Over the summer, Iran bought a large amount - more than 1 million tons - of wheat from the U.S.

That's something we've not seen in 27 summers. In Iran's case, a tough drought cut the wheat harvest by a third, forcing the country to look abroad. But still, the fact that Iran had to come to the U.S. is telling. It's like Lee asking Grant for rations in the summer of 1863. As one analyst put it: "Do you think Iran would come to the U.S. if they had any place else they could buy it... They're searching the world for wheat. They're buying the U.S. because it's the only thing they can buy."

Markets, like great unscripted dramas, develop their own plotlines as time rolls on. Now unfolding is a new plotline in the agriculture boom. It begins with the fact that there are fewer and fewer options these days for importers looking for large quantities of high-quality grains. But it speaks more to a deeper issue: an emerging shortage in fertile soil. Yes, we're running out of good dirt.

In fact, fertile soil - good dirt - may become more important to land values than oil or minerals in the ground. Some say it is already a strategic asset on par with oil. As Lennart Bage, president of a U.N. fund for ag development says, "Now fertile land with access to water has become a strategic asset."

Doubtful? Consider rising export restrictions around the globe, which act as a sort of fence keeping the goods within borders. India curbs exports on rice. The Ukraine halts wheat shipments altogether. The number of grain-exporting regions has dwindled, like the vanishing buffalo herds. Before World War II, only Europe imported grain. South America, as recently as the 1930s, produced twice as much grain as North America. The old Soviet Union, for all its faults, exported grain. Africa was self-sufficient. Today, only three major grain exporters remain: North America, Australia and New Zealand.

No surprise, then, to find faith in the global food supply at generational lows. So begins the scramble to secure farmland. Saudi Arabia, for example, is particularly at the mercy of the winds of global agriculture. It has little ability to produce its own food. The kingdom, reports the Financial Times, "is scouring the globe for fertile lands in a search that has taken Saudi officials to Sudan, Ukraine, Pakistan and Thailand." Saudi Arabia's quest is not one it pursues alone. There are many hunters.

The UAE has also been looking to lock down acreage in Sudan and Kazakhstan. Libya is looking to lease farms in the Ukraine. South Korea has been poking around in Mongolia. Even China is exploring investing in farmland in Southeast Asia. While China has plenty of cultivable land, it does not have a lot of water.

"This is a new trend within the global food crisis," says Joachim von Braun, the director of the International Food Policy Research Institute. "The dominant force today is security of food supplies." Food prices reflect this crimp in supply.

The mainstream press focuses on issues such as population, dietary shifts and the impact of biofuels. One thing that doesn't get talked about much may be the most important thing of all: a growing shortage of quality topsoil. Call it the topsoil crisis.

Quality soil is loose, clumpy, filled with air pockets and teeming with life. It's a complex microecosystem all its own. On average, the planet has little more than 3 feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it "the shallow skin of nutrient-rich matter that sustains most of our food."

The problem is that we're losing it faster than we can replace it. And replacing it isn't easy. It grows back an inch or two over hundreds of years.

This is not lost on certain far-seeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. "Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite." For every bushel of wheat produced, we lose two bushels of topsoil.

Until the final decades of the 20th century, the amount of new farm acreage added to the mix by clearing land offset the losses on a global basis. In the 1980s, the amount of land under cultivation began to fall for the first time since humble early humanity began to farm the rich land around the Tigris and Euphrates. It continues to fall today.

We lose topsoil to development, erosion and desertification. "Globally, it's clear we are eroding soils at a rate much faster than they can form," notes John Reganold, a soils scientist at Washington State University. Estimates vary. In the U.S., the National Academy of Sciences says we're losing it 10 times faster than it's being replaced. The U.N. says that on a global basis, the rate of loss is 10-100 times faster than that of replacement.

In any case, it seems safe to say that good dirt is in short supply. The obvious investment conclusion: Buy farmland. That's hard to do as an individual investor, although there are at least a few options. One is Cresud, which owns 1 million acres of farmland in Argentina. It trades on the NASDAQ. Our own Leucadia National (NYSE:LUK) owns 8% of the company and is the largest shareholder. Though harder to buy, Black Earth Farming owns farmland in Russia - which presents its own risks. The stock trades on the Pink Sheets in the U.S.

Another way into the idea is to own farming assets in grain-exporting countries. Viterra, which trades in Toronto, is the largest grain handler in Canada. (We own both Cresud and Viterra in Mayer's Special Situations.) Viterra thrives on volume. A busy grain market portends good things for Viterra's business. It is well financed and owns truly world-class assets.

More investment ideas will surely surface as time goes by. The topsoil crisis has a long way to go. It's not going to resolve itself anytime soon. In the meantime, though, investors may want to rethink the phrase "cheap as dirt." I'll keep an eye on this new trend in these pages.

Chris Mayer
for The Daily Reckoning Australia

• An Abundance of Paper Money is Causing Food Prices to Soar
• Americans Are Hoarding Food
• Thomas Malthus and the Global Food Crisis
• Are Farm Prices Destined to Rise as More People Compete for Food?
• Cattle Prices Have Risen Only 1% This Year

It might be too much to say Vancouver got its start with a bunch of alcoholics, but there's no denying that Jack Deighton, or 'Gassy Jack,' as he was known, had a hand in making the city.

As legend has it, Gassy Jack, a garrulous Yorkshire-born steamship operator, arrived in 1867 with a yellow dog, a First Nations wife and a barrel of whiskey. He solicited help from workers by telling them if they helped him build a tavern, he'd give them free drinks. So they did, and within 24 hours, the Globe Saloon was open for business, slaking the thirst of a rough frontier crowd of miners, trappers and loggers.

When a little village grew up around the saloon, Gastown was born.

This is where modern Vancouver began. Today, Gastown is the old section of the city. You can stroll down its cobblestone streets adorned with antique street lamps and stop off at one of the many bars and restaurants. You can see the old steam clock on Water Street, a local landmark. (But it's kind of a sham, because the steam clock is actually powered by electricity. It was also built in 1977, despite its antique look.) There are also some shops hocking the usual kitschy fare like faux totem poles and snow globes.

Salute the bronze statue of Gassy Jack, standing atop a whiskey barrel, in Maple Square. Then head over to my favorite microbrewery in the city, Steamworks, and order a Lions Gate Lager and a brick-oven pizza.

As you wipe the beer foam from your lips, you can think about the story of early wealth creation in Vancouver. Spanish explorers in search of the Northwest Passage arrived in the 18th century. You can still see their influence in street names such as Cordova, Cardero and Valdez. The British explorer Capt. James Cook also hit the west coast of Vancouver Island, looking for the Northwest Passage. Vancouver, though, gets its name from George Vancouver, who sailed the inlet in 1792.

Eventually, a number of early explorers, including Simon Fraser and Alexander MacKenzie, helped map the region's interior. In 1824, the Hudson Bay Co. began running fur trading posts out here. In 1858, prospectors found gold on the banks of the Fraser and Thompson rivers. The first sawmills along the Fraser River opened up in 1860. And there you have the triumvirate that drew adventurers and entrepreneurs from all over - furs, gold and timber. Into that swirl stepped Gassy Jack.

I like the city of Vancouver and enjoy going there every year for my publisher's big annual conference. This year's theme tackled investing in the age of scarcity. Perfectly appropriate for the market we find ourselves in.

Gassy Jack and all those early explorers, adventurers, prospectors, loggers and miners did their part to spice up the 19th century. As with most of the history of the Americas, fortunes bloomed as men beat paths to nature's riches. It was the basic stuff - metals, timber and other commodities - that made men rich. The voracious appetites fueled by the Industrial Revolution and rising urbanization created enormous demand for the natural storehouse of riches in the largely untapped Americas. If you were bold and talented (and lucky), you could strike out on some open valley or inviting hillside or promising riverbank - and dig or plant or pan your way to fame and fortune.

Despite all the advances and promises of the 21st century, we still need those basics. We've always needed them, but there is new urgency to the quest. The motor for that demand is a sort of second Industrial Revolution, in China and India, in particular. But it's a revolution that broadens out to many emerging markets. The analogy is not lost on certain investors.

Jeremy Grantham heads up GMO, a respected money manager. Grantham has been largely spot on in the big-picture sense of staying bearish on stocks for the last eight years or so. He is bullish long term on commodities. In his latest quarterly letter, Grantham makes some good points about the future of commodities and emerging markets.

His conclusion first: 'In the short term, slowing world economic growth combines with credit, currency and inflation problems to dominate the outlook and offer poor prospects for emerging markets and commodities. Longer term, the reverse is true, and they look like the assets to own.'

It is mostly the long term (looking out a couple of years) that interests me, although I obviously don't aim to step into any immediate problems if I can help it.

Longer-term backing for commodities demand comes from two sources, Grantham says:

'The first is that if enough people enter economic take-off at approximately the same time, as 2.3 billion Chinese and Indians have now done, then the pressure on resources might happen to increase marginal costs slightly faster than technology could offset them.'

This has already happened. It's why the price of oil, for example, is so much higher than historical averages. All that demand hits very quickly, but it takes time to bring new supply to market. In the interim, higher prices result.

This seems well-known already. Most investors realize that behind the commodities boom stands surging demand from countries such as China - former 'runts' now muscling in on the global dinner table.

The second reason is more interesting. Grantham believes that the global growth spurt has come at the expense of eating away at some hard-to-replace resources:

'Underground water resources that currently sustain some of our most productive land but, like a metronome, tick off a reduction of several feet each year; rain-fed waters that, although renewable, are finite and already so overused that previously valuable lakes retreat to sometimes disastrous local effects and river volumes, once seemingly limitless, are now fought over; subsoil, which took thousands of years to form, is depleted through casual use (in the Midwest, for every bushel of wheat produced, it is said that a bushel of subsoil is lost. Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite); high-grade mineral ores are fully developed, the very best are long gone and all are irreplaceable; previously fertile land has often been overgrazed and turned into desert.'

At Mayer's Special Situations, we've been on the water beat since this publication began in summer 2006. We've also watched the agricultural boom unfold, and we've picked up nice profits along the way. We are, in fact, still invested in these ideas.

Along with these ideas, oil, natural gas and base metals all have become more difficult and expensive to produce. Recently, we've had to sit through a pretty tough correction on the commodity names. Stocks in these sectors have sold off in a big way this summer, as I've noted. Based purely on fundamentals, though, these stocks haven't looked this cheap in years.

But short term, such drawdowns are common on the way to eventual higher prices. Grantham, too, says as much:

'The prices of commodities are likely to crack short term, but this will be just a tease. In the next decades, the prices of all future raw materials will be priced as just what they are: irreplaceable. Oil, for example, will never again be priced on the marginal cost of pumping a marginal barrel from some giant Saudi oil field, as has been the practice for most of the last 100 years of oil production. Real cost is always replacement cost, and oil, a precious feedstock for chemicals and fertilizers, simply cannot be replaced.'

I don't take as hard a plumb line as old Grantham does. I believe there is, even now, lots of room for innovation and replacement. Oil, for example, is replaceable in a broad sense. We can get energy from a broad array of sources. But it's not an easy or painless transition.

Slowing economic growth is the bigger issue. That's problematic for most commodities, short term. The market, though, is probably punishing the commodity companies too severely. That creates some interesting opportunities.

You can more easily pick up stocks trading for discounts to readily ascertainable net asset values now than anytime in the last five years, in my view. It doesn't mean making money in commodities is a lock or that it will be easy. Lots can go wrong with individual companies, and the drawdowns will probably be more than most investors can stomach. But longer term, looking out a few years, I think an investor will be happy with the portfolio assembled in the doubtful summer days of 2008.

Regards,

Chris Mayer

for The Daily Reckoning Australia

• Oil Prices Under $70
• Fall in Commodity Prices Will Reduce Inflationary Forces
• Commodity Inflation Causes Consumers to Cut Back on Spending
• Water Usage by Big Companies
• Who’s Afraid of a Financial Meltdown?

In one of these adventures, Tintin discovers oil on old American Indian lands. In a series of panels, a little construction boom transforms a wilderness into a busy city in a matter of hours. It's funny, but it also makes a point: After you discover oil, there is a whole lot that comes after that. The infrastructure of the oil business, you might say. I was thinking of Tintin after reading more about Brazil's big oil discoveries.

You've probably heard about Brazil's Tupi and Carioca, which may be the two biggest oil fields discovered in the last 30 years.

The Tupi field may hold 8 billion barrels of oil. If true, only the 15 billion-barrel Kashagan field in Kazakhstan, discovered in 2000, is larger. Tupi, though, may be small potatoes next to Carioca. This latter field may hold 33 billion barrels of oil. Again, if true, Carioca would be the third biggest oil discovery in history, behind only the mammoth Ghawar in Saudi Arabia and the Burgan in Kuwait. Brazil has another field it is assessing now, called Jupiter, which could be of the same scale as Tupi

What makes these discoveries particularly remarkable, in addition to their size, is where they are. They lie underwater, hundreds of miles off the coast of Brazil. Call it "blue water energy."

Tupi's oil, for instance, is 7,000 feet underwater and beneath another 7,000 feet of rock, sand and salt. It costs about $240 million just to drill the well there, which is like paying a big cover charge to hear a band you may or may not be happy with. Who knows how many more hundreds of millions it could take to get the oil out and to market?

One thing is for sure. Petrobras, the Brazilian oil company that discovered the oil, will spend a lot of money trying. Already, Petrobras has plans to spend more than $20 billion for marine support vessels and offshore drilling equipment. Those are big numbers, especially when you consider how tight the market already is for these things - not to mention the shortage of men and material to make more.

For perspective, consider that Petrobras has already leased nearly 80% of the world's deep-water drilling vessels. It will certainly try to lock up more rigs and vessels. But so is the whole industry, which is why offshore drilling companies are making money hand over fist like rose sellers on Valentine's Day.

It's not just in Brazilian waters that big prizes lurk. There are meaningful discoveries of oil and gas in the South China Sea, off the west coast of Africa and even in the waters off Trinidad and in many more wet places. Soon we could be poking around for oil beneath the Arctic seabed.

We'll need lots of subsea wells and platforms and other goodies to put out there in those watery plains. Just consider the pipelines alone. We'll need miles and miles of offshore pipelines to bring the oil to market. See the next chart, which shows the miles of pipeline needed by region.

According to Quest Offshore, between 2007-2011, the industry will have laid down 35,000 miles of pipeline. That's a lot of steel. And a lot of pipelay barges to do the work. And crews. It's a demand that should continue for years to come, even if the oil price comes down.

That's only part of the story, though. Here's the other: the existing miles of pipelines that are getting old. This is a familiar theme in our pages. We've often talked about the creaky infrastructure surrounding everything from roads and bridges to water and power supply. Matt Simmons, the oft-quoted energy analyst, likes to say, "Rust never sleeps."

The problem is particularly acute in seawater. It's more troublesome because you can't see it. Such infrastructure requires a lot of maintenance, which is not cheap. On the heels of two decades of low oil prices, much of the industry deferred a lot of maintenance. This problem extends beyond just the offshore oil and gas business.

The whole oil and gas infrastructure is a "vast spider web of steel." There are over 335,000 miles of pipelines in the U.S. alone.

There over hundreds of refineries in the world, as well as thousands of tank farms, gas stations and oil and gas wells. Simmons estimates that 90% of our offshore drilling rigs are too old, pushing the limits of what we know they can do. The average age of the world's offshore jackup fleet - over 400 rigs - is over 24 years. Our experience running them past 25 years is limited. Plus, newer deepwater projects are pushing the limits of how deep we can go, putting bigger strains on everything.

As Simmons says: "The entire value chain is built of steel. Steel begins to corrode the day it is cast."

The risk of failure - of leaks or breakages - is high. "If the world wants to continue using energy, its assets need to be rebuilt. Simple law of nature," Simmons says. "The construction job will rival the combination of building the World War II war machine, the Marshall Plan rebuilding of Europe and the post-World War II Interstate Highway System."

Simmons gives us one example, just a snippet of the infrastructure the industry is building. It is a $1.5 trillion energy project in the Middle East - Shell's massive gas-to-liquids plant in Qatar. It is as large as 450 football fields. It will require 300,000 tons of steel and employ 35,000 workers. All the while, the prices of steel, cement, copper, etc., all continue to rise. People, too, are hard to find, like parking spaces in Manhattan. "We let Nintendo work stations replace skilled oil workers," Simmons says.

It's a massive opportunity. The offshore drilling boom, and Brazil's offshore scores, only adds to the urgency of it all. I'm looking now at some of the companies that will participate in the big offshore infrastructure build-out. They also benefit from replacement work, too.

If Herge, the artist behind the Tintin series, were alive today, he wouldn't be surprised to see the rush of infrastructure that follows big oil discoveries. Some things never change. He probably would be surprised, though, to hear about oil fields deep under the world's big blue seas.

Sometimes you can buy assets in the stock market for cheaper than what it would cost you to get those same assets in the private market. Taking advantage of the gaps between the two is what investing like a dealmaker is all about. Such a gap, it seems, has opened up in the mining sector.

I think the gap exists because people in the mining business understand two things that stock market investors have yet to fully grasp. First, there is a growing scarcity of high-quality mining assets. Second, there is a shortage of skilled workers. Simmons calls it a "blue-collar boom in mining." So stock prices don't yet fully reflect these realities, and prices are cheaper than prices miners get when they buy assets from each other - or start them up from scratch.

First, let's size up the scarcity of high-quality mining assets, which has led to something of a race to lock them down. For evidence of that, we need look no further than the merger-and-acquisition market. For the first five months of the year, the announced mining takeovers tripled compared with a year ago. The total, about $200 billion in deals, puts mining mergers at the top of the M&A list for the first time since Bloomberg began compiling the numbers, in 1998. Over the prior two years, financial services companies have led the pack.

This feat is even more impressive when you consider the storm in which this financial torch has passed - amid a U.S. recession, growing inflation and an unfolding credit crisis. Global M&A overall is down 37%. Yet there is the mining industry atop the dealmakers' pile, grinning ear to ear and still flush with cash for even more and bigger deals. The world's biggest mining transaction ever would be BHP Billiton's $147 billion bid for Rio Tinto. Transactions this size would have been unimaginable even five years ago.

What this means, in my view, is that mining companies think it is cheaper to buy mining stocks than it is to open new mines. It's pretty simple. If you can buy eggs for $1 or raise your own for $3, you buy eggs all day long. New mines are hard to bring online. And it takes a lot of time. As a Morgan Stanley adviser recently put it, "If companies want to grow, they can either find something that might take 10 years to develop or buy something," he said. Even so, exploration is up, as well.

There is a lot of risk with new mines, too. Especially since many of the new sources of mines are in politically unstable parts of the world, like Africa, or are difficult and expensive to mine. What new deposits have been found also tend to have lower grades. That means the resource isn't as concentrated and there is more filler to process to get to the good stuff, be it copper, zinc, iron ore or what-have-you. Repeatedly, too, I hear mining companies warn about rising costs - for labor, equipment, energy and transportation.

The newer twist to the metals story is the power supply problems of many countries - South Africa, Chile, China and others - all important producers. Years of underinvestment in power supply - an issue I've written to you about before - is a global problem. And you can't fix it by flicking on a switch. It takes years to build power plants and add capacity.

South Africa is a particularly egregious case of power shortages. The effect on production is devastating. In the first quarter, mining output fell 22%, to its lowest level in 40 years. Mining companies in South Africa face the risk of repeated power outages and/or forced reductions.

Chile is suffering from severe power shortages, too. It depends on Argentina and Bolivia for natural gas. As the latter two countries consume more natural gas, they export less to Chile. Chile's water levels are also 40% lower than a year ago. Since Chile depends on hydroelectric power, this is a big problem. Electricity costs are skyrocketing in Chile. As it makes about 35% of the world's copper, its ability to expand or even maintain that production in the face of power shortages is in doubt.

These are just two examples, but there are certainly many more. Another factor holding back new supply and making existing mining operations so valuable is the lack of skilled people. Companies doing everything from mining coal to operating offshore drilling rigs all note the big challenge in finding enough qualified people.

The traditional skills are in short supply - people who can run a machine shop or a mining operation, for example. These skills are also not easily acquired. Yet a wide gulf exists between what these people make and what the guy running a mortgage trading desk on Wall Street makes.

As Michael Aronstein, a longtime money manager and strategist, recently put it:

"The relative compensation [difference] between somebody who is sitting on a derivatives desk and a guy who actually can diagnose and repair a locomotive has probably reached its millennial extreme... But that's going to change. I think we'll see the narrowing of all these spreads, a process that started at the lows in '02."

Add all this up - the hot M&A market, the power supply problems, worker shortages and more - and the bottom line is that supply is having a hard time meeting demand.

And demand is there, fueled by booming economies in China, India and Russia. In fact, much of the M&A business comes from these three countries. They need new supplies of metals to keep up with demand at home. For example, Aluminum Corp. of China and Sinosteel have spent more than $16 billion buying mining assets across the globe. These companies are looking to secure raw materials such as coal and iron ore.

Mining stocks, not surprisingly, have done well over the past couple of years, even as the broader market has gone nowhere.

For example, S&P's Metals and Mining ETF, a decent proxy for mining stocks, has doubled over the past two years. The overall market has barely budged.

Yet the view from the ground, as the foregoing argues, seems to be that mining stocks may still be too cheap.

Chris Mayer
for The Daily Reckoning Australia

• Riding the Bear & Deep Drilling in Australia
• Australian Iron Ore Shares on China’s Menu
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• Why an Energy Crunch Could Lead to Booming Profits in “Solid Electricity”
• Chinese Steel Price to Rise in Wake of Coal and Iron Price Hike

Laughner makes a wager with Elliott that will change the face of St. Petersburg forever...

The bet is this: If Walter Hagan can drive three golf balls off the face of Laughner's pocket watch without damaging it, Laughner will buy the 12-acre site across the street and build a resort there.

I still have a hard time imagining it, but they place the pocket watch out on the lawn somewhere.

Hagan succeeds, bouncing golf balls off the face of the watch, but never breaking it. Moments later, the men draw up a contract on a brown paper bag for the purchase of a 12-acre site that would open two years later as the Vinoy Park Hotel.

The story that follows is historical, but it illustrates how the ebb and flow of markets never cease. It truly speaks to President Truman's old line: "The only thing new in the world is the history you don't know."

The Vinoy opened in the sun-drenched opulence of the Roaring '20s. Optimism and opportunity abounded. Think we had a real estate bubble? They knew how to put on a good show back then too.

Board writes of a lot selling for $500 on Monday and $1,300 on Tuesday... only to flip yet again for $2,000 on Friday. I looked over black-and-white photos in Prudy Taylor Board's book on the history of the Vinoy. I saw some happy chaps in straw hats walking along a street near Tampa Bay. The caption actually read, "Smiling realtors." In the background, I could make out a placard that read: "Our flowers never die."

Bullish optimism at its best.

Signs of prosperity were everywhere. Building permits nearly tripled from 1920-1923. Bank deposits nearly tripled, too. All those real estate commissions, you see.

It wouldn't always be smiles and easy money. The hotel itself passed through many ups and downs throughout its history. In fact, within 20 years of its grand opening, the Vinoy was in trouble. The property actually held up well during the Great Depression. War was what finally did it in.

In 1942, the number of guests dropped by more than 50%. Profits were insufficient to cover maintenance expenses and the interest on the mortgage. By 1943, the Vinoy ceased operating as a resort. Instead, it became the local headquarters for the U.S. Army Air Corps. Laughner wrote to his shareholders in his annual report that the lease with the War Department "was made against the better judgment of the officers and directors of the company, and was done mainly as a contribution to the war effort."

Hard to imagine how different St. Pete must've looked in that dark year of 1943. Today, the palm trees still sway in the salty breezes off the bay. The sunshine beams as brightly as ever. But instead of chunky Americans with fanny packs wobbling around, there were GIs in combat fatigues marching in the parks.

By the end of 1944, the War Department canceled the lease. The good news was that the cash flow from the lease paid off all the debt on the property. The bad news was that the hotel took quite a beating and needed a major renovation.

Laughner sold the Vinoy in 1945 for $700,000. The saga continues, but I will stop here. I'll add only that the hotel had years of ups and downs (and another closure) left in its future. In a nutshell, the Vinoy story is part of the ebb and flow of markets. Few investments are good for all seasons. What worked for a while later stops working. And what seems cheap today becomes dear tomorrow. And back again.

It takes time to work these things out. The Vinoy was profitable for years, but trouble encountered in '42 essentially put it out of business by '43. It's always easier to destroy than to create. I stayed at the Vinoy recently for an investment conference in which I was a speaker. It's a grand old hotel, looking like a pink wedding cake, with its distinctive observation tower on top dominating the view on the waterfront.

The market is itself always writing a new story. It's hard to know sometimes where we are in the grand cycle of creation and destruction. But I think there are opportunities out there. It helps to have the kind of perspective that sees these long patterns. You come to appreciate that things take time. The recent credit crisis, for instance, will take some years to cycle through, just as it took years to wash out the effects of the 1920s speculative fervor. The banks and financials had a long run, both in the '20s and in the two decades before 2007.

Now comes the long period of convalescence. As the Vinoy history illustrates in a nutshell, prosperity comes and goes...and comes back again.

Chris Mayer
for The Daily Reckoning Australia

• 2008 Energy & Geology Tour
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• The Price of Gold Stocks in January 2012
• How Much it Really Cost to Bailout Fannie Mae and Freddie Mac

I hadn't seen Forstmann's name in years. He once lorded over one of the world's most famous private equity firms, Forstmann Little. For a time, it was, as the Journal notes, "the most successful private equity firm in the world, renowned for both its outsized returns and its caution." When things got a little too crazy, Forstmann chose not to play. For two years, he sat on $2 billion of uninvested funds. That's discipline you don't find often, in any era.

Ted Forstmann's caution saved his firm a lot of pain when the private equity market collapsed later. As the interview made plain, old Forstmann has that bad feeling again. "Buffett once told me," he said, "there are thee 'I's' in every cycle. The 'innovator,' that's the first 'I.' After the innovator comes the 'imitator.' And after the imitator in the cycle comes the 'idiot.'" We're in the idiot phase now, he says.

The idiot phase is when financial disasters strike. It's when the market reveals all the mistakes of the prior boom. It's when all these supposedly smart people running billion-dollar financial firms get their heads handed to them. "The creation of much too much money caused all of this excess," he says.

He would've found agreeable company in Vienna last week. The inaugural meeting of the Society for Austrian Economic Thought took place in the elegant salons of the Hotel Imperial. Here, a motley crew of entrepreneurs, philosophers and economists from all over the world met to discuss the world's troubles.

Austrian Economics, in case you don't know, refers to a school of thought originating largely in Vienna in the late 19th and early 20th centuries. Its great thinkers include Ludwig von Mises, for instance, who was actually born in what today is Ukraine. (As an aside, this sort of thing happened a lot, as the old Austro-Hungarian Empire's borders shifted in later years. Carl Menger, another founding Austrian thinker, was actually born in what is today Poland.)

Nowadays, the term "Austrian" in economic circles refers to anybody who holds to the theories of this group. The late Murray Rothbard, another famous practitioner and my favorite of the lot, was an American, for instance. I used to write for the Mises Institute and spent several years studying the Austrians. It's the economic framework I still use.

Anyway, I'm getting off track. One definite theme of the Society for Austrian Economic Thought meeting was the sick monetary systems of the world's economies. Dr. Andre Homberg, a friend, reader and the organizer of the event, laid it out as the 5 "D"s:

• Delusions - the notion that "the welfare state can provide everyone with a free lunch and a reliable pension and health care"
• Deficits and Debts - the accumulation of enormous fiscal imbalances, particularly in the public sector
• Dollars - the debasement of the dollar and reckless credit expansion
• Derivatives - Dr. Homberg pointed out that the notional value of derivatives topped $1,000 trillion, as per a recent IBS report. "This excessive leverage could implode anytime and make the U.S. subprime debacle look like a day at the beach," he said.

The end result of all this? Dr. Homberg happily explained: "The prices of everything that you must have will escalate at a speed that you will not believe. The prices of energy and fuel will continue to spiral higher. Food and water prices will accelerate upward and will result in a lower standard of living for yourself, your family and your loved ones."

It was a cheery afternoon at the Society for Austrian Economic Thought meeting, let me tell you. There's nothing quite like sitting under crystal chandeliers in a decadent 100-plus-year-old salon, spooning your weichsel-chily kaltschale mit gebratener Steingarnele - a sort of cold soup with sour cherries, chili and roasted prawn - while also matter-of-factly chatting about the end of the world as we know it.

There are plenty of reasons to feel gloomy. But even Dr. Homberg allowed that there would be great opportunities to make a lot of money. "At least for the ones that understand the forces involved," he added, "and have the courage to grab the opportunities that this process will create." Homberg is financially independent, in large part owing to his deft investing since 2000. I'm proud to count him as a loyal reader.

Going forward, I think it will be important to stick with real assets during these inflationary times. I've got two very interesting ideas I'm researching now. Both of them are quirky oddball opportunities rich in tangible inflation-beating assets.

Also, in thinking back to the "I" cycle, the idiots eventually make way for the innovators, the winners in the next up cycle. Among the innovators in this cycle will be those who solve or ease the high cost of oil.

I'm currently reading an interesting book, Engines That Move Markets by Alasdair Nairn. It's all about the history-making shifts of various innovations - canals, railroads, telephones, etc. In particular, the book focuses on their impacts on markets and investing. One early lesson is how people misread key events and missed great investments in the process.

One early quote stands out. The Quarterly Review in March 1825, noted: "What could be more palpably absurd than the prospect held of locomotives traveling twice as fast as stagecoaches?" Stagecoach and canal investors who doubted the power of the trains lost a lot of money. While the losers are easy to spot in retrospect, they're not usually so obvious to investors at the time, as The Quarterly Review comment shows.

As far as identifying the winners of this process, that was also not obvious. The railroads proved poor investments for most. By the mid-1870s, 40% of American railroad bonds were in default. The real winners were the people who enjoyed the lower cost of freight - traders and merchants expanding into new markets. So, too, the winners in this crisis might not be so obvious.

Chris Mayer
for The Daily Reckoning Australia

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As one water utility rep said: “As sulfuric acid prices increase, so do the products that contain this ingredient. The U.S. has also seen a shortage in supply of sulfuric acid. The U.S. has imported the majority of sulfuric acid from China in the past, but recently, China has slowed the trade of sulfuric acid to the U.S. because its own demand is greater than what China can produce for both the U.S. and itself.” In short, demand is swamping supply. Sulfuric acid prices in March hit a record high of $329 per ton, according to Purchasingdata.com, after trading at $90 per ton as recently as October. Sulfuric acid shortages?

Hmmm... Well, time to take a look at this, think I.

“Sulfuric acid is one of those unheralded lubricants that keep the gears of the industrial economy spinning,” says Chemical and Engineering News. “Although less in the limelight than petrochemicals such as ethylene or polyethylene, it is, in fact, the largest-volume chemical in the world.”

We use sulfuric acid in mining to extract copper, nickel and uranium. We use it in steel production and in making fertilizers. We use it to refine oil and to treat wastewater. It goes into the plastics we make, and a bunch of other things. The biofuel boom has kicked off a big increase in the demand for sulfuric acid. In fact, some 60% of the sulfuric acid ends up in agriculture. The surge in ethanol production is a doublewhammy on sulfuric acid. First, all that corn needs fertilizers. And second, the ethanol facilities themselves also use sulfuric acid in their own processing. A typical ethanol facility requires 2,000 4,000 tons of sulfuric acid per year.

Then there is that great demand pull from China and India. Traditionally, these two countries produced what they needed. But now their own rapid industrialization has turned the tables. They’ve switched from being exporters to importers of sulfuric acid.

The boom in metals such as copper and nickel also drives the demand for sulfuric acid. Smelting operations typically throw off sulfuric acid as a byproduct. But even here, metals companies need more than they can produce.

Supply is also tight. As with many commodities, there was a long period when sulfuric acid prices went nowhere. This led to a decrease in production facilities. I found one example of a closure as late as November 2006, when GenTek shut down a sulfuric acid facility due to “adverse market conditions.”

There also seems to be little new capacity on tap. Industrial Info Resources, in Sugar Land, Texas, tracks this sort of thing. According to IIR, of the $89 million invested in sulfuric projects in the U.S. in 2007, most of the funds went toward planned maintenance, rather than expanded capacity. It also turns out that not only is supply tight, but there are all kinds of transportation bottlenecks in delivery – such as a shortage of rail cars. Key Compton, president of a sulfuric acid producer in Texas, said toward the end of last year that customers soon “may be paying prices for sulfuric acid that they’ve never seen before.”

So how can you play it? Well, there are a number of producers of sulfuric acid. Most are big chemical companies that you wouldn’t own because you want exposure to sulfuric acid. Owning them is like buying Home Depot because you think it sells a great lawn mower. The only “pure play” on the idea I could find is a little company called Chemtrade Logistics in Canada, one of the world’s largest suppliers of sulfuric acid. It trades in Toronto under the ticker symbol CHE. You can find a quote on Yahoo using CHE-UN.TO.

It’s a Canadian income trust and pays a monthly distribution of about 10 cents. Based on a price of $11.44, that’s a yield of 10.5%. The company appears to be in good financial condition and throws off a lot of cash flow, much of which investors pocket in the distribution. It’s not a sexy business, but it looks like an interesting play on what seems to be at least a temporary scarcity of a key chemical. Chemtrade is not a one-trick pony. It also produces liquid sulfur dioxide and sodium hydrosulfite. The company also sells into a wide range of end markets, so you’re not tied to the fortunes of any single sector. The company has an excellent presentation of its business, complete with slides, on its Web site.

Since I have not completed my research on either Chemtrade or the overall sulfuric acid industry, I do not recommend Chemtrade. But since this sector is red-hot at the moment and appealing on many levels, I decided to share the insights I’ve gleaned so far. I plan to do more research on the idea. I would advise all investors do the same.

Chris Mayer
for The Daily Reckoning Australia

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I don’t put a lot of faith in macro predictions – as no one can predict the future. But you can study track records. You can look at history. History reveals some interesting clues about what the future may hold.

The quick take? It doesn’t look like the party is over just yet. But even if it is, past peaks in oil give us clues. When you dig a little deeper into those relationships, you find a great road map for making money.

If you look at the price of oil, you find something interesting. Since January 2001, you can explain the move in the price of oil largely as a function of increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply, as this next chart shows:

Basically, $100 per barrel oil is what we would expect to see, given this relationship between the oil price and money supply. Given that we are still in the midst of a credit crisis of sorts, it seems unlikely the Fed will tighten money in any way at all. That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms.

The other thing to remember – and people forget this by worrying excessively about a U.S. recession – is that the story of oil is no longer a U.S.-centric story. You’ve surely heard about how the rapid growth in China and other emerging markets drives oil demand. Well, it’s good to keep that in mind.

China and India are only beginning to consume oil at any meaningful level. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century. But look, we don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. The way I look at it is this: What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.

Mark Mobius, in a column he wrote for the Financial Times , points out that the fundamentals in emerging markets are better than they’ve been in a long time. The future looks bright. “The Chinese and Indian consumers are the world’s new consumers and they, along with consumers in Brazil, Russia, Turkey, the United Arab Emirates, Egypt, Mexico, Poland and many other emerging markets, are becoming an important force in global markets.”

All that bodes well for oil demand. But I haven’t really gotten to the best parts yet...

Even if oil has already peaked, that doesn’t mean oil is headed back to $40 per barrel or lower. In fact, if this oil boom follows history at all, we’re looking at years of oil prices right around $100 per barrel.

It is important to realize that in no prior oil boom did the price of oil retreat rapidly toward where it was before the boom began. In each case, the price of oil stayed up for years after the peak. That ought to give you some comfort about our current situation. The price of oil should stay up here for years. If his estimate of 2013 is at all close, we’ve got plenty of time left to make a lot of money.

So where do you go to make that money?

The one obvious place people will automatically look to is to own oil and gas producers. That’s not a bad idea at all. But I’ve got another angle here. The next two charts are amazing. They show you the capital and exploration spending of both Exxon and Chevron from 1928-2007. They show spending bottoms in 1948 and 1974. After each bottom, there was a long run of spending. Spending peaked nine years after 1948. Spending peaked seven years after 1974. If 2005 proves to be the bottom on capital spending – and it seems so, since Exxon only recently announced it would increase its capital spending to $25-30 billion over the next few years, a 25% increase -we won’t see capital spending peak until 2012 at the earliest.

Now, why is this important? Think about what the oil companies spend money on. Where do they go shopping? They go shopping at the oil field services and equipment companies.

So that is where we want to be. Because even if oil has peaked, we’re still looking at years of strong spending by the oil companies. You want to have some exposure to the receiving end of all that spending. Such companies will mint cash. And they give you a little different payoff than owning a straight producer. It can sometimes be better to own the picks and shovels. You don’t actually own or produce the oil or gas, but your equipment is vital to those that do.

Newmont Mining, the big gold producer, is an example of a producer that has profoundly disappointed investors amid what may be the greatest gold bull market in history. Newmont’s costs rose so fast and so much that it never really enjoyed (at least not so far) the higher price in gold. But if you were in some mining equipment manufacturer, you got paid.

So the key takeaways here are these: The price of oil has room to run yet, in part because of the growth in money supply and in part because of pressing international demand. Secondly, even if we already saw oil peak, history says that prices won’t retreat by much over the next several years. And finally, the capital spending boom by the big oil companies is just getting started, which is great news for investors in oil field services companies.

The big idea here is well servicing...

It’s really a great and kind of sneaky way to play an undeniable trend in oil and gas: the depletion of older wells past their peak production. Well servicing helps you get a little extra out of every well. A well service rig is the workhorse that does the well servicing.

Here’s the life cycle of a typical oil well...

Every time somebody drills a well, it creates an annuity for the well service industry. That’s because the maintenance work follows the life span of a typical well. If you don’t service your well, your production rate declines much more rapidly. So if you want to stay in business, you keep servicing your existing wells. You may not drill new ones, but you keep what you have.

The second key to remember is this: The more mature the oil or gas field, the more well servicing work needed. Well servicing doesn’t typically have the same ups and downs as exploration. Well service fleets provide much more durable and predictable cash flows. I expect all that money the big majors spend on exploration will lead to a lot of new drills and a long tail of new business for well servicing companies.

Chris Mayer
for The Daily Reckoning Australia

• Oil Has Hit a New Record High
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• How Much Worse Can the Stock Market Get? A Lot Worse

I headed up to Manhattan recently with Dan Amoss. We met in Baltimore and caught a train north to attend the 2008 Columbia Investment Management Conference. There, an all-star cast of successful investors assembled to speak about this crazy craft we all find irresistible - and to offer some ideas.

Richard Pzena's opening talk was the most interesting to me. In part, because what he had to say was timely, yet full of timeless wisdom. His title: "Surviving the Cycles of Investing."

Good topic, considering the nasty spill the market took to open 2008. And with the cloud of recession thick in the air, investors seem awfully full of worry. Pzena had some soothing words.

Pzena says there were only eight years in the last 40 when you would've been down 20% using a simple value approach. (For purposes of his discussion, he used a simple value strategy of buying stocks only in the lowest quartile of the market ranked by price to book. But the point applies to all us cost-conscious investors.) We just suffered through one of them - with the S&P 500 and Dow Jones industrial average dropping 20% from top to trough.

One obvious conclusion from looking at the data, if you are a value-minded sort like me, is to shrug off the bad times and say, "Who cares?" It's no accident that most people can name the big bottoms (1974, 1982, 1990...). It's because they are relatively infrequent. Plus, the long-term return on value stocks over the full 40 years more than made up for them.

"The problem is," as Pzena says, "when you're losing 20%, it doesn't feel very good." You start to question what you're doing. You start to wonder, Can I avoid those 20% down periods? Should I avoid them?"

To the first, Pzena rolls out the shopworn, but tested wisdom that trying to predict exactly when these downdrafts will happen is impossible. And selling after the market has already taken its tumble is a sure loser.

Therefore, "riding through them is the smarter thing to do," he advises. "The quest to get the timing right is what trips up most investors," Pzena says. The best investors buy value when it's offered and don't worry about timing the market or fretting about recessions.

Many investors think that with a recession looming, or already here, it may be best to sit on the sidelines. One problem with this is that economic health is extremely difficult to gauge. It's not as if you can slap on a pair of latex gloves and say to the economy, "Turn left and cough." It's possible we won't know we were in a recession for sure until it's over.

But even so, recessions tend to be good times for investors who buy value. Pzena had examples. From January-December 1969, we had a momentum market. A momentum market is one in which people focus on getting the next piece of information. Quarterly earnings reports and recent price action dominate. This kind of market can be difficult for value guys, who think longer term.

However, Pzena points out that a recession began in December 1969 and lasted through January 1971. Stocks flipped to a value market from January 1971 - August 1977. The timing of that flip was coincident with the beginning of a recession. The same holds true for all recession cycles of the last 40 years, according to Pzena.

How do you explain it? Pzena asks: "As people worry about a recession, what do they do? They put their money in what's working." That means momentum stocks, or stocks that have gone up. They worry about what the recession will impact. This is where we are now.

The thing is, as Pzena discussed, recessions bode well for investors looking to pick up bargains. As you get into the recession, though, people start to think about valuation again. Momentum stuff starts to not make sense.

Are we in a recession now? Pzena didn't hesitate to make a guess. "Anecdotally, yes," opined Pzena. "Toward the end of 2007, we had, at least, a major slowdown." The market is, once again, offering attractive bargains.

Pzena points to price-to-book indicators. Right before 2007, there was a narrow gap between the lowest quartile by price to book and the S&P 500. Meaning, the cheapest price-to-book stocks were trading at a small discount compared with the rest of the market. Now that gap has reversed. The gap is now wide, Pzena says.

So parts of the market look attractive again. But what about those ugly headlines, you say? "This is why value works," Pzena says. "Because when you see your list, you want to throw up." It's what gets you the pricing you want.

The savvy group at the conference was excited about the opportunities the market has given them. They are not alone. Several great funds long closed to investors are now open again for new investors. These include the Tweedy Browne Global Value Fund, the Longleaf Partners Fund, the First Eagle Global and Overseas funds, the Third Avenue International Value Fund and the First Pacific Crescent Fund. They're open because they have more ideas than they have money. They want to buy.

That's a useful list if you're looking for some excellent funds. I'd give these funds a look, because they don't tend to stay open for long. The opening of these funds, captained by investors with long track records of success, is also an indicator that the smart money is buying.

Regards,

Chris Mayer
for The Daily Reckoning

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This process of integration has been going on, in fits and starts, for centuries. Perhaps the most famous and influential trade routes in history were those of the old Silk Road. Now unfolding before our eyes is a sort of new Silk Road. Trade surges across the lands of Eurasia and the Middle East. This flow of trade creates important new opportunities for investors.

But before I get into how this is happening today and how you can take advantage of it, let's look over our shoulders into the slipstream of markets past. Certainly, it's not usual practice among investors to look to learn something from a man who has been dead for over 600 years. But as Charlie Munger, the witty vice chairman at Berkshire Hathaway, likes to point out, there are billion-dollar answers buried in history books.

In this case, the story of Ibn Battuta is one that informs. He led a truly amazing life. His tale is wonderfully retold in Ross Dunn's book The Adventures of Ibn Battuta: A Muslim Traveler of the 14th Century.

Ibn Battuta's story begins in 1325, when at the age of 21, he left his home in Tangier, Morocco. Battuta was off to make the pilgrimage to Mecca. But his journey would prove unlike any other.

Ibn Battuta did not see Tangier again until he was 45 years old. Until then, he chose to wander the globe. Battuta crossed over 40 modern countries and covered over 70,000 miles. He became one of the greatest travelers the world has ever seen. He left behind a travelogue of his life's journeys filled with details on the places, people and politics of medieval Eurasia and North Africa.

His adventures reveal, as Dunn writes, "the formation of dense networks of communication and exchange." These networks "linked in one way or another nearly everyone in the hemisphere with nearly everyone else.

"From Ibn Battuta," Dunn continues, "we discover webs of interconnection that stretched from Spain to China, and from Kazakhstan to Tanzania." Even in the 14th century, an event in one part of Eurasia or Africa might affect places thousands of miles away.

In reading the book, this multinational aspect of Ibn Battuta's world really fascinated me. The Mongol states allowed merchants to travel freely in their realms, regardless of religion or origin. This led to the creation of a worldly, prosperous and traveling elite, transmitting ideas as well as goods across countries. For these traders, the focal point was not countries, but cities. They were also, in Dunn's words, "free from the grosser varieties of parochial bigotry." It is one reason why some historians say that during the medieval period, the Islamic cultures came closer than anyone else in creating a common social order.

Needless to say, it was a time of great growth and trade. Households enjoyed porcelain from China, pottery from South Arabia, gold and ivory from Africa, animal skins from India, rice from the Ganges Delta and much more. Ships sailed the Volga, their holds filled with grain from the steppes, timber from the mountains of Crimea and furs from Russia and Siberia, along with salt, wax and honey - all carried by a hodgepodge of peoples: Egyptian traders, Turkish nomads, Greeks, Circassians, Alans... even Florentines and Venetians.

China, too, played an important role. The huge Chinese junks, the ocean liners of the day, expanded trade across the Chinese seas to the Bay of Bengal. Populations soared. Cities multiplied, along with a vast network of canals and roads.

That, to me, is a beautiful portrait. I think the new Silk Road is a revival of that kind of period. It's a kind of integrated economic bloc that stretches from the Mediterranean to the Sea of Japan.

Just look at the booming trade between China and the Middle East. It was a trickle of only $6 billion in 1995. By 2006, that number swelled to $69 billion. The numbers for 2007 are not in as I write these words, but my guess is we're approaching $100 billion by now.

The story gets more powerful as you dig. Bloodless statistics take you only so far. But look at what companies are doing. Sinopec, a Chinese company, invested $100 billion in an energy project in Iran. That's no two-week trade. That's a marriage. Or look at Damac Holding, one of the largest developers in Dubai. It recently put $2.7 billion in a real estate complex in Tianjin, China. These things would have been unthinkable even 10 years ago.

The possibilities of today's new Silk Road are sometimes mind-boggling. Consider this: There is huge demand for an overland route from Europe to Asia. Imagine it: a steady stream of trucks leaving the river towns of the Yangtze Delta, bound for the trading cities of Eastern Europe.

It's not far-fetched. China is constructing 12 highways to link its western Xinjiang province with Central Asia, which could eventually link up with Europe. China plans to nearly double its highway system, from 28,000 miles to 53,000 miles by 2010 - that's only two years away!

The ports, too, are busy along the new Silk Road. Global Insight says container shipping volumes between Asia and Europe grew 17% in 2007. Total volume was double the 2003 level. And the ships used today are, on average, 2? times the size of the largest ship a decade ago.

Many ports can barely handle the volume. "In about six years, the capacity of India's ports needs to double," says Amit Desai, executive director of Mundra Port in India. Mundra Port is the largest publicly owned port operator in India. Its shares doubled on its first day of trading in Mumbai. The offering was 100 times oversubscribed. That's like having a line of people out the door waiting to buy your stock. It's as if you were cooking the hottest tandoori this side of the Ganges.

Shipping companies are actively pursuing new routes. Perhaps through the ice-free Arctic passages, as I've written to you about before. Right now, Singapore is still king. It is the world's largest container port hub. Singapore, sitting in the Strait of Malacca, is the hinge that links Asia's shipping lanes with Europe. (I'd love to get to Singapore sometime in 2008.) Some of the excess may bleed into airfreight. China alone plans 48 new airports over the next decade, to add to its current total of 130. It's been called the "Silk Road in the sky."

It's not all peaches and cream, of course. There is all of that pollution and environmental destruction, for one thing. It's a concealed debt, to borrow author James Kynge's expression. The region will have to deal with that eventually. Even in the cleanup, there will be opportunity for investors. Of greater concern are rising social tensions and political minefields. Mankind has often proved adept at getting in its own way.

Still, as an investor, I want to be a part of this new Silk Road. In my last two letters to you, I've recommended stocks in businesses that have no U.S. operations. This is not an accident. These companies service markets right in the heart of the new Silk Road. In addition to these, companies that own the commodities the new Silk Road needs should prosper. It will need lots of copper, iron ore, nickel... as well as oil, coal, natural gas and much more, including clean water.

Regards,

Chris Mayer
for The Daily Reckoning Australia

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In Delhi, I walked through the old market of Chandni Chowk, which I had read so much about. Once it was a destination for camel trains from Kashgar, traders carrying jasper and sardonyx, cinnamon logs from Madagascar and much more. Today, it's still a busy market, lined with shops where you can buy just about anything.

I feel I got a good taste of what India's all about - our itinerary was so packed it would take pages to tell you everything I saw and did. Of course, I also met with money managers and private equity firms operating in India. That's how I learned some interesting - and surprising - things about investing in India.

For example, did you realize that India suffers from an acute shortage of hotels?

Our group stayed at wonderful hotels during our trip, such as the Rambagh Palace in Jaipur and the Oberoi Amarvilas in Agra. Still, the room rates were so out of whack with everything else. The supply-demand balance is so tight that the average room rates in some cities have reached the $400 level. Overall, room rates in India are higher than current average room rates for New York, London and Singapore. It was one of the most stunning economic facts of the trip. That $400 goes far in India, which is not true of the dollar in too many places of the world these days.

Hard to imagine paying that much for a hotel room in India, isn't it? But it does make sense...the entire country of India has fewer hotel rooms than the city of Orlando!

This is why we had to book rooms nearly two years in advance to get the hotels we wanted. It's not a situation that's going to get a lot better anytime soon. The number of tourists visiting India will likely increase 10% per year through 2012, according to the World Travel & Tourism Council. That would make India one of the fastest-growing tourist destinations in the world, to say nothing about the business travelers. Some companies have gone ahead and put up their own hotels on land they already own. They run these hotels for employees and business visitors. They can't afford to sit around and wait for government approvals to build new hotels.

So opportunity No. 1 for investing in India would be to develop and run hotels in India. Unfortunately, there is no way for you as an investor in publicly traded stocks to do that. We heard a couple of developers talk about hotel and resort projects they have on tap. These were attractive, I thought, promising 30-40% annual rates of return on modest assumptions for hotel occupancy and room rates. They also have recent success stories, such as a 250% gain on a project started in January 2006. The people on the trip with me will have a shot at investing directly in these projects if they choose, but for purposes of this letter, it's a tough insight to act on.

The real estate market is hot in India all around, and it's attracting some mega money flows. Goldman Sachs calls India "the most exciting real estate market in Asia." Overseas funds have raised $2.4 billion through September for investing in India. There's another $1 billon ready to come on in the last quarter of the year. According to Private Equity Intelligence, investors will pour another $4-6 billion in 2008 into property funds with an Indian focus. All told, the market could grow from $15 billion to $90 billion by 2015. Kind of mind-boggling, isn't it?

Even something like office space is in short supply. Commercial property space has doubled from 2002. Estimates call for another 150 million square feet over the next five years, and 500-650 million square feet over the next 10 years. That's a lot of real estate.

In addition to real estate, there are many parts of the domestic economy that are attractive for those interested in investing in India. Unlike China and the Southeast Asian economies, India's economy is not so dependent on exports.

The explosive growth in India's economy is mainly a grass-roots-driven trend. There are about 200 million participating consumers in India, with tens of millions added annually. Needs are everywhere - for power, water, basic infrastructure.

Unfortunately, yet again, many of these opportunities are off-limits to public equity investors. This was a common frustration as I traveled in India. Investing in India is just not that easy. Foreigners cannot own Indian shares directly. Only institutional investors can. You can participate directly in certain projects, as I mentioned above, but that's not helpful for our purposes here.

The easy way to invest in India is to buy the polite merchandise. That is, the ready-made off-the-shelf-goods on the NYSE - listed Indian companies such as Tata Motors or Sterlite Industries, or even an Indian mutual fund (the India Fund is a favorite). The problem is that the Indian stock market just went bananas while I was there. On Oct. 29, the Sensex - the common benchmark for the Indian stock market - topped 20,000 briefly. Over one 10-day stretch, the market rose 14%. For perspective, the Sensex was only a little above 12,000 earlier in the year. Some sectors were even hotter. Between Sept. 18-Oct. 11, Bombay's realty index soared 27%.

(This is not unusual among emerging markets lately. China's stock market doubled already this year. Polish, Brazilian and Pakistani markets are all up over 40%. It's remarkable how steep the climbs have been.)

I can't put money into a market running that hot. Especially given India's penchant (as with most emerging markets) for nasty corrections that lop off one-quarter or one-third of value in months. I'm inclined to wait. Certainly, it's not in my best interest to go on expensive trips on my publisher's dime and come back empty-handed as far as specific investment ideas go, but that's where I am.

Therefore, while I remain bullish on India's long-term prospects, I'm a bit fearful about investing in India in the short term. I realize that the crack in the Sensex might not come, in which case, I'll have missed out on a chance for good gains. But that's OK. I always invest by first thinking about what I can lose. The gains will come. That approach works for me, and I'll stick with that.

Chris Mayer
for The Daily Reckoning Australia

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