ASSUMPTIONS:

1. The US economy is weaker than most people suspect.

· Real estate bubble

· Money inflation --> most apparent in assets

· Twin deficits

· Manufacturing and autos also in recession

· Consumer inflation understated -- education, healthcare, gas, food and housing costs are up substantially

· Baby boomer's transition to have serious, yet indiscernible impact on economy

· Current imperial approach to foreign policy

· Despite these factors, it is impossible to predict when these factors will negatively impact so it is important to be conservative in any bearish stances.

2. Commodities scarcer while demand grows

· Energy needs especially hard-hit

- Production plateauing or declining

- Production and supply are not necessarily the same thing.

§ oil / natural gas finds are few and far between

§ increased production is not increased reserves!

- Exploration capacity and general infrastructure has been undercapitalized since last slowdown

- Growing competition from eastern countries

- Oil reserves increasingly concentrated in areas not controlled by free markets (>80%)

- Nat. gas is similiar but also less transportable (and LNG terminals aren't numerous enough)

- No other alternative is viable on a scalable basis

- Fundamentals of the energy industry in my view are changing due to supply constraints

§ Traditionally, the energy industry is cyclical but this was based on the assumption that energy (read oil) was both plentiful and cheap.

§ The cheap assumption is dying a slow death but there is still a substantial mainstream position that oil will fall to "cheap" levels (Morningstar, GS, etc.)

- COUNTERPOINT: there may be enough supply to meet current demand plus some according to futures contracts and the financial markets but these points are never backed up with TECHNICAL DATA! Therefore, I don't put much weight into this.

· Precious Metals

- Gold demand increasing due to Asian growth, confidence decreasing in paper money

- Silver demand increasing more due to above + increasing industrial uses

- Platinum/Others - ?

· Base Metals

- Large demand from Asia / housing boom in US

- ??? Not sure how much of Asian demand is proxy US demand.

- Bob Hoye: "30% of Chinese economy is from exports. Exports expected to grow at 30%. (.30% Exp/GDP * .30 Grwth/Exp = 9% Growth of GDP which is about what China's expected economic growth is expected." (from World Bank figures)

- Large infrastructure investments will require base metals.

· Water

- Scarcity of potable water to become bigger issue.

- Infrastructure is more attractive than utilities / land rights as most view water as a basic right and so the profit capacity may be capped by govt.

- Agriculture

§ As population grows, becomes more of an issue

§ Overfarming leading to non-arable land

§ Prices of corn, wheat, soybeans --> up this year

CONSIDERATIONS:

1. Short-term demand for commodities may be dampened by economic contraction. Long-term supply pressures suggest that commodities are in long-term uptrend.
2. US economy is headed toward:
1. deflation due to Fed protecting the dollar,
2. inflation (hyper?) due to Fed protecting the leveraged economy or
3. possibly stagflation.
3. How will the US economic crisis affect the global economy? Unknown.

THEMES:

1. Energy scarcity - peak oil/gas production
2. Gold/precious metals
3. Water
4. Infrastructure
5. Base metals / materials

STRATEGY:

1. Rule 1: Never LOSE MONEY!!!
2. DON'T FORGET RULE 1!!! (WATCH REAL RISK!!!!!!)
3. Emphasize hard assets vs. soft assets (ex. Chevron better than Microsoft).
4. Management teams are of utmost importance to long-term investing.
5. Diversify assets globally, either thru currency or equities (foreign).
6. Favor equities that return dividends to protect against unforeseeable downsides.
7. Have gold/silver to protect against falling dollar.
8. Minimize short-term decisions and focus on long-term horizons unless you have a specific short-term supremely confident opportunity.
9. Cash is your friend, not failure to deploy capital.
10. Though our strategy is based on macro themes, we should diversify even past our themes when the opportunity presents itself.