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!"   MELMAN MINUTE - June 14, 2010 - - - - - Seldom have we seen markets and public perception swing back and forth as rapidly as they have done over the past few weeks.  Just recently, we have seen deepening gloom over the Eurocurrency debacle, perceived slowing down of the Chinese economy and a truly dismal U.S. Department of Labor jobs report.  Then, with startling swiftness, sentiments changed dramatically with the stunning reports that European industrial production was climbing, Chinese exports were headed into the stratosphere and the world was finally cognizant of the dangers of deficit financing with one nation after another pledging that tidal waves of 'austerity' would resolve that problem once and for all. Sue enough, the Dow Industrials, along with the SPX and NASDAQ have suddenly headed higher, as can be clearly seen on this chart.  However, it must also be observed that this is hardly the first rally since the rapid declines of early May and those previous other rally attempts simply were not sustainable. At the same time, gold has been tracing out actions which are clearly the reverse of the financial indexes - which actually is the historic norm.  Most recently, as economic news has suddenly turned more positive (at least for the mini-moment) gold has backed off about $30-40 from its recent record highs.  Since we now have some consistent correlations which have been established, namely that financial markets as well as primary commodity markets (including base metals) want to rally when background news improves and gold tends to fall in such situations, it is vitally important that we seek to determine the most likely direction of future economic news. From our perspective, many of the major problems which brought about the entire collapse which began in 2007 remain in force.  Government are still running horrendous budgetary deficits; civil service unions still retain the power to prevent true austerity measures which might affect their incomes, job stability and benefits; the public desire for government services still remains at a very high level; and government stimulative programs costing uncountable billions continue to spew forth, despite the talk of 'austerity'. The State of Illinois provides us with an example of the difficulties governing bodies face when they attempt to genuinely institute programs of austerity when such efforts involve direct confrontation with civil service unions or with selling the public on the 'benefits' of reducing services to which they had become accustomed. As a recent article by Wall Street Journal columnist Amy Merrick states, "... the new head of the Illinois Department of Human Services, Michelle R. B. Sadler knew she would confront tough choices in preparing a budget that juggled rising needs for services with tumbling state revenues.  But she wasn't prepared for the long list of mandates and governor's priorities that tied her hands." The article then explains that she could not eliminate services which were required by court order.  She also could not eliminate programs related to Medicaid benefits or food stamps.  In addition, the political powers told her that she could not eliminate any programs that could jeopardize the people of Illinois' sense of safety or well-being. In order to balance Illinois' books, a deficit of $13 billion dollars must be eliminated and Sadler has estimated that for her department to contribute its share of such reductions, 6,250 private industry jobs would be lost and some or all services would have to be eliminated for 178,500 people.  However, she then questioned how safety and public-health could be maintained in the face of such Draconian cuts. That is, of course, the quandary, namely how to make the appropriate public relations declarations that the government realized exactly how perilous the situation regarding massive deficits had become; how it was going to institute all the cuts necessary to accomplish the needed reductions in expenditures; but somehow, at the same time, the public must be assured that all important programs would be maintained. Illinois is not alone in their problem.  The vitally important State of California is facing the same difficulties with its horrendous $19 billion deficit where Republican Governor Arnold Schwarzenegger has proposed eliminating the state's welfare and mental health programs to help close that gigantic deficit.  We can only wonder how multitudes of California's welfare recipients will respond when (and if!) they find that their monthly checks have been eliminated and the prospect of deprivation is staring them in the face. There is another problem which so far has been swept under the public relations rug as far as the majority of the population is concerned, but those days may be coming to an end.  That problem is the explosive rise in debt by municipalities and states as reflected in the magnitude of bonds and notes financed within the "Municipal" (or 'Muni') bond market.  Few of these bonds are retired by actual successful payment of the debt obligation but instead, most of them are paid for by the issuance of a new and frequently larger debt packages.  As the WSJ notes, "...Governments have loaded up on debt, stretched out repayment times, and used slick maneuvers to avoid constitutional borrowing limits....a sharp decline in tax revenues has prompted more abuse as politicians use long-term debt to kick short-term fiscal problems down the road." The 'muni' market is huge, now estimated to total over $3 trillion as opposed to just $1 billion a century ago and there are signs that it is becoming unwieldy and credit risk is growing.  If the muni market is unable to absorb future state and municipal debt offerings, this will compound those governing bodies' ability to re-write maturing debt and to pay interest and principal in a timely manner.  Should that happen on a widening scale, the entire future of municipal financing within America could be placed into jeopardy - and it is important to recall that many nations around the world are facing similar circumstances. When government debt and the driving force behind ever-more-expensive government services are considered, the future may not look quite so rosy, and one can also add in the fact that retail and auto sales have been deceptively slow so far if the past few months indeed represented a genuine recovery. Despite the hip-hip-hoorah talk of the past few days, a bit of caution may still be the proper stance.  It is also interesting to note, from a contrarian point of view, a figure cited in Alan Abelson's Barron's Magazine column this past weekend.  During a recent New York Times survey, every single one of thirteen bank economists predicted a higher market close by the end of 2010.  That kind of unanimity in one direction can be scary indeed. Markets this morning are still reflecting the anticipation of improvement and, as of 9:30 AM PDT, the Dow Industrials and the TSX Index were each ahead by about 100 points.  Gold had fallen back by about $10, but the industrial precious metals and base metals were sharply higher with silver and copper leading the way.  Mining share indexes were off by about one percent on the selling in gold, Crude oil was rising sharply, now back above the $75 level, and the US Dollar was down substantially with long-term interest rates headed higher. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, June 16.             ◄  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.