• 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

• February foreclosures fall from January heights… but a foreboding trend remains
• The typically overlooked data point that’s moving markets today
• Record highs for commodities across the board… why you should expect a pullback, and when
• U.S. bank guesses SWFs will soon have greater spending power than global governments
• A surprising knock-on effect of the U.S. water crisis
• Plus, did we touch a nerve? Unusually angry reader mail, plus our response below

Foreclosure filings spiked another 60% in February, RealtyTrac reported this morning. Over 223,650 American homeowners filed for some form of foreclosure last month, 25% of whom lost their home to the bank.

On the bright side, filings were down a bit from January. But looking at the one-year chart… a sharp eye might be able to spot the trend:

Retail sales fell 0.6% in February, three times what analysts predicted. While this data point is typically insignificant, today, it’s moving markets. The Dow dropped nearly 2% on the Commerce Department’s release.

Yesterday’s market action was less than confidence inspiring; 24 hours after the Dow’s best day in five years, markets in the U.S. spent the whole day fighting to hold onto Tuesday’s gains.

In the end, the Dow and Nasdaq shed about 0.5%, while the S&P 500 fell just short of 1%.

The dollar fell to new record lows last night… a trend still under way this morning. So far, the dollar index has fallen as low as 71.8. We can only assume the word in the pits is a U.S. recession, more rate cuts and liquidity injections from the Fed.

The euro found itself at another record high, breaching $1.56 for a split second before “retreating” to very high $1.55. The European currency is up 10 full cents in less than a month.

The pound has regained $2.03… up 3 cents since Tuesday. And the yen — the currency of a nation that’s essentially been in recession for the past decade — has reached 100, a 13-year high versus the greenback.

Thus, it should come as no surprise that oil marched to another record high, too. Light, sweet crude prices rose as high as $111 on the wave of dollar weakness. The U.S. Energy Department’s weekly supply report showed U.S. stockpiles at 6.2 million barrels, more than three times the 1.6 million expected. Traders, clearly, couldn’t care less.

Gasoline inched up another penny, to $3.26, at your average national pump.

Gas is still priced lower than its inflation-adjusted all-time high. According to the Energy Information Administration, gas in March 1981 cost $3.40 in today’s greenbacks.

You can expect that price by this summer, if not sooner.

Gold snuck briefly past the mythical $1,000 mark while we were scribbling away this morning. But it has since retreated to $991. Stay tuned. This is likely to be the 00:00 headline story in tomorrow’s 5.

“The soaring commodities markets are not immune to a sharp, sudden sell-off,” warns Eric Fry. “In fact, a sell-off is exactly what the nearby chart seems to be anticipating. Investor sentiment has become quite extreme in both the grain and precious metals markets. The ‘dumb money’ has been buying aggressively in both sectors, while the ‘smart money’ has been selling.

“In general, the ‘large speculators’ buy into markets as they are topping out and sell into markets as they are bottoming out. The ‘commercial traders (commercials) tend to do the exact opposite. Hence, simplistically, the ‘large speculators’ represent the ‘dumb money’ and the commercials represent the ‘smart money.’ Obviously, this characterization is neither exactly fair, nor exactly helpful. But when either category of futures trader is amassing a record-high position on one side of the market or the other, prudent investors should probably pay attention.

“Over in the gold pits, the commercials have amassed their largest ever net short position. This large bearish bet by the ‘smart money’ does not guarantee a sell-off in the gold market, but it does raise the possibility.

“Your editors have been vocal, longtime fans of gold and most other commodities… and so we remain. We anticipate much higher gold prices and oil prices and grain prices… eventually. But we’d rather be a buyer on weakness than on strength… So if the current signals from the commodity markets are valid, we long-term commodity bulls might soon receive a fresh short-term buying opportunity.”

“The year ends for Japan (fiscal year ends for companies) are at the end of March,” adds our friend Frank Holmes, hinting at when that short-term buying opportunity might reveal itself. “It’s basically our (North America) December, and we get a lot of disclosure.

“We’ve not heard much negative news about the subprime in Japanese banks. So odds favor that if there’s any type of news that comes negative out of Japan, that currency would all of a sudden go through a correction, the dollar would rally, gold would correct and then you get on with this wonderful bull market in gold.”

Frank, by the way, is a perennial favorite at our Vancouver Investment Symposium. This year, he’ll be just one of many esteemed speakers joining us for A View From the Peak. Mr. Holmes’ five-star hedge fund, the U.S. Global Investors Global Resources Fund, has risen over 680% since 2002. If you’d like to join us in Vancouver, please call Barb Perriello at 1-800-926-6575.

Sovereign wealth fund assets could soon be greater than the entire official foreign reserves held by central banks of the world.

Morgan Stanley analysts recently estimated SWFs control some $2.8 trillion in assets. According to their growth models, SWFs could easily become larger than the $12 trillion total net value of national holdings in the world — by 2015.

“The rate of growth is impressive,” said Morgan Stanley managing director Stephen Jen. “We are talking here of about $1 trillion per year in their asset pool, generated mainly by a boom in oil prices and other commodities.”

Jen later told Reuters that he expects most of this growth to come from Asia. Good old I.O.U.S.A. is still raising funds for its SWF… when checked this morning, it was looking like we’re at negative $9.4 trillion. Good start…

The Chilean sovereign wealth fund, one of the year’s many newcomers, will soon begin purchasing stocks. According to an announcement by the county’s international finance coordinator, Chile’s SWF will soon begin committing 15% of its $17 billion war chest to stocks and bonds around the globe.

Our Christopher Hancock is convinced that this wave of sovereign wealth investment might be just the ticket you need to ensure the safety of your own retirement. To find out more, read this report.

A surprising knock-on effect of the growing U.S. water crisis… stocks of Pacific salmon are at record lows. According to this morning’s New York Times, government officials will likely shut down salmon fisheries all over the West Coast in an effort to abate rapidly dwindling supply.

“The Central Valley fall Chinook salmon are in the worst condition since records began to be kept,” Robert Lohn, regional administrator for the National Marine Fisheries Service, told the paper. “This is the largest collapse of salmon stocks in 40 years.”

Such “central valley runs” are mostly surrounding the Sacramento River… “the focus of a water struggle between farmers and irrigation districts on one hand and environmental groups and fishermen on the other,” said the NYT.

In advance of our reader mail section this morning, let us give you this little nugget of information: The U.S. Treasury Department announced a current fiscal year budget deficit of $263 billion yesterday — an all-time high.

Clearly following Bush’s straight-as-an-arrow path to balancing the budget by 2012, the U.S. government’s current deficit since the start of the fiscal year (Oct. 1) is up 60% from the same period last year.

Not surprisingly, this nation managed to tally an all-time deficit while also raking in record high revenues for the period. The U.S. government increased earnings by 1.3%, to an impressive $967 billion since October.

Too bad government spending is up 10% in the same time, to $1.2 trillion.

And now to your ire:

“Literally speaking,” writes a reader, “baby boomers ages range from ages 50-62, not 44-wherever, as you indicated. Those six years in between are the represented ‘cohorts’ in Washington that you are unknowingly referring to, not the boomers. Boomers are going on entitlement rolls now, and no one in D.C. wants to do anything for the ‘Now Generation’ now that we will no longer contribute to the GDP, except on the debit side of the column.”

The 5 responds: If you want to get literal, the U.S. Census Bureau calls a baby boomer anyone born between 1946-1964. That would place them between 44-62, as we stated. And from a short smattering of officials in the current administration, it’s not hard to see that the boomers are the most highly represented demographic group in the U.S. government. For example:

George W Bush: 61 years old
Condi Rice: 53
Hank Paulson: 61
Robert Gates: 64
Ben Bernanke: 54
Average age of a U.S. senator as of January 2008: 62
Average age of a U.S. House member as of January 2008: 58

The government is dripping with baby boomers, and not even the younger ones in those ‘six years in between.’

But you’re right. The “first boomer” started collecting benefits this year. You’re heading into the period in your lives when you need health care and retirement programs more than ever. But your timing couldn’t be worse. The coming retirement of the baby boom generation is, in the words of David Walker, “a tsunami that threatens to swamp the ship of state.”

The government is already faced with exploding budget deficits and a rapidly compounding national debt. The public is bereft of savings. The economy has been hollowed out from the inside. We suspect there will be lots of blame being thrown around before we recognize the real crisis… and, unfortunately, not a lot of solutions.

“I am not a baby boomer,” writes another reader, “having been prewar issue, i.e., prior to World War II. However, I am constrained to deliver comment on your response to the reader who wrote in defense of his (baby boomer) generation.

“I am sure what he was reacting to was your acid comment, ‘God forbid the baby boomers ever take responsibility for their own actions.’ This was a totally irresponsible and insulting assertion that has little basis in fact. Further, you do not present evidence, even of the scantiest sort, to back up your statement — which amounts to an accusation — no doubt because there is none. You were further disdainful of your reader’s commentary which rang truer than not. After he took the trouble to write a thoughtful and courteous letter to you, you blew him off in a fit of arrogance and defensive rhetoric.

“Mr. Wiggin, I have bought and read every book of yours, including those co-authored. I enjoy your dry wit and satirical barbs at those who would divest us of our freedom and fortunes. But when you turn this persiflage upon one of your faithful, you have stepped over the edge of responsible authorship. I must say that you have disappointed me very much.”

The 5 Responds: Thank you for the kind rebuke. We’re impressed with your use of the word “persiflage” and apologize if we’ve disappointed you. We do, however, appreciate your restraint. You could have responded like this gentleman:

“The 5 is the most stupid group of idiots around,” he writes. “I worked hard, paid my debts and neither party represents my interests. And as for insurance, I paid out over $800 per month for insurance with high copayments and limited coverage. Now that I am 65 my coverage is no more and Medicare is a joke.

“Mr. Addison ‘Whoever’ is an educated idiot. All I can say is you will need more than money to survive. I would suggest a .357 Magnum… if you have the guts. You had better stay behind your high-priced gated prison. While the rest of us who do not know what instant gratification may be…

“My 2000 Express van has nearly 170,000 miles on it, because I cannot afford a new one. I know that all of your high-priced special services are for individuals with six-figure incomes. As for me, I have slow-speed dial-up service and rabbit ears on the old TV, which, as I understand, will be obsolete in 2009.

“So please do a little research for the rest of the country. The most I ever made in one year was $34,000, and that was the last year of my work. I usually read your 5 with respect, but Mr. Addison is a jerk of all jerks. After tonight I am blocking all e-mail from the stupid 5 group.

“The 5 makes me sick.”

The 5: Emotional subject, this one, eh? It’s only going to get worse.

“Ironically,” Ian writes by IM this morning, “this next bit comes from a Money magazine interview with Ben Stein published this morning:”

“Q. Are you totally sanguine about the outlook for the economy?

“A. A shortage of intelligent behavior. We’re a lazy, undisciplined generation. I don’t exempt myself: I spend way too much, even though I make a good income.”

Best regards,

Mr. Addison, “jerk of all jerks”
The 5 Min. Forecast

P.S. Don’t forget… our special offer on the Resource Reserve ends tonight. Click here for your last chance to get all our commodity letters for a heavily discounted fee.

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

Rejoice! The benevolent Fed saved the market… again.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regards,

Addison Wiggin,
The 5 Min. Forecast

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• 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

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