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 No deus ex machina this time around. Jim Cramer’s “Armageddon on Wall Street” buddies will have to stick it out without any help from the Federal Reserve.
 Monetary inflation remains the Fed’s “predominant policy concern,” said Ben Bernanke yesterday, moments after announcing the Fed’s decision to keep rates at 5.25%. Bernanke acknowledged recent market volatility, credit woes and the subprime bust, but only as increased “downside risks to growth.”
Then he waved his hand over his face and turned that frown upside down. The U.S. economy will, “continue to expand at a moderate pace over coming quarters,” he said, cheerily, “supported by solid growth in employment and incomes and a robust global economy.”
 U.S. markets responded to the Fed’s cold shoulder with surprising vigor. Major indexes climbed a hair higher. The Dow is up a quarter of a percent, while the Nasdaq and S&P 500 gained a little more.
 The dollar also rallied on the news. By not cutting rates -- Bernanke momentarily saved the greenback from the executioner’s sword. Thusly, the dollar rallied against the pound, euro and yen. Prices stand at $2.02, $1.37 and Y118, respectively.
 But just when dollar bulls thought it was safe to go back in the water…
This morning, the Communist Party threatened to use its $1.33 trillion of foreign reserves as a political weapon -- its “nuclear option” to counter pressure from the U.S. Congress.
Described as a "bargaining chip" by one of China’s finance chiefs, China’s $900 billion in U.S. bonds are enough to send our economy into full-blown recession, and perhaps mark the beginning of the end for the dollar… something the Chinese clearly understand:
"China has accumulated a large sum of U.S. dollars,” states He Fan, a Chinese yes man. “Such a big sum, of which a considerable portion is in U.S. Treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland and several other countries have reduced their dollar holdings.”
The threat comes on the heels of heightened protectionist legislation from the dingbats in the U.S. Congress, senators taking the Donald Trump approach to finance: “Look, we owe you sooo much money that if you don’t do what we say, we’ll just forfeit and take you down with us.”
The Communists made clear their objective: "China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar,” Mr. Fan said. If not, “The Chinese central bank will be forced to sell dollars once the yuan appreciates dramatically, which might lead to a mass depreciation of the dollar."
Fact is, it would be just as foolish for the Chinese to cause the dollar to crash as it would be for the Senate to try to restrict trade between the two countries.
 Still, the Chinese threat -- bold or stupid as it may be -- is real. And it underscores the era in which we citizens of the world live. Take a look at this chart:
These 10 countries account for more than 50% of total world dollar reserves. If China follows Russia, Switzerland and South Korea in selling the dollar… who will be left to buy it?
 Nerves. The 10-year yield registered its third straight day of gains on the news. Now at 4.8%, bonds have begun to approach the 5% mark for the second time this year. If China or any of the 10 countries on that chart, for that matter, really got serious about divesting themselves from U.S. debt or dollars, interest rates would skyrocket here at home…regardless of what the policy wonks at the Fed proscribe.
 Wells Fargo, one of the nation’s major mortgage lenders, has raised the rates for 30-year “jumbo” loans -- those of $417,000 or more -- over a full percent. Even the “rich,” those with a taste for extreme debt, are feeling the sting of the housing crunch. The hike from 6.8% to 8% -- the historical average, mind you -- would cause a $650,000 mortgage’s monthly payment to rise another $500.
 Toll Brothers, the nation’s largest builder of high-class homes, announced a 21% drop in its third-quarter revenues yesterday. That marks four consecutive seasons of falling earnings for the prominent homebuilder. Toll’s order cancellation rate jumped to an impressive 24% in the same time frame, up 5% from the previous quarter.
Toll Brothers stock has lost 29% since this time last year.
"We are now in the 23rd month of a down housing market," said CEO Robert Toll. "With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down."
 “How big will the housing problem be?” asks Bill Bonner in the latest Daily Reckoning. “The last crisis in the property market occurred in the early '90s, both in America and in Britain. In the United States, the Resolution Trust Corp. was set up to sort out about $300 billion in bad loans. But that was when America had an economy of only about $7 trillion.
“Today, U.S. GDP is closer to $11 trillion. Back then, consumers had only about half as much debt. And the housing boom of the '80s was nothing compared with that of the last 10 years. This blowup is likely to produce a couple trillion dollars worth of casualties... and a long period of rest and rehabilitation for housing values.”
By the way, Bill’s latest scribbling effort with John Wiley & Sons, a book called Mobs, Messiahs and Markets, hits the shelves in two weeks… we’ll keep you apprised.
 The Chinese market, meanwhile, marched on to its fourth consecutive day of all-time highs. At 4,663 and change, the Shanghai index is now up 22% since the start of July, and well past 60% since the new year -- our new year, not theirs.
 Reuters’ Beijing office concluded yesterday that pollution is so bad in major Chinese cities that the average traffic cop has a life expectancy of 43 years. Over 90% of all whistle tooters surveyed suffered from at least one severe nose or throat infection this year.
 “The U.S. market is the only one where coal prices are not at multiyear highs,” Chris Mayer reminded us in his latest agorafinancial.com “quick take.”
“U.S. coal companies are sucking wind right now,” writes Chris, queuing off of a recent WSJ story. “The only coal company to show any strength in its earnings was Consol, because it was able to sell its Northern Appalachia coal for higher prices.”
But the fragmented industry is ripe for consolidation, and at least in the next five-10 years, coal isn’t going away. “The coal biz looks crappy now,” says Chris, “but that’s often a good time to start building long-term positions.” An admitted history buff, one of Chris’ favorite contrarian energy players was the one-armed, brick-makin’, self-trained oil sleuth Pattillo Higgins. Click here to read his story >>
 “Hey, seriously, you guys found a Bob Nardelli fan?” asks a reader. “If you really have, he may be worth money as a collectors’ item. Isn't this is the same Bob Nardelli who nearly destroyed a Dow 30 company by refocusing it away from its basic market (homeowners) just in time to have the new area (contractors) collapse? There is an interesting phenomenon that permits CEOs who fail to be hired by other companies at even more money on the grounds that they now have experience. Bill Agee built an entire career on that principle. Old cynic that I am, I waited with a palpitating heart to see what our boy does to Chrysler.”
 “The chart you showed from John Mauldin is very useful,” opined another reader, “but I think defaults from ARM resets have a cumulative effect. There's a delay in foreclosure, and houses take awhile to sell, building up an inventory overhang. Mortgage holders will want to sell, but are generally holding ‘stronger hands’ than the original buyers. However, should they ever ‘need’ to sell, prices would plummet.
“This plunge (30-60%?) from forced liquidation could occur at any time, or never. The first-quarter 2008 peak in ARM resets will add supply, but does not indicate anything about timing. It could happen before or after… whenever a sauve-qui-peut panic avalanche is triggered. That is, if Fannie or Freddie doesn't throw some lifesaver in. Or an inflation panic doesn't devour inventory.”
The 5 responds: Hmmn… with interest rates rising, the credit cycle tightening, ARM resets and defaults climbing, the dollar falling and pressure on both the stock market and U.S. Treasuries… it’s not hard to see why managing the economy through monetary policy is a tenuous proposition at best.
Good luck, Ben. We said as early as 2002, when Bernanke was gaining sway at the Fed, he’d better be careful what he wishes for. Anyone following the Greenspan era at the helm of the Fed -- an era of easy credit and crisis management by liquidity spigot -- was going to be in for an interesting ride.
 One last word on water witching. We received no less than a dozen personal accounts on the subject… none of which had anything but glowing endorsements for this odd practice. We’re ready to give in. Maybe there’s more to it than meets the eye. Please… just don’t try it with your investments.
Best Regards,
Addison Wiggin
The 5 Min. Forecast
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August. 2, 2007:
Recent guerilla attacks in western Mexico have authorities on both sides of the Mexican border scrambling to protect billions worth natural gas pipelines. Companies such as Hershey’s, Honda, and Kellogg’s are losing up to $7 million a day as local rebels bomb energy sites left and right. Meanwhile, several little known organizations are well positioned to profit from a sudden energy grab... or… worse yet, a full blown U.S. / Mexico Border War. 
