Banks Drain Reserves, Insider Buying Surges, Wheat’s New Record, Pollution in China, and More!

by Addison Wiggin & Ian Mathias

  • U.S. banks drain reserves to Depression-era lows
  • Markets fall across the world… service sector data points to recession
  • But all hope is not lost: LIBOR returns to normal, insider buying hits 13-year high
  • Wheat soars to record high… Kevin Kerr on “big story” in agriculture this year
  • China desperate to curb pollution for Olympics… Byron King on its “ripple effect” sure to change the global economy

Oy. Bank reserves in the U.S. turned negative in January for the first time since the Great Depression.

In December 2007, total bank borrowing from the Fed topped 36% of reserves. That was the highest proportion since March 1933, when it hit 46%. Back then, President Roosevelt declared a “bank holiday” to prevent bank runs.

But…“In January 2008,” writes our friend John Williams of, “the U.S. banking system met its reserves only by borrowing an amount in excess of 100% of reserves:

“Mr. Bernanke has promised not to repeat the mistakes made by the Federal Reserve in the 1930s,” Williams explains, “whereby the banking system and the money supply collapsed into a deepening, deflationary Great Depression.

“The latest data on bank reserves suggest that something along the lines of an attempted nonrepeat of 1933 is under way. Faced with a devil’s choice, the Fed has acted in the last several months with a series of emergency actions to hold the banking system together and to prevent a debilitating implosion in the money supply. The Fed will create whatever money is needed to prevent a collapse of any portion of the financial system.”

That can’t be good…

Neither can this… the markets greeted “Stupid Tuesday” with a huge, across-the-board sell-off – the worst of its kind since October. The Dow, S&P 500 and Nasdaq all fell 3%. The horrid ISM report we mentioned yesterday caught most of the blame.

And as usual, market malaise in the U.S. spread to Asia. In Hong Kong, the benchmark Hang Seng fell 5.4%. The Nikkei 225 lost 4.7%. Shanghai gave back 1.5% of the 8% gains it posted on Monday.

But lest you think we’re all gloom and doom here at The 5, let us offer you three rays of hope:

First, the LIBOR — the interest rate banks charge each other for overnight loans — has gone down and even briefly dipped under the fed funds target rate. “That means,” explains Dan Denning from the other side of the planet, “the Western world’s major banks are not scrambling for cash as desperately as they were a few weeks ago.


“The falling LIBOR rates also suggest that the big banks are not as suspicious of one another as they were a few weeks ago.”

Second… insider buying among Wall Streeters has reached a 13-year high. In fact, January marked the first time since 1995 when CEOs and other senior corporate officials bought more of their own company’s shares than they sold. “Insider” purchases totaled $683 million last month in spite of the S&P’s 6% decline.

The last time insiders were net buyers, in January of 1995, the S&P rallied 34% in less than a year. What’s more, of the last seven times insiders bought more than they sold — all occurring between 1988-1995 — the S&P rallied an average of 21% in the following 12 months.

Among all the market’s sectors, net buying was most significantly found in communications, industrial, energy, materials and consumer cyclical groups.

And third… our friend Chris Mayer tells us by phone this morning from the Gabelli Pump, Valve and Motor Symposium in NYC that four of the value funds he’s been watching — Third Avenue, FPA Crescent, Tweedy, Browne Global Value and First Eagle — have opened their doors to new investors for the first time in years.

“That signals to me,” says Chris, “these fund managers see value in the market… and they want to buy. But they don’t want to dip into their reserves to do it. So they’re taking on new clients. It’s a good sign.” Mr. Mayer will show us what these funds are looking at on Friday. He’ll give us a full report on the Pump, Valve and Motor Symposium, too. Heh. Bet you can’t wait for that.

Former Treasury Secretary Robert Rubin, now chairman of Citi, doesn’t seem all that worried about the banking crisis either. Rubin told a crowd at Manhattan’s Cooper Union for the Advancement of Science and Art last week, reports Fortune magazine, that “The problems now roiling the markets and forcing the Federal Reserve into a defensive posture are ‘all part of a cycle of periodic excess leading to periodic disruption,’ and that we are not, in fact, on the verge of a financial meltdown.”

Instead, he blamed politicians and consumers for not understanding the mess we’re in. “Part of the problem,” wrote Fortune, explaining a point Rubin also made in our interview with him for I.O.U.S.A., “is that we need a ‘more educated electorate’ to hold politicians accountable. Without that, the U.S. won’t be able to overcome long-term economic challenges, like the troubles surrounding Social Security and budget deficits, or the new problems created by globalization.”

“It’s really not that difficult,” Rubin concludes in our movie. “The old saying ‘There is no free lunch’ is true”… in politics as much as it is true for the national economy.

The dollar hasn’t given up the ghost yet, either. The dollar index even perked up a full point premarket yesterday. Then it continued trending upward throughout the day, ending around 76.2.

Of course, this is only 2 points above its all-time low.

The euro slipped further this morning. It’s barely holding on to $1.46 as we write. Tomorrow, the European Central Bank meets to discuss rates in the eurozone. Given their equally dismal service sector numbers yesterday… a rate cut seems likely, sooner or later.

The pound has fallen 4 cents against the dollar since last Friday. If you’re fresh off the plane at Heathrow, you can score a pound for $1.95 this morning. Also in trading yesterday, the Canadian dollar let slip their U.S. dollar parity, down to 99 cents. But the yen refused to let go of 106.

Gold held its peace during yesterday’s sell-off on Wall Street. The precious metal has been trading between $895-900 most of the week. This morning, it opened in New York just above $895.

Wheat hit a record high $10.33 per bushel this morning. The same bushel would have cost you about 5 bucks in June… yikes! The grain also surged to record or near-record highs in other exchanges in North America and Europe.

“Wheat prices are soaring once again,” comments our Maniac Trader, but that’s not all. “Because of a weather event in Canada and overall global demand, corn is ratcheting higher on the new ethanol mandates, and soybeans… fugetaboutit; soy oil, soy meal… anything soy is the big story this year. Regardless of how much is planted, look for bean prices to continue north.

“Bottom line is if you don’t have some of these trades in your portfolio, you are not going to benefit from one of the biggest booms of all time. As my friend Sean calls it, it’s farmaggedon!”

Join Kevin and his Resource Trader Alert army here.

Olympic medical consultants have urged those traveling to China for the 2008 Olympics to limit physical activity. Hmmm…

A clear and sunny day in Beijing

“In 2008, China will experience increasing levels of pollution of every sort,” comments Byron King, offering a forecast of quite ominous proportions. “We’ll read numerous reports about the increasing damage to human health — in China and abroad — due to Chinese industrial development. The dirty environment of China and its potential impact on Olympic athletes will become a cause similar to the Chinese toy scandal of the past year.

“The Chinese government is likely to pull out all the stops to clean up the air and water near Beijing leading up to the Olympics. Vast swaths of heavy industry will be shut down, including coal-fired power plants in northern China. Electricity will also be diverted to Beijing from other regions.

“This will cause a ripple effect throughout the Chinese economy as thousands of plants close and millions of workers are displaced from jobs. Overall Chinese economic output will be affected, and there will be a disruption in the Chinese demand for commodities.

“This turbulence in the Chinese economy may also be the prelude to a major slowdown in Chinese economic activity after the Olympics. Chinese leaders are already looking for ways to get the breakneck pace of economic growth and price inflation under control, and post-Olympics will be a logical time for the Chinese economy to take a breather.”

That is, if it can catch its breath at all. For more on the global battle to reduce emissions, see Byron’s Energy & Scarcity Investor.

BHP Billiton offered to buy Rio Tinto for $147 billion last night. Rio responded with the “carefully consider” lip service, only to reject it this morning. Should the deal eventually go through, it will be the one of the largest of all time, and BHP will become a near-monopoly giant in the mining industry.

Goldman Sachs, Citigroup and five other banks have offered to lend BHP the $55 billion it would need to finance the deal… the largest loan in the history of business.

“China’s SWF played a masterstroke getting in between BHP and Rio,” opines one reader. “They’ve thwarted an almost certain rise in the iron ore price, and still managed to get a 9% stake in the company. It can block a deal; it prevents pricing power from swinging to the producers; and if BHP ends up buying Rio, China makes a quick 10% on its investment.

“That’s a good deal. And they were in a position to make it because A) they had the money and B) they were thinking in those terms.

“Our jackass politicians and corporate thieves are not. And the American economy is going to pay for it.

“No one really knows, but I don’t imagine the average Chinese spends too much time thinking about how important America is to his future. Maybe Chinese policymakers do, if only because America still has aircraft carriers and nuclear missiles. But I also imagine that in China’s long-range strategic view, the U.S. is just another market, perhaps hollowed out by a massive wealth deflation… and certainly not as important to China’s future as Americans would like to believe.”

The 5 responds: Of course, that’s not necessarily a bad thing. Might give us a chance to reign in a little of that greatest of American exports: political hubris.


Addison Wiggin
The 5 Min. Forecast

P.S. Sovereign wealth funds will continue to play a major role in stabilizing the global markets in 2008. If you haven’t had a chance to read our report on the subject and are not a subscriber to Christopher Hancock’s Free Market Investor, you’re missing out on one hell of a movement in global capital… don’t be afraid to grab a little piece for your own retirement fund.

P.P.S. If you’re still in an adjustable-rate mortgage, the Fed may be handing you a reprieve by reacting as they have to the credit squeeze. We told Prashant Gopal, the gentleman who covers real estate for BusinessWeek, as much on Friday. Check it out here.


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