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!"   February 17, 2010 One could almost begin to feel sorry for President Obama.  Here is a man who came into the USA Presidency just about one year ago on a tidal wave of goodwill, accompanied by huge majorities in the House of Representatives and the Senate, and it appeared that he would be able to rapidly enact every law, every regulation he could possibly desire.  How things have changed in just one year - and in ways noteworthy to the world of base and precious metals mining.  Given that he was a strong supporter of environmental regulations, it had appeared at first that our industry in America would be inundated with new and oppressive bodies of regulations and those laws would probably be duplicated in other major mining countries.  However, that flood may not take place after all. First, the laws he proposed were so cumbersome and so complex that the public began to question that some of them might do more harm than good.  Then America's budgetary deficit and National debt began to swell enormously, adding to the ammunition of his detractors.  Next, the result of state elections in New Jersey and Virginia turned against his party and then came the hammer-blow of the loss of Democratic icon Senator Ted Kennedy's old Massachusetts seat to the Republican Scott Smith, a result which robbed Obama of his "super-majority" of 60-40 in the Senate.  But that is not all. Just recently, his relentless call for a war on "Global Warming" is losing credibility as one scandal after another is revealed to a public which is growing ever-more skeptical.  This was followed by the news this morning that a corporate alliance formed to assist in the battle for Global Warming legislation has lost three of its most powerful members.  As the Wall Street Journal put things this morning, "...Three big companies quit an influential lobbying group that had focused on shaping climate-change legislation in the latest sign that support for an ambitious bill is melting away."  Then, finally, influential Democratic Senators in North Dakota and Indiana have both just announced they would not be running for re-election this coming November. Combining all these factors with the President's stunning decline in personal approval ratings, pundits are now openly speculating what was virtually unthinkable just one year ago - that the Democrats might actually be reduced to a minority in the Senate this November. From our point of view, this is encouraging news as it indicates that the President's socialist programs are meeting with public disfavor and may not be approved, thereby avoiding increases in both government expenditures and regulatory interference in the conduct of commerce and industry - particularly as it relates to the mining industry. This is a trend we will continue to watch closely. Another area of particular concern, in this case directly affecting Canadians, is a collection of stories which could indicate tough headwinds ahead.  Two factors are at play, namely the stunning rise in Canadian urban-area real estate prices of late and the equally stunning rise in the levels of personal debt across the wide dominion. Canadian real estate prices have indeed had a second boom period.  After matching the USA stride for stride in terms of house price increases from 2000-7, those prices mirrored America's declines in the ensuing eighteen months.  However, at this point paths diverge between the two countries.  While America has seen only a halting recovery which leaves many areas such as Detroit, Phoenix, Cleveland, Miami and Los Angeles mired in the depths; the Canadian experience reflects towering increases in prices, such as in Vancouver where the average home price at the end of January surged to a new historic high at C$788,499, according to the Vancouver Sun. The enabling factor which has allowed this growth to occur is sharply lower interest rates and we can report that rates for a typical five-year mortgage are as low as 3.69%.  With that rate, a new home buyer could finance C$700,000 at an interest cost of C$25,830 - or roughly C$2,150 per month.  Even at those levels, many Canadian families are stretched to the limit just to service their debt.  We must ask, then, "What happens to the Canadian consumer if factors such as the financial demise of the PIIGS countries, combined with weakness in the Euro, force world interest rates higher - a not unlikely prospect?"  Using the illustration above, if rates upon renewal of such mortgages reach say, eight percent - a normal range over the past three decades - those interest payments would rise from $25,830 per year to fifty-six thousand (CDN) dollars per year! To say that many families would default on their mortgages, lose their homes, lose their consumer purchasing power and put a brake on any economic progress within the Canadian economy is only to state the obvious.  Canadians are finally becoming aware of this growing peril and 58% of respondents told RBC bank that they are now worried about their debt loads.  One noted economist, Benjamin Tal of CIBC bank told the Financial Post, "...consumer bankruptcies have risen significantly over the past year and will continue to rise.  Clearly, some people are in over their heads, and more will get into trouble when interest rates rise." We report on this news because it is our opinion the world is at a strikingly high level of risk should interest rates rise significantly in the months and years ahead and, we will state without hesitation, we have both fundamental and technical reasons for believing significantly higher rates may, in fact, be on the way.  In terms of fundamentals, the growing flood of newly-created money, combined with the difficulties many nations now face regarding financing of their mammoth deficits appear likely to drive rates higher, as would also be the case if there is any serious re-ignition of visible price inflation. From a technical (chartist's) point of view, an amazing pattern is revealed on the long-term bond chart.  Ever since 1981, we have seen a pattern of rising bottoms, with the intermediate lows of 1984, 1987, 1994, 2000, 2002, 2004 and 2008 all occurring at successively higher levels.  However, the chart then rose vertically, culminating in what could easily be a "blow-off" top in early 2009.  Since that time, the chart looks "toppy" and important support now lies just above the 112 area.  With bonds now trading near 117, that is only a modest cushion.  Should bonds drop below that level, the next major support is evident between 103 and 107.  If that support gives way, we believe that would be an indication that the entire three-decade long bond bull market had come to an end. Interest rates could easily become the dominant topic in the months and years ahead. (Please note our disclaimers regarding taking investment positions.) For the most part, markets this morning have been making relatively small moves.  As of 10:00 AM, financial markets in the USA and Canada are slightly higher; precious and base metals are close to unchanged; and most currency, petroleum and interest rate futures markets are trading quietly as well.  Mining share indexes have retreated modestly. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, February 19, 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.