• Did you listen to what Dick had to say about gold?
• Dinner and drinks with the world’s largest U.S. dollar holders,
• Plus, Rude Awakening ends THIS WEEKEND, Mayer’s $1 offer is back and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

A Korean and his Scottish girlfriend and a Norwegian-born American and her Aussie boyfriend sit down for Japanese barbeque in Taiwan. If only we had a punch line…

Last night your editor joined a visiting couple for dinner at our favorite restaurant here in Taipei. After liberal helpings of marble beef, buttered scallops and spiced, seasonal vegetables – and enough warm sake to melt the polar caps – we wandered over to one of the local jazz bars. The area is popular with visiting Japanese businessmen, so we weren’t surprised to find it packed.

After a few more sakes and we found ourselves talking to Atsushi, a Taipei-based businessman originally from Tokyo. Pretty soon, the conversation turned to stock markets and the direction of the east versus that of the west.

“I have most of my money invested in the Japanese markets,” he informed us. “But it hasn’t done much for…well…a long time. It just kind of sits there…

“Maybe the Yen is too strong, right now,” Atsushi continued. “That hurts our exports and makes it hard for our companies to compete. Plus, American’s are cutting back, you know.”

“No kidding?”

“They are saving…but they are saving in dollars. The dollar has already fallen so much this year…it means they are really not saving that much, measured in their own currency.”

“But their debts are in dollars too,” we added, just for the sake of discussion. “It’s hard to go broke if you can pay back debts in a currency you can print.”

“Yes, but that won’t last forever,” Atsushi said with a certain confidence. “Besides, we have quite a few of those American dollars in Japan. Same for China.”

“And Korea,” our friend added. “We have some too!”

Everyone has dollars, Rude reader. They are flooding the world, printed and pushed by the Feds so American consumers can buy Chinese, Japanese and Korean knickknacks and so the U.S. government itself can purchase (on your behalf) Wall Street’s least efficient banking and insurance firms…and the nation’s auto makers…and the citizens’ mortgages…and their student loans and car loans…

French president Charles De Gaulle once described America’s reserve currency status as an “extraordinary privilege,” but, as our Japanese friend observed, it won’t last forever. You’ve heard the warnings and threats from China, Russia, Brazil. You’ve read the rumors that the OPEC nations were going to ditch the greenback…and you saw what it did to the world’s reserve currency in a matter of days. You’ve even seen Chinese students laugh in the face of Timothy Geithner as he assured them that their dollar holdings were safe.

And more recently, as the rest of the world looks for ways to go “ex-dollar,” you’ve witnessed the rise and rise of our favorite precious metal.

In today’s Rude Awakening, our second last issue ever, we bring you another essay from the “remembering Rude” vault. We originally published Mr. Chris Mayer’s remarks on gold back in February of this year and, with gold bumping against all-time nominal highs, readers who took his advice faired pretty darn well. Please enjoy…

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Buy Gold…We Really Mean it This Time
By Chris Mayer

His name was Dick Baker. Mark Twain called him an old friend and wrote about him in Roughing It (1872). He was the pocket miner of Dead Horse Gulch.

Twain and Baker would wander up in the hills of California, panning for gold. Pocket mining was a specific method in which miners hoped to zero in on the richest deposits “whose vagrant grains of gold have escaped and been washed down the hill,” as Twain wrote, “spreading farther and farther apart as they wandered.”

Sometimes all you needed was to find one spade’s worth of gold. That alone might pay $500 back then. “Sometimes the nest contains $10,000,” Twain relates, “and it takes you three or four days to get it all out.” The pocket miners told tales of finding $60,000… even $120,000 worth of gold, a fortune in those days.

Investing in 2009 is a little like pocket mining: A lot of panning around looking for that worthy payoff. But for the first time in a couple of years, the business of gold mining itself looks attractive, for two important reasons. One has to do with the big picture. The other involves the underlying economics of gold mining, which are attractive even if the price of gold goes nowhere.

As to the first, I’ll be brief, because it’s not the most compelling reason to buy gold stocks in my opinion, yet it’s the one most everyone spends most of their time talking about. It’s that the U.S. government is spending money like there is no tomorrow, which is bound to lead to printing a lot of money (read: inflation) and hence a rising gold price. It’s true, though: You couldn’t draw up a better scenario for gold than what’s going on right now.

Even some sharp-eyed value types – usually buried in the footnotes of their favorite companies, rather than speculating on the price of gold – find themselves drawn to the yellow metal. Indeed, some even seem apologetic about it. “We never thought we would ever buy gold or gold stocks,” writes David Einhorn in his latest quarterly letter to shareholders of his Greenlight Capital.

He talks about his grandfather, who was a gold bug and for the last 30 years of his life bought only gold and gold stocks. Since the age of 10, Einhorn heard warnings from his grandfather about the ravages of inflation and the dangers of the government’s printing press. And of course, for most of those 30 years, gold was a lousy investment. “Being patient is one thing,” Einhorn writes. “Being ‘wrong’ for three decades is quite another.”

Today, Einhorn admits to seeing old Grandpa’s ideas playing out. He’s buying gold and call options on a basket of gold miners.

Behind the bigger picture, though, there’s a more compelling reason to buy gold stocks today. First: The price of gold miners as a group is off more than 20% in the last year, even though the price of gold has held firm. Add to that mix falling mining costs in 2009 and you have a recipe for explosive earnings.

As gold analyst John Doody points out, oil accounts for about 25% of the costs of running a mine. Gold miners use a lot of energy to power big shovels and dump trucks and to haul ore. The price of oil, as you need not reminder, has collapsed. It’s down more than 70% from its high in July. For the first three quarters of 2008, gold miners had to contend with an average oil price around $118 a barrel. Barring a huge rally in oil, gold miners will reap a windfall in lower oil costs oil since then. As I write, oil is $36 a barrel.

Not only will gold miners get the benefit of lower oil costs, the currencies of the gold-producing countries have all fallen against the dollar. This means their costs are lower today in dollar terms. Consider, for a moment, where the gold comes from. In the mid-1990s, four countries dominated gold production and made up more than half of global production. They were Canada, Australia, South Africa and the U.S. But by 2006, these four producers made up only about one-third of global production. Today, you see China produce a lot of gold, as well as Peru, Mexico, Chile and countries in Africa. (This according to Frank Holmes’ book The Goldwatcher. The book, by the way, is a must-have manual for gold investors. Part II, in particular, has a wealth of gold investing strategies and insights.)

Many gold mining stocks today have assets in countries where the currency is falling against the dollar. As Doody says, “All the commodity nation currencies – the Canadian dollar, the Australian dollar, the South African rand, the Brazilian real, the Mexican peso – they’re all down 20-40%. When your mining costs in those countries are translated back into U.S. dollars, they’ll be 20-40% lower.”

Those two factors – lower oil costs and currency effects – mean gold profits should be higher in 2009 than in 2008 even if the price of gold goes nowhere.

I’ll add one other reason to like gold stocks here: They did pretty well in Great Depression I. And history may repeat. Even at their lowest prices in 1933, the stocks of Alaska Juneau Gold Mining and Homestake Mining were still well above their 1929 highs. At their highest prices, they were 230% and 300% higher, respectively.

Old Bernard Baruch was a principal stockholder in Alaska Juneau. It was his largest holding in 1931. Baruch was a savvy old trader and investor. He knew where the soup would stick to the spoon after Roosevelt’s New Deal policies. It would mean a devaluation of the dollar and a rise in the gold price.

Eventually, gold did surge, and so did gold stocks. “Baruch reaped an especially large profit,” his biographer James Grant writes, “for he had been buying stock and bullion.”

Obama’s stimulus plan smells a lot like Roosevelt’s New Deal. And if this is the greatest financial test we’ve faced since the Great Depression – as I believe it will ultimately be – then gold stocks may also be among of the few stocks to make new all-time highs in 2009.

If Twain were still kicking, I think he’d go look for his old friend Dick Baker, the pocket miner of Dead Horse Gulch, and head for those California hills.

Joel’s Note: Want all of Chris Mayer’s best research for a buck?

Well, here it is: A no muss, no fuss offer to test drive Mayer’s Special Situations for one month…for a single dollar.

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[Rude Endnote: And that’s it…the final weekday edition of The Rude Awakening. From Monday onwards, you’ll be able to catch us at The Daily Reckoning, where we’ll continue publishing our daily missives.

If you haven’t already signed-up to receive the DR (for free, of course), you can still do so right here.

We hope you can join us.

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• Did you buy this argument on March 11? You should have…
• The Mayer’s Special Situations Dollar Offer returns,
• Two more Rude issues and it’s adios! You comin’?

Joel Bowman, trying not to interrupt for long, from Taiwan, Taipei…

It is often said that those who do not learn from history are doomed to repeat it. But who cares about those who don’t learn? What about those who do? And, more importantly, what about those who actually PROFIT from their keen attention to relevant historical details?

On March 11 of this year – a mere 48 hours off what is still the year-to-date market low – we published in this space an article by Rude favorite and part time financial historian, Chris Mayer. In his column, Mayer boldly made the case for stocks, arguing that the then fresh market collapse had ushered in a “bull market in buying opportunities.”

There was plenty of blood on the streets when Chris and his readers waded back into the market. It takes a lot of courage to do that…but it also requires an astute sense for the lessons of history, the kind of sense Chris brings to his research service, Mayer’s Special Situations.

Today, as part of our “remembering Rude” series, we present the original column, with lesson intact. Please enjoy…

—- Chris Mayer’s Special Situations $1 Trial Offer —-

URGENT ALERT: Latest research points to early November as the final window of opportunity…

You Can Struggle and Sweat to Make a 74% Gain… or I Can Show You the Easy Road to 234%

Three powerful, irresistible forces are set to drive up this asset by 74% in as little as 18 months…

You could harness these forces to generate 234% gains in even less time than that…

And I’ll show you how today for just $1.

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A Bull Market in Buying Opportunitiesv
By Chris Mayer

Wall Street trader David Feldman lived through the Great Depression. In 1997, at the age of 87, he set down his thoughts in a little memoir entitled, “The Ups and Downs of a Wall Street Trader During the Depth of the Great Depression of the 1930s.” Interesting that he felt the need to apply “of the 1930s” to his title, so as not to confuse it with others that would follow.

In this memoir, I find some parallels to today. As an investor, the key takeaway for me is to proceed in 2009 with a great deal of caution. If I could sum up a game plan for 2009, it would be to stay with cash-rich and debt-light investments.

Let’s begin with the aftermath of 1929, which is not so dissimilar from the aftermath of the 2007-8 selloff. There was nearly universal optimism after the crash of 1929. When the pundits peered into their crystal balls for 1930, they were bullish to a man.

Feldman writes: “My research has uncovered nearly 50 prophesies the country’s leading businessmen, bankers and government officials contemplated as we slid into the worst economic calamity in the history of the United States. With the exception of a single one, every prediction of conditions in the cheerless year of 1930 was optimistic, even considerably upbeat.”

You could make the case that we see the same sort of thing today. Last fall, the legendary Warren Buffett was urging investors to buy stocks. He even published his bullish musings in a New York Times op-ed piece. Meanwhile, many longtime bears on the stock market were turning bullish. “This is the time to buy,” they said. But it was not EXACTLY the time to buy. The Dow has shed another 2,000 to 3,000 points since these various declarations of “the bottom.”

Most high-profile investors from the late 1920s behaved similarly. The lone exception Feldman found in 1930 was an editorial in the Times by a group of German financiers in Berlin. They predicted that “stocks may enjoy a big temporary recovery, but no prolonged bull movement is considered likely for several years to come.” Bull’s-eye!

Stocks slid to new lows by 1932. A short table of some issues selected at random by Feldman shows the damage:

After the crash, people and businesses did cut back, even though their financial leaders saw a rebound. And we’re seeing this now in our day. Consumer spending is falling. Capital spending is dropping. Another writer on the Depression, Frederick Lewis Allen, notes how the crash also wrecked the credit system. It endangered “loans and mortgages and corporate structures which only a few weeks previously had seemed as safe as bedrock.” Debts that once seemed bearable become a worrisome and heavy burden. Again, we’re seeing this unfold today as companies try to wriggle free of suddenly oppressive debts by trying to raise and conserve cash.

Statistics alone, fail to capture the economic devastation of the 1930s. But the statistics are breathtaking. The amount of money paid out in salaries dropped 40% from 1929-1932, according the National Bureau of Economic Research. Dividends fell 56%. The unemployment rate was about 25% in ‘32.

One thing we haven’t seen yet, but probably will, is a lot of consolidation among business. In the 1930s, Allen notes how there was “more zeal for consolidating businesses than for expanding them or initiating them.” With stock prices low, the cash rich in Corporate America have a chance to steal some things. Why invest in new oil wells when you can buy ‘em in the stock market for less than half of what they would cost you to drill new ones? Why build new factories when you can buy a competitor for 20 cents on the dollar?

As it turns out, the early 1930s were a good time to buy stocks, with one very important caveat: Avoiding companies that failed completely. As Feldman points out: “Stock prices [in the 1930s] were so low that so long as a company did not go out of business, practically anything you might buy was certain to go up, if not sooner, then later.” (Emphasis added). We might call this “Feldman’s Law of Depression Investing.” That caveat was not as easy to avoid as it may sound. By the end of 1933, more than 5,000 banks had failed. Thousands of businesses had also failed.

Feldman lost a lot of money in the crash and its aftermath, like almost everyone else. So what did this brutal experience teach him? “One thing that this experience taught me was that, in investing, you should never cry over spilt milk,” he writes. “Only the future is of importance.”

I don’t know if we are headed for another 1930s-style Depression or not. I think we are close to a precipice where that is more a possibility than at any time since the 1930s. Whatever the case, it will be critically important to stay with the cash-rich and debt-light companies. That’s where my focus is. “Cash was king,” Feldman writes of the depth of the Great Depression. “If you happened to have any, you were really in the driver’s seat.”

I want to be sure that I stick with the survivors and companies that can continue to build wealth, even if it doesn’t show up immediately in their stock prices. When we come out of this contraction, it is the stock in these companies that will pay off big.

Though the bear market of 2008-9 may seem like a calamity now, it may prove otherwise over time. As that great 17th-century wanderer, Jack Casanova, wrote in his memoirs: “My ill fortune, no less than my good, proved to me that…good comes from evil as evil comes from good.” Likewise, 2009 may be good fortune in disguise, as it allows us to pick up new ideas on the cheap.

Joel’s Note: If you would like to take a gander at exactly the kind of work Chris does, you can now do so for only $1. That’s right, back by popular demand is the Mayer’s Special Situations one-month, $1 trial offer.

So go ahead, kick the tires for thirty days before you decide whether it’s right for you or not. You get full member access to all his reports, the complete portfolio and a month worth of his service for a buck. Interested parties can proceed directly to the sign up page here.

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[Rude Endnote: Today is the second last Rude issue! Only tomorrow to go then we’re off to publish our insights in The Daily Reckoning. Have you signed up yet? If not, you can do so here for free.

That’ll be all…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• Commodities mount yet another rally as stocks flail,
• Crude: The other inflation hedge (and with room on the upside!),
• Plus, Rude moves house next Monday…Are you joining us?

Eric Fry, reporting from Laguna Beach, California…

For the second day running, commodities made some noise in the trading pits. Gold jumped to another all-time high of $1,064 an ounce; oil surged to a one-year high near $75 a barrel and most of the agricultural commodities bounced to new multi-month highs. By contrast, for the second day running, the stock market did a whole lotta nuthin’.

Two days’ trading action doesn’t make a trend, of course, but it does make a nifty topic of discussion for an online financial column! The specific “nifty topic” that interests us here at the Rude Awakening is whether commodities like oil, corn and wheat might now be much more compelling investments than the S&P 500 Index.

After all, if the economy is genuinely and truly recovering, demand for commodities will also recover. And yet, broadly speaking, the stock market has done a heck of a lot more “recovering” than the commodity markets. The S&P 500 trades for a lofty 19 times expected earnings – earnings, which, by the way, might not materialize as expected. Most commodities, meanwhile, change hands at price well below their highs of the last two years. And so we wonder, “Why not sell stocks and buy commodities?” Specifically, why not buy crude oil and/or the grains?

The nearby chart displays the recent price trends of both crude oil and the S&P 500 Index, since the end of 2007. As fate would have it, their respective zigs and zags have landed these two asset classes in approximately the same spot. Similarly, crude oil and the S&P 500 have both bounced about 60% off their March lows. But here’s where our story takes an interesting turn…

Historically speaking, stocks are very richly priced. On the other hand, crude oil seems very lowly priced, at least in relation to probably supply-demand trends and to the ever-rising cost of new production. Net-net, at the current quotes, the S&P 500 seems like a riskier bet than crude oil…and a MUCH riskier bet than the grains.

As an added plus for the would-be buyers of commodities, the U.S. dollar is looking a little shaky these days. Every time it stumbles, bids show up for the stuff that powers and feeds the world. Every time the dollar trips over itself, the world’s dollar-holders look around for ways to hold fewer of them – like exchanging them for gold, grains or crude oil.

For more on the whys and wherefores of the crude oil trade, please check out the insights below from Chris Mayer, editor of Mayer’s Special Situations. But a quick head’s up…Chris doesn’t get to the stuff about crude oil until about half way down the column. The first half contains what he calls “timeless investment wisdom”…

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Why Oil? Why Now?
By Chris Mayer

Forecasting is a troublesome art even in less confusing times than these. As Edward R. Murrow once said, “Anyone who isn’t confused really doesn’t understand the situation.” We are in uncharted waters in many respects. Nonetheless, we must try to make sense of it all. Herein, a few quick observations on where we are with some timeless investment wisdom and some kind words for crude oil, which looks like something an investor can bank on in uncertain times.

We’ll start with Howard Marks, the chairman of Oaktree, which oversees some $60 billion in assets. At the recent Grant’s Fall Investment Conference, he offered an interesting summary of what happened during the financial collapse of 2008. The story was, essentially, one of too much debt.

A willingness to take risks, easy credit and optimism fueled the boom. The ratio of credit to GDP, which has tended to hover around 140–160% here in the U.S., shot up to 300% pre-2007 crisis. In the years immediately following the Great Depression, this ratio shot up to 265%. So we are well into “ugly” territory.

As Marks points out, much of the apparent improvement in the economy today has had to do with the financial sector, and not the “real” economy. “Business is still terrible,” he says. “Our industrial base is shrinking, perhaps permanently.” Many of the boom’s problems remain unresolved. The potential for more defaults and more bankruptcies is still substantial, he says.

But what is an investor to do? As Marks says, “You can’t always prepare for a 2008. You’d never do anything.”

That is true. Marks shared a few of his favorite investment mantras, which are useful to keep in mind. The first is that “improbable things happen; and probable things fail to happen.” Anybody who lived through 2008 needs no reminder of this. It would’ve seemed improbable that oil prices could fall from $143 to $30 in six months, but it happened. It would’ve seemed probable that inflation would be high by now, but it isn’t.

Second, “It is not enough to survive on average; you have to be able to survive the worst day.” Marks used the example of a 6-foot man drowning in a river only 5 feet deep on average. The lesson: Buy companies that can survive the worst days.

Third: “Being too far ahead of your time is indistinguishable from being wrong.” Anyone who was bearish on oil at $100 a barrel — on its way to $143 — was pretty much wrong, even though they were ultimately right. Timing, sometimes, is everything.

And finally, on forecasting, Marks was brutally honest. He doesn’t believe forecasts, even his own. (“In fact, I don’t believe half of what I just told you,” he said as the crowd laughed. To which Jim Grant, ever ready with a rejoinder, quickly asked: “Which half?”)

With that, we’ll take a stab at the oil market, which seems to exhibit the wisdom of all the above.

The story of oil is one of an increasingly costly supply base and a stubbornly high demand for oil. Andrew Hall told the story. He is chairman of Phibro, a large commodity trading firm. His presentation highlighted all the pitfalls of our precarious oil supply. The U.K., Norway and Mexico are all in decline, and each was a major producer of crude oil not long ago. Indonesia, one of the founding members of OPEC, is now a net oil importer.

True, we’ve had several new discoveries. As Hall points out, though, these are all costly sources of oil. And all the new discoveries will barely offset the existing declines elsewhere. Add in the potential downside risk of delays and cost overruns and Hall believes there is little chance of upside surprises.

The key to his whole argument rests on the current replacement cost curve for world oil. The average marginal cost to produce 84 million barrels of oil per day – the current demand – is $70 a barrel. In other words, if the oil price falls below that level and stays there for a while, marginal production becomes uneconomic…which means that production would be certain to fall.

Furthermore, the cost of production continues to rise. Less than a decade ago, the marginal cost was only $25 a barrel. So the whole curve has been shifting upward over time.

There is also a kind of feedback loop here. The biggest cost to produce oil is the price of steel and the price of oil itself. So as oil prices go higher, it means extraction costs also go up. The return we get on energy invested, or EROEI, is another element in decline. In 1930s, the return was greater than 100:1. By the 1970s, it slipped to 30:1. Today, the “energy return on energy invested” is in the mid-teens. It seems clear we’ll spend even more energy on to get energy in the future.

The great backdrop of demand remains those emerging markets. They are still early in the growth curve for oil demand. As Hall says, the emerging markets are at a per capita level at which oil demand begins to grow rapidly.

That, plus the supply issues, paints a powerful bullish backdrop for oil. It’s why Hall concluded his presentation by saying, “Oil price upside is virtually guaranteed.”

We will see. But how to play it? Hall recommended owning oil in the U.S. or Canada. Also oil field service stocks remain attractive as the picks and shovels of the oil industry. He recommends avoiding the refineries, which should be a terrible business for years to come. He is also not a fan of the midstream assets (i.e., the pipeline stocks), as they won’t participate as much in a rising oil price.

The other thing about oil is that, like gold, it is an inflation hedge. Asked about oil as an inflation hedge, Hall said, “All hard assets are going to perform well in nominal terms. Oil prices quadrupled in the ’70s and then quadrupled again.”

So if we circle back round to Marks’ wisdom, “Improbable things happen.” How about a rising oil price in the face of a weak economy? Improbable, most would say. Inevitable is what Hall’s presentation promises.

Joel’s Note: Speaking of oil investments, right now Chris is spending some time over in the Middle East, checking out opportunities for his readers. After that, he’s off to India to get some “boots-on-ground” exposure there. In fact, Chris and Addison, our executive publisher, are amassing an international network of financial minds to help people get a better handle on the many investment ideas abroad. If you’re in any way “bearish on the Empire,” you might want to look at what Addison and Chris are building. You can check out their first briefing right here.

—————————————–

[Rude Endnote: Please don’t forget, dear reader, that The Rude Awakening is closing at the end of this week. From next Monday onwards, your editors will publish their thoughts, hunches, speculations and guesses from The Daily Reckoning. If you haven’t done so already, you can sign up for free here.

That’s all for another day.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• The growing risk in Treasurys and four ways to bet against them,
• The trouble with separating man from the economy he builds,
• It’s only the end of the world, why waste time worrying? And more…

Joel Bowman, reporting from Taipei, Taiwan…

Super typhoons, an earthquake and a tsunami; to put it mildly it has been a devastating week for the Asia Pacific region. Now another typhoon, Parma, is closing in on our doorstep. We await quietly its wrath. In the Philippines, the Catholics pray for deliverance. Here in Taiwan, the Buddhists batten down their hatches…

…and yet, from the shiny towers of modern economic theory, there pours forth a deluge of pure idiocy that threatens to drown us all.

In the aftermath of last week’s natural disasters, a few misguided economists have rushed forward to assure a battle-weary public that there will be “minimal economic impact” on the effected nations. Some, evidently suffering from a most unfortunate case of myopia, even suggest that the region will be “better off” for having suffered so at the hands of Mother Nature.

“Rebuilding has an accelerating effect on GDP,” Wai Ho Leong, Barclays Capital’s senior regional economist in Singapore, remarked in an interview with Bloomberg. “Typically, it more than makes up for such shocks. The overall impact on the economy might even be positive, if we factor in rebuilding programs.”

Such abuse of logic leads the unthinking person to assume that all our economies would be far better off, if only we were fortunate enough to be visited on by regular and extreme natural disasters.

One might have thought that such specious reasoning would have gone the way of the dodo after Frederic Bastiat elucidated for us its inherent flaw in his 1850 essay, “That Which is Seen, and That Which is Not Seen.”

In his famous example, “The Broken Window,” Bastiat examines opportunity cost, the cost of that which is “unseen.”

Suppose, Bastiat’s example goes, that a careless son breaks a windowpane in his father’s store. Witness that the bystanders will placate the shopkeeper with such statements as, “what would become of the glaziers if panes of glass were never broken?”

The idea here is that the “seen” effect of the broken window is a net positive, i.e., a glazier will be paid 6 francs (the figure in the example) to fix the window. What is left unseen, however, is not only that the shopkeeper must furnish 6 francs for a new window, but that he now has 6 francs less to spend on those things he might have purchased had his careless son not damaged his property in the first instance. (In Bastiat’s second supposition, where the window is not broken, the shopkeeper spends his 6 francs on shoes and enjoys, in addition to his new kicks, an unbroken window in his store.)

As Bastiat correctly concludes, “Society loses the value of things which are uselessly destroyed.”

The message is simple enough that one might think even a mainstream economist would be able to grasp it. Alas…

The misguided Leong continues: “We have seen the experience of Sichuan and more recently in Taiwan. Over an extended time period, there was no discernible impact on gross domestic product on a net basis.”

[It is true here that Mr. Leong has enslaved his reasoning capacity to the dubious metric we know as gross domestic product. And it is true that this measurement tends to paralyze the inquiring mind, often beyond resuscitation. But that debate is for another day...]

More than 3 trillion yuan ($440 billion) was committed to rebuild houses, highways and railways leveled by the earthquake that struck Sichuan back in May, according to Vice Provincial Governor Wei Hong. We can easily understand, therefore, that this money will not now be used by either individuals – to purchase new machinery for their farms, for example – or by the local government – to cover other expenses.

That 3 trillion yuan is an “unseen” cost, but a cost nonetheless…and quite a discernible one at that.

Even of we forgive Mr. Leong this error, we might have expected him to count the cost of the 87,000 people who perished in the disaster. Even if he wishes to separate these individuals from the economy, he must admit that such a tragedy represents a massive loss of productivity. You know…for the “economy.”

Such egregious remarks might be considered comedic fodder if the (lack of) thinking behind them was not so pervasive in modern economics, where spending – any kind of spending – is seen as an absolute and unchallengeable positive for all and sundry.

In the same article, Song Seng-Wun, an economist at CIMB-GK Securities Pte, assured us that, “For now, this is a human rather than economic story. In fact, there could be a mild boost from reconstruction works.”

Here we can see the pernicious misconception in higher resolution; that is, the assumption that economy and man are isolated entities. Of course, there is no “economy” without humans and any attempt to separate the two is, at best, a grossly sophistical error. From fascism to communism, all tyrannical and oppressive regimes have this mendacious claim at their heart.

Whether in response to natural or manmade disaster, beware the message, “good for the economy,” if it deviates in any way from what is good for the individuals who build it.

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And the Rest of Your Rude Reading…

The Last Bear
By Bill Bonner

Personal conversions sometimes mark dramatic turns in history. Saul of Taursus saw a vision so bright it left him blind. The next thing you know, he had changed his name and was pushing Christianity all over the world. According to Gibbon, the Roman Empire fell as a consequence. Then, on the advice of his mistress, Gabrielle, Henry IV became a Catholic, leading to the Edict of Nantes and its subsequent revocation.

How to Relax and Enjoy the End of the World
By Bill Bonner and Addison Wiggin

The world as we have known it is coming to an end. But what do we care? We smile and vow to enjoy it. It took the Roman Empire hundreds of years to fall. During that time, most people did not even know their world was coming to an end.

Kinder, Gentler…and Perverse
By Eric J. Fry

The kindlier, gentler version of American capitalism that has come into fashion since last year’s credit crisis is neither kind nor gentle… at least not to capitalists. The “new capitalism” visits the sins of an imprudent minority on the backs of a prudent majority.

The Sun Sets on the West
By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63-year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

Risk-Free is Not Without Risk
By Eric J. Fry

“All things must pass,” George Harrison mournfully crooned on his 1971 album of the same name. “All things must pass away…Sunrise doesn’t last all morning. A cloudburst doesn’t last all day”…and neither does a superpower’s global economic hegemony.

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[Rude Endnote: Your editor is off to Seoul, South Korea, this week to catch a glimpse at the world’s second most populous metropolitan area. If you’re in the city and want to grab coffee, drop us a line below.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• Just in case you forgot: China celebrates 60 years…in military style,
• How to be one with the commodities China really needs,
• Plus, braving the new world of 2050 and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

Just in case anyone forgot about the seriousness of China’s aspirations, the world’s most populous nation put on a bit of a “birthday bash” yesterday…complete with goose-stepping soldiers, homemade fighter jets and 80,000 or so placard waving students.

Oh yeah, and a president dressed in a grey, Chairman Mao-style tunic addressing the masses from atop the (in)famous Tiananmen Square Gate:

“Hello comrades…We have triumphed over all sorts of difficulties and setbacks and risks to gain the great achievements evident to the world,” declared President Hu Jintao, as translated by the China Post. “Today, a socialist China [is] geared toward modernization. The world and the future towers majestically in the East.”

Sixty years after one of the bloodiest revolutions in history – followed by Mao’s own unparalleled reign of tyranny – the Asian powerhouse finds itself the fastest growing major economy in the world. In the last decade alone, China’s economy has leapfrogged the U.K., France and Germany in terms of size. The numbers truly are mind-boggling. Here are a few to toss around the next barbeque:

Its universities churned out 30,000 MBAs last year; in 1998, that number was zero. There are now more English-speaking Chinese people than there are people living in the United States (who speak any language). Although the country already has more than 160 cities with a population of greater than one million (the U.S. has nine, the U.K two), housing, feeding and catering to the needs of China’s 1.3 billion people is no small task. Today China consumers half of all the world’s cement as it strives to build 97 new airports, 500 additional coal fired plants and 30 nuclear plants in the next decade. It commissions a new power plant every four days and, in 2007 alone, added as much power generating capacity as the entire output of France.

Where is all that “stuff for the furnace” coming from, you ask? It’s probably easier to ask where it is NOT coming from. Last month China’s sovereign wealth fund, China Investment Corp. (CIC) splashed out over $3.6 billion on resource investments around the globe. Its latest purchase, an 11 percent stake in Astana, an exploration and production arm of Kazakhstan’s state-run energy company, is right in line with the fund’s mandate: Buy the world’s resources and buy them now!

CIC’s latest Central Asia investment tops off a month in which the fund also secured a 15 percent stake in Noble, a Hong Kong-based commodity supplier and a 17 percent chunk of Teck Resources Ltd., Canada’s largest diversified mining company. Add to that a $1.9 billion debt purchase from Bumi Resources, Indonesia’s main coal producer, and you’re beginning to get a look at the general picture.

“China is targeting particular areas of the world like Central Asia and Africa to secure energy resources,” Michael Yu, an energy analyst at China Merchants Securities in Hong Kong, recently told Bloomberg. “China has good relations with developing countries like Nigeria and Angola and this helps secure deals. It’s far more difficult for China to secure resources in developed countries like the U.S. where there may be more political opposition.”

That’s not to say China is ignoring opportunities in South America, of course. Far from it. While the U.S. was busy greasing the halls of AIG and Citigroup with freshly inked paper money earlier this year, China was negotiating with Brazilian officials to nail down vital, strategic oil contracts. Brazil’s national oil company, Petrobras, walked away with a $10 billion loan to help develop its mega Tupi field. Petrobras will in tern supply 150,000 barrels of crude per day to China this year and 200,000 barrels next year.

Indeed, barely a day goes by without news of China staking out some new plot of land, underwater oil field or resource-rich region. [As we were writing this very issue today, news came over the wires that China National Offshore Oil Corporation (CNOOC), is expected to join talks with U.K. independent Tullow over its $5 billion Uganda oil project. In case you were wondering, China National Petroleum Corp. and China PetroChemical Corp. (Sinopec) are already in the bidding.]

Like it or not, China is the future. Where the American consumer is all but tapped out, the Chinese have plenty of cash to fuel their future aspirations, both collectively and individually. Indeed, many analysts in the west now pin their greatest hopes for a sustained, global economic recovery on the very emergence of the Chinese middle class and the voracious demand they bring to the table. Our bet is that these analysts will get just what they ask for…and then plenty more.

In the column that follows, Chris Mayer fast-forwards to the year 2050 and, with some additional insight from Dr. Marc Faber, maps the road leading to Chinese economic dominance. Prepare now. Read below…

— Mayer’s Special Situations Resource Report —

Urgent Resource Action Alert:

Closed to New Investors for the Last 6 Years — Now Open Again…

The “Chaffee Royalty Program” That Turned Every $1 Into $50

In 2002, the same royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”

In 2008, that door is open again… and it just got easier than ever to “make money while you sleep”…

But there’s no telling when it could close again…So you’d better collect your own “Chaffee Royalties” right NOW!

——————————————

The Sun Sets on the West
By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63-year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

China ought to be the world’s largest economy by then, Faber predicts. The economies of the U.S. and India, should be neck and neck for the No. 2 spot – about 60% of the size of China’s. A distant fourth, at maybe a quarter of the size of the U.S. economy, will be Brazil, followed closely by Mexico, Russia, Indonesia and Japan.

That’s a very different world than the one we live in now, where the U.S. is No. 1 by a large margin and the European countries, such as Germany and the U.K., still figure prominently. What interests us most, though, is not so much the destination of 2050, but the path of growth to get there.

There are as many ways to show this growth trend as there are golf balls in the water at No. 15 at my local golf course. But Faber cites the trend in motor vehicle sales to illustrate the trend.

You can see that the “emerging 16″ – the largest of the emerging markets, which includes China and India – caught up and passed the U.S., the European Union and Japan in 2008 as the world’s largest auto markets. What’s interesting here is that even in this recession that gap has widened.

There are all kinds of ideas that spin out of just that one observation. Cars don’t operate in a vacuum. They require an entire operating system to run, as software does. You need roads, for instance, and you need gasoline stations and gasoline. You need a lot of oil.

Just think about oil for a minute. The U.S. eats up about 25 barrels of oil per capita per year. Even countries such as South Korea and Japan consume around 15-20 barrels of oil per capita per year. China and India are tiny compared with that. China is at 1.5 barrels of oil per capita annually. And India barely registers.

So one can only imagine that as these economies grow and take up more of a share of the global economy, their oil consumption will rise exponentially. As far as investing goes, it boils down to investing in what these economies need, but don’t have.

In other words, we ought to ask the question, “For which commodities will demand not collapse?” Faber presents a chart that provides a partial answer. The chart presents China’s proven reserves of each commodity as a percentage of the world’s total reserves.

This chart does not include the agricultural commodities like soybeans and potash that China has in very short supply, but the chart does include many other important (and investible) commodities like copper, natural gas, uranium, bauxite (important in making aluminum), chromium (a steel additive) and manganese (important for making stainless steels). As investors, the left-hand side of the vertical line on the chart is where you want to be.

The commodities bull market, Faber ventured, is still on, though he cautioned that the road will be bumpy.

Even in commodity bull markets, 50% corrections are common.

“Hard asset booms are fueled as much by pessimism about economic prospects as by optimism about a continuously high appreciation of the commodity in question,” Faber explains. “In this sense, commodity booms are characterized by greed based on fear.”

On the question of the dollar, Faber was emphatic that we would see it lose value against the real world of things. Faber predicted that sooner or later we would have major inflation thanks to government stimulus and money printing. Therefore, Faber is long gold and silver.

He also thinks Japanese equities are depressed and points out that many Asian equities are near 20-year lows, except China’s. He also likes financial services in emerging economies and infrastructure stocks. On this latter idea, Faber said, “There are bottlenecks everywhere,” and noted a potential problem of delays or cancellations. He likes farmland, too.

As for what to avoid, Faber says turn your nose up at real estate and government bonds. There are also potential oversupply problems in tourism, with too many hotels, resorts and the like. Faber cautioned against these industries…and there are certainly too many government bonds as well.

We’ll see how it plays out, but I’m with Faber. The world is changing dramatically. And it’s the emerging markets that will provide the light at the end of the tunnel.

Joel’s Note: A few days from now, Chris Mayer and Addison Wiggin will set sail (well, they’ll fly) to two of the pulsing centers of the emerging world: Mumbai, India and Dubai in the United Arab Emirates. The two are off to hunt down investment opportunities for American’s looking to add a bit of “eastern exposure” to their portfolio. We’ll let you know how they go but, in the meantime, we encourage you to check out their latest research report. The title of it may give you some idea as to why they are looking abroad for opportunities, rather than at home. Check it out here.

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[Rude Endnote: A sea of red enveloped traders’ screens overnight following a bit of a dip in Wall Street’s majors yesterday. Okay, so that’s a bit dramatic. Let’s just say that most Asian and European markets mostly ended lower.

Japan’s Nikkei 225 closed the session down 1.5% while the Aussie markets, as measured by the All Ordinaries Index, slid 0.9%. Hong Kong’s Hang Seng also fell, bit only by 0.3%. China’s CSI, meanwhile, gained more than 1%.

In Europe, Germany, France and London’s measures were all trading lower last we checked, the latter two by about half a percent each. Germany’s DAX was fairing slightly better, but not much.

Quickly on the yellow and black stuff: Crude was down to a penny shy of $70 per barrel last we checked. Gold gave back a little ground, too. An ounce goes for $1,003 as of this writing.

That’s all from us today. We’ll be back when the sun rises this time tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• Just look at who’s buying our favorite yellow metal now…

• A cheap gold miner to keep an eye on for your portfolio,
• And, important information on RUDE’s NEW HOME…more below…

Eric Fry, faithfully holding a flame for his beloved, articulates his passion below…

“Gold is rising because the post-Breton Woods exchange rate system doesn’t work,” Eric Roseman, our colleague over at the Commodity Trend Alert, matter-of-factly declares. “More than ever, governments are piling up debts, as a result of bailing-out their respective banking systems. There is a price to pay for this profligate spending. And gold sniffs trouble.”

It’s true; gold has become noticeably less unpopular during the last few months. It is still not as popular an investment as, say, AIG or the shares of almost any other incompetent financial institution. But some investors have actually begun to admit that they’ve purchased some gold.

A couple of the most conspicuous gold-buyers – the Chinese government and hedge fund manager, John Paulson – represent quintessential examples of the “new” gold buyer. This new type of buyer does not also buy ammunition, bottled water and Lynyrd Skynyrd tank tops. Nor does this new gold buyer spend Saturday nights sipping Gallo Hearty Burgundy in his La-Z-Boy, while flipping through binders full of Walking Liberty gold coins.

These new gold buyers do not LOVE gold nearly as much as they FEAR paper. But they are buying aggressively nonetheless…and leaving their tracks everywhere.

Earlier this year, for example, Paulson & Co., the hedge-fund firm run by billionaire John Paulson, became the largest holder of the SPDR Gold Trust (NYSE: GLD), an ETF that buys gold bullion. The New York-based firm owned 8.7 percent of the fund, as of March 31. Paulson has also taken very large stakes in several gold mining companies – in particular Gold Fields Ltd., Kinross Gold Corp. and AngloGold Ashanti Ltd.

Paulson has lots of company among mom and pop investors who are allocating some of their capital to gold. As the nearby chart illustrates quite clearly, the SPDR Gold Trust ETF has been accumulating ever-rising quantities of gold bullion – all in response to investor demand.

Although this chart is a bit dated, the trend it illustrates remains firmly entrenched. As of September 21, this ETF controlled 1,563 tonnes of gold, making it the world’s fifth individual holder of gold. The Swiss central bank, by comparison, holds only a little more than 1,000 tonnes of gold.

Meanwhile, the Chinese doubled their official gold holdings last year, and have been making a lot of headlines with some very public gripes about the dollar. A couple weeks ago, Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party, complained, “If [the Fed] keeps printing money to buy bonds, it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies…Gold is definitely an alternative.”

No wonder rumors were running rampant last week that the 403 tonnes of gold the IMF is selling will land in a Chinese vault.

Interestingly, while investment demand for gold inexorably rises, mined production of gold inexorably declines. Apparently, the folks who coax this precious metal from the earth can’t coax as much of it as they might like.

According to Grant’s Interest Rate Observer (citing statistics from the World Gold Council), worldwide gold production has dipped over the last seven years. Gold production since 2002 has declined from 2,590 metric tons to 2,486 metric tons through June 30.

These divergent trends – demand up and supply down – do not guarantee a rising gold price, but they do suggest that a rising gold price may become the path of least resistance.

Obviously, substantial above-ground supplies of gold – in bank vaults, around fingers, in belly buttons, etc. – will find its way into the gold market if/as/when prices rise. Nevertheless, a powerful inflationary trend would produce enough investment demand for gold to easily absorb all sources of supply…and ALSO push the gold price higher.

“There is a growing distrust of paper currencies amid a deluge of massive government deficits since late 2008,” Roseman concludes. “The dollar might be the biggest drunk at the bar, but the euro and other currencies are also drinking their way to devaluation against gold.”

Chris Mayer, editor of Capital & Crisis, agrees with Roseman…and offers a few sobering words about gold in the column below…

— Mayer’s Special Situations Resource Report —

Urgent Resource Action Alert:

Closed to New Investors for the Last 6 Years — Now Open Again…

The “Chaffee Royalty Program” That Turned Every $1 Into $50

In 2002, the same royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”

In 2008, that door is open again… and it just got easier than ever to “make money while you sleep”…

But there’s no telling when it could close again…So you’d better collect your own “Chaffee Royalties” right NOW!

——————————————

Gold, the Newest Old Thing
By Chris Mayer

Since the U.S. government seems committed to sacrificing the dollar to prevent ANY economic downtick, investors should become committed to owning a bit of gold.

During the last several months, the Federal Reserve, along with other central banks around the world, have been trying to combat the forces of deflationary recession by adding trillions of dollars to the money supply. In other words, they’re pulling money out of thin air, thereby eroding the spending power of the dollars already in circulation.

This process is also known as “inflation”…and forward-looking investors should increasingly seek a defense against it. Already, inflation-phobic investors have bid gold’s price to $1,015 an ounce. But it’s not hard to imagine that four-digit might be here to stay. In fact, it’s not hard to image that the first digit of the four might become a “2” or a “3” over the next few years.

What happens as even more U.S. investors, pension funds and foreign banks move into this trade? Gold prices could easily double from where they are right now. Let’s take a quick look at some key factors that could shoot gold higher, before focusing on what I think is the single best gold stock right now.

Everyone worries about China ditching dollars. Can you blame them? The Chinese, too, are gold buyers. The Chinese central bank has already doubled its gold holdings this year.

I think it could even touch $1,200 or $1,300 during the next few months. If so, you’d do pretty well just holding bullion. I even hold some gold myself. But here’s why I like gold stocks now: They did pretty well in Great Depression I. And history may repeat. Even at their lowest prices in 1933, the stocks of Alaska Juneau Gold Mining and Homestake Mining were still well above their 1929 highs. At their highest prices, they were 230% –300% higher, respectively.

Old Bernard Baruch was a principal stockholder in Alaska Juneau. It was his largest holding in 1931. Baruch was a savvy old trader and investor. He knew where the soup would stick to the spoon after Roosevelt’s New Deal policies. It would mean a devaluation of the dollar and a rise in the gold price.

Eventually, gold did surge, and so did gold stocks. “Baruch reaped an especially large profit,” his biographer James Grant writes, “for he had been buying stock and bullion.”

Obama’s stimulus plan smells a lot like Roosevelt’s New Deal. And if this is the greatest financial test we’ve faced since the Great Depression — as I believe it will ultimately be — then gold stocks may also be among the few stocks to make new all-time highs in 2009.

One of my favorites is New Gold (NGD: Amex). This company cranks out a substantial amount of gold — closing in on half a million ounces per year, plus 1.3 million more ounces of silver and 15 million ounces of copper. Yet, it’s small enough to give you the huge upside most majors can’t offer.

Right now, New Gold is pulling gold out of the ground for as little as $370 an ounce. That alone could pump up this company’s cash flow high enough to send shares soaring past $12 per share. That’s a solid triple from where it stands right now.

New Gold (NGD:amex) in its present form has been around only since June 2008. It was born of a three-way merger between the old New Gold, Metallica Resources and Peak Gold. Then, in March of this year, New Gold announced a merger with Western Goldfields.

Western owns the Mesquite mine in California, which is a stable mine with good cash flow. The key here is that before the merger, New Gold could not fund the development of its New Afton gold-copper development project without help. Now, with Western’s cash flow in the mix, it can.

The newly fortified New Gold is also significantly bigger. The new company has 12.1 million ounces of gold (measured and inferred). It is what we call a Tier II producer, usually defined as miners producing between 250,000–1 million ounces of gold per year. In today’s gold market, these intermediate producers offer some of the best risk-reward opportunities.

New Gold wants to become a million-ounce producer by 2012. It will need acquisitions to get there. But even without acquisitions, New Gold has a nice runway — a 27% increase in production, to 440,000 ounces, by 2013 just with what it’s got already. Add in a 36% fall in total cash costs and you have a potential 83% increase in profit margins in the next three years. This is one of the most appealing parts of New Gold.

New Gold has three producing mines. I’ve mentioned Mesquite, which alone should contribute about half of cash flow next year. Cerro San Pedro is in Mexico. It is a gold and silver mine. Peak in Australia produces gold and copper. New Afton is a development project in Canada that could come online by 2012.

It will produce gold and copper as well. In addition to its gold production, New Gold produces about 1.5 million ounces of silver and 15 million pounds of copper annually.

Based on the cash-flow from its current production, New Gold seems quite cheap, relative to its peers. Including Western Goldfields, New Gold should generate around 35 cents per share in cash flow. At $4 per share, New Gold shares go for only 11 times cash flow. That’s cheap compared with many of its mid-tier peers, who carry valuations in the teens. The average for Tier II gold companies is closer to 20.

So by these measures, you get some discount for owning New Gold. Some of that may well be justified given the mergers and relative newness of New Gold. But over time, as (or if) the company hits its marks, these gaps should narrow.

Insiders and management own 10% of the stock. Goldcorp, a large gold miner, owns a 4% stake. That could prove important, as New Gold is itself also a potential takeover target.

New Gold has a strong balance sheet. Total long-term debt is $272 million against cash of $141 million. That’s not much debt for a company with a $1 billion market cap. New Gold also generates good cash flow.

The allure in New Gold is not only in what a rising gold price would mean for the share price, but also in the potential “rerating” as New Gold grows and lowers its risk profile. As it delivers on its projections, lowers its cash costs, boosts reserves and builds up its financial strength, New Gold will command the higher valuation afforded such gold stocks.

Even without that boost, though, New Gold could produce 60 cents per share in cash flow by 2012 — just over two years from now — assuming only $900 an ounce for gold. Even 10 times that cash flow would give you a $6 stock.

Of course, I wouldn’t own it if I thought gold was only going to be $900 an ounce by 2012. I just show you that to give you an idea of the kind of room you have to make some money here.

You can always have fun with numbers when it comes to this kind of thing. A $1,200 gold price means nearly $1 per share in cash flow. Slap a 10 multiple on that and you get a $12 stock. New Gold trades around $4 as I write.

The usual caveat applies with gold shares — they are speculative. Mining is a tough business. So be careful how much you buy. I always liked writer James Grant’s phrasing, that gold is the “investor’s guilty pleasure.”

Joel’s Note: Chris is a Rude favorite and we feature his insights as often as we can…but, in deference to his paid subscribers, we can’t give away all his best ideas. For instance, a little while ago Chris alerted his readers to a way they can gain exposure to commodities with a special royalty kicker. It’s a way to tap the upside potential of resource plays, without many of the complications associated with what is, traditionally, a very tough sector to invest in. For more information, check out his resource royalty overview right here.

— Urgent: From The Desk of Addison Wiggin —

Major News Outlet Calls This the “Next Crisis”…

THE GREAT AMERICAN”RECOVERY RIP-OFF!”

America on the mend? HORSE HOCKEY!

Here’s what’s real: Brace yourself for what’s about to go down as the BIGGEST FINANCIAL SWINDLE in world history, engineered by none other than Wall Street and Washington, D.C.

How does their scam work? It’s a crafty “triple-swindle” just clever enough that most Americans won’t even see it happen… until it’s too late!

The short of it is, every three days, these flim-flam artists use this strategy to secretly suck wealth out of your savings account. Don’t Be Fooled. Read On Here.

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[Rude Endnote: Here’s some news for the Rude faithful (and unfaithful alike).

We’re moving to a new home!

Yes, Rude reader, the time has come to move to a bigger, more accommodating abode. So, as of Monday, October 19, your editors will be publishing their daily missives under a headline you may already recognize: The Daily Reckoning.

We’ll have a bit more room to move over at the DR H.Q. and we’ll be able to bring you more insights from a wider range of authors. But don’t worry, the coffee-stained edge will come with us. (We couldn’t leave that behind if we tried.)

So, how does this impact your daily dose of Rude? Well, for now, the best thing to do is to simply visit the Daily Reckoning home page where you’ll be able to familiarize yourself with the content there. You can sign up there too, just to make sure you’re on board when the big switch happens.

We’ll send plenty of reminders before the change but, for now, that is a good place to start.

More information about our big move will be forthcoming before October 19^th …so keep an eye on this space as we update it.

Enjoy your weekend…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Baltimore, Maryland

• China’s big oil splash and a stock play on our “long term crude thesis,”
• The seller is back! What Bruce Toll’s actions portend for the markets,
• Why wedding dresses look so good on the floor and plenty more…

Eric Fry, thinking about nudity and the financial markets, reports…

“Naked I came from my mother’s womb, naked I shall return there,” the writer of Job reminds us.

This simple Old Testament phrase does not imply that we shouldn’t make an effort along the way to acquire a tunic or two…or a pair of pants. But it does imply that life ought not to be ALL about clothing, or shelter or any other material possession.

Naked isn’t all bad. In the eyes of a new groom, for example, no wedding dress could ever seem more beautiful on his beloved than it could on the hotel room floor.

That said, nakedness wouldn’t seem half as enjoyable if you didn’t have to peel off clothing to get there…and clothing wouldn’t seem half as beautiful if it did not artfully conceal nakedness. The two go together. They belong together…like almost all of life’s opposing conditions and processes.

Light needs darkness; satiety needs hunger; indulgence needs discipline; love needs indifference; caresses need contempt;…and yes, now that we are 170 words into today’s missive, bull markets need bear markets.

If a bull market attempts to begin before the preceding bear market has finished running its course, what do you have? Well, for one thing, you have a bull market that is likely to pull up lame early on ITS course.

Unless the preceding bear market – and accompanying economic distress – has purged the rot from the financial system, a new bull market will usually end shortly after it begins. We call these events “bear market rallies.”

Unfortunately, the distinction between a bull market and a bear market rally are only evident after the fact. Fortunately, this distinction doesn’t really matter very much. The S&P 500 has rallied a whopping 58% from its March lows. That would be a bull market in anybody’s book. But even after this stupendous rally, the S&P 500 remains well below its all-time high….which means that the recent rally would be also be a bear market rally in anybody’s book.

So let’s forget labels for a second and look around. What do we see? Well, we see a few signs that the economy has stopped getting worse…and a lot of signs that the economy is nowhere near to getting better. We also see that stock prices are VERY richly priced relative to actual economic data, as opposed to hoped-for data.

Lastly, we see that company insiders don’t like stocks very much. As we’ve noted a couple of times recently, insiders are entering about 30 times as many “sell” orders as “buy” orders on the shares of the companies they oversee.

Bruce Toll, vice-chairman of Toll Bros., provides a particularly interesting case study. When last we visited “our hero” – in the August 5, 2005 edition of the Rude Awakening – he was busily unloading shares of the homebuilding company he co-founded with his brother, Robert.

In that edition of the Rude Awakening, we observed, “Last month, the Toll brothers – the actual brothers, Robert 
and Bruce, not the home-building company they oversee – 
sold more than 2,000,000 shares of their company’s stock. The sales netted them about $120 million – also known as ‘real money.’

“We do not begrudge the Tolls their good (and very large) 
fortune,” we continued, “but we would point out that insiders NEVER sell because they expect conditions to improve. That’s what 
buying is for…If the Toll brothers are selling, what fate lies in store for the U.S. housing market?”

The answer arrived shortly after this column appeared. The housing market tanked…and so did the shares of Toll Brothers.

When Bruce Toll was unloading his company’s stock during the first seven months of 2005, he realized an average price per share of more than $87, for total proceeds of $148.7 million. By the end of 2005, the stock was changing hands for about $30.

We would not bother mentioning these extremely well-timed sales, if not for the fact that the seller has returned. Bruce Toll has raised more than $7 million this month from two open market sales. These are his first sales since last March. Granted, the sales aren’t large, relative to his sales in 2005, but neither are they buys.

Your editor has no idea why Mr. Toll has resumed raising cash. Perhaps he is doing so merely for “personal financial reasons,” as the press releases usually explain. And perhaps one of his personal financial reasons is that he believes Toll Bros. stock is about to get the crap kicked out of it.

But we are only speculating here. The shares of Toll Bros. may not be a “sell” just because Bruce Toll is dumping them…but they are probably not a “buy.”

If it’s a “buy” you’re looking for, Chris Mayer, editor of Capital & Crisis, has a suggestion in the column below…

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Down and Dirty
By Chris Mayer

I don’t mind owning crude oil here. And despite the fact that we are in a deep recession and the oil market seems well supplied, the longer term looks pretty good for black gold.

As Jeremy Grantham, of the money manager GMO, wrote in his latest quarterly letter: “As we move through our remarkable and irreplaceable hydrocarbon reserves, the price will, of course, rise remorselessly to ration supplies.” It’s simply getting harder to find the stuff and more expensive to produce it.

To illustrate the point, consider a few recent news items from south of the border. The Cantarell oil field in Mexico was once the world’s second largest, bringing billions to Mexico. For years, oilmen have been saying that the Mexican government has been starving this beast. Oil fields, like the bison of the plains, need a lot of chow to keep going.

The Mexican government, though, seems to have a gift for public suffering. Unable to control its spending, it kept trying to plug the growing hole in its budget by cutting its spending on Cantarell. It was only a matter of time before the inevitable happened. And so it has come to pass.

This week comes news that the big old oil well is dying even faster than expected. Oil production has slowed to 500,000 barrels a day, from over 2 million barrels a day in 2005. Mexico’s public deficit grows alarming wide, as oil exports make up 40% of its budget.

What this means to Americans is that we are going to lose a close and friendly source of oil. We’ll have to plug that hole by buying more oil from the Middle East, or Canada. And in particular, from the Canadian oil sands.

China made a big splash recently when PetroChina paid $1.9 billion for a 60% stake in Athabasca Oil Sands Corp. China just bought itself 3 billion barrels of Alberta oil. In reference to deals like these, the Globe and Mail reports: “Chinese companies have engaged in a months-long buying spree of global petroleum assets, snapping up a refinery and oil and gas properties in Asia, Russia, South America and Africa.”

We’ve long known that China has eyed the oil sands in Canada with desire. So the transaction is not a surprise, but it does signal that the oil sands are back. The price China paid just for the oil sand assets comes to about 60 cents a barrel. That is a price that brings us back to the level of some deals in 2007 and 2008.

China’s oil sands investment comes after Imperial Oil decided to begin construction of its $8 billion Kearl oil sands mine. This was in May, and was the first major oil sands project revived after last year’s crash.

As I say, the oil sands are back.

Then there is Brazil, which has made headlines routinely thanks to its large offshore oil finds. However, this oil is years away from seeing daylight. It will be extremely costly, as well. The government is already trying to figure out how to divvy up the spoils, which is a cause of worry for investors. My gut tells me the bulk of the profits from Brazilian oil will end up in a big government slush fund.

As an investor, these episodes highlight the supply challenges in the oil market. Cantarell is, in a nutshell, the story of many of big oil fields. They are getting old and are sputtering. China’s oil sand investment reinforces the idea. You don’t go paying up for oil sands projects if you can find better sources of oil. The oil sands are very long-term investments and expensive to produce. Ditto the Brazilian oil.

So here we sit in what is supposed to be the greatest recession since the 1930s and oil prices are hanging in there at around $70 a barrel. Isn’t demand supposed to collapse?

Well, it has. Oil demand fell by 2 million barrels per day, and most of that decline came from the developed countries, the U.S. in particular.

As Morgan Downey, author of Oil 101, writes, the U.S. uses oil inefficiently. About 76% of Americans get to and from work by driving alone. Plus, the U.S. vehicle fleet efficiency is less than half that of available technology. Therefore, Downey argues, “Relatively inefficient consumption allows for swift efficiency gains compared with other parts of the world, which are already at or close to maximum technically available oil-consumption efficiency.”

Yet at the same time, OPEC members have cut about 3 million barrels per day from supply. Then the developing countries such as China and India, which Downey writes “only saw a temporary stagnation and are now exhibiting growing demand again.”

The new demand for oil is from these developing countries. And it is a demand that has a very long runway to go yet.

The dollar also has something to do with the oil price, as we’ve discussed before. When the dollar is weak, the price of oil rises. In this way, oil is a great inflation hedge. If you like gold, you ought to also like oil for this reason.

I suggest investing in oil buy investing in the shares of small to mid-sized producers. The big oil companies are going to have to run extra hard and long to replace their existing oil reserves. The giant fields are getting harder to find and are costing a mint to develop. However, there are smaller oil fields with compelling economics, and companies for which such fields make a huge difference on their stock prices. These smaller oil companies will grow faster. They are also targets for those higher up the food chain.

Even so, I wouldn’t buy a small oil producer willy-nilly. It’s a tricky business. The price of oil can be wildly unpredictable. A smart operator, though, can make a fortune in oil. I need not remind you of how many of America’s fortunes (or the world’s, for that matter) owe their birth to crude oil.

When I think about what the perfect exploration and production (E&P) company might look like, I think of Contango Oil & Gas (MCF:amex). Contango produces natural gas. Still, it has all the qualities you’d want in an E&P. It has very low costs, so that it still makes significant coin in low-price markets, which inevitably come around every now and then. It has a pristine balance sheet with the financial strength to survive those bad times. It has a smart owner-operator in Ken Peak, who has a great track record. Peak has created a lot of wealth in Contango, which raised $50 million in capital (never a penny more) and even today is worth over $700 million. It is simple to understand. And best of all, it is cheap.

The price of oil will bounce around all over the place, but the long-term thesis behind these ideas is very strong.

Joel’s Note: As you may or may not know, Chris Mayer and our executive publisher, Addison Wiggin, have been hard at work on their latest project, joyously titled: The Great American Recovery Rip Off! In it, the pair lay out the case for what they call the “biggest financial swindle in world history” and, more importantly, detail their best “protect and profit” strategies so you can avoid the fallout. Oh yeah, the package also comes with an updated version of Addison and Bill Bonner’s best-selling book, Financial Reckoning Day. For the skeptical investor, it’s simply a must have. Feel free to check out their exposé right here.

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[Rude Endnote: U.S. markets seemed mostly to jog on the spot yesterday, perhaps waiting to hear the outcomes from this week’s FOMC and G20 meetings. The Dow ended higher by half a percent, the S&P a little more, the Nasdaq a little less.

Here in Asia, meanwhile, investors didn’t bother waiting to hit the sell button. China’s CSI 300 was down 2.3% in late afternoon trading while Hong Kong’s Hang Seng and Japan’s Nikkei 225 were lower by 0.5 and 9.7% respectively. Only the Aussies bucked the regional trend. The All Ordinaries closed the daty up 1.5%.

It was early in the European day when we were penning these notes, so not much had happened there yet.

Commodities too remained roughly where they were yesterday with oil a tad down at $71.50 per barrel and gold a smidge higher at $916 per ounce.

That’s it from us today. Oh, wait! No it’s not! Later today a story our technology expert, Patrick Cox, has been following hits the “mainstream.” Patrick calls it “the news release that changes history.” What’s he talking about? Find out here.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Joel Bowman, switching it up a bit from Taipei, Taiwan…

We wrote an entire introduction for today’s column but, on closer inspection, it is not nearly important enough to precede it (as introductions are generally supposed to do).

Sooo…you’ll find our own, somewhat ranting notes below but, as a priority, here’s what Chris Mayer, the mind behind the Mayer’s Special Situations and Capital & Crisis investment letters, has to say about some things of much greater magnitude and relevance. Please enjoy…

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The World’s Most Precious Resource
By Chris Mayer

Yesterday, I met with Ben Simpfendorfer, who is chief China economist for the Royal Bank of Scotland. He works out of Hong Kong, but is in the U.S. on business. We struck up a correspondence a few months ago after I read his book The New Silk Road (which I heartily recommend). We soon learned we are kindred spirits on a lot of what is happening around the world, and I was glad to finally meet him in person.

Simpfendorfer’s book highlights the growth of trade between China and the Arab world, a point I’ve also tried to show in my newsletters. It’s important for several reasons, not least because volumes are starting to become significant. They are also growing exponentially. For instance, a decade ago, Chinese exports to the Middle East totaled $4 billion. Today, they total more than $60 billion.

There are all kinds of investment implications from this shift in trade, which I’ve tried sorting out in these pages and in Capital & Crisis. The non-U.S.-centric trading models will affect the value of the dollar and commodities and more. Simpfendorfer talked about some of this over lunch.

If you’ve read this publication for any length of time, you know one of the critical issues is water. This is still not widely appreciated. But Simpfendorfer, who has traveled extensively throughout the Middle East and China — and speaks Mandarin and Arabic (“Yes, I have no free time,” he says) — will tell you it’s a “huge problem.”

In fact, when we talked about the state of the U.S. economy, Simpfendorfer ventured that water might be what keeps the U.S. on top for decades yet:

“The Silk Road has an average of 2,260 cubic meters of internal renewable water per person. The equivalent figure is 9,300 in the United States. In fact, an abundance of water is an important, but often overlooked, reason why the United States might defy its critics and remain the world’s major power through the end of this century.”

Conversely, when you look at the new Silk Road — an area that covers North Africa, the Middle East and Asia — water is what could “bring the region to its knees,” as Simpfendorfer says.

We talked about how water was crucial to nearly everything — and not just for drinking. You need water to run factories and to make textiles and consumer goods of all kinds.

This week, there were many warnings in the headlines that the water crisis is worsening. Simpfendorfer talked about Syria and how a quarter of a million farmers had to abandon their land due to drought. It’s worse in Iraq, where water flows have fallen by two- thirds. Lack of water, Simpfendorfer offered, might do more harm to the rebuilding effort in Iraq than Islamic extremists.

You probably saw the headlines about Mexico. It’s experiencing its worst drought in half a century. Mexico City is close to running out of water and Mexican farmers will likely report crop losses of over $1 billion.

According to the LA Times:

“Hard hit have been corn, beans, barley and sorghum, plus livestock. Farmers and officials say the impact, including lost earnings, unpaid debts and shortages of staple foods, could be felt well into next year.

“‘Although no one wants to recognize it, there is a food crisis,’ said Cruz Lopez Aguilar, president of a national federation representing rural dwellers. He and others say increasing imports to make up for lost crops could raise food costs.”

Mexico is not alone. Kenya, Argentina, Australia, India, and other places have suffered drought this year. The problems are deeper than drought, but drought does magnify the weaknesses in the world’s water systems.

As an investment theme, it means companies that help alleviate water stress, manage water resources more efficiently or even own water resources outright, should grow in value over time.

Over the weekend, Barron’s published a favorable piece on Nalco (NLC:nyse), a stock I recommended several months ago to the subscribers of Mayer’s Special Situations. Nalco is the world’s largest water treatment company. According to Barron’s, “It is about three times the size of GE, its biggest competitor.”

The company has many solutions. One highlighted by Barron’s is 3D Trasar Boiler technology, which saves water and energy and also reduces emissions. Nalco is also just starting to crack the growing markets along the New Silk Road:

“This year, Nalco has added 80 people in China and India, and recently hired a well-known Chinese ex-diplomat to lead Nalco’s thrust there. The company has established a research center in Nanjing to develop products for Asia. With its huge infrastructure, polluted water systems and heavy dependence on coal-fired energy, China is a perfect prospect for Nalco’s anti-pollution services and equipment.”

Nalco has dramatically outperformed the S&P 500 Index since I first recommended the stock. Also interesting to note, Berkshire Hathaway owns 6.5% of the company and is its largest shareholder. Nalco won’t double or triple overnight, but it ought to remain a rewarding investment over the years.

During our lunch, Simpfendorfer talked about Hyflux (HYFXF:pink sheets), a diversified Singaporean water company. He met with the company and believes it is in a great position to prosper from the water troubles along the New Silk Road.

As for China, specifically, you might wonder what Simpfendorfer’s views are given that there is much debate right now about China’s economy. He said the next five years or so “would be very difficult,” but he did not expect China to collapse. This is very important, because if China does collapse, it would devastate commodity markets. Yet even modest growth in China could buoy commodity prices for years.

Joel’s Note: Keeping in step with his general value theme here, Chris has just released his latest research report. In it, he details one investment rather “off the radar” for most investors…but one that could make quite the splash in coming months and years. For the full briefing, click here.

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[Rude Endnote: From above…

“Is Society Getting Ruder?” – a headline yesterday caught your editor’s eye. Against our better judgment, we allowed our usually- rational self to suffered a glimmer of hope…

Day in and day out we toil, trying to bring our readers honest stories about trends that will have direct consequences on all of our lives. We make the occasional tipo, sure, but we feel we do an honest job as best we can.

And now… “Could it be?” we thought…hoped…almost prayed… “Could someone in the mainstream have stumbled across our humble Rude Awakening pages? Is a new age of reason, observation and occasional irreverence upon us?”

No…Not even close. “Well good!” we shout. “We didn’t want you anyway!”

The story under the headline had nothing at all to do with false recovery hopes…or fraudulent government statistics…or corporate scandal… It was about three bozos who, smack bang in the middle of the greatest financial heist in history, managed to distract an entire nation from anything and everything that actually matters.

We won’t give them any additional press here…except to point out the absurdity of such a vast media sideshow, especially now. Not to be the wet blanket here, but the United States is suffering under a debt load so burdensome that, in the very near future, the nation’s entire budget will not be sufficient to pay the interest on it. American consumers, the “backbone” of a consumptive global economy, are not consuming…they are choking under stifling regulations and the persistent erosion of their personal liberties. Millions of people are unemployed or working fewer hours, for less pay, just to keep their heads above water. And, with its foot firmly on their heads, governments around the world are goosing their GDP figures (a spurious measure of economic wellness to begin with) with heretofore-unimagined levels of fraudulent spending in order to pull off the largest, most abominable scam ever perpetrated.

And, right when everyone should be paying the most attention, every major media outlet in the country get their knickers in a knot because an egomaniac with a bone to pick about a music video prances onto a television stage to ruin a poor starlet’s night?

Too bad for her, yes. But more than that, too bad for America.

Is this really what passes as “newsworthy” today? Do we really need a parade of etiquette experts to give us their opinion on what constitutes a social faux pas? Is it desperately important that three “impolite” remarks were made for, gulp, television audiences to witness?

We offer a moment of silence, Rude reader, not for the loss of “manners” in the U.S., but for, as far as we can tell, a loss of perspective and priority. Hopefully it’s only temporary.

We’ll be back tomorrow with more Rude views.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• Markets hit a fresh 10-month high…but why?
• Stimulus update: $2.8 trillion down…$8.2 trillion to go,
• The credit recovery myth, government spending worldwide and more…

Eric Fry, reporting from Laguna Beach, California…

U.S. stocks advanced to a new 10-month high yesterday. But don’t bother looking for a rational rationale; you won’t find it. Stocks are going up because stocks are going up.

That’s a nice thing, even though it may not be an entirely logical thing.

Yesterday we learned that 550,000 Americans filed for unemployment benefits least week. That’s good, we are told, because the number could have been higher. Such is the analysis that, for several weeks, has been filling headlines, shaping investors perceptions and begetting “Buy” orders.

Again, we’ve got no quarrel with these pleasant results; just don’t ask us to embrace the dubious logic that is producing these pleasant results.

Repeatedly, hopeful investors, bullish analysts and self-serving politicians assert that the U.S. economy is recovering. This glass-half-full contingent typically cites less-bad data to support its assertion…while not forgetting to mention that share prices are rising a lot. (The obvious implication being that nothing could be so bad if the stock market is darn good).

Maybe the bulls are right to be bullish, both about the stock market and the economy. But your editor cannot escape his nagging doubts. Sure, he can observe that share prices are rising. And he can easily see that the U.S. economy has not fallen off a cliff. But he cannot seem to detect any signs of genuine economic recovery out in the real world, where real people are trying to keep their jobs and not lose their homes.

More to the point, he cannot seem to detect any sign that individuals and small businesses have regained access to credit. Despite many top-down indications that the credit markets have “returned to normal,” the bottom-up anecdotes tell a very different tale.

This apparent contradiction has been bugging your editor for weeks. Yes, credit spreads are narrowing, which suggests a renewed appetite for risk-taking in the fixed-income markets. And yes, large companies sold a record $926 billion of new debt issues through the first eight months of this year.

And yet…and yet…financing remains very difficult to obtain for anyone who has not retained an investment banker. Mr. and Mrs. Average cannot obtain financing very easily.

“How could this be?” your editor has been asking himself. “How could the credit markets exhibit the characteristics of normalcy while, simultaneously, most Americans are unable to get a loan for anything?”

Your editor has no answer, but he has developed a theory: The credit markets aren’t really recovering, they are merely playing at it.

Two very visible trends are unfolding in the credit markets at the same time…and they seem to contradict one another. First, credit spreads are contracting. I.E. the yields on high-risk debt, relative to Treasury yields, have fallen dramatically since last fall. Taken at face value, this phenomenon means that creditors have become increasingly willing to finance high-risk borrowers.

But here’s he problem with this simplistic analysis: credit spreads merely depict the pricing of bonds that ALREADY exist; spreads tell you nothing about the volume or terms of new issuance. Bank balance sheets tell that story.

When balance sheets are expanding, lending is expanding. When balance sheets are contracting, so is lending. Guess what? Bank balance sheets are contracting. In part, this contraction has resulted from events like foreclosures and writeoffs. But this contraction has also resulted from the simple fact that banks are not lending…by their own admission.

“Banks tightened standards on all types of loans last quarter,” Bloomberg News reported recently, “and said they expect to maintain strict criteria on lending until at least the second half of 2010, the Fed said in its quarterly Senior Loan Officer survey published on Aug. 17. Most banks cited reduced risk tolerance and ‘a more uncertain economic outlook’ as the main reasons for restricting credit to businesses, with 35.2 percent saying they ‘tightened somewhat.’” For example, the amount of leveraged loans — the kind private-equity firms use to finance company purchases — has shrunk to $67.7 billion this year from $311.2 billion in 2008 and $962.9 billion in 2007.

Ditto, every category of consumer loan. Credit is scarce. But even if the banks had not admitted to restricting lending, we would have been able to see it for ourselves.

The quantity of loans and leases on the balance sheets of U.S. banks have been declining for months. At the same time, however, credit spreads have been narrowing. How cold this be?

Here’s your editor’s guess: Investment banks like Goldman Sachs and J.P. Morgan, along with numerous large hedge funds, are borrowing money at very low rates of interest and buying higher-yielding corporate debt. As this leveraged buying proceeds, the prices of high-yield bonds rise and their yields fall.

It is a simple “carry trade,” but it is a carry trade that causes credit spreads to narrow…and causes Wall Street analysts to declare that the fixed income markets are functioning normally. But this simplistic deduction may be too simplistic…and wrong. Spreads are narrowing because speculators are speculating and arbitrageurs are arbitraging. At the end of all this speculating and arbitraging, Goldman Sachs reports robust profits but Mr. and Mrs. Average still can’t get a car loan.

In other words, the credit markets may not be functioning as normally as they would appear to be.

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Stimulus Maximus
By Chris Mayer

What makes investing particularly difficult now is the distortion in prices, as if reflected in a funhouse mirror. Normally market prices should reflect underlying demand and supply. As in a vegetable stand, the prices come from the buying and selling of people in the market.

But with all the artificial stimulus money floating around, you can never be sure of what you see. Is this a real recovery or is it an artificially ripened tomato, and hence an imposter? When the stimulus money stops flowing will the recession get worse?

It’s hard to say, but let me give you a couple examples of distortions…

CNN’s bailout tracker reports that US government stimulus has totaled $2.8 trillion so far this year, with another $8.2 trillion in commitments. Most of this money has gone to the financial sector. Some of it has gone to infrastructure projects and to consumers (cash for clunkers, for example).

That is a lot of money. It is hard to say how all of this spending has artificially boosted economic activity in some sectors of the economy. It is obvious that such spending cannot continue indefinitely.

This has also been a worldwide phenomenon. There isn’t an economy of size that does not have some stimulus-spending program in place. Governments are spending money they don’t have. The result is widening budget deficits and higher debt levels.

The industrial production of emerging Asia is scooting along compared to the United States. In fact, it looks like Asia is recovering pretty well. we’re beginning to hear that “decoupling” word again, which became such a hot topic of discussion last year. The idea was that the emerging markets would not necessarily follow lockstep with the Western countries.

But this is only a part of the story. China is one of the countries in “Emerging Asia.” China supposedly grew in the first quarter at an annualized rate of 15%. Yet, the government also spent a lot of stimulus money. As Eric Sprott writes in his latest letter to shareholders:

“The Chinese have injected a stimulus equivalent to 64% of their first half 2008 GDP in the first half of 2009… The Chinese government has effectively spent and lent enough in six months to buy 122 Ford Class aircraft carriers at US$8.1 billion a piece. It is akin to the US government injecting (and US banks lending) almost $4.5 trillion USD to its citizens and businesses before July 2009…an ungodly sum that would impact every asset class under the sun. Is it any wonder then that the Shanghai stock exchange has more than doubled from trough to peak since its November lows?”

Let me remind you that GDP is a clumsy way to get at an economy’s size. It is a figure that includes government spending. So, put another way, stimulus money this year is about 64% of the recorded economic activity in the first half of last year for China.

In some ways, the Chinese government spent well — investing in the commodities it craves. It’s locked down oil and gas assets, iron ore contracts, interests in rare earths and more. It’s put up power plants and laid down roads and pipelines. It’s made long-term investments in Africa and Brazil. Some of that will pay dividends down the road, if not already.

For instance, in the first six months of this year China became Brazil’s single largest export market. That’s the first time that’s ever happened. The Chinese and Brazilians are doing deals. For instance, China will lend $10 billion to Petrobras in return for 200,000 barrels of oil per day. China, in fact, has been active throughout South America, investing billions in mines, refineries, ports, and railroads.

These shifting patterns of trade always fascinate me. And we are living in an era of great change on that front, as new patterns emerge on a scale we have never seen.

It’s clear that China will have enormous needs for commodities over time. In the short-term, we are surely seeing distortions from the stimulus money. But the long-term demand is there nonetheless and the Chinese have a lot of money to spend.

In fact, infrastructure needs — especially in the areas of water and energy — are becoming more of a headline issue than ever. Not a week goes by where I don’t pick up a handful of stories of infrastructure falling apart somewhere. This, too, is a global story.

Recently, for instance, there was a terrible accident in a Russian hydropower plant. Eleven people were killed and 65 were missing after water burst into a turbine room. It also destroyed the turbine. Besides the irremediable loss of life, it will take hundreds of millions of dollars and years to repair the demand.

As the FT reported, the accident “was a powerful reminder of Russia’s dire need for hundreds of billions of roubles in investment in its crumbling Soviet-era infrastructure.”

Putin’s government put aside $200 billion for infrastructure in two oil windfall funds, but that money is already being tapped for social spending programs and to help make up budget deficits. As in many places, including in the U.S., money set aside for infrastructure has been essentially hijacked by the political process and diverted to other uses.

Another story this week comes from Britain. Britain faces huge deficits in energy and the risk of widespread blackouts. Its energy complex is old and strained. The Economist reports: “The nuclear stations are simply too old to carry on: most are over a quarter of a century old. Around half have already been shutdown and are being decommissioned.”

About half of its electricity comes from natural gas, a legacy of its North Sea riches. But the North Sea peaked in 1999 and has been in steep decline ever since. Britain’s coal plants struggle under new pollution control rules and the effects of age. It’s an ugly situation that will cost a lot of money to fix.

The positive for investors is that there are several firms that are right in the sweet spot of this global infrastructure crisis.

— A Special Report from Capital & Crisis Research —

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[Rude Endnote: Markets in both Europe and Asia were again hot on the heals of Wall Street after the American markets reached a 10-month high at the close of yesterday’s session.

In Asia, Chinese stocks were bolstered by some positive production data. The CSI 300 rallied almost two and a half percent while Hong Kong’s Hang Seng also finished higher by half a percent. Australian stocks also rose by half a percent. Japanese stocks, measured by the Nikkei 225, fell 0.66%.

Over in Europe, London’s FTSE and France’s CAC were both up around 0.75% last we checked while Germany’s DAX was not far behind, up 0.5%.

Over in the commodity pits, gold rallied overnight, recovering much of the previous few days small dip. The yellow metal again passed the $1,000 mark and was trading a couple of bucks higher last we checked. Crude sits at $72 per barrel.

That’s all from us for the week. Be sure to check in over the weekend when we’ll have your usual wrap-up.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Baltimore, Maryland

• Markets’ meteoric rise flattens, could this be the edge of the next cliff?
• When it comes to investing in China, there’s something in the water,
• Avoiding the dubious art of “falling with style” and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Fans of the 1995 animated movie, “Toy Story,” will remember when Buzz Lightyear conducts a series of acrobatic maneuvers that persuades most of the other toys he can fly. But, Woody, the toy cowboy, angrily objects, “That wasn’t flying! That was…falling with style!”

Fans of the 2009 rally on Wall Street also seem to believe that the U.S. economy can fly. But that’s not flying, dear investor, that’s falling with style.

“Airborne” and “aerodynamic” are not synonyms.

If the nation’s leading economists are to be believed, the U.S. economy has lifted off from the long, bumpy runway of recession. But your editor suspects that this liftoff might last only slightly longer than the Wright Brothers’ 12-second flight at Kittyhawk.

The problem is that government credit is lousy jet fuel. Only private capital can power long-distance flights. For a short time, governmental efforts can send an economy airborne. But these flights of fancy almost always end quickly…and badly…unless private capital returns to the venue.

So far, private capital has shown little inclination to resume investing in anything riskier than T-bills. Financing remains scarce for most of the small and mid-sized businesses that comprise the heart and soul of the American economy. [Every single small- to mid-size businessperson with whom your editor has spoken during the last few months has reported that lack of credit is hobbling business. If any Rude readers would like to corroborate or refute this anecdotal impression, please email your firsthand accounts to Joel]. In the meantime, many of the most visible indicators of economy vitality remain unmistakably downbeat.

Given the related facts that private capital is conspicuously absent from the economy and that government stimulus programs are notoriously ineffective, the U.S. economy might struggle to remain aloft.

The nearby chart shows that the Institute for Supply management’s Index of U.S. service sector industries has improved a bit of late. Apparently, this segment of the economy has gained a little altitude. But remember, airborne is not aerodynamic.

“If we have a recovery at all, it isn’t sustainable,” predicts Kevin Harrington, managing director at the hedge fund group, Clarium Capital Management LLC. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

Paul Tudor Jones, one of the most successful hedge fund managers in America, holds a similarly dour outlook. Accordingly, he distrusts this year’s big rally on Wall Street that has lifted all the major averages 50% or more. This was merely a “bear market rally,” Tudor declared in an August 4th letter to his firm’s clients. Interestingly, all the major U.S. stock market indices are flat since August 4th.

This recent lackluster performance does not prove Tudor is correct, but it does prove that he isn’t wrong…at least not yet. In other words, his bearish outlook may not be right, but it is probably justified.

The very same stock market that has been going up for most of the last six months – and that Abby Joseph Cohen, the robotically bullish strategist at Goldman Sachs, predicts will continue to go up – is the same stock market that may begin going down…simply because the underlying economic realities fail to support rising stock prices.

Not all stocks deserve to be sold, of course. In fact, some types of stocks are probably worth buying right now…

In the column below, Chris Mayer, editor of Mayer’s Special Situations, revisits one of his favorite long-term investment opportunities…

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The End of Cheap Water?
By Chris Mayer

The price of water is starting to rise in a big way, at least in China. I’ve expected this for a few years.

Water rates in China have been so far below the global average it’s ridiculous. Especially when you consider the severe water problems in China. The Chinese are water-poor. They are sucking their aquifers dry. It is particularly bad in the north of China. The groundwater under the North China Plains is draining away quickly. By some estimates, China will exhaust this water supply in the next ten years.

You probably know that the city of Venice is sinking a fraction of an inch per year. But that’s nothing compared to what is going on in Beijing. Parts of Beijing are sinking 8 inches a year! According to Andrew Lees (The Right Game), it is the world’s largest cone of depression (an underground hole created by a depleted water table) at over 15,000 square miles. The second largest cone of depression is around Shanghai.

So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.

The second event that caught my eye was the collaboration between China and India to monitor the health of Himalayan glaciers. This area is very important to both countries. They fought a war over it in 1962. So, the fact that they are getting together on the Himalayan glaciers is meaningful.

Here is why it is so important: Seven of the world’s largest rivers, including the Ganges and the Yangtze, are fed by the glaciers of the Himalayas. They supply water to about 40 per cent of the world’s population.

Well, those glaciers are shrinking. The Indian Space Research Organization, using satellite images, has studied the changes in 466 glaciers. It found they had lost more than 20% of their size between 1962 and 2001.

This melting increases the water flow at first, but eventually slows dramatically as the glaciers either melt completely or reform. These observations have given rise to a kind of “Peak Himalaya” theory where people wonder if we have not seen the maximum water flow from the mountains.

We know the current run rate on demand is already well above what is sustainable given annual rainfall and river flows. That’s why you have those depressions under Beijing and Shanghai. That explains the depleted aquifers and the rivers that don’t reach the sea. Now throw into that ugly brew a decline in water supply from the Himalayas. The situation is worse than it seems, if that is possible, because much of the existing fresh water in both countries is so polluted it is unfit for human consumption.

As if all of that weren’t bad enough, the demand for water is still rising rapidly in China and India. The water use per capita in China and India are still well below global averages. As these countries industrialize, they’ll consume exponentially more water. It takes water to make just about everything. For example, to make a 1 tonne passenger car takes more than 100,000 gallons of water. Just to make a cotton shirt takes over 1,000 gallons of water. And most of our water goes into making our food.

So, population growth by itself guarantees increased water demand. (Globally, water consumption increases at more than twice the rate of population growth.) These two countries already have big populations and both will get bigger. When you look at demographic trends, China and India alone will add close to 600 million people over the next 30 years. That’s two present-day United States.

Fresh water, like oil, is getting a lot harder to find for 40% of the world’s population. It will get worse before it gets better. The days when we think of water as a cheap resource are coming to a close. That’s especially true for China and India.

Bottom line: We need to create more fresh water. You do that by finding new sources either through new supplies (drilling deeper, desalination, etc.) or by using existing supplies more efficiently (irrigation and other efficiency gains).

All of that takes time and energy. Desalination is energy intensive. Drilling deeper for water or going to more distant source requires energy to pump and move the water. Replacing older, less efficient plants and equipment takes time and energy again. (Detect a theme here?)

Countries, companies and people will find ways to make this transition. The companies that can solve these problems will do well.

Joel’s Note: … and, odds are, those companies will – if they haven’t already – find their way into the Mayer’s Special Situations portfolio. For a complete rundown on this excellent research service and access to his favorite resource plays, continue reading here.

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[Rude Endnote: Whatever happens in the future, if it happens for long enough, will come to be known as “normal.” As we all know, normal can differ vastly from country to country, generation to generation. What is normal for a child in the Sudan is not likely to resemble any kind of normal for a Goldman Sachs executive, for instance.

Still, everyone we talk to seems contended with the assumption that things, economically speaking, seem to be “returning to normal.” We wonder what that actually means? Yesterday we asked readers what they thought the “New Normal” might look like.

“I don't like what I perceive as the coming ‘new normal,’” writes reader, Jim. “It consists of higher unemployment, tighter credit, belt-tightening everywhere, increased homelessness, agitated, fearful, and frustrated citizens, combined with a squirrely set of politicians making things worse as they muck around pretending that they know how to fix a broken system.”

Reader Thomas B opines, “The abnormal 'new normal' is happening as it is because the Government Market Controllers have achieved some sort of control over the whole system....enough so that the market moves the way they want it to, when they want it to, for as long as they want it to....and I expect it to continue this way...in [an] irrational, abnormal way that [will] define the ‘new normal’.”

We’ll have more thoughts from the irrepressible Rude readership throughout the week. If you want to comment what you think the “New Normal” might look like, simply drop us a line below.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com