The late and great Milton Friedman told us that inflation is always and everywhere a monetary phenomenon. But there is an asterisk to his equation that we need to examine, namely, the velocity of money. Sometimes a fast-growing money supply is not as inflationary as you might think. Then we will take quick looks at why the banking sector is in for more and larger rounds of write-offs, as well as note that the housing industry is in a hole but is gamely digging itself deeper. This week's letter will require you to put your thinking cap on as we travel to a mythical island to get an understanding of how the economy really works. There are a lot of charts, so the letter may again print long, but the word length is normal. And with no "but first," we jump right in.

When most of us think of the velocity of money, we think of how fast it goes through our hands. I know at the Mauldin household, with seven kids, it seems like something is always coming up. And with my oldest daughter Tiffani getting married this summer (forget gas, you haven't seen inflation until you start buying floral arrangements), more kids in school, "Dad, I need a car," high energy costs, etc., the velocity, at least in terms of how fast money seems to go out the door, seems faster than normal. And what about my business? Travel costs are way, way up, and as aggressive as we are on the budget, expenses seem to rise. About the only way to deal with it is, as my old partner from the 1970's Don Moore used to say, is to make it up with "excess profits," whatever those are.

This week I am in South Africa. At the moment I am literally flying from Johannesburg to Durban in a single-engine Pilates PC 12, a very upscale Swiss-manufactured plane. I am told pilots will know and appreciate the plane. It is supposedly the safest plane in the world, which is somewhat comforting as we bounce through a few storm clouds (and thunderstorms later tonight of the way to Cape Town!). My business partners and hosts, Dr. Prieur du Plessis and Paul Stewart of Plexus Asset Management, have kept me busy, but it has been fun.

This week's letter is the text of the keynote speech I gave last night at the Raging Bull awards in Johannesburg. There are a number of awards given to the various mutual funds (called here a unit trust or a collective investment scheme) that had the best performance in their respective categories over the last 3-5 years. The winning funds had some very impressive performance indeed. It was a black tie dinner with about 400 attendees. It was one of the more elegant events I have attended in my life.

Before we get to the text of the speech, a few thoughts on my impressions of South Africa so far. It has been about 12 years since I have been here. My last visit I drove from Jo'burg to the administrative capital at Pretoria, a distance of about 30 miles. It was basically farm land between the cities.

I am in South Africa as this week's letter is being sent out; so it is with some irony that the letter is focused on a topic that generally concerns only US-based investors, although what the SEC does has an effect on regulatory bodies abroad. This is a letter you may want to forward to your friends and associates.

The Securities and Exchange Commission (SEC) has posted a new proposed rule that would raise the minimum net-worth requirement needed to invest in private funds from $1,000,000 total net worth to $2.5 million liquid net worth. This is a major change, and it means that some 7% of American households will no longer be able to invest in private offerings. In my opinion, it is likely to become law in the not too distant future unless there is significant public comment. This week we look at the proposed rule and some of its consequences, as well as a very interesting proposal by SEC commissioner Roel Campos.

Let's start with some background. The current definition of an accredited investor was adopted in 1982 and was set at $1,000,000 total net worth, including your home and other assets. At the time, according to the SEC, some 1.87% of all US households were qualified to invest in hedge funds and other private equity offerings. Due to inflation and the growth in all sorts of assets, including homes, today about 8.5% of US households are eligible. The original rule was proposed to keep supposedly unsophisticated investors from getting involved in investments like hedge funds, which were considered riskier than mutual funds.

Yesterday the Philadelphia Fed Business Economic Survey came in at the lowest level since the recession in 2001. Some argue that it is just one month's worth of data, and "...besides, it is Philadelphia. Those numbers are always quirky." And why pay attention to the Conference Board's Index of Leading Economic Indicators? The bond market has its own opinions, and they are different than that of the stock market. With all of this as backdrop, we will then think about why we should be optimistic. Things are going to get better. All it takes is a little innovation.

The data seems to be pointing to an economic slowdown of some kind. It is getting increasingly difficult to suggest that we are in for a Goldilocks scenario where growth runs at 3%, inflation drops below 2% and housing starts to recover.

The debate is between those who say we are in for a soft landing or a hard landing. A hard landing is one in which the economy enters a recession. A soft landing is normally defined as one where the economy slows but stops somewhere north of an actual recession.