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.

Another homebuilder feeling the housing pinch, KB Home, announced its closing operations in New Mexico, Illinois, Maryland and Virginia. The company posted a $772 million loss in the fourth quarter, 15 times the size of its fourth-quarter losses in 2006.

Do you think it’s possible that Queen Elizabeth II of England is reading The 5? If not, she’s getting awfully close to plagiarizing one of our drumbeat themes.

“The competition for fresh water by a growing population is itself becoming a source of potential conflict,” the queen warned her subjects yesterday. Her majesty shared a few words on Commonwealth Day regarding precarious scenarios surrounding the Nile. “This river is a fragile ecosystem and its vulnerability grows with the number of people dependent upon it, so that a single incident of pollution upstream may affect the lives of countless numbers downstream.”

“Water is going to be a priced commodity,” the U.K.’s chief scientific adviser echoed last week. He warned that food and water security could be “enormous problems” as the crisis slowly develops. Here, here. Harrumph… grumble. Ha-hem.

In the U.S., water isn’t as sparkling clean as you’d like to think. A five-month study conducted by The Associated Press found trace levels of ibuprofen, antibiotics, anti-convulsants, antidepressants… even sex hormones in the drinking water of at least 41 million Americans.

Among the hundreds of different drugs found floating in U.S. tap water, the AP reported that all were far too diluted to be considered medically useful. Darn. For what it’s worth, Philadelphia fared the worst… over 56 pharmaceuticals were found in Philly tap.

Your editors have been looking for an excuse to drink more wine and coffee anyway. Cheers.

Chinese consumer inflation grew at a stunning 8.7% in February – its fastest pace in 11 years. Food prices alone in China boomed 23% in a 12-month period ending last month. According to Bloomberg, pork prices are up 63%.

The Chinese central bank has raised rates six times over the past year, up to 7.4%, but to no avail. Rapid growth, an undervalued currency, all shades of farming crisis, a gnarly winter storm and loss of arable land to ineffective transport solutions are all factors with which even the most organized central government would have a bitch contending.

Then again, food prices in the U.S. aren’t faring much better. We present this chart, courtesy of The Boston Globe:

“As the prices of food commodities rise,” writes our crisis and opportunity champion Chris Mayer, “companies are starting to make changes to how they produce your food. This you might not want to know. Sara Lee, for example, is reformulating its breads using cheaper, lower-protein wheat.

“Food producers across the board face stiff increases in the price of certain commodities. Campbell’s Soup will cut back on the number of ingredients it uses in its soups. Some companies have much less wiggle room. If you’re Hershey’s, for example, you’ve got to worry. Hershey’s relies on expensive commodities such as milk, sugar and cocoa. There’s not a lot you can do. If you’re Tyson Foods, you need grains, which are trading near record highs.

“Commodities may face a nasty pullback, given the sharp rise in prices lately. But on the other hand, given the fall in the dollar and flow of money into commodities, it seems to me that commodity prices will only head higher.”

The U.S. dollar is doing its part to keep the commodity boom alive, too. The dollar index shimmied down to yet another record low this morning: 72.4.

The euro inched a bit further into the record high level of $1.54. The pound remains on the high end of $2.01. But the yen backed off a bit… down to 102.

Oil rolled right through previous record highs yesterday, to a new all-time high this morning of $108.

“The U.S. economy is, indeed, showing further signs of slowdown,” commented a slightly panicky spokesman from the International Energy Agency (IEA) today. “We are in an era of higher oil prices. If we look at $100 per barrel of oil, we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade.” You really think?

The IEA went on to lower its demand forecast for 2008, but only by a very small margin. Currently, the agency expects demand to grow 2% this year. Its expects gasoline demand to slow with the economy too.

Let’s hope so. U.S. gas prices have reached a new all-time average high of $3.23. Hawaiians are already paying $3.60 per gallon. Californians, $3.58.

Diesel has reached a record high of $3.84.

Gold rebounded this morning from yesterday’s sell-off. Spot prices shot up $20 over the past 24 hours, to a price this morning of $985 per ounce.

“Do I detect a subtle ‘changing of gears,’” asks a reader, “in your notorious bull posture with respect to gold? Seems several of you folks are taking a CYA (cover your ass) position recently?”

The 5 responds to this reader: Busted. Our position with respect to gold is only a marketing ploy to get you to buy our newsletters. Too bad it’s gone up 390% since we began recommending it at $253 in early 2000. You would have been much better off investing in tech stocks back then… and piling all your profits into real estate. Sorry to have inconvenienced you with our opinions. Thanks for reading all the same.

The 5’s response, if you’re not a cynical jackass: Of course, we get nervous when any asset we’re recommending goes up almost 400%. Show me an investor or analyst who isn’t trying to “cover their ass” every day. As our Ed Bugos points out, “Nothing goes up in a straight line.” But while a short-term correction is likely, nothing has changed with respect to the long-term case.

Here’s our most “notorious” gold bull, Bill Bonner, with an attempt to explain why:

“Even at today’s price around $975, gold is still less than half the inflation-adjusted high it set the year Ronald Reagan moved into the White House. And think of all that has happened since then! For one thing, more gold has come onto the market. Gold is never destroyed or used up. Still, an additional ounce of it is much harder to make than a crisp, new $100 bill. You have to find it and then dig it up out of the ground. That’s why the world’s gold supply increases only about 2-3% per year.

“But the supply of the paper money — in which gold is calibrated — goes up much, much faster, at least four or five times as fast over the past 30 years. And the world’s assets — also measured in paper money — have skyrocketed too. Our houses are worth three, five, 10 times as much as they were in the early Reagan years. So are our stocks. What’s more, now there are trillions of dollars worth of tradable financial assets in places where none existed at all in ‘79 — such as in India, China and the former Soviet Union.

“Gold began floating on this flood of liquidity nine years ago. It has doubled… and doubled again. Since 2001, it has gone up 240%. Since Ben Bernanke began cutting rates on Sept. 18, 2007, it has gone up 37%. And if you believe in the volume theory of money — and we do — you can reasonably expect its price to keep going up. Gold is, ultimately, money, and it is also the world’s ultimate money. Adjusted for inflation, it will have to go up to $2,500 or so, just to match the peak set in 1980.

“Most likely, it will go far further; we’re no longer young and foolish enough to think we know where.”

“Your reader who suggested he stop paying his mortgage,” opines our last reader today, “was onto something. For those too young to remember the savings and loan bailout, the only way to get the attention of the Resolution Trust Corp., the government bailout agency, was to stop making payments.

“The only people who could even make offers on the loans were the politically connected, which probably explains why our dear politicians never passed any legislation to prevent a repeat. The Keating Five and the Clintons and Whitewater were just some better-known examples. I speak from experience, having spent two years trying to buy the loan for a large apartment complex from the RTC.”

The 5: Caroline Baum suggests as much in a recent column on Bloomberg. “Any day,” she writes, “I expect some government official to unveil the John Galt plan to save the economy.” Galt, if you’re not familiar, is the iconic hero of Ayn Rand’s Atlas Shrugged — an entrepreneur, tired of government meddling, goes on strike and encourages his fellow producers to do the same. Once the world starts falling apart, the government kidnaps Galt and asks him what they should do. His plan to save the economy: “Get out of the way.”

“Today’s economic and financial crisis,” resumes Baum, “would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

“That’s not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

“We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It’s a tough way to run an economy.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

“Beyond the short-term games played by the central banks, the general outlook remains pretty much the same, with a deepening inflationary recession, a major bear stock market, heavy selling of the U.S. dollar and heavy buying of gold…”

When the opening bell sounded, not long after Bernanke’s 75 bps cut, the Dow and S&P rebounded immediately.

By the end of the day, the Dow and S&P 500 lost about 1%, while the Nasdaq fell 2%.

In this month alone — just 14 trading days — the Dow and S&P 500 are down 10% and the Nasdaq has fallen over 13%. Two or three more days like yesterday and all three of these indexes will be 20% off their all-time highs — a full-blown bear market.

The volatility index — an index on the CBOE that measures investor uncertainty — spiked to tech bust highs yesterday.

The volatility index (VIX) opened above 37 yesterday morning, its highest score since 2002. As you might guess, the higher the score, the more fearful and uncertain the markets. While the VIX retreated quickly back down to 32, it’s worth noting that traders are feeling more uneasy about the market than at any time during this subprime bust.

“Emotion — not rational decision-making — is driving the selling,” adds Dan Amoss, “so don’t panic with the crowd and sell quality stocks when they are cheap. This is not 1987. Thirty-year Treasury bond yields are not spiking toward 9%, as they were in the months leading up to the 1987 crash. Instead, they have been plummeting toward 4%:

“The Fed’s emergency 75 basis point cut sparked a late morning recovery, but it’s more of a psychological move than anything. Investment banks must still take losses on toxic mortgage-related securities that they had assumed were covered by bond insurers MBIA and Ambac.

“But those banks with access to the discount window now have access to Fed credit that’s nearly a percentage point cheaper this morning and will get even cheaper in the coming weeks. The yield curve is still flat after this rate cut, but it will eventually become positive. Inflation is coming down the pike, but right now, the market is fearful of unknown financial sector write-offs.”

If you’ve been following Dan’s Strategic Short Report recommendations, this fearful market has handed you some impressive profits… the average open position in his short portfolio is up 102%. Frankly, there hasn’t been a better time to be shorting stocks in years… click here and take advantage of this gloomy market today.

Ironically, venture capital investment in U.S. companies in 2007 also climbed to tech boom levels.

According to a Dow Jones report yesterday, venture capital investment reached almost $30 billion in 2007, 8% higher than in 2006 and at levels similar to those in 2001. Energy, health care, Web technology and green technology companies received the lion’s share of capital injections in 2007. The median investment for such ventures rang in at $7.6 million, the highest since 2000.

Markets in Australia snapped a 12-day losing streak with 4.4% gains. Japan regained 2%, while China bounced back about 3%. India’s Sensex, which was shut down yesterday for an hour to prevent potentially catastrophic losses, regained over 5%.

In other currencies, the Japanese yen remains the story of the month, as it continued to strengthen against all its competitors. This morning, the yen trades at 105, a 2½-year high versus the dollar.

Gold is holding onto the $880-890 range reached during yesterday’s U.S. market scare.

Poseidon’s new plant in California.… sweet lagoon

“The common problems with desalination usually involve the costs. But in the last decade, the cost has dropped in half. It’s more competitive now than it’s ever been, but still expensive. One reason is that the process is energy intensive. And the technology has a reputation for fickleness.

“Nonetheless, desalination is attracting some big money from General Electric, Citigroup and others. Of course, the biggest problem with desalination is that it doesn’t help you unless you are within easy reach of an ocean. Water is expensive and difficult to transport. Most experts put the limit somewhere around 50-100 miles. That’s why acre-feet in places such as Arizona, Nevada and Colorado go for thousands of dollars.

“So desalination does not have much impact on these kinds of places. But it could still create many interesting opportunities for investors. Building new plants requires new materials and technologies. Getting water where it needs to go requires pumps and pipelines. It all just adds another layer for water investors to play in.”

Click here for Chris’ “Blue Gold” portfolio

“Even today, very few Mexicans have bank accounts, and many of them tend to ‘save’ — i.e., preserve value — by sinking that money into an ever-growing house. Many towns in Mexico are veritable forests of rebar, waiting for the next installment. It’s what happens when you’re in the modest classes and cannot rely on government to protect the value of its currency.”

“The game goes something like this:

“1. The CEOs invite a bunch of cronies to join their board and receive generous options and monetary compensation for attending an occasional meeting. (With very little personal work responsibility… this is a pretty cush job, which they appreciate.)

“2. The board then forms a compensation committee, which may or may not pay consultants to tell them how much average CEOs like theirs should make. (Consultants who throw out low numbers do not do much consulting business.)

“3. The board concludes that its CEO is above average and should receive above-average compensation.

“4. Next year, surprise… the average has risen and the cycle repeats.

“You’ll note that the owners of the company (the shareholders who pay the salary) have very little to say about the matter. In my opinion, it’s not unreasonable to change that (perhaps by law).”

“So while they have voted to appropriate Social Security funds for general expenses over the years, instead of putting the taxpayers’ money in an interest-bearing lockbox, they, in turn, give themselves a better retirement program that is untouchable. And you want these hypocrites to decide what a CEO should be paid? How about your pay too? Get real.”

Regards,

Addison Wiggin
The 5 Min. Forecast

“In An Inconvenient Truth, former Vice President Al Gore offered his touring slideshow on global warming and made a compelling case for people to push their politicians to pass legislation to help clean the environment.”

Read the whole article here: Can debt be funny?

At the same time, the movie was also called “the scariest movie in Sundance” by LA Times reviewer Kenneth Turan.

When we originally began this project, we were working with a production company that specialized in horror films and teen comedies. Guess that auspicious start was more than prophetic.

To follow along with reviews and critiques of the movie, see the site we set up to track it.

Alan Alda was at our screening yesterday. And we ran into Matthew Perry at a party the agent for our film threw on Monday night… co-sponsored by, of all papers, The Wall Street Journal.