• 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

• Bernanke back on Capitol Hill… “Fed speak” translations show more rate cuts, higher inflation
• Why a former Fed chairman gave the dollar a “slap in the face”
• Housing takes another turn for the worse… surprisingly bad new home sales data below
• Oil retreats from $102, but only for a moment… Byron King with a battle plan for oil’s next pullback
• Chris Mayer on the worsening U.S. water crisis… you can kiss Lake Mead goodbye

“The economic situation has become distinctly less favorable,” Ben Bernanke told the House Financial Services Committee yesterday.

With the euro breaching $1.50 for the first time and the dollar index at all-time lows, we thought maybe, just maybe, Bernanke would get an earful from at least one upstart young congressman trying to make a name for him or herself.

Alas… “Downside risks to growth remain,” he stressed in his prepared remarks. The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.”

Translation: Dollar be damned… more rate cuts are coming. What else is he going to say?

Meanwhile, across the globe to the right, a former Fed chairman is doing his best to usher the demise of the dollar in at a quicker pace.

Middle Eastern nations who drop their dollar peg would significantly decrease inflation,
Alan Greenspan told Saudis at a conference in Jeddah yesterday. Inflation in the Saudi kingdom is surging at roughly the same rate as the U.S.’s PPI, up 7%, a 27-year high. Likewise, in the UAE, inflation is climbing at a rate of 9.3%, a 19-year high.

“In the short term, free floating,” Greenspan said, “will not fully dissipate inflationary pressure, although it would significantly do so.” As if the dollar weren’t in bad enough shape… the former chairman of the Fed is telling Saudis to ditch the greenback.

“Talk about a shot across the dollar’s bow,” cries Chuck Butler from the EverBank trading desk.“A slap in the face! All those types of metaphors rolled together. The former Fed chairman who had his hands deep into the mess that started all this is telling people to abandon the dollar!

“I actually felt sorry for [the dollar] at one point yesterday. The selling was so strong, and by noon yesterday, the euro was trading 1.514! And all the currencies joined in. In the old days of football [when I played] this was called ‘piling on’…”

And pile on they did… between Bernanke’s testimony, Greenspan’s advice, durable goods and new home sales data, the lowly dollar didn’t have a leg to stand on yesterday.

The dollar index fell to a fresh record low of 73, and as Chuck mentioned, the euro breached $1.51 for the first time. The pound shot as high as $1.99, the loonie rose to $1.02 and the yen climbed to just short of 105. Like yesterday, the trade of the day was to sell the greenback.

“I’m going to be the first one to tell you that this has gone too far, too fast,” Chuck continues. “The euro spent less time in the 1.50 handle than it takes for you to read the book about ‘what a man knows about a woman.’ So if the markets stop, take a pulse and go back to fill in the gaps… that certainly seems in order right now.”

Not surprisingly, gold held record ground yesterday as the dollar circled down the bowl. After hitting $965 premarket, gold prices flat lined at $960 all day and still trade there now.

Durable goods orders fell 5.3% in January — the steepest drop in five months, evidence that the slowdown conceived in the housing sector is spilling over into the “real” economy. Yesterday’s Commerce Department report showed the first net fall in durable goods orders since October. But the larger-than-expected 5.3% drop erased all gains made over the past two months.

Defense orders led the way, you might be surprised to learn, falling nearly 20% in January. Orders for “transportation equipment” were down too, falling 13% last month. Computers and fabricated metals fared poorly as well, down 11% and 4%.

But housing isn’t done yet. New home sales fell 2.8% in January, to an adjusted annual rate of 588,000. That’s a 34% decline year over year — the slowest rate since 1995.

Likewise, the median price of a shiny new house slid 4% from December, to $216,000, said yesterday’s Commerce Department report. One year ago, the median new home price was $254,400, 15% more than today.

U.S. markets traded flat yesterday. Benchmarks enjoyed hefty gains after Bernanke’s testimony, but slowly sold them back as the day progressed. Most American indexes ended where they began.

IPOs worth more than $21 billion have been pulled off the global docket so far this year, reports Thompson Financial. Following 2007, the biggest year for IPOs in history, the $21 billion in dead deals marks the highest on Thompson’s record. In fact, this month will go down as the first February since 1992 when IPO activity declined from January.

UBS shareholders approved a $12 billion sovereign wealth fund injection at the annual shareholders meeting we told you about yesterday. The Government of Singapore Investment Corp. will now own an approximate 2-3% stake in the super-sized Swiss bank.

Oil prices backed off recent highs of $102. Traders took a day off buying light, sweet crude to new all-time highs and oil retreated to $99 this morning, mostly on news of a better-than-expected weekly supply report. By lunch time, prices were back up to $102.

“If oil does take a dive, it won’t last for long,” advises Byron King. “OPEC has already announced that if the price of oil falls, the cartel will just restrict output and drive prices back up. Thus, if oil prices decline, be ready to step in and bulk up your portfolio with the best of the oil finders and oil service companies.”

Naturally, Byron recommended three such companies for your “oil dive watch list” in his latest Outstanding Investments alert. Gain access to the OI portfolio by subscribing here.

As oil flirts with new highs every day, Congress is doing its part to ensure it reaches $150 per barrel.

The House approved a multibillion-dollar oil tax bill yesterday. Should the bill be approved by the Senate and President Bush, the bill will roll back two tax breaks for the U.S.’s five largest oil companies… one helps manufacturers compete against foreign state-owned oil companies, and the other gives U.S. companies tax breaks for using American oil and gas services.

Authors of the bill estimate the bill will cost those five U.S. oil companies $18 billion. The bill would then, in turn, use that money to invest in alternative energy research.

And on the scarcity front, Lake Mead, a critical water source for much of the Southwestern U.S., could dry up in the next 13 years, says a study by UC San Diego.

Researchers claim that along with natural evaporation and higher temperatures, the rapidly expanding Southwest population is sucking more H2O from Lake Mead each year than the Colorado River can replace.

That ain’t paint… Lake Mead at critically low levels

Lake Mead’s water supply system is already operating at half capacity… supplying water for over 8 million people in Las Vegas, Los Angeles and San Diego is no easy task.

“We were stunned at the magnitude of the problem and how fast it is coming at us,” said Tim Barnett of the University of California at San Diego. “Make no mistake, this water problem is not a scientific abstraction, but rather one that will impact each and every one of us that live in the Southwest.”

“The water level of Lake Mead has fallen so low that it threatens to dip below the water intake pipes,” Chris Mayer tells us. “These pipes, like giant straws, suck water out of the lake. So authorities there have fast-tracked a project to extend the length of the intake pipes closer to the bottom of the basin. Literally, we are getting close to the bottom of Lake Mead.

“There aren’t any places to draw new water. New pipeline projects take time and money. Meanwhile, population growth in Nevada is among the highest in the country. Something has got to give. One is that the price of water rights will rise significantly. The other is that people can expect many more water use restrictions out there.

“As an investor, you can own a company that owns water rights out West. You can also own the company that supplies pipes for new pipelines. We’ve got ’em both in C&C.”

Follow along with Chris in Capital & Crisis, including his “Blue Gold” water portfolio, here.

“I think some of your readers have some misconceptions about manufacturing versus services,” writes a reader. “I have been a marketing manager in a manufacturing business for 25 years. Direct labor costs seldom exceeded 13% of our total costs. As we continue to automate, that portion of our costs keeps falling. Selling, general and administration costs and R&D labor costs are many times greater than direct labor costs. Eventually, our direct labor costs as a portion of the total will be even lower, and whether we continue to make our products in Canada or the U.S. (we have plants in both countries) or move production to China, the net loss of income to North Americans will be miniscule.

“Our major costs are ‘internal’ service costs, some of which could be outsourced to other pure service companies. Whether a widget is assembled by robots here or by cheap labor in China doesn’t make much difference to our direct laborers. They will all become redundant eventually. The main value in a product is in its design, which is determined by customer need/desire (market research), research and development, engineering and general management. That is what we do in North America.

“Eventually, production will move back here to be carried out by robots. Either way, blue-collar direct labor jobs are gone forever. You must remember that China is an assembler of imported components. The Asian Tigers make a lot of the components that are shipped to China for assembly and sold in North America.

“North American industry should be focusing on manufacturing high-end components with high intellectual content and selling them to Chinese companies who can assemble the components cheaply.”

The 5 responds: In a recent interview we did with former Treasury Secretary Paul O’Neill for I.O.U.S.A., he suggested that many of the measurements we use for the economy… the ISM manufacturing index could be considered one… were created and discussed by economists who have ideas about the world more consistent with thinkers in the 1930s than the way the world actually works today.

His fear is if people revert to that way of thinking, the risk of protectionism and demagoguery — two trends prevalent in the politics of the 1930s — will also return. “Take a look at the candidates for president right now,” we paraphrase him from memory. “The only one within shouting distance of the economic issues the country faces is Ron Paul. But he comes with so much baggage on other issues he represents no one will listen to him.”

The S&P/Case-Shiller home price index “is a self-serving chart to make the housing situation look like a financial disaster,” another reader comments. “CLOs and CDOs aside, the housing situation is far better than the rate of change chart portrays.

“The year-to-year drop in housing prices to November 2007 moves housing prices back to the 2004 level. The rest of my input on growth in pricing and household wealth still stands. With the drop in fed rates, we do not hear much about ARM reset problems anymore. It is likely that the housing prices will bottom in 2008, and may have already done so.

“Here in Phoenix, one of the fastest rising and hardest hit markets, Realtors report that home sales are up and prices have stabilized since November.

“Too much gloom and doom is not constructive.”

We’ll keep that in mind,

Addison Wiggin
The 5 Min. Forecast

• What MBIA, Ambac, Exxon Mobil and GE still have in common… and why it moved markets
• Home sales hit new lows, foreclosures new highs… where the fallout is the worst
• Jim Rogers on the U.S. recession… and how “it is going to get worse”
• A financial sector IPO we wouldn’t dare bet against
• Famous oil investor bets on $85 oil… Kevin Kerr on why you shouldn’t ride his coattails

Bond insurers Ambac and MBIA will keep their coveted AAA credit ratings, announced Standard & Poor’s yesterday… confirming the corruption and consistent inaccuracy in the ratings industry. Debt issued by both of these insurers will maintain the same credit rating as bonds from the likes of GE and Exxon Mobil… at least for now.

Ambac stock rose 13% on the news. MBIA shot up 17%.

Execs at MBIA were so emboldened by their AAA rating, so sure of their company’s ability to make money and pay off debt, that they decided to cut their entire dividend yesterday. The move will save MBIA some $174 million. Apparently, the $2.6 billion in recent stock and bond sales coupled with a $2.5 billion private equity injection wasn’t enough capital to let the MBIA elite sleep at night.

MBIA — a company with a $1.8 billion market cap — insures over $670 billion in bonds.

Markets rejoiced on the AAA news too. The Dow and S&P 500 furthered the day’s gains to close up 1.5% and 1.3%, respectively.

Existing home sales fell for the sixth month in a row in January to a new record low. Such sales fell 0.4% last month, to an annual rate of 4.8 million units sold, reports the National Association of Homebuilders yesterday. That’s the slowest pace since at least 1999, when the NAR started keeping track.

For what it’s worth, sales of existing homes are now down an amazing 20% from their 2005 high. The inventory of unsold homes also rose in January, by 5.5% to a 10.3-month supply, just short of a multidecade high. For perspective, during the peak of the housing boom in 2005, inventory fell as low as a four-month supply. As of January, over 4.2 million homes were for sale in the U.S.

What’s more, the national median home price fell yet again, now down to $201,100. This time last year, the average existing home fetched nearly 5% more… ouch.

Foreclosure filings skyrocketed 57% in January, year over year, reports RealtyTrac this morning. 233,001 homeowners filed in January, up 8% from December. Of those homes, over 45,000 were repossessed by loaners… in January alone.

Nevada, California and Florida led the way last month. An incredible one in every 167 homes in Nevada was in some stage of foreclosure during the month.

Not surprisingly, home wares supplier Lowe’s turned in a doozy of an earnings report yesterday. Fourth-quarter profit fell an impressive 33%. Same store sales dropped 7.6% during the last quarter of 2007, and the company said sales will continue to fall at least 5% in the current quarter.

If you can see a bottom to this whirlpool… you’ve got better eyes than we do. And better than this guy too:

“The U.S. is in recession,” Jim Rogers told reporters on a visit to Dublin yesterday. “It is going to get worse. They [the U.S. central bank] are printing money and are trying to prevent the recession — they are putting on Band-Aids,” he said.

“The Japanese did it and the Japanese still have not recovered 18 years later. As long as the [U.S.] central bank and the federal government keep making the mistakes, you will have a longer period of slowdown and it will be perhaps one of the worst recessions we have had in a long time in America.”

“History shows,” Rogers wrote in the foreword to our book back in 2002, “people who save and invest grow and prosper, and the others deteriorate and collapse.

“Artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks of the late 1990s… Now policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.

“When those bubbles burst, it’s going to be worse than the stock market bubble. No one, of course, wants to hear it. They want the quick fix. They want to buy the stock and watch it go up 25%… because that’s what they say on TV.”

“As of right now, U.S. economic growth is at zero,” said Alan Greenspan yesterday while at a conference in Saudi Arabia, offering proof that irony as an art form is not dead. “We are at stall speed. Recovery might take longer to emerge than it usually does.”

Visa unveiled plans to go public yesterday. In an SEC filing, the company said it would offer up to 446 million shares at $37-42 a pop. Thus, the company may raise up to $19 billion — the largest IPO in history by nearly a factor of two. AT&T’s 2000 IPO scrounged up a measly $10 billion.

Visa will be the last major credit card company to go public. While we dare not speculate on the short-term outlook of the IPO… if MasterCard’s recent offering is any indication, Visa’s will be the buy of the year:

There is no exact date set as to when Visa will begin trading, but rumor has it ticker “V” will be tradable by March 20.

Two of the nation’s largest 401(k) stewards saw frightening retirement withdrawals and loans in the fourth quarter. Fidelity Investments, the U.S.’s largest mutual fund provider, said yesterday that 401(k) withdrawals jumped 17% in December, the biggest decrease in the company’s history.

Great-West, which manages 3.5 million retirement accounts, also recently reported a 14% yearly increase in 401(k) withdrawals in 2007.

The dollar index fell again yesterday and overnight, plunging half a point this morning alone. Now barely clinging to a score of 75, the index is just less than a point from a new record low.

“There are so many people bearish on the dollar right now, including me,” added Jim Rogers in his speech in Ireland. “Normally, when that happens, something comes along to cause a rally, even if it is a bear market.” Despite a possible short-term rally, Rogers maintained his bearish position on the greenback, saying the dollar was set to “go down a great deal.”

“The dollar is going to lose its status as the world’s reserve currency,” Rogers asserted. “That is in the process of happening.”

The euro now trades on the high end of $1.48, less than a cent below its all-time high from November. The pound ticked up another penny, to $1.97. The loonie shot right through parity to $1.01, and the yen stood still at 107.

Wheat surpassed $12 per bushel for the first time yesterday in Chicago. Wheat for May delivery shot “limit up” 90 cents, or 8%, in after-hours trading — wheat’s largest single-day gain since October 2002.

While American wheat inventories remain at 1948 lows, we learn today that the U.S. export sales are up 56% since June compared with the same period last year. Yikes…

Light, sweet crude trades for 99 bucks this morning…off $1 from yesterday’s high.

“I think oil’s going to back off,” pontificated the legendary T. Boone Pickens last week, “The weakest quarter is the second quarter. We’ll drop $10 or $15 a barrel in the second quarter. I think we’ll be back above $100 in the second half of the year.”

The legendary energy investor told CNBC that he has taken on short positions in both light, sweet crude and natural gas.

“The risks of shorting this market right now are extreme,” advises Kevin Kerr, “and unless you have very deep pockets, let’s just say it could be very painful.” Just in case you’re thinking about riding T. Boone’s coattails on this trade, our Maniac Trader has a few words of caution:

“Sure, a slowdown in the global economy is bound to have some impact, and I am not discounting the potential for some money to be made on the short side. I just don’t have enough money to do it. I mean, a guy like T. Boone can afford to ride a crude position back down to $50 and still be long; I cannot.”

For Kevin’s latest resource buy recommendations, check out Resource Trader Alert.

Gold traders took profits yesterday as the market rallied, sending spot prices as low as $927. As we write to you this morning, an ounce of the stuff sells for about $935.

“Neither I nor my colleagues are economists,” writes a reader in response to yesterday’s discussion of manufacturing in the U.S., “but for years, we’ve been scratching our heads wondering how the U.S. economy can survive if it doesn’t make anything. A service economy is fine if it has a production economy to serve. This may be oversimplistic, but without a production economy, what is it serving?

“We can serve the production economies overseas, but sooner, rather than later, they will figure out how to service their own economies and won’t need us. It appears that the consumer classes in China and India, et al., are increasing exponentially. Soon they will arrive at critical mass — i.e., their middle/working class consumers will outnumber our middle/working class consumers. And once this happens, the USA will be expendable. They will no longer need to depend on the U.S. markets to buy their stuff. They will have their own markets to do that.

“I wish I could see a flaw in this thesis, but I can’t. In other words, I don’t see any way of avoiding our inevitable status in the not-too-distant future as a second-tier country, much like European countries were to us in the 20th century. Please show me how I’m wrong.”

The 5 responds: Sorry… no can do.

“I have been talking about the U.S. sending too many jobs overseas and out of this country for over a year now,” adds another. “Past and present trade agreements have allowed this situation to develop and continue. We have lost all too many blue-collar jobs, union jobs, foundries, mills, plants and factories — the type of jobs in which many could gain employment, prosper and raise a family. Outsourcing of U.S. white-collar jobs should be made illegal, as far as I am concerned. I fear for the future of this nation.”

The 5: One of your editors lives in a Baltimore complex called Clipper Mill — a former manufacturing plant and iron foundry, one of the largest on the East Coast. Baltimore’s first streetcars were built there, along with the columns that support the dome of the U.S. Capitol building.

After accidentally burning to the ground 10 years ago, nearly the entire lot was rebuilt into swanky hipster condos and apartments. The few little remnants that remained of the old mill were used to decorate this:

Why rebuild a factory when a there’s room for a pool?

“Being in the casting and machining business since the great 1994 renminbi devaluation has been rough,” writes a reader. “Our large customers, CNH, ITT, etc., threatened and did send our parts overseas to be manufactured. As a matter of fact, I sensed a perverse joy on the part of purchasing agents as they gleefully squeezed domestic industry and extolled their new Oriental partners’ ability to provide cheap parts and made their own people redundant, and therefore showed an increase in ‘productivity.’

“To counteract this, we started a China joint venture that has had high profit margins due to the currency valuation and tax/export rebates and income tax incentives. That all ended last month. Prices and costs for iron castings went up between 20-30% as the Chinese government tried to slow the growth of energy- and material-intensive industries.

“Three years ago, over half our industry capacity in the U.S. was in bankruptcy. Customers such as Caterpillar are finding a U.S. capacity shortage, as parts are now cheaper right at home than elsewhere. What did they expect?

“Prices are going up — fast.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget… you’ve got just one more day to take us up on our Strategic Short Report trial offer. Dan Amoss’ initial subscribers just pocketed 173% gains on their Systemax puts, and his latest recommendation — shorting a famous U.S. homebuilder — is still below his buy-up-to price. Get your free three-month subscription here.

The odds of a recession are “clearly rising,” Alan Greenspan told NPR this morning.

Last we checked, he was giving “more than one-third, less than fifty-fifty” odds on a coming recession. Since he didn’t give us another reading on his recession-o-meter, we can only surmise today he’s ready to flip a coin at this point.

“We’re getting close to stall speed” in economic growth, said Greenspan. “And we are far more vulnerable at levels where growth is so slow than we would be otherwise. Indeed… somebody who has an immune system that is not working very well is subject to all sorts of diseases, and the economy at this level of growth is subject to all sorts of potential shocks.”

In a truly confidence inspiring moment, Greenspan concluded that this housing disaster and subsequent market crisis were “inevitable.”

“I’m pretty much convinced that we will never be able,” said the former chairman of the Federal Reserve, “by monetary or fiscal policy or government actions, short of disabling the economy, [to undermine] those bubbles. Eventually, this has to defuse itself.”

Umn. So… why… uh… do we have a Federal Reserve?

The vultures have begun to circle… Private equity giant Blackstone announced yesterday that it has accrued some $1.3 billion to invest in subprime mortgage debt. No, it’s not another bailout… just good old-fashioned speculation.

Should Blackstone succeed, this might just be the contrarian move of the year. Otherwise, this will prove to be a galactically stupid investment… we can almost promise there won’t be much of a middle ground here. Blackstone is the second major Wall Street player brave enough to buy up the toxic debt that has sunk the market this year. Bank of America is down a few hundred million bucks after acquiring a $2 billion stake in Countrywide. We’ll let you know if Blackstone fares any better.

We interviewed Blackstone exec Pete Peterson for I.O.U.S.A.

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He said he’s been trying to warn the nation for years — through his work as secretary of commerce under Reagan, and his books Gray Dawn and Running on Empty — about the impending disaster created by so much debt, federal, state, local and personal. But in a truly candid moment, he called himself a “fat cat” and said it was no skin off his back whether the debt issue in the U.S. is ever resolved. But it will mean disaster for a lot of people who haven’t prepared for it…

Pete Peterson was one of the founding members of the Concord Coalition, which we also feature fairly prominently in the movie.

Yesterday, the markets managed to stay above water in trading, albeit barely. The Dow eked out a 0.3% gain after an entire day of losses, while the S&P 500 and Nasdaq ended even.

Consumer prices rose by 0.8% in November, the fastest monthly inflationary pace in over two years. The Labor Department cited rising gasoline, apparel, drugs and airline fees as the primary drivers behind this new inflationary wave.

Core inflation rose 0.3%, the biggest gain since January of this year. Like yesterday’s PPI, both measures of the CPI exceeded analyst expectations. Core CPI is now rising at an annual rate of 2.3%. Normal CPI, the government’s measure of typical consumer inflation, is growing at an annual rate of 4.3%.

Retail sales grew 1.2% in November, the best gain since July and double the growth predicted by economists. The Commerce Department’s report flies in the face of just about every other consumer spending indicator we’ve stumbled across this month… could it be true?

“Helped by the Census Bureau’s inability to adjust adequately for seasonal variations due to an early Thanksgiving,” reports John Williams, “some retail sales were drawn from December into November and were not adjusted. Also helping the monthly retail sales gain was surging inflation (including some upward revision to past history), the toll from which is seen more fully in today’s CPI report.”

The dollar furthered its recent recovery yesterday and this morning. The dollar index reclaimed the 77 mark for the first time since October. Inflation readings in Europe sent the euro down a notch, to $1.44, as Germany and Ireland both reported multiyear inflation highs.

The pound and yen also fell versus the greenback, down to $2.02 and 113, respectively.

Gold prices retreated yesterday as the dollar rallied. Prices sunk as low as $790 in London trading this morning.

“Once again, gold soared over $800 on one day, only to fall back below it the next,” laments one of gold’s most boisterous supporters, Doug Casey. “The pattern has now repeated so often that we may as well accept it as a given, at least until the end-of-year portfolio adjusting is over with.”

But for gold, “Demand remains at record heights. streetTRACKS Gold Trust, the biggest exchange-traded fund backed by bullion, announced that its vaulted metal reached a total of 616 metric tons yesterday, the highest level ever.”

Profit taking pulled oil back from Wednesday’s $4 spike. Now at $92 per barrel, the market vibe seems to be waiting for the next inventory reports to drive prices higher… not vice versa.

“Cheap oil is so… yesterday, so… 1990s,” opines our petro-fashion gauge Byron King. “Now oil inventories mean a lot. Last week, for instance, there was fog in the Houston ship channel. So tankers were delayed in docking, and reported inventories fell — even though the oil was in the tankers, just offshore. OK, inventories fell and prices rose. This week, the fog lifted. Tankers docked. Oil was offloaded. But again, for other reasons, inventories fell. Again, prices rose.

“World oil supply is riding an output plateau… for how long, nobody really knows. There is no slack in the system. There is no room for delay in output, let alone lost production. When it comes to oil any more, there is no room for error. When the numbers fall, the prices spike. Learn to love it. Welcome to the future.”

Byron has just begun bracing his Energy & Scarcity Investor readers for “the future.” His first picks? Five geothermal companies with assets so powerful they’re guarded by the U.S. Navy. You can learn more about these companies, and ESI, here.

“Watch for TiVo to be one of the penny stock turnaround stories of 2008,” writes Penny Sleuth’s Jim Nelson with what he feels is a juicy opportunity for today.

TiVo has fallen on hard times at the hands of competitors like Comcast and Direct TV, but according to Jim, a new deal with NBC could “revolutionize the television advertising market.” As a special “feature” to TiVo subscriptions, many NBC advertisements will be interactive. In other words, when interested in a product, a TiVo viewer can select the ad and access more information… much like a pop-up add on the Internet.

“Networks have been long awaiting interactive advertising, but the technology hasn’t yet caught up. Now with 20% of American households owning at least one digital video recorder (DVR) system, the marketing revolution can start. TiVo is trying to gain a monopoly on this, just like it did originally with TV recording.” Coupled with a pending patent lawsuit regarding a proprietary TiVo technology, Jim thinks TiVo could be a standout for 2008.

“But whether or not TiVo is a good investment depends solely on these deals. If any one of them falls apart, you can expect TiVo’s revenue levels to crash. But as it stands now, it seems the DVR business is about to revolutionize the television industry yet again. Look for this one to be a solid play for years to come.”

How rich should a president be? asks a truly mundane Money magazine this week.

The magazine highlighted the individual salaries, investments and sources of income for several of the 2008 presidential candidates. We include it here, if only to revel in the hypocrisy:

• John Edwards — the most “populist” of all the candidates is worth about $55 million. Edwards made some nice coin suing doctors and hospitals before he entered politics, and then he launched a creepy alliance with Fortress Investment Group. It pays him about half a million a year to serve as a part-time consultant and manage about $20 million of his money.
• Rudy Giuliani is worth over $52 million. Rudy collects several six-seven-figure salaries… one from a lobbying and security consulting company he launched in 2003, another from a Houston law firm, more from book deals and a healthy share from the 124 speeches he delivered in 2006, at $200,000 a pop.
• Hillary Clinton’s total net worth: $35 million, mostly from book deals, law firm days and her husband’s outlandish speaking fees.
• Mitt Romney has some to $250 million to play with! The humble Mormon candidate founded Bain Capital, a hedge fund.
• McCain has about $40 million in the bank.
• Obama, the “poorest” of the bunch, is still worth over a million bucks.

What, if anything, do these people know about the average American household… whose median income is about $48,000? Does it matter?

As usual, Ron Paul was left off the survey. A rag like Money would rather that he not exist at all. Our own efforts to find his net worth met with a dead end. But, we did find a government disclosure report that reveals his multi-million dollar portfolio. That man’s got gold fever.

“As I recall,” responds a reader to our skeptical quote about the life cycle of successful democracies yesterday, “the original quote regarding the tendency toward eventual failure of democracy was by Alexis de Tocqueville. He was writing about the USA in the early 1800s and said something to the effect that democracy can endure only so long as the electorate has not discovered their right to vote themselves ‘largesse from the public purse.’”

“Usually, I am impressed with and enjoy the candor, wit and information you impart in The 5 Min. Forecast,” writes a reader. “Today is a screaming exception. I can’t believe you wouldn’t know better than to say, ‘By some miracle, the Dow, S&P and Nasdaq managed to stay in positive territory yesterday.’

“You often point out things like how the CPI and unemployment numbers are phony, how banks are ripping us off, how the Fed is bailing out banks at the expense of taxpayers, etc. Don’t these deceptions at least raise doubts in your minds about our ‘free’ markets?”

The 5 responds:
Relax, chief. We were using a little rhetorical device we call “sarcasm”… have a glass of wine… try to enjoy the holidays.

“Nice that you should mention President Wilson,” writes another reader. “For all those who lambaste the current president for being ‘dumb’… review some history from when we had an honest-to-goodness intellectual as president. During his presidency, this Princetonian foisted upon this country the seeds of destruction: the federal income tax and the Federal Reserve Bank.

“Instead of silver certificates, we now have ‘IOU NOTHINGS.’ Instead of gold and silver coins (which always have intrinsic value), we have CLADS! My goodness, I know people who ‘collect’ these abominations. And the federal income tax (or whatever its official name is) has caused too much money to be sent to Washington, D.C., bringing about corruption and waste in almost any imaginable form…”

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Our entire editorial team met here in Baltimore yesterday for a marathon of a meeting.
We discussed all our favorite ideas for 2008, and it’s safe to say we’re excited for the new year. From Byron’s way to buy an ounce of gold for $33, to Chris Hancock’s new booming global infrastructure company, to Brian and Mish’s unique Japanese Real Estate play, even a New Zealand telecom pick… we’ve got more great investment ideas than we can handle.

If you want to be the first to hear our favorite 2008 investment themes, you could subscribe to all 11 of our publications… and squirrel away some extra cash for the 3 we plan on launching next year.

Or you could pay a one time, heavily discounted fee and get all our pubs for life by joining the Agora Financial Reserve. There is simply no better way to get our best picks as soon as they are available. If you’re interested in joining our most exclusive membership, click here.

ADDITIONAL RESOURCES
Doug Casey on the Latest Resource Action
Blackstone puts up $1.3bn to buy fallout from the credit crisis
Ron Paul’s Portfolio

• Fed unveils yet another rescue plan… markets didn’t buy it — will you?
• Greenspan denies fault in credit crunch of 2007… banks of the world harmoniously retort
• Expecting a raise this year? So is Lloyd Blankfein… to the tune of $30 million. Details below…
• Gold and oil prices spike… what’s fueling the latest resource rise
• Plus, readers target the source of the housing crisis… but did they miss the mark?

Bernanke and his brood at the Federal Reserve regretfully stole the spotlight yet again yesterday.

The Fed announced it will coordinate an international “temporary auction facility” – a global lender of last resort for commercial banks.

The TAF consists of a soft alliance between the Fed, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Canada. Each injects a certain amount of cash into this TAF, and a couple times a month the funds are auctioned off to banks in need at a rate far lower than usual.

Apparently, the rates on loans between banks, or LIBOR, is just too dang high. Thus, the Fed to the rescue… over $40 billion will be up for grabs before the new year, with more auctions already scheduled for January.

“Huzzah!” exclaimed the markets. “Our benevolent Fed is saving us all… buy!” Domestic benchmark indexes rocketed at the open… up 1.5-2% within minutes.

But then someone started thinking. “Wait, maybe LIBOR is so high for a reason? Wouldn’t it be better for banks to actually fix the credit market, instead of just showering it with more easy money?”

Markets began selling off at a steady rate.

“I do not doubt that a low U.S. federal funds rate in response to the dot-com crash,” confessed Alan Greenspan in a WSJ commentary yesterday, “and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices…”

Could this be it? Could Mr. Bubble himself finally be fessing up to the mess he created?

Nope…

“In my judgment, however, the impact on demand for homes financed with ARMs was not major,” he concluded. “The crisis was thus an accident waiting to happen.”

Maybe Mr. Greenspan should have a quick chat with Bank of America’s CEO Ken Lewis on how major the impact of easy-credit policies has been:

“The economy is definitely slowing,” said Mr. Lewis this morning. “We expect weak fourth and first quarters.” Lewis announced the bank will set aside an additional $3.3 billion to cover losses he expects in the fourth quarter alone. “While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing.” Ouch.

Not long after, Wachovia followed suit. The bank, in a filing with the SEC, revealed it too will set aside massive amounts of cash to quell a lousy fourth quarter… about $1 billion, twice as much as it forecast last month.

PNC then threw its hat in the write-down ring. It’ll be over $1.5 billion in fourth quarter losses for PNC, the Pittsburgh-based bank announced.

And how’s this for an economic indicator? Morgan Stanley has listed Citigroup as the No. 1 stock to short in 2008.

MS analysts issued a searing report yesterday, suggesting that new CEO Vikram Pandit will avoid spinning off units of the bank, probably cut the dividend and likely issue all kinds of funky hybrid securities — all of which will dilute the value of Citi shares. Morgan Stanley’s new price target for the bank is $28, down 13% from Citi’s current price per share.

By some miracle, the Dow, S&P and Nasdaq managed to stay in positive territory yesterday. The Nasdaq and S&P 500 ended up around 0.7%, while the Dow rose 0.3%.

International market makers weren’t quite so optimistic. Japanese, Chinese and Hong Kong markets all tumbled about 2.5%. This morning, European markets followed suit… French and English markets lost 2.1% and the German market fared “best,” with just over 1.4% losses.

Lloyd Blankfein, the CEO of Goldman Sachs, is on track to receive a large bonus — the biggest one ever.

The Financial Times reported this morning that Mr. Blankfein may be receiving a 30% raise for 2008, bringing his annual salary to $70 million dollars. Blankfein is estimated to take home over $54 million this year in cash alone, a Wall Street record.

The article only prompted us to ask one question: Why on Earth did Hank Paulson leave Goldman Sachs? Sure, the government has its share of spoils… but $70 million?

Wholesale prices rose an incredible 3.2% in November alone, the sharpest rise in 34 years. The Bureau of Labor Statistics producer price index was forecast to rise 1.5%, but a huge 14% swing in energy prices coupled with the dollar’s decline more than doubled analyst expectations.

Even the Fed’s precious food- and energy-stripped core PPI rose much more than expected… up 0.4% after not budging in October. Don’t forget to check us out for tomorrow’s consumer price index report… similar carnage is expected.

Gold rose overnight, too, to $810. We expect the Fed’s new wave of liquidity to buoy the price of gold, since preventing monetary inflation seems to be an idea out of favor in Washington.

A rush of somewhat troubling news sent oil prices up $4, to $94 per barrel yesterday. In its latest inventory report, the Energy Department said crude stocks fell 700,000 barrels last week. Such a decline marks a full month of negative inventory reports and brings stockpiles to their lowest levels since March 2005.

The same department also reported a rise in gasoline supplies, furthering the recent trend of decreasing fuel costs. Perhaps you’ve noticed… after climbing as high as a national average of $3.11 per gallon last month, gas prices have fallen considerably.

The national average for gas has dropped 12 cents since Thanksgiving, down to $2.99.

“Might want to look back to the days of ‘government deregulation’ that started with Reagan,” suggests a reader who believes he’s found the true root of the credit crunch.

“One esteemed senator brought forth legislation to do away with something called the Glass-Steagall Act. That act was brought by the Democrats under FDR in the depths of the Depression. That law mandated that banking, insurance and brokerage must remain separate. Many great economists and financial publications have found that the conspiracies of these three greatly contributed to the crash of 1929 and, of course, the Great Depression. When this legislation was done away with, the future handwriting was on the wall.

“And here we are today with one of the greatest financial disasters since the late 1920s looming over the heads of the U.S. and, possibly, world economies. One only has to look at MBIA and MBI to figure this albatross out. In my opinion, were Glass-Steagall still in place, this would never have happened. So the question begs itself, when will Glass-Steagall be brought back — and before it happens, will we once again suffer the fate of the late ’20s? Many are saying things are different this time. I’m not so sure.

“I’m beginning to think that things just might break down before the election of 2008. I am hoping that the next president and his or her Congress might have the same ability and desire to reduce the suffering of the common people and save the economy that was found under FDR’s administration.”

The 5 responds:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government,” supposedly wrote the political philosopher Andrew Tyler way back in 1787, speaking about the fall of the Athenian Republic some 2000 years before. This passage is now largely believed to be little more than an internet hoax… but it has found a strong footing in many circles, regardless of its historical validity. The idea rings true… no matter who really wrote it:

“A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, (which is) always followed by a dictatorship.”

Glass-Steagall may have been a useful bit of regulation. Personally, we don’t think so. But we address the larger issues you bring up in a chapter about the demise of our own republic in a chapter in Empire of Debt called “The Revolution of 1913 and the Great Depression.” Many of the solutions to what ailed the country in the 1930s are now coming full circle and biting us in the arse 70 years later.

Of course, we’re aware that the views we express in that chapter represent an extremely unpopular view of both Wilson and FDR… but that’s the way we see it. Unfortunately, you’ll have to read the book to catch our drift entirely.

This election year is going to be a hoot. If the candidates are anything like the current White House press secretary, who recently copped to not knowing what the Cuban Missile Crisis was on NPR, we’ve got our work cut out as citizens.

“A large part of the problem with these mortgages and the fact that banks don’t voluntarily renegotiate the loans is that if the loans are federally insured,” opines another reader, “the banks and other lending institutions know that Uncle Fed is going to bail them out and they don’t have to do a damn thing except foreclose.

“I used to be a HUD-area management broker where I would take boarded-up houses that the banks had foreclosed on into my inventory. These houses were to be appraised by me and put up for sale. Some of my cities had two, three, four board-ups per block. The banks were supposed to maintain the properties, but Uncle Fed never complained when the houses were received after being held by the banks for years with no maintenance except a board-up. I received houses with burst water pipes, grass that was waist-high, 3-inch diameter trees growing in driveways, roofs in the basement, etc., ad nauseam.

“When I approached the district director about that issue, I was told that if I didn’t accept those houses into my inventory within three days pronto, he would find me in violation of my contract with HUD and sue me. So in they went. The banks didn’t have to worry about the bad loans, because Uncle Fed and those fine bureaucrats who work in it just accepted the problem with no questions whatsoever as to whether or not they should. Lobby, lobby, lobby. The taxpayer, of course, ultimately pays. I begged to be let out of the contract, which I ultimately was, but the reason that I couldn’t work with HUD was that I was literally sickened by the absolute disregard for the law and the ‘live to get by’ attitude of the employees.

“I wrote to my congressman, but hey, you know how far that went. I concluded that the only reason our government survives in this world is that other governments are more corrupt and inefficient. It certainly isn’t that we are at the top of our game.”

That’s for sure,

Addison Wiggin,
The 5 Min. Forecast

P.S. We’ll end today with a clarification. We wrote to you on Tuesday about our Agora Financial Reserve Focus List… it is on track to gain 20% by the end of this quarter.

We issue the Focus List — a list of our editor’s best stocks to buy right now — every quarter to our Reserve members. The list about to hit its annual maturity in January is currently returning 19%. Despite technical corrections and YTD single-digit returns from the Dow and S&P, we’re still quite proud of this vintage’s performance.

The Reserve Focus List is the easiest and most economical way to take advantage of the top-notch commentary and analysis of Agora Financial analysts. If you like The 5, you’ll love being a Reserve member.

• Top S&P 500 performers derive their revenues outside the U.S.: why you should care
• Big surprise: Bush promises to use your money to bail out subprime lenders…
• Bureaucrats, wonks and lobbyists make Maryland the No. 1 wealthiest state in the union
• Buying opportunity in the euro… Russian news sends wheat skyhigh… prices prompt pasta protests in Italy
• China’s “total economic warfare” reprise…Amoss on Dubai’s future within its unstable surroundings
• Overtime: We bid Dr. Richebacher adieu… he will be missed.

Markets were closed yesterday for the holiday.

So… we begin today with an observation. The S&P 500 companies with international exposure have performed drastically better over the past few years than those with strictly domestic operations.

The recently created Bespoke International Revenues Index tracks all S&P 500 companies that generate more than half of their revenues from outside of the U.S.:

Investing in internationally savvy S&P companies since 2005 would have nearly doubled your profits compared to buying the whole index. For companies uniquely suited to cash in this trend, don’t miss Christopher Hancock’s Free Market Investor.

As we cautioned Friday morning, President Bush unveiled a massive bailout plan for subprime borrowers before the three-day weekend.

Bush promised to increase aid offered by the Federal Housing Authority (FHA) to “troubled” borrowers, remove tax liabilities for subprime borrowers about to lose their homes and to increase federal regulation of “predatory” lenders.

Speculators, says Bush, will not be bailed out. We’re not sure Mr. Bush can tell the difference between “speculators” and “troubled” lenders, except perhaps by checking if he can find their names on the White House speed dial directory. And… don’t you love the phrase “predatory lenders”? It’s a nice catchall for all the bad people who get lynched on the downside of the credit cycle… but were formerly heroes on the upside for helping so many people in need.

“By promising to absorb the $100 billion in subprime real estate losses,” says Adrian Ash in this morning’s Rude Awakening, with an alternate explanation of the administration’s motives, “Bush is in effect doing what many small-town U.S. banks did during the early stages of the ’30s Depression: Putting all the money where passersby will see it, right there in the front window, just to prove that the money exists.

“That way, or so the logic runs, anxious depositors will see their money’s still there…and they’ll wait a while longer before forming a queue to empty the bank in a panic.” You can check out full coverage of GW’s subprime plan in this morning’s Rude Awakening.

The euro retreated versus the dollar over our long weekend. The Esperanto currency is now barely clinging on to the $1.36 price.

“A lot of traders are beginning to see the light regarding Thursday’s ECB meeting,” says Chuck Butler of EverBank, “and realizing that there will be no rate hike at this time, and thus pulling out of euros and taking profits. I suspect we could really see this become the trade of the week, or even month, before the euro turns around and heads to 1.45.”

The ECB has been hinting at rate hikes all summer, most specifically at its next meeting, this Thursday. But times have changed… the ECB has injected billions of euros into the banking system since its last meeting, and a rate hike seems less likely by the day.

If you’re long the euro, Chuck says this week could be a great time to buy.

“Despite record spending on new oil and gas projects last year,” reports Chris Mayer, “companies found little new oil and gas reserves.” A new joint study by two industry research firms found that industry spending increased 45%. Yet that spending generated only a 2% increase in reserves.

“This reflects the high costs of production at maturing fields with declining output,” says Chris. “It also reflects difficulty in finding new reserves. This report comes on the heels of an earlier study by the International Energy Agency. The IEA pointed out that supply was falling faster than output expected in older fields, especially in the North Sea and the Gulf of Mexico.”

Are you ready? On Sept. 13, the world’s top pasta-consuming nation will put down their forks and Parmesan cheese and stage a “spaghetti strike” by refusing to eat pasta for 24 hours. Pasta in Italy has risen as much as 25% this year due to historic high wheat prices.

By sheer coincidence, Kevin Kerr will be in Milan that day speaking at a commodities investing conference. Hopefully, spaghetti withdrawal won’t prompt a marauding, angry uprising against our visiting commodity trader. We’ll keep you updated… at the very least, some entertaining pictures should come about.

Among other things, Kevin will be commenting in Milan on the fact that Russia — the world’s fifth largest wheat exporter — is considering banning the sale of wheat to foreign nations. Moscow officials are concerned about wheat’s skyrocketing price and its effect on the Russian consumer… especially on the eve of national elections.

“The announcement that the Kremlin is considering a ban on exports is absolutely one of the most bullish pieces of news we’ve heard for wheat in a while,” Kevin wrote to us. Wheat is currently priced at $8.06 per bushel. “Given this news, $9 a bushel is a real possibility,” says Kevin. “Export inspections are running very high and demand is huge.” This is a busy season for the Maniac Trader. You can follow his exploits in Resource Trader Alert.

Results from a Census Bureau study in the U.S. show that Maryland is the “wealthiest” state in the country. Hmmn…

The average household in the state where the Agora Financial headquarters are located earns an average $65,144 a year — more than any other state in the union. Runners-up include New Jersey, Connecticut and Hawaii. Of the “poorest” states, Mississippi, West Virginia and Arkansas hollow out the bottom three.

The average Mississippi household earns only $34,473 a year… almost 50% less than Maryland homes. We suppose we have the federal government — and your tax dollars — to thank for this largesse. Merci.

For the second time in three weeks, Chinese operatives have been accused of hacking into foreign government databases.

The Financial Times reported yesterday that the People’s Liberation Army hacked into Defense Secretary Robert Gates’ computer in June, which prompted American IT spooks to take down their network for a week.

Coupled with last week’s revelation that PLA computer nerds hacked into German Chancellery systems, we surmise China is on the information offensive. A couple of years ago, we published a report detailing China’s penchant for what it calls “total warfare.” Facets of that strategy include economic and IT strategies that require very long-range strategic vision. These news reports have prompted us to dig into the archives and recall our forecasts at the time. We’ll keep you posted on what we dig up….

“One part of the mortgage fallout has not been discovered on this side of the Atlantic,” notes a reader. “The Saechsische Landesbank (the Bank of Saxony) in the former East Germany invested about 1 billion euros in the America mortgage boom, hoping to profit from the (hopefully) rising interest rates. It didn’t count on the mess we’re in now.

“Result: They just folded, lock, stock and barrel! And last weekend, the Baden-Wuerttembergische Landesbank (the Bank of Baden-Wuerttemberg), with Stuttgart being the capital of the state, bought them out, since the BWL is a very rich institution. But being a andesbank (State Bank), they are owned by no other than — you guessed it — the taxpayers!!

“Who would have thought that German taxpayers would have to start bailing out greedy mortgage crooks on this side of the Atlantic?

“To keep things rather quiet, and sweep it under the rug, the BLW only made a rather short press release without elaborating on what really happened or why the SLB really failed! If the taxpayers find out what’s going on, there’ll be major uprising by the German population. But being sneaky as these financial crooks are, I doubt anything tragic will ever happen. Boy, oh boy!”

“I have seen no comments about the possible impact on fast-growing Dubai of any ruckus in Iran,” wrote another reader last week.

After The 5 responded in our flippant, superficial way, Dan Amoss of Strategic Investment added these two cents: “Dubai is likely to continue on a path of economic progress as long as it maintains very pro-free market policies – the kind that attract companies looking for a place to invest without high tax and regulatory burdens. But this is a slow-moving, generational trend; I doubt that Dubai’s economic progress can proceed without a few major speed bumps, including the possibility that Iran’s crazy leaders do something rash.

“Not only does Iran represent a constant threat to other Middle Eastern countries,” Mr. Amoss continues, “but they also need to distract the attention of their population away from a steadily deteriorating economy — one that will continue to suffocate under socialist-inspired policies (like rationing and price controls). Ahmadinejad was elected largely for his promise to ‘fix’ the economy, and that promise is clearly not working out.

“Lots of Western IT and financial companies have exposure to Dubai, but as far as I know, none of them has a critical level of exposure. In my view, the ones most at risk if the region were to descend into chaos would the Saudi/Kuwaiti/etc. oil billionaires who own assets like hotels.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. A few hours ago, we sent you the final reminder. You can still lock in six months of the world’s most valuable undiscovered stock research… free. But you must respond by Midnight tonight . Cheers.

P.P.S. In late July 2005, right before the start of our Vancouver conference that year, we released a book called The Demise of the Dollar. The day we released the book, it displaced the Harry Potter book then selling on the No. 1 spot on Amazon’s best-seller list and stayed there for the balance of our conference. It made for an interesting walk through the exhibit hall and bookstore.

Well, we’ve done it again. This morning when we began checking our e-mail, we saw that Bill Bonner’s book Mobs, Messiahs and Markets displaced Harry Potter and the Deathly Hallows, the seventh in the Potter series, at No. 1 for the better part of the Labor Day holiday. It’s currently sitting at No. 3 on Amazon’s best-seller list.

But here’s an interesting twist. When you buy a book on Amazon, it gets paired with another book that the publishers think you will like. “If you buy X,” the site says, “you can get Y for an x% discount.” If you’ve purchased any books on Amazon, you know what we’re talking about.

Here is an excerpt from a letter we sent to readers of the Richebacher Letter and the press:

Dr. Kurt Richebacher, famous financial commentator and forecaster of the subprime mortgage fiasco, died last week of natural causes. A iconic contrarian within the economic community and author of The Richebacher Letter, Richebacher was once described by former Federal Reserve Board Member John Exter as “one of the best economic analysts in the world.”

Dr. Richebacher most famous prediction occurred in his latter years, when in 2001 he forecasted the current mortgage meltdown with stunning accuracy. “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble,” wrote Richebacher in September of 2001. He continued to chastise lenders and market makers for allowing the bubble to swell until he fell ill in early 2007, only months before the subprime meltdown began in earnest.

Dr. Richebacher’s legend was far greater than his successful prediction of the latest market downturn. His consistently contrarian viewpoints were rarely easy to digest, but always poignant, accurate, and of the highest economic caliber.

He became so well known for forecasting financial calamity, that Former Federal Reserve Chairman Paul Volker once said, “I think it’s the job of each Fed chairman to try to prove Richebacher wrong.”

Before falling ill, Dr. Richebacher was close to completing what he thought to be his life’s finest work – a successful refutation of the monetarist’s view of the great depression. Richebacher was vigorously writing his last book in an effort to support this thesis near the time of his death. His publisher, Agora Financial, is currently seeking the means and research to conclude and publish his final work.

Never afraid to offer a frank assessment, Dr. Richebacher left this world with one final prediction: “The housing bubble – together with the bond and stock bubbles,” he wrote in the final edition of The Richerbacher Letter, “will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”

Dr. Richebacher passed away after 88 years in this world. He was a strong, temperate soul… an old-world gentleman – literate, well-traveled, intelligent and critical. And despite all the difficulties he’d seen in his lifetime – war, depression, illness and many long years after his wife passed away – he still enjoyed a good wine, a fine meal and a challenging conversation. He will be missed.