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!"   December 30, 2009   As we continue to review 2009 and look forward into 2010, we note a question which was raised in our MM of December 28; "... the Fed is faced with the age-old dilemma, namely whether to act responsibly and begin the next cycle of tightening while there is still time to possibly redeem the situation..."  We believe that, quite possibly, inside the answer to this question lies the financial future of much of the world.  As we observed Monday, if they act in that responsible manner, the situation - that is the continuation of a free, capitalist economic system - may still be saved.  However, if the pattern of deficits, debt and money creation is continued or even accelerated, true calamity might be the result. A number of stories have recently appeared which we believe heighten the odds of the latter course of action.  For example, according to the Census Bureau, revenues for America's state and local governments fell by a significant 7% during the Third Quarter 2009 compared to year-earlier figures.  Economist Mark Muro of the Brookings Institute predicted that, "At minimum, cities will be working through the catastrophic drops in revenue for the next 18 months to two years..."  Given that the Federal government in Washington is the only possible source of relief for many of these lower-level governments, can we expect the present leadership in that capital city to be willing to cut off or even diminish government aid to states and municipalities?  We believe that it does not appear likely. Government programs to rescue agencies such as "Fannie Mae" and "Freddie Mac" have already cost as much as $400 billion, but at least the Federal government had passed a regulation limiting government aid to that figure, lest the financial markets come to the belief that the Feds were promiscuous beyond redemption.  However, the Treasury Department of the USA just announced that, due to unforeseen problems with sub-prime and alt-A mortgages, coupled with unprecedented default rates on mortgage-backed securities, they were removing the previously-announced limit on government rescue funds for the two agencies.  Are we surprised?  In a word, no, we are not.  Is the Treasury likely to re-instate new limits on these two agencies any time in the near future?  Again, we believe the answer is "no". One other market whose difficulties hang over the financial system like the proverbial "sword of Damocles" is the world of commercial real estate.  In a press released just issued by the New York research firm "Real Capital Analytics", real estate lenders were loath to extend credit and property values were still plummeting.  The value of commercial real estate transactions concluded during 2009 was barely one-tenth when compared to 2007.  It has been estimated that some $700 billion in commercial real estate loans are of questionable quality.  Again, we ask whether the federal government is likely to stand aside and let many banks and other lenders bear the full brunt of these potential losses, perhaps endangering those lenders' financial structures in the process.  It does not appear likely, to put things mildly. And so, at least in America, we foresee a continuation of government activism, government deficits, government debt growth and government intervention in previously free marketplaces.  Over time, it is our belief that these actions will lead to further difficulties for the American Greenback. Serious problems still envelop other economically strong nations around the globe.  We note, for instance, that Japan's flagship airline, JAL, is contemplating bankruptcy unless it can win major concessions from retirees.  Like many major American corporations, during their halcyon years, JAL committed itself to massive retirement benefits, perhaps assuming endless corporate growth into the future.  As that growth has stagnated, the burden of those pledged retirement benefits has reached unsupportable levels.  What gives us genuine pause for thought is that many analysts are pointing to Japan as a source of international economic growth for the coming year.  We would only ask that if Japan was indeed on the verge of enjoying boom times, why does the stock of one of their major international corporate emblems seems to bear an ominous resemblance to the charts of many major American corporations during the second half of 2008. There is more to this story.  If Japan's economy is not only stagnating, but is actually continuing to contract - and its recent decline to the world's third largest economy from second place is hardly a cause for optimism - who is going to pick up the slack regarding the international purchase of American governmental debt paper? There are other negative articles emanating from nations such as Italy, Britain, South Korea and Spain, but those only confirm that for much of the world, strong recovery is much more a case of filtering news through a pair of rose-colored glasses than being founded on a strong basis of factual evidence. With such information in mind, it is time to look forward into 2010. - - - - - ANNUAL FORECAST - 2010 Well, there is no point denying the obvious.  Our forecast for the year now coming to a close missed the mark by a substantial margin.  While gold indeed moved to new record highs, it failed by a wide margin to reach our predicted levels.  What we had forecast for 2009 was: "Gold - $2,200 per ounce - late in the year Silver - $40.00 per ounce - late in the year Platinum - $1,400 per ounce - about mid-year"  In fact, gold reached a high of "only" $1,225, silver peaked just under $20.00 per ounce and only platinum fulfilled our prediction.  What went wrong? Our interpretation is that we underestimated - by a long shot - the public's faith in the wisdom of its economic and political leaders.  We believed that the sheer facts as they were presented, including an annual deficit approaching two trillion dollars per year and a national debt exceeding twelve trillion dollars, combined with a monumental expansion of the Federal Reserve Board's "quantitative easing" programs, would have been sufficient to panic the public and drive them, in ever-growing numbers, into the sheltering arms of gold and silver.  That panic simply never materialized to anywhere near the extent which we had anticipated. If we were to seek out a candidate for "spoiler of the year", we must turn to the long-dead Lord Keynes, purveyor of the economic thesis that government intervention solves dynamic economic problems.  His widely-read works have powerfully influenced three generations of economic leaders and his list of remedies has apparently yet to be discredited, because people such as Geithner, Bernanke and Obama keep turning to them again and again. Accordingly, the question we must ask when looking forward into 2010 and beyond is whether the future economic outlook would justify the expectation that the public's faith in Keynesian remedies will at long last be shattered.  Looking forward then, what we anticipate is a modest economic recovery during the first half of 2010, accompanied by a small reduction in unemployment. This recovery does not appear to us to be long-lasting and, in our opinion, we see a much weaker economic performance in the second half of 2010, which will then bring about another increase in government programs to stimulate economic activity, finally leading to growing pressures on inflation, interest rate increases and additional U.S. Dollar weakness. Having learned to proceed with some skepticism regarding the public's interpretation of events, we offer the following forecasts for the coming year: Gold - $1,500 per ounce reached late in the year, Silver - $27.50 per ounce, also late in the year, Platinum - $1,800 per ounce driven primarily by first half economic strength. We shall see. Markets are trading on very low volume as we approach the end of 2009.  As of 10:00 AM PST, financial markets are little changed, the petroleum complex is trading quietly, America's dollar is slightly higher and the precious metals are lower with gold close to $1,092 and silver just under $16.80.  Major mining indexes are slightly lower and base metals are little changed on balance, with the exception of copper which has once again risen above the $3.30 per pound level. Our apologies for the unusual length of this "Melman Minute", but we felt the news background deserved some extra comment. Please accept our wish that all of our readers, client companies, colleagues and associates might enjoy a Happy, Prosperous and Healthy New Year. ........................ All Quotes US$ unless otherwise noted. Our next scheduled "Melman Minute" will be Wednesday, January 6 as markets will be closed Friday for New Year's Day celebrations and we will be traveling to the USA on business Monday and Tuesday of  next week.     ◄  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.