The Shape of Things to Come. 8/31/1998

Our purpose in writing this piece is not to offer a litany of hopeful possibilities for the future. It is to show that there have been, and continue to be, successive waves of technological advances which have driven world growth to a higher plateau. Moreover, these waves are not weakening but are gaining strength. They have brought about a stunning transformation of the worldwide economic infrastructure, and truly remarkable advances in productivity. Seldom in history have so many forces built upon themselves to redirect society into a radically different one than existed before. Amazingly, these changes are being initiated not by wars nor government policy but by private initiative and a renewed and vibrant spirit of conquest, discovery, and achievement. The results can be highly profitable, and hold enormous potential for the good of humankind. New jobs are prolific, and new wealth is being created.

Despite the dire situation in Asia, increasingly grim reports from Russia, rampant terrorism and political scandals, the world economy is growing. Moreover, forces at work today offer the possibility of an extended economic boom. The positive underlying forces have been evolving slowly, one by one, and equally slowly are converging. This confluence of forces is leading to a new world economic infrastructure. It will drive world growth to higher levels with little inflation, and offers tremendous potential for human development. It is unlikely that this new economic order will be derailed by near term negatives no matter how fearful they appear to be.

One has to go back to the early 1980’s to pick up the thread leading to the evolution of the new economic order. The development of the microprocessor, initially somewhat cumbersome, in reality created a tool of enormous potential. The personal computer made possible the gathering, storage, retrieval and manipulation of reams of information heretofore locked in libraries and local files. In the same time frame the breakup of the telephone monopoly unleashed a frenzy of technological advances and new construction in communications. New companies such a MCI blossomed and almost immediately captured large markets. Fiber optic networks, satellite communications systems and cellular phone systems sprang up like trees in a burst of development which is still going on. New global phone networks capable of transmitting voice and data are well along toward becoming commercially available now.

These trends were well launched when the Berlin Wall came down in 1987, officially signaling the end of the Cold War. This watershed event unlocked the potential of millions of repressed workers in closed economic systems to become more productive. New markets opened quickly as whole countries adopted this spirit of enterprise. Central planning was jettisoned and a free market economy was adopted with stunning rapidity. Privatizations abounded and are still going on. Can anyone doubt that China is on a relentless march to a free market economy? Other beneficial trends arose from this dramatic implosion. Research and technological activity was redirected toward private sector use and away from an almost sole reliance on the military establishment. Most prominent among them was the Internet which fulfills the promise of the pc by joining it with communications. Building out this new information network ignited an explosion of development spending throughout the world and a retooling of existing facilities of all kinds. Electronic commerce is a reality today, albeit in its early stages. Not far in the future are new communications media to the home. Ultimately these systems will allow entertainment products, commerce, telephony, even energy management from one device, all made possible by developments outlined above.

The new spirit of enterprise and discovery has spread to other areas. In the 1990’s the practice of medicine and agriculture has been forever changed by developments in biotechnology. Experiments in genetics have led to a host of new medications and treatments for virtually every human condition. Similar studies in agriculture have led to dramatic advances. Through agricultural biotechnology seeds are being developed to produce disease free crops, of higher quality, in difficult climatic conditions, and at lower total cost. Both in medicine and agriculture these trends are in their infancy, but they are not fantasy. Witness in our own day for the first time the cloning of sheep and cows. Because genetic experimentation in medicine and agriculture essentially emulates the processes of nature, the possibilities are open-ended and enormous.

Reading the current opinions of stock market strategists, columnists, and other experts today, one is struck by the increasingly pervasive, indeed almost hysterical, preoccupation with current events. Often their commentary is based on the thinnest evidence and is intermingled with a heavy dose of personal anxiety. This myopia misrepresents the situation and creates an impression of a world economic system that is about to fall into a deep, dark abyss. Nothing could be more detrimental to sound economic and investment planning, and nothing could be further from the truth. The world is changing, not dying. As the perceptive futurist George Gilder has said, “Wealth in the form of physical resources is declining in value and significance. The power of the mind and spirit are everywhere ascendant over the brute force of things. The true capital of the current capitalist economy is not material, it is moral, intellectual, and spiritual.”

The current sentiment in the financial markets is dominated by fear. There are serious problems in the world, and some of them seem intractable. A more detached view provides a totally different picture however. In our opinion the current market decline offers the opportunity to participate in the attractive growth that is already in place.

THE INVESTMENT POLICY COMMITTEE
Alfred A. Lagan, CFA, Chief Investment Officer
August 31, 1998