On a damp Saturday morning, as we walked through a stretch of towering beech trees, I asked the timber man which species he'd recommend we plant following the projected harvest. He didn't hesitate for a second. "Loblolly pines."

Now, I have no particular prejudice against pine trees. They just happen to be soft and cheap. They lack any real material quality other than providing an inexpensive source for framing brick-faced Dutch Colonials or serving as the Christmas centerpiece for millions come December.

So I asked: "Would you consider planting black walnuts?" I didn't know the exact price difference, but I know black walnuts are worth considerably more than any species of soft Virginia pine.

"Black walnuts? You wouldn't want to do that," he said. I pressed him for a good reason. He rubbed his beard for a second. "Black walnuts take twice as long to grow. You'll have to wait more than 30 years before you ever see any cash from that type of tree. You can harvest loblollies in half that time."

I felt like the third-grader who truly believes his teacher when she assures her class that there's never a "dumb question." Nine out of 10 quickly comprehend the meaning. There's never a "dumb question" - as long as that question does not challenge the teacher's all-knowing authority on any and all matters. One student, bless his heart, always takes the bait. At that moment, I was that student.

Since timber investment contracts usually entail a great deal of money, I kept digging - much to my father-in-law's chagrin.

"How much would a mature loblolly pine sell for?" I asked.

"About $100."

"And what about a mature black walnut?"

"Well, you could probably sell a good walnut for $1,000," he presumed.

"But you'll never see that money," he chuckled. "Maybe your children will."

Is that fact so easy to dismiss? First, let's be clear that timber investments are no different from stock, bond or even housing investments. In each case, you expect the asset in question to produce an adequate return over some designated period of time.

In this particular case, the question whether to plant pine or black walnut pivots around the individual's particular investment time horizon. Loblolly pines mature roughly twice as fast as black walnuts. So a timber investor who plants a pine receives twice as many cash flows as the man who plants walnut. But let's consider the quality of those cash flows...

If a single walnut were worth exactly twice as much as a loblolly pine, the decision to opt for pine would be quite easy. But a single walnut generates approximately 10 times the cash flow of a single pine. Meaning over a 30-year period, a walnut harvest will generate five times the return as an investment in pine.

The 30-Year Timber Investment Race:

Pine: $100 per tree x 6 harvests = $600
Walnut: $1,000 per tree x 3 harvests = $3,000

For many, the decision to opt for walnut seems self-explanatory. Why then do most landowners opt to plant loblolly pines?

What happens when the majority of hardwood forests are being replaced with pine? The exponential supply growth of pine forests is bound to affect the price of a single tree 15 years down the road. And it won't be to the upside, come harvest time.

Meanwhile, the dwindling supply of 30-40-year-old black walnuts will, assuredly, drive up the market price for the precious hardwood.

These are the long-term economic conditions my father-in-law must consider.

We tend to believe that the overwhelming, seemingly unquestioned conviction to plant pine demonstrates a growing trend among all investors today.

There's a new investing generation. A generation weaned on the bottle of instant gratification. The stock market, for its part, has become the speculator's lottery ticket. The evolution of complex financial instruments, cheap credit and a material-obsessed society formed this trend.

One of the more unique aspects of western culture, we believe, is class mobility. Westerners tend to believe in their capacity to rise above the class to which they were born. In fact, this concept has been infused into our society from the very beginning. Our political icons constantly remind us of becoming an "ownership society," as if to say that when you do better and achieve more, you will find happiness.

Many believe in the interminable joys associated with great wealth. They think that the sooner they achieve fame and fortune, the sooner they will enter the exclusive club of perpetual nirvana.

But wealth creation takes time, while asset price inflation takes a loose central bank. Much of the Western world has chosen asset price inflation over true wealth creation. The speculator has replaced the investor. We day trade, flip condos and buy options.

Instead of picking up a copy of Benjamin Graham's The Intelligent Investor, today's investor shuns returns below double digits. Earning 9% won't cut it if someone else is earning 10%. Stock markets have morphed to symbolize divine measures of prosperity in every form. And when Mr. Market doesn't treat you well, you turn to Dr. Fed. And with the flip of a switch, he can quickly whip Mr. Market back into shape, or so we've come to believe.

The concept of wealth creation is Free Market Investor 's core theme. Our friend Marc Faber wisely points out, "It is important to distinguish between wealth creation arising from increased market valuation (asset inflation) and wealth creation through saving and investments."

As my former colleague the late Dr. Kurt Richebächer opined:

"American economists have never been as strict as European economists in making this distinction in wealth creation between rising market valuations and rising capital stock through saving and investment. Yet what has happened lately in this respect puts economic reason on its head. Protracted house price inflation, deliberately engineered by the Fed, is presented to the public as a virtually wondrous new policy stance in creating wealth and economic growth. It is hard to believe that such a grotesque perception is possible."

Focus for one moment on the premise that societies accumulate wealth slowly over generations. A true return on invested capital, like a tree growing in a forest, takes time to bring to fruition. Some investments, naturally, produce better returns than others. The key: Find the investments that have the potential to produce the greatest returns with an acceptable level of risk. When those investments trade for less than their intrinsic value, the potential for above-average returns can be fully realized.

In the case for cultivating the black walnut, the asset most timber investors lack is the patience to sit quietly and let their superior investments develop.

If market timers and the financial media followed this advice, many people would find themselves searching for other work. Instead, many investment professionals make a handsome living opining the ebbs and flow of quarterly earnings guidance, despite the fact that 59% of Wall Street's "consensus" earnings forecasts miss the mark by a mortifyingly wide margin. In such a world, a good timber investment can easily go unnoticed.

Christopher Hancock
for The Daily Reckoning Australia

• Leave it to Congress to Use “Christmas Tree” as a Verb
• Inflationary Monetary Policy, a Bit Like Pornography
• Making Bad Investments in a Rising Market
• Farming Cattle is Out; Farming Soybeans is In
• Commodity Stock Prices Meltdown

And if you thought things couldn’t get any worse, the Financial Times reported on Monday that U.S. mortgage rates soared last week amid a sharp rise in Treasury market yields. Make no mistake, inflation’s back. A Volker-like response may seem alarmist, even far-fetched, to many. However, investors are bracing for the Federal Reserve to raise rates going forward.

At least those rate increases could help U.S. Treasury Secretary Paulson fulfill his recent promise to “defend the dollar.” Secretary Paulson is on the final day of a four-day trip to Saudi Arabia, Qatar and the United Arab Emirates to negotiate currency and economic issues (i.e., a supply increase) from members of the OPEC cartel.

Shall we say America’s relationship with OPEC is a bit strained? Perhaps we’ve stayed a bit too long and expected a bit too much. The greenback keeps sliding down a cliff. Oil-producing states holding their dollar currency pegs are importing more and more inflation. At some point, both parties must reconcile that M3 – the fullest measure of U.S. money supply – can’t outpace a nation’s GDP forever.

Regardless, the Fed seemed content to exchange $16 billion worth of Treasury notes for mortgage- and asset-backed securities last Thursday. In its 10th Term Securities Lending Facility (TSLF), the Fed gave desperate investment houses another chance to dump their worthless derivatives for good ol’ American IOUs. To date, brokerage firms have dumped $175 billion on the Fed’s balance sheet.

Even holders of the mighty euro are feeling the pinch. We read in The Economist last week that customs seizures of counterfeit goods rose by 17% in the EU last year. Cigarettes and clothing accounted for more than half the sham gear seized.

It seems like desperate times call for desperate measures. And the masses, desperate for answers, call on politicians for help.

And any political production worth its salt has three main characters: the hero, the martyr and the villain. Heroes (politicians) need a martyr (America’s middle class) and a villain (oil companies) – and, if they’re lucky, a super villain (foreign oil companies).

Our colleague Eric Fry sums it up best: “When share prices soar, we call it a ‘bull market.’ When home values soar, we call it ‘healthy price appreciation.’ But when oil prices soar, we call it ‘speculation’ and ‘manipulation’...and then we gaze around for someone to blame.”

The members of Congress recently convened a special hearing to berate, rebuke and ridicule executives from five major oil companies. Each congressional inquisitor took a turn excoriating the oil companies for daring to earn a profit, especially when so many Americans have so little money. It just isn’t fair.

A few months earlier, you may recall, Congress invited the heads of America’s leading financial institutions to a little tête-à-tête. During that encounter, the congressional inquisitors took turns admonishing the finance CEOs for feathering their nests a bit too lavishly. But none of the execs in attendance drew much criticism for frittering away billions of dollars of shareholder wealth.

Therefore, the essential message from the nation’s top lawmakers is clear: Losing billions of dollars of shareholder wealth is a bad thing, but not nearly as bad as adding billions of dollars to shareholder wealth. In fact, earning billions for shareholders is such a bad thing that it must be legislated away or taxed into extinction.

Where were the nation’s top legislator-inquisitors when the NASDAQ bull market of 1999 and 2000 was powering higher? Where was the outrage over the “speculation” that produced obscene “windfall profits” for the Wall Street firms?”

We’re not so sure. But we continue to see that many in the West want to go through life pretending they’re still the greatest story never told.

It comes as no surprise. From Dutch tulips to dotcoms, people fool themselves into believing it’s “different” this time.

It’s never different this time.

Christopher Hancock
for The Daily Reckoning Australia

• Fannie and Freddie in a Free Market Economy
• The U.S. Dollar vs Inflation, Americans Vote for the Dollar
• Strong Dollar is in our Nation’s Interest
• Falling House Prices and Mass Housing Foreclosures Were Warning Signs of Things to Come
• An International Currency Not Just on Paper

My friends and I exited the train onto the long, cracked concrete platform. A drainage stream littered with rusty steel barrels trickled by. On the northern bank, a retaining wall backed by an even more daunting barbed wire fence served to support the numerous lookout posts dotting China's most traversed southwestern border. This wasn't the Rio Grande.

Lo Wu is called a "control point." I imagine the Chinese authorities used the Korean DMZ as a suitable inspiration.

Consequently, I saw no need to draw the army's attention. My friends, Western journalists from Hong Kong, certainly weren't the red-carpet type. So we hung back, letting the hundreds of Chinese scurry by.

The rush for customs ensued. The soldiers, dressed in their long pea-green military topcoats, suspiciously surveyed the masses. And the masses nudged to and fro, like cattle in a stockyard, hoping to find the most expedient line to re-enter the mainland.

My fire engine red North Face duffel bag drew some stares, but Western garb doesn't fascinate as much in Shenzhen as it would in the more remote, rural regions of northern China. After all, I should thank some among the Chinese hustling all around me for stitching it together. That's probably also true for just about every item of pure Americana attached to my privileged self. And if the Chinese didn't construct the authentic item, they could easily point me to an alley where I could haggle the repro.

Shenzhen, Deng Xiaoping's first attempt at capitalism, Chinese-style, received the elevated status of China's first Special Economic Zone (SEZ) in 1980. Seemingly overnight, factories popped up along the hot, humid delta like a nasty, uncontrollable case of Southern kudzu. Naturally, more factories required more transportation. Shenzhen became the world's fourth busiest port by 2005.

Within 20 years, market reforms turned a relatively remote city the size of Green Bay, Wis., into an industrial and financial powerhouse on par with Chicago.

Wal-Mart shelves and Christmas mornings in the West have been built on a 90-hour, six-day workweek in the East. The last 20 years of growth have produced more than 90,000 export-oriented processing firms on the mainland, with nearly 70,000 based in Shenzhen's Guangdong province alone.

It's no wonder Chinese officials fear what a slowdown in the export economy may bring. Domestic growth and stability have risen with Chinese workshops. And make no mistake, the first three long-term domestic priorities on Beijing's list are and will remain stability, stability and more stability.

The yuan-dollar peg has gone a long way in ensuring constancy. Chinese economic growth - we would argue, all economic growth - ensues under the auspice of a stable currency.

But ties to the greenback have recently come with a price. American policymakers have facilitated a weak dollar. The Fed, for its part, announced another $200 billion injection on March 11. Its most recent funding equals the $200 billion Bernanke set free on March 7. For its part, the dollar didn't know what to think ($400 billion in four days). Or else, it's in a rather cruel denial.

For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.

On the basis of credit default swaps, which are used to speculate on a government's ability to repay debt, the 10-year note reached a record high of 16 basis points on March 12. German bonds traded at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government's ability to pay... an increase shows the opposite.

"That's certainly eye-opening," writes our esteemed colleague Chris Mayer. "The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds."

Officials in Beijing must keep shaking their heads. China holds more than $387 billion in Treasury securities.

For China, a weak dollar makes critical imports (wheat, corn, iron and soy) more expensive. Expensive imports mean higher prices. Higher prices mean more inflation. More inflation means less stability.

Chinese Premier Wen Jiabao addressed the equal and opposite reaction on the other side of the planet.

"The primary task for macroeconomic regulation this year," he decreed, "is to prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation."

In his annual policy speech to China's legislators, Wen clearly labeled rising commodity prices and the subsequent food shortages as China's No. 1 policy issue for 2008.

So Beijing finds itself in a bind.

Going forward, yuan appreciation would certainly help alleviate rising prices (commodity imports would be cheaper). Export dependence, however, has thwarted this policy. On the other hand, protecting the export industry by enforcing a close yuan-dollar peg only intensifies further inflation as the dollar continues to slide.

In the meantime, Beijing has turned to price controls. But price controls are nothing more than a short-term stopgap. Price controls disincentivize ample production. Shortages ensue. Prices, therefore, rise even higher.

Beijing may have hope. China's appetite for consumption keeps growing. We see signs that China's GDP growth is no longer so export dependent.

According to The Economist, "The World Bank's latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year in the fourth quarter of 2007. Overall GDP growth slowed only modestly (to 11.2%) because of faster growth in domestic demand, which contributed an impressive 10.8 percentage points."

These recent numbers suggest that the Chinese economy appears to be transitioning into a sustainable form of adolescence. Achieving a more proper balance between domestic production and consumption should enable Beijing to gradually allow more currency appreciation as a means of fighting inflation.

What that will mean for the American consumer remains to be seen. Political threats of more American protectionism combined with a rising yuan won't do much to alleviate John. Q Public's pain. If anything, he'll have to spend more of something he already doesn't have.

On the other hand, companies with assets denominated in Chinese yuan should see a boost. Companies earning profits from people with money to burn (the Chinese) shouldn't do too badly, either.

And I've found a company that satisfies both conditions.

This company owns the franchise to manufacture, market and distribute the products of the Coca-Cola Co. And we're not just talking 7-Elevens on Hong Kong Island. This company also distributes Coca-Cola products in Taiwan, as well as in 11 states in the U.S. and seven provinces in mainland China. This represents a total franchise population of over 420 million people, or, if you prefer, 6.4% of the world's population.

And that's just the tip of the iceberg.

At Free Market Investor, we've warned investors to be very cautious on stocks reliant on American consumers. We stressed shifting focus from companies that produce luxury items (such as Apple, Starbucks or P.F. Chang's China Bistro) to companies that provide staples (such as Altria Group, Budweiser, Coca-Cola, Exxon or Johnson & Johnson).

Even if John Q. Public lost his house and credit card, he'd use that last $20 to buy what he needs. The list would read something like this: toilet paper, Diet Coke and a pack of smokes.

Every month brings us closer to this reality. In February, over 223,650 American homeowners filed for foreclosure. On top of that, unemployment insurance applications increased nearly 20-fold. Investingwise, that puts us back to the basics. Forget the MacBook Air and start thinking consumer staples.

For investors, companies that own or produce revenue streams from tangible assets (rental income), consumer staples (Coca-Cola) or natural resources (oil and natural gas) should prosper. Finding a single company - a conglomerate - capable of producing cash flow from all three seems even better.

That's the beauty of many conglomerates. Conglomerates often operate within a diversified group of income-producing industries. Meaning revenues aren't tied to any one particular division. Diversified income streams typically strengthen a company's margin of safety.

Christopher Hancock
for The Daily Reckoning Australia

• Chinese Steel Price to Rise in Wake of Coal and Iron Price Hike
• Chinese Consumers Are Getting Shiny New Credit Cards
• Rumours Swirl Over Chinese Equity Stake in BHP Billiton
• BHP Billiton (ASX: BHP) to Report Second Half Results Today
• Australian Iron Ore Shares on China’s Menu

For decades, United States federal inspectors knew that a flaw in the structure of the eight-lane I-35W bridge over the Mississippi could easily take down the entire structure. But year after year, the government let the bridge pass inspection.

According to the U.S. Department of Transportation, 756 steel deck truss bridges span America's waterways, just like the one in Minnesota.

Built in the 1950s and 1960s... approximately 11% of these steel bridges have weaknesses much like the one that caused the I-35W bridge's collapse. 80+ bridges at $250 million each?

The American society of Civil Engineers now warns that the United States has fallen so far behind in maintaining its public infrastructure - roads, bridges, schools, dams - that it would take more than a trillion and a half dollars over five years just to bring it back up to standard.

So the United States government now needs $1.5 trillion just to sprinkle Band-Aids across America's degenerate body.

For a quick perspective, consider this:

The Iraq war has cost the United States $458 billion to date.

Meaning, patching potholes and solid waste will cost roughly three times as much as the full-fledged war.

How will American taxpayers pay for all that, we ask? We're not sure. But it seems to us that he will pay for it with dollars... and that's the heart of the problem.

Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing: U.S. Dollar-holders beware.

Strong economies need strong infrastructure.

Strong infrastructure needs strong spending.

More spending means more government contracts. More contracts mean more campaign donations.

It gets better.

Every elected official represents a district with a broken bridge. A new bridge needs a new ribbon and a new name. Hence, the more bridges they build, the more votes they receive.

And here's the best part. They accomplished this benevolent feat without losing lives or raising taxes!

Better yet, everyone in Washington can play along.

Unfortunately, more spending means more debt. The U.S. Congress will turn to the U.S. Treasury. The Treasury wants to balk. But they turned on CNN and another bridge collapsed over the mighty Mississippi.

So they shrugged.

The U.S. Treasury will turn to foreign buyers. Foreign buyers should (will) require a higher rate of return for holding a depreciating fiat currency. Interest rates should (will) rise. The race to sell U.S. assets to foreign hands continues.

To make matters worse, analysts forecast future rate cuts. The latest U.S. Federal Reserve Meetings on Oct. 9 show a consensus supporting a 50 basis point cut... maybe so, maybe not. We really don't care. We have no idea what direction interest rates are heading. But we do know this.

The American dollar should (will) continue to decline.

Eurozone finance ministers quiver. On Oct. 8, the day before the U.S. leaked a forthcoming rate cut, the Europeans announced their intentions to actively depreciate the euro against the Chinese renminbi, the U.S. dollar and the Japanese yen. They claim a weaker euro will ease pressure on the European economy.

Europe, in a sense, showed its hand. And the U.S. Federal Reserve quickly trumped it one day later.

This dubious policy is finance-speak for this: The sovereign nations of the world are engaged in a perpetual sprint to boast the least valuable currency. They're in a race to the bottom, so to speak... a race to become, well, in a sense, worthless.

The reason: Currency depreciation makes domestic goods less expensive to foreign buyers. Consequently, a perceived re-emergence in a nation's domestic manufacturing may take place, as foreigners demand cheap "Made in the Most Worthless Currency" widgets.

You see, it's a win-win for Washington.

Washington's charitable handouts (debts) bought the bridges that bought the votes. Those charitable handouts (debts) also undermined the dollar- denominated debt.

The cheap dollar creates cheap exports. More exports create more jobs. More jobs... more votes. The cycle continues.

But here's the real kicker: Devaluing the greenback devalues the foreign debt that started this whole mess to begin with. So in the long run, we don't owe as much as we borrowed, inflation adjusted.

It's a win-win for Wall Street, too. The municipal underwriting business takes off. Banks now repackage municipal debt like mortgage debt. The fees keep rolling. Seven figure bonus days are here once again.

However, this game has one or two setbacks.

First, higher spending sans higher taxes works only when foreigners demand our debt. But that may not be the case much longer. The Chinese have eased their appetite for American IOUs.

Second, more debt means we print more money, which means more inflation.

Alan Greenspan is no dummy. He knew when to jump ship. Greenspan said that over the long run, the biggest problem facing the U.S. economy is "the re- emergence of inflation," and rising interest rates.

We concur with Mr. Greenspan.

Unfortunately, high inflation combined with high interest rates kill the middle class. That's the real long-term problem of fiat currencies. A fiat money system prompts legislative profligacy and inevitably produces inflation. The system stimulates the growing gap between the haves and the have-nots.

Consequently, the have-nots will turn to their elected saviors in Washington. They'll demand a change. And the elected saviors will provide some version of "something for nothing."

As Bill Bonner points out: "The goal here - as with all government programs - is to produce the desired benefits while pushing the costs onto someone else. That's how politics work. You promise something... and you force someone else to pay for it. You rob one Peter voter... and spread the loot among the Pauls."

But as the IOUs pile up, and the U.S. dollar's value withers, the Pauls will realise that they've been robbed as well.

Christopher Hancock
for The Daily Reckoning Australia

• None Found

With each passing day, American debt levels reach new highs, the United States adds $2.43 billion to their record-high national debt, and the dollar continues to fall in value, further eroding an already insufficient retirement savings...

What are most Americans doing about it?

They're consuming even more, even if that means dipping into their savings or taking on debt they'll never be able to repay.

Why? 

Because it has to do with an economic struggle... an innate and uniquely American fear of being left behind (or, even worse, completely left out)...  It has to do with an individual's fight for their particular piece of the proverbial American dream.

Political icons constantly remind Americans of achieving the "American Dream" and becoming an "ownership society" as if to say you can do better, achieve more and thus find happiness.

Its roots go back to the great bull market that followed World War II. That glorious economic expansion gave birth to America's first legitimate middle class... a group of people whose last names were scribbled onto University rosters for the very first time.

Every American family could now have a house with a yard, a new Oldsmobile or even a Cadillac Coup de Ville...  The "American Dream" was reborn and recast, unfettered by a cautionary tale not even one generation old.

If you couldn't keep up with your neighbors, then new companies such as Visa and MasterCard could help you out.

The gods orchestrating the strings of modern finance offer us a Faustian solution: the pleasure of consumption without the pain of saving. Did Mr. and Mrs. Consumer spend more money than they have in the bank? No worries, they can pay it back next month... or the month after... or maybe never.

They've been told to expect more for less...  They've been assured that it's O.K. to spend more than you make.

This is the game that caters to a new American debt filled generation... an entitlement class of children playing children's games... a generation weaned on the bottle of instant gratification.

It won't be long before the notion of keeping you're financial head above water will soon require more effort than signing one's name on the back of yet another new credit card.

But wait a second. How did we get into this quagmire of American debt, you ask?

I would venture to guess that the distance between economic theory and economic reality in most cases is about one foot. That's the approximate distance from your brain to your heart.

As Bill Bonner points out in his latest book Mobs, Messiahs, and Markets, "people's convictions arise not from proofs supplied by the brain but prejudices amplified by the heart."

Most modern economic theory remains based on the premise that man is a rational being. Anyone who's spent more than five minutes on planet Earth knows that man is rarely a rational being. As Bonner explains: "Human beings are neither good nor bad, they're merely subject to influence."

The reason seems simple. People find comfort in knowing lots of other people have made the same choices... like fans routing for a sports team. Human beings naturally gravitate towards the crowd. And "crowds cannot think. They can only feel and act."

So their behavior only seems rational in the fact that "everybody's doing it."

Enter Alan Greenspan, the High Priest of American debt financed consumption. For nearly two decades, the former Chairman of the Federal Reserve provided grandfatherly platitudes about the importance of saving and investing, while simultaneously pulling every monetary string imaginable to insure that Americans borrowed and consumed, or borrowed and speculated... or just borrowed for no good reason.

Under his watch, he lowered short-term interest rates to 1%, thereby stimulating an economy that required no excess stimulation. "He applied an emergency interest rates," in the words of James Grant, "even though there was no emergency."

So Alan Greenspan's recent comments to 60 Minutes correspondent Lesley Stahl struck us as mildly disingenuous, or perhaps just forgetful.

Greenspan said that over the long run, the biggest problem facing the U.S. economy is "the re-emergence of inflation" and rising interest rates.

Hmm... Wasn't he the chairman who presided over a series of financial bubbles? Wasn't he the chairman who battled each financial bubble with emergency doses of EZ credit? And wasn't he the Chairman, therefore, who sowed the seeds of the inflationary trend he finds so troubling, now that Ben Bernanke is in the hot seat?

Perhaps it is not Greenspan's fault that America now finds itself as indebted as ever and in possession of greatly debased dollar bills. But neither is it NOT his fault.

Let's take a quick survey of the current condition: Oil and food prices continue to surge... the U.S. money supply keeps stretching its legs at a 12% annual clip. Entitlement programs goad America deeper and deeper into debt. Politicians promise more to help alleviate record American debt levels.

Meanwhile, the Iraq war tab keeps churning along at a rather brisk $10 billion per month pace — or, if you prefer, $231,481 per minute. Throw in the Afghanistan situation on the running meter, and we add another $34,722 every 60 seconds of war.

The average American worker brings home $39,795 per year — or $19.13 per hour. So excluding overtime, John Q. Public must now clock six years to pay for 60 seconds. So dismiss the fact that his interest-only house payment is set to expire. Forget the fact his credit card bills bear a $15,000 balance. It's only interest. Washington plays this way...  why can't he?

It gets better.

Osama still lurks. President Bush presses for missile defense systems in Eastern Europe. Russia, for fear of being outmatched, lays claim to the North Pole and all its Christmas goodies, which just happen to include 10 billion tons of gas and oil deposits... not to mention the significant sources of diamonds, gold, tin, manganese, nickel, lead and platinum peacefully resting on top of the world. To punctuate its resolve, Gazprom threatens to flip the switch in Europe once again.

China, for its part, passively eases its desire to absorb American IOUs. Japan dips its toes in the waters of remilitarization. Venezuela throws its proverbial hat in the ring by ousting foreign oil, while Iran consistently defies the international community by mischievously playing with yellowcake.

Saudi Arabia, Egypt and Israel broker a multibillion-dollar American arms deal. The trade hopes to "counter" the negative influences stemming from Syria and Iran. And if geopolitical showdowns weren't enough, the world still fears a multi-trillion-dollar international credit crunch.

Meanwhile, American infrastructure keeps crumbling. After more than 20 years of reckless, American debt financed consumption, homes are full of plasma TVS, while American roads are full of potholes. The American Society of Civil Engineers submits Ds down the U.S. infrastructure report card. Poor road conditions now cost the American taxpayer $67 billion a year, $5.6 billion a month, $186 million a day, $7.8 million an hour or $130,000 every minute.

And that's just to patch roads and bridges. The EPA estimates that U.S. sewer system maintenance over the next 20 years will run somewhere in the ballpark of $390 billion. That's another annual $20 billion annually, or $1.7 billion per month.

Meaning potholes and solid waste are costing roughly as much as a full-fledged war. How will John Q. Public pay for all that, we ask?

We're not sure. But it seems to us that he will pay for it with dollars... and that's the heart of the problem. Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing:

Dollar-holders beware.

Christopher Hancock
for The Daily Reckoning Australia

• None Found

And Buffett didn't stop there. Berkshire Hathaway confirmed it has also acquired stakes in two remaining North American railroads. The largest American railroads remaining are Union Pacific (NYSE: UNP), CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC). Our neighbours to the north offer Canadian National (TSE: CNR). 

No one really knows why Warren Buffett fell in love with railroad investing all of a sudden. Burlington certainly carries Buffett-like characteristics: consistent earnings growth (22% annualised over five years), impressive margins and limited competition.

But none of these railroads typify your typical Benjamin Graham value play. The stock trades for more than three times book with limited liquidity and tangible debt.

So what was Warren Buffett thinking as drove Berkshire Hathaway onto the rails?

It's anyone's guess. But the prevailing consensus believes globalisation - specifically, moving the major staples of trade (things like coal, oil, cars and clothes - in other words, basic commodities and finished goods) from producer to consumer - is the long-term trend at play here. 

I'll buy that.

It was about this time in 2002 that a rebirth in the tangible assets sector really began. Much of that growth can be directly attributed to the insatiable demand for raw materials that the developing giants China and India are now consuming.

These countries are still in the early stages of development. It takes about 30 years to go from an agrarian to an industrial society. China is about one-third of the way there. China will continue to import commodities to sustain this enormous transition. India will do the same.

Furthermore, the golden era of stocks (1982-2000) directed capital in about every investing avenue except natural resources and raw materials. Hence, limited demand caused a decrease in available supply.

Now the entire world can't get enough copper, zinc, lumber and oil. But bringing on new production takes time. Supply can't catch up with demand overnight. In fact, it's going to take quite some time, especially when you throw the consumption potential of India and China (37% of the world's population) into the mix. Consequently, commodities, the market for the essentials, will remain tight for the foreseeable future.

And commodity consumption won't be limited to emerging markets alone. Let's not forget that the United States has begun to embrace alternative energy. And the two greatest oil alternatives, coal and corn, are shipped by train.

So transport stocks like Burlington certainly play into this long-term trend. And considering that rising fuel prices affect trucks more than trains, this idea begins to make more and more sense.

But many feel it's too late. Many believe the upside is already priced in.

Well, that may be true.

You see, recently, Prudential, Bear Stearns and UBS all downgraded BNI to some type of peer perform/neutral rating. Most investors are now asking: was Buffett wrong?

The key to that last sentence is the word "investors". Most individuals who buy and sell shares are traders, not investors. These are people looking for a quick buck. The type of action that reflects an attitude more suited for the Las Vegas Strip, not the undying, underappreciated sex appeal attached to the US$500 monthly deposit in the retirement fund. 

Without becoming too insipidly philosophical here, let me quickly add this. Blaise Pascal once said: "Most of men's problems arise from their inability to sit quietly and alone".

That's a fair point. Actually, that's a very good point.

It takes a rare soul to patiently sit on a US$32 billion Korean steel stock when the daily headlines of even the most conservative publications saturate our brains with tales of highflying hedge fund managers making upward of US$1 billion annually or A-list celebrities with nothing more than a high school degree receiving a US$20 million payday.

But take solace in this. As Max Ehrmann wrote: "If you compare yourself with others, you may become vain and bitter; for always there will be greater and lesser persons than yourself. Enjoy your achievements as well as your plans."

Shipping is, and will remain, irreplaceable on the world stage. We can't live without it. It won't be replaced. It's been around for centuries. Until we reach a stage of technological innovation in which the major staples of trade - things like coal, oil, cars, the finished products that fill Wal-Mart stores - can be disassembled one molecule at a time and instantaneously beamed to another location, our current means for commerce will remain the most efficient.

Regards,

Christopher Hancock
for The Daily Reckoning Australia

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The goal is simple, But for many, the attempt is futile and childish, grossly naïve in its fundamental premise. Most try, but few succeed.

Fifty years ago, keeping your head above water meant saving a dollar. Now, squeaking by has become the 13% annual return that nearly ruins a manager's financial career/reputation by narrowly clearing the S&P by a mere 50 basis points.

But there's a new American generation... an entitlement class of children playing children's games... a generation weaned on the bottle of instant gratification. They've been told to expect more for less... they've been assured that it's OK to spend more than they make... because in the end, the government will be there to brace their fall.

Unfortunately, mommy and daddy are broke. And so is Uncle Sam. But the American family keeps spending despite that the consumer savings rate for all of 2006 remained a negative 1%.

The 2006 figure proudly surpassed the negative 0.4% savings rate in 2005. These two years produced the most reckless lack of savings since the negative 1.5% savings rate in 1933, during the Great Depression.

So while most Americans woefully stare at double-digit Annual Percentage Rate (APR) as they cut another cheque for the minimum monthly payment, the debt continues to rise.

It won't be long before the notion of keeping your financial head above water will require more effort than signing your name on the back of yet another new credit card.

Hardly anyone beats the market for more than a few years, so why do we waste so much time and money trying? And more importantly, why do we deem our investing success relative to what a bunch of strangers are doing? It's comical when you stop and think for a second. As Jason Zweig cleverly points out in Ben Graham's The Intelligent Investor, no one's gravestone reads, "HE BEAT THE MARKET!"

Expectations today shun returns below double digits. Earning 9% won't cut it if someone else is earning 10%.

That type of thinking negates what Warren Buffett calls the very first rule of investing: "Don't lose money."

As investors, we're looking for a margin of safety... companies trading near or below their intrinsic value with an established earning power. That's basically it.

So here are four basic rules for investing in the stock market criteria I follow. You may recognise the thinking. Warren Buffett coined the parameters. It's a bit cliché, but we'll humbly concede that if the wheel ain't broke...well, you know the rest.

So let's begin. We always ask ourselves these four things:

1) Is the business easy to understand?
2) Does the business sell at a fair price?
3) Does the business operate with a long-term competitive advantage?
4) Does the foreign stock trade on a U.S. exchange?

For explanation's sake, we're going to lump the first two rules together in the following example.

Is the business easy to understand and does it sell for a fair price?

This is a fictional story of a small biotech company. We'll call the firm "CureAll Pharmaceuticals." CureAll currently holds patents on two mildly significant drugs that treat a rare blood disorder. Proceeds from those sales pay the rent, but the company continues to operate in the red. The company's immediate future rests on a breakthrough pipeline drug capable of curing prostate cancer.

Here is where our story begins.

One of the world's most respected financial newspapers reports that the small biotech company CureAll Pharmaceuticals, based in Raleigh, N.C., cleared Phase II clinical trials for a remarkable new drug that researchers suspect has a 90% probability of effectively curing early-stage prostate cancer.

The drug can be administered in pill form. Effective treatment will require one pill every three months. The FDA has signalled that passing Phase III trials seems likely. Anticipation builds.

Prostate cancer affects more men than any other form of cancer. The American Cancer Society estimates 220,900 new cases of prostate cancer were diagnosed in the U.S. in 2003 alone. No males are immune. The risks increase with age. Family history also increases the likelihood.

The breakthrough of such a drug would mean a great deal to a great many people. There's no way to quantify the benefits.

Even before Phase III clinical trials begin, the company's stock takes off. Investors are willing to forego 120 years of future earnings for a single share. Who could blame them? This is the miracle cancer drug we have all been hoping for.

Two years pass, and FDA approval looms even closer. The stock price continues to climb. The atmosphere around CureAll's stock feels strikingly similar to the sentiment for Internet search engines in the early 1990s.

You may remember, back in 1994, Yahoo's search engine started as a simple directory for the then-small universe of Web sites. The stock price rose side by side with the market all the way to its peak in 2000. On the last day before the new millennium, Yahoo closed at USD$432.69. Its diluted earnings per share that year were 6 cents on the dollar. And investors and pundits were predicting that Yahoo was set to go even higher.

We termed the 1990s the "new economy." We said times had changed. Many considered earnings to be irrelevant. We all know how that story ends.

By the end of 2000, Yahoo closed at USD$25, down 94% in less than a year.

But it's now 2007. Times have changed.

Investors argue CureAll maintains a tangible revenue-producing product. The dot-com companies had nothing like this, they said. That is why speculators got burned. "It's different this time," they claim.

CNBC and the financial press jump on board. They interview a host of potential candidates for this cancer-curing drug. Even pundits left of the far left begin cheering capitalism's conquest. They jump on the business- minded bandwagon. They claim seed money from cutthroat VC firms is finally being put to good use. Society and Wall Street are meeting face to face for the very first time.

Soon, management announces a press conference. The greatest minds in medicine start making public statements. This looks to be the breakthrough society has been anxiously awaiting. The stock takes off. The share price now trades for 200 times earnings.

Among a host of reporters, doctors and investors, CureAll's management discloses final FDA approval. The room explodes with applause and cheering.

Wall Street wholeheartedly jumps on board. The stock climbs even higher...by the end of the trading day, CureAll's shares are going for 250 times future earnings.

Here's where our story takes a turn.

In all the hype, investors confused the tangible benefits of the drug for the tangible benefits of the stock.

Unfortunately for investors, the costs of producing this innovative drug are astronomical. Gross margins are less than 5%. Operating margins are then even half of that.

Critical inputs come from shaky supply sources. To make matters worse, CureAll's current blood disorder drugs are about to go off patent. The future pipeline contains the only high-margin, cash cow product that could effectively put the company firmly in the black. But FDA approval for that drug requires successful DNA rebuilding in the Jensen sarcoma as well as full atomic models with sugar phosphate nucleic acid structures of 25 different lab rats.

That's tough to read, much less to comprehend.

Like Yahoo, the hysteria surrounding CureAll's drug eventually surrenders to the financing and fundamental earning power behind it. Although cancer patients are rewarded, investors suffer. The stock falls 94% by the end of 2007.

The story of CureAll demonstrates two common traps that readers of The Offshore Speculator will be encouraged to avoid: First, steer clear of businesses you don't fundamentally understand. And second, never pay too much for an asset, regardless of how great that asset may be.

You see, all market bubbles eventually come to an end. There's no telling what triggers the retraction. Some average investor woke up one day and realised that he'd probably not recoup his investment on a company with an earnings multiple well above 200. It's really common sense.

Value investors like Benjamin Graham and Warren Buffett know that throughout history, the average price-to-earnings ratio of the stock market has been 15.3 - which means investors have traditionally been willing to pay $150,000 or so for $10,000 in earnings.

Yesterday it was Yahoo and today it appears to be Google.

Growth projections are large, and they're built on a very fragile assumption. They assume Google will be the leading search engine for years to come. They assume a competing programmer will fail to construct a better algorithm. They assume real competition will not enter the market. In an industry with little to no switching costs, that's a pretty risky assumption.

As value investor Christopher Browne points out, there is nothing wrong with owning a great business that grows at fantastic rates... it's a matter of paying the right price for that business.

Browne goes on to say that investors should determine an intrinsic value, wait for someone to overreact or under-react to news and buy the stock when the market prices the shares for less than they're worth.

In the case of CureAll Pharmaceuticals, investors would have been wise to short the stock the day after the cancer-fighting drug received FDA approval.

But so it goes.

Google is just another name for the same story. It's a story whose message is focused on hubris and greed. Regardless, investors today are singing the same historical tune: "It's different this time."

It's never different this time.

Regards,

Christopher Hancock
for The Daily Reckoning Australia

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Considered by some as the Eighth Wonder of the World, the Empire State Building was erected at the height of the Great Depression...pieced together with Indiana limestone and adorned with aluminum and chrome-nickel steel.

At the time, it stood as the tallest building in the world, at over 1,400 feet. Construction consumed 60,000 tons of steel...10 million bricks...1,172 miles of elevator cable...6,400 windows...60 miles of water pipe and over 3,500 miles of telephone and telegraph wire.

Even with all that, the building took only 14 months to complete, costing less than half of its original $50 million budget.

But the world's tallest skyscraper is much more than the world's top-quality office space. It symbolised the progress of a nation rebuilding - a beacon of economic growth.

The strength of its image became universal.

One could argue the construction of the Empire State Building was a turning point for the U.S. economy and morale during the heart of the Great Depression, ushering in the world's first skyscraper boom.

Soon, skyscrapers began popping up throughout the American landscape: In Atlanta, Dallas, Houston, Charlotte...the World Trade Center in '72...the Sears Tower in '73. Every U.S. skyline you see today grew in a span of about 40 years.

These buildings required miles and miles of steel beams...hundreds of thousands of tons of cement...The IDS center in Minneapolis required enough reflective glass to provide two pairs of sunglasses for each resident of Minnesota and one pair for each resident of North and South Dakota.

The Sears Tower, the nation's tallest building, contains 2 million cubic feet of concrete and 76,000 tons of steel. And its foundation spans two entire city blocks.

Few people ever stop to think about the massive amounts of steel and cement that go into these structures. But those who did - especially in the early 1900s - could have made a fortune, especially those invested in steel.

Between 1904-1930, shares of U.S. Steel rose an average of 66% a year! Of all the components used in skyscrapers, steel grasps my interest the most.

Steel products are used in everything from the construction of buildings, bridges, railway rolling stocks, industrial pipes and tanks to numerous automobile parts and Campbell's Soup cans. So when a major macro-event like a building boom increases demand, supply becomes even tighter as other industries involved in general infrastructure and development compete for the same fundamental resource.

Right now, the world's "second skyscraper boom" is currently under way, and to no one's surprise, it's happening in the newest region of massive economic growth...Asia.

If steel production per person in China were to climb to U.S. levels, it would mean that China's aggregate steel use would double by 2031, to a level equal to the current consumption of the entire Western world. And when you add in developing countries like India, Malaysia, Indonesia and Vietnam, the numbers become staggering. We'll get to the specific figures in a minute.

Unlike the general use we see here in the U.S., high-rise buildings in Asia will provide much more than Grade A office space...These buildings will be the bedrock for the region's rapidly emerging middle-class housing.

Roughly 50% of the world's population lives in the region of the world experiencing the most dynamic growth. Last year alone, these economies accounted for more than half the world GDP. They now churn out 43% of the world's exports and hold 70% of the world's foreign exchange reserves.

And while real wages in the developed West are either flat or falling, wages among the up-and-coming nations of Southeast Asia continue growing.

So the world's latest member of the "middle class" will begin demanding spacious, convenient living in the immediate future.

Buying commercial real estate in Asia today is a lot like investing in American real estate at the end of World War II.

You may remember the Levittowns that shot up across the United States over 50 years ago. These carefully planned neighborhoods provided affordable housing for the thousands of young soldiers returning home from the war. But more importantly, these planned neighborhoods served as the new model for America's booming middle-class suburban lifestyle.

The emerging markets of Southeast Asia are currently experiencing a similar transformation. Except they're not peppering the landscape with tree-lined streets and 2.5-bedroom, 1.5-story ranch houses. High-rise apartment complexes are the new Levittowns of Asia.

You could easily move into one of these buildings and never find a need to leave. These buildings include everything from grocery stores and retail outlets to fitness centers with swimming pools.

Asian developers are utilising this high-rise housing model for one specific reason: Land is scarce. Most Asian economies lack the expansive terra firma we in the West find so readily abundant.

Take Singapore, for example...It's roughly 3.5 times the size of Washington, D.C., with an economy greater than New Zealand's and a growth rate double that of the United States'.

Hong Kong is another example: It's only six times the size of our nation's capital, with an annual GDP on par with Argentina and Portugal.

The point is...land is, and always will, be the most valuable asset in places like Hong Kong, Shanghai, Tokyo, Taipei and Singapore. These Asian cities lack the land for urban sprawl we in the U.S. see in places like Chicago, Washington, Houston, Los Angeles, Charlotte and Atlanta.

So when you can't build out, you build up. And that's exactly how these Asian economies are making their magnificent growth possible.

I travel back and forth to Asia a couple of times each year. Whether I'm in Hong Kong, Bangkok, Shenzhen or Shanghai, the landscape is constantly changing.

It's dynamic...exciting...like nothing the world has ever seen. You feel like you're watching a flipbook in real time as thousands of cranes blanket the landscape lifting I-beam after I-beam to new heights. One ambitious plan calls for a 200-story high-rise on the edge of Hong Kong's Victoria Harbor. That's twice the size of the Empire State Building.

In Hong Kong, for example, prime locations in the coveted Central District are running so thin that the government has commissioned even more land reclamation, stretching the island even further into the blue waters of Victoria Harbor.

The need to build up instead of out also explains why seven of the world's 10 tallest buildings are now found in Asia. And there is plenty of room and desire to build more.

Regards,

Christopher Hancock
for The Daily Reckoning Australia

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