Fed Bends the Rules, Behind Gross’ Plea, LTCM Returns, What’s a Jatropha? and More!

By Addison Wiggin & Ian Mathias

  • Dollar getting dreary again… Why the Fed’s “granite façade” is showing strains…
  • Mish uncovers the real reason Bill Gross wants a Bush bailout
  • “If at first you don’t succeed”: LTCM founder back in the game
  • Massive drought in Turkey, but you wouldn’t know it from this picture of fountains at Hagia Sophia
  • Wheat hits an all-time high…. Japanese hike noodles, Italians up pasta, French monte baguettes
  • T he jathropa weed: an inexpensive breakthrough in bio fuels?
  • Did Fidel kick the bucket? Will it make a difference?

“Negative sentiment toward the dollar is gearing up again,” reports our currency go-to guy, Chuck Butler. In Friday’s trading, the euro gained half a cent on the dollar… a miniscule movement to you and me, but a sizable shift in the currency world. The Esperanto currency will now set you back $1.36. The pound rallied too… back up to $2.01.

“The terrible financial tempest that I see breaking,” writes ShadowStats.com’s John Williams, “is one where massive dollar selling will trigger or exacerbate a major sell-off in U.S. stocks and bonds

Williams sees the Fed’s rhetoric about letting the market clean up the subprime mess…as applicable when convenient. But “Now that the banking system is flailing for a life preserver, the Fed will do whatever they can to preserve the same system that allows them to survive, the U.S. dollar be damned.”

For example, the Fed agreed to bend a longstanding rule last week to help bail out two of the country’s largest banks. Bernanke exempted Citigroup and Bank of America from rules that would limit the amount of lending their bank arms can float to brokerage affiliates. In other words, Citi and BoA need to lend more money than is legally permissible to their respective mortgage operations in order to keep them from imploding.

Previous regulations permitted banks to float up to 10% of their capital to troubled affiliates. Now Citigroup and BoA can lend up to 30% of their capital to mortgage units in desperate need of a bailout. That means each bank needed more than $8 billion in to relieve their distressed lenders… the current cap will allow each to loan about $25 billion.

“Beyond any near-term covert central bank currency intervention,” Williams concludes, “rigged economic data or other machinations imposed on the markets, the proximal trigger for the dollar’s sell-off could be any one of a number of factors ranging from an official Fed easing to expanded U.S. military activity in the Middle East.”

“A quick look at Pimco’s Total Return Fund shows the top 5 positions are all Fannie Mae and 40% of the fund is in mortgages,” writes Mish Shedlock, commenting on Bill Gross’ bizarre letter last week calling for the president to jump in and bail out mortgage companies.

The Total Return Fund, Gross’s flagship bond fund, has maintained a depressing 3.83% annual return since 2005… one that could easily be beaten by a simple high-yield savings account or CD. Of interesting note, Morningstar rates it a 5-star fund.

“The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of Pimco,” suggests Mish.

And isn’t this ironic? Robert Merton, co-founder of the Long-Term Capital Management Fund, has said he will be re-entering the asset management business and will once again run his own hedge fund. Merton, a Nobel Prize winner, made this announcement on the ninth anniversary of the LTCM crisis, which he himself helped ignite. Good timing, Bob.

Hurricane Dean has come and gone and, from an oil industry perspective, had very little impact. Mexican state-owned oil company Petroleos Mexicanos (Pemex), which stood most squarely in the path of the Category 5 hurricane, is returning more than 18,000 evacuated workers back to rigs today. They expect to return to pre-hurricane production levels this week.

Light sweet crude traded this morning for $71 per barrel.

“On Aug. 1,” writes the Rude Awakening’s Joel Bowman, making his way to Dubai from Budapest, by way of Turkey, “Istanbul’s reservoirs stood at an average of 31% capacity. Just 20 days later, they had dropped to an alarming 23%. Despite severe shortages here, precious water still cascades from fountains out in front of the Hagia Sofia and the Blue Mosque.


You wouldn’t know the country is in the throes of serious drought… not from this position, anyway. Tourists still snap shots of the famous landmarks… but pay inflated prices for bottled water at nearby restaurants.

“A few hours away,” Joel continues, “in the nation’s capital of Ankara, the situation is far worse. On the first of this month, the director general of the State Hydraulic Works (DSI) announced that Ankara had enough water for just 78 days. There, water reserves are lapping the 5% mark in the catchment basins… and even that level is depleting rapidly.”

Blue Gold

After hovering at an 11-year high for months, wheat busted through to $7.50 per bushel last week — its highest price ever.

Canada — the world’s second largest exporter — announced this year’s crop would be 20% smaller than previously expected.

Japan’s Ministry of Agriculture, Forestry and Fisheries has announced that it will increase domestic prices for the second time since 1983 — by a staggering 10%. Instant noodle maker Nissin Food Products has already publicly expressed interest in raising prices for the first time in 17 years.

In Europe, where wheat prices have nearly doubled this year alone, Italy’s Association of Pasta Manufacturers recently announced its products would cost 20% more in the coming months. French patisseries have united and agreed on a nationwide 5-7% hike on the venerable baguette.

Here’s some interesting news on the alternative energy front. Earlier this summer, British Petroleum dumped $90 million dollars into research of a weed known as jatropha.

Here’s what BP found: The jatropha plant is a large shrub filled with golf ball-size oily green fruit. It can grow almost anywhere, doesn’t require an abundant water supply, it’s inedible, resistant to pesticides and is essentially worth squat to those surrounded by it. In India, they use the plant to build hedges.

But as it turns out, jatropha oil can be poured right into a biodiesel tank. Making it “potentially” one of the first truly low-impact, high efficiency, natural biofuel sources. And it’s cheap…

Thanks WSJ

At $43 per barrel, that makes jatropha fuel almost half as cheap as oil. A highly efficient, easy-to-grow biofuel source that has no direct effect on the global food supply? We expect more money will be flowing in this direction very soon.

“Why can’t farmers make a profit,” asks a reader, “and why are they leaving farms in droves?

“The answer is easy: government subsidies. Over the last 70 years, government money has ruined farming, and made it a ridiculously costly, wasteful business, subsidizing the big at the expense of the small, who will always be the backbone of national character. About 10% of subsidy recipients receive over 80% of all subsidies.

“Has the money done any good? Just drive through the countryside and see, where rotting silos and milk barns mark the graves of dairies past, and no dirt is to be seen anywhere, because there are no farmers to turn it over. America now imports huge amounts of food. Why? Because conventional American agriculture is so successful? No, because it’s a costly dinosaur kept alive long past its time by government money.

“The new agriculture is coming with low inputs, intensive grazing and few chemicals. Small farms thrive on it, making huge profits where the high-input, industrialized, chemical-addicted, government-trained and subsidized farmers couldn’t grow a turnip. The old agriculture is dying, and the silly ethanol programs are merely symptoms of its disease.

“The sooner it dies, the better we will all eat, and the more farmers will be able to return to the land.”


Addison Wiggin
The 5 Min. Forecast

P.S. “Rumors have run hot and cold,” writes Dave Gonigam, “ever since Fidel Castro’s birthday passed on Aug. 13 with no speech, no letter, no pictures, not even a possibly years-old audio recording in the style of bin Laden.

“This particular episode speaks volumes about what happens when large numbers of people fervently, desperately want to believe something in the face of little or no supporting evidence. The large numbers of people are the Cuban exile community, and what they want to believe is that Fidel Castro is dead.”

It may not be true, now. But Castro will be dead at some point. The question is: Will Castro’s death spontaneously trigger some kind of counterrevolution, undoing 48 years of destruction? Probably not…comment here .

P.P.S Bill Bonner is a funny guy. He’s been poking fun at Thomas L. Friedman for years. Mostly because Friedman’s a simplistic, didactic moron, but also because his books are so widely read. Today, Friedman gets a chance to defend himself… or so we think. There’s an off chance, Bill may have written this himself.


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