• Fed to the rescue… markets stage best rally in years on news of latest Bernanke bailout
• The true beneficiaries of the Fed’s latest move
• John Williams on the long-term effects of the TSLF
• An “eye-popping” bond event… U.S. debt no longer the world standard
• Gas prices strike record high again, plus the most expensive gas station in the U.S.
  

Rejoice! The benevolent Fed saved the market… again.

The Fed’s new TSLF — a promise to swap Treasuries for mortgage-backed securities — kicked off the best day for U.S. stocks in five years.

The Dow shot up 417 points, or 3.5%, its best percentage gain since March 2003. The Nasdaq also had its biggest percentage gain since spring ’03, up nearly 4%. The S&P hasn’t seen a day this good since May 2002… it popped 3.7%.

Stock markets in Asia rallied big on the Fed bailout plan too. Markets in Australia, Hong Kong, Malaysia and Singapore all surged about 3%. Indian and Japanese markets gained 1% apiece.

In classic form, whatever America did, China did not. The Shanghai Composite fell 2.3% on rumors the Chinese central bank is planning to hike rates again… and the government is devising more ingenious ways to stymie inflation in their fledgling capitalist economy.

Mortgage enablers Fannie Mae and Freddie Mac were by far the most appreciative of the Bernanke clan offering. Once “sure thing” darlings of state pension plans and corporate retirement accounts alike, the government-sponsored mortgage lenders have already endured one hell of a year.

Both firms plunged 12% on Monday after a Barron’s report suggested the two companies were (gasp!) spiraling toward insolvency and would need a government bailout. Little did Barron’s know that the bailout was just a few hours away. As of March 27, up to $200 billion in Freddie and Fannie mortgage-backed securities will be as good as government bonds. (Ha!)

Both stocks popped over 10% yesterday. Still they remain about 75% off their all-time highs. Together, Fannie and Freddie account for approximately 45% of the $11 trillion U.S. home loan market.

The chairman prays: Please, God, don’t let Fannie and Freddie die

If Fannie and Freddie were the beneficiaries of yesterday’s bailout plan, Treasuries were not. For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.

On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note traded at a record-high 16 basis points today. German bunds are trading at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay… an increase shows the opposite.

By way of comparison, before the credit crisis began in July, U.S. credit default swaps were at 1.6 points, compared with 2.5 points on bunds. The rapid rise in both U.S. and German bonds shows how much the credit markets have seized up since the subprime mess began.

“The U.S. government is not immune from the consequences of the credit crisis,” Fabrizio Capanna, a corporate bond trader for the French bank BNP Paribas told Bloomberg yesterday. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”

“That’s certainly eye-opening,” writes our managing editor Chris Mayer, who flipped us the story early this morning. “The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds. The poor fiscal condition of the U.S. is no longer a matter of debate. It’s something people readily acknowledge and worry about. We live in interesting times, that’s for sure.”

For their part, currency traders didn’t seem to know what to make of the Fed’s diabolical plan. The dollar index felt some roller coaster swings:

After a wild day, the dollar index ended at 72.6 — just above its record low set on March 7. The euro still trades for $1.54. The pound remains at $2.01. Likewise with the yen… 102.

“The Federal Reserve’s announcement,” opines our friend John Williams, “that it will be providing an added $200 billion in liquidity to the system in a coordinated action with other central banks, on top of the $200 billion emergency funding announced by the Fed on Friday (March 7), again highlights the depth of and the ongoing deterioration in the banking system’s solvency crisis.

“The good news is the Fed will create whatever dollars it needs to keep the system from imploding. The bad news is the price that will be paid in higher inflation. Despite any relief rallies that seem to be taking place in the equity and dollar markets, the news here has horrendous implications for the dollar and inflation, corresponding positive implications for gold and likely continued trouble for equities.”

And more annoying data for the Fed: The U.S. trade deficit jumped to $58 billion in January, up nearly a percent from the previous month, the Commerce Department reported yesterday.

The U.S. imported a record $206 billion of goods in services during the month. Crude oil accounted for the biggest share, $27 billion. Oil traded as low as $85 in January. As oil jacked its way to $109.72 yesterday — another record high — a new record trade deficit is likely when February deficit details emerge.

Gas prices crept to another record high of their own today. AAA reports the national average price is now $3.25 for a gallon of unleaded.

If you don’t care for high gas prices, by all means, stay the heck out of Gorda, California.:

Yep, that’s $5.20 for a gallon of the cheap stuff. Our forecast was a scant winter season off.

In the middle of nowhere on the Pacific Coast Highway, this Amerigo station is the only gas for miles. James Willman, the man who attends the station seven days a week, told The New York Times yesterday that someone threatens or curses at him almost every day.

“This plan of Bernanke’s,” says one reader, “to swap Treasuries for bad paper in order to help the creators of the bad paper constitutes in my mind panic and dereliction of duty.

“What idiot would borrow from his savings account and loan it out to a gambler down on his luck to help the jerk out? Someone needs to step up and call for some kind of boycott to get the attention of these numbskulls in Washington who are playing not only with fire, but with our very lives and fortunes, and those of our children. Shame on them all.”

“I thought your edition yesterday was downright painful to read,” writes another reader. “Painful, because you lump everyone together — the baby boomers are not the instant-gratification set.

“We are the ones that help our elderly parents so they don’t have to steal cans of cat food for dinner, pay our fixed-rate mortgages that had 20% down or more, send our kids through college, pay our taxes no matter how outrageous and have no control over the federal government, the Fed, the IMF or anything else that impacts our lives — including federal support to use our food for energy, instead of filling our bellies, while they decry the use of coal, which is right in our backyards.

“We didn’t choose to go off the gold standard. We are the ones whose bank accounts are shrinking, whose retirement accounts are suffering, who lose our health benefits when we retire and who paid into Social Security all of our working lives and can’t count on it in retirement.

“So please, moderate your tone. We didn’t choose any of it, and the Democrats and Republicans never represented our interests, and don’t now.”

The 5: You’re kidding, right? Of all the mayhem in yesterday’s issue, you quibble with our use of the term ‘baby boomer’? How can you be emotionally attached to a demographic cohort? Oy. Puzzlement aside, “boomers” are roughly 44-62 today. The “me” generation is by far the most heavily represented cohort in Washington. And it shows. This next nugget is for you boomers, too:

We learned today that marijuana growers in Canada have exported much less bud as exchange rates eat into their margins.

“Canadian marijuana is now less competitive against marijuana grown elsewhere,” an economics professor at Simon Fraser University told the Missoulian this week. “This is a cost-driven business. With exports no longer viable, the British Columbia marijuana industry has certainly taken a hit, so to speak.”

The loonie trades for $1.01 this morning. Sorry, potheads, maybe you should start growing your own.

Regards,

Addison Wiggin,
The 5 Min. Forecast

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• Gas prices just short of all-time high… Bush reveals confusion, then brilliant legislative solution
• Bernanke back on Capitol Hill… how his words moved markets
• Dollar, oil and gold all further record levels
• Billions more in write-downs on Wall Street… one major bank predicts worst to come
• Plus, the new face of U.S. vending machines… press B12 for marijuana, A4 for Viagra

The national average gas price at the pump crept up to $3.16 today. We’re now about a nickel short of last May’s all-time high, way before the oft-hyped “summer driving season” begins.

“Wait, what did you just say?” President Bush responded yesterday to a reporter who said some analysts expect prices to soon climb up to $4. “You’re predicting $4-a-gallon gasoline?… That’s interesting. I hadn’t heard that.” After regaining his bearings, our commander in chief suggested a solution to skyrocketing gas prices: Congress needs to make his first-term tax cuts permanent.

“If you’re out there wondering… what your life is going to be like and you’re looking at $4 a gallon, that’s uncertain,” Bush said. “And when you couple with the idea that taxes may be going up in a couple of years, that’s double uncertainty.”

Hmmmn… double uncertainty. How do you calculate that?

He must possess mathematical formulas reserved only for the highest levels of government. Or, we suspect, skyrocketing gas prices have more to do with a crashing dollar and statements made by this guy:

“I think the greater risks are to the downside,” Ben Bernanke reiterated in his second day of congressional testimony yesterday, “that is, to growth and to financial markets.”

We heard hints in his testimony Wednesday that more rate cuts might be on the way. Yesterday, the Fed chairman made it quite clear that he means to cut rates again, noting that inflation expectations have remained “pretty stable” and that “inflation will moderate this year as oil and food prices don’t rise as much this year as they did last year.”

From the cheap seats, it’s sure looking like every food and energy commodity is at or near an all-time high and U.S. inflation is growing at a rate far from “pretty stable.” Regardless, gamblers in Chicago were emboldened by Bernanke’s remarks… futures there now price in a 100% chance for a 50 point rate cut in March, a 62% shot for 75 points.

Following Bernanke’s testimony, the dollar reached new lows across the globe. The dollar index has given up two full points since the Fed chairman began his testimony on Wednesday, and now sits at an all-time low of 73.

Likewise, the euro shot up to $1.52 yesterday, an all-time high of its own. The yen gained all the way to 104, a three-year high versus the greenback. The Canadian dollar and British pound stood still at about $1.02 and $1.98.

This is starting to surprise even us. We remember predicting the euro would go to $1.50 just after parity was reached… and getting roundly criticized for it. Now that we’re inching even higher, we suspect it’s going to have to gain some sympathy votes sooner or later.

“There will probably be some bank failures,” Bernanke suggested, saying that many overexposed small financial institutions in the U.S. are still at risk. While we respect Bernanke’s candor on the matter, markets didn’t care for his speculation.

Traders sold down financials in style yesterday, and the whole market followed… nearly1% losses for the Dow, S&P 500 and Nasdaq yesterday.

Neither Fannie Mae nor Freddie Mac helped in the matter much. Both banks reported big losses this week, writing down $3.6 billion and $2.5 billion in their respective fourth-quarter earnings announcements. Both losses were greater than Wall Street expected.

Naturally, as the U.S. two largest buyers and backers of American mortgages disclose a basket of bad subprime bets, the U.S. government has chosen to ease regulations on their investment capabilities.

Within hours of Freddie revealing its multibillion loss, the Office of Federal Housing Enterprise Oversight proudly announced that it will be removing limits to the amounts of loans and securities Fannie and Freddie can own. The two companies’ investment pools were formerly capped at a fixed level because of a few accounting “lapses” in 2004.

But now, Fannie and Freddie can invest in as many subprime-backed securities and risky mortgages as they can stomach, potential losses be damned. Brilliant.

Insurance giant AIG announced its own $15 billion write-down yesterday, adding a $5 billion fourth-quarter loss for good measure — its biggest in 89 years. Losses at the insurance group were attributed to bets gone bad among credit default swaps — pledges to cover missed debt payments that went arse up during the credit crisis.

Annual profits for the U.S.’s largest insurer were consequently cut in half, to about $6 billion.

Financial institutions of the world will write down some $600 billion by the time this “credit crisis” has run its course, estimated UBS analysts today. According to recent Bloomberg reports, a mere $160 billion has been written down by the global banks. Thus, UBS is calling for financial losses to get much, much worse.

And UBS might have a pretty good idea how bad it could be… its report comes just a few weeks after the Swiss bank admitted to a hefty $14 billion write-down of its own.

Fourth-quarter gross domestic product in the U.S. was confirmed at a lousy 0.6% by the Commerce Department yesterday. The government arm left last month’s GDP estimate unchanged in its “official” reading. Currently, all signs point to even less economic growth during the current quarter… recession, here we come.

But don’t rule out the American consumer just yet. In the face of economic turmoil and plunging markets, spending by individuals rose 0.4% in January, the Commerce Department reported this morning, higher than expected by a factor of two.

Not surprisingly, spending rates outpaced U.S. income gains, up 0.3% in January. Thus, personal savings in came in at a negative 0.1% for the month.

Maybe these new marijuana vending machines are just too tempting:

The newly created “Herbal Medical Center”

Scoring an ounce from these bleak-looking boxes isn’t quite as easy as picking up a Coke from the office vending machine. Three new machines in LA are housed in stand-alone rooms and guarded 24/7. When you want to get high, umn excuse us — relieve your symptoms, you’ll need to be fingerprinted, photographed and issued a pre-paid card that can be used only at the machine.

On the bright side, once you get past the guard dogs and swim through the moat filled with laser-equipped sharks, there will be a plethora of cannabis at your disposal. Users can buy a variety of “flavors” up to an ounce a week. According to a USA Today, these pot machines could soon be vending Viagra, Vicodin, Propecia, and various antidepressants — a veritable cocktail of pharmaceuticals.

Gold shot up to another record high yesterday. Spot prices spiked to $975 this morning. For the year, gold is up an incredible 16%. Gold $1,000 is just one solid rally away.

Oil nudged higher to another record high itself overnight. Light, sweet crude closed at a record high $102.59 in New York yesterday, and then briefly touched $103 in Asian trading, before retreating to the low, low price of $101 this morning.

“New technology is breathing life into an old fuel alternative,” Greg Guenthner told our crew in the editorial meeting at our HQ earlier this week.

“Sure, the older, louder diesel engines coughed massive amounts of nitrous oxide into the atmosphere. But the technology is better now. Diesel engines are cleaner, quieter and more efficient. Just ask someone who lives in Europe… About half of the cars on the road there are powered by diesel engines. The diesel revolution in Europe began almost a decade ago, thanks to high fuel taxes put in place to help fight global warming.

“Diesel is superior to conventional gasoline because the fuel releases less carbon dioxide than regular gasoline and diesel engines get 30% more miles per gallon. What’s more, diesel has a strategic advantage that petroleum just can’t match: It can be made without drilling a single hole into the ground in search of crude. In fact, biodiesel can be made out of animal fats, soybean oil and even waste food oils.”

Gunner just issued a new buy on a microcap biodiesel play to his Bulletin Board Elite readers on Tuesday. The company has pioneered a way to produce biofuel cleaner and cheaper than the industry standard… and is still really cheap. Details here: Subscribe today.

“Outsourcing production to China or any other country is the biggest misconception ever,” writes a reader. “When the so-called educated talk about globalization and outsourcing, they tend to overlook the huge requirements of energy and materials needed to accomplish this. To get that little widget to the U.S. from China or any other foreign country, ships, trucks, trains, containers, airplanes, roads, ports, offices and organizations need to be built. Let’s also not forget all the equipment needed to make the aforementioned operational.

“This has created a huge demand for raw materials and energy just to handle and ship these goods around the world. None of the ‘educated’ and ‘enlightened’ morons have ever figured into the cost of the product the building of that infrastructure and all the extra handling involved. A lot of that infrastructure was built with tax money.”

The 5 responds:
Uhh… we’ve been recommending infrastructure plays across our roster of services. But… seriously… what’s your beef with educated people?

“I am a living example of what has happened,” another reader writes, “is happening and will likely happen far more in our country unless changes are made, and made very quickly. My partner and I founded a successful high-tech electronics company. Our company produced many innovative products used across the consumer, industrial and governmental spectrum. We both put in the super long hours that are a dominant characteristic of entrepreneurs.

“After a couple decades, it became apparent to me that the bulk of my earnings were being siphoned off in the form of taxes. Once my partner died of cancer, I had to search deeply for the reason I was working my arse off for the benefit of a bunch of complaining, obstructionist anti-free enterprise morons who now represent the majority of voters in this country. The stress of running our company surely got to my best friend and business partner. I didn’t want to pay the same price.

“At the age of 47, I, essentially, retired from business, and now, 15 years later, I have no regrets. My standard of living is significantly lower, but my happiness in life is so much greater I can’t tell you. It was ironic, as I finally realized that I and most entrepreneurs and most wealth-creating people are being exploited through our tax system.

“This modern form of slavery is accomplished by people who are always complaining about being exploited (because their government handouts are never enough) thanks to the producers not being taxed enough. Sooner or later, the slaves will mostly join the ranks of their masters, but who will be left after every one realizes the taste of greenbacks is no better than its nutritional value?”

Enjoy your leap day,

Addison Wiggin,
The 5 Min. Forecast

• Bank estimates total cost of subprime crisis… you might want to sit down
• The latest doom asset-backed security class, and why you should care
• Bernanke speaks… the sound bites that caused worldwide sell-off
• Gold enters another noticeable trend, breakout seems imminent
• Natgas hits 15-month high… Chris Mayer on why it’s still cheap
  

The U.S. subprime and credit crisis has cost the world over $7.7 trillion, says a report released yesterday by Bank of America. The bank estimates 14.7% of the world’s market capitalization has simply vanished since peaking in October.

If that estimate holds true, the mortgage crisis will go down in history as more financially significant than Wall Street’s “Black Monday” in 1987, the Long-Term Capital Management disaster of 1998, any of the massive international currency crisis’ in the last 20 years… it will be even more financially destructive than the Sept. 11 attacks.

A report by S&P last week suggested that global stock markets lost $5.2 trillion in January alone.

And we’re not out of the woods yet… home prices fell during the last quarter of 2007 by a national median of 5.8%, the worst fall since the National Association of Realtors started keeping track in 1979.

Compared to the same time in 2006, the national average price fell from $219,000 to $206,200 in the last quarter. Of the four regions of the U.S., the West got it the worst — an 8.7% drop, says the NAR. Prices dropped 4.8% in the Northeast, 5.4% in the South and 3.2% in the Midwest.

Bank auto loans, too, are getting the squeeze. Car loans delinquent for at least two months hit a 10-year high in January, reports Fitch Ratings Thursday. Why should you care? Well, as with mortgage-backed securities, there’s a bevy of auto asset-backed securities stuffed into retirement funds around the globe.

According to Fitch, 0.7% of all auto asset-backed securities contain loans at least two months in delinquency. That’s a 12% rise from December and a 44% jump year over year. Over 4% of subprime auto loans are delinquent, the highest percentage since 1997.

Subprime mortgages have been grabbing all the headlines, but the truth is the credit squeeze runs deep.

Still paying that loan? Don’t worry, just default. Everyone does it.

“We’re clearly on the edge,” former Fed Chair Alan Greenspan said in a speech yesterday. Chances of a recession are now “50% or better.” We’ve been tracking Greenspan’s recession-o-meter since he went on tour promoting his book. We started with “almost 50%” and then moved to “50%” .This morning, we seemed to have tipped the scales to the dark side.

“The outlook for the economy has worsened in recent months,” admitted the sitting Fed Chairman Ben Bernanke before Congress yesterday, “and the downside risks to growth have increased.”

The U.S. economy will not go into recession, but endure a period of “sluggish growth,” said the chairman, “followed by a somewhat stronger pace of growth starting later this year.” But “the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or… credit conditions may tighten substantially further.”

Umn… weren’t these the very concerns he’s testifying about?

Minutes later, after acknowledging the “steep run-up” in energy prices and the “exceptionally rapid” rise of food prices, the Fed chairman suggested, “Inflation expectations appear to have remained reasonably well anchored.”

To sum up: The economy is slowing, housing and wages are “deteriorating,” credit is increasingly hard to come by, food and energy are going through the roof. But inflation is contained. And the economy is just fine.

Hmmmn…

Wall Street was surely listening when Bernanke threw this in: The Fed will “act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.”

Translation: If you continue to make bad bets like you did when you shipped mortgages and jobs overseas… no biggie, we’ve got your back. We’ll continue to cut rates.

Not surprisingly, the dollar sold steadily
overnight. The dollar index dropped below 76 again. The euro, despite a sluggish eurozone GDP report, rallied back to a skosh below $1.47. The pound trades for $1.96 this morning. The yen stayed put at 107.

“Canada’s trade surplus narrowed last month,” writes our friend Chuck Butler this morning. “That’s not good!” Chuck, we’ve come to accept, is a self-proclaimed loonie lover.

Canada’s trade surplus narrowed to C$2.4 billion in December, as exports slowed. “That’s the smallest trade surplus Canada has posted since November 1998,” Chuck points out. “This trade report drives home the point that the head winds from the slowdown in the U.S. are filtering into the growth outlook for Canada. And probably gives a green light to the Bank of Canada to cut rates again soon.

“This news won’t carry through as good for the loonie. So… be careful there. Yes, commodity prices are still rising and that puts a floor under the loonie. But you’d hate to see it fall to the floor!”

The U.S. stock market renewed its losing streak across the board yesterday. The Dow and S&P 500 fell about 1.4%, while the Nasdaq shed 1.7%. These markets were on the brink of break-even until Bernanke got on the mic. Traders sold off with every word from the Fed chairman… and then continued for the rest of the day.

Moody’s cut bond insurer FGIC’s AAA credit rating. FGIC, perhaps the least known of the “big three” bond insurers, saw its “insurer financial strength” rating chopped six notches, to A3. Moody’s also slashed FGIC’s debt rating to Ba1, officially making FGIC’s debt “junk” rated. Ouch…

Moody’s also said that while Ambac and MBIA are still under review, their ability to cover the bonds they insure and pay back debt was significantly better than FGIC’s.

This morning, Eliot Spitzer, now governor of New York, suggested the bond insurers had better get their act together or he was going to have the state take them over.

Oil traders appear to be the only ones who took Bernanke’s comments en verite. They bought his premise that the U.S. might avoid recession, and then bought the black goo. Coupled with Japan’s strong GDP growth, oil traded to more than a one-month high this morning — $96.

Gold traders have been lulled this week, keeping a tight range around $910. But if you’re a chartist, take note. Gold has begun another consolidation period, similar to what we saw back in November, when gold was trading at $800:

Think another postconsolidation rally is imminent? All the factors that made gold attractive at $800 are still in place. At the very least, look for big movements in gold soon… one way or another.

Natural gas advanced to a 15-month high in New York yesterday. Delivery for March shot up 4.6%, to $8.77 per million Btu, yesterday on news of exceptionally low natural gas reserves.

“I think natural gas is cheap,” Chris Mayer told The 5 back on Jan. 9 of this year. Citing both a deceptively warm beginning to the winter and growing reliance on natural gas to produce the U.S. demand for electricity, Chris called natural gas “one of the best buys on the menu right now.”

His call was right on. Since the beginning of the year, natural gas has shot up over 12%… and looks to continue for the short term, at least. Chris just sold his natural gas play, CNX Gas, for a 43% gain after Consol offered to buy it. Another play he’s recommended, Canadian Natural Resources, is up 30% after his recommendation… our friends at The Rude Awakening helped Mr. Mayer issue a rebuy on Canadian this morning. Check that out here.

“I agree that those Morningstar folks must be smoking some kind of illegal stuff,” writes one reader in response to Morningstar’s call for Dow 18,500. “I’d suggest that the more informed out there review some of the economic conditions brought on by political/business policies that occurred in the middle to late 1920s. While doing this review, they might also review some of the quotes by some of the leading forecasters about where the Dow was going to be in 1930… The similarities are chilling!”

“I’ll be so grateful for that $300,” says a reader of the economic stimulus. “If it comes in May, I can send it right back to the feds to cover a fraction of my quarterly estimated tax payment for June. The good news is I’m expecting to pay less in federal taxes this year because by driving down interest rates to help imprudent lending institutions, the feds have decreased my T-bill income by 60%!”

“So there is a ‘whopping’ 1.3% foreclosure rate now, eh? Wow,” writes a reader. We suspect sarcasm. “That still leaves a paltry 98.7% that are not foreclosed on. The sky is falling. Wake me up if it gets to 10% or 15%.”

The 5: Hmmm… RealtyTrac reports 1.3% accounts for 1.7 million U.S. foreclosures. 10% would be something like 11 million foreclosures in one year. The average household contains 2.5 people, according to a recent U.S. census. So… a little back-of-the-envelope math here… That’s roughly 27 million folks without a home.

If the foreclosure rate hits 10%, we won’t have to wake you up. They will:

Whiskey & Gunpowder’s Greg Grillot sends this parting shot before you begin your weekend: “Goldman Sachs saved its a$$ last year because those smart dudes shorted the mortgage market, right? And yet other parts of the company were long the same market. Sounds like a bit of an identity crisis, yes? Check out one of the perks you get if you work for Goldman:

“Another Goldman Perk: Sex Changes”

Enjoy yourself,

Addison Wiggin
The 5 Min. Forecast

P.S. You still have time. While you’re enjoying your weekend, consider our limited offer to try Options Hotline free for 4 months. We’ve showed you editor Steve Sarnoff’s impressive 2007 winners all week… this will be your last chance to test drive his 2008 picks at such a discount. The offer ends Monday. Ciao.

Learn more here.

• Trade deficit soars… how the latest reading is all the more remarkable
• Moody’s threatens to downgrade U.S. credit rating… Mayer on how the loss would be “far from symbolic”
• Bernanke speaks… equities, currencies and commodities react. Details below…
• Countrywide’s big bailout… World’s biggest bank to the rescue
• Plus, the $2,500 that might just change the world…

The U.S. trade deficit widened by a greater-than-expected margin yet again in November, the Commerce Department reported this morning. U.S. trade deficit rose by $63 billion, over $5 billion more than expected by economists.

That’s a 9% jump from the last month — the highest level since September 2006. Much of November’s deficit rise was attributed to record high oil prices — up 53% year over year.

The annual trade gap through the end of November swelled to $650 billion.

This huge deficit is made all the more remarkable by one fact: The U.S. has also enjoyed the ninth consecutive month of record high U.S. exports. Arthur Laffer and a slew of neocon economists would argue that growing exports and an expanding deficit are both symbols of economic prowess.

“The U.S. credit rating is at risk,” reports Chris Mayer this morning.

Citing a Moody’s report yesterday, Mayer suggests what we’ve tried diligently to document in our documentary. According to Moody’s, unless the U.S. can curb booming health care and Social Security spending, it could lose its AAA credit rating by 2017. If the government were to lose the ranking — which it has held since 1917 — confidence in the U.S.’s ability to pay back debts will be seriously damaged, and the U.S. economy could face a ginormous slowdown.

“When I read stories like this, it makes it harder than usual to stomach election-year politics. Is anyone paying attention to how much the government spends? Maybe with the market tanking, people will start to think about money again… and look less graciously on those who spend it so carelessly.”

“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” said Fed chairman Ben Bernanke in prepared remarks yesterday. While Bernanke reiterated that the Fed does not believe the economy will slip into recession, few could disagree that this was his most bearish outlook to date.

And for what it’s worth, “substantive additional action,” was completely interpreted by Wall Street as at least a 50 bps rate cut. Futures listed on the Chicago Board of Trade now price a 92% chance that the Fed cuts by 50 bps on Jan. 30.

Bernanke’s comments saved the market yesterday. Within seconds of the breath leaving his yap, the Dow recovered from 100 points down… and ended the day 1% higher. Wall Street sure loves an accommodating Fed chairman.

Another bit of news helped spur the rally, too. Bank of America will buy Countrywide for $4 billion, or about 7 bucks per share, the bank confirmed this morning. By acquiring Countrywide’s portfolio of mortgages, BoA will become, by far, the biggest mortgage lender in the country. According to third-quarter origination stats from MortgageDaily.com, the bank now controls $142 billion in home equity financings. Wells Fargo takes second place, at $68 billion.

Merrill Lynch will announce an additional $15 billion write-down in its earnings statement next week, reports The New York Times. Even the bravest of Wall Street analysts had predicted no more than $12 billion in additional fourth-quarter write-downs for the bank. Don’t be surprised when Merrill announces worse-than-expected fourth-quarter losses as well.

Currency traders heard Bernanke’s speech too… and sold the dollar off in droves. The dollar index, seemingly on the verge of a small rally, fell off a cliff:

Aided by the European Central Bank’s decision to hold rates steady, the euro marched from $1.46 back to $1.48. The yen crept up to 108. Even the Swiss franc enjoyed the ride… it’s heading toward parity with the U.S. dollar too. Currently, the creamy chocolate franc trades for 91 cents.

The pound has broken ranks with the dollar entirely.

Since November, the pound’s gone nowhere but down, falling a dramatic 16 cents in about two months. As our friend Chuck Butler put it in today’s Daily Pfennig, the pound “has been beaten like a rented mule lately.”

 

Gold saw the last visible effect of Bernanke’s comments yesterday. Speculators drove the spot price as high as $897… it has since steadied, trading between $890-895.

Indian automaker Tata unveiled the Nano yesterday, quite possibly the world’s least expensive car. For a about $2,500 bucks, this beauty could be yours:

Labeled “the people’s car,” the Nano will be made and produced almost exclusively in India. Tata estimates seven of every 1,000 Indians own a car. With 1.1 billion people in the country… looks like the market could be huge.

Make no mistake, Indians will get what they’ll pay for… the Nano comes equipped with a 0.6 liter engine, a top speed of 60 mph, no air bags, no passenger-side mirror, no power steering, no radio, no A.C. and one windshield wiper.

Tata plans on making 250,000 Nanos by July 2009, and if successful, plans to market the car in Latin America, Southeast Asia and Africa. In a related note, Tata is also a leading candidate in line to take Jaguar and Land Rover off Ford’s hands. Heh… interesting times.

We’ve been in and out of Tata a few times for good money. With this news hitting the major media and the Indian market as frothy as it is, we’d be wary of buying again right now. But it’s definitely a stock worth watching.

“Beats me,” writes a reader, “why any firm would want to pander to Tony Blair’s vanity and egomania by employing him part time to the tune of a (reported) $500,000 per year. Doesn’t JPM have enough so-called experts?”

The 5 responds: Hmmn… we invited Tony Blair to be in our movie, too. It wasn’t necessarily for his expertise.

“Wall Street’s biggest brat, Jim Cramer,” writes a reader “was on the Today show in Fluff-merica yesterday wearing his biggest pouty face. His latest railing? We should be as indignant as he is because Fed governors aren’t elected officials. All this, I suspect, because his pals on the Street haven’t been bailed far enough out by more and more rate cuts.

“Funny, I don’t remember hearing about the need to turn these into elected positions when rates were dropping precipitously.

P.S. You’ve got just a few more days to take advantage of our three-month trial offer of Energy & Scarcity Investor. ESI features the fast-moving small-cap energy plays of our oil adviser Byron King. Check it out now,
before we hike the prices on Monday.

• Are you ready to invest in the financial sector? Buffett is… the Oracle’s picks below
• Write-downs announced left and right… which banks are the latest to come clean
• Jim Rogers “urges you to get out” of this investment
• Mish and Brian identify a “very bullish development” in bonds
• Chavez threatens $200 oil for Americans, $20 for Haitians
• Reader advice on E*Trade, plus how to play the “Military Intelligence Investing Advantage”

Warren Buffett is buying banks… among other things.

The Oracle of Omaha announced this morning that Berkshire Hathaway is increasing its stake in Bank of America, US Bancorp and Wells Fargo.

“We’re looking for an entity that has durable competitive advantage,” Buffett told us in a private interview in his office at Kiewit Plaza this summer. “Somebody that not only is doing well now, but will do well 10 or 20 years from now.

“In capitalism,” Buffet pontificated, “when you have a wonderful business, it’s like having an economic castle. And the nature of capitalism is that people want to come in and take your castle. Now, what you need is a castle that has some durable competitive advantage, some castle that has a moat around it.

“One of the best moats, in many respects, is to be a low-cost producer. But sometimes the moat is just having more talent. I mean, if you’re the heavyweight champion of the world and you keep knocking out people, you’ve got a competitive advantage as long as you can keep doing it.”

“We’re not looking for the best brain surgeon in town. We’re looking for the Mayo Clinic, so we want an institution that, regardless of the person in charge, will maintain that competitive advantage over the decades.”

For what it’s worth, Buffett also snatched up sizable stakes in CarMax and Dow Jones and lessened his company’s positions in American Standard, Ameriprise Financial, Conoco Phillips and Nike.

Massive write-downs in the banking industry must be making Buffett salivate. Bear Stearns and Barclays both announced multibillion-dollar write-downs this week. Bear told its investors before the bell yesterday that it expects to write down $1.2 billion in the fourth quarter. Naturally, BS stock closed over 3% higher.

For its part, Barclays announced a $2.7 billion write-down this morning.

And the rumor mill is churning with expectations of a massive write-down from UBS as well.

The WSJ suggested yesterday that the Swiss bank might take a charge of as much as $7.1 billion this quarter. UBS has already written down about $3 billion; thus, an additional write-down of this magnitude would make it one of the biggest casualties of the credit crisis.

Investors with less resolve than Buffett sold off again yesterday. The Dow fell half a percent. The S&P, a little more. And the Nasdaq shed 1.1%.

The Labor Department released its Producer Price Index yesterday… it rose a subtle 0.1% in October. But that puts producer prices at 6.1% for the year — the fourth-highest level of inflation since the early ’80s.

It’s also three times the acceptable rate of inflation as determined by Federal Reserve Chairman Ben Bernanke.

“He is a total fool,” Jim Rogers said of Bernanke this morning. We’re not sure if Rogers watched the same YouTube video we sent you last week of Ron Paul berating Bernanke, but the sentiment was the same.

“[Bernanke claimed] Americans who buy only American goods are not affected if the value of the U.S. dollar goes down,” Rogers said. “I was terrified… If you only buy American products and the dollar goes down, the price of oil goes up, copper goes up, wheat goes up… That affects you.

“He doesn’t understand the economy, as far as I can see…

“If you have dollars,” Rogers said, “I urge you to get out. That’s not the currency to own.” Rogers echoed his sentiment from earlier in the month. He’s buying yen, yuan, Swiss francs and commodities.

“It’s not my prediction,” the UAE central bank governor, Sultan Nasser Suweidi, agreed this morning, “but everybody is expecting that the U.S. dollar will go down further.” Suweidi warned earlier in the week that the UAE was at a “crossroads” in terms of the dirham’s peg to the dollar.

Gov. Suweidi tipped his hand again this morning during an interview in South Korea, saying that while the dollar peg won’t be dropped entirely, he might “reduce it to a basket which will consist of more dollars, but not totally 100%.”

No official action has been taken, but if Suweidi checks the futures markets this morning, he’ll see that contracts to buy dirhams in 2008 jumped by the largest margin in 10 years, to 3.57 per dollar… a record high.

As if to defy Rogers’ and Suweidi’s comments, the dollar rallied ever so slightly overnight. This morning, the euro trades for $1.46. The pound, $2.05. And the loonie has fallen back to $1.02 — down 8 cents in a little over a week.

For its part, the Japanese yen is enjoying a bit of a rally lately, too. Overnight, it regained the 110-handle versus the dollar. It shot up 1.3% versus the kiwi dollar and 2.1% versus the South African rand.

Slowly this week, light, sweet crude has crept back up to $94 per barrel.

“With oil hitting new highs in the $90s, and with gold pushing $800 per ounce,” writes Mish Shedlock of The Survival Report, “you would think increasing inflation expectations would be driving bond yields through the roof.

“But that isn’t happening: The yield on the 10-year Treasury bond has declined almost 100 basis points (or 1%) from its June high, and continues to fall.

“From a high in June, the yield on the 10-year Treasury bond moved down and broken through its uptrend from its low in 2003. This is a very bullish development for Treasury bonds, and it’s clear that the weakening prospect for growth here in the U.S. is the main driver.

“These shifts in sentiment usually take a long time, but the signs of a slowdown are clear in the Treasury market.” Look for Treasury yields to go down from here. And look for ways to play them here.

“If the U.S. happens to invade Iran,” proclaimed Hugo Chavez, “oil will not just reach $100, but $200 per barrel. Not one drop of oil will leave Iran… The same would happen here.”

We hadn’t heard much from our favorite South American dictator in a while… we were beginning to miss him.

“How are you going to sell oil to Haiti,” asked Hugo practically in the same breath, “one of the poorest countries in the world, at $100, the same price that you sell it to the U.S.?… I would sell oil to a rich country at $100 and to a poor country perhaps at $20.”

He went on to suggest OPEC set up a preferential pricing program… that we’re sure has about as much a chance at success as Iran’s subsidy program for cheap gas for its citizens. You may recall our reports of gas rationing… and riots. Yeah, go get ’em, guys.

May we suggest you both pick up a copy of Economics for Dummies.

With the top 13 oil companies in the world owned by nation-states with similar nutjobs at the helm intent on using black goo for social agendas, we’ll be looking for alternative sources of energy far more aggressively.

“In terms of developmental processes,” reports Byron King this morning, for example, from the Geothermal Finance & Investment Summit in San Jose, Calif., “the geothermal industry today is about where the oil industry was back in the 1940s.

“At this stage, the industry is all about plucking the low-hanging fruit. Only the most evident and obvious projects are being pursued, like traditional hot springs or mud volcanoes. The areas that are not apparent constitute an immense, unexploited resource.

“Still, things are evolving fast. After a century of energy development in the U.S., ‘renewables’ generally are only 2.3% of the total electric output. But in terms of present and planned investment, renewables are coming along like gangbusters. In 2006, the U.S. overall spent $9.2 billion on renewable power investment, versus only $7.6 billion on new facilities to burn fossil fuels like coal and natural gas. Wind, biomass, solar and geothermal are gaining the upper hand for new investment.”

Byron has met with several geothermal developers whose projects are still in the private equity stage this week. They’re planning IPOs within the next 24 months. We’ll keep track of these firms for you.

In the meantime, you don’t want to miss Byron’s exclusive report on five companies already reaping the benefits of technologies developed by the Navy in this area… and already churning out electricity and energy royalties in the $200 million range. Read about “China Lake Energy” here.

“‘Even if E*Trade goes bankrupt,’ Chris Mayer said yesterday, ‘your brokerage assets are safe.
It shouldn’t affect you in any way,’” wrote a reader, furthering our E*Trade discussion.

“On the whole, it would make me very nervous.”

“True… SIPC protects investor’s accounts in brokerages,” wrote another. “But many people don’t realize that the limit is $500,000 in equity and $100,000 in cash. So if someone has an account greater than $500,000, the amount above $500,000 is at risk. While many people are below that threshold, many are also above it.”

“We should all be so lucky to have idiots like Citigroup’s Prashant Bhatia working in the financial services industry,” concluded our last reader today. “Well, E*Trade wasn’t so lucky, given that its stock tanked to $3.55 per share following Mr. Bhatia’s comments, but it is rather ironic that the firm for which Mr. Bhatia himself works is holding billions of dollars worth of bad mortgage notes and securities.

“Talk about throwing stones while living in a glass house.

“I am not the one who bought the 30 million shares of E*Trade stock following its freefall, but I am already sitting on $2,000 in profits that I made on E*Trade stock in less than two days after the freefall came to a halt. Please let me know when Mr. Bhatia opens his fat mouth and downgrades anything else again. I love free money.”

The 5 Responds:
If you bought E*Trade near its $3.55 low this week, you’re up 57% in 3 days. Even if bankruptcy isn’t in the cards, they’ve become prime buyout bait overnight. The company has about $1.9 billion in cash, or about $4.45 per share. But with stock prices now back to about $5.60, it looks more like Mr. Bhatia’s comments created a great buying opportunity… nothing more.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. In the alternative energy field, Byron King is also betting on something he calls the “Military Intelligence Investing Advantage”. On numerous occasions, the military has developed technologies for its own purposes — lasers, GPS, the Hummer, ARPANET (the Internet) — which it’s then bequeathed to private sector companies for civilian application. Many of the companies that get the “first mover” advantage in these new industries become household names… Microsoft, Honeywell, Texas Instruments…

In its effort to stave off dependence on foreign oil, the U.S. Navy has been very active in developing a source of energy for its massive China Lake base in California. They’ve been so successful, they’re producing all the energy they need, and then some. By selling the excess energy back to the California power grid, they’ve already earned some $194 million in energy royalties.

Now they are ready to bequeath this technology to the private sector, too. Byron’s got a lead on the top five companies — all selling for $3 dollars or less — that are prime candidates for the “first mover” advantage as this energy gets applied across the West. If you want to know more, read this report.

• Bernanke predicts slower growth, increased inflation… Ron Paul delivers the stagflation smackdown
• Nasdaq and China cap off a week for the record books
• Brazil’s transformational oil find… our gurus weigh in on this 8 billion barrel bounty
• Ready for the greenback carry trade? Yen and franc set milestones versus the dollar
• Consumer confidence plummets, takes retail with it… Merry freaking Christmas

“Growth of economic activity [will] slow noticeably in the fourth quarter from its third-quarter rate,” suggested Ben Bernanke before Congress yesterday.

OK… slower growth. Got it.

“Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity…”

OK… increased inflation. Isn’t there a word for this… oh, right: stagflation.

We cherry-picked the most pessimistic of Bernanke’s comments. After all, we have a reputation to uphold. But Bernanke’s speech was pockmarked with a few moments of optimism. And a few moments of pure entertainment.

For what it’s worth, Wall Street’s interpretation of the Bernanke testimony wasn’t far from ours. The S&P 500 and the Dow fell up to 1.5% within an hour of Bernanke’s statement. Then in the 11th hour, traders screwed up their courage and started buying. The late rally brought both indexes back to near break-even.

The Nasdaq wasn’t so lucky. It got whipped like a Catholic schoolboy caught nipping from the Communion chalice. Traders kept their afternoon losses right up until the bell… the tech-heavy index closed with a 1.9% loss.

Coupled with Wednesday’s fall of 2.7%, yesterday’s loss marked the worst two-day stretch for the Nasdaq since September 2002.

Across the Pacific, the Shanghai Composite Index suffered a milestone loss of its own. By registering a small loss of 0.3% overnight, the SSE capped off its worst performing week since 1997. The index fell about 8%, to 5,315.

A massive offshore oil discovery could boost Brazil’s oil reserves by 40%. Petroleo Brasileiro SA (Petrobras) announced this morning that its new “ultra deep” Tupi field could contain 8 billion barrels of recoverable crude.

If this report is accurate, Brasil’s reserves could quickly catch up to OPEC players like Nigeria and Venezuela. Currently holding the 17th largest oil reserves in the world, Brazil’s discovery could catapult the country into the top 10.

“If this is confirmed,” said Dilma Rousseff, presidential chief of staff, “we will no longer be a ‘medium’ country, pursuing self-sufficiency and exporting a little. It will transform the nation to another level, with exporting properties like Venezuela, Arab nations and others.”

Petrobras shares in the U.S. jumped just a tiny bit over the past year… from $24 to $116. Curiously, in Brazil, Petrobras shares climbed only 14%. There’s lots of money in New York looking for even the slightest bit of good news to invest in.

They better be dancin’ 40% harder at Carnival this year… big oil’s on its way

“Not so fast,” interjects our oil man Byron King. “The Tupi field is 286 kilometers (177 miles) offshore in the South Atlantic Ocean. Tupi lies under 2,140 meters (7,060 feet) of water, more than 3,000 meters (almost 10,000 feet) of sand and rocks and then another 2,000-meter (6,600-foot)-thick layer of salt. Getting that oil out of the crust will be a formidable challenge and require many years of expensive investment. Most of Brazil’s oil-bearing potential lies off its Atlantic coast.

“A discovery of 8 billion barrels is in the same class as Prudhoe Bay. ARCO and BP have spent over 30 years drilling and extracting oil from Prudhoe Bay. So it is not as if all 8 billion barrels from Tupi will see the light of day anytime soon. Petrobras has a very long-term program in front of it.”

On the brighter side, “I’ve long admired Petrobras for its outstanding technical competence… they are a genuine global leader in ultra-deep offshore oil extraction.

“Plus,” added Byron, “by the time Brazil’s oil comes online in any significant way, many other oil provinces of the world will be producing less. So congratulations to Petrobras, but don’t use this news as an excuse to buy a new gas-guzzling Hummer.”

Byron’s new Energy & Scarcity Investor debuts this afternoon. Look for it.

“The oil discovery in Brazil only strengthens the case for that country’s ascension into the investment-grade club,” says Chris Hancock. “Recent trade surpluses have been primarily driven through commodity exports. With oil prices rising, this is a huge windfall for the world’s unknown BRIC.

“Brazil’s growth-acceleration program, announced this year, includes $280 billion of public and private sector infrastructure investment between 2007-2010. That’s a respectable chunk of change.”

For more on Chris, including his way to trade the most secretive pool of investment wealth in the world… look here.

Crude oil prices continued to trade wildly overnight and this morning. Oil climbed back to as high as $97 yesterday, but then abruptly fell close to $94 on Bernanke’s suggestion that growth would slow in the coming quarters.

But this morning, oil is right back up to $96 on fear that a particularly burly storm in the North Sea will inhibit production and transport. Despite recent volatility, oil has yet to break through the $94 resistance established after the Fed’s Oct. 31 cut.

The dollar struck a new all-time low on the heels of Chairman Bernanke’s comments. For a brief instant this morning, the dollar index scored an all-time low of 74 — its first forary into the number. The index has since stabilized into previous lows in the 75 range.

The yen continued its strong rally overnight and this morning, trading for as low as 111. Not since Aug. 17 has the yen fared so well versus the greenback. The Swiss franc, its carry trade brother by another mother, also rallied to $1.11, the highest versus the dollar since 1995.

We told you about Morgan Stanley and AIG’s losses yesterday. Not wanting to be left out, Wachovia announced this morning it’s lost $1.1 billion in October and expects increased loan losses in the fourth quarter.

Rumors abound, too, that Barclays will soon announce a whopping $10 billion write-down. Barclays officials have denied the allegation, but traders seem to be selling the rumor, nonetheless. As we write, Barclays stock it down 7% on the day.

“Get Set for Wave of Debt Downgrades,” headlines the WSJ this morning. Rating downgrades from Moody’s, S&P and Fitch are expected to flood the market in the next few months.

The three agencies have already downgraded $70 billion in subprime CDOs. But further downgrades worth tens, if not hundreds, of billions of dollars are on the horizon. S&P, for example, has 709 CDO tranches on its “credit watch negative” list, the very last list before downgrading. Thus far, S&P has downgraded only 381 tranches.

Likewise, Fitch has 609 CDOs on negative watch, nearly double the amount it’s already downgraded. Moody’s did not disclose its hit list for the article… but didn’t deny it is in a similar situation.

Consumer confidence is at a two-year low, says this morning’s RBC CASH Index.

RBC’s measure of consumer confidence registered a score of 64 so far this month, down sharply from a score of 80 the same time last month. Not since Hurricane Katrina has the index scored so low.

The index measures expectations about the future, job security, economic conditions and feelings about investments. All four measurements fell from last month

Sales at retail stores rose 1.6% in October — the worst October performance in 12 years. Not since 1995 has the U.S. seen such an unsuccessful October, according to the International Council of Shopping Centers.

Wal-Mart, the U.S.’ biggest retailer; Gap, the U.S.’s biggest clothing retailer; and Macy’s, the largest department store chain, have all missed their latest round of earnings forecasts. “This does not bode well for the upcoming Christmas season retail sector hiring or store expansion plans,” writes Mish Shedlock. “Wal-Mart has already announced a second reduction in the number of U.S stores it will be building. I expect more cutback announcements from other stores.”

Dashed housing hopes, no doubt, play a role in sagging retail returns this year.

“There may be some truth to what the contributor says about the Chinese not trusting our motives,” writes a reader in reaction to yesterday’s discussion of “date rape” drug-laced toys in Australia and the U.S.

“However, there are more compelling reasons, and they are all economic. In an article today in the South China Morning Post, it was noted that the safe chemical component that was specified to be used in the ‘Aqua Dots’ toy costs three times as much as the toxic chemical used.

“By the same token, I was told that leaded paint dries faster, allowing for shortened production time. And in a world where the manufacturer will face hundreds of thousands of dollars in claims if it misses the shipping deadline, such things matter. Some American importers now consider their departments responsible for making those claims as profit centers.

“What we have come to is the proverbial ‘rock and a hard place.’ Just as the U. S. economy is slowing and the dollar’s purchasing power declines, China’s costs are going up also. Among those costs, U.S. companies add increasingly more and more rules, regulations and vendor compliance manuals that include inspection of factories for human rights violations to make sure the workers are happy with the dormitory and the mess hall menu. This, in theory, is all well and good, but there is still no free lunch in this world. Someone has to pick up the tab, and at the end of the day, it is the retail consumer.

“So take comfort, dear customer, in the knowledge that though you are paying more and getting less, your children are safer and the Chinese workers are happy, too.”

“A $9 trillion national debt represents about 65% of GDP,” comments another reader on our observance of that historical milestone yesterday. “This does not seem to be an outrageously high ratio. Many large corporations have a much higher ratio of debt to income. They use this debt to maximize their net worth by achieving a higher return on assets than their borrowing costs.

“It is also true that the national debt never needs to be ‘paid back’ any more than GE (for example) has to ‘pay back’ its corporate debt. What’s important is whether or not the debt can be financed out of income — just as it is for a corporation or, indeed, an individual with a mortgage, which can easily be 200% of income. Thinking of it in these terms, the national debt just doesn’t seem to be that big. In fact — dare I say it — it could even be a lot bigger and wouldn’t be a problem. Please explain why it’s different for a corporation than it is for the U.S. government.”

The 5 Responds:
You must like paying taxes. A corporation is a business. It finances operations with the intention of producing a product, which in turn should produce a profit. (Not so sure the example fits with GM. Heh.)

Government, on the other hand, produces nothing. By definition, it can only take from the production of others and redistribute what it takes. When it borrows to finance its activities… especially at such an excessive rate… it takes the choice out of the hands of the living, voting taxpayers and lays it on future generations who have no say in the matter. As Alice Rivlin put it in a discussion we had with her for our film on the subject: “It’s immoral.” You can apologize for government spending habits all you want, but we tend to agree. Regardless of what percentage of GDP it represents, $9 trillion is preposterous.

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Our friend Chuck Butler got some great news yesterday. After a battery of tests, his doctors say there’s no sign of new cancer. Good work, Chuck. You’ve got the little bastard on the run.

ADDITIONAL RESOURCES
October Retail Round-Up
Oil Discovery Rocks Brazil
Get Set for a Wave of Downgrades

• Dollar getting dreary again… Why the Fed’s “granite façade” is showing strains…
• Mish uncovers the real reason Bill Gross wants a Bush bailout
• “If at first you don’t succeed”: LTCM founder back in the game
• Massive drought in Turkey, but you wouldn’t know it from this picture of fountains at Hagia Sophia
• Wheat hits an all-time high…. Japanese hike noodles, Italians up pasta, French monte baguettes
• T he jathropa weed: an inexpensive breakthrough in bio fuels?
• Did Fidel kick the bucket? Will it make a difference?

“Negative sentiment toward the dollar is gearing up again,” reports our currency go-to guy, Chuck Butler. In Friday’s trading, the euro gained half a cent on the dollar… a miniscule movement to you and me, but a sizable shift in the currency world. The Esperanto currency will now set you back $1.36. The pound rallied too… back up to $2.01.

“The terrible financial tempest that I see breaking,” writes ShadowStats.com’s John Williams, “is one where massive dollar selling will trigger or exacerbate a major sell-off in U.S. stocks and bonds

Williams sees the Fed’s rhetoric about letting the market clean up the subprime mess…as applicable when convenient. But “Now that the banking system is flailing for a life preserver, the Fed will do whatever they can to preserve the same system that allows them to survive, the U.S. dollar be damned.”

For example, the Fed agreed to bend a longstanding rule last week to help bail out two of the country’s largest banks. Bernanke exempted Citigroup and Bank of America from rules that would limit the amount of lending their bank arms can float to brokerage affiliates. In other words, Citi and BoA need to lend more money than is legally permissible to their respective mortgage operations in order to keep them from imploding.

Previous regulations permitted banks to float up to 10% of their capital to troubled affiliates. Now Citigroup and BoA can lend up to 30% of their capital to mortgage units in desperate need of a bailout. That means each bank needed more than $8 billion in to relieve their distressed lenders… the current cap will allow each to loan about $25 billion.

“Beyond any near-term covert central bank currency intervention,” Williams concludes, “rigged economic data or other machinations imposed on the markets, the proximal trigger for the dollar’s sell-off could be any one of a number of factors ranging from an official Fed easing to expanded U.S. military activity in the Middle East.”

“A quick look at Pimco’s Total Return Fund shows the top 5 positions are all Fannie Mae and 40% of the fund is in mortgages,” writes Mish Shedlock, commenting on Bill Gross’ bizarre letter last week calling for the president to jump in and bail out mortgage companies.

The Total Return Fund, Gross’s flagship bond fund, has maintained a depressing 3.83% annual return since 2005… one that could easily be beaten by a simple high-yield savings account or CD. Of interesting note, Morningstar rates it a 5-star fund.

“The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of Pimco,” suggests Mish.

And isn’t this ironic? Robert Merton, co-founder of the Long-Term Capital Management Fund, has said he will be re-entering the asset management business and will once again run his own hedge fund. Merton, a Nobel Prize winner, made this announcement on the ninth anniversary of the LTCM crisis, which he himself helped ignite. Good timing, Bob.

Hurricane Dean has come and gone and, from an oil industry perspective, had very little impact. Mexican state-owned oil company Petroleos Mexicanos (Pemex), which stood most squarely in the path of the Category 5 hurricane, is returning more than 18,000 evacuated workers back to rigs today. They expect to return to pre-hurricane production levels this week.

Light sweet crude traded this morning for $71 per barrel.

“On Aug. 1,” writes the Rude Awakening’s Joel Bowman, making his way to Dubai from Budapest, by way of Turkey, “Istanbul’s reservoirs stood at an average of 31% capacity. Just 20 days later, they had dropped to an alarming 23%. Despite severe shortages here, precious water still cascades from fountains out in front of the Hagia Sofia and the Blue Mosque.

You wouldn’t know the country is in the throes of serious drought… not from this position, anyway. Tourists still snap shots of the famous landmarks… but pay inflated prices for bottled water at nearby restaurants.

“A few hours away,” Joel continues, “in the nation’s capital of Ankara, the situation is far worse. On the first of this month, the director general of the State Hydraulic Works (DSI) announced that Ankara had enough water for just 78 days. There, water reserves are lapping the 5% mark in the catchment basins… and even that level is depleting rapidly.”

Blue Gold

After hovering at an 11-year high for months, wheat busted through to $7.50 per bushel last week — its highest price ever.

Canada — the world’s second largest exporter — announced this year’s crop would be 20% smaller than previously expected.

Japan’s Ministry of Agriculture, Forestry and Fisheries has announced that it will increase domestic prices for the second time since 1983 — by a staggering 10%. Instant noodle maker Nissin Food Products has already publicly expressed interest in raising prices for the first time in 17 years.

In Europe, where wheat prices have nearly doubled this year alone, Italy’s Association of Pasta Manufacturers recently announced its products would cost 20% more in the coming months. French patisseries have united and agreed on a nationwide 5-7% hike on the venerable baguette.

Here’s some interesting news on the alternative energy front. Earlier this summer, British Petroleum dumped $90 million dollars into research of a weed known as jatropha.

Here’s what BP found: The jatropha plant is a large shrub filled with golf ball-size oily green fruit. It can grow almost anywhere, doesn’t require an abundant water supply, it’s inedible, resistant to pesticides and is essentially worth squat to those surrounded by it. In India, they use the plant to build hedges.

But as it turns out, jatropha oil can be poured right into a biodiesel tank. Making it “potentially” one of the first truly low-impact, high efficiency, natural biofuel sources. And it’s cheap…

Thanks WSJ

At $43 per barrel, that makes jatropha fuel almost half as cheap as oil. A highly efficient, easy-to-grow biofuel source that has no direct effect on the global food supply? We expect more money will be flowing in this direction very soon.

“Why can’t farmers make a profit,” asks a reader, “and why are they leaving farms in droves?

“The answer is easy: government subsidies. Over the last 70 years, government money has ruined farming, and made it a ridiculously costly, wasteful business, subsidizing the big at the expense of the small, who will always be the backbone of national character. About 10% of subsidy recipients receive over 80% of all subsidies.

“Has the money done any good? Just drive through the countryside and see, where rotting silos and milk barns mark the graves of dairies past, and no dirt is to be seen anywhere, because there are no farmers to turn it over. America now imports huge amounts of food. Why? Because conventional American agriculture is so successful? No, because it’s a costly dinosaur kept alive long past its time by government money.

“The new agriculture is coming with low inputs, intensive grazing and few chemicals. Small farms thrive on it, making huge profits where the high-input, industrialized, chemical-addicted, government-trained and subsidized farmers couldn’t grow a turnip. The old agriculture is dying, and the silly ethanol programs are merely symptoms of its disease.

“The sooner it dies, the better we will all eat, and the more farmers will be able to return to the land.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “Rumors have run hot and cold,” writes Dave Gonigam, “ever since Fidel Castro’s birthday passed on Aug. 13 with no speech, no letter, no pictures, not even a possibly years-old audio recording in the style of bin Laden.

“This particular episode speaks volumes about what happens when large numbers of people fervently, desperately want to believe something in the face of little or no supporting evidence. The large numbers of people are the Cuban exile community, and what they want to believe is that Fidel Castro is dead.”

It may not be true, now. But Castro will be dead at some point. The question is: Will Castro’s death spontaneously trigger some kind of counterrevolution, undoing 48 years of destruction? Probably not…comment here .

P.P.S Bill Bonner is a funny guy. He’s been poking fun at Thomas L. Friedman for years. Mostly because Friedman’s a simplistic, didactic moron, but also because his books are so widely read. Today, Friedman gets a chance to defend himself… or so we think. There’s an off chance, Bill may have written this himself.