A Melman Minute
By: Leonard Melman
August 13, 2008
Greetings from the Canadian Arctic, specifically the
city of Yellowknife in Canada's Northwest Territories, a beautiful city on the
shores of massive Great Slave Lake, one of the world's largest bodies of fresh
water. While previous generations could not help but feel enormously isolated
in such a location, hundreds of kilometers north of any sizeable community, in
today's world with Internet communications, cell phones and jet aircraft, it is
quite possible to feel just as connected to the flow of news and information as
one might be in Vancouver, Toronto, Chicago or New York.
So far this morning, that information is telling us
that markets are likely to open lower in North America and that the feelings of
euphoria of just a few days ago are beginning to diminish. Overnight markets
showed large losses in Asia and Europe, following hard on the Dow's 140-point
loss yesterday in New York. Some of the concerns investors are now noting
include declining retail sales in America, the conflict involving Russia and
Georgia which is now taking on some ominous implications, and relentlessly
negative news coming from the world's real estate markets.
Regarding the Russian-Georgian conflict, Russia has
just sent new forces deep into the heart of Georgia and the world is beginning
to wonder if there are some much deeper objectives which the Russian Bear has in
mind, perhaps even including the reconstitution of the former Soviet Union. In
any case, given the Russian importance in the world energy equation and
Georgia's location on the Black Sea with water access to European and world
petroleum markets, the news has put at least a temporary half to petroleum's
step price decline of recent sessions with the price of crude holding steady
this morning near US$113 per barrel.
Our own suspicions regarding the strength and
sustainability of the recent upward moves in the securities markets are based on
the opinion that none of the underlying difficulties facing the world's
financial markets in general and the United States Dollar in particular have
been resolved. The credit mess continues to expand. Real estate markets
continue to fall. Government deficits continue to expand. Dollar creation
continues at an ever-accelerating rate. Foreign ownership of American
government debt, now near $2.4 trillion, continues to grow. America's economy
continues to shed jobs.
We would draw sharp contrasts to the current
situation to that which existed in 1982 when the last great bull market in
securities emerged, with the Dow Industrials at barely 800 and destined to rise
to 12,000 within 18 years. In that earlier era, inflation had been attacked by
deliberate American monetary policies that sent interest rates soaring upward in
order to retard economic activity. Due to continuing fears of high interest
rates and ruinous inflation, the public's desire to buy stocks was at a historic
low. However, the Reagan Administration was clearly determined to attack
inflation and limit new dollar creation and, as their policies began to bear
fruit, public confidence was starting to improve.
In this age we see entirely different forces at
work. Inflation is just beginning to rise and instead of a tight-money policy,
we have dollar creation at massive levels. Interest rates are low, not high,
but appear likely to head higher as inflation brought about by huge levels of
stimulation appears ready to rise. Massive new government programs, all
apparently destined to add to government debt and deficits are now being enacted
in a veritable flood, pointing toward more inflation, not lower and a weaker
dollar, not stronger. And public confidence in the ability of the George W.
Bush administration to resolve problems - without their 'solutions' incurring
even greater ones, is minimal at best.
For theses reasons, we hold to the opinion that the
securities markets are still vulnerable to major declines and, in reaction, we
expect the precious metals to head sharply higher over time.
One look at the long term chart of the Dow
Industrials puts the recent rally into context. A major top has been formed in
the Dow and the recent gains have the appearance of being nothing more than a
correction within an overall declining pattern. Certainly, it has been an
uncomfortable correction for many, but so far there appears to be no change to
the upside in the major trend.
This morning's markets are continuing the pattern of
yesterday's trading at about 6:45 AM PDT with gold up slightly near (all prices
US$) $816, silver ahead by16 cents, platinum up $8, base metals slightly lower
and mining share index sharply higher. Crude was holding at about $113.25 and
financial markets in North America were headed lower, with the Dow down by about
100 points and the TSX off by about 40.
And now our tour heads deeper into the wilderness,
several hundreds of additional kilometers closer to the Arctic Ocean. It just
goes to show how the mining industry is willing to take extra-ordinary measures
to discover mineral wealth.
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