As investors, that means we need to abandon traditional techniques of value investing. That's because in a short-lived corporate world, there are no long-term values in the traditional sense.

When companies do initial public offerings (IPOs), their first few years will be devoted to allowing the founders and venture capitalists to cash out. In this period, you can expect accounting shenanigans and short-term stock-price boosting games.

Then, after the founders have sold, the company may become a zombie, with their research and innovation capabilities sucked out, existing only until its cash pile runs out. Research in Motion Ltd. (Nasdaq: RIMM) and Yahoo Inc. (Nasdaq: YHOO) may have reached this stage, for example.

Short-lived Corporations and Your Investments

That has important implications for workers, but it can affect our investment decisions even more.

In a world of short corporate lives, here are a few investment strategies to consider:

1. Dividends: If a company pays a 10% dividend yield and lasts only 15 years, and liquidates for 20% of its current value, that would still give you an overall return of 7%, which beats fixed-income these days. Plus, if you're smart, you may be able to sell it for full value about eleven years later, before others have cottoned on to its decay. Energy Master Limited Partnerships (MLPs) like Linn Energy (Nasdaq: LINE) are excellent examples of this type of investment.
2. Bargains: If you buy something for 50% of its net asset value, and the company is making profits, you will probably end up making out on the deal when it is sold off or wound up. In this case, the income may not be worth much, but the assets are.
3. Fast growth: If you are really convinced the company's profits are going to explode, and you're buying on a fairly cheap price/earnings (P/E) ratio, you may be able to ride the rocket. But don't pay too much, and don't forget to jump off when the rise seems to be slowing.
4. Family companies in family-oriented cultures: Other countries don't have the same estate taxes, are more family-oriented, and are less attracted by get-rich-quick schemes. In Germany or Japan, corporate lifespans have not shortened to the extent they have in the United States. In general, emerging markets are more long-term oriented than the U.S., although their political and economic risks may kill companies before their time.

In general, avoid companies that do not pay dividends. There will be cases of companies, especially in the tech sector, which enjoy an entire corporate lifespan of say 20 years without ever paying anything to investors who are not insiders with stock options. Don't be the sucker that buys these empty bags at high prices.

Also avoid well-established blue-chips, the equivalent of Kodak, which tend to be priced as if they will last forever, and whose dividend yields are not enough to compensate you for their now-shortened lifespan.

To take one example at random: The Procter & Gamble Co. (NYSE: PG). PG has been around since 1837. It is a perfectly good company, but its 2.1% dividend yield won't compensate you adequately unless PG makes it to 2060. History tells us it may not.

So while, shorter corporate lifespans may well speed innovation, they make being an employee or an investor much more difficult and dangerous.

Investors should recognize this and adjust their strategies accordingly.

When the times change investors need to change with them. That's the lesson behind the Kodak bankruptcy.



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On the flip side, if oil prices were low, you would need to look at companies exploiting areas with the lowest extraction costs like the Middle East or Nigeria. At lower oil prices, the temptation for the local governments to play games with foreign oil companies would be modest, so if you had access to cheap supplies you'd do very well.

In this scenario, high-cost supplies such as those in the U.S. oil shale and Canadian tar sands would struggle.

However, in today's environment of high oil prices, political stability is much more important than cost. The higher the price, the more low-cost supplies in unstable areas are subject to expropriation by the local politicians.

Conversely high-cost supplies in stable areas are highly profitable, and would attract most of the new investment.

How to Invest in the Athabasca Tar Sands

The Keystone pipeline decision is certainly a pity for the United States - though it may be reversed after the November elections.

However, it doesn't matter much to the Alberta oil producers.

They already have an alternative project, the $5.5 billion Enbridge pipeline, which will move oil to the Pacific Coast, where it can be shipped to the growth markets of China and East Asia.

So these capacity expansions can be carried out just as fast as the Keystone pipeline, with little or no risk of creating a glut that can't be readily moved to market.

The Athabasca tar sands have estimated reserves of at least 178 billion barrels of oil, but Shell Canada estimates their capacity at 2 trillion barrels, enough to supply the United States for 250 years.

That's why Chinese companies are interested in Canada - they have invested $15 billion in Athabasca tar sands projects over the last two years.

For an overall spread of investments in the Canadian energy business, investors should consider the Claymore/SWM Canadian Energy Income Index ETF (NYSE: ENY). This fund invests in the 34 stocks of the Sustainable Canadian Energy Income index, most of which are not listed in New York.

It's an easy way to invest in companies listed on the Toronto Exchange - especially if your brokerage doesn't deal in foreign exchanges.

The index includes tar sands, conventional oil, and uranium mining, which is another attractive sector that Canada dominates.

The ETF has a value of $114 million and an expense ratio of a moderate 0.7%. It also pays an attractive dividend yield of 2.83%.

However, the best major tar sands player is Suncor Energy (NYSE: SU), which is currently more attractively priced than its big competitors, trading at 10.6 times 2012 earnings and 1.44 times net asset value, with a dividend yield of 1.3%.

Suncor just announced its fourth quarter earnings, with earnings per share (EPS) up 10% from 2010 and operating earnings up 75%, primarily due to higher oil prices. For the year, Suncor's earnings of $2.74 per share were up 12% on the previous year.

Given its growth and leverage to oil prices, Suncor is very attractively valued.

So while the president seems intent on turning his back to our neighbors to the North, investors shouldn't follow his lead.

Canadian oil sands stocks are undoubtedly one of the best opportunities on the market.

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Keep Your Eye on The Money Supply

One of the more reliable signs of future inflation, at least in the medium term, is monetary growth.

In the last year, the St. Louis Fed's Money of Zero Maturity, the nearest counterpart to the old broad-money M3, has risen by 9.5%, while the slightly narrower M2 has risen by 9.8%.

As for the monetary base, which monetary theory tells us is supposed to be the most accurate inflation indicator of them all, that's up 29.9%. What's more, there is no sign of M2 and M3 slowing down.

If you don't believe me, you can discover these facts by clicking here and seeing for yourself from the St Louis Fed's weekly data.

This 9% to 10% increase in the money supply is compared to a current rise in nominal gross domestic product (GDP) of about 5%. (That's including some acceleration in 2011's fourth quarter over earlier in the year.)

Since monetary "velocity" tends to increase continually with modern payment systems, that is far more money growth than you need to currently run the economy.

So the real puzzle is not whether we will get inflation, but why we don't have it now.

After all, interest rates have been near zero for more than three years now, and the money supply was rising faster than the economy for many years before that.

By all accounts, prices should be higher -- but they are not.

Inflation Pressures Begin to Build

Part of the answer is found overseas.

The main factor suppressing inflation since the middle 1990s has been the Internet and modern telecoms. These have made it much easier to source products in low-wage countries.

So today we buy our clothes from China, whereas 20 years ago many of these same items were made in the U.S. The result has been about a 20% decline in apparel prices since their peak in 1993.

With this effect on consumer goods, and Moore's Law making technology-based goods cheaper and better all the time, even the rise in oil prices from about $10 per barrel in 1998 to about $100 today has been easily absorbed.

So the extra money that is sloshing around the world has pushed up commodity and energy prices, but has had much less of an effect on consumer prices.

However, there are signs that the price-suppressing effect of emerging markets manufacturing is coming to an end.

Chinese wages are rising rapidly, the currency has risen against the dollar, and China's balance of trade surplus has almost disappeared.

In fact, consumer price inflation worldwide began trending up in 2011. Now that commodity prices are rising again - as you would expect with expansionary money policy worldwide -2012 inflation pressures are beginning to build.

And now even Ben Bernanke finally weighed in last week as he tipped the scales even more decisively towards inflation.

By promising to keep interest rates at zero until the end of 2014, Bernanke has insured that interest rates almost certainly will remain below the inflation rate for the next three years.

That alone will cause inflation to rise, so we can expect the upward pressure on prices to continue.

So forget about deflation, since it will be vigorously resisted by the Obama Administration, Congress, and the Bernanke-led Fed. Inflation will keep heading higher from here.

In fact, by Election Day in November, inflation could be at troubling levels.

As for turning Japanese? .... I don't think so.

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Colombia has also gotten a boost by a surge in oil production, with exploration now possible in areas that had been "no go" for foreign investors for decades.

In November 2011, oil production was 920,000 barrels/day, up 17.5% from the previous year. Oil and minerals were responsible for 82% of Colombia's 2011 foreign investment, so the potential for investors is immense.

However, the real reason why Colombia is so attractive is the "catch-up" that needs to happen with its neighbors. Fifty years of civil war have left its infrastructure badly in need of an update.

For example, there is no railroad across the Isthmus of Panama - vital for shifting exports to the West coast for on-shipment to California and China. There is not even a decent road along the northern coast - you have to make a huge detour through Medellin.

But with China's thirst for minerals, there is ample opportunity for deals to get the infrastructure built. As that begins to happen, Colombia's per capita income - currently only $9,800 (ranked 110 in the world) compared with Chile's $15,400 - will catch up fast.

How to Invest in the Colombian Comeback

That's the beauty of Colombia's emerging position, and what makes it a special opportunity for investors.

Here's why.

Colombia's people are considerably poorer than they should be, given its decent business climate. So the forces pushing its GDP upwards are strong.

Third-quarter GDP growth in 2011 was 7.7%, and the overall year's growth is expected to be 6%. Of course, another demand crisis for raw materials would hurt Colombia. But even if its worldwide growth is merely sluggish in 2012, it won't be sluggish in Colombia.

Finally, the U.S.-Colombia Free Trade Agreement finally comes into force in the first half of this year, which should boost growth even further.

With any kind of decent global economy, Colombia should see several years of growth above 5% with low inflation and no balance of payments crises. There are few places you can say that about.

If you want to invest in Colombia, the best broad fund is the Global X FTSE 20 Colombia ETF (NYSE: GXG). This is a $120 million fund, but its annual expenses are a reasonable 0.83%. However, with a price/earnings (P/E) ratio of 16 times and a yield of only 1.16% GXG isn't especially cheap.

Alternatively, you can go straight to the source of Colombia's current growth and buy Ecopetrol S.A. (NYSE: EC).

Colombia operates a much more friendly investment environment than other Latin American oil exporters like Venezuela, Mexico, and even Brazil, so foreign competition in Colombian oil exploration keeps Ecopetrol efficient. That also prevents the government from using Ecopetrol as a piggy bank.

Ecopetrol also offers investors a very nice 4.6% dividend yield. While on a trailing earnings basis that my look expensive at 22 times, you have to remember that the company's output is growing rapidly. And with oil prices around $100 per barrel, its profits are doing even better - so on an estimated prospective P/E ratio of 11.8 Ecopetrol is much more reasonably priced.

Either way, take a serious look at Colombia for its energy and mineral resources. Its emergence from darkness makes it a unique safe haven.

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As Always It's About the Details

We also learned the President wants even more government "investments" in technologies such as clean energy.

However, Solyndra and other fiascos have surely shown that the government is a lousy venture capitalist - and the dangers of money being thrown away through corruption and political back-scratching are just too great.

On the tax side, the president also proposed incorporating a "Buffett Rule" whereby everybody earning more than $1 million would pay a minimum of 30% of their income in tax.

That, of course, is a slap at his potential November opponent Mitt Romney, who pays about 14% of his income in taxes, thanks to the fact his income consists of dividends and capital gains.

This 30% figure is reasonable, although it should include ALL taxes, state, local, and Medicare as well as ordinary income. At present, marginal tax rates of more than 50% are common in many instances.

In this case, dividends can easily be brought into this framework by making them tax-deductible against corporate income tax - thus eliminating the incentives for corporate loopholes and excessive top management pay.

With that provision, dividends could then be taxed as ordinary income-taxing folks like Romney at a much higher rate.

The one problem is capital gains, where the past 40 years' of experience has shown that capital gains tax rates above 20% reduces revenue and damages the economy.

Fairness Front and Center

However the President's call for closing tax loopholes on the wealthy is well taken, and is a much better plan than raising the tax rate on their income, which discourages risk-taking and effort.

On the other hand, the mortgage interest tax deduction, the charitable gifts deduction and to a lesser extent the state and local tax deduction all tilt towards behavior that's not economically helpful.

Capping those three deductions, at least, would raise huge revenues, thus closing the budget deficit, as well as improving the economy.

Finally, the President called for Congress to enact legislation that would make a politician's investments subject to the same insider-trading restrictions and conflict of interest rules that the rest of us have to abide by.

Needless to say, this is one idea that should have been done a long time ago.

However, there is one big gap between the President's programs and his promise of an economy that is "built to last." It's monetary policy.

That's because when the Fed pushes interest rates below inflation, all kinds of leverage, speculation and dodgy deals are encouraged.

At the same time low rates discourage savings while capital investment overseas becomes cheaper than hiring workers at home. As long as these policies continue to exist, the harder it will be to change the overall equation.

So if the President is serious about creating an economy " built to last" he can start by firing Fed Chairman Ben Bernanke and reversing his ultra-low-rate policies.

Even still, the President's State of the Union Address is a step in the right direction.

After all, you have to start somewhere...

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How Mortgage REITs "Goose" Yields

If agency mortgage REITs simply bought home mortgages on an unleveraged basis, they would be safe but boring investments, because their yield would be only about 4% currently.

Of course, their principal would be government guaranteed, though it would fluctuate with the level of interest rates.

But since there's not a lot of money involved in selling 4% yields to retail investors, mortgage REITS goose their returns by using leverage.

They borrow in the short-term market, usually by entering into "repurchase agreements" with the mortgages they have bought (they can do this because of the guarantee on the mortgages).

Since Bernanke has kept short-term interest rates close to zero for over three years, this is very profitable, maybe adding 2.5% to the yield of an unleveraged mortgage portfolio after expenses for each unit of leverage.

Thus, a portfolio leveraged 1-to-1 (with $100 of equity and $100 of repurchase agreements) would yield roughly 6.5%, while a portfolio leveraged 2-to-1 would yield about 9%, etc.

One mortgage REIT,American Capital Agency Corp. (Nasdaq: AGNC)actually takes this to an extreme, with leverage of about 9-to-1.

Consequently, AGNCmanages to pay out a dividend yield of 19.9% -- and earn somewhat more than it pays out.

How Rising Rates Effect Mortgage REITs

However, there are no free lunches in life.

Consequently, what a mortgage REIT gains in yield through leverage, it gives up in risk.

Of course, there is little danger of principal loss on the mortgage investments - they are government guaranteed. That much is secure.

However, rises in interest rates affect mortgage REITs in two ways.

If short-term interest rates rise, the spread between their funding cost and what they earn on the mortgages becomes less profitable, and their yield declines.

More dangerous, if long-term interest rates rise, the value of their mortgage portfolio declines. Since they are leveraged, it does not have to decline all that far for their capital to be affected.

For instance, with $9.00 of debt to every $1.00 of equity for a company like AGNC, a rise of about 2% in long-term interest rates would make the company insolvent.

That's the risk. You can hedge against it using swaps and options, and AGNC does so, but it's unlikely that hedges could cover a really sustained upward move in interest rates.

The upside is that Bernanke and the Fed have said that they do not intend to let short-term rates rise before the middle of 2013.

They also have a $400 billion "Operation Twist" program of selling short-term Treasuries and buying long-term Treasuries. That works against any sudden rise in long-term Treasury yields.

So to a large degree when you invest in REITs, you are trusting Bernanke. But that has worked for more than three years, and there's no reason it should not continue to do so.

However, as a responsible investor, if you buy a mortgage REIT you should follow monetary policy closely, and reassess your position every six months or so.

Two Ways to Invest in Mortgage REITs

That being said, here are two mortgage REITs to consider:

• American Capital Agency Corp. (Nasdaq: AGNC): AGNC is large and liquid, with $47 billion of assets and market capitalization of $6.3 billion. As I discussed, the company pays a $1.40 per share quarterly dividend, giving it a yield of 19.9%. It is priced about 5% above book value and is leveraged 9:1 - which makes AGNC a high risk, high-return proposition.

• Annaly Capital Management (NYSE: NLY): NLY is also very large and liquid, with $100 billion of assets, but leverage is only about 6:1. NLY pays a dividend of $0.57 per share, while priced at only a 1% premium to book value. Thus, overall this is a more conservative choice.
So don't let the Fed's war on savings keep you from earning the yields you deserve. The right mix of high-yielding dividend stocks can help replace what the Fed has taken away.

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On the contrary, workers in emerging markets became better educated and were made more knowledgeable by these new job opportunities. The wave of competition that followed continues to this day.

In software, for example, Indian companies were initially able to perform only simple repetitive tasks, while the fancy design jobs remained in the United States.

Of course, once they got established doing simple software jobs, the Indian workers quickly became more capable and sought to do the more complex jobs, perhaps setting up as subcontractors to their original employer.

Due to this same trend, you now also see a Taiwanese company, Foxconn, that does almost all the manufacturing for Apple Inc. (Nasdaq: AAPL) and its competitors from its gigantic Chinese factory, leaving very little manufacturing capability in the United States.

The Cost of Cheap Labor

Of course, Americans have benefited greatly at the cash register from international outsourcing.
It has enabled apparel prices, for example, to decline about 20% since 1993 while other prices have risen close to 50%.

It's true in Europe, too - the fancy (French cuffs, stiff cotton, pajama stripes) Harvie and Hudson shirts I used to buy in London cost $100 in 1999. They were so expensive you could only wear them on special occasions.

Today, Harvie and Hudson will sell me identical shirts, made in China to their specifications, for just $50. At half-price I can wear them considerably more often.

Of course, the charming and deferential elderly salesmen in the Jermyn Street store still have their jobs, but I'll bet they are paid less. What's more, I know somewhere in England there is a group of shirt makers now unemployed.

I feel guilty every time I go there.

Naturally, with manufacturing in China and services in India now so competitive, there is huge pressure on U.S. wage and employment levels.

If Chinese factory workers and Indian telesales reps and software engineers can do the same job for 1/10 the price, why should American workers be paid more in a free market?

The answer is that it's not going happen.

There are just two sets of people who are relatively safe these days.

One is the group of top corporate executives and bankers who have increased their profits by arranging of all this international manufacturing. Their earnings have actually increased as jobs have gone overseas.

At the other end of the scale, some occupations such as hairdressers and plumbers have to deliver their services locally, so are much less subject to international competition unless immigration is high.

There are also a few occupations - say, doctors and lawyers -- where cartels and licensing restrictions limit international competition artificially. Even so, I'll bet the cold wind of the free market will hit them too, eventually.

The Good News is This Won't Last Forever

At the end of the day, though, manufacturing in the U.S. still has its benefits.

For one thing, you don't need a cadre of expensive Chinese-speaking executives to deal with the outsourcing. Second, the United States still has, by and large, a better-educated workforce than China and India.

On top of that, the United States still has a massive amount of capital compared to emerging markets - though Ben Bernanke's ultra-low interest rates are eroding that advantage all the time.

So with unemployment numbers improving and Chinese wage inflation high, maybe we are approaching a new equilibrium of stable U.S. wages, which won't be disrupted until some other new innovation makes Chinese, Indian, and African workers even more competitive.

The good news is that technology and productivity improvements will undoubtedly continue, so there's a good chance that the world as a whole will get richer.

Still, if you've recently lost your job, or been forced to take a pay cut remember: your cell phone is to blame!

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He has focused on Iowa, and needs a top-three finish there to remain viable. If he does well, and Romney drops out, his underlying support could propel him forward.

Santorum is knowledgeable but has a rather aggressive personality and can be a wooden speaker. That makes him very unlikely to win against Obama. Though, he might mollify conservatives (but alienate Ron Paul supporters) as a vice president on a Romney ticket.

If elected president, he'd be bad at compromise across the Congressional aisle, protectionist, and probably not good for the market, although smokestack companies might benefit.

Michele Bachmann

Michele Bachmann, 55, is a three-term Congresswoman from Minnesota. She is a strong social and economic conservative with moderate views on foreign policy, voting against President Bush's 2007 Iraq "surge." She won the straw poll in Ames, IA, in August but has faded since.

Still, Bachmann claims conservative purity against other candidates such as Romney, Gingrich, and even Perry. She's knowledgeable but prone to gaffes, and for that reason is unlikely to win the nomination or beat Obama if she did.

It's possible that Bachmann could serve as vice president to Romney, but the Sarah Palin precedent works against her.

Rick Perry

Rick Perry, 61, has been Governor of Texas since 2001. That makes him the longest-serving governor in the state's history. During his time there Perry has presided over an excellent job-creating record (albeit helped by high energy prices).

Negatives are "crony capitalism" deals of state handouts to companies relocating to Texas and his poor debate skills.

Perry is a strong economic conservative. He's proposing a 20% flat tax, opening up the U.S. to major energy production, abolishing three cabinet departments - Commerce, Education, and Energy - and making Congress part-time.

He also has strong Evangelical and moderate social conservative beliefs. His foreign policy remains cloudy but is mildly isolationist.

Perry began his campaign leading in polls, then debate gaffes pushed him down. Focusing heavily on Iowa, Perry needs a top-three finish, but is well funded and could benefit from other candidates dropping out, since his ideas are well suited to the GOP mainstream.

Perry could give Obama a run for his money, provided he survived the debates. As President Perry, he would be strongly free-market and hard-money oriented, with good negotiation skills with Congress but subject to media hostility. Since many environmental restrictions could be removed by executive order, Perry would be excellent for energy sector stocks and probably good for the economy.

Ron Paul

Ron Paul, 76, is a 12-term Congressman from Texas (serving since 1976 with breaks). He was the libertarian candidate for president in 1988 and a GOP presidential candidate in 2008.

Paul is strongly conservative economically, inspired by the Austrian School of economics. He believes in the gold standard, proposes cutting federal spending by $1 trillion in his first year in office, and abolishing departments of Commerce, Education, Energy, the Interior, and Housing and Urban Development.

His foreign policy is heavily isolationist - even pacifist - and his social policy is moderately libertarian.

Paul is a highly eccentric candidate hated by much of the party establishment. He is knowledgeable and gained considerable credibility by accurately predicting the 2008 financial meltdown. His economic policy is popular with party conservatives but not the general electorate. His foreign policy is very unpopular with the GOP establishment but may have considerable hidden appeal to the electorate, especially the young.

Paul is currently leading in the Iowa caucuses by a slim margin, and has good fundraising and excellent organizational capability. If he were to win the nomination, he would have a better shot than most to beat Obama because of his youth support.

Paul has said he won't run a third party candidacy (which would almost guarantee Obama's re-election). However, his son, Kentucky Senator Rand Paul, is less extreme on foreign policy and would make sense as a vice presidential candidate for an establishment figure who wanted to ensure the Paul movement's support.

As president, Ron Paul would have fun with the Fed, but great difficulty assembling legislative coalitions or ensuring party discipline. His tight money policy would be highly beneficial in the long run, but would in the short-run involve a painful weeding out of "malinvestment," which would cause a stock market crash.

Newt Gingrich

Newt Gingrich, 68, is a former 10-term Congressman and served as Speaker of the House of Representatives from 1994-98.

Gingrich has eclectic political views, and a fountain of new ideas which aren't always sound. He can be ultra-conservative or moderately liberal, depending on the issue and the timing - he can be surprisingly supportive of "big government" solutions. He's also fairly "neocon" on foreign policy, though he describes himself as a "cheap hawk."

Gingrich organized the Republican takeover of Congress in 1994, but four years later was ousted by colleagues dissatisfied with his leadership style. Negatives include his post-Speaker lobbying career and his marital difficulties. He's currently tied for the lead in national polls, second in Iowa, and leading in South Carolina (primary: January 21).

Gingrich is short of money and disorganized, so would have difficulty winning the nomination, but might prove a strong opponent for Obama because of his debating skills. As president, he would be center-right, with his greatest achievements through forming bipartisan Congressional majorities. His foreign policy might be expensive, however. He has promised to replace Fed Chairman Bernanke, but it's doubtful he has a hard money commitment like Paul and Perry.

Look for a sideways market with inflation, with military contractors doing well.

Mitt Romney

Mitt Romney, 64, is the former Governor of Massachusetts and CEO of Bain Capital, a highly successful private equity company. Romney is still by far the front-runner for the nomination on Intrade, the political odds-making site.

He's unlikely to win Iowa, but should win New Hampshire and do well in South Carolina, where he has been endorsed by Governor Nikki Haley. Romney has espoused a wide variety of political positions. However, his healthcare plan in Massachusetts, and his father George Romney's political career as Governor of Michigan and 1968 presidential candidate, make me believe Romney would govern to the left of the Republican party, with occasional forays further left as fashionable Washington and media opinion influenced him.

Romney has a 53-point plan for the economy that includes minor and poorly designed tax cuts. He'd have been a great candidate in 2008, as his expertise would have served him well in the September crash. However, Wall Street and private equity-driven job cuts are now politically toxic, so Romney is less certain of the nomination than many think and would be a very vulnerable candidate against Obama.

If (perhaps owing to a "double-dip" recession) he managed to get elected, Romney's economic policy would be close to that of President George W. Bush, although it's likely he would add a trade war with China to Bush's policies. You could thus expect continued anemic growth with "Bernanke-esque" loose-money policy (he has said he would remove Bernanke, but that is most likely a sop to the primary electorate). Short-term, his election would give the market a fillip, but it wouldn't last.

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• Some companies are running along fine, but consistently pay out more in dividends than they take in through earnings. After a few years of this, the cash runs out and they have to cut or eliminate the dividend - which makes the stock drop, normally by much more than the extra dividends you've earned. Frontier Communications Corp. (NYSE: FTR) for example was paying $1 per year, which it claimed it could meet out of cash flow even though earnings did not meet it. Then after a big acquisition, it cut the dividend to 75 cents. In the last four quarters it has earned 16 cents, so I'd bet that the dividend will have to be cut again. Perfectly good business, but with profits and thus value in steady decline.

• Then there are the companies whose earnings cover their dividends, but whose life is limited. Some of the Master Limited Partnerships (MLPs), which own a finite pool of oil or gas wells, are in this category. An extreme case is Great Northern Iron (NYSE: GNI). Nice company, 14% dividend yield, almost covered by earnings. But it depends on an iron ore mining concession that runs out in 2015 - so you only get four years of 14% plus 5% to 10% in extra assets in 2015 before the company disappears altogether. That doesn't add up to 100%, to put it bluntly.

By and large, yields above 12% are not that common, and yields below 6% are not especially worth going for. Still, that leaves you quite a big universe of companies with yields in the 6% to 12% range.

All you have to do then is determine whether the companies are going to be able to continue paying their dividends. Of course, the possibility of increasing earnings and dividends does not hurt. Look for earnings that are well in excess of dividends, with a business model that seems sustainable in the long run. Ideally, if the shares are selling below book value, that's a plus too.

As you can see, income investing is a bit more difficult than just looking for the highest dividends, or picking the blue chips whose yields have inched above 3%. But it is also highly rewarding, giving you yields close to double digits in stocks with solid values.

As far as specific investments go, I have an excellent suggestion in today's edition of Money Morning Private Briefing. It is undervalued in today's market and has a strong chance of appreciating in value and increasing its dividend. If you're already a Private Briefing subscriber you can read all about it in today's issue. If not, you can sign up by clicking here.

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• The Yield Curve: Central bankers have kept short-term interest rates far below the level of long-term rates and have made it clear that they will intervene if long-term rates rise. Banks can borrow short-term, lend in the long-term markets, and through this "gapping" use massive leverage to boost their returns.
• Regulatory Loopholes: Basel Committee banking regulations currently allow banks to escape allocating capital to their holdings of Organization of Economic Cooperation and Development (OECD) government debt. These regulations allow banks to play the gapping/leverage game without limit, provided they invest in government or government-guaranteed bonds. This has financed the gigantic budget deficits of recent years. However, it has also "crowded out" private sector lending.
• Limitations On Capital: Banks have ample liquidity, but they have only a finite store of capital. Accordingly, if regulators force banks to hold more capital, their loan volume will be limited and they will no longer be able to expand lending (other than to governments). Currently, banks can only raise more capital at below their net asset value, diluting their existing shareholders.

Even the "shadow" banking sector - the brokerages, money market funds, hedge funds and structured investment vehicles that provided massive lending volumes before 2008 - cannot help much now.

Structured investment vehicles are, for obvious reasons, a lot less popular than they were before 2008. Hedge funds were until this year even more popular than before 2008, but their suddenly cautious bankers don't let them leverage themselves like they used to. Money market funds have shrunk because their returns have been pathetic for the last three years. Meanwhile, inflation has risen, eroding the real value of their investors' capital.

So the shadow banking system won't be able to make up for lending cutbacks in the banks.

Indeed, the string on which the Fed is pushing is completely slack, and another $1 trillion of Fed monetary stimulus won't lead to even an extra dollar of productive loans.

The solution?

Interest rates need to rise. That will increase the supply of savings, reduce the ability of banks to make money through gapping/leverage games, and restore the linkage between massive systemic liquidity and sluggish productive lending.

Of course, while Ben Bernanke and other current central bankers are in charge, higher interest rates are off the table - regardless of how beneficial they might be.

Now here's what that means for 2012.

Preparing for the 2012 Recession

With interest rates so low and banks so restricted, the chance of a true credit crunch is quite high.

That means countries with large budget deficits - notably Britain, Japan, and the United States - could suddenly see interest rates rise and funding dry up abruptly.

Emerging markets would be divided into those with ample domestic savings or currency reserves - China, Taiwan, Singapore and Chile, for example - and those with bloated public sectors and extravagant consumers - the majority of Latin America, Brazil and India.

Liquid emerging markets would do fine, but illiquid emerging markets would suffer badly - think Latin America in the 1980s and Asia after 1997.

In the private sector, businesses such as aircraft financing and commercial real estate that are chunky and not especially people-intensive could find funding through the shadow banking system, albeit at higher rates than they are used to. However, small businesses and trade finance would find funding much harder to come by.

The existence of vast pools of liquidity would support commodity prices, unless the world suffered a major economic downturn. And gold and silver, which are safe havens in times of crisis that do not depend on a smoothly functioning banking system for their support, would probably do quite well.

Some trade financing might be carried out in gold, with sellers happy to carry buyers' credit risks on their balance sheets provided they could be repaid in an inflation proof asset with no linkage to troubled financial systems.

The bottom line is that in spite of, or to some extent because of, the efforts of Bernanke and his cronies, a credit crunch and another massive drop in world trade volumes is quite likely in 2012.

Only a modest money market shock would set one off, and with Europe tottering such a shock seems very likely indeed. We should be prepared.

To safeguard against any trouble, you might consider the iShares MSCI Singapore Index ETF (NYSE: EWS), the iShares MSCI Taiwan Index ETF (NYSE: EWT), and the Aberdeen Chile Fund (NYSE: CH), which I recently recommended in my 2012 emerging markets outlook.

It'd also be a good idea to add to your precious metals holdings through the SPDR Gold Trust ETF (NYSE: GLD). Don't hedge this risk through gold alone, however. If the 2008 crunch repeated exactly, its price would fall rather than rise.

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Canada, and some emerging markets of East Asia and Latin America likely to come out on top. (Australia is currently badly run, and looks likely to "kill the goose that laid the golden eggs" by taxes and environmental regulations.)

Emerging Opportunities

Canada and Chile are well run and benefit from current high commodity prices. Malaysia does, as well, while South Korea and Taiwan would benefit from a fall in prices. And Singapore does well in all environments except a major world slump, which I don't expect.

The best way to invest in most of these markets is through exchange-traded funds (ETF).

For Canada that's the iShares MSCI Canada Index ETF (NYSE: EWC), with net assets of $5 billion and a price/earnings (P/E) ratio of 14. For Chile, there's no ETF, but the Aberdeen Chile Fund (NYSE: CH) is well run, although small with a market capitalization of $130 million. For Malaysia, the iShares MSCI Malaysia Index ETF (NYSE: EWM) has net assets of $929 million and a P/E of 15. As a hedge against a commodity price crash, look at the iShares MSCI Korea Index ETF (NYSE: EWY) and the iShares MSCI Taiwan Index ETF (NYSE: EWT).

If that's not enough, however, there is one more emerging market that's positioned to do very well in 2012. It is well governed, has ample natural resources, and is currently planning a huge infrastructure build-out. That makes it a prime investment opportunity. However, that recommendation is only available to Money Morning Private Briefing subscribers.

If you're already signed up then you can read all about it in today's issue. If not, then I highly recommend you sign up by clicking here. That way, in addition to today's pick, you'll receive dozens of other top-tier recommendations.

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In each recession - 1893, 1907, 1920, and 1932 - a number of railroads went bankrupt, reducing their debt servicing costs. This further increased the strain on any railroads that had not defaulted.

By the 1930s the result was a general industry default and debt reorganization, which for many railroads was the third or fourth such event. The railroad industry failed to invest in necessary infrastructure improvement, so it was hopelessly unable to compete when trucks, buses, and airlines appeared.

Similar economics have ruled the shipping industry since 1973. Variable costs are low, so most of the time shipping rates are driven down to levels that fail to service shipping debt, let alone provide an adequate return for investors. Only occasionally, in times of capacity scarcity, do shipping rates rise sufficiently to provide a profit, at which point huge amounts of excess capacity are built in the world's state-subsidized shipyards.

Like its fellow transportation industries, airlines have now been forced into a vise of unprofitability.

The Unprofitable Airline Industry

The airline industry, like railroads, was once profitable during its rapid expansion period, which in the United States was before 1969 and in East Asia before 1997.

Now it's condemned to unattractive economics.

Only an occasional operator can make a profit by ignoring the rules and union contracts by which the oligopolists are bound. If the profitable operator grows, however, it loses its niche. Either it becomes subject to the same cost constraints as others, or the oligopolists free themselves from their cost constraints and drive down costs and tariffs, making everyone equally unprofitable.

Naturally, airlines seek ways out of their dilemma. Three commonly explored solutions include adding service, providing hidden rebates to favored customers, and getting government subsidies.

But there's little opportunity to add service. The general experience of flying is so universally unappealing that an airline competing on superior service is like a dentist competing on the basis of having a more comfortable chair.

Airlines' attempts at rebate offers have backfired. They've created a consumer determination to "game" the airlines to get the best deal. Not only has this eliminated profitability, but it has triggered a huge and justified resentment among other customers who paid a substantial premium for exactly equivalent service.

As for handouts, the airlines have already used this technique both directly, like the $15 billion subsidy after 9/11, and indirectly - playing the governments of the few aircraft suppliers against each other. Both manners have done little to improve airline companies' long-term financial positions.

It would probably make sense for airports to pay landing fees to airlines, rather than the other way around as is currently the case. After all, the airlines are bringing millions of captive customers to the airports' shopping centers and food courts. Those subsidies would be modest for hubs like New York and Boston, which airlines would need because of their commercial links, and much larger for places like Las Vegas, which without air travel would be a mere desert oasis.

However, that's not going to happen any time soon. So the airline industry is a lousy investment.

In fact, there's only one airline I see that could rise above the industry's substandard profitability: Singapore Airlines (PINK ADR: SINGY). Its routes derive from international agreements, so are relatively uncompetitive. It also has an exceptionally high proportion of long-haul business class travelers, and to attract them it offers a distinctly better flying experience than most of its competitors.

It's doubtful these advantages will last forever, but for now, investing in Singapore Airlines is like flying in 1965: a comfortable, potentially profitable experience.

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The pound has some upward potential, and Britain's balance of payments deficit is currently modest, but the Bank of England (BOE) has announced a $430 billion (275 billion pounds) "quantitative easing" program - equivalent to a $2 trillion program here in the United States. So if the United States gets in trouble, Britain is likely to be in even more trouble.

The Australian dollar and Swiss Franc both have safe haven potential, but both currencies ran up a long way in 2011 and the Swiss National bank is determined to print money in order to stop its rise against the euro.

Avoiding these currencies is the first step toward a profitable 2012. The second step is to load up on the currencies that will weather any potential economic downturn and soar should the global economy recover.

Three Must-Own Currencies

To that end, the three must-have currencies of 2012 are as follows:

1. The Canadian Dollar (CAD): Canada is a close neighbor, but distinguished from the United States in having a sound banking system, a much smaller budget deficit, and huge energy and mineral wealth. The Canadian dollar had risen as high as $1.06 in the early part of 2011, but has since drifted back down to about 98 cents. At that level, it has further to rise and is an excellent hedge against any severe problems in the U.S. economy.
2. The Chilean Peso (CLP): Like the Canadian dollar, the Chilean peso benefits from rising resource prices. Better still, Chile is by far the best-run country in Latin America, with a Transparency International Corruption Perceptions Index rating better than that of the United States. The next election is not until December 2013, so political stability is assured. The peso has fallen about 8% this year on fears about emerging markets, but Chile's current account deficit is less than 1% of GDP. It has virtually no government debt and a large trust fund to cushion against shocks (such as last year's earthquake, for example).
3. The South Korean Won (KRW): The won is a hedge against problems in the United States, but also against a collapse in commodity prices. Contrary to the Japanese yen, the won has fallen about 20% against the dollar since 2007, and is flat on the year. However, even with high commodity prices, Korea runs a substantial current account surplus. It also runs a budget surplus with the lowest amount of government spending in the Organization of Economic Cooperation and Development (OECD) group of rich nations. So it is fabulously strong economically. The only potential weakness comes in the form of an election next April, but even the opposition in Korea is thoroughly pro-market and should cause few problems.

So there you have it. These are the three currencies investors must own in 2012. Stick with them and avoid the likes of the dollar, euro, yen, and pound. If you do, you'll be set for a far more rewarding year in 2012.

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• BreitBurn Energy Partners (Nasdaq: BBEP): BBEP primarily invests in oil and gas properties in the Antrim Shale in northern Michigan, the Los Angeles Basin, Wyoming, Florida, and Kentucky. Unlike many MLPs, it does a considerable amount of exploration, so while its income is more risky, it is not self-liquidating. To ensure a steady cash flow, BBEP hedges its output for up to three years forward. This produces a stable cash flow but a wildly fluctuating income when oil prices bounce up and down. Thus, in the third quarter of 2011, BBEP reported net income of $2.87 per share as oil prices dropped, giving it a large profit on its forward hedges of three years' production. Operating EBITDA was about 90 cents per share and the company declared an increased quarterly dividend of $0.435 per share, or $1.74 per year, on the basis of which its yield is 9.8%. Since it's also trading at 14% below net asset value, BBEP looks like a good deal on both an income and a capital basis.

• Penn Virginia Resource Partners LP (NYSE:PVR): Penn Virginia operates in two segments, coal and natural resource management, which manages and leases coal properties, and natural gas midstream, which offers gas processing, gathering, and other related services. It's somewhat diversified, with steady income but also has exposure to rising resource prices. Its quarterly dividend of $0.50 has risen steadily since 2003 and has doubled in that period. Net income currently does not quite cover the dividend, but cash flow is ample and there are many MLPs with worse income positions. It currently yields 7.7% but is trading at 4.4 times book value.

• TC Pipelines LP (Nasdaq: TCLP): TC Pipelines transports natural gas in the United States and eastern Canada and owns 46.5% of Great Lakes Gas Transmission LP. Unlike many of these companies, its earnings cover its divided - $3.11 per share in the last four quarters, compared with a 77-cent quarterly dividend totaling $3.08. Being a pipeline, it has the advantage of very steady earnings, and yields 6.8%. That may not exciting, but it's still more than three-times Treasuries for a cash flow that is bond-like in its assuredness.

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A Clean Break

The first, and cleanest, would be a split between the "strong" countries in the Eurozone - such as Germany, Finland, and the Netherlands - and the "weak" countries, such as Italy, Spain and France. Greece and Portugal would have to split from even the weaker euro.

Of course, this would require intelligent, apolitical management by European authorities, so it's pretty unlikely.

Even if such a split was well executed, it would have a negative effect on the economies concerned. It would introduce costs and disrupt the global trade balance. Still, after a year or two of slow growth, Europe would recover. And other European economies outside the Eurozone, like Poland, would not be affected. In fact, they might even benefit, as the disadvantage in international trade wrought by their small currencies would be lessened.

The Perils of Printing Money

The second possibility is a disorderly breakup of the Eurozone, which would result from the ECB printing money.

The ECB would default, but Eurozone debt would not default, simply losing most of its value. Obviously, that means a period of extraordinarily high inflation would accompany such a collapse.

Indeed, large public debts can be worked off quite quickly with enough inflation, as my native Britain discovered in 1945-75. Wartime debts were worked down to a manageable level during that period, in spite of a notable lack of budget discipline.

Of course, the losers were small savers like my Great-Aunt Nan, who put her substantial life savings in government bonds at her retirement in 1947 and was more or less penniless by the time she died in 1973.

This approach, solving a government's debt problems at the expense of the old and powerless, is especially disgraceful, but politicians don't care about that. In this case, bonds of all types should be avoided, but stock investments in non-Eurozone members would do fine. However, Germany would be traumatized by the inflation and the costs imposed on the economy by the destruction of its savings.

Disorderly Default

Finally, the third possibility would result from the redoubtable German Chancellor Angela Merkel protecting German taxpayers from bailouts and German savers from inflation. In that case, country after country could default, dropping from the Eurozone in a disorderly manner.

The negative wealth effect from defaulting government bonds would make the defaulting countries poor. Additionally, Eurozone non-members would suffer increased competition from suddenly cheap labor in those countries.

Meanwhile, Germany and other strong countries, like the Netherlands or Finland, would do fine. They'd run balanced budgets and gradually lower their state debts. They would probably remain in the Eurozone (or whatever's left of it), which would gradually strengthen as the dead weight of weaker economies was trimmed.

Truly, a Eurozone split would be bad news - no matter which way it happened.

Germany would survive an orderly breakup and do well in a tight-money default, but fare poorly in a period of hyperinflation. Conversely non-Eurozone Eastern Europe would do well in an orderly breakup and survive hyperinflation, but it would be battered by a tight-money default.

At the end of the day there are no easy answers on this one. The best you can do is to find markets with little economic connection to Europe - and even that's not easy.



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Of the big U.S. companies that stand to gain from the new FTAs, Tyson Foods Inc. (NYSE: TSN) and Caterpillar Inc. (NYSE: CAT) are in the most promising position.

Tyson Foods is the largest U.S. poultry producer. It also owns the largest beef producer, Iowa Beef Producers. Tyson is a $7 billion company with a price/earnings (P/E) ratio of 8.8, which means it's reasonably well valued.

Caterpillar should benefit, as well - especially from increased demand from Colombia's extraction sectors. Of course, it's a $54 billion company trading at 14-times earnings, so it's pricier.

Playing foreign companies is a little trickier, but there are still some good options available to U.S. investors.

Samsung Electronics Ltd. Co. (PINK: SSNLF) and Hyundai Motor Co. (PINK: HYMTF), the two most obvious Korean beneficiaries of the FTA, are quoted only on the Pink Sheets and trade very thinly.

For that reason, I think you're better off with the iShares MSCI South Korea Index Fund (NYSE: EWY). It has a $3.5 billion capitalization and a P/E of 6.76. This exchange-traded fund (ETF) should do well considering the recently-signed FTA is expected to give a 0.6% annual bump to Korea's economic growth. South Korea recently signed an FTA with the EU, as well.

As far as Colombia goes, the most obvious beneficiary is Ecopetrol SA (NYSE ADR: EC). The Bogota-based oil company is expanding rapidly as a result of Colombia's very attractive offshore and onshore oil deposits. It has a market cap of $84 billion and a P/E of 12.

As with South Korea, this FTA should increase U.S. investment in Colombia and further speed the country's already rapid growth. The largest ETF, the Global X FTSE Colombia 20 ETF (NYSE: GXG) is thus a good bet. It has a market capitalization of $135 million and a P/E of 17.

There is one more company that will benefit, and it by far is the best choice for U.S. investors. It's a big-time exporter that's beginning to get a lot of attention from company insiders. And even though it's strung together five consecutive profitable quarters, the stock remains relatively cheap.

However, I'm saving this one for Money Morning Private Briefing subscribers. If you're already a member, then my in-depth analysis of this company was made available to you this morning. If not, then you can sign up to get this pick and access to dozens of others by clicking here.

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Ireland had a banking problem because of its immense real estate bubble, and the government got into trouble because it foolishly guaranteed the banks. However, Ireland's current account is now in surplus and its economy appears to have begun growing again - despite draconian austerity measures.

Portugal, like Ireland, has replaced the government that caused the problem, which was largely one of public-sector overspending. However, it could run into difficulty again.

Portugal's living standards (like Greece's, but to a much lesser extent) are higher than justified by its productivity, and its balance of payments is still heavily in deficit. It's in between Greece, which should definitely leave the Eurozone, and Latvia, which was able to bring its economy under control without losing its currency link to the euro.

If Portugal gets in trouble again, leaving the euro will be much easier, and in the long run, better for its economy than forcing further austerity measures. Because it is so small, Portugal won't damage the Eurozone by leaving it. Instead, like Greece, it represents just a trimming at the edges.

Spain's Nov. 20 election should produce a better government, committed to austerity. While it has a much lower debt level than Greece, Italy or Portugal, it combined a real estate bubble with government profligacy. If Italy stabilizes, the market's attention will revert to Spain, but it can probably survive with a dose of austerity and good government.

Belgium is a basket case in terms of public debt, but the vast income it earns from the EU headquarters allow it to run a balance of payments surplus. It's badly run, and for long periods of time not run at all, but probably not an immediate threat to the system - and it would be bailed out if it needed it.

The Eurozone's Achilles Heel

Finally, we have Italy - the Eurozone's Achilles heel.

Italy has slow growth and only moderate payments and budget deficits. Its high debt level is the result of decades of profligate government spending before Silvio Berlusconi came along. Berlusconi achieved less than he promised, but he cut government spending, raised the pension age and considerably improved Italy's finances. If he's succeeded by a capable center-right statesman, Italy should be fine, and the market panic should die down.

However, with Berlusconi's coalition having lost its majority, and the president an aged leftist, there is a substantial chance of instability. If an election takes place that is won by the left, or if a "government of technocrats" that is in practice dominated by the left is appointed, then the corruption and special interests in the Italian political system may prevent necessary spending cuts and reforms, possibly imposing tax increases instead.

Since Italy is already overtaxed, and tax compliance is among the lowest in the EU, higher taxes result in revenue loss and economic downturn that could tip the country over the edge.

Also, since Italy is so large, the EU lacks the money to bail it out. Worse, its departure from the euro would destroy the currency and cause a major global recession. Our own economic health thus depends on the machinations of Italian politics.

Still, in any scenario other than a complete Italian collapse, most of the EU will continue to do fine, although the Eurozone's growth will be constrained by bailout costs and austerity measures.

Of course, non-Eurozone EU countries that are capably managed and have a labor cost advantage over Germany, France, and Italy should continue to do fine, benefiting from not having to pay for bailouts.

For that reason, you might look at the Market Vectors Poland Fund (NYSE: PLND), which has suffered unjustified contagion from the euro mess and is trading on only 9-times earnings.

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• JPMorgan Chase & Co.: JPMorgan survived 2008 better than any other house, since its CEO, Jamie Dimon, was both conservative and shrewd. The firm has an excellent international and corporate franchise, which should do well going forward, and its foray into investment banking through the purchase of Bear Stearns has been brought well under control. JPMorgan's weakness is investment banking, which caused third-quarter earnings to decline 33% from last year. Nevertheless, even based on those earnings, its price/earnings (P/E) ratio is only about 8-times and it sells at about 83% of net asset value.

• Citigroup Inc.: Citi nearly went bankrupt in 2008 but has done considerably better since then (though pre-2008 shareholders have lost 90% of their money). Active in more than 100 countries, Citi has the best international network of any U.S. bank. This is a major competitive advantage in emerging markets, with which only HSBC Holdings PLC (NYSE ADR: HSBC) and Standard and Chartered PLC can really compete.

Citi also has a good U.S. consumer franchise, especially in profitable credit cards, and has de-emphasized the riskier parts of investment banking. Third-quarter earnings were inflated by a silly accounting rule that says you book a profit when your bonds go down, but on an operating basis, Citi trades at about 9-times earnings. More interesting, it's selling at just 51% of book value. While about a third of that book value represents deferred tax assets, which only become valuable as the bank earns profits, that's still a great deal.

• PNC Financial Services (NYSE: PNC): PNC made the smartest deal of all in 2008, buying the Cleveland-based National City Bank for $5 billion in stock, and getting $6 billion in tax write-offs with the deal. National City had run into mortgage problems, but its operations were in the Midwest, not California, so there were far fewer bubble mortgages to weigh down its balance sheet. PNC's third-quarter earnings were slightly up on an operating basis, and it's currently selling at a P/E of 8 and at 86% of book value. If you want a bet on a regional consumer-oriented bank, PNC is the one to go for.

Of course, if you're really looking for an investment-worthy bank, you'd be better off looking outside of the United States. For instance, in today's issue of Money Morning Private Briefing, I discuss what's currently my favorite bank stock. It's selling at just 49% of its book value, at 5-times trailing earnings and 4.2-times forward earnings, and it's based in a fast-growing Asian economy.

If you're already a Private Briefing subscriber, then you have all the information you need. If not, you can sign up here to get access to this banking stock, as well as a cache of other major-league profit plays.

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The U.S. Federal Reserve is tilting the playing field in favor of those attempting to get mortgages by keeping interest rates ultra-low. The Senate also has voted to tilt the playing field in their favor, by raising the limit of Freddie Mac and Fannie Mae guarantees back to $729,750 - an absurdly high amount for a program that was meant to help the middle class.

However, the banks themselves are being very cautious, restricting lending to those well within traditional parameters of no more than an 80% loan to value ratio and no more than 25% of income consumed by mortgage payments. That helps the rental market, by preventing well-qualified renters from buying homes, but it does nothing for housing market recovery.

Given the restrictions on mortgage availability and the continued overhang of foreclosures and pre-foreclosures, housing stocks remain unattractive. Their land inventories remain a burden and the pace of new home sales remains extremely depressed. Further, even when the housing market recovers it will do so first through the absorption of existing inventory, so the demand for new building will remain low.

A few weeks ago I recommended apartment stocks on the basis that demand for rentals is increasing, rents are increasing, and finance remains cheap. However, they remain highly leveraged and currently sell at a rich multiple of both book value and earnings.

The housing market is bottoming out and if you can get a mortgage, a house is an increasingly good investment. But for equity market investors, there's not much to go for.

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• Steer clear of leverage. Don't leverage up your portfolio and don't buy into companies that leverage up theirs.

• Do not invest based on political beliefs. Rely rather on economic analysis.

• And always stay humble. Maintain a deep skepticism of your own knowledge and wisdom. Neither the best market analysts nor the best baseball players should expect to bat 1.000.

Three Things to Learn From the MF Global Bankruptcy

First, trading and leverage do not automatically bring riches. The Efficient Market Hypothesis says that markets know everything and it's impossible to beat them.

That theory has its faults in long-term investment, where thoughtful analysis of a company's prospects can achieve superior returns. However, it's spot-on in the trading markets, in which adrenaline junkies attempt to achieve quick profits at each other's expense, multiplying those profits by cheap borrowing.

The overall effect of cheap leverage is that it drives up asset prices - thus the dotcom, housing, and commodities bubbles. It also amplifies short-term trading profits, and makes some traders very rich for a time. But in the end, what goes up tends to come down. That certainly was the case with Corzine. And if you need even more evidence, just look at John Paulson, who made billions from the housing crash but whose Advantage Plus fund in early October was down 47% for 2011.

For us ordinary investors, trading and leverage are both dumb strategies.

Second, Corzine believed he was smarter than all the traders in the market. That's why he believed he had found an opportunity in European bonds that others missed. Since the big players have similar skills and knowledge, this is very unlikely and shows hubris.

At Goldman Sachs, it was a little different - the firm has a lot of very smart people who together have huge, and even unparalleled, market knowledge. That's why Goldman can sometimes beat the crowd - although it shouldn't try to, if it wants to keep a banking license. But one smart guy in a medium-sized house is very unlikely to beat the market, and quite likely to come unglued if he makes a leveraged bet the wrong way.

Finally, Corzine believed that the economics he had applied (pretty unsuccessfully) as Governor of New Jersey would work for Europe too. He believed economic recovery required only massive doses of government spending "stimulus," that deficits and debt don't matter, and that "rich" taxpayers can always be called on to bail out mistakes.

As should have been clear a year ago, German taxpayers won't stand for unlimited bailouts at their expense, and providing handouts to Greece won't make that sorry economy viable.

All three of these mistakes were critical errors. And we should all take note.

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For one thing, all those 10 billion people will want Western standards of living. We have seen that in the last two decades. As China, India, and other emerging markets fully entered the world economy, the number of people who can aspire to Western standards of living has increased from 600 million to about 3 billion, pushing up commodity prices and multiplying carbon emissions.

With a population of 10 billion affluent citizens, it's likely that the world economy will be unstable. At some point, we will run out of some crucial mineral, or a disease against which antibiotics are helpless will sweep the planet. The result will not be a gradual decline in living standards, because complex systems are not stable when put under stress. Instead, a collapse will occur, with perhaps 80% to 90% of the world's enlarged population being wiped out. Whether civilization will be reestablished after the collapse will depend on what caused it - and it is by no means certain.

We thus need to control population, "bending the curve" of its growth downwards so that it can peak as soon as possible and begin declining towards a safe level.

A Population Growth Plan

Most of the population control will need to take place in poor countries.

Japan has shown that in rich countries a natural process reduces population growth and produces a healthy decline. According to U.N. population projections, Japan's population will fall from its 2007 peak of 127 million to 91 million in 2020. At that point, it will be well on the way towards its pre-industrialization population of about 30 million. Conversely Nigeria's population is projected to be over 700 million in 2100 - one's mind can only boggle at what life in Lagos will be like!

I realize that China's "one child" policy has given population control a bad name - and rightfully so. Instituted in 1978, the policy is brutal and intrusive. However, China in 1978 was an extremely brutal society. It had just ended the Cultural Revolution that killed more than 1 million people - so it's not surprising that its government chose brutal means to achieve its goal. Certainly the policy has been successful. China today is nearing population equilibrium with nearly 400 million fewer people than it would otherwise have had - and a much wealthier society in consequence.

Still, brutality is completely unnecessary when economic means are available.

For example, it is well known that a big motivator for large families in poor countries is the need to provide for one's old age. We could thus introduce a program across Africa (where population growth is fastest and most dangerous) for a pension of, say, $2 per day for all Africans reaching 70. Since there are only about 30 million Africans of that age from a total population of 800 million, this would be relatively cheap - it would cost about $20 billion annually.

With this security in their old age, there would then be no need for the very large families that Africans have traditionally wanted. And over a generation, as in China, African population growth would slow to a more manageable level. That, in turn, would make Africa richer, because there would be less of a drain on schools, housing, and infrastructure. It also would slow population growth further, as lower fertility normally goes with higher income.

So let's mourn the arrival of the world's 7 billionth inhabitant - while welcoming the baby personally. And let's resolve to slow population growth, so that ideally it never reaches 8 billion.

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The U.S. government didn't even start issuing TIPS until 1997. That was after it fiddled with the consumer price index (CPI) to take account of "hedonic changes" - improvements in quality, which it defined by things like the "Moore's Law" increases in computer chip speed. By this measure, the price of computers today is 1/1000 its level in 1997 (The government adjusts the weightings each year to make sure "declines" in computer prices are fully captured).

Of course, if you only use computers for more basic functions like word processing and calculations, they're no more useful now than they were in 1997. Admittedly, Internet access is more efficient, but not much more efficient than it was in, say, 2004.

So the CPI understates inflation, by about 0.8% to 1%, and TIPS thus have about a 0.8% to 1% lower "real" yield than they advertise.

Floating rate notes will not have this problem.

FRNs are likely to be based on the six-month Treasury bill rate, with their interest rate reset every six months, plus or minus a margin. In theory, since six-month T-bills are issued all the time and are completely liquid, while floating rate notes might trade at a discount, that margin ought to be positive.

But in practice, the initial demand for FRNs may be so great that the government can issue them with a zero or negative margin. In that case, investors should be cautious - FRNs with a negative margin are likely to trade at a discount once Federal Reserve Chairman Ben Bernanke is put out to pasture and market conditions are normalized.

However, if the margin is at least a little positive, Treasury floating rate notes are a good deal. Today, they would yield only around 0.06% (plus any margin), but your income would rise alongside interest rates.

More importantly, if inflation were to reach something like 10%, a new Paul Volcker would have to be brought in to get prices under control and short-term interest rates would soar.

Don't forget, six-month Treasury bill yields were above 15% for much of 1981. A return to those levels would certainly make floating rate notes a good investment.

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