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 28, 2010 As promised, our prime interest in our "Melman Minute" of this morning is discussing last night's State of the Union (SOTU) address by President Obama.  Given that your editor has no particular interest in political partisanship, having been neither Republican nor Democrat during our years in the USA; our goal is to evaluate this address from two particular points of view. First, we believe that the greatest threat to the United States' economic future is the imbalance between income and outgo from two points of view; namely the budget deficit, now projected for $1.3 trillion this year along with the continuing, though mostly forgotten, Balance of Trade Deficit, now once again proceeding at a rate in excess of $425 billion per year.  Both situations require the creation of huge new levels of debt and, in our opinion it is massive levels of debt that are the greatest threat to America's future financial stability. In the second place, one of the causes of economic doldrums is uncertainty of law.  Businesses in general and small businesses in particular - which do not have large legal staffs - simply cannot plan effectively without a strong degree of certainty of future law.  Given the staggering numbers of legislative and taxation proposals now being introduced into Congress, the level of confidence in future stability of law is at a low level, to put things mildly. From these two points of view, we consider the President's SOTU speech to be a dismal failure.  Here is why. Budgetary deficits can be reversed by a combination of only two factors, increasing revenues and decreasing expenditures, and we would prefer a combination of both factors occurring simultaneously.  Unfortunately, it appears to us that President Obama cannot accept such simple considerations.  After considering his speech in detail, we have created four categories in order to list the President's comments: (A) - REVENUE DECREASING MEASURES (B) - REVENUE INCREASING MEASURES (C) - EXPENDITURE INCREASING MEASURES (D) - EXPENDITURE DECREASING MEASURES A -       Increase small business tax credit;             Eliminate capital tax gains for small business investments;             Provide tax incentives for all business investments for plant and equipment;             Provide rebates for home energy efficiency             Provide families with $10,000 tax credit for 4-year college education;             Expand tax credit for "nest egg" formation;             Extend "Middle Class" tax credits;             Doubling of Child Care tax credit. B -       New fee on bank transactions. C -       New jobs creation bill;             Thirty billion dollars to help community banks;             Spend more on infrastructure;             Build clean energy facilities;             Create National Export Initiative;             Expand Elementary & Secondary Education Act;             Invest in community college revitalization;             Create bipartisan financial commission;             Increase investments in veterans. D -       Despite a thorough scouring of the speech from beginning to end, there was not one single expenditure-reducing measure.  The best that could be offered was a freeze on a few areas of expenditure - with many loopholes. In summary, there will be numerous reductions in revenues, virtually no enhancement of revenues, several new additions to expenditures and no reductions in expenditures.  To us, that sounds like a strange prescription indeed for deficit reduction and restoration of confidence in America's financial structure. Our other important category is the complexity of laws and regulations which now plague American commerce and industry, as well as well as similar activities in many other nations.  Small businesses in particular were looking for some relief from this overwhelming complexity of law.  They did not get it in the President's speech.  In fact, we found he suggested these new additions to laws and regulations: * - Financial Reform regulations * - Regulations to encourage innovations * - Passing of comprehensive energy & climate law * - New National Export Initiative * - Reforms of export controls * - New health care and insurance law As far as we could see, there was not one suggestion regarding the abolition - or even reduction - of a single category of laws & regulations. On our score card, therefore, we cannot help but regard the speech as anything other than an emotional attempt to reach out to a Populist audience, rather than a factual, reasoned approach to solving America's - and the world's - growing of litany of serious threats to future financial stability and security. - - - - - Markets this morning are apparently having some second thoughts as well.  As of 9:40 AM, following very brief rallies, both the Dow Industrials and Canada's TSX Index have moved sharply lower, each down by about 150 points.  Most other markets also appear to be concerned that hopes for economic expansion may not be fulfilled as precious metals are down sharply with gold off by almost $8 and silver down about 50 cents; base metals are falling on average and even Crude Oil is in retreat, now barely $73 per barrel.  Both major mining share indexes are now at their lowest levels since September and currencies from commodity-rich nations such as Canada and Australia are also headed lower. Action in the silver market is of particular concern.  As can be seen, the white metal has been falling rapidly, from almost $19 per ounce just two weeks ago to barely $16 this morning and now appears ready to break through chart support in the $15.50 to $16.00 zone.  This sharp decline has caused the gold/silver ratio (GSR) to expand and we now calculate it at 1,080/$16.20 or 66.7:1 - a significant increase in recent weeks.  Historically, silver rallies faster than gold in a widespread bull market, driving the GSR to the downside.  Therefore, a rising GSR is a matter of some concern in our ongoing analysis. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for tomorrow, January 29, 2010.  We plan to take a close look at continuing reaction to the SOTU speech as well as update economic information. ◄  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.