DAILY VIDEO COMMENTARIES

As Bob Rubin has said, we are in completely new ground as far as global markets are concerned. None of us has the faintest idea what will happen now that they are so well interconnected. But I was struck not so much by the interconnections as by the lack of some other things that I thought would happen by now.

About 20 to 25 years ago, I thought we would move from fractions to decimals in the same way other transactions were done on the stock exchanges, and it hasn’t happened yet . . . it will help investors when it does. I thought we would have electronic trading without specialists but with, essentially, computers and their intelligent agents acting as specialists with a completely open book. I thought we would also have completely global markets and integration with full information on every market available all the time, thereby allowing markets to arbitrage themselves. And finally, and the most bizarre of all, I thought we would have encouraged insider trading by now. It’s going to happen. And we want the knowledge of the insiders in the market—we need to keep them in, not out. But these haven’t happened, and they won’t happen until we have a market decline. And then they will happen, and we will wonder why we didn’t do it before.

Somehow, spring seems to be the time to take stock of what one has done in the last few years. And look ahead and see how you can do better. And I thought I would stand here by my view from the window, so you can see what I look at as I do these reflections. It seems to me that I have made a number of forecasts that haven’t come true. For several decades I’ve predicted fewer people in the investment business, and that hasn’t happened. I have expected costs to go down; yes, they have a little bit because of indexing but nowhere near as dramatically as I thought they would have or still think that they can. I thought there would be less travel, because we would learn how to move information and absorb information without expensive and needless travel. That hasn’t happened.

I suppose, on the offset, that I’ve had a few things right: small stocks; globalization; the cult of the equity. Yet somehow I have the feeling that most of these things have sort of played out and, at least culturally, we are at the end of a market cycle. But I don’t know what comes next. I hope I do better on forecasting.

This is the first of a two-part series that I wanted to do just before I left Switzerland. The first will be on Swiss democracy.

The Swiss pride themselves in their democratic lineage. It has been one hundred and fifty years since the confederation (the equivalent of a constitution) was set up among the cantons—they came in at staggered times. I just went today to a canton town meeting. It would be the equivalent in the United States of a town meeting with all those citizens of a state. This was in Glarus, about 15 kilometers from here, where there were thousands of people present, all in their Sunday finery, and each one had an opportunity to speak, if they wished to, at the meeting. It was very formal; it was very dignified; and the representatives were elected. Those who were not hung their heads in public as if they felt publicly shamed. Everyone had a chance to speak.

Why does it work? It works because the Swiss have a very egalitarian society. There is not a great deal of difference between the highest income and the lowest. Income distribution is really one of the flattest in the world among the well-to-do nations. The living standard is very good here, it’s on a par with Sweden’s, and yet, in both places, Sweden and Switzerland, the social safety net is very high. But it has not seemed to stifle initiative. The Swiss have, like most Europeans, a very strong appetite for vacations, and most of the Swiss men take out three weeks to defend the country in obligatory military service which adds an extra burden on the nation. Overall, however, they have a huge sense of pride. Especially at the canton level and also at the local level. The Swiss, I think, have much to teach us. And I rather hope that they hold on to their present system and don’t get caught up entirely in the Pan-European rush.

"Nazi gold" is a title that has a sinister ring to it. It is especially sinister in Switzerland where many of the events of World War II caused the Swiss citizens to feel concerned and ashamed.

They were surrounded by the German axis at that time and were afraid of being overrun. Switzerland has almost always had an island mentality. It has no minerals, no agriculture, and the only thing it can do is fight to keep its independence. The Swiss bankers put on the secrecy provisions during the early 30s largely to accommodate and, indeed, to exploit, from a business standpoint, the opportunities of flight capital from Jewish families. And, of course, the Jewish families did not want to reveal who they were. The last thing you would want to do is to put your own name or a family name on an account. So you took the money out, knowing it would be worthless inside Germany, and maybe if it got out, there was some chance maybe you, or somebody else, might get a chance at it later.

It is true that, over the course of fifty years, dormant accounts largely earned little or no interest, and much of the time Swiss banks had negative interest rates because there was more capital flowing in here. And Swiss banking charges are notoriously high. I have jokingly said that any general manager of a Swiss bank who allowed a dormant account to actually grow in size, instead of shrink, would be fired for not charging enough. There would be almost nothing left after 50 years of bank charges and negative interest rates.

But now the Swiss bankers are charged with proving who are the rightful owners of these accounts, and most of the accounts are terribly small anyway. The Swiss bankers have not been very sympathetic to the plight of the families of Jewish people who might have had some assets before or even during the early phases of the war. They fell back on legalisms rather than concern. Now they are paying the price in terms of having to buy their way out in some kind of a settlement in order to appease international recognition for compassion. But in reality it is not the bankers’ job or even their ability to determine who are the exact surviving relatives of owners of accounts which they may have never known the particular source of, in the first place.

It’s a terrible mess. It will be settled, but it won’t be settled in a way which makes people feel good on the basis of principle. It will be settled on the basis of tough financial negotiations which gives everyone a bad taste. It’s too bad. It shouldn’t have come to this.

I wonder if anyone has figured out that the throes that Microsoft is going through now have some parallels with the United States on the world scene. Microsoft dominates the operating systems, as we all know. English dominates so many parts of the world—in the fields of commerce, air travel, military, even culture . . . popular culture. Microsoft controls the desktop. The United States controls business practices around the world, which practices increasingly become more American-like. Microsoft is rich, very rich. Perhaps it is a little bit lucky, too, because it hit at the same time the world was receptive to PCs. Maybe the United States is also rich, and perhaps a little bit lucky. Microsoft benefits from having stock market performance that allows it to hire the brightest people. It has what we are calling these days the economics of increasing returns, which is an old notion. The United States is also benefiting from the economics of increasing returns.

Also, Microsoft makes a plea for the cultural advantages that it brings called innovation, says it is symbolic of innovation, and in a sense it is. The United States makes a plea for human rights, and that’s an item which, yes, is true here, but we’re not as strict at applying that across the board as Microsoft is even in applying innovation. Yes, we have our failures. Microsoft has failed thus far with Microsoft Network. It has a big gap between what it wants to do in terms of the connected world and what it can do on the computer, and its programs are gigantic. The United States is also muscle-bound, muscle-bound in the military, and it has failed. It can’t control Israel, which is probably the most client-like state that America could ever think of. And we have steadily widening incomes. We haven’t succeeded in bringing capitalism’s benefits to the people who may need it most.

So as I see Microsoft go through its court problems and see the industry lashing out at it, and even consumers who buy its products lashing out at the inadequacies of Windows 95 and the like, I’m also wondering what this portends for the future of the United States. Will there be a time in which the nations of the world perceive that the United States is like Microsoft? That it has brought many advantages and done many great things . . . it’s just a little bit too rich and a little bit too smug to get away with it.

The financial safety net in the American economy and American markets are gone. It was reported by my friend, Lincoln Rathnam (who in turn was quoting Martin Barnes, a bank credit analyst), that financial assets—net financial assets as a percentage of GDP—in the last twenty years in the United States have gone from 10 percent to less than one percent. That means it is about zero. That’s the value of all financial assets minus indebtedness.

So the US investor these days is flying on a high wire, and there’s nothing underneath. And we all know what happens to high wire acts. Someday they have their Detroits. A typical American family has approximately $1,000 in net assets. That is way too little, and it means that the family is betting on crossing the high wire and getting to the other side. Someday, sometime, they will want a safety net under that act.

But meanwhile, it sure is exciting . . . and we are applauding.

Let’s hear it for shoppers . . . their day is coming. On the Internet, we saw that shopping was only a couple of billion dollars last year. It is about $75 billion this year, and it is supposed be a trillion dollars or more in a few years. It is growing very, very rapidly.

The reason it’s growing is not because you can just replicate what you saw in a catalog a few years ago, now on the screen, and order by e-mail, it’s growing because you can do entirely new functions which empower you, the consumer. You can see a chart of past prices of products. You can find any retailer for a particular product across the country who is willing to ship to you at the lowest price and the best availability. Furthermore, you can even take charge of the pricing by participating in auctions. Now, airline tickets are available on an auction—you set the price at which you want to fly, and the airline accepts or rejects. It is a reversal of the old role. And you can extend the same thing to other products as well—consumer products, computer products and the like. Almost every thing will be engaged in this sort of two-way transaction where buyer and seller meet in an auction-like environment. It is a new shopping world, and if you own shopping centers, beware. You can’t do it there.

So, the consumer is empowered. You’re in charge. Have fun, shoppers!

About 25 years ago, there was a pop psychology fad called "transactional analysis." It actually made a lot of sense—the "I’m OK, you’re OK," aspects. We are going to hear more of a new mutation of that called transactional relationships. With the new tools on the Internet, things that heretofore could not be measured in transactions are now going to be measured. We are going to measure things like exchanges of information. We are going to measure intangibles: satisfactions; security; risk. Not just in monetary terms, but in new terms, perhaps called units, perhaps called personality characteristics, perhaps called anything else . . . development units. But we will measure them and almost all forms of interaction—human interaction—will be measured in terms of these exchanges of units. And everything we do will be counted and measured. That is going to be the transactional relationship. It is my candidate for the next pop psychology . . . and it will probably help a lot, too.

I have just returned to the United States from Europe. I’m a native of the United States, of course, so it’s not a matter of first impressions. But I was struck as I came back this time by some differences that seemed to hit me more than before between Europe, where I’ve been, and the United States.

The first thing, of course, is consumerism. I went to a food store, as I’m inclined to do shortly after arriving here, and in Switzerland, but here I was struck by the enormous variety of options—consumer options—that were available. This is truly the land of consumerism.

Next, watching the news, reading the news, I was struck by the fact that the news was mostly local, mostly violent, and it was temporary, fleeting. These were not long-term stories. Stories about Israel and the Palestinians were over the current negotiations rather than over the perspective of the Rabin government and what is happening with Netanyahu. Similarly, the stores on local politics. The United States is clearly pulling inward, and you can see that in a variety of aspects in the newspaper.

I found I was struck by the variable performance. People who do things for you sometimes are very good, extraordinarily good, and sometimes very bad. And in a sense you have to monitor this and struggle with it. In Europe it’s more stable, similar . . . an above-average level, high average, but never particularly declining, but on the other hand, never surpassing by being spectacular.

So these were the immediate differences: the US is shorter-term, local, and interested in self and consuming. I’m not sure it’s bad, but it sure struck me hard this time.

I doubt we can live in a world in which disarmament is really possible. India bunched its group of nuclear tests together, received international condemnation, and then appears contrite. That is "blitz" timing, in a public relations sense. If you want to do something bad, do it quickly, get it over with, and then appear contrite. Hitler did it in World War II, invading small countries and then proposing peace conferences. Similarly, the United States is one of the non-signatories of the land mine proposal and received condemnation. However, we continue to go ahead in favor of land mines although most countries have seemingly rejected them.

The next level of weapons will be terrorist weapons—biological, in most cases, chemical. And I don’t think we can keep the lid on those. We are probably one of the major testers, and we are going to see more and more of those as we go on. It will be a hostile world.

Steve Gage: Well, just that we’re struggling with some balky computers here at the last minute, trying to get various components of Dean’s coming extravaganza together. I think it’s going to be very interesting and people are going to learn a lot because nobody can push the envelope like Dean can.

Dean: Well, thanks. We are going to try to do that on Wednesday. We’ll see you there!

A longtime friend of mine, Stu Myers, the head of the Finance Department at the Sloan School at MIT, said that there were always 10 problems in finance that were intractable. If one was solved, another would come in, perhaps because we could count on our 10 fingers, or 10 toes, I guess. And now I think we can apply the unit-of-10 circumstance to other fields: world affairs; almost any professional field. I always try to keep a list, following Stu’s advice, of the 10 problems to think about. The surprises here could be favorable or unfavorable, but there are surprises no matter what happens. That’s the nature of an intractable problem.

On the world scene, a couple of my candidates at the moment. Terrorism above all others. Not necessarily external terrorism, but internal, the most insidious of all. We can see that cropping up around the country, and the world leaders who have recently been assassinated have been assassinated by their own people. We may see more of that with bigger and more tremendously devastating weapons. Similarly, another problem is that the sweep of capitalism around the world has widened the income gap. It’s created the potential for violence and dissatisfaction even more than it was before . . . the distance between the haves and the have-nots is steadily widening and we don’t know what to do about it. And it’s getting worse. Computers enable the haves to have more and, without them, the have-nots are left out. Unless we put computers in their hands, nothing will happen to change that. So those are three: terrorism; income gaps; and computers. I’ve got seven more, and it’s worthwhile putting them down. But I don’t want to reduce the fun that you would have completing the list or even telling me that mine aren’t very good. You should try to do it.

Have you thought about what you are going to do to celebrate the change of the millennium, for the year 2000? It is only a year-and-a-half away, so it’s not too soon to start planning now. One alternative is to have a big whoopee somewhere. And I suppose most people will do that. But we’ll celebrate it another way on this Web site. Let me tell you about it.

I want to take a month or two to study each century of the past millennium, starting at the year 1000 and immersing myself in the centuries as they go by, finishing on December 31, 1999, the day at which it will change. Hopefully this will condition my mind to spring forward a little bit into the next millennium and try to peer around the corner and look ahead. I’m not sure I can. But on the Web site we will have a syllabus for each century so that you can go along with me if you’d like to.

I’m not sure that I can promise you much fun in Europe during the Black Death, but we’ll find some joys and triumphs, much as the human condition has been for the last thousand years. Come join me!

Would you like an investment that is almost totally uncorrelated to the stock market and equity prices? Unaffected by changes in interest rates? Insensitive to foreign exchange? An investment that is a basic commodity, absolutely necessary for life and sustenance, for which there is an assured rising demand related to population and lifestyles, living standards, and a stable and, almost assured, declining supply? A necessity, as I said before, that is completely global—one for which there are investments that range from the high technology side, biological, all the way down to the generic, tonnage-type product? An investment that is completely unexploited by investors around the world? There is such a thing—it is water, pure, simple water.

Water investments meet all of these requirements. And there are investments in water that relate to the transportation of water, to the source, water rights, desalination and filtration, and distribution. It is possible to put together a portfolio of this nature, one that would be quite attractive to investors. Maybe we should try it.

We have a global financial inter-connectivity that we’ve never had before. We have a common banking system, the G-7 (or G-8, as it’s sometimes called). We have the ability to flow money electronically around the globe, instantly, in unrestrained amounts, and with no transparency. We have a common educational system for business people based largely on the American model. And we have the notion that Adam Smith’s unrestrained capitalism for the individual produces the best common good. Even a common desktop, the English language.

Now, when one of our global members gets into trouble, whether it be Korea or Indonesia, the others feel, perhaps quite rightly, that a major rescue package at any cost must be contained. It is rather like a diseased patient with a potentially contagious disease—the only way to stop it is to come along and put the diseased patient back into the population. The way you would normally take care of a diseased patient is by quarantine. This is a new method. It’s rather contrary to the position you may be in in long wave dynamics where cultures and politics are pulling people apart.

Isolation is becoming more common and the institutions are more collective. Its tug is causing great strains and misunderstandings. I’m afraid we may see more of it. And I don’t quite know if we have any idea what the outcomes will be.

Companies that succeed have succeeded according to a dedication to service, no matter what. A recognition that the customer is king. Companies that fail are those who work the rules, establish official rules that hold, no matter what—the epitome is a bureaucracy. A company that succeeded against a bureaucracy was United Parcel Service, UPS, which showed the U.S. Postal Service how to do business . . . by service. Now, post-strike, UPS is different . . . watch it go down hill. It is operating according to "rules." No longer do drivers service the same route all the time. No longer is the rule broken about having a signature for places which are known to driver and recipient. No longer is it possible to deliver packages which essentially might have been undeliverable before. Now they go back into the system.

Meanwhile, the U.S. Postal Service sends out special messengers to deliver goods from remote post offices. They are soliciting customers by having Postal days. And, not surprisingly, some shippers are offering U.S. Postal alternatives whereas before it used to be UPS-only. UPS, post-strike, is a company in decline. UPS, pre-strike, was the one that showed us that service counted. Let’s watch how this happens.

About 25 years ago, a friend/colleague and I were working to improve securities trading. We thought that within five, perhaps even as long as 10 years from then, it could be virtually free, fully transparent, global, instantaneous. With complete openness on transactions and trading. With fully disclosed order books so that investors would have a fully optimum market.

Now, 25 years later, we just had a conversation and the same issues remain. Markets are extremely backward. Perhaps it’s a bull market so nobody cares. The New York Stock Exchange trades stocks in fractions not decimals. NASDAQ is integrating backwards, joining the American Stock Exchange. And the Securities Exchange Commission is still coping and has not wrestled yet with issues of the Internet.

E-commerce is soaring. Consumers—investors—have learned that financial transactions over the Web are safe, secure, and can be done in a timely fashion, a convenient fashion. E-commerce returns a great deal of the purchasing decisions, power and information to them, the consumers. One interesting aspect of this return of power to consumers is auctions, auction sites. Now, airline tickets are auctioned on the Web between airlines and consumers. Consumers bid. Furthermore, electronic equipment, computer equipment and almost everything else can be found on growing auction sites—OnSale.com and eBay.com are just two of them—and the auctions are going straight up . . . through the roof.

It’s too bad the financial markets, which I commented on yesterday, have not learned what these types of transactions are showing them. And that is that consumers like to have transparent, open markets where they have a fair shake. I would have expected it in securities, first, but it’s taking place in auctions.

Group investor visits to countries or companies are most often viewed as propaganda opportunities by the hosts. After all, having a group arrive presents the chance to make your case, often with reporters around, in a way which you consider to be most persuasive. These visits are most frequently arranged by investment bankers who expect to get financing as a result.

Such a group is currently going through Russia and will go on to Kazakhstan. I am usually part of this group, the Russell 20-20. They were in Moscow this last weekend and were addressed by the new, young Prime Minister who steadfastly told them what they wanted to hear, and they were encouraged. But I don’t think we should have expected anything else, other than this particular speech. Nor do I think it adds any great new learning for us. The so-called reformers know that foreign investors want to hear that reforms are continuing. So, in a sense, it is a set piece and we must be very, very careful to view it as such. Sometimes that’s a little bit easier to see from the outside.

Events in Russia are at a critical point. Whether one can judge them best by being in a propaganda situation or not, I’m not entirely sure. But I have a feeling that this group has a real challenge on its hands being there, right now.

The nature of work is changing. And that is the reason I picked this particular location for today’s commentary. I’m sitting on a boat. Am I working or having fun? The answer is . . . both.

Work, in the days in which it was brawn instead of brain, was something that you did in order to live for the rest of your life. Today that’s not true. Work, in your entire life, is entirely mixed up with pleasure, satisfaction. With growth, progress. And it may be on a boat as well as in an office—or anywhere for that matter.

In today’s connectivity it’s very hard to tell who is the boss and who is the employee, and they switch from time to time. We used to tell by who paid money to whom, but in today’s information exchange, when you’re a part of a network, money is only the way to settle incomplete transactions on other units of value. So, I may be working here—in a sense, doing these commentaries is work—but it’s also fun. And it’s even more so when I do it on a boat.