I am reminded that events, timing, and personalities have to coincide for great things to happen.

I’m struck by the negotiations between Israel and Palestine (the Palestinian Authority, now). And it seems to me that the times have passed and, at least for one person, the personalities have passed. Nothing is happening there, and I’m afraid nothing will happen.

The Dayton Accord and the Oslo Agreement are dead, completely dead, and they might just as well be forgotten, although the outcomes are extremely unpleasant to forget. Chairman Arafat is sick and unable to control—even if he wanted to—the corrupt influences in his administration. President Netanyahu, who was elected on the basis of stopping the peace process, has been fulfilling that heinous pledge and has succeeded.

The time has passed and now there is no particular accord that can be reached that will amount to anything.

[On screen: line chart with line trending down]

What is this mysterious chart that I’m holding? You’ll notice that it plummets down. That’s the chart of gold prices for the last 18-and-one-half years. Gold has hit an 18½-year low. It is strange, in the midst of a climate of uncertainty, that gold—a metal that has been sustained in prosperity and hoarded in crisis—is still going down. I wonder if that will continue.

Here is a Swiss gold piece or, for those who prefer, silver [shows two coins]. People have them buried in their back yards in many emerging market countries. But central banks still seem to be selling their gold hoards. It has now reached the price—$285 an ounce—where gold is below the value where it makes sense to take it from the ground. In the past, that has often been a key for a price rise.

Can we have deflation, where commodities go down and gold returns to a sense of monetary value? Yes. I’m not a gold bug, but it’s worth watching. That 18½-year low certainly attracts a contrarian.

I’m not sure that most market participants have figured out that the market drivers are different now than they used to be. Just six months (or so) ago, the market drivers were easy credit, moderating inflation, lower interest rates, rising earnings, wide publicity of a 16-year bull market, and by some counts a 50-year bull market in equities. And the most recent experience is that everything made money at the same time . . . bonds and stocks. The last 10 years have seen about a 16% compounded rate of growth for equities versus 6% historically, so no wonder we have strong momentum, and momentum is what kept everybody in the game.

But now the drivers are different. Illiquidity. Wealth has been destroyed in many, many parts of the world to an extent which we do not realize in the United States. Inflation has gone to disinflation, to lower inflation, and now deflation. Deflation is destructive, especially for debt, which has led to a quality preference on debt where only the highest quality can pass muster and the ability to borrow is probably the only thing that counts in analyzing securities.

This is a different set of drivers, and it is hard to tell where they will drive us. The type of financial concerns we have now are rather novel in the lifetimes of all of us, but they deserve to be studied.

Russia is in desperate need of consumer goods for the winter. This reminds me of 1990, just shortly after I had received a mandate to go to the Soviet Union to look at restructuring and investing in the Soviet military and industrial enterprises.

I had a visit with a mysterious, but extremely urbane, 60- or 70-year-old Russian who was extraordinarily well-dressed at a time when nobody else had any money for clothes. What he proposed was that investors in the United States quickly send $1 billion worth of toothpaste, soap and shampoo—consumer goods—to the Soviet Union for the winter, rather than invest in military enterprises. For this, the Russian (then-Soviet) government would give a mortgage on all of its industry for $1 billion. But it had to come right away, before the harsh winter that was due to come, because otherwise there might be unrest in the streets. I indicated that no, I wasn’t in that business and didn’t know anything about it. That I would continue on the investment line.

This fellow never identified himself in terms of his official position, but it was clear that he was a person of considerable authority and was treated as such by everybody else. I suspect very strongly that he was a KGB general sent as a personal emissary of Gorbachev, because that’s what they needed at the time.

Similarly, they need that now, the same thing . . . consumer goods. I doubt we’ll give it, but that’s more important than banking or restructuring for the winter that‘s to come, coupled with their 40% decline in agriculture for this year.

I thought of his request in 1990. We’re back again.

The crop of politicians we’re going to have for the next decade or two will be a fairly sorry lot. I had a meeting with a candidate who will probably win a high public office, and he had just three principles. They were standard principles that he couldn’t go beyond. He’d been advised to not go beyond them in terms of giving anything specific to the voters but, rather, to smile and be (essentially) a Colgate candidate.

And that’s really what we’re going to have, now that anyone’s personal life can be uncovered from way back. We’re going to get some nonentities. But there’s a favorable outcome to this because the process of referendum government using the Internet is coming along.

First, we had leaders who could not be in touch with their constituents all the time, and they had to make decisions. Then we have politicians who check the polls and do their best to stay with their constituents, representing their interests as defined by polls. Now, we’re going to go right to a national town-meeting system, where referenda are done on major issues . . . and that’s what counts. Here is a confluence of weak politicians whom we don’t need anymore, new technology, referendum government, and the timing of essentially broadening our democracy.

I don’t think it’s bad but, oh my, these politicians look like a sorry lot.

Normally leaf-peeping season in New England brings another seasonal occasion in Washington. That is, the annual IMF and World Bank bash, where elegant cocktail parties and dinners are given all over Washington. The city runs out of long black limousines, to whisk the bankers around from schmoozing to schmoozing. Everybody smiles and is happy, leading to more open and more free markets. This year is different, and it is mightily different.

We’re seeing IMF-bashing by everybody. We’re seeing the Americans bash the Japanese; the Japanese government bashing its own banks; the Russians running around saying "things aren’t so bad;" Latin Americans saying "please don’t look at the arithmetic now, we’re trying very hard;" the Southeast Asians saying "we can’t solve our own problems, but if you give us maybe the next 10 or 15 years we’ll pull it out." And everyone bashing the United States for not making its IMF contributions.

What a brawl. I can’t imagine that people aren’t throwing drinks around, throwing canapés at each other. It is all very unseemly and unsettling in the first instance. But in the second, the IMF does need to be restructured, and maybe it will only come about through a bashing and a brawl like this.

It’s a barroom. It’s not an elegant cocktail party.

(Dateline . . . the tennis court . . .) Hi! Exercise times the amount of time that you do it, equals exhaustion. Everybody has a sprint or two in them and they don’t feel it. But if you sprint all the time, then you do feel it. Or if you play steadily all the time, you feel it. At least I do. So it is . . . the point I’m trying to make about markets.

The question that we ask is (drops the ball . . .): are the small investors worried and fleeing the market? Not yet. Because although the markets have gone down a lot, and we don’t know yet how much wealth has been destroyed outside the country, we have to ask whether it has gone on long enough (since April.) It will take a year or two to shake investor confidence before they actually leave the markets. No one is afraid yet. That suggests to me that we have further to go.

I wonder if I have more exercise left in me.

Napoleon needed $1 million to finance his European war and he offered the United States a chance to buy New Orleans. Thomas Jefferson correctly foresaw the opportunity to add immeasurably to the country, the United States, by doubling its size. He thus offered Napoleon $15 million, and the Louisiana Purchase was consummated. It was a great deal and it led to the tremendous expansion of the U.S. that we’ve all enjoyed.

There is another chance now. The idea is a slogan, perhaps started in bizarre circles. I first heard of it from John Ellis, a Boston Globe columnist . . . the offer for the United States to buy Siberia for $1 trillion in cash and credit. At first instance this seemed silly, and I can think of lots of reasons why the Russians wouldn’t do it. The fear of losing nationalism; the adverse reaction to the sale of art treasures from the Hermitage by various czars; and the loss of land.

However, it might just go and it probably could be put together. And it would do a tremendous amount to extending the entrepreneurial and pioneering spirit of the United States into Siberia and making it a number of new states. I think Siberia needs it. I think the United States needs it. It’s a new opportunity and this is the best new idea I’ve heard in a long time from both countries, Russia and the United States.

Buy Siberia.

It’s early to talk about which emerging market will come out of the current decline the strongest. However, I do want to make an early bet on China. They’re handling everything just about right while everybody else is handling everything wrong. They’re not asking for loans. Quite the contrary, they are going ahead with a $3 trillion public works program that would have done credit to Franklin Roosevelt in his first hundred days. They are making their peace with Taiwan now that Clinton has given (without even knowing that he’s done so) the green light to China to incorporate Taiwan. Taiwan understands it and has gone to Beijing to start high-level negotiations, not on this issue, but one that will lead to the fact that the Taiwanese issue will quite likely be solved within the next decade.

And Japan’s faltering means that China has a clear road to be the leader in Asia and perhaps over a larger sphere. China has a domestic-run economy; it has a strong food supply and distribution system that was set up during the period right after the Cultural Revolution; and it keeps the people well-fed and happy. It was devastated this year by floods, but it seems to have taken that in stride. Overall economic performance will not be 10% as it’s been for a number of years (but maybe 6% or slightly less), but at least it’s on the "up" side. China’s exports will suffer but, on the other hand, it has a very strong internal consumer base.

I think China is going to come out of this being very strong and very powerful and you’ll notice, despite its size, that it is being the quietest of the emerging markets.

The U.S. State Department has an arm called Overseas Private Investment Corporation ("OPIC") which invests in projects—and insures both projects and portfolio funds that are invested in developing countries. In the fiscal year that ended in the middle of 1997, it had insured about $4.8 billion in projects. In total it looks like it has at least $3 billion in insurance outstanding on emerging markets portfolio funds.

Overall I think we can expect that this company has been hit very hard with losses from the typhoons which have hit almost all emerging markets, with their portfolios off 50% to 60% just this year. I’ve noticed that there have been no reports from OPIC and, as yet, I have not been able to find out what its current situation is. But I think that we can expect there will be a story unfolding about very substantial losses hitting the American taxpayers, from investing directly and insuring funds operating in emerging markets.

It will be an interesting story to follow.

Corporate compensation plans are due for a major overhaul and reform. At the moment they’re a travesty and will become a source of litigation and anger on the part of workers and shareholders. Workers in the current situation and shareholders at periods of declining stock prices.

Not only has top executive pay increased the gap between lower-level workers and top executives, but top executives have given themselves attractive golden parachutes which pay off handsomely in the event they are let go for incompetence or for any other reason. Furthermore, increasingly, pay is tied to stock incentives or stock options. On the surface this seems fine except that if the stock price goes down options are nearly always rewritten to the lower stock price. This is a compensation scheme that cannot lose for the corporate executive. Compensation by this technique is not typically a deduction in income and does not reduce reported earnings per share. It really should because it is a regular part of the compensation package. This is an area that is a subject of considerable reform and will be a source of litigation in the event that we have a sustained market decline.

The enormous increase in financial news sources has come about from the 18-year bull market, at which we rest on the top (or not quite the top, but pretty near it). And I’m not sure that we realize what kind of industry we’ve built up. For example we now have seven full-time channels—from Bloomberg to CNN-fn and so forth—of financial news, 24 hours a day in this country. We’ve had an increase in investment clubs in this period of time from 4,000 to 32,000. We’ve had an increase in the number of equity mutual funds in this period from 320 to 2,500.

All of these suggest that, to 401(k) plans, home savings and the like, equity-related investment and the news supporting it has increased hugely. Now, in the midst of a decline, assuming it continues, we will see what these news sources tend to bring. We’ve just started now with the first layoffs in the brokerage industry, usually the most sensitive part of an economic decline. Will it also cause a shrinkage of financial news, or will people really want to know bad news if it continues? We’ll have to see, but I think we’ll see some shrinkage, and it’s probably overdue.

I’ve been reading A World Transformed, the George Bush/Brent Scowcroft book of the time of Bush’s presidency in foreign affairs. It’s a tremendously disappointing volume. One particular. I went to the London conference in 1990 where Gorbachev gave his last desperate appeal for engagement in the West and the transformation of the Soviet Union. He went away empty-handed. I knew something of the story on both sides, having worked with both sides in the preparations for that conference.

Bush gives the impression that he totally missed the point of that meeting of the G-7. He thought it was all about a conference on freedom in Lithuania and negotiations over START-1. He was the cold warrior, still thinking of yesterday’s issues, not the issues of the future. That is, the equivalent of a Marshall Plan modified for Russia to save, in effect, the Soviet Union from disintegration. There is no indication that he even knew what the issues were.

That’s too bad because Bush was supremely qualified for the job of a foreign affairs president. As a former representative of the United States in Beijing, former head of the CIA, former representative to the UN, he probably knew more about it than anyone else. But, oh my, his cold warrior sights just caused him to miss the key issues here, and he confirms it in his book. Too, too bad.

We are crossing the watershed where capitalism in the future will not look the same or be the same as it has been in the past century. And we can speculate on what it might be.

Capitalism has been found wanting for most of the world’s peoples, who find that it is a system which is not able to allow them to cross the poverty line, the information line or the financial access line. Rather it dead-ends people into areas, not unlike serfdom, where only the very rarest people can cross over.

And now we are challenging capitalism, as indicated by the recent awarding of the Nobel prize to an expert in welfare economics, to put on a human face. The future will be bipolar, at least, blending the precepts of a socialism that will look quite different and the precepts of capitalism. They will exist simultaneously, like the helix of a DNA. It may be multi-polar, but at least it will be bipolar.

We have to understand that and adjust our institutions to accommodate this new look.

I thought I’d share my thoughts on the Web site that you’re now watching.

I started this over a year ago to experiment with the exciting things that are happening on the Internet in the only way I can learn . . . by putting my hands on it . . . and also as a technique to keep in touch with a number of friends and colleagues around the world with whom I want to maintain a close working relationship. Those have happened. In addition to that, it has also sensitized me to some issues that I’ve been talking about, and I’ve had to do it in a more coherent way than would otherwise be the case since I’m publishing every day.

We have learned some things about what it takes to make a successful site that people want to visit. One is a consistent structure so that it’s easy to navigate your way around without long and time-consuming downloads, but still with enough graphics to make it look attractive. And also to change things daily, so that when people come there’s always something that might be useful to them. So that they come again.

And we get a high volume of repeat visits, including a high proportion of people from outside the United States. Also, we have maintained extensive archives, so if anyone wants to go back [which happens more frequently than I would have anticipated], they can do so. We are going to improve the search techniques of doing so and continue to try to innovate in that regard.

Also of course, as you know, the Internet is a very important resource for me. I have some links on the site [modem dialing in background]. You may hear that in the background. It’s one of the four computers in front of me that’s going and setting off the once-every-30 minute picture for the Web camera from Sunapee. I’m in Sunapee now, not Switzerland.

I thought you might like to see some of the links that I find particularly attractive and that I find useful throughout the day [camera switches from Dean to computer screen with four panels]. I apologize for the flicker, but I think you’ll get the point. I’m using KatieSoft, my favorite browser, which gives me four panels at once. Normally I have a satellite working, but it’s not working, so I’m chugging along at just 28.8 speed today.

On the browser we have The New York Times, which is my favorite news source—I’ll bring it up so you can see it directly. [Video switches from four panel to full NYT screen.] I look at that probably several times during the day and at MSNBC, which gives me pretty good video coverage of a variety of things that happen during the day. For financial sites, the best writing in my opinion is TheStreet.com. I look at, of course, Financial Times and The Economist several times as well, not necessarily daily, but TheStreet.com gives me a feel for the market as if I were there, as if I were actually sensing it from a trading desk. Fortune Investor is the best resource for doing screening and tracking stocks. It is worth millions and millions of dollars to have access to Fortune Investor. Also Ed Yardeni, at yardeni.com, gives me good coverage for broad indices and economic figures.

In addition to that of course you have the usual mishmash of things like shopping comparisons and so on. There are a whole variety of new things that come along. I make extensive use of videoconferencing through PictureTel and increasingly through Net Meeting. And also you’ll see the links on the site, mostly for financial sites. But that’s a quick overview of what’s here and approximately the same thing in Switzerland. I’m glad that you visit this site and I hope you like our experiments like our minicam, moving around to do things like this.

Four people make this web activity possible. First and foremost is the Webmaster, Steve Gage, here in New Hampshire, who provides technical support for me and handles the design, input and almost everything else for this Web site. He is helped by Marilyn Pitchford who works with me on almost everything and has for years, who provides editorial and everything else for the site. In Switzerland, Arthur Hefti does the technical service there and works on a variety of projects, especially those for when I’m giving a speech from Switzerland. In the background, but equally important, is Patricia Strehan at Batterymarch, who has acted as a ghost on her own time, coming up and helping me with new things. She knows and likes innovation and has continued in that way. (She’s going to have a baby now so I don’t expect she’ll be as helpful, so we’ll try to make up for it.)

Thanks to all of them and to you too.

I am here in Bermuda for an emerging markets meeting. It seems the proper place to talk about offshore finance which is about to undergo (and may have even started) a very, very dramatic change. Offshore finance existed because of a need for secrecy for almost every major country in some of its financial dealings, for tax protection, tax preference, and also for preferential treatment for investors.

Bermuda was the place for Americans and Canadians, Uruguay for Latin Americans, Mauritius for Indians, Hong Kong for Chinese. Every major country had its place. But now we will see a big change. This meeting I’m attending has been held for the last ten years at a number of places around the world. But now it no longer has to, because the climate in America has changed whereby these meetings can be held inside the United States because of a liberalization of policies.

We now have more common laws around the world—common financial laws—because people have had common legal and financial training. We are having cyber-movements of funds and communications in which people can attend a meeting without having to be in any one location. We are also having a reduction of secrecy because cross-border posses can unlock the secrets of most of banking’s privileged places like the Cayman Islands, Curaçao, the Channel Islands and so forth. The days of my visits to Bermuda and of offshore finance are rapidly coming to a close.

I’m still in Bermuda. I want to talk about a tendency Americans have of preaching. Americans like to preach to people from other countries. After all, we’ve had a better, wealthier life, so we must be right since God seems to have given us rewards on earth. We preached to the Russians and said if they would just stop the cold war, break down the Iron Curtain, and join us, they could live like they had seen in Hollywood movies. I think we welshed on that deal.

They recognize it now and we’re going to pay for it. We preach human rights but we have a pretty spotty record ourselves. After all, among our best friends are the Saudis, who are hardly paragons of virtue for human rights. Even some clear examples, like the method by which we put criminals to death, are extremely inhuman. The so-called humane lethal injection puts a scared human being alone in a pressure tank, tied down to a table, with an injection of lethal fluid ready to come in automatically. All alone, lying there, with priests and loved ones and pastors outside the containment chamber. What a very, very cruel way to deprive somebody, at the final moment of their life, the comfort of anyone standing right there.

We preach democracy in free markets but hardly seem to practice that terribly well ourselves, with the influence of campaign financing so evident in the United States, our own retreat from free markets recently, giving subsidies to farmers in difficulty, retreating from letting the markets go free. I don’t think we can preach very much until we’ve cleaned up our own camp.

What a clunky Congress. I think I’d have to agree with the Democrats who are criticizing this as the worst group of legislators we’ve had there for a long time. Not only did they avoid doing so-called people’s business for a couple of years, passing up campaign reform which most of us wanted, passing up tobacco legislation which made sense, and generally fiddling around, not quite getting their act together. But at the last minute they passed a budget which was horrendous.

It gave the defense department money they didn’t want in order to build airplanes in California, park them in Biloxi and make parts in Marietta, Georgia, satisfying Trent Lott and Newt Gingrich. They also extended, as a major piece of legislation, the duck-hunting season in Mississippi. And the legislators had one night, 24 hours, to read 4,000 pages. Even the Democrats got a piece of meddling in education by paying for, out of the federal budget, teachers’ salaries. What a mess. And it tells me if we have further to go down in the quality of legislators, it’s starting already at a very, very low level.

Among the alternatives discussed by the President and Congress over the seeming largesse of having a government surplus are a tax cut and new spending for important welfare plans.

Indeed, we did dip into the so-called surplus by $20 billion or so for emergency spending, which meant it was not subject to the spending cap. That’s strange enough but, among those alternatives, the one that was the most obvious of all was never even mentioned by anybody. And that was to pay down debt. If the United States cannot pay down its horrendous debt during boom times like these, when will it do so? And after all, the paydown of debt is the equivalent of a tax cut for every American now living or to be born in the future. It’s the best one of all . . . reducing the volatility of our economy for the uncertain times that we are coming into.

So I wonder why we missed this chance to demonstrate to the world that our fiscal responsibility sense was in order. We didn’t, we passed on it, and it sends a terrible, terrible message.

I’m giving a speech tonight at the annual banquet for the New England Complex Systems Group. My notes and the accompanying videos are attached to the Web site.

But let me just mention a little bit about the conclusions. I do think that complexity has done a great deal to give us a new lingo to look at the world . . . with emergence, adaptability, fitness landscape, nonlinear processing, and a whole new series of insights that have taken us away from Newtonian thinking in the social sciences.

However, it really has failed to drill down deep into policy-making and problem-solving to identify the specific nature of complex systems and how they can be modeled dynamically. We can go ahead and discuss the metaphors of swarms of geese and the metaphors of artificial intelligence, but we haven’t really cracked the code of deep, constructive science that goes beyond the application of a Zen-like approach to our normal problems. I hope to inspire a little bit of that in my banquet speech.

Generally the institutions that have been developed in the last twenty years have disintegrated. Expectations of what they can do vastly exceeds their abilities, and we are moving to smaller and smaller units . . . as nations as well as global institutions.

One process which appears to be against this trend takes place in Europe. The European Community is not as strong as the European Union. It exists in form and only partially in practice. The European Central Bank, formed in the rush for Euroism a decade ago, is within a year of actual formation. But I have doubts as to whether it will survive a re-examination by German socialists, a recession in Italy, possible economic problems in Greece and a re-examination yet again of the already weak link with the U.K., which of course is standing aside and waiting to join after the fact.

The euro as a currency may come into play, but may actually cause more problems and dislocation as countries alone try to form independent monetary policy separate from what they pledged to do within Europe. We must remember of course that members may withdraw voluntarily at a time when it does not serve their purpose. It is a very weak process and one that may not survive next year.

I’m sitting here with William Wirth. We have just finished watching a program from AIMR on its Web site, talking with Jim Kramer of TheStreet.com. This is a continuation of the services that AIMR (the analysts’ society) is providing to analysts around the world. Now it’s very fortunate for me because I have one of the great scholars of investment analysis from Zürich with me, my friend William Wirth. This is one of his early experiences with this kind of thing. William, what did you think of this, of what we’ve spent the last hour doing.

WW: What can I say? I’m overwhelmed with what’s going on here and in my own profession. Analysis uses the intellect. It’s part of how you think. I agree with most of what’s been said. However, I wonder that Mr. Kramer does not slightly underestimate what’s going on outside the United States.

DL: Yes.

WW: I happen to know people in Germany, in England and in my own country who, I would say, are as advanced probably. It’s a big quantity, but it’s not a majority of the people still. But the ‘Net is very well known and used also overseas.

DL: I asked him a question about why he didn’t trade international stocks. He didn’t happen to answer that, but it’s still very much sort of pan-American. Not perceiving from the American side as to what’s going on outside.

WW: Yes I was asking the same questions, but, I think "okay, his market is the United States and he was talking to them, not necessarily to people outside."

DL: The net should be especially useful to people in Russia, in China, and in the emerging countries who do not have other competing sources. They can get these things essentially instantaneously and for free and so it collapses the gap.

WW: That’s absolutely true and I think this is a unique means of bringing the world together, but we should not insist on that point, look at it in a nationalistic way. We looked at different sources on the ‘Net and one was overseas, including Geneva, and I think the people there also knew exactly what they were doing. It is, as you say, a fantastic means to shrink the world.

DL: Look at the difference between professional investors, which you and I are, and individual investors. Let’s give them some tools. Or is it so vast that they don’t know what to do with it?

WW: Well, first of all, it starts with the big difference between the United States and, by and large, Europe, with the exception of, probably, the UK. People here are more sophisticated anyway. The proportion of people here who are holding stocks is much higher than in Europe, so I think it’s not necessarily that we do not know how to handle the Internet, but for the average investor, the big investor, investing in Europe is done the old-fashioned way. He has his broker, he has his investment counselor, he is much more interested in interest rates than in the stock market. Okay, it’s been different for the last few months, but that is the big difference. People here are much more educated in these things.

DL: Before we sign off this gives me a chance to thank through the Web site, my friend William for introducing me and convincing me on the deep part of Switzerland. He tells me that I am more enthusiastic about Switzerland than the Swiss could be, so during the first years of our friendship, he showed me the advantages. And now he’s telling me that I have gone overboard, and I am like the converted . . . I am too enthusiastic. He has been dampening it down, but I thank him very much for this and we’ve been having a good time together. Thanks, William.