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. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   January 22, 2010 It is said that history repeats itself in the strangest ways.  Just perhaps, we may be about to see one of the strangest – and in its way one of the most ominous – such repetitions of all time.  First, let’s take a look backward. By late 1999, America’s “dot.com” stock boom was in its final, most frenzied stage and the collapse that hit many of the speculative shares in the time period immediately following was historic in nature.  Many predicted years of economic trauma, but to the rescue came the real estate boom which took up much of the slack.  Riding on the wings of lowering credit standards, government encouragement and loose monetary policies which drove interest rates to the downside, real estate prices began to rise steadily, thereby encouraging new buying, thereby forcing prices higher, thereby encouraging new buying – all in an ever-rising cycle which appeared to have no end. This towering real estate boom took up virtually all the economic slack caused by the “dot.com” bust as building supply companies, contractors, raw material suppliers and all manner of construction labor saw boom times. There were several downsides which took place during the boom, most particularly the fact that a huge percentage of the general public saw prices rise so high that they were virtually eliminated from any hope of ever owning their own homes.  At the peak, it is estimated that more than 80% of the general public no longer could afford to purchase a home of their own. As we all know, beginning in 2007 the real estate market began to roll over and by late 2008, the entire financial structure teetered and tottered and is still far from stable and secure, to put things mildly. Now, let us fast forward to the present era in China.  They had enjoyed a spectacular boom producing massive quantities of consumer goods and selling them to merchants around the world.  However, with the economic contraction of 2007 through 2009, those markets withered substantially and the Chinese economy threatened to move into reverse gear with a vengeance – but, just as had occurred in America a few years earlier, a government sponsored credit-fueled real estate boom took off in time to rescue the economy and China has just reported Fourth Quarter 2009 economic growth of a staggering 10.7%.  Virtually everyone is still looking for China to maintain, and perhaps even enlarge, their role as the economic engine of world growth. Unfortunately, we must report that ‘red warning flags’ are beginning to fly on the Chinese real estate horizon. A recent Wall Street Journal study points out many of the dangers now facing the Chinese real estate market and their report reads like many we ourselves wrote in 2007 and 2008.  Among the comments we note in the WSJ article, we find Ji Zhu, Professor of economics at Beijing Technological and Business University noting, "With exports facing hart times, real estate has become an important pillar of China's economic growth...No one wants to see real estate prices fall." We also learn that their boom is gathering momentum with prices up by 20% last year alone; high end apartments are rising in price faster; rising prices are encouraging more building and, in the process, "...boosting demand for construction workers and raw materials and supporting the overall economy".  We are also informed that, "...Both November and December saw a record volume of construction starts, which are up 75% from a year earlier for the quarter." (our emphasis). The article tells us that the Chinese experience is paralleling the American one in yet another important manner as there is a risk that, "...too much new housing is being built at prices too high to ever find buyers, resulting in wasted investments and bad debts that would weaken the economy in later years."  As a last important item, we learn that many people are now priced out of the home market, particularly potential new buyers as, "...Housing prices in Beijing and Shanghai are now largely out of reach for middle and low-income families." When the Japanese real estate bubble burst in 1990, it sent that economy into a tailspin from which it has not yet recovered. The effects of the bursting of the US real estate bubble are still with us and are far from having been overcome. If the Chinese real estate bubble bursts, that will be yet another difficulty for the economies of the world to overcome and, from our point of view, the efforts to further stimulate the world economic structure via deficits and currency creation could indeed raise the possibility for an international currency crisis - which, in our opinion, could lead to gold and silver taking on an increasing role regarding insurance positions against a monetary collapse. ................. On the subject of recession, U.S. News & World Report editor-in-chief Mortimer Zuckerman just published an op-ed piece which will hardly be thrilling reading for the "boom times ahead" crowd.  He is pessimistic indeed about the chances for a sustainable economic recovery in the near future. His most forceful arguments involve the entire labor situation and what he has to say should give any optimist pause.  "Unemployment, in short, has graduated from being a difficulty, a worry.  It is now a catastrophe, with some 15.3 million Americans out of work." (Our emphasis)  In addition, "...Since the Great Recession began in 2007, some 8.6 million jobs have been lost...and small businesses, the normal source of new jobs, are still shedding workers." He concludes that the net result going forward will be, "...sluggish GDP growth; employment gains that are too slow to prevent further increases in the unemployment rate (already at 10 percent-LMM); and firms still very reluctant to hire vigorously." If Zuckerman is right, then we would also foresee an expansion of government interventions, more 'infrastructure' programs, more debt, more deficits and more pressure on the currency markets to accommodate these stimulative policies. Markets are continuing to display a growing concern that the recovery is encountering some unforeseen difficulties as financial markets have continued to trend lower during the past few days.  As of 9:00 AM, the Dow Industrials and Canada's TSX are both off about 400 points from their recent highs, Crude oil is now down by about $8 in the same time frame, all metals continue their short-term declines and, conversely, both the US Dollar and interest rates have been improving.  Mining share indexes have stabilized after falling sharply during the past three days. However, as the above chart shows, the recent moves in gold, while disconcerting for many, have clearly not reversed the positive long term trends for the yellow metal. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Monday, January 25, 2010. ◄  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.