Several Chinese economists are predicting that from 2006 until the end of 2010 (these figures are based upon statements by the Chinese government about their spending plans):

• About $350 billion U.S. is to be spent expanding the distribution and generation of electricity in China.

• About $175 billion U.S. is to be spent improving railroad infrastructure in China.

Spending over $500 billion in five years will take a heap of metals. You need iron ore, zinc, nickel, molybdenum, copper, lead and many other metals and rare earths for this kind of building. You need mining equipment and transportation equipment. Thus, demand for base metals will remain very strong.

It is obvious to even the densest observer that China must go abroad to get these minerals, and that is exactly what they have done and will continue to do; targeting assets in Africa and Latin America. When 2010 passes, the projects will only be about 25% completed. We continue to believe that China, India and others will be building out their infrastructure for decades to come.

By the way, this half of a trillion U.S. dollars does not include the growth and infrastructure demand from India, South East Asia, Eastern Europe, Russia, Latin America and the developed world; so total global demand for metals will be much higher.

All I can say is, WOW!

INFLATION

We have been saying it for a long time, but the mass media is now starting to get it. Please read this very well written op-ed article from the New York Post.

HEY BABY, INFLATION'S UGLY

By: John Crudele

July 19, 2007--YOU and I know how bad inflation really is.

We know every time we fill up our cars, go to the supermarket, pay a tuition bill or need to see a doctor.

In fact, even when we want to deceive ourselves it's difficult because inflation is such an in-our-face part of everyday life.

It's almost like when your best friend gives birth to an ugly baby.

You lie and tell her that the kid is beautiful, hoping that some day he will be. But the parents aren't blind, and they know the kid isn't going to be supporting the family by modeling anytime soon.

Washington has been telling us for years that we have model inflation - it's a beautiful thing to behold especially if you don't consider food and energy costs.

And if you look at housing in a certain light you can ignore the huge run up in prices over the years that are now only partially being reserved.

And computers - ah, those marvelous machines - may go up tremendously in price but can actually cause inflation to retreat because of a novel theory.

I'm going to spend some time over the next few weeks writing about inflation and explaining how Washington - in cahoots with academics who mean well and a media that doesn't know any better - has made the government's calculations of price statistics resemble a Vegas magician's act.

Wave a stick and price increases are there one minute, and gone the next.

The government yesterday announced relatively benign consumer price increases for June - up 0.2 percent whether you count food and energy costs or not.

You might not have noticed it at the store, but Washington thinks there was a big drop in clothing prices. That meant prices were just 2.7 percent higher than last year at this time - which would be a big no-sweat if people actually believed it.

In a bit I'll show you some of the ways Washington makes inflation disappear and why we should care.

But first, let me introduce you to some of the supporting players.

First, there's the Federal Reserve whose job it is to closely monitor inflation because big changes in prices in either direction will play a major role in whether borrowing costs should go up or down.

Right now the Fed says it is still worried about inflation even though - at just a 2.7 percent annual rise - you'd think Chairman Ben Bernanke and his guys would have moved on to more pressing issues.

But there's a reason.

Bernanke's worried about inflation because he understands the real numbers - not the ones being dished out to the public. When he was Fed chairman in the 1990s Alan Greenspan kept harping on his fear of inflation, much to the bewilderment of everyone including me.

The dilemma - or conundrum, as he called it - was that Greenspan wasn't talking about price inflation as you and I know it.

Some of us caught on early, others didn't understand until the chairman himself explained that it was asset inflation - meaning the rising stock market - which had him worried.

And in 2000 his worries proved valid.

Today's Fed says it is worried about "inflation" but - as when Greenspan was in charge - there is probably something else going on.

Most likely, Bernanke is really concerned about the value of the U.S. dollar in relation to the rest of the world.

And he's using inflation-talk to keep from lowering interest rates in this country or, almost as important, to keep people from expecting rate cuts.

With the economy slowing here, an interest-rate cut would normally be in order.

But Bernanke is hamstrung by the dollar's weakness and the strength of economies around the world. Focusing on inflation is an easy - although not-too-credible - way to snuff out the debate on interest rate cuts.

Another participant in the inflation game is the U.S. Department of Labor, which is the keeper of the inflation statistics.

Every few years the department comes up with a new theory that invariably cause inflation to lessen.

Each tick down in the inflation means a tick up in the economic growth that politicians can tout on the campaign trail.

The housing market and Wall Street, two other key players, would love an interest-rate cut.

But as I've explained in other columns, the U.S. would cause more problems than it would solve by reducing borrowing costs unilaterally.

Despite too many problems to go over again here, investors are having their annual summer romance with stocks and the Dow Jones industrials could easily hit the 15,000-level by September.

But inflation is a funny thing. Like the ugly baby, you can deny its existence even as it is goo-gooing you in the face. But eventually the truth will come out.

Over the next few weeks I'll show the ways inflation is being disguised.

Remember, oil, base metals, precious metals, foreign companies and foreign currencies can all be good protection from U.S. inflation. This is one reason why our clients have owned them, and continue to own them.

Thanks for listening.

At Guild Investment Management, we are finding opportunities, and we believe our themes are in sync with what is happening in the global markets. If you are interested in hiring Guild to manage your portfolio, please contact us.

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