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Proactively predicting what the US Federal Reserve and US Treasury will do has turned out to be fairly straightforward. The only way out of this financial mess is to either raise rates (which “Heli-Ben” doesn’t do) or let the US Dollar get hammered (which Hank is into these days).

If you want to crush your currency, the first thing you should do to your company or country is lever yourself up. Levering up America’s balance sheet is cool with Paulson. Don’t forget that after the SEC waived their leverage rules in 2004, Paulson signed off on levering up Marcus Goldman’s handshake. It takes a leverage banker with some serious experience to get this kind of stuff done folks!

Will there be consequences beyond John Thain not getting his bonus in 2008? You bet - one of the obvious consequences will be asset based inflation. The world has already learned how this works. Cutting rates to zero, allowed asset bubbles from Icelandic banks to San Diego real estate give a new meaning to the sound of the word “pop.” This time was more like “POP, POP… BANG!”

Never say never. Just when the mass media’s pervasive message is “deflation”, we are setting up to “Re Flate”. Our “Re-Flation” Investment Theme is an intermediate one, and while we think price inflation will appreciate on a far lower scale, what happens on the margin is what matters here. Directionally, this will matter to hard assets like gold just as much as speculative growth stocks on the Nasdaq.

See the chart below. This week we saw the US Dollar get pounded for a -3.7% week over week move, while Gold zoomed higher registering a +9% weekly move.

One week ago today, our accountability sheets showed you we were long gold and short the US$ via the GLD and UUP exchange traded funds.

Hank and “Heli” – thanks for the “Trade.”
KM