by Addison Wiggin & Ian Mathias

• What the world needs now is… another trillion-dollar bailout
• The 5 explains the complex plan that’s got the market booming
• Who’s paying for this? CBO forecasts $9 trillion in new debt over next decade
• Chris Mayer on one sector that “ain’t dead yet!”
• Forget about the Big Three… two foreign automakers with serious “signs of the times”

  Not to be outdone by the Fed, the Treasury announced its own trillion-dollar bailout plan this morning. 
 
Showing its desire to out-alphabet the old New Dealers, too, Geithner and crew unveiled the masterfully named “Public-Private Investment Program” (PPIP). The program is essentially a fully revised and updated version 2.0 of the Resolution Trust Corp. (RTC) set up in the late ’80s to deal with the S&L crisis.

  In this episode, Uncle Sam will be teaming up with private investors to buy toxic assets, rather than failed S&Ls. Suspiciously, the most easy-to-understand explanation we’ve found detailing the program came from the government. Here’s how they described it to the New York Times:
 
“A pool of bad residential mortgage loans with a face value of $100 is auctioned by the FDIC. Private investors would submit bids. In the example, the top bidder, an investor offering $84, would win and purchase the pool. The FDIC would guarantee loans for $72 of that purchase price. The Treasury would then invest in half the $12 equity, with funds coming from the $700 billion bailout program (TARP); the private investor would contribute the remaining $6.”
 
See? They’re solving a complex leverage problem with a complicated system of more leverage --plus federal guarantees and loans. The government will initially finance up to $500 billion in toxic purchases, expandable up to $1 trillion. The Treasury insists that profits, should they magically appear, will be split 50/50 with the private sector.
 

  For now, the market loves the new PPIP. The Dow is up over 300 points as we write. Most other indexes are up at least 3.5%.

  Meanwhile, the U.S. budget deficit will climb up to $1.8 trillion in 2009, the Congressional Budget Office reported on Friday -- an easy record in dollar terms and the highest deficit to GDP ratio since World War II.

Over 13% of the U.S.’ total economic output will be consumed by government this year.

To put that into perspective, membership in the EU requires each of the 25 countries to keep their budgets deficits below 3% of GDP. Most currency traders get nervous about the health of currency over when the sponsoring country’s deficit surpassed 5%.

  Fiscal year 2010 could be even worse. “CBO's estimates of the deficits under the president's budget are higher each year than those estimated by the administration -- by $93 billion for 2009 and by about $2.3 trillion for the 2010-2019 period.”

The CBO estimates that should all of the current policies be carried out, we will produce a deficit of over $9.3 trillion over the next decade. Far as we know, that doesn’t include any of the money getting sucked into the black hole at the Federal Reserve.

  “The practical implications of this is bankruptcy for the United States,” Sen. Judd Gregg said over the weekend in response to the CBO estimates. “There's no other way around it. If we maintain the proposals which are in this budget over the 10-year period that this budget covers, this country will go bankrupt. People will not buy our debt; our dollar will become devalued.”

Gregg championed TARP 1.0 in front of an I.O.U.S.A. audience at the New Hampshire Film Festival when Bush was still in office. Now, curiously, he’s concerned deficits could pose a problem for the country down the road.

  The dollar index had already taken a 4-point drubbing last week after the Fed announced its new initiative. The DX fell from 87 to below 83 -- the worst week in its history. We suspect with the Treasury’s announcement and a renewed desire for stocks this morning, there’ll be more of the same for the buck this week.

  Last week was a hell of a ride for commodities. The Reuters/Jefferies index of commodities (CRB) enjoyed its best day of 2009 on Thursday, and is now up 13% from the credit crisis low it formed in late February.

Crude oil popped 10% last week, its fifth weekly gain, to its highest level of 2009 -- $52 a barrel. Copper had a similarly bright week. Soft commodities like corn and soybeans had their best week of the year. The spot price of gold rocketed $80, to a high $965.

  “Commodities ain’t dead yet!” declared Chris Mayer on Friday. “People ask me if the price spike in 2008 was a bubble. My gut says it wasn’t. Overlay the 1966-1980 commodity bull market (courtesy AgCapita) on our own and you see an interesting picture:

“While the 2008 sell-off was much steeper than what happened in the 1970s, it’s not out of line with historical experience. The biggest rally in commodity prices could still be ahead of us.

“If you go back even further and look at the 1929 crash and its aftermath, you get a similar picture. Commodities tanked after the crash. Take corn, for example, which lost nearly 80% of its value from its peak in 1929 to its low in 1932. Yet by ’37, corn put in a new high. It was 20% higher than the 1929 peak. Put another way, the price of corn rose fivefold from the bottom -- and this during the Great Depression!

“Commodities still have legs, especially with the Fed playing loose with the dollar. The action this past week was just a prelude. Expect the world of useful commodities to hold value better than the dollar. Not only the headline-grabbing oil price, but also food prices. The retail price of food rose about 6% last year. I’d expect we’ll see food prices -- and other commodity prices -- rise again this year.”

  Ahhh… it’s Monday again. Five more financials failed over the weekend.

The FDIC closed the doors of three different banks Friday, bringing this year’s total to 20 -- five short of 2008’s tally. Two credit unions with a combined $57 billion in assets were seized. Both had quietly invested in mortgage-backed securities and finally copped to it over the weekend. Uncle Sam had to write another $5.9 billion check to keep the credit flowing.

  Existing home sales rose in February thanks to plunging prices. Home resales ticked up 5.1%, said the National Association of Realtors today.

And no wonder, the national median home price dropped 15%, to $165,400. Year over year, the drop in prices is second only to January’s record 17.5% plunge.

  Mortgage refi applications are also soaring. The Mortgage Bankers Association reports applications for all mortgages were up 21% in the week ending March 13, to the highest level since January. Applications for home refinancing surged 30%, but new purchase applications rose a scant 1.5%.

We’ll be especially interested to see the next two iterations of this MBA report now that the Fed has launched a full-scale effort to bring down long rates. We know more than a couple homeowners who’ve got their mortgage brokers on speed dial, waiting for a mystical rate somewhere in that not-too-distant future.

And truthfully, this shot at a historically low rate is one benefit of this crisis if you’ve been fiscally responsible your whole life. But… watch the fees.

  Tata Motors officially launched its uber-hyped Nano today. The Indian automaker will start taking orders next month. The world’s fist Nano owners will sputter their way out of dealerships by July.

Tata is sticking to its guns… with a $2,500 price tag, they’ll still bill the Nano as the world’s cheapest car. They expect sales to reach over a million units a year, mostly in India. The car is expected to mobilize -- and, thus, enrich -- the entire Indian lower-middle class.

As a side note, we recently agreed to become a “big brother” to our Indian partners in Mumbai. We’re not exactly sure what that means at the moment, but we’ve got a few conference calls and a trip to London scheduled for later this month to meet with our new partners. We’re excited about the prospect… and will keep you posted as events develop.

  On the other side of the world, physically and economically, Rolls-Royce quietly admitted that even the world’s most luxurious automaker is not immune to the credit crisis. At their latest show, they pulled the curtain off this baby -- the “Recession Rolls”:

The 200EX will sell for a “mere” $250-280,000, a hundred grand less than the typical Rolls.

But fear not, you’ll still get your money’s worth… the 200EX comes with features like the winged hood ornament, doors that open backward, and a storage bay in the back seat that automatically shrinks to fit whatever you put in it. If you frequently carry volatile explosives, a glass of wine, a Faberge egg -- or all the above -- this could be the car for you.

“I was born in Britain,” a reader begins, “but raised in Canada. It seems to me that the Great Depression was much worse in the U.S. than it was in the U.K. as world power made the transition from imperial Britain to the good ol' USA. Perhaps this is due to the fact that in times of transition, the new power has not yet found its footing.

“So my view is that the current slump, which I think will rival the Great Depression in terms of the misery coming, is actually going to be WORSE in China than in the U.S. China will, of course, ultimately become the next world superpower, and the transition is under way. But China, like the rest of the Asian tigers, depends almost entirely on the egregious spending of the U.S. consumer for its economic might. Well, guess what? The U.S. (and Canadian) consumer is flat broke busted, and will be for at least the next decade.

“The crushing blow this will deal to China will be formidable. Despite the great press and unabated enthusiasm for everything China, the country is about to get one hell of a body blow before it advances to a position of world dominance.”

The 5: Unfortunately, there were a couple of world wars tucked into that historical period of transition, too. It’s not a given that China will be the next superpower… but with all that wealth stored up in U.S. Treasury debt, it might be willing to fight for it.

“The 5 is fabulous,” the reader continues, “no better one-stop shop for a daily update on what's relevant in the business world. Keep it coming!” (We couldn’t help but include that part.)

  “I traveled to China last September,” writes another. “20 days, seven cities, 4,000 miles of self-directed tour with my daughter. Huge numbers of really poor people, but they don't know they are poor -- and the hardest working souls I ever saw. They don't work hard because they like too, or out of some national pride. It’s simply survival.

“As one local guide told us, 30 years ago, if these peasants had a bad crop, they didn't eat and some may have starved. I saw guys pedaling large tricycles loaded with 1,000 pounds on back riding down the street -- the place just deemed with energy and movement all day and into the night. The Chinese may not be the most efficient, but they are not afraid of hard work in trying to create a better life for themselves and their family.”

The 5: That’s the other side of the story. Westerners have become accustomed to a very high standard of living without expending a lot of physical effort. China may sustain a blow to its production cycle… but the West is about to experience one hell of an identity crisis.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. On Saturday, the trash guys came by… and drove right over the pile of construction waste in our alley.
 
On Sunday, a “supervisor” drove up in a city pickup, got out and started taking pictures. He mumbled something about assembling a “special team” to come out on Monday to deal with it and then started to get back in his truck. One irate neighbor we’ve dubbed “the mayor” came out and started whooping up some local fervor. We and two other neighbors effectively commandeered the man’s pickup and filled that back with debris.
 
“Very well,” said Mr. Supervisor, who’d been resting on a rake the whole time. “I’ll have my office contact you on Monday to report your citizen’s complaint has been resolved.” Seriously, you can’t make this stuff up.

P.P.S. We've found three little-known government mandates in the pipeline that could actually MAKE you money, instead of just stealing it to prop financials. Consistent with this administration's plan for a "smart grid," they back a new form of power that could revolutionize American electricity... and handsomely reward early investors. Read the special report, here.