Freedom Lawyers of America

The World's Most Important Commodity

It's real... It's measurable... It's here. I'm talking about the new bull
market in commodities I predicted over 18 months ago when it was still in
its infancy... a bull market that has only just begun. In just under a year
the CRB Index of commodity prices has risen approximately 18%. Individual
commodities have done even better. Soybeans are up 39%, wheat is up 43%,
crude oil is up 54%, platinum is up 21% and cocoa has skyrocketed a
whopping 77%.

But you wouldn't know it from the mainstream press. Burned by the post-9/11
false bottom in stocks and the massive accounting frauds at Enron and
WorldCom, investors and the media are buying into the doom-and-gloomers'
deflationary arguments. With visions of past stock collapses dancing in
their heads, the public has stampeded into real estate and bonds, hoping to
ride out the storm.

Searching for Shelter in All the Wrong Places?

Like deer frozen in headlights, investors could be on the verge of making
another expensive blunder.

This isn't the 1930s or 1989 Japan. It is 2002 and America is at war. This
gives the government carte blanche to spend "whatever it takes." Whenever
you hear that, look out.

World War I led to hyperinflation in Germany. The "police actions" in Korea
and Vietnam ignited the inflationary '70s. I cannot think of one instance
in modern times where inflation did not follow war.

The huge and rising debt loads of the public and private sectors also make
inflation more likely.

Even without a real war, Bush has already signed into law the biggest
military spending increase since the Reagan administration -- a $355
billion package. And, of course, budget surpluses are a thing of the past.
According to Congressional Budget Office estimates, the budget deficit was
$157 billion in 2002, ending four consecutive years of surpluses, and
deficits are projected to continue until 2005 (possibly an optimistic
forecast). Do you think Bush is going to call for tax increases to pay for
all this? Not likely. The government will do what it does best: borrow and
inflate.

In the private sector, household leverage hit a new postwar record in the
third quarter. Net worth and homeowners' equity continue to drop.
Nonfinancial corporate debt-to-asset ratios have reached a postwar high as
well. Alan Greenspan and the rest of the gang at the Fed won't come out and
say it, but there is a way to lighten America's debt burden while keeping
the effects hidden from the average observer. How? Inflate, of course!

Governments don't do very many things well. But they've always done a
"great" job of raising taxes and destroying currencies. Is there any reason
to doubt that our government won't weaken the U.S. dollar in order to
combat deflation?

What About Deflation?

Is there any evidence for deflation, apart from some speculating by the
media? The latest CPI reading showed that prices are still rising at a
steady clip... and that's during a recession!
What happens when the economy recovers? You guessed it, prices will jump
even higher, and so will short-term interest rates. For those arguing that
deflation is imminent, they need to answer one question: What will stop the
Fed from printing more money to prevent this from happening, which at the
same time helps consumers and businesses in debt and the government finance
its deficits? The answer: nothing.

What commodity prices and the incredible growth in money supply are telling
us is that the Fed has already chosen inflation.

The Fed has been flooding the market with cash for more than two years.
The inflation pedal is pressed to the metal, and I expect it
to stay glued there well into 2003.

Dollar Decline Is Inflationary

The final piece of the puzzle for commodities is the U.S. dollar. It has
been falling for months, and it's going to fall some more. A falling
dollar, quite simply, means higher prices. The dollar lost 17.5% of its
value versus the euro earlier this year, while the CRB Index of commodity
prices gained 18%. Coincidence? I don't think so.

A strong dollar since the early 1990s meant the things that could be
purchased with those dollars were "cheap." Especially cheap were the goods
from regions with weak currencies, such as Asia and South America. This
caused domestic manufacturers to keep their prices low as well.

The dollars spent on these goods and services were then recycled back into
the U.S. economy by foreigners pouring money into the U.S. stock and bond
markets. These investors purchased billions of dollars worth of U.S. stocks
and bonds.

But the honeymoon is over... Foreigners have begun to pull capital out of
the United States. This trickle could soon turn into a flood, especially if
they lose confidence in President Bush's ability to manage the U.S.
economy. Low interest rates could also cause foreign bond investors (who
own 40% of all U.S. government bonds) to take their money home. Cheap
foreign imports won't be so cheap anymore, and U.S. manufacturers, no
longer forced to compete and desperate for profits, will raise prices. Once
foreigners start pulling out of the U.S. financial markets, the dollar is
doomed. And that's when the coming commodity bull market will really kick
into high gear.

Then the Fed will feel duty-bound to raise rates.

Your Most Important Commodity Play

The impact of these unexpected rate hikes forms the backbone of our
strategy. Commodity bull markets typically trigger and fuel higher interest
rates, making a higher rate strategy the ultimate "commodity" play. A bet
on higher interest rates is a clever way to cash in on the entire natural
resource sector with one investment.

In fact, a strong argument can be made that interest rates are the most
important commodity of all because they ultimately determine the cost of
money, which to a large extent determines the nominal price of everything
else.

I am aware that my forecast for higher rates is in direct opposition to the
general consensus... But, then again, so was my call for a bull market in
commodities 18 months ago. You don't make big money by following the herd.
Just remember: If you follow the herd, you're sure to get slaughtered.