Sources of global instability

The Q&A section of LinkedIn is a clever way to make professionals invest some of their most expensive time on activities with no immediate or clear return. One of the more recent questions was:

"From your perspective, what do YOU see as THE major source of global instability facing us? How would you overcome these instabilities?"

To which I replied:

According to Donald Rumsfeld's taxonomy,

1) As we know,
There are known knowns.
There are things we know we know.

There are only few universal sources of instability we can all agree on--e.g. death. Usually, one's source of instability leaves another indifferent and makes other prosper. For example, a gal in Africa may think AIDS is IT, while a British pal frets about global warming. Not to mention how one may think of globalization in the US or France vs. Chindia. Usually, these situations present arbitrage opportunities.


2) We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.

We all know that everything comes to pass--even the supremacy of the US, or of the Chinese Communist Party. What we don't know is for how long the US can maintain its supremacy and what price is everyone party to the world order willing to negotiate. Accepting Chindia in the power structures (e.g. G8) could be a palliative.


3) But there are also unknown unknowns,
The ones we don't know
We don't know.

Here's where anyone's imagination goes wild. In addition to the usual suspects (a large asteroid will hit the planet, the oil reserves are depleted before we find alternative sources, global warming, etc.) I would add the unforeseen externalities of R&D, such as nano-X, stem-Y and younameit-Z. And here's where some science fiction writers (include today's prophets just as well) make their money.

In conclusion, absent of the crisis, there is no single source of global instability, but a myriad of them that keep testing out optimism.

I would add that it's interesting finding out that most people's opinions, on broad themes like the one above, tend to be skeptical in nature and embrace major views already circulating in mass-media. In other words, is it that media become somehow source for instability, or instability cannot become a problem unless acknowledged by media?

A pair of similar puzzles

LinkedIn Question:

Without getting into idealogical battles, can you suggest models under which the "threat" can be effectively managed?

1. Terrorism is (largely) the act of stateless individuals/groups committing acts of violence against other individuals, groups and/or states. Given the completely amorphous nature of this form of activism - how does one effectively deal with the threat while preserving the very standards that the threat seeks to eliminate?

2. Open source software is the product of a stateless non-affiliated (corporately) group of individuals who self assemble on an ad hoc and as needed basis to produce an exceptional product that is distributed freely. The advantage over a corporate production environment is the ability for the open source "movement" to assemble huge groups of highly talented and passionate experts at the drop of a hat to solve problems or add features; whereas a corporation must manage operating expenses, adjust teams much more slowly (HR process), and is not as agile in terms of being able to accept or reject work at the drop of a hat. How does a corporation like Microsoft compete against a non-entity like open source without taking the battle to the point where the goal is to destroy the community that is the open source movement?

For comparison's sake - note the similarity in MSFT taking the war on OSS to the door of those entities that formed to make OSS more viable commercially (Red Hat, etc.) and the US Gov. taking the war on terror to the doors of those countries the (may have) supported terrorism. As I see it, in both wars - the true target is almost impossible to attack - so we find/fabricate a proxy and fight them instead.


Reply:

[...] with all due respect, I think your questions belong to a framework too anchored into the PRESENT. If the answers were to come from within the same framework, the actors might be advised to do more of the same. However, as the history teaches us, solutions exist always outside/transcend the present framework--the one that create(d) the very conditions of conflict in the first place. And, for the incumbents impervious to learning, seeking solutions outside status qvo is too much already.


Follow-up question:

Having stated that my problem is too PRESENT-focussed, can you provide an alternative model that isn't present focussed and that encompasses the issues at hand? Please clarify.


Follow-up reply:

MSFT and the US reached unprecedented peaks sometime in the last decade of the 20th century. Since, the question has been whether or not their success models run their courses. And, especially from the inside, it is very difficult to come to the conclusion that change is still necessary once you reach the top.

Open source and terrorism could be viewed as manifestations of the world's reactions to the status qvo (i.e. the current world order). The rise of Google and of the idea of 'multi-polarity' in world affairs, for example, could be two more, respectively.

Consequently, my professional and cultural biases notwithstanding, I would rephrase the questions you raised along the following line:

• Is this entity well prepared to face challenge X? What's at stake?
• If the entity is not prepared, what does it take and how can things turn for better or worse?
  

From the history, MSFT could learn from IBM, while the US from France in Algeria or UK in N. Ireland. This would be in addition to better listening to their organizations. Indeed, MSFT owes the success of X-Box in part to the fact that it was built outside its OS. Moreover, the US-Lybia opening owed also to communication between Ghadafi and the Brits.

As a side note, the funny problem introduced by your questions is that one person in the US may agree or not with MSFT, but most probably won't take the side of the terrorists. So, there is either a paradox, or an illustration of the saying "one's terrorist is another's freedom fighter." Needless to say, I enjoyed taking the time to think about, and reply to them.

Buffett on gold

There is a lot of talk about investing in gold at this time. Thus, a late '90s remark by Buffett re-sounds as true as ever:

"[Gold] It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Loss of Hard Core expertise in North America

LinkedIn Question:

Loss of Hard Core expertise in North America

It is becoming clear that North American Technology Graduates are moving to Marketing and sales Job or otherwise not interested in Technical assignments.

What does this mean for Business and Economy for North American Software Business.

Reply:

1) I would have to say that the situation captured by your observation has to do with the reinforcing effect of the US' being #1--at least at a common perception level. Indeed, it's hard to change course, towards sustainability, while you can do no wrong.

2) It is not only that we are not doing as much science as we used to, but except for finance, entertainment, sports, and few other areas, what else do we do to the extent (of quantity and quality) we used to? Since not all professions are created equal, another reason for so being is what one may call social mobility fueled by professional change. Look around and chances are that smart kids go for law, medicine and finance. Not exactly the type of professions that reward double-e degrees.

3) How many talented physicists and electrical engineering graduates have been absorbed by Wall Street since the coming of, let's say, options and derivatives?

4) Electrical engineering is damn difficult to get into when primary education has been left wanting for so long.

5) Globalization will only accentuate what has already started (points 2, 3 and 4).

The value of paraphrase imagery

Images supplanting ideas have been around for as long as we can remember. Here's the latest installment, coming from Phil de Vellis, concerning the Clinton-Obama growing rivalry:

This episode is exemplary for the new level of civic thought and action enabled by the internet. As well, it shows what YouTube, of which I wrote here, can be when it will have paid off the $1.7Bn Google bought it for. By the time of this posting, this clip has been viewed 2,075,594 times. Now, that's a novel model.

Before going into civic debates, have a look at the Apple Macintosh 1984 clip and see how little it took Mr. de Vellis to make his mark:

Whereas up until now such things were the domain of the 'pros,' now we have another level of democratization of the medium.

Hedging Options

Just google "Buffett on derivatives" to see the latest on the subject from the Sage of Omaha. In theory, derivatives are financial means to manage risk by syndicalizing it. In practice, nobody knows how well they work when large scale panic selling and/or contagion hit the financial markets.

The recent worries about subprime lending in the house market, preceded by the Chinese sell off, has one ponder as whether or not these might be the signs for financial trouble that not only Buffett, but also Greenspan as of late, has been talking about.

If one considers the slowing of the house market together with the drop in durable goods orders (i.e. what goes with/into a new house), one may get a picture that's so much uglier than what one is normally told through the 'official' channels. To get an idea as how far and wide the subprime lending has gotten, consider the range of companies whose executives are called to testify in front of the US Congress: HSBCPlc (HSBA.L), New Century Mortgage Corporation (NEWC.PK), Countrywide Financial Corp. (CFC.N), General Electric Co's (GE.N) WMC Mortgage unit and First Franklin Mortgage (FFHS.O). Subprime lending has made for many a record high bonus on the Wall Street of the 2006's end.

The options for the US government are few and limited. It can raise or lower interest rates. If it lowers them, one side effect could be that houses keep appreciating--one source said that all the subprime lending problem would disappear if house prices went up by 10%. The cost of so doing is increased inflation, which has already been at work. Another casualty could be the mighty dollar itself, including its position for some treasury departments in the developing and oil exporting worlds. Raising rates is a an even less likely option for the current thinking goes that it would send the whole economy down, so it would be considered only if inflation was acknowledged as the bigger problem than the risk of recession. A third option would be to raise taxes. If the Democrats were in power, that would have been the way out of this situation. The Republican executive may decide though to creatively tax the US by going into Iran. Not counting the political evidence supporting a war with Iran, the economic rationale is there. The dollar would improve its safe haven status, the oil would keep transacting mostly in dollars, and a lot of the financial troubles that have been accumulating since Greenspan would be shouldered by us all in the form of war debt, or something along the lines of the war budget (deficit) for Iraq.

Consequently, some options for the individual investor become: defense companies, Swiss Francs, and US Treasuries. Before I forget, let's mention Red 22 in Las Vegas.

Global consumer trends

Following is an excerpt from a McKinsey Quarterly survey about various changes over the next decade. However pertinent and intuitively valid, these projections are silent on two dimensions. Nothing is said about the future of digital products and the middle class from the developed nations, respectively. The digital goods' likely evolution will marked by defiance of intellectual property rights until the developing countries become themselves generators of digital goods. If what goes on in the US consumer market is an indication for the future, the middle class consumer in the developed nations and the consumers in developing nations will likely be increasingly alike. And, considering their prediction, this might have been the working assumption of the McKinsey consultants. However, the European consumer, given the protectionism in the EU market, looks differently.

A changing consumer landscape

Economic growth in the developing world will usher nearly a billion new consumers into the global market-place over the next decade, as household incomes reach the level (around $5,000) associated with discretionary spending. Although these consumers will have less spending power than do their counterparts in the developed world, they will have similar demands as well as access to global brands. Many industries therefore face polarized markets where premium and no-frills offerings are squeezing middle-of-the-road ones.

This polarization will become a fact of life throughout the materials sector as well. Consider the automotive industry, which is largely concentrated around two kinds of vehicles: high-volume, low-cost models and premium luxury ones. Materials providers will benefit if they can offer auto-makers differentiated products—say, for lighter bodies with improved fuel efficiency. Likewise, specialty providers of high-strength steel and aluminum are harnessing technology to create captive markets among luxury carmakers. Similarly, paper manufacturers have profitable niche opportunities to design innovative packaging for makers of consumer products such as ice cream or potato chips.

In fact, premium niches represent important opportunities for producers of aluminum, paper, and steel as they find themselves squeezed by high input prices, the substitution of materials when customers attempt to slash costs, excess capacity, and tough competition. Winners will increasingly need to play the role of productivity-improvement partner to their customers—by offering services, for example, or helping in areas such as product design.

"Global trends" by Ivo J. H. Bozon, Warren J. Campbell, and Mats Lindstrand

Some thoughts before the opening bell

Nobody knows the extent to which the recent stock-markets "correction," which began with the Chinese bourses, was due to anyone from the so many objective factors, such as Chinese overheating, American economical slowdown, or global excess liquidity.

Of significant relevance I find a subjective potential factor and an anecdote. Just before the Chinese sell-off, Greenspan said via satellite link to a business conference in Hong Kong the following: "When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign. For example, in the US, profit margins have begun to stabilize, which is an early sign we are in the later stages of a cycle." The, otherwise widely circulated, anecdote has it that a certain Li Ruichang, a 63-year-old Chinese engineer and speculator, stated the day after the fall of the Chinese bourses that: “Things like that happen. But I’m not worried about a crash. After a five-year-long bear market, the bull market shouldn’t end that fast.” I should add that Mr. Li's statement came a day after the sell-off, as the Asian and European bourses were still falling while some in China regained some of the losses. Before the sell-off, the Chinese major indexes were twice as high as 12 months before. In any case, for some, the strength of the Chinese stock market consists of its number and determination (not to lose) of investors.

As if encouraged by the second day gains in the Chinese and US stock-markets, officials put out several soothing messages. The Chinese regulators gave up on plans to curb speculation and were ready to consider opening their stock markets to foreign investors--it would be interesting to see if foreign speculators get any special treatment. In the US, Ben Bernake, chairman of the Federal Reserve, said that one could reasonably hope for a stronger economy by mid-year IF housing stabilized, and IF manufacturing improved. So far, his twice-conditional message has been taken as support for the rally.

But then again, what's a stock market if not a conspiracy of hopefuls? One would only have to distinguish among the types and motives of hope, and then check for alignment between their own and the economic realities.

On a final note, it's ironic how globalization has been considered to transcend stock-market rules, just as increased productivity driven by technology had been until (twice in) 2000.