PERFORMANCE ANNOUNCEMENT

As Of: March 18, 2004

The Lesser Of Two Evils

Beating Inflation Is Yesterday's News. FED Wants Growth.

      Given a choice between inflation and deflation, it is clear that the government prefers inflation. During 2001 and 2002, there was a deep-seated fear that the United States might be heading for another 1930's style depression. The Federal Reserve has deliberately kept interest rates down at the lowest levels in the past 40+ years in order to stimulate the economy and prevent another recession or depression. This is uncharted territory! The Federal Reserve (which was created in 1911) failed to lower interest rates and increase liquidity after the market crash of 1929. The history books place a large part of the blame for the ensuing depression on the Federal Reserve. This time around, the Federal Reserve has created abundant credit availability with low interest rates. We must recognize this for what it is: an experiment. Instead of allowing the economy to correct itself with a full market cycle after the exuberance of the 1990's, the Government, with its tax cuts and low interest rates, has tried to sweep structural problems under the carpet and artificially pump up the economy. So far the strategy appears to be working, but at what cost?

      The Bush administration is simply unlucky that it is trying to fight wars during a slump in the economic cycle. The result is large deficits. Unfortunately, large deficits during a period of low interest rates and easy credit may mean that we are heading for a period marked by a dramatic decrease in the purchasing power of the dollar. It is not by choice that the government will allow the dollar to drop on international exchanges and inflation to resume domestically. The Federal Reserve has simply painted itself into a corner where, given a choice between triggering a credit collapse or allowing inflation, the choice will be inflation.

      There is no guarantee that the government can overrule normal economic cycles, so we are still presented with the possibility that we may have a recession combined with inflation. If the desired objective of continued economic growth is achieved, growth will undoubtedly come with an increase in inflation and a corresponding increase in interest rates. Any way you slice it, there is probably no benefit to bet against the will of the government. The most likely event in the future will be a loss in purchasing power for Americans holding U.S. dollars. In this scenario, gold and foreign investments continue to be attractive.