"And as the limits of ordinary people are opening up, the powers of the state are contracting. The immediate effect of all this is dislocation, turbulence and uncertainty. The long-term result will be an unprecedented increase in the world’s wealth and prosperity. Rarely has the valley in front of us seemed so dark and foreboding - and the mountains in the distance seemed so majestic."

This quote is excerpted from our 4th quarter 1990 News Review which went to press that December as the world held its breath, transfixed by the build up for war in the Persian Gulf. It has been an exhilarating if bumpy ride from the valley of Desert Storm to today’s lofty mountain heights. The stock market jump from those pre-Gulf War days at Dow 2600 to the present Dow 9000 is a reflection of a wide range of positive fundamentals topped off by a new found contagious optimism for capitalism and the global marketplace. There is no denying that we now find ourselves in the upper reaches of those majestic mountains. But as financial stewards it is imperative that we be at the watch for fissures that can become the next treacherous valley. With that in mind we offer the following observations.

International: In the seven years since the Gulf War the U.S. has further solidified its role as the undisputed superpower in a unipolar world, but current U.S. foreign policy is in disarray. From Iraq, to India, to Pakistan, to Indonesia to China serious problems are brewing that could jeopardize the free flow of global trade. Secondly the devaluation policies of the International Monetary Fund (IMF) have contributed significantly to the turmoil and economic chaos in the Pacific rim. The hyper-inflation these policies unleashed in Indonesia have already precipitated riots and a change in regimes. Also troubling is the ineffectual communication U.S. leadership has with the Islamic world, a block that represents close to one third of the world’s population. In Europe, economic matters are looking up in anticipation of the new "euro" currency that debuts in less than seven months. It should greatly facilitate trade and commerce in the European community provided the new European central bank can keep the eleven participating countries in harmony with their monetary policy.

Technology: Technology and innovation in computing and telecommunications has been the primary engine of productivity and prosperity growth over the past seven years. The continued convergence of these two has created a networked world that dramatically improves the flows of information and in the process radically reduces cost structures. It has led to rapid consolidation in the financial and industrial sectors and has opened up whole new fields for entrepreneurial exploitation. Chief among these is the Internet and wireless communication where digital technology has enabled new players to enter the marketplace with products and services.

Science: New developments in the life sciences will define the decade ahead in much the same way that computing and telecommunications shaped the past ten years. The billions of dollars poured into research and development in biotechnology and genomics is just now beginning to bear fruit in the form of powerful new drugs and genetically enhanced agricultural products that promise better yields with increased resistance to insects and herbicides. The recent spate of stories on new cancer treatments is just a sample of what the pharmaceutical industry will produce from their biotech empowered pipelines in the years ahead.

Inflation: The inflation outlook in the U.S. has rarely been better. While the Federal Reserve seems preoccupied by the lowest unemployment rate in 25 years the "real" Federal Funds Rate (Federal funds rate minus the 12 month change in CPI) at 4% is the the highest it has been in 9 years. These numbers indicate a restrictive monetary policy with continued low inflation ahead and the potential for lower short and long term interest rates in the future.

Great Awakening: There is a remarkable ground-swell in our culture towards self-help and individual responsibility. Witness the Promise Keepers rallies and the Million Man March. Some snickered when the President proclaimed, "The era of big government is over!" But he was prescient in understanding today’s new zeitgeist where big government is no longer the solution of first resort. Finally, in an extraordinary essay in the 24 May New York Times noted scholar Michael Novak predicts, "you may be sure that the 21st century will be the most religious in 500 years." He points out that two of the three great intellectual struggles of the century have been resolved, democracy versus dictatorship and capitalism versus socialism - the last is reason versus faith. Novak concludes, "We have come through a long and bloody century, and something new is stirring everywhere. It is none too soon."

Summary: The big risks to today’s good times come from the international arena. The Asian contagion has already shaved at least one percent off of forecasts for global growth and there is no proof that the crisis has bottomed out. Japan is still mired in deep recession and tensions are on the rise between India and Pakistan. But if these international problems can be sorted out without calamity there is every reason to be optimistic. The limits of ordinary people are still opening up and being leveraged by ever more powerful technology. The power of the state is contracting and major programs like social security are ripe for privatization. Dislocation, turbulence and uncertainty will continue to haunt us, but in essence they are the necessary byproducts of progress. And those majestic mountains in the distance of 1990 - when you consider just how far the last seven years has brought us - when you consider the questions answered, the problems solved, the demons exorcised it is entirely possible that these majestic mountains might prove to be just the foothills. DBJ

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