DAILY VIDEO COMMENTARIES

Let’s talk about spin and public relations. So much of news today is controlled by what it wants to accomplish. Propaganda has been taken to a high art that Paul Joseph Goebbels never even conceived of. Now, it is practiced by companies who manipulate GAAP accounting to their own ends especially at times of mergers and acquisitions, but at other times as well as a normal concomitant of a bull market.

Government runs almost entirely on spin. Not just the United States government but all governments. Public relations and foreign relations are exactly the same thing. India and Pakistan blew off atomic weapons not against each other but to play to their domestic constituencies and to prove that they deserve a place at the world’s highest table.

And visits that are normally fairly diplomatic, like Mrs. Clinton’s trip to China, become "set" pieces—everybody demonstrates that they feel free to say something publicly that they know has no special meaning. So spin has become a main feature of management. I think it is unfortunate and sinister, and that we have to unravel it to find out what is behind the news.

Fortunately there are some sources that do that, and I respect them.

Shorting is tempting in the U.S. market. Interest is limited to a few large stocks and the technology area. The market shows all the cultural signs of being in a form where there is universal enthusiasm on the upside—double-digit forecasts are common in the face of news, which appears to be worsening. And yet shorting takes a different mentality than most of us have. We are almost all products of a period in which markets have gone up for more than several decades. Shorting requires a certain form of tough-minded pessimism, and shorting also provides the possibility of infinite loss. You can lose more than what you put up because, essentially, the sky is the limit. So unless one is really psychologically conditioned to this, and unless the market has given definite indications that it is in a long down trend, which has not taken place, shorting is best left to the absolute pros and the people with daily attention to the market.

In the Middle Ages, crossbows were banned by most of the monarchies and dukedoms for about 100 years because it was such a devastating weapon. Then the protagonists could not overcome the temptation to use them, so crossbows came into general use. So it is with almost all weapons—whether they be nuclear, chemical or biological—they come into being at some time later.

I’m sitting beside a piece of a Soviet missile, which was destroyed in the first disarmament phase by the Soviet Union in 1989. I suspect this is one of the few pieces in the United States. This was at a period in which disarmament had just started, at least on the part of the Soviet Union, unilaterally, and was hoped to be matched by the United States, but was not—at least not anywhere near the same scale.

Similarly we have the refusal to completely ban land mines. And now, we have the spread of nuclear weapons to a group of countries, which we’ll call for the moment "second tier." Also, we cannot stop the weapons moving into hot spots anywhere in the world, whether they be in Africa or Kosovo, Chechnya. All of the places can get almost all of the weapons that they wish, so disarmament remains a goal that seems sensible but there has been little record in history that it can be accomplished.

We are unlikely to have disarmament unless the defense complex is given some assignment other than the production of weapons. And so it was attempted in the Soviet Union with "Konversia"—defense conversion—where the Soviet Companies Fund, with which I was involved, tried to reorganize and help extract pieces of industrial enterprises engaged in armament production and give them investments and assistance in civilian pursuits.

At no time did it—defense conversion—really happen in the United States, although there was defense fallout over a period of time in which civilian applications from defense research was applied. In the case of Russia, it looks as though the very companies that might have engaged in civilian production are going to go back to producing armaments to engage in the world trade. It is a very unfortunate circumstance and, knowing many of the people involved, I feel badly that the efforts of the past decade have in most cases come to naught.

Several years ago when I began studying the application of the Internet, it seemed to me that the Internet industry was very similar to emerging markets of five to 10 years earlier, with the excitement of discovery, with the glamour of seemingly unbridled growth and almost infinite demand. And markets were completely attracted to emerging-market countries because little was known about the risks or any of the eventual outcomes. Not so in emerging markets now. We are going through a period of increasing maturity and sobriety.

The Internet, on the other hand, is in the stage of emerging markets of three or four years ago with enthusiasm that seems completely unchecked. The latest is on portals and home base. It seems somewhat silly because the Internet arena for retailing and commerce will go through the same stages as outlets and shopping malls have gone through in the United States and elsewhere. At first people wanted the convenience of going to the same place all the time. But then they wanted to make sure that there were competitive stores in a given shopping mall, and they only went to malls that had more than one so-called anchor store. Similarly with portals, except now the shopping will be done by bots and intelligent agents, so portals will actually be of no value whatsoever. And yet, they seem to be important now.

Yes, I use Lycos as a typical portal; others use Yahoo; and I was probably one of the earliest customers of Amazon, but I can be perfectly well persuaded to use Copernic to choose among all of the booksellers on the Internet and have it do the buying for me. Yes, the Internet is emerging markets all over again, and I suspect it is going to follow exactly the same path.

We are on the upside now.

The UN does seem like yesterday’s organization. Not only does the United States refuse, unfortunately, to pay its—in excess of $1 billion—dues which is owed to the UN, but the UN is not a participant in any of the major crises going on today. It has no role in Bosnia; it has no role in the financial crisis that is affecting the Asian region. It tries to have a role but fails miserably in doing any more than having minimal relief in Africa. And, most recently, it voted overwhelmingly to admit Palestine to the United Nations in a special status, with almost everyone voting in favor except the United States.

This is the public recognition, which is correct, of the end of the peace process and the establishment of Palestine as the new Middle East state . . . in a state of confrontation with its neighbor, Israel. The UN could not play a part in mediating that process. It is an organization, which is a throwback to another time and just not suited to the new mood of nationalism which is prevalent around the world.

Service is what it’s all about. The clash between UPS, post-strike, and the Post Office is being won by the Post Office. When you visit your local post office now you will see pins and tie clips that match the stamps that are being sold. And the smile, and the service that says they will deliver the packages to you after-hours. Meanwhile, UPS, which was formerly the exclusive supplier of packages from a number of retailers, is now sharing that spot with the Post Office. It is a terrible thing to watch a company lose its franchise.

Similarly, I had the experience recently, I must say, of applying for, of all things, Social Security. And I was amazed and pleased to find courteous, friendly, efficient service. Most of it could be conducted on the telephone or on the Internet, and yet this was an organization, which was supposed to be one of the great big bureaucracies for which there was no incentive for service.

And finally, of course, the Web itself is all about service because it delivers just exactly what you want, when you want it, at the price you want to pay for it, and in as much detail as you wish, and no more. So service is about being close to the customer, and if you do what the customer wants, you can’t go wrong.

Each emerging market considers itself unique in attempting to solve its own problems. However, the problems seem to be quite common. Most emerging markets have borrowed heavily in dollars, in this capital-plentiful period, in order to rebuild their economies. Investors have also invested dollars in those economies and now plan, at higher rates, in higher markets, to take them out. And even if not at higher levels, take them out anyway because emerging markets on the whole look like a considerably less attractive place to invest than they did five years ago. This is a worldwide phenomenon, not just limited to Indonesia, Russia, and Latin America.

China may be different in the sense that it has a high surplus of dollars with its very positive trade balance with the U.S., but for others, perhaps, it is quite different. And I think we can expect that there will be continual turmoil in these countries, promoting more nationalism, more separation from the international community and yet more necessity on the part of the developed nations, especially the United States, to support them. These countries are the countries that have a very positive trade balance (in most cases) with the United States. And they buy what we produce.

It is a tough, tough dilemma and will produce more turmoil.

Hashimoto’s fall is the second major consequence of Clinton’s China trip. The first was to cut Taiwan loose, as a purely Chinese domestic issue, and that will hasten Taiwan’s move to establish independence, probably starting from its elections at the end of this year.

Second, Hashimoto’s fall is no doubt related to the recognition that China is now more important in Asia to the United States than Japan. By not visiting Japan, and over-flying it, Clinton clearly indicated that China was the important nexus for the U.S., not Japan. Also by the amount of time he spent in China. America did provide support, currency support for the yen, probably to the tune of about $1 billion, which has failed, although it did spark a pretty important rally in the U.S. stock market.

So, now, Japan has to pull itself up, by itself, and we will see some new policies on the part of the government to try to stimulate the economy. In the long run that is good, but Asia is still a place of considerable turmoil.

I’m getting ready to spend several days on a motorcycle trip around New England with a friend, and I am reminded of the fact that motorcyclists these days tend to be old guys. The average age of the motorcyclist must be well into the gray hair range, from the people I’ve been seeing.

This particular group of people is a little different from what they used to be. They are moving into retirement age, spending time with health machines, enjoying their toys more, and becoming more settled. They are not racing around traveling like they used to, except maybe for some tourist travel, and they are emphasizing living style. In many cases, perhaps, as it is for me, their pattern of life is the same seven days a week. They work some, maybe a lot, and they play some, maybe a lot, probably depending upon the weather.

It is a small group of people because we are from a pre-baby boom cohort. Maybe that’s why many of us succeeded beyond our wildest dreams.

Can the Internet survive capitalism? I’m a great fan of the Internet . . . it’s magic for me! I was an early adopter since really, I suppose, the ‘70s as far as computer equipment is concerned. And I’m an early adopter because it is magic and want to get the magic going as early as possible. Of course, I have found a number of things I don’t use, and I either give them away or throw them away. But when I find something that absolutely works, it’s terrific.

Lately, capitalism is driving the Internet, and it has to do with financings and deals and mergers. It’s not the old days where there were just a few hackers getting together to try to do something, with a remarkable new tool, that provided them with some personal satisfaction . . . now Wall Street has hold of it.

And I can see it in the quality of the products that are coming in, the matchings, and the quality is going down quite seriously. I hope it doesn’t affect things, but I fear, now that the Web is getting involved with telephony and with TV, that we will have regulators and more capitalism and financings, and the hackers are going to take a back seat. I am afraid we are all going to lose.

The Internet seems made for countries like Nepal. All of a sudden a remote land with no money is hooked by computer to the best of the world’s knowledge, at a price which is free, at a time which is instantaneous, and where distance is immaterial. You would think it is ideal. A friend of mine sent to me a review of conditions in Katmandu, which suggests that my optimistic framework is less than realistic.

In the first place, much of the news on the Internet is U.S.-based, or so they find with the New York Times and MSNBC and so forth. They have not explored the other news sources. Next, it is in English, 85% of it. Certainly, English is the "lingua franca" of the commercial world, but, for most of the people in Nepal, it doesn’t help them very much—although English is the language of the intelligentsia of that country. And finally, it is extremely expensive. There are only three ISPs in Katmandu and they charge, as a percentage of national income, a horrendous amount.

So it doesn’t always work but at least it is better than nothing, and at least it is competition for the postal service because e-mail works. Well, it works most of the time . . . when the country has electricity.

We have long been accustomed to the magic and movies of Stephen Spielberg and George Lucas, not knowing what is real or what was created by computer in the studio. But are we accustomed to the fact that we can do these things and more on our own desktops?

Buried in Word97 is a feature called Auto Summary, which will take any document and automatically summarize to abstract size or even just slim it down modestly, depending upon our wishes. There is a natural language search engine writing program called Inquisit, due to hit any day now, which will compare a written document to the style and meaning of any other written document. This can also be used to transform a style of one form of writing to another, or at least compare it and see how close they match.

And also, for general use, we have Professor Franklin’s paint program which will take any graphic picture—photo or whatever—that we have and transform it to the way it would have looked had Van Gogh, Seurat, or Monet done it . . . or even as a pen and ink drawing. So we have full flexibility to convert what we wish to what we would like to have. This is, again, another form of magic and I don’t know quite where it is going to take us.

I probably haven’t done a book report since school days, but maybe one is long overdue. I was recently motivated by a review on the Internet to read Burn Rate, How I Survived the Gold Rush Years, and I recommend it to you. It is a cultural account of what it’s like to be in the Internet business today. The financings, the venture capital, the Wall Street deals, and how business and financing get tied together in some ways which are not terribly constructive for the business.

But more than that, it is the tempo of the finger-snapping time which causes so many old fuds such concern about today’s market conditions. Burn Rate is about a very good idea, the Internet, going awry. And it is the process of financing, with its sense of "quick bucks," that is making it happen. I commend it to you. Amazon.com will sell it to you at 30 to 40% off the $25 cover price. You will read it like a mystery.

I am showing you a machine, which I have claimed, for a couple of decades, was one of the first stock-selection devices. It has dials where you can set P/Es and yields; market trends, on-off; different market phases. You push a button, and it says "buy" or "sell." This has held a place permanently in my office since the earliest days of using quantitative tools which of course have become much more sophisticated . . . computerized, global, faster and so forth. But here you see the root.

I think it is time for me to tell you where this machine came from. It is an elegant-looking machine, in a beautiful mahogany box, but I found it in a trashcan in a Boston alley. Somebody had used it, and it failed, and they threw it out in a fit of pique.

I was reminded of this yesterday when I read the article in the electronic edition of The New York Times saying that quantitative techniques were being despaired of by D.E. Shaw and others who have used them for years. Quantitative techniques are most often, at least as interpreted by their performance, rooted in history. And when they haven’t changed so very much, for very long at least, they tend to be discounted by the market and they no longer work. So, the proponents and pioneers—my peers—of quantitative techniques are frequently throwing their machines in the trashcan.

The trick is to find the new devices that will be used. We don’t yet know what they are, but the quest for them is exciting and they are worth studying. That is what I do.

All of us try to spend time systematically thinking about how to maximize the benefits of our charitable giving. For my part, I usually do it at the end of the year and I think of three segments.

First is responsibility—obligation giving—to those schools I’ve attended. To those institutions that have helped me immeasurably along the way, to whom I should give back many, many-fold over the resources they gave me, and which I was able to amplify upon.

Next are local charities, those activities, sometimes people, who are needy; who I know; who are close to me and to those who are around me; who enhance the lives of those who are important to me. I try to help those as much as I possibly can. Usually they can’t take as much as you would often like to give them.

And finally, there are the big issues. In my case they are twofold. The first is hunger—at the very margin, the base of life. To my mind nothing happens unless people can live without fear of famine. And that has almost always been the case for me. That is my baseline big issue. And second, an intellectual issue, to support those breakthrough research possibilities, which, although they have a small margin of success, can really change the world in front of us. And I try to help those, very much as a research venture capitalist.

Those are the categories. I work at it, hard, and I wonder if I should work at it harder.

We have seen occasional flashes of anger about executive compensation. There has been the case of the AT&T chief executive whose compensation was increased and, just afterwards, a huge cutback in employment was announced. Last week we saw Computer Associates’ stock go down about one-third, partially in response to very large awards that had been announced, but not publicized, for stock options. And now, the comment on stock options, which never appear as an expense on income statements as the common and most popular form of executive compensation.

But I do think in the increasing litigiousness we will see executive compensation be one of the principal issues whenever stock prices go down for an extended period—let us say several years or more . . . when shareholders lose money in an absolute sense and then find that executive compensation has been high; when options have been ratcheted upwards to be more attractive and adjusted when the stock price goes down so that it is always a winning strategy for the executive; when executive compensation includes very large payments for severance. I think we are going to see anger and lawsuits.

Executive compensation could be the touchstone for the next market decline.

It is conventional wisdom that the U.S. economy is in a healthy state of moderate inflation. I wonder if that’s true. I rather suspect, instead, that we are in a mixed economy with some features still experiencing inflation, principally wages and salaries, and others experiencing deflation, principally those associated with materials and commodities. And in the future we are going to see even more competition from lower wages from the developing countries which are experiencing extremely heavy deflationary pressures in their own economies. And it will spread here.

So our mix is surely one that we should be concerned about, with the newly emerging deflationary pressures, and not have so much patting ourselves on the back about good inflation.

If you have tried to find the appropriate prices to pay for airline tickets and telephone services, I can assume that you are confused. The companies providing those services have come from a long background of protective, regulated prices. Now, when competition is supposed to be helpful to the consumer, they have resorted to obfuscation and confusion in order to have some consumers pay a full and high price, while at the margin they use promotional services to gain new consumers and increase market share.

As yet there are no services on the Web to help you sort this out although Expedia and Travelocity, as well as price comparisons for telephone companies, give you a clue. But it is not the real answer and much remains to be done. Meanwhile, you can be paying, easily, ten times what you should be paying for services which are available—if you take the extra effort all the time—to unscramble it. It does not speak well for the corporate mentality.

Amid all the policy discussions of what to do about the newfound federal budget surplus, why are we not exploring the most obvious, which is to reduce the debt during good times? We are talking about saving Social Security and, after all, Social Security is really in a separate fund anyway, since it is backed by the full faith and pledge of the United States Government—so it is an obligation of the government, just like debt.

We are also discussing tax cuts. That hardly seems appropriate during the good times that we have now in a late stage of a business cycle. Rather we should save that tool for some other time when we need it more badly.

And we have also discussed adding new programs. Of course, there is always the collection of pork-barrel programs—those are not much. But also principal new programs such as military spending and, of course, the increasing international bailouts for other economies . . . which is investing in those other economies.

But what about reducing debt? That reduces the volatility of economic strength in the future. Wouldn’t that be a good idea?

Today is my birthday. Tomorrow, incidentally, is Switzerland’s birthday, the national day, and I am more or less celebrating them together.

I want to thank you, the number of friends around the world who keep in touch with me through this Web site, for the wonderful opportunity that you have given me. To live where I want to live for lifestyle; work when I want to work, which is usually all the time; and to be involved in innovation, which is my own special pet passion, continuously, while I’m having a good time.

Thanks much. And I have no special message other than to tell all of you . . . I hug you. And thank you very much for letting me do this.