U.S. BOND MARKET FALL-EFFECTS WILL BE FELT WORLD WIDE

Last week, the U.S. bond market fell substantially and yields rose as
investors finally began to see the obvious: Quantitative Easing (the
purchase of U.S. Treasury bonds by the Federal Reserve) and its potential
inflationary pressures are weakening the U.S. dollar.

As most economists will tell you, the U.S. economy is in a depression.
Statistically speaking, most depressions are deflationary and therefore
accompanied by a fall in interest rates. However, the bond market's recent
behavior provides evidence that the current depression is not deflationary.
On the contrary, inflationary pressures are building and interest rates are
rising. Bond investors, looking ahead and seeing a light, are realizing
that it is the headlight of an oncoming train...and this oncoming train is
the trillions of dollars of U.S. bonds which must be floated by the Federal
Reserve in the next few years. The consequences of this flotation will
include a weakening of the dollar and an increase in interest rates.
Investors are finally awakening to this trend which we believe will
continue for some time.

Certainly, the last two weeks have rewarded our long held global investment
strategies. In our view, this is not the end, but rather the beginning of
the decline in the U.S. dollar...and the rise in many other investment
areas. Accordingly, we continue to believe that the wise investor will not
hold U.S. dollars, but rather invest their portfolio in oil shares, gold
shares, better-managed non U.S. currencies, and stocks in countries where
corporate profits will grow rapidly, such as China, India, and Brazil and
selected other countries.

For several years, our commentary has brought attention to the looming
deficits and the questionable methods of financing them that have become so
prevalent. The current situation of the U.S. economy thus comes as no
surprise to our readers. What may be a surprise to our
readers is how long the U.S. dollar will decline, and how high many
alternative areas of investment, including the areas mentioned above, will
rise.

We do not mean to imply that there will be no price corrections. In fact,
investors should be aware that a correction in one or more of the areas we
mentioned could take place at any time. However, they must remember that
these are just corrections in a long term uptrend.

We strongly recommend that you use these corrections as buying
opportunities. Do not let go of your strong positions just because profit
takers or market manipulators temporarily slow down or reverse the trend.

THIS MAJOR TREND WILL LAST FOR A PROLONGED PERIOD

Use declines to add to your foreign currency and strong stock positions.
We expect something close to what was seen in the late 1970's, when
investors globally tried to diversify out of a depreciating U.S. dollar.
At that time, the U.S. dollar fell, while the prices of gold, commodities,
and many stocks in growing companies rose. Today, China, India, Japan, and
other buyers of U.S. treasury bonds reiterated that they would continue to
buy U.S. treasuries. Those are kind words, but looking at the available
cash of some of these countries, we see that they do have much cash to use
on U.S. bonds. So their words just may be meant to keep their existing
positions from falling to rapidly.

GLOBAL STOCK MARKETS LOOK FORWARD-FOCUS ON CHINA AND INDIA

As we have expected, global markets are rising even though global economic
growth continues to shrink. Markets always look forward; the only question
is how far forward do they look?

For example, every professional money manager knows that you buy cyclical
stocks, like steel, oil, coal, and heavy manufacturing shares when earnings
are low or nonexistent, and when orders and backlogs are collapsing. They
also know you must sell the same industries when business is booming, when
profits are high and everyone thinks they will go on rising because "this
time it's different".

Gold (COMEX)-One Year Chart



Crude Oil (NYMEX)-One Year Chart



As we pointed out several weeks ago, the North American, Chinese, and
European stock markets are currently selling for about the same P/E ratio
versus last 12 months earnings. The difference is the forward earnings of
the four regions. We expect China's corporate profits to grow at a rate in
excess of 17% per annum for the next five years, and Indian corporate
profits to grow at a rate in excess of 13% per annum. We expect Brazil to
grow corporate profits at about 10% per annum, while in Europe, Japan and
the U.S. corporate profits may grow at a rate of about 5% per annum for the
same time period.

Since stock market valuations are highly correlated with corporate profit
growth, we expect Chinese, Indian, and Brazilian stock markets to greatly
outperform the North American, European and Japanese stock markets over the
next five years...especially when measuring the returns in U.S. dollars.

U.S. NATIONAL DEBT

The U.S. national debt is currently about $11 trillion, which is about
$100,000 for every household and about $36,000 for every American resident.
We are paying about 4% interest on this debt, but rates will be rising and
we will be paying much more as Quantitative Easing and an ugly U.S. balance
sheet cause our creditors to demand much more interest on the money that
they lend to us. When interest rates get to 8%, as they soon will, the
cost of servicing this debt will escalate even more rapidly.
Disconcertingly, none of this realism is found in the Congressional Budget
Office's estimates, where they expect the U.S. to enjoy continued low
interest rates.

The Congressional Budget Office, which always estimates much too low (we
assume due to political pressure), states that the budget deficit for this
fiscal year is $1.8 trillion. Looking ahead they estimate next year's
deficit to be about $1 trillion, and state that it will stay in the high
ranges (above $0.5 trillion) for at least the next few years. In our view,
these numbers underestimate the severe deficits we will be facing.

UNFORTUNATELY, THE U.S. HAS NO CHOICE. IT MUST CONTINUE TO PRINT MONEY AND
DEBASE THE DOLLAR

China is positioning itself using a panoply of agreements that include
allowing Chinese Yuan bond financing by Hong Kong banks, arranging trade
related currency swap agreements with Brazil and six other countries, and
working with countries and companies all over to world to lock up assets
that it will need to run its production machine. China's purchases include
oil, coal, iron ore, nickel, and zinc to name a few. In short, China is
buying assets worldwide -including an ever increasing share of the world's
gold supply - to stoke its economic machine in coming years.

China's lust for gold is significant and deserves note. The fact is that
China has been buying much more gold than it is producing. China is buying
gold in the open market, willing to take gold off of the hands of the
poorly managed IMF and central banks like Britain, who sold most of their
gold at about $250 per ounce. Britain, the IMF, and others who have been,
or will be, gold sellers appear to us to be operating with an excess of
pompous verbiage and a shortage of common sense.

Gold will be an instrumental part of any new monetary system that is
created in the world to succeed the current Breton Woods system. When the
U.S. turns over power as the world's reserve currency to China, it will be
China's large holdings of gold and large cash hoard which will make them a
new monetary superpower. When that transition takes place, the old cliché
about the golden rule, "Whoever holds the gold makes the rules" will be
remembered for its wisdom.