Little by littleâ�,�¦a change of sentimentâ�,�¦

It can take yearsâ�,�¦or it can happen in a matter of hours.One way or another, the bright blue skies have to give way to the dark, terrifying night.

â�,�¦We felt it for a moment yesterday.

â�,��"Did you hear the news?â�,� asked our Irish companion.â�,��"Theyâ�,��"�ve closed all the airports in London. Several bombs have been discovered on planesâ�,�¦thatâ�,��"�s all Iâ�,��"�ve heardâ�,�¦I donâ�,��"�t think anyone knows what is going on yetâ�,�¦ But theyâ�,��"�ve banned all liquidsâ�,�¦and you canâ�,��"�t even use a laptop anymore.â�,�

A chill air blew across the back porch, where we were having lunch. What if the airports didnâ�,��"�t reopen? What if the terrorists really could bring air traffic to a stopâ�,�¦not just for a few hours, but for a few daysâ�,�¦or more?

Or what if they were able to cripple the Internet, rather than air transportation? Either way, commerce as we know it would come to a halt. Stocks would collapse. The economy would plummetâ�,�¦

When we think about itâ�,�¦we marvel at how easy it seems to be to bring down a commercial jetliner. That bottle of wine we carried back from Vancouver, for instance. It might just as easily have been a bottle of gasoline. High-octane. With a screw top. It would have taken only a few seconds to turn it into a Molotov cocktail.

On the other hand, surely, suicide terrorists must have already thought about it. Either there arenâ�,��"�t as many of them as we thinkâ�,�¦or they have other plans on their minds.

Anyway, we donâ�,��"�t need to wait for terrorists to bring the economy to a grinding halt. A stock market crash would do that just as well...followed by deflation. That is how it happened the last time there was deflation in America -- in the 1930s. Could it happen again? No one seems to think so. Yet we watch the wobble of the Dowâ�,�¦and think about all those millions of shareholders who must be getting a little tired of holding stocks â�,��"for the long run,â�,� wondering if the long run will last longer than they will. It has been eight years with no growth whatsoever in stock prices. As for the Nasdaqâ�,�¦donâ�,��"�t even mention it... All investors have gotten for their pains is a puny, pathetic dividend yield of less than 2%. After taxes and inflation, theyâ�,��"�re losing money.

So what would it take to bring the Dow down sharply? What would it take to turn sentiment negative? What would it take to turn blue skies dark? Probably not too much is our guess.

What is an investor to make of all this? Take the sentiment out; examine the picture coldly. Stocks are still near their highsâ�,�¦not their lows. They are still expensive...not bargains. What could he hope to gain from them? Dividend yields do not even match inflation. In order to make him any money, his stocks would have to go up in price. But what would possibly make them go up at this point? Higher earnings? Lower interest rates?

As to the second, if rates go down again this time around, they will more likely be signaling a wilting economy, rather than a growing one. Stocks could, of course, go higher even if the economy slumps, but when stocks are already so high, we wouldnâ�,��"�t bet on it.

As to higher earnings, a note in todayâ�,��"�s mail shed a sobering light on the ground that is being lost:

â�,��"In many ways, the last few years should have been a golden era for American manufacturers. Since 1997, the productivity of U.S. factories has soared, rising at a 4.6% annual average rate. That's the fastest sustained rise in manufacturing productivity in at least 40 years, and well ahead of the 1960s heyday of U.S. industrial prowess.

â�,��"Yet despite these gains, the U.S. factory sector all but imploded. Domestic factory output is still down 2% from its 2000 peak, while imported goods are up 8%. Some 3 million factory jobs -- one in every six -- have been lost since the last peak in mid-2000. And while the manufacturing sector is finally expanding and hiring again -- up 37,000 jobs since January -- no one expects domestic manufacturers to ever recover the ground lost to overseas competitors.

â�,��"Economists, business leaders, and politicians give all sorts of reasons for the dire state of U.S. manufacturing: Competition from low-wage offshore factories, an excessively strong U.S. dollar, high corporate taxes, and the rising bill for employee and retiree benefits.

â�,��"But there's a more surprising explanation for why U.S. manufacturers have fared so poorly. Fact is, as fast as American factories have improved productivity and cut costs, foreign competitors in Asia and Europe have charged ahead even faster.â�,�

To this jeremiad, we add an illustration from the Financial Times: Since October 2000, the dollar has lost 35% of its value against the euro. The decline ought to have handed American exporters a golden opportunity to increase sales in the eurozone and bring down the trade deficit with the area. But the U.S.-Europe trade deficit actually went up during the period
-- it doubled.

What do we make of this?

Lesson one: It will take more than a decline of the dollar to revive manufacturing in the U.S. and balance trade. It will take a genuine change in sentiment that makes Americans reluctant to buy anything, including things made overseas. And that will take a serious recession...

Lesson two: An investor has more to lose than gain by diving into U.S. stocks now. There is little hope of much upsideâ�,�¦and the downside is vast.

Little by little -- or all of a sudden -- sentiment is going to change toward the downside. We see it already. House prices are no longer risingâ�,�¦in some areas, they have begun falling. Stocks have gone nowhere for a very long timeâ�,�¦certainly not up. Americaâ�,��"�s military adventures are bogging down. Commuters are running out of gas. Consumers are running out of money. Energy and commodity prices are still rising, showing little signs of coming down.

The Empire is peaking outâ�,�¦it is going brokeâ�,�¦

â�,�¦little by little -- or all of a sudden -- sentiment among its subjects is bound to go a little sourâ�,�¦

*** As you know, Addison is in Cannes, working with Dr. Kurt Richebacher on some insights into the current state of the bubble economy in the United States. This morning, he sends along these money paragraphs:

â�,��"Though we dislike admitting it, we have, in common with Mr. Bernanke, taken great interest in what went wrong in the United States during the 1920s that lead to the Great Depression.

â�,��"Bernanke has even gone so far as to claim an understanding of the Great Depression as the â�,�˜Holy Grail of macroeconomics.â�,��"� We agree that the experience at the time offers, in many respects, most valuable lessons for past and present, but to learn and understand these lessons, it definitely needs digging deeper than just changes in money supply and bank reserves.

â�,��"Bernankeâ�,��"�s folly, and apparently that of monetarists in general, is the categorical assumption that sufficient monetary ease does infallibly guarantee desired economic growth under any conditions. This implies every recession arises from the failure of a central bank to provide the necessary monetary ease. The possibility that the gathering economic and financial dislocations during the prior boom years, which impose severe constraint on the decisions of banks, firms, and consumers, is completely alien to their thinking.

â�,��"Until long after World War II, it was the accepted notion that the U.S. Great Depression of the 1930s had its decisive causes in a variety of such dislocations and imbalances, which the U.S. economy and its financial system had incurred during the prior boom years in the wake of major excesses in borrowing, lending, and spending at the time.

â�,��"The possibility that monetary policy may become ineffective is something a true monetarist cannot and will not swallow. With this conviction in mind, they have rewritten the history of the Great Depression during the early 1930s. The catalyst for this change in perception was one book: A Monetary History of the United States, 1867-1960, written by Milton Friedman and Anna J. Schwartz and published in 1963.

â�,��"In time, the Friedman and Schwartz view was to monopolize the revisionist view of the Great Depression.â�,�

Says Addison: â�,��"Since November of 2002, when Ben Bernanke gave his now famous â�,�˜Helicopter Theoryâ�,��"� speech, the monetarist view of the Great Depression has been a huge driver in the interest rate strategy employed by the Fed. Dr. Richebacher -- as strong-minded as ever at 88 years old -- is convinced this view is wrong and that â�,�˜monetary policyâ�,��"� will be completely useless during the next downturn in the economy.â�,�

*** The recent breakdown of the oil pipeline from Alaskaâ�,�¦strain on the electrical power systemâ�,�¦failure of the New Orleans leveesâ�,�¦gummed up trafficâ�,�¦the Big Dig et al.â�,�¦brought forth reflections from our colleague, Eric Fry:

â�,��"George Bush et al. have been so focused on the enemy without, that they have completely ignored the enemy within -- i.e., our crumbling physical AND FINANCIAL infrastructure,â�,� he writes.

â�,��"Corroding pipes on the North Slope knocked out more oil production than all the terrorists attacks of the last three years combinedâ�,�¦

â�,��"This is how Empires crumble, from within. America seems unaccustomed to
-- and unprepared for -- internal decay. She will realize it eventually, and as she does, she will devote resources to addressing the problems. For the investor, therefore, the better big-picture investments will be in the companies like Gorman-Rupp that make pumps for New Orleans (thank you, Chris Mayer) or Grant Prideco, which makes the sorts of pipes that are corroding in Alaska (thank you, Dan Amoss), rather than some military hardware provider.â�,�

*** Another colleague, Dan Denning, is more pessimistic.

â�,��"Maybe that national infrastructure won't be repaired or replaced,â�,� he suggests. â�,��"It'll simply crumble, and state governments or private sector companies will focus on the critical projects.
 
â�,��"Think about the scale of national industrial infrastructure: ports, waterways, canals, bridges, roads, interstate highways, airports, the air traffic control network, water grids, electric grids, gas and oil pipelines.
 
â�,��"That's a lot of fixed capital investment. Not exactly the kind of thing the country has been doing lately............The only enduring icons to Rome, ironically, are its roads, aqueducts, and...walls. In the early days, the republic had its priorities right. You can find those sturdy icons all over Europe. Heck, when I worked in Paris, I walked up the rue St. Martin...which was straight as an arrow because it was built on top of an old Roman north-south road through the city.
 
â�,��"Before they were conquerors, the Romans were builders. In fact, engineers at the Department of Transportation say that Roman concrete from 2,000 years ago is superior to the concrete we produce today. So much for progress! And if you've ever been to the Pantheon, you'll know what I mean.
 
â�,��"The foundations of Empire are an efficient transportation system that can get armies and commercial goods and food and water from one place to the other quickly, at a relatively low cost. It's almost a logistics story. And a building materials storyâ�,�¦â�,�
 
Meanwhile, Justice Litle sees a future for the U.S. with bananas in it:
 
â�,��"Well, there's always the Macquarie solution: Let overseas investors with capital surpluses buy up all the infrastructure in disrepair, fix it up, and lease it back to us for a 99-year term. The ultimate outsourcing.

â�,��"Then 10 or 15 years down the road, when the Macquaries of the world have covered their initial investment outlays and are taking in pure profit with each toll payment in the box, we nationalize everything and embrace our new role as a banana republic.â�,�

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.