Featured Trades: (THE CALIFORNIA MARIJUANA INITIATIVE),
(BUD), (DEO)

2) California Marijuana Industry Dreams May Go Up In Smoke. One issue to be decided on November 2 will be proposition 19, the latest effort to legalize marijuana in California. This is another one of those 'Be careful what you wish for' stories. Advocates claim that passage of such a measure would solve the state's budget crisis, as it would bring in tens of billions of dollars of tax revenue while cutting the cost of our prison budget by billions more. Up to a third of the state's 170,000 prison population are there for possession of small quantities of drugs.

Proponents are right on the second point, but miss on the first one by a mile. In 1933, the 21^st amendment to the constitution repealed the 18^th amendment, rendering the Volstead Act unconstitutional, ending prohibition. Tens of thousands of small time backyard distillers, basement breweries, and bathtub gin makers rejoiced at the prospects of a larger market. Instead, legalization caused the price of their products to collapse, driving them out of business. Today, the industry for alcoholic spirits is dominated by a handful of globally integrated marketing giants running volume driven businesses on razor thin margins, like Anheuser Bush (BUD) and Diageo (DEO).

The same would happen to the pot industry. An Internet search reveals that potent Mary Jane today sells for $200 an ounce wholesale, or $400 retail. Legalize it, and that price might drop to the $20 that I heard prevailed during my college days. Your typical Mendocino underground farm or Oakland grow house with its $3,000 monthly electricity bill, doesn't fit anywhere in this picture.

The same would happen to anticipated state tax revenues. Right now, California smokers pay $1.05 in federal taxes per pack, and 87 cents in state taxes, bringing the average retail cost of cigarettes to $5.05 a pack. I doubt actual marijuana tax revenues would exceed what it currently earns from cigarette taxes, or $839 million a year.

There is another matter proponents aren't focusing on. US Attorney General Eric Holder last week said that his Justice Department would continue to prosecute pot dealers, even if the proposition passes, as federal law trumps state law. Federal prisons are already full of former growers who were deluded into thinking they were growing pot legally because they had licenses from the state.

My guess is that the state's pot industry lobbyists have been smoking too much of their own product when preparing their budget forecasts.

California's Path to a Balanced Budget?

'Ten year government bonds yielding 2.5% are an accident waiting to happen,' said hedge fund legend Leon Cooperman of Omega Advisors.

Featured Trades: (THE EURO AND GLOBAL RISK APPETITE), (FXE)

4) The Euro is the New Canary in the Coal Mine. Short term traders and long term investors should be keeping a laser like focus on the Euro/dollar exchange rate these days, as it has emerged as the canary in the coal mine for global risk appetite.

We live in a binary world now, and the European currency seems to have the highest correlation with the risk appetite of every description. When the markets are in 'risk on' mode, watch the Euro rocket. US stocks, emerging markets, bonds, commodities, and precious metals head off to the races. When the Euro falls back, markets are in 'risk off' mode, investors run for their bunkers, and the price of everything declines. This applies not just to your risky, marginal positions, but to all of them. It's really that simple.

Hint: the Euro has had a great run since early June, posting a 20% gain, a big move for a currency in such a short time. So the amount of risk in all markets is high right now. Just thought you'd like to know. That ski chalet at Lake Tahoe's Incline Village is beckoning as we speak.

Is the Euro Getting Reading to Sing?

Featured Trades: (MONGOLIA), (IVN), (RTP), (975:HK), (MONGOLIA MINING)

3) Get On Board With Mongolia Mining. The 3:00 am phone call was scratchy, broken, and barely intelligible. Would I be willing to accept a collect call from Ulan Bator, the capital of Mongolia? My man on the ground there was on the line with a stock idea that I absolutely had to get involved with. Mongolia Mining (975:HK) had just listed its shares on the Hong Kong Stock Exchange at $7, had already moved up to $8.30, and was headed for higher altitudes.

Mongolian Mining is the country's major producer of metallurgical coal, which it sells to neighboring China to stoke the insatiable demand of its steel mills. The deal came out at a rich 13.6 times 2011 forecast profits, and 9 times 2012 earnings. The issue was led by JP Morgan, lending it some extra credibility with wary foreign investors. It raised $700 million for the company, which plans to invest the funds in road and rail upgrades to its open pit at Ukhaa Khudag in Southern Mongolia.

This is expected to take output from 1.8 metric tonnes in 2009 to 15 million tonnes by 2013. Mongolia has a major price and shipping advantage over existing suppliers of coking coal in the US and Australia, so the Middle Kingdom is expected to take everything Mongolia Mining can produce.

I have written extensively about Mongolia in the past as one of the one great 'pre-emerging' markets now coming on to the scene (click here for 'I Told You to Buy Mongolia!'). Until now, investors have been limited to indirect plays, like Ivanhoe Mines (IVN) and Rio Tinto (RTP). The great thing about Mongolian Mines is that being a local company with substantial government ownership, it will get first priority of essential licenses, permits, and approvals, putting it at the head of the queue, in front of foreign competitors. In developing economies, who you know is often more important than what you know.

I keep hearing things that are incredibly bullish for Mongolia. It has the world's biggest unexploited coal reserves and the richest untapped copper deposit. It is poised to become the fifth leading gold producer. It has large latent oil fields in the south, which begin production next year. And it has the world's largest customer sitting on its doorstep. With emerging markets, natural resources, and hard assets definitely the flavor of the decade, there is an easy double in Mongolia Mines --once this market picks up a head of steam.

Fill Her Up. It's a Long Way to China

Featured Trades: (IAN BREMMER OF THE EURASIA GROUP),
(GOOG), (SPX), (EZU), (FXI), (FXE), (EWA), (EWC), (EWY), (EWT), (THD), (IDX), (EWS), (EWZ), (ECH), (EWW), (RSX)

4) The Big MarketView From 30,000 Feet. There is a new war underway between two forms of capitalism. The traditional type is driven by the big global multinationals we all know and love which are being aggressively challenged by a new form of state capitalism, of which China is the prime practitioner. While it is too early to predict the outcome of this conflict, it is clear that western style multinationals are currently on the defensive. Witness the all out assault on Google (GOOG), whose business was so attractive that the Chinese government launched a concentrated hacker attack to grab technology and market share, both from within, and from outside the company.

I gleaned these incredibly useful insights from Ian Bremmer, president of the Eurasia Group, one of the top independent political research and analytics firms in the world. Ian received a BA at Tulane and a PhD from Stanford in political science. He has been at the forefront of bringing together the once disparate worlds of international investment and political science, a space once inhabited only by a few globetrotting journalists like myself, and commands a religious following among the large hedge funds and mutual fund groups.

Ian gave me a tour de force of the international investment landscape, where to put your money, and where to avoid. The US (SPX) is the smartest kid in the 'dumb class', and is clearly losing out in this new global competition. But it is still in the game, with the world's largest economy and an overwhelming lead in technological innovation and higher education. But the future GDP growth rates will be shadows of their former selves and, at 17.2%, real unemployment will remain chronically high. You might as well take any forecast now flogged by the major research houses and cut it in half.

Europe (EZU) is in dire straits, with economic growth rates plummeting. The big question is whether Germany pulls out of the EC, not Greece. Having nearly busted its own economy with the reunification with East Germany two decades ago, it doesn't want to replay that movie. The bad news: we won't know the outcome for five years. There is no visible support for the euro (FXE) anywhere. Take that newly cheapened European summer vacation, sip all the latte you want, and enjoy those topless beaches, but keep your investment capital in friendlier climes.

While the Middle Kingdom (FXI) is now ascendant, it is not without its challenges. They lag in local innovation, suffer a nightmarish environmental crisis, and down the road, will endure a demographic shortfall that will mirror Japan's. But Ian thinks that Jim Chanos's prediction of a crash in China is 'farcical', and that the country has at least a good five year run ahead of it.

The best places in the developed world to park your money and forget about it are in Canada (EWC) and Australia (EWA), which prosper from bounteous commodity and energy exports, stable political regimes, small populations, the rule of law, and conservative banking and financial regulation. Canada enjoys having the world's largest customer on its doorstep without any of the overheads.

While South Korea (EWY) has an economy that is the envy of many, it runs a gigantic 'fat tail' risk from North Korea, which could blow up at any time. The outlaw regime recently sank a South Korean warship and executed its minister of finance. A total collapse could stick the south with a massive reunification bill it can ill afford, and don't forget those loose nukes. Taiwan (EWT) looks like a no brainer as a takeover target by an acquisitive China, the financial, and not the military kind.

The fate of the monarchy in Thailand (THD) is now a hard fought battle, and it is better to fish elsewhere until the fires burn out. Indonesia (IDX) is nearly a model country these days, and should be the fifth country in 'BRIC', with huge energy and commodity exports and a rapidly growing middle class. Singapore (EWS) also looks great, with an incredibly well managed population of only 3.5 million, massive reserves, a high educational level, and sophisticated manufacturing base.

On the other side of the world, South Africa (EZA) is not just a gold story with a great structural foundation, it will also cash in on the rise of a consumer class in the rest of Africa. Brazil (EWZ), long a hedge fund darling, still looks good, but its glory days are behind it as it transitions to a more conservative government. Other enticing Latin American picks include Chile (ECH) and Mexico (EWW). Russia (RSX) is not just an oil story, but also a consumer one, but faces daunting demographic challenges.

Ian is also a prolific author, bringing out two new books in the past year, which are a must read for any serious global macro investor. They include The Fat Tail: The Power of Political Knowledge for Institutional Investing, and The End of the Free Market: Who Wins the War Between States and Corporations. To prove he is not a total wonk, Ian openly admits to being a card carrying member of the Stanford bowling team. Entirely composed of Russian speakers, they were appropriately known as the 'Bolsheviks

Readers can purchase their own copies of The End of the Free Market at a big discount through Amazon clicking here. To buy The Fat Tail, please click here.