• Federal Reserve alters yearly forecast… even the moneymakers see a gloomy 2008
• FOMC minutes reveal more rate cuts to come… but perhaps a “rapid reversal” soon after
• Great modern minds collide… Volcker, Richebacher, Roubini add their thoughts to the state of the union
• Major agriculture CEO warns: Without a record grain crop in 2008, “I believe you’d see famine.”
• One of the few subprime-proof housing markets skyrockets to new highs… the sickening details below
• Plus, in The 5’s inbox: The “vanishing money” debate rages on…

The Federal Reserve published a revised outlook for 2008 yesterday. It’s not good. Especially by their standards.

In the minutes of their Jan. 22 and 30 meetings — and the transcript of a secret emergency conference call on Jan. 9 — we see the following forecasts:

Economic growth: 1.3-2% in 2008, revised down from an October forecast of 1.8-2.5%
Unemployment: 5.2-5.3%, up from 4.8-4.9%
Core inflation: 2 — 2.2%, up from 1.7-1.9%.

Mr. Bernanke and his friends blamed “further intensification of the housing market correction,” “tighter credit conditions amid increased concerns about credit quality” and “ongoing turmoil in financial markets” as reasons for the downward revisions. Oh… and “higher oil prices.”

Still, not one of the 8,704 words in the release could be rearranged to spell R-E-C-E-S-S-I-O-N. So at least we don’t have to worry about that.

Or this: The FOMC said that its 125-point cuts in January “would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources.”

Translation: A slowing economy — consequently slowing demand for raw materials — will put the kibosh on any bad things that might happen as the dollar gets crushed. The Fed did, however, leave the door open for a “rapid reversal” in policy, should the need arise. After all, the Fed’s charter says it’s supposed to promote “price stability.”

To review: Cutting rates won’t increase inflation, because the economy is slowing down. But raising rates quickly will stem inflation in a pinch. Got it?

What happens to the economy, then? Hmmmn….

A lot of smart people think Bernanke and the Fed are fast running out of bullets.

You may recall when we interviewed former Fed Chairman Paul Volcker for I.O.U.S.A., he cautioned Bernanke not to let inflation get started, because once it does, fixing it may not be as simple as a “rapid reversal” in policy.

And readers of the late Dr. Kurt Richebacher would have to agree… Kurt’s gotta be rolling over and over in his grave right now. When we were working with him on his opus in Cannes in August 2006, apart from trying to disprove the monetarist view of the Great Depression, Dr. Richebacher was extremely concerned about two things: a “balance sheet” recession among banks and the Fed’s inability to address the crisis with “monetary policy.” Monetary policy, in Kurt’s view, always fails in the long run.

With the billions in write-downs still pouring in from major global banks on a daily basis, it’s no mystery what a “balance sheet” recession looks like… now we’ll see how long the Fed can hang on trying to inspire consumers with cheaper and cheaper money before “price stability” becomes a quaint notion of the past.

Last week, the economist Nouriel Roubini cooked up a 12-step doomsday scenario explaining how failing monetary policies might wreck the global economy. Martin Wolf, writing in the Financial Times, paraphrased him in this way:

“Step one is the worst housing recession in U.S. history. House prices will, he says, fall by 20-30% from their peak, which would wipe out between $4,000-6,000 billion in household wealth. Ten million households will end up with negative equity, and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more homebuilders will be bankrupted.

“Step two would be further losses, beyond the $250-300 billion now estimated, for subprime mortgages. About 60% of all mortgage origination between 2005-2007 had ‘reckless or toxic features,’ argues professor Roubini. Goldman Sachs estimates mortgage losses at $400 billion. But if home prices fell by more than 20%, losses would be bigger. That would further impair the banks’ ability to offer credit.

“Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The ‘credit crunch’ would then spread from mortgages to a wide range of consumer credit.”

Steps four-12 are a swirling Charybdis of defaults, write-downs and deleveraging of hedged bets on a global scale. If nothing else, Roubini’s list
is worth considering.

In the end, the Fed could be ineffective in dealing with the onslaught of bankruptcies, for some of the following reasons: “U.S. monetary easing is constrained by risks to the dollar and inflation, aggressive easing deals only with illiquidity, not insolvency… overall losses will be too large for sovereign wealth funds to deal with, public intervention is too small to stabilize housing losses, and regulators cannot find a good middle way between transparency over losses and regulatory forbearance.”

“I place the beginning of ‘the Greater Depression’ in January 2007,” writes our friend W. Curtiss Priest, who heads up the Center for Information, Technology & Society at MIT “corresponding with the first month that the Shiller/Case/S&P home price composite index turned negative.”

Hey, they don’t call this the “dismal science” for nothing.

By the end of the day, futures in Chicago priced in a 100% chance of the Fed cutting again in March.

And the markets cheered. Never mind $100 oil, sharply rising consumer prices, a gloomy spate of economic data… the hint of another rate cut coupled with a great earnings statement from HP was enough to move the Dow, S&P 500 and Nasdaq up nearly 1% apiece.

Good vibes in the U.S. shimmied across the oceans, too. A quick glance at our favorite world market sites shows a sea of green. Just about every benchmark index in Asia and Europe ended higher overnight, most by 1.5-2%.

For its part, the European Union tried to one up the Fed yesterday with its own dour outlook on economic growth in the eurozone. The EU cut its growth forecast to 1.8% this year, down 0.4% from its last release.

And guess what… markets are up in Europe this morning, too. Go figure.

“If you had any major upset,” warns William Doyle, CEO of Potash — the world’s largest maker of crop nutrients — “where you didn’t have a crop in a major growing agricultural region this year, I believe you’d see famine.”

Global grain supplies briefly touched all-time lows late last year, and have barely recovered since.

“We keep going to the cupboard without replacing,” Doyle explained to Bloomberg this week, “and so there is enormous pressure on agriculture to have a record crop every year. We need to have a record crop in 2008 just to stay even with this very low inventory situation.”

“There’s no room for error,” laments our resource trader Kevin Kerr. “Feels a lot like the energy refining situation in the U.S. One bad weather scenario and suddenly we have a whole different pricing matrix. If we get a drought here like they suffered in Australia last year and it impacts soybeans during the critical pod stage, or if it were to roast 50% of the corn prior to harvest, imagine where that would (will) send prices.

“My advice, stock up on those cheap soybeans at 13.50 and $5 corn.” If you need additional trading advice on the ever hot commodities market, check out Resource Trader Alert here.

While home sales across the U.S. fell an average 13% in 2007, Manhattan apartment sales rose 3.2%, says a study by CBS. Likewise, as the national average home price fell 1.8%, to $217,000 last year, the average Manhattan apartment sold for $1.4 million — an all-time high.

“According to three different real estate firms,” says the CBS story, “the number of apartments that sold for more than $10 million in the city last year tripled over those sold in 2006. Brokers say they haven’t seen this kind of action since the dot-com boom of 2000.”

To that, add this
:

18 E. 68th St.… it could be all yours for a cool $64 million.

The 103-year-old mansion, formerly an apartment building for some seriously “old money” city dwellers, was recently converted to a single unit. Thus, one family might soon enjoy its 15 bedrooms, 17 bathrooms, seven fireplaces and — of course — spacious ballroom.

The whole building was sold, as an apartment building, for $7.6 million in 2003. It changed hands again last May for $39 million. Thus, nine months and the prospect of just one family living in this mansion have nearly doubled its “value” to the most expensive officially listed home in Manhattan.

When this bubble pops, don’t say we didn’t warn you.

Oil prices climbed to a fresh high yesterday of $101.32 per barrel yesterday, not long after the Fed released higher inflation forecasts. For what it’s worth, we don’t see oil backing too far off this level until at least March 5, when OPEC meets again. And the “SOS”
have a chance to stick it to the empire once again.

Gold showed signs of bouncing out of its consolidation phase this morning. The metal leapt to $948 per ounce overnight. Spot prices climbed to a new high in aftermarket U.S. trading yesterday and have held steady near their new record since.

“Gold got a boost from inflationary price data,” writes our friend Doug Casey, “as well as the release of the FOMC’s last meeting minutes, which suggests that the Fed is focused right now on propping up the economy at the expense of the dollar.

“Gold as an inflation hedge is clearly getting some play.”

Currency traders gave back most of the dollar’s recent gains yesterday. The dollar index fell back to 76 even. The euro rose a full cent, back to $1.47. The pound bounced off 10-month lows, rallying 2 cents, back to $1.95. The yen remains at 108.

“That money didn’t vanish,” a reader quibbles, responding to our coverage of the total subprime mess wiping out some 7.7 trillion bucks. “The value vanished. You pay $70 for a stock that drops to 30 cents… your value or equity has vanished, but the person whom you paid the $70 to still has the money, so it has not vanished.

“The banks got $7.7 trillion from somewhere (depositors, the Fed, etc.) and loaned or paid it out in exchange for deeds of trust and various derivatives. Someone got that money. Then when the deeds of trust and derivatives dropped in value, the banks no longer had the assets on their balance sheets, nor the ability to get the money back.

“My guess is that most of this money ended up in foreign sovereign wealth funds. The money in those funds had to come from somewhere, and it probably came from all the people who got the equity loans or who sold their price-inflated houses and then bought all kinds of ‘essentials’ from China.”

The 5 responds: Semantics. In a fractional reserve system in which banks can “create” money out of thin air, it can just as easily vanish… as our next reader points out:

“This reader, like so many others,” he writes, “can’t get a grasp on the nature of the so-called ‘money’ supply. Most still have a mental image of money as something tangible, as witness his reference to someone putting a match to it.

“He needs to understand and come to grips with the reality that the overwhelming amount of the money supply is simply computer numbers or paper documents with zeroes added on as needed, therefore easily created and easily destroyed, as we are witnessing. The only tangible and true money remaining is gold and silver, both indestructible.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S.
One way to safeguard against a slowing economy or declining stock market is by following what one of our top analysts calls “the paddle strategy”…check it out for yourself.

• U.S. service sector’s monumental plunge… well past typical recession levels
• Latest poll shows economic concerns as No. 1 issue heading into Super Tuesday
• Are Democrats bad for business? Top Wall Street contributors give surprising answer
• Hedge fund financing flees Japan… Chris Mayer on the opportunities that still remain
• China’s winter weather worsens… how this harsh storm is quickly becoming China’s “Katrina”

The U.S. service sector, savior of American consumerism, and roughly 90% of the American GDP, plunged into contraction during January for the first time in five years. The Institute for Supply Management reported early this morning its nonmanufacturing index dropped from 54 in December to 41 in January. That’s a monumental change. A score of 49 or lower represents “contraction” within the sector. January’s score of 41 is the first below 50 since March 2003. And the lowest reading since 2001.

The number is so bad, in fact, the ISM released its data at 9 a.m. EST this morning, an hour and change ahead of schedule, in an effort to quell any leaks that might spook the stock market. In spite of an early release, the Dow opened down over 200 points.

The average reader of The Washington Post has a more pessimistic view of the American economy today than at any time over the past 15 years, says the Post this morning.

80% of the people selected for the poll rated the economy as “not so good” or “poor.”

30% are bearish about their investments and financial prospects in 2008

60% believe America is already in a recession.

39% of those polled cite the “economy and jobs” as the No. 1 issue in the current presidential campaign, up 10% in the past three weeks alone, and more than double those who call the war in Iraq the No. 1 concern.

Only 19% view the economy in a positive light — the lowest level since June 1993.

These numbers come out just in time for Super Tuesday. More than 1,700 delegates are up for grabs in Democratic primaries and caucuses around the country today. Over 1,000 will stand up and be counted for Republican candidates.

Yawn.

Conventional wisdom will tell you “Democrats are bad for business.” Looking at the top campaign contributions so far during this primary season, Corporate Americans are gluttons for punishment:

Oil has declined steadily this week. Light sweet crude is down around $88 this morning. The market appears to be waiting and wondering if a U.S. or global slowdown will affect consumption. Or… if the Fed is willing to crush the dollar enough to hike the price past $100.

The dollar posted some big gains this morning on news that eurozone service industries have themselves shrunk to three-year lows. The dollar index rallied over half a point, to 76, this morning, sending the euro back down to $1.46.

“$1.4684 is a far cry from 82 cents, eight years ago!” comments Chuck Butler in a reminiscing frame of mind.

The euro could “experience a problem when the European Central Bank (ECB) finally gets around to cutting rates this spring,” Mr. Butler speculates. “The dent could take the euro to 1.40. But after getting past the initial blow of having lower rates, calmer heads will prevail and use this lower level as a springboard to push the euro higher. This is when I believe we will see 1.50, but not before suffering some rough times.”

Gold continued to fall in overnight trading, too. New York opened at $888 this morning… still a fair shot higher than the $253 we remember back in 1999. Buy.

Hedge fund investors yanked $7.7 billion out of Japanese funds in 2007 – over 20% of the nation’s total hedge fund industry.

Given the poor performance of the Nikkei et al., Nipponese hedge funds shed nearly $11 billion last year. Investors in such funds are no strangers to losing money. Japan’s 2006 performance was equally disappointing.

“All that pessimism creates some nice prices,” Chris Mayer comments. “I was in Manhattan on Friday attending an investment conference. One of the speakers was Jean-Marie Eveillard, a legendary investor who runs the First Eagle Global Fund. His favorite idea was to invest in Japan. He likes the ‘world-class manufacturers’ — some of them trading for cash on the books.

“Let’s face it — people in Japan live well,” Mayer adds. “They are relatively rich and live long lives. Unemployment is 3.8%. Crime is low. Japan is still the second largest economy in the world. It’s still home to many world-class companies. Infrastructure is good. There is a large and comfortable middle class.

“For the first time in a long while, Japanese real estate is rising. Plus, in Tokyo, the real estate market is strong. There are few vacancies. The prospect for increases in earnings looks good as old leases roll off.”

For Chris’ favorite Japanese real estate play, see your latest Mayer’s Special Situations alert.

Moody’s proposed a new rating system for CDOs and other complex debt securities today. Good timing there.

The new system would distinguish these securities from more legitimate bonds by rating them with a system of 21 numbers — not the traditional 21 letter system of AAA, AAA-, AA and so on.

Yeah… like it’s going to make a difference now.

Congress passed a bill yesterday making the words “In God We Trust” more prominent on the nation’s new dollar coin.

The motto was formerly etched on the narrow edges of the new coin — a creative touch meant to dissuade counterfeiters and provide more room for art on the face. Now, by law, it will return to the fronts and backs of the coins.

The provision was earmarked to a $555 billion spending bill.

Hmmn. Let’s see. The dollar index is down over 10%. And by the government’s own calculations, U.S. inflation jumped 4.1% in 2007 — the largest rise in 17 years. Fourth-quarter inflation soared past 6%. Seems like Congress ought to be a little less concerned with what’s written on the darn thing… and a little more concerned with what it’s worth. Yeah?

As we reported Friday, China is dealing with a nasty squall of winter weather. But just how bad is it? Probably worse than you think… check this out:

“I cannot help but say the media are out of control,” writes a reader. “They announce that Exxon Mobil, the second largest corporation in the land, made obscene profits of $1,300 per second, or about $78,000 per minute.

“How can they not make the dramatic announcement that the federal government deficit-spent at a rate 12 times as high, or over $1 million per minute? Or that the 2007 federal spending of $2.8 trillion is over $5 million per minute?

“Talk about obscene.

“We should remember the wise words of Cicero when he said: ‘The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.’”

“The actual deficit for 2008 will be about $500 billion more,” writes another, “than the projected deficit of $410 billion. Please take a look at the table below from the U.S. budget Web site. The Bush administration’s projection of the 2008 budget deficit of $410 billion is off by about $500 billion — if the budget shenanigans of the past few years are any guide.

“Before you write me off as another nut, look at the bottom line in the table in the column ‘Debt at start of year.’ You will see that at the start of fiscal 2007, the debt was $8.451 trillion and that the debt at the end of the year was $8.949 trillion. The difference — that is, the real deficit — was $497.1 billion.

“Yet the government announced late last year that the deficit in fiscal 2007 was $162 billion. The difference between the actual $497 billion and the announced $162 billion is $335 billion. Remember, these numbers come from the official government Web site.

“The $335 billion credit to the budget was something you might find in Oz-land: the interest on the total obligation of the government to the Social Security Trust Fund, which is about $4 trillion (the interest rate was apparently something like 8%). The government’s own stats (below) show that the actual deficits have been $498-594 billion per year since 2003, far higher than the announced deficits.

“Please tell your readers that the government includes nonexistent credits in its numbers every time it announces the budget deficit. We are in even deeper doo-doo than we thought. I thank you, and so will your readers.”

U.S. federal deficits versus increases in the federal debt

“Regarding the ins and outs of the distribution of I.O.U.S.A.,” writes a reader, “I think you should take it that your loyal fans — and I’m one of them — won’t mind how you distribute your new movie, just so long as they can view or buy/download a copy ASAP.

“This story is a universal one: As you and Bill Bonner keep reminding us, there are people in every country (just about) who’ve been spending way ‘too much money they don’t have, on stuff they don’t need.’ Here in Ireland, we’ve raised this notion to a fine art and achieved (sic) a personal income-to-debt ratio in the region of 165% — which far exceeds the borrow-and-spend orgy that’s gone on in the U.S. or U.K. Most of this debt is tied up in housing (though we’ve built up prodigious amounts on credit cards, too) that is now sharply falling in value.

“There’s a much-quoted expression here that in regard to both our style of capitalism and our social attitudes, the Irish are ‘closer to Boston than Berlin.’ I don’t think Irish audiences will have any difficulty ‘getting the point’ of your movie or applying its lessons.”

The 5 responds: Slainte! We’re working on it. We’ll keep you posted.

Best,

Addison Wiggin,
The 5 Min. Forecast

P.S. As we write to you this morning, the Dow is down well over 200 points…today’s ISM reading has brought recession woes back to full force. While U.S. investors seem to spend every trading day “waiting for the other shoe to drop,” our international investing adviser Chris Hancock has found a global niche immune from the credit crisis… one that he thinks “could be the most persistent and reliable market boom in a decade.” You can learn about it here.

 

• Mighty American consumer shows new signs of strain
• Markets react to 1.25% rate cut in a week: “Is that all?”
• Tales from the credit crunch: MBIA gets bailout, S&P cuts ratings
• Senate’s stimulus: Costs more, puts less in your pocket
• Putting a price tag on China’s “Storm of the Century”
• Retailers’ own Super Bowl bet set to pay off big
  

Consumer spending in December rose 0.2% from the month before — the lowest rise since it fell a tenth of a percent in September 2006. Personal income rose half a percent. Adjusted for inflation, spending went nowhere… zilcho. And income increased two-tenths of a percent.

As expected, the Fed cut its lending rate again yesterday… by 50 basis points. That’s 125 points in a week.

Likewise, the U.S. dollar got creamed just as Eli Manning will on Sunday. Nearly stagnant GDP growth and the Fed’s 50 points whipped traders into a frenzy. When the dust cleared, the dollar index had fallen to 75 even, about half a point short of its all-time low.

Gold buyers rejoiced en force on the rate cut news, too. The yellow metal surged to a record $942. Overnight in Asian trading, gold settled back to a respectable $926.

The Senate Finance Committee approved its version of the “stimulus” package yesterday. It’s already $12 billion heavier than when it left the House… now weighing in at over $150 billion. Despite the extra funding, the average American will actually get less than they would had the House’s $146 package gone straight to law.

Bond insurer MBIA announced a $2.3 billion quarterly loss this morning, thanks mostly to a $3.5 billion write-down due to its credit derivatives portfolio. Big surprise, there. MBIA also announced it has received a $500 million shot in the arm from private equity group Warburg Pincus. Heh, it was either private equity or a sovereign wealth fund (SWF).

Japan is taking steps to create its first sovereign wealth fund. Japan’s financial services minister, the U.K. newspaper the Times says, is touring other SWFs of the world, and Japan is well into the design phase of its own state-controlled investment body.

Japan is the world’s largest holder of U.S. Treasuries. Of the country’s $973 billion in reserves, $580 billion are U.S. bonds. That investment, versus the value of the yen, is down about 13% over the past year alone. If and when Japan launches its SWF, it could easily become the world’s second largest (behind Abu Dhabi’s massive $1.3 trillion fund). Our Chris Hancock has put together a special report on how such funds could save your retirement nest egg… read it here.

Ratings agency Standard & Poor’s said it has begun cutting ratings of as much as $534 billion in additional mortgage backed securities and CDOs.

According to S&P officials, the downgrades could cost the world’s holders of such securities more than $265 billion in losses. Such losses would have a “ripple impact” on broader financial markets, a release from the agency said. That would be shocking.

The Chinese are currently suffering through their worst winter in over 50 years.

What was a bitter nuisance is quickly becoming nothing short of a national crisis. A particularly nasty storm struck China this week on the verge of the Chinese New Year… the biggest annual human migration in the world.

Some 178 million Chinese — more than the entire population of Russia — are attempting to travel throughout the week to celebrate the New Year with families. All over China, the winter weather has shut down the majority of airports and railroads, and now tens of millions of Chinese travelers are stranded.

What fun: Just a few of the 500,000 people stuck at the Guangzhou Railway Station.

BusinessWeek estimated the railroad crisis has already cost the Chinese government over $3 billion in damages. Protestors are taking to the streets. If anything, it’s an incredible testament to the multitudes and groupthink at play in China… where else would 178 million people try to get up and go somewhere at the same time?

Despite recession and personal income fears, this weekend’s Super Bowl is expected to be one of the most lucrative of all time. The National Retail Federation estimates the average American will spend $59 dollars on Super Bowl-related goods, up 3 bucks from last year.

“I found your take on the buying of Jaguar and Land Rover by Tata interesting,” writes a reader. “These cars have about as much ‘Americana’ symbolism as cricket and kidney pie.”

The 5: Touche. We heard from a number of readers on our misuse of the term “Americana.” Apart from the fact that one of your editors drives a Land Rover and loves it, we only meant to show that now they’ll no longer have anything to do with the American economy.

“I felt a never-before numbing chill,” writes a reader, “when I read about the Chinese establishing manufacturing plants in the U.S. by buying up land and buildings and hiring local workers. The word that leaped to mind wasn’t “slavery.” It was “serfdom.”

“What ought to be done is for the government to invest $400 billion in our infrastructure,” writes another reader. “The government can contract (with American companies and employees only) to build all the renewable energy (wind, solar, wave and geothermal) systems needed to replace all the coal and natural gas systems, and get ourselves started on an electrical transportation system in the process.

“This would stimulate the economy, as opposed to squandering more dollars and devaluing the dollar, which only leads to more inflation. Our country would then have the cheapest and most reliable power in the world — one great asset when it comes to being competitive on the world market. Be one healthy place to live, too.”

The 5 responds: Amen.

“Now that you are an experienced media exec, how about putting The 5 Min. Forecast on video downloadable through the Web?” asks our last reader. “A 20-30 minute show should do it. I suspect 90% of your readership is male, so good-looking female presenters would be a plus. Once the masses understand that they can make 3 times the money watching your show instead of CNBC, advertisers will beat down your door.”

The 5: Hmnn… maybe we should. But do you really think the world needs 30 more minutes of us each day? We were thinking five minutes is a stretch.

P.S. I.O.U.S.A. continues its post Sundance “buzz” online. Yesterday, Zoom In Online, a local Webzine that covers Sundance, posted some audience member comments after they saw the movie… and Patrick, Dave and Bob did an interview with Federal News Radio, here.

• 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.

• Markets fall… why you should expect more pain in the coming days
• Thus, time to sell? Byron King on managing your portfolio during these turbulent times
• How holding cash could be the worst investment of them all… the latest stunning CPI report
• Washington to the rescue… could an “economic stimulus” revive ailing markets?
• Kevin Kerr on a domestic bull market alive and kicking
• Plus… a die-hard Ron Paul supporter who’s not voting for Ron Paul

Sell, baby… sell. That was the word on the Street yesterday. And sell they did.

Citi’s horrid earnings announcement, lousy retail results and wholesale prices rising faster than they have since Flashdance was a box office hit all conspired to hand the major indexes their worst day of this new year.

The Dow fell 277 points, or 2.1%. The Nasdaq and S&P 500 fared even worse, down 2.5% each.

It’s not over yet. Intel issued an earnings warning after the bell yesterday, which will more than likely drag techs down all day today. Wells Fargo failed to beat estimates in its earnings announcement. Big surprise there. JP Morgan missed expectations in an earnings announcement of its own.

Washington Mutual, Merrill Lynch and Bank of America will report earnings this week too. We suspect none of them will bear good news.

And for what it’s worth, the market malaise in the U.S. spread abroad overnight. Chinese, South Korean, Australian, Philippine and Taiwanese markets all fell over 2.5%. In Japan, the Nikkei 225 plunged 3.4%.

English and German stocks fell 1%. France was down 0.3%

“It might be time to lighten up on your common stock holdings,” Byron King advised his Outstanding Investments readers yesterday. This is the third time since the Bear Stearns revelation back in July that we’ve been in the position on looking ourselves in the mirror, asking what now?

“If you are nervous about the prospect of a looming bear market,” King counsels, “sell some portion of the winners in the portfolio and take the funds off the table. Hold the cash in reserve for future opportunities. How much should you sell? Don’t feel bad about selling 10% or 20% of your shares and booking the gain. It is better to pay taxes (especially on long-term capital gains, at 15%) than to absorb losses. And by all means, stay away from margin debt.

“The message to take away from the past few months of market volatility is that the days of easy credit are over. The steadily appreciating — and sometimes irrationally booming — stock markets of the last 20 years or so are probably coming to an end. There are many implications in all of this, not the least being that many of the hedge funds that have come into existence in recent years, as well as much of the hedge fund trading, are doomed propositions. Don’t be surprised to see a lot of unloading in the realm of energy futures and metal holdings as capital-starved firms do the equivalent of burning the furniture to stay warm.

“But whatever happens, we still believe — for many reasons — that the energy and natural resource sectors are and will remain good places for investment. Through thick and thin, we believe that gold and oil will generally follow rising trends.”

Of course, holding “cash” if it’s in U.S. dollars isn’t exactly a smart move these days, either.

Today’s Consumer Price Index (CPI), for example, shows that prices for food, energy and haircuts rose an average 4.1% in 2007 – their highest rate since 1990. Energy soared an impressive 17%. And food is up nearly 5% since this time last year.

Of course, if you don’t eat, drive, heat your home, turn on lights or watch football on TV, your cost of living got only 2.4% more expensive this year.

Looking at the most recent numbers, CPI rose 0.3% in December. Over the last three months of the year, consumer inflation rose at an annual rate of 5.6%. Wherever you’re holding “cash,” if it is in U.S. dollars and not yielding 6%, you’re losing money.

Currency traders endured big swings in dollar trading yesterday. The dollar index sank like a stone at the U.S. open, coming less than a point away from its all-time low of 74.4. But within hours, the dollar recovered and continued a slight rally in trading overnight.

The euro is clinging to $1.48 like a 4-year-old whose parents are leaving for a dinner party. The pound has almost managed to stem its bloodletting of late. The queen’s currency has steadied itself at $1.97.

Alas, the yen proved to be the big winner overnight, as risk aversion took full effect around the world. Japan’s currency rose to 2 1/2-year highs versus the greenback, up to 106.

“In the absence of the gold standard,” former Fed chair Alan Greenspan wrote back in 1966, when he was still hanging with Ayn Rand and blowing sax in nightclubs on the Lower East Side, “there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Gold’s price fell victim to yesterday’s sell-off, as well. The metal’s price has fallen over $30 from Monday night’s high of $914, down to as low as $875 this morning. Gold is rebounding as we write, inching into the $880 range.

“All the stars are still aligned to catapult gold into the lead vis-a-vis the other commodities this year,” reports our gold man Ed Bugos. “You have heightening political instability in the Middle East, wars, financial crises, the election, tight supplies, dwindling mine production and a growing sense that central banks are going to continue inflating until Mammon himself drowns in green.

“It is conceivable that it can rally another $300 in the next few months before the seasonal weak period kicks in during the second quarter. For now, at any rate, there’s little sign of a top. This move is long overdue.”

Oil fell yesterday as the market succumbed to the “recession = less energy demand” theory. Prices fell $2, to $91, during the sell-off, and then dropped another buck overnight as rumors leaked that today’s inventory report would show an unexpected increase in crude supplies. As we write, black gold sells for about $90 even.

While heads were rolling on Wall Street yesterday, Ben Bernanke and Nancy Pelosi shared a nice cup of tea in front of the cameras:

Washingtonians drooling over rumors of an impending “stimulus package.”

This pretentious photo op was preceded by a 27-page Congressional Budget Office report, which recommended the wonks and pols do what they love to do best: spend your money. Who knows what they’ll settle on at this point — housing crisis funds, tax credits, Social Security boosts, expanding unemployment insurance — but never fear, they’re sure to be multibillion-dollar endeavors.

“This is all beginning to remind me of Japan in the ’90s,” laments EverBank’s Chuck Butler. “Their gov’t kept coming up with one stimulus package after another, only to fall deeper into their decade-long funk…

“Could the U.S. be headed into the same type of funk? I would have to think that the growth engine in the U.S. would keep us from that, but Japan didn’t have the debt that we have going against us, nor did they have the housing and collateralized debt obligation/credit default swaps meltdown, nor were they fighting a war… YIKES!”

The Baltic Dry Index fell for its sixth consecutive day yesterday. The measure of global raw material shipping fell by about 4.2% — we hear its biggest drop since 1989. Looking at the premarket data this morning, the Baltic seems set for another doozy of a drop.

On Monday, we learned “cotton acreage and carryover supplies have dropped dramatically,” reports our Maniac Trader Kevin Kerr. “As more and more farmers shift out of the cost-intensive, low-margin cotton to things like wheat, corn and soybeans, supplies of cotton will dwindle even further.”

Consequently, yesterday, the cotton market hit a two-day limit-up rally of over 600 points.

“The volume of buying was so swift and merciless that the ICE (the electronic trading platform) had to shut down on Monday and only pit orders were being accepted, which made for an even more chaotic situation. It wasn’t a good sign, since all of the NYBOT products are supposed to go 100% electronic at the end of February.

“Anyway, cotton is delivering significant profits, and I expect it to go higher.” If you’re not trading these markets alongside the Maniac, maybe you should be.

Ferrari unveiled its first-ever biofuel-powered sports car this week. The penultimate luxury automaker showcased its new F430 Spider concept at the Detroit auto show on Monday, the first of the Ferrari fleet to consume E85.

The car will run on a mix of 85% corn and 15% gas, perhaps the most popular blend here in the States. It would appear that even niche brands like Ferrari are preparing for the government-mandated future of ethanol. We haven’t heard any revised MPG data, but we’re guessing it’ll consume corn at an equally stunning pace as its gas-powered predecessor. But hey… it’s got snazzy green stripes! Must be earth friendly…

“I have been doing business in China for 17 years,” writes a reader. “The RMB (renminbi or yuan) rate was always fixed, and for a long time was 8.2 to $1. Starting in 2006, the Chinese started a gradual upward valuation of the currency. On Jan. 16, 2007, the rate was 7.79 to $1. On Jan. 14, 2008, it was 7.25 to $1.

“While not freely convertible in the Western world, I can assure you that in the Eastern world, you can change a pocketful of RMB to any currency you wish at the posted rate of the day, which generally is less favorable to the dollar as each day passes.”

The 5 responds: The Chinese are in a bit of a quandary over pegging their currency to the U.S. dollar. The yuan was down 9% against the euro in 2007. So what are they to do?

“The changes [in their dollar peg] this month alone,” reported the Telegraph yesterday, “would see a 15-16% hike on an annualized basis, and markets are starting to estimate that the gain may be as much as 9% over the year. That would bring the total change since the government abandoned the fixed peg in July 2005 to nearly 20%.”

Officially, the Chinese aren’t dropping the peg. But 20% in less than two years sure tells a different story. Of course, if the dollar were to rally or even hold steady, you’d see a reversal in these changes in a heartbeat. The real danger is a sudden drop in the dollar. That would spook the Chinese even more and exacerbate the problem. Goodbye, greenback.

“I look forward to your 5 Minute Forecasts every day,” writes a thoughtful reader from Texas. “I always get them just in time for lunch.

“Ron Paul used to be my congressman, back before the last time Texas was redistricted. I wrote letters and e-mail to him frequently about issues that concerned me, and I always received prompt responses. (In contrast, I once wrote a letter to then-Gov. Bush’s office regarding his policy on states’ rights. It took six months to get a response, and I wasn’t encouraged by what it said.)

“I met Dr. Paul on a couple of occasions — he came into a store I owned in San Marcos, Texas, one day to talk to some of my patrons about his ideas. I found him to be personable, down-to-earth, a man of deep conviction and integrity. Just the kind of person we need to be president. In my opinion, his only shortcoming is that he doesn’t really have a “presidential” charisma.

“I’ve been really excited about all the Ron Paul bumper stickers, yard signs and overpass banners, as well as the attention he’s received from other readers. It gives me hope for the direction the mood of conservative voters is taking.

“All that said, I will not vote for Ron Paul in this election. Even if he were elected, he would not be able to implement the changes that this country needs to get it back on track. He would need the support of the legislature, and unless a whole lot of The 5 readers suddenly decide to run for the House and Senate in their districts, he wouldn’t get it. No (other) incumbent has the integrity and political nerve to do what needs to be done. It will cause a great deal of short-term pain, and that won’t win re-elections.

“As you pointed out yourself in yesterday’s 5, “… the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.”

“That’s going to happen, no matter who is elected. I adore Dr. Paul (as a congressman) too much to have it happen on his watch. Come to think of it, that may be just the right reason to vote for Hillary or Obama!”

Addison Wiggin,
The 5 Min. Forecast

P.S. “I.O.U.S.A.,” says a LA Times article covering the Sundance Film Festival, “as it cautions us about the problems we are getting into with a national debt as big as the Ritz, might be the most unexpectedly frightening movie in the festival.”

We’re heading out this afternoon. After a rather circuitous route through New Hampshire, we’re arriving in Park City, Utah, tomorrow night. The festival begins on Friday.

Surprised as we are about it, we’re kind of anxious about the whole thing. There are supposed to be 50,000 attendees at the festival this year. Check it out: “Small Town, Large Impact”.

According to The Wall Street Journal over the weekend, the writers strike in Hollywood could actually be working in our favor. A year from now, there will be very few completed movies on the market. That makes the completed ones in this festival all the more attractive to prospective distribution companies. Of course, they still have to like the movie. That part remains to be seen. Heh.

• U.S. markets stage strong comeback… back to normal or sucker rally?
• Citigroup drops the bomb… a quick and dirty account of the latest carnage below
• Inflation at 26-year highs, retail sales slump… is anyone not calling for recession?
• Bush pleads for more oil… why the Saudis won’t be saving us this time
• Can’t afford your new home? Burn it down… Foreclosure arsons flaming up across U.S.

You know you’re hurting when IBM posts your most exciting news of the day….

The U.S. stock market rallied yesterday, sending the Dow and Nasdaq up about 1.5% and the S&P 500 up just over 1%. Nearly the entire day’s gains were fueled by an early-morning earnings announcement from IBM. Big Blue beat fourth-quarter earnings estimates by a handsome margin.

But we’re willing to bet very few people noticed this: IBM’s outsized profits were the result of currency moves in its global sales.

“If you take out the currency component,” Chuck Butler from EverBank points out, “IBM’s sales increased 4%, not the 10% for revenues expected. Even big old (boring) IBM can make some money in the currency markets!”

In all, the move shows how desperate the Street is for good news.

And with good reason. Citigroup announced a cornucopia of bad news this morning:

– $18 billion write-down
- $12.5 billion cash infusion from outside investors, including Government of Singapore Investment Corp, Saudi Prince Alwaleed bin Talal and former Citi CEO Sandy Weill
- 41% dividend cut
- 70% decline in year-over-year revenue
- a 4,200 job cut — at minimum
- $9.8 billion net loss — the biggest quarterly loss in the bank’s 196-year history.

Merrill Lynch, Wells Fargo, JP Morgan and Washington Mutual all report earnings this week. While Citi is expected to be the worst of the bunch, similar write-downs and losses are practically guaranteed.

When the dust settles, this might be the worst quarter for financials since the Great Depression.

Rep. Henry Waxman, chair of the House Oversight and Government Reform Committee, has requested Chuck Prince, Stan O’Neal, and Angelo Mozilo to testify at a House hearing next month.

Congressman Waxman wants to ask these former Citi, Merrill and Countrywide CEOs if their bloated salaries and severance packages were “justified in light of your company’s recent performance and its role in the national mortgage crisis.”

It’s so easy to be cynical about Congress on this one… we’ll have to pass. At least it will make for interesting TV.

Neither is there any relief in sight for the economy:

Inflation, for example, at the wholesale level rose to 26-year highs in 2007, reports the Labor Department this morning. While the producer price index managed a tiny 0.1% fall in December, the government reported this morning that total 2007 producer inflation rose to 6.3%, a level not achieved since 1981.

The retail season was rather anemic, too. Total monthly retail sales fell 0.4% in December, says the Commerce Department today. The “biggest shopping month of the year” proved to be the sharpest monthly decline in retail sales in six months. November sales were revised down to a 1% gain, from a previously recorded 1.2%.

And if that didn’t fan the recession fire enough, the National Retail Federation also lowered its 2008 sales forecast to 3.5% — its weakest pace in six years.

And the Baltic Dry Index, which is a measure of freight costs for shipping dry goods like coal and grains, just recorded its biggest two-day drop since its inception back in 1985. It’s now down about 30% from its all-time high in November.

“The slowdown in freight has devastated the shippers,” comments Chris Mayer.“Take Excel Maritime, which was $80 in October… It’s about $30 today. That’s pretty typical. Most shipping stocks have been cut in half. Just another point of evidence that a recession is hitting the U.S.”

The mainstream seems to be taking notice too:

According to The Economist, almost 60% of Americans believe we are in recession.

“High energy prices can damage consuming economies,” President Bush mumbled under his yarmulke today while on a trip to the Middle East. “When consumers have less purchasing power, it could cause the economy to slow down.”

“I hope OPEC nations put more supply on the market,” he suggested. “It would be helpful.”

Aside from threatening Iran, President Bush was visiting the Middle East in hopes of negotiating an OPEC output increase. Iraq is not a planned stop on his itinerary.

Saudi Arabia, perhaps OPEC’s most powerful constituent, will not increase output for the sake of the U.S. economy.

“A recession in the U.S. is very significant to the oil market and demand,” says Saudi oil chief Ali Al-Naimi. “I’m sure that no one would look with pleasure upon a recession in the U.S. But we will raise production when the market justifies it. This is our policy.”

Even if Saudi Arabia could increase their oil output, which is a debate in and of itself, they won’t be doing so for the sake of U.S. consumers. “Over the years,” the sheik continued, “the U.S. has played an important… and appreciated role in the development of Saudi Arabia. However, some people mistakenly think that the [relationship] is controlled by how much oil the United States imports from Saudi Arabia.”

Take that, W.

Gold popped as high as $914 yesterday, setting yet another record high.

There are few assets outperforming gold during this rocky first month of 2008. While the U.S. stock market has fallen 4-5%, gold is up over 8% since Jan. 1.

“The new gold futures exchange in Shanghai,” comments Ed Bugos on our mention of the new exchange yesterday, “is designed for retail investors. According to press reports, the exchange traded one-third of the average Comex daily trading volume on its first day and gold was trading at the equivalent of $1,000 per ounce.

“That’s a $100 premium over the international gold price.

“The Chinese exchanges are still cut off from the rest of the world, which is the reason for the discrepancy. But there is little doubt in my mind that besides the debt crisis and the central bank response, the launch of futures trading in gold on the SFE last week is responsible for the bullish take off in gold this month.”

U.S. mutual fund investors will likely be hit with the biggest tax bills in market history this April.

According to the Financial Times, American mutual funds will most likely ring in a record $350 billion in capital gains taxes for their 2007 performance. Despite a rocky second half, 2007 mutual fund investors will pay more in taxes this year than during the height of the tech boom, whether they sold their positions or not… ouch.

The spike in foreclosures heated up another trend in housing last year: arson.

Allstate has seen a significant spike in arsons among homes in foreclosure, reports Fortune magazine. In California, one of the states hit hardest by the subprime crisis, “questionable” residential fires increased by 76% in 2007.

With “untold thousands of homeowners struggling with ballooning subprime mortgage payments,” reads a report from the Coalition Against Insurance Fraud, “fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments.”

Apparently, this is a common problem when the housing market slows down. Go figure.

“Today’s news about Citi,” writes an overseas correspondent, “was enough to inspire me to move another huge chunk of our savings out of Citibank and into another account.

“I also noticed Citi is seeking more sovereign wealth money — from Abu Dhabi — after being rejected for same from China, which is no longer interested. Wow. Beijing thinks Citigroup stinks so much they don’t even want it.”

Yesterday, a reader wrote: “There is not a shred of fiscal conservativeness among the current batch of presidential candidates.” And then the mail came…

“Obviously, the only information he’s been fed is from the biased, tightly controlled media,” says one reader. “As everyone should know, Ron Paul is the ONLY true fiscal conservative running for president. And he IS running for president! He wants to repeal the income tax, the inflation tax and the 16th Amendment.

“Of course, along with this, he will drastically reduce government spending. I’m sick of people whining about the government, the taxes and the welfare state and then refusing to vote for a stellar candidate when given the opportunity. The whiners will get what they deserve if their whining is not accompanied by action. Do you really, truly want change? Then quit whining and vote Ron Paul for president.

“If there is to be any shred of financial hope for the USA within the next four years,
writes another, “it lies in Ron Paul winning the election. If not, the fiscal calamities promised by this and other prognosticating readers are essentially guaranteed

“Ron Paul,” writes a third, “has very sensible ideas, including the unusual notion that elected representatives, who swear to uphold the Constitution, should actually do that.”

And so on… we received about 30 responses similar to these.

The 5 responds: Here’s the problem. Yesterday, Paul Krugman, writing in The New York Times responded to the increased fear among Americans that the economy is heading into recession.

“Since this is an election year,” Krugman writes, “the debate over how to stimulate the economy is inevitably tied up with politics. And here’s a modest suggestion for political reporters. Instead of trying to divine the candidates’ characters by scrutinizing their tone of voice and facial expressions, why not pay attention to what they say about economic policy?”

He then goes on to review the economic policies of all the candidates. Except one. He conveniently forgets to mention Ron Paul. The only candidate who has actually ever studied or remotely understands economics… and the country’s biggest economic populist (blowhard) doesn’t even mention him.

What can you do? Lest we begin to sound like a recording, the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. If you’re interested in joining us in Vancouver this summer, today’s your last chance to take advantage of our early registration pricing. We’ll hold our annual Investment Symposium in late July again this year at the lovely Fairmont Hotel, Vancouver. If you’re already thinking about being a part of this incredible event, sign up today and save yourself a couple hundred bucks. See you there…

P.P.S. Thought you might get a kick out of this… we’ve seen several folks looking for tickets to the premiere of I.O.U.S.A. on Craigslist in Salt Lake City. Reminds me of my misspent youth searching for tickets outside sold-out Grateful Dead shows.

By the way, if you do have tickets, or know of someone who does, please stick around after the premiere for a Q&A session. David Walker, the federal government’s chief accountant, and Bob Bixby, director of the Concord Coalition, will be there to field the tough questions. Not exactly Jerry Garcia and friends we know, but should still prove to be a stimulating evening.