The US economy continues its fight against a deflationary debt bust, and the rest of the world is also trying to adjust to the new realities while trimming its own excesses.

Resources have been at the forefront of this process, as global demand has fallen off a cliff. In addition, assorted market participants (including the sophisticated, leveraged variety) have sold everything quite fast, accelerating the price-adjustment process.

We’re reviewing demand and production numbers for the metals, and we should have a more detailed idea of where they stand next week. For now, investors who’d like to allocate some funds should start with our Fab Five, which can be found at the end of today’s issue. The Fab Five represent our preferred themes right now, well-diversified miners with solid quality assets and agriculture-related stocks.

As far as the broader market is concerned, the only good news of late was China’s announcement of a USD586 billion domestic demand stimulus package, which will be deployed over the next two years. Spending will be concentrated on rebuilding earthquake-hit zones, transportation projects, housing development and other projects that require hard commodity supplies.

Unfortunately it may be some time before the impact of this new Chinese demand is reflected in commodity prices. The magnitude of the destruction in the sector over the past few months is clearly formidable. Brazil-to-China freight rates are down to USD10 per ton from USD105 per ton five months ago. Moreover, the plan will unfold at a gradual pace. The earliest timeframe should be sometime after the Chinese new year. And if things go relatively well, more strength in China’s demand should be coming along in the next two to three quarters.

Turning to the longer-term picture, things look a little more promising. For starters, China’s stimulus, though taking place in the middle of a global financial crisis, includes a lot of plans that were ready to go anyway. China continues with its substantial urbanization plans and its efforts to improve the domestically driven economic development model.

And China isn’t alone. India, the Gulf Council Countries and Russia, among others, are in the process of revitalizing their economies, too. Contrary to what the grim headlines scream now, they’ll still be able to proceed with their plans long after the crisis is over and the global economy starts functioning again.

There will be cancelled projects and delays along the way, given the prevailing economic conditions, but the change is structural and critical and so will continue.

The second long-term positive for the sector remains the supply issue. This has been a recurring theme for us, and is still one of the main reasons for investing in commodities.

The world remains unprepared for covering the rise of the new economies. For one thing, the demand for raw materials we’ve witnessed the past five years will pale in comparison to future needs. Most importantly, global infrastructure remains weak, and many of the improvement projects underway will probably be delayed, while the ones on the planning stage will be put off.

As companies plan for less capital expenditure, future supply will slow dramatically, and it will take time to restart because lead times for mining projects are long. Consequently, when the global economy starts to recover, commodity prices will rise hard and fast, as global miners will be again in a bad position when it comes to supply.

Finally, we expect that the recent rise of the US dollar will prove nothing more than a bear market rally. Current US dollar strength is artificial and politically driven. The huge market liquidation has led to demand for conversion purposes. And it’s political because US dollars required for the purchase of Treasuries, which is what a lot of countries around the world are now doing.

It’s in nobody’s interest for the US economy to collapse at this stage of the game. Consequently, governments around the world are in agreement that the US economy has to be given enough liquidity to ensure it has time and flexibility to solve its problems. If it does, the benefits will be global in nature.

That said, the US dollar is gradually losing its attributes as a store of value, although it is retaining its value as a means of exchange. The path US financial leaders have traveled for some time now–and that the economy has to follow–ensures the former will take place. The gargantuan size of the US economy will make sure the latter persists.

A weaker US dollar will be a great positive for the sector going forward. The process should start happening in 2009 as the global economy at last finds its footing.

Potash Corp (NYSE: POT) is the world’s largest and lowest-cost publicly traded potash producer, the fastest-growing segment in the fertilizer business. Its potash reserves are sufficient for more than 100 years of production. The company controls about 70 percent of the world’s excess capacity. Potash Corp is also the world’s third-largest phosphate producer and fourth-largest nitrogen producer. Buy Potash Corp up to USD100.

China Green Holdings (Hong Kong: 904, OTC: CIGEF) is a China-based producer and supplier of fresh produce, processed and pickled products, branded food and beverages, and rice and rice flour products. China Green Holdings is a buy up to USD1.50.

Switzerland-based Xstrata (UK: XTA; OTC: XSRAF) is the world’s fourth-largest copper producer. It also has substantial positions in nickel, thermal and metallurgical coal, zinc and aluminum, and operates an alloys division for chrome, vanadium and platinum group metals. Xstrata is a buy up to USD15.

UK-based Rio Tinto (NYSE: RTP) is the world’s second-largest miner with operations in Australia, Africa, the Americas, Europe and Central/Southeast Asia. Rio Tinto is the world’s largest producer of aluminum, second-largest producer of iron ore and a top five producer of alumina, uranium, mined copper, thermal and coking coal, and diamonds. Despite its large size, it’s a takeover target as well. Buy Rio Tinto up to USD200.

Vale (NYSE: RIO) is one of the world’s largest miners of iron ore and nickel. The 2005 acquisition of Inco, a Canadian nickel producer, initiated Vale’s transformation from a Brazilian iron ore miner into a global player, with assets and operations on six continents. Vale is a buy up to USD20.