DAILY VIDEO COMMENTARIES

In my short lifetime in investment management I have seen investment products go from being bought by investors, usually on the basis of word-of-mouth, to being sold by intensive, well-designed, expensive marketing programs. I’m not sure that this is necessarily the best development. Earlier I had forecast that investment products would be made available to an increasingly informed group of people through seminars, typically held at academic institutions.

Today, the same kind of information can be passed-on by computer through the Internet. But instead we are still barraged by rather simplistic publicity campaigns. Internet offerings are often just a repeat of regular published paper information. We haven’t yet started using the informed comparison capability of the Internet, and I doubt if we will until after we get through the next bear market.

I don’t wish that upon us, but investment marketing needs to be shaken up a great deal.

We are playing a great game of "institutional chicken" now. Most funds I know of are run by fully-invested bears . . . people who believe that we are at extraordinarily high valuation levels, totally unjustified by even modest, low-confidence estimates of what the future could bring. And the mantra of the day is to run disciplined portfolios, where discipline is a "cover" for staying close to whatever the benchmark may be. In other words, to not reflect one’s judgment, concerns or even enthusiasms, if one happens to have that about an investment’s outcome. Discipline is a better word than uncertainty, and it is a better justification than saying, "I’m doing something I don’t believe in, because otherwise I might be fired."

We are all going to reach for the wheel at the same time, and we are going to have some outcomes that will embarrass the best of us.

It is uncomfortable to watch.

Here we go on a nuclear arms’ race. At the end of the cold war, I would have said that nuclear bomb technology was dead for all time. But that’s not true. Although a propaganda campaign is underway to say nuclear weapons are not useful, we have demonstrated that they are the most useful things of all to have.

India and Pakistan received a slight slap by joining the nuclear club, and then it turned into a pat. Russia has received economic aid of multi-billions of dollars of every variety, every year, since the Soviet breakup. The Ukraine, in similar circumstances, received almost nothing, but it gave up its nuclear weapons to Russia at the behest of the United States, voluntarily. Other countries with nuclear capabilities that are at the fringe—Korea, Egypt, yes, Israel, that has it but doesn’t really publicly admit that it does, Iran and Iraq—will all want to cross the line. Even in Latin America, I suspect that Brazil and Argentina will as well.

So the nuclear race is on. The club is important to be a member of, not for political expansion, but for economic purposes. It is a high-return business.

One of the essential features of this era is the extraordinary amount of connectivity that we have—on a personal level, corporate level, governmental level. We are able to intertwine almost everything that we do in ways we have never been able to do before. My mother was here recently, and she knows that I spend a lot of time with computers, so she was concerned about my health and asked me what I was doing to protect myself from computer viruses from other people. I did not explain the kind of programs I have to try to filter that out, but she knew that connectivity was a risk.

We have benefited from competitive advantage—that each of us has become a specialist at something, and we can produce that something for other people better than they can for themselves. But no longer are we generalists. No longer can we survive by ourselves. As such, we are enjoying the benefits, but we are exposed to the risks also, of increasing returns, which has become the new economics.

At the monetary level we are at risk of becoming unable to contain financial difficulties in Asia, which may spread to Russia and could well spread to Latin America and elsewhere. Now, we have to worry about how to deal with connectivity in ways that will be beneficial. We do have to worry about our health in this highly communicative process.

Polling is an important part of the contemporary American scene. And polls feed on themselves. Approval ratings are exaggerated, and disapproval ratings also are exaggerated. Polling is a very, very complicated process. The wording of questions can have a big impact. For example, approval of the president, who is receiving such high marks at the present time, can mean, "I don’t want to answer the question," rather than specific approval. Similarly, disapproval can occur very quickly if you have a different interpretation, referring to specific actions.

Similarly for products—we can have a variety of different responses. The only poll that counts for products is the product at the marketplace and how it is sold and whether or not it has good shelf space. Whether it has point-of-sale promotion and whether or not consumers buy the product repetitively after their own experience. Polling is usually done with a very small sample size. It is highly variable.

We should be suspicious, especially now when polls seem to be so influential, affecting major policy decisions. I think that at this time, we should take polls with a good ton of salt, not just a grain.

Let me show you the dramatic chart of the Russian stock market while I speak. In the last six months the Russian stock market, which had previously been one of the best-performing of the emerging markets, has crumbled over 80%. Infusions of cash from the IMF and re-dedications of the new government to economic reform hardly caused a hiccup in the dramatic decline, most of which occurred on very little volume.

The fact that the economy functions at all after this decline shows how little the stock market is actually involved in the real economy in Russia. The stock market is of interest mostly to foreign investors, because domestic investors are involved with the managers of the enterprises who control the cash flow. So foreigners see the stock market as a way in which they can judge the health of their investments in the economy. And, with the rise of nationalism, I fear the stock market reflects the opinion of international investors for future prospects, not necessarily for the domestic health of the economy.

There are times in which the antics of government amaze me. Politicians often cynically presume that their constituents know absolutely nothing about the past and the motivations of political power. But recently I have been more amazed than usual over the issue of campaign finance reform.

I think we all know, and the evidence is extremely strong, that good politicians are kept out of office because they are unwilling to do the things that are necessary to raise the enormous funds essential to win an election. And every politician seems to proclaim being in favor of campaign reform, including the president while at fundraisers. However, the whole process of campaign reform has completely stalled, mostly at the hands, of all people, of the Republican-led legislature.

And now we have the most cynical thing of all. That is, a censure—an important censure—of the Attorney General for not appointing an independent counsel on the important issue of campaign reform . . . censure by a Republican-led legislature. Congressmen now have the opportunity to go home for a congressional election and say that they really did something—they vote to censure a Cabinet official when they, the very same congressmen, voted against campaign reform.

This is really too much and I hope the American people recognize it as such and severely chastise the scoundrels.

Like many people, I have a wealth of friends. Some are from school days, people with whom we all tested various behavior strategies—some good, some bad—and still maintain substantial and close contact. Others are people with whom I have worked when we were developing careers. And we shared our aspirations, while developing work skills to be helpful to other people. Others are friends from around the world, who became friends through travels and exchange of experiences—friends from different cultures, different places and different times. All of theses are friendships that can be maintained by e-mail and by videoconference techniques, as well as by personal visits.

But today it truly is a global village of close, personal friendships where there is a warmth, a continuous bond—often shared electronically—as if going around the corner and having a cup of coffee.

Individuals or groups in a weakened position often identify a list of enemies, real or imaginary, whom they blame for their own plight.

Recently, Hillary Rodham Clinton blamed those who dislike the State of Arkansas—I’m not sure whether many people have a view on this topic—as well as the ultra-right, for the problems of the administration. In a similar vein, Hitler blamed Jewish people, often citizens of Germany, for the difficulties that had been brought upon his country by the Weimar Republic. Indians and Pakistanis glare, and occasionally shoot at each other across the border, over issues that are perhaps forgotten—somewhat like the Hatfields and the McCoys—although Kashmir still does exist as an issue.

Russians increasingly cite the West as the source of their economic difficulty and they blame the West for the damage to their pride, their loss of strength in Europe and, most recently, for the indignity of NATO expansion. And CEOs may well become the targets of shareholders, as enemies, if shareholders become weakened by losing money in a bear market, while CEOs are seen as having made very large sums.

So it is often very instructional to see who are the enemies who are identified, and who does the identifying, and for what motive.

The lesson of the financial collapse in Russia this week is not related to Russia, although that is significant with somewhere between 26,000 and 30,000 nuclear weapons potentially at loose in the hands of terrorists around the world. But it is a lesson of the institution of the IMF (the International Monetary Fund) which is no longer effective on the global scene. The IMF is out of money.

The US Congress, among others, refuses to give it more money, and so it cannot stop the flow of crises from Asia, to Japan—a different kind of country than others in Asia, to Russia, potentially back to China, Eastern Europe, and maybe even back to the United States . . . which continues to build up its trade deficit even while we are greatly enhanced economically.

The system is broken and I doubt if we can fix it at the same time we are putting out fires. It doesn’t relate to a particular country. It is a global issue and it will take a global solution.

Politics and diplomacy both require the skill to say something without really saying anything at all, or at least saying something that means different things to different people. These skills often obfuscate more than they clarify.

About six months ago I commented on a movie which has now disappeared from the movie theaters, Primary Colors, a fictionalized story of a president who looks remarkably similar to our present one. This president had been such a successful politician for so long that he had forgotten the ability to be clear and to be honest. And he wasn’t really intentionally being misleading, he just had fallen into the habit. His wife on the other hand knew the difference, and in the fictionalized account she was the villain because she knew the difference between right and wrong and how to express it.

I’m thinking of obfuscation and lack of clarity now and wondering if some of the participants just fall into the habit and really don’t mean to be malicious.

It is just another day on the Canadian border, and it is not suitable for boating. Not only is there turmoil in the weather here, but also in Russia. Over the weekend the Russian ruble was released from its peg to the US dollar and devalued by 34%, although it was not an "official" devaluation. Similarly, payment of short-term debt was postponed although it was not an official default.

The Russian Duma will come into session on Friday of this week. This will be a political donnybrook. The Russian economy is in a shambles in one sense, but it is extraordinarily strong in others. It is commodity-based and commodities, as we know, are enjoying—or suffering—a worldwide deflation. However, the commodities are sold and are contributing to capital flight in Russia, which may be somewhere in the order of $13 billion for the past year. In the past week alone the Russian central bank’s reserves went down by $500 million to $17 billion. At that rate, as we have projected it, they are only several months away from being out entirely. The Russian government has $150 billion of loans in dollars outstanding, which it is totally incapable of meeting.

The economy needs to broaden out. It needs many, many things. Financial help right now will only stave off the most immediate dire circumstances. But the solutions are not really at hand yet.

Today I’m speaking from very close to the Canadian border on a windy day, potentially thunderstorms, so it is not very good for boating. But I am reminded here of the information we can glean from the conversion of the Canadian dollar to the U.S. dollar. It has hit an all-time low, as you know, and Canadians wonder what is wrong with their economy. Their economy is, now, as it usually is, a mirror of the United States. But their dollar is low, because their currency, with its low liquidity, is not perceived as being a haven.

So perhaps we have a measure of the "liquidity preference" for the U.S. dollar over other currencies, and it is about 10%, because that is the amount that the Canadian dollar is lower than the U.S. dollar in relation to its normal pattern. I think this figure will tell us what has been the benefit in the U.S. to having higher currency because we have been a haven . . . about 10%. And we might lose it when the euro comes into play. That is what I learned while not boating on the Canadian border.

The range of candidates for public service office has been getting narrower and narrower for the last ten years at least. Not only is the job of a political candidate bad in the sense that they have to raise money all the time, but also the job of an appointed official is extremely uncomfortable and risky. The degree of public scrutiny that one is subjected to—sometimes for a reason, but often only incidental with some other activity for which one is not at all responsible—is so wide, that a lifetime of work and reputation can be thrown in jeopardy. More and more, good people will just not want to be in public service, and that is a tremendous loss for all of us.

This is now the end of a week’s cruise on Lake Champlain. I have had a lot of time to reflect on the role of history and Clinton, and the conclusions I have reached may be worth sharing with you. Yes, the Clinton investigation has produced a number of innuendoes, a number of accusations, probably many of them true. Certainly the most recent one seems to be and that is his relationship with Monica Lewinsky. However, the others—of Whitewater, of padding legal bills, of Travelgate (which is somewhat like padding frequent flier mileage), of abuse of power—all seem very petty.

The extraordinary thing is how small they are, although each case represents a violation of principles that we hold dear. But that is not the important thing. What is really important, it seems to me, is the fact that we are not addressing ourselves to the issues of government. But that so far is not the important one either, because this government hasn’t done anything.

The economy has been extraordinary. That is probably due to things that happened well before this time, and now we have a do-nothing climate. As Pat Leahy, the senator from Vermont, has said, this Congress has been the least productive of any that he has seen since 1974. And the worst thing of all, underneath the issue of a do-nothing government, is the fact that we are avoiding those issues, which are not graphic, which are not short-term, and which are beneath all of this. Those beneath are the major issues of the next century.

These issues are really threefold. One is terrorism. Now that a single terrorist can be empowered to wipe out millions, we do address this problem, because it is essentially intractable. Another one is connectivity. Now that we have connected so much of the world’s population, and the financial systems are bringing the benefits of specialization, we do not know how to stop disease and problems when they occur within the financial system. And it runs. Furthermore, we have the final problem, which is the failure of capitalism to bring benefits to over half of the world’s population, which is not part of the global financial system. There is a widening spread everywhere between incomes of lower and upper brackets, which has always in the past produced trouble, and that is what Marx and other people have reminded us—that capitalism feeds on itself. This year, probably the best example of that at the moment is in Russia.

Overarching all of this is the development of this marvelous new tool of the Internet, which we are using now, and that is clearly coming down as one of the major achievements of this historic period. Yet underneath it we have a whole play of Shakespearean plots weaving in and out, with characters that are marvelously visual, playing their roles, and it will all make great, great history which we will appreciate several decades from now. But we are too close today to see it.

As you can tell, I’m back at home station, on land. Well, at least part-time on land. And I think it is worth mentioning that there are some ideas on terrorism perhaps worth passing on. We just started the overt fight against terrorism by bombing in the Sudan and Afghanistan. I suspect this will not work. In fact, it may even be counterproductive. Bombing mixed civilian and military targets in earlier wars has stiffened the resistance of our opponents. Bombing in World War II gave heart to the Germans that they had to support Hitler’s regime. Bombing in Vietnam convinced the civilian population that they should side with the North Vietnamese and the Vietcong. Bombing is a clean weapon on the part of the military when they are fighting against military forces. But again, a mixture does not work.

Instead, let me suggest that sunshine, or disclosure, works. Terrorists work in the dark. They engage in activities where they are always in a clandestine environment. What they can’t stand is to be disclosed. And yet, that is exactly what we should do—we should disclose who the terrorists are, in Ireland or wherever they may be, what their connections are, who deals with them and who helps them.

Typically, their supporters radiate out. Bankers, industrialists, shippers, all of these are support people who may be helping terrorists, either intentionally or otherwise. Disclosure. Sunshine. It would absolutely frighten the terrorists completely to death, and that is what we want to do.

So my suggestion . . . a war of intelligence, not a war of explosions.

Russian politics would be entertaining if it did not have such curious implications with the nuclear weapons that are present there. Now that Sergei Kiriyenko is out and Viktor Chernomyrdin is back in, what have we got?

I think—here is an unusual interpretation, all interpretations are perilous, but let me offer mine—that Yeltsin will resign. Chernomyrdin is in place as the designee, as he has always been, for the banks and for the old-boy, industrial network controlled by the banks. So it is business as usual, and there is no one else the banks could trust.

Alexander Lebed is being groomed, but they don’t really trust him, even though he is receiving some financial help from them. He is too much of a reformer in the sense of trying to clean out the corruption. Chernomyrdin won’t try. We are quite likely, as has already been tipped, to see foreign investors discriminated against. But we have expected that for a while anyway with the rise of nationalism. Yeltsin has said that Chernomyrdin is his appointed successor, and my guess is that that may come before 2000.

I have always been fascinated by a technological solution to human problems; many of you have heard me say that before. There is another technological solution to a massive problem, which seems so simple to me. And it is a way of having prisons without walls. Prison populations are growing, prisoners are expensive to maintain, and it doesn’t seem to do very much good for the prisoners as well as for society.

I attended a meeting recently at which the MIT Media Lab demonstrated a small, clip-on, electronic button, preprogrammed with an individual’s conversational preferences. The idea was that, as you moved around a cocktail party, the button would get warmer—the lights would be brighter—as you were moving towards those people with whom you were more likely to have a worthwhile, pleasant conversation.

This silly little party toy—which, incidentally, worked and produced what you wanted it to do—could be used as part of an identification, permanently attached as a bracelet or otherwise to an individual. It would limit their scope of freedom, of reference, to some specified area, their home, or something slightly larger. And you could also identify the prisoners for some period of time—the crimes they had committed, what brutality of some form, or tax evasion. It could be anything. Anyone on the outside could find out directly what the offense was and be on appropriate guard.

Is this any different than putting somebody in prison? Yes, it does provide the individual with some opportunities for mobility, albeit limited. And yes, it does protect society because society is informed as to what the predilections of the individual are likely to be. This I believe is a technological solution that would work.

Let’s talk about something more pleasant today than falling emerging markets, or investor preference for quality, or social problems somewhere in the world. Let me tell you about two incidents that I had with nature on Lake Champlain in the past week.

The first was on about a ten-mile run northwest across the lake from Basin Harbor in the southern part to Essex, New York. Moving at about 25 miles an hour, a flock of Canadian geese joined us and flew parallel with us for most of the way; we were part of the flock. I am quite sure they joined us as part of the swarm. We watched other geese climb and break apart. And we could see that there was no leader; there was no hierarchy in this swarm, but yet it operated in a very fine, organized, purposeful fashion, flying only a few inches over the water, which was glassy smooth, to take advantage of the ground effect. We were part of the flock.

Secondly, there was a small nest of sparrows in the rafters outside on the porch, only about three or four feet from where we were eating. In the nest were four or five open-mouthed sparrow babies, waiting to be fed. The parents—or at least some adult birds—would come by periodically, about every five minutes. They would fly into the 20-knot wind, hover briefly, and drop something from their bills to the waiting sparrows. The small baby sparrows had to lean forward in order to get fed. The parent birds had to hover in the winds at exactly the right point in order to transfer the food, and they had to do it all equitably, without the chicks falling out of the nest, and without getting improperly fed. It was wondrous to watch.

Through both of these experiences I gained a much greater appreciation for nature, and for people who enjoy it all the time.

This chart illustrates the dismal results—an approximate 50% decline—in emerging markets in the past 12 months. It started in Asia and became most visible and most illustrative in Russia, with its approximate 90% decline—about the same as in Indonesia, the fourth largest country in the world in terms of population. And it has been quietly going on, without a great deal of popular-press publicity, in Latin America throughout this period. The publicity on Latin America is building up.

What is all this about? We have commented here before that the mixture of rising nationalism and deflation is a very potent, negative medicine for emerging markets. The reform of banking systems means that banks have to recognize bad loans. Interconnectivity means that when something happens in one part of the world, the rest of us feel it. I am not sure that this is necessarily a dramatic buying opportunity except for those people who can watch the hourly news.

And yet, we are setting up the conditions by which the long struggle of the workout period can take place. It is probably some distance into the future, but the early dramatic decline has certainly been felt.

If you were an analyst and given only one question—a single question to ask of a company, an industry, a country—to determine the market value of a security, what would it be? Let me offer it . . . the question is about borrowing capacity. Can you borrow, how much and at what price? If you have this information you need very little else.

And currency, of course, is a method of borrowing. It is a representation, on paper, of the fulfillment of a promise to provide goods and services in the future, very much like borrowing. In the old days, borrowing was fulfilled by completion of a project and the borrowing was then paid off, or paid at the completion of a trade loop. But now that is not true. Debt is now rolled over, and the ability to re-borrow in order to pay off old debt is essential for individuals, companies and countries.

So ask yourself the question when you’re looking at a security: can the company borrow? If so, how much, and at what price? If it can borrow more money at a lower cost than its competitors, buy it. The same holds true for a country.