According to Goldman Sachs, robust 2010 oil demand growth will deplete these inventories over the next 12-to-18 months and diminishing production rates in key areas around the world will create a supply/demand imbalance.

The top portion of the nearby chart shows the decline in production from the world's top 230 projects. After peaking in 2009, production from these projects is set to fall for the next several years. Excluding OPEC countries (bottom portion of the chart), the decline rates will likely quadruple from 2007 to 2012.

Over that time period, non-OPEC production is expected to fall by 2.5 million barrels per day. Only Brazil, Canada and the former countries of the Soviet Union are expected to see production growth.

One of the largest contributing factors for this is chronic decline rates from some of the world's top mature fields. Mexico's Cantarell field, one of the largest oil fields in the world, produced 30 percent less oil in 2008 than it did in 2007 - a trend that's expected to continue.

Norway, the world's 11th largest oil producer in 2008, saw its oil production peak in 2001 and is down 27 percent since. Another big producer, Venezuela's state-owned oil company PdVSA has seen annual decline rates of more than 25 percent in certain fields according to the Energy Information Administration (EIA).

Adding to the dilemma, many countries without decline-rate issues have been holding out production increases until projects become more cost effective; this is why we recently saw Russia overtake Saudi Arabia as the world's largest oil producer.

The Saudis have been content to sit on the sidelines while awaiting the return of higher prices. The same goes for other OPEC countries; PIRA, an oil-industry consultant, says the cost of oil will have to rise above $80 per barrel in order for the cartel to increase production.

With oil prices currently hovering around that $80 level, OPEC officials have recently hinted that production increases aren't off the table for the cartel's upcoming December meeting.

But even if we see a production increase out of OPEC, decline rates from maturing fields and high barriers of entry to bring new fields online should keep the supply/demand balance tight for years to come.

Regards,

Evan Smith and Brian Hicks
for The Daily Reckoning Australia

• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
• BHP Billiton: The Oil Company That is Not an Oil Company
• Where Will Future Oil Production Come From and How Can Investors Profit Today?
• Oil Price Chart Shows Slight “Correction” in Near Future
• OPEC Agrees Not to Cut Oil Production Until it Meets in May

"It's a chart."

"Right. What is it telling you?"

"A lot of things. It'll be easier if I just send you the conclusion..."

So later, he did. His note began, "Oil is up. Stocks are up. But here is the trading question: is Woodside and petroleum a buy at these levels? To answer that, you have to look at WPL and oil side by side.

"A simple comparison of the Brent crude price and WPL (see below) shows how impressive Woody's rally has been from the lows. We can see that in Fibonacci terms (useful for tracking a stock's movement over a discrete period) Woody's has retraced to its .618 of the whole move down from all time highs. In comparison oil hasn't even reached its .382 retracement. Advantage Woodside.

"You've also seen a big rally in the Australian dollar over this time. This lowers Woody's AUD earnings. But the stock is being priced for growth anyway. Investors are obviously starting to appreciate the long term value and growth in WPL over the next few years. And why not? The long term story for WPL remains very sound and one that I would want to be exposed to.

Click to enlarge

"Having said that, WPL may have gotten a bit ahead of itself at these levels. The stock price is resting on the top of the channel. And you can see the stock has moved up and down-but always stayed within-that channel since the lows of 2008. With the stock at the top of the channel now, you'd want to be cautious about entering any longs. The risk is that the stock tests the top of the channel, fails (as it has done consistently) and moves to retest the lows.

"If Woodside is ahead of itself, what about oil? The chart shows that oil itself is looking weak and could see a retest of recent lows around $60. This would definitely put some pressure on WPL. But that's not all bad news if you don't have a long term position in WPL already.

Click to enlarge

"If WPL is to maintain its current uptrend we could easily see a pullback towards $45. That could provide a good risk/reward buying opportunity. You get the stock you want to own. But you get it a technically good time, without overpaying or buying in before it retests the lows.

"But a resumption of the downtrend in the overall market could see even lower levels for the stock. And that is the big risk right now. Even though WPL is a stock you should own as a long-term energy bull, there will be an opportunity to buy it at better levels in the future. If you own it now, you ought to either take some profits off the table or prepare to have your conviction challenged.

Dan Denning
for The Daily Reckoning Australia

• The Only Thing Really Going Down Right Now is the U.S. Dollar
• Big Difference Between Stark News in Job Market and Behaviour of Stock Market
• S&P 500 Heading Towards Some Major Long Term Resistance Levels
• Profiting From the Copper Indecision
• How to Trade Gold Shares

The bear is out there somewhere, probably sleeping off his latest wealth destroying bender. This makes it safe for talking heads, bankers, and hedge fund managers to poke their heads up on television and talk about glimmers of hope. Stocks in New York are back at 1997 levels.

Back to the Future!

Your editor has been laid low by some sort of virus/food poisoning event from last night. We apologise ahead of time for the lack of vim and vigour in today's letter. Maybe now that the rally has begun, our body is releasing the accumulated tension of the last six months...by repeatedly vomiting.

Notable in yesterday's move is the 11% rise in oil to US$47. Oil is certainly not up on the basis of a huge ecomic rebound in 2009. So what is it? China's been stockpiling oil while prices are cheap. It's straegic reserve is now all full. OPEC is meeting to discuss more production cuts.

Those two facts suggest lower oil prices, not higher prices. But they also suggest that somewhere down the line this year, demand is going to spike for oil at a time when supply/production is in first gear. Is this what the oil price is telling us?

Who knows? Prices are supposed to communicate information. But sometimes they mumble. The Washington Times reports that China has wrapped up $41 billion in oil and energy deals with Russia, Brazil, and Venezuela recently. What's the trade? Simple: cash for tangible goods.

Or, as the times puts it, "A series of high-profile energy deals and mining bids in the past month marked an end to the nervousness that appeared to impinge on Communist Party leaders at the outset of the global financial crisis. Attention has turned from hoarding foreign exchange reserves worth close to $2 trillion to locking up future supplies. Oil has emerged at the top of China's shopping list."

So this is how the dollar standard ends. Not with the floating of the yuan...but with the gradual swapping of dollars for dirt and energy. Seems like a good trade, although once people are on to it, watch out for the dollar. It could head lower...and oil and gold much higher.

It's a tricky strategy, using debt to by assets like stocks and houses. The Federal reserve reports that American household saw their net worth fall by US$11.2 trillion in 2008. They lost 18% of their total net worth-wiping out the last five years of gains.

The houses are still there. And most of the companies are still there (with notable exceptions like the investment banking industry and maybe soon, GM). But the debt people used to lever up so they could get in on the great inflation in assets is still there.

Asset prices always regress to the mean. This cycle has seen a pretty mean regression. The really important question for 2009 is how central banks and governments will handle such large debt-to-GDP ratios when people are losing their jobs, seeing their incomes fall, and watching their asset values circle the bottom of the drain. If the past is any guide, you know they'll inflate.

Did you see the Mother of All Perp Walks with Bernie Madoff? It's amazing no one tried to lynch him.

That will have to be it for the day. We sense some, er, volatility as the market opens. Until Monday...

Dan Denning
for The Daily Reckoning Australia

• Crude Oil Extends its Price Decline
• US Dollar is Getting Trashed
• Corporate Debt is Just One Aspect of the National Debt Problem
• Why the Oil Price Will Correct Itself
• OPEC Agrees Not to Cut Oil Production Until it Meets in May

Do you get the feeling investors have no idea what to do? It would be a pretty common feeling. Yesterday's action makes it seem like the idea the idea of a synchronised global recession is just now occurring to investors.

But then, the Dow gyrated all day long, before closing up 400 points to 8,979. The signals were decisively mixed. What about here in Australia? It was a historically bad day for the big miners. But you'd have to think Rio Tinto and BHP are starting to look over-sold.

Well, you wouldn't have to think so. But it looks like it nonetheless. There was a strong whiff of desperation, margin calling, and capitulation in the air yesterday. So what gives?

First the numbers. BHP, at $25.80 a share, is trading at just 5.7x projected 2009 earnings. The company hasn't moved the guidance for those earnings lower, although investors clearly seem to think this will happen. The company has US$4.2 billion in cash and just $12.6 billion in debt.

Rio trades at $66.01, or just 5.3x expected 2009 earnings. It has US$2.4 billion in cash. It does have US$43.8 in debt, $40 billion of which it took on to finance the deal with Alcan. Earlier this week, Rio said it was delaying $10 billion in asset sales and cutting back aluminium production.

Investors punished the China story yesterday, sending Rio down 16% and BHP down 13%. Goldman Sachs cut its forecast for Rio's 2009 earnings, citing Tom Albanese's comments earlier this week that marginal Chinese steel producers would reduce demand for iron ore. For its part, BHP faces concerns that increasing production at Olympic Dam (especially copper) is going to take longer and be more expensive than it originally planned.

But keep in mind Rio did not say it was freezing all capital spending. It's reviewing short-term projects, but not revising long-term capital spending goals. The company still believes demand for base metals and bulk commodities justifies spending billions on new projects. Ditto for BHP.

The trouble is in the short term. Because it's been unable to sell the assets as planned, it will have to pay down some of the debt that matures in 2009 with cash flow. That's less money available to shareholders. And you know what they say; you have to spend money to make money. If you're spending money to pay back money, you're not making money.

Still, the real issue here is whether investors have lost total confidence in the China story. And just what investors are we talking about anyway? Mums and dads? Hedge funds? Aussie institutions? Global fund managers?

We don't typically fish at the end of the pier where the blue chips are. But Rio and BHP are currently priced for a bad 2009. And it wouldn't surprise us if they may make new lows with the market. But in our Robinson Crusoe portfolio of stocks you'd want to own if you were on a deserted island for the next ten years, one, if not both the companies, would be on the list.

What about Woodside Petroleum (ASX:WPL)? The company reported yesterday that third quarter revenues were up by 84% over last year. Higher oil prices (year over year) and a production increase are what delivered the gaudy number. And going forward?

Woodside would have to set a final quarter production record to reach its goal of 86 million barrels of oil equivalent this year. It looks like that number will come in between 81-84mboe. That was enough to send the stock down 5.5% on the day to $37. It's down 47% from its high in May.

One other reason the stock probably fell is that the company studiously avoided saying anything about global oil prices or a global recession. Oil futures were down almost US$6 in New York trading to close at $69.85. That's the first time oil's closed below US$70 since August 23rd of 2007.

Is Woodside a Crusoe stock? Well, it depends on what your long-term view of energy is, doesn't it? In the short-term, the whole planet is having a recession. Oil prices could go lower. Woodside's stock price would probably go lower, too. By the way, if you have your own "Crusoe Stock" suggestions, send them to us at dr@dailyreckoning.com.au.

In the long term-at least the part before we are all dead-we reckon this global recession is a bit of a reprieve for anyone who hasn't taken Peak Oil all that seriously. Demand growth for crude is going to slow. A world less busy uses less energy.

But don't think it will last forever. Today's oil production comes from oil fields that were discovered decades ago. That same is true for many other commodities. We are harvesting the bounty of previous exploration.

As demand resumes growing-in one month, one year, or two years-we'll be right back up against the problem markets began to price in last year: declining oil production in the world's major fields side-by-side with growing demand from the emerging markets.

With the emerging markets currently submerged by recession fears, the oil issue comes off the boil for a bit. Oil stocks too. This gives you an excellent chance to ad companies that throw off huge cash flows when energy prices rise. And in our view, energy prices are going to rise again and by a lot in the coming years.

By the way, thanks for the many helpful notes and offers for help with our new super annuation project. If we don't get back to you right away, please don't take offense. The response was large, so it's going to take a few days to sort it all out. But it's good to know there are so many people already taking control of their investment future among the Daily Reckoning's 40,000 Australian readers.

Dan Denning
for The Daily Reckoning Australia

• BHP Billiton: The Oil Company That is Not an Oil Company
• Higher Oil Prices, the New Normal
• Oil Prices Fall 77%
• Pemex and Mexican Peak Oil Equal Expensive Oil
• Stranded on a Crusoe’s Island With One Stock

On January 4th, 2001, Yahoo stock (NASDAQ: YHOO) climbed over US$500 in intraday trading. It closed below that. But just a few months earlier one of our colleagues had speculated that YHOO was cheap at $400 and fairly valued at $500.

Yahoo was a stock everyone respected (whatever that means). It was safe to like. And it was not some start up Internet outfit. Everyone used it and everyone liked it, even if no one was sure how much advertising revenue search engines would eventually generate for shareholders.

Our colleague's price forecast wasn't based on any metrics that we recognised at the time. He was using what everyone else was using, eyeballs, page hits, clicks and all the buzz words that Internet companies used to justify astronomical multiples to trifling earnings (when there were earnings at all).

Yahoo shares were so in demand that the stock split 2-1 in February. A month later, the high was in for the NASDAQ at 5,048. It closed yesterday at 2,321. Yahoo has had its own troubles since then. It's now a US$20 stock.

Is oil the new Yahoo? You can make a good argument for higher oil prices based on how tight the supply chain is. But right now, the oil price is going up on just about any little rumour. The market has ceased to be rational about it. Even oil insiders are trading predictions about how high it could be by the end of the year.

But maybe-just maybe-we saw oil put in its high for the year over-night. Mind you, we remain a long-term energy bull for those very same unfavourable supply-demand dynamics mentioned above. Based on our experience, though, this is a market that feels really toppy. Our intuition is that you could see oil put a top in sometime in the next week, if it hasn't already happened.

Not that you want to step in front of a moving truck. Markets can remain irrational longer that you can remain solvent, the old saying goes. We're not suggesting you bet against oil. But we are suggesting you take note of the sentiment. The bears have almost totally capitulated. The bulls are being whipped into froth. When any little thing drives the price higher, you have a very dangerous market.

Dan Denning
The Daily Reckoning Australia

• Your Second Chance to Escape the Bear Market
• How To Calculate Your Own Gold Price Projection
• Equity Premium Will Be Replaced With a Tangible Asset Premium
• Oil Prices Under $70
• Riding the Bear & Deep Drilling in Australia

What the Saudis give, the Nigerians take away. There was a big oil summit in the Saudi city of Jeddah this weekend. Men in suits from 36 countries, 7 international organisations, and 25 oil companies gathered to solve the world's energy crisis, or at least look like they were doing something.

In a statement released at the end of the summit, the group said, "The transparency and regulation of financial markets should be improved through measures to capture more data on index fund activity and to examine cross-exchange interactions in the crude market."

That doesn't sound like it's going to make oil any cheaper, does it?

The trouble here is that people are divided on what's driving the oil price up. OPEC's Chakib Khelil says it's the deliberately weak U.S. dollar. He says increasing oil supply is "illogical" because oil refineries - the ones that produce refined fuels - already have plenty of supply.

The Italians, the French, and a handful of U.S. politicians are blaming "the speculators." U.S. Senator Joe Lieberman wants to make it illegal for pension funds to invest in commodities. Others blame Asian countries for subsidising consumer fuel prices, which they say prevents higher prices from discouraging demand and leading to lower oil prices.

Gee. There is a lot of blame to go around. Who's right? Well, for starters, the Saudi promise to increase oilproduction to 9.7 million barrels per day was instantly nullified by the loss of nearly 400kpd from oil production in Nigeria. Both Shell and Chevron had to shut off pipelines that were threatened by sabotage in the Niger Delta.

Another explanation is one Bill Bonner offered while we were away on holiday in Colorado earlier this month: the oil vigilantes. That is, professional investors used to monitor inflation via the bond market. Today, oil could be their weapon of choice in trying to combat inflationary monetary policy.

In the past, if governments started printing too much money (leading to inflation), bond vigilantes sold bonds, driving up yields and interest rates (bond prices and yields move in opposite directions). By pushing up market interest rates, the bond vigilantes could tip the economy into recession. It was a handy threat to have in your back pocket.

The bond market enforced monetary discipline by punishing governments that printed too much money. That all seemed to go out the door in the last ten years. Exactly why is a bit of mystery.

Our guess is that everyone bought the bogus line that inflation was dead (the so-called Great Moderation during which you could have growth without inflation). In a world made safe from inflation, there was no need for vigilance! The battle was won. The posts were abandoned. The defences fell into disrepair.

Instead of being vigilant about inflation, investors chased rising asset prices (and higher-yields in riskier bond markets). The easy monetary conditions created the kind of asset inflation that was simply too tempting for most people to resist. Seduced by the simultaneous rise in all asset classes (bonds, stocks, real estate, commodities), no one was especially vigilant from 2002 to June of 2007 (more on last June below).

But when the Fed cut rates from 5.25% to 2% and bailed out Bear Stearns in March, investors began to get nervous that by saving Wall Street, the Fed was dooming the rest of us to much higher prices for oil, food, and anything else priced in dollars. The need for vigilance returned, but how could investors punish the Fed for unleashing inflation and still protect their assets?

Think back to a year ago. This week is the one-year anniversary of the beginning of the subprime crisis. A year ago this week we covered the slow-motion collapse of two Bear Stearns funds, the High Grade Structured Credit Strategies Enhanced Leverage Fund and the High Grade Structured Credit Strategies Fund.

On June 22nd of last year, you could still buy a barrel of West Texas Intermediate crude for $68.85. Today-even after the big oil summit-a barrel of oil traded on NYMEX will cost you $135.02. Oil prices are up 96% since the semi-official beginning of the credit crisis.

On March 17th, when the Fed announced the Bear Stearns bailout, the oil price closed in New York at $105.75. It's up 27% since then.

When you take a step back, it's hard not to see what's going on. The worse the credit crisis gets, the higher the oil price goes. The more the Fed creates new liquidity to try and contain the damage in the credit markets, the higher the oil price goes.

Can you blame investors for wanting to own commodities? Joe Lieberman wants to ban people from doing the sensible thing. Investors see that central banks have lost control of inflation, or are even making it worse. It is not speculation to find a better store of value for your money. It's common sense. No wonder certain governments want to ban it.

Dan Denning
The Daily Reckoning Australia

• Consumer Price Inflation has Spooked Investors Everywhere
• The Confusing Big Picture in the Oil Market
• Price of Oil has Gone Up 40% and 75% of Americans Blame George W. Bush
• Price of Eggs Go Up as Oil Prices Go Up
• Look out! It’s The Bond Vigilantes!

An oil shock is undoubtedly here. It may turn out to be "the" oil shock, or it may not. Either way there's a lot you have to take in as an energy investor. Oil is breaking new ground each time it gains. We haven't been here before. Not many analysts understand exactly what is going on.

However, the laws of supply and demand still apply. There are still buyers and sellers. Read on for a clearer view of what you're dealing with. Now may not be the time to go chasing high-priced oil companies, an oil price correction could be on the horizon.

The trend is your friend until it ends.

There could not be a more important maxim of technical analysis. We don't know who said it first, but they were right. Every trend eventually ends. Every bull market corrects.

We're not looking for the end of the overall trend here, but a price consolidation. A minor trend that goes against the major one. Where does this current price explosion cease? And where will the minor trend take us?

In other words, when will oil consolidate, and by how much?

If a broker's report could tell you that, I'd be out of a job. Thankfully, there are some issues that fundamental analysis is hazy on. The chart should provide a bit of wisdom here.

There are three pretty well-defined points of support for oil. Each was established by a previous high. You'll note the long-term support level of US$83 stretches all the way back to 2005. It's the most well-tested, and the strongest buying point if oil comes back that far.

The other two are fair buying targets, although not as bullish as US$83. A level of support at US$110 will be the first place that traders move back into the market. If they get run over by sellers there, watch for a rally at US$98.

As for the when? Well, the answer is: any time now. There has been a common misunderstanding that the oil price should have corrected a long time ago, at US$110 for example. We can't help but disagree. Only now are the technical indicators finally beginning to show some cracks in the trend.

Firstly, oscillators indicate that oil has sailed into overbought waters. The MACD on the chart above is at an all-time high. Watch for it to turn around. That would confirm a turnaround of sentiment in oil.

But here's a little industry secret...traders won't be selling until the MACD line moves below zero. Such a movement tells them that the short-term average has dropped below the long-term average for oil's price. That's the selling signal sellers are waiting for.

We rarely settle for a single indicator though. The MACD gives us a taste of what's yet to come, but we're not full yet.

That brings us to the Ultimate Oscillator. This vital chart, second from the bottom, has often been a great relief to many oscillator traders. It smoothes out the volatility in other oscillating indicators, leaving you with a raw signal that can't be ignored. It tells when other prices indicators are lying.

Consider the bullish trend started in end of March until now. Oil prices recently posted a higher high (on May 21 above $134). But today there's a bearish divergence in the Ultimate. This divergence argues for a coming retracement. It overrides other methods.

Not enough for you? Well, the RSI and Stochastic oscillators also indicate that the prices are overbought.

Broadly speaking, a lot of bearish signals are flashing...or soon will be. The market is truly ready for a healthy oil price correction. You know where the buying points are. Now it's just a matter of time before the correction takes place.

Gabriel Andre
for The Daily Reckoning Australia

• How to Trade Gold Shares
• Profiting From the Copper Indecision
• Macmahon Holdings Limited (ASX:MAH) Near a 52 Week High
• CRB Index Correction Likely to Go Further
• The Aussie Dollar as a Measure of Global Risk Appetite

Curious. How could that be?

It’s an interesting story. Glad you asked.

Saudi Arabia runs its oil operations like a family Italian restaurant. In theory, everyone owns a bit of the business. There aren’t private interests like Santos (ASX:STO) or Woodside (ASX:WPL). Aramco is Arabia’s oil producer. The profits from oil then go to the government.

Of course the last link in the chain, where the government transfers money to its people, is usually missing.

But Saudi Arabia is a lot richer than it used to be. As we said in a previous Money Morning, at US$130 it pulls in revenues of well over a billion dollars a day. And that means it has spare liquidity to pour into investments. Those investments will, of course, be the source of its income when oil eventually runs out.

One of them is Australian. Bemax Resources (ASX:BMX) recently received a takeover offer from Arabian National Titanium Dioxide Company. Bemax burrows around in Australia’s vast mineral sand resource. Among other things, it produces minerals containing titanium and zircon.

As Dan Denning notes in a recent Australian Small-Cap Investigator, these metals are getting a lot of demand from ceramics industries. He’s put a magnifying glass to the whole sector. It doesn’t seem like anyone else has heard of the potential here. We’d thought you’d be interested. Foresight here could be very profitable indeed.

So Arabian National Titanium put up a AU$300 million takeover offer. Bemax is already up 35% this week. It’s one way Saudi Arabia is expanding and diversifying its economy to prepare for post oil-boom times.

Sinosteel Regroups for Another Billion-Dollar Iron Bid

It’s often how a person acts, not what they say, that shapes your opinion of them.

The politician who promises to lower taxes? He’s too busy splurging on an electoral campaign. The fellow in the pub who tells you he’s “sober as a judge”? A judicial authority is rarely found sprawled upside-down under a bar stool, attempting to woo a disgusted member of the opposite sex.

Actions talk. Talking doesn’t always mean action.

As you saw yesterday, Murchison and Midwest look set to wed in corporate matrimony. But let’s consider the actions involved. How did China’s Sinosteel respond?

It went straight to the Foreign Investment Review Board.

Why?

To argue that it wouldn’t have to re-apply for approval, now that its target will probably become a new entity. There’s only one reason it would keep that option open. It plans to make another bid.

This time, the stakes have risen. Murchison just announced five-fold growth in its iron mineral resource. Add in Midwest’s resource. The company now controls over 600 million tonnes of iron, in various forms. It’s all quite close to important shipping ports.

To China, this means more iron under one roof. So it has popped down to the realty to see if this new house is for sale.

We’re surprised it found the time. Sinosteel has been very busy working on a stake in Fortescue (ASX:FMG) lately. The iron-hungry steel maker has been soliciting Harbinger Capital for its 8% stake in FMG. Fortescue leapt 7% yesterday. It’s now a AU$27 billion company.

We don’t need to spell this out. Sinosteel wants to own an Australian iron exporter, one way or another. We have a feeling it’ll get its way.

ABB Grain Adds 80% to Profits

ABB Grain (ASX:ABB) just unleashed some déjà vu upon us. A week ago AWB (ASX:AWB) announced a 90% boom in profit growth. Yesterday ABB did a good impersonation, revealing an 80% boom in earnings. The company’s share price added 8%.

Wasn’t the market expecting something along these lines? Grain prices soared earlier in the year. It’s been a good growing season. Maybe people are only just starting to wake up to the agricultural boom.

If that’s the case, you might be interested to know that Graincorp (ASX:GNC) is yet to announce any new profit guidance for this year. Maybe it’s next in line. The company expanded its grain marketing operations in 2006-07. And as you can see below, its share price hasn’t curved up in the recent past.

That’s probably because the stock is bidding for Ridley Corporation (ASX:RIC). The market may have overlooked this one.

If you’re not exposed to rising agricultural earnings yet, it might be time. And if none of the companies above suit you, we have two even better suggestions.

We know you might prefer to sample something before committing to it. Fair enough; we’re the same way. So we’ve twisted our boss’s arm a little. Diggers and Drillers is now offering a 3-month trial subscription. Take a look at the link for our top two picks in the Ag sector, plus all our currents “buys” in metals, coal, iron, oil and gas. If you don’t like what you see, no problems. It’s only a trial. The next issue comes out later today.

We’ll be looking at others soon. Until then...

Al Robinson
The Daily Reckoning Australia

• The Fourth Biggest Iron Player in Australia
• Foreign Investment in Australia, How Much is Too Much?
• Australian Iron Ore Shares on China’s Menu
• The Iron Ore Pricing War Between China & Australia
• Wayne Swan Approves Chinalco Investment in Rio Tinto (ASX: RIO)

Before we get down to serious reckoning, however, we give you a look at the news from the end of last week.

On Friday, the Dow fell another 145 points. Oil stuck around $132 and the dollar at $1.57 per euro. Gold rose to $925.

Remember when you could buy an ounce of gold for less than $100? We do. Remember when you could buy a gallon of gas for 25 cents? We do. What is Memorial Day for...but for remembering?

First, let us pause for a moment of silence, in honour of our ancestors, our veterans and our war dead. Like Pericles, we recognize that we have a big debt to the generations that went before us -- their sacrifices have helped made us what we are...and made the country what it is. They saved. They invented. They built. What we see around us is mostly the result of their hard work...and many years of saving. If our ancestors had used up everything they produced, there would have been nothing left behind. But they didn’t. They left us their inventions and their constructions. They left us money, too. In the post-WWI period up until the mid-‘1980s, America was the world’s biggest creditor. More people owed more money to Americans than to any other nation. Public finances were occasionally stretched – such as during WWII itself – but from the founding of the republic almost until the Reagan years, each federal administration generally tried to leave the government cash till in about the same state it found it.

But in the space of a single generation, that huge legacy of capital and custom has been squandered. Now, the United States is the world’s greatest debtor – by a huge margin. Every year, it spends approximately 6% more than it earns. Its leaders have abandoned the virtuous practices of their ancestors. They no longer even pay them the homage of hypocrisy; they don’t even pretend to balance the budget, and the latest tally reported in these reckonings put the total unfunded liability at $61 trillion. This has effectively bankrupted the average family. It also turns every new baby in the U.S.A. into a major debtor – with more than $100,000 worth of unpaid bills –on the day he is born.

So we have a lot to remember this Memorial Day, and a lot to reckon with.

Warren Buffett was born in 1930. He must remember what the United States was like when it was still growing and genuinely prosperous.

“I’m fond of 1929,” said he a few months ago. “I was conceived that year and have always had an agreeable feeling towards the crash.”

Now, the richest man in the world, Buffett has come to Europe looking for better investments.

In an interview for Der Speigel, the Sage of the Plains said the United States was already in a recession and that it would be “deeper and longer than people think.”

He was in Madrid over the weekend, so we picked up a copy of El Pais to see what else he was saying.

When will growth in the U.S. economy pick up, the Spanish paper wanted to know?

“I have no idea,” Buffett replied.

When will the financial markets stabilize?” El Pais persisted.

“No idea about that either.”

So you see, Buffett could write for The Daily Reckoning; he would fit right in. Go ahead; ask us a question. We’ll give you the same answer Buffett gives:

We have no idea. But we do have opinions.

And in our opinion, George Soros is probably right when he says:

"The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years."

*** Yes, it was a super-boom that Soros describes. And it coincided with your author’s life. He was born at the beginning of it. He has now reached what he thinks is the end of it. That financial super-boom also probably marked America’s great peak – when everything went so well for so long that politicians and central bankers all wanted to claim credit for it.

But the tippy top of the peak also coincided with a number of trends and events that made it possible. Among the most important was a low oil price. Back in the ‘70s, the price of oil went to $30 – and shocked the world. It stayed around that level for 5 years, long enough to convince people that it was permanent. Consumers – especially in Europe – learned to live with less energy. Oil companies spent fortunes to produce more. And then the price plummeted back to $10...and world enjoyed a great boom.

That boom seems to be over, it drowned in the rising tide of the oil price. The black goo has gone up $50 a barrel since last September. The world’s consumers and producers should simply take the price clue with good grace – cutting back consumption and looking for new supplies, just as they did in the ‘70s.

That is what is happening. The oil companies are spending four times as much on exploration as they did eight years ago. And consumers are being forced to cut back too. But it is not all that is happening. Central banks are fighting the correction with everything they have – and all they have is cheap money.

As you know, the combination of higher fuel prices...and lower housing prices...is squeezing America’s family. Comes news at the end of last week that the typical house in California is down 32% from a year ago. The state also has the second highest foreclosure rate in the nation, with one out of every 204 houses going back to lenders.

The other thing putting pressure on U.S. family budgets is the price of food. For the 15 years, up to 2007, food prices rose only 2.5% per year. This was the “Great Moderation” that central banks felt so proud of. But in the last 12 months, food prices are said to be up 4%.

We use the expression “said to be” as a polite way so saying that the government is lying. The raw data show food prices going up twice to three times as fast. Wholesale food prices are going up even faster. And every independent tally of prices at the supermarket shows much bigger increases than the government’s numbers are willing to confess.

For example, on this Memorial Day, you’ll find the price of hot dogs about 7% higher than a year ago, according to the Associated Press. Soda and potato chips are 10% higher. And hamburger buns are up 17%.

What do we have to thank for such high prices? Partly, it is a natural, cyclical trend in the food sector. But that’s not all. There is also all that cheap money that central banks are putting out. Speculators are using it to wager on oil...and food.

*** Think you’ve got it bad. El Pais sent a reporter to Cuba to see how the island was doing now that Fidel has stepped down.

It appears that bro’ Raul is trying to take the country in the direction China has taken: preserve the communists’ grip on power, but give the economy some air.

The El Pais reporter found a country desperate for some fresh air. Nothing seems to work – not even the public toilets. And thanks to bad agricultural policies (collective farming) vast tracks of what would otherwise be productive farmland have gone to seed. A nasty shrub tree, the marabu, has taken over. Crews of laborers work all day, with machetes, clearing them out.

A man can clear two “cordels” of land in a day, each measuring 400 square meters, says the reporter. For each cordel cleared in the Cuban worker’s paradise, he is paid 1 euro (about $1.57).

But if the money is bad, the satisfaction is worse.

“You can clear a whole field,” said one worker, “and then if they don’t put tractors and pesticide on it, you’ve done nothing. It [the marabu] just comes back.”

*** “When the price of oil was $25 and gold was $300, it was easy to know what to do with your money,” lamented MoneyWeek editor Merryn Somerset Webb last week. “Now, it’s not so easy.”

A friend in Paris echoed her sentiment on the weekend:

“I just don’t know what to do...I’ve got all my money in cash, because I can’t decide...and the dollar is falling. This is terrible. What should I do?”

We gave our friend the same answer Buffett gave El Pais. We don’t know.

It is not given to man to know his fate. We don’t know what will happen.
Still, you need to make decisions. So, here we offer a very little, very modest bit of advice. It is worth every penny you pay for your Daily Reckoning subscription:

First, pay attention to your business...or your earnings. This is where you get your money. Make sure you understand what you’re doing.

Then, make sure your costs are lower than your income.

If you have a house, make sure it is a place to live, not a speculation.

When you invest, there too make sure you’re really investing – not speculating. Buffett told El Pais what he always tells investors: never invest in anything you don’t understand. If you don’t understand it – that is, how the underlying business works and how you will make money from it – it’s not an investment. It’s just a speculation.

Right now, we are putting cash into three things:

1) Gold...for all the reasons you have read about in these Daily Reckonings. Is gold going up? We don’t know...we think there is a fair chance of it. But we don’t care; the gold (we hope) is for the next generation.

2) Swiss francs...because it is not the dollar

3) Emerging markets...because they are going up; it’s a trend we think will continue as the world economy regresses to the mean. We suggest an ETF of major developing markets...recognizing that some will probably fail and others will continue to grow.

What about oil? What about commodities? We don’t know enough about them to speculate. But from what we see, they look toppy.

Bill Bonner
The Daily Reckoning Australia

• Warren Buffett is Buying Four Percent of Goldman Sachs
• Warren Buffett Says American Economy is a Shambles
• Fed is Trying to Keep the Money and Credit Moving: Commodities, Food, Oil and Gold
• Feds’ Attempt to Bail Out Consumers with Tax Rebates
• Congress Urged to Approve Bailout By George Bush and Warren Buffett

What are the two sectors that would be hit most by higher oil and petrol prices? Transport stocks and retail would seem like the safe bets. Businesses that have oil as a cost and consumers that have petrol as an expense would be on the front lines, feeling the effects of oil's steady rise. But take a look at the chart below and then rejoin us for a comment.

The chart shows the U.S crude oil exchange traded fund (AMEX:USO) against the Dow Jones Transportation Index, the retail ETF (AMEX:RTH), and the oil and gas sector (NYSE:XOI). What does it show?

Oil has been the standout for the last 52 weeks. By comparison, retail stocks are down almost 15%, the Dow Transports are flat, and the oil and gas stocks have failed to follow crude higher. If the oil price is an accomplished fact at US$126, what is the stock market waiting for? Shouldn't it be pricing in the effects of higher energy prices?

Earnings. You can see that oil's really strong run has come since February. Remember, in January of last year crude futures had actually declined below US$50. Earnings for U.S. retail stocks have already taken a hit from the reeling housing market. But we reckon this chart shows you that the market believes the higher oil price is cyclical and not structural.

If it's right, that sets up the U.S. market for a huge rally should the oil price decline. So, if you think the oil price is looking frothy, and you want a punt, what about S&P 500 calls? We have put up a chart of our own, just to see if it confirms our theory that the S&P could make a breakout on lower oil prices. Take a look.

What you can just barely see is that the upper end of the S&P's current channel is also where the 200-day moving average currently sits. This chart shows some interesting things. The S&P rallied after last August's credit market woes surfaced.

This rally proved to be premature. But it did have conviction, with the S&P making what you might call a double top above 5,550 on the bogus rally, and has been in a downward channel since. A big correction in the oil price might allow the index to break that channel. And then…well then we'd go from there.

Of course none of this may matter much in Australia. The market here is taking its cues from rising resources prices. And even Aussie financial stocks are bucking the bearish U.S. trend. The National Australia Bank reported $2.24 billion in six-month earnings. NAB was up 4%. Compare that with American insurer AIG. The firm lost US$7.8 billion in the first quarter and the stock was down 8.8%.

AIG took big write-downs on credit derivatives. By "big" we mean around US$9 billion, as the company was forced to mark some assets to market value. Those assets-credit default swaps-are not exactly cash or near cash. AIG says it will seek to raise US$12.5 billion in new capital.

But hey, it's not alone. Citigroup wants to sell US$400 billion in assets to raise capital and revenue this year. You read that right, US$400 billion. Citi has US$2.1 trillion in assets. That's why it's the largest U.S. consumer bank. But the garage sale is one now.

This shows you how inflated asset values are in U.S. financial stocks. The combined market caps of Australia's two largest miners (BHP and Rio) is $338 billion.

Speaking of the miners, it looks like China Inc. has largely conceded it that pricing power in the resource market has swung towards the producers. So Plan B, as we mentioned last week, is to get some equity in the producers. And if BHP is off limits for a takeover, then the Pilbara's third-largest iron-ore producer will do just fine.

"Chinese circling Fortescue," reports today's Australian. While that story plays out in the press, there is real activity on the ground. We'll have a report from Diggers and Drillers editor Al Robinson later this week.

The Federal Budget comes out this week. But the bigger data release is probably the wage price index. The RBA confessed on Friday that inflation looked like staying outside its 2-3% comfort zone. If wages start moving up to match rising petrol and food prices, look for a re-think on rates. That is, higher wages make it likely the bank will raise rates again instead of standing pat.

Goldman Sachs says US$500 billion. That's the total credit market losses from the U.S. housing bust. A research note last week concluded, "We think that overall mortgage credit losses will end up being larger than generally believed." Believe it.

Dan Denning
The Daily Reckoning Australia

• Looking at WPL and Oil Side by Side
• Wesfarmers (ASX:WES) Increases Revenues But Not Earnings With Coles
• Dollar Rally the Sort of Thing that Will Lead to Correction in Gold Price
• How to Trade Gold Shares
• June Producer Price Index Indicates Slower Inflation in Australia