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BELATEDLY, THE RTC STYLE BAILOUT HAS BEEN INTRODUCED

BELATEDLY, THE RTC STYLE BAILOUT HAS BEEN INTRODUCED

One thing we do know is that the cost will be much higher than if they had done it a year ago, when we first mentioned that such a government bailout would be necessary in order to achieve some stability in the credit markets

THE DERIVATIVE PROBLEM REMAINS UNSOLVED

The derivative meltdown has still not been dealt with, and this will cost much more than the Treasury Department’s first estimate of $700 billion.  Remember, when the first estimates of the war in Iraq were about $100 billion?  We have spent well over $700 billion in Iraq thus far…plus we must add the cost of rehabilitation, care and pensions for the injured, and for those who served.

We predict that the FINAL COST OF THE BAIL OUT from all sources around the world five years from today will be over $5 TRILLION…and it could be AS HIGH AS  $20 TRILLION.

We are not kidding…this is how we see it happening:

New crises will arise, and governments will again implement the mechanism of guaranteeing and absorbing financial institutions’ losses and toxic paper.  The many governments involved will add money to favored institutions or give handouts to voting blocs, and play down the devastating costs, especially after the public has become numb to the costs.

GOVERNMENTS ARE ALREADY UNDERTAKING AN EFFORT TO REFLATE THE WORLD ECONOMY

There is only one long term way to deal with the bailout, and that is to print money and expand the money supply of the U.S. and other developed countries.  The money printing has already begun…now we expect it will accelerate.

Already, global money supply has been growing at about 15% prior to this bail out.  Meanwhile, productivity has been growing slowly.  As we have discussed in previous letters, inflation is born from the difference between the monetary growth and productivity growth.

INFLATION IS AHEAD OF US AND IT WILL BE A BIG PROBLEM

Not for the next few months, but in coming years, inflation will be a big problem…and we had all better prepare for it.  You may be getting tired of hearing us beat this same old drum but if you prepare for the next problem before it arrives, you will be much more financially secure.

The only solution for the current crisis is to liquefy the global economic system and liquefy it to an extreme never before experienced.  You think that the mortgage bubble was a big one?  Wait until you see the next bubbles.

The U.S., Europe, Australia, Japan, Canada, and others will all join the parade to fiscal and monetary irresponsibility by inflating their money supplies and creating our next big investment opportunity.

THE NEXT BIG INVESTMENT OPPORTUNITY IS TO REALIZE THAT THE U.S. DOLLAR WILL FALL AND INFLATION WILL RISE LONG TERM

That is the inflation trade.  This means shorting the dollar by going long strong, better managed currencies while also staying long gold.  It will not be easy, or is it for the faint hearted.  The markets will be volatile but what is the choice?  Base metals and industrial commodities will not participate in the price rise at first due to slow economic activity and a serious recession or quasi-depression in the developed world.  Later, we expect they will resume their price appreciation.

Energy substitutes such as uranium, wind, natural gas automobiles, and some other economically viable substitutes will do fine, but investors should be careful of substitutes that come with purely political motives.  In a time of diminished resources and slowing economic activity, politically popular but economically absurd alternatives (e.g. biofuels with subsidies) will get a lot of lip service, but action will be delayed.

IN RECENT MONTHS, THE U.S. HAS INCREASED ITS LIABILITIES IMMENSELY

For how long can global currency markets ignore the obvious fact that the dollar is now a very over-levered currency?  The U.S. has too much debt, and too many obligations to bail out world financial institutions, not just U.S. institutions.

The U.S. dollar must fall…and fall substantially.  We agree with those currency experts who say that the Euro, Yen, and British Pound also have problems.  This is true, but the U.S. dollar problems remain supreme.  We favor the Norwegian Krona, the Chinese Yuan and other more effectively managed currencies.

Because so many other currencies are poorly managed, there has been a recent move into gold.  Our long term bullish outlook for gold remains consistent.

Another area of focus:  We continue to believe that China and India will grow much faster than the developed world for many years to come.  We do not own Indian stocks due to the fact that the market has not fallen enough to make it inexpensive, but we do believe that China is cheap for long term investors.  We believe that we will see many policy decisions by the Chinese government designed to strengthen Chinese economic activity and the Chinese stock market in coming months.  Of all emerging markets, the least attractive are Russia and the Eastern European countries, which on the whole are poorly managed.

Thank you for listening.


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