TCS Daily

An interview with David Malpass, Chief International Strategist for Bear Stearns

By James K. Glassman - May 8, 2000 12:00 AM

Is Washington strangling the new economy? And what about overseas? Which countries are pursuing tech-friendly, investor-friendly economic policies? For the answers to these and other fascinating questions, Jim spoke to David Malpass, Chief International Strategist for Bear Stearns.

Jim Glassman: David, in a letter you wrote to clients not too long ago explaining the sharp decline in the NASDAQ, you cited as one of the reasons the political intervention that seems to be developing in technology. Could you explain?

David Malpass: The government's active in lots of sectors of the U.S. economy. Recently it seems to have stepped up that activism so we have the Microsoft intervention or change of policy by the government to be particularly aggressive in attacking one of the major technology companies in the country, but we also have other examples. One is on Internet taxation. The debate is being left very open of how that's going to evolve where states will want to be able to tax it or not... that's cause for concern. Another area that concerns me is the rhetoric and the rationale for a liberal trading environment.

The administration has allowed the policy to evolve since the Seattle demonstrations against free trade. The administration has seemed to allow this issue to stay open and to give some credence to the idea that trade should be burdened by many other aspects of economic policy. I think that's cause for some concern.

Glassman: Now when you say they've left that open, we just interviewed Charlene Barshefsky for Tech Central Station. Of course she adamantly denies that. She says these are two separate issues.

Malpass: It's hard to tell how administration policy evolves. One thing that surprised me was in February, President Clinton came out on the front page of the New York Times saying that the trade deficit was cause for grave concern. That raises the issue of how open the U.S. is going to be with its market. That rhetoric then became Federal Reserve rhetoric about the imbalances in the global economy and has since been picked up by Treasury Secretary Summers in speaking about the concerns about the trade deficit. This is a slippery slope into managing the U.S. dollar weaker, and if that happened I think we can see some severe financial market negative reactions.

Glassman: Let me switch gears. You are the Chief International Strategist for Bear Stearns, and one of the big events that's happening has been the decline of the Euro. If memory serves, you were an enthusiastic supporter of the Euro. Why is the Euro declining?

Malpass: I was a supporter of the Euro and still am. I think it's worked beautifully. However, it's weakened apart from its functioning as a currency, which has gone well and there's been full conversion of interest rates in Europe with lots of bullish implications for Europe. The Italian government now can borrow at a lower interest rate than the U. S. government, which could only have been achieved through the Euro. The Euro, though, has weakened for two reasons. One, the strength of the U.S. dollar and the productivity growth in the U.S. So, it's weakened in a relative sense to the very strong U.S. dollar. But then also I think Europe hasn't done as much as it could to state the importance of a stable currency. There's a misconception going on in economics that a currency should reflect the economic fundamentals of the region. That raises the issue that if you go into recession, your currency should weaken, which is counterproductive because if the financial markets know that then they want to sell a currency that's already weakening. It becomes a momentum phenomenon.

I think that's what's at work in Europe. They haven't stated clearly that they intend to keep the Euro stable regardless of their growth rate. They've been saying that they're waiting for their growth rate to be above the U. S. growth rate and then their currency can strengthen. I don't think that's a comforting policy for them to be projecting.

Glassman: So, some people have said that they wouldn't have been surprised if the Euro had weakened considerably against the dollar at a time of economic weakness for Europe because there's the fear of exactly what you're talking about -- the weakening of the currency to take care of that problem. But, Europe is pretty strong economically, isn't it?

Malpass: No, it has been strengthening some, but the current growth rate and the prospective growth rate are still way below the U.S. expectation. So as long as you have a policy that a currency should reflect economic fundamentals, then you end up with a result where the market is invited to sell the Euro and buy the dollar.

Glassman: Now, I want to talk about those fundamentals. Why is it that the Europeans, which by some lights have a better system of education than the U.S. -- Why is it that the Europeans seem to be so far behind in technology?

Malpass: I'm not an education expert, but I would question whether your assumption is correct on their system being better. I think it's clear that they teach reading, writing and languages better at early ages. But, but by the time you get to high school and college, the U.S. has developed a system where people are allowed to flower, and so that's why our university system is so attractive to foreign students.

So, one aspect of our technological advance in the U.S. is the university system here, both private and public. I think though, more importantly is simply the entrepreneurialism. In Europe it's hard to conceive of a star student, or excuse me, of a student like Bill Gates, who was not a star but was at Harvard, dropping out and starting a software company in his garage. That's relatively normal in the U.S. and would be abnormal in Europe. Small businesses are easier to start in the U.S. The tax structure is less unfavorable in the U.S. and the labor mobility issues are critical.

Glassman: Would you say that that same analysis would apply to Japan?

Malpass: Japan has had a more engineering spirit left from the rebuilding after WWII and up through the 1980s and 1990s, so they have a very strong engineering culture that I think is going to help them in the current technological environment. However, they have been not at all entrepreneurial in their approach to small businesses and in their approach to even the way large corporations develop. The people at the top of the corporations often have the right connections, rather than the right skills. So there's not even entrepreneurialism within the corporate structure. I think that's something Japan's trying to work on...

Glassman: So as long as we're making a tour of the world, what is your assessment of the emerging markets that suffered so much just a few years ago?

Malpass: Some of them have rebounded smartly, Korea being a strong example. But many of them are still left in a much-weakened state. Their living standards are lower than they were early in the 1990s. So you have Thailand still weak, Indonesia of course still basically flat on its back trying to move at all -- that's shown up this week in the changeover in the Cabinet structure and they're trying to find their direction for economic policy. Overlaying that though is a clear value placed on Asian technology and entrepreneurialism in places like Taiwan and like India, where engineers count and the number of entrepreneurs count and where they're being given enough capital to spread their wings. So I think it's a mixed picture of recovery coming out of the 1998 global financial crisis.

Glassman: But you would point to India as one country that is emerging in a strong way or are you saying that Indian engineers themselves are doing well? Is it for example a stock market to look at?

Malpass: Yes, I think India's stock market offers some opportunities. To make a general statement, around the world markets are valuing countries that have technology or that are interested in technology that recognize the value of productivity enhancement and that often is going to go along with their past interest in producing engineering graduates. This was a brand of education where you were interested in doing things productively in making your society better. And so, stand-outs in the number of engineers would include Japan, Taiwan, India, I think those offer good prospects in this environment, as well as Southeast Asia, and so Malaysia, Singapore, Hong Kong, all offer opportunities. In addition, there's one other very strong force going on in addition to technology, that is stable money as an influence for investment.

So we've seen substantial advances on that front in Turkey, and also in Brazil and Mexico. So you have this world environment where the U.S. is going strongly and where two forces are being projected or being picked up abroad. One is entrepreneurial technology development and productivity enhancement and the other is the spread of sound money.

Glassman: And, as far as sound money is concerned, you have some concerns about the Euro, but would you say that as far as the European currency in general is concerned, that seems to be pretty sound and European countries are beginning to move in an entrepreneurial direction?

Malpass: Yes, I think the Euro has been a huge advance for Europe and its going to continue to be. Over the next ten years it will spread to other countries and bring stable money and lower interest rates to them. We're going through a period right now where they have to figure out how to operate monetary policy, especially at a time when the U.S. dollar has been incredibly strong. So, you've got to find a way to deal with the current environment. But I think over the longer horizon, the Euro has been a tremendous success and has more benefits to come.

On entrepreneurialism, it's more of a mixed bag for Europe. They're making some progress on the labor mobility front, also on the tax front. There are some powerful tax cutting movements in Germany, a little bit in Italy, a little bit in France and those seem to be developing. Entrepreneurialism proper has caught hold in the United Kingdom and in Ireland, but it's had some difficulty spreading to the continent. I think we'll see, we need to see some more developments in that area before we can say with confidence that Europe is getting it.

Glassman: But in Scandinavia, entrepreneurship seems to be doing well?

Malpass: Scandinavia has developed a great niche in technology. I think that's a little different from abroad in sustaining entrepreneurialism, but clearly a powerful technology hub being created up there.

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