Author: A.T.

“Dear Andy: Please write a column urging stockowners to pay attention to the proxy statement booklets they get this time of year, and then vote their shares accordingly. I know you once wrote that you just tossed the proxy statements (and I presume the proxy ballot). Please reconsider. There really are important things being proposed. As a matter of fact, you could sponsor resolutions yourself. All you need is $1000 of stock held for one year.” — Carl Olson, Chairman, Fund for Stockowner Rights

Thanks, Carl. Good point. But do you have any anecdotal evidence or otherwise of cases where it’s made a difference? With so few people voting (and most stock held by their pension fund), if a measure gets 3% or even 23%, does management really take note?

To which Carl persuasively replied:

“Dear Andy: Here is some good data for you. As you may know, the SEC is considering a proposed rule change to make it much harder for stockowners to propose items for votes at annual meetings. A massive battle is on. You can see it at the SEC web page www.sec.gov under the proposed rules, including hundreds of comments (including mine as chairman of Fund for Stockowners Rights). This is a quote from the SEC presentation:

Based on the information provided to us by IRRC [Investor Responsibility Research Center in Washington, D.C., which analyzes issues to advise stockowners how to vote], we understand that in the period January 1, 1997 to date [July], 19 proposals obtained shareholder approval out of a total of 234 submitted to shareholder votes. Nine were proposals to repeal classified boards. Nine sought redemption of companies’ shareholder rights plans. [Poison pills]. One focused on ‘golden parachute’ payments to executives. Even if a proposal does not obtain shareholder approval, however, it may nonetheless influence management, especially if it receives substantial shareholder support. A proposal may also influence management even if it is not put to a shareholder vote. We understand that in some instances management has made concessions to shareholders in return for the withdrawal of a proposal.

“In my own case, I proposed that Occidental Petroleum Corp. adopt a confidential voting policy. In 1991 it got 54,000,000 shares in favor; in 1992 it got 71,500,000, and in 1994 it got 111,400,000 (versus 93,000,000 against). The board finally adopted a watered-down one. The same thing happened at The LTV Corp. Oftentimes it takes a multi-year approach in order to build support. Another example is the Fleming Companies (food wholesaler). Another stockholder has been able to have passed proposals in both 1996 and 1997 to eliminate the poison pills.

“This coming season of annual meetings has a lot of exciting matters.

“1. At Occidental Petroleum and LTV, I have proposed that the stockowners should be told how much financial backing the auditors have for their opinions. You may have seen that the Big Six now have LLP after their names. This means that the individual partners are NOT liable for the misdeeds of the other partners. Thus, for the Big Six, security in the amount of $3 billion to $5 billion has been removed from the stockowners of an audited firm. We ought to know. This issue right now is up for an appeal to the full SEC.

“2. At AT&T, a permanent confidential voting policy.

“3. At Lucent, GM, Ford, and BellSouth, an anti-slave labor policy (not just sweatshop, but real forced labor, such as the massive ‘laogai’ system in China that Harry Wu is exposing). ”

OK, Carl. I’m not sure I’m against slave labor, but I’m no fan of poison pills. I’ll try to vote more often. Keep up the good work!

(This is a joke. I am against slave labor.)

Writes Dave: "Inventory the contents of your wallet! I lost mine somewhere yesterday and spent the good part of the morning reconstructing its contents mentally. Then, I was off to the races: closing checking accounts, canceling a credit card account, etc. I remembered, too, that I had saved a note from my mother in which she had described how to use her calling card (‘Hello, Mom, Happy Valentine’s Day and please call your credit card company and have them issue you a new number.’). What else was inside? A few business cards (other people’s), my frequent flyer card, driver’s license (expired), health insurance card (circa 1995), two employee I.D.’s, and my current bus pass. All this from memory. But what else was inside?"

The simplest way to do this is dump the contents onto the nearest Xerox. Another handy way: set up a word-processing document or a weekly reminder (if you use a "reminder" program that allows lots of text) called WALLET and just keep a current listing there.

If you have some items automatically charged to your credit card or checking account each month, don’t carry that credit card (or checks from that checking account) in your wallet. That way, even if you do lose your wallet you won’t have to hassle with changing your bill to a new card.

You lost your wallet? How?! To me, losing a wallet is like losing a kidney. You just don’t do it.

(I know: famous last words.)

From Larry Jensen: “I’m sorry that they haven’t chosen to use your Clickle buzzword, but there has been progress on this front. Last month Digital Equipment Corp. (now Compaq, if I’ve got my merger trading cards straight) started beta-testing software for ‘The MilliCent™ microcommerce system.’ The basic concept is exactly the same as you described, with a bit more flexibility: it allows web sites to charge variable fees for content – as small as 1/10th of a cent – either for single-time usage or for longer subscriptions. You can read all about it, and download the software (a plug-in to your web browser) along with $10 of free scrip, on their web site at www.millicent.digital.com.”

From Bill Densmore, president of Clickshare Service Corp.: “See www.clickshare.com for more information.”

From Timothy Lash: “Why wait until next decade for the replicator? See www.streamline.com today. It’s pretty close to what you describe.

From Jim L’H.: “I like your idea of the replicator and was thinking along similar lines myself. Don’t worry, I’ll let you claim credit if you want. But for this to work, we really need to make our goods transportation system more efficient. Having a person getting in and out of a behemoth truck, driving all over town burning fossil fuel is outdated and unnecessary. Here’s my idea.

“Let’s make a small-package trolley system. String lines, or better yet have underground tubes that go to every home on every street. Little pods would zip along the lines, or through the tubes carrying small packages. My hospital has this for medical chart delivery. Just scale up the infrastructure. Then when you order your shampoo and other sundries, the person at the sundries warehouse puts your order in a pod, gives it your address and sends it down the line. It is automatically controlled and programmed to find the most efficient route to your home. When it gets there, you unload it, put in your recycling, and send it on down the line again. Theft would not be a big problem. First, a thief wouldn’t know what he was getting, second, it is most likely low value anyway, and third, the system would be rather inconvenient to break into (high in the air, or underground in tubes). And of course the pod would be digitally protected to open only at your house. You can claim credit for the clickle and the replicator, but this one is mine. However, I will cut you in if you can think up a catchy name for it.”

Well, one name I can think for it is: stupid. But then you can reasonably have said the same for my clickle and replicator, so I think I’d rather call it visionary. We could get the guys who designed the Denver Airport baggage system to work on this, and soon shampoo or a bottle of aspirin could cost no more than it does in a hospital — $16.

I love the idea, but I think it needs a little work.

“When a stock is shocked by bad news and there is a torrent of sell orders, where do the market makers find all the buyers? I can imagine some answers to this question but would like the inside story.” — Derek Deer

The buyers come from two places, basically. First, with most stocks there is a book or backlog of “good-til-canceled” orders to buy and to sell. Say the stock was 40 and someone’s been holding out to buy 5,000 at 39-1/4. Someone else put in an order to buy 200 shares at 34-1/2 and forgot all about it — but it’s still in the broker’s computer. Right there, we have “found” buyers for 5,200 shares. For an actively traded stock, there would be hundreds or thousands more such orders. (There would also be some stop-loss orders lodged in the computer, triggering some automatic sells as well, adding to your torrent.)

Second, the same news that attracts the sellers jolts the much larger number of non-owners of this stock. For every one institution or individual holding Oxford Health, say, would there not have been 100 times as many people who didn’t own it? So out comes this news, and suddenly the owners who see it feel sick and yell “Sell,” but some of the non-owners are thinking that maybe there’s a way for them to take advantage of the panic. A certain proportion may figure, Gee, these troubles will pass, or at least there’ll be a little bounce . . . so if it was 40 a second ago, maybe I’ll put in to buy some at 28.

The real answer is that the buyers are “found” by the price at which the market “clears.” (With a very thinly traded stock, the market may not clear — e.g., you won’t sell your house for a dime less than $120,000, no buyer is willing to pay more than $102,000, so your house sits unsold. But if you did put in to sell it “at the market,” you’d get $102,000. The buyer would be “found” by the pull of the new lower price.)

With a New York Stock Exchange-listed stock, the specialist will provide a little (itty) bit of buying power, too. More to the point, the company may alert the Exchange that important news is coming out and trading may be halted to allow its dissemination. Or the specialist may receive a huge imbalance of orders and ask for a similar brief halt. During that time, the specialist will be issuing “indications” of where he plans to open the stock for trading . . . which in turn may cause people to enter new orders or adjust or cancel old ones. Finally, he sees that 32 is about the price at which supply and demand balance, so he opens the stock for trading there . . . and now a lot of potential sellers are saying to themselves, heck no. I’m not selling at 32 — which significantly cuts down on that torrent of supply. And enough buyers are thinking that, at 32, the market just might be overreacting, and this is a good opportunity to buy.

This is also what makes horse races. And it explains why some people actually liked that horrible Austin Powers movie. (Well, no it doesn’t. But I feel better for having said it anyway.)

ZAIDE ON THE INTERNET

“My favorite thing about your concept of a Clickle is that it sounds like Yiddish. I’ll bet my late Zaide (olov hashalom) could even have related to it! ‘Ich hob geshikt finf clickle oy’fn Internet….'” — Dr. Steve Rosenbach

I speak no Yiddish, but I’m guessing olov hashalom has to mean “rest in peace.” It is from meshugganah insights like this that the Rosetta Stone was ultimately translated.

PAY OFF CAR LOAN OR INVEST?

“My wife and I, 40 and 45 years old, have about $300,000 in 401Ks and regular mutual fund accounts, $80,000 home equity, and no debt except for our mortgage and a car loan. We’ve got some cash, and can’t decide whether to pay off our $8000 8% car loan, or try to invest the $8000 in something that would make more than 8% after taxes. I see some bond mutual funds yielding 10 – 13%. What would you do?” — Bruce

Unless there are prepayment penalties, pay off your car loan.

The bond funds only “yield” that much because interest rates have been falling, which makes the value of the bonds they hold go up. The actual yield — interest payments less management fees — will be much lower unless they are investing in wildly risky bonds. Of course, interest rates could continue to fall, though not below zero I think, but they could also rise. With the car loan, not having to pay 8% is the equivalent of a guaranteed tax-free 8%. Outstanding.

SOON WE’LL BE OFFERING THE CROATIAN TOUR

“Hi, Andy. When you said your agent sold the Croatian rights to your book, did you mean the rights to sell the book to Bosnian Croats or to sell the book in Croatian in Croatia? If you meant the latter, then I am surprised that you are surprised! There is a vast class of very wealthy people in Croatia, and most of the country, except for the southern coastal resort towns, was barely touched by the war. Zagreb, the capital, has been a prosperous cosmopolitan city for quite some time, with a cost of living comparable to that of most US cities. People in Croatia seem eager to adopt anything American, and there is no reason that market investing should be any different! Croatians are quite well off as an immigrant group in this country as well. I’d say there could well be a market for the book in Croatian except for one thing — most Croatians with money already speak excellent English.” — Andrew Hoppin

My smart and savvy pal David scoffs at the Year 2000 problem we reprised again yesterday. He says his own firm beat this problem ages ago-they’ve been trading bonds maturing past the year 2000 for nearly 30 years. And banks? They’ve been writing mortgages that don’t come due until 2027. David offered to bet me last night that this whole thing will turn out to have been just one more false alarm. And he may be right. But he may also be forgetting that banks and brokers (and everyone else) use more than one computer program. The program that handles the mortgages is not the same one that controls the mainframe’s air-conditioning system.

For another view, comes this from S. McGrath:

“Here’s another Sixties programmer reporting in. I worked for a major insurance company, and back in the mid-1980s one of our major accounting systems started going crazy for selected policyholders, one at a time. After a few months, we were instructed to delve into the program and find out why accounting reports were no longer usable for these clients. Seems the system used a one-digit year. If the one-digit year code was 5 or greater, the previous policy year for the policyholder was assumed to begin in 197x; otherwise the date was assumed to be 198x. By 1985 the accounting years were containing 120 months of claims, not 12. What does Dan mean, ‘the documentation doesn’t match the programs.’ What documentation? We never got around to doing that; there was always another system to write. Back in the 1960s, programmers were scarce, and we didn’t waste our time writing documentation. Besides, that wasn’t any fun . . . we wanted to program. It scares me when any company says that they have the Y2K problem under control. What gets you in any system change is what you haven’t thought of, not what you’ve programmed and tested. I don’t think I’ve ever worked on any major system change when everything worked 100%, even after it was tested and tested and tested. And the ratio of complete failures to successes for new systems (i.e., when the whole system is junked rather than put into production) used to be about 1 in 6 (and not just for insurance systems, for all systems), so a total system rewrite may not solve it, either. I certainly hope that the ratio has improved recently. I’m glad I’m not a programmer in 1999; I’m sure their New Year won’t be happy.”

Nervous? Well, then, how about this:

From an FDIC attorney: “Don’t be too complacent that American financial institutions are addressing the Y2K problem. The FDIC has already issued a ‘cease and desist order’ against an institution whose board has done nothing, so far, to investigate whether its systems are Y2K compliant. This is just the beginning of FDIC’s push to get the bank and thrift industry in shape; this is a very serious potential problem. Just having the big banks, like Citibank, in compliance is not enough. All banks and thrifts in the economic food chain (and credit unions, too) must be compliant or the little non-compliants will drag down the big compliants.

“An analogy would be GM, building cars utilizing the ‘just in time’ parts supply assembly process. Recently, one tiny parts supplier suffered a strike. The little company temporarily ceased production, and that, in turn, stopped GM’s production of a line of cars for lack of that part.

“If smaller, correspondent banks can’t participate overnight with the clearinghouse and the big banks, then there will be a major liquidity problem first, with other problems to follow. Remember back when Penn Square Bank failed in Oklahoma City in the early 80’s? In and of itself it wasn’t a big bank or big failure, but its failure was a direct cause of the failure of Continental Bank in Chicago, a real biggie in its time.

“I suspect there will be large charge-offs by corporations over the next three to four years, either to head off the Y2K problem or to clean up the meltdown after Jan. 1, 2000. A compelling reason to be diversified into bonds and cash (especially in light of sky-high PE’s for many stocks today).”

Still not nervous? Try this, from Walt Lamphere. It might even hint at one reason Warren Buffett recently bought 20% of the world’s silver supply:

“Every large problem began with a small wrong decision. The greatest problem we have before us with YK2 is the present wrong decision of the majority of businesses, government, and even the individual, who thinks that ‘someone else will fix it.’ We will all soon be involved in the worst of financial chaos, such as the world has not known to this day. The impact will be far more catastrophic than any can imagine, and the results, virtually unimaginable.

“If ever there was a need to begin to teach the truth of the precarious status of our financial system, this situation calls for the utmost effort on the part of every finical [sic] institution. I suspect that the majority of the effort has been devoted to a ‘band aid fix,’ with most corporate officers keeping a tight lid on the immensity of the problem. The fact is, there is not one person in the community of nations that will not be impacted.

“In an age when public confidence in government is daily eroded by the increased revelations of the peccadilloes of our leadership, and business is so intimately tied to our government, it is not beyond imagination that a financial collapse is not only possible but more, likely.

“It is likely, not imaginative thinking, that once the general public comes to understand the potential of the immensity of the loss to their own financial situation due to the “glitch” of the YK2, the run for their funds will occur. Who will stop them? Who will prevent them? The Government may well be forced to close the banks. And the military could be the agent of the worst repression this country might ever experience.

“Every person that begins to understand the enormity of the disaster looming on the horizon will contribute to growing awareness. But, who will leave his/her money in the bank, when it may be impossible to get your money the next day, or next week. Who will not join the rush? Will you leave your money in your bank if there is a more than good chance you will not have access to it, due to computer lockup.

“I suspect the value of hard currency will also be greatly enhanced in the near future. Gold and silver have been historically the haven of those concerned with the retention of value of their money. ‘Buy Gold,’ ‘Buy Silver,’ etc., will be the cry of the masses, but will there be enough gold and silver to satisfy the demand? Of course not. So . . . have you begun to diversify to hard currency yet? Do you trust your bank? Watch the slowly increasing propaganda of banks and government, attempt to smooth over the growing nervousness related to the shaky situation of YK2. But it will crash in a day. The day after will be too late to get your cash. And it won’t be the day after January 1, 2000.

“I suspect that the greatest new guessing game in the country will not be speculation about how much will the stock market Dow index increase, but rather, what day will I no longer believe my money is available to me from my bank or fund, or market. I nominate July 5, 1999. Independence is having control of your own money. That will be the day that people will suddenly understand that the closure of the banks will be necessary, within five more months. What a rush. The Gold rushes of history will be minuscule in comparison.

“And the greatest irony of all will be that the computer, that makes us all more information conscious, will ultimately be the cause of the greatest potential disaster the world financial institutions and markets could ever have. Personally, based upon the record of my own bank, which doesn’t seem to think that the problem is all that significant, I may not wait till December 1999. No, maybe not even till July 5th., 1999, either.

“I don’t think I am a trouble maker. I did not create the computer glitch. I use a PC everyday. But I am not an ostrich either. This problem is not being solved adequately to meet the deadline of January 1, 2000, and I know the mind of the people, that when they realize that the problem involves ‘their’ money, they will move it. My suggestion: Buy a little gold and silver as a safety currency. That’s what I’m going to do, just in case.”

OK. Now I’m nervous. I like to think my friend David is right. And I do have a lot of faith in American ingenuity when it comes to fixing stuff in a crisis. But it’s hard to imagine there won’t be some problems.

Tuesday: Zaide on the Internet

From the estimable Dorothy Mallonee:

My husband, Bill, works for a company that sells solutions to Y2K problems, so I am familiar with some of the issues, and have a couple comments.

First, Y2K is so big and scary that companies are in absolute panics. Some of them are so overwhelmed that they will listen to anyone, buy anything, and pay any amount of money to someone who promises to fix their problems. I have heard about companies that will fix your code for, say, $1.50 per line; some organizations have BILLIONS of lines of code. There’s lots of opportunity out there for Y2K charlatans; we should not suspend common sense when trying to solve the problem.

Second, Bill agrees with today’s correspondent that ’98 and ’99 will see the beginning of some big troubles. He suggests that, starting TODAY, your readers keep every scrap of paper dealing with financial transactions: statements, canceled checks, buy/sell confirmations.

Third, don’t be too confident that, because people know about the problem, they have it in hand. I heard a few weeks ago that some federal regulatory body fined some bank because it had not even started to deal with its Y2K issues.

And from the equally estimable Dan Hachigian (though how does one estimate these things, anyway?):

The most astounding thing about the Y2K bug is that we haven’t learned anything from it. Our children’s children or perhaps one or two generations further out are going to face a crisis that makes the Y2K problem look trivial. I refer here to the “social security number bug” about which I haven’t heard anybody else saying a thing.

Essentially the problem is that social security numbers are “hard coded” to be nine digits long. Virtually every program that uniquely identifies individuals in the US makes use of this fact. Hence virtually all of these programs limit themselves to 1 billion unique id’s. Imagine the scenario that US population doubles every 60 years. That gives us less than 120 years until the name space is not large enough to accommodate a unique id per person. Recoding this field is going to be several orders of magnitude more work than Y2K.

Note the second poor assumption here, that SS #’s can be recycled, which to my knowledge is not currently done. Every year we retire something like 1/75th of the population’s id’s. We can buy some extra time by recycling them, but it will be at the expense of potentially getting ourselves confused with dead people. On the other hand, maybe it wouldn’t be so bad to end up with Bill Gates pension benefits! But, of course, I’d hate to end up with the id # of a wanted criminal!

Well, I guess it’s kind of like the environmental problem, the energy crisis, or the social security cash flow question. Most of us probably won’t be alive when it hits the fan. Wouldn’t it be astounding if the real crisis in social security isn’t running out of money but rather running out of id numbers?

Reason enough to join ZPG! Well, not really. This is only slightly less worrisome to me (and I suspect to Dan, whose tongue was poking around his cheek) than this one, from the estimable Monty Goolsby. I think even I can solve this one:

So you think the Year 2000 problem is bad, huh. Just wait ’til 2100. Most computer programmers I know determine a leap year by dividing the year by 4 and checking for a remainder of 0. If it is 0 they assume that it’s a leap year.

But 2100 isn’t a leap year and is evenly divisible by 4.

The rule for determining leap year is: Every fourth year is a leap year except that every hundredth year is not except that every four hundredth year is. Whew.

So, the year 2000 will be a leap year and 2100 will not. On March 1, 2100 the whole world will be one day later than the computers think it is. This is going to be so much fun, I think I’ll have a party. Of course, if all the enterprises begin now and fix this problem on their legacy systems while they’re working on Y2K, then their synergy will avoid a paradigm that they won’t like.

Again, we have to assume Monty’s tongue is in his cheek. But apart from the near certainty that technology will have advanced to the point that problems like this have become trivial, there’s this: the world could simply agree to make 2100 a leap year.

(But wait: maybe Monty’s right. What about the legacy software that had already been designed to do this right? Then it would be goofy. Still, I have to think that getting the date wrong by a day will be less catastrophic than getting it wrong by 100 years — the current problem.)

Tomorrow: A (not so) Cheery Year 2000 War Story from S. McGrath

IRA ROTH . . .

From Glenn Doherty: “I’ve been preparing to open an IRA, though I have also been taking full advantage of our company 401K. From what I’ve read of the pros and cons between the Roth and traditional IRA, a person in my position would be better off opening a Roth. What I was thinking of doing was to open a traditional IRA as well, since a portion of it — the standard deduction and personal exemption — will remain tax-free. So when I retire I would take just enough out of the traditional IRA to use up the deduction and exemption and then take the rest of any needed funds out of my Roth. Is this logic flawed?”

You’re young. Who has a clue what the tax system will be when you retire? What if the income tax is replaced with a VAT? Won’t Roth folk feel silly then. (They will have forgone tax deductions now to avoid paying income tax no one has to pay after all!) Not that this is likely. But the point is: who knows? The main thing is just to fund one or the other. Since the 401(k) will provide taxable funds, why not “diversify” with a Roth IRA?

This is especially true if you’re in a relatively low tax bracket, and would be a complete no-brainer if, being covered by a plan at work, your contribution to a traditional IRA were not deductible.

The Roth IRA will also prove to entail less paperwork and be eminently more flexible at withdrawal. Opening both a Roth and a traditional IRA is more work, and income you receive from the 401(k), not to mention Social Security and/or outside investments, is likely to use up the standard deduction and personal exemption anyway.

INFLATION FROTH . . .

More from Glenn: “I always hear the phrase adjusted for inflation, as in my 15% gain was only 12% after it was adjusted for inflation. Is it only me or does this inflation number seem out of touch with reality? The number is derived from a consumer price index of things some of which I never buy; others bought at rates I never pay. I really believe a lot of things have been going down in price because of improved efficiencies in the marketplace. New distribution channels like the Internet have brought down prices for those of us that know how to look for them. Which brings me to a concept which I think more than offsets this thing called inflation. I like to think of it as a personal rate of becoming a more efficient consumer. Every year I become a better consumer because of increased knowledge of value and where to find it. From new distribution channels to better ways to buy, like bulk, each year I think my dollar goes farther, and thus makes me wonder if inflation is real or has any real meaning.”

As amazed as I am that scientists are able to measure changes in “world temperature” over the century within a fraction of a degree — how can they possibly do that? — so you have put your finger on at least some of the difficulties in accurately measuring inflation. Another would be the difficulty in measuring the value of improvements. A car may cost 3% more this year than last, but what if it’s safer? Or more comfortable? Or gets an extra mile to the gallon?

I do think the government should adopt recommendations for a better measure that would have cut the CPI by about 1% over the last many years and might cut it about that much going forward.

But beware of confusing your own CPI with a global statistic. The fact that you become a smarter shopper each year does not mean that the cost of the items you shop for are falling. You might also be spending less on gas each year, as you learn to inflate your tires for better fuel efficiency or drive with fewer starts and stops (lift your foot from the gas pedal well in advance of the light . . . glide . . . no need to brake . . . the light turns green . . . now accelerate from 15 mph instead of from zero). But does that mean the price of gasoline has dropped?

So where are we now? We are where we always are: delicately balanced on the edge between greed and fear, between great prospects for the future and the possibility of grave disaster, between risk and reward.

Here are some of the most important factors at play:

The Positives

1. Peace. With our military budget cut from about 6% of GDP to 3%, our economy suffers that much less drag. Relatively speaking, directing our resources to pay soldiers or to blow up targets in training missions — while obviously important — adds less to economic progress than directing those resources to industry or education.

2. Technology. The pieces of the puzzle are fitting together faster and faster, with simply dazzling results. Things barely imagined two decades ago are routine, as we take three-ounce phones from our pockets and all but instantly reach the ear we seek 12,000 miles away. Things that seemed impossible two decades ago are now around the corner — cars that routinely got 12 miles to the gallon in 1972, or 25 miles to the gallon in 1992, could get 80 miles to the gallon in 2002. A quantum leap in efficiency.

3. Free Markets and Trade. NAFTA, GATT — the world has been moving toward freer trade and toward market-based economies. Russia may have come out of its seven-year economic collapse as the seeds of capitalism have taken root. Even Africa may be stirring. This is good for world economic growth and also for keeping U.S. inflation low.

4. Demographics. We baby boomers are saving like mad for retirement. And the younger generation, realizing that Social Security won’t be enough to provide a comfortable retirement, are funding their 401(k)s as well. Month after month, new money pours into stocks, driving their prices higher, with no letup in sight.

The Negatives

1. War. One way or another, the Iraqi crisis will pass. But one can envision a scenario under which we turn the next generation of Iraqis into bereaved fanatics, each of whose mission it becomes to go abroad with a small aerosol can.

2. Technology. What if the apocalypse is brought not by four horsemen but rather by this preposterously simple, silly technological glitch — the Year 2000 problem? Wouldn’t that be ironic? Most businesses and government agencies may have perfectly patched or replaced their “legacy” software by then. But in a world so interconnected, even a small number of problems could have ripples. Or what if, instead of aerosol cans, those Iraqis who’d seen their loved ones killed by our bombs took up their computer keyboards instead, devoting their lives to hacking into and destroying confidence in our computer networks? I’m not remotely predicting any of this. But the financial panics of old — the bank runs, and such — were always paper-and-pencil based. What would our first true high-tech panic look like? How quickly might it spread?

3. Protectionism. What if Congress’s denial of “fast-track” authority to President Clinton a few months ago proved to be the peak of the free trade cycle? What if the problems in Asia led to beggar-thy-neighbor competitive devaluations? What if that made the price of Japanese cars so cheap Detroit had to call for protectionist quotas? And slash its dividends and throw a significant chunk of its people back onto the unemployment line?

4. Demographics. As Japan and America age, the ratio of strong young workers to elderly retirees steadily shrinks. What happens to the stock market when, some hoping to “die broke” and others having no choice, we stop piling money into the stock market and begin piling it out?

#

My own view of the future is far more positive than negative. But that doesn’t mean, with stocks at record levels, we have nothing to fear.

BUFFETT AND SILVER

“What should you do if you are worth nearly $40 Billion? Maybe #6 on Mr. Buffett’s list was to buy a few million bags of silver dimes. Comments?” — J.B.

Let’s not kid ourselves that Warren’s not in the enviable position of being able to move markets — and knowing in advance which way he will move them, which gives him (an entirely legal) edge.

Sounds as if his analysis of the supply/demand for the commodity itself showed it to be a good bet. So he got silver’s value as an inflation hedge for free.

DIAMONDS AND SPIDERS

“How about discussing the advantages and disadvantages of buying diamonds and spiders (DIA and SPY) as opposed to buying index mutual funds? I am still a little confused about this.” — Chris

These two derivatives — baskets of the Dow stocks and the S&P stocks that trade just as if they were themselves stocks — are very convenient, with tiny transaction costs, and thus may even beat out index funds (if you already have a deep-discount brokerage account through which to buy them), though at some level you wind up splitting hairs; i.e. both are very good. The question with both is whether the Dow and even the S&P have gotten ahead of the smaller stocks. (That’s the question; I don’t have the answer, though I don’t feel the Dow is cheap here.) If you think so, you may want to explore an even broader index fund.

CROATIA

While I laud the humor in your recent column, keep in mind that Croatia and the current Yugoslavia are peaceful and have not been involved in the war in Bosnia. Incidentally, most Bosnians speak Serbian, a relative of Croatian. — Dan Scott