Rule By Outlaws, Spending Insanity, The Second Wave, Dreamliner Lessons and More!

by Addison Wiggin & Ian Mathias

• Treasury bends laws on maximum debt, dodges bullet with “extraordinary accounting tools”
• Mind-boggling government spending rundown: $1.8 trillion approved in 24 hours
• Why the second wave of the housing bust might crash ashore ahead of schedule
• Byron King with lessons from the Dreamliner launch for the everyday investor
• A reader asks, “Enough criticism, what would you do?” Our response, below

  Technically speaking, the U.S. government is now illegitimate.

Not in the way most people use that word… like describing product of a lonely housewife and the mailman, or as a synonym for illogical. But we mean, as Webster’s puts it, “not sanctioned by law: illegal.”

Yesterday the national debt, as reported by the Treasury, reached $12.13 trillion. Rest assured, it’s even higher by now. The official debt ceiling -- a rule of law which the government must obey, lest it render all other laws illegitimate -- currently does not allow the national debt to exceed $12.10 trillion.

Viva la revolucion!

  If our system of government weren’t a laughable mess of loopholes and earmarks, this would be a problem. But you can sleep easy… an unnamed Treasury official told CBS News that government has some “extraordinary accounting tools” at its disposal to move the official national debt up or down $150 billion. This has happened before, we’re assured, so it’s no big deal.

Still, the typical homo sapiens response to this kind of dilemma might be to cool off debt accumulation, if only for a little while. Heh… yeah right:

  The American government approved around $1.9 trillion in new spending in the last 24 hours. It’s a sad day when we have to bullet point one day’s worth of Uncle Sam’s tab… but here we go:

• President Obama signed into law a 1,000-page, $1.1 trillion spending bill. The bill encompasses six of the 12 appropriations bills for the fiscal year 2010, including:
• $447 billion for operating budgets of various government agencies… the mind-boggling expense of “keeping the lights on” for the federal government
• $650 billion for Medicare and Medicaid payouts
• And about $4 billion for more than 5,000 local projects and earmarks. (The gears of American legislature don’t grease themselves, if you know what I mean.)
• The House approved the $636 billion defense budget yesterday. Evidently, it was too massive and complicated to be fit into the spending bill Mr. Obama signed.
• The House also passed a $154 billion “jobs bill.” House Democrats, the sole supporters of the bill, aim to pump up the populism for the 2010 elections by throwing some billions at new infrastructure, state aid and funding for “safety net programs.”

Also earmarked in that House “jobs bill” is legislation to raise the debt ceiling to $12.39 -- not because Nancy Pelosi and her brood actually give a s$*t, but probably because it will entice Senate Republicans to push it through. Incredible, these people…

Feeling hosed yet? Exact revenge here.

  Elsewhere in D.C., The Fed stuck with the usual routine in yesterday’s surprisingly hyped FOMC interest rate announcement. Given the recent rise of consumer and wholesaler inflation and constant assurance from the government that the recession is over, traders were looking for some sign of an exit strategy. Ha! The FOMC said, rates will stay “exceptionally low” for “an extended period.” Inflation is still forecast to be “subdued for sometime.” The only hint of an exit strategy the Fed offered was a dull recounting of the planned dates to withdrawal manipulation in the Treasury and Agency debt markets.

  Today, the “Person of the Year” will stroll over to Capitol Hill for his reappointment hearing. It didn’t occur to us yesterday, but what a convenient moment for Mr. Bernanke. Such a distinction is certainly a nice tail wind for his trip through the Senate Banking Committee today, and the rest of the Senate sometime in January. Of course, some senators claim they want change, but we’d be surprised if any are really wiling to upset the status quo.

  The same old story from the Fed inspired stock traders to leave markets unchanged yesterday.

  Major indexes got off to a nearly 1% loss this morning. Greece is leading the way down after suffering its second recent credit rating downgrade, this time from S&P. Initial jobless claims came in higher than the Street anticipated, also spooking traders.

  The banking sector is also giving traders a rash today. Citigroup miscalculated market appeal (or lack thereof) for its stock offering yesterday, which was mostly designed to raise cash to pay back TARP loans. Citi consequently had to lower the offering to $3.15 a share -- lower than the $3.25 the government paid way back when. So now the Treasury has announced its hesitancy to even allow Citi to repay… and on and on and on. No wonder traders feel like selling.

  “The second wave of ARM resets and foreclosures might come sooner than you think,” notes Jim Nelson. “According to Whitney Tilson and Glenn Tongue of T2 Partners, the experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be in serious trouble.

“And that could be happening very soon:

“The chart above, which should look familiar, shows the two peaks in this long-term housing conundrum. The first mountain is comprised of subprime ARM resets. And the second is mostly constructed of option ARM resets. We appear to be in the eye of the storm.

“That alone shook our nerves when we first discovered it. But it was a different chart in Tilson and Tongue’s most recent presentation that really got us startled… It’s also the reason I’m predicting the dollar spike in 2010.

“Instead of resetting as expected after the first five years, many option ARMs are so negatively amortized that they are hitting their automatic reset cap.

“That means they are resetting early…like right now -- with unemployment reaching quarter-century highs every month, and a massive number of homeowners about to receive mortgage bills for two-three times what they are used to paying.

“It takes anywhere between three-12 months for most homes to actually go into foreclosure. It’s tough to say exactly when the storm will come. But my guess is the second half of 2010.”

Thus, it would be smart to own a handful of stable dividend-yielding stocks to help weather the storm -- precisely what Jim offers in his Lifetime Income Report.

  The dollar rally/gold sell-off continues today. With risk getting sucked out of the stock market, these two are playing their typical parts. The dollar index is up almost a full point from yesterday, to 77.7. Gold’s spot price is back to $1,115, just barely above a one-month low.

“At last, the Boeing 787 Dreamliner has taken flight,” reports Byron King -- both our resident resource authority and former naval aviator. “On Tuesday, Dec. 15 -- two years late, sad to say -- a prototype aircraft rolled down the runway and lifted off from the Boeing assembly facility in Everett, Wash. Delayed it may have been, but it's a great moment in aviation history. And it's not a bad day for an outstanding old American firm like Boeing, its many employees and a worldwide network of suppliers.

“We don't hold Boeing in the Outstanding Investments portfolio, but the Dreamliner first flight holds a general lesson for investors. The price of Boeing shares DROPPED just as the Dreamliner lifted off on its maiden flight. Thanks, Wall Street. Must be that old saying ‘Sell the news.’ No good effort goes unpunished.

“Then again, without oil and jet fuel, airplanes don't fly. Now we're moving toward the OI idea. One of these days, people might be OK with driving electric cars to work and such -- if there's enough lanthanum metal to manufacture the batteries (don't bet on it).

“But for hopping on an airplane and flying across the ocean, nothing beats the energy density of good old hydrocarbon fuel. The green crowd can bad-mouth oil all they want, but they sure like their airline travel. And don't be fooled by stories about so-called ‘aviation biofuel.’ That swill is just a mixture of plant-derived oil blended into a whole lot of basic Jet A kerosene. You want to fly? Drill for oil.

“As for the rest of the Dreamliner? The fuselage and wings are made of carbon composites, derived from... yep, you guessed it.”

  “You people are clever, witty, cute and well written on all financial matters involving the world,” a reader writes. Thanks, that’s very nice of you to say.

“BUT... what would you do? It is easy to criticize. How about some suggestions on how to stop this smooth slide to socialism.”

The 5: Ask and you shall receive. It’ll take a lot more than 5 Min. to cover it all, but our currency trader Bill Jenkins wrote this in his latest weekly missive… seems like a great place to start:

“The only way out, and I mean the only way, is to cut spending to the bare bone.

“Forget paying for education and the huge bureaucracy that drives it (into the ground). American children learned very well for generations without public schools. Forget subsidizing farmers for not planting their fields. For that matter, forget subsidies of all kinds. Foreign aid. Art. Health care for nonretirees. Sell federally owned lands and quit paying people to manage them. Shut down the IRS and move to a flat-rate taxation. Fund Congress and the Senate on a strictly honorarium basis and only let them work part time at the Capitol… say, 30 days per year. They would do a lot less damage that way…

“Our government no longer promotes freedom, but bondage. No longer liberty, but slavery. Our welfare and education systems have created a bloated citizenry nearly incapable of fending for themselves. Like baby birds in the nest, they sit with their mouths open waiting for some federal bureaucrat to drop something in.

“Until we are willing to provide personal, and not tax-based, charity to those who are truly in need around us; until parents are willing to take their children’s education back from the hands of the educational elite who have proved to us decisively that they know how to teach children not to read and not to count; until we demand that all our troops be brought home to defend our own borders and have no tangling alliances with foreign nations; until those who are determined to sit on the public dole go hungry for a while and decide that getting a job is better than starving; until we cut our porked government budget to live off a flat tax from our own people, and not borrow from nations all around us…

“Until all this happens, there will be no escape. There will be no redemption. There will be no recovery. There will be no hope for our grandchildren.”

Be well,

Ian Mathias
The 5 Min. Forecast

P.S. Today you enjoyed just snippets of advice from Bill Jenkins, Byron King and Jim Nelson, but there is a way you can have it all -- all the actionable advice from almost every one of our editors and analysts. You can have every stock and option they recommend, past, present and future, for just one highly discounted price. That’s the meat of the Agora Financial Reserve… now accepting new members for a limited time.