From: anonymous-remailer@shell.portal.com
Date: Mon, 4 Dec 95 01:43:08 PST
To: cypherpunks@toad.com
Subject: Re: Do the Right Thing
Message-ID: <199512040942.BAA22190@jobe.shell.portal.com>
MIME-Version: 1.0
Content-Type: text/plain


On Sun, 3 Dec 1995, Timothy C. May wrote:


> Netscape, being the dominant browser company, and Microsoft, being the
> dominant OS company, are in special positions to "build in Big Brother."
> I'm not claiming they are, just that they are clearly in a position to make
> it technologically more feasible to make non-GAK illegal. They both need to
> carefully think about the role that's been "given" to them (whether by
> fortune, hard work, or being in the right place at the right time) and do
> what's right.

That's always a tough position to be in.  If Netscape or Microsoft
knew what was the "right" thing to do, I don't doubt that they'd be
doing it.

The problem is always that there is no crystal clear "right" answer
on lots of these issues.  Everything is always "fuzzy" because of the
possible consequence that flows from action.

> Strong words, perhaps, but the implications of mandatory key escrow are
> quite clear. We debated these points for a long time during the Clipper
> debate, and later when "Software Key Escrow" began to rear its head. I
> won't repeat these arguments against GAK here, but will take this
> opportunity to quote from a new book that actually quotes my words:

Good quote, Tim.  

I'll lift a glass of eggnog at the end of the "open door policy" as
well.  It really doesn't serve anyone's interests at all.  My concern
is the policy wind-down challenge.  It can call for a real strong
stomach sometimes, as Greenspan could probably attest.  

It probably shouldn't be embraced except by the most foolish of fools.

> And time is of the essence. Things move very fast. It is no longer the case
> that a law is passed, then companies respond to the new legal regime with
> their own policies and products. Companies, especially in high tech, are
> "partners" from the start, as we saw with the Clipper development (where
> AT&T had known about Clipper for years prior to the first public
> announcement, and was cooperating in the development of it, not to mention
> the other companies such as Mykotronx, VLSI Technology, etc., which were
> involved in secret for years).

Sure, this isn't news to anyone.  Time is now compressed.

There usually has to be some lead time to these things.  AT&T as an
example has been well rewarded -- in fact, some circles might suggest
that they were overly well-rewarded -- when they got a $1 Billion plus
preferential contract in the Middle East (Bahrain, if memory serves ...)
following Desert Storm.

Does this then mean that anyone should be surprised with Thomson-CSF's
alternate means against Raytheon?  Not this cowboy.  

We're into a completely different altitude of engagement here.
Completely different.  And in this case, we not only face an enemy,
but we're surrounded with civilians who can get caught in the
cross-fire.  No different than the orphans who were used as human
shields in Bosnia.

These companies generally need to be briefed early on what the action
plan will be and on the possible range of consequences and the
attendant probabilities so that proper contingencies can be drawn up.
Unless of course, these companies are actually your adversary, while
posing as your friend, in which case it's best to keep them out of the
loop altogether.  

Probably best just to amuse them, as you do a child in a crib, while
you go about your affairs.

> It is only sheer speculation on our part (some of us, at least) that
> negotiations about GAK have been going on with the major software
> companies. Jim Clark, for example, learned what he knows about key escrow
> _someplace_, and it probably wasn't from our list or from articles he'd
> read. I'm betting, but could of course be wrong, that he and other folks at
> Netscape (and I mustn't leave out Microsoft, Sun, SGI, Apple, etc.) have
> been briefed on key escrow and that various negotiations are already
> underway. This would match how things were done with Clipper, and would
> explain Clark's voiced support for the need for GAK.

Clark's voiced support for GAK is one of the most insane ideas I have
come across.  Does he have any idea of what he is tinkering with?
Does he know how to play his tune of Tommy the Tinkerer??

Somehow, I have doubts.  Serious doubts.

His GAK comments could trigger a very nice cascade throughout the
entire high-tech sector which could spill over and out.  "Friendly
Fire" could be deadly to some American financial powerhouses.  Not
only could Jim throw a monkey-wrench into the exit-strategies of
valley venture-capitalist's, but this whole scenario could well 
spill into other issuers if he's not careful.

To understand, the market truly is not looking at Netscape as a
"software" play.  It is the quintessential Internet play -- a whole
"new" economic sector.  

The sector which many Dow firms (IBM, AT&T, and Disney) hope to
exploit as part of their mid to long-term business plans. Future 
earnings forecasts and indeed valuations up and down the street
are based around the assumption of Internet success.  Jim is playing
with fire, if the audience he's _hoping_ to address isn't listening to
him while _another_ audience in fact is.

Anyone who doubts this, or thinks that the markets aren't particularly
vulnerable and sensitive, shouldn't listen to me -- who am i -- they
should listen instead to the true "professionals".  

Here's what Doug Casey, an investment adviser out of Baltimore is
writing:

    "We're at the tail end of one of the great manias of history,
    where value is thrown totally to the wind and everybody with two
    nickels to rub together plans on making a million with mutual
    funds.  I sincerely hope that all the best happens and the market
    goes to 10,000.  But I'm not planning on joining the party.  Since
    May, 1985, when the mutual fund assets market reached a $100
    Billion (US), asset growth has gone hyperbolic.  Half of all the
    money in equity funds has come in during the last TWO years.  It's
    a mania of historic proportions.  It's completely and totally
    insane."

I might go one step further, and ask the thorny question of how much
of that recent mutual fund investment -- the "hot money" that's come
in over the last two years -- is actually "leveraged money".  How much
of it is borrowed funds?  Probably a pretty fair chunk.

Then I might ask how many of these casino bets, are with money that
people truly can't afford to loose.  How many IRA's or college funds
are invested either directly or indirectly in Spyglass, or some other
darling??  Instead of prudent "blue-chip" stuff, that couldn't
*possibly* ever take a big hit -- parts of the Dow Industrials -- like
AT&T or Disney??  Again, probably a fair chunk.

Let's suppose that as a result of Jim's GAK comments, people loose
faith and ask to redeem their mutuals.  What's the cash-position of
these funds?  Do they have the liquidity to meet the redemptions or
will they have to engage in selling wave after selling wave -- selling 
everything regardless of "fundamentals"?  And then will the across
the board selling cause ever more redemptions as hopes and dreams 
fade and as reality sets in?

Maybe, I'll help answer that question, by quoting analyst, Leo Hood,
from Gainesville Florida, who spoke of some of the risks and attempted 
to debunk the perceived "safeguards" when he wrote:

     "One by one, investors have moved their money out of conservative
     investments and into growth funds and high-tech stocks.  Many
     feel this concentration of power in the hands of a few is a
     safeguard against a horde of small investors selling all at
     once.  I think the opposite is true.  With funds down to very low
     cash levels, a panic by individuals is likely to make matters
     worse."

Hood is correct in this case, about the present state of mutual fund
liquidity.  It's next to non-existant.  And Hood raises another market
vector to contend with.  The so-called "safeguard" no longer resides
in broadly distributed wetware.  Instead, everything is auto-pilot.

The safeguard -- Mr. "Safeguard" Circuit-breaker investment fund
manager -- can't default on a client redemption.  If he doesn't have
cash in the bank, he has no option but to raise cash by selling.

In fact, he might not even have the authority or discretion to
determine what he'll sell.  He might be forced to follow the
Investment Committee's guidelines and formulae.  He might even try to
play hero, and over-sell near the perceived market "top" to meet his
anticipated future redemptions, and "beat the market", so that he and
his fund have claim to future "bragging rights".

Seeds for an anticipatory meltdown??

Possibly.

In addition to the historic mania for mutual funds, Alan Newman from
Great Neck, New York tries to help out and give us some historical
perspective on where our market sits, historically.  He looks back
many years and writes:

     "The dollar value of all U.S. stocks now amounts to 85.9 per-cent
     of nominal GNP -- far and away the highest such reading of all
     time.  Prior peaks in August 1929 at 77.4 per-cent, December 1968
     at 79.3 per-cent and December 1972 at 80 per-cent were all
     followed by brutal bear markets that lopped off at least 21
     percent in value over the next twelve months.  Two of these
     times, 1929 and 1973-74 -- marked the start of the two worst bear
     markets of the century.

To understand and give Alan's words some context, especially his
observation that these nosebleed valuation levels were invariably
followed by spectacular historic corrections, let's remember that
his data reflected old fundamentals.  The old-style market.

This is not '29 nor '73-74.  Back then, we didn't have the compressed
ultra-sensitive global market we now face, where a sneeze turns into
an earthquake.

We also didn't use the complex financial instruments (many of which
are off-balance sheet) like we now do.  And we didn't have duelling
neural nets in charge of trading. 

The seasoned professionals with the experience and human reason and
judgment to manage these events are gone.  The ones who had the
authority in the past to exercise their "judgment" in managing new
"unlearned" events have had all of their authority stripped from them.

That authority now sits in other hands.  In silicon.

During '29 and 73-74, the markets certainly weren't facing the type
of optimism that we're facing today ... (well maybe, in '29 they
were.)  An optimism which has been fuelled by the media.  Including
such memorables as the Rolling Stones "Start me up" which I've heard 
hummed in elevators.  They weren't facing the "News" on the front
page of every major periodical and the near constant bombardment on
the "Internet".

And no one need mention that nifty icon in the corner of every
computer screen.  The coverage has set individual expectations to
unattainable levels.

All of the above, might well come together to form a "series of
factors" which act serially -- factors which will magnify 
market swings.

If all of this hasn't helped convince Jim, perhaps Paul Franke from
Kansas City might shed some additional illumination on the present 
situation.  Some recent history.

He tried to look at the current market within a narrower time frame
than Alan Newman's long-term historical.  He wanted to give some
current (twelve-month) context for our consideration.  He wrote:

     "In late 1994, skepticism and pessimism among investors were very
     high.  Mutual funds had cash levels of close to 10 per-cent.
     Some 60 per-cent of investment advisers were staunchly bearish.
     Interest rates were high after rising all year.  Inflation seemed
     to be picking up steam.  Today, the stock market is in the
     opposite position it was a year ago.  Futures traders are more
     bullish than they have been in several years, and mutual fund
     cash levels have fallen to near a record low.  Cautioning
     investors to watch their step may prove to be an understatement."

Some very good advice there from Kansas City about watching your step.


We have many other vectors to consider.  One, is the manner in which
mutual funds report unit-holder value.  Mutual funds do not present
and publish a "real-time" value.  The reported NPV lags the
calculation.  The value most people see published and what they will
react to, is not actualy where "it is" -- it's actually where "it was".

This information "air-gap" will tend to make the unit-holder reaction
time much longer and will tend to continue and give life to negative
news, as well as presenting exploitation opportunities to market
professionals who have an information advantage.

Domestic and International Pros will use this "feature" to calculate
and approximate the reported unit-holder value before the report hits 
the press.  On the basis of educated "guesses", they will likely trade 
through overnight or international markets to pre-position themselves 
prior to the general release of mutual fund values to the American 
public, again magnifying the raid.

This combined interplay -- between the public and the professional --
would respectively extend the reaction period and, magnify intra-day
market movements.  Or in plain English, it would last longer and be
more volatile.  Or much more succinctly, as Irwin Yamamoto said,
"_Mutual Funds_ will be an obscene expression."

The full impact would of course require a full analysis and model of
another vector, that of the entire futures market and that of
international arbitrageurs.  When they smell blood, they tend to
behave as piranha.  Arbs and "vulture funds" have the resources --
personnel resources as well as procedural resources to preferentially
position themselves such that they have an advantage of trading
execution and a preferential view of how market buy/sell orders flow
into the theatre of the exchange.  

Both professional types are prepared at a moment's notice to jump in
or refrain.  They can assess track record's, determine
capitalization's, psychoanalyze the personalities of everyone involved
and phone everyone in their Rolodex looking for some clue and subtlety
to play.

(Arbs not only have Breaking News Co-ordiantors but are also privy to
particular intelligence.  They recall how the market-makers took it on
the chin in '87 and had to go to the window.  Many market-makers made
great sacrifices in attempts to maintain order during '87.  A
sacrifice they may not willingly make to ensure system-liquidity now.)

All of these factors (and many more) will tend to interplay in one big
international soup.

Clearly, Jim is not only in position to influence the future of GAK,
but he could cause a great deal of trouble throughout the chain of the
US financial system.  The market does not need a jittery Chairman,
going on about GAK.  No one is served by this type of play.

I doubt the President wants a market meltdown as we start to move
towards an election year.  Body bags and a bad economic front are a
bad mix and could swing the whole election with the dual near 
unsurmountable election obstacles.  Then again, Bob Dole probably 
wouldn't want to take hold of the Presidential reins in that 
environment, either.

As an endnote to something that really wasn't relevant to Jim's GAK
comments, something which veered off and almost assumed a life of its
own, I'd say that the probability of the foregoing is certainly in
excess of one chance in ten.

> I hope Jeff W. and Jim C. can have some _long_ chats. The stakes are too
> high for product decisions to be made without full awareness of the
> implications. 

Yep, we're in "the shit" as they say.  

> The statements from Jim Clark do tend to imply a kind of
> defeatism, and even Jeff's comments seemed laden with qualifications about
> "only if the government requires us to." As Hal Finney noted in his post,
> it's as if the Netscape people are preparing for the inevitable. Maybe it's
> not an indication that GAK is being considered within Netscape, but maybe
> it is. After all, one rarely hears "only if we have to" qualifications on
> things that are truly from out in left field.

Preparation can be a good thing.

I still think that coming out and saying what is being said, is risky
business.  It is a comment out of left field.  But then I'm not privy
to all the variables either, so take my comments with a grain of salt.

> (A side point, somewhat abstract: The dominance of Netscape, rising from
> nowhere to becoming the major player in this debate, illustrates a point
> about "monocultures" and their ecological effects. If yellow corn is good,
> replace other strains of corn with yellow corn. Pretty soon, the world's
> corn output is 96% yellow corn. Some ecological downsides to this. In this
> case, Netscape is becoming the yellow corn of the Web, and an obvious
> "choke point" for the NSA and its sisters to mandate crypto policies.
> Hence, the role of non-yellow-corn alternatives...)

Yep Tim, I'll agree with you on this. 

I think Maurice Strong has also been saying something along these lines 
for some time.  Warning about systems and monocultures.  Sadly,
monocultures can develop without our even seeing it.  Or at least, I
think Maurice has been saying something along those lines in his own
fashion.

> And what Netscape agrees to put in future releases of its browsers or its
> servers could have dramatic effects on the whole climate.

Sure.  Just like Christmas in Bosnia will, undoubtedly.

'Tis the season ...

Hopefully, god-willing, we won't face any tragedies.




Alice de 'nonymous ...               <an455120@anon.penet.fi>


                                  ...just another one of those...


P.S.  This post is in the public domain.
                  C.  S.  U.  M.  O.  C.  L.  U.  N.  E.