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 25, 2010 It is our belief that in coming months, one question above all others will be asked with increasing frequency, namely, "what will take place once the stimulative measures which have been adopted in such an abundant array begin to be withdrawn?"  At present, there is a completely divided range of opinion.  Those who are most optimistic believe the stimulative measures already undertaken will have rejuvenated economic activity to the point where it will be able to carry on successfully toward prosperity.  However others, such as ourselves, believe that no such fundamental strength has been restored and, if the present level of stimulation is reduced, the economy will quickly descend into another spell of contraction, which will then require newer and ever-increasing amounts of stimulation. The latter case received some support in recent days from two developments. In the first case, we have seen that once the initial surge in home-buying which resulted from the government's initiation of a special new home buyer's tax credit had passed, purchases of existing homes have collapsed once again.  As the National Association of Realtors reported to AP, "Sales of previously occupied homes took the largest monthly drop in more than forty years last month..."   It is clear that the crush of new buyers which entered the market at the time the government's program was announced has abated sharply. In the second case, while some corporations are indeed reporting better Fourth Quarter 2009 earnings, the general consensus is that this improvement has been due almost totally to reducing the cost of overhead, rather than sustained sales increases which are taking place within high and profitable margins.  Clearly, without increasing levels of consumer activity, it is doubtful if continued improvement in earnings can be accomplished.  As the Wall Street Journal reported this morning, "...the shrinking has had broad impact.  If you're already unemployed, it's harder to find a new job.  Nearly 40% of the unemployed have been jobless for 27 weeks or more."  They then went on to add this gem:  "...Corporate America has been on a strict no-fat diet with banks, airlines and manufacturers among the high-profile industries getting a lot skinnier." Somehow, we don't see the kind of economic vigor ongoing which would sustain the optimists' belief about a resurgent American economy absent enormous and continuing stimulation.  Of course, and in line with our general outlook, it is our belief that continuing massive stimulation via debt and deficits will work to weaken the underlying economic structure, which is why we have not altered our suggestion regarding maintenance of  insurance holdings of monetary precious metals. An important factor confirming our belief that the economic future is somewhat less than rosy is the continued drive by many governments toward higher taxes and several new articles continue to confirm that this trend is both ongoing and healthy.  Examples abound in many places. For example, the City Council of Washington D.C. enacted a new tax on bags at grocery stores, charging consumers five cents apiece for such containers.  Clearly, if consumers are nicked for five cents for each grocery bag, that leaves them with five cents less to spend elsewhere.  Multiply that seemingly innocuous five cents by tens of millions of bags and you can see this becomes yet another significant matter where money is taken out of the private, free market economy and turned over to government. In Oregon, two important new taxation measures will be put before state voters on Tuesday.  The first measure is a "soak the rich" increase of 2% in the state income tax rate for the highest earners.  Second is an increase in the minimum corporate income tax rate.  Oregon's legislators are claiming that these measures will raise an additional $733 million to help cover the state's budget shortfall.  While these measures are, not unexpectedly, supported by public service unions, teachers' unions and a host of antipoverty program advocates, we would suggest that these worthies consider three identifiable consequences if these measures are indeed passed tomorrow. First, should the estimates prove true; $733 million will be removed from the free market economy, almost certainly resulting in layoffs, lower earnings and perhaps additional business failures. Second, there is a growing tiredness among the targets of various "soak the rich" tax measures and, if Oregon's rates continue to rise, they can look forward to an exodus from their state of growing numbers among their wealthiest and most creative residents - thereby reducing, not enhancing future economic activity. Third, corporations have a tendency to locate in favorable jurisdictions.  Should Oregon make good their threat to raise corporate income taxes, there are 49 other states and a host of foreign nations which might be able to offer better terms. But the "soak the rich" programs are hardly confined to states and municipalities.  Speculation is growing that President Obama will announce new measures to aid the struggling American middle class.  The ideas being openly discussed by both Obama and VP Biden include doubling the child tax credit for taxpayers earning under $80,000 per year, limiting repayments for student loans; expanding tax credits for retirement savings accounts; and increasing aid to families taking care of the elderly or disabled.  All of these measures will reduce the flow of money into government at a time when enormous deficits are already endemic.  Our own suggestion is that government is counting on more "soak the rich" programs aimed at the wealthy and corporations to make up these shortfalls, with the same inherent risks as noted above. Frankly, and it is admittedly our personal opinion, we are getting the impression of a disconnect between recent Obama Administration statements and economic reality.  In fact, the latest Obama tone is growing increasingly feisty and "populist" in nature as he rails against bank bonuses; bank profits; corporate greed; fat cats in general; and the need for government to greatly expand their regulatory roles.  As he continues to be confronted by bad news such as his party's defeat in the recent Massachusetts senatorial elections, continually high and rising unemployment numbers; legislative setbacks; and falling popularity ratings, it appears that he is concentrating his attention on finding "scapegoats'. In fact, on a personal note, President Obama appears to reflect sentiments I expressed years ago in a verse written during my early attempts at rhyming poetry: "He cast his gaze upon far hills Whenever troubles came Not seeking to find what went wrong But merely who to blame." We will learn a great deal about the directions President Obama intends to take in his "State of the Union Address" scheduled for Wednesday evening, January 27.  Due to the importance of the speech, we plan to alter our "Melman Minute" schedule, delaying our next report until Thursday, January 28 and following that up with another on January 29. As of 10:00 AM, markets appear to be recovering slightly from the bashing many of them took last week.  Financial markets are moderately higher and precious metals are also slightly improved along with the petroleum complex.  Base metals, however, have turned somewhat lower on balance while long-term interest rates are gaining and the US Dollar is trading a bit lower.  Mining share indexes continue to decline and, as can be observed in the chart of HUI, they are setting off some negative chart signals as the average has now fallen below the bottom of mid-December and is threatening to also violate the late October lows. - - - - - All quotes US$ unless otherwise noted. Next Melman Minutes scheduled for Thursday, January 28 and Friday, January 29. ◄  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.