This is a season of reflection with the harvests in the northern hemisphere and the planting season in the southern hemisphere. We are thus reflecting and wanted to take this opportunity to thank you for your confidence, friendship, and readership.

HOW WE GOT HERE AND WHERE WE ARE HEADED

Every so often it is our policy to review the history of what brought us here to this place in world economic history and thus to see what the economic and stock market future holds.

1. In 1989, The Berlin wall fell and the Soviet Union collapsed. It turned out that the Soviet Union was a much bigger economic failure than western economists had realized and all of the left wing discussion of instituting Soviet-style planned economies stopped in the Western universities, and stopped being practiced by many third world countries.

2. Instead, third world countries took their cue from the newly developed Asian Tigers which grew so nicely in the 1980 and 1990's. At the time, the Asian Tigers were: Hong Kong, Korea, Singapore, and Taiwan. Countries that wanted to develop and to grow began to emulate these countries economic policies which were based upon market capitalism.

3. When China created property rights for foreigners, China received a wave of outside capital investment which continues to this day. Due to this wave of investment, China has developed into the most successful economic story of the new century. India has been more reticent to accept foreign capital and clings to some of the old socialist policies but they too have grown stunningly fast. Simultaneously, the developed countries' economic growth is slowing.

4. Because the social safety net is limited, residents of these developing and newly-developed countries tend to save more than people in developed countries. So a huge wave of savings has accumulated in the developing world. This is a key thing to remember.

5. At the end of 2006 the world found itself with a group of debtor nations with free spending populations...the developed world, and another group of creditor nations with saving populations...the developing world.

6. In 2007 a world financial crisis has developed around sub-prime debt and many of the world's banking institutions and investment banks are shaky. We believe that this crisis will be solved by a four pronged attack.

New capital investments in the shaky banks by developing country companies (in other words; Chinese, Russian, United Arab Emirates and Saudi Arabian companies among others) may redeploy their savings to invest in western financial institutions to strengthen them.

The World's central banks will unleash a wave of liquidity to create confidence in the global banking system.

An organization will be funded to purchase illiquid debt and make a market in it so that transactions can be carried out. This may be funded by private or government sources in the U.S., and maybe in Europe.

The U.S. Treasury and other governments will buy up low quality debt to guarantee financial institutions against excessive losses. Taxpayers will bear the brunt of the folly of banks.

THIS BRINGS US TO TODAY

Two major trends dominate:

Trend 1

Some countries are growing much faster (and will be for the next few years) than others.

Clearly, the fast growing parts of the world: China, India, developing Asia, Latin America, and Eastern Europe will have the majority of the corporate profits and growth in coming years . As a result, most wise investors will focus on these regions. We have been investing in these regions for decades and will continue to focus our investments where the growth is to be found.

Trend 2

We have predicted it for a few months, and it has arrived. The U.S. is in a recession. Europe may also end up in a recession. This will cause a slow down in growth in the emerging world, but their growth will remain positive and will re-accelerate as the U.S. recession winds down.

The banking crisis and recession have left the U.S. dollar in shambles. The U.S. dollar is still sick. Gold and some foreign currencies have been a good alternative to a depreciating dollar.

BEN BERNANKE MAKES HIS MARK

You would not expect the Fed to be so direct, but the Federal Reserve of Ben Bernanke is proving to be a far cry from the Federal Reserve of Alan Greenspan in terms of transparency and candor. This is especially noticeable in the minutes of the last Fed meeting. Let me explain.

A disturbing note, The Federal Reserve governors in the minutes stated that the Fed did not believe that the U.S. economy could grow more that 2.5% per year without engendering inflation. Even while they held that the high food and fuel prices that had been plaguing the economy would end after 2008 causing inflation to decline. This is not good news.

IF I MAY TRANSLATE

1. After the current recession ends, if the U.S. economy grows at about 2.5% a year this compares very unfavorably to China growing 11% and India 9%per year. May I pose a question? Why would anybody own U.S. stocks with a declining currency and a 2.5% GDP growth when they can get stocks abroad at comparable PE ratios and with GDP growth of 3 or 4 times as much?

Let me further elaborate, GDP growth of 2.5% long term probably means corporate profit growth of about 8%. While GDP growth of 9% or 11% probably means corporate profit growth of 30% plus.

We believe that stock prices are a function of corporate profits. There is in our opinion ample historical proof of this and it also makes excellent logical sense. Thus, faster growth in profits means a faster rise in stock market valuations. In other words you make more money in stocks when profits are growing faster...and profits grow faster when economic growth is faster.

All of the above is very bullish for the long-term growth of the stock markets of China, India, and other fast growing countries. We discuss the short term outlook below.

2. If the U.S. economy gets up a head of steam and grows faster than 2.5% the Federal Reserve believes that inflation will rise. Another word for rising inflation and slowing or flat growth is Stagflation.

Clearly stagflation is to be avoided...no growth combined with rising inflation means a lower standard of living for all who experience it...This is a very unattractive outlook and although we don't see that right away we do not rule it out in the long term, especially if the U.S. government keeps making such unwise economic decisions as they have over the last few years.

SUMMARY-WE STILL LIKE THE SAME LONG-TERM THEMES

India and China are getting a correction and we plan to buy them after a decline. Currently, we are very light in these two countries.

Gold and precious metals also getting a small correction and we will continue our commitment here. They benefit from a lower dollar, and the fact that inflation is rising in the emerging world.

Due to a recession in the U.S. which we believe has already begun, and a possible recession in Western Europe, base metals will be under pressure for a few months as some of the developed world goes through a recession. The developing world will slow down but continue to grow. We will avoid base metals while much of the world is in recession.

Foreign currencies continue to outperform the U.S. dollar, and we believe that this trend will continue long term.

Energy continues to hit new highs. After oil peaks and pulls back we will add to our commitments here.

Altogether for the long term; India, China, non Japan Asia, precious metals, energy, non U.S. currencies, and base metals will continue to outperform, although a correction is currently under way in many of these areas.

We plan to hold much of our cash in foreign currencies or short term foreign government bonds, as has been part of our strategy for several years.

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