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 “Markets without nasty down days or weeks,” observed Chris Mayer over the weekend, “would be like Melville’s Moby Dick without its white whale. It is because the whale sometimes strikes back that makes the tale worth following. It is the element of danger that makes the plot interesting.”
U.S. markets rocketed back on Friday. For the week, the Dow was down 204… a little less than 2%.
 “Fourteen of the 21 banks and securities firms that underwrite the government's debt changed their outlooks for lower interest rates or increased forecasts for bond yields last week,” reported Bloomberg on Friday, following the 10-year Treasury’s sojourn above 5%.
“In my banking days as a corporate lender,” said Chris Mayer, reminiscing on another subject, “the 10-year note was the only rate I watched every day. The pricing of many loans ties to this security. A spike, like the one we’ve had, is what we used to call a deal killer. Because, inevitably after such a spike, there were at least a few loans we knew would never get to closing...
“The stock market’s rise depends on low interest rates. When the 10-year Treasury doesn’t even pay 5%, the stock market, even at 20 times earnings, looks good. With rates at 6 or 7%, the comparison gets tougher.
“If rates keep rising, a lot will change in the stock market.”
 If rates continue to rise, so too will the pain felt in the subprime market.
In 2000, Alan Greenspan was “opposed” to increased scrutiny of subprime lenders, despite internal pleas at the Fed., Ed Gramlich, Minneapolis Fed governor from 1997-2005, said on Saturday. “I would have liked the Fed to be a leader" on the matter of supbrime lending, said Gramlich.
"For us to go in and audit how they act on their mortgage applications would have been a huge effort,” retorted Greenspan when reached for comment by The Wall Street Journal. “It's not clear to me we would have found anything that would have been worthwhile."
On the eve of the subprime bust in 2005, 52% of subprime mortgages were originated by companies and organizations with zero federal supervision. And rightly so, perhaps. A free market in credit should operate without federal supervision. It could also do without the pretense that the Fed could and/or should do anything about lax lending standards… or the shell game set up by Congress with Fannie Mae, Sallie Mae and Freddie Mac.
The fallout from the subprime meltdown will be one of the great stories of 2007.
 A recent study by Swiss bank UBS AG, reports our own Kate “Short-Fuse” Incontrera in The Daily Reckoning Weekend Edition, found that more than two-thirds
of central banks worldwide would rather diversify their foreign currency reserves with bonds OTHER than U.S. Treasuries.
 “My impression is that foreign holders of U.S. Treasuries were no small players in the abrupt spike in interest rates last week,” wrote Dr. John Hussman in today’s Weekly Market Comment. Don’t think for a second that this recent surge in Treasury yields only affects U.S. economics.
“The U.S. is essentially consuming at the table of China and other nations, happy to finance our consumption and government deficits by writing IOUs to foreigners and saying, ‘See, they’re willing to lend us the money! They’re funding our deficits by the billions every day! And nothing bad is happening! This can go on forever!’
“Meanwhile, foreign holders have now accumulated half of the float in U.S. Treasury securities, and are increasingly eyeing our real assets,” Hussman warned.
“Witness China’s deal to purchase part of Blackstone Group so it can expand its purchase of what would otherwise remain our property if we were less profligate in our consumption and government spending.”
 China’s trade surplus with the world widened to nearly $22.5 billion in May, according to customs data released this morning. That’s almost $6 billion more than April and only about a billion shy of the record. Year over year, China’s exports were up 73% from May 2006.
These numbers are ironic, aren’t they? Given the amount of time Hank Paulson spent with the Chinese in trade talks last month. The Treasury secretary can try to talk up the U.S. economy all he wants. The Chinese, the numbers reflect, would rather make stuff… and sell it.
 Gold lost $16 bucks on Friday. Ouch. As we write Monday morning, it has regained $7…
 After Friday’s close, the USDA reported that at the end of the 2007-2008 season, there will be nearly 17 million bags of coffee available. Sound like a lot? It’s not. In fact, it will be the lowest season-ending inventory since 1961.
The price of coffee -- like milk, corn, beef, gas, chicken, eggs, spinach and all the other staples we’ve written about here in The 5 -- will mostly likely go up. We’re getting a case of the heebie-jeebies just thinking about it.
 Meanwhile, north of the border… the Canadian jobless rate hit a 33-year low in May.
“Canada's economy seems to be near full capacity, so the Bank of Canada will likely be forced into raising interest rates again this year,” reported Chris Gaffney over at EverBank. Hmmm… so Canada is experiencing record “low” unemployment, record “high” consumer spending and is due for a rate hike. Looks like loonie-buck parity will be here sooner than we expected.
Let’s practice: $1 Canuck buck = $1 greenback. Crazytown.
 After reaching a 22-year high, the New Zealand dollar (the kiwi) quickly tumbled 2% this morning. Reserve Bank of New Zealand officials called Friday’s high “exceptional and unjustified.” Weren’t they the same guys who chose to shock the currency world by raising rates to 8% on Friday? What did they expect?
The “yen carry trade” is alive and well at those rates. Borrow in yen, invest in kiwis. International finance made easy.
 “It seems silly that OPEC would have any concern about ethanol, etc.,” wrote a reader after OPEC’s El-Badri threatened to blackmail the West, “in context with the explosive increase in energy consumption in China. There doesn't seem to be enough land area to grow corn and other fermentable materials in sufficient quantities, and given the energy required to distill and concentrate the alcohol, to replace oil in significant quantities.
 “I love your 5 Min. Forecast,” wrote a reader, thumping his chest a little. “I have taken to heart your warnings about our ever-declining dollar. I decided today that the best thing to do was to use some of my paper dollars while they were still worth something, so I put a lot of them together and went out and bought a luxury automobile for cash. Now I'm ready for whatever comes next.”
A poll of 1,000 boys and girls conducted by Charles Schwab showed earlier this year what a pleasant dream world Americans live in. Of kids between the ages of 13-18, 73% believed they "would earn plenty of money." Boys said they expected to average $174,000 annually, girls $114,200.
In 2005, by comparison, when the census last surveyed the nation, the median earnings for men were $41,386.
The top three fields these kids aspired to? Medicine, technology and teaching. ($114,200 as a teacher? Sure.)
Hope you enjoy your day,
Addison Wiggin
The 5 Min. Forecast
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While working with Citigroup in Hong Kong,
