• Federal Reserve alters yearly forecast… even the moneymakers see a gloomy 2008
• FOMC minutes reveal more rate cuts to come… but perhaps a “rapid reversal” soon after
• Great modern minds collide… Volcker, Richebacher, Roubini add their thoughts to the state of the union
• Major agriculture CEO warns: Without a record grain crop in 2008, “I believe you’d see famine.”
• One of the few subprime-proof housing markets skyrockets to new highs… the sickening details below
• Plus, in The 5’s inbox: The “vanishing money” debate rages on…

The Federal Reserve published a revised outlook for 2008 yesterday. It’s not good. Especially by their standards.

In the minutes of their Jan. 22 and 30 meetings — and the transcript of a secret emergency conference call on Jan. 9 — we see the following forecasts:

Economic growth: 1.3-2% in 2008, revised down from an October forecast of 1.8-2.5%
Unemployment: 5.2-5.3%, up from 4.8-4.9%
Core inflation: 2 — 2.2%, up from 1.7-1.9%.

Mr. Bernanke and his friends blamed “further intensification of the housing market correction,” “tighter credit conditions amid increased concerns about credit quality” and “ongoing turmoil in financial markets” as reasons for the downward revisions. Oh… and “higher oil prices.”

Still, not one of the 8,704 words in the release could be rearranged to spell R-E-C-E-S-S-I-O-N. So at least we don’t have to worry about that.

Or this: The FOMC said that its 125-point cuts in January “would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources.”

Translation: A slowing economy — consequently slowing demand for raw materials — will put the kibosh on any bad things that might happen as the dollar gets crushed. The Fed did, however, leave the door open for a “rapid reversal” in policy, should the need arise. After all, the Fed’s charter says it’s supposed to promote “price stability.”

To review: Cutting rates won’t increase inflation, because the economy is slowing down. But raising rates quickly will stem inflation in a pinch. Got it?

What happens to the economy, then? Hmmmn….

A lot of smart people think Bernanke and the Fed are fast running out of bullets.

You may recall when we interviewed former Fed Chairman Paul Volcker for I.O.U.S.A., he cautioned Bernanke not to let inflation get started, because once it does, fixing it may not be as simple as a “rapid reversal” in policy.

And readers of the late Dr. Kurt Richebacher would have to agree… Kurt’s gotta be rolling over and over in his grave right now. When we were working with him on his opus in Cannes in August 2006, apart from trying to disprove the monetarist view of the Great Depression, Dr. Richebacher was extremely concerned about two things: a “balance sheet” recession among banks and the Fed’s inability to address the crisis with “monetary policy.” Monetary policy, in Kurt’s view, always fails in the long run.

With the billions in write-downs still pouring in from major global banks on a daily basis, it’s no mystery what a “balance sheet” recession looks like… now we’ll see how long the Fed can hang on trying to inspire consumers with cheaper and cheaper money before “price stability” becomes a quaint notion of the past.

Last week, the economist Nouriel Roubini cooked up a 12-step doomsday scenario explaining how failing monetary policies might wreck the global economy. Martin Wolf, writing in the Financial Times, paraphrased him in this way:

“Step one is the worst housing recession in U.S. history. House prices will, he says, fall by 20-30% from their peak, which would wipe out between $4,000-6,000 billion in household wealth. Ten million households will end up with negative equity, and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more homebuilders will be bankrupted.

“Step two would be further losses, beyond the $250-300 billion now estimated, for subprime mortgages. About 60% of all mortgage origination between 2005-2007 had ‘reckless or toxic features,’ argues professor Roubini. Goldman Sachs estimates mortgage losses at $400 billion. But if home prices fell by more than 20%, losses would be bigger. That would further impair the banks’ ability to offer credit.

“Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The ‘credit crunch’ would then spread from mortgages to a wide range of consumer credit.”

Steps four-12 are a swirling Charybdis of defaults, write-downs and deleveraging of hedged bets on a global scale. If nothing else, Roubini’s list
is worth considering.

In the end, the Fed could be ineffective in dealing with the onslaught of bankruptcies, for some of the following reasons: “U.S. monetary easing is constrained by risks to the dollar and inflation, aggressive easing deals only with illiquidity, not insolvency… overall losses will be too large for sovereign wealth funds to deal with, public intervention is too small to stabilize housing losses, and regulators cannot find a good middle way between transparency over losses and regulatory forbearance.”

“I place the beginning of ‘the Greater Depression’ in January 2007,” writes our friend W. Curtiss Priest, who heads up the Center for Information, Technology & Society at MIT “corresponding with the first month that the Shiller/Case/S&P home price composite index turned negative.”

Hey, they don’t call this the “dismal science” for nothing.

By the end of the day, futures in Chicago priced in a 100% chance of the Fed cutting again in March.

And the markets cheered. Never mind $100 oil, sharply rising consumer prices, a gloomy spate of economic data… the hint of another rate cut coupled with a great earnings statement from HP was enough to move the Dow, S&P 500 and Nasdaq up nearly 1% apiece.

Good vibes in the U.S. shimmied across the oceans, too. A quick glance at our favorite world market sites shows a sea of green. Just about every benchmark index in Asia and Europe ended higher overnight, most by 1.5-2%.

For its part, the European Union tried to one up the Fed yesterday with its own dour outlook on economic growth in the eurozone. The EU cut its growth forecast to 1.8% this year, down 0.4% from its last release.

And guess what… markets are up in Europe this morning, too. Go figure.

“If you had any major upset,” warns William Doyle, CEO of Potash — the world’s largest maker of crop nutrients — “where you didn’t have a crop in a major growing agricultural region this year, I believe you’d see famine.”

Global grain supplies briefly touched all-time lows late last year, and have barely recovered since.

“We keep going to the cupboard without replacing,” Doyle explained to Bloomberg this week, “and so there is enormous pressure on agriculture to have a record crop every year. We need to have a record crop in 2008 just to stay even with this very low inventory situation.”

“There’s no room for error,” laments our resource trader Kevin Kerr. “Feels a lot like the energy refining situation in the U.S. One bad weather scenario and suddenly we have a whole different pricing matrix. If we get a drought here like they suffered in Australia last year and it impacts soybeans during the critical pod stage, or if it were to roast 50% of the corn prior to harvest, imagine where that would (will) send prices.

“My advice, stock up on those cheap soybeans at 13.50 and $5 corn.” If you need additional trading advice on the ever hot commodities market, check out Resource Trader Alert here.

While home sales across the U.S. fell an average 13% in 2007, Manhattan apartment sales rose 3.2%, says a study by CBS. Likewise, as the national average home price fell 1.8%, to $217,000 last year, the average Manhattan apartment sold for $1.4 million — an all-time high.

“According to three different real estate firms,” says the CBS story, “the number of apartments that sold for more than $10 million in the city last year tripled over those sold in 2006. Brokers say they haven’t seen this kind of action since the dot-com boom of 2000.”

To that, add this
:

18 E. 68th St.… it could be all yours for a cool $64 million.

The 103-year-old mansion, formerly an apartment building for some seriously “old money” city dwellers, was recently converted to a single unit. Thus, one family might soon enjoy its 15 bedrooms, 17 bathrooms, seven fireplaces and — of course — spacious ballroom.

The whole building was sold, as an apartment building, for $7.6 million in 2003. It changed hands again last May for $39 million. Thus, nine months and the prospect of just one family living in this mansion have nearly doubled its “value” to the most expensive officially listed home in Manhattan.

When this bubble pops, don’t say we didn’t warn you.

Oil prices climbed to a fresh high yesterday of $101.32 per barrel yesterday, not long after the Fed released higher inflation forecasts. For what it’s worth, we don’t see oil backing too far off this level until at least March 5, when OPEC meets again. And the “SOS”
have a chance to stick it to the empire once again.

Gold showed signs of bouncing out of its consolidation phase this morning. The metal leapt to $948 per ounce overnight. Spot prices climbed to a new high in aftermarket U.S. trading yesterday and have held steady near their new record since.

“Gold got a boost from inflationary price data,” writes our friend Doug Casey, “as well as the release of the FOMC’s last meeting minutes, which suggests that the Fed is focused right now on propping up the economy at the expense of the dollar.

“Gold as an inflation hedge is clearly getting some play.”

Currency traders gave back most of the dollar’s recent gains yesterday. The dollar index fell back to 76 even. The euro rose a full cent, back to $1.47. The pound bounced off 10-month lows, rallying 2 cents, back to $1.95. The yen remains at 108.

“That money didn’t vanish,” a reader quibbles, responding to our coverage of the total subprime mess wiping out some 7.7 trillion bucks. “The value vanished. You pay $70 for a stock that drops to 30 cents… your value or equity has vanished, but the person whom you paid the $70 to still has the money, so it has not vanished.

“The banks got $7.7 trillion from somewhere (depositors, the Fed, etc.) and loaned or paid it out in exchange for deeds of trust and various derivatives. Someone got that money. Then when the deeds of trust and derivatives dropped in value, the banks no longer had the assets on their balance sheets, nor the ability to get the money back.

“My guess is that most of this money ended up in foreign sovereign wealth funds. The money in those funds had to come from somewhere, and it probably came from all the people who got the equity loans or who sold their price-inflated houses and then bought all kinds of ‘essentials’ from China.”

The 5 responds: Semantics. In a fractional reserve system in which banks can “create” money out of thin air, it can just as easily vanish… as our next reader points out:

“This reader, like so many others,” he writes, “can’t get a grasp on the nature of the so-called ‘money’ supply. Most still have a mental image of money as something tangible, as witness his reference to someone putting a match to it.

“He needs to understand and come to grips with the reality that the overwhelming amount of the money supply is simply computer numbers or paper documents with zeroes added on as needed, therefore easily created and easily destroyed, as we are witnessing. The only tangible and true money remaining is gold and silver, both indestructible.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S.
One way to safeguard against a slowing economy or declining stock market is by following what one of our top analysts calls “the paddle strategy”…check it out for yourself.

• The 5 translates the latest “Fed speak”… stagflation still around the bend?
• Average Thanksgiving feast will cost 11% more this year
• Dollar visits new lows, pushes oil to $99
• How school teachers and firemen could be stung by an SIV sell-off.
• 1 in 10 hedge funds to fail, says industry insider

The Fed released the minutes from its last meeting yesterday. Apparently, the decision to cut rates was a “close call.” Only one member voted not to send the dollar to the depths of oblivion. The rest agreed to do so reluctantly.

During the meeting, the FOMC members “viewed financial markets as still fragile,” says the release, “and were concerned an adverse shock… could further dent investor confidence and significantly increase the downside risks to the economy.”

Translation: Subprime is a bigger threat to investment bank balance sheets than expected. One more piece of bad news and investors won’t be helping us buy our yachts anymore. That could, in turn, be bad for everyone else.

“With real GDP likely to expand below its potential over coming quarters,” the release continues, “recent price trends favorable and inflation expectations appearing reasonably well anchored, the easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation.”

Translation: The economy is addicted to cheap credit. Since subprime put the squeeze on credit markets, we have cut interest rates. So far, cuts don’t seem to be causing prices to rise too much for ordinary folks. But it’s likely to slow the economy down, a little.

The Fed lowered its 2008 growth forecast from 2.5-2.75% to 1.8-2.5%.

According to futures contracts, “investors” are betting a 92% chance the Fed will cut rates again on Dec. 11.

Yet the view from the cheap seats still looks like increasing inflation and slowing growth… stagflation, if you will.

“I’m going to go to war with the Fed!” decrees Chuck Butler, with our most outspoken critique. “Our central banker has lied to us! At the Fed’s last meeting, it told us the risks were balanced between growth and inflation…

“Hmmm… If that’s so… Then why did it lower its forecasts for growth next year and suggest that expansion won’t reach its trend rate until 2009? I’ll tell you why… Because it knew it all along, and was hoping to get this news swept under the rug.”

“Reasonably well anchored” inflation has driven the cost of the average Thanksgiving dinner up 11% this year, reported the American Farm Bureau yesterday. Prices rose over $4 per family, sending the national average dinner price up to $42.26 for a meal for 10.

This one won’t get a pardon…

U.S. stocks registered modest gains yesterday. The Dow and S&P 500 rose about 0.4% while the Nasdaq squeaked out a 0.1% gain.

The dollar, on the other hand, sank to new record lows. The dollar index found a new low at 74.9 this morning. The euro traded as high as $1.48 overnight, up over a cent and a half since Monday. The pound regained some ground of its own, climbing back to $2.06.

But the “carry trade” currencies grabbed the big headlines, once again. The yen rallied versus all 16 major trading currencies to 108 — a two-year high. The Swiss franc leapt to highs of its own. At 1.105 per dollar, the franc joins the club of current all-time highs versus the greenback.

And with another record low for the dollar came more record high oil prices. Oil traded as high as $99.29 yesterday, its all-time intraday high. Aside from the latest surge in dollar weakness, two significant refinery outages seemed to be all the news traders needed to propel oil prices to new highs.

As we write, oil has backed off its high to about $98 per barrel.

Gold prices went through the roof yesterday and overnight. Gold pulled itself out of its $775 gutter and rallied $30, to $805. Prices have now stabilized around $800.

The number of potential defaults on home loans “will be significantly bigger” in 2008 than this year, suggested Treasury Secretary Hank Paulson yesterday. Thanks for staying on top of things, Mr. Secretary.

Investment management monolith BlackRock will probably be the steward of the $75-100 billion SIV-saving superfund created by Bank of America, Citi and J.P. Morgan Chase. In the interest of “fairness,” BlackRock analysts will evaluate the prices of distressed SIVs entering the fund and ultimately decide when to sell them back to the market and at what price.

While BlackRock’s involvement is supposed to make this whole SIV superfund more impartial and objective, we’re yet to be impressed. For starters, 49% of BlackRock is owned by Merrill Lynch. And BlackRock CEO Larry Fink was practically the inventor of the mortgage-backed security… that’s what a normal person would call a “conflict of interest.”

The fund may be up and running by January.

“SIV debts could be a disaster for public investment pools,” Mish Shedlock of The Survival Report tells us. According to a recent Bloomberg special report, thousands of school, fire, water and other local districts in the U.S. are invested in state/county-run investment pools.

Many of such pools are infested with SIV debt once thought to be investment grade, but now suspected to be filled with subprime-backed securities. Public fund managers have historically modeled their funds after private money market funds… now the same toxic debt that plagues the likes of Citigroup and Merrill Lynch is jeopardizing in excess of $200 billion in public investment pools.

“The people managing those pools had absolutely no idea what they were buying,” says Mish. “No doubt they all thought they were geniuses, too, even as every single one of them blindly bought anything top rated as if there were no risk to the extra yield they were receiving.

“This is yet another painful lesson in the well-established concept of ‘there is no free lunch.’”

“No doubt this will lead to calls for government regulation of the rating agencies, when it was government sponsorship of the big three rating agencies that created the problem. This disaster for public schools is just another in a long list of reasons why it’s time to break up the credit rating cartel.”

Mish has created quite a SIV-proof portfolio for his Survival Report readers through a system of puts and shorts in the banking sector. Some are still below their “buy” price: [

Click here for more…

More than one in 10 of all hedge funds will go out of business this year, suggests Peter Clarke, CEO of Man Group — the world’s largest hedge fund manager.

“Historically, the hedge fund world has seen somewhere between 5-7% attrition rate in terms of funds closing or ceasing business; I would expect to see that, and this is a pure guess, of course, maybe reaching twice that,” suggested Clarke in this morning’s FT. Clarke expects the “quiet withering” of hedge funds to continue into 2008 as low performance and the worsening credit crisis dim investor interest.

Yesterday, we looked at some $38 billion in bonuses given out by Wall Street firms this year. Today, we’ve got another one… a signing bonus worth $15 million and then some.

Merrill Lynch’s new chief John Thain received a 1.8 million stock option/500,000 stock unit bonus for joining Merrill. At current share prices, that’s a $28 million gift. What’s more, if Thain can bring Merrill stock back up to its YTD high of $98, that bonus will grow to over $140 million. If he can’t, well… he’ll just have to settle with his $750,000 salary and $15 million cash signing bonus.

Where are the customers’ bonuses?

“You did not really answer the question,” opines a reader in response to yesterday’s discussion of Hugo Chavez. “Why do you call a democratically elected president a dictator? By the way, this is not a polemical question; I truly would like to understand why most journalists in America call him a dictator.”

“Chavez is a dictator,” writes another reader, inadvertently answering for us. “Anyone who thinks differently is obviously either a proponent of his form of Marxist/fascism (or is it fascist/Marxism?) or an ill-educated twit.

“President for life. Eliminate your protagonists using thugs and violence or confiscation by decree. Shut down any media that won’t parrot the Chavez line. Nationalization of value from those who have invested their money and efforts. Using the army and refusal to pay fair market value for the nationalized values.

“Chavez, like his mentor Castro, is a cheap, murdering, Latin American dictator from a long line of cheap, murdering, Latin America dictators. It is sad that the Venezuelan people will have to suffer for his ego.”

We’ll leave you to mull over this debate as you digest your holiday bird. If you care to comment, write us here. Otherwise, we’ll talk on Monday.

Happy Thanksgiving,

Addison Wiggin
The 5 Min. Forecast

P.S. Some breaking news from our small-cap research desk: One tiny company controls the technology that could be in 80% of new cars in less than a decade. A pair of recent contracts pushed the stock up 195% in the last four weeks…

It only gets more exciting from here — one small sector of the industry this company leads could grow 510-fold every year for the next 10 years. A respected transportation authority recently stated that 228,000 hybrid electric vehicles have been sold in the United States so far this year.

But — here’s the kicker — a major research firm has predicted that by 2015 — as many as 80% of all vehicles sold could be hybrid electrics! Our small-cap sleuth Greg Guenthner will be filling you in on details later today… look for them.