How 25bps Changed the World: All Time High Currencies, $96 oil, $800 gold, Traders Lose Their Minds, and More!

Ben Bernanke and the FOMC crew had their hand in the mischief. While we were forced at gunpoint to predict a 50-point cut… 25 was all we got. But it was enough to drive a stake into the dollar.

As far as Wall Street was concerned, the 25-point rate cut was already baked into the cake. What they really wanted was 50 points. Hence, the Dow and S&P sold off immediately after the Fed’s announcement…

The market rallied back to a nearly 1% close. But this morning saw the Dow open down again… over 250 points down.

Too bad… 25bps may be all Wall Street will get for a while…

“The Committee judges that,” read the Fed’s statement, “after this action [the 25 bps cut], the upside risks to inflation roughly balance the downside risks to growth.” (Translation: Cutting again might do more harm than good.) “Recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation,” continued the Fed, harkening back to early 2007 inflation concerns. And echoing forecasts you’ve been reading here in The 5.

Still, we aren’t out of the woods yet: “The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction,” said the statement.

Inflation on the one hand… a slowing economy on the other. What’s a Fed chair to do?

Unlike the Fed’s previous cuts this year, the FOMC vote was not unanimous. Kansas City Governor Thomas Hoenig requested no change in the fed funds rate.

“Currencies looked as though they were going to the moon after the rate announcement,” reports EverBank’s Chuck Butler. “The euro jumped up to $1.45… then it did hit a roadblock at 1.4505, and profit taking set in. But you should have seen the currency screens lighting up. I’ve seen action like that only a few times in my days as a currency trader… it’s truly a sight to behold!”

By the end of the day’s trading, the pound shot up to $2.08, a new 26-year high. The Aussie set a new 23-year high by breaking through the $0.93 barrier. And you already know what happened with the loonie.

It could be worse. Inflation in Zimbabwe has become so extreme that reserve bank officials will soon be forced to introduce an entirely new currency. Even at today’s rates, one greenback will fetch you an amazing 1 million Zimbabwean dollars.

Those few Zimbabweans who actually have money to hoard can rarely do so. According to an allAfrica.com article, most banks run out of notes by 10 a.m. each day.

The wait in line for passport applications for Zimbabweans trying to leave that country is often more than 24 hours long.

Gold soared overnight… as high as $798. Futures broke the $800 mark for the first time since 1980. Gold for December delivery shot up as high as $802 an ounce.

“The trends are clear,” reports GoldMoney.com’s James Turk. “The precious metals are trending higher, while the dollar is heading lower. I see no reason why these trends are about to reverse course. Short-term corrections can, of course, occur anytime, but don’t let those distract you. Go with the major trend. Own the precious metals and avoid the dollar.”

Massive profit taking has since struck the gold market. The price in New York this morning hovers around $787.

U.S. foreclosures doubled in the third quarter, year over year. RealtyTrac reports 635,159 filings in the third quarter — one for every 196 households. That’s a 30% increase from the second quarter. California, Florida and Ohio represented 44% of the total, while Nevada took the prize for the highest foreclosure rate — one for every 61 houses.

But we haven’t seen the worst of it yet.

“Given the number of loans due to reset through the middle of 2008,” said James Saccacio, CEO of RealtyTrac, “and the continuing weakness in home sales, we would expect foreclosure activity to remain high and even increase over the next year in many markets.”

Remember when the Vegas market was climbing 50% a year… year over year? We do. You can certainly expect more fallout from The Second Wave of the Housing Tsunami.

The U.S. government delivered oil prices a one-two punch yesterday, sending prices as high as $96 per barrel.

First, the Energy Department reported domestic crude inventories fell by 3.9 million barrels last week… a tad more than the 100,000 barrels they expected. Analysts pinpointed at terminal in Cushing, Okla., that reported a 3.1 million barrel drop. Oops.

Just as surprising, the Energy Department also reported an unexpected drop in refinery activity and capacity. Refinery activity fell by nearly 1% last week, to 86.2% capacity… analysts had predicted an increase of half a percent.

Crude imports rose an average of 278,000 barrels a day, to 9.4 million a day, last week as the nation readies itself for winter.

“I fully expected these draws in crude, but the severe weakness in the capacity utilization number shocked even me,” says our commodities counselor Kevin Kerr. “$96-100 is now not only likely, but probable within seven-14 days, if not much sooner.

“All eyes will be on heating oil now, and this refinery capacity number does not bode well. At the same time, natural gas prices are soaring, and if the gas numbers are as bad as these crude numbers… we could get another big boost in prices across the board. Peak Oil is here, and there is no denying it now.”

Learn more about the 2007 oil war here.

Supplies are likely to remain tight as well. “The top economist at the International Energy Agency says he’s experienced a revelation,” explains Dave Gonigam. The IEA came clean this morning when they finally acknowledged the rapidly growing oil consumption issues in China and India. Read more here, at the Desidooru Saloon.

U.S. manufacturing grew in October at its weakest pace since March, reports the Institute for Supply Management this morning. Its manufacturing index fell from 52 in September to 50, a full point below expectations. A score below 50 signifies contraction in the nation’s manufacturing capabilities.

Interesting. The farther the dollar falls, the more attractive manufacturing things in the US becomes… or so the predominant excuse for destroying the dollar goes. Seems that at least for now, the data don’t support the theory so well. Arghh! See you in hell, puny greenback.

Meanwhile, China has passed Germany by as the world’s No. 1 exporter. The World Trade Organization (WTO) reported earlier this week that China shipped $111 billion worth of goods in August, beating Germany’s export machine for the first time. China’s net export earnings surged an incredible 55% from the same time last year.

China now accounts for 8% of the entire global export market.

“As for your reader that thinks people don’t move out of the country for tax reasons,” writes a reader. “First, the name John Templeton comes to mind. Perhaps the reader doesn’t know the fellow, but in 2007, Templeton was named one of Time magazine’s 100 Most Influential People. I understand he renounced his citizenship in 1968 and moved to the Bahamas to avoid paying taxes. Why does this reader think places like Dubai and Hong Kong exist if nobody moves there for tax reasons? Have you noticed the impact of tax policy changes on Ireland?

“As for companies, look no further than Haliburton, which recently moved its official headquarters to Dubai, no doubt for tax reasons. My own company is moving its European headquarters to Switzerland from France for tax reasons.

“I think the effect is deceptive, but little by little, the loss of good companies and their tax revenue really adds up. Inertia slows people and companies from moving, but it will also slow them from moving back. The world is a lot more mobile than it used to be. A recent article, ‘The Secrets of Intangible Wealth,’ by Ronald Bailey, shows the change in value of resources based on government intervention policy. No surprise that Switzerland (what a coincidence that my company’s office is moving there) is No. 1 for intrinsic wealth created by government policy.

“Make no mistake, the impact is real…”

“The reader exchange regarding Dubai, Singapore and taxes should, perhaps, include the following observation,” writes a reader. “Americans are responsible for paying their taxes no matter where they live in the world or where their income is produced. Tax planning can help, but not a lot.

“The only thing you can do is renounce your citizenship, as John Templeton did some years ago. But today, the IRS has a new rule addressing even that step. It will assume you did this in order to avoid taxes, and unless you can prove in a court of law that you had a ‘legitimate’ reason, it will continue to demand annual filings and taxes for 10 years after you have changed your citizenship. The United States is unique in all of this.”

“It never ceases to amaze me, the people who incessantly cry they don’t pay enough taxes,” writes another reader. “Gates, Buffett and the infamous Clintons are always crying about the fact that they don’t pay enough taxes. Unless I am missing something, the answer is clear. If you don’t feel you pay enough taxes, write a check and send it to the IRS. There is no law forbidding it. I’m sure the IRS would happily accept any and all contributions.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. By the way, we’ve nailed the dates down for next year’s Vancouver event.
We’ll be hosting the symposium at the Fairmont again from July 22-25, 2008. As a reader of The 5, you’re invited to sign up for the extra discounted rate of $599.

Registration for this event is simple. Click the link below or call (800) 926-6575 or (561) 243-6276, ext. 105 or 106, for more information.

The 2008 Agora Financial Investment Symposium will sell out early, so we urge you to secure your seat before it’s too late! Our discounted offer will expire on Nov. 5, 2007.

Register here.