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THE NEW INDUSTRIAL REVOLUTION

THE NEW INDUSTRIAL REVOLUTION

The holiday season is upon us, so allow Tony and me to wish all of you and your families a very happy holiday season and warm wishes for health, success and every joy in years to come.

INTRODUCING A NEW THEME FOR 2007 – TRENDS LAST SEEN IN THE 1500’S ARE BEING RE-ESTABLISHED

I imagine some are saying, “Monty! This is an even wackier theme that those that you usually come up with. What do you mean by this absurd statement?”

A new industrial revolution is taking place outside of the developed economies. Presently, the top developed economies the U.S., Japan, and Western Europe are growing their GDP (another name for production of goods and services) at about 2% per year. The developing world is growing at 7-10% per year. According to a recent speech by the former head of the World Bank, James Wolfensohn, China’s current $2 trillion GDP will approach $50 trillion. At the same time, according to Goldman Sachs research, India will go from less than $1 trillion to about $27 trillion in GDP. Over the same time frame, the U.S. will grow from about $13 trillion to $37 trillion or about 2 1/2 times. By 2050, China will be substantially bigger than the U.S. and India will be about 70% as big as the U.S. Together, China’s and India’s economies will be larger than all the current developed countries economies.

This new industrial revolution is happening much faster, and it will dwarf the one that took Europe from a backwater (economically speaking) in the late Middle Ages to global dominance. From the 16th century to the 19th century, technological advancements in weapons, manufacturing, and transportation catapulted Europe’s economies over the much wealthier, more populous regions of Asia Minor, and what is now India and China. According to global economic historians, these regions controlled about 50% of the world’s GDP in the year 1500. While the Western economies became industrialized and started their colonial expansion, India and China remained primarily agrarian. India and China’s GDP bottomed at a very modest 7% of world’s total around 1980.

In recent years, the huge populations in these Asian giants have gotten a taste of “prosperity”, and they are becoming ever more motivated to improve their condition. They are educating their populations, embracing innovation, and leveraging their competitive and comparative advantages. It is only a matter of time before their GDP’s are once again tops in the world.

We estimate that, about 1 billion out of the world’s 6.5 billion people are actively participating in the global economic system. By 2050, we expect 2 to 3 billion people out of an estimated world population over 7.5 billion will be frequent consumers of goods, savers, investors and participants in the global economy.

By this date the economies of India and China will be about 50% of the world’s economy. They will have become the most economically powerful nations in the world. We must be aware of these trends and we must prepare to do business with and work with these emerging powerhouses.

Education will be a key. A year ago, I was speaking to my next door neighbor here in L.A. She is a widow with two young children. At the time, both of her preschool children were learning to speak Mandarin Chinese. A Chinese lady would come daily to converse with them and to teach them to write Chinese. My neighbor had gone to top universities, and plans for her children to enjoy the education and success that she and her late husband enjoyed. I give this example to explain what must be done on a large scale in the developed world. We must learn their language, learn how they think and learn to operate in their world, as they will set the agenda for the second half of the 21st century.

MOST PEOPLE IN THE DEVELOPED COUNTRIES ARE ASLEEP AND DON’T EVEN KNOW THAT THEY ARE LOSING THE GLOBAL CONTEST FOR ECONOMIC GROWTH

Economic power leads to military and political influence. What this really means is that they are losing the contest for wealth and supremacy.

AN INTERESTING ASIDE

On another note, it is with admiration, mixed with humor, and more than a touch of irony that I nominate the Finance Minister of Italy Tommaso Padoa-Schioppa for the “Most Honest Finance Minister in Recent History” award.

According to the Financial Times of Friday Nov 17, 2006, Mr. Padoa-Schioppa, who is a respected economist and former central banker, was speaking at the German Bundesbank, when he recalled the legend of Faust who sold his soul to the devil: “For Faust, the lure of Mephistopheles’ services is greatly enhanced by the fact that the price, albeit a terrible one, is to be paid later. For politicians, the lure of the support obtained through public expenditures is similarly enhanced by the fact that public debt will be paid –or reneged–by next generations; often well after the end for one’s political career.”

Clearly Mr. Padoa-Schioppa is a man who has already made his reputation and will never run for public office. This makes his honesty more understandable. But I still admire his bravery, for as we all know, he will be pilloried and denounced for his honesty and intelligent analysis of the motivations of politicians.

SUMMARY

We continue to ride the same horses; energy, metals, non-U.S. currencies, Indian and Chinese stocks.

Outside the developed world, massive infrastructure building projects are under way, and more are being planned. New markets for housing, automotives, consumer goods and services are being created. All of this points to dramatically higher demand for energy and raw materials. Well managed commodity exploration and production companies, and well positioned commodity industry suppliers are in a position to produce tremendous returns for their investors.

In order to achieve the higher returns being created by the addition of billions of people to the global economic system, investors must look to where the growth is, and where the tailwinds are strongest. Operating margins and corporate profits in industries serving the faster growing, less exploited markets expand more easily than in slower growing, mature exploited markets. Fast growing corporate profits equate to faster stock appreciation.

We look forward to hearing your comments and suggestions.