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Signs and Portents for 2007
January 2007

I’m going to repeat what I said at the outset of last year’s ‘Signs & Portents’: The future is inherently unpredictable, and one of the few certainties in life is that it will catch us by surprise. This does not lessen the value of looking forward – those who will prosper next year 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, 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 2007.

The Expected Future

Geopolitics – Emperor George W. Bush tripped over his crown, lost his shirt (and most of his power) in the American midterm elections, ditched his incompetent and unpopular Secretary of War, and is now trying to make-nice with the in-coming Democratic Congress (both houses). That Democratic Congress has a solid majority in the House of Representatives, but a one-vote majority in the Senate, and won’t truly control there on most issues. The result will be a divided American government – which isn’t necessarily a bad thing. History shows that the division of power between parties tends to produce more productive, responsible government. Lord knows it couldn’t be worse that the government that Bush has provided so far. It also means that America is now in a lame-duck mode, and won’t be taking many bold initiatives unless there is some extraordinary event that unites Republicans and Democrats, such as another terrorist attack. There may well be more movement towards protectionism, which plays well at home, even though it’s been demonstrated to (eventually) hurt everyone, including those it’s intended to protect.

One thing every American politician will be looking for is a door that says ‘Graceful exit from Iraq this way.’ I just don’t believe such a door exists.

This year will go a long way towards determining just who is going to run for the Republicans. The Democrats will have a three-way race, with Hilary Clinton (plus Bill), Barrack Obama, and John Edwards all running credible candidacies, along with a bunch of also-rans. But the Republicans don’t know whether to put up a real candidate in hopes that they can win back voters’ trust in two years, or put up a straw man, like John McCain, knowing that they’re going to get beaten because of Iraq. Since I don’t expect any good news out of Iraq, I’d bet it will be the latter.

And, as stated last year, China and India will continue to press, hell-bent-for-leather, for economic growth. Indeed, they will probably pick up some of the slack in the global economy left by the sag we’re likely to see in North America. China will also start throwing it’s weight around more, but quietly, trying to avoid headlines and confrontation with America, its principal customer.

Iran will continue to work towards the creation of nuclear weapons, but now there’s a hopeful sign: the average Iranian is getting fed up with the theocratic dodos who rule Iran. It will be interesting to see if the theocrats can hold onto power in the face of public displeasure – does democracy win, or does despotism?

North Korea’s Kim Jong Il , the Glorious Goombah, looks as if he will finally back himself into a corner this year. I doubt that China is enjoying his antics anymore, his people are starving because of his refusal to negotiate, and his time and resources are running out. The big question is whether he will blow up, and kill lots of people along the way (including South Koreans), or self-destruct without harming anyone outside of his circle of toadies. He won’t listen to reason because for his entire life everyone around him has told him that he’s always right. Now, when people outside Korea tell him he’s an idiot, he refuses to listen. If he does go ballistic, he won’t need nukes to kill a lot of people – he has enough conventional artillery trained on South Korea to be able to wipe out many of their major cities, including Seoul. Unless someone takes him out or he grows some common sense and humility, this year could get messy on the Korean peninsula.

Britain is going to see a new Prime Minister this year. Incredibly, the party he led from the wilderness, and for whom he has won one of the longest strings in power in the post-war period, is kicking Tony Blair out the front door, largely because of his support for Bush in Iraq. The irony would be complete if Labour then lost the next election to a new Conservative leader, David Cameron, who seems very successfully to be stealing Blair’s playbook.

Canada will probably see another election this year, and my bets are that the Conservatives will lose power. Stephen Harper has made a lot of right moves, but two major wrong ones: he’s cozied up to the American president (always a bad idea for a Canadian PM, especially when that president looks increasingly like a loser), and he’s alienated a lot of people in his own base by taking the – correct – move of taxing income trusts. Quebec will wind up with the swing votes, and there it comes down to which party they dislike least. Whether the Liberals win a majority or a minority will depend on whether their new leader, Stephane Dion, can persuade Quebec voters to trust him.

Technology – What became clear in 2006 is that the democratization of the Internet not only continues, but has become the most important trend in technology. More and more websites are transferring power to individuals, whether for video, consumer trends, news media, or networks and influencing public opinion. The news media no longer control the dissemination of information or opinions because of blogs and podcasts, video is now created, copied, and disseminated through a variety of sites, and more and more consumer trends are being solicited from the web by even the major consumer product companies. With the increasingly powerful computers and software tools available, I fully expect that the production of independent films and video programs will allow individuals to completely bypass the film production and television network apparatus, and distribute home-brew programming directly to viewers. Initially it will be crude and pretty dreadful (witness most of the crap on YouTube), but over time the best will get steadily better. It’s already possible to create your own radio network (through podcasting); creating your own television network, sometimes complete with commercials, is not far behind.

YouTube is indicative of other things as well. It’s purchase by Google for US$1.65 billion (admittedly in Google stock rather than cash) may be an indication that we’re embarking on another silly season for stocks, as we had in the late 1990s and into 2000. Beyond this, the development of portable electronics disguised as cellphones is rapidly allowing Little Brother and (not to be sexist) Little Sister to invade your privacy. As the storage capacity available in small sizes continues to expand, before long it will be possible for people to first photograph (perhaps every 10 seconds or so), and then video their entire lives, say through a tiny camera attached to, or contained in, the rims of their glasses. They will then be able to upload these images and share them on sites like YouTube. The result is that we will gradually find that whenever we are outside of our private spaces (and maybe even when we are within them), we will be ‘on camera’ with every little foible, eccentricity, and wart in plain view, and potentially held up to ridicule. Our privacy is rapidly being whittled away by private individuals.

And, of course, by corporations and governments as well. Indeed, as egregious examples of the violation of privacy emerge (as they will), governments will pass useless privacy legislation that will, just incidentally, give them even more authority to violate our privacy in the name of protecting it. This, plus the special powers governments are arrogating to themselves for ‘security’, will gradually move us towards a world where there is a legal right to privacy that just happens to be unenforceable.

Meanwhile, the already thin line between virtual life and ‘real’ life is rapidly vanishing. Second Life is a shared, online experience where more than 2 million people create an online persona (or ‘avatar’), complete with lifestyle, gender, money, and work. It seems weird to me that people will pay real money to spend hours online at virtual work in order to buy a virtual home so they can spend Saturday afternoons mowing a virtual lawn, but then my opinion isn’t terribly important. Having a secret (or alternative) identity is clearly popular, and real world money is starting to be generated by virtual world activities. Who knew you could legally sell real estate that the buyer knows doesn’t even exist? What is really weird, though, is that there are drive-in theatres in Second Life where virtual people can go to watch real movies (i.e., films you could see in real life). So, you have real people pretending to be virtual people, going to see real movies in which real people pretend to be virtual characters. Where does reality end and something else begin?

Computer gaming is also getting serious. Not only are the sales of computer games (arguably) greater than the sales of movie theatre tickets, but computer games are now being shaped for purposes other than just having fun. Companies are creating computer games as a new means of advertising their products. Educators are toying with computer games as immersive environments for teaching serious subjects, which isn’t new, but with few exceptions, such as Where in the World Is Carmen Sandiego?, has never been pursued beyond trivial drill-and-kill applications. Companies will get into it too, once they discover that their people learn faster in immersive environments.

New devices for 2007 likely include Apple’s next foray into an iPod-cellphone combination. It won’t be called an iPhone because another company already owns that name, but Apple must enter this arena if it wants to both protect and enlarge its iPod empire. As well, wearable computers will continue to multiply. I already own two (not counting my wristwatch or cellphone): a heart-beat monitor to help me optimize my exercise regimen, and an iPod. You can already get a specially made Nike shoe with a monitor insert that hooks your shoes up to your iPod and allows you to track (pardon the pun) your training runs. More serious monitors, for measuring blood sugar or overall health, protecting against heart attacks and seizures of various sorts, will continue to emerge.

And computer companions – stuffed toys with computers inside – are now appearing, earlier than I expected in my 1994 book Facing the Future. They’re not yet capable of behaving like the talking, walking cat that I described, but they’re approaching it. Robots in general are appearing in both functional forms, like the home vacuum Roomba and floor scrubber Scooba, but also as humanoid-like replicas. They’re clumsy now, but as computers continue to get faster and smarter at exponential rates, we will see remarkable advances, even in the coming year.

The economy and investment markets – Many of the indicators I follow tell me that investment markets are not overvalued, but my gut is telling me to be cautious. Moreover, one of my favorite economic indicators is flashing a yellow warning sign about a coming slow-down. It’s clear that the U.S. housing market has rolled over, and while most commentators are talking about a ‘soft landing’ (including the chairman of the U.S. Federal Reserve), I don’t believe it. I think that several U.S. regional real estate markets will have very hard landings indeed, and if there are enough of them, then it will cause a significant slow-down in the American economy overall. In turn, this will become a drag on the global economy, and cause real pain in Canada, especially in the manufacturing heartland of Ontario and Quebec. It will also cause softening in demand for commodities, notably metals and petroleum, and lower prices, which will certainly affect the Toronto Stock Exchange, as well as the overheated economy in Alberta.

The U.S. dollar will continue to slide. Currency moves, once established, tend to go through prolonged pendulum swings, and the U.S. dollar has been strong for a long time. If we’re lucky, it will be a gradual slide. If we’re not lucky, there may be a dollar panic, which would cause U.S. interest rates to spike as foreign investors try to dump American bonds and investments. That unhappy development could lead to a real recession instead of merely a growth slow-down.

The global economy generally will keep growing, largely because of China and India, but a good deal of the heat will be taken out of it by the retreat of the world’s biggest pool of consumers. Europe will continue to grow, but not at rates that will pick up America’s slack. I suspect 2007 will see the beginning of economic softness in America and Canada, but not the end. However it happens, it probably means a poor outlook for stocks in North America. Moreover, because of the potential for an interest rate spike caused by a run on the dollar, I wouldn’t be piling into long bonds either. This is, I think, a time to be cautious. I should also warn you that I have a natural bias towards caution, and economic cycles are tending to last longer than we expect, so I could be early at being gloomy, but watch carefully what’s happening, and have a plan to retreat to safe investments if my fears materialize.

And if stock markets do retrench (which is a nice way of saying fall, crater, or crash), be prepared to buy back into commodities. I find the arguments made by others (such as Donald Coxe of Harris Bank) that we are in a secular (i.e., long-term) bull market in commodities such as metals and petroleum convincing.

Wild Cards

A wild card is a low probability event which, if it occurs, has dramatic consequences. Examples are the terrorist attacks of 2001, the SARS epidemic of 2003, or hurricane Katrina. Some wild cards are becoming predictable, by which I mean you more or less have to include them on any list of potential wild card events. Among such ‘predictable unpredictables’ are terrorist attacks in rich country targets, especially cities; a flu pandemic, which we know will happen one day, but whose timing is completely unpredictable because it requires a specific, random mutation; and a trade war provoked by protectionism.

Among other wild cards that might occur in 2007 are:

War in Korea – If Kim Jong Il actually does go off the deep end, it could precipitate a war by accident. What would make it even worse would be if it led to a confrontation between China and America, with the Taiwan issue dragged in for good measure. Relations between the U.S. and China have been getting more heated because of trade, Taiwan, and China’s rising investment in military might, among other things. Korea could be the flashpoint that brings these issues to a boil.

Nuclear Iran – If Iran’s nuclear program is farther advanced than is suspected, or if they manage to buy nukes from North Korea, then the Middle East becomes much less stable. The worst outcomes include an attack by Israel on Iran’s nuclear facilities, or an attack by Iran on Israel (in the name of the Palestinians). All sorts of bad things can happen with either of these.

Harmony in the U.S. Congress – If both sides actually try to get along because the polls tell them that’s what the American people want (which they do), peace might break out in Congress. I don’t think that’s likely, but it could lead to some very constructive things happening in America, that could curtail a slow-down, and make the economic prospects better.

Continued rise in productivity – Productivity numbers seem to be lagging, yet technology seems to be kicking into overdrive. If a second tech revolution occurs in less than 10 years, productivity could soar, and wealth and prosperity will follow. It won’t, of course, be equally distributed, but it’s better than everyone getting poorer.

I’m sure I’ve overlooked something truly obvious, but I’ve also gone on for quite a while, so let me just repeat what I said at the outset: the future will catch us all by surprise. The key will be how quickly and well we recover. Until then, have a safe, prosperous, and joyous 2007!

by futurist Richard Worzel, C.F.A.

© Copyright, IF Research, January 2007.

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