We have had many inquiries about the comments regarding short pools attacking stocks. What types of stocks do they attack? Clearly it would be stocks in an industry with declining fundamentals like financials.  The most recent example mentioned of short pools was in the context of their involvement in the Bear Stearns decline that preceded its forced sale to J.P. Morgan.  Other financials are likely to come under attack due to their deteriorated fundamentals.

People have asked about whether they are attacking gold, energy, food or base metals stocks.  Our answer is, No.  In our opinion, it would be foolhardy to short and try to push down companies in industries where demand for their end products is so strong.  The industry groups where the short pools are more likely going to find their targets are in the financial and home building related areas.


Those of you who were watching economic and financial events in the late seventies and eighties will remember Paul Volcker.  Mr. Volcker was, and is a towering figure in financial markets; not only because of his 6 foot 7 inch height.  As chairman of the Federal Reserve he engineered the defeat of inflation after the confused leadership of the seventies had led to a large and growing inflation by 1980.  In recent months, Mr. Volcker broke his long silence to remark on the latest developments in the banking system and the financial and credit markets.

May I summarize the main points in his recent speech to the Economic Club of New York?
1. “That the United states as a whole has become addicted to spending and consuming beyond its capacity to produce.”
2. “Financial legerdemain” and other techniques disguised the problems for a while, but it is time to return to “painful but necessary adjustments”
3.  Private sector bankers enjoy the benefits when things go well, but do not share in the downside when things go poorly.
4.  He pointed out that the Federal Reserve’s job is to act as “custodian of the nation’s money and to protect its value and resist chronic pressures towards inflation”.  To put it another way the Federal Reserve’s job is not to bail out irresponsible bankers and load up its balance sheet with shabby paper (low quality mortgage bonds purchased from the very bankers who overpaid themselves while creating this mess).

In our opinion, he is saying quite clearly that the events of the past: 1) Consuming more than we can afford, 2) Using derivatives and accounting gimmickry to hide bad investments and increase leverage way beyond legal limits, 3) over pay ourselves and be willing to enjoy the good and go crying for help when the inevitable bad happens…will all lead to another period of inflation like the 70’s if we are not careful.  May I insert that the United States and the developed world are far from careful at this stage.

Let us fervently hope that a leader of the character and intelligence of Mr. Volcker is available to rescue us after the coming inflation as he did in the period of his stewardship of the Federal Reserve.

TRANSLATION OF THE ABOVE…Inflation is coming and there will be a great price to pay when it dawns on everyone that the inflation genie is out of the bottle.


Around our offices every day we are inundated by information about faster money supply growth and higher inflation in a host of countries in Asia, Europe, Latin America and other regions.  We are seeing the U.S. dollar fall while some Asian countries and their currencies are booming.  The Chinese Yuan has risen 11% versus the dollar in the last year.  Huge cash inflows into China are forcing the currency up as people from all over the world abandon the dollar and buy the Chinese, Japanese, Indian and other Asian currencies.

On April 9, the World Bank estimated that global food prices have risen 83% over the last three years.  Further, the IMF forecasts that consumer prices in industrialized and emerging countries will rise 7.4% this year.  This is the highest level since 2001. These higher food prices are leading to very sad global news about food riots and great suffering among the worlds poor.

To read the article, go to:

We have been expecting this and we have prepared for it by owning gold, fertilizer and farming related companies, base metals, a few value stocks in China where the currency is rising, and other vehicles which benefit from inflation.

In addition, our clients own foreign currency denominated government bonds in non U.S. currencies earning interest. We believe that except for a few industries listed above, investment opportunities in world markets are not numerous.  We will be adding to these foreign currency denominated bond positions.

Respectfully yours,

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