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 - July 5, 2010 - - - - - One of our the concepts we have raised many times during the past couple of years is the negative role played by excessively complex regulations, believing they inflict great harm against the otherwise efficient workings of commerce and industry.  We now have yet another example of the unbelievable level of such complexities within the recent action of the American Congress. When Leo Tolstoy wrote what is regarded as one of the greatest, longest and most complex novels of all time, "War and Peace", it took approximately 1,300 pages.  For Ayn Rand to lay out, in excruciating detail, exactly how her philosophies would change the world in which we live in her best-selling novel, "Atlas Shrugged", it took her about 1,060 pages.  However, for the United States House of Representatives to simply write a bill regarding financial regulations, that August body has brought forth a detail-laden tome known as the "Dodd-Frank" financial reform bill which encompasses an astonishing total of 2,319 pages! The great problem is that if approved by the U.S. Senate, an action anticipated by mid-July, that monstrosity will become the law of the land for the most powerful economy on earth and it goes without saying that few will read the law, few will know any of its impacts, and few will be able to evaluate its level of interference until they are enmeshed inside its entrails.  All of this should prove to be eminently beneficial to the incomes of armies of attorneys, but, in our opinion, will provide yet another series of drags on the American economy, reducing profits, reducing tax revenues and, thereby, leading to even further escalation of the already-massive levels of American debt and deficits. When this 2,300+ page law is combined with other horrendous compilations such as the Fresh Air and Water Act, the law revising America's Medical system and the various stimulative laws already on the books, one can begin to see the cumulative impact of such regulations.  We all grew up learning the KISS formula which reads, "Keep It Simple, Stupid."  It is a formula the world's lawmakers should re-learn before they utterly cripple the productive and imaginative efforts of entire populations. - - - - - The markets of Wednesday, June 30 provided us with a startling example of non-conformity to what might have been anticipated.  On that day, the U.S. Dollar plunged in value.  Historically, when the Greenback falls, we normally expect gold to rise - but it did the opposite, declining by forty dollars in that one day.  Many observers have expressed puzzlement over the combination. In our opinion, the following scenario may now be in the process of taking place.  As can be seen on the chart, for the past seven months the US Dollar Index has been gathering strength, despite uneven American economic data.  Our interpretation is that the Greenback has indeed been rising in comparison to other currencies such as the Euro, Pound and Swiss Franc, but that improvement has not come about because of "positive" economic data, but rather because America's economic performance has been "less bad" than others, particularly those countries which form the European Economic Community. We note the DXY chart has now begun to turn down and we wonder if this is a harbinger of a change in the wind, to one where the American economic performance is going to enter a period where it will no longer be "less bad" than Europe, but "equally bad", or perhaps "even worse".  If that transformation in expectations takes place, it occurs to us that the Greenback could enter a period of decline against other major currencies, including the Canadian Dollar, and, if that is so, then a new and vitally important consequence could ensue. If the US Dollar falls far enough, the price of every item imported into America - and these are massive quantities of such imports - will begin to rise and with that rise we might very well see the re-ignition of visible inflationary fires.  In the face of such a relative decline in the Greenback's value, we might also see a growing reluctance to purchase huge quantities of American debt. In each case, the end result would be pressure to increase interest rates for two reasons. First, lenders will increasingly demand compensation for anticipated reduction in their money's purchasing power over time and, second, as an inducement for foreigners to continue buying Americas government-issued notes and bonds. Unfortunately, if these types of interest rate increases do occur, then rising interest rates could have two truly scary consequences.  First, they would limit economic activity in giant industries such as housing and auto sales, leaving the economy even weaker.  Perhaps worse in our opinion, they would force monumental increases in the amount of interest government would be forced to pay to keep refinancing their already-catastrophic level of debt, now in excess of $13.2 trillion, increases which would be piled onto already monumental deficits. Should this type of situation develop, it is our opinion at TMR that insurance positions in the precious metals would become even more important. ..................... Friday's June jobs report from the US Department of Labor offered little comfort to the Obama Administration or the Democratic Party as it showed a loss of 125,000 jobs overall.  While it also showed a reduction in the Unemployment Rate to 9.5% from 9.7%, that was because over 600,000 people became so discouraged that they stopped looking for work, thereby removing themselves from the "unemployed" rosters, since that number includes only those actively seeking work.  Without those removals, the Unemployment Rate would have reached 10%. This dismal jobs picture is a vital concern for the Democrats with the fall elections only four months away, because it is leading to the perception among many voters that the Obama Administration's 'remedies' simply are not working since even the best job numbers since the depth of the "Great Recession" show only job creation in the private sector of 33,000 in May and 83,000 in June - far less than the 150,000 required for the economy to even stand still.  In fact, a Quinnipiac University national poll in late May showed fully 74% of voters thought the USA was still in recession. The pre-election rhetoric is only beginning.  It should be quite a summer and fall.  Given the dramatic differences that have emerged between Republicans and Democrats, this election for the entire House of Representatives and one-third of the Senate could have dramatic consequences if the Democrats lose their majorities in either or both Houses. With the US markets closed today for the Independence Day holiday, trading action has  been somewhat limited.  The TSX Index has opened down by about 100 points as of 6:45 AM PDT while trading in London commodity markets has the base metals mostly unchanged while gold is off by about $4.00 to near $1,207.  Crude oil is unchanged and the C$ is down by about 25 basis points to near $93.87 against the Greenback.  Asian and European markets were little changed in last night's trading. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, July 7, 2010. ◄  Previous Minute                                                                                                        Next Minute  ►
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