--------------

Bill Bonner, back in London with more views...

*** So we return to Dr. King's question: Will the next 10 years be as stable and as nice as the last 10?

We have no sure answer, but we have a guess. The world advances by fits and starts; in endless cycles of growth, correction, boom, bust, innovation and destruction. One success leads not to more successes, but ultimately to more failures, since life cannot follow life. Death follows life, and then life again. One business has to go broke so that a new industry can flourish. One tree has to fall so that the small seedlings beneath it will get the sun. Everything in nature - including markets - are self-limiting, and self-correcting.

Mr. Greenspan seemed to have this natural cycle in mind when he cautioned central bankers at Jackson Hole last month. The silver lining he drew out by successfully stabilizing financial markets for so long seemed to have a cloud wrapped around it. Investors, and homeowners, took stability as a fact of life, and current market conditions as permanent. Why not borrow, they said to themselves? There will always be jobs, plentiful credit at lower rates, and higher asset prices. You'd have to be a fool not to buy a house on these terms.

On a website this morning, we saw an advertisement: "$150,000 Mortgage - Just $483 per month!" A man with $1,500 of free cash flow available could borrow $450,000 - about the average cost of a house in California in 2003. A year later, he had about $100,000 in "equity". What was his investment? He had to live somewhere. He had merely "rented" a $450,000 house for $1,500 a month. His investment was zero.

Thus has the entire nation been lured into debt like a teenager into a free strip show, knowing that it can't help but be interesting.

But why cannot the next 10 years be just the same? Because once the man has committed his $1,500 - he can buy no more. Sales grow sluggish. Inventories build up. Eventually, prices fall...as fellows decide to take their winnings off the table.

[Ed. Note: When times are easy, investors love to take risks...big risks. But too many risks at once really start to add up, as we're seeing now. When something triggers a sell-off, panic rises...along with lots of market volatility. But in these moments of surging volatility, certain investors can make a fortune. Find out how:

The One Thing Certain to Go Up

---------------------

The Daily Reckoning PRESENTS: Puerto Rico is experiencing its own property boom...and as it is on the mainland, this boom is fueled mainly by cheap credit. Chris Mayer watches from the sidelines in Toa Alta, Puerto Rico...

THE BOOMING 51st STATE

by Chris Mayer

"I used to drive out on the island... You could see the ocean and the beautiful views...and you could stop off one of the little restaurants along the way...enjoy a cold beer, a nice steak...Now, you see nothing but housing developments and the traffic is horrible."

My grandfather was telling me about the changes in Puerto Rico over the last several years.

Puerto Rico is a Commonwealth - existing in the gray area of non-statehood, a sort of vassal in America's empire, a prize in a long-forgotten war with Spain.

Puerto Ricans have voted many times before on the issue of statehood. The voting has been very close. So far, the status quo has won out. But the last election fiasco was eerily similar to the U.S. presidential election in 2000, with the Supreme Court of Puerto Rico casting the deciding votes, along party lines, that sent their man into office. Statehood lost its closest contest yet.

I'm confident that at some point in the not-too-distant future, Puerto Rico will join the Union as the 51st state.

Until then, it will continue to mirror the United States in other ways. Puerto Ricans seem to love SUVs and fancy cars as much as continental Americans. Consumerism is also in vogue, with retail chains such as Walgreen's, JC Penney and Macy's enjoying success here. Plus, nearly 70% of the island's workers are employed in service industries.

And Puerto Ricans, too, have their own housing boom.

The economy of Puerto Rico is likely the region's most dynamic economy. Nearly every major U.S. and European pharmaceutical company has significant operations on the island. Other companies and industries also find the island attractive for a host of reasons: the population is largely bilingual and educated; there are tax incentives to move operations to Puerto Rico; nearly 5 million tourists come here every year and spend more than $3 billion; and it is a bridge to the rest of Latin America.

In order to capitalize more on the island's appeal, the government has spent more than $13 billion in the last ten years improving the infrastructure. There is, for example, a new deep-water port, urban train, and coliseum; along with more common amenities like better signage and expressways.

My grandfather notes the passing of sugarcane fields and farming from the landscape. Instead, shopping malls, hotels, condominiums and auto malls are popping up all over the island. And new housing developments, too - sturdy cement houses painted in the pastel colors favored in the tropics, like cotton candy pink, lime green, sunflower yellow and sky blue.

Housing is in short supply and prices are rising. For years, Puerto Rico's housing market reliably appreciated 5-10% per year. This year, the market is getting hotter. In 2005, the average sales price is about $311,000 - up nearly 16% from 2004.

The demand for residential loans is higher here than in the United States, after adjusting for population differences. Nearly 75% of Puerto Ricans own their own home.

It's no wonder prices are rising. Population density is among the highest in the world, with nearly four million people living on an island of about 3,500 square miles. By some estimates there is a housing shortage, with 100,000 more units needed.

Still, as in the mainland United States, the housing bubble is also being fueled by cheap credit. Curiously, while late payments occur four times more often than on the mainland, Puerto Ricans are less likely to wind up in foreclosure.

As in the mainland, there is also cause for worry.

Doral Financial is the dominant mortgage company on the island, with 40 branches and $11 billion in assets.

This, from Doral Financial's annual report:

"Borrowers use equity build-up as a means to consolidate high-cost consumer debt of credit cards [sic], auto loans and other types of credit."

Basically, the islanders have succumbed to the temptation of using their home as an ATM machine - just like Americans.

Doral, by the way, enjoyed a stellar run over the last ten years - riding the crest of Puerto Rican prosperity. Its stock price rose more than 8,000% from 1995 to its 2005 peak. That's an annualized return of about 56%.

In March of this year, the whole enterprise seemed to come apart at the seams. The stock was ripped in half, on news that the company was being overly aggressive with its derivative portfolio and would write off about hundreds of millions of dollars.

But the beating was just getting started. Downgrades from various analysts continued to push the stock lower. Then the credit agencies got in on the act, with Fitch downgrading the company as well. Eventually, the stock hit bottom under $10 per share, but has since rallied.

Today, however, I'm inclined to stay on the sidelines with housing - if not actively bet against it. My readers closed out a 53% gain in Countrywide last week, prospering from the mortgage giant's deflating stock price.

When the housing bubble finally finds its pin, it will be like an ATM machine that no longer dispenses cash. That won't be good for banks, homebuilders, credit card companies and a slew of other businesses that have, to date, prospered in the credit-induced revelry of the housing boom.

Freeman Tilden, in his book A World in Debt (published in 1935, but still a terrific read), described fortune as a "willful jade" that set about victimizing human beings, "especially debtors."

Credit cycles turn, dear reader, and this one will turn also - both in the mainland United States and in the future 51st - and anywhere else easy money has left her unmistakable footprints.

Regards,

Chris Mayer

for The Daily Reckoning

P.S. Wouldn't it be nice to have at least one investment in your portfolio that just grows and grows over time? Well, I've found one company that's poised to become the next Berkshire Hathaway that's hell-bent on one thing only - building real, tangible wealth. Check out my new special report that details this company - and five more - that you hold onto forever...

Editor's Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and Capital and Crisis - formerly the Fleet Street Letter.