Part II:Takeaways from The National Intelligence Council’s 2025 Report: Part II

Below are some more insightful excerpts from the “Global Trends 2025″ report.

“If current trends persist, by 2025 about 57 percent of the world’s population will live in urban areas, up from about 50 percent today. By 2025, the world will add another eight megacities to the current list of 19—all except one of these eight will be in Asia and Sub-Saharan Africa. Most urban growth, however, will occur in smaller cities of these regions, which are expanding along highways and coalescing near crossroads and coastlines, often without formal sector job growth and without adequate services.” page 23

“Historically, people who become accustomed to rising living standards react angrily when their expectations are no longer met, and few people have had grounds for such high expectations as do the Chinese.” page 30

“Even at prices below $100 a barrel, financial transfers connected with the energy trade produce clear winners and losers. Most of the 32 states that import 80 percent or more of their energy needs are likely to experience significantly slower economic growth than they might have achieved with lower oil prices. A number of these states have been identified by outside experts as at risk of state failure—the Central African Republic, DROC, Nepal, and Laos, for example.” page 45

“Beijing’s ties with Saudi Arabia will strengthen, as the Kingdom is the only supplier capable of responding in a big way to China’s petroleum thirst. Beijing will want to offset its growing reliance on Riyadh by strengthening ties to other producers. Iran will see this as an opportunity to solidify China’s support for Tehran, which probably would strain Beijing’s ties to Riyadh.” page 51

Part I:Takeaways From The National Intelligence Council’s 2025 Report

The National Intelligence Council, known in the intelligence community simply as NIC, published last week its fourth in a series report on possible future world scenarios. The report, “Global Trends 2025″, was drawn from consultation with intelligence analysts and experts around the world in various fields. The report garnered heavy media coverage for its prediction that the U.S. role in the world would be greatly diminished by 2025. Below is part one in a series of three posts highlighting other interesting excerpts from the report.

• “Major technologies historically have had an “adoption lag.” In the energy sector, a recent study found that it takes an average of 25 years for a new production technology to become widely adopted. ” page viii
• “Maritime security concerns are providing a rationale for naval buildups and modernization efforts, such as China’s and India’s development of blue-water naval capabilities. The buildup of regional naval capabilities could lead to increased tensions, rivalries, and counterbalancing moves but it also will create opportunities for multinational cooperation in protecting critical sea lanes. ” page x
• “An increasingly numerous Hispanic population will ensure greater US attention to, and involvement in, the culture, religion, economics, and politics of the region.” (Latin America) page 15
• ” Demographers project that Asia and Africa will account for most of the population growth out to 2025 while less than 3 percent of the growth will occur in the “West”—Europe, Japan, the United States, Canada, Australia, and New Zealand. In 2025,roughly 16 percent of humanity will live in the West, down from the 18 percent in 2009 and 24 percent in 1980. ” page 19

Bold? and Bold!

“Fortune Favors the Bold” is a frequently cited quote. It might appear on first read to mean “doing something big, thinking out of the box, or doing the unexpected.” Yet, what is missing here is the focus on the word bold in the translation. The definition of bold is being fearless in the face of danger. In other words if you do something big or radical it can’t be bold unless there is a significant risk involved or an obstacle to overcome. Many of the startups launched in the years 1995-2000 were considered “bold ” for what they were setting out to accomplish. However, given the economic boom they operated in they were probably misinterpreted for their boldness.

Today, by contrast the landscape is gripped by a palpable sense of fear and uncertainty. Paradoxically it has been said that recessions or financial crisis are a great time for startups. Yet, unlike the startups of the late 1990’s which were started by individuals in their 20 and 30’s now you are seeing a trend whereby industry veterans are remaking their own industry. Ken Moelis, once one of UBS’ highest ranking executives now runs his own show at Moelis& Co. In technology look at how Palo Alto Networks continues to receive funding. There will be more of these companies you may hear about in the weeks and months to come. Not all will become public and file IPO’s, yet it will be a space worth watching for those who do.

***Weekend Edition*** November 22, 2008

Highlight: Analytical Technique

Scenario Planning

Introduction:

Scenario planning is the examination of the possible. It attempts to come up with plausible situations that might play out in the future based on what is happening at the present time. Because no one knows for sure what the future holds, multiple outcomes are drafted. It is an exercise to make sure one has covered all the angles. However, it is not meant to guarantee to account for or eliminate every surprise. Yet, it does allow one to plan effectively.

Modern scenario planning grew in importance after World War II. The U.S. military was greatly concerned about the rise of the Soviet Union and the possibility of nuclear war. To this end it incorporated the work of Herman Kahn a mathematician at the RAND think tank into its military plans. Kahn had authored the book, On Thermonuclear War, in which he attempted to analyze the outcomes of such as war. The intelligence community today gives great credence to scenario planning as evidenced by the series of reports it has published called “Global Trends.” Just this past week it published its 2025 report.

In the business community scenario planning became of age in the 1980’s with Shell Oil. The company used the method to effectively map out and deal with the fluctuation of oil prices.

Example:

Below is a possible scenario of what the hedge fund industry will look like in the year 2015.

The stock market crisis in 2008 has forced many hedge funds to close shop. Yet, despite the existence ofnew regulation and financial transparency those remaining find it increasingly difficult to beat the market. Thus, some reinvent their methodologies and build it around behavioral economics. This growing field, which gained credence in the early 2000’s by the work of Richard Thaler and others, has provided new insights on investor psychology. Hedge Funds are anxious to make use of and exploit this knowledge. Computer algorithms, a long mainstay of hedge funds investment process, are still the primary method used for making investment decisions. Now, however, hedge funds are now staffed with PhD’s in Anthropology, Sociology, and Psychology. Hedge Funds have realized they have over emphasized the importance of mathematical equations at expense of the human equation. The following decades with be those of the mind and not the calculator.

Implication:

Many people by default assume that the future will look very similar to the present. Scenario Planning allows one to envision the future. If you can’t imagine what happens next you can’t prepare for the threats and opportunities that exist.

The Art of Intelligence

Think

Intelligence, is at its core, the analysis of information. It is the search in information for competitive insight or predictive meaning. This is brought to light by applying analytical techniques. What is sometimes overlooked, however, is that intelligence is also a interdisciplinary field. If you are in the business intelligence field for example reading up on other fields such as science, or philosophy, or politics, or sports can provide numerous examples for improving and applying intelligence in the business field. Peter Schwartz in his book, The Art of the Long View, makes a point of stating that if you want to know what the next trend will be then you will need to expand your reading list.

Thus, I would like to use an example from the sports field and apply its use for understanding the current Wall Street crisis. Harvard professor Rossabeth Moss Kantor in her book Confidence: How Winning Streaks and Losing Streaks Begin and End studied sports teams to see how confidence produced winning streaks and the lack of it produced losing teams. One of the characteristics of a winning team is how much more willing they are to share information and help each one another out win games. The information is free flowing. On losing teams as things go from bad to worse information becomes scarce. As blame become a focal point mistrust begins to display itself.

Now take the current crisis on Wall Street over the last 15 years. If you put yourself back in the Dot-Com era of the 1995-2000 period you will remember things on Wall Street were good. Real good. If you were a start up technology company you could easily get funding. Conversation at parties was about stocks and people were happy to share their winning picks. Confidence was high.Now fast forward to today. There have been virtually few IPO’s in the past several weeks. Information has become scarce, not because you can’t find it on the internet or CNBC, but because true insight is now being clouded in personal self interest. Commentators and finance professionals report how they are approached by countless people in the street asking “What do I do??? Confidence is now low. This means, like losing sports teams, blame is common and mistrust is prevalent. While finance professionals come on the air to plug the “ride it out or just “hang in there” investors continue to sell. Now who is right? The professionals? Maybe. Yet, if you look at your portfolio become wiped out you maybe asking yourself if you have been duped. This is all points to a common them in intelligence which is beware deception. You have to realize a rising tide may lift all boats, but in a sinking ship the elbows appear for the lifeboats. It is something similar to what John Najarian would call the “Lifeboat Ethic.”

So the question then becomes how do you protect yourself? One of the ways you do this is by relying on your own unique knowledge. Technologist and Forecaster Paul Saffo makes this argument in the Long Now presentation “Embracing Uncertainty” as did economist Friedrich Hayek whose following quote appeared in the book Crowdsourcing.” Each member of society can have only a small fraction of the knowledge possess by all, all each therefore is ignorant of most of the facts on which the working society rests.” In other words, you have knowledge no one else has and vice versa. Your own insight is your true competitive advantage. Why is competitive advantage important? It is important because it is your lifeline in what is a now a competitive environment. It is as simple as that.

Take your own council.

***Weekend Edition*** November 15, 2008

Did you Know?

According to this article in the NY Times today, 22 of the 30 fastest growing occupations in the next eight years are those that do not require a college degree.

Article of the Week

Here is an excellent article.“Trading on Soft News” details the use of information and news for picking stocks as opposed to the conventional model of strictly studying the financials.

Is Blackstone Taking a Page From Thomas Watson Sr.’s IBM?

In an article that appeared in the USA Today in April of 2003, “IBM founder’s Depression gamble pays off” author Kevin Maney argued that Thomas Watson’s Sr’s deft moves during the Depression not only saved IBM, but put the company far ahead of its competitors in the coming years. Maney writes “Revenue jumped from $19 million in 1934 to $31 million in 1937. It would climb unabated for the next 45 years. From that moment until the 1980s, IBM would utterly dominate the data processing industry — a record of leadership unmatched by any industrial company in history.”

What did Watson Sr. do that was so special? He simply bet the farm on R&D investment. One might ask what product was he trying to create? How could be be convinced that people would buy it? What were the chances of the company going under? The answers are these. First, he was not sure what the new product would be. Secondly, he was convinced that only in developing and producing new products could the company survive. Finally, the company nearly ran out of cash and went bankrupt in his attempt to develop new products.

So what prompted IBM’s fortunes to improve so radically? Simply put the enactment of the Social Security Act required a vast amount of automated machinery to track workers wages. By act of default IBM was the only one in a position to benefit from this need. One might want to attribute it to luck, survival of the fittest, or simply being in the right place at the right time. Yet, this picture stands out. IBM kept its focus. It did not blink. It recognized that to overcome the shock that the Depression created required a response that was twice as powerful.

So what about Blackstone? Regarded as one of the premier private equity firms Blackstone went public in June 2007. However, since then stock market has since delivered a devastating blow to equities and financial firms in particular. The stock is currently down 66% YTD. It should not be lost on anyone, however, that in the midst of this crisis Blackstone has been making some agressive moves to try to take advantage of the situation. This past summer it was rumored to be a bidder for Lehman Brothers.

Now traditionally private equity firms have left the investment banking to the investment banks. Yet, that too may be headed for a collision course. Blackstone, it seems, appears to be entering the world of investment banking via the addition of teams in Asia. Today’s WSJ also notes a possible turf war.

Even the Wall Street Journal’s Evan Newmark has drafted a favorable outlook for the firm in his fictional account of the Wall Street landscape in the year 2012. It is worth a read.

Too be sure Blackstone must deal with a economic landscape that shifts on a daily basis. Its buyout and now ownership of Hilton Hotels is valued at less than its purchase price. Its ability to raise funds for its private equity funds is not necessarily a sure thing. Yet, the company appears determined to take advantage of the current situation. Steven Schwarzman, its CEO, in a financial forum held today added he is optimistic that the company will be able to take advantage of the crisis.

Now IBM and Blackstone share differences. The obvious being that one is a manufacturing/software company the other being a financial services company. One had to deal with business conditions in a Great Depression and the other operates in a world that may be about to enter one. Yet, similarly and most importantly both have exhibited an optimistic attitude, a commitment to increased investment in a poor economic environment , and a determination to follow their own course.

Site of the Week: RealClearWorld

If you need to get up to speed on the world’s events fast check out RealClearWorld. It does a great job of streaming the feeds from editorial pages all over the world. Check out its other publication as well: RealClearMarkets.

Was the Wall Street Crisis Foreseen?

Did We Miss It?

Many people who have witnessed and speculated that the real estate market was a bubble that was about to burst were correct. In fact hedge fund manager John Paulson and economist Nouriel Roubini accurately profited from and predicted such events.

For those outside the world of hedge funds or academics the question is how might one have known what was about to take place? One could surmise such event was inevitable if they knew of neighbors flipping houses or saw the rise of home prices in their own neighborhood. Yet could they know what would be at the center of the crisis? Could their observations be backed up by factual data?

The answer is as this website has argued is in not reading the tea leaves, but in reading the news. Profitable Readings, unfortunately, did not foresee the Wall Street Crisis of 08′. However, in reviewing some of the articles that have been collected by this website there is one written back in June which is one of particular note. See: “Nearly Half of Wall St. Profits Are Gone.” Its’ emphasis if perceived and acted upon might have tipped off the investor to what was to come.

Now the counterargument is that there were any similar articles written at the same time period all warning of imminent demise. Yet, what is interesting about this article is that very few if any articles were hitting on this exact theme. They failed to note that “center of gravity” was the bank profits and less so the mortgage industry. They failed to lay out the specifics in such clear terms.

The best observations and conclusions are reached when you can match anecdotal information with cold hard facts as this article does. It makes one wonder if only five months ago this current Wall Street Crisis was all too inevitable.