• The cyclo-cross illustrates our quickly crashing market
• Sovereign wealth funds giving up on their rescue attempts
• China creates its own $586 billion stimulus
• Greg Guenthner talks about “low” oil prices…and short-term opportunities
• Restructuring the AIG bailout plan

• Gold prices dive… the AF team tells you why and what to expect next
• Greenspan’s cuts created a housing bubble — our bet on where Bernanke’s cheap money will flow
• Frank Holmes on a $1.5 trillion growth story
• Has the market found a bottom? Dan Denning’s signal for when the crisis will end
• Gas prices back down… is there a price that will make consumers stop driving altogether?

Wow. Gold investors took profits overnight with abandon. Spot gold dropped $100, to $910 — a level last seen in mid-February and the biggest downward 24-hour move for gold in 28 years.

“After a great run for gold in the first 10 weeks of 2008,” writes Byron King, “large funds are taking profits to round out their first quarter. Some are liquidating to meet margin calls. When gold passed $1,000 and moved up toward $1,030, there was a serious drop in physical demand, particularly from the jewelry users. Demand from India just plain fell off a cliff.”

“There were also rumors circulating yesterday,” adds gold aficionado Ed Bugos, “the futures exchanges were going to raise margin requirements on some commodities, but no one knew which ones.

“Then the Chinese central bank increased its reserve requirement ratio for banks by 0.5%, to 15.5%. This might have had some effect on the commodities markets. Chinese demand is a big driver for most of them.

“But let’s get real,” Ed concludes. “The Fed is pumping a lot of money into the financial system, it has dropped interest rates by more than half in eight months and it’s using Depression-era loopholes — all in an effort to heap mounds of liquidity on the mortgage crisis. Inflation can only continue to spread. The crowd that is bullish on gold for the right reasons is a relatively small crowd, but the Fed is proving them right at every turn.

“The current slide in gold should be enough to shake off these short-term negatives and give bulls another window of opportunity to accumulate gold positions for a second run at $1,000. I think we’ve seen the worst of it on this go-around.”

For more on Ed’s favorite stocks for the next leg of a gold rally, click here.

But gold was only the most visible commodity to get sold in earnest yesterday. Oil retreated by its greatest margin in over 17 years yesterday, too.

The oil market greeted a positive supply report by dropping five bucks in the New York session alone, closing in the U.S. at $104.

Not only did supply increase 200,000 barrels, but the U.S. government also announced it’d be adding 700,000 barrels to the Strategic Petroleum Reserve. Traders in Asia kept the spirit alive and sold the black goo down to $99 a barrel.

The last time oil fell by more than $5 in one day was Jan. 17, 1991 — the day the U.S. started the Gulf War.

Wheat prices in Chicago trading dropped the maximum daily loss the Chicago Board of Trade will allow. Futures for May delivery dropped 90 cents, to $10.74 a bushel.

That’s 20% off its all-time high of $13.49 from late February.

In addition to wheat, oil and gold… you can add every other commodity under the sun. The commodities correction we’ve been expecting happened in a very short span of time. The CRB Index, which tracks 19 tradable commodities, dropped 5.7%, from 405 to 382.

“I will not be surprised that two-three years from now,” Kemal Dervis of the United Nations Development Program suggested yesterday, “we realize that the liquidity and macro boost generated to fight the subprime housing crisis ended up fueling a commodity bubble.”

In fact, a full-year look at the CRB looks a little heavy:

“Each time, financial markets overshoot and macroeconomic policies are forced to react to the ensuing bust by encouraging, unwittingly, another bubble somewhere else. It may well be the commodities that are now rising in price at an unreasonable and unsustainable rate.

“We may again, then, be faced with fighting the negative consequences of an unforeseen downward adjustment.”

“It’s plausible a commodity bubble could be next,” comments our Chris Mayer. “We’re not there yet, but if this plays out, commodities could really go parabolic, and investors stand to make a ridiculous amount of money as we ride to that peak.”

“The key, of course, will be to know when to get out. But I think we’ve got some time yet.”

On the other hand, insatiable demand from China and India are placing real upward demands on the market for commodities.

“China and India have come out with these five-year plans,” our friend Frank Holmes reminds us. “When you combine them together, it’s almost $1.5 trillion to spend on infrastructure over the next five years. In 1970, basically, ‘Chindia’ had no global footprint. Today, they are 40% of the world’s population, growing at 10%.

“During this period, we have not been finding enough commodities to meet the fact that the world’s population went from 3 billion to 6.5 billion people. In fact, the whole population of the world in 1970 now lives in city centers. The commodity pricing does not impact their budget as much as it has impact here, because our salaries are so much higher. These are very important global shifts.”

Mr. Holmes is a crowd favorite at our Vancouver event every summer. We’re taking reservations for A View From the Peak: Seeking Profits in a Time of Risk and Scarcity as we speak. Discounts are still available. But if you’re planning to attend, you should reserve your spot soon… they are filling up fast.

Given all the drama in the commodities pits, you might be surprised at how aggressively the stock market sold off. The Dow, S&P 500 and Nasdaq handed back the majority of Tuesday’s record-setting gains with losses of 2.5% and more. Energy and commodity stocks got hit the hardest.

“I remind you that the current crisis is both a liquidity and a solvency crisis,” writes Dan Denning. “Whole swaths of mortgage-backed securities are still out there and still carrying AAA credit ratings.

“The Fed’s willingness to make money available or to accept mortgage-backed collateral may loosen up credit markets. But it won’t and can’t improve asset quality. The solvency issue — the concern that banks may still be sitting on losses that could wipe out their capital and shareholder equity — won’t go away anytime soon.

“This crisis isn’t going to go away until losses on mortgage-backed securities are fully realized.”

Today could be a doozie for stocks, as well. But for other reasons than direct asset quality. A rare “triple witching” Thursday will throw fuel on an already fiery market. March stock index futures, stock index options and stock options all expire today.

Chances are good you’ll see traders go for a ride as they scramble to exit their positions.

In an equal and opposite reaction, the dollar has been steadily rallying since the Fed’s rate cut on Tuesday. The dollar index rose a point and a half, to 72.8, this morning.

The euro shed two full cents versus the dollar, to $1.54 as we write. The pound and loonie fared the same, down to $1.98 and 97 cents, respectively. The yen returned to 99.

On the consumer front, gas prices failed to reach another record high yesterday for the first time this week. AAA says the national average price at the pump is now $3.27.

Nearly three out of every four Americans polled by CNN say recent gas price increases “have caused financial hardship for them or their households.”

Unleaded prices are up about 28% since this time last year. The latest Commerce Department report showed gas station sales were down 1% in February, despite higher gas prices. If gasoline hits an average of $8 a gallon, says the poll, “most Americans said they would quit driving altogether.”

Heh… we’ll see about that.

The Conference Board’s measure of leading economic indicators furthered its longest losing streak in seven years today. The group’s index assembles economic data like jobless claims, building permits, vendor sales and market performance and bunches them into one score that’s meant to predict the overall business cycle.

The Conference Board’s latest leading indicators measure fell 0.3%, to 135. That’s the fifth straight month of decline, its worst losing streak since the tech bust.

We end today with a spot of poetic irony. Even Ben Bernanke is losing money on his home. According to a Bloomberg report published today, the value of the Fed chairman’s home in Washington has fallen around $260,000 from its $1.1 million peak in 2006.

He paid a humble $840,000 for a Capitol District row home back in 2004 when he moved to town for job-related reasons. Like a good chunk of Americans, he’d be lucky to break even on his home today.

Regards,

Addison Wiggin
The 5 Min. Forecast

• Fed fright… Bernanke sets up multibillion-dollar emergency CDO bailout
• Even the queen is worried about water… her majesty on the next “potential conflict”
• Food prices lead explosive Chinese inflation… plus charts showing food prices in U.S. growing rapidly
• Has The 5 reversed its gold prediction? Bill Bonner on the future of precious metal prices
• Plus, “the John Galt plan to save the economy”

You have to admit, widespread panic at the Fed is entertaining.

One week after calling “Mulligan” on the entire mortgage bubble, Bernanke is suggesting we pass the entire mess onto the next generation. God forbid the baby boomers ever take responsibility for their own actions.

The Federal Reserve announced this morning that it will make an additional $200 billion available to strapped lending institutions. But instead of firing up the printing presses and going about business as usual, the Fed has unveiled a whole new plot, and a handy acronym to go with it: Term Securities Lending Facility (TSLF).

The new initiative, like the old Term Auction Facility (TAF), will provide short-term loans to distressed financial institutions. But instead of enticing banks with cheap interest rates, the Fed is now offering to swap mortgage-backed securities for U.S. Treasuries.

Thus, a bank swelling with Fannie Mae and Freddie Mac paper and other “AAA” mortgage-backed assets can unload it on the Fed for the next 28 days. The Fed wants banks to take that money and lend to the masses, thus stimulating the economy. No word yet how much additional debt it will take for the government to absorb this mess.

The new TSLFs will begin on March 27.

U.S. markets loved this idea. The Dow leapt up like a leopard after a gazelle on the news — up 2% within minutes of the announcement this morning.

And not a moment too soon, Jim Cramer would say. Yesterday, the Dow lost 1.2% in its fifth day of losses out of six. The S&P 500 and Nasdaq were down 1.5% and 2%, respectively.

Yesterday was an ugly day for homebuilders. Hovnanian reported contracts for the first quarter were down 41% from the same period last year. The actual dollar value of those contracts fell as well, by 50% year over year. For the first quarter, the homebuilder reported a net loss of $130 million… twice the size of its first-quarter loss in 2007.

Another homebuilder feeling the housing pinch, KB Home, announced its closing operations in New Mexico, Illinois, Maryland and Virginia. The company posted a $772 million loss in the fourth quarter, 15 times the size of its fourth-quarter losses in 2006.

Do you think it’s possible that Queen Elizabeth II of England is reading The 5? If not, she’s getting awfully close to plagiarizing one of our drumbeat themes.

“The competition for fresh water by a growing population is itself becoming a source of potential conflict,” the queen warned her subjects yesterday. Her majesty shared a few words on Commonwealth Day regarding precarious scenarios surrounding the Nile. “This river is a fragile ecosystem and its vulnerability grows with the number of people dependent upon it, so that a single incident of pollution upstream may affect the lives of countless numbers downstream.”

“Water is going to be a priced commodity,” the U.K.’s chief scientific adviser echoed last week. He warned that food and water security could be “enormous problems” as the crisis slowly develops. Here, here. Harrumph… grumble. Ha-hem.

In the U.S., water isn’t as sparkling clean as you’d like to think. A five-month study conducted by The Associated Press found trace levels of ibuprofen, antibiotics, anti-convulsants, antidepressants… even sex hormones in the drinking water of at least 41 million Americans.

Among the hundreds of different drugs found floating in U.S. tap water, the AP reported that all were far too diluted to be considered medically useful. Darn. For what it’s worth, Philadelphia fared the worst… over 56 pharmaceuticals were found in Philly tap.

Your editors have been looking for an excuse to drink more wine and coffee anyway. Cheers.

Chinese consumer inflation grew at a stunning 8.7% in February – its fastest pace in 11 years. Food prices alone in China boomed 23% in a 12-month period ending last month. According to Bloomberg, pork prices are up 63%.

The Chinese central bank has raised rates six times over the past year, up to 7.4%, but to no avail. Rapid growth, an undervalued currency, all shades of farming crisis, a gnarly winter storm and loss of arable land to ineffective transport solutions are all factors with which even the most organized central government would have a bitch contending.

Then again, food prices in the U.S. aren’t faring much better. We present this chart, courtesy of The Boston Globe:

“As the prices of food commodities rise,” writes our crisis and opportunity champion Chris Mayer, “companies are starting to make changes to how they produce your food. This you might not want to know. Sara Lee, for example, is reformulating its breads using cheaper, lower-protein wheat.

“Food producers across the board face stiff increases in the price of certain commodities. Campbell’s Soup will cut back on the number of ingredients it uses in its soups. Some companies have much less wiggle room. If you’re Hershey’s, for example, you’ve got to worry. Hershey’s relies on expensive commodities such as milk, sugar and cocoa. There’s not a lot you can do. If you’re Tyson Foods, you need grains, which are trading near record highs.

“Commodities may face a nasty pullback, given the sharp rise in prices lately. But on the other hand, given the fall in the dollar and flow of money into commodities, it seems to me that commodity prices will only head higher.”

The U.S. dollar is doing its part to keep the commodity boom alive, too. The dollar index shimmied down to yet another record low this morning: 72.4.

The euro inched a bit further into the record high level of $1.54. The pound remains on the high end of $2.01. But the yen backed off a bit… down to 102.

Oil rolled right through previous record highs yesterday, to a new all-time high this morning of $108.

“The U.S. economy is, indeed, showing further signs of slowdown,” commented a slightly panicky spokesman from the International Energy Agency (IEA) today. “We are in an era of higher oil prices. If we look at $100 per barrel of oil, we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade.” You really think?

The IEA went on to lower its demand forecast for 2008, but only by a very small margin. Currently, the agency expects demand to grow 2% this year. Its expects gasoline demand to slow with the economy too.

Let’s hope so. U.S. gas prices have reached a new all-time average high of $3.23. Hawaiians are already paying $3.60 per gallon. Californians, $3.58.

Diesel has reached a record high of $3.84.

Gold rebounded this morning from yesterday’s sell-off. Spot prices shot up $20 over the past 24 hours, to a price this morning of $985 per ounce.

“Do I detect a subtle ‘changing of gears,’” asks a reader, “in your notorious bull posture with respect to gold? Seems several of you folks are taking a CYA (cover your ass) position recently?”

The 5 responds to this reader: Busted. Our position with respect to gold is only a marketing ploy to get you to buy our newsletters. Too bad it’s gone up 390% since we began recommending it at $253 in early 2000. You would have been much better off investing in tech stocks back then… and piling all your profits into real estate. Sorry to have inconvenienced you with our opinions. Thanks for reading all the same.

The 5’s response, if you’re not a cynical jackass: Of course, we get nervous when any asset we’re recommending goes up almost 400%. Show me an investor or analyst who isn’t trying to “cover their ass” every day. As our Ed Bugos points out, “Nothing goes up in a straight line.” But while a short-term correction is likely, nothing has changed with respect to the long-term case.

Here’s our most “notorious” gold bull, Bill Bonner, with an attempt to explain why:

“Even at today’s price around $975, gold is still less than half the inflation-adjusted high it set the year Ronald Reagan moved into the White House. And think of all that has happened since then! For one thing, more gold has come onto the market. Gold is never destroyed or used up. Still, an additional ounce of it is much harder to make than a crisp, new $100 bill. You have to find it and then dig it up out of the ground. That’s why the world’s gold supply increases only about 2-3% per year.

“But the supply of the paper money — in which gold is calibrated — goes up much, much faster, at least four or five times as fast over the past 30 years. And the world’s assets — also measured in paper money — have skyrocketed too. Our houses are worth three, five, 10 times as much as they were in the early Reagan years. So are our stocks. What’s more, now there are trillions of dollars worth of tradable financial assets in places where none existed at all in ‘79 — such as in India, China and the former Soviet Union.

“Gold began floating on this flood of liquidity nine years ago. It has doubled… and doubled again. Since 2001, it has gone up 240%. Since Ben Bernanke began cutting rates on Sept. 18, 2007, it has gone up 37%. And if you believe in the volume theory of money — and we do — you can reasonably expect its price to keep going up. Gold is, ultimately, money, and it is also the world’s ultimate money. Adjusted for inflation, it will have to go up to $2,500 or so, just to match the peak set in 1980.

“Most likely, it will go far further; we’re no longer young and foolish enough to think we know where.”

“Your reader who suggested he stop paying his mortgage,” opines our last reader today, “was onto something. For those too young to remember the savings and loan bailout, the only way to get the attention of the Resolution Trust Corp., the government bailout agency, was to stop making payments.

“The only people who could even make offers on the loans were the politically connected, which probably explains why our dear politicians never passed any legislation to prevent a repeat. The Keating Five and the Clintons and Whitewater were just some better-known examples. I speak from experience, having spent two years trying to buy the loan for a large apartment complex from the RTC.”

The 5: Caroline Baum suggests as much in a recent column on Bloomberg. “Any day,” she writes, “I expect some government official to unveil the John Galt plan to save the economy.” Galt, if you’re not familiar, is the iconic hero of Ayn Rand’s Atlas Shrugged — an entrepreneur, tired of government meddling, goes on strike and encourages his fellow producers to do the same. Once the world starts falling apart, the government kidnaps Galt and asks him what they should do. His plan to save the economy: “Get out of the way.”

“Today’s economic and financial crisis,” resumes Baum, “would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

“That’s not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

“We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It’s a tough way to run an economy.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

• U.S. markets plunge again… which major benchmarks are back to 2006 levels
• Gold retreats… Ed Bugos on “the key to breaking past $1,000”
• Copper’s on a tear… Chris Mayer on the “biggest driver” behind the future of industrial metal prices
• Gas prices tie record high… Why $3.22 might soon seem cheap, and a way to invest in gas’s future
• Dan Amoss demystifies the crisis at Carlyle Capital… and how its problems could spread across the market
• Plus, The 5 “defending Prince, O’Neal or Mozilo?” Our explanation, below

After the BLS’ less-than-hopeful jobs report Friday, U.S. stocks fell to fresh lows. The Dow dropped more than 1%. The S&P shed 0.8%.

At 11,893, the Dow hasn’t been this “cheap” since October 2006. The S&P is even worse, now at August 2006 lows.

The dollar sold off all through the weekend, too. Against our favorite basket of currencies — the dollar index — the greenback sank to another record low of 72.6. The euro, for its part, climbed to a record high $1.54. The pound broke back up to $2.02.

The yen climbed as high as 101 — as strong as it’s been in eight years.

Out of step with the dollar, gold backed off its recent all-time high, all the way down to $966 this morning.

“Gold is done rallying based on oil breaking through $100,” Ed Bugos tells us, “or platinum through $2,000, or because the U.S. dollar is reeling into the abyss.

“The key to breaking past $1,000 for gold now is that the market can be driven by an increasing focus on the falling value of money. The world has yet to wake up to the fact that this is not just a dollar problem. It runs much further and deeper than that. The dollar happens to be the generally accepted reserve currency. But it is only at the center of a sea of fiat currency regimes flooding world markets with their own brands of liquidity.

“Should the market realize that the world is in the midst of a revolution in prices caused by misguided monetary policies (run by politicians) and broaden its focus beyond the Fed, or the dollar, it could easily take gold to $1,400 by June.

“All it would take for $2,000 is news that the Chinese government has begun to accumulate gold reserves.”

[Special to The 5: We’re putting the finishing touches on Mr. Bugos’ Gold & Options Trader. It’ll be a fine resource if you’re interested in trading the precious metals and the mining markets. For a limited time, you can also reserve your spot in advance by checking out in the Resource Reserve: a discount offer which includes all our top-rated, award-winning resource services, including Outstanding Investments, Resource Trader Alert, Energy & Scarcity Investor and the soon-to–be-released Gold & Options Trader. Learn about it here.

Like most of the finer commodities in the world, copper is trading near all-time highs:

Speculators have been expecting the flailing U.S. housing market to slam the door on rising copper prices. After all, if McMansions aren’t being lined with copper any longer, how could prices possibly continue to rise?

Again, the answer seems to lie abroad.

“The biggest driver behind metal prices such as copper and aluminum,” explains Chris Mayer, “is the huge global demand for infrastructure. Morgan Stanley estimates that emerging markets will spend $21.7 trillion on infrastructure over the next 10 years. Power plants, roads, bridges, airports.

“One sleeping giant in all of this is India. Certainly, when you compare India’s consumption of metal on a per capita basis with that of other countries, you see enormous room for growth.

“This is not idle wondering. This has real merit, like mixing vodka and tomato juice. Increased metal consumption is practically a given. India desperately needs more power. (See chart below.) And India’s government will spend billions of dollars adding around 600 gigawatts of electricity by 2030.

“All of this infrastructure requires a lot of metal, especially copper. Hence, one of the hot growth sectors in India is its metals and minerals. Most investors tend to think of India’s famous technology companies. But here is an industry still in the early stages of growth.
India has substantial deposits of bauxite, iron ore, copper, zinc and more.

“In some of these, India’s reserves are among the largest in the world. With all the demand for metals both from India itself and abroad, India’s production has ramped up significantly. Indian companies are also among the lowest-cost producers in the world.”

After an extensive research trip to India and two long years of research, Chris recommended his favorite Indian base metals play in his recent report on investing in India. You can read it here.

China’s trade surplus plunged 63% in February. That nation’s trade surplus totaled $8.6 billion last month, way down from the $23.7 billion accrued during the same period last year. Chinese government spokespeople blamed weakening U.S. and European demand, and also that nasty winter storm that stranded tens of millions of Chinese workers over Chinese New Year.

Also, not surprisingly, imports are steadily increasing over there. The Chinese brought in 35% more goods last month from the same time in 2007.

Back in the U.S., gasoline prices hit $3.22 this morning — just short of an all-time high set last May. According to a Lundberg survey, the national average shot up 9 cents in the past two weeks, and is up 64 cents per gallon in the past 12 months.

If oil prices are any guide, you can expect to continue seeing prices rise at the pump:

While oil has jumped 45% over the past 18 months, gas has barely budged. Once refinery supplies of oil run down, you can expect gas to once again step up in line with the former’s record rise.

If you’d like to place a bet on gas prices, check out the newly launched United States Gasoline Fund (UGA), a tradable ETF on the Amex.

Victoria Bay, which overseas UGA, also runs the very successful oil (USO) and natural gas (UNG) ETFs. For what it’s worth, they’ve filed for a heating oil fund too.

As always, caveat emptor.

Carlyle Capital, an arm of the Carlyle Group, stands to lose $16 billion in the loan crisis we told you about Friday.

The company admitted today that its creditors could liquidate $16 billion in Carlyle collateral if the company is unable to squirm its way out of margin calls. We also learned today that Carlyle Capital has almost $22 billion in leveraged “AAA” mortgage debt issued by Fannie Mae and Freddie Mac in its portfolio.

Yeah, AAA, indeed.

“Fannie Mae and Freddie Mac’s guaranteed paper was thought to be bulletproof,” explains Dan Amoss, “thus, an entire industry sprouted up to invest in it. This industry, called mortgage REITs, leverages shareholder capital by borrowing short-term debt to invest in mortgage-backed securities.

“Carlyle Capital is one of these mortgage REITs. It used just $670 million of client money to buy a $21.7 billion portfolio of Fannie- and Freddie-backed mortgage securities. How could it buy such a huge portfolio? It borrowed the difference from Wall Street, which now wants its money back.”

Dan’s got his hands deep in the balance sheets of mortgage lenders caught up in this mess… and bond insurers like MBIA and Ambac, which, after putting pen to paper, he calculates are worth far less than their AAA ratings would imply. The politics alone involved with these companies sets them up to be prime “short” targets. If you want a recommendation from Dan on which company he thinks is next to hit the skids, be sure to subscribe to Strategic Short Alert.

“Please don’t forget the real losers and victims in this scenario,” a reader urges us, in reference to Bernanke’s proposed mortgage bailout, “the guy next door that didn’t take out a subprime scam mortgage has lived in his house for a number of years, pays his bills on time and never has missed a payment. His comparable (in an appraisal) is now $480,000.

“The real problem is that the subprime debacle is resetting prices for even the guys that didn’t and don’t have ANY exposure or relationship to the crisis. In the extreme, if prices go low enough and equity is scant enough, even the folks that have NO involvement will need to walk away from their properties.

“Helping out people in trouble is not a bad thing… but let’s make it fair to everyone, not just bail out the poor decisions and greedy bastards that created this situation. What a friggin’ mess! There’s nowhere to hide.”

“Well, if the banks start lopping off principal from outstanding loans,” responds another, “there’s only one thing left to do. Stop paying the mortgage!

“I would like a $100,000 drop in my loan principal too. Especially since I didn’t feel taking on a variable-rate loan was wise when I financed, so I missed out on all those years of 4% interest that apparently some people may get to continue paying, instead of the new rate their contract says they should.

“So what the heck. I’m a boomer and will never be buying another home, so why not get the same advantages that those people who don’t know how to run their finances get? Just stop paying the mortgage and the bank will lower my loan amount! Just two questions… who actually owns my loan, and do you think the guy who bought it once it was securitized will mind if I don’t pay back the original amount?

“Idiocy!”

“Why do you seem to be defending Messrs. Prince, O’Neal or Mozilo?” asks a reader in reference to our coverage of that motley crew testifying before Congress. “As imperfect as Congress is (particularly with all the contributions I’m sure they pocketed from Citibank, Countrywide, et al.), somebody needs to differentiate between capitalism and plain-old robbery.

“Not that I expect congresspeople will be forced to repay any of their ‘compensation’ after the hearings, but at least they will be on the hot seat, forced to defend their greed and shamed, if they still have any capacity for embarrassment. After all, they did rob many of their investors. Not that I was one of them. After all, I’ve been warned by you for years.”

The 5:
We’re not defending anyone. Like anyone else, these guys will get what’s coming to them. If you think the feds have a corner on dispensing justice, we note this morning that Countrywide is being investigated by the FBI. Although it’s more likely that justice, in the end, for all three men will be karmic in nature.

If you want to talk about robbery, that’s a different matter. What greater crime could there be than federal deficit spending year after year? And piling up debts a generation of Americans who aren’t even born yet will have to pay?

Nah. This next reader is probably more accurate, when he suggests:

“The feds aren’t after these guys… they want to know how it is done. The only real trouble these CEOs may have is that the feds are envious.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. The Resource Reserve is a great offer, especially in the midst of a rapidly developing bull market in precious metals and natural resources. You couldn’t read a better set of advisers on the subject. Nor will you be able to get such a great deal again. The offer ends Thursday. Don’t wait until then.

P.P.S. Looking to get involved in the resource boom with no downside risks? We hasten to add that EverBank’s MarketSafe Gold and Silver CDs are a day from their funding deadlines. If you’re at all interested, be sure to check them out today.

• Consumers ready to tap out? A compelling chart reveals an undeniable development
• Government reports net job loss in February… how today’s report nearly guarantees recession
• Which two U.S. financial powerhouses got hit hard this week… and what it means for the market
• Another American housing milestone… homeowners in worst shape since World War II
• Plus, more on the Bernanke subprime bailout… could the “PESO” be the answer?

Consumer confidence has dipped to a five-year low so far this March.

According to the RBC CASH Index — a measure of Consumer Attitudes and Spending by Household — confidence among consumers has sunk to 33 this month, steeply down from 48 in February and its lowest reading since inception in 2002.

Jobs took a hit this morning, too. U.S. nonfarm jobs fell by 63,000 last month, the Labor Department reports. January numbers got revised down, too… from minus 17,000 jobs to minus 22,000.

That’s an “official” two-month, back-to-back loss in jobs. Worth noting, because in the past 40 years, there have never been two consecutive months of job losses that didn’t coincide with a recession.

Still, as usual, the government stats are confusing. Somehow, despite the net loss of 85,000 jobs over the past two months, “unemployment” has improved to 4.8%, up from 4.9% in January and 5% in December. Hmmmn…

Ten minutes before this morning’s jobs report, the Federal Reserve announced it’d be injecting $100 billion into the U.S. banking system. The Fed will print an extra $20 billion for both of its term auction facilities held this month on the 10th and 24th. Each will now inject $50 billion in the embattled financial industry, for a monthly total of $100 billion.

Immediately following the Fed announcement and jobs report, traders in Chicago priced in 100% odds of future Fed cuts of 75 bps.

Naturally, within seconds, the dollar tanked. The dollar index pierced the 72 barrier for the first time in history, sinking to another record low of 72.6. The euro popped to a new all-time high of $1.54. The yen shot up to a fresh three-year high of 101. The pound is back to $2.01.

Gotta love the Fed, eh? Stalwarts of price stability. Mmn. Love ’em.

Stocks in the U.S. sold off steadily all day yesterday. While much of this week was marked with up-and-down volatile trading, the mood on the Street Thursday was oppressively bearish:

For the day, the Dow shed 1.7%. The Nasdaq and S&P 500 dropped 2.2% apiece.

For the year, the Dow is now down 9%… the S&P 500 is off 11%… and the Nasdaq is creeping toward 16%.

Carlyle Capital, a publicly traded affiliate of the Carlyle Group, said today it is experiencing the same default notices and margin call woes as we reported Thornburg Mortgage as having yesterday.

Lenders have begun liquidating securities from Carlyle Capital’s $21 billion portfolio. The group claims losses from its mortgage-backed portfolio have left it unable to repay its debts. Carlyle Capital’s shares, which trade in Europe, fell 60% yesterday.

We mention this for two reasons. One — another seemingly safe investment group is biting the dust. Two — the Carlyle Group is one of the most powerful, globally connected private equity joints on the planet. We can’t help but think that if it couldn’t dodge this bullet, no one can.

Standard & Poor’s cut the credit rating of Washington Mutual yesterday. WaMu, the U.S.’s largest savings and loan, now rests on the lowest rung of investment grade credit ratings, BBB.

“We now believe that the severity of losses on all residential mortgages will be higher,” said an S&P spokesperson, “and that the weak housing market will now be a longer cycle.”

WaMu stock fell 7% on the news and is now down over 60% in the past two quarters. This morning, The Wall Street Journal leaked news the bank is aggressively seeking injections from private equity firms and global sovereign wealth funds.

Chuck Prince, Stan O’Neal and Angelo Mozilo will all be appearing before the House Committee on Oversight and Government Reform today. The two former CEOs of Citigroup and Merrill Lynch and the current head of Countrywide have all been ordered to Capitol Hill today.

Lawmakers, they say, are interested in hearing how the three CEOs managed to pocket fortunes as their organizations collapsed and the stock market reeled. Specifically, why the three companies lost a collective $20 billion in 2007, yet their three CEOs took home over $321 million in compensation and stock.

There’s something wrong with this picture, isn’t there? Shouldn’t Congress be looking into its own financial habits first… before going after these yahoos?

Oil stayed steady yesterday and overnight right at its all-time high of $105. Likewise, gold has held steady at $980.

We’ve posted a couple of interviews Kevin Kerr and Byron King have done recently with Fox News and CNBC on the Agora Financial web site. If you’re interested in seeing these gentlemen in action, they’re discussing the state of the economy, historic oil prices, the dollar on the skids and record-high commodities prices. Check it out…

Curiously, despite the dollar’s historic bender… and record price levels for everything from oil and wheat to gas, tuition and health care… consumer spending appears to be holding steady. Wal-Mart and Target posted better earnings in February than anyone expected. You know what they say: When the going gets tough, the tough go shopping.

In turn, this next item should come as no surprise to you: For the first time since World War II, the average American homeowner’s debt exceeds the equitable value of their home.

According to a Federal Reserve study released yesterday, the percentage of equity in U.S. homes has fallen below 50% for the first time since 1945. Homeowners’ percentage of equity slipped to 47.6% in the fourth quarter. The Fed began tracking these equity numbers in 1945. Odds are this is the worst reading since the Great Depression.

Moody’s recently estimated, too, that 10.3% of all homeowners will have zero or negative equity by the end of the month.

And here’s a curious development: Remittances to Mexico — money sent back to Central America from immigrants working in the U.S. — dropped 6% in January, the biggest fall in 13 years.

The Bank of Mexico reports this morning that remittances fell to $1.65 billion in January — down about $10 million from the month before. The bank attributed the massive drop to recent changes in migration policies and a sizeable decline in U.S. construction activity, which accounts for 20% of jobs for Mexicans living in the U.S.

For what it’s worth, such remittances comprise 3% of Mexican GDP and are the second largest source of foreign currency flowing into Mexico.

Meanwhile, across the planet, the number of billionaires in India and China doubled. Billionaires with a “B.” In India, there were a “mere” 36 billionaires in 2006. Today, there are 53. Same story in China… up from 20 in 2006 to 42 today.

Yesterday, we mentioned Mr. Buffett had regained his title as the world’s richest man. Today, we note another, perhaps far more important facet of Forbes’ annual study: Four Indians have made it to Forbes’ list of the top 10 richest people on the planet, the most of any nation. Indians occupied Nos. 4,5,6 and 8 this year. Especially noteworthy was K.P. Singh… the mega-rich Indian’s riches tripled in 2007, to $30 billion, enough to garner him the No. 8 spot.

If you haven’t checked out Chris Mayer’s recent report on investing in India… it’s a must-read. Click here for three ways to play the market that’s making Indians richer every day.

“I couldn’t agree more with you guys,” says a reader in response to our cordial discussion of the Bernanke mortgage crisis bailout plan. “As a real estate broker, it made me sick to see all of the cheap money out there and the ease with which people qualified for loans.

“The Fed needs to stop bailing the private sector out. I agree with Mr. Bonner, people get what they deserve. It’ll be tough, but it is time for people in this country to start taking responsibility for their actions, and it is time for the Fed to stop trying to be like Underdog (‘Here I come to save the day’).”

“I have been a mortgage banker for 34 years,” says another reader, “and say let the mortgage mess unravel without any government intervention. Real estate does not always go up in value, requires significant annual monies to maintain and must be held long term to realize a gain. Your home is shelter, not an investment. We all have to live somewhere.

“The people asking for solutions are the realtors, lenders and counties that are trying to protect their incomes by having the homeowner pay more than they should for housing. They sponsor the counseling agencies for the consumer where foreclosure or bankruptcies are not offered. Foreclosure and bankruptcy are solutions to this dilemma, both locally and federally, and are actual consumer rights. They do not prevent one person who takes this route from continuing to rent or own their next home at a lower cost.

“The FDIC did not do its job in following its regulations or conducting on-site audits of major banks. This is identical to FSLIC in the 1980s. All taxpayers will pay a terrible price for their repeated stupidity on trusting their government. They have also been given a lesson that Wall Street is never to be trusted. What is sad is that this will all be forgotten in 10 years… and it will happen again.

“We recovered very nicely from the foreclosures of the 1980s and will do so again.”

“The banks had willing partners in the real estate Ponzi,” notes another reader, “so where are the suggestions that realtors bail their clients out by giving back the massive commissions they booked as the bubble inflated?

“Some people saved money all this time. Some people shorted housing/financials last year and are still short and strong. These people will use some of those massive gains to buy homes once the prices are reasonable (another 20% lower or so, minimum). Then the wannabe no-money-down real estate tycoons that were booted out of their homes (sorry, I mean the banks’ homes) can surely find places to rent at reasonable prices from the new owners. That, too, is the natural order of things.

“I’m only in my 30s, but even I already know that history repeats. This market and real estate cycle is nothing new. To those who don’t like it, I ask that if you’re not going to profit from it or pick up good deals, at least stop whining. Seems to me, with these bailout ideas floating around the government, we’re going to lose the war against inflation and communism all in one move.”

“Here’s an idea,” our last reader suggests. “The banks forgive part of the principal and in return they receive a like percentage share of the equity. Forgive 10% of the principal and own 10% of the house. This wouldn’t help them raise any cash, and the house sale could be years off. So maybe they could aggregate all their equity shares and then sell them to investors. They could call these, say, “Phantom Equity Securitization Obligations,” or PESOs” for short.

“Now, what could these investors do with their new PESOs? Maybe they could sort of dice them up into differing quality levels and sell some sort of pieces of them. They could have say, three different levels and sell their “Pieces of Three,” or POT, shares.

“And on and on we could go.”

The 5: Heh. Now we’re talking.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Kevin Kerr and Byron King are more than just television personalities. They also steward a significant portion of the trading gains being enjoyed by your fellow 5 readers:

In recognition of their efforts and your commitment to successful trading and investing in what we expect to be a multiyear bull market in natural resources, we’ve assembled a stellar offer for you this month. If you plan to make money investing over the next decade, you can’t do any better than to follow the advice given by these two gentlemen:

Wanted: Aggressive, Wealthy and Tight-Lipped Agora Financial Reader

• Bankruptcy, foreclosure filings at multiyear highs… Bernanke offers his cure for the subprime ailment
• Dissent among the ranks… Fed governor says inflation is new “paramount risk” to U.S. economy
• China’s new No. 1 priority, and how it might change the global economy
• Commodities endure wild swings… Kevin Kerr on where to take profits
• Care to profit from a global food crisis? UBS unveils a way to put your money where your mouth is
  

76,120 Americans filed for bankruptcy in February — a 15% rise from January.

Personal bankruptcy filings, says the American Bankruptcy Institute, are now at their highest level since 2005. Business bankruptcies shot up as well, to a four-month high of 4,326.

Total personal filings surged to an incredible 800,000 last year. The institute estimates a million people will file this year. That’s a lot.

Adding to the discomfort, foreclosures and mortgage delinquencies continue to rise. And home prices continue to fall.

“In this environment,” Ben Bernanke suggested yesterday, offering what is possibly the most bizarre intervention strategy ever to be recommended north of Venezuela, “principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.”

Say what?!

“The fact that many troubled borrowers have little or no equity suggests that greater use of principal write-downs or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders.”

Translation: Because banks made bad loans to people who can’t repay, they should be willing to accept less money back. It’s in the best interest of both lenders and borrowers to reduce the amount borrowed… and the amount to be paid back.

This is crazy. Bernanke wants a “Mulligan” — a “do-over” — for the whole housing bubble. Remember all the rising prices we were fired up over about two years ago? The very “engine of economic growth” in the country — nay, in the world? Just forget about them. They never happened.

Oy.

Surprisingly, markets saw right through Bernanke’s plan.

As the chairman spoke yesterday, the Dow hemorrhaged a good 200 points. Along with some bad news for Citigroup, it looked like a serious case of collective angina in the trading pits.

But a unnamed consortium of banks administered the Pepto-Bismol — word leaked that a bailout for bond insurer Ambac could arrive as soon as the closing bell — the Dow and S&P 500 rallied back to near break-even.

The Nasdaq finished in the black.

“I consider the perception that the Fed is pursuing a cheap-money strategy,” commented Dallas Fed President Richard Fisher in a speech yesterday, “to be a paramount risk to the long-term welfare of the U.S. economy.”

For his part, Fisher is officially tapped out. He pledged he will heretofore urge his Fed brethren to stop cutting rates.

“We cannot,” he said, “in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored. Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient.”

Good for him.

“The primary task for macroeconomic regulation this year,” said Chinese Premier Wen Jiabao, addressing the equal and opposite reaction on the other side of the planet, “is to prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation.”

In his annual policy speech to China’s legislators, Wen clearly labeled rising commodity prices and subsequent food shortages as China’s No. 1 policy issue for 2008.

“Chinese inflation indexes are heavily weighted to food prices,” says Christopher Hancock of Free Market Investor. “Price controls are a short-term solution. Going forward, yuan appreciation would go a long way to alleviate this problem, as commodity imports would be cheaper.

“Export dependence has thwarted policy. But Chinese dependence on an export economy is waning. The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year to the fourth quarter of 2007.

“Domestic demand, not exports, contributed 10.8 percentage points of the 11.2% growth rate.”

In a related vein, China’s largest state-owned bank bought a 20% stake in South Africa’s biggest financial institution this morning. The Industrial and Commercial Bank of China paid nearly $5 billion for its new stake in South Africa’s Standard Bank.

Standard Bank operates in 38 nations, mostly in Africa, and will surely provide China an interesting partnership in what we can only guess is a Chinese effort to begin extracting the huge bounty of African resources.

China is now the largest Standard Bank shareholder.

As we suspected would happened, the dollar found a temporary foothold in the slippery walls of the monetary abyss yesterday. The dollar index inched up slightly from Tuesday’s all-time low of 73.3 to just short of 74. We know, hardly a rally… but these days, you’ve gotta take what you can get.

The euro, pound and yen all backed off by very small margins. Prices this morning are around $1.52, $1.98 and 103, respectively. The loonie rallied to regain parity… $1.00 on the dot.

We note the Canadian dollar retained its parity with the U.S. dollar despite a surprise 50-point rate cut by the Bank of Canada yesterday. BOC Gov. Mark Carney noted that further reductions might be needed as U.S. exports slump.

“The Canadian dollar looks like it will stay trading right around parity with the U.S. dollar,” notes Chris Gaffney in The Daily Pfennig, “as both administrations seem happy with this level. With a majority of exports flowing south into the U.S., I would expect the BOC to mirror any further rate cuts by the FOMC and the Canadian dollar to stay stuck at the current levels for the near term.”

Nothing puts a point on the uncertainty of markets these past few days better than a look at the spot price of gold.

“It was time for a breather,” our friend Doug Casey wrote yesterday after gold fell for the first time in six sessions, silver for the first time in 11.

But as we write this morning, it’s skyrocketing back to new highs of $993. Could today be the day for gold $1,000?

Oil, too, shed nearly four bucks, to close yesterday at $99 per barrel. But as of this writing, it’s right back up to $104, a new all time high.

OPEC officials chose to leave global oil production as is, the group announced after its meeting today. In spite of pleas from the U.S. and Japan, the cartel will not alter its production schedule, claiming that crude stockpiles were well within their five-year average.

In fact, “I would prefer in this situation to lower production because demand globally is going to be lower,” said OPEC president and Algerian oil minister Chakib Khelil. Presidents from Algeria, Iran and Venezuela all called for OPEC to cut its production.

“Understand the consequences of high energy prices,” commanded President Bush in a speech directed to OPEC officials yesterday. “I think it’s a mistake to have your biggest customers’ economies slowing down as a result of higher energy prices.”

Hey, he’s right. In America, the customer is always right, right?

Heh. Go, Dubya.

U.S. gas prices increased again yesterday, too. The average price now stands at $3.18, a nickel shy of its all-time high.

Soft commodities, however, took a hit. Grains like corn, wheat and soybeans all backed off recent highs yesterday.

“A sign of a healthy market is a correction that comes during overbought conditions,” Kevin Kerr reminds us. “That’s what we got today; nothing more, nothing less. What you need to focus on now is which profits to grab and which to let ride back up — and most importantly, which commodities offer good value to establish new long positions.”

For what its worth, Kevin and his Resource Trader Alert readers have recently pocketed profits in silver and sugar… both around 200% gains. He’s also headlining a group of products we call the Resource Reserve, which is comprised of Outstanding Investments, Resource Trader Alert, Energy & Scarcity Investor and our soon-to-be-released Gold and Options Trader. Together, these services provide a comprehensive strategy for playing the booming energy and resource markets… details on your discounted Resource Reserve offer are coming soon. Look for them.

Also, if you’re looking to place bets on the rise and fall of food prices across the world, here’s a new chance:

UBS unveils the UBS Bloomberg Constant Maturity Commodity Food Index today. The Index will track 13 commodities directly linked to human food consumption. Stewards of the index note that this is the first commodities index that directly targets food prices, and as such, raw materials not found in other indexes, like red winter wheat, cocoa, orange juice and lean hogs, will be included.

“Why worry about the price of gasoline now?” asks a reader. “Let’s remember, it’s an election year. Big Oil wants Republicans in office, and two years ago, gasoline prices dropped under $2, just in time for the elections.

“No wonder Bush never considered that prices could go that high while he is in office. They went back up by over 50% within six months, and if the pattern repeats, we will have big problems for 2009, but we can look forward to a break in the meantime. We just have to stop driving from now until October.”

The 5: Heh.

“You spend a lot of time talking about the loss of purchasing power of the dollar,” notes another reader. “And rightly so. Therefore, I fail to see the problem with anyone spending dollars as quickly as possible and incurring debt. That dollar spent today will be worth less, if not worthless, tomorrow, and the dollar repaid will be of lower value than the dollar borrowed.

“Can’t have the argument both ways.”

The 5 responds: Not sure how we’re having the argument both ways. We’re lamenting the demise and the futility of saving at the same time. People who save and invest build wealth over time. If you spend and borrow and spend more — especially because the currency in which you’re spending in is losing purchasing power — that’s hardly a recipe for prosperity.

“I enjoyed your use of a Bob Dylan quote today,” says another reader about yesterday’s edition, “but an equally good one is:

“Maybe someday, you will understand
That something for nothing is everybody’s plan.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. “How do I get a copy of I.O.U.S.A.?” remains our most FAQ in the 5’s inbox. We’re still finishing the movie, doing our best to bring it to a big screen near you in time for the election. DVDs and a book about “the making of,” too. Please bear with us while we work out the kinks… we think it’ll be worth the wait.

In the meantime, perhaps you’d like to check out this podcast from zoom-in.com… they just posted it this morning. Patrick, David, Bob and I did the interview during a brunch we hosted at Sundance.

P.P.S. The speaker invitations… the theme… the sponsors… all sent and ready to roll.
In light of your daily briefings here in The 5… we were hard pressed to identify a more urgent and important topic than this year’s symposium in Vancouver. Get all the details here. Sign up soon… space is very limited.

• Global banks unite for another bailout “superfund” — who’s the target and how it’s moving markets
• More Shanghai shellacking… Mayer on opportunities still remaining despite a recent Chinese bear market
• Dollar flirts with all-time lows… Chuck Butler on the greenback’s next move
• Our Maniac Trader on silver’s sudden breakout… just the beginning or time to take profits?
• Plus, food inflation threatens global hunger relief funds… what a perfect time for a biofuel jumbo jet!

Oy, here we go again… A consortium of the world’s biggest banks is discussing the creation of another bailout superfund – this one for struggling bond insurer Ambac.

Citi, UBS, Wachovia and Royal Bank of Scotland are all rumored to be in talks with the New York State Insurance Department. The AP reported on Friday afternoon the banks may plan a bailout of Ambac and its belabored bond portfolio.

A Goldman Sachs analyst recently estimated that Ambac would need some $3.5 billion in capital just to maintain its AAA rating, and who knows how many billions more to cover all the assets it insures. Perhaps this new banking conglomerate superfund will be more attractive than the similar, but utterly useless $100 billion fund abandoned last year just before Christmas… we’re not holding our breath.

Still, Ambac shares shot up 16% Friday.

And on the news, the U.S. markets staged a surprise turnaround.

Benchmarks were in the dumps most of the day. The Dow and S&P were down over 1%. In fact, the Nasdaq fell as low as 1.5% intraday, re-entering an official bear market territory by falling 20% off its 2007 high.

But the Ambac news caused traders a bit of late-day euphoria. With 30 minutes left before the closing bell, the Dow and S&P 500 both rallied to positive territory. The Nasdaq dissed its bear, too, breaking even for the day.

For all of last week’s ups and downs, swings and throes… the market essentially went nowhere.

On the other side of the world, however, the story was a little more dramatic. The Shanghai Composite fell again by over 4% last night, even as markets all over the world rallied. The benchmark Chinese index is now at a seven-month low, 30% off its all-time high set in October:

Winter weather and drought have damaged some 23 million hectares of Chinese farmland.

A severe drought in northern China, coupled with abnormally frigid temps in south and east China, has scared a plot of land collectively the size of Idaho… one-sixth of China’s entire farmable landscape. Unless Mother Nature provides a quick turnaround, much of this land may not be usable for the 2008 growing year, and some may not recover for years… if at all.

Add this to last week’s reports of Chinese consumer prices spiking to 11-year highs of 7%, a massive recent global run-up of grain prices, a current bear market in Chinese stocks and the ever-looming “global economic slowdown.”

This could get interesting.

On the other hand, “The Chinese transportation industry is booming,” Chris Mayer tells us, finding opportunity in the midst of a growing number of Chinese crises.

“China now has the second longest highway network in the world, behind only the U.S. But it will add to that significantly over the next decade. Then there is the railway expansion. The Economist calls it ‘the biggest expansion of railway capacity undertaken by any country since the 19th century.’ Then there is air travel: From only 7 million air travelers as recently as 1985, China topped 185 million last year. Then there is sea container capacity: Over the next decade, China plans to expand this by 85%.

“And on and on it goes. That’s a lot of metal and concrete to consume. That’s a lot of fuel. All of that infrastructure supports a growing appetite — in the many senses of that word — of over a billion people. That’s just China. Add India to the mix. Add Russia.

“So you see, it’s not hard to imagine where the scarcity comes from. We need to produce a lot more of the basics, and we need to use what we have more efficiently. Those are powerful trends in the world today.

“For investors, then, the playbook seems obvious. Own what’s scarce. Own what helps alleviate that scarcity.”

Mr. Mayer’s latest Capital & Crisis recommendation owns just that… a budding petroleum refiner with an attractive, undervalued agricultural asset. Learn about it by subscribing, here.

In the U.S., gas prices have crept up again. They’re now just short of all-time highs.

The national average price at the pump rose to $3.11 over the weekend, a dime short of last May’s record high of $3.21 and 75 cents higher than this time last year. The U.S. Energy Department recently raised its forecast for spring gas prices up to $3.40. If you ask us, that’ll be a bargain by 2009.

The dollar index continued its recent fall over the weekend, sinking deeper into the 75 range and now less than one point from its all-time low. The euro dug deeper into $1.48, and the pound rebounded to $1.96. The Canadian dollar is little more than a whisper below parity, at 99.7 cents. The yen rallied too, back to 107.

“If you’re keeping score at home,” notes Chuck Butler, “that’s two consecutive down weeks for the dollar, after spending most of the early part of this year on the black side of the ledger. There were just so many pundits out there talking about a ‘dollar rebound’ in 2008 that the markets had to test the waters to see how it looked. And it just didn’t look very good! The fundamentals just aren’t there for a dollar rally in 2008.

“But hey! Stranger things have happened, eh?”

Gold’s price held steady all through the weekend, around $950, just off recent record highs.

To put that price in perspective, each Oscar statuette last night cost “the Academy” $100 more this year than it did in 2007, says Bloomberg. Gold has shot up 40% since the last Academy Awards, and according to Oscar spokespeople, each legendary trophy now costs a record $500. But even an enterprising Oscar winner won’t be able to profit from gold’s rise: By accepting an Academy Award, winners are required to never sell, trade or alter the Oscar before offering to sell it back to the Academy… for $1.

We met Alex Gibney, btw, the guy who won the Oscar for best documentary, when we were at Sundance a couple of weeks ago. He came to a party hosted by our agent. His current film is about the life of Hunter S. Thompson, but a couple of years ago he took us behind the scenes of the meltdown at Enron. Nice chap, if a little intense.

The silver spot price busted through $18 this morning, setting mulitdecade highs and continuing an impressive recent run. Year to date, the metal is up 22%.

“Silver has moved up to its new highs on several factors.” says our resource man Kevin Kerr. “Fear of inflation, the drop in output in South Africa and prospects of U.S. rate cuts are all helping to lift gold too.

“The market is supposedly now anticipating another 50 point cut by the Fed. Meanwhile, inflation is surging at every turn. While gold positions itself for a run at $1,000, silver is just catching up and is probably fairly valued at around $19 per ounce.

“Strong global demand for both retail and industrial uses is supporting a strong silver price and will continue to for some time to come; however, at these levels, for those of us who have been long since 12 and 13 bucks … well, $17 and over offer very nice profits, and in my opinion, it’s a good time to cash out and then observe.”

You can ride along with our Maniac Trader, here.

Richard Branson flew the first biofuel-powered commercial jet across Europe over the weekend. Virgin Atlantic flew a 747 from London to Amsterdam using a fuel supposedly derived from Brazilian nuts and coconuts. The bizarre tropical cocktail made up 20% of the plane’s fuel for a flight Branson labeled a “vital breakthrough.”

Branson getting high on biofuel

Virgin officials maintain that none of the fuel’s bio-ingredients will compete with staple food sources… that is, until every Brazilian farmer slaughters his cattle and burns down his sugar cane field to plant coconut trees to sell to Sir Richard.

Meanwhile, the World Food Program, the United Nation’s agency that aims to alleviate world hunger, will most likely halt aid to several locales because of rising food prices.

“Our ability to reach people is going down just as the needs go up,” said WFP exec Josette Sheeran. She told the FT over the weekend that the WFP’s budget was rising by millions each week, thanks entirely to rising food costs.

“We are seeing a new face of hunger in which people are being priced out of the food market… Situations that were previously not urgent — they are now,” she continued, specifically citing Indonesia, Yemen and Mexico. Barring a sudden wave of short-term donations, the WFP will be forced to consider “cutting the food rations or even the number or people reached.”

Hmmmn…

“OPEC is taking political/economic advantage of a geological imperative,” writes a reader in response to OPEC’s recent threat to cut production. “It has to cut production because its enhancement techniques are beginning to lose the ability to keep up.

“After 30 years in oil field servicing, I have worked most of the fields — 12 in the Gulf — and know when fields enter decline. From what I have seen, there are none left there that have capacity to economically increase production — even at $100 per barrel. Beyond $150, there is some untapped reserve that could be produced with expensive tertiary enhancement, but even that would not significantly increase exports.

“It is time to realize that the peak has passed and that while there will be oil coming out of the ground for many years to come, it cannot possibly sustain the consumption levels that continue to be ignored by economists and politicians.”

The 5 responds: Peak sustainability — not just in oil fields, but in resources, water, food, etc. — is in some ways a more interesting challenge for the global economy than the debt and demographic picture that we’ve been obsessing over for the past decade.

In an effort to gain some perspective, this summer, we’re convening an entire conference on the subject at the Vancouver Fairmont from July 21-25. We’ve invited economists, traders, politicians, presidential candidates, authors, entrepreneurs, “diggers and drillers” and analysts of all stripes to come to share their views on building wealth and security during this “time of risk and scarcity.”

If you’re not already signed up for A View From the Peak and you know you’d like to attend, call Barb Pariello at 1-800 926-6575. If you’re not sure, we’ll follow up in a week with more specific details.

“I just forwarded Friday’s letter to six people,” a reader tells us, “among them a Ph.D. in economics, a Ph.D. in business, a former director of engineering at a major auto OEM and a manufacturing expert who heads up the Manufacturing Innovation Technology for Industry (MITI) and the National Association for the Collaborative Development of Manufacturing Sciences (NCMS). Needless to say, all are worried about the decline in America’s manufacturing base and lack of competitiveness, particularly in the automotive industry.

“First and foremost, manufacturing is critical to national defense. Second, we’ve been transferring the product value chain overseas, and in doing so, building up the economies of other nations at our own expense. Unless we reverse this decline quickly with a national manufacturing policy that keeps value — and jobs — in this country, America will become a third-world nation that prints worthless currency as its core product and seeks succor from the powerbrokers in China, India and the Middle East, where much of our debt increasingly resides.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

• Surprising data: U.S. debt still has takers… is our democracy doomed?
• Russian SWFs get OK to invest in America… but only in the two worst stocks on the market
• Analyst that predicated the January financials plunge calls for 15-50% more losses
• How a Philadelphia survey might herald an entire U.S. manufacturing decline
• U.S. markets fall again… an atypical chart shows the Dow deep into an 8-year bear market

Here’s some interesting news. The Chinese bought more U.S. debt in December than they sold… the first time they’ve done so since before the credit crisis began last July.

Mainland China upped its stake in American debt during the month by nearly $20 billion, to $405 billion. Thus, surprisingly, China has brought U.S. Treasury holdings back to pre-credit crisis levels.

Also interesting, Brazil more than doubled its stake in U.S. debt last year, from $53 billion to $126 billion.

As we hasten to note nearly every time this data is released, the number of Treasury notes owned by foreign governments is breathtaking. Even though Japan has been a net seller for the last six months, Japan, China, the U.K. and Brazil own over $1.4 trillion in U.S. Treasuries themselves.

“Can democracy survive when its financial roots have been cut?” asked the economist James Galbraith back in 2006. “The American citizenry has lost its pride of place as creditor of the American state. The proportion of U.S. debt owned directly by Americans has fallen to below 10%; in 1945 (when the debt was more than twice as large in relation to GDP as now), citizen-creditors just about held it all.”

Combined, financial institutions and foreign nations now own over 70% of U.S. debt.

“The scale of public debt is not the issue,” contends Galbraith, “but its ownership is. Can a country — whether the United States or any other — be truly democratic if it is in hock to banks and foreigners?”

“We no longer ‘owe it to ourselves,’ as FDR used to say,” opines our Byron King. “The banks and overseas creditors have hijacked the bond process. The citizens have little direct stake in the U.S. government, certainly not as bondholders. And more than half of all citizens pay no taxes at all. Over 50% of all taxes are paid by the wealthiest 3% of households; 90% of all taxes are paid by the wealthiest 10%.

“I guess the amounts of money were just too large for the citizenry to continue to buy bonds and keep a financial stake in the health of the government. So with no financial stake in their own government, it’s all about ‘I get mine.’ From pork at the congressional level to ‘what benefits can I get?’ at the personal. Heck, everyone wants their check from the government. Hey, where’s mine?

“We’re doomed.”

The Russian government has given two sovereign wealth funds worth $157 billion the green light to begin buying bonds of foreign government agencies. The Russian Finance Ministry told its SWFs yesterday that 15% of their funds can now be used to buy the debt of 15 different international government-backed companies.

Most interesting to us, the Russian funds will now be allowed to buy debt of two U.S. companies — Freddie Mac and Fannie Mae. Oy… we hope they know what they’re getting into.

The other 85% will be used to purchase sovereign debt.

Meredith Whitney, the Oppenheimer analyst who outed Citigroup back in November, has issued another sell signal for banks yesterday.

A day after Whitney’s November warning, Citigroup stock fell 7% and the Dow shed 2.6%. Soon after, Citi cut its dividend by 41%, and has lost about 30% of its “value.” At the time, Whitney’s alert was rewarded with death threats from investors in the stock.

If you’re a Citi shareholder, grab your latex gloves and start cutting out letters from the newspaper. There’s more pain to come: “The best-case downside scenario,” Whitney told CNBC, “is that there is a 15% downside in the financials; worst case is 50%.” Whitney also speculated that Citi will soon need to cut its dividend again and raise much more capital to cover write-downs.

Bond insurer MBIA withdrew from its industry trade group — the Association of Financial Guaranty Insurers — yesterday. Ironically, MBIA chieftains claim that the industry must begin separating the business of insuring muni bonds from insuring riskier assets like CDOs and asset-backed securities.

“It is up to us to shape our future,” said newly crowned MBIA CEO Jay Brown, “in a way that we believe is most responsive to the markets, our policyholders and our owners, and we must do so without the constraints of participation in an industry association that does not always share our views.”

Food prices will rise 3-4% in 2008, predicted the U.S. Department of Agriculture’s chief economist Joseph Glauber yesterday. Should his prediction come true, that would spell a whopping 8% inflation rate for food since January 2007.

“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs,” Glauber suggested at the USDA annual outlook conference, “it will also contribute to higher crop and livestock prices… Overall retail food prices for 2008-2010 are expected to rise faster than the general inflation rate.”

“There’s going to be real food inflation in this country,” added C. Larry Pope, CEO of Smithfield Foods. “I think we need to tell the American consumer that things are going up. We’re seeing cost increases that we’ve never seen in our business.”

Ahh… Inflation, the hidden tax, continuing in a grocery store near you.

The Philadelphia Fed’s Manufacturing Index fell to minus 24 from minus 20 in January. Often seen as a precursor to the ISM’s manufacturing index — which we’ll see on March 3 — the Philly Fed’s index now lies at lows unseen since post-tech bust 2001.

In fact, the Fed division’s measurement of “six-month outlook” fell to minus 16.9. That’s the first negative reading since 2001 and the lowest since 1990. Traders have baked in a ISM report early next month… perhaps you should, too.

The dollar took that news on the chin… again. As the dollar index fell back to 75, the euro rose well into $1.48, about a cent short of its all-time high set in November. The pound and loonie recovered too, back up as high as $1.96 and 99 cents, respectively. The yen found its way back to 107.

Gold struck yet another record high yesterday, of $953 per ounce. The once and future money has gained over $40 this week alone. Since striking its new high, we note that the gold price has stayed in a tight rage between $945-950 in Asian and European trading overnight.

The stock market in the U.S. lost about 1.2% in yesterday’s trading session. The Philly Fed Index seemed to be the downer of the day… losers topped winners 3-to-1 on the NYSE. In spite of all the recent volatility and occasional market upswings, the Dow is now a mere 2.5% above its January low.

And for some broader perspective, check out this graph of the Dow priced in gold:

The Dow, priced in gold, has been a totally hopeless venture since the tech boom. In 2000, you would have needed 45 ounces of gold to buy one “share” in the Dow… today those 45 ounces would fetch you three times the number of Dow stocks.

We recall, working with Bill Bonner in 2000-2001, issuing the “Trade of the Decade: Sell the Dow, Buy Gold.” Eight years on, we’re feeling pretty good about that trade.

Across the Pacific, the Shanghai Composite fell again overnight, this time by 3.5%. We hear that many “lockup periods” among institutional shareholders — holding huge amounts of recent IPOs — will soon expire in China. Coupled with higher-than-usual share offerings from Chinese financial institutions, investors are bailing in fear that a flood of shares will soon hit the market with nary a buyer in sight.

Oil backed off a bit yesterday from its recent high of $101. Light sweet crude fell to $98 in New York yesterday on Energy Department reports of higher-than-expected crude inventories.

The U.S. government has reversed its decision to remove the economicindicators.gov site, reports the Commerce Department yesterday. “Given the feedback… received,” says the site, the government will continue to offer its listing of economic resources for free. As usual, we’ll attribute this victory solely to the power of The 5 and its readers.

Despite the government’s retraction, John Williams of shadowstats.com tells us he will still run an economic indicators site of his own, also for free. Like most other private ventures aimed at replacing a government-sponsored service, we suspect John’s will somehow be superior.

Check it out here.

“Have one of your researchers look up the Great Panic of 1907,” suggests a reader. “The current situation is very similar, but with more zeros in the numbers. Bank fraud, commodities corners, asset collapse. Unfortunately, J.P. Morgan is not alive to solve the problem this time.”

The 5 responds:
We mentioned the eerie similarities between 1907 and today back in September and January. Warren Buffett is probably the closest the U.S. has to a J.P. Morgan today, but while he may lend a hand in the muni bond arena, Berkshire Hathaway is a long way from having the funds to bail out the entire financial system. Buffett says as much in I.O.U.S.A..

“That reader was right,” writes a reader responding to yesterday’s debate. “THE money didn’t vanish. YOUR money vanished into someone else’s pocket. You had $70; now he has it. You were counting on somebody paying you maybe $100 down the road; now he wants to pay you 30 cents, which is the new value of your holdings. This is not ‘semantics’: it’s how to correctly state risk and outcome. Journalists are always asking what happened to THE money, probably because they never had any to lose.”

“The reader surmising that the vanishing $7.7 trillion,” another responds, “somehow ended up being transferred from banks to sovereign wealth funds must not have noticed that money flows only in the other direction.

“Make no mistake about it: SWFs get their money from U.S. consumers buying oil from Abu Dhabi and rubber dog crap or Pocket Fishermen from China. If you don’t like it, then stop buying gas for your car, plastics and other oil-derived products, and anything manufactured in China.

“I hear the Amish make killer wooden toys.”

“The reader who thinks somebody still holds the ‘other side of the trade,’” comments a third, “in the vanishing $7.7 trillion is also failing to consider the multiplying effects of leverage and credit. I’ll buy $1 billion of your paper by putting up $200 million (or so) of my cash in an asset-backed security, giving you $800 million, while at the same time, I’ll sell the $1 billion of paper for $1.1 billion and collect $220 million cash and take my buyers $980 million ABS.

“I’ll be sure to buy a credit default swap from somebody to be sure I get my money and I can pay my seller. The guy I sold to has probably sold again, and then again, etc., etc., until we get about $1 trillion. Pretty soon, all that “the other side of the trade” is holding as real value is the down payments on the deals, while all the credit portions of the deals vaporize.”

Have a nice weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Are you enjoying your 173% gain? Back in October, in your complimentary issue of Strategic Short Report, Dan Amoss recommended you short Systemax, a computer retailer on the verge of collapse. Last month, just about three months later, Dan recommended you end your short position in Systemax… for a sweet 173% return. During that same period, the Dow fell over 10%. Not too shabby, eh?

The beta issues of Strategic Short Report generated such positive response — and handsome gains — that we’re currently offering three additional months for free. Click here to learn more.

P.P.S. “For most investors, the surest way to profit from the weakening U.S. dollar is to invest directly in strong currencies and their certificates of deposit (CDs)…” Who said it and why? Check it out here.

• Stunning U.S. demographic forecasts… better teach yourself Spanish, quickly
• Buffett offers to bail out Ambac, MBIA and FGIC
• More bloodshed in the banking sector… is the “credit crisis” really over? Or just taking a breather?
• Writers strike concludes… the surprising dollar cost of Hollywood’s latest battle
• Wheat hits another all-time high… Kevin Kerr’s cautious advice on playing the commodity market
• Plus, why pollution won’t be the only thing gagging Olympic athletes in Beijing

The Pew Research Center released an eye-opening U.S. demographics study this morning – it’s so dense with useful nuggets we’ll just fire ’em out one by one:

If all this isn’t a massive, inevitable investment theme… we don’t know what is.

On the financial front, Warren Buffett offered to buy out much of the municipal bond liabilities covered by Ambac, MBIA and FGIC. Buffett told CNBC this morning that he offered the three major bond insurers a takeover plan that would cover a staggering $800 billion in muni bonds.

One unspecified insurer has already rejected Buffett’s offer, and the lack of response from the other two hints that this proposal may have been dead on arrival. While the proposed Berkshire bailout would alleviate the huge financial pressure currently felt by bond insurers, the proposal is far from altruistic.

“When I go to St. Peter, I will not present this as some act that will entitle me to get in,” Buffett said on CNBC. “We’re doing this to make money.”

In turn, the stock market celebrated Buffett’s offer. The Dow reversed premarket losses and opened up 75 points this morning. All 30 components opened up and quickly amassed a 200-plus point gain.

But we suspect the buyout offer won’t be enough to keep the market afloat for long. Shares of AIG, the world’s largest insurer and the sixth largest company on the planet, plunged 12%, to five-year lows, yesterday after the company admitted to a “material weakness” in the way it values its derivatives.

Uh-oh…

A report by PricewaterhouseCoopers, the auditor hired by AIG, suggested significant flaws in the way the insurer assigns prices to various credit swaps — particularly CDOs. Thought we were done with these little mortgage-backed buggers, eh? Nope.

The great derivatives unwind continues.

Credit Suisse announced yesterday that the bank’s fourth-quarter profit shrunk 72% after writing down $1.9 billion in subprime-related bets. Since we’re in the forecasting business, we’re willing to bet that while this will be one of the last fourth-quarter write-downs, it won’t be the last of 2008. Not by a long shot.

Bank of America, Citi, Countrywide, JP Morgan Chase, Washington Mutual and Wells Fargo have banded together to form Project Lifeline – a plan to bail out struggling homeowners across the U.S.

According to details provided by the Treasury Department and HUD, the six banks will allow nearly foreclosed homeowners to suspend foreclosure for 30 days, giving them one last chance to refinance. We’re not quite sure who’s bailing out whom on this one, but don’t expect Project Lifeline to have hard-core effects on the subprime bust.

Barring a few last minute formalities, the Hollywood writers strike is over. The latest deal, which is expected to be approved by the Writers Guild of America, gives writers a significant slice of profits from “new media” and Internet sales.

Looking back, the writers strike has been estimated to cost the American economy over $2 billion. The Los Angeles Economic Development Corp. estimated that losses in Hollywood support businesses — caterers, florists, hotels, restaurants, valets and costume/set designers — took the lion’s share of the losses, about $1.3 billion. An estimated $733 million was lost in day-to-day production spending

The last writers strike, in 1988, cost the nation around $500 million, despite lasting a full six weeks longer.

It was suggested by some that we join the Writers Guild when we were writing the movie I.O.U.S.A. Can you imagine? We’d have to have picketed our own house during the strike.

Goldman Sachs raised its three-six month wheat price outlook to $13.50 this week. Such a revised outlook marks a 20% rise from today’s Chicago wheat prices and a 47% hike from Goldman’s previous price estimation.

Goldman analysts say U.S. wheat supplies are at their lowest levels since 1947.

Likewise, the wheat “trading band” has been widened this week for the first time in eight years. In response to upward pressure on wheat prices over the past year, U.S. commodity exchanges are allowing the wheat price to move a maximum 60 cents up or down each day, instead of 30 cents.

On cue, wheat soared nearly 60 cents in Chicago, to a new record high of $11.53. The price retreated quickly, back to $10.48 — 45 cents below its opening price. Swings like this are likely to continue for some time.

“When you get a rally like we have seen in wheat,” explains Kevin Kerr, “the exchanges (and government) get nervous. So they take action. In this case, the limits on the wheat market were raised considerably, and in essence, that will raise margin requirements too, and force many individuals to liquidate. We are not seeing wheat back off too much yet, but it will almost certainly have an impact.

“This has been an incredible rally for the grains, but now is not the time to be overly bold. Now is the time to use caution. Changes like this can send a chill through the market and make traders nervous. This is one of those times to be defensive and secure profits until things get sorted out.”

In the currency world, traders seemed to have taken the day off yesterday. Currencies traded flat across the board. This morning, we’re seeing a strong bias to selling the greenback… we’ll let you know how it turns out tomorrow. Until then: euro $1.45, pound $1.96 and yen 107

Gold has been trading between $917-927 all week. As with the dollar, this morning brought on a quick selling spree, pushing gold to about $912.

But the precious metal has since rallied back, to $920 as we write.

“Private equity deals dominated oil and gas acquisition in 2007,” observes Chris Mayer. In his latest Special Situations alert, Chris noted that in the midst of the so-called “credit crisis” of the last half of 2007, private equity firms snatched up about $7 billion in international energy business. P/E action within the industry outpaced peer-to-peer mergers by both frequency and volume.

“These dealmakers find energy attractive for all the obvious reasons. Oil companies are flush with cash and looking to expand. Oil assets are scarce, however. It’s cheaper and easier to make an acquisition than it is to find new oil reserves, for example.

“It’s not just oil and gas reserves, but also oil services companies and refineries. These companies own assets that take time and money to acquire and develop. In some cases, such as with a refinery, it’s incredibly difficult to build a new one.

“Small refineries are among the best bargains in the energy bin these days — especially when compared with the cost of putting up new refineries. There is lots of activity in the energy sector and plenty of potential suitors and deals. In my most recent issue of Capital & Crisis, I recommended a small oil refinery trading at a deep discount to net asset value.”

Chris’ latest pick, we hasten to add, is still below his “buy” price. Subscribe soon if you’re interested.

Perhaps the only “genuwine” crisis actually happening this week: Millions of BlackBerry mobile devices stopped working for about three hours on Monday. Manufacturer Research In Motion claims it received a flood of complaints from the White House to Canadian Parliament and everywhere in between. This is the third BlackBerry outage over the past year.

Call us old school, but neither of your editors has ever even held a BlackBerry before, never mind owned or used one.

The Chinese government has forbidden any Olympic athlete from criticizing China during the 2008 Beijing games. The U.K.’s Daily Mail reports that “British Olympic chiefs are to force athletes to sign a contract promising not to speak out about China’s appalling human rights record — or face being banned from traveling to Beijing.”

The British Olympic Association has confirmed the “gag order.” China is rumored to have sent similar requests to other competitors. Like it or not, this is the same nation that is rapidly becoming a world superpower… interesting times.

“Don’t let that gorgeous old maple tree go to waste,” responds one reader to the wind-felled tree formerly occupying our front yard.
“I live in Floyd, Va., where as soon as a tree is felled, whether due to Mother Nature or otherwise, it is salvaged.

“Expert woodworkers could cut 2-inch-thick slabs. The tree would make beautiful tables, headboards or even wall sculpture for your whole family. Every family member could have their own special furniture and recall the great day the tree fell.”

“Please consider the economic value of the tree,” suggests another. “I am a wood nut and I know that sometimes trees of that magnitude sell for thousands of dollars for veneers — although if it fell over, there may be deterioration, which undermines its value. It is probably already too late for any economic recovery, as it is, no doubt, ready for the fireplace by now!

“I’m sure there is a metaphoric parallel in here somewhere. At least you’ll stay warm.”

The 5 responds: How’s this for a metaphoric parallel? Early this morning, the city arrived with a huge grapple hook and flat-bed. Nameless men dragged the stump and trunk away. Left the debris… all without so much as knocking on our door.

“It is my understanding that the rebate checks that everyone is about to receive,” writes another reader, on a different government mystery we’ve been following here in The 5, “is not the great windfall that it appears to be. It is a nothing more than an early tax distribution this year that will be deducted from tax refunds next year, assuming there are refunds due.

“Some people will get away without having to pay it back, as they weren’t going to get a refund anyway. But they will be the only ones to escape that. Get a copy of the bill and read it for your own conclusions. I may have it wrong. If this is the case, Wall Street won’t like that. Robbing next year’s ‘Peter’ to pay this year’s ‘Paul.’

“What a fraud.”

“The reader who wrote in,” writes yet another reader, “that he felt China using a sovereign wealth fund is better than China investing directly is a good case of why Americans should never have been able to elect senators by popular vote and why the electoral college is such a necessary thing in a smoothly working REPUBLIC.

“I have no idea what the situation to bring this about will look like.”

“By the way,” the reader continues, changing tack completely, “the Chinese sovereign wealth fund IS a clear and present danger to the U.S., in my opinion. But because we have so many pinheaded dummies in the U.S. hollering for health care and other bennies, our government has no choice but to borrow money to pay for them. Bernanke has made it clear that they intend to inflate until the thing suddenly implodes, rather than let the thing deflate under its own weight. By then, though, I suspect the Hamptons will have relocated to Ecuador and Belize.”

Umn… yeah….

Addison Wiggin,
The 5 Min. Forecast

P.S. Don’t forget, you’ve got less than six days to take advantage of our four free months of Options Holine offer. Learn about this limited time deal, including our 600% gains in 6 months guarantee, here.

• U.S. banks drain reserves to Depression-era lows
• Markets fall across the world… service sector data points to recession
• But all hope is not lost: LIBOR returns to normal, insider buying hits 13-year high
• Wheat soars to record high… Kevin Kerr on “big story” in agriculture this year
• China desperate to curb pollution for Olympics… Byron King on its “ripple effect” sure to change the global economy

Oy. Bank reserves in the U.S. turned negative in January for the first time since the Great Depression.

In December 2007, total bank borrowing from the Fed topped 36% of reserves. That was the highest proportion since March 1933, when it hit 46%. Back then, President Roosevelt declared a “bank holiday” to prevent bank runs.

But…“In January 2008,” writes our friend John Williams of Shadowstats.com, “the U.S. banking system met its reserves only by borrowing an amount in excess of 100% of reserves:

“Mr. Bernanke has promised not to repeat the mistakes made by the Federal Reserve in the 1930s,” Williams explains, “whereby the banking system and the money supply collapsed into a deepening, deflationary Great Depression.

“The latest data on bank reserves suggest that something along the lines of an attempted nonrepeat of 1933 is under way. Faced with a devil’s choice, the Fed has acted in the last several months with a series of emergency actions to hold the banking system together and to prevent a debilitating implosion in the money supply. The Fed will create whatever money is needed to prevent a collapse of any portion of the financial system.”

That can’t be good…

Neither can this… the markets greeted “Stupid Tuesday” with a huge, across-the-board sell-off – the worst of its kind since October. The Dow, S&P 500 and Nasdaq all fell 3%. The horrid ISM report we mentioned yesterday caught most of the blame.

And as usual, market malaise in the U.S. spread to Asia. In Hong Kong, the benchmark Hang Seng fell 5.4%. The Nikkei 225 lost 4.7%. Shanghai gave back 1.5% of the 8% gains it posted on Monday.

But lest you think we’re all gloom and doom here at The 5, let us offer you three rays of hope:

First, the LIBOR — the interest rate banks charge each other for overnight loans — has gone down and even briefly dipped under the fed funds target rate. “That means,” explains Dan Denning from the other side of the planet, “the Western world’s major banks are not scrambling for cash as desperately as they were a few weeks ago.

“The falling LIBOR rates also suggest that the big banks are not as suspicious of one another as they were a few weeks ago.”

Second… insider buying among Wall Streeters has reached a 13-year high. In fact, January marked the first time since 1995 when CEOs and other senior corporate officials bought more of their own company’s shares than they sold. “Insider” purchases totaled $683 million last month in spite of the S&P’s 6% decline.

The last time insiders were net buyers, in January of 1995, the S&P rallied 34% in less than a year. What’s more, of the last seven times insiders bought more than they sold — all occurring between 1988-1995 — the S&P rallied an average of 21% in the following 12 months.

Among all the market’s sectors, net buying was most significantly found in communications, industrial, energy, materials and consumer cyclical groups.

And third… our friend Chris Mayer tells us by phone this morning from the Gabelli Pump, Valve and Motor Symposium in NYC that four of the value funds he’s been watching — Third Avenue, FPA Crescent, Tweedy, Browne Global Value and First Eagle — have opened their doors to new investors for the first time in years.

“That signals to me,” says Chris, “these fund managers see value in the market… and they want to buy. But they don’t want to dip into their reserves to do it. So they’re taking on new clients. It’s a good sign.” Mr. Mayer will show us what these funds are looking at on Friday. He’ll give us a full report on the Pump, Valve and Motor Symposium, too. Heh. Bet you can’t wait for that.

Former Treasury Secretary Robert Rubin, now chairman of Citi, doesn’t seem all that worried about the banking crisis either. Rubin told a crowd at Manhattan’s Cooper Union for the Advancement of Science and Art last week, reports Fortune magazine, that “The problems now roiling the markets and forcing the Federal Reserve into a defensive posture are ‘all part of a cycle of periodic excess leading to periodic disruption,’ and that we are not, in fact, on the verge of a financial meltdown.”

Instead, he blamed politicians and consumers for not understanding the mess we’re in. “Part of the problem,” wrote Fortune, explaining a point Rubin also made in our interview with him for I.O.U.S.A., “is that we need a ‘more educated electorate’ to hold politicians accountable. Without that, the U.S. won’t be able to overcome long-term economic challenges, like the troubles surrounding Social Security and budget deficits, or the new problems created by globalization.”

“It’s really not that difficult,” Rubin concludes in our movie. “The old saying ‘There is no free lunch’ is true”… in politics as much as it is true for the national economy.

The dollar hasn’t given up the ghost yet, either. The dollar index even perked up a full point premarket yesterday. Then it continued trending upward throughout the day, ending around 76.2.

Of course, this is only 2 points above its all-time low.

The euro slipped further this morning. It’s barely holding on to $1.46 as we write. Tomorrow, the European Central Bank meets to discuss rates in the eurozone. Given their equally dismal service sector numbers yesterday… a rate cut seems likely, sooner or later.

The pound has fallen 4 cents against the dollar since last Friday. If you’re fresh off the plane at Heathrow, you can score a pound for $1.95 this morning. Also in trading yesterday, the Canadian dollar let slip their U.S. dollar parity, down to 99 cents. But the yen refused to let go of 106.

Gold held its peace during yesterday’s sell-off on Wall Street. The precious metal has been trading between $895-900 most of the week. This morning, it opened in New York just above $895.

Wheat hit a record high $10.33 per bushel this morning. The same bushel would have cost you about 5 bucks in June… yikes! The grain also surged to record or near-record highs in other exchanges in North America and Europe.

“Wheat prices are soaring once again,” comments our Maniac Trader, but that’s not all. “Because of a weather event in Canada and overall global demand, corn is ratcheting higher on the new ethanol mandates, and soybeans… fugetaboutit; soy oil, soy meal… anything soy is the big story this year. Regardless of how much is planted, look for bean prices to continue north.

“Bottom line is if you don’t have some of these trades in your portfolio, you are not going to benefit from one of the biggest booms of all time. As my friend Sean calls it, it’s farmaggedon!”

Join Kevin and his Resource Trader Alert army here.

Olympic medical consultants have urged those traveling to China for the 2008 Olympics to limit physical activity. Hmmm…

A clear and sunny day in Beijing

“In 2008, China will experience increasing levels of pollution of every sort,” comments Byron King, offering a forecast of quite ominous proportions. “We’ll read numerous reports about the increasing damage to human health — in China and abroad — due to Chinese industrial development. The dirty environment of China and its potential impact on Olympic athletes will become a cause similar to the Chinese toy scandal of the past year.

“The Chinese government is likely to pull out all the stops to clean up the air and water near Beijing leading up to the Olympics. Vast swaths of heavy industry will be shut down, including coal-fired power plants in northern China. Electricity will also be diverted to Beijing from other regions.

“This will cause a ripple effect throughout the Chinese economy as thousands of plants close and millions of workers are displaced from jobs. Overall Chinese economic output will be affected, and there will be a disruption in the Chinese demand for commodities.

“This turbulence in the Chinese economy may also be the prelude to a major slowdown in Chinese economic activity after the Olympics. Chinese leaders are already looking for ways to get the breakneck pace of economic growth and price inflation under control, and post-Olympics will be a logical time for the Chinese economy to take a breather.”

That is, if it can catch its breath at all. For more on the global battle to reduce emissions, see Byron’s Energy & Scarcity Investor.

BHP Billiton offered to buy Rio Tinto for $147 billion last night. Rio responded with the “carefully consider” lip service, only to reject it this morning. Should the deal eventually go through, it will be the one of the largest of all time, and BHP will become a near-monopoly giant in the mining industry.

Goldman Sachs, Citigroup and five other banks have offered to lend BHP the $55 billion it would need to finance the deal… the largest loan in the history of business.

“China’s SWF played a masterstroke getting in between BHP and Rio,” opines one reader. “They’ve thwarted an almost certain rise in the iron ore price, and still managed to get a 9% stake in the company. It can block a deal; it prevents pricing power from swinging to the producers; and if BHP ends up buying Rio, China makes a quick 10% on its investment.

“That’s a good deal. And they were in a position to make it because A) they had the money and B) they were thinking in those terms.

“Our jackass politicians and corporate thieves are not. And the American economy is going to pay for it.

“No one really knows, but I don’t imagine the average Chinese spends too much time thinking about how important America is to his future. Maybe Chinese policymakers do, if only because America still has aircraft carriers and nuclear missiles. But I also imagine that in China’s long-range strategic view, the U.S. is just another market, perhaps hollowed out by a massive wealth deflation… and certainly not as important to China’s future as Americans would like to believe.”

The 5 responds: Of course, that’s not necessarily a bad thing. Might give us a chance to reign in a little of that greatest of American exports: political hubris.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Sovereign wealth funds will continue to play a major role in stabilizing the global markets in 2008. If you haven’t had a chance to read our report on the subject and are not a subscriber to Christopher Hancock’s Free Market Investor, you’re missing out on one hell of a movement in global capital… don’t be afraid to grab a little piece for your own retirement fund.

P.P.S. If you’re still in an adjustable-rate mortgage, the Fed may be handing you a reprieve by reacting as they have to the credit squeeze. We told Prashant Gopal, the gentleman who covers real estate for BusinessWeek, as much on Friday. Check it out here.