This week I am in Maine on vacation with my son, and next week is my daughter Tiffani’s wedding, so for the next two weeks I am going to send an updated version of a speech I have been giving the past few months on what I think is the likely potential for the rise of a brand new asset class.

It is too long to be sent as one letter, so we will start with the first part today and finish with the second part next week. This first part can be read as a standalone letter.

The Rise of A New Asset Class

I think we’re at a watershed moment, what Peter Bernstein defines as an “epochal event,” with the very order of the investment world changing as it did in 1929, in ‘50, in 1981, where a number of things came together – it wasn’t just one thing but a number of events happening that conspired to change the nature of what worked in the investment world for the next period of time. It took most people a decade after 1981-2 to recognize that we were in a different period, because we make our future expectations out of past experience. It’s very hard for us to recognize a watershed moment in the process. We’re going to look back in five or ten years and go, “Wow, things changed.” As we will see, it’s going to be a change that’s going to cost people in their portfolios and in their retirement habits.

We’re going to look at a number of different concepts and separate ideas that in and of themselves don’t make that much difference. But I think their confluence in the present moment is going to change things.

Now, some of this is new, some of it is old. The old stuff we’re going to fly through. Most of you have been reading me for a while now, and you’ve got the concepts down. So let’s start.

The first thing to note is that we’re in a Muddle Through Economy. We’re in a recession that’s fueled by the bursting of two bubbles: the housing bubble and the credit crisis. The real question is: when do we come out of the recession? At what time do we come back to trend growth, which is 3 to 3.5 percent a year?

I believe that over the next 20 years the US economy will grow at roughly a rate of 3 percent compounded, in real terms. But I believe that we have some headwinds for the next year or two. So I think the real bottom of this economic cycle will be later this year, during the fourth quarter and possibly into the first quarter of next year. But it will take two years, for some reasons we are going to get into, to get back to long-term trend growth. It will take much longer than normal because the things that created the problem – the housing bubble and the credit crisis – aren’t things that can respond to Fed policy, and they aren’t things that can respond to the normal cycles. It’s going to take a long time to work through these.

First, we had an investor-driven transaction bubble in housing. There were 48% more houses built since 2005 than should have been built, if you were simply looking at trends.

What that means is there are 3.5 million homes we have to work through. Now, that means that the 8 or 9 hundred thousand homes that we’re now down to building a year, is going to end up going down to 400,000. It’s going to take some time to work through those excess homes – for the prices to drop enough that people can go in and buy them or rent them. We are probably talking 2011 before we finally work through this housing crisis and get back to a normal market where housing contributes significantly to GDP growth.

On April 7, Taipan Daily stated, “The global food crunch could make the credit crunch look tame.” (You can read that episode here.)

This week, the financial elite said much the same. As The New York Times reports, “The world’s economic ministers declared… that shortages and skyrocketing prices for food posed a potentially greater threat to economic and political stability than the turmoil in capital markets.”

Two weeks or so ago, Taipan Daily wrote, “If you think of grain availability like financial liquidity in a time of crisis, the picture becomes clear.” Now the picture is clearly becoming worse. Kazakhstan, one of the world’s biggest wheat exporters, has halted outside sales. Major rice producers are banning exports, too. On the other side of the ledger, countries like Haiti are descending into chaos.

This is very serious business. The food crunch is well on its way to eclipsing the credit crunch… but that doesn’t mean the credit crunch has gone away.

Turning to credit and housing for a moment, the news flow from California continues to shock and amaze. West Coast home prices are now heading into “free fall” as a result of the credit crunch.

It turns out that Golden State home prices soared to insane levels with the help of “jumbo loans” — extra-large borrowing packages that required huge leverage to take on. Now that the banks are pulling in their horns, those loans have disappeared. They are simply nowhere to be found, and the Fannie Mae / Freddie Mac substitutes aren’t nearly as generous. The most a homebuyer can hope to borrow these days — without paying backbreaking fees — is something like $417,000.

That’s barely enough to cover the back patio in Calfornia. Or at least, that’s the way it used to be. With no more jumbo loans, there is no more market for $85K-a-year households buying $700K worth of house. This leaves a huge gap between what new buyers can buy and what desperate sellers are hoping to fetch. For California in general — and especially for the higher priced urban areas — $417K is a long, long way down.

Think of Wile E. Coyote taking a gulp as he realizes there is no ground beneath his feet. Or Tom Petty belting out “Free Fallin’” on the radio.

It’s a looong day, livin’ in Reseda… There’s a freeway, runnin’ through the yard…

Anyway, enough of that.

As usual, though, the news isn’t all bad. (It almost never is.) Ann Sosnowski has found a way to make credit lemons into lemonade for Diligent Investor readers. Her latest pick can help put you on the path to a recession-proof portfolio, and give you the opportunity to turn a nice profit to boot. Take a look. And despite all the troubles out there, enjoy your weekend!