Wednesday, July 18, 2007


One man's Crack-Up Boom is to another man "The Greatest Economic Boom Ever." That is what Fortune magazine calls it on the current cover.

And now everyone is coming to see that we are in the midst of a huge, worldwide credit boom. And most recognize it's prominent features:

- Rapid economic growth in Asia. News yesterday told us that China is set to overtake Germany as the world's third largest economy by the end of the year - thanks to Chinese GDP growth rates in the double digits.

- Globalization of trade and finance. Asia is growing so fast largely because its exports are sizzling. Ships are backing up in ports all over he world, trying to keep up with it. Large financial deals typically include players from several different countries.

- Financialization of the world economy. Almost everything can now be packaged and sold as a financial asset - including works of art, collectibles, name it.

- And behind it all - a rising tide of liquidity. The United States emits dollars. Other countries emit their own currencies, attempting to keep up with the greenback. Everywhere, the liquidity level increases - pushing up asset prices.

Our old friend Steve Chapman writes in the Chicago Tribune that the U.S. economy is in great shape. The stock market is near record levels; unemployment is down to 4.5%; inflation is running below 3%. "Recessions used to come along every four to five years, but since 1991 we've only had one mild downturn, back in 2001." Americans have grown so accustomed to prosperity that we take it for granted," says Steve.

Ah, that's the trouble with prosperity. It is like a mistress; as soon as you take her for granted, she begins to pout and flirt with strangers.

And that is the fundamental difference between a Crack-Up Boom...and The Greatest Economic Boom Ever. Here at The Daily Reckoning we don't think you can take mistresses or prosperity for granted. Instead, they need to be handled carefully, given proper respect, shown appropriate appreciation...and, occasionally, allowed a tantrum.

That the U.S. economy has had only one minor recession since 1991 we take as cause for a teenager who is unusually polite; we figure he's up to something. But most economists, and sensible people too, regard the lack of a major correction as a good sign; they believe it signals that the economy is so healthy it needs no correction.

The economy is not really healthy at all - especially not in America.

The latest report from the New York Times tells us that the rich are doing better than ever. It's a new "Gilded Age," says the gray lady. Wealth is once again being concentrated at the top - just as it was before the Great Depression. Then, it was the great men of industry - the Vanderbilts, the Rockefellers, Carnegies and Fords - who controlled vast wealth. Now, it is the great men of finance - the Schwarzmans, the Petersons, the Kravises, and the Kolhbergs - who get the dough. According to the TIMES, only 15,000 American families now collect 5% of total national income - equivalent to $9.5 million per year each.

Hey, good for them. But while the Carnegies and Fords boosted real incomes for the whole population, the Schwarzmans and Kravises seem to keep it to themselves. The average American is increasingly trapped between the Scylla of stagnant income...and the Charybdis of increased expenses. He has a bigger house, a bigger mortgage, more cars and a more expensive living standard. But he has no more money to pay for it.


From Houston comes word that more and more Americans - already the hardest working race on the planet - are giving up old-fashioned vacations. Either they don't want them...or they can't afford them. And even when they do go off for a while, they take their portable phone and portable computer with them so they can keep up with work while they're away.

And now oil prices are rising again. They're just pennies away from the record high set last August...and Goldman says a barrel of oil may go to $95.

Meanwhile, analysts are now projecting that the housing slump could last for years - that there is a 'second wave' of housing hurt coming our way. This wave could not only affect the equity you have in your house...but all of your investments. The Survival Report's Mish Shedlock shows you three solid hedges against the coming bust here:

The Housing Tsunami

Our friend and colleague, Porter Stansberry reports:

"The number of U.S. home foreclosures rose 87% in June year over year. There were 164,644 loan default notices, scheduled auctions, and bank repressions, led by California, Florida, Ohio, and Michigan. If you assume that each of these homes is worth the median U.S. home price, that's $36 billion in defaults. And if you assume the banks, hedge funds, and bond managers that own these debts will recover 75% of this value, that's an estimated $9 billion in one month."

"We're trying to sell our old house in Maryland," said an associate in Baltimore, "because we bought a new house and have already moved in. Right now, we're paying two mortgages, so we want to get rid of the old place as soon as possible. So far, we've had a few people look at it. And we've actually had a couple of offers...but they were both contingent on the buyers being able to sell their houses. So we looked on the Internet to find out what the odds of them being able to sell quickly really were...and we found, in both cases, that they were trying to sell houses in areas where there were hundreds of houses just like theirs for sale. It didn't look good for them...and it doesn't look good for us. For us it's not too much of a problem, because we bought our house many years ago. We have a lot of equity and a small mortgage. But I don't know what other people do in this situation..."

We don't know either...but, as always, we'll find out.

More news:


Addison Wiggin, reporting from Baltimore...

"Core inflation rose 0.3% in June (0.1% higher than forecast), thanks largely to a surge in domestic auto prices, said the U.S. Labor Dept. in a release this morning.

"If this truly is the measure of inflation the Fed watches the closest, they should be noticing a trend. Core inflation ticked up at a similar pace in May. Chairman Bernanke is expected to continue expressing the Fed's woes over rising inflation during his scheduled congressional testimony tomorrow. We'll be sure to translate his comments for you soon after they've gurbled forth."

For more from Addison, see today's issue of

The 5 Min. Forecast


And more views:

*** We've been talking a lot about the newest newsletter that we launched this past Friday - and since many of our dear readers have shown an interest in it, here's Greg Guenthner (know as 'Gunner' around these
parts) to give you the thinking behind his latest service, Bulletin Board

"Over-the-Counter Bulletin Board securities or stocks that trade on the Pink Sheets aren't what you normally find here in the pages of my newsletter, Penny Stock Fortunes. And it's not that we don't appreciate them. After all, some of these tiny wonders can show investors seemingly impossible gains in a matter of months, weeks or even days.

"The fact is they're just too illiquid and difficult to trade for such a large readership. Too many people buying at once can cause huge price spikes, only for the stocks to tank the very moment the volume subsides. If you don't believe us, log onto any penny stock chat room and see for yourself how sheer speculation can wildly move the bulletin board market.

"After all, the bulletin board and Pink Sheets are prime territory for 'pump and dump' schemes. This is when unscrupulous people buy shares of a small, illiquid company and then begin to hype the company's potential to anyone who will listen - mostly folks who stumble onto faxes with 'hot investment tips' or overhyped message board posts on the Internet.

"Then, all of the sudden, the good news stops. The crooks pull the plug on their pumping efforts after selling their shares during the mania. The volume drops back to almost nothing, and the stock plummets back to its normal levels.

"Despite all of this, there are plenty of small, reputable public companies that aren't yet listed on major exchanges. And we realize it is incredibly difficult to find reliable information to aid your bulletin board investment decisions. Until now...

"Our readers have spoken, and we're listening. Over the past few months, we've been working on another way to deliver you 'underground recommendations' on many of the faster moving smaller companies on the OTCBB and Pink Sheets. To do that, we finally came up with my newest service, Bulletin Board Elite."

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