It’s natural at the beginning of a New Year to look ahead and think about what’s the come. Some events, such as the mid-term elections for the U.S. Congress scheduled for November, are certainties, but this is also a good time to remember that the future is inherently unpredictable. This does not lessen the value of looking forward – those who will prosper most will be those who have best anticipated what might happen. But the real key for preparing for the future is not whether we will be caught by surprise – we will – but how quickly and how well we recover from surprises when they happen. By considering a wide range of possible futures, you reduce the potential for surprise, and prepare for those that do happen.
With this in mind, I have broken this edition of ‘Signs and Portents’ into two parts: things I expect to happen or that are highly likely, and possible surprises (called ‘Wild Cards’) that might intrude on us in 2006.
The Expected Future
Geopolitics – The year to come will likely be dominated by news from four principal countries: the United States, China, Iraq, and Iran. Others will make news, but these four will drive the news.
First, the U.S. is heading into mid-term elections, in which all members of the House of Representatives and one-third of the Senate will be elected. It is natural to expect that the sitting President’s party loses popularity in mid-terms, but this year may see a significant shift, as President Bush’s popularity took a real kicking in 2005. This may leave him as a three-year lame duck, with a Congress that is increasingly antagonistic, and even hostile, regardless of party lines. Despite this, Bush and his circle don’t seem to be any more accommodating of views that differ from theirs. The result is that the U.S., absent a new crisis that rallies people around the president, will drift, which is not good news on many fronts. In particular, it means that the U.S. may leave Iraq in an unstable and unfinished state, which is bad for the stability of the region. It also means that Congress is likely to become even more aggressively protectionist than they already are, especially in an election year, which is potentially very bad for the global economy. If Congress manages to ignite a trade war with China, say, or Europe, or even Canada, everyone will suffer – including the anti-globalistas who believe that globalization is a bad thing. In terms of America’s political relationships abroad, this is also negative, for it means the U.S. government, as a whole, is likely to drift towards isolationism and arrogance – not a good combination.
Meanwhile, China will continue to try to foster the strongest possible economic growth. They need to do this to attempt to create jobs, as they have an enormous number of people who are either unemployed, or seriously underemployed in an economy that is developing rapidly, but not sharing the goodies equally. This has the potential to create widespread unrest. Indeed, there are low level and persistent rumors of protests over ham-handed development that benefits cronies of the powerful at the expenses of large numbers of ordinary people, as well as protests over the lack of work and income. The need to develop China’s economy quickly may be the primary motive that shapes Chinese policy, and this means China will continue to be aggressive in trade matters, and worry not-very-much about consequences for its trading partners, except as they cause an imminent backlash. Consequently, between America’s continuing thirst for cheap consumer goods, Congress’ growing protectionism, and China’s aggressiveness, there is the potential for a blow-up that will benefit no one.
Iraq remains a hard place for the United States. Regardless of how you feel about the invasion of Iraq, America must not leave the job of country-building undone, or it will both suffer an enormous blow to its prestige, provide great encouragement to its opponents, most notably to terrorist groups, and worsen the already dangerous instability in the region. Yet, the headlines from Iraq will continue to be depressing, even as incremental progress is made. The progress won’t make headlines, and will be tainted by a new, rising cry that America is leaving behind cronies, puppets, incompetents, and power structures tainted by corruption. The free and open democracy that President Bush loves to paint in such glowing terms will mean nothing if the Iraqi government comes to be seen to be just another corrupt puppet dictatorship with democratic window dressing. For the U.S. to succeed in Iraq, and make all its very real sacrifices worthwhile, Iraq has to emerge with a truly democratic government that is accepted by its populace as reasonably honest and representative. In addition, the U.S. has to allow that government to make decisions the U.S. doesn’t like, just as France or Canada do. That’s a tall order, will take time and effort, and will not become evident for years to come, if it happens at all. Meanwhile, pressure within the U.S. for a rapid pull-out is building, which puts the Bush administration in a difficult, if not impossible, position.
Iran is intent on building nuclear weapons, and anything they say to the contrary is mere propaganda. They feel threatened by the U.S., which has forces to the west in Iraq, to the east in Afghanistan, and to the south with the U.S. Navy. The Iranian government is clearly and explicitly antagonistic to Israel, and wants to counter Israel’s unacknowledged but very real nukes with nukes of their own. Moreover, they want to be an important power in their region. All of this means that they will ignore all attempts to deflect them from building nukes, even as they speak softly, buy time, and try to make noises like good world citizens.
Those are the highlights, but there will also be a lot more going on in the background. America’s trading partners are getting fed up with the U.S. picking and choosing which trade rules it wants to follow, especially, but not exclusively Europe and Canada, and may come together with others to gang up on America – which will send the U.S. Congress into a froth-at-the-mouth spasm of self-righteousness. India is largely hidden in China’s shadow, but making big strides of their own in many areas as an emerging economic power to rival China. When you add the large assets of a big group of English-speaking professionals and a tradition of laws that protect property rights – both notably absent from China – it seems clear that India is going to continue to creep up and surprise people.
North Korea is going to be a continuing sore point, but unless the Perfect Dolt that leads their country finally goes off the deep end, that’s going to be a continuing issue that threatens to blow up, but probably won’t.
Canada’s political system will remain unstable. As Chantal Hebert, a Quebec columnist, pointed out, majority governments traditionally occur in Canada when Quebec and Ontario vote the same way. Now, however, Quebeckers are livid with the Liberals for the sponsorship scandal, and so far, Ontarians see Mike Harris whenever they look at Stephen Harper, with the result that no party is going to carry both provinces, which together account for about 60% of the seats in Parliament. This is a recipe for continued minority governments and elections every 18- to 24 months until the electorate finally gets fed up and picks a solid winner.
Technology – This year will see a changing of the guard in technology. PDAs are fading, and either being left in desk drawers, or their functions are being absorbed into communications devices, like cellphones and BlackBerrys.
But the bigger transition is coming to moving pictures, both those originating as ‘films’ (an increasingly archaic term) and television programs. As it was at the beginning of the desktop computer era, Apple is at the epicenter of this shift, although not entirely responsible for it. Moving images (let me call them ‘videos’ for convenience) are being detached from those who transmit them. Movie theater revenues fell in 2005 for the third straight year, and movie producers are worriedly considering selling videos of first-run movies simultaneous with theater releases, because it’s clear that the theater is no longer as popular a place to view movies as in the past. And users are now getting used to downloading videos over the Internet, from subjects not available elsewhere, up to pirated full-length movies. Into this fluid situation steps Apple, offering its exquisitely easy-to-use iPod interface to those who wish to download images to handheld devices, and watch them at their leisure. Initially there was a very limited supply of programs to be had, most of them from sources beholden to Mr. Jobs, Apple’s CEO (Pixar, ABC). Very quickly, though, the two other major networks, NBC and CBS announced that they would make some of their programming available for downloads, fearing that they would have happen to them what happened to the music industry if they lagged behind. And shortly after that TiVo, marketer of a popular Personal Video Recorder (PVR) system announced that they were planning to enable TiVo subscribers to record and upload to iPods any programming (except for pay-per-view) available to subscribers. In effect, we are now moving towards a world where individuals will demand – and get – all moving images via the Internet.
Once that happens, you have to wonder what happens to companies whose only reason for existence is to transmit material produced by others. Included in this list are all television networks (why watch a network affiliate when you can download directly from the production company?), and all movie distributors. This also has international implications, starting with Canadian television stations, which make virtually all of their profits from buying U.S. programming, and then broadcasting it over their own networks. When Canadian (or English, French, etc.) viewers can download a program directly from a producer, why do they need a Canadian broadcaster?
This also has major implications for advertisers. Apple has set a market price of $1.99 per downloaded program. If consumers buy programming, what happens to advertisers, who are already wondering whether their message is being received? Younger consumers have already demonstrated that they prefer watching programs like Buffy or Firefly on DVD without the commercials, and are willing to pay to do so. Is this the straw that breaks the back of the ‘free’ broadcast’? Or will there be two prices: a higher, commercial-free price, and a lower (or even ‘free’) price for programs with commercials? This might get particularly interesting as a producer, if they know the identity of the person downloading the program, will eventually supply individually-tailored commercials suited to the purchaser.
Ironically, all of this may eventually render the highly anticipated Microsoft X-box vs. Sony PlayStation battle obsolete. Both companies are desperate to win this war because they’re convinced that gaming consoles will become the center of the home computer system – which explains why Microsoft got into a hardware business on which it has only lost money. Both may lose out to Apple, or someone else (Google?) who can provide the video image that currently is the center of home technology. This is not all going to happen overnight, and there’s a lot more to this than I’ll go into here, but this is an earth-shaking event for all who make, transmit, view, or make use of moving images, including producers, marketers, and advertisers – virtually the entire private sector.
Meanwhile, the communications industries have more shocks on the horizon. There is now a clearly established trend towards wireless Internet access developing as a municipal service, with Phildelphia, San Francisco, and New Orleans having declared for such service. But with high speed wireless access available, consumers will ultimately be able to dispense with POTS (‘Plain Old Telephone Service’), cellphones, cable or satellite TV, and, of course, Internet Service Providers. Moreover, Google is a surprise player in this field, having offered to create San Francisco’s wireless system for free (provided, of course, that Google gets to be the home page and portal for all those citizens). I would not be surprised if Google offers a similar deal to a home town near you – at the exponential growth rates they clearly desire, any successful venture gets expanded very quickly. And this development, too, has major implications for advertisers, marketers, and those who sell to the general public.
The economy & stock markets – With all my doom-and-gloom discussions of problems and difficulties, and my later comments on disruptive Wild Card events, it would be easy to assume that I’m a bear on the economy and the outlook for investment markets. Not true. I actually believe that we are most likely to muddle through most of the problems that certainly lie ahead of us, and will experience economic growth that will continue to surprise economists, and delight governments and investors, and will see new highs in all of the market indices. I also expect oil prices to slip down closer to $50 as new supply comes on stream, and as higher prices change consumption behavior. Having confirmed my Goldilocks status, though, I should also say that we are heading for one of two kinds of bad times. Either one of the Wild Cards described below will occur, in which case investors should trigger previously prepared defensive strategies. Or markets will keep their upwards trajectory, in which case we will start moving back towards investor overconfidence and greed, repeating some of the mistakes of the late 1990s. If it’s the latter, it probably won’t be this year, but you will start to see some symptoms of a new silly season, especially with IPO’s. If, as I expect, the markets do continue to rise this year, remember that nothing goes up forever.
The aging boomers – The leading edge of the baby boom turn 60 this year, and if it was true that you shouldn’t trust anyone over 30, then it’s doubly true of people over 60. From about age 55, health care costs per person start to go up almost exponentially, and boomers are notorious for wanting what they want, when they want it, and to hell with the consequences for others, and this is true in spades in health care. The net result is a continuation of the health care crises in both the U.S. and Canada. In the United States, the pain is being divvied up among corporations, governments, and individuals. In Canada, governments are starting to get desperate in their desire to wiggle out of their financial obligations to a populace under the illusion that they’re getting free health care. The real problem is that health care is rationed in both countries, even as both countries pretend that it’s freely available, but no one wants to discuss how it’s rationed. This almost universal delusion in both countries, combined with the coming debacles of the boomers approaching what they believe should be their retirement age without enough assets to retire, is leading to the potential bankruptcy of not just the United States and Canada, but all of the rapidly aging OECD countries. And the longer we deny these facts, the harsher will be the solutions we have to accept.
Meanwhile, there is enormous opportunity for companies that are nimble enough to anticipate where the boomers are heading in terms of lifestyle, and position themselves to serve this future boom market. This is especially true as boomers are edging towards retirement, even as they redefine what ‘retirement’ means. These opportunities are in product definition, marketing, advertising, selling, real estate, services, technology – in short, virtually all aspects of the economy, but they take perceptiveness, an ability to innovate, and a willingness to think both conventionally and unconventionally at the same time.
Wild Cards
Influenza pandemic – We’re about half way through flu season, and the pandemic that was so widely talked about in the Fall hasn’t appeared, so people are starting to believe it was all a false alarm. But the mutation of the H5N1 or similar strain of flu virus to allow it to jump from human-to-human, which is the likely trigger for a pandemic, is literally unpredictable. It could happen this afternoon, a year from now – or (least likely of all) it might never happen, and no one, no matter how brilliant, can tell when because it depends on a random event. If it happens, and it turns out to be as bad as feared (another unpredictable), it could make the disruptions due to the south Asian tsunami and hurricane Katrina seem like Sunday School picnics in comparison, killing tens or even hundreds of millions of people, and potentially causing trillions of dollars in economic disruptions. But, as I say, when or if it is going to happen is unknowable.
Trade war – As I mentioned earlier, there is a natural tendency towards protectionism everywhere, and this is especially true in the U.S. Congress in an election year (i.e., every other year). However, all major governments know that everyone loses in a trade war, so protectionism is usually exhibited as a series of skirmishes, with countries trying to cheat at the margins (as the U.S. is currently doing with softwood lumber, Canada persists in doing with poultry and dairy products, and France/Europe insists on doing with agricultural products generally), and then play chicken on bigger issues before coming to a last-minute agreement. However, the Doha round of the World Trade talks has essentially failed in that there is not enough time to finish everything before the American president’s negotiating authority for this agreement runs out. This means that protectionist sentiment is rising, and the risks along with them. The outbreak of a trade war is not something that is likely to capture the imagination, nor front page headlines, but if it happens, it could lead to a disastrous repeat of the Great Depression – which means you want to watch trade conflicts carefully this year, and be prepared to retreat to very deep trenches if they flare up.
Terrorist attacks – The military planners of most NATO countries have been expecting NBC (nuclear, biological, or chemical) attacks on Western urban centers for some time. In fact, Tokyo has already suffered an attack with the Sarin nerve toxin in their subway by Aum Shinrikyo in 1995, so a major attack using NBC weapons is still a very real possibility, and one that would shake confidence and cause significant disruptions. Or new, coordinated attacks using more conventional means could erupt again. I’m quite sure that a number of such attacks have been forestalled by security services in developed countries – but if you stop 99 out of 100, one still gets through, and we only hear about the ones that happen. Will there be another major terrorist attack this year? Nobody knows, but it seems likely that something will happen. A more important question is: will such an attack be sufficient to disrupt economic activity, and shake people’s confidence? The terrorist attack on London in 2005 didn’t do that, nor the one in Spain in 2004. As attacks happen repeatedly, they have to become more dramatic to achieve the same shock value, and that’s the real uncertainty.
Vote fraud in the U.S. midterm elections – It never made the mainstream media (‘MSM’) but there were contentions all over the Internet that George W. Bush actually stole the 2004 presidential election through some of his followers hacking the results from electronic voting machines, notably in Florida and Ohio. Skeptics branded such comments as sour grapes by paranoids and tinfoil hat conspiracy theorists. Moreover, the evidence is circumstantial, not clear-cut or concrete. Watch the up-coming elections though, notably for statistically significant variations from polling results that virtually all favor one party over another, as the 2004 results did. If this pattern recurs, we may have seen the last true election in U.S. federal politics, but if perpetrators are caught in the act, it could be the worst political scandal in the last 150 years. Not likely to occur, but explosive if it does.
Housing crash – The most likely outcome of overheated real estate markets in North America are price declines in the most overbought markets, and price stagnation most other places. However, if there are too many speculators (excuse me, ‘investors’) who get caught short, it could trigger severe price drops as properties flood the market without supporting bids. If this happens in enough markets, it could knock income, and consumer confidence, into a cocked hat throughout the U.S. economy, and precipitate an economic downturn. Too many U.S. consumers have lived in a mortgage-fed dream-world for too long, and the piper is warming up in the wings. What we don’t know is how stiff a price he will demand.
Run on the U.S. dollar – Economists and other prognosticators have been predicting this for at least the last couple of years, and it still hasn’t happened. But, like the boy who cried ‘wolf,’ America’s economic and financial sins must eventually catch up to it. If there is a run on the dollar, then it means substantially higher interest rates, first in the U.S., then Canada, and eventually elsewhere. Next, it means a significant drop in U.S. GNP, which, in turn, slams on the brakes for growth world-wide, starting with China and Canada. The best we can expect is continuing strong economic growth in the U.S., reducing the federal deficit, coupled with a gradual slowing of American consumer purchases of cheap foreign imports. The worst is panic and disaster. And, as always, nobody – including me – is smart enough to know what could trigger a panic, or when it could occur.
So, as with all Wild Cards, the antidote is think about them ahead of time, and Be Prepared, as Lord Baden-Powell enjoined us. And a healthy, happy, and prosperous 2006 to all!
by futurist Richard Worzel, C.F.A.
© Copyright, IF Research, January 2006.
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