But then everything is up this year, at least since the markets started buzzing in March. The S&P 500 is up over 64% from its March 6th low. That's an exceptional bounce even by dead cat standards. With negative real interest rates in the States, owning cash is losing money. Hence the rise in stocks.

Yes, rising U.S. stock prices could have something to do with a fictitious recovery. But with labour markets weak and housing getting worse (rising foreclosures) we're not counting on it. So we'll stick with the credit-fuelled stock rally.

It's gotten so surreal on markets that yields on some three-month Treasury bills briefly dipped below zero in trading action. As it is, the yields on Treasury bills are hovering just above zero. Bloomberg reports that, "For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate."

Why would investors lend their money to the American government for nothing? And why would they continue buying stocks at the same time? Ponder....and discuss.

We think the answer is that the Fed's policy has forced global investor into an either/or situation. You either get out of cash and into equities to beat inflation. Or, you are so terrified of buying equities divorced from normal valuations that you prefer capital preservation in the form of Treasuries, even if you're losing out to inflation there as well. At least you get your money back at a non-inflation adjusted par value three months later.

Or, you could buy assets like gold, oil, silver, and copper.

Why the sudden move in markets yesterday? It could be that Federal Reserve of St. Louis President James Bullard told markets the Fed should keep buying mortgage-backed securities after its self-imposed March deadline for exiting the market expires.

The Fed's plan to purchase $1.25 trillion mortgage debt and agency securities has effectively kept U.S. interest rates from creeping up. It's also kept the housing market afloat, although even at these levels you are not exactly seeing refinancing boom. But it's the prospect of more quantitative easing by the Fed that must have markets spooked about inflation.

Bullard said, that, "If the economy came in very weak, let's say, in 2010, weaker than expected, we would have the option of doing further quantitative easing." The Fed would do this through additional asset purchases, presumably with more, uh, "money" it created.

Bullard also said that, "If the economy came in stronger than expected and inflation expectations started to ratchet up a little bit we could maybe sell off some of these assets and remove some of the accommodation from our quantitative easing program."

The market must not have heard that second part. Or maybe it didn't believe it. Maybe it concluded that the Fed loading itself up with mortgage-backed securities is not a healthy expansion of the central bank's balance sheet. Maybe that's why the dollar fell and gold rose.

Hey it turns out that we were wrong and man-made global warming is real after all. A bunch of scientists have colluded to invent it by suppressing evidence that the earth is actually cooling. It turns out that empirical data do not support the agenda to expand government power and control over nearly aspect of our everyday lives.

How inconvenient!

You won't find the story of the leaked IPCC e-mails in too many main-stream press outlets. Most of the media is in collusion with governments to cram some sort of climate change carbon law down our throats. Publishing evidence that suggests there is still real scientific debate doesn't suit that agenda.

Before you send us e-mails condemning us to hell for hating the earth and clean air, let us make a small point. Of course the climate is changing. But - as these leaked e-mails show - the scientific community is not nearly as unanimous in its "interpretation" of what the climate data are showing as the political community would like you to believe.

Be sceptical. It works with investing. It works with politics. Any time a group of people tries to shout you down and make major changes to the law, you should be very concerned. The debate about how we inhabit our ecosystem is an important one. But it's obvious the science has been politicised.

And please don't write in saying that doing nothing is not an option. Doing nothing IS doing something. It means NOT doing something stupid until you have a fuller picture of what's going on. And there are still many in the scientific community who are modest enough to admit that the earth's climate is too complex a system to determine whether releasing carbon dioxide into the atmosphere is actually causing temperatures to rise today.

If you were even more sceptical, you might conclude that promoting global warming (or climate change) has become a lucrative industry for both scientists and failed U.S. presidential candidates with massive carbon foot prints. Both have a strong desire to tell other people how to live.

In any event, climate science is not our beat here. But the behaviour of hysterical crowds and how to survive it IS our beat. So have a look at the ClimateGate story in your spare time and let us know what you think. And in the mean time, keep an eye on your wallet and your mind on guard.

Dan Denning
for The Daily Reckoning Australia

• An Old Friend With a New Idea on Global Warming
• What Assets are Going to Beat Inflation in the Coming Ten Years?
• Quantitative Easing Explained
• 1 Out of 10 American Mortgages Are Owned by Other Countries
• U.S. Fed Now Accepts Credit Card Debt as Collateral

It takes water to produce energy and energy to produce clean water. That nexus creates a number of profit possibilities. Sometimes, they are not so obvious. But often, a company that possesses expertise in water treatment will possess a related expertise in the energy field. The connection between water and energy is at least as old as the process of pumping water into old oil fields to boost production.

But the connection between these two precious fluids is changing quite a bit.

Let's take a look at one of the less-obvious connections...

You may not realize this, but two-thirds of oil discovered stays in the ground. The average recovery rate is only about 35%. What if we could recover more of the oil we've already discovered?

If the recovery rate improved to 50%, the world's recoverable oil would increase by 1.2 trillion barrels. It would double today's proven reserves, says the IEA. That much oil makes even a cynical old oilman catch a gleam in his eye and starts his heart aflutter. Indeed, lots of big brains churn away at this problem day and night.

"It's the prize for the next half century," says Howard Mayson, vice president for technology at British oil giant BP, quoted in this morning's Wall Street Journal. BP relies heavily on enhanced-recovery methods. These methods aim to improve that oil recovery rate.

As The Wall Street Journal reports:

"Enhanced recovery is a lifeline for the biggest oil companies, such as Exxon Mobil Corp. and BP, which are under intense pressure from shareholders to keep ramping up production and gaining access to fresh reserves. But that's hard to do when the companies are shut out of the oil-rich Middle East and places like Russia. So they rely more and more on existing fields, some of which have been producing oil already for decades."

It is like squeezing a sponge ever tighter to extract the most of what you can get. The old method is to simply flood the reservoir with water. The idea is to create enough pressure to make it easier to pump the oil out. It is not very efficient, but it works for a time. It is also becoming a bigger problem to secure the water supply. That's why we see oil companies buying water rights out West. Currently, the shale oil plays consume a lot of water.

Instead of using water, some companies will pump the reservoir with carbon dioxide. Companies used to store carbon dioxide in old unused reservoirs. Using this method of enhanced oil recovery, they put that carbon dioxide to work. BP uses this method out in its Prudhoe Bay reservoir, to great effect. Recovery rates there are 60%. Now Prudhoe Bay, which people in the 1980s once thought would cease pumping oil in 30 years, looks to be good for another 50 years.

The WSJ describes another method BP uses: "flooding reservoirs with polymers that expand like popcorn when they come into contact with hot rocks, thus flushing more oil out of difficult-to-reach nooks."

The name of that polymer is BrightWater. One company has a patent on this material and makes it for a profit. That company is Nalco Holding (NLC:NYSE), a company I recommended several months ago to the subscribers of Capital & Crisis. BP uses BrightWater in Argentina and Pakistan. "BP says the additional oil the new technology will produce over the next 20 years is roughly equivalent to finding a major new field," reports the WSJ.

"Nalco," you say, "but isn't Nalco is one of the world's largest water purification companies for industrial companies?" This is what we mean by energy-water nexus. The two are related. And Nalco sits right in the middle of that nexus.

Last year, Nalco's energy services segment was a bright spot. Sales grew 17% organically for the year. In the fourth quarter, sales were up 23% despite the steep oil price decline. In that segment is Nalco's enhanced oil recovery (EOR) business.

CEO Erik Fyrwald commented on this business in a quarterly conference call. "We are in with a lot of oil companies explaining and talking to them about it," he says. "We believe as oil prices come back up, [EOR will be a] really big growth opportunity, just delayed for a period of time."

The delay stems from the fact that many oil companies slashed their exploration and production budgets last year, when oil and gas prices were falling. But it seems inevitable that as the big oil reservoirs dwindle, the EOR business will be big down the road. Of course, EOR is only one of the many valuable things Nalco does in the energy-water nexus. It is no wonder why Warren Buffett's Berkshire Hathaway is the biggest shareholder.

Nalco is a long-term buy.

Regards,

Chris Mayer
for The Daily Reckoning Australia

• A Hot Future for Geothermal
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• Unsustainable Energy Trends
• Price of Water Rises in China
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Oil did move up overnight in the futures market to US$71.94. And locally, there was more positive news for energy and energy stocks. Bloomberg reports that, "LNG sales from Australia's biggest resources project may reach A$300 billion over its first 20 years." It added that, "Chevron yesterday completed supply agreements with Tokyo Gas Co., Osaka Gas Co. and South Korea's GS Caltex Corp. that [Aussie Prime Minister Kevin] Rudd valued at A$70 billion. The Japanese companies have agreed to buy a combined 2.25 percent stake in Gorgon."

The Prime Minister would be keen to associate himself with the success of Gorgon. Who wouldn't? It's a big deal. It's also a dirsuptive deal.

Earlier in the week - prior to being struck down again with an intestinal virus - we reviewed the negative comments on unconventional LNG from Woodside Petroleum's Don Voelte. He pointed out that the capital spending and operating costs for the coal-seam-gas business were probably higher than people realised, and that there were real problems with higher carbon dioxide levels and other by-products from unconventional gas (compared to conventional off-shore LNG).

Voelte may be a bit frustrated that investors are taking a punt on the small companies in the LNG business that have yet to produce anything, instead of say, chucking some cash into his firm. After all, Woodside remains one of the best established LNG producing stocks in the world. That's why we featured it in Diggers and Drillers a few years ago.

But he was wrong to imply that unconventional LNG can't be economic or competitive. It can. An example is the production of unconventional reserves from the Barnett Shale formation in Texas over the last two years. Yes, it was capital intensive. But it - and other 'tight gas' projects - increased gas production in the U.S. over the last three years. That reversed a long period of stagnation, with natural gas production having peaked in the States in the early 1970s.

So the financial and business model for succeeding in the unconventional energy space is already there. For Australia, that makes the prospect for investors even more exciting. Not that it will be easy. But at least you know what you're looking for. You're looking for geographic regions that are highly prospective for either "tight gas" (natural gas stranded in semi-porous structures) or coal-seam-gas, most of which is being found in Queensland's Bowen and Surat Basins.

Once you find the companies that have the best prospects, you look for the companies that can produce those prospects at the lowest cost. You'd also look at the capital structure to make sure the firms can execute their projects without a lot of debt, and preferably with a cash cushion. You'd look for good managers too.

None of this still guarantees the company will succeed or the share price will rise. But if you want safer integrated energy plays, there are already plenty of those to choose from. And all those firms are valued on production and reserves, meaning that the upside (in terms of share price) is strictly correlated with rising oil prices.

The case with the unconventional energy plays is different. First, the big institutions aren't looking for these firms. They don't want to take a punt on unproven company in an unproven industry with high capital costs and high probability of failure. The advantage for finding the eventual winning firms goes to small investors simply because bigger investors can't be bothered to look until later, after the winners emerge (by which time the largest share price gains will have already occurred).

But the main advantage of looking at the smaller firms is that they are emerging as the disruptive technology firms of the energy sector. It is true that technology can increase production from oil and gas fields and help us find more oil and gas. We don't think this means that better technology means there is no oil crisis.

However the smaller, entrepreneurial companies are probably the most exciting energy stocks because their success is so unexpected. As Ingrid Campbell writes in "A overview of tight gas resources in Australia, "The defining feature of the history of tight gas exploration in North America has been the high level of scepticism by the major global oil and gas companies towards the commercialisation of this unconventional resource. It was, and is, the smaller independent explorers, who were motivated to develop the techniques and technology for extracting gas commercially from tight reservoirs."

Small companies with everything on the line had better be extremely motivated. If they aren't, they'll fail. And frankly, most of them do. But the ones that don't, well they often do very well indeed. And that alone is the best reason to keep looking at these stocks, as Kris Sayce has with his "thin air" plays at the Australian Small Cap Investigator.

Dan Denning
for The Daily Reckoning Australia

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You surely know that windmills don't turn when the wind doesn't blow. And solar does not generate electrons in bad weather or at night. But geothermal runs 24 hours per day, in essence "mining" heat from the bowels of the earth. (That is, the fuel is "free.") Thus, geothermal offers reliable baseload power. And geothermal emits near-ZERO carbon dioxide (trace amounts at worst), so it completely trumps any and all fossil fuels for a clean power source. There are no long-term waste or storage issues, like with nuclear. There are many locations within the U.S. - and around the world - that are completely suitable for geothermal. Geothermal is a technology whose time ought to be here.

Yes, the time for geothermal ought to be here. So why isn't the geothermal business exploding? First, geothermal power is competing against a worldwide installed base of existing power systems and economics. When most people think of electricity, they don't naturally conjure up images of steam wells turning turbines. Few schools anywhere teach future geologists how to "do geothermal."

Second, the pure-play geothermal companies are small firms subject to the same credit crunch as everything else that has gotten hosed in the past year. (Note, however, that the largest geothermal power player in the world is Chevron.) At the same time, all five of the ESI geothermal companies are following their business plans. There is no bad news from any of them. Each of the geothermal companies is on target and budget. They are generally doing well, with sufficient cash to fund their current business plans. Yet the stock prices of the ESI players are trading flat or down. All I can say is that we should consider it our opportunity to buy a few more shares at low prices and to wait to profit in the future.

Rick Rule has a great way of putting it all in perspective. And I had a long talk with Rick about the geothermal players. Here is some of what he told me.

"Geothermal is easy to understand," said Rick. "You drill a hole. You lower pipe. You get steam up the pipe from the heat of the earth. You use the steam to spin a turbine. You make electricity. You sell the electricity down the wires. But for as easy as it is to understand, it takes special expertise to put it all together. And the world does not have a vast army of people with that geothermal expertise, as you have with the oil industry. So geothermal is still in a developmental stage. That's what we have to realize. It takes patience."

Rick continued: "The good news is that the political and economic climate for geothermal is improving almost every month. Every time the U.S. government, the European Union or the United Nations passes some new regulation about saving the environment, we are one step closer to the geothermal power revolution. Everything that the regulators are doing seems to be making the world tougher for burning carbon and easier for industries that don't emit CO2. That means that they're paving the way to a geothermal power build out."

Rick and I discussed how already, Nicaragua-based Polaris Geothermal is selling CO2 credits to German buyers. "Hey," said Rick, "if the Germans want to give me euros for my CO2 credits at Polaris, I'll take their money. Meanwhile, Polaris is operating and selling power to people who want electrical power down in Nicaragua. Eventually, the stock market will figure this out. I'm patient."

Until next we meet,

Byron King
for The Daily Reckoning Australia

P.S. So the future for geothermal is bright. The worst I can say is that the geothermal future is coming slower than I anticipated a year or two back. But it's coming, of that I'm certain.

In fact, there are three government mandates that could just about guarantee geothermal's future...and one of these mandates could happen soon...very soon.

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