This from Whiskey & Gunpowder:

Lately I’ve been discussing concept of scarcity in the energy and natural resource sectors. In one recent note, I discussed how the idea of scarcity has transformed from a “geological” basis to an “above ground” basis. In another note I discussed how the financial system of the world has broken down. This breakdown has damaged many a portfolio. But I still believe that an investment focus that is based on future scarcity of energy and mineral resources is basically correct.

In the future there will still be profound restraints on the availability of energy and natural resources. So owning shares in firms that “do energy” or “do resources” is still a good idea over the medium and long term.

We Still Have a Big Problem

We still have a big problem. The credit system is broken (and that’s the nicest thing you can say about it). Many large banks in the world are broken too (ditto). The investment model of the modern era, starting back in the 1860s during the U.S. Civil War, has almost ground to a halt. That is, the idea and method of “floating capital” is not functioning. Indeed, capital no longer seems to float. Actually, it seems like capital has been sinking like a stone.

The lack of capital (at least, in the forms that we’ve come to utilize it for large scale investments) means that it is difficult – impossible in some cases – to go forward with the new energy and resource projects that are designed to mitigate the present depletion’s in older oil fields and other resource provinces.

In the face of this, most governments of the world are trying just to look good for the TV cameras. Central banks and government treasuries across the world have been reduced simply to throwing money at whatever problems catch their collective eye. Squeaky wheels get the grease. So we see the national treasuries “recapitalizing” busted banks. We see the likes of the U.S. Big Three automakers coming hat-in-hand to Congress for a bailout, and Congress in turn acting like it knows how to run a sophisticated manufacturing business. And we hear announcements, from China to the U.S., of massive new public works programs to get the world moving again.

It’s like if we pour enough concrete, and then everything will turn out all right. Somebody ought to ask the Japanese about that. They all but paved the island of Honshu in the 1990s, and still lived through a stagnating era.

Can things really turn out all right? Can we return to some happy past? As Heraclitus once noted, “You cannot step twice into the same river, for other waters are continually flowing on.”

Prosperity Stolen from Fort Knox

Indeed, all rivers flow to the sea. In Asia Times Online, the always insightful Henry C. K. Liu recently wrote that the credit crash has “turned out to be a catastrophic, global, financial perfect storm of unprecedented dimension that will cause serious structural damage to all market economies around the world. It may even spell the end of the cowboy finance capitalism of the past two decades in which risks are socialized and gains privatized, with debt manipulated to act as phantom capital.” Yep.

A fellow Pittsburgher, financial writer Jim Willie, is even more pessimistic. He thinks that in 2008 the U.S. economy and financial structure suffered “mortal wounds.” Jim states – using a very clever turn of phrase (I wish I’d said this) — that a “decade of prosperity was stolen from Fort Knox.” That is, major elements of U.S. monetary policy in recent years involved the gold carry trade enacted by the U.S. Treasury in the 1990s.

What is the gold carry trade? The U.S. Treasury and Federal Reserve treat the details like state secrets. But what has leaked out makes for a sordid story – treasonous, even. It’s enough to make you wish that we still executed people by firing squad in this country. Let me put it this way. Perhaps President-Elect Barack Obama thinks that his biggest surprise will come when he gets “THE briefing” and finally learns what is really out in the tightly guarded hangars near Groom Dry Lake in Nevada (a/k/a “Area 51”), and Dugway Proving Ground in Utah. Well just wait until Pres. Obama asks how much of the original Fort Knox gold still remains the unencumbered property of the U.S. government. Surprise, surprise.

The Wolf is At the Door – Say Hello to the Nice Wolf

In 2008 we all experienced the destruction of a world-wide credit bubble. This was the end of many decades of dollar-abuse and monetary malpractice by the U.S. Federal Reserve and the utterly profligate U.S. government in general. As Gresham’s Law states, “Bad money drives out the good.” And decades of bad money did not just drive out the good stuff. In turn it sowed the seeds of its own destruction.

It was just a question of time before the wolf showed up at the door, and that time has arrived. Say hello to the nice wolf. So now it’s time to face the fact that the U.S. economy is in far worse shape than most people believe. And it will be in bad shape for a long time to come. If everything goes right, it might take a generation to clean out the stables.

But we are already off to a bad start. The 2008 credit meltdown has caused huge collateral damage. And in 2009 we will see an extraordinary attempt to re-inflate that bubble. Will it work? Probably not like people expect.

The traditional financial system is now in the fight of its existence. The system was based on U.S. dollar hegemony and the supremacy of U.S. national power. That, and the way that the U.S. benefited from ingrained habits of foreign monetary authorities kowtowing to Washington based on decades of living with Bretton Woods and its ghosts. It all hit the wall in 2008. But like the creatures in the Aliens movies, these critters won’t stay dead for long. The Wall Street/Treasury Axis will come back to fight hard and play dirty.

Things to Do to Ensure Your Security

I believe that the old system is irretrievably doomed. But you cannot replace something with nothing. There is still no “new” system that has come around to take the place of the old one. Thus the big task for 2009 is to save your personal wealth from going down with the ship. So how do you ensure your security?

In the short term you can protect your financial interests by increasing your cash position as a percentage of your assets. When all else fails, add to cash. Yes, we will probably see inflation in the future, but for now more cash is better.

Also, in anticipation of inflation you should own physical metals like gold and silver. I mean it. I’ve said it before. OWN GOLD! And I mean OWN THE METAL. Take delivery! Maybe I sound like the Mogambo Guru on this, but he’s right. Let me quote Mogambo. “Own freaking gold!”

And get out of any but the very best shares. The first requirement for share ownership is to look for companies with enough cash to fund operations and make it through some very lean times. Then you also want to invest in firms that are going to be important in the world that’s coming down the tracks.

What kinds of firms will be important? Well, energy and resource firms for starters.

Source: Falling Prices and Scarce Energy

This from Investor’s Daily Edge:

“Fear frustration; Some Call it Quits,” a recent Wall Street Journal article, unknowingly summarizes what I have been saying for a long, long time.

The article is a short list of people who have thrown in the towel on the stock market. In every instance, the people described themselves as having everything or most of their money in the stock market.

A formula for disaster.

All of the people were professionals, all were successful, or sounded so from the description of them, and all must try, very hard, to ignore all the good advice that’s out there about how to invest your money.

After many years of trying to get investors to listen to good advice, I know it’s a waste of time to say this again, but you cannot have all your money in stocks. In fact, I left the brokerage business because I was sick of my clients ignoring what I told them to do and then blaming me because they were losing money. Here we go again.

It is financial suicide to invest only in stock.

Here’s one of the saddest stories I know about learning this lesson the hard way.

Paul, a former client of mine, just retired from a Fortune 500 company with a huge stock, stock option and 401K-rollover portfolio. This guy was the poster child for how to do your retirement planning right, around $4 million.

He took his entire 401K and rolled it over into some great mutual funds. Good move, he didn’t want to be bothered with the day-to-day stuff and knew this particular group very well. He also understood the fee structure and was ok with it. This portion was about 25 percent of his entire net worth.

The rest of his money was in stock options and stock in his former company, one that he rightfully held close to heart. He credited this company with everything he had.

Two problems that are common to many retirees: one, he had too much in this wonderful company. Investments are not collectables or mementos. Paul refused to accept this.

Two, he had everything in stock. Despite my best efforts, he refused to budge from his positions. When I first met with him, his company stock was at 94. Within three years, it was at 12. That’s an 87 percent drop in value. Three fourths of his total worth dropped 87 percent.

Leaving yourself open to the full brunt of the stock market will always have the same outcome.

---

INTERNAL ENDORSEMENT Stop Playing the Stock Market Lottery! In the ongoing destruction of the capital markets, no haven is safe. Gold… down. Blue chips… down. Utilities… down. Consumer staples… down. Cash? Well, maybe for a little while, but we all know the dollar is doomed. Why risk your precious funds in the stock market lottery? Did you know you can make stock market returns… without stock market risk? You can! And there has never been a better time than RIGHT NOW for this investment…

---

The past six months should be enough to prove to you that the stock market, while it has great long-term returns, is a risky proposition. There are techniques that if used properly will reduce that risk, but can’t ever eliminate it. Not diversifying properly in stocks, bonds and cash, as everyone now knows, is as close to a guaranteed loss as you get in this business.

Investors have severe tunnel vision and an unwillingness to allow for failure in their investment planning, or lack of planning. If you do not plan for the type of market we are in now, you will not survive.

There have been six different “end of the world markets” since I have been investing and working in the investment industry. Every one came after a period of crazy increases in real estate and/or stocks. It is the nature of the beast.

In case you haven’t figured it out yet, there will be another market just like this one; maybe worse, it is how the market works. Call it financial selection, market cycles or just craziness, but you must plan for the next inevitable crash or be a victim again.

How do you survive these killer markets? Diversify with stocks, bonds and cash investments, use reliable research, avoid listening to conversations about investing at parties, and stick with the tried and true. This advice may seem boring and nonproductive at times, but it is the only way I have found to be there to fight another day.

Source: A Survivor of the “End Of The World Market”