The Great Dichotomy

Since 1952, when I first left the U.S. at the age of 6, I have lived many years in Latin America and Asia.

I have visited every continent except Antarctica.

I have studied every major world language except Arabic. I have traveled on cargo planes, by truck, on foot and even by mule.

And everywhere I went, I accumulated a vast photographic record of the hard-working people I met.

But for many years, there was one thing I did NOT do in those countries: Invest my money.

It’s not that I didn’t believe in their future. Rather, what stopped me was another, far more critical, consideration: I didn’t trust their currencies.

Throughout the developing world, basic infrastructure was spotty. Domestic banking was shaky. Federal deficits were rampant. Without foreign investment, capital was scarce.

Worst of all, in a desperate attempt to compensate for these weaknesses, politicians were making their central banks print paper money like it was going out of style.

So virtually everywhere, inflation was rampant. It undermined business. It corrupted government. It eroded the social fabric.

That troubled me a great deal. I saw too many harvests sold for pennies, too many investors lose everything, too many families forced to start from scratch, so many hopes dashed.

But what troubles me even more is the realization that, today, some of those same ills are now coming to the country I love above all others: The United States.

Like in many third world countries of the last century …

Our roads and bridges are in decay.
Our government is running huge budget deficits.
It’s financing debt mostly with money borrowed from overseas.
It’s printing money like there’s no tomorrow.
And our currency â€” the U.S. dollar â€” is sinking in value.

It would be a gross overstatement to say that our economy is like that of a “banana republic.” It’s obviously far larger and more evolved. But for investors like you and me, what counts is the direction of change:

Our Economy Is Losing the Critical Strengths
That Made It Great; Theirs Are Overcoming
The Great Obstacles That Made Them Weak.

This is the great dichotomy of our times, and you can see it everywhere.

I don’t have to tell you about the U.S. highways full of holes or the U.S. bridges that are on the verge of collapsing. Nor do I have to remind you about the large deficits that never end, the debts that are going bad or how the dollar continues to fall.

We’ve already written plenty about that.

But Mike Larson’s blog chronicles little-discussed new woes in the U.S. â€” this time among America’s thousands of small and large commercial banks.

He writes: “The latest report on the state of the nation’s banking industry was just released by the Federal Deposit Insurance Corporation. Things weren’t pretty in Q1 2008. In fact, I’m inclined to describe the U.S. financial industry as ‘a mess’ â€” to use a technical term.”

Here are the ugly facts he highlights:

FDIC insured commercial banks and savings institutions reported a 45.7% decline in net income compared to the first quarter of 2007. The primary reason cited by the FDIC: Higher provisions for loan losses.
Although the biggest losses were among the largest institutions, 50.4% of all institutions reported lower net income.
Loans 90 days or more past due surged by $26 billion, or 24%.
To cope, banks increased their loan-loss reserves by $18.5 billion, or by 18.1%, the largest quarterly increase in more than 20 years. Despite that, a measure of their ability to cover bad loans plunged to the lowest level since 1993.
Most telling of all, the FDIC itself admits that “we’re still in the early stages of the traditional credit stress you typically see during an economic downturn.” In other words, the pain has barely begun!

In key countries overseas, however, the story is vastly different. New investment in highways, ports and bridges is the biggest of all time. Banking is going strong. Currencies are stronger. And economic growth is not just rapid, it is being sustained at a rapid pace.

Sean Brodrick, reporting from a silver mine near Guanajuato, Mexico, shows us how even the most productive producers simply cannot keep up with surging demand for key commodities around the world.

Rudy Martin, our Latin America specialist, writes about the most dramatic boom of all in Brazil, fast becoming the world’s leader in alternate energy, and now ALSO sitting on the largest new petroleum discoveries of the century so far.

In his latest dispatch, Larry Edelson shows how nearly every natural resource under the sun is about to enter the second, most powerful phase of their bull markets, eventually reaching dizzying heights that could make today’s record prices seem tame by comparison.

And in each of their reports, it’s obvious that it all ties back to the great dichotomy between domestic weakness and booms in key foreign economies. Indeed, this dichotomy is so large it permeates virtually all market sectors right here in the United States as well.

Banking, housing and others largely dependent on the U.S. economy are mostly sinking; while …
Energy, steel, and others tied to overseas growth are mostly rising.

Moreover, the great dichotomy presents such large investment opportunities in Asia right now that Tony Sagami has just flown out to China.

This morning, he’s in Shenzhen, talking to a company that could be one of the most amazing alternate energy plays in the world today. And soon he will tell you more about it.

In the meantime, just remember: The great dichotomy is not a passing phenomenon. It’s growing larger. And barring drastic changes, it’s likely to be with us for many years to come.

Good luck and God bless!

Martin

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