• Chris Mayer on the sudden opportunity born of an Asian bear market
• Foreclosures rise to staggering heights… more than 1 in 100 U.S. metropolitan homes at risk
• John Williams on the Fed’s attempt to “fire wall” the U.S. economy
• Bond insurer shares plunge… what’s behind their rejection of Buffett
• Chavez cuts off Exxon oil supply… why neither oil traders nor Exxon shareholders seem to care
  

Early this week, Goldman Sachs analysts upped their projections for U.S. federal deficits in 2008 and 2009, to $425 billion and $440 billion, respectively. Yep, we’re definitely heading in the right direction there.

But rather than dwelling on the negative, we begin today with a buying opportunity:

As you may know, we’ve been watching India closely. You’ll recall we sent Chris Mayer and Karim Rahemtulla on a two-week mission there in October… the third such mission in as many years. Agora Inc., our parent company, opened an office in Mumbai last year. And while we found companies we like, we’ve been hesitant to pull the trigger, because the Sensex had rallied well beyond our buying range.

Yesterday, we got the retrenchment we were looking for. The Sensex has fallen over 20% in about a month. As “investors” flee, Mr. Mayer tells us prices are starting to look good.

“India is really in the early stages of a massive secular boom,” Mayer offers by way of explaining our excitement. “It begin with liberalization in 1991.” If the Sensex’s five-year chart is any indication, pullbacks such as this latest bear market are little more than brief reprieves in a strong growth trend.

The Indian middle class is multiplying over 20% per year. Indian home prices have risen 16% annually for the past four years. Around this time last year, India received the coveted AAA debt rating.

“Like any emerging market,” Chris warned when he was on the ground in the subcontinent, “there will be plenty of growing pains. There is still an immense poor population here, and many environmental/infrastructure problems — including a severe water crisis. But these warts make the opportunity what it is — an immense fiery cauldron of a market just starting the process of industrialization and billions of people wading into the rolling waters of globalization for the first time.

“I’ve gathered what I think are the three best ways to play the rise of India. Each takes advantage of long-term trends building in India. Along the way, there are bound to be some shakeouts. But for those who stick with them, I think these investment ideas will bring enormous returns.”

If you subscribe to Capital & Crisis, we suggest you read Chris’ India report today. You should have already received the link. Otherwise, click here to learn more about the three picks we recommend to capitalize on this opportunity.

Back here in I.O.U.S.A., foreclosures in the top 100 metropolitan areas of the U.S. surged 78% in 2007, reports RealtyTrac today. A remarkable 1.3% of all homeowners in these areas filed for foreclosure last year. California, Nevada, Florida, Ohio and Michigan led the way.

In response to the ongoing trouble caused by the staggering foreclosure rate, the Federal Reserve injected $30 billion of ready cash into the banking industry yesterday, via short-term loans. That’s the fifth “loan auction” conducted by the Fed since the practice began late last year. So far, the auctions have accounted for $130 billion in emergency funds for the reeling U.S. banking system.

“We need to remain very focused on the downside risks to the economy,” said San Francisco Fed President Janet Yellen yesterday. “Our job is to make sure we create enough of a fire wall … so fire doesn’t hurt innocent bystanders.”

Translation: “Forget price stability, we’re going to manage the entire economy.”

In one statement, she single-handedly repurposed the charter of the Fed. According to Yellen, the Fed’s doing a good job, thank you very much. In her view, it’s “most probable” that the U.S. economy would avoid recession.

“I have contended for some time,” notes John Williams of shadowstats.com, “that the Fed will do everything in its power — create whatever money/liquidity is necessary — to prevent any portion of the financial system from collapsing. The Fed cannot allow any sector to fail, given the heavy interrelationships and leverage built upon leverage within the broad U.S. financial markets and industry. Failure in one area quickly would implode the entire system.

“No one has been through a crisis of the current magnitude for three-quarters of a century. Coming into the Great Depression, the United States was on the gold standard and enjoyed fiscal and trade surpluses, which offered some meaningful policy options to the government.

“Today’s environment has had the meaningful options fully depleted, leaving only gimmicks and the government’s ability to print money.”

U.S. markets finished higher yesterday, fueled almost entirely by Warren Buffett’s offer to “bail out” struggling bond insurers, just one of the areas threatening to implode.

The Dow gained 1%, the S&P 500 rose 0.7% and the Nasdaq ended unchanged.

But while most stocks enjoyed a Buffett-driven rally, the shares of the very stocks he offered to rescue absolutely tanked. Both MBIA and Ambac stocks fell 15% on the rumors that one, or both, had denied Buffett’s offer.

Ambac did, in fact, give Buffett the cold shoulder. His offer “would result in little to no net capital relief to support Ambac’s ratings,” the company complained. A closer look reveals why. The Oracle offered to take on $6 billion in muni bonds — classically stable investments — for a $3 billion fee.

Elsewhere in the world of super-sized bond investments, legendary bond house Pimco revealed this week that it has begun taking stakes in Bank of America and Citigroup.

“The fact that the banking sector has attracted fresh capital in the last couple of months is huge,” said Mark Kiesel, an executive VP at Pimco. “We’ve been playing defense for the better part of two years, and the question we’ve been asking ourselves is when to go on offense. In the banking sector, we’ve started to do that.”

Classic. These are vulture investing strategies from impresarios Berkshire and Pimco. Like a stunning round of 18, it’s fun to watch from the clubhouse, even if you’re not out on the links yourself.

U.S. retail sales rose 0.3% in January. Wall Street was looking for a 0.3% retail decline, but the Commerce Department says otherwise. Sales in January were driven almost exclusively by auto and gasoline sales. In fact, minus those two retail categories, sales during the month were flat.

Despite the Fed’s bravado on the subject, the big “R” still looms, but it’s not baked into the cake just yet.

The International Energy Agency (IEA) cut its 2008 global oil demand forecast this morning, blaming a coming U.S. slowdown. The IEA now expects the world to consume a mere 87.6 million barrels of oil each day, bringing annual consumption growth down to 1.9%. The IEA had predicted 2.3% growth earlier this year.

Should the IEA’s forecast come true, growth would shrink to its slowest pace since 2003. Light, sweet crude fell a buck, to $92.

Still smarting from his loss in international court, Hugo Chavez threw a tantrum this morning and cut off oil shipments to Exxon Mobil. Global oil traders greeted the news with little more than a yawn and a stretch. Exxon shares rallied over 1% on the news. Venezuela accounts for a very small percentage of Exxon’s business.

“This is not to defend China’s behavior,” writes a reader regarding China’s “gag order” to Olympians, “but please remember (or look up, if you’re too young) what happened to Tommie Smith and John Carlos at the 1968 Olympics in Mexico City when they dared to exercise their right of free speech to protest U.S treatment of African-Americans during a medal ceremony.

“Most countries view the Olympics as a public relations event as much as a sporting event, and they frown on any athletes who try to use the Olympics as a platform for political expression.”

“Man, I would call their hand,” suggested another. “The last thing China wants is an Olympics where no one shows.”

“Many thanks for the heads-up,” writes a reader, “from Kevin Kerr in today’s 5 regarding changing conditions in the wheat trading market and commodities in general. I took his advice and ‘secured’ some profits in DBA. Here’s hoping these timely posts from Kevin keep coming in The 5. As an Outstanding Investments
subscriber, I enjoy reading his updates there also. But The 5 is quicker.

The 5 responds: Our pleasure. Wheat continued to back off its recent $11 high overnight, down to $9 in Chicago.

In a related vein, retail prices of Maxwell House, Folgers, Yuban, and Chock full o’Nuts coffee brands were all raised this week. Both Kraft and Procter & Gamble, the parents of the brands, cited a rise in global demand for coffee thanks to a shortage of resources, falling output in Vietnam and energy costs. On average, prices will hop up about 10-20 cents per pound.

Be warned, this latest development could hinder production here at The 5.

Cheers for now,

Addison Wiggin,
The 5 Min. Forecast

P.S. Last week, we mentioned the act passed by Congress requiring “In God We Trust” be prominently displayed on all new dollar coins. When it goes into effect… it’s only going to make the “godless” dollar coins we told you about last month even more valuable. Good thing our friends at First Federal still have a few sets on hand, eh? If you’d like to investigate, do so here. Having read about the congressional act here, Nick has agreed to give readers of The 5 a special price, this week only.

Thanks, Nick.

P.P.S. Check this out… below are few of Steve Sarnoff’s Options Hotline winners from 2007. We calculate Steve’s track record on the highest possible gains returned by each recommendation. Thus, attaining gains this huge is a difficult task. Still, it’s easy to see… Steve has quite a winning streak going.

Granted, trading options isn’t for everyone, and neither is Options Hotline. But for the next 5 days, you can sign up for 4 free months of Options Hotline and give it a shot, on the house. Learn about our offer here.

• 300% on Bristol-Myers Squibb March $25 calls on Jan. 29, 2007
• 220% on American Standard April $45 calls on Feb. 26, 2007
• 165% on Monsanto April $55 puts on March 5, 2007
• 130% on Allstate April $60 puts on March 14, 2007
• 107% on Exxon Mobil May $80 calls on May 20, 2007
• 151% on Schlumberger August $80 calls on June 22, 2007
• 283% on TLT September $89 puts on June 12, 2007
• 122% on Target October $65 calls on July 12, 2007
• 225% on Intel July $22.50 calls on July 17, 2007
• 205% on Coca-Cola September $55 calls on Aug. 9, 2007
• 612%…and still counting on Newmont Mining Dec. $45 calls on Nov.8, 2007
• 114% on General Electric $40 calls on Oct. 2, 2007
• 366% on SPY $152 puts on Nov. 12, 2007
• 137% on Merrill Lynch $55 calls on Dec. 10, 2007.

• Dow undergoes first lineup change in 4 years… who went where, and why
• Chris Hancock on the paradigm shift within the S&P 500
• Chavez threatens “economic war,” promises $200 oil
• Dollar rally ends, OPEC says oil in euros less than 10 years away
• Plus, Chris Mayer on the “unavoidable” slow-motion crisis already plaguing the U.S.

We open today with a teeny sign of the times: Directors of the Dow Jones industrial average announced this morning they will change the Dow’s composition for the first time since 2004. Withering corporate giants Altria and Honeywell will be replaced with the swelling Bank of America and Chevron.

“We saw that the financials industry was underrepresented,” said Marcus Brauchli, one of the Dow’s caretakers, “notwithstanding the current turbulence — and that the oil and gas industry’s growing importance to the world economy called for another representative to join Exxon Mobil Corp.”

Altria will be removed because recent and expected spinoffs make it mostly a domestic tobacco manufacturer. Honeywell, despite outperforming the Dow by over 100% over the last five years, will get delisted from the Dow because it is and threatens to remain the smallest component by revenue/earnings of all the companies in the Dow 30.

These changes will take effect on Feb. 19.

Markets closed Friday with small losses. The Dow and S&P fell about 0.5%. For the week, both indexes shed around 4.5%. The Dow is almost 5% above its 15-month lows set in January, but still 14% below a record high set on Oct. 9.

Yahoo, for what it’s worth, scoffed at Microsoft’s takeover bid. Spokesman for Yahoo said Gates’ bid “substantially undervalued” the company, stuck their collective tongue out and wiggled their fingers in the air.

The bid gave a 62% premium on Yahoo’s stock price.

“The companies representing the Standard & Poor’s 500 index now derive 49% of revenue from foreign markets,” comments Chris Hancock on another weighting issue, “up from 30% in 2001. Meaning those with money to burn (Southeast Asian consumers) will keep earnings reports strong. Stronger repatriated currencies should only bolster this trend.

“Many Americans believe strong S&P earnings equal a strong American economy. Unfortunately, we see another American economy. We see an economy riddled with debt. And we see the American consumer eerily close to tapping out.”

“If you end up freezing [Venezuelan assets] and it harms us,” threatened Venezuelan nutcase Hugo Chavez over the weekend, “we’re going to harm you. Do you know how? We aren’t going to send oil to the United States. Take note, Mr. Bush, Mr. Danger.”

Mr. Danger? We don’t get it either.

Chavez is referring to a victory won by Exxon Mobil in British and Dutch courts. The U.S. based oil company has been suing Petroleos de Venezuela, Chavez’s state-owned love child, in international court for the seizure, control and a majority stake in an oil production project in Venezuela worth $12 billion.

The court’s decision blocks Venezuela from selling assets and transferring wealth out of the Netherlands Antilles and the U.K.… if moving the money would reduce available assets below $12 billion.

But Chavez doesn’t have any patience for the rule of law. “I speak to the U.S. empire,” he quipped. “Because that’s the master: continue and you will see that we won’t sent one drop of oil to the empire of the United States. The outlaws of Exxon Mobil will never again rob us.”

“If the economic war continues against Venezuela,” Chavez said, “the price of oil will reach $200 and Venezuela will join the economic war. And more than one country is willing to accompany us in the economic war.”

We presume he means Iran.

The U.S. is Venezuela’s No. 1 oil trading partner. Oil revenues account for 90% of Venezuelan export earnings, 50% of its federal budget and about 30% of its total GDP.

America gets about 14% of its imported oil from Venezuela.

Chavez also announced plans to nationalize milk. “We’re facing an economic conspiracy,” he said yesterday, “and we’re obliged to act.” He claims the Italian and Swiss milk makers Parmalat and Nestle are conspiring and creating shortages ahead of elections in November.

We’re sure this plan will go over well with Venezuelan citizens.

Mr. Crazy Eyes sets his sights on milk

Light sweet crude hopped up about 3 bucks, to $92, in overnight trading, still a mite below the $200 Chavez promises. Gasoline in the U.S. continued its recent pullback over the weekend. The national average at the pump dropped 5 cents last week, to $2.94. Gas began the year at $3.11 per gallon, but has fallen steadily since.

“Maybe we can price the oil in the euros,” suggested OPEC Secretary-General Abdullah al-Badri on Sunday. “It can be done, but it will take time.” Al-Badri told reporters oil could be priced in euros in less than 10 years.

“It took two world wars and more than 50 years for the dollar to become the dominant currency,” he concluded. “Now we are seeing another strong currency coming into the frame, which is the euro.”

You can file that as your “understatement of the weekend.” Since 2000, the dollar is down 44% versus the euro. Look for OPEC to get out of greenbacks as quickly as politics allow.

The dollar backed off recent gains over the weekend. The euro and pound regained a full cent, at $1.45 and $1.95, respectively. The yen is back at 106.

The dollar index – which measures the dollar versus the euro, pound, franc, yen, krona and loonie — climbed just shy of 77 last week, before retreating to about 76.5 this morning.

Looking at the one-month chart of the dollar index, we’re not sure anyone knows how to price the dollar in the current market environment.

What’s a dollar worth these days, anyway?

Gold is recovering nicely from its recent sell-off. From last week’s low of around $890, gold has since recovered to $925 this morning.

“It will take time to work through the current financial turmoil,” said Hank Paulson after meeting with other G-7 finance ministers this weekend. “As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced.

“I am confident in the long-term health of the United States economy and I expect that it will continue to grow in 2008.”

“When I heard the stimulus plan had passed,” comments a reader, “my first thought was that the newspaper headline should read: ‘Biggest Subprime Loan Ever.’”

“Most of America bleeds away hours of precious life idling in a car,” notes Chris Mayer in the latest Capital & Crisis. “It’s a mean reality and a hidden tax.” Traffic jams cost the U.S. economy some $78 billion annually. They eat away 4.2 billion hours in travel delays and waste 2.9 billion gallons of fuel — every year, according to the Texas Transportation Institute.

“The future doesn’t look much better… unless you’re an investor. In which case, there are ways to cash in on the massive rebuilding of America’s roads.

“But first, you have to know how mangled and screwed up the road systems are. The chart below shows you how few miles of road we’ve added since 1982, percentage-wise. Population is up a much greater percentage. So, too, the number of drivers and vehicles and the miles they travel. The end result is predictable and unavoidable: Mounting hours of delay. The average American spends 40 hours per year in gridlock.

“Currently, the amount of money we invest in our roads is not enough to offset the beating they take. The U.S. Department of Transportation (DOT) estimates that over 160,000 miles of federal highway has pavement deemed ‘unacceptable.’ Over 153,000 bridges are structurally deficient or functionally obsolete, says the DOT. Of this last point, we could hardly have a more dramatic reminder than the bridge collapse in Minnesota.

“Incredibly, the need for miles of highway will double again over the next 30 years. If the demographers are right, the U.S. should add another 100 million people over that time frame. If we add capacity at a rate no faster than what we’ve done in the past, the average American could spend up 160 hours each year in traffic. That’s about four workweeks!

“It’s quite a predicament. I tend to think that the industry will get the money, only because the bridge collapse gives politicians a chance to make that an issue. And there will certainly be more bridge collapses and tragedies if we don’t do something soon. Also, as the economy weakens, a big public road-building project is a way politicians can claim they created jobs. But you never know. Sometimes things have to get really bad before they get better.”

“Yes, I do feel better with China using a private equity fund,” writes a reader in response to our coverage of a Chinese sovereign wealth fund investing in the U.S. via JC Flowers.

“Letting China invest directly in U.S. technology companies would be a giant mistake. Anyone who thinks differently is a fool. Using a private equity fund should be OK while keeping secrets — military and technology — safe. China will try to steal or buy technology, but we can’t be the idiots that allow the selling of our future for some fast profit. More power to Jim Webb!”

The 5 responds: Huh? The Chinese government owns the fund. What’s the difference? Oy.

Enjoy your Monday,

Addison Wiggin
The 5 Min. Forecast

P.S. For the next seven days, we’re offering four free months of our most popular options trading service, Options Hotline. Using options during choppy markets can be a great way to hedge short-term losses within your long-term holdings. We’re certainly not convinced the worst of this “credit crisis” is over. Thus, we’d like to offer you a chance to try out options on the cheap. Learn more about Options Hotline, including our 600%-gains-in-six-months guarantee, here.

There’s no particular economic reason to mention the tree. Just thought we’d share the awe.

• Scary new foreclosure stats, same old State of the Union… how America has become its own worst enemy
• How long do you hold your stocks? New figures reveal buy-and-hold gives way to churn-and-burn
• The 5’s own “economic stimulus” plan: Clone Britney
• Loonie back at parity… Chuck Butler on the future of the Canadian dollar
• Chavez back in the news, aims to form multination military alliance versus U.S.
• Consumer confidence at fresh lows, gold at new highs and more!

More than 405,000 homeowners lost their homes to foreclosure last year.

Total filings, according to RealtyTrac, were up 97% year over year in December, bringing the yearlong increase up 75% from 2006. More than 1% of all U.S. households were in some form of foreclosure in 2007.

“I would argue,” says David Walker, the U.S. comptroller general in the opening lines to I.O.U.S.A.
“that the greatest threat to our nation is not someone hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility.”

You wouldn’t get that impression from the State of the Union address given by George W. Bush last night. He mentioned the nation’s deficit only once, and even then only repeated his pie-in-the-sky projection that the deficit would be down to zero by 2012. Bush didn’t mention the word “debt” once… even though our national IOU just crossed the $9 trillion threshold.

As we pointed out last week, even by Congress’ own measures, the deficit is on track to increase by $219 billion in 2008… not including off-budget spending for the wars in Afghanistan and Iraq. And not including the economic “stimulus” package Bush begged Congress to pass.

Bush spent 16 minutes — 30% of his entire speech — talking up the “war on terror” in Afghanistan and Iraq.

“If we had been running our economies the old-fashioned way,” the venerable Stephen Roach said at the conclusion of the World Economic Forum in Davos last week, “for example, were saving and consumption funded by income, maybe we wouldn’t be in this mess we are in now.” The subprime fiasco, says Roach, “will dwarf the dot-com slump.”

“It is one thing to punish a few speculators with skin in the dot-com game,” added our friend Bill Bonner in The Daily Reckoning yesterday. “It is quite another to deliver a stern lesson to America’s entire middle class. The latter never liked school.

“Spending on information technology was barely one-sixth the spending on house building. But that’s only the beginning — because the dot-com bubble didn’t cause millions of householders to think they were a lot richer than they really were. It didn’t lead millions of families to borrow and spend far more than they could afford. And it didn’t entice bankers and investors into billions of dollars worth of losing positions.

“A word to the wise: You can’t really make people wealthy by resorting to ‘Zimbabwe economics.’ A society grows rich by producing things… and saving money. There is no other way. Cheaper credit won’t do it. More consumption won’t help. Printing money — and dumping it from helicopters — is a losing proposition.”

Markets kicked off the week with a nice day of gains yesterday. The Dow and S&P 500 opened to a sell-off, falling as low as minus 0.5%. But stocks surged back, led almost entirely by financials, to notable gains.

The S&P 500 ended up 1.7%, the Dow rose 1.4% and the Nasdaq managed a 1% gain.

“The average holding period for a stock on the NYSE is just nine months,” notes James Montier in our friend John Mauldin’s Outside the Box e-letter, commenting on the true speculative nature of the U.S. economy.

Investors in the U.S. markets are fixated on the short term — more so now than ever before.

“Of course,” Montier concludes, “if everyone else is focused on the immediate future, mispricing of the long term may well result.

“If you are investing on a nine-month time horizon (see chart above) then your returns are likely to be dominated by price returns. You are simply betting on whether a stock goes up or down. In fact, the capital gain delivered via the change in valuation accounts for some 62% of your total real return.”

“Do you know what the highest-rated show on CNBC is?” asks our Maniac Trader Kevin Kerr, as if to put a point on the subject. “Jim Cramer’s Mad Money? Closing Bell? Fast Money? Kudlow & Co.?

“None of the above. The highest-rated show, by far, is the game show Deal or No Deal, on which people try to guess which briefcase has the most money.” Fast, easy money and scantily clad women… what else is on the minds of the gaming public these days?

Given the above, we have an alternate suggestion for economic “stimulus” … let’s clone Britney Spears.

According to Portfolio magazine, Ms. Spears, loony as she may be, accounts for $120 million of the U.S. GDP each year. She has sold about 83 million records, grossed over $150 million touring, over $100 in perfume sales, and netted $10 million-plus in advertising.

Paparazzi firm X17 sold $2.5 million worth of Britney photos in 2007 alone… the magazine estimated that photos of her account for at least 20% of the entire paparazzi industry. Her face on the cover of gossip magazines boosts sales by an average 33% — newsstand sales of mags with her on the cover amounted to $360 million in the past year and a half.

She’s been Yahoo’s No. 1 search term six of the last seven years. Just another hundred Britneys or so, free cameras from the federal government and we’re in the clear…

The U.S. dollar fell yesterday and overnight. The dollar index slipped to the lower side of 75, accelerated mostly by a surging euro — up to just a hair from $1.48. The pound is in similar shape, trending upward to $1.99. The yen is ever so slowly letting go of its recent rally, trading at about 107.

The Canadian dollar, on the other hand, refuses to let go of parity with the greenback. But at a dime off its November all-time high of $1.10, it’s most likely in the pits until commodity prices rebound.

“The loonie has seen better days, for sure,” writes our friend Chuck Butler, watching currencies closely. “But let’s not get too down on it. I recall, not too long ago, when the loonie was trading at 65 cents! It’s now trading near parity.

“The short-term problem is that the loonie is getting tugged on both ends. The Bank of Canada’s rate cuts and the idea that Canada gets tarred with the same brush as the U.S. are trying to pull it down, while rising commodity prices, and a strong economy, are trying to pull it higher. Which one will win? That’s for the markets to decide, my friends.”

We’ll let you know as soon as something gives.

Orders for durable goods in the U.S. rose 5.2% in December
– the biggest leap upward in five months. Orders for big-ticket items meant to last more than several years, says the Commerce Department, doubled analysts’ expectations. The number is especially surprising in light of the ISM’s manufacturing index current four-year low.

Still, for all of 2007, durable goods orders rose 0.9%, a might bit slower than the 6.3% jump in 2006 and the 9.4% gain in 2005.

Consumer confidence fell in January to two-year lows. After a slight increase in December, the American consumer resumed his gloomy outlook in January, sinking the Conference Board’s index to a post-Katrina low of 87.9.

“We have to do everything possible,” urged our favorite South American dic… er… president, Hugo Chavez, to Latin American leaders this week, “so that in the coming years, the U.S. empire falls.”

Chavez called for all Central and South American countries to begin withdrawing the billions of dollars they hold in reserve in U.S. banks. And as plenty of other nations are doing without his insistence, Hugo wants his Latin allies to sell whatever U.S. Treasuries they might own because, well, “You can’t put all your eggs in one basket.”

Mr. Chavez added to that sentiment today by suggesting that Nicaragua, Ecuador, Bolivia, Cuba, the Dominican Republic and Venezuela create one united anti-U.S. military alliance. That no doubt would be interesting.

We wonder where Chavez is going to get fodder for his tirades when Bush leaves office a year from now.

“I see you, puny imperialists, I see you… ha ha ha!”

Gold reached another record high this morning, climbing as high as $933 per ounce. Platinum hit an all-time high as well, up to $1,738 per ounce.

“What caught my eye this last week,” writes a reader, “was your story of China becoming the world’s No. 1 in gold producer in 2007. My wife is Chinese and was born there. When I told her this, she was surprised about how production has grown.

“No matter what happens here in the U.S., I believe China will drive the price higher and higher.It’s the right thing to do if you were the largest producer of gold last year.

“So make sure you buy some more gold today.”

Countrywide CEO Angelo Mozilo announced yesterday that in light of his role as the spearhead of the greatest housing bust since the Great Depression, he’ll forfeit $37.5 million of his severance pay. The poor guy will now be stuck with a measly $24 million pension.

“Why are the very engineers of this mess,” asks another reader, “not personally held responsible?

“If you are an engineer, trained to be an engineer, and you build something that collapses due to your own inability, being an engineer, a matter expert, you are held responsible for your work.

“While taxpayers eventually end up paying, the CEOs of Citicorp, Merrill Lynch, Bear Stearns and all the other Harvard, Stanford, Princeton, etc.-trained CEOs of the very financial companies that designed and executed this disaster are walking away with millions upon millions of dollars in severance packages, bonuses and stock options while the little guy on the street has to bail out what’s left — while having to deal with the economic downturn on top of that.

“It’s not just evil — it’s plain wrong. It might be legally correct, but it’s still wrong, wrong,
wrong.”

“Addison Wiggin, Bill Bonner, Chris Mayer, et al.,” suggests a third, “are to be congratulated on what — and how — you report what’s REALLY going on in the financial world!

“Years ago, I stopped following the advice of all the ‘experts’ on CNBC and other idiotic TV stations, especially after big losses on Motorola and Qualcomm. Now I follow your advice… and lo and behold — despite of what happened last year — I came out about 26% ahead of the experts!

“Thank you for what all of you are doing, and keep up the good work!”

The 5 responds: OK, we couldn’t help but publish this last one. (Bashful fluttering of the eyelashes.) Thank you for reading… and good luck. It’s a speculative world out there.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Tonight at 5 p.m., we’re going to publish Dan Amoss’ special report on which stocks are likely to get hammered next in the subprime fiasco. If you’re interested in his “paddle strategy” for investing in these uncertain times, now would be the correct time to act. Learn more here.

• More shoppers but fewer sales… The story behind the “Black Friday” numbers
• The 5 reveals the real cost of the 12 days of Christmas… can you say “gooseflation?”
• Eric Fry on perhaps the greatest misallocation of $38 billion in recent history
• Dollar declines again, overtakes yen as carry trade currency of choice
• Did your fund return 1,000% this year? The one that did below…
• Plus, the last word on “dictator” Chavez… for now

147 million shoppers pillaged stores in the U.S. for their holiday booty over the weekend… up nearly 5% from last year.
But even with the added help, sales were down 3.5% from the same period the year before.

“While last year showed a greater emphasis on high-definition televisions,” says National Retail Federation (NRF) CEO Tracy Mullin, “this year, consumers were focused on lower-priced doorbusters like digital photo frames, laptops and cashmere sweaters.” The average shopper spent $347.44, down over $10 from last year.

– Nearly 15% of “Black Friday” shoppers were nutty enough to hit stores for those 4 a.m. sales — up nearly 2% from 2006.

– 1 in 12 consumers have finished their holiday shopping already. On the other hand, 2 out of 2 of your editors started thinking about Christmas about 5 minutes ago and will finish their holiday shopping sometime around 10 p.m. on Christmas Eve.

– Men so far this year have spent an average of $393 shopping; women less… $303.

– The NRF expects holiday sales from now till the end of December to rise 4%, to $474.5 billion — the slowest growth rate in 5 years. If you’re the betting type, you might still find a few good shorts on retailers this week…

And while we’re in the mood, here’s more holiday cheer: If you were to buy all the gifts of “The 12 Days of Christmas” song, it would cost $19,507 this year… up or 3.1% from last year, and surprisingly close to CPI growth of 3.5%.

The price of the five golden rings would be your biggest wallet buster — they’re up 21% since Christmas 2006, an extra $70.

“Six geese a-laying” rose a close second… up 20%. We blame ethanol.

And wage rates have gone up too… after the first increase in minimum wage since 1997, “eight maids a-milking” inflated dramatically.

Only “nine ladies dancing” saw no price increase this year… they held onto last year’s 23-year high of $4,759.

If you had to throw in “a dozen Wall Street bankers” — not that anyone would want them for Christmas — you’d really be busting the curve this year. We reported on Monday the bonus pool for Wall Streeters this year reached $38 billion… even as the top banks book billions in losses.

“The connection between merit and pay disappeared a long time ago,” writes Eric Fry in the Rude Awakening, helping us break the numbers down. “As recently as 10 years ago, the bonus pool for New York City’s finance company employees totaled less than 90% of the net income of NYSE brokerage firms. Today, the relative size of the bonus pool has doubled, to about 180% of net income.

“$38 billion is more money than Wall Street’s five largest brokerage firms — combined — earned during the last 12 months; $38 billion is also more than the combined earnings of these five firms during all of 2004 AND 2005.

“It is more than the annual GDP of Guatemala or Costa Rica. It is seven times more than the annual budget of the National Cancer Institute (NCI), America’s principal agency for cancer research.

“Looking beyond our own shores, $38 billion is three times more money than the entire world spent on humanitarian aid last year. $38 billion is twice the sum necessary to provide basic health care to every child in the world, and three times the sum necessary to provide clean drinking water to every child in the world.”

Yet as we expected, there are more losses from these banks on the way. Swiss bank UBS is expected to write down more than $5 billion in the fourth quarter, reports MarketWatch this morning.

Gold has rallied over $30 since Nov. 21, storming back to $830. Gold’s weekly rise was the most since mid-July, and the percentage gain Friday was the biggest since Feb. 21, 2007.

“While trading was thin in all markets because of the holiday,” writes our friend Doug Casey in his Daily Resource PLUS, “there was no denying gold is benefiting from weakness in the dollar and a crude price over $98. But also factoring in is the widespread belief that the Federal Reserve will lower borrowing costs.”

Interest rate futures show a 98% chance the Fed will lower the overnight rate again on December 11th.

Oil closed at another record high, $98.18, on Friday. Futures traded as high as $99.29 that same day, a record of their own.

While traders were enjoying tryptophan-induced pipe dreams here in the U.S., the international variety sold the dollar all the way down to $1.48 against the euro… that’s a whopping 12% decline year to date. They bought yen… which shot up 2.5% last week alone and 10% year to date.

The pound has risen a “mere” 6% this year, up from $1.95 in January to $2.07 today.

Who would have ever imagined the “dollar carry trade?” Well, we have… but only in jest. Now according to numbers compiled at Bloomberg, “A basket of currencies including the British pound, Brazilian real and Hungarian forint financed with dollars returned 17% this year, compared with 9% when funded in yen and 7% in Swiss francs.”

Despite ludicrously low interest rates in Japan and Switzerland, falling dollar prices coupled with the Fed’s rate cuts since August have made it the carry trade of choice in 2007. This could become more interesting still… hmmmn.

Over the weekend, Lahde Capital, a Santa Monica hedge fund, reported 1,000% gains for its investors this year, after fees.

The California hedge fund attained such remarkable results by shorting all things subprime — from lenders to homebuilders. According to the Financial Times, if Lahde can maintain its 1,000%-plus returns until the end of the year, it will be “one of the world’s best-performing funds of all time.”

By the way, as a reader of The 5, you should also be getting your complimentary copy of Dan Amoss’ Strategic Short Report. His plays are not up 1,000% since August, but they have averaged a respectable 40% gain. We e-mailed his latest short, a struggling American auto parts manufacturer, to you over the holiday. If you missed it, click here.

“Chavez wasn’t elected as a dictator,” writes a reader. “He was elected as a president. That should settle those concerned about his legitimacy. However, he has turned himself into a dictator. Those are the indisputable facts. Call him whatever you like. The end result is the same. The country and people of Venezuela are already paying a heavy price — and life will get much worse there, before it ever gets better.”

“The reader who wrote in has missed the most important element,” writes a reader in response to the question ‘Democracy is not the opposite of totalitarianism. Why do you call a democratically elected president a dictator?’

“They answer two entirely different questions: 1) Who propels to power? and 2) How MUCH power? Chavez is a democratically elected president who has become a dictator. Of his dictatorship, there is no doubt. “By their fruit shall you know them,” said someone far wiser than I.

The 5 responds:
Amen. We were flooded with e-mail concerning Hugo Chavez and our recent “critiques” of his leadership. But in this case, we’ll let Senor Chavez reveal himself to be what he is:

“He who says he supports Chavez but votes ‘no’ is a traitor, a true traitor,” uttered Hugo over the weekend, referring to his proposed constitutional changes, one of which could allow him to be president for life. “He’s against me, against the revolution and against the people.”

The changes would also allow government to expropriate private property without court authorization, take control over the central bank and impose a national six-hour workday.

Until tomorrow,

Addison Wiggin
The 5 Min. Forecast

P.S. We note with sadness today the passing of Ali Samsam Bakhtiari
(1946-2007) of Tehran, Iran. Mr. Bakhtiari was a former director of the National Iranian Oil Co., and a vocal spokesperson on the impending social and political implications of “Peak Oil.” Our own Byron King was a regular correspondent with Mr. Bakhtiari, and we’ve had the honor of publishing a number of essays based on those discussions.

Mr. Bakhtiari died suddenly. Byron will publish a more detailed obituary in the next few days. Meanwhile, we express our condolences to the Bakhtiari family.

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

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

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

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

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

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

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

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

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

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

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

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

This one won’t get a pardon…

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

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

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

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

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

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

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

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

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

The fund may be up and running by January.

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

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

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

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

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

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

Click here for more…

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

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

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

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

Where are the customers’ bonuses?

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

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

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

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

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

Happy Thanksgiving,

Addison Wiggin
The 5 Min. Forecast

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

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

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

• Goldman puts market in a tailspin… but reveals a massive loss of its own
• Freddie Mac joins the billion-dollar write-down gang
• Housing permits, housing starts, builder confidence data revealed… and it ain’t pretty
• Mike Muehleck on why 1.6 million citizens are planning on leaving the U.S.
• Visiting the Taj Mahal? Don’t bring your greenbacks… they’re no longer welcome
• Plus… Byron King on the Peak Oil “conspiracy”

As if it needed it, Goldman Sachs smeared the financial sector yesterday by downgrading Citi and just about every bank on the block. The Dow, Nasdaq and S&P 500 all responded by losing about 2%. The Dow now flirts with 13,000… a level not seen since the worst of this summer’s credit crisis.

Goldman reported its own prize quant fund, Global Alpha, may lose up to $6 billion this year, too — a 60% loss. The fund returned over 40% gains in 2005.

Freddie Mac joined the write-down gang this morning… in a big way. The government-backed mortgage firm announced an $8.1 billion write-down for the fourth quarter. Freddie Mac officials reported a net loss of $2 billion so far this quarter, and suggested that they may have to cut their stock’s dividend by as much as 50%.

Shares are down nearly 8% as we write.

Housing permits fell to a 14-year low in October, the U.S. Commerce Department reported this morning. Permits to build new homes sunk to an annual pace of 1.18 million in October, down from 1.26 million in September — the lowest seasonally adjusted level since July 1993.

Curiously, the same report revealed that housing starts rose by 3% in October, the biggest hike in eight months. But before you break out the party hats… nearly all growth of home starts in October came from the apartment sector, up 44%.

Construction of single-family homes fell for the seventh consecutive month, declining 7.3%.

And as you might expect, homebuilder confidence is at an all-time low. The National Association of Home Builders updated its builder confidence report yesterday. Builders ranked their confidence with a score of 19 — the lowest ranking in the index’s 22-year history.

A score of 50 marks neutral builder sentiment… any score lower indicates worsening confidence.

Write-downs… real estate… and the dollar. These 5 Min. Forecasts are striking a familiar pose as we head into the Thanksgiving holiday. The dollar got ambushed in the Asian markets overnight. The euro has pushed up close to 1.48. The pound is back into the $2.06 range, and the yen backed off its recent rally, to 110.

The national average for gas prices has risen 18 cents in the past two weeks. Now at $3.09, it’s a dime short of the all-time high set in May. The city with the highest average price? San Francisco… where a gallon of gas will set you back $3.48 this week.

Rising fuel prices are giving people rashes at all levels of “society.” Californian cruise lines Windstar Cruises and Majestic America Line announced this week that they will be adding a $8.50 surcharge on all passengers “cruisin’” after Dec. 15.

“We regret having to take this action and hope our guests understand the impact that fuel prices are having in today’s economic environment,” said Diane Moore, executive vice president of both cruise lines. Somehow, we don’t think this will slow the conga lines one iota… at least for now.

Here’s an interesting trend: 1.5 million U.S. households are preparing to move out of the U.S. A poll by Zogby Intl. of 115,000 Americans estimated that:

1.6 million U.S. households have already made the decision to leave
1.8 million are seriously considering and likely to leave
7.7 million are somewhat serious about leaving and may do so
3.0 million are seriously considering purchase of non-U.S. property
10.0 million are somewhat serious about purchase of non-U.S. property.

“We are not talking about the next major deployment of National Guard units to the Middle East,” comments Mike Muehleck in Strategic Investment.
“In fact, none of the emigrants are government workers or corporate employees leaving for temporary overseas assignments. This is a group of malcontents and adventurers. They consist entirely of private citizens and their families packing up and leaving the USA at their own initiative.

“Why do people leave home for strange foreign lands? While a handful might claim to leave for political or religious reasons, most seek greater economic opportunity. All of my grandparents emigrated from Germany or Lithuania in the early 1900s. My wife’s Chinese grandparents emigrated from China to Siam in the same generation. None came because of a burning desire to be ‘free.’ They all came because they wanted to make more money and thus enjoy a better life.”

Which, evidently, is getting harder to do in the U.S. Mike himself emigrated to Thailand years ago. You can find Mr. Muehleck’s comments in Strategic Investment.

The Taj Mahal, along with 120 other Indian tourist sites, will no longer accept dollars to pay for admission. The Archaeological Survey of India announced this week that a fixed rupee rate will be the only method of admission to the Taj and other sites.

The greenback has lost over 12% of its value to the rupee year to date.

The world’s most famous mausoleum… now also a milestone of the dollar’s demise

“Interesting, this news, on several levels,” reports Chris Mayer, fresh from his Indian investment excursion. “For one thing, it’s another marker along the road of Indian ascendancy. Its own currency, the rupee, long a redheaded stepchild among currencies, is now preferred over the good old American dollar. For another thing, it just shows once again how the dollar is really deep in the soup this time around. This is no normal dollar sell-off, of the kind we’ve seen countless times over the years. This is something big. Something history making. The dollar’s reign is really in jeopardy.

“While I was India, you could pay for many things with dollars. I wonder how this new announcement will change things on the street. Good thing I’m back home. U.S. visitors to India can expect to pay 30% more to visit Indian historical sites. I’m sure other places will follow suit.”

Merrill Lynch launched its largest ever investment plan into Indian real estate this morning. The famous investment bank bought a 49% stake in a portfolio of residential projects managed by DLF, worth about $377 million.

Merrill’s share involves seven midincome residential projects in Chennai, Bangalore, Kochi and Indore, reports the Financial Times. Merrill’s total investment in Indian real estate now exceeds $550 million.

Brazilian defense officials announced plans to build their first nuclear submarine last week. Is Brazil preparing for war? Worried about foreign nations patrolling their waters? No… just looking after their oil…

“When you have a large natural source of wealth discovered in the Atlantic, it’s obvious you need the means to protect it,” said defense minister Nelson Jobim last week. Brazil, which has been discussing nuclear submarine production for decades, is finally moving forward, thanks to the gigantic Tupi oil discovery it reported earlier this month. The Tupi field is believed to contain up to 8 billion barrels of oil.

Brazil has no official enemies in South America, nor has it been the target of any significant terrorist threat. However, the Tupi field could boost Brazilian reserves by as much as 62%… Brazil doesn’t seem interested in taking any chances.

MTV Arabia launched over the weekend. Headquartered in Dubai, MTV Arabia will feature 60% international music and 40% Arabic music. MTV spokespeople said the network will focus on hip-hop and R&B, popular yet underserved genres in the UAE, but promises to be “culturally sensitive” by censoring much of the profanity and sexuality you expect from American music.

The network was launched by a taped performance by rap star Ludacris… famous for songs like “Move Bitch,” and “Pimpin’ All Over the World.”

“Your characterization of Chavez as a dictator displays either genuine ignorance,” writes a reader, “willful ignorance or is a gesture of ‘playing to the gallery’; whichever the case, your image as a savvy international investor is damaged by such rhetoric.

“Additionally, you call the leaders of 13 countries ‘nutjobs.’ I have two comments. One, I suppose that this kind of talk is par for the course for someone from a rapidly failing empire; and secondly, there is the old saying about people in glass houses — your country’s leader, the semiliterate former alcoholic who is furiously banging the nails into America’s coffin, is probably the leader that most people in the world would call a nutjob.

“I’ve always found it a bit unsettling when Americans completely denigrate any foreign leader who displays a lack of enthusiasm for America’s agenda — but I suppose that the effects of having had the privilege of empire include a lack of respect for ‘inferior’ people, as well as diminished critical faculties.

“I had assumed that someone who poses as an astute investor might have escaped these effects. Apparently, my assumption was in error.”

The 5 responds:
Eh, we didn’t call the leaders of OPEC nutjobs. Just Chavez and Ahmadinejad. And yeah, we’d throw Bush in there, too. They deserve each other. Of course, the last time we said that, we didn’t hear the end of it for weeks. So thanks.

As for your comments on empire… we wrote a book on the subject, so you’re not exactly shocking us with insight. That you assume we share enthusiasm for “America’s agenda” — whatever fascist vision you may have of the current administration — is equally as ‘unsettling.’ Or perhaps you just haven’t been reading very long…

“There is much more talk about Peak Oil these days as we have approached $100 per barrel, especially from your leading expert, Byron King,” writes a reader. “But I wanted to ask your thoughts on the whole self-renewing oil field theory. There is growing opinion by scientists that the amount of oil we have on Earth is not fixed, but continually renews from within the Earth itself. There have been many cases in which depleted oil fields have essentially refilled and begun producing again.

“Is the Peak Oil theory a conspiracy set in place to keep us paying large sums of money to tyrants for our oil?”

The 5 responds:
We passed this note to our resident geologist and oilman, Byron King. According to Byron, “Our reader is raising a point concerning what is called the ‘abiotic’ theory of hydrocarbon origination. And yes, there is a small kernel of validity to the idea that hydrocarbons are present deep within the mantle of the earth. For example, there are methane seeps coming from some areas of the midocean ridges and from deep hard rock mines in some parts of the world.

“Some of these small quantities of hydrocarbon may even date back to the formation of the planet, 4.5 billion years ago. But no, these methane seeps are not and — for reasons of basic physical chemistry — cannot be the ultimate source of the oil deposits of the world. Virtually all of the oil and gas deposits of the world can be linked directly to ‘organic’ origins. This means that ancient life forms died and have been preserved and contained within the rock column.

“So the bottom line is that Peak Oil Theory is not some sort of rip-off conspiracy. It is a very real phenomenon that you ignore at your peril.” You can read more from Byron on “abiotic” oil in Whiskey & Gunpowder.

You can also learn the names and tickers of five companies that are prepared to capitalize on the alternative energy source with the most progressive chance of helping wean the U.S. off its dependence on foreign oil here. This report will be published at 5 p.m. tonight, so don’t wait:

Secret California Energy Site — 5 p.m. tonight.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. You’ve got just a few hours left to get four free months of Byron’s Energy & Scarcity Investor. We allotted 2,500 spaces for the inaugural wave of ESI subscribers, and as of this writing, less than 800 remain. After tonight, what few spots are left will be sold at full price. Click here to learn more about your last chance to get ESI free for four months.

• Are you ready to invest in the financial sector? Buffett is… the Oracle’s picks below
• Write-downs announced left and right… which banks are the latest to come clean
• Jim Rogers “urges you to get out” of this investment
• Mish and Brian identify a “very bullish development” in bonds
• Chavez threatens $200 oil for Americans, $20 for Haitians
• Reader advice on E*Trade, plus how to play the “Military Intelligence Investing Advantage”

Warren Buffett is buying banks… among other things.

The Oracle of Omaha announced this morning that Berkshire Hathaway is increasing its stake in Bank of America, US Bancorp and Wells Fargo.

“We’re looking for an entity that has durable competitive advantage,” Buffett told us in a private interview in his office at Kiewit Plaza this summer. “Somebody that not only is doing well now, but will do well 10 or 20 years from now.

“In capitalism,” Buffet pontificated, “when you have a wonderful business, it’s like having an economic castle. And the nature of capitalism is that people want to come in and take your castle. Now, what you need is a castle that has some durable competitive advantage, some castle that has a moat around it.

“One of the best moats, in many respects, is to be a low-cost producer. But sometimes the moat is just having more talent. I mean, if you’re the heavyweight champion of the world and you keep knocking out people, you’ve got a competitive advantage as long as you can keep doing it.”

“We’re not looking for the best brain surgeon in town. We’re looking for the Mayo Clinic, so we want an institution that, regardless of the person in charge, will maintain that competitive advantage over the decades.”

For what it’s worth, Buffett also snatched up sizable stakes in CarMax and Dow Jones and lessened his company’s positions in American Standard, Ameriprise Financial, Conoco Phillips and Nike.

Massive write-downs in the banking industry must be making Buffett salivate. Bear Stearns and Barclays both announced multibillion-dollar write-downs this week. Bear told its investors before the bell yesterday that it expects to write down $1.2 billion in the fourth quarter. Naturally, BS stock closed over 3% higher.

For its part, Barclays announced a $2.7 billion write-down this morning.

And the rumor mill is churning with expectations of a massive write-down from UBS as well.

The WSJ suggested yesterday that the Swiss bank might take a charge of as much as $7.1 billion this quarter. UBS has already written down about $3 billion; thus, an additional write-down of this magnitude would make it one of the biggest casualties of the credit crisis.

Investors with less resolve than Buffett sold off again yesterday. The Dow fell half a percent. The S&P, a little more. And the Nasdaq shed 1.1%.

The Labor Department released its Producer Price Index yesterday… it rose a subtle 0.1% in October. But that puts producer prices at 6.1% for the year — the fourth-highest level of inflation since the early ’80s.

It’s also three times the acceptable rate of inflation as determined by Federal Reserve Chairman Ben Bernanke.

“He is a total fool,” Jim Rogers said of Bernanke this morning. We’re not sure if Rogers watched the same YouTube video we sent you last week of Ron Paul berating Bernanke, but the sentiment was the same.

“[Bernanke claimed] Americans who buy only American goods are not affected if the value of the U.S. dollar goes down,” Rogers said. “I was terrified… If you only buy American products and the dollar goes down, the price of oil goes up, copper goes up, wheat goes up… That affects you.

“He doesn’t understand the economy, as far as I can see…

“If you have dollars,” Rogers said, “I urge you to get out. That’s not the currency to own.” Rogers echoed his sentiment from earlier in the month. He’s buying yen, yuan, Swiss francs and commodities.

“It’s not my prediction,” the UAE central bank governor, Sultan Nasser Suweidi, agreed this morning, “but everybody is expecting that the U.S. dollar will go down further.” Suweidi warned earlier in the week that the UAE was at a “crossroads” in terms of the dirham’s peg to the dollar.

Gov. Suweidi tipped his hand again this morning during an interview in South Korea, saying that while the dollar peg won’t be dropped entirely, he might “reduce it to a basket which will consist of more dollars, but not totally 100%.”

No official action has been taken, but if Suweidi checks the futures markets this morning, he’ll see that contracts to buy dirhams in 2008 jumped by the largest margin in 10 years, to 3.57 per dollar… a record high.

As if to defy Rogers’ and Suweidi’s comments, the dollar rallied ever so slightly overnight. This morning, the euro trades for $1.46. The pound, $2.05. And the loonie has fallen back to $1.02 — down 8 cents in a little over a week.

For its part, the Japanese yen is enjoying a bit of a rally lately, too. Overnight, it regained the 110-handle versus the dollar. It shot up 1.3% versus the kiwi dollar and 2.1% versus the South African rand.

Slowly this week, light, sweet crude has crept back up to $94 per barrel.

“With oil hitting new highs in the $90s, and with gold pushing $800 per ounce,” writes Mish Shedlock of The Survival Report, “you would think increasing inflation expectations would be driving bond yields through the roof.

“But that isn’t happening: The yield on the 10-year Treasury bond has declined almost 100 basis points (or 1%) from its June high, and continues to fall.

“From a high in June, the yield on the 10-year Treasury bond moved down and broken through its uptrend from its low in 2003. This is a very bullish development for Treasury bonds, and it’s clear that the weakening prospect for growth here in the U.S. is the main driver.

“These shifts in sentiment usually take a long time, but the signs of a slowdown are clear in the Treasury market.” Look for Treasury yields to go down from here. And look for ways to play them here.

“If the U.S. happens to invade Iran,” proclaimed Hugo Chavez, “oil will not just reach $100, but $200 per barrel. Not one drop of oil will leave Iran… The same would happen here.”

We hadn’t heard much from our favorite South American dictator in a while… we were beginning to miss him.

“How are you going to sell oil to Haiti,” asked Hugo practically in the same breath, “one of the poorest countries in the world, at $100, the same price that you sell it to the U.S.?… I would sell oil to a rich country at $100 and to a poor country perhaps at $20.”

He went on to suggest OPEC set up a preferential pricing program… that we’re sure has about as much a chance at success as Iran’s subsidy program for cheap gas for its citizens. You may recall our reports of gas rationing… and riots. Yeah, go get ’em, guys.

May we suggest you both pick up a copy of Economics for Dummies.

With the top 13 oil companies in the world owned by nation-states with similar nutjobs at the helm intent on using black goo for social agendas, we’ll be looking for alternative sources of energy far more aggressively.

“In terms of developmental processes,” reports Byron King this morning, for example, from the Geothermal Finance & Investment Summit in San Jose, Calif., “the geothermal industry today is about where the oil industry was back in the 1940s.

“At this stage, the industry is all about plucking the low-hanging fruit. Only the most evident and obvious projects are being pursued, like traditional hot springs or mud volcanoes. The areas that are not apparent constitute an immense, unexploited resource.

“Still, things are evolving fast. After a century of energy development in the U.S., ‘renewables’ generally are only 2.3% of the total electric output. But in terms of present and planned investment, renewables are coming along like gangbusters. In 2006, the U.S. overall spent $9.2 billion on renewable power investment, versus only $7.6 billion on new facilities to burn fossil fuels like coal and natural gas. Wind, biomass, solar and geothermal are gaining the upper hand for new investment.”

Byron has met with several geothermal developers whose projects are still in the private equity stage this week. They’re planning IPOs within the next 24 months. We’ll keep track of these firms for you.

In the meantime, you don’t want to miss Byron’s exclusive report on five companies already reaping the benefits of technologies developed by the Navy in this area… and already churning out electricity and energy royalties in the $200 million range. Read about “China Lake Energy” here.

“‘Even if E*Trade goes bankrupt,’ Chris Mayer said yesterday, ‘your brokerage assets are safe.
It shouldn’t affect you in any way,’” wrote a reader, furthering our E*Trade discussion.

“On the whole, it would make me very nervous.”

“True… SIPC protects investor’s accounts in brokerages,” wrote another. “But many people don’t realize that the limit is $500,000 in equity and $100,000 in cash. So if someone has an account greater than $500,000, the amount above $500,000 is at risk. While many people are below that threshold, many are also above it.”

“We should all be so lucky to have idiots like Citigroup’s Prashant Bhatia working in the financial services industry,” concluded our last reader today. “Well, E*Trade wasn’t so lucky, given that its stock tanked to $3.55 per share following Mr. Bhatia’s comments, but it is rather ironic that the firm for which Mr. Bhatia himself works is holding billions of dollars worth of bad mortgage notes and securities.

“Talk about throwing stones while living in a glass house.

“I am not the one who bought the 30 million shares of E*Trade stock following its freefall, but I am already sitting on $2,000 in profits that I made on E*Trade stock in less than two days after the freefall came to a halt. Please let me know when Mr. Bhatia opens his fat mouth and downgrades anything else again. I love free money.”

The 5 Responds:
If you bought E*Trade near its $3.55 low this week, you’re up 57% in 3 days. Even if bankruptcy isn’t in the cards, they’ve become prime buyout bait overnight. The company has about $1.9 billion in cash, or about $4.45 per share. But with stock prices now back to about $5.60, it looks more like Mr. Bhatia’s comments created a great buying opportunity… nothing more.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. In the alternative energy field, Byron King is also betting on something he calls the “Military Intelligence Investing Advantage”. On numerous occasions, the military has developed technologies for its own purposes — lasers, GPS, the Hummer, ARPANET (the Internet) — which it’s then bequeathed to private sector companies for civilian application. Many of the companies that get the “first mover” advantage in these new industries become household names… Microsoft, Honeywell, Texas Instruments…

In its effort to stave off dependence on foreign oil, the U.S. Navy has been very active in developing a source of energy for its massive China Lake base in California. They’ve been so successful, they’re producing all the energy they need, and then some. By selling the excess energy back to the California power grid, they’ve already earned some $194 million in energy royalties.

Now they are ready to bequeath this technology to the private sector, too. Byron’s got a lead on the top five companies — all selling for $3 dollars or less — that are prime candidates for the “first mover” advantage as this energy gets applied across the West. If you want to know more, read this report.

• Fed releases the “Lily White Book”… a litany of anecdotal evidence refutes their findings
• Private job stats hit a 4-year low, record layoffs in financials, temp employment paints scary forecast
• Pending home sales worst on record… traders take it out on the dollar
• U.N., OECD, Grantham all down on the U.S. economy… who’s watching Cheney’s stash?
• Gold breaks step with equities…strikes out on its own… destination: $700…
• Gabrielle gathers strength in the Atlantic… a microcap way to play this active hurricane season
• Why your daughter got scammed on her iPhone…
• A free look into the minds of Chinese military strategists… and more on our favorite South American dictator…

The Fed’s “Beige Book” was released yesterday , so named for the color of the paper stock its cover is printed on. Today, we begin with a formal suggestion: The Fed should rename the book the “Lily White Book” on account of what’s printed inside.

“Outside of real estate,” said the Fed in regard to market activity in August, “reports that the turmoil in financial markets had affected economic activity during the survey period were limited… Credit availability and credit quality remained good for most consumer and business borrowers.”

“The weakness in the housing market deepened across most districts,” the Fed added, “with sales weak or declining and prices reported to be falling or flat.”

“Crazytown,” commented Extreme Ian while assembling the notes for today’s issue. “The absolute worst of the subprime shock… and this is all they have to say?”

Yesterday’s edition of the Lily White Book covers economic activity across the United States from July 17-Aug. 27.

We offer the following rebuttal to the Fed’s rosy outlook in the spirit of the late Kurt Richebacher … not because we’re gloomy per se, but to heap opprobrium on those who deserve it.

Exhibit A: The United Nations couldn’t resist taking a shot at the U.S. economy yesterday. The U.N. predicted a sharply slowing U.S. economy this year in their annual economic report.

The U.N. predicted 2% domestic growth, slightly more than the OECD, but still behind global rates of “similar” nations. The U.N. forecast 2.8% growth in the eurozone and 2.3% growth in Japan… if these predictions come true, this will mark the first time since 2001 that Europe and Japan have outpaced the U.S. China and India are expected to be the year’s big winners, with 10.5% and 8.5% growth, respectively.

Exhibit B: The OECD, an international hodgepodge of economic thinkers, cut their forecast for U.S. growth yesterday, from 2.1% to 1.9%. In a manner not totally familiar to U.S. policymakers, chief OECD economist Jean-Philippe Cotis cited what he expects will be weak growth in the third and fourth quarters and recommended a Fed 0.25% rate cut on Sept. 18.

Heh. That’ll stick in the craw of a least one freedom fries-loving, anti-Frog American…

But these quasi-governmental bureaucratic hack havens aren’t all they’re cracked up to be, either. So we turn to factual anecdotes about layoffs, temp jobs, hiring patterns and pending home sales to get a broader feel for what’s happening in the U.S. economy.

“Planned U.S. layoffs rocketed in August as the housing slowdown and subprime mortgage debacle led to record job cuts in the financial sector,” the AP reported this morning.

Citing a report by the employment consultants Challenger, Gray & Christmas Inc., the AP reported “announced layoffs” surged 85% from July-August — the highest since February. Financial job cuts were the highest in August since Challenger, Gray & Christmas began tracking in 1993.

Countrywide Financial, for example, cut another 900 jobs this morning, bringing their total to 1,400 since the trouble in Subprimeville began.

As we reported last week, too, temp jobs are falling off faster than expected. So we might expect broader employment to follow suit.

Temp jobs have historically led broader employment trends… in this case, into the toilet.

General hiring has already slowed. Private sector companies hired the fewest employees in August since 2003 , said yesterday’s ADP employment report. The payroll services firm reported 38,000 jobs added in August, down from 41,000 in July, and the smallest gain since July 2003.

The Labor Department will release its own notoriously massaged employment report this Friday.

“The next five months will show us just how strong (or weak) employment is,” comments Mish Shedlock of The Survival Report . “It will be especially interesting watching the next few sets of birth/death numbers from the BLS. One of these months there is going to be a massive “unexpected” downward jobs revision. More than likely, that will be used as an excuse by the Fed to cut (or further cut) rates. It won’t help.”

Pending home sales dropped more than expected in July, too… down 12.2%, the largest drop in the index’s seven-year history . Now resting at a score of 89.9, the National Association of Realtors calls this index reading the worst since September 2001.

What’s more, July’s drop was a few fathoms greater than economists predicted: Wall Street’s best minds guessed a 2% fall in contracts being signed for existing home sales.

Lastly, we present a star witness: “Even if the credit crunch passes without a major catastrophe,” notes Jeremy Grantham in the latest issue of Fortune magazine, “the prices of stocks, bonds and real estate have a long way to fall.”

If you recall, Jeremy predicted a “global bubble” back in late April. Much to the amusement of his peers, he predicted global sell-offs in the near future in nearly every market. Safe to say he nailed that one.

What to make of all the data in the economy and turmoil in the markets? “Risk will be repriced,” Grantham predicts:

“Last year, a broad base of risk measures — including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality versus low-quality stock values — reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk.

“For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better…

“Asset prices will be under broad pressure, and risky assets will be under extreme pressure.” Depending on the state of the credit market, Grantham thinks this could all happen very quickly.

Grantham manages about $153 billion in client assets. We learned this morning that Dick Cheney is one of his clients. We’re not sure what to make of this new piece of information yet.

Domestic markets reacted to this litany of unfavorable news — including a massive sell-off of iPhone maker Apple — by shedding about 1% across the board.

“The euro and other currencies rallied versus the dollar all day yesterday after the latest pending home sales data printed,” says our go-to currency man Chuck Butler.

“The report was awful, just awful! Pending home sales in July collapsed. There’s just no better way to describe a 12.2% fall. It’s not a laughing matter.” The euro regained this week’s losses and is back to $1.36, while the pound sterling shot up nearly 2 cents, to the $2.02 mark.

The dollar index has retreated back to the ominous score of 80 — a much watched support line. If the index breaks through 80, look out below.

Gold defied the rest of global markets yesterday and continued its recent climb. Gold’s been in lock step with the rising market since the August correction, but this week, the precious metal is showing signs of independence, jumping in to the $690 range.

“WooHoo! Go gold!” exclaimed Kevin Kerr. If gold breaks 700, Kevin’s gold trade could start making RTA readers a lot of money. As we write, gold prices reached as high as $697. Will gold test the $700 mark? Keep your eyes tuned…

About the sell-off in Apple shares: “Apple is cutting the price of the iPhone by one-third. It’s been on the market for less than three months,” notes Dave Gonigam.

The 8GB iPhone will now set you back $399… a cool $200 cheaper than its debut price. Steve Jobs announced this price cut in a rhetorical footnote during yesterday’s unveiling of snazzy new designs for the iPod and Nano. Wall Street saw right through it… Apple stock was trading flat up until Jobs’ presentation, and then promptly fell 5% by the closing bell.

“The story here is bigger than Apple,” Dave suggests. “It’s about an American consumer who can no longer make room in the household budget for a new gadget, no matter how cool it is. It’s about an American consumer cutting back — and running scared.”

Hedge funds too are enjoying the wincing pain of a credit squeeze. Some $55 billion was yanked out of hedge funds by jittery investors in August.

An area of exceptional low pressure between the Bahamas and Bermuda is expected to become the seventh Atlantic tropical depression of the year , reports AccuWeather.com this morning. Even though we wrote to you yesterday warning of more hurricanes to come this season, we were surprised to see this one pop up so quickly.

Gabby… in the flesh

If she grows as expected, Gabrielle is forecast to be the first tropical storm to strike the East Coast. Weathermen predict the storm could run from South Carolina to as far north as Cape Cod.

While we wish the best for those in this storm’s path, Gunner’s found a great microcap play that Gabrielle might whip into a frenzy. In his latest Bulletin Board Elite dispatch, he recommended a contractor that specializes in cleaning up Atlantic Coast weather disasters. Ol’ Gabby is expected to earn her stripes by Friday and touch down late this weekend.

She may not reach hurricane strength, but will almost certainly cause some sort of damage… click here to get in on this trade in time.

“The part about Chavez not being a dictator because he was democratically elected makes me laugh,” writes a reader. “The reader who wrote obviously does not understand the word ‘dictator.’ From the dictionary: ‘A person exercising absolute power, esp. a ruler who has absolute, unrestricted control in a government without hereditary succession.’

“Does Chavez have a credible opposition? No. Has he assigned all kinds of executive powers to himself, so that he can pretty well run the country without any input from the people or parliament? Yes. What happens to foreigners who disagree with him? They get thrown out of the country. What happens to citizens that disagree with him? We can only guess. Can and has he confiscated property from anybody that he figures should belong to him or the state, which is at this point the same thing? Yes. Etc., etc., etc.

“Was Hitler elected? Yes. Was Mussolini elected? Yes. Where those people dictators? Not when they first were elected, but they quickly changed the rules to eliminate all credible opposition, so yes. So given the current circumstances, is Chavez a dictator? Definitely. Should we take him seriously? Yes, I think so, because all nut cases in power are dangerous.

“Sorry to be so cynical,” writes a reader, “but don’t you think it’s a little out of [the Chinese communist government’s] character to allow two serving Chinese army officers to actually publish their plans to ‘destroy the Americans’?

“Sounds more like a dumb counterintelligence scheme [if that] of some eejit in some U.S. security agency to keep your countrymen’s paranoia about the Chinese up at full throttle. I would have thought just maintaining a mega-trade surplus and adopting the ancient Yankee ethic of hard work and self-denial is doing the trick for the Chinese in their ’sinister’ master plan to take over the world.

“Regards and best wishes for the continuing success of The 5 Min. Forecast.”

The 5 responds: Hard work and self-denial may yet be part of the plan. But owing to the wonders of the Internet, you can decide for yourself. A free edition of Qiao Liang and Wang Xiangsui’s Unrestricted Warfare is available to read here. It’s a monster-sized PDF. If your computer can load the page, it’s worth a read.

As if on cue, the Chinese government infiltrated British government networks , U.K. government insiders told the English press overnight. The Times and The Independent both cited two separate unnamed sources, both of which claimed that the Chinese are utilizing “electronic means to hack into systems to discover Britain’s defense and foreign policy secrets.”

That’s three nations — the U.S., Germany and the U.K. — all claiming to have been hacked by the Chinese in the last three weeks.

Regards,

Addison Wiggin
The 5 Min. Forecast

• Markets slide worldwide… U.S. traders read Fed minutes, throw tantrum, tank indices
• Chinese stock market surpasses Japan’s… why you should care… and three new plays on the Hong Kong exchange
• Chavez to chop three zeros off Venezuela’s “strong” bolivar… similar scheme in Nigeria blocked…
• Are “bad credit” and “looming defaults” scarier than terrorism? Study says yes…Bonner’s take on the mob
• Startling U.S. electricity stats…
• What’s your home worth when it’s priced in gold? Got any more ‘nutty’ questions? Bring em on.

Asian markets felt the sting of domestic selling overnight. Major indexes in Japan, Hong Kong and Singapore all fell over 2%. Australia, South Korea, Taiwan and Shanghai fell well over 1% as well.

And yet… After the close of trading yesterday, the Chinese stock market settled in with a higher market cap than Japan’s. If you include the Hong Kong exchange, as of yesterday, the Chinese markets are valued at $4.72 trillion in China. In Japan, the market is valued about $200 billion less.

This Hong Kong exchange is about to get very busy…

“That’s pretty amazing,” comments Chris Mayer, “especially when you consider what the world looked like as recently as 1989. Few would have bet that by 2007, China’s stock market would exceed that of Japan’s. Japan’s economy is still 63% larger than China’s. There is a lot of room to go yet in China.

“In any case, it is further validation of our long-term thesis, that we are in the early part of an Asian century — in which countries such as China and India play big roles,” concludes Chris. “Asia now has two stock markets with nearly $5 trillion in market cap.” For a complete rundown of that long-term thesis, we recommend the audio CDs from our Rim of Fire investment conference , held in July in Vancouver

Earlier this week, we told you that mainland Chinese can now invest their $2.2 trillion in personal savings directly in the Hong Kong market . Christopher Hancock called it “the most important development since the Chinese were allowed entry to the WTO.” Since that time, Mr. Hancock has added three new companies to his Hong Kong portfolio . If you want to know more, there’s still time to get in these positions.

Also, you can meet Christopher, in the flesh, this October at International Living’s “Ultimate Event.” Sounds like a great location too… click here for details .

Here in the land of the red and blue states, the Dow, Nasdaq and S&P 500 all shed over 2%. This week’s dreadful housing stats and plummeting consumer confidence were blamed for the sell-off.

Traders were also miffed and confused when the minutes from the Aug. 7 Fed meeting didn’t reveal a group of grumpy old bankers eager to cut rates.

“A further deterioration in financial conditions could not be ruled out,” the Fed admitted, “and to the extent such a development could have an adverse effect on growth prospects, might require a policy response.” But the statement was not enough of an alarmist diatribe to convince the Cramers of this world that 5.0% is right around the corner.

Still, the broader U.S. citizenry seem concerned. “Bad credit has surpassed terrorism as the gravest immediate risk threatening the U.S. economy,” reports Bill Bonner this morning.

According to the latest research from the National Association for Business Economics, 32% of its members thought loan defaults and excessive debt were the predominant national economic concern, while only 20% cited terrorism. While this should seem normal to any reasonable person, members of the NABE ranked terror as the No. 1 concern back in March, when the survey was last conducted.

“Terrorism poses a tiny statistical danger to Americans…but never any real danger to the USA,” comments Bill. “Instead, the Bush administration correctly identified it not as a threat, but as an opportunity…to spend more money and boss people around. Trouble was, the money being spent hadn’t been earned yet; we wonder if it ever will be.” Bill unpacks this idea in his new book Mobs, Messiahs and Markets, which is currently Amazon’s No. 1 financial and investing book — and it hasn’t even been released yet. If you’re interested, you can preorder your copy here.

Our favorite South American dictator, Hugo Chavez, announced this week that he plans to knock three zeros off the Venezuelan bolivar.

Turns out Chavez has done such a fantastic job “protecting” his people, a black market for U.S. dollars has spiked in the streets of Caracas. Chavez has doubled government spending since 2003 and instituted countrywide price controls.

The result has been staggering. Currently, the “official” exchange rate is one dollar for 2,150 bolivars. But on the black market, the average Venezuelan citizen has to pay upward of 4,000 bolivars to get one dollar’s worth of goods.

What a nightmare…

Starting in 2008, the new “strong bolivar” will be instituted. “Strong”… yeah, OK… strong like Chavez “dynamic” democracy.

The Central Bank of Nigeria has been blocked by that country’s president from pursuing a similar scheme to knock a few zeroes off the naira. The legislature recently passed a law forbidding Nigerians from “abusing” the national currency. Some reports suggest the law was intended to prevent people from using the paper nairas in strip joints.

“Between 1975-1999,” reports the WSJ this morning way in the back, “the U.S. spent on average just $83 million per year on power lines and facilities to deliver electricity to end-users. But since 1999, increases in transmission spending have been enough to meet just one-third of new demand.”

The decrepit electrical grid is back-page news for now… but not for long. For example, the State of California spends only 3% of its state budget on infrastructure, compared with 20% in 1960, even though the state’s population has grown rapidly. Spending on transmission lines is going to have to go up. Chris Mayer is tracking a company right now in Capital & Crisis that isn’t even public yet, but has a proprietary advantage in helping to build out new transmission lines.

“I’ve been reading your hype on jatropha and wanted to add a couple points,” writes a disgruntled Aussie reader. “As some background, I own a plant nutrition company, an environmental management company and a renewable energy company that we operate as a group. As such, we have been and continue to research oilseed crops for biofuels, among other things.

“Jatropha is not the panacea you are reporting, and your recent reader obviously hasn’t looked very far, either. The reason it doesn’t compete with food crops is because it’s poisonous to humans, domestic animals and wildlife. It is also a very invasive environmental weed, and quite a few countries/states have completely banned (or are in the throes of banning) its production because of this. Western Australia in my country comes to mind.

“The comment it doesn’t need much water and no fertilizer is complete crap. This may be true in its native state, but as a commercial crop, it must be irrigated (albeit less than canola or other commercial oilseeds) and it must be fed (fertilizer) in order to get the 40% oil content needed for the 1,800-plus litres of oil per hectare (that’s around 195 gallons per acre) needed to ensure long-term viability.

“This is not a huge bad thing, but requires significant management of the crop, which adds significantly to the cost, particularly on a large-scale cultivation program, certainly something Chris Mayer has not calculated in his cost comparisons when he claims equivalence to US$43 per barrel.

“On the good side, though, it also has uses in malaria treatment and constipation remedies and has possible links to Alzheimer’s and Parkinson’s treatments.

“You can save your weary analyst’s time and money as well: The “big secret” BP partner is, of course, D1 Oils, which anyone who gets a newspaper well knows. This company is cutting a living on hype, but not very well. In early 2005, it really hyped the media machine and stocks and rocketed to around 450p. Most in the know realized it was hype, and it got smashed 60% over the next year. It’s ticked along OK since then, had another good spike recently with the BP news, but again, as the hype subsides, it’s dropped 30% in the last month (to around 180p). This may be a buying opportunity, but there is lot more that needs to be learned on jatropha before I’d be throwing my money at it.

“On last point, if you’re looking for a better/alternate crop than jatropha, wild radish is generally easier and cheaper to grow on a large scale and contains 48% oil (20% more than jatropha).”

The 5 responds: Nobody’s hyping the jatropha. We just like saying the word around the office. We didn’t realize it would be so annoying to everyone.

“I was just having a nutty thought, so I felt compelled to e-mail you,” writes a different reader. We approve e-mailing of any nutty thoughts, by the way. Bring it on…

“Reading What You Should Know About Inflation by Henry Hazlitt, the subject of the post-Civil War fate of the greenback came up. It turned out the U.S. decided to enact the Resumption Act, effective 1879.

“Basically, the greenback was a bust, so the country went back on the gold standard, and various measurements were made to set its price.

“Let’s say the U.S. inflates the dollar to near extinction when some epic event happens, even maybe a nuke goes off. Worldwide financial systems implode. Paper money literally goes up in smoke. It doesn’t even need to be a nuke… just maybe Israel and Persia start a rhubarb in the oil patch and an Arab-Yankee melee shuts down energy production and shipments. The unthinkable happens. The world is forced into a new gold standard.

“What about all the Ludwig von Mises advocates sitting on their heaps of gold previously valued in dollars and other erstwhile paper currencies? How would the value of gold be measured?”

The 5 Responds: You’re asking the question ass-backwards. When we were in Vancouver, we met a gentleman by the name of Charles Vollum. Charles was wandering around the conference for the better part of four days wearing a pith helmet. So he was definitely on our list of people to meet and talk to. Charles, it turned out, was and is the editor of a Web site called http://www.pricedingold.com .

If, as you suggest, the worldwide financial system were to implode, no one’s going to give a rat’s patooty how many dollars your gold will fetch… they’ll be worth less than the paper they inkjetted on. The real question you’ll be asking is what can I buy with this yellow stuff?

That’s where Charles comes in. Here, for example, is a chart showing median home prices in the U.S. from 1968-2006… priced in gold.

“Watch your profits,” Charles writes on his site, “and don’t be fooled by a shrinking dollar — make sure your real wealth is increasing!”

And just by way of suggestion, you might also want to read the book we published in June: Gold: The Once and Future Money .

Regards,

Addison Wiggin,
The 5 Min. Forecast

P.S. By the way, we fully endorse any nutty thoughts you may have. In fact, if you click here , you can respond directly to anything you’ve read in today’s 5 by entering your nuttiness on the blog. A short registration is all you need, and it’s free. There are a number of registrants already. Bring it on.