by Addison Wiggin & Ian Mathias

• Congressional horror show: Another unreadable trillion-dollar legislation
• Scary “cash for clunkers,” consumer spending data… Chris Mayer on the average Joe’s mighty burden
• Dan Denning on what 3.5% GDP growth really means
• Japan yells “Fire!” in crowded theater… Byron King explains, below

  Trick or treat?

Boo!

Congress has done it again… yet another unreadable, trillion-dollar piece of legislation is slithering its way through the House of Representatives. The House’s new health care reform bill, championed by Speaker Pelosi, emerged yesterday at 1,990 pages, with a CBO estimated cost of $1.05 trillion. Highlights include this spat of legalese:

“(a) Outpatient Hospitals – (1) In General – Section 1833(t)(3)(C)(iv) of the Social Security Act (42 U.S.C. 1395(t)(3)(C)(iv)) is amended – (A) in the first sentence – (i) by inserting “(which is subject to the productivity adjustment described in subclause (II) of such section)” after “1886(b)(3)(B)(iii); and (ii) by inserting “(but not below 0)” after “reduced”; and (B) in the second sentence, by inserting “and which is subject, beginning with 2010 to the productivity adjustment described in section 1886(b)(3)(B)(iii)(II).”

We’re yet to find any “wooden arrows for children”-style earmarks like those in the Emergency Economic Stabilization Act of 2008. But it’s still early in the process… plenty of time to pork it up.

We’ve got no problem with health care reform… it has to happen, if only to stave off the coming bankruptcy of our entitlement programs. But 1,990 pages? Another trillion dollars? We had a hard time forging through Atlas Shrugged -- and that was a good book, and it only cost $15.  

  Speaking of spooky government spending, here’s another: The “cash for clunkers” program ended up costing the American taxpayer $24,000 per clunker, says a report from Edmunds.com. The auto sales analysts scoured yearly sales data and concluded that of the 690,000 new cars sold during the program, only 125,000 were vehicles that would not have been sold by the end of the year. In other words, Edmunds claims that 81% of “cash for clunkers” sales were completed by customers that would have bought a new car this year anyway… they just bellied up to the proverbial bar when drinks were on Uncle Sam.

Thus, if you trust Edmunds’ numbers, the government spent $3 billion to summon 125,000 extra auto sales… or about $24,000 per car.

  "The average U.S. consumer is not in a good position to sail through this crisis,” notes Chris Mayer, “If we applied our CODE metrics to U.S. consumers, they would fail the “E” -- for excellent financial condition -- miserably. Household liabilities are still high, as this next chart shows:

“U.S. consumers need to save and rebuild their financial strength. This is why the savings rate is on the rise. This is why, for the first time since the 1950s, household credit debt declined.

“As investors, it seems clear that any idea that depends on discretionary consumer spending -- say, buying trendy new sweaters or watches or expensive shoes -- faces some big head winds…

“We will stay with companies that own needed assets and build needed things. As I like to say, we will stick with what keeps civilization a going concern. We will also avoid any stock that is dependent on regular access to the credit markets. As we saw in 2008, a mortgage crisis can shut down the credit markets. We don’t want to be held hostage by lenders in that situation, so we will stick with excellent financial conditions.”

Sounds like a plan, eh? Time is running out to take us up on our one month of Mayer’s Special Situations for $1 offer… get Chris’ favorite hard asset companies right here for just a buck.

  Consumer spending slumped 0.5% in September, the Commerce Department said today, another unintended consequence of “cash for clunkers.” That’s the first fall in five months, the biggest since December 2008 and a stark contrast to the clunker-fueled 1.4% rise in August. Real disposable income fell too, says the report. It dropped 0.1% in September, its fourth consecutive monthly decline.

  The Senate is poised to extend and expand the homebuyer tax credit. Like “cash for clunkers," the program has been christened a smashing success (costs be dammed), and word leaked this morning that the Senate could vote as early as next week to keep the credit from expiring. The current proposal will continue offering $8,000 in “free money” to first-time homebuyers, and now a new $6,500 credit for existing homeowners. Sounds like a great chance to pick up that second condo in Las Vegas, maybe with a 3.5% down FHA loan!

Whether it happens next week or not, we’d be shocked if this thing doesn’t get extended. Really, who’s on the other side of the huge lobby efforts from the realtors, homebuilders and mortgage lenders? A consortium of happy renters? A lobby representing responsible taxpayers (ha!)?

  18.8 million homes in the U.S. were officially vacant in the third quarter, the Census Bureau reports today. That’s up 400,000 from this time last year, 100,000 from second quarter and just off the all-time high -- 18.9, set in the first quarter of 2009. Thus, 2.6% of all houses in the U.S. have no occupant, three-tenths of a percent from the record high.

  The S&P 500 flew up 2.3% yesterday after the better-than-expected third-quarter GDP numbers. The Street was expecting 3.2% growth, the government delivered 3.5%… simple as that. As we write today, the market is giving back most of those gains from Thursday. Buying opportunity?

“Don't believe the GDP hype,” Dan Denning urges from his post in Melbourne. “The big problems in the economy -- too much debt, too much leverage, too much government -- are still there. They didn't go anywhere overnight. We'd suggest that getting sucked back into stocks now because of the U.S. GDP figure is a very bad idea.

“Of course, we could be wrong. Maybe stocks will go up another 20% from here. Or 30%. Or 50%. But it's not likely. It's more likely that the recession is over, but that the Depression has just begun.

“It's begun because what the U.S. GDP numbers actually show is a private sector in full retreat as its income shrinks, its assets fall in value and the cost of servicing debt rises. Into that terrible breach the public sector has stepped, armed with an arsenal of inefficient and stupid programs that give the illusion of economic activity, but actually prevent the economy from liquidating excess capacity and bad debt (the two conditions required for a real recovery).”

  Of the many possible catalysts for the next wave down, here’s a front-runner: CIT Group. The lender is on pins and needles this morning, awaiting for the outcome of a critical bondholder vote. In essence, CIT’s creditors have to either approve a restructuring plan that would wipe them out of billions in owed debt payments or take their chances in bankruptcy court. According to Bloomberg data, the latter looks more probable.

As we’ve forecast before, this super-sized small business lender is as deeply entrenched as it is fiscally screwed. Could get spicy…

  Despite the big stock rally yesterday, the dollar will end the week with a notable gain. The dollar index is up about a full point from Monday, to 76.3.

  Which is tough news for gold. It’s $30 off its record high, at $1,040 as we write. (Just as we were about to publish, Chris Mayer submitted an article titled, “When to Sell Gold.” Check us out on Monday for the details.)

  “Just this week,” reports Byron King, “word leaked that the rare earths issue is a serious concern within the highest levels of the government of Japan. According to the Financial Times, ‘A Japanese government official said... that it was “extremely important” to secure (rare earth) supplies.’

“Whoah! If you understand Japanese culture, for an official to say that something is ‘extremely important’ conveys the highest sense of urgency. For example, Japanese don't like to say the word ‘no.’ Instead, they say something is ‘very difficult.’ You're supposed to understand that ‘very difficult’ means "no," and not push the issue. So when a Japanese person says that something is ‘extremely important,’ you need to upgrade the literal words to realize that it's like shouting ‘Fire!’ in a crowded theater.

“To illustrate the issue some more, word is out that Japanese tech giant Toshiba is looking for rare earths at the source. Toshiba is clearly worried about its future supplies of rare earths. So Toshiba is trying to make a deal with the government of Kazakhstan to get access to some rare earths deposits that are mixed in with a uranium find.

“This follows another Japanese firm, Sumitomo, recently making a deal with the Kazakhs to process rare earths from leftover uranium tailings at old mine sites. And back on the home front, the Japanese government has adopted a national program to recycle even the smallest items, like cell phone batteries, to recover rare earths. The Japanese are looking in every nook and cranny for future supplies. Meanwhile, the issue is barely on the radar screen in the U.S. Rare earths? Huh? I guess it's too important for Congress to reform health care, right?”

Byron’s been hot on the rare earths beat long before it captured the mainstream’s attention. He told us at the editorial meetings this week that he is expending his coverage to what’s called “technology metals”: “Important deposits of exotic metals like tungsten, indium and some other items. It's safe to say that without these metals, the modern world just wouldn't work.”

Put Byron’s rare earth plays together with those tech metals and you get St. Barbara’s list -- a portfolio of companies in this niche, named after the patron saint of miners. Not even his high-end Energy & Scarcity Investor readers have seen the full list yet… find out how you can, here.

Happy Halloween,

Ian Mathias
The 5 Min. Forecast

P.S. Check this out: The first ever Richebacher Society Round Table discussion. After our editorial meetings this week, Addison Wiggin, Eric Fry, Chris Mayer, Rob Parenteau and Dan Amoss met for a macro debate in Dr. Richebacher’s memorial library here at our Baltimore HQ.  They discussed baby boomers, gold, the market, “going Galt,” BRIC nations, government stimulus, the dollar reserve and alternative investing. We recorded the whole show -- over 45 minutes of forecasts, insights and strategies you won’t hear anywhere else. Members of the Richebacher Society can listen now by clicking here.

Not a member? You’re really missing out… join us here.