A Melman Minute
By: Leonard Melman
July 30, 2008
Most of the markets we follow seem determined to
continue on their paths of the past few days, namely higher stock market quotes,
lower metals, lower petroleum and a high level of general optimism - despite
some of the most horrendous financial background news imaginable.
In early trading this morning, financial markets in Canada and the USA were
stronger with both indexes up over 100 points at 7:45 AM PDT. Metals markets
were divided with the precious metals sharply lower across the board with gold
off by (all quotes US$) $20 to just under $900, silver down almost 40 cents to
$16.92 and both platinum and palladium also falling steeply, while the base
metals were close to unchanged on balance. Petroleum trading has been relatively
quiet near $121 per barrel and currency markets show the US Dollar slightly
stronger.
(insert chart #1 www.bigcharts.com XAU one year)
What does concern us greatly is the weak performance of mining shares over the
past few months, a condition well illustrated by the performance of the XAU
mining share index which has just fallen to the lowest level in several months
and has also broken down through short-term chart support.
While the broader markets appear to be trading upward on optimism that the Fed's
latest "repair efforts" will allow the economy to function normally in the
future, the ongoing parade of negative background news continues without let-up.
Along with yesterday's news that the U.S. government's deficit for the coming
fiscal year was expected to balloon to the $500 billion level (excluding the
costs of the Iraq war), several news items tell us that the world's credit woes
continue to spread. One of the most interesting comes from Australia where a
Financial Post article authored by John Greenwood informs us that the ANZ Bank
of Australia just announced their profits could fall as much as 25% this year
and they have just hiked their provisions for loan losses. This action triggered
a wave of selling in Australian financial shares.
ANZ's actions came just after National Australia Bank (NAB) was forced to
announce they were making provisions for A$800 million in collateralized debt
obligation losses. During the past year, NAB's stock has fallen from a high of
A$45 to a low of A$25 while ANZ's figures are a high of A$32 and a low of A$17.
In fact, we are told that since NAB's announcement, the five largest Australian
banks have lost a cumulative A$27 billion in market value.
In a separate story written by Economics Reporter Heather Scofield for the Globe
and Mail's "Report on Business", she writes that, "...So far, the world's banks
have written down $400 billion...and earnings will remain under significant
pressure since more and more loans are going bad. The banking problems and
credit crunch are slowing credit growth in the United States and Europe
imperiling economic growth. But at the same time, central banks can't slash
interest rates because of rising inflation risks."
That is very much a reflection of the "rock and a hard place" syndrome we have
been writing about for some time. In our opinion, the economies of the world
indeed require some significant level of stimulation if a major contraction is
to be avoided. However, given the flood of money that has already been
introduced into the system, the risk of out-of-control inflation has put a
damper on any central bank potential moves.
An example of the kind of problems European economies are facing includes the
dismal state of U.K. housing. According to a Financial Times article, "The
Nationwide Building Society's survey, due on Thursday, is expected to show house
prices fell 1.5% in July, taking the year-on-year decline from 6.3% to 7.8%."
Further compounding the problem is the fact that mortgage money is getting to be
much more difficult to find as credit granters raise their standards. In January
of 2007, 120,000 mortgages were being approved each month in the U.K., but the
number is now down to about 40,000 per month. If potential buyers can't get
mortgage money, they can't buy the rising number of homes for sale now flooding
the market - and prices would appear likely to fall further. The U.K. seems to
be following a path regrettably similar to that of the USA.
One of the real curiosities we note is that with the election less than 100 days
away, both candidates for the American Presidency seem determined to say nothing
of substance regarding the serious economic problems facing their nation. As an
FT column by Clive Crook puts it, "...The greater surprise, though, and the real
letdown in this campaign, is that the image war is all there is. " He goes
on to note that when the candidates do address the issues of budgetary deficits,
health care, etc., it is only to cast blame rather than to offer concrete
suggestions.
When any writer takes a position that seems to fly in the face of general public
acceptance, such as the past few days, it is always good to hear that prominent
individuals also share similar opinions. Such is the case when we note that
Peter Schiff, President of Connecticut-based Euro Pacific Capital Inc., also has
a sense of unease (to put it mildly) over the future of the U.S. economy.
He was recently quoted by financial columnist John Heinzl as follows in answer
to a question regarding the outlook for that mammoth economy: "Unfortunately,
into an even deeper hole, one from which it could take years to emerge." He also
believes that the corrective actions taken by the government so far will
actually make things worse over time in the form of soaring inflation. His
greatest fear is that, "...The government (American) doesn't have the balls to
raise taxes. It's going to print the money. It's going to destroy the currency."
Mr. Heinzl then concludes, "...If Mr. Schiff is right and the U.S. is heading
into a period of hyperinflation, then even the most prudent savers will see
their wealth eviscerated."
Historically, should any semblance of hyperinflation occur, gold would likely
move sharply higher. Whether the society itself will be worth living in could be
another story.
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