Q:  How would you describe the investment philosophy of your fund?

A: It’s a top-down approach, using the macro view of the markets to decide on the outlook,and direction interest rates are taking their direction, and the forces moving them, are our overall guiding light This doesn't mean that we wouldn't buy certain bonds for company specific reasons.

This fund launched in July 2005 to get distribution on a more wide-scale basis, as we were making money both in declining and rising interest rate environments. Our view was that the yield curve would invert and that the sweet spot over the next two and a half years would be the short end of the curve. We still believe that.

We are very opportunistic, keeping a lot of cash to take advantage of pricing. Usually, one or two industries a year tumble, whether it is Qwest, Xerox or General Motors, and it's during these time periods that we have successfully provided high Alpha.

Q:  Would you explain your current macro view in more detail?

A: We believe that interest rates will go up to 6% by the end of the year, the Fed is all about the dollar, regardless of their recent comments. If the Fed takes its foot off the gas for one second, the dollar will fall, oil will go to $80-$90, and commodity prices will go through the roof, resulting in a recession. The other choice is measured, tightening, and to keep raising interest rates until the dollar firms up. This is bad news for consumer because of mortgages, higher credit expenses, etc.

The theory behind this view is that when you raise interest rates, foreigners buy your currency to get that rate, thus moving the dollar up. That's going to be critical for the next couple of years, with a fairly big impact on what we do. For example, a similar low-duration fund predicted that the Fed would stop at 3.25% to 3.50% last year. As a result, they extended maturities which hurt their performance when rates kept moving up without them.

Q:  You mentioned the inverted yield. Why do you believe that it will persist for one or two years? And why do you believe that the Fed is all about the dollar?

A: It will persist, it’s the hangover after the big party. When Greenspan lowered interest rates from 6.5% to 1% in the face of the market collapse in 2000, he was trying to stimulate the economy. He knew the dollar would fall because when you take rates down to 1%, investors retreat. We did lose investors as big institutions started buying paper everywhere but here.

The correlation between the dollar and interest rates is significant and Greenspan was aware of this. But I believe that his bet was on growing the GDP through exports. Theoretically, if the dollar falls 50%, more of our products sell overseas, but that didn’t happen and we have record trade deficits. The current earnings are contributing to the GDP, just not enough.

So, rates moved up about 15 times and he’s only moved the dollar up probably 8 to 9%. When he moved rates from 6.5% to 1%, he brought the dollar down 50%. Getting the dollar back to its previous levels requires a move of 100%. The Fed has to get that dollar back up.

Otherwise consumer will choke on high commodity prices, as we continue to import way beyond our means.

That's why we believe that they'll continue to raise rates. Historically, recession occurs when we go inverted on the curve because costs are rising quicker than growth rates. Wages are on a flat-to-negative trend, down from $50 an hour to $25 an hour. If you don’t believe that, ask the folks at GM or the airline pilots or workers in manufacturing. The only reason the feds would pause is due to the dollar stabilizing.

Currently the market is dealing with a weak dollar, due to rumors that the Fed would quit raising rates, this puts more pressure on the Fed to continue to raise rates. So our view is cemented; it’s almost a no-brainer. The Fed gave up a lot of ground for no reason and if they were paying attention to what happened in Katrina, they’d know that those kinds of comments can be very dangerous. That makes you almost appreciate Alan Greenspan as he was better at information dissemination.

Q:  I believe that the last time we had a trade surplus was in the first quarter of 1964. One could make an argument that the trade deficit is not something new and the difference is only in the magnitude.

A: Exactly. You could also ask when was the last time consumer debt was over 80% or 90% of their assets. A guy making $100,000 a year, owns a house for $1 million and a car for $150,000. He’s always in debt, as has been the case for a long time, but the intensity is greater now. In my opinion, that has to do with the falling dollar, the rising prices of houses and other hard assets, as well as with inflation.

I see all the numbers on inflation less housing and food, but I spend a lot of my income on housing and food, so I don’t know how you could take that out. My point is that the falling dollar has escalated hard assets to a fairly extreme level. Going forward, I don’t think that the consumer can handle much more debt because he’s tapped out. So prices should start to fall i.e. recession.

You could raise interest rates on the short end and exacerbate that problem for the consumer. He can only move that credit card up to a point, so he'll cuts back either because of continued escalation in prices or because you raise rates. Both ways it’s going to create a slowdown and the inversion in the curve quantitatively tells you that.

But there’s always a lag effect of the Fed's action. For example, there was a 12-13 month lag between the time Greenspan started lowering interest rates and the time when the dollar began to fall. When he started to raise rates again, there’s a lag of about 14 months before the dollar started to take hold. I think that we’re still getting some of the benefits of Greenspan going from 6.5% to 1%.

Q:  But we haven’t been able to increase the share of manufacturing in the economy since 1975. All that we've done is creating more Wal-Marts and low-paying jobs. And we've never created more than 2 million jobs a year since 1971, while the population has been growing, and that means higher level of employment at low pay.