DAILY VIDEO COMMENTARIES

Chat doesn’t sound very serious, does it? But it is. It’s a way of keeping in touch with people . . . it’s what we do all the time. It’s what a manager does in managing by walking around. Just keeping in touch with what people are doing, how important it is, and being present.

There are two types of chat that occur on the computer. Both are important. One is the development of communities which is one of the hottest areas of computer activity where affinity groups grow up—there are tens of thousands of them and they occur all the time with people exchanging views, usually very confidential views of important topics.

The second is the impromptu chat. Things like NetMeeting within Microsoft or the Buddy System in AOL are coming along very fast—you can tell if somebody is on the computer at the same time you are, and exchange thoughts like, "How are the kids?" or the like. Those are ways of keeping in touch and reaching out in a very highly visible way, with video too.

Chat’s something to keep in mind . . . and use. You’ll like it. It’s fun!

We’ve watched young kids playing Nintendo for hours and hours, and we thought nothing was happening. We were wrong. It is the forerunner of business-type simulations and the spreadsheet revolution that started with VisiCalc, went on to Lotus 1-2-3, and is now coming to complicated 3-D sight maps. Simulations and these types of spreadsheets are coming together to portray business graphically and in a meaningful way. Combined with complexity engines that do not guarantee a specific outcome from every event, you can play through business possibilities. We can train ourselves and do forward testing rather than relying upon the historical accidents of backtesting.

This is the new frontier, and it is right at our doorstep.

I wonder if the current wave of mergers creating the new behemoths is really what should be going on. Computer technology is empowering individuals to do marvelous things. Projects are taking the place of process. No longer do we have permanent constabularies of process administrators keeping the wheels of business moving but instead we have projects where the "administration" may include customers, employees, suppliers, and temporary consultants to complete a project and then split apart. The business management of the future is very similar to a movie producer—bringing people together to engage in a creative function, and then split. People can be members of several creative teams at the same time. But in each one we have to have one who has the fire-in-the-belly to make it happen. It is like a movie production.

Artificial life is becoming a rather misleading term. There is an intersection today between complexity and biology. They are coming together in interesting ways that suggest that the old definitions of what is life no longer work because life, in every respect, can be recreated in the computer.

Admittedly I’m not dealing with issues of the spirit, which is a separate and perhaps important thing, especially so in the Eastern religions. But, aside from that, and I’m not sure that even that won’t be dealt with sometime, life appears to be something that can be recreated under any conditions. Even Darwin is being challenged and, in many cases, overturned. People at first were using artificial life to create little robots which did simple little tasks like deliver the mail and so forth.

But eventually we will ignore the human life forms and recreate life in terms of functional things within a computer. They will perform useful services, like intelligent agents, but more than that they will do other things. And it’s even conceivable—just—that life which we know now in our bodies as largely carbon-based, may well be replaced by life which is silicon-based. Carbon has a very short half-life; it doesn’t last very long. Silicon is almost endurable. So, if we’re going to go into space travel, it may be our silicon-based progeny who have learned from their carbon-based ancestors what life really is.

For some time I’ve been meaning to talk about the training and education of investment managers. Today, I have with me a guest who knows more about that than anybody else—my mother—who trained an investment manager, although she didn’t know it at the time. But I can tell you from the stories that she tells, the path by which I went and followed and became an investment manager.

There is an old adage in the investment business that managers do not pick markets, markets pick managers. And to that degree those of us who have had successful investment performances may well have been selected based upon our character and the way in which we were formed, rather than our own particular choice. But my mother knows more about this and she actually has some views on the development of a contrary investment manager.

Dean: Now, Mother, when you heard it said that your son was referred to as a contrarian, how did you react?

Irene LeBaron: I reacted, certainly. I was not in agreement with that at all. You were not a contrarian. As a child, you were not contrary, you were what I would call independent. To me, whatever you showed was independence. You wanted to do things your way . . . but that’s not contrary! That’s being an individual, and I let you develop as an individual. You used to say to me that you wanted chores to do that were responsible. You didn’t want just minor little things if I tried to find something for you to do—it had to be something responsible, and we chose accordingly for your age. Responsible, independent thinking, that was it.

Dean: So perhaps, Mother, contrarian doesn’t mean negative, but it means independent and thinking for yourself.

Irene LeBaron: That’s exactly right. It does not mean negative. You were not a negative child. You were certainly positive, very positive in your own way and you were right.

Dean: And perhaps, even in that sense, a contrarian can be going along with the consensus if he or she arrived at the consensus through an independent path.

Irene LeBaron: Yes, that says it nicely. That is exactly what you did. Your success is due to that, to your independent thinking. You didn’t have to follow the crowd, you had better ideas.

Dean: This is becoming somewhat of a mother’s commercial for her son, and I don’t mean it to be that.

Throughout the Asian financial crisis, we kept hearing the pleas for more transparency. This reminded me a great deal of Heisenberg’s uncertainty principle, which by its extension, suggested that the role of the observer in an experiment was very critical in determining the outcome. Accounting information and financial information are subjective. You can see pretty much what you want to see, within some rules, to be sure, but at least in the short-run, less than five years or so, there is a fair amount of flexibility as far as reporting profit, not necessarily honesty, but profit. You can find out pretty much what you want. The market really determines its own support and background, rather than the background determining the market.

Most innovations start by replicating old functions even better than we were able to do them before. But the really good innovation goes on to do things that could not even be imagined before we had the innovation. And that’s how it will be with the Web.

Right now we are publishing magazines and books, and engaging in transactions, pretty much the way we were doing them before, but faster and on a global basis. And, in just a few years, about 25% of Americans have become daily users of the Web. But let’s throw our minds out only a few years ahead and try to visualize those functions that we cannot even imagine now. What are they likely to be?

First, we’re going to get solutions, actual solutions to problems where the Web will perform functions for us with intelligent agents, with business simulations, and with other kinds of simulations not unlike video games, that we turn on, try something and then say, "I like that process, go do it."

Next, we can do easy comparisons of price and quality across the world. Insurance is already purchased this way; airline tickets are cheaper on the Web than with travel agents or even directly from the airlines; hotels, cars and so forth; and stock transactions. You’re going to be able to compare price and quality on the Web.

And, finally, we’re going to find ways of getting country information—information that was otherwise inaccessible to us. Just a few years ago I found that you could get a Zulu site in South Africa, although I couldn’t find any South Africans who would introduce me to Zulus. And just yesterday I visited the North Korean press office site and could see the view from the standpoint of the North Korean government.

We can do many more of these things, but these are things that would not otherwise be available to us individually. Just looking beyond, we see that the Web actually has a long, long way to go, to do things that we cannot yet imagine.

The millennium is going to bring a new type of computer virus. The year 2000—Y2K—problem. It’s real, it’s big, and it’s not easily solved.

A special commission has been established by the United States government to deal with it, because the present efforts are not good. I’m going to attach to this video one of the best things I’ve seen written on the topic. This Adobe Acrobat document comes from Ed Yardeni’s Deutsche Bank Morgan Grenfell site at http://www.yardeni.com/public/19980309.pdf. I hope you are able to view it because it describes Chairman Greenspan’s comments and views (as an old computer programmer who used COBOL) how difficult the Y2K problem will be to solve. I did some programming years ago myself and though I’m not responsible for dealing with it, I know it will be extremely difficult to clear it up. This should be watched.

Even the optimists among us have to be impressed at the market’s power. Momentum is outstanding. It overcomes bad news in the technology sector, bad news in Asia with an uncertain development. An increasing period of withdrawal and isolation and nationalism around the world. And yet the market power is strong everywhere—Europe, Asia, the United States. Money is flowing into equity funds. Short-term money flows are occurring without any transparency at ever increasing amounts. We have to be impressed with all of this.

This is the best sign for a durable bull market. Of course it is. We’ve had it for a decade. Why shouldn’t it be durable?

Let’s hear it for failure. We forget that failure is essential in a free market system that has both reward and risk. If we take risk out of the equation, the market doesn’t work. Failure is absolutely the check that we need in a system of checks and balances. After all, it occurs in a forest, where we have forest fires that occur and make the forest grow better. And so we need it in the financial system.

I fear that when we get into trouble the financial system will scream to have bailout and controls, to get away from the free market to pay off investors or whatever. And that just doesn’t work.

There has to be some pain to correct market excesses, otherwise we’ll have much, much worse pain later on. And this is a good time to think of it now, with Asia. And it will get worse.

We’ll never shop the same way again. Web shopping is something different. It is as different as shopping at the general store was from going to the catalog—like Sears Roebuck in the old days. Now with the Web we have instant comparison of prices all over the world. The consumer is empowered through his knowledge of pricing, shipping, availability and all the product specifications, much more than any salesperson could find for you.

Go to a couple of sites for computer shopping; for example, Price Scan (www.pricescan.com) or Computer ESP (www.computeresp.com).

You’ll see what I mean. Try it.

Commodity prices are following a pattern around the world. This move is consistent with the long wave principles that were first espoused by Kondratieff who described price cycles over the past several centuries. But it is more than just a commodity price cycle. We are now discussing deflation openly. And we are seeing signs of volatility in the political spheres, in cultural institutions which are giving up. And a rise in nationalism on a global basis.

A particular clash may well occur with respect to agricultural products which are necessary for export from the less developed countries. We are currently in a cycle where agricultural subsidies are very high in developed countries, and we make up for that by lending to Africa and other places so that they can survive on the money that comes from outside. But in a period of nationalism it won’t be as easy to continue global lending. We can already see some signs of resistance to that. As we pull back within our own frontiers, the pressures for raising subsidies will increase, and the possibilities of clashes over prices will also increase.

It will be a very tough and interesting time.

As we try to understand more about the operation of a new global financial system, we cannot underestimate the impact of havens. They come in two forms. Monetary havens—the United States enjoys being the leader and, in the future, will, in my opinion, share this with the new European Monetary Union, the Euro. And then also the so-called tax havens—which in many cases are used for things other than taxes—almost every major country has a haven where financial transactions are commonly done offshore. Bermuda is often the haven for the United States, although the Cayman Islands is coming along very fast; the Channel Islands for England; Mauritius for India; Uruguay for Brazil; Hong Kong for China (in the past, but I’m sure there will be another one that will come along). But we cannot understand transparency and have transparency until we understand the flows of short-term currencies and the amount of transactions that occur behind the veil in havens.

The first way we review the value of technical innovations is to find out what can be done better. But the most rewarding way is to look at the things we could never have imagined before that would have been impossible to do.

Let me use GPS—Ground Positioning Systems—as an example. I’m holding in my hand a little pocket GPS unit that is a Garmon 3, which sells for about $300. It contains every space in the Western Hemisphere within an accuracy of roughly 10 yards (and even that is limited due to defense reasons). I’ll take it with me to help find my way around Mexico City.

Think of what can be done. First we are now seeing cars’ navigation systems that will speak to you about where you can find gas . . . and tell you, "Go to the second traffic light, turn right," and so on. But you can also color-code traffic directions, so that if you follow the green sections, you would get to your destination faster and easier. Ultimately, traffic flows could be distributed across the streets much better.

Similarly with respect to overcrowded prisons. We shouldn’t have too many prisons, but we do. With bracelets on prisoners confined to particular areas by GPS, you could actually have a prison be everywhere and not just in an institutional facility.

And it is all from a single technical innovation. We will see many more. This is the $300 unit that will fit in your pocket here and in Mexico City.

We need to keep alert to many more of these same types of things.

There are many theories of leadership these days, but one fact is common in all of them. That is, you can tell a good leader by whether outstanding people are selected and whether everybody on the team is outstanding. If somebody is not outstanding, they cease being on the team.

One of the best examples I recall was my first encounter with the team of Zhu Rongji, when he was mayor of Shanghai. Shanghai was one of the first cities to blossom during the coming out. You could tell that because people there wore colors at a time in which almost all of China was blue denim drab. The people in the city government were outstanding, especially those in the Reform Commission. And Zhu has maintained the meritocracy around him ever since. He has just been elected Prime Minister of China, and some of the same people whom I saw about two years ago in Switzerland, where they were studying inflation, are very closely involved with him. They solved the inflation problem, and he has gone on to economic prominence.

Good people really know what to do and they know what to do quickly.

It is curious how the goals and aspirations of business students cluster. Thirty years ago they were oriented around moving into middle management in large companies. The cliche at the time was to become a man in the gray flannel suit . . . and it was a man.

Now the movement is into high-priced services—management consulting and investment banking. After a 25-year bull market it is not surprising that services of the high priced variety are in prominence. I rather suspect that the non-consensus alternative is more likely to be correct.

It was financial services thirty years ago. And my guess is that in the next thirty years it will be something related to human services—those people who are involved with putting a human, soft face on capitalism, as distinguished from its unbridled greed.

Perhaps we can learn about where we are in the economic cycle by studying culture rather than economics. Culture precedes economics rather than the other way around. Culturally, 50 years ago, we had the development of very strong Western institutions. Governments were strong. Multinational governments were strong. The development at Bretton Woods created interlocking currencies which were strong in the agreements of federal reserve banks.

Twenty-five years ago, we began seeing the rise of independence of some institutions, the development of tribes and clans and coordinating activities among these tribes and clans. Individuals were beginning to feel confident about their futures and they developed a need for teamwork and coaching, rather than hierarchies and autocracies.

Now, we are even further along in the cycle. Individuals want to be preeminent. Instead of being interlocked by communications, we are empowering individuals with technology. And individuals themselves want to be measured and judged based upon their own entrepreneurial, economic returns rather than upon their membership in a team or group. This is a normal cycle of a 50-year upward economic cycle.

But the important thing is, what’s next? Do we want a safety net, or do we want an open roof?

What do you do at Hilton Head on a cold, sometimes rainy Saturday afternoon? Well, like most of the other geriatrics, you go to the movies at 2:00 in the afternoon. I don’t think I’ve been to the movies at 2:00 p.m. since I was about six years old. (They didn’t give out any free dishes, but everybody there was a little bit older than I.)

I saw "Primary Colors," which I strongly recommend to you. Of course it is an interesting story, the story of Clinton’s 1992 campaign, set mostly in New Hampshire. But more important than that, it tells us what a foolish system the primary system is in driving everybody to the wall, so most possible good people who want to serve the country can’t make it. And most who are driven and obsessed by power do make it by breaking every rule. But it all is a process of testing everybody and most people will tend to fail.

It seemed to me that the villain of the picture was not John Travolta, playing the character of the president, as described by director Mike Nichols and writer Elaine May, but Hilary Clinton, who was smart enough, driven enough, and knew enough to know the difference between right and wrong. She wasn’t as well played as John Travolta played Clinton, but she came across as the one who really should have known better and done something else. I recommend seeing it, both for the level of entertainment, but also for the lessons it will leave with you.

The news is full of interpretations of the political machinations going on in Russia. As is frequently the case, especially in Russia, I think the news is focusing on the wrong issue. It is not a case in Russia of whether to have reforms or not. Rreforms will continue . . . too many people have gotten rich and want to get richer for those to be reversed.

Rather, it is the issue of nationalism—whether Russia wants to pull back from global dependence. She doesn’t have much but does have some and is moving toward a more internal reliance upon her own self-interest and a return to the imperialism of the Soviet Union as during the cold war days. Not necessarily militarily, but economically.

People like General Lebed will rise to the fore in this period. It is not going to be the 35-year-old reformers but, rather, the tough military people who, behind the scenes, have had the power and control all along. We should watch them. They are going to try hard to be unseen. But watch the nationalists, not the reformers.

In offices like this all over the country—and by that I mean mostly the United States—plans are underway, on flip charts, to increase stock prices for companies that are publicly-owned and, for those that are not publicly-owned, to go public with IPOs . . . producing wealth for corporate executives beyond anything they could expect from their salaries. Remuneration is tied to stock prices, and that’s how people expect to be paid.

A concomitant of that has been the development of bonuses, options and so forth as the principal form of corporate payment . . . and companies and investors, are accused of short-termism. There is a very simple solution if we want long-term ideas and focus on the part of our companies. Instead of having CEOs and others paid with bonuses or stock options related to current results, change the time frame to three-to-five years hence. That is, a chief executive would be paid according to the results of a company three to five years from the time in which the bonus or option was set.

I just returned from Mexico, having spent several days there going over some of the same ground that I visited a few years ago . . . and over the course of the last 10 years. There is not that much new that you learn by being there that you cannot now find by reading the local newspapers, using a translation in my case (on the Web) or by maintaining contact with people. However, the images are more vivid.

Mexico is undergoing exactly the same type of transformation that other emerging markets are undergoing. That is they are finding that the whole focus of emphasis on reform of the financial system is not reaching the mass of the people. So you have a bipolar economy pulling out. That is, the top is reformed . . . with the rich getting richer and, underneath, the poor being even poorer. This is intolerable and, in the case of Mexico, it means crime and kidnapping as a systematic business. It means violence politically because the populations are scared; it means corruption—which is where the opportunity is. And the whole process will bubble.

No, Mexico is all right as an economy. There are good investments, but they take place in a background that is rather sad. It is a missed opportunity of globalism and reform, and it has to be fixed.

You will notice that I am not in the picture for this scene. [Camera pans across mountains.] I have arrived in Switzerland and will be speaking with you from here for the next six weeks, often while looking at this scene. And I thought it would be well for you to see it beforehand, picture-postcard style, looking over the mountains and the lake. It is summer-like weather.

More importantly, in Switzerland, the serenity masks two underlying sources of turmoil. One is the issue of the Holocaust—the Swiss will settle just to get rid of the issue regardless of the principle. They don’t understand what the issue was. The issue was their callousness during World War II and later, not the legality. The legality is that any Swiss bank account that was left dormant for 50 years would have been eaten up by fees, so there wouldn’t be anything there. But the Swiss banks will come up with some amount to settle so it is no longer an issue.

The other issue is whether the Swiss should join the EU. Eventually it will, probably right after the millennium, because the industrial French, rather than the rural Germans (where I am), will be in favor of it. But other than that, Switzerland has always been the traditional haven from turmoil in the world, where money has come when it didn’t know where else to go.

The United States enjoys that position today, and the Swiss cannot understand why they are not thriving. They’re not thriving because, in a financial sense, prosperity is elsewhere.

But, despite that, it all seems quite serene here, as you can see.