Boomerang: How the EU, China and dollar impact the Paper vs. Hard Asset trade As our attached exhibits describe, we attribute 2001-present leadership of Hard Asset equities to: (a) post-9/11 dollar weakness, (b) Chinese capex/construction underwritten by currency devaluation, and (c)extractive capacity reduction 1980-2000 which led to cost-push inflation for new capacity thereafter. Comingfull circle, we now see: (a) extractive industry capex as hurdle rates have fallen (but the equities respond tofalling commodity prices which seek to close the marginal cost/price gap, and not commodity EPS), (b) Chinarebalancing away from fixed investment due to peaking national savings in tandem with a break-out in income per capita, and (c) a sharp reduction in downward pressure on the dollar as the eurozone and China areseveral years behind the U.S. in a painful rebalancing process, with potential dollar shortages as a result.Thus, we believe Hard Asset leadership ends after the current seasonal October-2011 to April-2012(E) rally

To recap, our 2012 macro view, largely unchanged YTD is: We see the S&P 500 ending 2012 at 1,400 and 1,600 by2013/14, with commodity equities and small cap having a final seasonal beta rally Oct-11 to Apr-12. By mid-2012, weexpect QE3 as fuel costs pinch GDP and weaken stocks. Beyond 1H12, we see large cap growth leading to ~2013/14,with Financials also participating. We believe the S&P 500 benefits from the U.S. head start rebalancing, deflationbeing averted, Fed laxity offsetting fiscal tightening, and foreign U.S. inflows as the EM & EU painfully rebalance.

We believe the locus of the financial crisis was Chinese and German surpluses that created excess savings whichserved to cheapen money via the inducement of debt in the U.S. and EU periphery, respectively. That rates remainedlow despite rising demand for credit is evidence this was an excess savings "supply-side" issue. S&P 500 weakness(the S&P 500 is flat with the late 1990s) simply discounted ephemeral GDP derived from excess credit. As the 2000sdrew to a close, and to escape debt deflation as housing failed, the U.S. inflated the eurozone and China viaQuantitative Easing (Q.E., or Fed asset purchases with electronic money), driving food and energy prices up andforcing the surplus states to re-balance toward a greater domestic consumption profile

We see no U.S. dollar weakness due to currency rivals, and thus we see no currency-related upward lift for whatremain largely dollar-traded global commodities. Our opinion is the U.S. is three years ahead of the eurozonerebalancing and four years ahead of China, with a fairly well-defined playbook. Layering a competitive North/Southeurozone unit labor cost disparity (labor cost per unit of output), we believe eurozone deficits can only be remedied bymild German inflation and peripheral wage stagnation, hardly a prescription for euro strength. Dollar stability followedby strength usually benefits Technology, Financial and Healthcare equities, just as dollar weakness benefits Materials,Energy, Industrials and Utility stocks. Hard asset industry stock valuation multiples usually compress at pricing turnsdespite strong investment spending on new extractive capacity.

We think China faces peaking gross national savings (corporate retained earnings + personal savings + governmentsurplus = national savings) and thus peaking investment (in a largely closed system, savings = investment) beforerising income per capita and consumption can take up the slack. In a sense, the future may be better for labor in Chinathan for investors in China. Similarly, for what we term the "CRABS" (Canada-Russia-Australia-Brazil-S. Africa,traditional commodity exporters), heretofore hand maidens to China's fixed investment boom, we see those currenciesdepreciating as China rebalances and they are exposed as one-trick ponies