J.P. Morgan Chase and the New York Federal Reserve will team up to bail out Bear Stearns. Rumors have abounded all week that Bear Stearns is facing severe liquidity problems. But the news turns out even worse than the Street’s forecast.

Bear will be injected with yet untold billions by J.P. Morgan, which will borrow the money from federal printing presses and you.

Bear Stearns stock fell over 35% within minutes of the news hitting the wire, even after being down some 25% this week already. The whole S&P slipped 1%.

That did the trick for gold, too. On this news, gold spiked to $1,003.

“The end of write-downs is now in sight for large financial institutions,” reported Standard & Poor’s yesterday. That news helped the Dow eke out a small 0.3% gain for the day. Likewise, the S&P 500 ended up 0.4%, and the Nasdaq rose 0.7%.

But either traders failed to read the fine print, or a financial crisis is already priced into the market. The S&P report estimated total write-downs to be some $285 billion, up $20 billion from the forecast last month. While this estimate is nowhere near the $600 billion guess UBS wagered last month, it’s still significantly more than the $160 billion already written down by global financials.

To paraphrase the S&P report, we’re barely over halfway there.

While markets in the U.S. have enjoyed a rally for the better part of this week, investors in Asia are still down on their luck. The Nikkei 225 is down almost 7% since Wednesday on worries that a U.S. recession and very strong yen will stunt Japan’s export economy.

After its big drop of 3.3% this morning, the Tokyo exchange is at a 30-month low.

Elsewhere in the Pacific… Hong Kong plummeted almost 5%, while Singapore’s index shed 4%. Stocks in Seoul, Sydney and Shanghai fell about 2.4%.

Oil set an all-time high of $111 by yesterday’s close. The price has since backed off a skosh. But upward pressure remains.

“Would gold and energy and other materials be this high” Larry Kudlow asked our Kevin Kerr last night on his show, “if we were poised for a really bad American recession?”

“This is a global growth story, Larry,” the Maniac Trader quipped in response. “While the U.S. may be heading into recession, we’re still seeing a lot of world demand. I don’t think we’re seeing the price of a recession in the commodities right now, so I do think were going to see a short-term correction, which will help ease the recession.

“Longer term, I really believe these commodities are going to go higher because of that global demand.”

Water, too, remains a commodity in high demand. One driver in rising water consumption is the rush to produce biodiesel, as this McClatchy chart shows:

Across the board, consumer prices neither rose, nor fell in February, the Labor Department said this morning. We’re not exactly sure which economy they were measuring, but polled economists predicted a 0.3% jump in the consumer price index (CPI) last month, slightly less than January’s 18-month high of 0.4%.

Since inflation is under control, the Fed is free to cut rates next week without fear of ruining the economy.

Still, the dollar can’t catch a break. It found itself another all-time low last night, this time at 71.7. Similarly, the euro and pound inched higher, to $1.56 and $2.02, respectively. And for a brief second, the yen struck 99, a 12-year high.

“Those aren’t good tidings,” George W. Bush told PBS yesterday when asked about current exchange rates, “if you’re for a strong dollar like I am. One reason I am for a strong dollar is because I think it helps deal with inflation.”

Really… you don’t say?

“Did you see the president say with a straight face,” wrote a reader last night, “that he favors a strong dollar? And the interviewer failed to follow up with the logical next question — why, then, do we have $9 trillion in national debt? I could have screamed.”

President Bush likes to say he got a “B” in economics, but an “A” in cutting taxes… and being fiscally responsible with the people’s money.

Congress passed the president’s $3 trillion spending proposal this morning.

The Senate quickly authorized this massive budget for the next fiscal year, beginning Oct. 1, just a day after the current government spending data showed record-high deficit so far this year.

But that’s all part of balancing the budget by 2012, we suppose… setting new all-time spending highs each year. The logic is impeccable.

“This is getting absurd” Jim Rogers told CNBC yesterday about the dollar crisis. “I know they can run their printing presses forever, but that is not good for the world, inflation is not good for the world, a collapsing currency is not good for the world. It means a worse recession in the end.”

When asked how he would handle the dollar crisis, specifically, the first two things he would do if he were in charge, Rogers responded: “I would abolish the Federal Reserve and I would resign… no country in the world has every succeeded by debasing their currency.”

Something tells us Mr. Rogers won’t be on CNBC long with that attitude.

“With all due respect,” writes a reader in response to our friendly debate about who is really to blame for the nation’s economic woes, “a cursory analysis of the ages of those who have most influenced U.S. economic and monetary policy over the last 30 years would suggest that our current deficit crisis (in most aspects) was a product of the ‘Greatest Generation.’

“The baby boomers are just starting to retire, and will face depletion of the trust funds, etc., in their retirement, while the architects of our troubles, from 1971 onward, will most likely die before their legacy comes to fruition, having both the ability to live off the spoils of the longest boom in our history and the tail end of the trust funds.

“Perhaps the hubris of winning World War II contributed to the mentality that the U.S. could overcome any obstacle, even deficit spending.”

“I am a boomer,” counters another, “and I have always thought my generation was a pack of super lemmings. Depending on the time frame, I have been called a freethinker, radical, rebel, rabble-rouser, social Darwinist and anarchist. Recently, in politer circles, I am an eccentric.

“Twenty-five years ago, I was blacklisted. In the Old West, a man’s survival threatened to that degree led to a hanging (horse thieves). Today, that is unacceptable. With the exception of family and a couple of close friends, ALL of my so-called peers supported the list.

“I have had an interesting and productive life since, but quite lacking in sympathy for the kind of trivia I ‘m seeing here. A good dose of truth has a salutatory effect on occasion, and you are to be commended for providing it.”

The 5 responds: Judging by the amount of mail we’ve received on this issue, age is a hotter subject than sex in this country. As well it probably should, given the tsunami headed for the nation’s financial situation.

One common thread stands out among the writers: Each generation is all too willing to blame the one before it for the mess it perceives the country to be in. Boomers do appear, at least from the cross section of letters we’ve received, to have a higher degree of self-loathing than either the “Greatest Generation” or those in their 30s — the so-called “Generation X.”

For our part, we’d like to apologize for being so general about our comments, and leave you with these words of wisdom from the generation that follows us:

“As for my and everyone else’s generation,” writes our last reader on the subject, “the vast majority of each are ignorant, especially financially so. Basic finance isn’t even taught in public schools. Thus, it would be idiotic of me to defend my demographic simply because I am lumped in by the fact of my age.

“What’s next, defending the actions of the Fed simply because it is American and so, by birth, am I?

“In regard to the vocal defenders of their demographic, don’t you find the level of groupthink a tad surprising for a publication catering to those sympathetic to a contrarian financial perspective?”

Enjoy your weekend,

Addison Wiggin,
The 5 Min. Forecast

P.S. By the way, if you’re a current subscriber to Resource Trader Alert, Outstanding Investments or Energy & Scarcity Investor and you’d like to join the Resource Reserve, we failed to mention we’ll credit your account the subscription fee of your existing pub toward the discounted Reserve Membership. You can claim that credit by calling 1-866-361-7662. But please do so by Monday — we’re trying to close the membership drive.

Rejoice! The benevolent Fed saved the market… again.

The Fed’s new TSLF — a promise to swap Treasuries for mortgage-backed securities — kicked off the best day for U.S. stocks in five years.

The Dow shot up 417 points, or 3.5%, its best percentage gain since March 2003. The Nasdaq also had its biggest percentage gain since spring ’03, up nearly 4%. The S&P hasn’t seen a day this good since May 2002… it popped 3.7%.

Stock markets in Asia rallied big on the Fed bailout plan too. Markets in Australia, Hong Kong, Malaysia and Singapore all surged about 3%. Indian and Japanese markets gained 1% apiece.

In classic form, whatever America did, China did not. The Shanghai Composite fell 2.3% on rumors the Chinese central bank is planning to hike rates again… and the government is devising more ingenious ways to stymie inflation in their fledgling capitalist economy.

Mortgage enablers Fannie Mae and Freddie Mac were by far the most appreciative of the Bernanke clan offering. Once “sure thing” darlings of state pension plans and corporate retirement accounts alike, the government-sponsored mortgage lenders have already endured one hell of a year.

Both firms plunged 12% on Monday after a Barron’s report suggested the two companies were (gasp!) spiraling toward insolvency and would need a government bailout. Little did Barron’s know that the bailout was just a few hours away. As of March 27, up to $200 billion in Freddie and Fannie mortgage-backed securities will be as good as government bonds. (Ha!)

Both stocks popped over 10% yesterday. Still they remain about 75% off their all-time highs. Together, Fannie and Freddie account for approximately 45% of the $11 trillion U.S. home loan market.

The chairman prays: Please, God, don’t let Fannie and Freddie die

If Fannie and Freddie were the beneficiaries of yesterday’s bailout plan, Treasuries were not. For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.

On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note traded at a record-high 16 basis points today. German bunds are trading at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay… an increase shows the opposite.

By way of comparison, before the credit crisis began in July, U.S. credit default swaps were at 1.6 points, compared with 2.5 points on bunds. The rapid rise in both U.S. and German bonds shows how much the credit markets have seized up since the subprime mess began.

“The U.S. government is not immune from the consequences of the credit crisis,” Fabrizio Capanna, a corporate bond trader for the French bank BNP Paribas told Bloomberg yesterday. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”

“That’s certainly eye-opening,” writes our managing editor Chris Mayer, who flipped us the story early this morning. “The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds. The poor fiscal condition of the U.S. is no longer a matter of debate. It’s something people readily acknowledge and worry about. We live in interesting times, that’s for sure.”

For their part, currency traders didn’t seem to know what to make of the Fed’s diabolical plan. The dollar index felt some roller coaster swings:

After a wild day, the dollar index ended at 72.6 — just above its record low set on March 7. The euro still trades for $1.54. The pound remains at $2.01. Likewise with the yen… 102.

“The Federal Reserve’s announcement,” opines our friend John Williams, “that it will be providing an added $200 billion in liquidity to the system in a coordinated action with other central banks, on top of the $200 billion emergency funding announced by the Fed on Friday (March 7), again highlights the depth of and the ongoing deterioration in the banking system’s solvency crisis.

“The good news is the Fed will create whatever dollars it needs to keep the system from imploding. The bad news is the price that will be paid in higher inflation. Despite any relief rallies that seem to be taking place in the equity and dollar markets, the news here has horrendous implications for the dollar and inflation, corresponding positive implications for gold and likely continued trouble for equities.”

And more annoying data for the Fed: The U.S. trade deficit jumped to $58 billion in January, up nearly a percent from the previous month, the Commerce Department reported yesterday.

The U.S. imported a record $206 billion of goods in services during the month. Crude oil accounted for the biggest share, $27 billion. Oil traded as low as $85 in January. As oil jacked its way to $109.72 yesterday — another record high — a new record trade deficit is likely when February deficit details emerge.

Gas prices crept to another record high of their own today. AAA reports the national average price is now $3.25 for a gallon of unleaded.

If you don’t care for high gas prices, by all means, stay the heck out of Gorda, California.:

Yep, that’s $5.20 for a gallon of the cheap stuff. Our forecast was a scant winter season off.

In the middle of nowhere on the Pacific Coast Highway, this Amerigo station is the only gas for miles. James Willman, the man who attends the station seven days a week, told The New York Times yesterday that someone threatens or curses at him almost every day.

“This plan of Bernanke’s,” says one reader, “to swap Treasuries for bad paper in order to help the creators of the bad paper constitutes in my mind panic and dereliction of duty.

“What idiot would borrow from his savings account and loan it out to a gambler down on his luck to help the jerk out? Someone needs to step up and call for some kind of boycott to get the attention of these numbskulls in Washington who are playing not only with fire, but with our very lives and fortunes, and those of our children. Shame on them all.”

“I thought your edition yesterday was downright painful to read,” writes another reader. “Painful, because you lump everyone together — the baby boomers are not the instant-gratification set.

“We are the ones that help our elderly parents so they don’t have to steal cans of cat food for dinner, pay our fixed-rate mortgages that had 20% down or more, send our kids through college, pay our taxes no matter how outrageous and have no control over the federal government, the Fed, the IMF or anything else that impacts our lives — including federal support to use our food for energy, instead of filling our bellies, while they decry the use of coal, which is right in our backyards.

“We didn’t choose to go off the gold standard. We are the ones whose bank accounts are shrinking, whose retirement accounts are suffering, who lose our health benefits when we retire and who paid into Social Security all of our working lives and can’t count on it in retirement.

“So please, moderate your tone. We didn’t choose any of it, and the Democrats and Republicans never represented our interests, and don’t now.”

The 5: You’re kidding, right? Of all the mayhem in yesterday’s issue, you quibble with our use of the term ‘baby boomer’? How can you be emotionally attached to a demographic cohort? Oy. Puzzlement aside, “boomers” are roughly 44-62 today. The “me” generation is by far the most heavily represented cohort in Washington. And it shows. This next nugget is for you boomers, too:

We learned today that marijuana growers in Canada have exported much less bud as exchange rates eat into their margins.

“Canadian marijuana is now less competitive against marijuana grown elsewhere,” an economics professor at Simon Fraser University told the Missoulian this week. “This is a cost-driven business. With exports no longer viable, the British Columbia marijuana industry has certainly taken a hit, so to speak.”

The loonie trades for $1.01 this morning. Sorry, potheads, maybe you should start growing your own.

Regards,

Addison Wiggin,
The 5 Min. Forecast

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The Alon USA oil refinery in Big Spring, Texas… bit of a flare-up

And of course, there’s your typical “rebel uprising” news from Nigeria this week… rumors that OPEC is going to cut production… and more than one CNBC cheerleader calling for a quick U.S. economic comeback, leading to higher U.S. demand.

“But the real reason oil finally broke $100,” says our oil man Bryon King, “is a fundamental shift in global production. The old ‘Seven Sisters’ are aging relics — Standard Oil, Royal Dutch Shell, British Petroleum, Texaco, Chevron, Exxon and Mobil. They are no longer what they once were. Today, these poor spinsters collectively control less than 10% of the world’s oil resources.

“The old seven have now been replaced by the new ‘Seven Other Sisters’ (SOS).” These are:

Saudi Aramco (Saudi Arabia)
Gazprom (Russia)
CNPC (China)
NIOC (Iran)
PDVSA (Venezuela)
Petrobrás (Brazil)
Petronas (Malaysia).

“The party line from the SOS and OPEC,” Byron says, “is that ‘the market is fully supplied.’ Well, only if you like paying $100 a barrel.”

Despite the impending recession, U.S. consumers appear to be willing to keep up their spending. At least a quick glance at Wal-Mart’s fourth-quarter earnings would suggest so. U.S. benchmarks gained 1.2% on the news yesterday that Wal-Mart posted 4% growth through December.

Then “investors” took a closer look… and saw a gloomy 2008 forecast from Wally World economists.

By the end of the day, the Dow and S&P ended down 0.1%. The Nasdaq dropped 0.6%.

After very publicly announcing a new office in Mumbai, private equity group Kohlberg Kravis Roberts & Co. announced yesterday that the firm has delayed payments on billions of greenbacks in debt. The bank, apparently, borrowed these untold billions to invest in Alt-A home loans. Whoops…

KKR’s aftermarket news coupled with oil’s rise hit Asian markets hard. The Nikkei 225 shed 3.3% on the news. The Japanese government also downgraded growth expectations for the first time in 15 months.

Then, as if more were needed, news came that inflation hit an 11-year high in China… and the Shanghai Composite got knocked for a 2% loss. Benchmarks in Australia, Singapore and India all followed in kind.

In Europe this morning, stocks are down too. The CAC and the DAX dropped 1.5% and the FTSE closed down 1.2%.

Back here in the U.S., homebuilder confidence edged up in February. The National Association of Homebuilders/Wells Fargo Housing Market Index rose one point in February, to a score of 20.

But before you get all lathered up and start buying, keep this in mind: Aside from December and January scores, builders have never been so pessimistic.

Of the three components that make up the index, “buyer traffic” and “present market condition” sentiment rose. The portion measuring “six-month outlook” fell.

Permits to build new homes in January fell 3% to a 16-year low, reports the Commerce Department today. Not since November 1991 have so few builders applied to break ground on new developments.

As new permits sank, “housing starts” actually rose… albeit slightly. Housing starts crept up 0.8% last month, to a seasonally adjusted rate of 1 million — a three-month high. Even here, we see economy in action: Single-family home starts fell over 5%. But buildings with two or more units rose 22%, fueling the starts’ uptick almost entirely.

Consumer prices in the U.S. rose by 0.4% in January. When you yank food and energy out of the mix, prices still rose 0.3% — the highest monthly rise since June 2006.

In fact, damn near everything rose last month: Food and energy prices rose 0.7% — food’s biggest monthly rise in almost a year. Prescription drugs were up 0.7%, hospital prices up 1%, airline fares rose 0.8%. But don’t worry: New car prices fell by a stunning 0.3% in January. Keep those rate cuts a-comin’, Ben!

Credit Suisse, a bank thought to have largely dodged the subprime mess, announced a nearly $3 billion write-down yesterday. It blamed “pricing errors by traders.” The details of the errors made by these careless, rouge traders (conveniently quartered in the bank’s asset-backed securities division) will knock over $1 billion from CS’s first-quarter earnings.

Credit Suisse stock fell over 6% in Europe. Standard & Poor’s has placed its credit rating under review.

“The Northern Rock bailout is troubling,” says Dan Amoss in response to our coverage yesterday. “In many ways, the British economy is a microcosm of the U.S. economy. Both are considered safe havens for international capital — but for how much longer?

“Both economies pushed the envelope on housing inflation and credit growth. Both are involved in the unsound practice of trading paper money for energy and manufactured goods. And both are moving to the left politically. This doesn’t add up to attractive conditions for investors, so you want to be picky and skeptical in your investment decisions.”

If you’re exceedingly skeptical, you may want to place your bets accordingly. Dan can help. His latest “short” in the Strategic Short Report pulled in 173%. Get subscription details here.

The dollar was in the pits all day yesterday. Then, miraculously, higher-than-expected inflation readings from the government sparked a rally. The dollar index jumped over half a point, to 76.5, within an hour of the CPI’s release. Go figure. Traders must be thinking Ben’s ready to slow the rate cuts… but can he afford to?

Regardless of this fuzzy rationale, the euro dropped to $1.46. The yen finally let go of 107, up a point to 108. And the British pound, the mangy dog thus far in 2008, lost a full cent, to $1.93.

Gold rose as high as $930 last night, and has been trading steadily around $920 since. We’re still looking for that nice breakout to the upside.

“Should we be concerned,” asks a reader, “with the ever increasing amounts that are being floated by the Fed as loans to shore up the capital of U.S. banks? You bet! Because this is what these loans are; they are, in a nutshell, the difference between the regulatory capital required to stay in business as a bank and the net worth of certain banks assets and liabilities. The deficits become ‘short-term loans’ so as to keep these certain banks ‘afloat’…

“This appears to be a very ‘convenient’ way for the administration to avoid going to Congress and explaining why certain banks are failing and the need to vote (and lobby for) additional money and the complete overhaul of the U.S. banking industry. Instead, Bush’s cronies at the Fed are, with a debit here (the Fed books), a credit there (the bank books), and voila, $50-150 billion magically appears to avoid an embarrassing situation and the inconvenience of holding a Treasury auction.

“In fact, what this accounting shell game is achieving is very much an off-balance-sheet (remember Enron) borrowing against the nonexistent equity of certain banks. When the smoke clears, those bad loans will wind up U-KNOW-WHERE… on the balance sheet of the U.S. government as write-offs buried in some arcane language related to funding the Federal Reserve.

“Didn’t the Japanese try to hide their bad real estate loans this way?”

The 5 responds: They sure did.

“I thought you might enjoy this picture,” a Venezuelan reader writes. “My apologies for the quality, but I took it with a cell phone (VERY discretely…):

“This poster was in the waiting area of the Ministry of Small and Medium Industries of Venezuela. The main captions say:

Top — ‘Recognize These People!’ ‘Enemies of the State!’
Bottom — ‘Merchants of Terror!’ ‘Manufacturers of Lies’, ‘It Is Forbidden to Forget!’

“The photos on the poster are of various owners of media outlets such as local newspapers and TV stations. What may catch your attention is the seal of the U.S. Department of State as the background.”

The 5: Chavez really is a man of the people, isn’t he? What a great leader.

Regards,

Addison Wiggin,
The 5 Min. Forecast

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Polimeni budgeted the project at around $10 billion, the cost of which he intends to recuperate by charging drivers $25 each way and selling advertising on the tunnels walls.