Today we are in the midst of a period of large and continued shifting of alliances, both political and military. Because of these shifts, the world is facing many political and economic uncertainties. Why are alliances shifting? Wealth has shifted from the consuming nations to the producing nations of China, India and Southeast Asia. Economic power shifts ultimately lead to political power shifts. It is obvious that China, India and other emerging economic growth countries will soon become important centers of political power. In coming years, we will continue to see changing alliances. An example of a hitherto unsuspected alliance might be the joint military exercises recently held by Russia and China.

We are currently in a period of transitions and uncertainty, and thus, it is a very hard time to make accurate predictions. Therefore, we will do more reporting than predicting in this memo.


Rumors abound that the Pakistani military and intelligence establishment is shielding Osama Bin Laden and providing him with communications to manage his global terror empire (Several Saudi Arabian sources have repeated these anecdotes recently). Another recent rumor is that Osama Bin Laden is in the process of relocating to Bangladesh. He seeks to undermine the establishment there and bring his supporters to power within the government, military and security authorities. Please note that the recent bombings in Bangladesh by al Qaeda have come with a call to establish Islamic law. It seems obvious that Osama wants at least partial control of a country from which to launch his public relations and terror campaigns.


The following is a reported possible series of developments from the well-respected Stratfor Geopolitical Diary. Stratfor recently stated that nationalist pressures are building within Russia. The loss of the Soviet Union and the buffer states has created a feeling of insecurity within Russia. Stratfor believes that with the Russian economy in shambles and controlled by less than 100 oligarchs, these oligarchs will have to go. Further, according to Stratfor, the KGB will be resuscitated in order to deal with fear of foreign sympathizer.

Does this nationalism lead to more hoarding of domestic oil and gold by Russia? In our opinion, yes it will. By the way, Russia has just announced that they may increase export duties on oil. None of these events argue for lower oil prices, or more global, political and economic stability.


Historically, tight monetary and fiscal policy has led to slower economic growth in the U.S. and thus, the world. Lower corporate profits follow tightening. As you know, we are forecasting lower corporate profits starting in 2006.


According to Merrill Lynch economist Richard Bernstein, the core crude materials producer price index has deflated nine times since 1972. A profits recession followed after seven of those instances. Profits growth slowed during the two periods in which a recession did not occur. The index is now deflating.


I recently read a good article on the real estate bubble written by Robert Schiller, a Yale economist, who like many seasoned investors, correctly predicted the Internet bubble. Mr. Schiller is interviewed in the Sunday New York Times dated August 21, 2005 (section 3, page 1). This is a very informative article for those of you who want some historical background on real estate bubbles in Europe, and how they ended.

Additionally, in his recent farewell speeches in Wyoming, Fed Chairman Greenspan went out of his way to point out the current dangers in the real estate market and in real estate finances. I don’t want to over comment on real estate, so you can review my last letter for my opinions about the “real estate bubble.”


Derivatives markets are not as adaptable as the economy as a whole. When changes in the economy, or the market for the underlying instrument against which a derivative is written, occur and are not reflected immediately in the derivative, it can lead to a problem such as the one that is currently occurring with the ten-year U.S. government bond. For more detail, see the article “Derivatives Cannot Take the Strain”, in the Financial Times weekend edition date August 20, 2005 (page 11).

One product of my experience as an analyst of global, social, economic and political trends, and of individual stocks, is a suspicion of complex models and forecasts, which assume that the past is a reasonable guide to the future.

In derivatives, this reliance on historical relationships can be very dangerous. The first signs that the relationship between the derivative and the underlying instrument may have changed is usually the emergence of events that seem inconsistent with the hypothesis of the way the derivatives and the underlying instrument were supposed to behave. When inconsistencies appear, losses on the derivative may be the next thing to appear. This is just another reason why I have been, and will continue to be, wary of derivatives.


We still hold our positions in energy and have been adding to our Canadian energy trust and energy service company holdings. These are generally producers of natural gas and oil, which we believe will grow their dividends through increasing production of energy. Energy prices have risen a lot and we would not be surprised to see a price correction in coming months. The key indicator for energy performance is the outlook for the demand from China and other emerging economies. Supply is not going to increase anytime soon. If demand flags, energy stocks may correct. Otherwise, energy stocks will stay strong.


The Canadian dollar has put on a strong rally and looks like it will continue to rise over the longer term. Other major currencies are building bases, and we believe that the British Pound and others are starting to look attractive. We may add to our currency positions in coming weeks.

We continue to see gold in a base building phase and believe the next major trend will be up as the currencies once again begin to rise and the U.S. dollar resumes its decline. We would not be surprised to see the price of gold move up sooner rather than later.


Lives by Plutarch- a history of the lives of famous figures. It is remarkable how little people change over the centuries.

Why Gender Matters by Leonard Sax M.D., PhD- tips for educators and parents about the biological differences between girls and boys, and how to teach each gender to learn in the most effective manner.

The Trial and Death of Socrates by Plato- Plato’s four dialogues about the trial and death of his teacher Socrates. It presents a picture of Socrates as an uncompromising intellectual, and displays his philosophical talents, and the grace and dignity he exhibited in his last days.

Summer is still with us. I hope that you are enjoying the season.