--Crude oil for October delivery set an all-time record...

--Crude oil for October delivery set an all-time record yesterday, hitting US$80.18 in intraday trading in the States. This comes right after the news that OPEC agreed to hike oil production by 500,000 barrels per day. Earlier in the week we learned that the world's second-largest economy in Japan contracted by 1.2% in the second quarter. And yesterday, America's National Association of Realtors said new home sales will decline by 24% in 2007.

--To summarise: oil production is up, Japan may be in recession (after 17 years of fighting deflation), and the American economy is being slowly sucked in to a consumption-killing housing-led recession. And oil hit an all-time high. What gives?

--The official line is that oil rose because US inventories fell by 7 million barrels, when the expectation was for a 2.7 million barrel fall. "Seven million barrels is an awful lot of oil to lose in one week...There's a feeling that OPEC waited too long to make this move," Energy analyst Rick Mueller told Bloomberg. This variability in US oil inventories apparently trumps the prospect of recession in the world's two largest economies. Surely there must be a better explanation.

--There are two other explanations, actually. The first is that we've found the inflationary leak in Federal Reserve policy. When Alan Greenspan cut rates like a madman starting in 2001, he couldn't save the tech bubble. But he did create the housing bubble. The moral of the story is that you can flood the world with money, but you can't control where it goes.

--Central banks all over the world are trying to reflate the bubble that took all assets to soaring heights. But where will the money go? Back into stocks? Into real estate? What about commodities?

--There are several good reasons why commodities could be the unintended recipient of the Fed's interest rate cuts. For one, commodities are tangible assets. There is demand for those tangible assets (see below). And buying resource producers seems like a better bet than buying retail stocks (or anything that depends on consumer borrowing). Is this the beginning of much higher commodity prices? Hold that thought.

--"Export earnings from resources punched through the $100 billion mark in 2006-07 on the back of higher prices and volumes," reports Felicity Williams in today's Herald Sun. "Nickel, zinc, gold, oil, and iron ore exports were the stand-out performers amid a sustained resources boom fuelled by insatiable commodities demand from China...Uranium, lead, alumina, aluminium, LNG and copper export revenues also increased."

--All together, earnings from mineral and energy exports were up by 17% for the year. The lone laggard was coal. But when you throw in Woodside's AU$45 billion deal with China last week, and if you accept our proposition that global reflationary policy may find its way directly into commodity prices, well then the scene is set for an earnings blowout in the resource sector.

--Rising resource prices contribute immediately to producer cash flow. On the other hand, capital spending incurred to increase production volumes is amortised slowly, bit by bit. With income from assets up, but the cost of those assets not yet affecting earnings, well it could be salad days for resource stocks. What else could this mean?

-- Our colleague Chris Mayer in the States says, "It could also mean another buyout spurt as asset rich companies will look cheap - compared to the cost of producing those assets. Similar to the 1980s, when oil companies were getting bought out because they were cheaper in the stock market than it was to drill new wells and create your own reserves.

--"The way I look at the market," Chris elaborates, "is to look for those wide gaps between what's happening in the public markets and what people are doing in the private markets. I imagine a stepped up bout of monetary inflation will create distortions between the two...and hence, opportunities to profit."

-- "The fortunes of the Australia economy do not depend overwhelmingly upon what happens in the US," said Australian Treasury official Ken Henry earlier this week. Henry made the case that Australia's boom can continue even if America's recession has just begun. The key is China's growth - and whether China itself depends on America.

--Though it's possible it's headed for a blow-out inflationary recession of its own, the key thing for Australian investors is to see that China's future growth won't be driven by exports in America, but by China's own internal growth. "The big drivers [of Chinese growth] are continuing urbanisation of the country (still 56 per cent rural) and associated infrastructure spending, the desire to spread prosperity westwards away from the coastal strip where most exports are produced, and the lifting of living standards. These impulses will not fade quickly," reports Barry Hughes in today's Australian.

--It's a big bad scary investment world right now. But it looks pretty clear the US Federal Reserve will allow the American dollar to set new lows against various currencies and commodities. Coupled with the long- term resource-heavy demand from Indian and Chinese growth...well...it's a good time to own a core collection of cash-flowing resource stocks.