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!"   April 7, 2010 Strange, isn't it, how the world's economic concerns shift from topic to topic.  One moment it appears to be the precious metals, another time it may be jobs and unemployment information, and later it may be interpretation of forthcoming elections such as next month's important balloting in Great Britain.  However, for the moment, the great focus seems to be squarely on interest rate movements and the market's reactions are indeed important to study. When interest rates appear to be headed higher, which we believe to be a sign of growing instability since rising rates is the last thing governments want, securities markets begin to falter and precious metals prices frequently rally.  That is the case in this morning's trading and two of our favorite charts clearly demonstrate these trends. As of 8:45 AM PDT, gold has moved sharply higher this morning and the June 2010 commodities contract has reached the $1,150 level for the first time this year and also appears to be breaking to the upside in a decisive manner.  Every attempt to drive the price of gold lower during the past two months has met with failure. At the same time, interest rates on US 30-year bonds, as measured by the TYX Index, have just moved to a new multi-month high and are now approaching five percent for the first time this year.  This increase is beginning to be felt in mortgage markets where the Mortgage Bankers Association just reported the average rate on a fixed-rate 30-year mortgage has risen from 5.04% to 5.31% during the past week.  It may be granted that a 0.27% increase, by itself, will not involve a great deal of trauma for home-buyers, but it is the direction of interest rate moves that is our primary consideration. We can think of several reasons for the development of this trend. For months now, the U.S. government has been reporting glorious economic news, ranging from new job creation to increases in the GDP, rising Durable Goods Orders, etc.  However, some of the recent news simply does not fit into the scenario of a rapidly-improving economy.  New Home Permits, a solid indicator of future residential building activity, have actually begun to decline and this morning we have just learned that if the economy is truly improving, someone forgot to tell American consumers. Real estate research company Reis, Inc. just reported that shopping centers were not only failing to see any concrete improvement, but matters were still in a period of decline.  Rates they charge to retailers for mall space continue to decline while vacancy percentages continue to advance.  Reis research director Victor Calanog told the Wall Street Journal, "...we don't see positive rent growth resuming until the middle of next year at the earliest..."  It is also very interesting to note that the upper end of the retail chain is still suffering as most new positive activity has been concentrated on discount stores and even that activity is taking place at lower rentals as desperate retail center owners are accepting lease rates far below those of last year.  Shopping center vacancies now stand at almost 11 percent of floor space, the highest rate in two decades. If, in fact, the U.S. economy is not expanding in accordance with the glowingly positive political forecasts, that would imply new mountains of borrowing by government, adding to uncertainty in debt markets. However, the most powerful force mitigating toward rising rates over the present term still appears to be the international financial situation.  Deficits in nation after nation are enormous, debt figures continue to expand rapidly and most of the so-called "solutions" to these problems, such as Greece's latest appeal to the International Monetary Fund, do not appear to have a sound basis, being far removed from what, in our opinion, is the only genuine solution.  In our view, the only viable answer over time is a reduction in government expenditures - in real terms - to bring spending in line with reliable revenue. That concept is now coming into play in the forthcoming British elections, scheduled for May 6.  Britain, like the USA, has been running horrendous deficits and is racking up debt as a rate that is, putting things mildly, becoming very worrisome to the British public.  According to the latest figures, the UK's National Debt now stands at 917 billion Pounds - or approximately $1.5 trillion dollars - almost comparable on a per capita basis to the U.S. National Debt.  Britain's projected deficit for the coming year is in the area of 150 billion Pounds, even larger than that of the USA on a per capita basis. Given the public's concern over such figures, the opposition Conservative Party has led in recent polls, but their margin has been slipping, and while few expect the ruling Labour Party to continue in power, if the Conservative victory margin is small, they would fail to achieve a majority in Parliament and that would make implementation of any severely restrictive spending programs difficult to pass. In the meantime, Greece is hardly the only Mediterranean European Economic Community nation in trouble as Spain's problems continue to develop.  Spain has remained in recession for seven quarters; their unemployment rate has soared to a depression-style 20%; their ongoing budgetary deficit is close to 11% of GDP - comparable to both the USA and Great Britain; and their economic growth in the coming year has been estimated by their central bank to come in at an anemic 0.8%.  Moody's bond rating service refers to Spain as occupying the highest rung in their "misery index" (unemployment plus percent budgetary deficit) and they are threatening to further downgrade Spain's government debt paper - putting further upward pressure on rates, government expenditures and deficits.  And it must be remembered that Portugal, Ireland and Italy are waiting in the potential default wings. All of this is causing bond investors to anticipate rising potential for defaults and, as a result, they are becoming loath to loan money over any lengthy term at low interest rates. Precious metals continue to be the star players in this morning's markets with gold up by $18 to spot $1,152 as of 10:00 AM PDT.  Silver is higher by 28 cents to $18.18, platinum is up by $20 and palladium is showing a strong percentage gain, up by $6.00 per ounce.  Base metals are trading slightly lower on balance, mining share indexes are ahead by 2-3%, Crude Oil is off by about 50 cents and the currency markets are relatively quiet on balance, as are both the Dow Industrials and Canada's TSX Index, each slightly lower. - - - - - All quotes US$ unless otherwise indicated. Due to travel requirements both to and from the Cambridge House Calgary Conference, no "Melman Minutes" will be published this coming Friday and Monday.  However, they will resume Tuesday, April 13. ◄  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.