DAILY VIDEO COMMENTARIES

This is the "Monday Morning Line" for February 16. We’ll do these things approximately once a week, and the purpose is to expand on some of the things that have been written about in this site, to make them a little bit more topical.

I have a couple of thoughts for the day. First, the news is filled with Iraq and whether the United States will or will not go ahead with military action largely on its own. The significant point from a military standpoint, as to whether or not to be engaged, is a tactical affair that seems to me to be twofold.

First, the United States has been very poor in convincing the rest of the world—and including even our own citizens—as to whether military action is necessary. We’re supposed to be the experts in spin control, and, yet, we surely haven’t persuaded anybody that after six-and-one-half years of inspection that there is specific evidence that requires going in on a surgical strike. The Russians have hinted darkly that there might be some chemical clouds that would be released over the Caucasus. If they know something, they also haven’t made it very publicly available as to what kinds of weapons are there. But, even more, the so-called weapons of mass destruction are probably in many locations around the world, not necessarily just Iraq. It might well be possible, in fact I guess it is pretty clear, that they would be in Israel as well, in that part of the world and many other places. Certainly the linkage of weapons from the Soviet Union at the time in which I was there very intensively (around the late ‘80s and early ‘90s) would have been quite easy, and any weapons that could be stored could be anywhere in the world. So we haven’t really convinced anybody, and the United States, as an expert on spin control, has not demonstrated its skill in convincing somebody that we should do this. The issue of terrorism is a very specific concern. It might well be a form of convincing people that it would be desirable to eliminate terrorism wherever it’s found, whether it be in Ireland or Iraq or Africa or Asia, to make the issue something beyond Saddam Hussein as a single individual.

Asia is the second item in terms of effect on global capitalism. The Asian markets appear to have stabilized—or at least left the immediate crisis stage—although they’re still in for a very tough time. I can’t help but think and be reminded of the fact that global markets are all interconnected by free market movements. So that what happens one place will also have an effect elsewhere.

The United States has been a haven for capital in the last few years and that has added to the incredible prosperity that we are all experiencing. But we’re going to have some competition, in my opinion, from the European Monetary Union, which may well have a very strong hard currency and provide some competition for the dollar as a reserve currency. I think we can see some pressure on the dollar occurring in the next several years. And, from an investment diversification standpoint, diversifying away from the dollar, which has been a bad idea for the past five years, will look like a very good idea in the next five years.

And finally, the attitude of American financial institutions and financial people about financial cronyism, corruption and the like in Asian financial institutions, could well come back to haunt us. Financial institutions around the world including the United States have many, many options that require them and guarantees to require them to provide loans, letters of credit, guarantees—all of a variety which are vastly in excess of what appears on the balance sheet—that could well all come back to haunt the American financial institutions at a given point in time. The financial risks are higher than we know and transparency isn’t necessarily greater in the United States than it is elsewhere.

So, those are the thoughts for the week on Monday. And, I’ll see you next week. Bye.

Huge confusion exists on what happens when people misunderstand what kind of negotiation they are in. Some negotiations are cooperative in which both sides can expect to win . . . strategic alliances might be an example. Or what Russia thought it was doing when it was the Soviet Union and giving up on the Cold War.

The other type is the competitive negotiation where one side wins and the other loses, where it takes from one and gives to the other. This is what the Western countries thought they were doing at the end of the Cold War. The United States won, Russia lost, and huge misunderstandings occurred.

I can see somewhat the same thing occurring now in commercial transactions and also in foreign relations. Besides, we always have to let the other fellow have a way out. Otherwise the negotiation is going to stumble.

Let us keep an eye on deflation. It started in producer goods. We’ll see it occurring even more in technical goods and consumer goods that come from Asia. And we’ll see some very funny things happening in currencies and with interest rates. The U.S. Federal Reserve is concerned about it and most of us do not have a memory long enough to go back to a time when we worried about deflation instead of inflation.

It could drive us to currencies other than the U.S. dollar, and we should watch what happens in Europe to see whether or not there is a new strong reserve currency there. And we should probably forget about diversifying away to foreign currency . . . diversification that we were getting in the very international-American portfolios.

Let’s keep an eye on it.

Everything seems to be going along swimmingly. Markets are good, money is freely available, transfers of money occur around the globe easily, and capital is efficiently being used, seemingly with great productivity especially in the United States.

What are the issues that we should be looking at, monitoring for potential difficulties as we slide in the next 22 months towards the millennium? I think there are several:

First there is a problem with computers as we come toward the year 2000. Next, the rise of nationalism—it’s a worldwide phenomenon. Third is deflation; it’s occurring and will get worse. Finally is the lack of transparency as computers are used to transfer knowledge and currency everywhere.

The advantage of all of this is that individuals are being empowered by computers to do just absolutely wonderful, wonderful things.

The United States has just reported its highest ever trade deficit. It’s $140 billion or thereabouts. That in itself isn’t terribly surprising nor will it be surprising next year when it soars much higher.

What may be surprising, however, is that the United States—which has been a global supporter in principle of multilateral trade negotiations, especially through the World Trade Organization—will again resort to bilateral, specific negotiations with trading partners with whom we have an adverse trade balance, especially those in Asia. It would therefore undermine the overall global notion of free trade and say that, specifically, when we get into periods of instability we have to solve problems on a specific case-by-case basis.

This is not going to help global trade—globalization—and it will prove to be a setback of greater proportions than any one-year’s trade.

A great deal of emphasis in the last decade has been placed on brand management, brand identification, use of brands to sell, and the use of brands to improve a relationship. It started in consumer goods, but it has spread out to services in almost all aspects of commercial activities . . . of course even including politics as we well know.

But I think the important thing about brands in today’s Internet world is being forgotten. Brands get you into the game. Without a clear brand image you’re not in the commercial game at all. But it doesn’t keep you there. You have to have a clear brand message, not confuse it with mixed signals. And with the Internet we will be allowed to compare brands, one against the other. So brands will compete with other brands on price, quality . . . all very easily and right away.

So brands will be competitive.

It is a very good idea to keep a close eye on China. It’s always present and it is a tremendously powerful force in the region and in the world. You could see its hand felt in the situation in Iraq. It didn’t take a forward leadership role, but it made its views known, and it expected to be counted. And it was.

The group that is running China now—and in the next decade—is tremendously competent. I watched them fight inflation when inflation was running about 20%. There was a group of people I knew reasonably well who came to Europe to study with the German Central Bank. In the course of about 60 days, ten people produced an inflation-fighting program. This is the group that will be running China’s economy over the next 10 and 20 years.

We should play good attention to them all the time. China is a force.

The nature of work is changing rapidly, and it’s about time. The old style of bossmanship, instructions, motivation, performance measurement, firing, bonuses, is giving way to independently-derived task assignment, selection from the place where the task is performed . . . even machines as intelligent agents are performing this way.

The organizations are totally different, the response time is much faster, quality is much better, and the whole system is now working very well. It’s hard to do, but it’s consistent with the notion of "Complexity" as distinguished from linearity.

So, if we incorporate Complexity in our thinking, we’ll get our work environment right.

We should remember the stamp that could appear on currency forecasts . . . that these forecasts can be injurious to your wealth.

But I’m going to make a forecast—in fact I’m going to make one even more likely to be injurious—and that is to go up against the prevailing forward momentum of the U.S. dollar which has been prevalent for the last five years or so. It strikes me that the dollar is in a very perilous condition. We’re running into a huge increase in trade deficits from a position of already huge deficits. We have massive debts to the rest of the world—in dollars to be sure—well in excess of our reserves to support them . . . 20 or 30 times as much, in fact.

And, the euro is coming along as a reserve currency to match the dollar. I suspect governments will keep a good part of their reserves in the euro as they do in the dollar. Under those circumstances it’s hard to imagine how the dollar can continue its strength.

We should diversify away from the dollar in our portfolios.

There is a battle raging in economic circles between increasing returns and equilibrium economics. In part it’s motivated by an article from about a year ago in the Harvard Business Review written by Brian Arthur of the Santa Fe Institute. It’s been challenged as to whether it was original or not. That’s really not the point.

The point is that with the antitrust actions against Microsoft and the increasing technological component of American industry, there are large sectors of the economy rapidly growing, where it looks like there is an enormous advantage to being early. There’s a "stickiness" to early market share . . . and that’s increasing economic returns, not regression to the mean.

And so perhaps it is also in the stock market. Momentum may have something to it.