But let's start with sovereign wealth fund of China, the China Investment Corporation (CIC). CIC was set up in 2007 with US$200 billion of China's nearly $2 trillion foreign exchange reserves. It's been shopping ever since, with mixed results. Last year, for example, CIC stood pat and only invested US$4.8 billion outside China. It preferred to ride the bubble in Chinese bank stocks, which worked out pretty well for it.

Yesterday, however, Reuters reports that CIC is now cashed up to the tune of $300 billion and ready to buy again. "It will not be too bad this year," says CIC chairman Lou Jinwei. And here's the good part. "Both China and America are addressing bubbles and we're just taking advantage of that. So we can't lose...We have to be in everything because you never know what's going to happen in this world."

Come again?

There's a charitable way of reading these comments and there's a straight forward way. The charitable way is that Lou and the rest of China's economic mangers know that their $2 trillion in forex reserves (which are mostly in U.S. dollars) are in perpetual danger of devaluation. If you had a pocket full of $300 billion in monopoly money, trading it for anything-anything at all-would be the sensible strategy.

You'd want to trade it for a real tangible assets or equity before asset sellers started treating your money with disdain. This is why CIC "can't lose." Better to trade it for something now then watch it turn into nothing later.

The straightforward interpretation is that the Chinese wealth fund managers have lost their marbles. Counting on more bubbles to increase your wealth is a portfolio destruction strategy. Chinese fund managers may end up being every bit as stupid as the hedge fund managers and bankers and CEOs at U.S. banks who ran their respective institutions into the ground making the worst leveraged bet of the century on U.S. housing.

The only real difference, as far as we can see, is that the U.S. bets were made with borrowed money (often borrowed from Chinese creditors, we reckon), whereas China is investing the fruits of its productive labour over the last twenty years. It is a massive gamble. The U.S. managers, who may have been criminal rather than stupid, did tremendous damage to their country's economy. Will China's managers replicate the feat?

This also makes you wonder how much the emergence of China itself is a function of a global bubble in fiat money since August of 1971, when Richard Nixon took the U.S. dollar off the gold standard. Sure, there are tens of millions of Chinese people working in real factories making real products out of real raw materials (many sourced in Australia). These people have real dreams, ambitions, and economic aspirations, not to mention real savings (in gold and paper money).

But is it possible that China's time at the centre of the global economic stage is limited because China's economic model itself always depended on cheap credit and fiat money? Yes, yes. It goes against the whole "next economic empire" way of thinking. But if China's official asset managers are counting on bubbles to make them wealthier, you wonder how sound the model is, and how long the wealth will last. We wonder anyway, which is our main job at the DR.

Empires. They sure don't make them like they used to. Rome lasted a good long while, with a big lead up as Republic. The 1,000 year Reich didn't last ten years. The economic and political clock seems to be speeding up these days.

That would be something. A twenty-year global boom from fiat money that simply accelerated the depletion of natural resources and the misallocation of capital to projects that are uneconomic at lower levels of household and business debt. Hmmn.

Speaking of resources, two notes that prove oil is still out there, but getting harder to find and more expensive to produce. PetroChina will spend $2 billion to buy a 60% stake in the MacKay River and Dover oil sands projects in Canada's Athabasca oil sands. Canadian sources reckon there are 5 billion barrels of bitumen on the properties. But turning bitumen into oil isn't easy or cheap. It takes lots of water and energy, neither of which are money.

The other note is that BP says it has found as much as three billion barrels of oil in the Gulf of Mexico. It found it by drilling 10,685 metres below the Gulf of Mexico, or 35,000 feet. So BP drilled the equivalent of a Mt. Everest underwater to find the oil. Actually, Mt. Everest plus another six thousand feet.

This is ample evidence of Peak Oil. It shows that oil is getting harder to find and more expensive to produce. Technology has improved, of course, allowing exploration companies to look further afield than ever before. Oil companies can increase reserves this way. They're finding oil. But it is not the cheap, easy, free-flowing stuff once found in the oil fields of East Texas or Saudi Arabia.

By the way, if you're wondering what could cause a second dip in the global recession, we have an answer: government stimulus. Yesterday was full of stories on how the stimulus spending by the Australian federal government made the recession less worse than it might have been and produced positive GDP growth. This has everything backwards, although it's being swallowed whole by the financial press.

A rebound based on monetary inflation and government spending isn't a real rebound at all. It gives the appearance of normalcy and economic health through rising asset values and more transactions in the economy (which GDP itself measures). But unless there's a big pick up in private investment, the economy is not on any sounder long-term footing.

In fact, it's worse. The illusion of prosperity created by stimulus spending induces people into maintaining debt loads they might otherwise reduce. Consumption patterns which ought to change in order to put the household and corporate balance sheets back in working order aren't changed at all. And when the government stimulus is withdrawn later---as it must be before higher fiscal deficits lead to rising interest rates-the economy reverts back to its pre-stimulus levels of growth-only without the underlying issues of over consumption and too much debt having been addressed.

Or the short version: there is no easy way out of this mess. The government can't create wealth by borrowing money or taxing people and spread the lucre around to favoured groups at the expense of others. That's theft and it's immoral. But the real issue is that the whole economy needs to reduce leverage. The housing bubble has to pop. And the nation has to quit living above its means (we remember writing this about America five years ago).

How about some reader mail?

Hi Dan,

Gene A.

Not this first time we've heard this and won't be the last. We write about outliers and Black Swans. Those topics are controversial, which is why the mainstream media is afraid to express a real idea about them. What's more, getting people's attention in this economy is tough. Sorry you don't like the ads. But don't expect them to change.

For one, we have to pay the bills. As much as we like writing the DR, there's an entire publishing operation to support that provides research to paying subscribers. Secondly, we wouldn't describe any of our publications as "loopy get-rich quick schemes." We know how much time and research goes into each monthly report. We stand behind all the ads and have a hand in a fair a few of them to make sure they're telling the stories we think you can profit from. If you really don't like them, you can always just ignore them.

--Hi Dan

Aidan

--DR

John

Dan Denning
for The Daily Reckoning Australia

• China and its Trade
• Economy of China to Decelerate?
• The Iron Ore Pricing War Between China & Australia
• Anthony Bolton on China
• China, the Miracle Economy

How did Australia get caught up losing money in commercial U.S. real estate? In yesterday's Age, Bwembya Chikolwa, a lecturer in the School of Urban Development at Queensland University of Technology, says Aussie super funds had money to burn and listed property trusts, with their large portfolios of U.S. assets, were liquid enough to do the trick.

"Unfortunately they were caught up in circumstances to do with the financial crisis," she says. "Moving into the US wasn't a problem because it had more or less the same settings...It was driven by large investment inflows into the super funds...The super funds needed new investment avenues and the trusts were a good avenue. So they invested through the listed property trusts. They had the funds and had no choice but to move offshore and the US market because of its size."

No choice? A portfolio manager always has a choice. It's the retail investor who is forced into compulsory super that has less choice. But this does highlight the obvious fact that fund managers are not paid to put clients into cash. Self managed super investors can do this easily enough, and many did (whether by design or indifference), thus avoiding the share market wipeout. But big fund managers have to buy big stocks. They are too big to buy small stocks, by the way, which creates a niche for Kris Sayce at the Australian Small Cap Investigator.

But now we have yet another seemingly external threat to your cozy domestic retirement: U.S. commercial real estate. Yesterday's Wall Street Journal reports that the $700 billion U.S. commercial mortgage backed securities market saw a delinquency rate of 3.14% in July. That was up six times from the year before.

The Journal reckons that over $153 billion in loans need to be refinanced by 2012. Of that amount, at least $100 billion could be in trouble. Why? The underwriting on the original commercial real estate loans was dodgy (as it always is in a credit bubble). But more importantly, with property values on commercial real estate down by 50% in some areas, refinancing at the same loan to value ratio as before just isn't going to happen.

Cash flows are fine for debt service and principal repayment now, according to the Journal story. It's the write down in property values that will scupper the refinancing. What's more, because the loans were securitised, it's often hard to figure out who you should be renegotiating with. This is reminiscent of the residential mortgage backed securities market where Deutsche Bank couldn't proved it owned the properties it wanted to foreclose on.

Mortgage servicers, banks, and investors would all prefer the problem to go away so no one has to take a write down on their asset values or a loss on their securities. But Aussie firms already know better. The only question now is if a pear-shaped U.S. commercial real estate market will do as much (or more) damage to the global financial system as the residential housing market. Stay tuned....

Dan Denning
for The Daily Reckoning Australia

• REIT Investors Grown Complacent About Risks in Commercial Real Estate Market
• An Insider’s View of the Real Estate Train Wreck, Part II
• An Insider’s View of the Real Estate Train Wreck
• Property Sector Has Seen the Value of its Assets Wiped Out
• Commercial Mortgage Backed Securities Are Back

The attendees come for a number of different reasons. Some want to gain some insights on interest rates, the dollar, or the stock market. Others are seeking a new investment strategy. Still others are looking for good investment ideas or, as one gentleman insisted, "just one great stock."

But before you can put your money to work effectively, you need something even more fundamental to your success: a philosophy of investing.

In her book Philosophy: Who Needs It, Ayn Rand argues that all of us have a philosophy of life, whether we know it or not. "Your only choice," she writes, "is whether you define your philosophy by a conscious, rational, disciplined process of thought...or let your subconscious accumulate a junk heap of unwarranted conclusions..."

What's true of life is also true of investing.

Over the past two decades, I've dealt with thousands of individual investors, some highly astute, some rank novices. Many had only the foggiest notion of what they were trying to achieve - or how. In some ways this is understandable. World financial markets are complex and the investment process can be daunting.

Beginners often don't understand the fundamentals of saving and investing. And even more experienced investors are often stymied by the complexities and technical jargon surrounding the investment process. Many try (and inevitably fail) to outguess the markets - or simply wave the white flag and turn their portfolio over to "that nice young man down at Merrill Lynch."

Big mistake.

No one cares more about your money than you do. With a basic understanding of the investment process and a bit of discipline, you're perfectly capable of managing your own money, even your "serious money." Especially your serious money. By managing your own money, you'll be able to earn higher returns and save many thousands of dollars in investment costs over your lifetime.

The Gone Fishin' Portfolio rests on a powerful philosophy of investing. It's battle-tested. It's built on the most advanced - and realistic - theories of money management. And it works.

Moreover, The Gone Fishin' Portfolio does something that virtually no other investment guide does. I'm going to show you - very specifically - where you should put your money. And then I'm going to show you how to manage it year after year.

Once you've set up your portfolio, the whole process will take less than 20 minutes a year to implement. This may sound like an audacious claim. But, as you'll soon see, the strategy itself is steeped in humility.

It is based on the only realistic premise for an investment philosophy - that, to a great extent, the future is unknowable. So don't expect me to draw on my gift of prophecy and tell you what's going to happen to the economy, interest rates, the dollar, or world stock markets. (No one is more surprised than me how the market action unfolds each year.) Nor will we ignore uncertainty or pretend we have a system that has eliminated it. Instead, we're going to use uncertainty and make it our friend. In short, we're going to capitalize on it.

Investing is serious business. Getting it right is the difference between a retirement spent in comfort (or luxury) and spending your golden years counting nickels, worrying whether you'll have enough. The difference could hardly be starker.

Up until now, you may have been tempted to turn your investment portfolio over to someone else to manage. After all, your financial security is paramount. You may not think you can take the risk - or handle the responsibility - of running your money yourself. I fully intend to disabuse you of that notion. I also want to point out that there are serious risks to turning your money over to someone else. That person may manage it poorly. Or be terribly expensive. Or both.

If you're skeptical on this point, it may be that you've bought the story that Wall Street is selling: Investing is so complicated - or your personal circumstances so exceptional - that you should not be trusted to run your own money.

I'll concede that if you don't know what the heck you're doing, this is absolutely true. But one solution is learning what to do, rather than turning your financial welfare over to someone else.

When it comes to managing your money, there are plenty of potential pitfalls out there. However, those investors who wind up in retirement with less money than they need have generally fallen prey to one of four basic mistakes:

1. They were too conservative, so their portfolio didn't grow enough to begin generating the income required to meet their spending requirements.

2. They were too aggressive, so a significant percentage of their portfolio went up in flames along the way.

3. They tried - and failed - to time the market. Confident that they would be in for market rallies and out for market corrections, they ended up doing just the opposite much of the time.

4. They delegated unwisely. They turned their financial affairs over to a broker, insurance agent, or financial planner who - over time - converted a substantial amount of their assets into his assets. In addition, the advisor may have been too conservative, too aggressive, or tried and failed to time the market.

If your nest egg is lying in pieces late in life, you generally don't have the opportunity - or the time - to build another one. The consequences, both personal and financial, can be devastating.

Planning your financial future is a momentous responsibility. Although The Gone Fishin' Portfolio has a lighthearted name, it enables you to handle your serious money - the money you need to live on in retirement - in a serious way.

There are few guarantees in the world of investing. In fact, once you get beyond the risk-free world of Treasuries and certificates of deposit, there are virtually none. However, The Gone Fishin' Portfolio eliminates six major investment risks:

1. It keeps you from being so conservative that your long-term purchasing power fails to keep up with inflation.

2. It prevents you from handling your money recklessly.

3. It does not require you to own any individual stocks or bonds. So a single security - think Worldcom or Enron - cannot cause your portfolio to crater.

4. It does not require a broker, financial consultant, or anyone else to attach himself to your portfolio like a barnacle, siphoning off fees every year.

5. It doesn't require you - or any investment "expert" - to forecast the economy, predict the market, or analyze competing economic theories about the future.

6. Perhaps most importantly, it guarantees that your time will be your own. Rather than spending countless hours evaluating stocks, market trends, or fund managers, you'll spend your time as you please. While others struggle to manage their money effectively, you'll have "gone fishin'."

This last point means that instead of spending countless hours fretting over your investment portfolio, you'll be able to relax...play golf...travel the world...spend more time with your kids or grandkids...or just swing on a hammock in the shade with a glass of ice-cold lemonade. Because your investments will be on autopilot.

This is not just a strategy for today's markets, incidentally. The Gone Fishin' Portfolio is designed to prosper - and generate peace of mind - through all market environments.

And I invite you to be skeptical. In fact, let me begin by asking you a question:

If I could show you a way to manage your money yourself, using a strategy that is as powerful and effective as any used by the nation's top institutions, that will allow you to outperform the vast majority of investment professionals, pay nothing in sales charges, brokerage fees, or commissions, that will take less than 20 minutes a year to implement, and is based on an investment strategy so sophisticated it won the Nobel Prize in economics, would you be interested?

I hope so. That, in a nutshell, is The Gone Fishin' Portfolio. It's about handling the money you intend to retire on simply, effectively and cost-efficiently, with the absolute minimum of time and attention.

If you're like most people I know, you have better things to do than watch your stocks bounce up and down all day.

Don't get me wrong. I'm not averse to trading stocks, myself. (Long- term investing and short-term trading are not mutually exclusive.) But short-term trading strategies are beyond the scope of this book. Instead of focusing on trading or speculating, we're going to focus here on the money you intend to retire on - and perhaps ultimately leave to your kids, your grandkids, or your favorite charity. This is money that shouldn't be treated like chips in a poker game.

Reaching financial independence is a serious goal, one that should be pursued in a disciplined, rigorous way.

That's why I recommend that you make The Gone Fishin' Portfolio the core of your long-term investment program. The philosophy behind it is based on the best investment thinking available. It has been tested in various economic conditions. It increases your returns while reducing your risk. And it minimizes your investment costs and annual capital gains taxes.

Best of all, it works. Investors who have put their money to work this way have enjoyed years of market-beating returns while taking less risk than being fully invested in stocks.

Now it's your turn.

Regards,

Alexander Green
for The Daily Reckoning Australia

• Gone Fishin’ Investment Strategy
• The Problem With a Well-Diversified Portfolio
• Greek Banks Playing the Carry Trade and Investing in Government Bonds
• Investors Better Off Investing in Anything but Stocks
• Investing in Japan…

"Diversify your portfolio," say the stockbrokers.

I say, "Don't listen to them."

The idea of having well diversified portfolios is probably the best piece of spin doctoring to have come from the funds management industry in the last twenty years.

The problem with well-diversified portfolios is they usually aren't well diversified. They tend to be diversified in the same direction. Look at the make-up of any 'balanced' managed fund. A fund split between Australian shares, international shares, property, bonds and cash isn't a diversified portfolio at all.

In fact, based on the current market, three out of five of those asset classes require a bullish market sentiment. As for bonds and cash, they just cancel each other out - what you gain on the rise in bond prices you lose on the falling cash rate.

The problem is, when you diversify your portfolio too much across a single asset class or across multiple asset classes you tend to neutralize your returns.

For instance, what has a diversified portfolio done for most investors during the last eighteen months? Just take a look at the stock indices, that should paint a pretty clear picture of the damage.

Instead of investment managers preaching portfolio diversification, they should be telling clients to take a view and either stick with it, or have exit strategies if the view turns out to be wrong.

But of course, it's not in the interests of fund managers to promote such a strategy. They want to convince you that managing investments is too hard for the average punter - leave it to them, your money will be safe in their hands... No thanks.

The key to investing really is to take a view and back your convictions. If you do that, and you're right, then you'll do much better than the average investor. If you get it wrong then you may do worse. But if you are actively managing your investments you can switch out of the investment if it moves against you. Traders do this all the time using stop-loss orders.

Let's take the current market as an example. Last November when the S&P/ASX200 hit a low point, I - perhaps foolishly - called the bottom of the market downturn.

Does that mean you should have gone in 'boots and all' to the stock market last November. No, because I had an important caveat, and that was to look only for share market investments in the small cap sector and for those shares that are paying sustain a dividend payment.

In addition, my view was to stay away from finance sector stocks.

Four months later and little has happened to change that viewpoint. Let's take the small cap sector as an example. Of course, I've a vested interest as editor of the Australian Small Cap Investigator newsletter. But the facts speak for themselves.

Since the market hit the previous low point in November the S&P/ASX200 has fallen by a further 3.28%.

In comparison, the stocks in the Australian Small Cap Investigator portfolio have gained by 16.59%. If you had diversified your portfolio across the whole market on the basis of market capitalization you would have received almost none of that gain from the small cap stocks.

As for the dividend paying stocks? Well, late last year I decided that it was almost time to release a new newsletter based on income investing. Now that interest rates have fallen to a pitifully low level, and many companies have slashed their dividends, I think that now is the perfect time to offer an income investing service to investors.

I'm currently putting the finishing touches to it, but hopefully we'll be ready to launch in April. [Ed note: If you want to be among the first to find out about my new income service send an email to moneymorning@moneymorning.com.au and type "Keep me informed about your new income newsletter" in the subject line]

In my opinion, if you have a view on a particular asset class or particular investments, it makes sense to back yourself. Providing of course, you are prepared to accept the potential downside if you're wrong. But that's where your risk management strategy comes in.

If you really believe the banking sector is undervalued right now, why shouldn't you load up your portfolio on bank stocks? Especially after CBA's decision to maintain its interim dividend. But if bank stocks start to head further south then you've got to be prepared to cut your losses quickly. You can always jump back in again later.

Unfortunately, the only risk management strategy that many investors use is 'diversification.'

Considering that investing is supposed to be about getting wealthier, sticking to the convention of diversifying will only result in your fund manager getting wealthier while you see your investments barely keep pace with inflation.

Actively managing and monitoring your short-term and long-term investments is the only way to keep ahead of the market and ensure you are not just an 'average' investor.

Kris Sayce
for The Daily Reckoning Australia

• Equity Asset Allocation and Portfolio Rebalancing Left Out of Superannuation Review
• The Best Time to Invest in the Market in 5 Years
• Your Average Australian Super Fund
• The Permanent Portfolio
• Australian Investment: Shares or Property?

"You ought to have 5-10% of your portfolio in gold and silver, and I mean the real, physical stuff.

"Oh, you haven't gotten around to buying any gold or silver yet? Let me quote Rudyard Kipling, from his poem 'Gunga Din.' You need to 'put some juldee in it.' Quick! Go and get some precious metals! Don't make me say I told you so, because I will.

"Indeed, I told you so. Or we told you so. Buy gold and silver. If you follow almost any of the publications from Agora Financial, you ought to know that in one way or another, for about 10 years, Agora has been advising people (this means you) to buy precious metals. Back then, in the good old days of Y2K, gold was selling for well under $300 per ounce. Silver was going at $2-3 per ounce. Lately, gold has been selling in the $900 range, with an excursion over $1,000 about two weeks ago. Silver is trading in the $12-14 range.

"Starting in 1999, Bill Bonner told you to buy gold. Bill even helpfully labeled it "The trade of the decade." Over the years, Agora Financial published countless essays about gold from the Mogambo Guru, who was never subtle about it. 'Buy freaking gold,' said Mogambo. "Or if you don't buy gold, buy silver," he said. You could look it up.

"Many other Agora editors and contributors told you to buy gold and silver. Addison Wiggin, Eric Fry and Dan Denning told you to buy it. Agora Financial published guest articles from the likes of Gary North, Doug Casey, Marc Faber and many others about buying precious metals. I've been writing about gold in Agora Financial publications since 2003, when I was a mere "unpaid correspondent in Pittsburgh" composing occasional notes for The Daily Reckoning. 'When all else fails (and it will),' I said, 'own gold.'"

Bill Bonner
for The Daily Reckoning Australia

• Bullish On Silver
• Gold and Silver Demand Unprecedented
• Silver and its Large Short Position
• Price of Silver Climbing to All Time High of US $1,012
• Gold Flourishes but Silver is the Real Precious Metal Story of Late