One can find humor anywhere.

I would like to quote from a piece of research by an analyst from one of the world’s largest financial institutions that I read the other day, “China’s industrial output only recovered marginally from last month’s slump. Real value added of industry rose 14.9% in November from 14.7% in October….Industrial growth may rebound early next year.”

Excuse me? What universe does the writer come from?

Economies only very, very rarely grow at 10%. Industrial output growth at 14.9% is astoundingly high for any economy, in almost any situation, in any part of the world. Maybe it is a slight slow down from China’s growth rate a couple of months ago, but let’s be realistic, if you grow industrial output at 14.9% per year, you have doubled output in only five years thanks to the wonders of compounding. So, while the world’s most populous country is on pace to double their output in five years, India, the world’s second most populous country, along with many other countries are not exactly dawdling along. They are also growing briskly.

The growth we are witnessing today in China, India, Russia, Brazil and other countries does not occur every few years. It occurs once every few hundred years. We are in a new industrial revolution that is gigantic in its scope and most people in the developed countries have yet to realize it.

This brings us to some the themes for 2007.

In the 1500s, the major economies of the world were India, China and Persia (much of whose wealth came from their conquest of India).

Europe was relatively poor, and much of the currently developed world was very sparsely inhabited.

The global economic landscape began to change after Europeans began to view education, mathematics, scientific discovery, and commerce as noble pursuits. Technological innovation followed, and a few hundred years later, the Industrial Revolution that we all studied in school gave Europeans the ability to efficiently manufacture goods (including weapons), and to transport people and goods great distances. Europe and the European colonies in North America, Australia, New Zealand, and in some parts of South America, Africa and Asia gained access to new manufacturing technologies. The former leaders, China, India and Persia remained agrarian, although they had a great many cultural and intellectual achievements. Thus, the Europeans and their colonies came to eventually dominate global trade.

Today, much of the world’s economic growth is coming from China, India and other developing countries where capitalism and entrepreneurship are being embraced. These developing nations are shifting from agrarian economies to newly industrialized economies.

The developing world’s growth rate is about four to five times faster than the rate of that of the large developed countries. At their current rates of growth, or even at part of their rates of growth, India and China will dominate the world economy by middle of this century. The numbers of people they will bring into the developed economy is large, to say the least.

What will happen to today’s developed world now that manufacturing and much else is going to lower cost higher efficiency developing countries? What is the comparative advantage of the developed nations? What makes them attractive?

The developed nations are much of Western Europe, Canada, U.S., Japan, Australia, New Zealand and a few nations in Asia.

Characteristics of these developed countries that make them attractive are: good system of education, ambitious populace (in some countries), good legal system, accurate and honest accounting, a tradition of laws (one can go to court and get legal redress in a few years), available insurance, and an educated work force. Furthermore, they typically have strong banking and financial services. This allows entrepreneurs to get the capital they need to grow, and gives investors the opportunity to fund growth and innovation. Thus, new products and services are constantly being developed.

Additionally, the better developed countries do not have a strongly imbedded class system. The dignity of work is much derided in countries with an imbedded class system, which creates impediments to economic growth and personal success. In general, these are societies which respect the concepts of hard work and success.

Finally, developed countries often have less corruption and much more transparency than exists in other parts of the world. The newly industrializing countries are still grappling with considerable amounts of corruption that can make it harder for outsiders to earn a fair return if they don’t have powerful economic and especially political contacts. Outside investors and business people can sometimes be viewed as victims to be manipulated.

Industries which will continue to provide profits in the developed world are: farming (especially those using new technologies), mining, forestry, energy production, high tech software and hardware, specialty manufacturing, medical tech, bio tech, medical services delivery, and those helping provide access to financial innovation and markets worldwide.

Many of the world stock markets have run up and are currently priced for perfection. Based on any type of historical analysis, world stock markets and commodity markets are not cheap. However, positive economic tailwinds from rapid global growth are strong. So what to do? We suggest wait for the inevitable market declines in the fast growing markets, and then buy on dips.

We favor the British Pound, Euro, Swiss Franc, and Australian Dollar. Historically, global oil sales were denominated in U.S.

dollars, and many countries, including China held mostly U.S. dollars in their huge foreign exchange portfolios. It seems that many countries, including many of the oil producing nations, and China have determined that the U.S. dollar should be a smaller part of their portfolios. Thus, a weaker U.S. dollar is in store for some time to come.

Demand is strong, and will continue to be strong for the base metals needed to create the infrastructure and capital goods which are the vehicles of economic growth. Once economic growth is achieved many, newly affluent and middle class individuals will want to hold some of their assets in gold. As global growth continues, so will the demand for gold and other stores of value.

Without a crisis, the rise will be labored. Global demand is growing and production is strained. We continue to hold energy, but not as large a proportion as in the past. Danger to the worlds energy supply is at the greatest level in many decades. However, alternative fuels and substitution will make the long term supply issues less important.

In our opinion, the developed world must get on the energy conservation and substitution bandwagon now.

1. Narrow body planes and regional jets for carrying people around within fast growing countries like India, China, Russia and Brazil. As the middle classes in these countries grow, demand increases for narrow body airplanes to fly people around within these countries. Many new flights between cities in South America and Asia are being scheduled as people travel more on businesses and pleasure. Suppliers of aircraft or their parts are one way to invest in this.

2. The electrical transmission grid in the United States and many other countries has fallen into disrepair. Companies involved in the rebuilding the electric transmission grid in the U.S. and many other developed countries are becoming attractive.

3. Alternative energy companies such as: clean coal (the technology for this exists), solar power, hybrid vehicles will provide opportunity.

4. Banking and financial services in the developing world will provide opportunity. Banking in China has been opened to foreigners, and it is expected that banking in India will be opened to foreigners in 2008.

5. Stock and commodity exchanges serving the people and companies of the developing world should continue to expand.

6. The emerging world’s demand for food, base metals, timber, industrial raw materials, engineering know-how, technology know-how, business know-how, educational services, business services, software, high tech hardware, medical technology, pharmaceuticals will be in increasing demand for years to come.

Happiest Holiday wishes to all who read this memo. We look forward to hearing your thoughts and comments. May your New Year be filled with health, happiness and success.