Your editor was semi-conscious over the Pacific ocean at the time, so he can't vouch for reports. But our 30 hour trip back from Baltimore, via Chicago, L.A., and Sydney gave us time to think. Are we just being a paranoid nutcase about the global economy? Or is the position - gradually reduce your exposure to stocks and increase your tangible asset holdings - pretty sensible in a world with soaring debt and ambitious socialists?

You'll find our answer in just a moment. In the markets, it's pretty sunny out. While most of Australia idled its way through Labour Day yesterday, the ASX/200 crested through 4,800. It was a six-week high for the index. And then the news got better.

Newswires report that Royal Dutch Shell and PetroChina have offered $3.31 billion in cash and stock for coal-seam-gas player Arrow Energy (ASX:AOE). There's some consolidation going on now in Queensland's unconventional gas sector. So what should you do?

Nothing. The time to do some speculating was in November and December of 2008. That's when our colleague Kris Sayce tipped two of the entrants in the CSG race in Queensland. As the projects were "de-risked" the share prices went up. We phoned up Kris down the hall this morning and it is long-since out of his LNG positions.

The point? You have to be a year or two ahead of these big ideas and risk looking like a fool to make the big money on them. There's probably plenty of safe money to be made still. And if you are not a speculator or you don't have money you can't afford to lose, you shouldn't be playing the small cap game at all.

But as we contended at a dinner in Baltimore last week, the best reason to be in equities at all right now is for the chance to make five or ten times your money. These are Taleb's positive Black Swans, the low-probability, high-magnitude events that are actually good for your portfolio. Your much better off owning a portfolio of disruptive technologies or prospective ore bodies leveraged to higher commodity prices than blue chip stocks. Why?

The share market as a method for long-term, safe wealth-generation is a dead letter. That is, it ain't gonna happen that way anymore. Stocks are up nearly 70% from their March 9 lows of last year. The reflation rally engineered by monetary and fiscal expansion in the last year has merely papered over some huge structural weaknesses in the global economy.

But more importantly, the share market is at risk now for a big fall as it was in the middle of 2007 when the Bear Stearns story broke. Since then the perimeter of global markets has gradually been overrun by the forces of wealth destruction. Investors retreat into a smaller and smaller circle of "healthy" institutions and currencies - which only heightens their risk to further asset write downs.

The basic problem is that the global illness of too much debt has been remedied by more debt, which is no remedy at all. France and Germany may bail out Greece. But who will bail out Europe? And who will bailout the United States when public debt could rise to be 716% of US GDP in the Congressional Budget Office's alternative scenario (see page 20 for the figures).

Of course if you really think stocks are cheap now, your best bet would to be buy them and hold them. It's worked before. But we wonder, given the demographic forces in the Western world, if there is simply going to be more sellers than buyers in the coming years as the boomers liquidate.

Granted, we're arguing for a change to the prevailing conventional wisdom of the last 30 years. But hasn't the last two years given you every indication that the world really is different now and that what worked for you before in investment markets may not work again?

Or if you prefer the argument in more concrete terms, have a look at what Karl Denninger has said about the systematic balance sheet fraud going on in the United States. Dennigner shows that the suspension of market-to-market rules for U.S. banks did not - surprise surprise - lead to any improvement in asset quality.

But it's only at liquidation when the banks are taking over by the FDIC that the banks admit they've been carrying loan portfolios at much higher valuations than market prices would suggest. They only realise their losses when they are technically insolvent on their fictitious asset values. You wonder how many U.S. (or Australian) banks are doing the same thing.

Denninger reckons, based on the write-downs in assets on the firms seized by the FDIC, that total unrealised losses on bank loans could be between $1.5 and $3 trillion. Imagine what that would do to credit markets. And if the Fed tried to paper it over, imagine what that would (will) do to the dollar. Now imagine having the chance to buy gold at $1,124 an ounce.

Of course the underlying assumption to the recovery narrative has been that the bank collateral would always recover in value once the real estate market recovered. And that would happen with the passage of time, low interest rates, and short memories.

But in America at least, it's nowhere close to happening. If anything, a second and destructive down leg is coming. This is why banks continue to hold large excess reserves at the Fed. They know they're going to need it.

The underlying belief to all of this is that the credit boom has already gone bust and assets won't fall any further. You see this fiction over and over in America with the ramshackle and largely failed attempts to modify mortgages with longer terms and lower interest rates. But the basic problem - the house just isn't worth that much - is ignored.

Here we are, then, a year into the rally. The great central bank counterfeiters of the world have pumped up prices - presumably so those in the know can sell at a smaller loss, or in the case of the investment banks, at a substantial profit. But the real economy remains massively burdened by debt. For the rest of this week, we'll look at why we think the end-game to all this will play out over months, and not years. And why it won't be deflationary. Until then...

Dan Denning
for The Daily Reckoning Australia

• A Sovereign Debt Crisis Bullish for U.S. Dollar and Bearish for Gold
• Corporate Debt is Just One Aspect of the National Debt Problem
• Debt Problem Has Not Gone Away
• It All Comes Down to Debt Again for NAB
• Australia Has Highest Household Debt to Disposable Income Ratio in World

That said, coal stocks stand to lose the most from cap-and-trade or emissions trading schemes that put a price on carbon dioxide. Even so, there ARE plenty of unconventional hydrocarbons out there that can provide transportation fuel or gas streams for turbines to generate electricity.

Turning stranded coal seams into liquid fuel is a kind of "energy mining," a hybrid industry that's capital intensive but also sensitive to global oil prices. Australia is full of these "energy mining" projects that could benefit investors. Today's Age has a story about underground coal gasification. It's a story we first covered in the Australian Small Cap Investigator in June of 2007, which, by our reckoning, was about two years ago.

Since then, editor Kris Sayce has looked at the coal-seam-gas industry brewing in Queensland. He's found a few recommendations that have zoomed up with the interest of major international oil and energy players. And as we mentioned last week, the newest aspect of the "Long Aftershock" is the development of gas-rich shale formations. We're on that story in this month's Diggers and Drillers.

Our main point in all of this is that you don't have to take the coming implosion of the U.S. bond market and soaring interest rates lying down. Oil, gold, gas, silver...precious metals and energy projects...these are all investments that ought to do well in an inflationary boom.

The big risk to all of these investment ideas is that deleveraging of global balance sheets sends all stocks down to new lows (lower than 2003) and sucks the global economy into a deflationary depression.

The only reason we doubt the deflationary depression scenario is that central banks have an unlimited capacity to print money to buy assets or finance fiscal deficits. Granted, this will ruin their economies if they do so. But it's what they always seem to do. It's part of that body of lies currently circulating that says it is always and everywhere appropriate for governments to run 'temporary' deficits in order to 'support demand' during a recession.

That's a load of rubbish.

Dan Denning
for The Daily Reckoning Australia

• Energy Debate in Australia Needs to Get Serious
• Rising Coal Prices to Increase Electric Bills in Australia
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project
• A Hot Future for Geothermal
• Thorium as a Nuclear Fuel

Not just coal though…coal seam gas. Black rock is the new black. Rock on.

We emailed our full wrap-up of the sector to our beloved Diggers and Drillers fraternity a couple of days ago. But the big-wig of the sector is Santos (ASX:STO).

Santos, after wooing several potential partners, has found a mate to invest in its LNG export terminal at Gladstone. Petronas, Malaysia’s state oil and gas investment vehicle, grabbed 40% of the project for AU$2.6 billion. Santos must have laid the woo on pretty thick.

But woo is an infectious disease in the hard asset sector these days. You have to wade through a viscous slurry of woo to get anywhere. Romance is blossoming…covetous, greedy-eyed romance. Everyone wants someone else’s stuff.

How else could Australia’s largest sugar producer make 38% of its revenues from building products…35% from aluminium…and just 19% from sugar? It’s been doing some whacky diversifying.

Whacky or not, Gabriel has caught the sweet scent of gains in CSR’s (ASX:CSR) chart. As usual, you’ll find him toiling away down at the bottom of the e-letter.

This new Santos story opens up another door for coal-seam gas producers. BG’s bid at the start of this month was like connecting a jumper lead for stocks with coal-gas. Petronas’ foray will shift share prices up a gear again. Two of the world’s largest LNG producers have thrown their back into Australia’s top-notch coal-seam gas reserves. If they play this right, the stuff should be whizzing out of port and up to China within a few years.

How good is that demand source though?

Huge Growth in LNG Demand

Well, latch your peepers onto this offering from ABARE. It shows you what LNG demand is capable of doing in the next few years. LNG is as good as any fossil fuel, but it’s one of the cleaner ones. So it’s getting top billing these days.

Growth just keeps popping up in the energy sector. A thought hit us late yesterday on the topic. We think the oil price is too hot to touch right at this instant. Further down the track, it’ll be a little cheaper.

But when it comes back a little, that doesn’t mean things go back to normal.

The current spike in oil prices tells you something. No-one has full control over the oil price. The purpose of OPEC in the first place was to keep oil between US$22 and US$28. Obviously it didn’t keep it there.

Want a recipe for today’s oil price? Easy. Take one full-sized digit. Add it to either of those two numbers above. Mix thoroughly. Hey presto. You’ve done it, by jove. You’re now equally as capable as the good people running the International Energy Agency.

This will be a year of oil market exposé. If OPEC has a leash on oil, it’ll be taking up the strain soon. You’ll soon find out whether production can rise to meet the shortage or not.

Tower Says Life Insurance Market will Triple

Life insurer Tower just added 80% to its net profits. It announced this yesterday. Then it said that the life insurance market will triple in the next ten years.

Bold, very bold. Predicting life insurance demand is no easy task. Neither is predicting the supply for it. Do you plan ten years in advance to take out a life insurance policy? How can Tower possibly know something so uncertain?

It probably uses some sort of model based on demographics, and human behaviour. Such models over the course of history have been enormously successful at embarrassing their owners. It’s difficult to put your thumb on human behaviour because it appears to have a random component.

We wouldn’t invest in that kind of prediction. You should treat any growth stock with a dour attitude. Most of them don’t live up to expectations.

Al Robinson
The Daily Reckoning Australia

• Queensland Govt Chooses Coal Seam Methane Over Resource Boom
• Coal Delays at Dalrymple Lead to a Longer Boom
• Rising Coal Prices to Increase Electric Bills in Australia
• LNG in 2009
• Quotes on Coal and Oil from Stupid Politicians