense mechanism, that there is a reason that we go through that in the first place, that sometimes when shocks are so big, when we can't deal with them, we need some time to absorb. But denial becomes a problem if you stay in that stage too long. Some of the strategies for dealing with denial have to do with looking at some of our decision-making processes, as I was saying, some of our individual biases towards optimism, towards filtering in rosy information and just not hearing information you don't want to hear; confirmation bias—listening to information that confirms what you think already and throwing out, and sometimes even a backlash against, information you don't want to hear.

Denial starts really with this question: What's in front of me that I'm not dealing with? Being aware of your biases, being aware of the way that your decision-making systems affect those, whether it's as an individual—a lot of my friends recommend that you have a personal board of directors: your financial advisor, your best friend, your agent if you are in entertainment or media businesses. But ask yourself who you are turning to. And in your company, who is in the decision-making processes? How open are people to information that they don't want to hear, whether it's good or bad information?

The second stage is muddling. Everybody knows the problem is there, but they come up with all kinds of reasons not to do anything about it. There are certainly structural reasons, political reasons, a preference for short term over long term. There are also times when certain prerequisites aren't in place, and until you get those prerequisites in place, you can't make the bigger changes that you need.

There is some interesting research cited in the book about shock therapy and Latin America and Eastern Europe and some of the economic transformations that they went through, basically suggesting that the countries that moved more slowly, that put in place rule of law, that put in place some of the systems that they needed, did much better than the countries that put in place shock therapy.

So there are some times when muddling is good, but in other cases—infrastructure is one of the biggest examples of this—it can be very, very bad. We don't do a very good job of accounting for the money saved by investing in preparedness—the sort of "stitch in time saves nine." I think we could do a much better job of that.

Third stage, diagnosing. This is when you are not going to muddle, you are coming up with the right solution. It's very helpful to figure out what kind of gray rhino you are dealing with, whether there are policy options that other people have used in similar situations, how fast it's moving, how much consensus there is about the solution, how connected this gray rhino is to other gray rhinos. And, if you are going to solve it, do you have to also solve other ones; do you have to take a grand strategy approach? And is it creative destruction? Is it something that ought to get trampled? In which case how do you be trampled as gracefully as possible? Technological change is a great example of this.

The fourth stage, panic. A double-edged sword. The paradox of gray rhinos is that the sooner you deal with them, the less it costs and the more likely you are to succeed; but, of course, the less likely you are to actually do anything. The panic stage is when you feel like it's right on top of you. That's when you are more likely to do something, but it's when you are not necessarily as likely to make good decisions about what to do. You look at Herbert Hoover, who, to his credit, did something in the Great Depression. Unfortunately, it wasn't the right set of things. So panic can be tough.

Finally, there's action. As we see with climate change, there is a whole spectrum along action. You start out usually with one or two people who may be slightly crazy—in a good way, hopefully—and then those people connect to other people, to other influencers. You get networks of influencers reaching out, and slowly you get bigger groups. But on the other hand, an individual can often have more impact on big problems than you think. So you might see a couple of crazy people with the potential to move lots of people, but individual people here and there making some changes.

My favorite example of this in the book is my friend Mina Guli, who is an amazing, amazing woman. She is Australian. She is a long-distance runner. A few years ago, to draw attention to water scarcity, she started a run across the Sahara Desert. Seven kilometers in, she had a terrible pain, but kept on through the whole 243 kilometers and discovered at the end that she had been running with two broken hips. But that wasn't crazy enough. And I mean crazy in a good way. This February and March, she did a series of 40 marathons to draw attention to the fact that very soon there is going to be 40 percent more demand for water than supply. She did 40 marathons in seven deserts on seven continents in seven weeks. She ended on World Water Day.

She combined that with this fantastic pledge. In fact, it's still up there. If you go to Thirst4water.org, there is a water pledge, where you can look at different things you can do to save water. I gave up chocolate for a month. My family is from Belgium, so I can tell you that that was not a very easy thing to do. But it saved an awful lot of water. She is basically trying to save a billion liters of water.

Those are the five stages.

I often get asked, "What is the one takeaway that you want people to come away with for this?" For me, it's really the power of this idea that we are missing the things that are right in front of our nose, the most obvious, most frightening threats, in spite of, or sometimes because, they are right in front of us.

So the one thing I would love to see everybody take away from this room is to go back and ask yourself, what's my gray rhino? You might ask it in a couple different contexts:

  • What is it personally? Is it health? Is it financial? Is it like my friend's marriage?
  • In your organization: What are the things that your company is dealing with? Might they be really the gray rhino itself? For many organizations, the gray rhino is that they don't have a way to deal with gray rhinos.
  • Then for the planet. Every single one of us is a citizen of the planet. Obviously, for the Carnegie Council, looking at ethics in global affairs, this is a perfect audience to think about what each of us can do to deal with some of the gray rhinos we see on the planet.

I want to move to questions. But you might take a minute to really start thinking about that question: What's my gray rhino?

Questions

DEVIN STEWART: Thank you very much, Michele. Excellent. First of all, I'm very happy that the European Union is the top one. There is an economist named Paul De Grauwe—you have probably come across him—a Belgian economist, who was talking about the inevitable trauma or difficulties the European Union is experiencing right now. He was talking about it in the mid- to late-1990s. It was like, "Well, political rationale overturns economic reason, so let's do it anyway." That was sort of the thinking at the time, in the late-1990s.

You were very nice and ethical to put the ethics at the very end. There is an ethical imperative of dealing with the gray rhino. That's kind of what I'm hearing from you, that we have a duty to look at these things rather than to shut our eyes and close our ears and see no evil and hear no evil. It's another animal reference.

MICHELE WUCKER: And the ostrich, too.

DEVIN STEWART: And the ostrich. There has to be a gorilla there, right? Is China the gorilla, the 800-pound gorilla?

MICHELE WUCKER: Yes, exactly.

DEVIN STEWART: A lot of animals.

The other ethics question is, in my own research around the world I have noticed that there is a question of values. There is always a question of values that plays out as a part of an ethical code in a society that shapes the way people make decisions and it shapes the types of challenges and problems that they encounter, including in Greece. We have a friend from Greece here, Anna. We have friends from all over the world here today. A packed room, by the way. Thank you all for coming.

Can you tell us a little bit about the role of values and how they play in thinking about risk and understanding risk and how risk occurs?

MICHELE WUCKER: That's a fantastic question. It goes, really, to how you define the particular rhino, how you diagnose it, how you talk about what the real questions are, what is the problem that you are trying to solve.

I gave a talk in Chicago yesterday, and there was a question about the sort of ideological approaches to some of Chicago's problems, which are not so different from Puerto Rico's or Greece's or Argentina's. It really came about, what are the questions you are asking? Are you asking, what's the liberal solution to this problem? What's the conservative solution to the problem? Which is really the wrong question, in the first place. It's how do you frame something? And also, how do you frame your goals in trying to address a gray rhino? Is it that your goal is just to get out of the way and not get trampled by something and it's okay if other people are?

Is your goal to make a boatload of money off of other people being trampled? Is it a big short? Shorts can also be useful in providing information and in changing situations. I don't want to be too strongly giving a value judgment there, because there is a lot of use in short-selling.

The third one is, how do you find a solution to the problem? This is sort of a design thinking approach to gray rhinos and it's what a lot of social entrepreneurs are doing. How do you, by solving a problem—yes, people want to make money for themselves—but how do you create a greater good? What do you do about it? That's really where I would like to see a lot more approaches going. Interestingly, the companies that have been dealing with this question, the ones that have looked at it in this sort of design approach, have been doing much better in getting companies to be more responsible.

I did a lot of interviews with SABMiller and MillerCoors. For them, the business case was: no water, no beer. It was pretty simple. But it started out with work that the UN Global CEO Compact did on water, looking at some of the shortages. When you put the question to businesses in terms of supply-chain risks and things like that, some of them are faster than others at getting it; some of them are slower. But when it's put in clear financial terms, they are likely to do something.

How they solve the problem is really where the ethics come in as well. There has been a lot of debate about how different companies have been dealing with water security and water scarcity, which is a whole other discussion. But, really, what are the values? How are you solving the problem; and then, what do you define as the problem?

In Milwaukee we had another very, very interesting discussion. I was meeting with a group of civic and business and media leaders. We were talking about some of Milwaukee's issues with segregation, with transportation, with joblessness. One guy asked the question, "Isn't the problem that these people aren't getting married?" Someone else in the room said, "Well, look at the reasons why. These manufacturing jobs have disappeared. If you don't have job, then it's hard to get married." Defining that question was so important in both ethical terms and in terms of how do you get to the policies that solve it.

I'm really, really glad that you brought that up.

DEVIN STEWART: To find a place with no beer, just look at Venezuela and see what happens, a top risk.

QUESTION: Peter Burgess.

I'm an engineer who became a chartered accountant in London in the early days of accountancy, 50-odd years ago. I love the idea of your gray rhinos. I think it's an absolutely wonderful image. It moves us from bulls and bears and sharks and vultures—

MICHELE WUCKER: There really are a lot of animals.

QUESTIONER: The zoo is full.

But for me, the biggest thing that I think is wrong is that we have a system of measuring in our modern world that is absolutely stupid.

MICHELE WUCKER: Are you talking about GDP?

QUESTIONER: I'm talking about GDP. I'm talking about money. I'm talking about profit. I'm talking about stock market values. Those are only a small part of a huge and complex system, and if you don't have the right measures in a system, I guess it becomes an elephant in the room or something.

MICHELE WUCKER: It becomes a gray rhino. I actually call it a meta-rhino, actually, the kind of thing that affects other ones.

QUESTIONER: I agree with the five. But for me, the biggest sort of issue is that we can't run the economy and the society and the environment with a money measure only. So anyway, that's my general comment.

MICHELE WUCKER: It's fantastic. There are people are doing really interesting work on how to measure things differently. Joe Stiglitz has been doing a lot of work on this. Matthew Bishop and Michael Green have done some amazing writing on this. You have Bhutan, with their Gross National Happiness.

But this question of what you measure is so important because it also helps you in thinking about how well you are doing in solving something.

QUESTIONER: But you can't go to a bank with the good that you are doing. You try and raise money for something that is going to do good and they laugh at you. You can go to a bank and say, "I'm going to do all sorts of bad things to the environment, to society, but I'm going to make a ton of money," and they get it.

MICHELE WUCKER: Yes, it's the externalities that aren't costs. Thank you for raising that because that is really important.

QUESTION: Hello. I'm Anne Kornhauser, and I am an associate professor of history at the gray rhino known as CUNY (City University of New York). If anyone has any money or anything else that you can help us with, I'll be—no, this is about Michele. But I just had to throw that in there.

My question is—sorry to do this, but I'm an academic—two gray rhinos or more—and you alluded to this, actually. The ethical mention at the end of your talk made me think of this because it comes up with clashing rights, clashing interests. What I thought of, actually, is water, since you have been talking so much about water, which is obviously a huge resource question. And guess what takes up a lot of water? You all know this. It's called hydraulic fracturing, fracking. It uses an enormous amount of water, I believe, to create the pressure to—so we need energy. We need new forms of energy that are not the old fossil forms. Fracking—I have mixed feelings about it, but it seems like one possibility. Yet we probably don't have the water to do that.

Then I also understand it's either yogurt or soy, one of those two—I think it's Greek yogurt —takes a lot of water.

The point is, again, what metric, what value, can you use to try to balance two or more obvious problems that you are confronted with? I think that is actually often the case, rather than one at a time.

MICHELE WUCKER: As you know, I have done some work on "The Water/Energy Nexus," the paper we did at the World Policy Institute about five years ago. This water usage of energy is quite high. There is really an ethical tradeoff in greenhouse gases versus water usage—you know, are you going to smother or bake to death before you parch to death?

There really are tradeoffs. When you have two rhinos clashing at each other, it's very, very hard.

With companies, too, seeing some of the measurement—you have to measure who uses water. The biggest use is agriculture. There are a lot of places where we are still not measuring what different farms are using. My parents live in Milwaukee, and there is news this week that they are going to use these—I forget what they are called—high-volume wells, that they are going to basically look the other way.

So measuring who is using what—and it gets down to questions of right. There is this big debate about "is water a human right?" Yes. But when you are talking about big agriculture companies, big fossil fuel companies, how do you distribute those things? In many cases there are clashing rhinos that you have to really choose among.

QUESTION: Andrew Quale, Sidley Austin LLP. I have spent a number of years working in the trenches on global financial crises—and there will be another one coming soon, I can guarantee you that. I can't tell you when.

I'd like to say that my basic question is, what do you think will trigger the next real crisis? I'll give you a few ideas, and whether you agree with them or you have thought about them in the end.

Maybe a slight preface. Global financial crises cause more pain and trouble and loss of standard of living than probably anything that we do. And yet we still keep repeating them. There are different causes every time, usually, but we still keep repeating them. Now, some people say "this time it's not different"—Rogoff and his friend. [See Rogoff and Reinhart's Carnegie Council 2009 talk: This Time is Different: Eight Centuries of Financial Folly]

But the issue that I see is liquidity. When liquidity dries up, everything starts to collapse. We were lucky that we had a guy at the Fed and a guy at the Treasury when our liquidity seized up who threw everything at it that they could. Some of those worked; some of them didn't.

Today I see liquidity problems in a couple of areas. One is derivatives. There are about $400 trillion dollars of face-nominal amount of derivatives out there, particularly credit default swaps, guaranteeing maybe only as much as $4 trillion or $5 trillion of underlying debt. So this is a betting game. If a major party in a swap, a major counterparty—J.P. Morgan, Citi, Bank of America—and all of them came close, obviously some closer than others, to collapsing—if one of them collapses, unraveling that whole derivatives situation—because they all say, "Well, net we're zero. We're on both sides of trade. So we're not exposed." Well, the minute one party fails to perform, the good guy is exposed on the other side. So that's one major liquidity issue.

Another area of liquidity is just in the repo market. That's what brought down Lehman, as you know. Credit just seized up overnight, and they were gone. The same with Bear Stearns.

I don't know if this is too technical, but this is where I see the next crisis will come. It comes through liquidity. And, of course, it comes through leverage that triggers that. Your thoughts on that?

MICHELE WUCKER: I think the liquidity part is so important. For everyone who says they didn't see 2007-2008 coming, I'm like, "Did you read Charles Kindleberger or the stuff that Michael Pettis has done on the volatility machine and these big liquidity waves?"

I think you are completely right. As far as where it's going to be, some of the highly technical derivative stuff is important, but I get a sense of déjà vu from that. Remember, they started writing a lot of emerging markets derivatives when I was writing about them in the 1990s, and everybody was like, "Oh, this is all going to blow up." But it was very complicated.

The problems in the decline of the media and the fact that a lot of the media has a lot of incentives to report on happy, shiny things and doesn't always have the resources to go into the highly technical, geeky things—the devil's in the details—that are going to get us, I think that's a big problem.

So I would be totally with you on the liquidity side. I have no idea what particular thing it's going to be, but would love to see some more reporting on some of the issues that you have talked about. You have scared me even more than I was already.

QUESTION: I'm Seth Cunningham. I was with J.P. Morgan venture capital and now distressed debt in Asia, so a life cycle of companies.

It's a little off-topic, but I would be interested in what animal you would choose for natural disasters, things such as Iceland's volcano, which, if it blows, is going to change—sulfuric acid all over Northern Europe—tsunamis, earthquakes, Ebola. What do you call those things, and how do you deal with them? Or, by definition, we can't deal with them? I would be interested if you had any thoughts on those.

MICHELE WUCKER: A lot of them, to me, fall in this category of recurring rhinos. My mom was saying, "Oh, the tornado is a black swan." I'm like, "No, Mom, it's not, because you know they are going to happen at some point. You don't know exactly when."

This article called "The Really Big One," in The New Yorker, got a Pulitzer Prize for [reporting on the Cascadian subduction zone]. It was basically saying in the Pacific Northwest there is like a 1-in-10 chance that in the next 50 years there is going to be a 7.0 earthquake, but there is a 1-in-30 chance that it's going to be a 9.9 or something. A bunch of people tagged me on it. It's great. I love it when they do this on Facebook or Twitter—they go like "Gray rhino, gray rhino."

A lot of people asked me about that one. I really struggled with it. What are the odds? Byron Wien, when he does his 10 surprises every year, defines surprises as something that he thinks has a 50 percent or more chance of happening but the market thinks 30 percent or more. So the line as to what is probable is a little bit strange.

But I think with a lot of things, it's a matter of when, not if.

Another part of it is, what can you do about it? My mom, ever since I was a kid—"We are never going to move to California because they have earthquakes there." There are some people who will take calculated risks. I think in the Pacific Northwest or wherever, they are like, "Well, if this all goes to hell, what's the point anyway?"

QUESTIONER: Beachfront in Nevada.

MICHELE WUCKER: Yes. But some of those we can have warning systems for, like tsunamis or things like that. So they kind of fall in different categories. For tornadoes and hurricanes, we do have a certain level of warning system. You can put in place resilience measures for some of them and not for others. I think they are still gray rhinos, but the timing is a little murky.

QUESTION: Ron Berenbeim.

At least three of the five of your top rhinos—that is, U.S. political instability, Europe, and the Middle East—one was climate change. What was the fourth one?

MICHELE WUCKER: The European Union, United States, liquidity, climate change, and the Middle East.

QUESTIONER: So we'll leave out liquidity and climate change. But the other three have a connecting link or chain of possible causality and outcome that is widely commented upon. I would be interested in your thoughts, because it may be vastly over or underrated. That is the destruction—creative, perhaps not so creative—of the old media and the rise of social media. I would be interested in your thoughts on that.

MICHELE WUCKER: That's a great one. I mention it briefly in the book. I ended up not going into more detail just because people have done so much on that.

It has been interesting to see how that is—some companies have seen it just as a threat, others as an opportunity. Some media companies—The Wall Street Journal seemed to have figured out pretty early on how to make money from that, although the original family is now gone.

But yes, this change of media—I think it's one of these things where not everybody has figured out the solution. But it is definitely a gray rhino, the effects of technology on media. Some of that is moving faster than people can deal with it.

I do think that the legacy media industry was very, very slow to respond to it. When I started as a journalist in the late 1980s, early 1990s—I forget now what the numbers were—the annual dividends for media companies were just obscene. I don't remember the exact number so I'm not going to say it, but it's a jaw-hits-the-floor kind of number. So they were used to this gravy train and—I guess it's like Kodak—just didn't want to imagine that the end was coming. Some of them have done a better job than others at dealing with it.

Any sort of disruptive technology is, I think, one of the big gray rhinos in general. Thanks for raising that one, because it's important.

QUESTION: My name is Chris. I participate in the New Leaders program here, but I also during the day write for a magazine called Private Debt Investor. I will very selfishly start with a very specific question, then try to build out to a little bit broader.

You mentioned China's debt specifically as something that you know has been held up as a potential risk. My understanding is that there are some foreign investors, or outside-of-China investors, now looking at those opportunities. We may have some of those gentlemen here. My understanding of what would determine the creditworthiness of any particular Chinese entity has ultimately to do with their political relationships. In some ways, you have a group of investors in the United States who are beginning to contemplate the need to make these kinds of judgments with their own money to reach their own ends that essentially have to do with judgment as to the stability, the quality, the nature of the governance in China.

This is happening at a time when, as I listened to your description of the gray rhino, it sort of describes one half of an increasingly active debate within people who look at China for a living, who say, "We have been engaging with China on one set of assumptions that increasingly look to be not the assumptions they are using when they come into those engagements."

It occurs to me that He Whose Name Should Not Be Mentioned also uses some of this logic. He certainly talks about China quite a bit in terms of where people should be directing some of this energy.

Devin, I think, said something to the effect that China emerges as kind of the ultimate gray rhino, or something to that effect.

Number one, is China something you can sort of put particularly and say not just China and its rise, but the way the United States has engaged with that rise is now coming into contact with this financial world and these decisions that are driven by a set of interests that are already in process? The debate is ongoing as to how we collectively look at the value or how to judge those decisions.

MICHELE WUCKER: That's a great question. I struggle a lot with all sorts of questions on China, but I'm going to kind of focus on that political-relationship-with-the-United-States thing.

If, for example, China's reserves drop faster than people expect—and there are some people who have actually been arguing for a preemptive devaluation much sooner—my concern is the geopolitical consequences of that, that certain people, whose name I don't mention either, will talk about it as this mercantilist, aggressive policy, when China would not really have a choice. It's not really about that. It's about saving their own financial butt. Excuse my French.

That's what scares me, that there are two totally different narratives. Frankly, China in a lot of cases has avoided a lot of gray rhinos. When I was very first doing the research and the brainstorming for this, several people said Deng Xiaoping—that China was facing a real economic situation and he turned it around.

China's financial situation, to me, is, in general, that stability, that impact on commodities markets, the impact also on its own geopolitical issues, because I have seen that when countries are in trouble, that's when they go and attack other countries, and we have certainly been seeing some issues in the South China Sea. Those are the things that really scare me about it. But also, the reaction to it being based on a completely different narrative in a scary, scary, scary way.

Thanks very much for raising that one.

QUESTION: My economics training has led me to be keenly interested in Yanis Varoufakis and his brilliant analyses of everything related to economics. What he describes in his lectures—there are a zillion of them now on YouTube—about the economic conundrum that he experienced with Greece is something that is the canary in the coal mine, which is another form of rhino, right? But it's a rhino that is yelling at us. The fact that he explains what went on behind closed doors indicates that they were in agreement with Yanis about his interpretation of exactly what was happening, and they said to him, "But we can't do it because we're invested in this other thing."

Now I want to take this opportunity today to ask you, but also having a person from Greece—I think that's really exciting—I would love to hear what you think of Yanis's example of Greece and how he explains what has happened there and how we can learn from that—because it does seem like Greece is always the one that is really trying to tell us something, that it's time for us to figure it out from what is happening to them. It has happened with other things before.

MICHELE WUCKER: I know his book is coming out.I haven't read that yet. I'm very, very eager to read it.

There have been all kinds of interesting lessons from Greece. Some of Greece's problem is, obviously, the debt issue. It has also been the imbalances within the European Union. You have Germany that now has—is it an 8 percent current account surplus? It's something crazy like that. By being part of the European Union, they effectively have had an undervalued currency and have really, really done well by it.

Again, this is the clash of narratives—this "we don't want to bail out those spendthrift Greeks." The Greeks themselves recognize that retiring at—what was it, 40 something?—retiring really young, and it has gone up—even they I think recognize that that was not great optics. But it's not really about spendthrift Greeks or about Germans getting a free ride on the back of rest of Europe. There are a lot of things going in there.

There is also within Greece the way it's much harder than it needs to be for new entrepreneurs, for new businesses. There is the lack of real development in parts of the economy. There are so many things going on. I think some of it you can peg on the European Union, on external factors; some of it you can peg on the debt being that high; and some of it you have to peg on Greece itself. When the blame is that diffuse, it becomes that much harder to solve the problem.

The other question about Greece is the question of panic. Last summer it was like "Oh my god, the sky is falling and everything's going to fall apart." That kind of messily got to a quiet place. It has been really interesting to see the negotiations that happened a few weeks ago, which were much more of a muddling nature and quiet.

A friend of mine made a very interesting point, which is quoted in the book, which is that if they had come to an agreement in 2011-2012, then it would have favored Germany so much more that it just would not have been a good agreement to come to. This was a German friend who made this point.

So in Greece I really go back and forth on when to muddle and when to panic and which is a better policy lever. I think it's very closely related to the discussions we have been having in the States about how change happens, whether it is gradual or whether it is in a big boom.

QUESTIONER: It's also the democracy question, really.

MICHELE WUCKER: Yeah, it's tough.

QUESTION: I'm Andrew Schulman. I'm a resident musician for seven years in the Surgical Intensive Care Unit at Mount Sinai Beth Israel, which was just in the papers because it is being closed down over the next few years. So the gray rhino on steroids: health care.

QUESTION: I'm surprised that three major gray rhinos that are facing our society here have not come up in our discussion thus far, and I wonder why. One is the blatant xenophobia and demagoguery of Donald Trump, which I don't see foundations and think tanks and business leaders standing up against.

I see this whole issue of weapons being available. There was a news report this morning that an AR-15, that machine gun, can actually be assembled in part through 3D printing. You can assemble the parts and you don't even need a license. [Editor's note: This event occurred a few days before the tragedy in Orlando.]

The third thing, which I'm surprised that nobody is taking a stand on, is this whole issue of Islamophobia that is taking over this country. As many people in this room may remember, in the 1930s there was a similar phobia against the Jewish people, thinking that if they came from Germany, they might have connections with the Nazi regime and so forth.

But people of conscience are not taking a stand on three major issues facing us thus far. I wonder why you think this is happening.

QUESTION: Thank you. Michele, I'm Barry Herman at The New School. I haven't seen you for many years.

My question is, I'm sort of struggling with the concept of rhino. The idea, it seems, is that it's a rhino that I, being perceptive, would see and others, being less perceptive, would not see, and they have to sort of get to the point of seeing it.

But I think there is another possibility, which is, besides others not wanting to see it, they could say, "Oh, I see what you are worried about, but it's actually a squirrel, it's not a rhino." And that's because they are not concerned about the same issues that, say, you and I and most of the people here might be concerned about. They might be concerned about a much narrower range of issues.

For example, the world economy is growing more slowly now, will continue to grow more slowly. Every revision of growth forecasts is for less. This has been going on year by year for the last several years. You would think, "Okay, people, we need a more balanced macroeconomic policy, less reliance on monetary policy, more on fiscal policy." But it doesn't matter to some people. They are quite okay with the package that exists—you know, the famous 1 percent.

So is there another dimension to the rhino, about whether it's really there or only there if you are a good guy?

MICHELE WUCKER: Quickly, health—a huge, huge, huge issue. I don't even know where to start. I think we have made some progress in the last couple of years in dealing with it, and certainly mental health issues. We have similar issues in my neighborhood in Chicago to some of the issues we had in the West 90s, that people are just not being dealt with and they are not getting the services that they need. They are very, very vulnerable.

Then, more broadly in terms of health care, just the cost being out of line—part of this is a policy issue, and then there is also the individual issue, people not wanting to give up cheeseburgers.

Because there's so much, I'm not going to say much more about that. But I'm really glad that you raised that one.

On the Islamophobia and the xenophobia, I mention those briefly in the U.S. section.

Guns are part of the—really, a casualty of—this paralysis and polarization, where in Washington people can't seem to get things done when you have 80, 90 percent of Americans agreed on some of the basic steps that you need to take. It scares me. It really scares me.

Certainly in part of Europe, the discussions about refugees—Islamophobia and racism and xenophobia are part of the fractures that are behind some of the bigger issues in Europe as well. Those are huge issues and I'm glad that you raised them specifically.

I have seen some people doing some things about them. Some people are really struggling about how you convince the Duck Dynasty fans to change their minds. There is an element of "yes, there are definitely things you can do," and there are some things where we need to figure those out more.

Barry, the squirrels—that's really great. Actually, at a workshop I did in San Francisco there was a table that came up with something called "limping hippos," which is the things that you think are gray rhinos that are not there. I think that's a big problem that we see a lot of. You will have people—Islamophobia, actually, that "Oh, Islam is the big problem," when there are actually very specific things. No, extremism is the problem. Guns are the problem. People pointing at the right things. But the squirrels—I think some of it has to do with who you are. Different people have very different gray rhinos. It affects them in very different ways. It goes back to the narrative behind things.

I think this country is starting to see that if you neglect something that is a gray rhino for a lot of people, at some point it does become a gray rhino for the 1 percent—or the .001 percent, or whatever they say the new number is that we are supposed to look at. I think what you need is a greater number of people in that population coming out and saying, "Hey, this is going to come and bite us on the butt." So I'm glad you raised that as well.

Thank you all for your fantastic questions. I loved them.

DEVIN STEWART: Thank you very much, Michele.

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