There were hundreds of them...different shapes...different sizes. A businessman in a pin-striped suit, briefcase in hand, concentrating on his sales report; he almost stepped in front of a motorcycle. A salesgirl, grotesquely overweight...yellow hair streaked with brown...wishing she hadn't had so much to drink the night before. A lawyer daydreaming about his secretary. A man who would have rather been fishing...still in his waxed coat. A woman annoyed about something. A heavy construction worker, his legs splayed outward as he walked. A tense young woman who dared not look up. A woman worrying about her son. A man thinking about buying a new car. One man trying to remember a line from a song he learned 30 years ago. Another talking to herself. One looked like a doctor taking an afternoon stroll. Another was stark raving mad.

All of them walking along...from one place to another...shuffling along...the living towards the dead.

We were thinking of our children. What a different world they grow up in. And yet, it is still the same too. A man might have been stuck on a London street 50 years ago...and hundreds of years ago he might have watched the same shopkeepers and carpenters walk by, each caught in his own thoughts like a fly in a spider's web.

Our old friend John Mauldin wrote to say that his mother's experience was not much different than ours. She joined the WACs during the war...met John's father...and then nature took her course.

But both John and your editor had a big advantage in life. We both caught the upswing.

Not so with our children. They inherit a different world. America was the world's leading nation in the '50s and '60s. And it was growing in power and wealth - rapidly. We grew up with it. Things were getting better and better...we were sure we'd live much grander, richer, and more exciting lives than our parents. The sky was always the limit!

Now, America is in decline. China's economy grows while hers declines. The Far East has savings, while she has none. The Asia nations are net exporters, making huge profits...while American industries are judged too old, too expensive, and too highly regulated to compete. Americans have debt up the kazoo, while their competitors have little. A young person in America has to look forward to supporting 70 million retired baby boomers...and paying for their drugs, their food, their wars, and their bailouts.

For our children - ours and John's - the situation on a personal level is different too. Coming from poor families, we could look forward to much more wealth and material success than our parents ever knew.

We came back to Ireland this week for a reason that our parents would never have dreamed of. Your editor has set up a family office. It is a very modest affair by family office standards. The typical family office manages a fortune of $100 million, according to The New York Times. We may not even be on the same planet with these rich families; but we are in the same universe. That is, we try to think about...and manage...our wealth as rich people do...as a family legacy or an endowment, not as a retirement fund.

What wealth we have accumulated - even if it is paltry - will be held by a family-owned corporation. Then, the corporation, run largely by the adult children, manages the assets - from our base in Ireland.

Your editor, freed from the responsibility of managing his own money will be free to wander and think...like a vagabond, a gypsy, a refugee, an itinerant mendicant...forced to sup on whatever is at hand and take lodging wherever he can find it - but favoring the Four Seasons and Chateau Margot when they are available.

Whatever else this does, it puts the children in a very different situation from their parents. Instead of starting out with nothing, they're starting out with something. While this would seem to be a big advantage to them, it has huge hidden disadvantages. Like America itself, they are in danger of finding themselves slipping downhill. Instead of expecting things to get better, they may find it hard even to hold onto what they've got. Instead of the "Morning in America" that Ronald Reagan promised, they may find that it seems more like evening, both in their personal as well as their national lives.

"From shirtsleeves to shirtsleeves in three generations," say the French. The grandfather begins without a coat. His grandson ends that way.

But what to do? Spend it all now...so the children begin with the same clean slate we had? Move to Brazil or India - countries with more obvious upside?

In the deep, cosmic end, it probably doesn't matter. The advantage to starting out on an upper rung of the ladder may be about equal to the disadvantage of having to worry about falling off. Who can know?

Every man has to play the cards he's been dealt. What else can he do? He may have a humpback or a beautiful voice. He may have had a hard upbringing or a soft head. He may have a fortune worth of poetry in his soul but not dime in his pocket. As far as we can tell, every young man starts out even. Each one begins life in the same place - where he is. And every generation takes what it is given, and makes the best of it.

The real advantage in life is having the gumption to get on with it; no one knows where that comes from.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• The Family Office
• All You Need is Love… and Work
• Dinner in White
• Life is a Long Hike
• Global Warming and the Children of Israel

All this goes to show is how completely the people in charge of things in the United States have lost their minds. They seem to think this mass exercise in pretend will resurrect the great march to the Wal-Marts, to the new car showrooms, and the cul-de-sac model houses, reignite another round of furious sprawl-building, salad-shooter importing, and no-doc liar-lending, not to mention the pawning off of innovative, securitized stinking-carp debt paper onto credulous pension funds in foreign lands where due diligence has never been heard of, renew the leveraged buying-out of zippy-looking businesses by smoothies who have no idea how to run them (and no real intention of doing it, anyway), resuscitate the construction of additional strip malls, new office park "capacity" and Big Box "power centers," restart the trade in granite countertops and home theaters, and pack the turnstiles of Walt Disney world - all this while turning Afghanistan into a neighborhood that Beaver Cleaver would be proud to call home.

America loves the word "recovery" as only a catastrophically sick society can. "In recovery" is the new universal mantra of loser individuals and loser nations. Everybody in the USA is in recovery. Even Michael Jackson (he may have given up on somatic activity but, on the plus side, as the Rotarians love to say, he's quit using drugs for once and for all, and the magazines have stopped publishing photos of him taken after 1990, when he turned himself into something out of the Hammer Films catalog).

To sum it all up, the US economy is in recovery. Paul Krugman says that we'll soon realize that Gross Domestic Product (GDP) is growing. He actually said that on the Sunday TV chat circuit. Not to put too fine a point on it, but I would really like to know what you mean by that Paul? Do you mean that the Atlanta homebuilders are going to open up a new suburban frontier down in Twiggs County so that commuters can enjoy driving Chrysler Crossfires a hundred and sixty miles a day to new jobs as flash traders in the Peachtree Plaza? Do you mean that the Home Equity Fairy is going to wade into the sea of foreclosure and save twenty million mortgage holders currently sojourning in the fathomless depths with the anglerfish? Do you mean that all the bales of deliquescing, toxic "assets" hidden in the vaults of Citibank, JP Morgan, Bank of America, et al, (not to mention on the books of every pension fund in the USA, and not a few elsewhere) will magically turn into Little Debbie Snack Cakes on Labor Day weekend? Do you mean that American Express and Master Card are about to declare a jubilee on accounts in default everywhere? Do you mean that General Motors will produce a car that a.) anyone really wants to buy and b.) that the company can sell at a profit? Are you saying we get a do-over, going back to, say, 1981? Did we win some cosmic lottery that hasn't been announced yet? What's growing in this country besides unemployment, bankruptcy, repossession, liquidation, gun ownership, and suicidal despair? In short, are you out of your mind, Paul Krugman?

The key to the current madness, of course, is this expectation, this wish, really, that all the rackets, games, dodges, scams, and workarounds that American banking, business, and government devised over the past thirty years - to cover up the dismal fact that we produce so little of real value- these days - will just magically return to full throttle, like a machine that has spent a few weeks in the repair shop.

This is not going to happen, of course. It is permanently and irredeemably broken - this Rube Goldberg contraption of swindles all based on the idea that it's possible to get something for nothing. And more to the point, we're really doing nothing to reconstruct our economy along lines that are consistent with the realities of energy, geopolitics, or resource scarcity. So far, our notions about a "green" economy amount to little more than blowing green smoke up our collective behind. We think we're going to build "green" skyscrapers! We're too dumb to see what a contradiction in terms this is. The architects are completely uninterested in the one thing that really is "green" - traditional urban design - and most particularly the walkable neighborhood. That's just too conventional, not special enough, lacking in star power, not enough of a statement, boring, tedious, so not cutting edge! We blather about high-speed rail, but you can't even get from Cleveland to Cincinnati on a regular train - and what's more amazing, nobody is really interested in making this happen. All we really care about is finding some miracle method to keep all the cars running.

What we've been seeing is nothing more than a massive pump-and-dump operation in the stock markets, most of it executed by programmed robot traders, with the trading nut provided by taxpayers current and future. These shenanigans add up to new risks and fragilities so extreme that the next time a grain of sand catches in the exquisite machinery they will sink the USA as a viable enterprise. We will end up discrediting not just capitalism, but also the idea of capital per se, that is, of deployable acquired wealth. As this occurs, of course, events on the ground will give new meaning to the term "reality television."

Regards,

James Howard Kunstler
for The Daily Reckoning Australia

• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• Gone Fishin’ Investment Strategy
• A Recovery of Some Kind in Global Trade
• Keynesians Believe Governments Have to Manage Economy in Macro-Economic Way
• Reader Mail: Manufacturing is Not a Dirty Word

The summer is an idyllic time in the French countryside. Parisian intellectuals return to their ancestral estates and invite you to dinner. We dined al fresco, under the stars, next to a large lake.

“Hear the frogs croaking?” asked our hostess. “The noise is much louder in June. These are love songs...quite a racket. But now what we’re hearing is just the old frogs remembering what a good time they had a few weeks ago. These are the nostalgic frogs...”

“I would put the beginning of the decline a bit earlier,” we had protested, “to the crash of the speculative bubble on Wall Street. That was really when the markdown of U.S. assets began. Of course, you could put it almost at any time. It’s not a precise moment...but a whole series of things...and we don’t really know what it means, not yet. This might not be the top of U.S. power at all. There could be hyperinflation to wipe out the debts...a revolution or coup d’etat to get rid of the bureaucracy...who knows?”

Nobody knows. But our guess is that the great empire is on a downward slide. So much the better, in our opinion. We liked it better as a humble republic. Empires can be great. But they are rarely good.

“No...when you talk about empire,” she continued, “you are talking politics, not economics. Political power, not purchasing power. And it was with the invasion of Iraq that the United States lost its political position in the world. When the Twin Towers came down, America was still at its peak of power and prestige. The rest of the world was sympathetic and eager to get behind America’s campaign to rid the world of terrorists. But then, with this military adventure in Iraq, America’s political capital began to drain away. People lost their faith in American power and American judgment.”

Bill Bonner
The Daily Reckoning Australia

• The French are Feeling Pretty Smug
• Britain, the Empire Which Had Paramount Global Power
• French Model of Economy Allows Meddling from the State
• The Major Difference Between Rome and the U.S. – Electronic Transfers
• The American Empire Depended on Trade…and the Dollar

Modern people imagine that they are to thank for whatever goes right. Did they not write the Treaty of Versailles...and invent both Long Range Ballistic Missiles as well as Long Term Capital Management? Didn’t they build Las Vegas? And hasn’t Ben Bernanke finally taken the crunch out of the credit cycle?

What follows is basically a lament...a wail...a whining reflection on how we flatter ourselves...and why the most flattered are the best short sale candidates. The short version is that “alpha” is a windy fraud. In broader terms, the moral of the story is simply that whenever you feel proud enough to offer advice to others, you should prepare to get it yourself. Good and hard.

What brought this to mind is a news item from the New York Times: America’s president seems to have an insight. The reason food prices were going up, he guessed, was because people in India had more money in their pockets and now they wanted to eat more. This remark might have gone unnoticed, but for the fact that it was true. The foreigners are getting richer...and uppity. “Asian Age,” of New Delhi, whose name gives you an idea of the way the Indians think things are going, said the U.S. president wouldn’t “get away...with passing the buck on to India.” Others threw biofuels and agricultural subsidies in America’s face. Then, striking low, they said Americans ate too much; if they just slimmed down to the weight of middle-class Indians, said Pradeep S. Mehta, “many hungry people in sub-Saharan Africa would find food on their plates.”

What a revolting development! For four generations, America has been the world’s alpha nation – the country with the money, the power, and the answers. Generations of Americans have offered advice to the rest of the planet, confident that they knew best what was good for everyone. Wilson showed up in Le Havre with his “14 Points” in 1918. Clemenceau remarked sourly, “God only needed 10.” From then until six months ago, the world’s unfortunates had to put up with American know-it-alls. “Tear down this wall,” said Ronald Reagan and the neo-cons. “Dollarize,” said Jeffrey Sachs and the Chicago boys. U.S. military “advisors” showed foreign armies and terrorist groups how to kill more efficiently. U.S. businessmen explained how to set up factories and operate them more profitably. (F. W. Taylor introduced ‘scientific management’ ...Stalin loved his ideas, which still are known as ‘taylorism’ in much of the world.)

A long stream of professors handed out trade secrets like chewing gum, confident that the ideas would never stick; foreigners would never really get the hang of it. They urged free-market policies, monetary reforms, and market regulations. Agricultural engineers introduced peasants to pesticides and DDT. And just as 17th century priests showed the heathen how to copulate correctly, our own world improvers demonstrated to couples all over the world how to copulate without begetting. There was no vanity too absurd...no pretension too embarrassing. By the 1960s, Americans were even sending their children – who hadn’t yet learned a trade or earned a living – in the belief that their callow bodies, in the Peace Corps, might lift the fuzzy wuzzies out of poverty...like Pharaoh’s wife plucking Moses up out of the bulrushes.

And then, wouldn’t you know it? The little Moses all over the world took the advice, set up their own shops...and now they’re back-sassing America’s president and stealing its best customers.

And here, for further elaboration, we return to the world of money. While Americans offered advice gratuitously, Wall Street offered its own advice, for a price. The financial industry hotshots said that they, too, had some special magic. Yet, a colleague recently handed us a chart of the London stock market over the last 107 years. What is remarkable about it is that it shows a flattish line beginning over the far left and running right along the bottom for three-quarters of the page. Then, after lying in the dirt for three-quarters of a century, the chart suddenly springs to life like a locust, in the early ‘80s. In the next 20 years, it shot up more than 1000%.

This same phenomenon is visible in almost any market you choose to look at. There are small gains – and small losses – all the time. But the big gains come all at once. In the gold market, for example, except for occasional war spikes, the price barely budged from the defeat of the Spanish Armada until the 1970s. Then, an investor who bought the stuff in 1972 would have seen his money multiplied 21 times in the next eight years. Following this exertion, gold went back to sleep...and didn’t wake up for another two decades.

The pretense of America is the pretense of Wall Street. It is pretense of alpha itself and the vanity of the species. While Wall Street promised investors elusive, above-market gains – alpha – the real gains came from merely being in the right place at the right time. Beta, in other words. Likewise, it was no special genius that put Americans on top of the world; it was simply being in the right place at the right time. Too bad they can’t stay there.

Bill Bonner
for The Daily Reckoning Australia

• George W. Bush Presents Middle Easterners With a Lengthy ‘To-Do List’
• S&P 500 Index Total Return Was Actually Negative
• Fortunately Private Debt is Not Inheritable
• Barack Obama and His Nobel Peace Prize
• The Collapse of Gold and Commodities

What should you do with your money now?

Today, we take a break from our usual cogitations to bring you something useful. A suggestion.

"Sell the U.S.," we have said.

"Sell the U.K.," say our colleagues in London. The English have very similar problems to the United States - too much debt, too little profitable output, high costs, too little energy, too little food. What's more, the U.K. economy relies far more on the financial industry than America does.

But today we are feeling positive... helpful... almost earnest. We offer some buy-side advice.

Our colleague in Buenos Aires has persuaded us that Latin America is a buy. (Spanish speaking readers are invited to go directly to moneyweekes.com to read his reports unblemished by our bad translations.)

The whole region is booming, says our man in South America. GDP growth is solid to spectacular. Currencies are rising. These economies are relatively unburdened with the high costs and legacy obligations of Britain and America. And they produce what the world seems to want most - food and energy.

"The economy of Peru is gathering momentum," writes Horacio Pozzo. "GDP growth reached 8.99% in 2007, with a strong growth in consumption (rising at a 7% annual rate) and with outstanding growth in capital investment, at around 23.4%.

"Wherever you look, the Peruvian economy is healthy - with a fiscal surplus of 2.6% of GDP and an external surplus of 1.5% of GDP, with record foreign currency reserves of $28 billion, unemployment of 6.9% and an inflation rate, which reached 3.9% last year, under control."

By almost every measure, in other words, Peru has a more solidly growing economy than either Britain or America.

In Brazil, meanwhile, consumer spending is rising too - up 5.5%, compared to an average of only 2.4% in the '90s. How come consumers are spending more? Simple... there's more money in the country and they have more jobs. Earnings have gone up 148% in just the last five years - to a per capital level of $2,794 in 2007. Unemployment has been going down too. It ran into the double digits in 2001 and 2003. Since then it's been coming down, to the lowest level in the last ten years in 2007 - at 7.4%.

Inflation is still running a bit hot in the Amazon. But the authorities are turning on the air conditioners. The key lending rate of Brazil's central bank is 11.25% and may go up, as officials try to hold down price increases. And unlike the U.S. president, Brazil's top man is actually becoming more popular - with approval ratings above 50% and rising.

Money is flowing to Brazil because the country is a major supplier of raw materials and soft commodities - the very things whose prices are rising so sharply. Just last week, for example, Brazilian suppliers got South Korean and Japanese buyers to accept a 63% increase in the price of iron ore. Wheat, of course, is off the charts.

But how do you take advantage of the boom in Latin America... and without getting whacked by a downturn in commodities? Here at The Daily Reckoning, we are suspicious of commodity prices. As soon as you notice a big spike up in a commodity - such as wheat, currently - you have to expect a big spike down. Commodity producers - with some major exceptions - react quickly to price increases. They produce enough to meet the demand... and then, typically, a lot more. Bust follows boom, sometimes so quickly that an investor has little time to get into position.

The 1970s, for example, were boom years for commodities, generally. But the price of sugar actually peaked out at 70 cents per pound in 1973 - at the very beginning of the boom. Marc Faber explains:

"Despite accelerating inflation rates, sugar thereafter failed to make a new high in the 1970s. After 1981, when interest rates fell, the price of sugar continued to decline and bottomed out at 2.5 cents per pound in 1985. And although interest rates continued to decline in the 1990s, sugar was still selling for just 5 cents a pound in 1999... very simply because supplies exceeded demand."

A boom in commodities is almost always followed by trouble. That's why our old friend Rick Rule says, "most people can't believe how cyclical commodity markets are." He goes on to say that in commodities, "either you are a contrarian or you are a victim."

But Horacio makes a suggestion for how to profit from Brazil's boom without getting on the wrong side of a commodity cycle.

TAM is an airline with nearly 50% of the domestic Brazilian market. Air transport in Brazil is rising at 10% per year. Yet, TAM sells at a price that is only 4 times earnings. And it has a price to book value of only 1.14.

Buy TAM, says Horacio.

Latin America is booming. And our colleagues in Buenos Aires, Argentina are well placed to help you profit from the many value opportunities south of the border. They have launched an email report service entitled Informe Moneyweek that covers both Latin American and international investment opportunities. It's written daily in Spanish by South American market experts, Horacio Pozzo and Paola Pecora. If this is something you would be interested in, I encourage you to click here ... and by the way, it's free!

Bill Bonner
The Daily Reckoning Australia

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But the trouble with recent news financial news is that the press doesn't know what to do with it. Just today, former crime buster and now New York governor Eliot Spitzer charged the feds with being "partners in crime" with predatory lenders. What do you do with an article like that? Should it go with the crime stories? Or in the Health section? Is it a matter for the police to deal with, in other words... or psychiatrists?

England was made bully prosperous by its dark, satanic mills. But now, spiders build their webs in front of the mill doors, confident of being unmolested. In the City, meanwhile, people come and go in such fury of busyness that the whole world stands back in admiration or disgust.

The City's new Jerusalem makes up one third of Britain's entire economic output... and last year accounted for nearly half of U.K. GDP growth. It pays one third of all corporation tax... contributes a surplus of nearly £20 billion to the trade balance... and there are now more finance sector workers in Britain than there are construction workers, farmers and factory workers COMBINED. So rich and important has the City become that you cannot drive through drunk without running over a millionaire. Every day, it turns over a third of the entire world's foreign exchange - more than $1 trillion.

"London has 40% of the global foreign equity market... trades 70% of all Eurobonds... and is the world's leading market for international insurance," reports the Fleet Street Letter. "Currently the business and finance sector accounts for 28% of Britain's GDP... some £306 billion per year. "That's 21 times more money contributed to the economy than the construction industry... 35 times more money than the automotive sector... 47 times more money than the pharmaceuticals industry..."

But what kind of City on a hill has the City built?

One of the great conceits of the credit expansion was that "finance" was, if not a noble trade, at least it was an honest one. Mothers wanted their babies to grow up to work for Goldman Sachs. Why not? Nothing paid better... and there was no heavy lifting. But what do they actually do 'in finance' and how come they get paid so much for it?

They 'add value' by 'allocating capital efficiently,' comes the answer. But what kind of value has actually been added to Britain's economy... or America's?

In these Daily Reckoning columns, we have made the point that the financial boom was a fraud. It was based on phony money... and produced phony growth. At the end of it, the average American is worse off than when it began. He has more debt... and a lower, real hourly wage.

In Britain, the story is very similar.

Personal debt in Britain has reached £1.3 trillion... (about $2.5 trillion) up 137% since 1993 and greater than the U.K.'s GDP for the very first time. Much of that debt is the notorious 'subprime' mortgage debt. Nearly 20% of all new U.K. mortgages written last year were either "subprime" or were "made to a homebuyer who offered no proof of income", reports the FT . Consequently, 21% more people were forcibly evicted from their homes in 2007 than 2006. The Council or Mortgage Lenders expects repossessions to jump another 50% in 2008! More than 500,000 Britons have missed a mortgage payment in the last 6 months."

On the institutional side, an estimate coming out of the G7 meeting put losses from sub-prime lending alone at $400 billion. So far, only $120 million has been revealed. If the estimate is correct, there is surely more subprime debt hiding in a Wall Street and City basements.

Colleague John Stepek, in the London office, puts it this way: "Our consumers are in more debt than their American counterparts. Our houses are more overvalued. We are even more dependent on a small niche area of the economy -- the City of London -- than Americans are. So we have even further to fall."

He might have added that the FTSE is already down 13% this year, while the Dow is down only 8%. And while the dollar has rallied, the pound has fallen.

Blame the City? Call in the cops to investigate?

It's true, practically all the deals made by Wall Street and the City over the last few years have a bit of Ponzi in them. As long as the volume of credit kept expanding, an investor could hope that a greater fool would buy out his positions at a higher price. Subprime mortgages, liar's loans, private equity finance, Chinese stocks, residential housing, SIVs, CDOs - they all needed more and more leverage, more and more finance, just to stay even.

Many of the new financial products, too, were based on false pretenses. Mathematicians crossed their fingers, calculated the odds based on historical prices, and then passed off the results as though they were as reliable as the periodic tables. If wheat had never traded at $10 a bushel, the $10 figure was an "outlier," not worth worrying about. What they didn't realize, or didn't admit, was that prices are neither fixed nor random - but subject to influence. By speculating on "normal" patterns, they were leaning against the very price curves they said were eternal. And when enough speculators crowded on... the price curve bent, and then collapsed under their weight. "Stability creates instability," as Hyman Minsky used to say.

But prosecutors would have a hard case. No one held a gun to investors' heads. Instead, they asked for it. he whole show was more a slapstick farce than a police thriller.

Bill Bonner
The Daily Reckoning Australia

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