But the U.S. Government has a technology, called a printing press that allows it to produce as many U.S. dollars at essentially no cost. By increasing the number of dollars in circulation, or even by credibly threatening to do so, the U.S. Government can reduce the value of dollars in terms of goods and services, which is equivalent to raising the prices of dollars of those goods and services. We conclude that under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Ben Bernanke, 2002

Lenin is said to have declared the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of its citizens. Lenin certainly was right...
John Maynard Keynes

Just when you thought you had seen it all and could possibly be seeing the light at the end of the tunnel, a new locomotive came down the tracks last week nearly running us over. Financial markets continued their volatile ways last week starting with a bear run on Bear Stearns (NYSE: BSC, $5.96 - Not Rated) resulting in the Federal Reserve's unprecedented guaranteeing of $30 billion of Bear's assets and helping facilitate the "take under" by JP Morgan (NYSE: JPM, $45.97 - Not Rated) for $2 a share. It shows how fast fortunes can change in the tumultuous times - shares of Bear were over $170 at the beginning of 2007 and during the days of Haimchinkel Malintz Anaynikal - "Ace" Greenberg's guru advisor - Bear was thought to be the most conservative and tightly run investment bank.

Additionally, the Fed stepped in twice last week lowering the discount rate to 3.25% and extending that to investment banks, and lowering the federal funds rates an additional 75 basis points to 2.25%. As noted in Ben Bernanke's quote above, the Fed does have the ability to literally print money and while liquefying the market has had short term positive effects and was probably necessary, a weak dollar and bubbling inflation are not helping the long-term outlook.

Over the past year, the dollar is off about 10% versus a basket of world currencies. On the positive side, our exports are up about 8% versus just a 2% increase in imports. On the not as positive side, M3 is estimated to be up approximately 15% year-over-year creating more overhang.

The volatility in the markets has clearly spooked many out of the market with $75 billion of outflows year-to-date and $9 billion of outflows from mutual funds in the past two weeks alone. Markets tend to "climb a wall of worry" and last week, stocks mainly finished significantly higher (with the exception of the ThinkGrowth Index which was off 1% for the week, as well as commodities-energy which were the bottom performing groups). Also a significant positive for the market last week was the U.S. record $17.9 billion IPO for Visa (NYSE: V, $64.35 - Not Rated) which traded up an impressive 28%.

In today's global economy, where access to capital, technology, information, labor markets and commodities are increasingly available from around the globe, the concept of geographic "clusters" may seem a paradox. However, globalization has had the greatest impact in stepping up the pace of global competition, rendering productivity, not access to low wage workers and inputs, as the key to a company's success.

Clusters, or geographic pockets of companies tied together by a common industry, though not necessarily companies within the same industry, enable firms within the cluster to be more specialized, benefiting the growth and competitiveness of the entire cluster. While clusters may be defined by the principle industry, such as information technology and venture capital in Silicon Valley, media and entertainment in Hollywood, asset management in Boston or even wine in Napa Valley, the breadth of the companies within the cluster will likely not conform to the standard industry classification.

In effect, while the cluster may appear to be comprised of only loosely connected industries, the reality is that they are highly specialized in their particular trade or service as it applies to the cluster's principle industry, such as in: legal and financial services, manufacturing, marketing, transportation, construction and educational institutions.

The three principle means in which competitiveness is typically affected are through: 1) increasing the productivity of companies within the cluster by promoting specialization, 2) spurring the pace of industry innovation across the network cluster and 3) promoting the growth of new companies as a result of the cluster's competitiveness, productivity and ultimately success.

As clusters reach critical mass, benefits typically become more widespread, allowing individual companies to reap scale economies as a result of the cluster's size, while maintaining the nimbleness and flexibility of a smaller firm. Furthermore, much as outsourcing allows more mature firms to shed non-core aspects of their business as their operations grow, cluster economies enable growing firms to focus on the growth of their strategic assets while relying on specialized firms to manage the growth of non-strategic operations - the "negative" side-effect of growth and success.

We believe what the growth of industry clusters are increasingly highlighting in today's global marketplace is that competitive advantage is increasingly being driven by "local-globalization" - the specialization of industry linkages, business relationships, local knowledge and labor markets - that drive productivity growth in the immediate relationships between companies as opposed to just the productivity within a company.

As we are hunting for the Stars of Tomorrow within defined sectors, scouring the region which is home to the industry cluster can be very fruitful, in our opinion. For example, if trying to find the next big thing in medical devices, we think one would be wise to troll in the Minneapolis market, home of Medtronic (NYSE: MDT, $48.53, Accumulate - Price Target: $55), St. Jude (NYSE: STJ, $42.64, Buy - Price Target: $52), and Guidant.

We believe that globalization will continue to expand new growth markets for current and future products and services, though even more importantly, the global marketplace will serve as a means to "economize" through a combination of labor market cost advantages, production efficiencies, access to global markets as well as handling coordination of post-production, sales and services. The advantage of going and thinking global will be an imperative to free valuable resources for future growth opportunities, in our opinion.

It is not inconceivable that in the near future, the majority of companies could engage in R&D locally, have product components manufactured in China, then assembled in South America or Eastern Europe, then re-distributed as finished products back into the global marketplace, where local product positioning, sales and advertising are tailored for the local-global marketplace.

In the after market, customer service may be handled in India, with product issues sent back up through the supply chain; fixes handled by global product engineers and identified enhancements incorporated into to the continual R&D process occurring back at the original R&D center. Not only do I see globalization as opening up new end-markets to businesses, but also new markets for essentially every business function that was once performed in house. We believe the result will be greater capture of global cost advantage and the bringing of market forces to business functions that were once protected inside of organizations.

We believe it is widely appreciated that rising global trade between developed and developing countries has important benefits such as holding down inflation in mature economies and promoting rapid growth in developing economies. What often goes underappreciated, in our opinion, is the increase in variety - growth in the types of essentially the same product.

Most think of expanding global trade as a substitution of production and consumption of a domestic product for a foreign product - decline in one and growth of another. The reality is that rising global competition tends to increase variety, giving consumers as well as businesses more choices. In fact, rising competition couldn't occur without an increase in variety.

The traditional view of trade overlooks this and focuses on the potential loss to overseas companies that export "the same" product, at a lower price. The more accurate view is actually quite easy to see in everyday experience in the rising number of automobile types, shoe styles, wine varietals and coffee flavors, all due to increasing global trade. Globalization typically creates dynamic efficiency which increases the quality of products and decreases the price.

In a recent study of the impact of variety emanating from global trade, it was estimated that the dollar benefit to U.S. consumers amounts to roughly 3% of GDP or roughly $300 billion. In the same study, it was found that the number of product varieties of product had risen from approximately 75,000 (7,700 products) in 1972, to nearly 260,000 (16,390 products) in 2001 - a near doubling in the number of varieties per product.

This increase in variety not only has implications for consumer's standard of living, but the entirety of the retailing industry, in our view, where growth thrives from being able to increase product assortment to better match consumers ever evolving preferences.

Moreover, with increasing global trade and rising variety, the dynamics of "brand equity" shift further toward servicing consumers' evolving preferences, with the most adept retailers being those that view their value proposition from the standpoint of being first and foremost a purchaser for their customers; obtaining the most sought after products at the best possible price and providing customers with the largest assortments. These companies recognize global markets and global sourcing as a competitive imperative for growth, because their first focus is purchasing for customers.

We continue to expect to see volatility in the market but look to keep on being focused on buying companies we see that have the most powerful long-term growth potential and believe investors will be well rewarded over time.