Thoughts for 2003 Craig Harris President Harris Capital Management, Inc. CTA December 24, 2002 Having been bearish on the equity markets since the late 90's, last year at this time I was writing my "thoughts for 2002," in which I was talking about rising commodity prices and warning about the still overvalued equity markets. I discussed how I was using a long position in gold as an insurance policy. I was out on a limb going into 2002 because most people were optimistic about the equity markets and predicting deflation. With the CRB index now making multi year highs, my opinion, while very different from the consensus, turned out to be correct. For the past several months however, I've been focused on 2003. I believe successful speculation and investing requires an investor to be several steps ahead of the crowd and looking forward into the future to develop an independent, comprehensive view of the world. Mid year in 2002 I became convinced that a war in IRAQ was a near certainty and I put my "war trades" on long before it became the consensus that a war was likely. With that said, I always endeavor to to stay well ahead of the crowd in terms of my thinking and long term planning. During 2002, a constant theme I communicated to my clients was the increasing Anti American sentiment around the world, continued overvaluation in the equity markets, an unsustainably high US current account deficit which up until now was funded by the foreigners re-investing that money back into the US financial markets, a very vulnerable US dollar, the destabilizing effects of the current geopolitical environment, and particularly the curious lack of or biased coverage in the US media on many key unfolding world events. In the foreign press, the US was being compared to the Roman Empire and people were debating whether or not we are in a period analogous to the "expansion" period where indirect control of other governments gave way to more direct control, or whether we have entered a period similar to the "decline" phase where the unwieldy and expensive aspirations of direct control and world domination caused a collapse. Overreach... remember that idea because it will likely be in the history books 100 years from now. These are certainly very important considerations when you talk about the long term, which is what I'm always focused on. Right now, I'm focusing on the aftermath of an initial attack on IRAQ. If the war were to go very smoothly, I believe oil prices would immediately crash as the US took over the oilfields and gold would have a setback in what I believe is an unfolding bull market. If the war doesn't go well or spirals into a regional conflict, then I think we could see very high oil and gold prices with serious potentially devastating negative economic consequences for the US and the world. So, as we move forward into 2003, I have several key themes A vulnerable US dollar . Stagflation in the US with a stumbling economy and rising prices (although it won't show up in the Government numbers) . Exporting deflation to other countries through a lower US dollar . An exploding US deficit . Printing presses in the US printing fiat money at double digit growth rates . Continued overvaluation in the US share markets . Decreasing rights and freedoms, increased security costs and the associated impact on the global economic engine in the US... people will be staying at home more and going out less . A continued and very powerful influence of the reverse wealth effect due to the bubble pop... people will continue to spend less . A difficult economic environment for many businesses . An increased unwillingness for foreigners to reinvest the current account deficit back into the US because of lower interest rates, a bear market, increasing Anti American sentiment and even US boycotts overseas that receive no attention in the US media. McDonalds has already been hurt by this . Continued bankruptcies and layoffs at US corporations . Underreporting of inflation by the government causing disposable income to drop below what would be expected if the numbers were accurate . A political overreach that threatens globalization, US preeminence and it's standing in the global investment community . A developing bull market in gold . An unstable (and worsening) geopolitical environment fueled by rabid and increasing Anti Americanism worldwide . South America continuing to fall apart . Democracies (like South Korea) increasingly electing Anti American leaders and creating new hostile alliances . Property taxes soaring . Insurance costs soaring . Increased security costs, coupled with lower public participation due to the "pain in the butt" factor . Deficit spending . Bankrupt state governments raising taxes and cutting services, potentially sparking their own "mini" financial crises . A war in IRAQ which will cost hundreds of billions of dollars . Increasing acceptance of the Euro as an alternative to the US dollar . An artificially depressed gold price which in turn artificially inflated the value of the US dollar will turn out to be unsustainable . A pop in the US housing bubble US Dollar I became very bearish on the US dollar for many of the reasons cited above during 2002, and that short dollar position has, and continues to work out very well for me. I believe that we will continue to see a slow steady decline, almost like an erosion, during 2003, but that view may be modified depending on how the planned war with IRAQ goes. I believe that war will start by February of 2003. Gold I was long gold throughout 2002 and I continue to be long the market. Throughout 2002 I had been holding gold from much lower levels and trading half the position, selling near 330 at the upper end of what I considered an artificially imposed "cage" by the Financial Engineering team, then buying back around the 315 area. I, like many others have noted the "coincidence" that a very important gold report outlining the size of the gold short position, known as the Howe/Bolser report was published on Dec 4, O'Neill and Lindsey were fired on Dec 5, and then gold rallied $37 to $354 from Dec 4 to Dec 19. A coincidence? Maybe, but I have been convinced for years that we have been under a "stealth gold standard" where gold prices were maintained in a range by the Financial Engineers but now it looks like something has changed. A loss of control? or maybe just a financial engineering "adjustment" to allow market forces to take it to a higher trading range as part of the "anti-deflation" campaign? I don't know the answer to that question but it does seem like most of the mainstream gold market analysis is worthless because it ignores the real issues. I continue to believe that gold offers an excellent "calamity hedge." One thing I feel strongly about going into 2003 is that the risks inherent in holding your wealth in a fiat currency or a paper asset are increasing, and that idea is catching on. So, throughout 2003 I believe there will be a continuing struggle between the Central Banks versus the investment community increasingly seeking tangible value for the storage of wealth. Silver I have been trading silver in 2002. I have a simplistic view of the silver market right now, which is that it follows the gold market, bouncing around as the "plaything of the funds" with an average price set by the price of gold. The translation? I buy it low and sell it high within the broad 4-5 dollar trading range either going long futures or shorting out of the money put options into declines. I do believe that if gold were to explode upwards in price that silver would follow, and I also believe that at current prices silver is undervalued relative to gold. Oil / Saudi Arabian riyal I went long crude oil during 2002 and I'm currently still friendly towards the oil market. This is a complicated idea however because there are a lot of geopolitical variables, the biggest one being what happens with IRAQ and war. If the war is quick and the US takes over IRAQI oil supplies quickly, then I think oil prices will crash, Saudi Arabia will destabliize and that will be the next stop for the US. I'm very bearish on Saudi Arabia and I've looked into shorting the Saudi Arabian riyal. Any way I slice it, I see bad things ahead for Saudi Arabia which will lead to a complete regime collapse. I believe that ultimately the US will covertly or overtly overthrow IRAN, Syria, and Saudi Arabia and have controlling interests in basically all of the mid east oil. This is a very bearish long term factor for oil prices. Coffee, Copper, Currencies I've been and will continue to be long undervalued commodities like coffee and copper. I like the tangible things. I like commodity based currencies. The NZD has done very well in 2002 and I like the Canadian dollar for a lot of reasons. While I am not short the equity markets, I am bearish and I wouldn't touch the long side with a 10 foot pole. Why? Given the problems and issues I outlined above, why would I risk money being long equities when the valuation levels are already high? What could possibly be my justification for investing in an already overvalued asset class when the future holds so much uncertainty and potential problems? Read between the lines Lastly, I write these outlooks to get people thinking and put my opinion on record. It's all my opinion. I strongly discourage people from investing based on other people's ideas. Successful investing requires study, analysis and conviction regarding your ideas which is not possible following someone else's thinking. I could be wrong. I could change my mind tomorrow on a key idea and you'd never know. Do your own homework... think for yourself. As illustrated by the collapse of the stock market bubble, following the crowd can be hazardous to your financial health. Most importantly, seek a wide range of information sources. TV news in the US is polluted by special interests... you will never gain a fair assessment without casting a wide net. Use the internet and watch news broadcasts originating in other countries around the world. Be skeptical. Don't take things at face value, read between the lines. I wish a happy and prosperous 2003 to everyone. December 24, 2002 Craig Harris President Harris Capital Management, Inc. CTA http://www.harriscapitalmanagement.com bcharris@gate.net Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. 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