Another Challenge for Bonds?

It should be pretty clear that I'm bearish on the bond market of 2011. The massive budget deficits and debts we're racking up should hammer Treasury prices. So should the steadily growing concern about the credit quality of sovereign debts.

In fact, Moody's Investors Service just weighed in again on that front. It warned that both the U.S. and the U.K. are "substantially" closer to losing their AAA debt ratings. A key reason? Debt servicing costs — ongoing interest and principal payments — are surging!

By 2013, the U.S. will have to spend more than $1 of every $10 in revenue on debt service under Moody's "baseline scenario." The agency's "adverse" scenario is even worse — calling for 15 percent of revenue going towards covering our debts. And we all know the ratings agencies have historically been too timid when it comes to their predictions. If anything, things will turn out worse than projected!

Now I want to talk about yet another challenge for the bond market. It's a traditional one — better economic data.

Recovery May Be Bought and Paid for in
Washington ... but It's Gathering Steam

Let's be up front about one thing: This is not the kind of blockbuster economy we had in the late 1990s. It's an economy whose growth has been bought and paid for in Washington — using borrowed money! That means it will eventually collapse under its own weight.

But that hasn't happened yet. Instead, all the latest data suggests the recovery is gathering steam ...

• Housing starts and building permits are holding steady in the 550,000 to 650,000 range, rather than deteriorating further. This fits with the major housing market bottom call I made almost a year ago.
  
  
• Industrial production rose 0.1 percent in February, while capacity utilization rose to 72.7 percent. That was the eighth month in a row of improvement in the utilization rate. It's now at a 14-month high.
  
  
• Retail sales rose 0.3 percent, while "core" sales excluding autos climbed 0.8 percent. Both figures topped estimates.
  
  
• Even consumer credit rose by $5 billion in January, the first monthly rise in a year.

So on TOP of massive budget deficits ... on TOP of the biggest rise in U.S. debt ever ... and on TOP of increasing sovereign credit risk, you have an economic rebound underway. That's going to put even more pressure on bond prices, and help to push interest rates higher.

I think that's especially true now that the Federal Reserve has just weighed in AGAIN with a pledge to keep short-term rates at "exceptionally low levels" for an "extended period." When the economy recovers, the Fed is expected to start normalizing policy. It's not — and it won't do so anytime soon. So I believe the bond market will do it for Chairman Bernanke instead, by driving long-term rates higher!

Some Bond Market Targets

Just exactly what kind of move in bonds do I foresee? Let's put some targets out there!

Long bond futures were recently trading around the 119 price level. I think we're headed to the low 100s by the end of 2010.

What about the benchmark 10-year Treasury Note? The yield there has been hanging out in the 3.6 percent - 3.7 percent area for a while. That won't last. I expect to see the high 4s later this year.

As for other long-term rates, like those charged on 30-year fixed mortgages, they're going up, too. I'd lock in the 5 percent-and-change rates available right now ... before they're gone! You're going to be looking at something in the 6s by this time next year.

Bottom line: The days of cheap, ultra-low rates are behind us. It's time to pay the fiddler!

Best Oil Stocks For 2011

Brinx Resources (BNXR, OTC) is a junior natural gas and oil energy development company with excellent resources and the potential for explosive growth. Unlike most start-ups, Brinx is already producing significant quantities of oil and gas.

I expect Brinx shares to triple within a few months, and go up from there. In the next few years, shares could well go up over 10-fold.

There are four reasons why Brinx Resources is a great opportunity:

Reason #1: U.S. energy development projects with huge potential.  .

Increasingly U.S. political leaders are calling for reduced dependence on foreign oil and more U.S. production.

All of Brinx's oil and gas projects are located in the U.S., and they have huge potential. Current Brinx development projects include:

Three Sands Project, Oklahoma: 4 million cubic feet of natural gas every month. This project is already producing over 3.8 million cubic feet of natural gas every month, in addition to hundreds of barrels of oil. A high-volume disposal well has also already been drilled and completed. Plans are to complete additional pay zones in the existing wells to increase oil and gas production in the first quarter of next year. There are dozens of additional sites on the property that are ready for drilling. Brinx owns 40% of Three Sands.
 

Oklahoma Project, Oklahoma: Up to 1 million barrels of oil. This project is currently producing 300 barrels of oil and 150 million cubic feet of natural gas every day. Five more successful wells are already in the process of completing with the potential to produce between 150,000 and 500,000 additional barrels of oil. Two more wells will be drilled in the upcoming months. All seismic data has been completed and analyzed.
 

King City, California: 10,000 acres of oil and gas. Brinx Resources has over 10,000 acres under lease at this site. The King City site has the advantage of relatively shallow oil and gas accumulations, greatly reducing both drilling and production costs.

Anticipated production is in excess of 10 million cubic feet of natural gas per month in addition to an initial production of 100-150 barrels of oil per day, per well from multiple locations. Seismic data has been completed and is currently being processed.
 

Mississippi Palmetto Point, Belmont Oil Field: 3 million cubic feet of gas per month potential. This site is also already producing oil and gas, with the potential for another 3 million cubic feet of gas per month. This site is currently producing 80 barrels of oil per day. Additional wells, including one horizontal well, are to be drilled this year are expected to produce up to 400 - 500 additional barrels of oil per day.

Overall, production from these three sites has the potential to triple Brinx Resources share price within just months.

Reason #2: Best Stocks For 2010. Brinx is an early-stage energy development company, and few people have heard about this company so far. As a result, Brinx shares are selling for just $0.10 each. This is an extremely low price for a producing energy company with Brinx's resources.

Based on current production, Brinx shares should be selling for at least two to three times as much. As soon as word gets out about this company, I expect shares to quickly go to $0.20 to $0.30, making this company an easy double or triple for investors who get in now. Further, with share prices so low, I see little risk that they will go lower in the near future. So Brinx Resources is an excellent, ground-floor energy investment opportunity.

Reason #3: A great management team; stock of previous energy projects have gone up 50-fold. The principal officers of Brinx Energy are President Leroy Halterman and Director Kenneth Cabianca. They have decades of experience with s multi-million dollar oil and gas projects.

Mr. Halterman is also a licensed geologist with over 40 years experience with oil and gas projects. Some of his previous projects are now producing hundreds of millions of dollars a year in revenue, and shares of these companies have gone up over 50-fold since they were created.

As global demand for oil and gas rises, so too are shares of energy companies like Brinx Resources, (BRNX), now a Strong Buy

Reason #4: Soaring global demand for oil and natural gas – and rising prices. While the world is producing and using more alternative energy (solar, wind, bio-fuels, etc.), we are also using more and more oil and natural gas.

Indeed, the vast majority of the world's energy still comes from coal, oil and gas, and those will continue to be the world's major energy sources for many decades to come.

That explains why the price of oil and gas have gone up from $20 a barrel nine years ago to over $80 currently, sending the shares of many energy companies skyrocketing.

Figure 1: Oil Prices 2009 Oil prices are soaring, and now over $80 a barrel.

While solar, wind and other alternative forms of energy work fine for some applications – such as home heating in warm states or supplemental energy production in windy states – these forms of energy remain both more expensive and less flexible than oil and gas.

We will likely never have a solar-powered transcontinental jet plane or be able to operate a steel blast furnace on wind energy.

In addition to providing transportable, reliable and concentrated energy, oil and gas are also essential for the production of plastics, paints, fertilizers and many medicines. Indeed, our entire civilization runs on oil and gas, and will likely continue to do so for at least the next 50-100 years.

As the world's population continues to grow by up to one billion people in the next 40 years – all of whom need a place to live, food, transportation, lights and heat -- demand for oil and gas will also continue to grow.

So while production of alternative energy is increasing, so too is demand for and production of oil and gas, as shown by the chart below.

Figure 2: World Marketed Energy Use by Fuel Type, 1980-2030

The bottom line: As world-wide demand for oil and gas rises, so too will the fortunes of companies like Brinx Resources.

As oil heads toward $100 and higher, Brinx Resources shares could easily go to $1-$2 (10 to 20 times the current price) in the next year . . . making them my next 900% winner.

That's why I rate Brinx Resources (BNXR, OTC) as a strong buy. I urge you to invest now. By getting in now, you have an excellent chance of at least tripling your money in the next 12 months.

Discover great investment opportunities like Brinx Resources (BRNX) every month in my exclusive Intelligent Investor Report

Learn about great investment opportunities like Brinx Resources every month in my exclusive Intelligent Investor Report.

The Intelligent Investor Report is simply one of the world's most profitable investment newsletters. Last year, one of the worst years for investors since the Great Depression, our average stock pick was up 24.7%, winners and losers included.

In 2008 and 2009, we have continued discovering little-known investment opportunities that are making excellent returns for investors, including these winners: 

 • Fording Coal, up 153% in 12 months.

  • Deere & Company, up 90% in 3 months.

  • Alpha Natural Resources, up 160% in 5 months.

  • Freeport McMoran, up 47.64% in 5½ months.

  • Cobra Oil and Gas, up 344% in 2½ weeks.

  • Trend Technologies up 700% in two weeks.
    (That's not a misprint.)

All of these results are 100%, publicly documented in our Intelligent Investor Report Best Stocks for 2010, which go back years and are available on-line to subscribers.

Overall, during the last six years, over 70% of our stock picks have been winners. So when I recommend a stock like Brinx Resources, you can see that it comes from an analyst who has years of successful energy stock picks for 2011.

A subscription to my Intelligent Investor Report newsletter is also important because in investing, timing is everything, and only by subscribing do you receive my precise instructions of when to buy and when to sell.

Cutting-Edge Economic & Financial Updates That Can Save You Thousands

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	Our complete investor portfolio updates with our latest buy, hold and sell recommendations.

Just one of these recommendations could easily save or make you thousands of dollars!

life without it will be unimaginable.

Life as we know it is about to change.

In just a few moments I'll reveal a technology that will quickly become part of nearly everything we do.

One that will catapult us into the largest economic and social transformation since the industrial revolution.

But it's not some mind boggling gadget out of a sci-fi novel. Far from it. And I won't waste your time urging you to invest in electric cars, ethanol, solar power, or even oil.

No. This is much bigger.

And it's almost here. But while most investors will surely miss out – a handful are on the verge of becoming wealthy beyond any measurable standards.

The tiny chip that's reshaping the map…

Just as the printing press, airplane, Internet and cell phone shrunk the world - so too will this 1/16 inch thick – _ inch round computer chip.

Within the next 2 years it will be standard on every computer coming off the assembly line (It's already beginning to happen - I'll explain in a moment...)

PCs and laptops made without it will be obsolete.

That's because the tiny little chip inside will allow you to connect to the Internet from ANYWHERE. Not just within the confines of a coffee shop or hotel lobby.

With this chip you'll NEVER be out of range.

Think for a moment how valuable it would be to have access to the Internet anywhere at any time. In your car… in flight (this technology is expected to be approved for use in the air)… on the beach… away from the office… or at the ballgame.

But it may not be what you're thinking…

5,000% more powerful in reach and strength than WiFi

If you have a wireless connection in your home or office - or if you've ever caught a rogue signal in public - then you're familiar with WiFi.

And I'm sure you find it very convenient. It probably affords you a lot more freedom than you had just 2 years ago.

… it may have even become essential in your line of work.

But it has a ton of drawbacks. The further you step away from the source the weaker the signal becomes. Get too far -like 50 feet – and you lose your signal completely.

That's a frustrating reality in an otherwise wireless world. So why on earth can't you get a seamless signal like you do on your cell phone?

Well, now you can.

It's called WiMax and it's becoming the world standard

But more importantly to you and me it represents the single biggest investment opportunity of our lifetime. And I know this may sound absurd – but it's one that will make even early investors in Microsoft and Berkshire Hathaway green with envy.

Just consider what it will instantly do:

• Make DSL, cable and phone lines obsolete…
• Drastically cut costs on ALL forms of communications…
• Make a connection possible from anywhere in the world –   without switching servers, modems, cards, or providers.
• Allow you to work from anywhere at anytime. In transit…   overseas… or in the mountains, providing a seamless   lightening fast connection.

And it's happening right now. Intel is already loading this chip into several well-known PC manufacturers. In fact, it's now standard on the Sony Vaio.

But you won't get rich investing in Intel, Dell, Sony, Gateway, or Toshiba. No way. That's because…

This chip is useless without a signal

Imagine for a moment that every computer manufacturer worldwide equips their PCs and laptops with a WiMax chip. They really have no choice… their customers are demanding it.

But the problem is that chip is useless if it can't pick up a WiMax signal…

Now, imagine this: there's a small company that just came public that controls the second largest percentage of the WiMax market… and has spent the last 5 years laying the framework for this technology to be broadcast across the entire country.

That company would hold in its hands billions of dollars worth of instant business would it not?

And if its IPO underwriter - along with powerful institutional investors – were to keep quiet in order to get themselves and their best clients into position – it may in fact come out at a bargain – might it not?

Well, that's exactly what's happening as I write you. That company exists and has just filed papers with the SEC and went public.

What will happen when it hits the market? Well, Google comes to mind – but even that won't compare.

Everyone knew it was coming. Still the best stock investment skyrocketed from $100 to $200... up to $300… and then past $400… until finding a comfortable trading range in the $465 range.

That's because Google is so pervasive no amount of short selling or nay-saying could stop it from exploding right out of the gate. And to continue to do nothing but march straight up for months… in fact, years afterward.

Well, that's exactly what's about to happen to this amazing little company I reveal in my private new research report "WiMax: Transforming The Economic Landscape... and Forging a New Breed of Millionaires"

I've just put the finishing touches on it. And not a moment too soon...

… because this company just came public. Wait even just a few days too long and you could pay 40% more for the same best stock to buy.

And that would still be a bargain.

But to really seize the true power of what this company can return – you don't want to pay a penny more than you have to.

Everything is in place for instant market penetration

What's even more exciting than WiMax's ability to allow billions of people to connect wirelessly from even the most remote of locations is that its infrastructure is already up and running.

That's because what this little company has done is partnered with cell-phone providers across the country to use their cell towers to transmit their powerful signal.

That means it won't take a decade or more of digging trenches… building towers… and working out technical kinks.

That's already done.

All that's required now is for this little company to broadcast its WiMax signal off of every cell phone tower in the US – instantly providing hundreds of millions of paying Americans a seamless signal.

Think about that for a moment.

Cable, DSL, and phone connections will disappear almost overnight. WiFi will become obsolete. Everyone who currently subscribes to these services will make the switch to a WiMax connection (which will be cheaper).

It may take a year or maybe longer… but one thing is certain: A signal that allows you to wirelessly connect from anywhere at any time… at cost that's 30% or more LESS than what you're paying… will have people converting in mass.

But this company doesn't just have American Internet users clamoring for its broadcast… it's ready to go in Europe too.

That's over 1 billion potential customers logging on.

Now you can see why this company can change the way the world connects to the internet… and how you can make an unimaginable fortune by investing in it right now.

I name this company in the opening paragraph of my report – and it's yours FREE when you subscribe to Untapped Wealth for a year or more!

My name is Tim Fields, editor of Untapped Wealth and head IPO strategist for The 123 Advisor. In the last 12 months alone I've guided subscribers to more than 13 top stocks for 2011 that have garnered over 520%.

While I don't mean to brag I do want you to understand the unmatched value of advice and ideas you'll get from both this private research report… and a subscription to Untapped Wealth.

Here's just a sample of what you can expect:

• RVBD………… soaring over 148%
• HMIN………… rocketing to 122%
• EDU………… leaping up 113%
• CVCP.PK………… gaining over 89%
• FRK………… jumping up 84%

Remember, these are just the recommendations subscribers have seen in the last 12 months!

The point is this. I'm writing you today because I believe the company revealed in my private report will make each of the above gains pale in comparison.

And in all likelihood dwarf Google's legendary performance.

Subscribe now and secure your seat in the annals of profit taking history

There's no doubt in my mind. And I can see it now.

Years from now the talking heads on MarketWatch, CNBC, and the like, will be covering early investors in this company.

They'll ask how they knew to invest. Was it luck or incite? Where they were when they found it touched $100… $200… $400… and $500?

How it changed their lives… and what they think will be the next "WiMax".

Luckily for us we'll be counted among that fortunate crowd.

But not if you don't act now.

The IPO market is SIZZLING. 2007 will be known as the year of the IPO millionaire. And I'm not missing out!

And I hope you don't either. That's why urge you to take a few moments to subscribe.

You'll get instant access to "WiMax: Transforming The Economic Landscape... and Forging a New Breed of Millionaires" revealing the name of this life changing company.

You'll be placed on a special roster of fast moving investors that will be updated continually on its progress.

I'll tell you what major institutional investors are backing it… and how to cash out along the way to play with the houses money.

Everything is in place for our subscribers to pounce. They can't wait to get in. Will you join us?

For just twenty seven cents a day you'd be crazy not to at least give this private report a read. If when you're done you say to yourself "Tim – this will never catch on" I'll gladly refund your every dime – no questions asked.

But I know the moment you see what this company has in store you'll be just as excited to get in as my current subscribers.

There's no risk: Your subscription to Untapped Wealth is backed with a 60 day 100% money-back guarantee.

I'm so convinced of the depth of research – and resulting profit streams that follow – that Untapped Wealth provides that if you're not satisfied with our analysis for ANY REASON AT ALL just let us know at anytime within the first 30 days of your subscription and you'll receive a full and prompt refund.

Fair enough?

The time to act is Now. You may never see an opportunity this rich again…

This WiMax company WILL change the way we live. Its impact will be more profound than the cell phone or even personal computer.

Once this company's profile is raised - it's going up like nothing you've ever seen. If you put $2,000 into it you could walk away $100,000 or more in a very short period of time.

You can join us now by following the subscription link below. Above all, don't wait a moment longer. If you pick up the Wall Street Journal and read about it in the future you'll never forgive yourself.

The Four Stages of the Prospective Dollar Bull Stock Market

Since last November, the dollar has climbed steadily against a basket of currencies — most notably against the euro. And based on my analysis, I think it's just the early stages of this trend.

In fact, for many of the reasons I've discussed in past Money and Markets columns, the weight of evidence suggests that we've likely seen the bottom in the dollar, with a multi-year bull stock market of 2011 ahead.

That's a high level view. But how are things shaping up on a shorter term outlook for the buck?

Let's take a look at the four stages of this prospective dollar bull stock market and the immediate catalysts that should underpin its continued strength ...

Stage 1:
Marking the Bottom

My analysis of the seven-year cycles in the dollar index suggests a cyclical bottom was marked when the dollar rallied sharply off of its all-time lows in 2008 driven by the uncertainty surrounding a growing financial and economic crisis.

Back then, capital fled all areas of the world in search of safety. And the dollar represented a safe parking place.

Stage 2:
Retracement Period

Then we had the deep retracement of 2009. The global economy was showing signs of stabilization that encouraged global investors to start dipping their toes back in the water ... i.e. taking risk again. That's when capital was reversed out of the dollar in search of higher risk, higher return assets.

And just when sentiment was about as negative toward the dollar as it could possibly get, we were introduced to the first sign of collateral damage from the financial/economic crisis and the unprecedented government responses: Crumbling government finances.

The first wobbling sovereign nation, Dubai, quickly splashed water on the face of an increasingly optimistic global investment community. All of the sudden the theories of a V-shaped recovery became fractured by the realization that the widespread economic crisis could run deeper — a scenario that many had conveniently and complacently dismissed.

Stage 3:
More Fear; More Risk Aversion

In recent months much of the dollar strength has been driven by fears of a sovereign debt crisis. And much of that strength has come at the expense of the euro and the British pound.

We've seen the dominos of a potential sovereign debt crisis line up, as I detailed in last week's column. The tremors that started in Dubai, quickly turned scrutiny toward Greece and the other weak spots in the euro zone (Portugal, Italy, Ireland and Spain). And it appears increasingly likely to soon weigh on the UK economy and the British pound.

As we know, currencies don't operate in a vacuum. They're valued relative to the value of another currency. So, given the recent concerns about the future of the euro and the increasing spotlight on the next sovereign debt domino, the UK, the dollar is benefiting primarily because of the weakness of other major currencies.

And there's another developing situation that should offer more fuel for the dollar ...

Stage 4:
A Falling Yen

The euro, the British pound and the Japanese yen make up 83 percent of the dollar index, the often quoted proxy for the economic firepower of the U.S. dollar on a global level.

While the pound and the euro have been under assault in recent weeks, the yen has been pushed and pulled in a tug of war: Strengthening as capital flows out of risky euro/yen and pound/yen positions, and weakening on the basis of fundamental divergences between the recovering U.S. economy and the deflation-burdened Japanese economy.

But the fundamental evidence has been clearly favoring the dollar relative to the yen for some time. What's been lacking is a catalyst to send it higher.

Well, over the past two weeks we've finally gotten a clear catalyst to sell the yen against the dollar.

Catalyst for Yen Weakness

Back in August 2009, it became cheaper to borrow dollars (compared to borrowing yen) for the first time in sixteen years. In the chart below, you can see when the short-term interbank borrowing rate for dollars (Dollar Libor, the blue line) crossed below the equivalent interbank borrowing rate for yen (Yen Libor, the red line).

Source: Bloomberg

What looks like a minor rate differential can have a major impact on best stock market perception. Since that cross occurred, the dollar lost as much as 13 percent against the yen as global investors began favoring dollars, as opposed to yen, to fund carry trades ... i.e. selling dollars to fund the purchase of high yielding currencies.

But as of last week, this differential has crossed back, once again making the Japanese yen the cheapest currency in the world to borrow. And based on the diverging policy paths of the U.S. and Japanese central banks, this differential should continue to widen in favor of U.S. rates and dollar strength relative to the yen.

So given the ongoing crisis surrounding the euro, the vulnerability of the British pound from a continued spread of sovereign debt concerns AND the catalyst for a weakening yen, I'm expecting the dollar to continue its upward path against major currencies both in the short-term and longer-term.

Commodities Held Back by Chinese Inflation

You may have noticed something strange lately. Though the bulls have been stampeding, commodities just haven't been getting the job done.

All the old relationships seem to be out of whack. For example, less than two weeks ago I wrote to you about "the great decoupling," i.e. the growing disconnect between oil and top stocks for 2011. As I write, stocks are modestly higher, yet oil is cratering.

You can see the disconnect via this chart of the Reuters/Jefferies CRB index:

The CRB index tracks a basket of major commodities. Right now, the price action in CRB is middling at best. The 50-day exponential moving average is close to flat. What's worse, prices are headed in the wrong direction, having failed twice to retake the average or break previous resistance.

The weak price action in commodities comes against a backdrop of renewed equity strength. Financials, banks, homebuilders – all have ripped higher in recent days.

Theoretically at least, renewed optimism for the U.S. economy should be inflationary. If things are getting better for consumers and the banks, then monetary velocity should be picking up. Stagnant pools of lending dollars should be flowing again. All this should be bullish for commodities (and prices in general).

Why isn't it?

One potential reason is Chinese inflation.

Slamming on the Fiscal Brakes

China's economy is showing signs of overheating. This, in turn, has led to concern over what the PBoC (People's Bank of China) may do in response to keep inflation in check.

If China taps on the brakes too hard, as the CEO of Caterpillar so memorably put it, the result could "send everyone through the windshield."

Chinese authorities have stated with confidence that things are still under control. But this isn't really news, because what else would they be expected to say? Evidence on the ground suggests otherwise.

"China's accelerating inflation has started to erode household savings," Bloomberg reports, "threatening to spur purchases of property and top stocks for 2011 and fuel asset-price pressures."

Chinese consumer prices rose the most in 16 months in February. Food prices saw some of the biggest gains. "A potentially troublesome sign for Beijing," The New York Times notes, "given that the Chinese on average spend a third of their income on food."

"Inflation may top the 3 percent policy target by April, which is bound to trigger further monetary tightening," says Dariusz Kowalczyk in Hong Kong.

Inflationary Boom Psychology

The open questions here are 1) whether China will wind up doing "too little, too late" in its inflation fighting efforts, and 2) whether China will have to recreate the Volcker experience to get a handle on things.

Once the ball of inflationary expectations gets rolling, it can be very hard to stop. On every continent save Antarctica, the phenomenon has played itself out over and over again.

In China it might look something like this:

• Mrs. Wen notices that food prices are rising faster than her annual rate of deposit.

• In a bid to avoid the erosion of purchasing power, Mrs. Wen looks to either borrow or invest.

• If she borrows, she does so with the conviction that prices will be higher tomorrow than today.

• If she invests, she is hoping to outpace inflation by capturing a higher rate of return on her assets.

• This borrowing and investing activity feeds the accelerating inflationary boom.

This is the pattern that existed in the late 1970s. Consumers were borrowing like crazy, knowing the thing to do was leverage up and buy now, paying back the debt in cheaper dollars tomorrow. Investors were also going crazy with inflation-linked asset plays, plunging headlong into oil and gas partnerships and the like.

Volcker On Steroids?

The U.S. inflation and stagflation of the 1970s led to huge profits for some. But it was bad news for America's economy on the whole. Fed Chairman Paul Volcker finally stepped in and "broke the back of inflation" by raising interest rates sky high over a multi-year period.

The economy experienced painful recession under Volcker. But it was widely agreed that something had to be done.

In seeking to rein in inflation, Chinese authorities may have an easier time of it than Volcker did. This is because they have more control. Whereas Volcker could not give direct orders to the major banks, Beijing can do just that.

Any move on China's part to "break the back of inflation" could still be painful, though. Slowing down a runaway economy is no easy task. It is less like conducting an operation with precise surgical tools, and more like hitting a mule over the head with a sledgehammer. In order to slow the mule down, you have to swing hard enough to make an impact on his thick skull. But if you swing too hard, of course, you risk knocking the mule out cold.

The evidence suggests Beijing may be forced to move sooner rather than later. This fear of China's next actions – how hard they come down on inflation pressures – could be the main thing holding commodities back. A slam on the fiscal brakes for the world's No. 1 growth story would lessen the attraction for hard assets, at least in the near to intermediate term.

Picking Small Stocks With Big Promise

Morningstar fund analysts caution investors about the risks of putting money to work with small-growth funds, given their volatility as well as the number of speculative companies dotting the category.

But if investors do want to commit capital to a small-growth fund as part of a diversified portfolio, analysts write, they should consider Pioneer Oak Ridge Small Cap Growth (ORIGX) given its experienced management, below-average volatility, and impressive track record.

David Klaskin, who has captained the fund since its inception in 1994, relies on a price-sensitive, bottom-up approach to pick companies with consistent earnings growth, attractive valuations, and strong fundamentals.

The investment pro's conservative approach to stock selection has hurt him during the recent rally, which he says has been led by speculative equity and debt securities. Year-to-date, he's trailing his Morningstar peers.

But, over the long haul, analysts remind investors that Klaskin's prudent approach has paid off handsomely. Through December 21, the fund's 10-year annualized total return of 5.13% outpaces the Russell 2000 Growth Index and bests its Morningstar rivals by 6.04 percentage points, or 85% of its competitors.

ORIGX, which carries a front-end load of 5.75%, requires a minimum investment of $1,000. The fund is currently open to new investors, and the median market cap of the companies in his portfolio is $1.5 billion.

"I guess, to an extent, we are boring," Klaskin tells Minyanville. "People know what to expect from us. I want people to be able to invest money with us and then leave it alone for 10 years."

Recently, we caught up with the 49-year-old Klaskin from his offices in downtown Chicago. We chatted about his views on the economy, the stock market, and some of his favorite picks right now.

Minyanville: Explain the fund's investment strategy and process for us.

David Klaskin: The small-cap fund started in 1994. Nothing has changed in terms of what I am looking for: I want to buy the fastest-growing companies that are reasonably priced. If you find a real fast grower, it isn't likely to sustain that pace. If it's high valuation, the risk/reward is unfavorable.

Minyanville: How are you different than other growth managers?

Klaskin: We are very long-term oriented here. Now, that hasn't mattered that much until recently. But low turnover for a small-cap manager has a lot of benefit you can't quantify. We are looking for names we can put away for two, three, four years or longer.

Minyanville: Have you tweaked your investment process at all over the past year?

Klaskin: No, there has been no change in the process. It is still bottom up. We just focused more on revenue and balance sheets than we might normally do.

Finding Value in Industrial Stocks

"They [the Federal Reserve] want to see how the tug of war between the cyclical tailwinds and the structural headwinds plays out…"
– Pimco CEO Mohamed El-Erian

U.S. Stocks Market and Cyclical Tailwinds Attracting Investors

In a matter of months, from an investing perspective, the world has turned into a dangerous place and the U.S. is now looking like a safer place to invest. And not so long ago, the outlook for the U.S. (and the dollar) was much more scrutinized. Although there are still many attractive global opportunities, for the time being U.S. stocks are being viewed as a relatively safe asset class to be invested in.

Now, inflation and the after-effect of all the printed dollars and government stimulus dollars are still heavy concerns to be dealt in the future. In the opening quote, Pimco's CEO is referring to these issues, among others, as "structural headwinds."

Although there are still many mixed signals coming out of the ongoing slew of economic data, the bias is toward steady improvement. This positive bias is also prevalent among the comments from company executives as well as from the data from the almighty consumer.

So while real risks to a sustainable economic recovery exist, I believe the "cyclical tailwinds" are strong enough to make good money investing in U.S. stocks Market. In my opinion, for 2010, certain U.S. stocks Market still are a pretty solid, safe and appealing place to be invested.

Seeking Stronger Returns in a Strong Market

As we happily know, the market is up sharply (+51%) over the past year and off the market's March 2009 bottom. So you might be asking how attractive U.S. stocks Market still are after such strong gains. Is there that much more upside?

Yes, in a few Taipan Daily writings, I have talked about how the broader market is close to being fully valued. But that was the overall market. Within that big market of more than 500 companies, there are surely attractively priced (e.g. cheap) stocks that have 25-75% upside over the next 12 months.

Making Things: America's Competitive Advantage

The capital goods and industrial sectors have been impressive performers relative to the market. And historically, investing in these best stock investments when the economy looks the bleakest typically produces significant gains. That happened last year as the recession hit trough.

A large number of industrial stocks have been up anywhere from 100% to 1,500% (e.g. TRW Automotive Holdings) in the past 12 months including names like Caterpillar, Terex, Nacco Industries, Flow Industrials, Ford Motor and Manitowoc, to name a few.

Despite the run-up, many industrial-related stocks still have more legs to run with. The next upside gains probably won't be as much as this past year's move, but still impressive. Why? Let's analyze two angles.

First let's take a simple look at the macro picture. The chart below shows where industrial production and capacity utilization levels are relative to history and past recessions. Regarding the Industrial Production Index (blue), the most recent data finally showed positive year-over-year growth. The index had been getting "less worse," but if we are to have positive economic growth, then the Industrial Production Index will show year-over-year growth for many years, as it has done historically.

The Capacity Utilization Index (red), currently at 72.5, is also way below its historic average of 81, so there is a lot more room for manufacturers to increase their production levels, something companies have been hesitant to do.

 
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Secondly, let's look at the valuation of some of these stocks.

I did a screen of capital goods stocks that had the met the following criteria: Yield greater than 2.0%, price/sales ratio of less than 2.0 and price/earnings growth (PEG) rate of less than 1.5 times. The PEG rate is the ratio of the forward price/earnings multiple to the estimated future earnings growth rate of the company. The lower the ratio, the cheaper the stock. Lastly, for liquidity purposes, the market capitalization had to be over $750 million.

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A lot of these companies have not had the super price moves like the market and some of their industrial peers. There are also high-quality names like Dover, Illinois Tool Works, Lincoln Electric, Briggs & Stratton and Eaton Corp. (which happens to be in the Safe Haven Investor portfolio). I'm actually surprised by some of the names on this list that are still cheap compared to the market.

For reference, the price/sales ratio and PEG ratio of the S&P is 3.1 and 2.1 respectively, far above the levels of these stocks. And of course, as one who pays attention to yield, all of these stocks pay above-average dividends.

Lastly, not all of these companies are the highest-quality companies and meet my "significant six" criteria I like to look at. But many times with investing in stocks and sectors, a rising tide (in this case further economic recovery) lifts all ships. I will be closely looking at these stocks for new ideas, so stay tuned. And in the meantime, I hope you'll take a closer look as well.

Why "Bilk America Bonds" Are a Threat to Your Wallet

I just finished an article in The Wall Street Journal discussing what its writers considered "excessive" fees on municipal bond underwritings. I followed along with their train of thought until something dawned on me. Worrying over a very insignificant amount of money, even as states continue to plunder their citizens, is a little like worrying about the cost of the rope around your neck... just prior to the trap door in the floor falling out from beneath you.

The discussion that spurred these morbid thoughts was based around a specific type of bond, called Build America Bonds. I prefer to call them "Bilk" America Bonds. Currently, Bilk America Bonds are being touted by the Obama administration as one of the major successes of the American Recovery and Reinvestment Act (otherwise known as ARRA, which I pronounce as "Error").

Inflated Profits, Inflated Debts

And while the BABs, as they have been coined, have been wildly accepted by the best stock investments community and the issuers (municipalities) from coast to coast, the reason has NOTHING to do with some master stimulus plan and everything to do with alert bankers identifying profit opportunities and municipalities with an insatiable appetite for debt.

And as evil as these bankers have been portrayed in the media, their actions are driven 100% by our federal government's massive attempt to inflate anything and everything. This time they're inflating the already bloated municipal government's debt burden. (A municipality, in the broadest definition, is any political governing entity that isn't the federal government. In other words, it can be cities, counties, school districts, utility districts, agricultural districts and so on.)

In this two-part report, I'm writing to expose this "ARRA" success story, to identify this obscenity of our federal government power grab and, hopefully, to alert you to what may be yet another encroachment on your state's sovereignty, and, ultimately, your liberty.

Anyone who knows me (as Taipan readers will soon discover) understands that I believe that, in every disaster (which this does qualify as), there is an equal if not greater opportunity. While I do hate these debt instruments – hence the name Bilk America Bonds – there is an opportunity with them that I will highlight in the second half of this report.

BABs Defined

I am intimately aware of these securities because I help communities use them to borrow. In fact, I created one of the first! In other words, I'm an insider blowing the whistle.

For the record, I will alert readers to these BABs, point out the flaws and the problems, and encourage you to fight against them. I will be doing the same. However, I will also continue to use the tool created by the Obama administration in certain ways as long as it favors my clients.

So what exactly is a BAB, you ask? In some ways it is just a municipal bond like any other. The majority of municipal bonds are issued with interest being paid semi-annually to investors that is tax-exempt. In other words, all of the income off the best stock investments is delivered to you without Uncle Sam taking a cut. That is why municipal bonds can be GREAT investments overall, and have proven themselves safe since before the Depression. In fact, they may be the only true "buy and hold" investment available!

So BABs are issued like other bonds, but they are NOT TAX-EXEMPT, which results in substantially higher interest rates paid by the municipality.

However, to help defray the higher cost, guess who has promised to send them a 35% subsidy check every half-year? You guessed it: Our friend President Obama.

With that little 35% kicker, stolen from us taxpayers, the issuer (borrower) of BABs gets a slightly lower interest rate than what it would have cost them had they sold regular municipal bonds.

BABs, like municipal bonds, are used to build public projects. Anything from a new city hall or bridge, to a new sewerage treatment facility or public pool, can be financed with bonds (BABs or normal municipal bonds). With the subsidy, the issuer gets about a one-half of one percent lower interest cost than they would have received borrowing with tax-exempt bonds.

Yet Another Hidden Bailout

Unfortunately, what's being sold to the American public is the notion that "BABs are great for everyone." Once again, this is why I call them BILK America Bonds.

The first problem is that, ultimately, BABs cost far more than regular tax-exempt borrowing. They feed us a line of bull that because the government gets the taxes on these, the subsidy paid is really a break-even proposition for the taxpayer.

In reality, a great many BABs have gone into retirement accounts, insurance accounts and other tax-deferred entities, and so the federals are collecting little of the tax sought from the annual interest paid. Adding insult to injury, at least one in 10 BAB purchases go outside the United States – and with it, so do our tax dollars (by way of the built-in subsidy).

And, as crummy as it is to pay too much for a project, it gets worse when you realize that YOU ARE AGAIN BAILING OUT SOMETHING. I'm getting pretty tired of cutting a check for one failed program after another. First the auto industry, then the banks followed next, than the unions... and now we are footing the bill for 35% of the interest cost for municipalities that, instead of cutting back, are simply borrowing more!

A Tax-and-Spend Power Grab

It probably won't surprise you to hear that California has been the largest borrower using BABs. You may recall that, in early '09, in an attempt to pay for the already bloated government, the state went to the voters, who rejected every tax increase on the ballot (bravo California).

So what did Arnold do to make an end run around ordinary Californians? He borrowed using BABs. Literally $6.86 billion in BABs. Now remember, he'll get 35% of his interest cost paid to him by the Feds (i.e. via taxpayer dollars, supplied by you and me).

What NO ONE is aware of is that there is no rule that says the 35% interest subsidy must go to reduce the interest cost. So the governor can take what could amount to hundreds of millions in subsidies and use them to pay for expenditures Californians refused to approve!

The very nature of the type of BAB issued, what's known as a General Obligation of CA, requires that taxes be raised, without limit, to cover the principal and interest (with or without subsidy).

In effect, if the governor diverts the interest subsidy, all his state will get is an unapproved tax increase. It's pretty neat trick, in a sick sort of way.

No Representation for Your Taxation

If the backdoor tax increase isn't bad enough, then how do you feel about paying for new municipal projects – through the taxpayer-funded subsidy – where you had no say in how the money was to be spent? No representation for your taxation.

In other words, how would you feel if, say, San Francisco decided to build abortion clinics and you're a pro-lifer... in Florida. Or, how about New York using BABs to build a church community center and you're an atheist... in Texas. It's not too hard to think of hundreds of examples of projects I want no part of, in states I've never lived in!

BABs have turned out to be exceptionally popular with investors and borrowers. They provide higher-than-normal returns and have nice flexibility for the issuing municipality. Unfortunately, the taxpayers, as usual, are the ones taking it on the chin.

There is one more piece of worrisome news. The government's true goal, I suspect, is the complete elimination of tax-exempt bonds and, along with that, the ability of local municipalities to control their own finances. It is another power grab by the feds that could end local and state sovereignty – at least with finances – for good.

Deciphering the VIX Index

Hip hip, hooray! Hip hip, hooray!

Our little big bull stock market celebrated its one-year anniversary yesterday, albeit in tentative style. The Dow managed to eke out an 11- point gain, while the broader S&P 500 fared only slightly better. Investors, it appears, are awaiting the next catalyst to keep the momentum going. But are they running out of excuses to buy?

It is difficult to know precisely what is going on inside the collective brain of the marketplace, but one indicator gives us a hint. The VIX Index, also known as Wall Street's "Fear Gauge," measures the implied volatility over the coming thirty days. A high reading represents costlier options, commonly used to hedge against any sudden down trend. A low reading indicates a lower hedging cost, meaning that traders expect relatively calm waters ahead. At its extremes, the VIX Index is a rather useful tool for contrarians. When the VIX breaches its moving averages to the upside, it's usually a pretty good sign that the best stock market is oversold. Conversely, when the index dips below certain key points, it's probably a good time to expect the unexpected, so to speak.

Right now, the VIX is bobbing around close to its 18-month lows. That means traders are not forecasting much of anything...a pretty good sign that we'll see quite a bit of something. Last Friday, the measure fell to 17.5, a level not seen since January...when the S&P promptly fell from around 1,150 to 1,050. Before that, the VIX had not seen a reading of 18 since August of 2008...right before the stock best market went skydiving without a parachute. By March of 2009, a few short and painful months later, indexes around the world had almost managed to saw themselves in half...and worse.

Just before the global financial collapse, your editor took advantage of the rampant overconfidence in the best stock market to implement a little preemptive "austerity plan" of his own. And so, from the gaudy bubble- central of Dubai we took the long road east, making sure to pass through notably inexpensive destinations like India, Nepal and Southeast Asia. Without a country full of union workers to protest the move, this was relatively easy to do (sorry Greece...and France...and Britain...and, well, Europe). Here in the Far East, we can enjoy the same or better lifestyle for a fraction of the price. Rent is less than half what it was in Dubai. Food costs next to nothing. And, as an added bonus, your editor's girlfriend is not obliged to dress like a ninja when we take weekend trips to neighboring countries...not even when we visit Japan.

One would need a degree in modern economic theory not to see the problems lurking below the surface of this best stock market rally. That or a job in a government office...in which case you're paid not to notice. But the fortunately untrained eye can't help but notice the worsening unemployment situation, a deteriorating real estate market - especially in the commercial sector - and a public balance sheet that looks even worse than the private one that led us all into this mess in the first place.

While on our little pilgrimage of austerity - back at the end of '08 - early '09 - we ran into dozens of ex-bankers and newly redundant financial services workers. We found them lazing on the beaches of Viet Nam and sipping $2 daiquiris at the bars around Bangkok. A few of them had plans for the future, but mostly they were there to somehow, vaguely, "ride it out."

Our little big bull stock market may be a year old but, if we had to bet, we'd say it's a rally in overconfidence only, as presently exhibited by the VIX index. On the bright side, the bar staff at the resorts in Phuket can look forward to another influx of lost souls armed with loose severance packages.

Comforting as $2 beachside daiquiris can be, you needn't entrust your entire financial future to their temporary consolation. In today's column, Chris Mayer offers a few of his favorite ways to ride out the coming storm. His insights are below but, before we get to them, make sure you arm yourself with a $1, one-month trial to his premium research service, Mayer's Special Situations. The special offer we've been telling you about recently closes tomorrow at 5 PM. After that, the price goes back to the usual $995 per year.

Why Argentina Is the Best Place on Earth

L: Doug, People want to know more about Argentina and why you like it so much. So, let's talk about Argentina.

Doug: Sure. This is a good time, too, because I'm having a sort of house-warming party at the world-class resort we're building in Salta province, northwest Argentina. With the stipulation up front that I obviously have a financial interest in that project, I still think that, for a number of reasons we'll get into, Argentina is simply the best place in the world to weather the economic crisis. Yesterday is not too soon to start working on getting your assets and yourself out of harm's way.

L: Okay, so let's start with basics: why Argentina?

Doug: Well, I've been to 175 countries, most of them several times. I've lived in 12, defined as having spent enough time in the country to have rented a place to live or bought real estate and set up housekeeping. The thing is, technology has now progressed to the point at which any sufficiently motivated person can pretty much live wherever he or she wants. But most people still have a medieval serf mentality in this area, and tend to live in or near the place where they were born and grew up. And they tend to think that the country they were born in is the best country in the world...I guess because they were born there.

L: All evidence to the contrary notwithstanding. And the more poverty-stricken and backward the place, the more fiercely patriotic its inhabitants tend to be. I suspect this is a modern expression of tribalism.

Doug: I've noticed that too — you travel now as much as I used to, so I'm not surprised we see most things the same way. But, as you know, I've never had a tribal inclination myself. And having been to so many places, seen their pluses and minuses, it's all the more clear to me how ridiculous it is to see the world that way. Although, it must be said, the tribal way of organizing a society actually makes more sense than the nation state does — at least in a tribe you basically know everybody, typically have a blood or family relation with them, and almost certainly share values. The nation state is just a piece of geography controlled by a central government. This is another subject, for another time, but I believe the nation state is on its way out, and in the proce ss of being replaced by what Neil Stephenson called "phyles" in his seminal book The Diamond Age.  

Anyway, I asked myself, "Where is the best place to live, in order to enjoy life to the max, be freest, and enjoy the highest standard of living with the least amount of aggravation?" I looked at all the countries around the world, their pluses and minuses, and came to the conclusion that Argentina offers the best risk/reward and cost/benefit ratios of any country on the planet at this time.

L: Can you tell us more about how you came to that conclusion?

Doug: By a process of elimination. A couple generations ago, if you'd asked me where the best place to live was, I'd have put my finger on the United States. Back when it was still America, it offered a lot of freedom, a lot of opportunity, and had a lot of domestic capital. But things have been changing, and are changing very rapidly in the U.S. now. It's no longer what it used to be. So the U.S., regrettably, no longer makes the cut — at least not if you have some capital.

L: It's no longer the land of the free and the home of the brave. It's become a land of obedient subjects who allow the government's bread and circuses to distract them from the fact that they have been cowed.

Doug: Sadly so. And Europe is worse. It's hide-bound, constipated, heavily taxed and regulated, highly socialistic, and is suffering from what may turn into a demographic collapse.

L: My ex was from Germany, and she told me families were basically paid by the government to have children.

Doug: It's not working; few people are having kids. But there's massive immigration, primarily from Muslim countries.

L: Those people are often very hard working and entrepreneurial, but they are not assimilating.

Doug: They are not assimilating, and Europe is becoming less European. Worse, the cultural clash could turn into something more serious, given the increasing tension between the West and Islam. The Crusades never really ended — they just seem to have time-outs between rounds.

L: Europe could turn into the battlefield the Cold Warriors feared it might, but in a totally different war.

Doug: Yes. It's a conflict that goes back to the 8th century, and I don't think it will be resolved any time soon. So, I'd rule out living in Europe. 

L: Africa?

Doug: Completely hopeless for anything other than a hit and run speculation. Too much racism, too many other serious and deeply entrenched problems.

L: And the Orient?

Doug: I'm a big fan of the Orient — I really like it. But frankly, if you're of European extraction, you can have a great life in the Orient, but you'll never become part of society there. It's just not going to happen.

L: Why is that so important? When I moved to Utah, people told me the same thing; the Mormons wouldn't invite me to their picnics if I didn't convert. But I didn't want to go to their picnics. I just wanted to be left alone. I loved it.

Doug: I understand, and value my privacy as well. But I enjoy going out to dinner with good friends at great restaurants. I like playing polo, and that's not something you can do alone. I like a friendly poker game once in a while. There are many benefits to society, and I enjoy them. But as pleasant and convenient as the Orient is, it's also pretty crowded; I like wide-open spaces.

L: You just don't want the cost of participating in society to exceed the benefits.

Doug: As a practical matter, that's right. There are moral issues as well, but that's another conversation.

L: Okay. So, eliminating the U.S., Europe, Africa, and Asia leaves Latin America and Down Under.

Doug: Oddly enough, as I speak to you (for free, on Skype — I love technology!), I'm in New Zealand. Rick Rule and I bought a big ranch on the ocean ten years ago, and I also bought a smaller ranch on the Clevedon River. I first came here, as you know from our conversation on the subject, for the polo. It was kind of a joke. People used to ask why I came to New Zealand, and I would say it was for the kangaroos. "But," people would say, "There are no kangaroos in New Zealand." "Yeah," I'd reply, "I was misinformed." But it was really for the polo.

New Zealand is a delightful place. I think I'll keep my ranch here, because I like it. But the fact is that, for all of its advantages, New Zealand is an island, and it's pretty much at the end of the road. It's not very sophisticated, quite frankly, and it's become quite expensive.

When I first moved here, and was recommending the place highly in the International Speculator, it was almost as cheap as Argentina is today. It was so cheap buying a meal in a restaurant, you'd almost feel guilty. But since then, the currency has doubled in value and domestic prices have risen more rapidly than in the U.S., so the general cost level is about the same as in the U.S. It's not a bargain anymore.

That's even more true for Australia, which is bigger, but isn't as pleasant, to my way of thinking. Entirely apart from the fact that everything that moves there, on the land or in the sea, tends to be deadly. 

L: And that leaves Latin America.

Doug: Exactly. Within that, what do we have? Central America, to be brutally brief, is "okay." But those countries simply have no class. When it comes to South America, I'm very partial to Argentina, Chile, and Uruguay. Of these, I prefer Argentina. Why? Because it has a down-at- the- heels, but very classy, elegance. That kind of reflects the fact that, a hundred years ago, it was the major competitor to America for the best place to go if you were a European looking to immigrate to the New World. It attracted many of Europe's best and brightest — and their capital.

Argentina blew it, of course, transforming itself from having one of the highest standards of living in the world to an economic basket case over the course of the 20th century. But in spite of how monumentally stupid the government of Argentina is, with controls and regulations on everything, a big bureaucracy, and so forth, that's compensated for by the fact that the place is very, very inexpensive. Whether you're looking at real estate or day-to-day expenses, it's much cheaper than either Chile or Uruguay. Also, I've found that on a practical level, the government leaves you alone more than most.

Uruguay, of course, is just across the Plate River from Argentina. It's got some advantages, but it's rather like a backward, yet more expensive, province of Argentina.

L: Why's that?

Doug: It's a smaller country than Argentina, one tenth of the size, both in population and land area. It's long been known as a kind of "Switzerland of South America." It's a banking haven. Until recently, there was no income tax in Uruguay. Idiotically, they just slapped one on domestic income, but foreign income is still tax-free there. That draws a lot of rich foreigners, who have a disproportionate effect on prices. They bring a lot of capital, and the country's currency has risen about 30% against the Argentine peso in the last year. So, it's nice, but it's a quiet backwater — except for Punta del Este during January and February, when it's one of the most hopping places on earth. But Uruguay is considerably more expensive than Argentina at this point.

A lot of Uruguayans, if they're in a position to, tend to want to live in Buenos Aires instead of Montevideo. Montevideo is a place that still has horse-drawn wagons and gauchos standing around on street corners, drinking mate.

L: And the Graf Spee in the harbor.

Doug: [Laughs] I can't help but think of that when I'm there. The place is in a time warp, although a lot less than it used to be. When I first went to Argentina, in 1980, I felt I was taking a trip back to the 1950s. Then, when I went across the river to Uruguay, I felt I was taking a trip back to the 1930s. They still had the old black, Bakelite telephones. That's all changed, but these countries are still caught in a bit of a time warp.

L: And Chile?

Doug: Chile is the unsophisticated mining province that made good... It's modern, everything works, and the capital city of Santiago is clean and nice, if plagued by air pollution. But it's a lot more expensive than Argentina or Uruguay, and doesn't have the same charm. Pinochet, for all his faults, put the place on the road to success. It's estimated the average Chilean has more net worth than the average American now.

L: So it's Argentina.

Doug: Yes. For one thing, I like its wide-open spaces. It's like the western U.S. Argentina is the size of the eastern U.S., but it has only 40 million people, and about 40% of those are centered around Buenos Aires. So, once you get out of BA — which is one of the great cities of the world: sophisticated, marvelous, you can get everything and anything you want there, just one of my favorites — you really are in the countryside. In most places, you can drive for hours through incredible scenery, and not see another car. I like that.

Sometimes people, who haven't been there, look at me in a questioning way when I mention Argentina, because they've heard of the government. But it's not evil, or dangerous, like many. It's just corrupt, incompetent, and inefficient — which is actually much better than the alternatives, when we're talking about governments. But there are disadvantages, too. Through one of the most impressive acts of government stupidity I've ever seen, Argentina, a country world-renown for its beef, might actually end up having to import beef this year. It's insane. Like Saudi Arabia importing oil. But, that's what governments do.

Still, you can get the best beefsteak in the world for, oh, I would say a sixth of what you'd expect to pay for something equivalent in the U.S.

L: I've been to El Rey del Bife in Salta City and verified this for myself. One of the best steak dinners I've had, with salad and wine (I'm not religious about avoiding alcohol, and I wanted to try something local), and it was just over five bucks.

Doug: It's unbelievable. And I think I've found a place that's even better than El Rey del Bife, so we'll have to go there next time we're in town together.

L: I'll look forward to that. Did you start buying land all the way back in 1980, when you first visited?

Doug: No, I bought a ranch in Patagonia about a dozen years ago. One of my best Argentine friends said, "You'll make some money on that. It's okay for gringos, but if you really want something special, you'll go up to Salta province". I did, and he was quite correct. Patagonia is pretty, but it's not a center of culture.

L: It's mostly empty. I've been there. I think I saw more penguins than people.

Doug: It's basically a large expanse of wind-blown desert, except for a narrow band along the border with Chile, which is very pretty.

L: Because of the Andes.

Doug: The mountains, exactly. That's really it. So it's quite overrated and over-promoted. Salta, indeed the whole northwest area of Argentina, is much more interesting. Salta, by the way, was recently named in Frommer's Top Ten Destinations: 2010. I especially like Cafayate, a town about the size of Aspen, Colorado, and strikingly similar in a number of ways. It's got a beautiful central square, with lots of sidewalk cafes, a couple dozen nice restaurants. It's very gemutlich, very enjoyable.

L: And it's not overrun by leftist environmental extremists.

Doug: Definitely one of its great qualities. But as nice as it is, it didn't have everything I wanted in a place to live. I thought, "Well, I'll just have to bring the things I want here." So, some friends and I bought 1500 acres on the edge of town, and we're building a world-class resort.

We're very fortunate in that Cafayate is in a wonderful grape-growing region — that's one of the reasons it has so many nice things. All around the world, places that are good for vineyards are generally very nice places to live, as anyone who's been to Tuscany or Napa Valley knows. This is very much like that. It's a bit like Taos, New Mexico, meets Napa-Sonoma, California.

But there wasn't a polo field, so we're putting a couple in, in our resort, which is called La Estancia de Cafayate. We're also putting in 40 miles of hiking, biking and jogging trails, an 18-hole, world-class golf course, tennis courts, a lap pool, a Gold's-type gymnasium,  and a spa. The clubhouse will have everything from a cigar bar, to a billiards room, to a library, to a bocce ball court, to a quiet place where you can play go or chess. I don't think we've missed a single element, providing what a civilized person could want.  We've got about 200 acres of grapes, so all the home owners will get their own allotment of wine. Grapes are very aesthetic, which is the big thing, but we want to keep running costs as close to zero as possible — a nd they're a big help.

L: Okay, so be honest with me here. We had a conversation about spas, and you went to great lengths to distinguish between little wanna-be spas, where you can get a massage and they put cucumber slices on your eyes, and a real spa, which is a total living experience that includes diet, education, sports and physical training, as well as the saunas and massages, etc. Are you really going to be able to provide that kind of world-class spa experience?

Doug: Well, slowly, slowly, catchee monkey. So far, about 130 people have bought lots, and about 30 houses are under construction. More will be built over time, and that will get us to the level at which we can sustain a spa such as I described. It's a software issue. We'll have the physical facilities soon, but it will take a while to build the clientele that would justify having the people there who would provide the services. My intention is to start next year, hiring a couple Thais, or Filipinos, who are multi-talented. They'll know how to teach Tai Chi, Qui-Gung, do proper Thai cooking, and give proper massages.

As far as the spa cuisine is concerned, we're well on our way, because almost everything we'll eat grows in the valley. A wide variety of fruits and vegetables are being planted on our own land right now. The chickens and the beef and the milk are all local and organic.

With a little bit of luck, we'll eventually be as good as the Canyon Ranch or the like. You know, it takes a little time to develop the software. But I think it's very important to have the facilities for a full life. Mens sana in corpore sano, as the Romans said.

L: How much is ready to use?

Doug: We've built the golf course and golf club house. The construction of the social clubhouse, gym, tennis courts, etc. should start next month. It should all be pretty well done within a year. By then, there should be 40 or 50 houses built, or under construction, and it will be a delightful place to live.

There's one really interesting, perhaps unique, thing about this project. I've lived in, and been to, a lot of communities around the world, and sometimes you like your neighbors, and sometimes you don't. It's the luck of the draw. In Aspen, the chances are that I wouldn't like them; these days it's just drawing the wrong crowd, from my point of view. But I like all the folks I've met who've bought lots at Cafayate and are planning to spend time there. It's a generally laissez-faire, smart, get-along & go-along crowd, drawn from 14 different countries. It's really becoming a bit of a Galt's Gulch.

It's been a pain, having to build it myself, but there was simply no existing place in the world that I knew of that had everything - or even just most of what I wanted.

One sign of how real this is, is that many of those who've bought lots at Estancia de Cafayate are Argentines — which shows that the pricing is right.

L: And they pay cash.

Doug: Everyone pays cash in Argentina. That's why land prices are real and so low — they are not inflated by borrowed money. There simply is no money to be borrowed for real estate in Argentina. None.

L: And you say Argentina has a very European flavor?

Doug: Yes, at this point, Argentina is more European than Europe is. You know what they say: an Argentine is an Italian who speaks Spanish, thinks he's British, and lives in a French house. That last refers to the gilded age buildings, of which there are thousands. Apartment buildings in La Recoleta generally have 14-foot ceilings and walls two feet thick, because that's how they were made, back in the day.

You know, I talk about how bureaucratic and stupid the government is, but I think there's a chance that the place will reform for the better, much the way New Zealand did in the mid-1980s. In other words, you can be so stupid, for so long, that eventually you have to throw in the towel and try being less stupid. There are several candidates running in the next presidential election, which will take place in 2011, who are reasonably market-oriented. If the same thing happens in Argentina as happened in New Zealand in the 1980s, it will boom.

L: With clear consequences for Argentine real estate.

Doug: Exactly, although the place has always had wild fluctuations in prices. When I was first there, BA was more expensive than London. Before the last crisis it was about like New York. Argentina suits me as a speculator, it suits me as a freedom-lover, and it suits me as a place to live. All things considered, of all the countries in the world, I honestly just can't think of a better one.

And if you want to live there, they are very mellow about it. You don't need some sort of residence permit. For years, the practice has been to let anyone in for three months, and if you overstayed your tourist visa, even by a couple of years, you only pay a fifty peso fine. And you can come right back in again. Try that in the US and see what happens...

L: What if I wanted to stay more than three months?

Doug: You just take a boat over to Montevideo, get your passport stamped, and come back. Or maybe drive up to Bolivia, or across the mountains into Chile, or maybe Paraguay for a weekend trip. This can be, and is done indefinitely, with no problem. Cafayate actually isn't a bad place from which to get to know the southern half of the continent. But I don't like to leave once I'm there.

L: Okay, so it's no problem to prolong a tourist status, but if for some reason, I wanted to acquire a more permanent residency status, would it be difficult, or expensive?

Doug: No, but you'd be wiser to do it in Uruguay. As an Uruguayan, you can cross over to Argentina with much more ease than even Canadians used to be able to cross over into the United States. They are both Merco-Sur countries, and residents of those countries can move between them freely. You can become a citizen of Uruguay after only two years — it's not as good a passport to travel on as an Argentine one, but that's the way to do it.

I should also remind our readers that they don't want to keep any money in a bank account in Argentina. It's not a good place for that, but bank accounts and real estate are two totally different things.

L: Anything else? More best stock investments implications?

Doug: I think what's going to happen, given the demographics we spoke of in Europe, is that thousands and thousands of Europeans are going to come to Argentina. Not poor ones, the kind who immigrated a hundred years ago, but wealthy ones. They'll see that the lifestyle is better in Argentina. It's less crowded and vastly cheaper — maybe 20%, or less, of the cost of living in Europe. And they can live there tax-free. As more and more Europeans discover this, you're going to have a lot more of them piling in. This is going to happen with Americans too, though they won't gain the same tax advantages. The IRS will still want to tax them; nevertheless, I think we'll see more of them moving down there. It's very popular with Canadians as well.

With the good things happening in Colombia, Brazil having finally turned the corner, and the problems clowns like Chavez in Venezuela are running into, there's a chance that South America, in general, could be the next sleeper that may soon awake to its day in the sun.

So, it's a place with a future. And any person who does not diversify his or her assets and physical presence, geographically and politically, in today's world is a fool. If they see what we see and don't take action, they'll get what they deserve.

It's especially important for U.S. persons to do this now, before we see foreign exchange controls in the U.S. making it impossible, or very costly, to get your wealth out of the country.

L: What's the first step, for someone who hasn't really thought about these things seriously before?

Doug: I'd like to urge anyone reading this to join me, and my friends, at the open house we're having at Estancia de Cafayate from March 25 to 28. It'll be a great introduction to Argentina. Just be warned that you may not want to leave; it's that pleasant. And late March is a good time to leave the tail end of Northern Hemisphere winter behind. Also, most of the Casey group is going to be there, and we're going to have a half-day stock investment seminar for those who come down.

L: That's what I'll be doing: hitting BA, then setting out to look for opportunities to invest in gold and silver projects in South America.

Doug: I'll enjoy seeing you there, and given the type of person who will actually take my advice on diversifying his or her assets out of their home country and come check Argentina out, I'm sure I'll enjoy seeing them, too. I hope a few of our new readers come on down.