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December 27, 2004

December 27, 2004

The end of 2004 is approaching and we are writing to convey our warm holiday greetings and wishes for a happy, healthy and prosperous New Year. We are also making a few predictions. We will elaborate on these points in our next email, which should reach you in the first week of 2005.

MAJOR EVENTS IN 2005
In our opinion the following events will dominate the landscape in 2005.

1. U.S. economic growth will slow in 2005 but will be positive for the year at about 2.5%. This rate is slower than 2004 growth. The country may come close to a recession by the end of 2005. I am not sure if a recession will develop in the latter part of the year but it is a possibility.

2. The U.S. dollar will rally in the first part of the year and then probably return to a descending pattern in the latter part of the year.

3. European economies will grow at a very slow rate in 2005 and Asian economies as a group will grow much faster. The two fastest growing large economies will be India and China.

4. Foreign markets will attract additional investment in 2005. Money will flow to emerging economies especially those who can supply materials or expertise to the continuing Chinese juggernaut. Possible recipients of investment money are Korea, Brazil, Taiwan, Hong Kong and possibly India.

5. U.S. small capitalization growth companies will continue to prosper in 2005. The stock market always treats good growth companies with low prices well.

6. Oil will range between $30 and $60 in 2005 due to a slowdown in Chinese economic growth. If terrorism continues, and we believe that there is no doubt that it will, oil will be very volatile moving back above $50 per barrel. We expect an average oil price in the high $30’s per barrel for the year. We expect oil to stay in the $30 to $60 range for the next several years. This provides a big opportunity in oil and natural gas stocks during periods of seasonal market weakness. Energy stocks often fall in spring with the onset of warm weather and rise with the onset of winter. Today, energy stocks do not reflect the long-term price of above $30. Propaganda and misinformation have led most observers to miss the point that energy is in much less supply than is generally believed.

7. China will grow its GDP by between 6% and 10 % in 2005. This is slower growth than in 2004 but it is not slow by any measure. Very few countries on the face of the globe can grow at above 5% a year.

8. Bigger U.S. stocks will be generally unattractive in the first part of 2005. It is the first year of a new presidential cycle. U.S. Presidents take the bad economic medicine in the first year of a four-year cycle so that they can report sunny economic news in the year before the next presidential election. Historically, stocks do poorly in the later part of the first year of a presidential cycle and the early part of the second year. Then the economy and stocks do better for the remainder of the presidential term.

9. Stocks of Asian economies like Singapore, Korea and Taiwan do well in 2005.

KEY POLITICAL AND ECONOMIC POINTS

RUSSIA

Russia will continue to take control of energy and probably telecommunications assets as President Putin reestablishes an autocracy of the KGB in Russia.

The Ukraine issue is one of great importance to Russia. They do not want a pro-western government in Ukraine just as they are beginning to restructure themselves to once again become a world political power. The pro-western candidate has won. Now we look for part of Ukraine to eventually split off and join a Russian Federation. The part to split and join the Russian Federation will be the eastern and southern sections of the country.

Russia will use its energy and natural resources to economically ally itself with Europe, or possibly Japan or China, to balance what they see as existing U.S. global hegemony and rising Chinese global hegemony.

The projection of military power is a function in the long run of economic power. To put it simplistically, it is impossible to fight wars if you can’t pay for them. Thus, economic allies are more important than military allies in today’s world.

CHINA

It is widely understood that China is the rising global colossus. In order for China to grow it must have raw materials and economic power. Its economic power comes from the western addiction to cheap goods and China’s ability to produce them. China now must obtain a continuous flow of raw materials. In order to do so, China must create the alliances to continue to obtain them. As China’s economic machine continues to gain momentum, its world power gains momentum.