I. INVESTMENT CONTEXT

Savvy investors who have focused on them for years call them Asian Tigers for a reason: they represent countries which live in an exciting environment and thrive on it. Their populations tend to be young; they are aggressive, entrepreneurial, risk-takers; hardworking; and with a predisposition towards open-market capitalist systems. They live in close symbiosis with and benefit from imports of capital and know-how from the second-largest economy in the world (Japan), and growth in two of the largest and fastest-growing economies on earth, China and increasingly India. Many of them, most of the time, have enjoyed close trade and other relations with the U.S. The list includes South Korea, Indonesia, Thailand, Hong Kong (the prototypical Tiger, long before its integration with China), Singapore, and Malaysia.

II. THE ECONOMY IN PERSPECTIVE

In this context, Thailand represents a good example of the Asian Tiger phenomenon. Located at the center of peninsular Southeast Asia, it is slightly more than twice the size of Wyoming. Its population of 65 million (68% rural, 52% urban, with 10 million in Bangkok alone) makes it the 19th. most populous country in the world. Life expectancy is 72 years, the literacy rate is 93%, unemployment is under 1.5%, and less than 10% of the population lives below the poverty line. The population is concentrated, but includes some diversity: 80% is Thai, 10% Chinese, 3% Malay, and the rest uncategorized (immigrants, Vietnamese, etc…). Ninety percent is Buddhist and some 4% Muslim. Per capita on a purchasing power parity basis was $8,300 in 2005. As befits an economy in the midst of transformation, agriculture/forestry/fishing employs 49% of the workforce, but contributes only 10% of GDP --- the shift is to services (tourism/banking/finance) +/- 50%, and manufacturing (approx. 43%).

In addition to tourism, the country is heavily dependent on exports (notably of textiles and electronic component parts), which account for 60% of GDP. The diversity of economic activity is manifest everywhere; thus while Thailand is the world's leading exporter of rice, its automobile manufacturing industry turns out nearly 1 million vehicles annually, with Toyota and Ford being significant players, and a steel industry following in its wake.

While fiercely independent --- it is the only country in Southeast Asia never to have been occupied by a European country --- Thailand's relationship with the outside world is key to understanding its present economy. It is open to new ideas and inter-action; hence its mixed economy, encouragement of capitalism, and free trade.

Following very rapid economic development in the 1960's and 1970's, when Thailand enjoyed compound growth rates 8.4% per year, the country was affected by the world-wide recession of the early 1980's. As a result, growth decelerated to a still-remarkable 7.2% during that decade, before benefiting to the fullest in the global boom of the Nineties. Too fully: over-rapid growth led to a surge in non-performing assets in the banking system, speculative unloading of the baht (the local currency), and Thailand became a key player in the Asian financial crisis of 1997-8. With help from the IMF, the U.S., Japan, and Singapore the system recovered, and Thailand has benefited from the economic recovery in the U.S., and as well as subsequent rapid growth in Asia in general and China in particular. On the other hand, the important tourist industry, which contributes 6% to GDP, has been slowed by Muslim terrorist incidents in the south, the tsunami of December 2004, and an increase in HIV/AIDS.

III. WHY NOW

With the above as background, the present may be an appropriate time to initiate or increase exposure to Thai equities, for a combination of reasons:

1. Valuations are attractive. At 11.5X estimated 2006 earnings, the market is the cheapest in Asia. (The Philippines, at 13X, is the second-cheapest.) After advancing by a smart 6.9% in January --- as much as in all of 2005 --- the market has retreated by more than 2%. This is in reaction to political unrest targeting the Prime Minister for alleged family corruption. If underlying economic fundamentals prevail, as they reasonably should, in this context such reactions provide opportunities. Indeed, the valuations may provide acceleration of M & A activity, as evidenced by the bid by a major Indian steel company to acquire Thailand's largest steel construction company last December. In the words of Citigroup, "This may finally be the year Thailand leaves all vestiges of the Asian crisis behind and gets on with life (and growth)."

2. Growth is expected to accelerate. The Central Bank is estimating that the economy will grow by 4.7 - 5.7% in 2006, vs. 4.7% in 2005. Thailand is benefiting from strong commodity prices, and a revival of tourism.

3. The government plans a sevenfold increase in infrastructure capital expenditures, notably for housing, water, and health, in the fiscal year to September 30.

4. Inflation appears to have peaked in the fourth quarter of 2005, and forecasts favor a peaking of interest rates by the second quarter of 2006.

5. The capital expenditure cycle should accelerate as 2006 unfolds, given the unfolding scenario.

6. A trade agreement with the U.S. and Japan is being negotiated, which would increase bilateral trade with these two major trading partners, boosting domestic activity.

7. Benefits from the ongoing growth in China.

8. A potential currency rebound.

IV. RISKS

Exciting as these positives are, as usual U.S. investors should deploy assets in emerging markets with care, as above-average rewards also entail risk. A short list would include political uncertainties, any economic slowdown in the U.S. and China, the price of energy, the continued need to raise domestic savings and reduce external debt ratios, and the threat of terrorism affecting the tourist industry. We feel obligated to highlight these, even if we believe them to be outweighed by more positive forces.

V. RECOMMENDATIONS

Our recommendations focus on stocks that we believe offer attractive permutations of the following: recovery beneficiaries, attractive yields, participation in the growth of infrastructure, the rapidly-growing service areas, and commodity plays. The banking and finance sectors, in particular, represent a "slice of Thailand".

The following is a condensed version of a more in-depth interview with Jim Rogers which will be available in its entirety as a special report accessible on our web site www.europac.net . Its great stuff, so make sure to download the report as soon as it becomes available.

Peter Schiff:
In the late 1990's, most investors saw the brave new world of tech as the way to instant riches. You, instead, were focusing on commodities. Tech has collapsed, and commodities are booming. You were right, of course.

Jim Rogers:
There was a great division between me and many other analysts in those days. I can remember some of the TV interviews I gave in the late 90s. The moderators were giggling and drooling over the latest doc.com success, just when I was saying buy commodities and buy China. By the end of the commodity boom, in 10 or 15 years, everybody is going to be giggling and drooling on the financial TV shows, and saying “buy commodities.” Of course, if I am on the shows at that time, I’ll be saying it’s time to sell commodities.

Peter Schiff:
You always stressed the overwhelming importance of potentially explosive demand from China. You’ve also noted that the authorities there would periodically try to rein in runaway growth to keep things under control. It now increasingly looks like their overriding concern is in fact to keep the economy growing at all costs, in order to keep employment growing. What are your thoughts now on that score?

Jim Rogers:
Well, they’re still trying to keep the economy growing. But the main thing the Chinese are doing is trying to avoid economic bubbles. For example, they have been trying to cut back on real estate speculation. Yes, China is interested in increasing employment, and keeping the economy strong. . But simultaneously, they are trying to keep things from overheating. The right sectors in China will continue to be very buoyant.

Peter Schiff:
Let’s talk specifically about commodities and energy. Can technology and alternative fuels rescue us from the commodity shortage? I’m thinking about nanotechnology, nuclear power, gas hydrogenation to provide clean-burning coal, solar energy, etc

Jim Rogers:
Yes, of course. Eventually this commodity bull market (which includes energy) will come to an end, Peter. If history is any guide, some time between 2014 and 2022. That’s based on history, and is not a prediction. The reason commodity cycles are so long is the tremendous lead time in rebuilding infrastructure, discovering and developing new mines and oil wells, organizing new plantations, etc. These enterprises take many years to come on stream. The average commodity bull market has lasted about eighteen years. If we all decided today to have wind power, it wouldn’t work. You can’t get a windmill. You can’t change the world that quickly. And solar is not competitive right now. Eventually it might be. But if we all decided to have solar panels on our roofs, you can’t get them. . Nuclear of course, is making a come-back. But it takes years to build a nuclear power plant. And remember in the mean time the old plants are all becoming obsolete.

There has been massive underinvestment in things like mining and oil exploration. Agricultural land is left fallow. Plantations give way to real estate development.
Technological changes are coming, of course. But it just takes a long, long time. We don’t reverse these things quickly. Almost every oil country in the world has got declining reserves. All the major oil companies are quite open about the fact that they are not replacing their reserves, not by discoveries anyway or development. Maybe they’re buying other oil companies. But that’s not increasing the amount of oil in the world. There’s going to be something to cause this bull market to come to an end, someday, but the emphasis should be on someday, because someday is a long way, away.

Peter Schiff:
There is still a lot of money to be made by investing in these commodities. Which brings me to my next question. Would you comment about the differences between renewable commodities, like trees, agricultural products, solar power, on the one hand, and depleting categories on the other?

Jim Rogers:
If I were looking at commodities these days, I would look at things like agriculture. Because agriculture, for the most part has moved up less than metals or anything. . The amount of acres devoted to wheat around the world has been declining for 30 years. The world has consumed more corn than it has produced for five years in a row. That’s never happened in recorded history. The worldwide inventories are low, on a historic basis.

And, by the way, increasing agricultural production is not as simple as just planting as few seeds. Take coffee, for instance. It takes five years for a coffee tree to mature. You don’t snap your finger, and magically fruit tress, cotton plants and soy bean bushes appear. And in the meantime, the price of everything those farmers use is skyrocketing. Natural gas, diesel fuel. labor, insurance, etc.

Peter Schiff:
Possessing valuable commodities is one thing, but that means little if they are located in geographically unsafe areas of the world. Have you tended to concentrate your investments in the U.S., Australia, Canada, New Zealand, for example? What geographic areas you like?

Jim Rogers:
Well, the countries that have raw materials are obviously going to be a better place than ones that don’t. All other things being equal. But remember those words, all other things being equal. The Congo has huge amounts of raw materials. But I am not investing in the Congo. I don’t think its going to be a good place for my money. I prefer areas with lower geopolitical risk. Canada has, perhaps, the soundest currency in the world right now, and a strong economy. If you want to invest in North America, the best place to invest is Canada. That’s the sort of place you want to be focusing on in times like these.

Peter Schiff:
When it comes to investing in these commodity driven countries, you don’t necessarily have to be invested in just the pure commodity plays. Just about any investment in a commodity-oriented country would benefit from the overall growth of that country’s economy. And it is probable that the country’s currency would also be strong.

Jim Rogers:
Well, there is no question that retailers in Canada or Australia or Brazil are going to be better than in other countries. Anybody in a country which has an economy that is expanding is better off.

Peter Schiff: How do you deal with the cyclical concern that after 14 interest rate increases the U.S. economy may slow down later in 2006 and into 2007. Would that have a significant downward effect on commodity prices in the intermediate-term?

Jim Rogers:
I expect the U.S. to have a decline in the economy this year and into next year. I don’t know how long the decline will last. We’ll probably have a recession. It is probably going to have an effect on some commodities, yes. But I would remind you, that there is always correction in every bull market.

Peter Schiff:
I think from the American perspective, one of the big differences between this commodity cycle and the cycle in the seventies, is that then America was the world’s leading industrial economy. We manufactured everything. We had all the machines, we had a trade surplus, we had a current account surplus. Now it’s the other way around. It’s Asia that is saving and manufacturing and producing. They’ve got the factories and the productivity and we’ve got no savings, a huge current account and a huge trade deficit and all we do is run around and service one another.

Jim Rogers:
We were an incredible nation in the seventies. We are now the largest debtor nation the world has ever seen. That’s another big difference. I don’t want you to think that there won’t be corrections, or there won’t be consolidation. But for the most part, it’s a secular bull market in commodities.

Peter Schiff:
Unfortunately, I think that Americans will feel the brunt of this commodity bull market on their standard of living much more so than they did in the 1970’s because of the underlying changes in the economy.

Jim Rogers:
And the currency situation makes things much worse in this bull market than it was in the seventies.

Peter Schiff:
Which brings me to my next question. Your outlook on gold. You've always viewed gold differently from other commodities. Why?

Jim Rogers:
The supply and demand dynamics for gold have been different from other commodities for two or three decades. I own some gold, but I’ve always tried to explain to people that they would make more money in other commodities than they would in gold, because of the supply and demand dynamics. Now that has been true for the last decade or so. For lead, in fact, you would have made a lot more money over the past thirty years, the past twenty years, the past ten years, than you would have in gold.

Peter Schiff:
For a while the Goldman Sachs Raw Materials ETF was the only commodity index fund available in that form. It has just been joined by a cousin, the Deutsche Bank Commodity index fund. More may join the party. Your thoughts?

Jim Rogers:
Merrill Lynch has just launched a tracker fund based on my commodity index, The Rogers Commodity Index. The Goldman ETF has very serious flaws, as far as I am concerned. The Merrill Lynch Fund is a wonderful product, because it is the only financial instrument of which I am aware where you can get 100% long term capital gains after six months.

Peter Schiff:
Do you expect to see many more of these types of commodity funds?
Jim Rogers:
Of course. Right now there are over 7,000 mutual funds in which the public can invest... There are fewer than 10 commodity funds. By he end of the commodity bull market there will many more commodity funds and products.

Peter Schiff:
Every good investment manager constantly asks him or herself: "what would cause me to change my mind?" What would cause you to change your mind on commodities?

Jim Rogers:
If someone discovers a gigantic natural gas field in Spokane or Chicago, or there is a huge copper mine discovered in Tokyo, with easily accessible product, of course it will have an effect. If there is a dramatic increase in supply in a politically stable area, it will have an impact on prices. But remember, in the commodity world, it generally takes a long time to bring new supplies, new discoveries to market. The basic situation is when supply and demand are out of whack you are going to have a bull market. And they are seriously out of whack now, and getting worse.

Peter Schiff:
If you look at supply and demand, the one thing that we know is going to be in abundant supply is the U.S. dollar. And eventually the demand for the greenback is going to drop significantly. So that really can be the biggest factor, from an American point of view, propelling the U.S. dollar price of commodities higher.

Jim Rogers:
That’s the icing on the cake. You can have a decline in the dollar and you wouldn’t necessarily have a bull market in commodities. Supply and demand are still the most important factors. And the supply/demand imbalance currently is gigantic.

Peter Schiff:
And it comes from years and years of neglect and under-investment in that area. And it is not going to change overnight.
Well thank you very much Jim. It is always a pleasure talking with you, and I really appreciate the time you spent with us. I am sure our newsletter readers will appreciate your insights.