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Higher rates on the horizon mean many things.

It is bearish for
1.  Bonds
2.  Income stocks
3.  Companies that borrow a great deal to operate their businesses (profit margins will be negatively impacted)
4.  All assets with fixed income and rising costs

It can be bullish for
1.      Common stocks of growing companies (they will get money formerly allocated to bonds)
2.      Commodities that benefit from inflationary psychology (when short term interest rates rise slower than the rate of inflation, it adds to inflationary psychology)
3.      Companies and products that benefit from higher inflation


People often say that interest rate increases put pressure on inflationary expectations.  In our opinion, this is only true if interest rate increases are faster than inflation increases.  Currently, it is obvious that inflation is rising faster than interest rates and as we allude to above, this causes inflationary expectations to grow.

Some other implications of higher rates:
1.      Carry Trade-Some positive and some negative influences: it is positive for currencies with higher rates; it is negative for the Japanese Yen, which has very  low rates.
2.      It is bad for speculators who borrow a lot for their speculation; however it can be good for long-term, conservative investors
3.      Stock market valuations are a function of earnings growth and interest rates.  If earnings growth remains constant, higher rates mean slightly lower P/E ratios for  stocks.
4.      It is bad for private equity.  Higher rates make it harder for private equity firms to take their companies public.  Plus, tighter credit makes it harder to borrow at the  low rates which make private equity more profitable.


Investors should sell bonds and income stocks that have fixed yields.  Hold cash in high yielding well-managed currencies until rates peak, which may take several years.  Higher interest rates in the U.S. can strengthen the U.S. dollar in the short term; however, other countries are raising their rates too.  Therefore, so we continue to favor higher yielding currencies like the Australian dollar and British pound.

Posted: June 7, 2007


India and China, with their educated and hard working people have kept inflation down in the developed world for years.  Cheap high tech skills from India and cheap labor intensive products from China have been enjoyed in the developed nations.  This has kept the world from experiencing the kind of inflation one would have expected.  We will now see inflation rising due to the big increases for base metals, energy and luxury goods prices.

The period of low costs of goods and services from the above countries is now over.  China and India are experiencing wage inflation as the pool of skilled English speakers has been employed.  For example, India now imports experienced managers from the U.S. and Indian CEO’s make as much as many CEO’s in the U.S.

To sum it up, the pool of qualified labor is now employed and new hires can only be made by paying more to someone who already has a job.  This will create inflationary problems in the world as a whole and in the U.S. especially.

We anticipate that periodic market corrections will be experienced in all world markets during the summer and autumn months.  We believe that these will create buying opportunities for good quality stocks which benefit from the themes that we continue to favor.  Those themes are:
• Growth of China, India and the Asian region creates investment opportunity in these markets.
• Energy demand will continue to grow; supply is not growing hence energy prices will rise.
• Non U.S. dollar based currencies will continue to appreciate.
• Demand for global financial services will grow rapidly.
• Industrial metals and precious metals will be needed to further global growth.  Supply is stagnant and demand is rising, hence prices will rise.
• Transportation equipment is important for this growth to continue.

Posted: June 1, 2007


India just reported GDP growth of 9.4% for the fiscal year ended March 2007.  This is way above the 8% predicted rate of growth and moving toward China’s stunning 10.4% growth rate.

India, like China is becoming an engine of global growth.  The U.S. is clearly no longer the important engine of global growth that it once was.  Let us face facts.  The U.S. has lost much of its global political leadership, and now its global economic leadership is coming into question.

The U.S. is still the world’s biggest economy, but with a growth rate of less than 1% in the last quarter, and with close to double digit growth in India and China there is little doubt that the U.S. will lose its status as the world’s biggest economy within a decade if these trends persist.

We are American, and we are pro-America, but we are also realists.  Let us invest in those areas where the money is to be made.  Let us invest in the countries that are growing fast and in the commodities and precious metals which will benefit from these trends.  Let us look at the transportation companies whose products and services are necessary to effectuate this growth and at the energy and base metals which are the building blocks of any economy.  Let us also look at the global financial intermediaries that will provide the financing for this growth and at the precious metals stocks where many of the profits will be invested.

In our opinion, gold will play a major part as a vehicle that central banks will acquire to strengthen their balance sheets.  Recently, Spain sold some gold.  The buyers were the central banks of countries with growing economies-the buyers were Asian central banks.