"Fear rules credit markets," Bloomberg quotes a source at Goldman.

"Corporate loan market is reeling," adds the Wall Street Journal. The WSJ does not mean 'reeling' in the sense of the Virginia reel…or of a Scottish reel…but reeling like a boxer who has just been hit by a haymaker.

In the battle between greed and fear - the latter seems to be landing the hard punches. Deflation is winning - not inflation…Mr. Market - not the market manipulators. Bust, not boom.

But let us back up to where we left off yesterday.

Were you paying attention, dear reader? We hope so.

Yesterday, we noted that Americans had misunderstood what capitalism is. It is not a system that makes people rich. It is only a context, in which people CAN get rich, if they do the right thing. It is a moral context, in which virtue is rewarded and error is punished. Given misleading signals by their financial authorities, Americans made a big error - they spent too much and saved too little. Now they are being punished for it, even while the feds tell them that they were doing the right thing all along…and that they're going to get more money and credit so they can continue doing it.

But nature - whom capitalism allows to express herself - will have her way. Nature wants to correct the errors of the past five years, at least. Maybe she wants to correct the errors of the last 25 years…we don't know. But she's got a switch in her hand, and we're staying out of her way!

Yesterday, the Dow went down a further 65 points. Even great companies, with unbeatable brands are going down. Harley Davidson (NYSE:HOG), for example, is off more than 20%.

And now, it appears to us that Americans are learning their lesson. They are finally downsizing…cutting back…making do. Soon, we predict, we will read that they are saving more money. 'Thrift' will make a come back.

"More homeowners walking away," says CNNMoney.

There's even a website to help them - walkaway.com. It tells homeowners how to walk from their mortgages, but stay in their houses. That's right, it tells them that they can live in their houses for 'up to 8 months' without paying their mortgages…and after announcing to their mortgage holder that they have no intention of making any further payments.

Nice deal for them. But not nice for the lenders. That's why there's so much fear in the credit market. They're afraid they may never see their money again. By they time they get the family out of the house and put it on the market, for example, the house price could be well below the loan amount.

Even at the top end, house prices are getting softer and softer. Forbes reports that Hollywood celebrity Ed McMahon has cut the price of his Beverly Hills house three times, from the $7.7 million he asked in July '06 down to $5.7 million today. Guns 'N' Roses guitarist Slash bought his house in Hollywood Hills for $6.2 million; he sold it last month for $5.8 million.

Toll Bros. (NYSE:TOL) announced its seventh straight drop in quarterly income.

And analysts are saying that the coming recession (maybe it is already here) will be "worse than recent downturns."

It will be a "Year of Reckoning," says a Wall Street Journal headline. Hey wait, that's our line!

*** While deflation is landing most of the solid blows, inflation gets a jab in now and then. Yesterday gold rose $14.70 to over $905. The CRB rose to 506…and wheat cracked the $10 a bushel mark.

Our guess has been that if deflation takes down stocks, property and other assets…it will leave gold RELATIVELY unharmed. Because, though the feds' efforts to counter deflation won't really help the economy very much…they should light a fire under the yellow metal. On the other hand, if the feds were able to revive the boom, the inflationary pressures would probably drive gold up more than stocks. Sell stocks on rallies, we concluded. Buy gold on dips.

In any event, gold still looks like a good thing to hold onto - even over $900. It's gone up nearly 30%/year for the last six years. The bull market probably has a ways to go.

We've been telling you of a way to get gold out of the ground for just a penny per ounce for a while now - and the offer is still good. Don't miss out…this could be the cheapest (and yet most profitable) to get in on gold's rise. See here for all the details:

Buy Gold With Your Pocket Change

*** There is a fair amount of talk in the financial press about how a recession might be not be in the cards…or how it might already be over. Stock markets around the world are down 10% to 20%. U.S. housing is down 10% or so. "The bad news is already all out there," say the optimists. Then, they look at the banks and the builders and they think they see a bottom.

It could be, of course. You never know. But, the financial world badly needs correction. Housing prices rose 70% from '97 to '07. They should go down more than 10%. Stocks rose more than 1,100% from '82 to '07. You'd expect something more than a 10% give-back. And the 27-year credit expansion itself was the biggest the world has ever seen. You'd think it would be followed by more than six months of nervous headlines.

"I have a feeling there's more pain in our future," says our own Short Fuse this morning. "Just look at all the data that's out today. Every time I check my inbox, I have another MarketWatch update. Here are just a few:

"'Wal-Mart's January sales come in soft'…looks like the thrifty are getting thriftier.

"'Pending Home Sales Fall 1.5% in December.'

"'Bank of England cuts key rate a quarter-point to 5.25% as 'global disruptions' continue'

"Hmm…I wonder what part of the globe these disruptions are coming from…."

*** With so much trouble in the northern latitudes, we're beginning to look to the tropics for opportunity (more tomorrow). Our colleague in Buenos Aires, Horacio Pozzo, thinks he has spotted an opportunity - in Colombian coal. "Snowstorms in China (which is having its worst winter in 50 years), floods in Queensland, Australia, and energy problems in South African have affected the output of coal in these three countries, the world's major producers of this fossil fuel, and provoked a record price last Friday," he writes.

China counts on coal for nearly 70% of its energy, says Horacio. It's the world's leading producer…and its leading consumer. The country has had so much trouble getting enough coal to the right place at the right time, it has had to ration energy in 13 provinces, according to China Daily. In 2007, China was an exporter of coal. This year, it looks as though it will have to import 15 million tons.

Naturally, the price of coal has already reacted - up 73% in 2007. And, all of a sudden, the old, dirty business of coal mining has become much more profitable. Who will be the beneficiaries? Horacio is looking at Colombia. Coal exports from Colombia are known to be low in pollutants and high in energy. In 2006, Colombia was the 6th largest exporter of coal worldwide. Of course, the country has major infrastructure limitations. It will take a while to boost its exports considerably. But Chinese demand doesn't seem to be slowing down and experts see the price of a ton of coal rising to $100 sometime in the near future. Colombian producers can take those kind of figures to the bank…

[Ed. Note: ¿Habla español? ¿Quiere ganar dinero?

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!

*** Meanwhile, Byron King sees the whole world running low. Oil production is peaking out. American power is peaking out too - as primary industries leave on the Orient Express.

As goes America's industrial might…and its credit…so goes its ability to protect itself, says Bryon:

"Our politicians and societal elite seem to believe that a strong house-building industry, knocking up McMansions from sea to shining sea, is a reflection of a robust economy and powerful, forward-looking culture. Somehow it is OK to neglect the upstream economy of primary extraction, milling, manufacturing and fabrication. They truly believe that just because the Fed can print money by the yard, then as a nation we can always buy our way out of any bad situation. Apparently they are so far removed from any understanding of physical scarcity that they cannot conceive of just not being able to accomplish something."

Scarcity is something that Byron understands quite well - especially when it comes to oil.

Everyday, the world consumes more oil than it produces. The oil left in the ground is getting scarce, harder to find and extract and far more precious than in the past. Simple economics tells us that when supply is reduced, prices will rise.

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. With oil closing in on $100 per barrel, that's exactly what we're seeing right now. The reduction of oil means the opportunity for new energy forms and new technology to power the world.

And that's exactly what Byron will focus on in his new newsletter, Energy & Scarcity Investor. He'll tell you not only how to protect yourself during a time of rising energy prices, but how potentially to profit as well. See here:

The Era of Cheap and Easy Oil is Over

The Daily Reckoning PRESENTS: There is a distinct difference between a 'boom' and a 'bubble'. Both, at their core, are generally wasteful and messy - but booms produce something of value. A bubble, asserts James Kunstler in the essay below, is something more like a financial Chinese fire drill than actual productive activity. Keep reading…

SERIAL BUBBLES?
by James Howard Kunstler

Eric Janszen of iTuilip.com has made a splash in the mainstream media with his Harper's Magazine cover story on the "The Next Bubble." His thesis is that a new tidal wave of investment will shortly roll toward "infrastructure and alternative energy." By this Janszen means a revived nuclear power push, refurbishing highways, bridges, and tunnels, "high-speed rail," solar and wind power, and alternative liquid fuels. This coming boom, he says, would be driven by political fear about energy security.

On the face of it, Janszen's proposition seems more promising and intelligent than the previous engineered boom in suburban houses. But it raises a lot of questions and flags.

For one thing, the term "bubble" suggests something more like a financial Chinese fire drill than actual productive activity. It would be an excellent thing if Americans invested in a restored passenger rail system. But if it were merely a scheme for big banks to issue innovative new securities for gigantic fees without actually getting any trains running - well that would be in the nature of just another old-fashioned swindle, as the bundling of mortgages into securitized debt paper has proven to be.

In other words, does Janszen make a distinction between a boom and a "bubble?" He seems to understand that the previous two bubbles in dot-coms and houses were essentially frauds that generated imaginary wealth, which sooner later evaporated off the balance sheets and out of the financial system. A boom, it seems to me, is not the same as a "bubble." While perhaps wasteful and messy, booms at least produce something of value beyond the fees paid to bankers for arranging the deployment of capital. A boom that resulted in citizens being able to take a train from Boston to Albany would produce a substantial public good. The creation by Goldman Sachs of a company on paper that never accomplished anything would be something else. This, of course, leads to a deeper question as to whether the U.S.A. is actually a serious society or just a nation of hopeless, greedy clowns? Are we even capable anymore of distinguishing between purposeful activity and the art of the grift?

This leads to a further consideration of where the capital for "the next bubble" supposedly comes from. Janszen doesn't account for the essentially bankrupt condition of the U.S.A. The capital that was deployed and squandered in the previous two bubbles is not there anymore to be washed, rinsed, and recycled. It's gone. It was winkled out of hundreds of pension funds, millions of individual investors, and, in terms of eventual obligations, the federal government. There is a black hole of unresolved debt where that "capital" used to be.

Janszen's idea seems to be that the new investment comes from simple credit reflation. I don't see how this is possible while the current bubble in housing remains only fractionally "worked out." It has a long way to unwind yet, and a lot of damage to do. It will bring down banks, insurance companies, hedge funds, municipal governments, and leave a lot of individuals impoverished, literally out in the cold. As long as trillions in losses remain concealed or unresolved, the basic system for deploying capital will remain paralyzed.

I wonder if fixing all the infrastructure for happy motoring is not an exercise in futility and another layer of tragic misinvestment. After all, it's based on the assumption that we will still be running huge numbers of cars and trucks decades ahead, and I'm not convinced that this will be possible under any circumstances. The psychology of previous investment will exert a powerful pull to throw money at our highways. It might be more realistic to think of this as a triage process - to ask ourselves how much of this stuff do we just let go of and which parts do we actually keep. Thousands of miles of suburban commercial strip highway six-laners may not be needed at that "level of service." What becomes of them? Do we run trains down the interstates? Surely, we don't want our bridges to crumble.

By the same token, I wonder if our investments in alternative energy will prove to be chimerical - things wished and hoped for but impossible to achieve. My own hunch is that our notions of scale are not consistent with what reality will permit in this field. I don't believe that we will build more than a few giant wind farm installations. Rather, I believe we'll discover that wind power is only really practical on the household or extremely local basis. Ditto solar. I also doubt that we will continue to get all the necessary exotic metals needed to fabricate the hardware for these things. Along similar lines, I believe our expectations for ethanol and bio-diesel fuel production will prove to be not only disappointing but destructive to the food production sector.

All of which is to say that an investment campaign aimed at sustaining the unsustainable by other means would end in tears. Personally, I don't think there will be a "next bubble." I think we're out of bubbles and that our current mode of life in this nation is running out of time. We're facing such an array of potential instabilities that even assuming we continue to live in an orderly society may be too much. Like every other activity in our lives, finance, too, may be in for an epochal downscaling.

Regards,

James Howard Kunstler
for The Daily Reckoning

Editor's Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, The Long Emergency describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

You can purchase your own copy here:

The Long Emergency

You can get more from James Howard Kunstler - including his artwork, information about his other novels, and his blog - at his website.

-- Posted Thursday, 7 February 2008 | Digg This Article