A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. The working title of the book will be 'Just a Melman Minute!"   November 20, 2009   Just a few weeks ago, while on my North American train vacation, I was fortunate enough to ride along the Niagara River as it approached the falls.  What struck me as absolutely amazing was the gathering speed and power of the immense flow of water as it neared the edge of the world-famous precipice. That analogy mirrors our sentiments at TMR as we watch the danger signs of an economic catastrophe mount.  What follows are some of the reasons why we believe that a pattern of worsening, perhaps insurmountable, problems are beginning to accumulate and, most frightening of all, it is the giant American economy which is leading the way along this ominous path. It is our belief that lying at the heart of the problem is the abandonment of the very principles which made America a great nation.  Chief among those principles were sound money, free markets, limited government and individual liberty.  Under that philosophical regime, America enjoyed decade after decade of being regarded as the most attractive place on earth. But all of that has changed.  Gradually, and now with accelerating force, all of those propositions have been abandoned.  America's currency is becoming an international joke, with trillions of fiat dollars being created out of thin air as a matter of national policy!  Free markets are rapidly being replaced by an array of regulatory agencies and laws which are creating enormous complexities and inefficiencies which are dramatically impeding the ability of commerce to provide goods and services on anything resembling a cost-efficient basis.  And, saddest of all, individual liberty, meaning freedom of choice, is being replaced with government directives aimed at controlling the lives of the populace in ever-expanding directions. It is our belief that the Obama Administration, combined with strong Democratic majorities in both house of Congress, is committed to the latter style of politics, and that opinion has been supported by an astounding number of newly-proposed laws which expand intrusion by government in an unprecedented manner. Presumably, all of these laws which have been released on the population of America in a virtual tsunami-like avalanche since late January of this year, were enacted or proposed in order to restore prosperity, provide employment, allow people to retain home ownership, remove commercial abuses, expand medical care, and in combination with other like measures, provide a new era of social and economic Utopia. Have they worked well to perform their desired 'tasks'?  In our opinion, not only have they not worked, we believe they are inflicting the most serious harm possible on the future of America.  We are somewhat gratified to see other analysts and commentators now raising the same type of questions, and we also note that important international financial organizations are now issuing warnings of the severest nature.  Combined with a steady stream of negative economic data, these questions are now raising the level of general alarm. One eye-catching warning came in the form of a article published in the U.K. "Telegraph" newspaper under the by-line of Ambrose Evans-Pritchard which cites a warning from the French investment giant Societe Generale to their clients which tells them, "...Overall debt is still far too high in almost all rich economies.."  They warn, under their "Bear Case" scenario, that "...the dollar would slide further and global equities would retest the March lows.  Property prices would tumble again.  Oil would fall back to $50 (per barrel) in 2010." They then add this particularly noteworthy warning.  "...Governments have already shot their fiscal bolts.  Even without fresh spending...worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade."After adding a comment about the additional pressure being put on governments by rapidly aging populations, the article then warns, "High public debt looks entirely unsustainable in the long run.  We have almost reached a point of no return..." The author, who is not noted as a "gold bug", then wrote this comment.  "Inflating debt away might be seen by some government as a lesser of evils...If so, gold would go up and up and up as the only safe haven from fiat paper money."  (Our emphasis) Regarding negative economic data, markets had a mouthful to swallow this morning in the form of a report from the Wall Street Journal, citing figures released by the Mortgage Bankers Association (MBA) regarding delinquencies on home loans. Quite astonishing to relate, 14.4% of first-lien home mortgages - or one in seven such loans - is now delinquent by thirty days or more or is already on the path to foreclosure.  This is the highest rate ever recorded in the 37-year data series and the trend is profoundly negative, with the relevant figures for 2007 being 7.3% and 10.0% for last year.  The implications of that figure are of major importance.  If the flow of foreclosures is to increase in coming months, then this alone will raise the number of homes on the marketplace and, not only that, but foreclosures, by their nature, must be sold at the earliest possible time at whatever price the market will bear.  This should put downward pressure on the general level of residential real estate prices and will also serve as a brake on any plans by builders to increase the stock of newly-constructed houses. Increasing activity by builders had been looked upon by Obama Administration economists as one key to alleviating the high level of unemployment, but that is now in serious doubt. We also note an analysis by two Republican Representatives; Jeb Hensarling of Texas and Paul Ryan of Wisconsin; published in the Wall Street Journal and headlined, "Why No One Expects a Strong Recovery."  Despite the possible partisan nature of their study, they do point to several important considerations. First, history has shown that the recovery from past recessions has been proportionate to the rate of decline of the preceding recession, therefore the saying, "the bigger the bust, the bigger the boom."  This time, however, "...forecasts of a 2% recovery in growth are only one-quarter as strong as postwar experience suggests." Next, they attempt to answer why this recovery is likely to minimal, if it occurs at all.  One of their answers relates directly to the changing American philosophy we noted earlier in this piece:  "The source appears to be a growing fear that the federal government is retreating from the free-market principles of the last half-century..." Hensarling and Ryan raise yet another important point.  We at TMR have always believed that business must have a background of identifiable and consistent law in order to function efficiently, but referring to the recent avalanche of interventions by government, "...This intervention has arguably had the effect of stifling investment as wary investors watched political consideration trump the rule of law." There is much more to be said on this important subject and we will follow up in Monday's Melman Minute. Markets this morning continue to reflect uncertainty with declines noted in financial markets, several commodities and resource-based currencies.  Both the Dow Industrials and Canada's TSX are lower this morning by about 50 and 60 points respectively while silver and platinum plus the base metals are little changed.  Crude oil is down to near $76 per barrel and the Canadian Dollar (see chart) is headed lower and looks ready to test support near 92 cents U.S. Gold is worth a special note.  After selling off sharply in early trading, it rebounded smartly and is now once again approaching the $1,150 level - and it is doing this despite a stronger U.S. Dollar and weakness in the other commodities.  We regard such action as a positive indication for the yellow metal. (All quotes U.S. Dollar unless otherwise indicated.) Next Melman Minute scheduled for Monday, November 23, 2009. ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.