----------------------------------

From Dan Denning at the Old Hat Factory:

--And so we begin another week in the life of the late, great, U.S. dollar. The dollar is not actually dead yet, of course. But its dying days are sure starting to get exciting. The latest phase of the dollar's demise has started a chain reaction of sorts in the currency and commodity markets.

--The Aussie dollar, for example, tacked on 4.5% against the greenback last week. The Aussie is now at a seven-month high against the USD. You could be tempted to say the "carry trade" is back on. That's where investors borrow in Yen or U.S. dollars to buy higher yielding currencies like the Australian and New Zealand dollars. But we don't think that's the case. Why?

--The "carry trade" was popular over the last few years when appetites for risk were healthy. They aren't so healthy right now. U.S. stocks and bonds are falling. Interest rates are creeping up.

--What's more, the green shoots of economic recovery have been nearly blown away in the last week of negative economic news (mostly concern about America's credit rating). Australian stocks are set to open lower today as well, following Friday's down day on the Dow. It could be quiet in Asia today with American markets closed on Monday for the Memorial Day Holiday (which also kicks off the summer driving season, whatever that actually means). Also, keep in mind that the big rally since mid-March may simply have run out of steam.

--But if the "carry trade" isn't carrying the Aussie dollar higher, what is? Well, it could be the appeal of a "commodity currency." Gold closed over seven bucks higher in Friday trading to close at $958.90. Oil was up one percent, too, to $61.70. Saudi Arabian oil minister Ali al-Naimi told reporters in Rome that oil would hit $75 when global demand picks up. Perhaps the minister has read our "Long Aftershock" report!

--"We'll get there eventually," al-Naimi said. "The trick is keeping it between $70 and $80. It will be achieved as demand rises and the fundamentals are better than they are now." We're not exactly sure what 'fundamentals' al-Naimi has in mind. The one we have in mind is supply. Don't be surprised if global oil demand rises a lot faster than the capacity of oil companies to increase supply.

--Some national oil companies-especially PEMEX in Mexico-are watching their major oil fields experience big declines in production. The Cantarell field, for example, used to pump out around two million barrels of oil per day in 2004. Today, it's just 700,000 barrels per day. That decline is a result of under investment by PEMEX and simple resource depletion.

--When you combine the huge fall-off in capital spending by the oil companies with declining production from the world's major fields, and then add in the possibility of a swifter recovery in demand than investor's expect, you get a higher oil price. And don't forget inflation. The weaker U.S. dollar will put a little in wind oil's sails as well.

--One interesting aspect of this latest energy bull market is that it won't be confined to crude oil. Coal might be loathed. But it's hard to imagine the modern power grid supplying base load electricity without coal. Anyone who tells you that base load power needs can be met with alternative "clean" energies is living in fantasy land.

--That said, coal stocks stand to lose the most from cap-and-trade or emissions trading schemes that put a price on carbon dioxide. Even so, there ARE plenty of unconventional hydrocarbons out there that can provide transportation fuel or gas streams for turbines to generate electricity.

--Turning stranded coal seams into liquid fuel is a kind of "energy mining," a hybrid industry that's capital intensive but also sensitive to global oil prices. Australia is full of these "energy mining" projects that could benefit investors. Today's Age has a story about underground coal gasification. It's a story we first covered in the Australian Small Cap Investigator in June of 2007, which, by our reckoning, was about two years ago.

--Since then, editor Kris Sayce has looked at the coal-seam-gas industry brewing in Queensland. He's found a few recommendations that have zoomed up with the interest of major international oil and energy players. And as we mentioned last week, the newest aspect of the "Long Aftershock" is the development of gas-rich shale formations. We're on that story in this month's Diggers and Drillers.

--Our main point in all of this is that you don't have to take the coming implosion of the U.S. bond market and soaring interest rates lying down. Oil, gold, gas, silver...precious metals and energy projects...these are all investments that ought to do well in an inflationary boom.

--The big risk to all of these investment ideas is that deleveraging of global balance sheets sends all stocks down to new lows (lower than 2003) and sucks the global economy into a deflationary depression.

--The only reason we doubt the deflationary depression scenario is that central banks have an unlimited capacity to print money to buy assets or finance fiscal deficits. Granted, this will ruin their economies if they do so. But it's what they always seem to do. It's part of that body of lies currently circulating that says it is always and everywhere appropriate for governments to run 'temporary' deficits in order to 'support demand' during a recession.

--That's a load of rubbish.

--In any event, Barack Obama has admitted what everyone knows: America is out of money. Over the weekend, an interviewer asked him, "You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?"

--"Well, we are out of money now," Obama said. It's kind of shocking to hear a politician be so direct. Surely it must have been a slip up. But the man is right. America, along with Britain, is financing a hodge-podge of corporate welfare and classic handouts with deficit spending, otherwise known as borrowing.

--If they can't borrow the money-which is getting more and more expensive as interest rates rise and investors fret about sovereign credit quality-they will print it. What happens when "quantitative easing" is expanded on a greater scale is anyone's guess.