DAILY VIDEO COMMENTARIES

Dean LeBaron: This morning in Switzerland I’m sitting with Paul Turner from AIMR in Charlottesville, Virginia. We’re preparing—Paul and I and a host of other people in different parts of the world—for the first Webcast training session for AIMR on how to use the Web. So I thought while Paul was here he would tell us about that and we’ll pass this along to our Web site today. Paul, what are we doing?

Paul Turner: We are putting together a Webcast that will have live audio along with live Web pages that will be broadcast out to the world, including AIMR members, and will give them the same experience we hope as participating in a live conference. The exception is that they will not be with us live; they will be at their computers, at their desks, around the world.

Dean: How is this going to be any different as a Webcast than if we went around and held a meeting in one of the analyst society locations?

Paul: The main advantage of doing a Webcast is that you can do it from your desk, you can do it from your house, you can do it from the road if you have a laptop, and if you miss the live show, you can catch us on videotape, on the archive.

Dean: So this really catches it. We are actually going to do it from my desk in Weesen, a small town in Switzerland.

Paul: That’s right. In this case we’re going to do it live from Switzerland. Next week we can do it live from Hong Kong; we could do it live from Australia; we could do it live from Charlottesville, Virginia. The beauty of this technology is that it allows you to travel anywhere and connect yourself, certainly via audio, and, we hope, within weeks or months, with video as well.

Dean: Sounds like fun. We’re going to have a good time today. Thanks, Paul.

Paul: Okay, thank you!

One of the slightly sick jokes I remember reading in the Journal of Portfolio Management made a very profound point. A new researcher, a freshly-minted Ph.D., came to work at a brokerage firm from academia and was told that he would do numbers, problems involving addition, subtraction, multiplication and division—but not to worry, division wasn’t used very much. The point of that story was that what passes for quantitative analysis in the investment area is frequently static, simplistic, and does not meet the rigors of statistical tests that can be used with today’s instruments and today’s demands.

The new tests are dynamic, often involving complexity analysis and often involving destructive statistical testing to determine the limits. They are very demanding of time scales and frequently are so large and so demanding, such as high-frequency analysis, that they can only be done on supercomputers.

In today’s investment world, quantitative analysis must be the very best, not the most used.

One of the topics we were very interested in during the recent visit to Mexico, was the result of NAFTA. We have been in it for a couple of years and it was even anticipated for several years before its final passage. The Mexican business community is enamored with it. It’s doing very well, and both new factories and jobs have come into Mexico. Due to the fact that tariffs have been dropped by the Mexican government against manufactured goods, the factories can re-equip more easily.

The people hurt in Mexico have been the peasants and the farmers who are increasingly engaged in unrest. The reduction in price supports on which they so dearly depend has hurt their cottage industry of farming, especially in corn.

So, if there is political unrest and it grows more than at the moment, pressure will come from the Mexican side to renegotiate NAFTA. That reminds us that NAFTA and free-trade agreements, in general, are products of global economies doing well, and that they come under question when people begin to want to guard themselves without regard to the overall economic benefit.

We should watch free trade—it isn’t terribly well practiced in the United States anyway in industries in which we do not do well. And it will become a topic of some criticism in the future when economies slide back. We can see it in Mexico.

My friend and colleague in New Hampshire, Steve Gage, asked a very profound question during the recent dress rehearsal for the global AIMR Webcast. He said, "What is reality?" I think there was a better answer that I could have given than the one I gave during the Webcast. Let me try now.

Reality is wherever you feel you are—if your mind is there, that’s reality. If you’re a 13-year-old boy playing Nintendo, your mind is inside the machine. Or if you’re in school, and the teacher and the contents really grip you, that’s reality. Or if you’re doing e-mail, and you’re engaged in active conversation with somebody, perhaps whom you’ve never met but on a topic of mutual interest, that’s reality. Reality is usually what is instantaneous, what is part of your own mind in the sense that it’s colorful, accessible, personal and, most important, it is where you are in control. And so as we create our materials for learning, teaching and communicating, we keep in mind especially that reality is in the hands of the beholders, and they want to be in control.

I’d like you to understand a little bit about what the impetus is for the idea of work-at-home. That’s what I’m doing as I’m sitting here in the sun in Switzerland, with a background of a mountain with snow on it and a lake with boats going around. There are a few places in the world with these types of amenities, and they are going to be very popular. People will flood out of the cities. I can’t believe that work in the skyscrapers in London or New York makes sense when you can work as productively, yet collaboratively, with other people as you can from places like this. The lifestyle is good; it’s not terribly expensive. That rumble that you just heard was the Swiss army guarding the mountains as every Swiss male does for three weeks every year—this area is especially well-guarded because it is a favorite place for maneuvers. But this is part of the impetus of the at-home work. Tough, isn’t it?

Technical analysis—who needs it?

We’ve had a 16-year bull market in the United States, and the Dow has gone from 1,000 to 9,000 . . . it has doubled in the last three years. How would you possibly want to have a tool, which, even if successful, got you in and out of the market? The thing is to be in, in fact, even in an index fund which has outperformed most active managers who have tried to do better than the average of other managers—or better than the average of the market (which might be an index).

Technicians are in the doghouse. And yet, they may have their day. Let me suggest a couple who might be useful to you. I’m involved with, and am an investor in, a high-frequency data processing firm in Zürich called Olsen. Their Web site is http://www.oanda.com. They use very advanced mathematical techniques to forecast currencies. My favorite of the traditional and extremely good market technicians covering equity markets is my friend Walt Deemer. He has a complicated Web site address, but if you go to your favorite search engine and look for Walter Deemer, market technician, you’ll find it. [transcriber’s note: http://www.4w.com/deemer/]

Walt and some other technicians feel that the United States market is getting a little "toppy." Not the end, but "toppy." Will we ever know when the end is? But what a fantastic ride!

So much for forecasting. Here I am dressed to go out to run around the mountain, and it’s raining. Such it is, often, in economics as well—in fact it usually is. Right now, we’re having a most unusual but important tug of war. The institutions that were created in the last decades since World War II are frustrated by their inability to marshal the political force to carry out what they think is the will of consolidation and globalization. People want to fragment, pull back, develop individuality. Companies, too, want to merge and become larger, propelled by the results of management consultant studies that say that is the thing to do. And yet everything that we know is on the empowerment of smaller and smaller groups, the behavior of smaller units of organizations which pulls against exactly these structures towards higher and higher, larger and larger units of consolidation.

So maybe the two, in sync, will come out together, and I think it will be that culture will win out; that we will see that there will be smaller and smaller units and the big ones won’t be right. And I’ll be able to put away my umbrella—do you think? You see, now the sun is shining, so I can go on.

It’s the spring of a congressional election year. What a surprise . . . we’re going to talk about Social Security. And it’s a better opportunity now, isn’t it, because the President has already said he will allocate the "windfall surplus" towards improving the Social Security benefits.

Don’t be taken in by this discussion. It’s a fraud. The money that’s taken in from Social Security payments and put in the so-called trust fund—it isn’t really a fund. It’s invested in the government, in government obligations, out of which the general obligation of the government to pay Social Security benefits is paid. And Social Security benefits can go up and down because the terms and contracts can be changed by Congress. So, it’s really a pay-as-you-go system, little different than any other. It’s not funded. Oh yes, we’ll discuss whether to put it in the stock market now. Maybe by the time the stock market hits 10,000 that might be a good idea. Whoopee for a market distribution point when the government puts money in the stock market. So be careful. This is just spring fever. It really is nothing else.

Don’t waste your time on it.

There are lessons to be learned, from early indications, that the Irish settlement might finally be reached. After thirty years of violence, and thousands of people killed, maybe they have come together.

We can extend these lessons to other places, like Bosnia, Rwanda, and the Israeli-Palestinian conflict. What are the lessons? I think they are twofold. First it is necessary for the outside supporters to leave the actual participants isolated. In Ireland, the Irish government in the south said that they make no claim on land in Northern Ireland. And similarly, the British government said they would let a referendum go forward in Northern Ireland and let the people there democratically decide their own future. Of course, that was going to be the United Kingdom, but quite likely it would also be with greater autonomy. And also, you have to allow for political jobs for everyone. In the Irish case there will be hundreds of jobs on the various commissions, cross-border and otherwise, that will be created by the settlement.

If we apply these settlements to Bosnia it would mean that the Serbs would pull out, and maybe even also the European Union, and let the people there solve their own problems. Instead the Dayton Peace Accord calls for separation, border separation, which is artificial. That probably is not going to work in the long run.

Force the people together, pull away their support, and they will find a way to work together as they have in the past. So we should learn the lessons of the Irish case and apply them to other sources of conflict around the world.

American investors tend to ignore foreign exchange movements. Furthermore, financial analysts are hardly trained to analyze the details of foreign exchange markets. It is a mistake. Foreign exchange these days tends to lead economic activity. We have had that lesson given to us in a very strong and pervasive way in Asia.

Foreign exchange markets are huge. The New York Stock Exchange daily trading volume is only about US $20 billion. The activities of short-term US-government securities is about 10 times that, or about US $200 billion. But foreign exchange trading, as we could guess, is about $1.2 trillion, or six times that of short-term US government securities. We cannot ignore it. For its size and for its forecasting ability, we should spend time on it and not sit back and complacently consider that the US dollar is in the strongest position.

This is the year for videoconferencing, for videotelephoning and, generally, the introduction of multimedia things to everyday personal computers. That is the reason I’ve been trying to do these videos—basically to learn about the new technologies in the way I usually do, and that is experimenting myself.

You might like to know how it’s done. I have the Intel Create and Share camera on almost every computer and it operates on everything from the laptop to the desktop, and a version of it works on the tiny Toshiba Libretto which I used in South Carolina. It’s easy to carry around . . . I even have a holster for one. You can do it almost anywhere, you’ll notice that I try to change the background. I record in basically uncompressed fashion, trying to keep the messages crisp—and fail, as I probably will with this one—and then compress later using RealPublisher, which appears to be the standard for the industry. Usually it’s sent (the compressed version of less than a megabyte) over standard analog lines, although I have ISDN lines and use those quite frequently. I try to keep the file so that the download at your end is not too bad. It’s a good way to keep in touch, and it’s a good way to use the new built-in systems that are coming in the computers. And we’re going to see an awful lot more of it.

I rather like it. I hope you do too.

We tend to underestimate the impact of technology in monetary affairs. The world seems to be awash in capital. Just today I noticed that Prudential is spending about $1 billion to buy up the song rights for a variety of musicians. Investments are being made in venture capital that a short time ago would never have been made. Money is flowing around the world in ever-increasing amounts. Money supply has not necessarily increased but the velocity has increased, and money supply is a function of amount times velocity.

So as we have introduced technology to transfer money we have increased the money supply immeasurably. Actually, that has kept down interest rates. Although they seem high in real terms, interest rates are really quite low in terms of their ability to support enterprises. The United States has become a haven for this money, and capital has flowed into the United States because it’s more attractive than other places or, at least, less unattractive.

But let’s credit technology, the technology of moving money fast, with a click of a mouse, the way we do with this video.

President Clinton is currently in Chile espousing free trade. Who really is in favor of free trade? It’s a nice phrase. The answer is: any one country representing those industries that are the most productive and the most prosperous. The United States is in favor of free trade for financial services. It is not in favor of free trade for agricultural goods. When President Clinton went to Africa he heard the message that the Africans wanted to be able to sell agricultural goods to the United States. No way—we still have subsidies, tariffs and quotas, although they’re slipping, but not slipping very fast.

Similarly, when President Bush went to Japan to espouse free trade in automobiles what he was really talking about was quotas; that is, quotas for American automobiles to be sold in Japan. So, free trade comes wrapped in prosperity and it’s very industry-specific prosperity at that, rather than as a general proposition.

Let’s hear it for games. Not only am I dressed for a game, as you can see, but I’m here to espouse games as devices for learning, as devices for testing, and as devices for recording alternatives that might have occurred, but didn’t, in history.

We see kids playing Nintendo and think they’re wasting their time. They’re not. They’re learning a whole bunch because they’re right inside the game. Whether they are working off their aggressions or not doesn’t make any difference—they’re working on strategies. We’ve had chess for years which has been a simulated battle game; one, many people would even say, a game of life. And we have business simulations that are coming along. They are coming along to be just as realistic as the flight simulator is to a pilot. A game has to have a reward system and a penalty system. The case studies in business schools are games. They have to have meaningful scenarios, they can be forward-testing, rather than merely looking at history, and they can be a way of practicing for a variety of alternatives that may occur that have not occurred in the past. So games are popular. Games are here to stay and they’re serious.

It’s fun and it’s still serious.

As financial analysts, we are professional forecasters who have, I fear, a pretty dismal record. Our results are usually no better than chance, and when you take into account our expenses of achieving these results, they come out a little bit less than chance.

But we can make our forecasts more useful, even though not necessarily better, and that’s by labeling them. Let’s follow the truth-in-labeling law, which is done on food packages and everything else, and call it what it is. Let’s describe what kind of forecast we are making.

For example, if we’re going to use backtesting, let’s use backtesting. But say that’s exactly what we are doing. They come in two varieties. One is momentum. That is, the forecast is derived from our view that the past momentum will continue in roughly the same direction (straight line often) as it has in the past. Another form of backtesting is regression to the mean. That is, we think things will go back to average conditions, not back, or up or down, but return to average. It’s like a coin flip that goes ninety-nine times in one direction, and we think the next event is related to the preceding one.

Or, we can say that our forecast comes from our own insight or novelty and label it that way until we know that it’s essentially out of our head and creativity (or lack of creativity) which we will know in time. Sometimes different techniques, like high-frequency forecasting and so forth, come from this. Or it can come from news, our response to new news. I will not call this "insider information," but let’s say it is news that’s not necessarily generally recognized by others. And that is a form of forecasting derived from information.

Finally, which is the most common of all, I fear, is that we waffle. That is, we do benchmark-investing, or we stick to the middle, because we don’t know what else to do. That’s perfectly all right, but let’s label it as such. Let us say that is what we are doing, so people can understand what they’re getting when they listen us. Most of the time, a waffle is the right thing to do, but at all times we can make our forecasts better by correctly labeling them.

(four people in video)

Dean LeBaron: I’m the "mouthpiece" of this crew. This is the AIMR Webcast Crew in the little town of Weesen in Switzerland broadcasting—or preparing to broadcast—around the world to bring the insights and glories of the Internet to financial analysts everywhere, 500 of whom are eagerly waiting for the next hour to come. We are ready—all ready. I want you to see the excited faces and hear them speak. The director of the project is Paul Turner. Paul, why don’t you tell everybody what it’s like?

Paul Turner: It’s complete and total chaos as we get ready for the live broadcast in an hour, but I think we actually have everything under control. And I am now going to pass the mic to our colleague, Arthur Hefti, and he can tell you his story.

Arthur Hefti: Yes, I think we have everything under control, unless we have a power loss or something like that. Okay!

Heinz: My name is Heinz, and I’m the sound engineer. The sound is very clear and we are already prepared, so, let’s go!

Dean: We’re going!

The most important participant at the Meeting of the Americas in Santiago wasn’t even present. Thirty-five nations of the Americas were represented, but one was not and that was the most important one—Cuba. Cuba was not represented because it would conflict with American policy and America was extremely important to have there . . . so you could have America or Cuba, but not both.

And next year’s Chairman, Prime Minister Chretien of Canada, is making a point to go to Cuba for a special visit on his return from this meeting. This demonstrates that American policy on Cuba is terribly, terribly misguided. The Pope went to Cuba and, point blank, said that American policy was wrong. American policy is dictated by offenses of almost two generations ago, and it still continues, and we don’t know how to get out of it. It probably has something to do with the fact that the Cuban export of sugar will conflict with the sugar beet production in the United States, as well as the political bloc of Cuban-Americans in Miami. But wherever it is, we’ve got to get out of it and get out of it soon. It’s pretty silly.

We’re making Cuba much more important than it ever could be if we were there.

Following the AIMR Webcast, we had a number of good comments and suggestions, so I thought I might mention a few of them in my video for today.

First—one should think of the Web in terms of new applications. One of those is not having to get people together at the same time; rather, the experience can be controlled by the users, and they can join in whenever they want. We were swamped with people logging in to our Webcast, and our technical capabilities were strained because we were operating with a live event. The archive experience will be much better and, in the future, I think we should do that, giving control to people when they want it.

Next—firewalls are a problem in most corporations. A firewall censors things that you don’t want to come in, but they also censor good things. And firewalls prevent people from communicating outside. The firewall issue has not been solved in most organizations, which are going to find that their employees will work at home without firewalls or they’ll have a separate place set up at the company to operate without firewalls.

Third—we should use video. Video is easy to use and very simple and it creates a richer experience. We have that capability.

Fourth—the interactive experience is extremely important. What we were trying to do was have an exchange. I did see the questions from participants, although from a distance. I couldn’t read them but I could tell they were coming in as the Webcast was going on. But I think the users or viewers—participants, we’ll call them—would have enjoyed seeing the questions as well. We might have run them through a moderator but still put them out live so viewers would have the sense that they were participating in the questions of others. Also some of the people who came on would have had video capability, and we could have beamed their pictures, enlarged, over the Webcast as well.

Fifth—auto-translation is coming very quickly as I mentioned during the Webcast. It will be possible to put subtitles on, probably in no more than six months or a year, to give people the experience not only of English but also their own common language.

Finally—I was interested that analysts are interested in somewhat the same things that they were 10, 20, 30 years ago. And that is: "what stocks do I buy to make money for my own portfolio?" "how do I save time by doing searches?" I knew that was strong, but I was a little surprised at how strong that topic really was and I hope we were able to be helpful.

There was a great deal of interest in e-commerce, which is coming on very strong. And also some of the old—what I call principal—items that, it seems to me, will be solved in time, although it seems to be taking longer than anticipated. Things like soft-dollar payments and global trading. I think we all know where it is going and we’re all surprised at how slow it’s going, but the answers on it are fairly clear. I enjoyed the experience. I found it was rich and I hope others did too, and I think we’ll be able to do better as we go along. Thank you very much for participating, those who came in. And for those who didn’t I encourage you to go to the archive section.

(view from bottom of a waterfall)

(view on pathway around waterfall)

We are now looking at what we would call the cataract, down about a thousand feet—maybe more, 1,500 feet, about 500 meters—but at the height of the waterfall. The Swiss use this efficiently to generate power, as well as for a scenic place to hike. If you look over there, you might see some hikers and a dog walking along, getting their exercise on their way to Quinten. There are no cars along here, and the only way to get there is by boat or walking, which is what we’re doing. I must be getting pretty sick, because as I look at this I am thinking of what the inside of a silicon substrate looks like—many different paths like this. It goes down multiple pathways and gives a sense of real power.

I’ve been spending too much time with computers when I look at a waterfall and I think of a semiconductor.

What a contrast in political styles. On the one hand in Moscow we have had a parade of old-time, machine-politics activities. Yeltsin has installed yet again a new person to take the blame for the disaster that is occurring underneath the Russian economy. And this time he didn’t even make the pretense of getting somebody who had national stature but was rather clearly a puppet. And he used machine politics—perks in the Duma—to get them to reluctantly and secretly go along rather than lose their apartments and cars.

At the same time, out in the middle of Siberia, in Krasnoyarsk, there was a new leader emerging. Lebed. I’ve commented on him before, and here is a point of policy and principle. Lebed is impeccably clean as far as politics is concerned, or so we suspect; tough; and he is reminiscent of the campaign of Robert Kennedy who used a base in New York to launch a presidential campaign on the basis of liberal issues. And so it is with Lebed. He went to a place where he had not lived, seemingly he has won and, in the wave of nationalism that is occurring throughout Russia, Lebed will be the man to watch in the next couple of years—not the games in Moscow.

Bull markets, the really strong ones like this, go up, climbing a wall of doubt. But those doubts continue to exist and frequently come along to confirm the decline in an I-told-you-so type of fashion. And so we must watch this time for just that, if any, from this lofty perch where we sit.

What are those doubts, potentially? Here are some of the ones that we have already discussed: the year 2000 problem of computer conversion; the rising tide of nationalism around the world to replace the global movement that we’ve had for the last generation; the unrest on the part of populations who are concerned that the apparent prosperity has only benefited the few, not the many; and income dispersion that has widened.

Also terrorism, a force that we have no idea how to stop. We know that individuals can be empowered to use simply terrible weapons, and there is no particular form of protection that we have for that.

And companies, those companies in the United States, have learned that instant gratification comes from mergers, while operations come from smaller and smaller units. So we are shifting to having to feed our own financial greed with more and more artifices.

These are a few. They need not necessarily be troubling, but they are present and overhanging us. It’s worthwhile to look at them from time to time . . . perhaps, particularly, now.

I was reminded on Sunday, in reading the online edition of the New York Times Book Review, that this is the 150^th anniversary of Karl Marx’s Communist Manifesto. One of my great possessions is not one of the original editions but one published shortly thereafter, in English, of the little 23-page pamphlet. It is a remarkable work that has been substantially defiled by its use in Russia—or should I say the Soviet Union—by something that has very little to do with communism, but rather, a step in that direction. And I am certainly not a fan of Communism, as such, but neither am I a fan of capitalism that essentially does not reach most parts of society.

We are looking now for capitalism with a human face, a kind face—and unbridled capitalism doesn’t do it. Karl Marx gave us his message 150 years ago, and he had much to say about what unbridled capitalism would do. Since then it has given us many, many good things, and the alternatives would be substantially worse. But he reminds us that the quest for a new definition, a new capitalist manifesto, if you will, has a great point.