TRANSCRIPTS OF
DEAN LeBARON’S
August
2002
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Is It Summer, or Decade, of Our Discontent? |
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Are College Endowments Tippees? |
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Washington’s Equivalent of Lenin’s Tomb Information |
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Networking by Blog |
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PR: A Client of One |
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Engagement, Not Containment |
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Our Don Quixote |
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Where’s Afghanistan? |
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Idea: Multi-Currency Fund |
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The Black Hole of Currency: You Don’t See It But Sense Its
Gravitational Influence |
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Who’s Vote Is It? Mutual Fund Proxy Votes |
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What to Watch? |
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Jim (a name disguise): View From the Brokerage House Frontline |
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You Are Known |
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Accusers/Tipsters/Indictments ... Same As Convictions? |
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Tale of Two Choices: Cyclical or Seminal? |
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America’s Psychological Health |
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A Modern Military: An Old-Fashioned Militia |
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Score: Terrorists vs. US |
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Event Politics |
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Bolshoi Russia During the War on Terror |
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Glass-Steagall Rides Again |
Is
It Summer, or Decade, of Our Discontent?
We’re going to be able to call this year, 2002, the summer of our discontent. We are examining some of the most basic precepts of American business: globalization, individual responsibility, shareholder activism, equity participation by everyone, and yes, even the very integrity of global capitalism itself. All this is taking place at a time in which debt ratios to almost everything are at their highest level in recent history. Well I have a hunch. My hunch is that if this market decline which we have experienced really in the last two years is no more or less than a normal decline in the last 50-year bull market since the battle of Midway in 1942, that we will recover and we will go up and we have had just one more market decline, perhaps as serious as ‘62, but still a psychological one which will recover and we’ll go on to the long-term bull market. And we’re just about now. Yes, we may test this low again and yes we may fuss around here during a no news month of August, but essentially the low has substantially been reached. If on the other hand, the pillars of business that I’ve mentioned, come apart and if as I have said in an earlier commentary they’re affected with termites then we will go down to a new, lower level and one that may spiral down particularly as we learn that our fate is not in our own hands, but in the hands of foreigners for whom we have worked very hard in the past two years have worked to bring out, to manifest their dislike for Americans. Yes, we’re going to find out whether this is just a normal decline or whether this is a real seminal change in the market that occurs only once every couple of generations. It’s not a good odds-on bet to say that it is the latter, and I surely hope it is not. And we’ll find out, but my hunch is the odds are greater that it is the latter than most people would say.
Are
College Endowments Tippees?
If I was a prosecutor assigned the task of looking for places where inside information might have been obtained and improperly used I could think of no better place to look than college and university endowments. Of course, I should say that I’m not really in favor of prohibitions or going after the demons but I am in favor of disclosing what was done and to whom in some considerable detail and doing so in real time as we go forward. However that’s not my task as a prosecutor for the moment. Why would I look at college and university endowments? Well, from my own experience there are high incentives for some university endowment managers to perform because they get a share of the profits not unlike a hedge fund. For another, the willingness of college and university graduates to share their best secrets for the good of their educational institution is often overwhelming and overwhelming their good sense. So they bring their best ideas in and there are often vehicles in meetings for them to bring their best investment ideas forward. Would a highly incentivized (oh, God, what a terrible word!) manager of an endowment turn down the inside information? I doubt it. And there are some clues perhaps that it has been used. But I would look and I’ll bet I’d find plenty. Yes, if I wanted to make an efficient use of my time as a prosecutor, I’d go back to school.
Washington’s
Equivalent of Lenin’s Tomb Information
In the old days in the Soviet Union you’d learn about which commissar was in and which one was out by looking at the lineup, and the top of Lenin’s tomb. And so we have a clue this time. In looking at the economic leaders who stood behind President Bush for the signing of the corporate fraud bill or whatever it was called – and incidentally beware of anything that passes in government voted for 99-1. Yes, it will do more harm, much more harm than good. But looking at the lineup, who was missing? Vice President [Richard] Cheney and SEC Chairman [Harvey] Pitt. Well, they may have been at other places. Cheney may have been fishing in Wyoming and Pitt may have been job-hunting, but in any event, the fact that they were not there, I think, allows us to draw some conclusions. And I’m very sorry to see this bill pass so fast, without discussion. It became a remedial measure and at that, it was only a partial remedial measure. It established strict standards, stricter standards, of punishment, but not many people are punished for white-collar crimes, so that didn’t make too much difference. It established required signing requirements for corporate accounts but no one knows – does that mean everything in a corporate account? If so I don’t know if any one or even two people would ever attest to that. And is it going back to being retroactive? I doubt that. So I think in all probability it will mean less disclosure, no particular application of penalties, and it is a reminder that it will go on pretty much as business as usual, but with less information. Oh yes, and less people, because we’re going to put some new people in the lineup. It’s not a very good day’s work as I can see.
Networking
by Blog
The world wants to network. The tools that we have available today for dissemination of information and its consolidation are really quite extraordinary. I have been doing these commentaries for almost five years on my Web site and I use it to collect a variety of other things; not many other people did it then. I did it in part as a demonstration of how easy it was to do. Well, the fact was it was a little harder than I expected but now there’s a tool call Blog which a half a million people are using to do much the same thing that I do with this and that is, they are communicating to friends and new acquaintances on what things they’re thinking about and what they’re doing. And from this temporary networks evolve and form on particular problems. Indeed, I hear from a number of people who see and hear these words as of things that they’re thinking about and we tackle, through iteration back and forth, problems together and a Blog does the same thing. If you haven’t done it, I encourage you to do it. And my good friend Paul Turner who has directed me in so many innovative places has told me about Blogs at first. And Paul, yes, I’ve been doing Blogs, but I’ve been doing them in a somewhat more complicated way. And you’ve pointed out an easier way. And I hope others take your advice and follow this particular pattern to have their own Blog too. I appreciate it.
PR:
A Client of One
I can think of few administrations in recent years, and perhaps, in terms of a qualification would have to go back to Franklin Roosevelt, who have been as conscious of public relations as the second Bush administration. And yet, it is failing miserably, miserably, in exercising public-relations good judgment around the world and increasingly at home. And I think the reason for that is that it perceives that it has a clientele of one, and that is the president himself. There can be little question but that the message that is being conveyed when the president speaks on security problems, investment security problems, and business, reminds people of non-disclosure from Cheney and Harken Petroleum activities from the president himself during the glory days of a decade ago, no matter what he says, and he doesn’t say very much. Similarly, when the United States troops bomb a wedding party in Afghanistan by mistake, or by somebody’s direction for their own purpose, or when an Israelis hit seven children (or is it nine) in Palestine, there is nothing said by the United States except that it was perhaps an accident and we’ll investigate. But when four American students at Jerusalem University are killed by a bomb, the president is angry and furious. Does that support the case that the only thing we care about are American lives? It tends to do so. And similarly King Hussein, a moderate leader whom we would like to court in the Middle East, visits the White House, and the only thing the president says is, “I wanted him to hear how I feel about the course of my administration.” Notice the use of the first person pronoun. He doesn’t say I listen to King Hussein. He doesn’t say, I’m taking his views into account, or I’ll study them. Rather, “I lectured this young king on what my views were.” Is it any wonder that the United States needs a new agency of propaganda? But is it any wonder that it will fail and the perceptions of the rest of the world that have been so anti-American are being reinforced in practice rather than refuted in propaganda? It is a disappointment and it suggests to me that this public relations effort is focusing inside and not outside.
Engagement,
Not Containment
So the U.S. has a policy of containment? I didn’t quite know that but do now. And that the regimes we do not like and which we name Cuba, Iraq, Palestine, that have heads that do not meet our standards, we say we are going to contain them. Of course there are other regimes that are equally bad, Saudi Arabia notable among them, but we are friendly with those. No matter. We have Milosevic in a war crimes trial; we didn’t like him. But of course we’re not in favor of war crimes tribunals anyway because they might get us. So he’s sort of in limbo and he might die of a heart attack anyway. If the policy of containment is a failure, we apparently consider the next step to be in the direction of more violence. And containment of course is violence itself on a mass basis. But why not instead of military action replace containment with engagement? And let me suggest that the evidence is very strong that engagement on educational, cultural, economic and political levels works. Yes, we have the tools of engagement. Let’s use them and it will stop the violence. Engagement, not containment.
Our
Don Quixote
I have tried to explain the American administration to my non-American friends. And I’ve tried to use imagery because I think that’s the only way you can understand it. It’s clear that they don’t and that’s why money is being removed from investment in the United States. I’ve used the example of a Texas frontier sheriff who shoots first, can ask questions later. That’s the only way you survived as a Texas frontier sheriff. Those who didn’t do it did not get out alive. And I’ve explained the anger of some who, particularly those who’ve worked their way up from poor circumstances, like Condi Rice, who have bested others by being harder working, more diligent, more skillful and are a little bit angry about a system that made her win things that way. And others are just doing their job. They have been hired by big business to produce and they are producing a series of practices and policies that favor big business and big wealth. But in the case of the president himself he reveals who he is in now in the war on terror and specifically in his identification of adversaries whom he just doesn’t want to deal with, the so-called regime change and when he talks about weapons of mass destruction which of course everybody had, all the way from the first caveman who picked up a stone and threw it through crossbows which were outlawed for 100 years in the Middle Ages and so forth. Weapons of mass destruction are going to be with us and we have to learn how to leave with it. And similarly regimes we don’t like are going to be around for a long time and always have been and we’re going to have to learn to live with that. But instead, what we’re doing is we’re tilting at these things by labeling them as evil versus good. We’re the good and the others the evil. And I’m reminded, as I hum the “Man of La Mancha” a little bit, of Don Quixote who was protecting the virtue of his lady friend as he tilts at windmills and requires the services of his faithful squire, Sancho Panza. And of course, our president has his faithful squires who perform about the same duties. Yes, in the case of our president he discusses the apocalyptic thing that he is a patient man standing to preserve civilization and it’s to protect the onslaught against freedom-loving people and it is only as he stands there holding his golf club as Don Quixote held his lance, can we think of him going off to tilt at the windmills which he labels evil, just as Don Quixote did. Yes, that’s our president, Don Quixote. Please treat him with a sense of humor, because that’s about the only way that you can understand it.
Where’s
Afghanistan?
I’m all sweaty from playing tennis. But while I was playing, I wasn’t thinking of the scores as much as I was of the world conditions and that’s a shame. I hope the world gets straightened out so I can concentrate on the tennis because I need to use my full concentration to make up for my less than full physical prowess. But it occurred to me while I was playing tennis, where is Afghanistan now? Six months ago we were mesmerized by Afghanistan, the punishment of Mullah Omar and Osama bin Laden, the success of the war on terror and our abilities to reconstruct another nation. We hear nothing about it now except for the daily skirmishes that even occur in the outskirts of Kabul. And the pleas from our newly installed president to give them the money that was promised at the international commission and at the very minimum protect his own body, but it’s getting to be smaller and smaller. He looks like a puppet under house arrest. What’s happened there? Well, our attention is being diverted to Iraq and corporate scandals. But, meanwhile, what have we accomplished in the war on terrorists? Well, we probably spent or committed to spend about $500 billion that we haven’t spent before. We have also pushed back the rules of law, habeas corpus, where the citizens could be protected against the arbitrary arrest by government. We have lost the moral position in the world. We have now and we are incurring deficits as far as the eye can see into the future. And yes, we have taken Afghanistan, the country we rushed to save, and we have sent it back to its tribal conditions pre-Taliban. Oh, by the way, did the sheriff catch the culprits? Nope, nor for that matter do we even have any witnesses like Tony Blair who say they are sure that the culprits were culprits after all. Boy, this sure sounds like accomplishment to me in the last 18 months. I hope we don’t have another 18 months with these kinds of accomplishments. Meanwhile, I ask, where is Afghanistan? And I also ask, please let me play tennis better tomorrow.
Idea:
Multi-Currency Fund
Let me present what I believe to be a moneymaking idea for my friends in the mutual funds business. Start a multi-currency fund, a fund that invests in money instruments, certificates of deposits (sparingly), money market instruments, in a variety of currencies, currencies to diversify away the preponderance of U.S. dollar investments that most of us have. The reason for this is that Americans for most of the post World War II period have only thought of the dollar as being the currency to have. The occasional flirtations with others usually have gone awry but we may be moving into a period now in which currencies are not going to be dominated by the dollar, although the dollar is the principal reserve currency. Instead most of us will feel, perhaps a decade from now, that we should have a basket of the world’s currencies. A great deal of academic work has been done on, in a sense, what they call the unrewarded risk of holding portfolios in foreign currencies, foreign to the liabilities that one owns. But I think that esoteric argument is probably not as important as the transfer of money from a single dominant reserve currency like the dollar to others. Perhaps the multi-currency fund that I’m suggesting my friends to begin should be somewhat like the reserves of the Singapore government. The Singapore government backs its currency with other currencies around the world roughly in proportion to the trade activities of the Singapore government. And so we should do something of the same kind – hold the major reserve currencies but also a spread to other currencies as well. That would be a popular fund and to my knowledge one does not exist. I hope somebody starts it.
The
Black Hole of Currency: You Don’t See It But Sense Its Gravitational Influence
There is a mysterious but important bank in Switzerland called the Bank of International Settlements, BIS, which each year selects figures from central banks all over the world and aggregates them and for the past five years or more their collection of the aggregate current account deficits has, peculiarly enough, been in excess of the current account surpluses. Now in double entry accounting, as we are learning in the United States, chicanery can exist. And it’s not such a surprise for those who’ve studied Social Security accounting in the United States that it can exist at the governmental level. However, it is important to remember that one country’s asset is another country’s liability. One country’s deficit is another country’s surplus. The sum should be zero and you can have, of course, rounding errors but they shouldn’t be as large as they are this past year, something on the order of $350 billion. Now of course we have roughly a $31 trillion global economy. You can say, ah, that’s only one percent. But one percent every year mounts up. Where is the black hole? Normally, in an expanding global economy we don’t really care. But if the global economy is flat or if we have debt problems we might care. Let me suggest a couple of possibilities, and these are just possibilities for investigation because I don’t have the answer. One is, the holding of U.S. hundred dollar bills in mattresses around the world. There are many more $100 bills in circulation outside the United States than inside. And they’re not really circulated. Essentially people around the world have been loaning hundred dollars to the U.S. debt free, or interest free. And that is because they felt the United States was the largest, safest, most trustworthy economy. Do they continue to think so? Well, I guess, yes. But if they don’t and start turning in these debt instruments, and that really has been the black hole into which the gravitational gap between deficits and surpluses has gone, we’re in trouble. Not only is it interest-free, but we can’t pay it back, because the United States economy requires roughly $1 billion a day of foreign investment to continue. This is a great concern. Secondly, of course, we should do a better job of keeping our numbers. No one seems terribly concerned that debt of all varieties -- sovereign, corporate and personal -- have risen. And in the United States we don’t need to be told that corporate bankruptcies as well as personal bankruptcies are increasing. But if this occurs on a worldwide basis, remember that one person’s bankruptcy is another person’s asset loss because a debt instrument that they thought was worth something becomes zero or nearly zero. And so we are in a state of asset liquidation – perhaps – around the world. It is because of these things, among others that I have a hunch, just an odd hunch, that the things that are going on at the moment are not just the normal cyclical things but really are seminal and need to be addressed. No, we’re not addressing them and we can begin with the black hole.
Who’s
Vote Is It? Mutual Fund Proxy Votes
link: Business Week article on proposals to release
or hide proxy votes from clients http://www.businessweek.com/bwdaily/dnflash/aug2002/nf2002088_7528.htm?c=bweuropeaug13&n=link12&t=email.
It is shocking how uncomplicated it would be to restore confidence in integrity in financial markets and to allow the capitalist system in the United States to return to its place as the premier showcase of free markets in the world. However, I fear none of this is going to be done, I’m talking now on the day in which a photo-op is taking place at Baylor University and one can tell by the composition that it is intended to obscure what is really going on at the level of government administration than to illuminate the possibilities. But no matter. It’ll make for theatre even though it’s bad theatre, but a political photo-op only has to last for one evening news program and then it can be dropped. But what are the things that can be done? I’m illustrating a link, just one, which should be so terribly obvious, which is that the votes of funds held by mutual funds for shareholders should be revealed. How can one argue to the contrary? After all the mutual fund shares are the property of the ultimate investor and if they want to know the votes, shouldn’t they know them? Batterymarch in the old days used to reveal its votes on shareholder issues in every case including when it voted against its own clients, 10 days ahead of time. And it would be so easy to do so for people now one can hardly argue the contrary unless there are malicious reasons for withholding the votes meaning for the manager’s own business interests which I suspect is the case. But that’s what government regulation can do and do it with the sweep of the pen. Similarly the argument on whether or not options are expenses is so easy, that could be a stroke of the pen as well and there shouldn’t even be a discussion because it could be done so quickly. Even on such issues unrelated to business as campaign finance, it’s clear that the country wants it but it’s also clear that it can be subverted by actual practice quite easily and one can see the lineup of former lawmakers, Republican and Democrat, lobbying Congress on various issues which should not really be topics of much discussion. Back on the integrity of corporate line I am a fan of insider sales as perhaps you know but I am a fan that they be revealed contemporaneous at least with the sale or even in advance. I would like the markets to function with their full information, that is withhold no information, buy or sell, and a buy or sell is information for the market at any given time but merely to identify what is the character of the buyer or seller. It should be easy. It’s not difficult to do these things and it doesn’t even require a conference. However the conference is designed to obscure, not to illuminate, and meanwhile the agenda of government which is to support the narrow interests of a handful of big business contributors continues apace. It is a shame.
What
to Watch?
Most of the American investment community and the administration are looking to things in the economy like the spending patterns of consumers and business investment as guides to when we will really climb out of the economic doldrums in which we find ourselves. And we hold public relations exercises that seem to have adverse results. And most of us sit back and say we don’t understand why, when the fundamental strength of the American economy seemingly is so strong. Well, let me pose two elements that I think are worthy of consideration. Number one, the fundamental elements of the American economy are not strong, they’re extremely weak. A global glut of credit is upon us and there is the implication of the Japanese deflationary scene with many of the other elements of the Japanese zaibatsu economic relationships that are comparable in the United States. Crony capitalism as it’s called in the United States is a worldwide phenomenon and we can see that others got there before we did. But not only are the fundamentals extremely weak and have to be painted over with relatively short-term methods, but we don’t seem to understand that it is how other people perceive us that is so important to us. It’s not a U.S. domestic-only situation. Yes, of course we’re going to have a propaganda department to explain ourselves to the rest of the world. The fact is they see our actions as explaining us extremely well. So when they talk about the fact that we are going to whack almost any country in the world that has weapons of mass destruction, now known as WMD, because we use the expression so commonly, and if they are not democratically elected, they will be whacked. Well, we don’t have a list published as to who has WMD, but presumably the list is extremely extensive. That includes such well-known names, led by ourselves of course, and Russia, of course. And WMD are nuclear weapons, chemical and biological. Of course biological can be anybody with a pharmaceutical or fertilizer plant because they are common to those processes. Chemicals are much the same thing, they’re really rather simple. Even with nuclear, in the making of a dirty bomb, anybody with construction explosives and access to spent fuel from a nuclear electric site, would qualify. And I think most people in the world would put under weapons of mass destructions, one of our favorite weapons, which are mines because they seemingly destroy more people – more civilians – than almost anything else. Yes, the world does not approve of the United States as a rogue nation running around the world whacking almost anybody we feel like. And as such they may be withdrawing from what we need, the oxygen we require, which is a billion dollars a day of cash infusion. So we can watch the dollar. And just think for a moment what it will be like in this country when the hedge funds in the United States start shorting the dollar, our own currency. Wow, that will create quite a stir. Can it happen? Sure it can.
Jim
(a name disguise): View From the Brokerage House Frontline
Dean
Here we are on a very pleasant Lake Sunapee weekend, with a very, very good
friend, whom I’ll call Jim. No, “Jim” isn’t his name. “Jim” is a
disguise, because Jim is a really good friend who is a manager of a brokerage
house. In other words he’s on the front line, with all of those things that
I’m talking about. I’m off in hairy-fairy, ethereal land, but he’s dealing
with people who have lost money. Of course, he has to be anonymous, because
there are so many legal suits now flying around, or potentially, that anything
that he may say, or not say, may be troublesome later. So Jim has been kind
enough to speak to us this way. Hi, Jim.
Jim
Good evening.
Dean
I’m glad you’re here. Has it been fun to be relaxed away from the
office?
Jim
Very much so.
Dean
What’s it like there, in the investment world, dealing with investors now?
Jim
It’s trying. It’s difficult. A lot of people have been damaged by this.
It’s been a market unlike anything we have experienced in the past. I count in
my time in the industry I’ve seen, I think, four bear markets and this one is
by far the most damaging, the worst. The most severe days usually get over in a
day or two. These severe days just seem to keep lingering and lingering. I’ve
heard for example, people say it’s like death by a million paper cuts.
Dean
But do you have to be a cheerleader; do you have to be optimistic?
Jim
You do; you have to trust in the system, you have to believe. I said I’ve
seen four, I was on a conference call with a senior colleague a few weeks ago
and he’s seen nine bear markets. They all feel the same, they’re all
painful, nobody likes it. Nobody thinks there ever going to end, but they do.
And it takes time; it just takes time. And we have some damage to the economy
and the markets that will take time to heal. And so we’ll look back on this
one, and draw a chart of this period and it won’t look like much. But on a
day-to-day basis it’s long and trying.
Dean
At least in combat, once the battle starts, there’s not too much you can
do about it. From a general staff basis, anything you do about it is wrong
because decisions are made on the field. Is it one of those situations now?
Jim
Very much so. It just has to run its course. We’ve seen a lot of things happen
that have been somewhat unprecedented and it’s just, it will take time to work
itself out. I think you have to take time and believe in the American economy; I
do and it’s wartime. And I think we’re the strongest country in the world
and I think the money that’s left our markets will return to our markets at
some point. But it’s a matter of confidence right now, along with the
institutions, along with the average investor. We’ve seen a lot of people who
had anticipated retiring in the next two years who probably can’t now because
their portfolios have suffered a pounding. It’s just a hard time to deal with.
Dean
That’s almost an axiom of faith for your clients, isn’t it, Jim, that
it’s the strongest economy in the world? What happened? Maybe we’re not the
strongest economy in the world? We’ll wake up one time and say, hey, wait a
minute – China, growing at eight percent with 1.8 billion people, maybe
that’s the strongest economy.
Jim
I think there are lots of opportunities and lots of things that are
happening around the world. I still think as far as the strongest economy, our
core I believe has to be better. I believe there’ll be other opportunities
around the world, but I still think that politically and economically this is
probably the safest haven for investment funds in the world.
Dean
And for the last point, Jim. Do you feel that you’ve got a bunch of
lawyers sort of looking over your shoulder now and it makes it hard to do the
real work because you have to keep a paper trail of a whole bunch of stuff that
you never had to do before?
Jim
It’s much more difficult now. I’ll lay a little bit of that on the
media. I don’t know why that, let’s say, CNBC, why is it so important that
you know what your portfolio is doing every five minutes? I think they’ve done
a lot of damage and shaken a lot of people up because they want to make a lot of
sensationalized stories that maybe aren’t such a big deal. And for people,
even if you have this information that’s ongoing and right there, what do you
do with it? Do you need to make a transaction on your portfolio or reposition
your portfolio every day? No, I don’t think so. I think there’s a problem; I
think it’s not important to know what my stock does every five seconds. So I
think you should have long-term goals and stick with them. The other analogy is,
you know if Christopher Columbus crossing the ocean, when he hit the first storm
had turned back, things would be very different. So we have to weather some of
these things.
Dean
Okay, I’m going to take BusinessCenter off Season Pass on Tivo on your
recommendation! [laughter] Jim, thanks very much. I don’t envy you; I don’t
feel like going on to the front lines where you are.
Jim
It’s been a good experience. I’ve also had my faith restored in people.
Even though we’ve had our fair share of some liquidations and things, a lot of
people, a huge number of investors are out there who have held their ground, and
have not stampeded out the door and they’re waiting it out. And they’re
doing what they should do. So that’s comforting too.
Dean
What we should do now is go out on the boat now and have a good time.
You
Are Known
I wonder if most us know how much information those pesky calls that come on the telephone around dinnertime actually have about us. It really is quite remarkable. There’re programs called Who’scalling.com and others that from the basis of a telephone number that is answered or even one that is not answered can reveal on a screen to the caller who does not know you, shows your address, probably the value of your home, its tax records, your credit records, a good part of your insurance and/or health record, in other words a major profile including many features that you don’t even know about yourself. Yes, this is available at a touch of the computer and it reveals so much about you and you don’t know anything about the person on the other side. Well most of us hang up on these calls as I do, but very few of us know how much information there already is there. And you can probably not defeat the system so if you are a private person, and I am not, you’re probably going to have this information generally available around anyway, so it’s going to be a little tougher but people will find it nonetheless. If you leave the door open, as I do, then information is there and you just hope that it’s accurate information about you but it’s information nonetheless. Who’s calling.com and everything else lays you out in very great ease. It’s not very much fun to be a spy any more.
Accusers/Tipsters/Indictments
... Same As Convictions?
What do we believe? And it is important to know what we believe and what we want to question. Somewhere in the course of my education, probably around the high school years, I began to question, because I was encouraged to do so, things that the teacher would say. But I still accepted almost as gospel fact almost anything I read. And then somewhere around the sophomore year at college, I started questioning almost everything I read because I learned that that was appropriate to do. And I could find texts that completely contradicted one another and had many points in between. And so I questioned almost everything I read. And somewhere in the course of my army time, I began questioning what government said. Prior to that I had accepted almost anything that government had said because after all government was for the people, wasn’t it. But then I learned in the army that if any bureaucracy has multiple priorities, then serving people tended to be somewhat lower down on the scale, the army or U.S. government being perhaps the worst. Yes, we always questioned foreign governments like the Russians and so forth, because they had an authoritarian system and didn’t have a democracy. But of course we always accepted things from the media, because these were people who were paid to be accurate. And if they weren’t accurate, they got fired. Now, of course media is so competitive and is so wrapped up, journalism is wrapped up as entertainment, the question is do we question that? And of course we never even questioned sports figures until now, with steroids and the like we question them. My point is that we should be very careful to operate and jump quickly to blame anything. I’m not an expert; I’m not even an amateur on the throes of self-examination going on in the Catholic Church. But I rather suspect that the sum of the accusations of sexual abuse that are 30 years old or are X years old, are against priests who are now in retirement or the like, deserve to be questioned and that is, the accusers deserve to be questioned. I don’t mean to make it difficult but I have the feeling that just the blame can ruin something. Just the blame, of course, ruined Arthur Andersen in the Enron case. Of course we well know that Enron has yet to be blamed in anything but the press but that’s not bringing too much trouble for them. Andersen was bad because they shredded documents, were they bad because they proposed all of these other things? I’m not so sure. But they really suffered the blame game. What I am proposing is that we try very hard to look at the other side of almost every question. We look at, in a sense, the media from foreign sources to compare with our own and we try to get outside of every problem, and look at it from every side. And it seems to me that in the so-called war on terrorism, in the position of the American economy, is it strong or weak, we’re tending to take our own single side without question. I suggest that we go back and look at a question from every side and we don’t jump to the view that the accuser is right even though we may be the accuser. We should be cautious of the blame game.
Tale
of Two Choices: Cyclical or Seminal?
I like it when the market issues are so clear. Yes, they’re clear now. This is not a muddy time. There really is only a single choice to make in between two opposing views. View number one is that we have just been through a mild recession, we will go into a mild recovery that may last a long time, investment returns will not be great but there will be trading opportunities and we have already hit bottom or we are in the process of forming a bottom, and if not the Federal Reserve in its accommodating way will come along to make sure that this is one in which case the pain of the bubble in telecom and technology is over. Not necessarily those will recover, but something else will and in any event our bias should be on the positive side. Oh, yes, of course, there are problems in the world but they’ll be sorted out but there are always problems, and we’ll have an accommodative fiscal and monetary policy. Yes, September may not be a good month, but it’ll come along afterwards. In any event, that’s alternative number one, that we have been through a normal, cyclical decline and we will have a normal cyclical recovery, albeit perhaps a little bit on the modest side. The next alternative is a little more scary. And that is the alternative that we are entering a Japanese-like deflation in which case you can’t really stop it very well and it’s a little more seminal. Now of course our president acts as if he’s engaged in an opportunity, a God-given opportunity to him, a divine opportunity, in fact, to save civilization from the terrorists of the world. And he does not make that sound like it is a normal event, quite the contrary, he sees himself in a DeGaulle-like role. Furthermore it may be that the structure of the American economy, which requires foreign investment, is so weak that we will not recover and that our only great strength is in our ability to have military power and the will to use it. In other words we do meet the definition of an international bully. And that was the only thing that will save us. As Lord Cain said, the only way that governments can correct a depression is to have a war. And we may discover that. That is the second choice. Take your pick between the two. The first one is the odds-on choice; it certainly is the consensus. The other one perhaps is an odd 5-10 percent of market observers who see the deflation alternative in which case we’re in for a secular decline of perhaps 10 years or more. But that’s only small odds. Which do you want? I have a hunch my chances, my assessment of the odds are a little higher than normal on the second one, deflation. But still I wouldn’t say that they’re even odds, just that it bugs me and I can’t get rid of it.
America’s
Psychological Health
In my first job after undergraduate school for a year I was a college recruiter for Norton Company Abrasives Manufacturer in Worcester, Massachusetts. As such I used to give as a preliminary screening tool a brief psychological pen and pencil quiz to prospective applicants. One page was a variety of characteristics, personality characteristics, that someone would check on: What do other people think of you? Then, without knowing it they were asked to fill out another page immediately afterwards, what do you think of yourself? Well, the answer of course was that there was no right or wrong answer, but a measure of psychological health was having both sides of the paper be relatively the same. That is, your perception of yourself was similar to that of others. If there was a disconnect the assumption was that you were in some form of psychological trauma, a minor version, but trauma nonetheless. I was reminded of that today because I was giving a talk on Russia to a small foreign policy group in New London and the perception on the part of the people as to what the United States was and stood for in the world was quite different from what the rest of the world thinks of us. We think of ourselves as the bastion, the protector of human rights. Others in the world think that we are the most flagrant violators of human rights currently. We think of ourselves as economically strong and yet others think of us as being dependent upon huge flows of foreign capital into the United States to keep us going, a billion dollars a day or so. We think of ourselves as being politically free and the core of the democratic country. And yet we went through a contested election, a presidential election where the winner was shy of about 500,000 votes of the popular vote count. We think of ourselves as being militarily strong, and yes, we are building up new weapons against massive enemies and yet the military threats are being increasingly more local and more guerilla-like rather than the way in which we’re going. And finally we think of ourselves as making major capital investments but most of the capital investments that we’ve made in the last 10 years blew up in a technology bust whereby they American stock market will go down in history as the tulip-bulb bubble did, plus all the other attendant problems in the corporate area which show that the American capital market isn’t quite what we called it to be all the way along. And there are more. However, what I was struck by was the difference between one sheet of paper, what we think of ourselves, and what others think of us, and whether or not that tells us something about the psychological health of the United States at this time.
A
Modern Military: An Old-Fashioned Militia
Secretary Rumsfeld has quite correctly initiated a study on the military of the future. For too long we have relied upon old-fashioned military precepts. And he has envisioned a high-tech, sophisticated use of technology to essentially replace manpower and extend the power of manpower in the military of the future. This is expensive, this is long-range and it’s visionary. But I think he has it wrong. In fact I think he has it completely wrong. The threats in the future are local threats. The old military was designed around capturing land and holding it while new governmental structures would arise. But the threats of the future are internal. There’s no difference between civilian and military. And war conditions are conflict conditions in which the individual civilian is empowered with the capability of having huge violence. So I think the military of the future is a militia, somewhat along the lines of the Swiss militia in which people at home are trained to detect terrorist activity and can be mobilized quickly at local levels to fight guerilla threats, in other words a guerilla army against a guerilla threat – not Star Wars, not massive equipment that has to be kept updated, but essentially back to the old Minuteman concept and the Swiss army concept. It’s low-tech, it’s cheap, it’s responsive, it’s locally directed and it’s the army of the future – the militia.
Score:
Terrorists vs. US
We have an administration that believes in accountability and now that we’re about one year into the war on terror it is appropriate for us to assess how we’re doing in the war on terror. This administration says and has said repeatedly from about week one that we’re winning the war on terror. Let’s see what we think. From the terrorists’ standpoint, there are probably more terrorists in terms of numbers now than there were a year ago. And they’re certainly more highly motivated because it’s been demonstrated that they are successful in creating disturbance. Of course their leaders, or at least two leaders that we know of, Osama bin Laden and Mullah Omar, have not been captured but that probably doesn’t make too much difference because there are other leaders coming up. And certainly the United States has motivated a thousand terrorists or if they weren’t terrorists before they are now – motivated them to hate the United States by their imprisonment in Guantánamo and probably a few thousand more in Afghanistan. So we have trained and motivated the terrorists in the same way the IRA people were trained and motivated in British prisons when they were captured. On the other hand the United States has spent or prepares to spend, along with the rest of the world, about $500 billion, some of this is on the war on terror which has demonstrated, on Afghanistan, that we have been able to bomb a medieval country even farther back into time. We have re-established the warlords in power who were kicked out by the Taliban over 10 years ago, and the price of heroin on the street has dropped by 90 percent because the poppy season is growing in full force in Afghanistan to promote the warlords there. At the same time we’ve taken the drug detectives off to go chasing around after terrorists. In other words from the United States standpoint we’re worse off. The U.S. habeas corpus, the principal thing that we had as a legal right, that was a human right, has been refuted because we’ve demonstrated that we’re afraid of the war on terror. So I have to conclude from that that at least at the one-year mark the terrorists are winning. We have demonstrated of course that terrorism can be done in a low-tech way by almost anyone and that the results are tremendous. For the moment at least, if I was scoring this as a fight, I’d give the first round to the terrorists not the other way around.
Event
Politics
Political history will accord to the present administration, the administration of George W. Bush, the 43rd president, a major innovation. It will be called event politics, whereby the political structure uses the power of the media after the fact, not before the fact in order to promote its policies. Previous administrations and politicians tried to shape media through photo opportunities, through privileged access to powerful figures in order to promote policies that they whish to pursue. This administration reverses the process. And it takes events, whatever they may be and we know that they will be events, and based upon those events it shapes policies that it wanted to have promoted and ties it in to those events whether or not it makes any sense. The most recent case, and it’s one of many, is the timber activities, taking the so-called drought which was a climactic event and the fires in the west, the Bush administration ties in its timber industry policy to the event of cleaning up the forests to make them safer. Of course it’s true that the specifics don’t have anything to do with the environmental concerns but that doesn’t make any difference, it at least is claimed that there is a connection and it works off the event. The tax cut was the same thing; it didn’t make any difference whether we were announcing a surplus or an impending economic decline, the tax cut for the upper one percent of American taxpayers was going to come anyway and the end was used as justification for the policy that was prescribed. Similarly with energy policy we’re concerned about foreign oil even though in most cases foreign oil is owned by U.S. domiciled companies and oil prices are essentially an international commodity anyway, but we use that to justify the increased drilling and the relaxation of environmental restrictions in this country. And so it is that we take any event that occurs and from that event can extract policy. The greatest example of this is September 11, a climactic event to be sure, from which a massive increase in defense spending was promulgated, but most of the defense spending processes in the case of the things like missile defense and so forth would have little to do with the kinds of terror threats that were likely to occur in the future. That made no difference. It was the desired policy of this administration to increase defense spending and September 11 was used as an excuse. Well, I won’t say an excuse but at least a justification whether it tied in or not. And so we have this new process, called event politics and it will go down in history. And it’ll go down to the credit of this administration of making a different way of using media, politics to produce results for the voting franchise that put you in office. It’s a major accomplishment.
Bolshoi
Russia During the War on Terror
There is one clear winner in the war on terror. Undeniably Russia is coming out ahead. Yes, they are playing it just right and it is obvious to most of us that Russia is moving in to the vacuums that we leave as we identify people as sources of evil. Russia is increasing its presence in Iran and even with its enemy and the traditional Russian partner, Iraq. The $40 billion economic program with Iraq is probably not a recent development but it’s a culmination of efforts that have gone on there for several years. But the timing is propitious for both Iraq and Russia. It proves that Russia is indeed playing on a world stage in a world class game and succeeding where the United States fails. Furthermore, Russia is doing so at the same time that it is increasing its economic relationships with both Europe and China. So meanwhile as President Putin smiles and says he is engaged in partnership with the United States and gets us to support his World Trade Organization membership, he is undertaking a very, very clever game of competition with us while not claiming to be overtly competitive, and winning. The gap that was created in the world by the move towards American isolationism within the homeland is being picked up by Russian economic aggression. And they’re doing it right, and in a non-violent fashion and one has to accord President Putin with a very strong tip of the hat. The Russian economy is on the move on a worldwide basis taking our place in many, many areas, and doing so with a demoralized army, with no high tech weapons, in fact not even much of an economic force. One has to give them great credit.
Glass-Steagall
Rides Again
A large number, in fact maybe even all, of the disclosures on conflicts of interest between the commercial banking side, investment banking side and research side of financial service companies may not be illegal, may not be criminal. They certainly are unethical and they certainly involve a form of double-dealing where things like research reports say we are recommending such-and-such when indeed the self-interest of the recommendation was only disclosed in boilerplate at the bottom of a report which no one ever saw. And a number of the activities of research analysts seem to be in contravention from the professional ethical precepts espoused by the organization that most of us belong to, 50,000 of us in fact, the AIMR, Association of Investment Management and Research. And so we maybe have become accustomed in a bull market to violating the higher standards of professional ethics that we espoused but as a commercial practice, we all with a nod and a wink understood that our activities would go to the highest return on our time which was investment banking support. And actually most important is that the Glass-Steagall Act was revoked in 1999, just a few years ago. And the Glass-Steagall Act came about following the heyday of the 20s. It came in the 30s where it separated commercial banking from investment operations. In other words it established a strict wall not just a Chinese wall. Now although the practices are continuing that probably preceded the revocation of the Glass-Steagall Act, now clearly these practices are not criminal where they might have been under the Glass-Steagall Act because the walls then had to exist even if they were somewhat of a fiction. So my question is, should the Glass-Steagall Act come back? We have partially put it back except not with the teeth of the Glass-Steagall Act. Should we admit, because we’re putting pieces back, that revocation of the Glass-Steagall Act was a bad idea? I think it was.