THE U.S. DOLLAR

As we predicted, the drumbeat of PR for the dollar has begun in earnest, and this was and is to be expected.

No governmental financial authority anywhere wants the dollar to fall in a straight line without any rallies and without any slowdown. Now an effort has begun to give the dollar a rally; and it has been successful so far. The battle to slow down the dollar decline will include:

intervention by central banks to protect their dollar holdings jawboning by central bankers and finance ministers in every country to try and give the dollar a further rally

Long-term, we remain bearish on the U.S. dollar. We should however, remember that even the dollar can rally, and it occasionally does. It rallied for eleven months beginning in December 2004. Then it had a spectacular decline from late 2005 until quite recently.

THE CREDIT CRISIS - A BAIL OUT IS UNDERWAY

In the last two weeks there have been several capital injections into the weak banks and brokers.

Abu Dhabi has injected money into Citicorp. Ping An, the Chinese insurance company, has injected money into Fortis Bank, Citadel into E-Trade, Bear Stearns has traded investment positions with CITIC, the U.K. Government and the German Government have injected funds into U.K. and German banks. The Chinese Sovereign Wealth Fund announced that some of their money would go to capital infusions in Chinese banks. Today, UBS is getting a capital injection from Singapore and an unnamed mid eastern source.

Many investors, including sovereign wealth funds and major hedge funds are looking at the possibility of buying up assets on the cheap from banks, brokers and funds who are stuck with illiquid paper. To some, buying subprime debt at 20 cents on the dollar may qualify as cheap.

ECONOMICS

Certainly, the U.S. economy is just beginning its profits recession. U.S. corporate profits will be down for at least two quarters, and for even longer in the housing and finance sectors.

Companies will also have to deal with CPA's being much more vigilant about making their clients write off submerged bad debts and accounting for unpriced, or mark to model investments. Therefore, it is an easy call to say that the recession in U.S. profits and U.S. GDP growth is just beginning. We can expect the news media in coming months to be full of negative news about corporate profits.

THE EASIEST SOLUTION TO SOLVING THE CURRENT PROBLEMS IN THE NEWS IS TO…CREATE MORE INFLATION

Most of the problems have to do with the bad debt clogging the U.S. financial system and contributing to a situation where credit is not available to some borrowers. This can have long-term economic consequences and should be cured as quickly as possible. The recent government intervention will not be a major part of the clean up.

For this reason, we are happy to see the sovereign wealth funds and hedge funds step up and buy heavily discounted assets at what they think are bargain prices. Will they be followed by other opportunistic investors?

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