One of the highlights of my trip was taking a group of subscribers to visit one of the world's best resource investors - Rick Rule - at his farm outside of Auckland, New Zealand. After eating lunch, we got down to the business of the market.

Rule expects markets will be extremely volatile this year, which he considers a gift. It's what allows you to pick up assets on the cheap. Specifically, assets in his favorite sector, natural resources.

There are simple reasons why Rule likes resources: For a long period of time, very little new investment occurred in most resource industries. So now they are playing catch-up. From 1982-2000, there was no net investment in the resource sector, Rule maintains. These industries require continuous investment because they are, by definition, self- depleting. If you run a mine, for example, every day you run it, the deposit gets smaller.

At the same time, global demand for resources has been booming. "When Indonesians make a little extra money, they buy stuff," Rule explains simply. "They upgrade from bicycles to cars. They buy air conditioners for the first time. They buy refrigerators." All of these things use basic materials - steel, aluminum, and other metals. They use energy.

Rule sums it up this way: "When we Americans spend money, we buy services. When poor people spend money, they buy stuff." He points out China uses only 3% as much oil as the US on a per capita basis. Therefore, if Chinese oil demand were to rise only to the level of South Korea on a per capita basis, which is 16% that of the US, then China's incremental oil demand would account for all of current world production.

Not surprisingly, Rule's favorite sector in the resource sector is energy. "Energy is cheap, and it's not going to stay cheap. Natural gas is the same price as it was in 1980 on inflation-adjusted terms."

Demand is going up and supply is problematic. Rule points out that most of the oil in the world is produced by national oil companies (NOCs), like those of Venezuela, Peru, Iran, Mexico, and Indonesia - not by the ExxonMobils and Chevrons of the world. These NOCs are starving themselves of much-needed reinvestment so that they can spend the proceeds on social programs or to advance political objectives. Many of these countries are on the verge of halting oil exports, simply because local demand is close to consuming all the local oil production.

Another factor in favor of rising energy prices is "carbon hysteria." Skirting the issue of whether global warming is real or not, there are consequences to the current drive to reduce carbon emissions. For instance, "coal is bad" has become the pervasive governmental point of view. So if you found a bunch of coal in Australia or New Zealand and wanted to develop it, Rule says, you probably couldn't. Governments hate coal, despite the fact that most of the world still relies on coal.

So what does Rule like here? His favorites are geothermal and uranium.

"I really like geothermal," he says. And the US is one of the best places in the world to develop geothermal reservoirs into power-generation facilities. Political consensus in the US is that geothermal is good. Power companies want it and are willing to pay up for it because it's "green." Political subsidies make the economics of geothermal even more compelling. Rule maintains you can earn a 22% internal rate of return with a cost of capital less than 5%. These are far better returns than solar or wind projects generate.

"I can't say when geothermal stock will take off," Rule said. "But the businesses work stupidly well. They really work. It almost doesn't matter what stock you buy, just own the sector." Rule reeled off four names to own - Ram Power, Nevada Geothermal, Sierra Geothermal, and US Geothermal.

They are speculative little ventures, but owning a basket is probably a good move. As for the speculative nature of the stocks, Rule said the best stock he ever owned was an Australian penny stock. "I bought it for 1.5 cents per share and sold it for $10 per share," he said. "It was the best stock of my life."

He also likes uranium. Uranium had a mania and then the price collapsed, and the stocks with it, but the businesses kept getting better and better. "The uranium story that fed the mania is still in place." Rule said we consume more uranium than we produce. "The uranium price has to go up. And more importantly, it can go up." Meaning, the price of uranium is very low. It could double and still not have any meaningful impact on the economics of a nuclear plant. "People don't care much about uranium today, but in three years, they are going to care a lot."

Rule's favorite themes are much the same as mine. As I explained in the January 27th edition of The Daily Reckoning, I'm a big fan of buying mid-sized oil and gas stocks right now because, like Rule, I believe oil and natural gas prices are going to be higher three years from now. But I'm also digging into other energy sectors like geothermal and nuclear.

I am persuaded by Rule's analysis.

Regards,

Chris Mayer
for The Daily Reckoning Australia

• A Hot Future for Geothermal
• Energy Debate in Australia Needs to Get Serious
• Uranium: A Carbon-friendly Substitute for Coal
• Thorium as a Nuclear Fuel
• The Energy Resources Are Out There

From an investment perspective, China's growing interest in nuclear power will provide enormous investment opportunities over the next few years. Some analysts say the price of uranium, while soft now, could double over the next couple of years.

China's nuclear capacity is now less than 9,000 megawatts, but the country has more than a dozen more plants either under construction or in the planning stages. According to figures from the brokerage CLSA, the capacity could grow fivefold by 2015. The official target is 40,000 megawatts by 2020.

Such an ambitious program raises the question of how to fuel all of the new plants that China wants to bring online in the next decade. Where will all of the uranium come from to handle this new demand?

China is not alone in its nuclear ambitions. Earlier this year, the International Atomic Energy Agency (IAEA) projected that global nuclear capacity would grow from about 370,000 megawatts (14 percent of world energy consumption) now to as much as 540,000 megawatts by 2020 and 810,000 megawatts by 2030. In dollar terms, capital expenditure on nuclear plants could total more than $500 billion over the next 20 years.

Roughly 40,000 megawatts of nuclear capacity are now being built on four continents, with China accounting for a quarter of that total, well ahead of #2 Russia and #3 South Korea. The chart below shows that China will be second only to the US in terms of future capacity when projects at all phases are completed.

China has uranium reserves within its borders and it is aggressively lining up supplies in Central Asia, Africa and Australia to make up any shortfall. But this shortfall is large and growing. According to a recent Reuters story, China can supply only a third of the 10,000 metric tons of uranium annually required to meet its 2020 nuclear capacity target.

The World Nuclear Association says the world's measured uranium resources are sufficient to last 80 years at current usage rates, with the largest untapped deposits found in Australia, Kazakhstan, Russia and Canada. But just looking at China makes it clear that usage rates are soon to see a sizable increase. Nevertheless, worldwide uranium production is unlikely to increase until uranium prices increase.

Uranium prices shot up to more than $135 per pound in 2007, after the first new nuclear power projects began emerging. But uranium subsequently slumped back down to $40 a pound, as above-ground stockpiles flooded into the market.

Looking forward, however, rising demand for nuclear power seems likely to produce rising prices for uranium. In fact, some analysts expect the uranium price to reach $80 a pound by 2011.

Watch this space.

Regards,

Romeo Dator
for The Daily Reckoning Australia

• Nuclear Industry Presents a Major Investment Opportunity
• Thorium as a Nuclear Fuel
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project
• Uranium Shares To Show Gains in Face of $120 Oil
• Ratings Agencies Put Spain on Negative Debt Watch

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
• Water Usage by Big Companies
• Unsustainable Energy Trends
• Price of Water Rises in China
• Buying Oil on Sale as U.S. Dollar Gets Weaker

Qatar's greatest asset is its natural gas reserves. In fact, the largest gas field in the world is here. Its discoverers were disappointed when they found it in 1971. They were looking for oil.

The boom Qatar now enjoys is the result of some daring investments in liquefied natural gas (LNG) back when people thought doing such a thing was a little batty. Faisal Al Suwaidi, the head of Qatargas, deserves the props for his wager, which have paid off handsomely. Today, Qatar produces about one-quarter of the world's natural gas.

Qatar supplies such faraway customers as Japan, India and China. Qatargas also operates the largest LNG terminal in Europe at South Hook on the Welsh coast. This facility provides Britain with a fifth of its gas needs.

Qatar's dominant position has filled its coffers and changed the country forever. On a per capital basis, it is one of the wealthiest countries in the world. And given the world's growing energy demands and the appeal of clean-burning (and cheaper) natural gas when compared with oil, Qatar seems in a good position.

In Dubai, the story is quite different, as Dubai does not have Qatar's gas reserves, nor does it have much oil. Dubai's story is one of trade and finance.

As I write, the sun is just peeking over the horizon. It is dawn in Dubai. Out my hotel window, I can see two buildings with cranes over them and in the distance another building in scaffolding. For a city that was once booming and turned bust - as with most places - there is still a lot of construction going on.

As recently as September 2008, realtors could claim that no one had lost money in the Dubai property market. That's no longer true. In fact, now the market has too much of just about every property type. One headline story noted how 32,000 homes are about to come on the market next year, which is a big number to choke down in any city. Dubai had a huge property boom and now must suffer the flip side.

The hotels, too, are pretty empty. We are staying at the new Address Hotel downtown, which has been open for only 25 days, we are told. I'm the first person to stay in my room. It still has that new carpet smell.

I wandered down for breakfast and was alone in a cavernous dining room. The hotel is brand-spanking new and everything looks wonderful. It's just mostly empty. I think there are more hotel workers than there are guests.

In Dubai, revenue per room is down 35% from a year ago. Yet there is still an expansion going on. Next year, estimates call for a 15% increase in the number of rooms. This would mean a 40% increase in two years.

Over breakfast, I perused my complimentary copy of The National. One of the things I like to do in a foreign city is to read the local newspapers. I'm kind of a newspaper junkie anyway - I get three dailies delivered to my doorstep at home. In any event, I always find interesting nuggets from a perspective you might not get if all you read is The Wall Street Journal or Financial Times.

Today's business page carried an array of tales... There was the arrival in Doha of a new LNG tanker, fresh from Seoul's shipbuilding docks. There was a story about how UAE consumer confidence is up. Also, notes on bond issues in the Gulf, the latest figures on money supply in Kuwait (it's rising at a frighteningly quick pace of 18.7%), the price of villas in Dubai and more. All sorts of little odds and ends that help paint the picture.

There was also a lot of chatter about infrastructure, which I found particularly interesting. Abu Dhabi, the capital of the UAE, which I will visit on this trip, is looking to raise $100 billion for infrastructure projects. From The National: "The emirate needs to fund new transport, electricity and telecommunications schemes..."

Dubai itself also has ambitious infrastructure spending plans. Last night, as we made our way to our hotel, we could see the new Dubai Metro stops along the way, which, lit up as they were in soft blue and white twinkling lights, looked like something out of the future.

Incredibly, the Dubai government last year spent about 45% of its budget on infrastructure projects - mostly on the roads and ports. But there is a lot more on tap, as The National reports:

"Dubai could invest as much as $20 billion in desalination projects in the next decade alone as it increases its water output by 2.72 billion liters a day... [There are also] plans to add 14,405 megawatts by 2017... Construction costs for those new plants amount to $11.6 billion, while infrastructure costs, including substations and transmission lines, will be about $11.6 billion."

This massive build-out is not unique to Dubai, or even the UAE. There are also big infrastructure projects of all kinds in India and China and other emerging markets.

Regards,

Chris Mayer
for The Daily Reckoning Australia

• Arab Wealth Pours Back into Dubai
• Dubai and Abu Dhabi: Newcomers to the Global Finance and Trade
• Is Dubai the Bubble It’s Made Out to be?
• Dubai, Built on Debt and Sand
• India Can Grow for Many Years

"Always liked Bedford Springs. A resort to presidents going far back into the early days of the republic (you know... 'A republic, if you can keep it.')

"My dad used to go there quite a bit. The Pennsylvania Bar Association hosted its annual meeting at Bedford Springs for many decades. And my dad used to do very well in the golf tournament. So he'd schmooze with the judges, and win at golf...you got a problem with that?

"Delightful mountain retreat, really. An escape from the bad air and worse sanitation of old east coast cities. A necessary water stop on the Pennsylvania Railroad. Giant old building, with many a fine room - those walls have some stories to tell, I'll bet. And those elegant balconies? Ah, from there you can catch the cool breezes falling off the nearby hillsides.

"Time was unkind to the hotel, however. Oh, what a wreck and ruin the place was by the mid-1980s and through the 1990s. Time passed it by. It was built for a steam railway age, when horses and carriages would lug the guests and baggage up from the train station for lengthy stays. People would 'summer at the Springs.'

"By the modern era, people didn't need some old-fashioned mountain resort. They wanted to get into jet airplanes and fly off to some coastal port-city, thence to board giant cruise ships or the like. Take their vacations riding the waves in 'don't spill the drinks' comfort. All while visiting some island du jour, where they speak English with funny accents.

"Really, who needed Bedford Springs so long as the world offered cheap credit and cheap energy?

"Still, someone must have realized that Bedford Springs is irreplaceable. They just don't build 'em like that anymore. So the place underwent a superior renovation about 10 years back. Now it's a luxury resort...beautiful job. But in a world of tightening credit? Hmmm...it's a luxury resort, 'if you can keep it,' to coin a phrase.

"Thus Bedford Springs still has to compete hard in this tough economy. From what I know, it hosts many a wedding and a few business meetings - its advantage is that it lacks the federalized stigma of other resort locales like Las Vegas. But it has yet to make it in a big way into the public consciousness.

"Still, it's right off the Pennsylvania Turnpike. So for the price of half a tank of gas, you can get there from Pittsburgh or Philadelphia, Washington or Baltimore...and within a three hour drive or so. So geographically, it's a good place for an era of tighter credit and more expensive energy.

"Plus, it's on the dry land of the Keystone State. It's a fixture, with deep foundations and good old bones.

"When the Chinese have long since repossessed the encumbered airliners and cruise ships, they might have some trouble seizing and shipping home the likes of Bedford Springs.

Who knows? The American economy may yet dig in, and its last ditch will be along Route 30 near Bedford Springs. 'This far shall you advance, oh you creditors and claimants, and no further.'

"Bedford Springs...what a great old piece of Americana."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Bedford Springs and the Whiskey Rebellion
• A Degree from an Elite College is No Guarantee of Higher Wages
• World Economy Has Never Been in a Fix Like This
• Vinoy Park Hotel: A Wager That Changed St. Petersburg Forever
• 2008 Energy & Geology Tour

So how much more bounce is there left in this market? That's the question we grapple with today. If you're into rhetorical fallacies, you might say we're begging the question. You only assume it's a bounce if you reckon the rally is not based on an improved long-term earnings out-look.

There are plenty of analysts and investors - many of whom are now filling up our inbox with snarky notes - that contend the worst of everything is over. It's a recovery. And even if America is stuffed, Australia has its cosy China relationship to power commodities and the currency higher.

Maybe so, put probably not. We reckon it is a bounce in the image of the post 1929 stock market crash. You don't liquidate a decade's worth of speculation and leverage in 18 months. It takes years. They started the process in Japan in 1989...and it's still going on.

But the stock market is not a television show or a graphic novel. It does not have a tidy beginning, an enthralling middle, and a miraculous end. Attention spans are short these days. People expect instant resolution. But the unwinding of a credit boom doesn't work that way, especially when you have central banks and governments fighting it every step of the way with measures to prevent the needed liquidation.

Consider this our warning then: this rally is on borrowed time. We don't know when. We don't know why. But we do know what. And the what is that stocks are going to price in much lower earnings and investors are going to pay less for those earnings. Expect a lot of spring volatility.

Unlike late 2008, though, this is a great opportunity for traders, mainly because you can short financial stocks. The S&P ASX 200 Financial index is actually up 63.5% since the March six lows. We've been working with Swarm Trader Gabriel Andre to add short recommendations to his service. It's ready to roll now, and Gabriel says the financials make inviting targets.

Energy investors ought to take heed as well. Lately there's been a nice correlation between the oil price and stocks. The better the economy, the better it is for oil and earnings. Both have gone up.

We're still bullish on energy for a lot of reasons. But if the party ends sometime in September/October/November, you can expect lower oil and energy prices. That means if you have gains in energy stocks, you'd want to think about trailing stops and profit taking. In fact look for profit taking on the share market as a precursor to a new move lower.

It certainly does make for a tricky investment strategy. Energy stocks are some of the few stock we'd really want to own for the next ten years. But stocks are stocks. And in a bear market, most stocks go down. So what do you do?

A more active management strategy is probably what's called for. But this violates one of those old axioms of institutional investors: do not try and time the markets. The buy-and-hold strategy works when you're in secular bull market. It also works to the extent that most investors take control of their investments in moments of extreme uncertainty. People end up selling at the bottom and buying at the top as a result.

So why become active when being passive is so much easier? Because your money - and perhaps your retirement - is what's at stake. You can go along with the media and pretend the last two years haven't happened, or that they did but everything is better. But remember, these are the people who didn't see the whole thing coming in the first place. Does trusting them sound like a good game plan?

Of course most of the time, trusting the conventional wisdom/do nothing approach works. Most of the time the world's financial system doesn't totter on the brink of a cliff. Most of the time you wouldn't have to bother reading about outliers, black swans, and worst-case scenarios - the subjects it is our full-time job to explore here in the Daily Reckoning.

But we reckon now IS one of those times. In fact, it's been that way since the Fed took interest rates to zero in 2003 and kicked off a global liquidity boom in all asset markets. You live and invest in an era of global fiat money. How that era ends is a dead certainty. But when is another question altogether. More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

• The Australian Resource Boom Isn’t Dead Yet
• Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings
• Stocks Better than Bonds When Inflation is a Big Threat
• Should You Buy Stocks Now to Take Advantage of Bull Market?
• June Producer Price Index Indicates Slower Inflation in Australia

Well just a day after highlighting the size and scope of the Gorgon LNG project in Western Australia, we have news that it really is a big deal. It is so big, in fact, that Martin Ferguson, the Federal Minister for Energy and Resources, said Australia is emerging as an "energy superpower."

Shazzam!

Ferguson was in Beijing last night to sign a deal sending $50 billion worth of Gorgon gas to China over the next twenty years. Exxon Mobil will sell the gas to PetroChina and the Australian government will siphon off as much as $40 billion in tax and royalty revenues over the life of the project.

China gets energy. Exxon gets profit. Australia gets jobs and revenue. Investors get a whole new industry to play with.

Mind you, this comes after the Gorgon consortium agreed to sell $25 billion worth of gas to India over the next 20 years as well. The deals are truly flowing. And there could be more. "As well as Gorgon and Woodside, there is the Sunrise project in the Timor Sea," Ferguson says. He's right. In fact, there are four major LNG zones in Australia.

Back in April we wrote this in a weekly update to Diggers and Drillers subscribers, "The other three major areas of LNG development are the Browse Basin (off the Kimberley Coast), Darwin (for LNG from the Timor Sea), and Gladstone in Queensland (the proposed terminal for export of coal-seam-methane projects in the Bowen and Surat basins). Under the Howard Government, Australia had as ambition the production of 60 million tonnes of LNG per year for export (mtpa). The current capacity of the four regions, according to industry analyst David Wood is more like 90mtpa. That would be more than half of current global production of 175mtpa."

Some of those regions are considered "conventional" LNG zones. Others, like the coal-seam-methane district in Queensland, are "unconventional." There are a few small firms operating there that Kris Sayce has been all over at the Australian Small Cap Investigator. Ferguson is excited about these too. "We also have an emerging industry on the east coast -- coal-seam methane. So we now have the opportunity, in my opinion, over the next 12 to 18 months, of getting investments of up to $100bn in the LNG sector."

With all that investment pouring into LNG production, and all those contracts pouring money into corporate and government coffers, you have to wonder what all the fuss about iron ore is over. In dollar terms anyway, it seems like less of a big deal. Aren't Australia and China getting along swimmingly?

For example, yesterday we learned that Andrew Forrest's Fortescue Metals Group will cut iron ore prices by 35% from last year's price in exchange for $7.2 billion in loans to fund expansion of its operations in the Pilbara. We should note that the price cut was negotiated with the China Iron and Steel Association (CISA) and that the loans will come from Chinese banks.

What gives? It's not likely that Fortescue's agreed price cut of 35% from last year's benchmark price (which is just two percent larger than what BHP and Rio have already agreed to with Japanese and Korean customers) is going to influence the negotiations between Rio Tinto and the CISA. But that seems to be the message behind the deal: you play nice with us and we'll loan money to you.

Fortescue has agreed to sell 20 million tonnes of ore over the next six months at the discounted price. Keep in mind that annual seaborne iron ore trade is closer to 400 million tonnes a year. It is a big deal. But not a huge deal, certainly not the sort of deal that would bring down the spot price of iron ore, which at over $110/tonne, is higher than the target benchmark price being sought by Chinese firms.

In any event, it looks to us like pricing power in the iron ore business is moving toward a new equilibrium. The annual price negotiations in which the ore producers are represented by one party (that can be squeezed by Chinese political machinations) and the steel makers are represented by another party (in this case, the CSIA, which seems to have made a meal of it) will be replaced.

But with what? BHP wants a benchmark index. China, seeking price certainty and the control a large customer expects to have, resists.

Whatever happens, we're beginning to think that energy exports will matter a lot more to Australian bottom lines than iron ore exports. Of course BHP and Rio are large diversified miners and employers. Troubled relations with China for to the two largest miners by market cap on the ASX are not good for investors.

But what is good for investors is the LNG boom. The big risk, as with any commodity, is that increased demand leads to over-supply. But that is not something we're worried about just yet. These projects take years to develop and secure permitting. Just in time LNG doesn't exist.

That means the firms with the biggest head start and the best prospective areas are going to be worth punting on. At least that's the idea anyway.

But while we're at it, let's report that at least one major investment bank is predicting a second commodity boom driven by a shortage of capital spending and resurgent demand. You always wonder if Goldman Sachs is just talking its own book because it's already made its bets in the sector. But for what it's worth, Goldman is predicting another commodity boom.

"We expect a commodity supply shortage in 2010," a company report proclaimed recently. "We have long emphasized that the commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced."

Goldman argues that the, " imbalances have actually worsened owing to the sharp drops in prices and tight credit conditions that have further impeded investment. In this context, it is important to emphasize that the commodity crisis is, at heart, a supply shortage. Although emerging market demand growth has been strong, the structural rise in prices that has been a key feature of commodity markets for the past several years would not have occurred if supply were sufficient. In reality, trend demand growth for many commodities has been slowing due to supply constraints that are restricting overall demand growth despite robust emerging market demand growth."

Goldman's note goes on to recommend a handful of blue-chip firms that will benefit from higher demand growth. Firms like Cairn India, Cameron (US), CNOOC (China), Hess (USA), Peterobras (Brazil), Suncor Energy (Candada), and more. For Aussie investors, there are a smaller number of energy blue chips and a larger number of excellent speculations.

Dan Denning
for The Daily Reckoning Australia

• The Iron Ore Pricing War Between China & Australia
• Buying Oil on Sale as U.S. Dollar Gets Weaker
• Rio Scraps Deal to Sell to Aluminium Corporation of China
• Giant Costco Opens in Melbourne!
• LNG – The Energy Play for 2009

And none too soon! The big box retailers are soon to be dinosaurs. They are living monuments to cheap energy and globalisation. Only cheap energy and cheap global labour make it possible for goods to be shipped this far and sold this cheaply.

We thought this era of retail decadence was well and truly over with the Global Financial Crisis. But the Costco opening is a nice, nostalgic coda to the whole era of misallocated real resources and capital. While the suburban-retail-housing economy of America crumbles, Australia has built a small shrine to that way of life down in the Docklands.

Mind you, we don't have any problem with lower prices. There's a bit of snobbery about American attitudes toward Wal-Mart and other giant retailers like Costco. After all, isn't it a good thing when a large part of the population can reduce the amount of money it spends on basic food and necessities? These stores really do lower prices on the things people buy every day. To that extent, they should be celebrated as an achievement of capitalism.

Of course there are consequences to organising your economic life around discount retailing. Mom and pop shops-mostly neighbourhood places with friendly faces (if higher prices)-can't compete with goods and textiles imported by the container ship full from Asia. The folksy local retailer is crushed under the heel of the big box with the big global footprint.

This necessarily changes the job market too. Some small businesses-usually the largest employer in an economy-go to the wall if the big box retailers start popping up everywhere. More and more jobs in the economy shift to lower-wage retail sales. Fewer people are employed making things and more are employed selling them (often on credit).

Gosh. It feels like we're writing a history of what happened to the American economy over the last twenty years. Cheap oil, credit, the container ship, sophisticated logistics systems...all of these combined to deliver a one-off massive decrease in the cost of living for Western workers. Whether or not the lower cost of living resulted in a higher quality of life is a different question. And the trade off was the slow erosion of real wages from globalised labour.

Anyway, the appearance of the Costco in Australia is like a time machine from the retail past arriving. A massive Tardis from Dr. Who, filled with the cheapest underwear on offer and mountains of washing detergent, deeply discounted. We will probably head on down this weekend to see if they have Coca Cola by the barrel.

Nothing in the market can compete with our excitement about the appearance of Costco. But yesterday we speculated that energy would be the best inflation beater of the next ten years. And out in Perth, The West is reporting that, "Australia is on the verge of another WA-led resources boom that promises to dwarf the last surge, lock in thousands more jobs and be worth billions of dollars to WA businesses."

The paper refers to the Gorgon LNG project. Gorgon is not, at least in this case, an ugly, snarling, snake headed female figure from Greek mythology. Nope. In this case, Gorgon is a $50 billion Liquefied Natural Gas (LNG) project that aims to produce 40 trillion cubic feet of LNG off the coast of Barrow Island in Western Australia. The project exists because energy itself is no longer cheap, but still in demand.

The main partners in the development of Gorgon are Chevron, Exxon Mobil, and Royal Dutch Shell. In fact, just last week Exxon signed a $25 billion deal with India's Petronet to sell 1.5 million tonnes of Gorgon LNG to India each year for the next twenty years. That's a big off-take agreement. There will be more, probably from firms in India, China, Japan, and Korea. Asian power utilities prefer cleaner-burning LNG in their electricity producing plants.

A final investment decision by the partners is expected early next month. But that's a near certainty now. With the WA and Federal governments granting the environmental permits necessary, there was only one big hurdle left, and that was cleared yesterday. Once it's played out, the Gorgon field has been identified as a place to store captures carbon dioxide.

Yesterday, the Federal government indemnified the partners once the site is closed. That essentially means that the gas partners are responsible for producing LNG. The Federal government, meanwhile, assumes any risk if there is a problem with using the site as a place to store captured carbon dioxide.

Gorgon is Australia's biggest energy project. But it is not one punters will probably make much money on. The big companies involved in the project have massive global exploration and production portfolios. As big as Gorgon is-and as important as the off-take agreements are to firms in Asia-Aussie punters ought to look at the three or four other prospective LNG producing regions in Australia.

This is what your editor and Kris Sayce have been up to for the better part of the last six months. Kris has cherry-picked the best plays from Queensland's unconventional LNG plays near Gladstone in the Australian Small Cap Investigator. Over at Diggers and Drillers, your editor has looked at other unconventional gas plays, mostly natural gas trapped in sandstone formations in certain basins around Australia (so-called 'tight gas.')

Who knows which projects will end up prospering? No one yet! Already, some of the stocks are prospering on the speculation. Investors know that energy is Australia's most valuable long-term commodity export. The smaller players in the market are already pricing that development in.

We still have a few energy-related projects to add to our resource shopping list. We don't think we'll find them at Costco. But maybe we will finally find some Captain Crunch!

Dan Denning
for The Daily Reckoning Australia

• Buying Oil on Sale as U.S. Dollar Gets Weaker
• Inflationists Reappointed at the Fed
• Gorgon LNG Deal with China a Really Big Deal
• A ‘Draw’ in the ’Flationary War
• CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project

Murray addressed a point we've been banging on about here for a month now: when you have to import your capital from the rest of the world, you become dependent on global banks to fund your domestic economy. And if those banks don't like what you're doing with your borrowed money-if they think you are using it to bid up house prices rather than build investments that will generate higher returns-they may decide to invest elsewhere.

What does it mean to be capital poor? "We ask them [global banks] for the money to build larger houses...more square metres per house, year-on-year...and we ask for the money to put less and less people per house at the same time," Murray began.

"Why in Australia is that money not going to fabulous new infrastructure...public goods...why isn't it fuelling great companies?" he asked. We assume the question is rhetorical. The obvious answer is the country is in the grip of a housing hysteria, or at least the belief that everyone-banks, real estate, agents, government tax collectors, builders, and home buyers-can all get rich on houses.

"We're now going to have to invent a corporate bond market because this money isn't flowing right," Murray added. By 'flowing right,' we assume Murray means that instead of funding productive investment and enterprise, Australia's foreign borrowing addiction could eventually threaten the supply of credit provided by foreign banks.

"I think that our friends around the world who have a habit of saving and helping us with it are entitled to ask, 'Is this the best return for my precious savings dollar?'"

Lots to think about. For what it's worth, we think Murray is right on the money. The Chinese are already-and quite rightly-telling American officials to reduce their deficits or jeopardise the flow of credit coming from China.

This is a subject we expect to speak more about tonight. The American fiscal deficit is directly linked to Australia. The more the Chinese are worried about the value of their U.S. dollar assets, the more quickly they will look to diversify those assets or shed them outright.

That probably means increased Chinese investment in Australia's resource and energy sector. Australia is part of China's answer to "the resource question." Also, the Chinese already realise that making a buck of Aussie borrowing is not a bad investment strategy either. Dow Jones news wires reports that, "China's Bank of Communications will open a Sydney office as its first working branch in Australia.

"The move, announced by the NSW government today, underscores the growing ties in trade and business between Australia and China, a major export customer, and is part of a strategy by authorities to promote Sydney as a regional hub for financial services. The Bank of Communications, China's fifth-largest bank, is seeking a licence from the Australian Prudential Regulatory Authority to establish a branch delivering a full array of services."

Selling money can be a good business. China is also branching out with its global investment/expansion strategy, trying to diversify its sources of income. The profit margins in finance are probably a lot higher than the profit margins in making air conditioners (or most assembly and manufacturing industries.) If you want to increase national income, it's a good strategy (although it's not as good for full employment, which is also a big objective of the Chinese State).

Also, when you've accumulated a huge chunk of capital with a mercantilist trade policy based on keeping your currency artificially cheap so you can run a large trade surplus, you have to put that capital to work eventually and not just buy U.S. Treasury bonds. It will be interesting to see if the long-term strategy works.

But you get the feeling there IS a long-term strategy at work in China. In Australia? Murray says that under his direction the Future Fund will meet the unfunded liability of superannuation for public servants by taking a long-term view. He encourages all of Australia to do the same.

He says he is, "Taking a long-term view about saving, which is a critical problem in the Australian economy...taking a long-term view about our next generation, not just ourselves...taking a long-term view about the stability of employment and skills building...whether it's at the Future Fund or anywhere else...and a long term view about the pride in our institutions."

We find those comments quite encouraging actually. One of the big faults in the corporate world in the last twenty years-driven by quarterly earnings analysis and the 24/7 media cycle-is managing long-term institutions for short-term gains. To some extent, this just reflects the compression of time in a globalised world. The business cycle seems to have speeded up.

But shareholders and corporate management alike would both be better served by considering what's best for the long-term interests of the institution...and how to make sure that particular business continues to serve customers well. This goal might not always be compatible with short-term earnings management strategies that allow executives to meet targets which trigger extra compensation.

Essentially, we think Murray is suggesting that we all need to be better stewards of capital. He's also implying that for the last twenty years, we-the institutions of modern capitalism-have NOT been good stewards of capital. If you pursue that line of thinking, it might also mean that the expectation that you can make a lot of money very quickly without really doing any work or adding value is-as a cultural frame of mind-not very healthy for our long-term survival.

We'll have to leave it at that today! Tonight is the big night of the Debt Summit at the State Library of Victoria. We'll be back with a full report on Monday. Until then!

Dan Denning
for The Daily Reckoning Australia

• IMF Gold Up For Sale to Pay the Bills
• The Problem With a Well-Diversified Portfolio
• IMF Report Concludes Aussie Banks are “Very Sound”…
• The Inevitable Path Toward Capital Controls in America
• You Can Never Be Sure How Fabricated Income and Earnings Are These Days

By the way, last year at the Agora Wealth Symposium in Vancouver, one of our colleagues took the stage to point out that your editor was complete moron. In this particular case, it was for being bullish on gold.

He said that gold hadn't done much adjusted for inflation since 1980. What's more, he said, its worth less, adjusted for inflation that it was twenty years ago. How, he speculated, could anyone take the advice to buy gold seriously when it had performed so abysmally?

Well here are the facts. The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.

We've asked Kris Sayce to bring this small fact to the attention of our colleague when he attends this year's Vancouver show next month. The theme of this year's show is "Ten Years of Reckoning," celebrating the tenth anniversary of the Daily Reckoning. Kris will be spearheading the Australian delegation. More details on that later this month.

In any event, it seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it's still not as high as we expect it to go before it starts to look foolish. Meanwhile, today's government bond market looks an awful lot like the stock market circa 2000. You're seeing a generational high in bonds. It's another version of the "high-low" strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 yesterday. Bloomberg says the weakness in the U.S. dollar is, "bolstering the appeal of energy as an alternative investment." Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil's latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long-run, it's the smaller-than-expected oil supply growth that will drive the market.

By the way, some Diggers and Drillers subscribers have wondered exactly which of our energy recommendations come from our "Long Aftershock" scenario. We'll make sure to specify which oil and energy stocks we had in mind in tomorrow's weekly e-mail update (for subscribers only).

One thing Kris will probably be making clear to U.S. dollar-based investors is just how relatively attractive Australia's position is in the developed world. "Even as Australia's challenges increase, it will still be the envy of the developed world," writes William Pesek at Bloomberg. "Even in its worst moments... Australia is among the least unsightly economies anywhere," he adds rather optimistically. We'll see about that.

Finally, we meant to write a bit about other possibilities in China today. That is, we were going to explore collapse scenarios (financial, political, and societal). But we did not realise it would be ambitious to try that in a few hundred words. So look for something more considered later this week in the essay spot.

Dan Denning
for The Daily Reckoning Australia

• A Simpleton’s Trade: Sell US Stocks and Buy Gold
• The Bailout is Approve So Now It’s Time to Buy Gold
• Sell China and Buy Goldman Sachs
• LNG – The Energy Play for 2009
• Note to Australia: Buy Resources, Not Banks