“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

Visa — ticker “V” — was supposed to open this morning on the NYSE for $44 a share. But strong buying pressure pushed up prices to open to the everyday investor at $60.

While the mood on the Street is incredibly optimistic for V, thanks mostly to MasterCard’s breakout IPO in 2006, the newly minted share faces stiff head winds. The Renaissance Capital IPO Index, which tracks public companies from their debut to two-year birthday, is down 23% this year… twice as bad as the performance of the S&P 500.

Morgan Stanley crushed Wall Street earnings estimates today, reporting net income about 45% above analyst expectations. But like its financial brethren yesterday, despite beating estimates, Morgan also admitted that first-quarter earnings were nearly chopped in half compared with the same period last year. Year-over-year quarterly net income fell $1.5 billion, or 42%.

As usual, the FOMC would like you to forget about inflation. “The committee expects inflation to moderate in coming quarters,” continued the statement, “reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization.” While the Fed admitted that inflation uncertainty “has increased,” it did little more than assure us that they would “monitor inflation developments carefully.”

CNN/Opinion Research released a poll yesterday showing that “the rising rate of inflation” is Americans’ No. 1 economic concern. Ninety-one percent of all folks polled by CNN listed the dollar’s devaluation as their primary fiscal worry. Worry over the value of the bucks in their wallets beat our job growth, the stock market or housing concerns in the poll.

Yet in an act of sheer defiance, the dollar index surged off near-record lows after the Fed’s release hit the wire:

We can only assume traders had priced in 100 points, rather than the paltry 75 they drummed up. The dollar index currently rests at 71.7, about a full point above its all-time high. Hooray!

The euro trades for $1.57 this morning, a penny short of its record high. The pound has fallen a bit, down 2 cents, to $2.00. The yen is back to 98, and the loonie has retreated to parity with the greenback — $1 even.

The Swiss franc, we note today, has reached parity with the U.S. dollar for the first time in history. The franc — a destination currency in the global “carry trade” — is up about 17% on the greenback in the last three months.

The stock market loved the FOMC’s cut yesterday too. Already elated with Goldman Sachs and Lehman Brothers earnings announcements, the Dow had rallied 250 points before the Fed’s announcement. Despite a sharp pullback within minutes of the release, by the end, U.S. stocks enjoyed their best day in five years:

The S&P 500 and Nasdaq skyrocketed 4.2%. The Dow mustered a gain of 3.5%.

The Dow’s 420-point gain was the fourth best in the index’s history, and you’ll have to look back to 2002-2003 for bigger one-day gains for any of these major U.S. indexes.

We weren’t surprised to see financials lead the way yesterday – just about every bank, broker and lender soared to double-digit gains yesterday. Bear Stearns is even getting in on the action:

Since it’s “acquisition” for $2 per share on Sunday, BSC has more than quadrupled.

Gold got shellacked during yesterday’s stock market rally and again this morning. Spot prices fell to around $995 after the New York close, and are sinking to $950 as we write.

We’re inclined to think, at least in the short term, the “easy money” has been made in the gold trade. But in terms of trading gold stocks, our gold adviser Ed Bugos thinks there is plenty of money yet to be made. He just published a report on the five gold stocks that have yet to catch up with $1,000 gold. You can learn more about them here.

Oil crept back up to $109 per barrel, $2 shy of its all-time high this morning before falling back to $104. While the world’s eyes have been fixated on rising crude costs, coal prices are quietly setting records, too. Check this out, from today’s New York Times:

“China’s coal consumption is mind-bending,” writes our Byron King. “China is currently building giant, 500-megawatt coal-fired power plant systems in an almost assembly line fashion. And China is installing and commissioning these coal burners at an astounding rate of THREE per WEEK!!!

“Each year as of late, China has added more electrical generation capacity than the entire nation of Germany. And Chinese electrical generation capacity has been growing at a steady rate of over 15% per year for the past five years.”

In the U.S., coal accounts for about 50% of American electricity production. The U.S. also has more coal deposits and proven reserves than any other nation. If you’re interested in investing in coal, Byron’s your man.

Rice shot up to a 34-year high this morning. Thai rice, largely considered the global standard, has risen 72% in the last three months to $640 per tonne this morning. Rice in the Philippines is selling for $702, up 50% in a little over a month.

“Some of this is weather related,” explains Chris Mayer, “but it also speaks to the larger issues of increasing resource scarcity. We see it in the energy markets; we see it in food prices. Rice is particularly important because of its central role in the diets so many people. And for many of them, a doubling in price since January is keenly felt. It’s also a potential source of social unrest.

“There is no easy way out of this. It’s going to take time and a lot more investment in agriculture. All of this spells opportunity for the number of agricultural plays out there.”

Chris’ Special Situations readers own Viterra, one of the largest grain handlers in North America. Since he recommended it in August 2006, its up over 80%. Discover the rest of Chris’ blockbuster MSS portfolio, here.

Sovereign wealth funds (SWFs) invested a record $48 billion in U.S. companies in 2007, says a Dealogic report on Monday. That’s a 165% increase from 2006, the study showed. What’s more, despite SWFs moving out of the spotlight this month, Dealogic estimates that SWFs have already spent $24 billion on U.S. securities this year… well on pace for a record 2008.

Again, we suspect these funds are going to be a key component in any investor’s successful retirement strategy. If you haven’t checked out Christopher Hancock’s work on these funds, you can do so here.

We end today lamenting the anniversary of the war in Iraq.

Five years ago today, U.S. troops unleashed “shock and awe” on ancient Babylon. Then-Secretary of Defense Donald Rumsfeld fully expected the troops would be “greeted as liberators.”

The U.S. government now estimates the total costs of the war are up to $2 trillion… give or take a trillion. And as a popular documentary last year illustrates, there’s “no end in sight.”

“No one would argue that this war has not come at a high cost in lives and treasure,” President Bush said this morning, “but those costs are necessary when we consider the cost of a strategic victory for our enemies in Iraq.”

Yeah. “I would argue,” says David Walker in the opening lines of I.O.U.S.A. “that the greatest threat to our national security is not some guy hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility.”

“The dollar is depreciating against gold,” postulates a reader with a forecast of his own, “because of a fundamental change in pricing of the value of goods in the world. Commodities are priced against each other, and only because of tradition are we still quoting commodities in U.S. dollars.

“Until quite recently, gold, oil, copper, lead, agricultural commodities, etc. were priced in U.S. dollars. They are still quoted as such, but in reality, the commodities are valued against each other, just as it was done during early civilization. Of course, the one major difference is it’s all done electronically. Currencies have become irrelevant. Unbelievably, we are still in awe when we hear a report that gold went up by US$20 or crossed the US$1,000 barrier. It’s really no big deal in terms of other commodities. The price of gold over the last few years actually went down against most other commodities.

“The same is true for oil. As in the good old days of early civilization, a commodity value is now strictly based on the available supply. Today, if corn is in short supply, it will appreciate against wheat if there is an excess. Of course, when the prices of basic commodities like oil and energy are appreciating against the U.S. dollar, it will affect the people who pay for their daily needs in that currency. But the rest of the world really doesn’t care unless their currencies go down too.

“In the foreseeable future, some commodities will be in much shorter supply, in particular, the commodities that are used up and cannot be replenished. An obvious one is oil. Once we use it up, it’s gone. The supply is constantly diminishing. Not so with gold. Other metals will also become rarer, but only because high-grade ore bodies are more difficult to find and costlier to develop. The price of the rarer metals will appreciate against other commodities that are more readily ‘available.’ Gold will likely be among them.”

Regards,

Addison Wiggin,
The 5 Min. Forecast

Since the peak two years ago, new home starts are down 62%.

Building permits, the best indicator of future housing starts data, also plunged in February. Permits fell 7.8% in the month to an annual rate of 978,000, also a 17-year low and the steepest monthly decline since 1995.

Goldman Sachs and Lehman Brothers both shocked Wall Street this morning with much-better-than-expected first-quarter earnings. Goldman said it earned $3.23 a share in the first quarter, beating estimates by about 25%. Lehman did the same, reporting earnings about 13% higher than the Street expected.

The news from Lehman was particularly well received. The market was anxiously awaiting Lehman to suffer a fate similar to its infamous counterpart Bear Stearns. Traders had barraged Lehman shares over the past week, sending LEH from $48 to $21 in the last five days.

But on the news this morning, shares in LEH have rebounded nearly 70% from Monday lows, to $36.

Still, both banks show over a 50% year-over-year net decline in first-quarter earnings — a long, long way away from the profitability they enjoyed just a year ago.

Nevertheless, markets skyrocketed this morning on the Lehman and Goldman news. The Dow surged over 200 points on the open.

The opening rally this morning furthers some good will mustered by investors midday yesterday. When the Dow, S&P and Nasdaq all opened the week with 1.5%+ losses… and given the Bear news … we were ready to let the crash flags fly. But traders, like consumers, held their ground. The Dow actually mustered a gain of 0.2% by the day’s end.

“It’s big mess,” our Chris Mayer told CNBC yesterday, referring to the Bear debacle, “and it’s going to take time to sort out. In the meantime, it’s going to weigh on the market. We’re likely to see some screwy prices as hedge funds and other leveraged players face forced liquidations. The fall in prices itself will also shake loose additional sellers as fear starts to take hold.

“That creates opportunity for investors who take a cooler view of things. Just as that huge gap opened up on Bear, there are other gaps that open up on the upside. In other words, there are stocks that dealmakers would pay considerably more to own getting tossed overboard in a panicky market.

“Studies show that after compounding, 90% of the return on stocks is generated on just 1.5% of the days the exchanges are open. So things can snap back quickly. I think if you’re going to put money in this market now, you’ve got to be patient and willing to give ideas some time.”

Chris’ book Invest Like a Dealmaker shows exactly how the richest investors in the world keep calm in times like this — and dive in for incredible bargains when the time is right. It’s worth the read.

Prices at the wholesale level jumped 0.3% in February. “Core inflation,” stripped of food and energy costs, and regarded by the Fed as the accurate measure of rising prices, actually shot up 0.5% — its biggest monthly leap in over a year.

Over the past 12 months, PPI is up 6.4%, with energy goods (up 19%) and food (up 6%) leading the way.

Yet as the Fed meets today, fed funds futures in Chicago are pricing in a near 100% chance of a 75-point cut today, about a 50% shot at a full 100-point slash.

Anything less than 75 points and you can expect mayhem on the corner of Wall and Broad streets in Lower Manhattan.

“The Fed has been playing the equivalent of Whac-A-Mole,” said Former Fed Vice Chairman Alan Blinder yesterday, “as financial turmoil keeps cropping up in new and unexpected places. Yet many of the problems facing [the economy] are beyond its reach.”

“When you have Fed insiders describing what they do as an arcade game,” suggests Christopher Hancock, “in which players try to hammer down plastic critters that randomly pop out of holes, you’ve got to wonder where’s the safest place to put your money.”

The yield on a three-month U.S. Treasury bill fell to a 50-year low yesterday. The 13-week T-bill, widely considered the ultimate in “safe” investments, yielded a pathetic 0.6% yesterday.

In other words, more investors are sitting on the sidelines than have been since Elvis was gyrating in front of his ladies.

The dollar backed off yesterday’s all-time low… but only by a smidge. The dollar index, after striking a new all-time low of 70.6, returned to 71.2 this morning. Light volume suggests traders are holding their breath until Bernanke exhales his own today.

“These aggressive moves by the Fed have all but sealed the fate of the U.S. dollar,” says our friend at EverBank, Chris Gaffney. “Currency traders have continued their assault on the greenback, and there is currently no rescue in sight. I don’t think even Hank Paulson can seriously talk about a strong dollar policy anymore.

“They have, obviously, thrown inflation concerns and concerns about the weakening currency out the window and are just trying to keep the U.S. economy from falling off the precipice. I think we have, unfortunately, already fallen off, and the currency traders look like they agree.”

“I myself watch very closely the development in the world economy and the U.S. economy,”
said Chinese Premier Wen Jiabao today, “and I’m deeply worried.”

Wen at the NYSE… quite literally keeping an eye on the U.S. economy

“What concerns me now is that the U.S. dollar is depreciating continuously, when the U.S. dollar will reach the bottom in this depreciation process, what kind of monetary policy the U.S. government will adopt and where the U.S. economy is heading.”

“China’s economy is already tied to the globalized economy,” said Wen. “All kinds of changes and fluctuations in the international economy will inevitably be reflected on China’s own economy.”

Oil finally took a breather yesterday. After touching another record high of $111, light sweet crude fell a good 4%, its worst one-day performance since August.

Thus, oil opened in aftermarket trading at $105 and is trending up to $105. A 75-point cut by the Fed today should kick the dollar in the groin and drive oil back up toward record highs overnight.

Despite oil’s pullback, U.S. gasoline prices attained another record high yesterday. The national average price at the pump has jumped about 1 cent a day for the past week and now rests at a record $3.28.

The U.S. Energy Department forecasts a national average of $3.48 by the end of spring. Bummer.

Gold sold all the way back to $996 last night. In fact, Just about every commodity under the sun got hammered yesterday. The Reuters Jefferies CRB Index — a measure of 19 different commodities including metals, oil, grains and meats — fell 5%. That’s the worst daily percentage loss in about 40 years.

A slowing economy in the U.S. could be putting a damper on demand for commodities. At the same time, financial institutions may be trying to liquidate positions in order to raise capital to shore up their balance sheets. Either would cause a correction in the index.

Either way, it was well overdue. The CRB has had quite a run:

“Am I worried?” Kevin Kerr asks himself. “No, not at all. I knew a correction would come. I’m still very happy we purchased some long-term options.

“Under no circumstances should you panic or start fretting over this kind of correction. That would be a huge mistake. Sure, it’s no fun to see an option lose value, but if you begin to think of it as an actual loss, you are going to have a very tough time trading options.

“As an active investor, the best thing to do now is what we have been doing. Take profits when we can keep the portfolio light and nimble, add when we see good opportunity and never trade beyond our means.”

Visa still plans on floating its initial public offering tomorrow. All signs leading up to this event suggest Visa’s IPO will be the largest in U.S. history, perhaps the world. Still, it ought to be interesting. The world’s largest credit card company floating during the height of one of the worst credit crunches in U.S. history. You can’t buy drama like that…

We’ll keep an eye on it. More tomorrow.

“You let ‘California Homeowner’ off too easy in Monday’s 5,” opines a reader. “For one thing, people who can’t pay mortgages can’t stay in their houses, and the bulk of jobs created in California over the past 10 years have been in home marketing and construction, so you can figure on a bunch of foreclosures from that crowd. Add to that the number of second homes and speculator-owned homes and you have a lot fewer than ‘99%’ of owners happy to stay put.

“Obviously, ‘California’ is whistling past the graveyard, because if he’s owned his home for 25 years and had its value drop below what he owes on it more than once, it means he’s been sucking out his equity for 25 years.

“I’ve owned a house in California for 25 years, and it’s paid for.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. Despite gold’s pullback last night, there are still very good reasons why its bull run still has good legs… we explore nine of those reasons here.

J.P. Morgan Chase and the New York Federal Reserve will team up to bail out Bear Stearns. Rumors have abounded all week that Bear Stearns is facing severe liquidity problems. But the news turns out even worse than the Street’s forecast.

Bear will be injected with yet untold billions by J.P. Morgan, which will borrow the money from federal printing presses and you.

Bear Stearns stock fell over 35% within minutes of the news hitting the wire, even after being down some 25% this week already. The whole S&P slipped 1%.

That did the trick for gold, too. On this news, gold spiked to $1,003.

“The end of write-downs is now in sight for large financial institutions,” reported Standard & Poor’s yesterday. That news helped the Dow eke out a small 0.3% gain for the day. Likewise, the S&P 500 ended up 0.4%, and the Nasdaq rose 0.7%.

But either traders failed to read the fine print, or a financial crisis is already priced into the market. The S&P report estimated total write-downs to be some $285 billion, up $20 billion from the forecast last month. While this estimate is nowhere near the $600 billion guess UBS wagered last month, it’s still significantly more than the $160 billion already written down by global financials.

To paraphrase the S&P report, we’re barely over halfway there.

While markets in the U.S. have enjoyed a rally for the better part of this week, investors in Asia are still down on their luck. The Nikkei 225 is down almost 7% since Wednesday on worries that a U.S. recession and very strong yen will stunt Japan’s export economy.

After its big drop of 3.3% this morning, the Tokyo exchange is at a 30-month low.

Elsewhere in the Pacific… Hong Kong plummeted almost 5%, while Singapore’s index shed 4%. Stocks in Seoul, Sydney and Shanghai fell about 2.4%.

Oil set an all-time high of $111 by yesterday’s close. The price has since backed off a skosh. But upward pressure remains.

“Would gold and energy and other materials be this high” Larry Kudlow asked our Kevin Kerr last night on his show, “if we were poised for a really bad American recession?”

“This is a global growth story, Larry,” the Maniac Trader quipped in response. “While the U.S. may be heading into recession, we’re still seeing a lot of world demand. I don’t think we’re seeing the price of a recession in the commodities right now, so I do think were going to see a short-term correction, which will help ease the recession.

“Longer term, I really believe these commodities are going to go higher because of that global demand.”

Water, too, remains a commodity in high demand. One driver in rising water consumption is the rush to produce biodiesel, as this McClatchy chart shows:

Across the board, consumer prices neither rose, nor fell in February, the Labor Department said this morning. We’re not exactly sure which economy they were measuring, but polled economists predicted a 0.3% jump in the consumer price index (CPI) last month, slightly less than January’s 18-month high of 0.4%.

Since inflation is under control, the Fed is free to cut rates next week without fear of ruining the economy.

Still, the dollar can’t catch a break. It found itself another all-time low last night, this time at 71.7. Similarly, the euro and pound inched higher, to $1.56 and $2.02, respectively. And for a brief second, the yen struck 99, a 12-year high.

“Those aren’t good tidings,” George W. Bush told PBS yesterday when asked about current exchange rates, “if you’re for a strong dollar like I am. One reason I am for a strong dollar is because I think it helps deal with inflation.”

Really… you don’t say?

“Did you see the president say with a straight face,” wrote a reader last night, “that he favors a strong dollar? And the interviewer failed to follow up with the logical next question — why, then, do we have $9 trillion in national debt? I could have screamed.”

President Bush likes to say he got a “B” in economics, but an “A” in cutting taxes… and being fiscally responsible with the people’s money.

Congress passed the president’s $3 trillion spending proposal this morning.

The Senate quickly authorized this massive budget for the next fiscal year, beginning Oct. 1, just a day after the current government spending data showed record-high deficit so far this year.

But that’s all part of balancing the budget by 2012, we suppose… setting new all-time spending highs each year. The logic is impeccable.

“This is getting absurd” Jim Rogers told CNBC yesterday about the dollar crisis. “I know they can run their printing presses forever, but that is not good for the world, inflation is not good for the world, a collapsing currency is not good for the world. It means a worse recession in the end.”

When asked how he would handle the dollar crisis, specifically, the first two things he would do if he were in charge, Rogers responded: “I would abolish the Federal Reserve and I would resign… no country in the world has every succeeded by debasing their currency.”

Something tells us Mr. Rogers won’t be on CNBC long with that attitude.

“With all due respect,” writes a reader in response to our friendly debate about who is really to blame for the nation’s economic woes, “a cursory analysis of the ages of those who have most influenced U.S. economic and monetary policy over the last 30 years would suggest that our current deficit crisis (in most aspects) was a product of the ‘Greatest Generation.’

“The baby boomers are just starting to retire, and will face depletion of the trust funds, etc., in their retirement, while the architects of our troubles, from 1971 onward, will most likely die before their legacy comes to fruition, having both the ability to live off the spoils of the longest boom in our history and the tail end of the trust funds.

“Perhaps the hubris of winning World War II contributed to the mentality that the U.S. could overcome any obstacle, even deficit spending.”

“I am a boomer,” counters another, “and I have always thought my generation was a pack of super lemmings. Depending on the time frame, I have been called a freethinker, radical, rebel, rabble-rouser, social Darwinist and anarchist. Recently, in politer circles, I am an eccentric.

“Twenty-five years ago, I was blacklisted. In the Old West, a man’s survival threatened to that degree led to a hanging (horse thieves). Today, that is unacceptable. With the exception of family and a couple of close friends, ALL of my so-called peers supported the list.

“I have had an interesting and productive life since, but quite lacking in sympathy for the kind of trivia I ‘m seeing here. A good dose of truth has a salutatory effect on occasion, and you are to be commended for providing it.”

The 5 responds: Judging by the amount of mail we’ve received on this issue, age is a hotter subject than sex in this country. As well it probably should, given the tsunami headed for the nation’s financial situation.

One common thread stands out among the writers: Each generation is all too willing to blame the one before it for the mess it perceives the country to be in. Boomers do appear, at least from the cross section of letters we’ve received, to have a higher degree of self-loathing than either the “Greatest Generation” or those in their 30s — the so-called “Generation X.”

For our part, we’d like to apologize for being so general about our comments, and leave you with these words of wisdom from the generation that follows us:

“As for my and everyone else’s generation,” writes our last reader on the subject, “the vast majority of each are ignorant, especially financially so. Basic finance isn’t even taught in public schools. Thus, it would be idiotic of me to defend my demographic simply because I am lumped in by the fact of my age.

“What’s next, defending the actions of the Fed simply because it is American and so, by birth, am I?

“In regard to the vocal defenders of their demographic, don’t you find the level of groupthink a tad surprising for a publication catering to those sympathetic to a contrarian financial perspective?”

Enjoy your weekend,

Addison Wiggin,
The 5 Min. Forecast

P.S. By the way, if you’re a current subscriber to Resource Trader Alert, Outstanding Investments or Energy & Scarcity Investor and you’d like to join the Resource Reserve, we failed to mention we’ll credit your account the subscription fee of your existing pub toward the discounted Reserve Membership. You can claim that credit by calling 1-866-361-7662. But please do so by Monday — we’re trying to close the membership drive.

“A. No. There’s a real economic crisis highballing down the track. And that’s the baby boom’s retirement. There are going to be 20 million or 30 million people coming up quite short of the money they’ll need to live on. I’m terribly worried about that.

“Q. What’s the problem with boomers?

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

As if to illustrate the MBAs report in real-time this morning, U.S. mega-lender Thornburg Mortgage is having a tough day:

The lender was unable to meet a $28 million margin call and consequentially, its lender – J.P. Morgan — has announced it will exercise default rights and “liquidate pledged collateral.”

In other words, another lender is about to bite the dust. Thornburg couldn’t pay its bills because its housing-related assets aren’t worth what they were a year ago. Now the milkman wants his money back… or a piece of the company. Look for more of these default scenarios in 2008.

And so much for an Ambac rescue. Ambac announced its latest, very hyped plan to stimulate the company and shore up its ugly balance sheet yesterday… sell more than $1 billion in common stock and $500 million equity units.

Rumors of a state-sponsored bailout or even a sovereign wealth fund infusion muckled about all week. No such luck. Just good old-fashioned wealth dilution for now. Ambac’s stock-selling plan will more than double the number of shares outstanding.

Those crazy enough to still own Ambac weren’t exactly in love with that plan. The stock fell nearly 10% on the news.

Yesterday’s release of the Fed’s “Beige Book” shows Fed governors accepting the economy for what it is: a charlatan’s ruse.

Growth “has slowed since the beginning of the year,” the lily-white report kicked off. “Two-thirds of the districts cited softening or weakening in the pace of business activity, while others referred to subdued, slow or modest growth. Retail activity in most districts was reported to be weak or softening, although tourism generally continued to expand.”

All districts cited “tight or tightening credit standards and stable or weaker loan demand.” Also worth noting, inflation worries mounted as “upward pressure on prices from rising materials and energy prices” were seen by each district.

The Beige Book’s bashful honesty did a fine job killing the “animal spirits” on the trading floor yesterday. Stocks rallied briefly as the Dow gained as much as 120 points early on. But all the major indexes pulled back and ended the day up about half a percent.

The private sector shed 23,000 jobs in February, reports the employment firm ADP yesterday. That’s the first monthly drop since April 2003.

We rarely give much credence to the ADP jobs report… or the Labor Department’s guess, due Friday, for that matter. Still… this is worth noting. The bean counters are struggling to keep the books on the positive lean. Should the BLS release a similarly dismal jobs report tomorrow… look out.

Gold struck a new all-time high yesterday of $993. After a brief retreat, the precious metal surged to new highs on more weak dollar news. Once again, gold has backed off its recent high this morning, to about $975. But we dare not bet against this rally… $1,000 could be here by the weekend.

Oil prices continued to skyrocket yesterday, too. After a very brief retreat to $99, oil has risen above $105 this morning, another all-time high.

A surprise inventory report from the U.S. Energy Department showed a reduction in inventory by 3.1 million barrels. Traders were expecting an increase of about 2.3 million. These days, that’s more than enough for a new record high.

“The weaker dollar is certainly a part of these commodity increases,” our Kevin Kerr told Larry Kudlow last night on CNBC. “But adjusted for inflation, really, we’re not even halfway there in some of these commodities, including oil. Bottom line, if the Fed doesn’t step in and start supporting the dollar, you’re going to see commodities climb exponentially. Not to mention worldwide demand is just huge.

“Oil’s going to $125-150,” Kevin concluded. “We might see some pullbacks in the short term due to healthy supply, but this is something that Europe has been living with for a very long time… we’re just getting a taste of it today.”

To honor this incredible commodity bull market, we’re offering our Resource Reserve at a specially discounted price. The Resource Reserve is a collection of our finest commodity letters… Outstanding Investments, Resource Trader Alert, and Energy & Scarcity Investor, plus the soon to be launched Gold & Options Trader. We already bundle these products together at a discount to buying them individually, and starting tonight we’ll chop off an extra few bucks to sweeten the deal.

If you’re looking for a comprehensive solution to playing the commodity boom, keep an eye on your inbox tonight for details on the Resource Reserve.

For what it’s worth, even the loudmouth equity cheerleader Larry Kudlow is worried about the dollar and its effect on commodity prices. The demons in Hades must have felt a sudden icy chill…

“This is the new big theme,” he said on CNBC last night, effortlessly reversing his economic stance for the past few decades. “I don’t think the commodity rally will end, maybe not in my lifetime, unless and until the U.S. government finally defends the U.S. dollar. I’ve changed my thinking on this… I am very worried about inflation.”

“We gotta get off oil,” added our always convincing president yesterday. “America has got to change its habits.” He went on to push his weak ethanol strategy… again. The energy bill passed by Congress calls for ethanol refiners to increase ethanol output by a multiple of five — from 7 billion gallons per year today to 36 billion by 2020.

“That’s good if you’re a corn farmer,” Bush chuckled, “and it’s good if you’re concerned with national security.”

The dollar, as you might guess, set new records of its own. The dollar index found itself at another all-time low of 73.1 late last night. The euro marched to another record high of its own: $1.53. The pound is back at $2 even. The loonie gained to $1.01, and the yen stayed at 103.

We note that both the Bank of England and European Central Bank chose to leave their benchmark lending rates unchanged in their monthly meetings this morning.

On the scarcity scene, scientists are flooding the Colorado River.

The U.S. Department of the Interior has ordered the folks running the Glen Canyon Dam at Lake Powell to flood the Colorado River at a rate of 300,000 gallons per second for the next 60 hours. If the Empire State Building were an empty container, this man-made flood would fill it in less than 20 minutes.

The government is ordering the flood to restore sandbars and ecosystems in the Grand Canyon, but we hasten to add that the billions of gallons of water will end up in Lake Mead… the very lake we showed you last week being sucked dry by neighboring cites. How convenient.

For what it’s worth, Buffett’s back on top:

Mr. hamburger and a Cherry Coke himself retook the title of Forbes’ “richest” man on the planet yesterday.

Buffett pocketed a cool $10 billion since this time last year, due almost entirely to Berkshire Hathaway stock appreciation. The Oracle of Omaha is now estimated to be worth $62 billion, besting Mexican tycoon Carlos “Slim” Helu’s $60 billion net worth and Bill Gates’ measly $58 billion.

If you’d like to ride Mr. Buffett’s coattails, Berkshire Class A shares peaked at an incredible $150,000 a pop in December. You can pick one up today on the “cheap” for about $139,000.

“What do you propose for the people who cannot pay the adjustment on their ARMs?” asks a reader. “Just saying that it is not right for people to renege on their debts doesn’t solve anything.

“Kick them all out of their houses and the lenders get to hold the bag anyway (a lot of otherwise worthless real estate). If the lenders’ pockets are deep enough, they may be able to hold the bag AND tread water long enough to come out OK. If you like that scenario, you must also like tons of the working poor living on the street, in their cars and in shelters.

“Is this a great country or what?”

“Ben Bernanke’s comments about the banks doing something to help the people losing their homes are absolutely correct,” writes another. “It is obvious that you are not in the housing industry. For the banks to help out the people in these homes by working with them and doing an extension on the home, taking the payment that they can afford and taking less on the amount that the people must pay off on their home is smart!

“Right now, I am a builder and realtor and have had the market hit us head on. The principal reason was the banks put too much easy money out in the market; next, the news media filled the air with so much fear that a lot of this is self-prophecy. Before we knew it, people got scared and walked away from their homes.

“So things get tough, and now the banks don’t take partial payments or work with customers at all. They just take the home back and put it back on the market for 50 to less than 75 cents on the dollar, killing the whole neighborhood’s values.

“Where is the bad idea of working with the original buyer if you are going to throw away that much money?”

“Since the lenders are already taking a beating on their foreclosures,” adds a third, piling on, “maybe debt forgiveness isn’t that crazy of an idea. For instance, a lender is owed $600,000, and a house is worth $500,000. The lender forecloses and sells the property for $480,000. Subtract closing costs, add carrying costs, and it net about $450,000. Nobody wins.

“Now say the lender lowers the principal amount of the loan to $525,000. The owner agrees and starts paying his payment. Win-win. One less house on the market, banks getting at least some cash flow and the owner keeping the house. When you look at the alternative, it’s not that crazy. The fact that the lenders had some complicity in that debacle should not go unheeded, nor should their responsibility. Housing prices are going to stabilize only when the supply starts decreasing. Keeping foreclosures off the market is a good start.”

The 5 responds: You’re probably right. What can they do now but try to save everyone’s ass?

Unfortunately, our comments come from an entirely different perspective. We were scoffed at when we predicted the mortgage bubble would arise, having studied the exact phenomenon a scant 10 years before in Japan. Ridiculed a few years later when we suggested it couldn’t last, and now we’re heartless, out to lunch and less than pragmatic about the collapse.

It would be amusing, if it weren’t such a tragic farce. It’s fruitless to point out there ain’t no such thing as a free lunch when the government and media are complicit in — even arrogant about – fomenting, then excusing, recklessness. And when lenders and borrowers alike have come to expect it. What a wet blanket we are, eh?

But let me ask you this: How long is the credit system — the heroin that courses through the veins of our euphoric American life — going to function if debtors are consistently encouraged to renege? It IS crazy. Be careful what you wish for. Screw it, we’re already past that.

The real answer in this case is the mortgage bubble should never have happened in the first place. But since we have been admonished since childhood never to use the word “should,” as it implies some moral superiority on our part, let’s try this: Let the chips fall where they may. As our friend and mentor Bill Bonner often says, in markets, as in life, “People don’t get what they expect, they get what they deserve.” That’s not a moral judgment on our part… but simply the natural order of things.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. If we seem unusually cranky this morning, the Ultimate Fighting champion who baristos at The Daily Grind when he’s not in the ring poured us a hazelnut, instead of a French roast. We didn’t realize it until we’d driven away. No one should ever pour a man hazelnut in the morning. It’s just not right.

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.

We begin today with another benchmark for your kitchen calendar: March 3, 2008 — most expensive oil price in the history of human civilization.

Light, sweet crude briefly touched $103.95 yesterday… its first inflation-adjusted historical high since 1980.

Courtesy of The New York Times:

In dollars, the 1980 high was just below $40 a barrel. But as you can see, $40 ain’t what it used to be.

“In 2007, the United States imported $331 billion worth of crude oil,” comments our oilman Byron King, citing a Department of Energy report, “at an average price of $64.25 per barrel. If the U.S. imports crude oil in 2008 at an average price of about $95 per barrel, the annual import bill could jump by about $150 billion or more, to $580-600 billion.

“That would be larger than the entire budget for the Department of Defense.

“This hemorrhage of currency will, of course, negate any effect of the Bush-Congress economic stimulus package, of about $152 billion value.”

Who could have seen that coming?

In kind, the dollar bled all day yesterday and into this morning. The dollar index dribbled down to a new all-time low of 73.3. The yen is still having its way with greenbacks… the Nipponese currency climbed on top, to 102, during the night. The euro watched and enjoyed its way further up, to $1.52.

“I think the only thing the dollar has going for it these days,” says EverBank’s Chuck Butler, “is the hope that the European Central Bank tries to play catch-up with the Fed regarding rate cuts. I don’t think the ECB will do that. But it will, most likely, cut rates this spring… probably in May. So… When that happens, it just might be a buying opportunity.”

“The dollar’s going to get weaker over time,” Warren Buffett told reporters yesterday, following the release of the Berkshire shareholders letter. “The government can talk about how it’s in our interest to have a strong dollar, but we’re not following policies that lead to that. [A weak dollar] is just a consequence [of government policy], and it’ll just continue to be.

“If you do the same thing over and over again, you’re going to get the same result… and we are doing the same thing now that we were doing two, three, five years ago, and the dollar will weaken in an irregular basis, in my view, for some time to come.”

Amen.

The stock market swooned on petty rumors yesterday.

Out of the gate, the ISM manufacturing data we discussed tripped markets up and down. They went a full 1%. But then whispers of another “secret, closed-door Fed meeting” drove markets wild. Up they rallied… but then… it turns out the meeting was actually just the same old boring regularly scheduled drivel fest the Fed usually conducts.

“Nothing out of the ordinary,” said Fed spokespeople.

A fickle bunch, floor traders smirked. After they’d slithered off for the day, the Dow and S&P 500 ended right where they started, and the Nasdaq fell 0.6%.

It’s going to take “a lot more money” to rescue Citigroup and U.S. banks, suggested Sameer al-Ansari today, CEO of Dubai International Capital.

The head of the UAE sovereign wealth fund was referring to the $23 billion in capital injections Citi has already received from SWFs in Dubai, Kuwait and Singapore. How much is “a lot more”? We think you’ll find out soon, and so will Merrill Lynch:

Citigroup will post another loss in its first quarter, analysts from Merrill Lynch predicted this morning, and take more “big write–downs.” Merrill has slashed its earnings estimate for Citi to a loss of $1.66 per share this quarter.

Citi shares plummeted to a nine-year low on the warning. If this keeps up, it might soon be a good time to buy. But not yet.

2007 brought you terms like “ARM,” “CDO” and “SIV”… here’s one for 2008: pay option loan (POL).

The pay option loan is a variation on the ARM in which the borrower can choose how much they can pay toward their mortgage each month. The loans allow you as the borrower to pay less each month if the going gets tough. Fair enough.

Trouble is, if you pay the minimum enough times, you’ll come up short of the interest owed, the remainder of which gets added to your principal. Enough of that… and you’ve got a noticeably larger mortgage than you first signed up for… with the adjustable rates about to kick in. Fun, eh?

Yeah.

Our friends at Countrywide filed an SEC report on Friday admitting they hold $29 billion worth of POLs… $26 billion of which have already grown beyond the amount of the original loan. More than eight out of 10 of these loans were made to borrowers who provided little to no income documentation. As of December, seven out of 10 of them were electing to pay less than interest-only payments.

Good grief… three guesses as to what happens next.

The Canadian government reported this morning that its economy grew less than a percent in the fourth quarter… which was a shock to some, given the commodities boom and the soaring Canadian dollar. For the year, the economy grew an anemic 2.7%.

The loonie lost parity on the news, down to 98 cents against the dollar this morning.

On cue, The Royal Bank of Canada posted the worst Canadian write-down since the start of the subprime banking massacre yesterday… a whopping C$187 million.

Not to make light of a couple hundred million bucks, but c’mon. If that’s as bad as it gets up there, you’ll never shake your moniker: United States Lite. Let’s get with it, eh?

Gold spiked to another new record high yesterday, this time to $989. Not coincidentally, the precious metal peaked the very moment the dollar index attained its latest record low. Also, as with the dollar, gold backed off its latest record this morning, and trades for about $983.

“If you’re worried about the U.S. economy,” says Kevin Kerr, “buy gold. If you’re not worried about the Chinese economy, buy some more gold.

“Gold demand in China relative to GDP is about five times higher than in the U.S. Also, for several years, Yu Yongding, a committee member of the People’s Bank of China, has advised that China use its foreign currency reserves — the largest in the world — to buy gold. He’s not the only one. Other Chinese economists are urging their government to QUADRUPLE the nation’s gold reserves.”

As we’ve noted here in The 5, China reports that less than 1% of its $600 billion in reserves are held in gold. Should the country move even a fraction of the trillion-plus in dollar reserves it has into gold, you could see a spike of historical proportions.

The CRB Spot Index, the historic global benchmark for commodities, jumped 12% in February – its highest leap since July 1974, when “stagflation” was making its debut as a buzzword for wonks. What’s more, the index is up 15% already in 2008 — its best two-month opener since Eisenhower was working on the Interstate Highway System 52 years ago.

“The American economy is definitely slowing,” comments Chris Mayer to his Special Situations readers. “Whether it is or isn’t actually contracting is a matter of debate. Just looking at how companies are doing, it’s not hard to see that North American operations are off. Overseas, though, it’s a different story. Companies with operations in China or India report that business is good. The booming CRB index is proof of that.

“So it’s an interesting market for investors here in the U.S. Sometimes, it’s like picking over a minefield, because the price swings seem so great. But it’s that volatility that creates room for the stock picker to operate.”

Mr. Mayer’s new release, Invest Like a Dealmaker, is topping the charts this morning… No. 1 on both Barnes & Noble’s and Amazon’s business lists. If you’re inclined to read books, there is no easier way to get insights from the finest value investors of our time.

You may recall we’ve mentioned the water war brewing in the Southern U.S.. For the past two years, the Georgian government has been “illegally” damning up extra water to support a booming Atlanta population — water that would otherwise have flowed to cities in Florida and Alabama.

The Army Corps of Engineers announced this morning they failed to broker a negotiation between Georgia, Alabama and Florida. Now Army engineers will employ a water-rationing plan handed down by the federal government. We predict this will get a whole lot more interesting before it rains.

“Based on my personal experience with friends,” writes a reader, “as long as we Americans have a dollar in our pocket — a single dollar — we will spend it. No matter how poor one’s financial condition, no matter how large one’s financial responsibilities/commitments loom, consumer spending will increase as long as there is a dollar left to spend. This is the pathetic truth. When that last dollar is spent — then and only then will consumer spending plummet.”

The 5 responds: The past two “recessions” prove consumers will go even further than that. They’ll spend the last dollar and any on loan from a credit card banks offering instant gratification near you.

“By the way, I rate your services a perfect 10 out of 10 — you guys are great!”

The 5 responds, again: Gracias. You flatter us.

“As Bob Dylan said, ‘When you ain’t got nothin’, you got nothin’ to lose…’” a reader reminded us after we witnessed two frame store clerks casually discussing the annihilation of the middle class.

“I think that woman showed great perception and insight with her comments. The impact of rising food and energy costs will utterly destroy the standard of living of many middle-class families, many of whom already can’t afford health insurance unless their employer provides it — an increasingly rare occurrence. A middle class will remain in name only, with a lifestyle similar to that of the lower middle class of the 1950s and 1960s that I grew up in — no home ownership, no vacations, almost no discretionary income, living paycheck to paycheck.”

The 5: This time around, however, Americans will be experiencing a first: the prospect of shrinking paychecks, rather than growing ones… and a diminishing return on those dollars comprised within.

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. Today is the birthday of the nation. The Constitution was ratified on March 4, 1789. For many years, it was also the day that new presidents were sworn in — that is, until rapid transportation made it possible for the electorate to oust the outgoing louse 43 days earlier.

It’s also your eldest editor’s birthday today. For a present, his wife scheduled a physical with a new physician. At his age, you know what’s included in the battery of tests… ahem. Thank you, ma’am, are we supposed to hug now?