A Melman Minute By: Leonard Melman   July 28, 2010   It is always surprising to us to observe that many members of the public seem fixated on yesterday's headlines.  Our case in point is interest rates, particularly those long-term rates which impact on debts such as mortgages and auto loans.  We would suggest that if you ask the general public regarding such rates, they would, almost to a man, suggest that such rates are at their lowest levels in history.   They just haven't been paying attention these past three or four weeks. It is clearly evident that long-term rates hit at least a temporary bottom a month ago and since then have risen from 3.826% to 4.1% this morning.  While this move does not yet constitute a major chart reversal, it does suggest that all may not be quite as rosy as has been projected. In fact, Reuters just carried a story this morning headlined, and we quote, "Mortgage Demand Dips on Rising rates."  The article informs us that, "U.S. home loan demand cooled last week as rising mortgage rates cooled refinancing requests..."  This cooling of demand has come in the face of a mere .10% increase in mortgage rates.   One can only wonder about the impact should rates begin to rise significantly. This (to-date) minor reversal in interest rates seems to us to be part-and-parcel of the suggestion that the economy may not be rebounding with anything near the strength and vigor that recent securities market action might have suggested.  Final retail remand remains weak, the home market is dragging along just above multi-year lows, unemployment remains a most serious problem in many countries and debt levels remain overwhelming. Another important piece of data released this morning by the U.S. Department of Commerce adds fuel to the negative picture.  The widely-watched "Orders to U.S. Factories for big-ticket Manufactured Items" figure actually declined by an unusually large one percent during June, a number which is utterly inconsistent with any believable argument that the economy is expanding on a sound basis.  Big ticket orders should be expanding, not contracting under such a scenario, but they are not.  As an AP article suggested this morning, "...Manufacturing has helped drive growth during the early phases of the recovery.  A slowdown in orders could be a sign that the recovery is losing strength."  (Our emphasis) Your editor is hardly the only writer raising questions regarding the true validity of the "the economy is responding positively to stimulation and the future looks bright" argument.  Among the most notable holding contrary views we find the oft-quoted Jimmy Rogers who recently discussed his views with London's Telegraph newspaper.  Simply put, he envisions serious problems down the road, to put things mildly. His greatest concern is that he sees another recession which will hit within two years, but it will be made much worse that previous experiences because, "...the arsenal of available tools to combat the next recession is somewhat lacking."  Rogers has impressive company as the same article quotes Robert Shiller of housing-index fame as stating that a renewed recession could come much earlier and, "...For me a double-dip is another recession before we've healed from this recession.  The probability of that kind of double-dip is more than 50%.  I actually expect it." From a longer point of view, the greatest problem of all is debt, specifically the staggering levels of debt owed by governments, individuals and corporations around the world, especially when combined with the mammoth future obligations already undertaken by left-leaning governments around the world.  A recent column by Bronwyn Eyre in the Vancouver Sun newspaper dealt with that most serious subject. As Eyre notes, the currently quoted U.S. federal debt amounts to about $14 trillion, but she then cites the "National Review" as stating, "...once you factor in all the government entitlement liabilities, (it) reaches the near inconceivable level of one hundred thirty trillion dollars ($130,000,000,000,000)..."  But the US is hardly alone.  Eyre then quotes U.S. financial pundit Jim Jubak as stating, "...debt across the European Union averages 434% of GDP, marking a crisis that inevitably will engulf all of Europe and beyond through plunging stock markets driven by fear-wracked investors." Even the American White House has had to raise their projections for coming deficits as the recovery simply is not generating taxation revenues at expected levels.  They now call for a deficit in fiscal 2011 of a staggering $1.4 trillion to be followed by an average of $850 billion per year over the next decade.  In answer to the obvious question of how the American authorities are to finance such monumental sums, Fed Chair Bernanke admitted that the 'solution' may call for a possible resumption of what has become known as "Quantitative Easing" (QE) instead of its old and more honest name, "Monetization of Debt."  In either case, it involves the creation of currency values out of thin air by the Fed, and the ultimate effects of such monetary creation remains one of the strongest arguments for a powerful golden bull market. The picture remains cloudy and, for the most part, markets have been marking time for several months, since the late April initial break to the downside from the rallies which had lasted since March 2009. In a separate note, troubles for the mining industry simply will not go away.  Just recently, an Ontario Judge ruled that mining giant Vale, headquartered in Brazil, may be liable for pollution which occurred as a result of Inco's long-closed operations near Port Colborne, ON.  Liabilities in the case are estimated to be C$35 million, but the greater question is whether this suit will open the door for a flood of similar actions against mining companies or other resource developers.  Just another problem for the industry to worry about. Financial markets this morning are trending slightly lower as of 9:45 AM PDT with the Dow Industrials down by about 12 points and Canada's TSX Index down by twice that amount.  Gold is recovering somewhat from yesterday's sharp sell-off when it lost $25 and traded as low as $1,155 before improving to near $1,160 this AM.  Silver is moderately lower again today, trading near $17.50 while the base metals are slightly higher on balance, continuing their recent rallies.  Mining share indexes have improved by about one-half percent so far today. In other markets, crude oil has declined to under $77 per barrel, interest rates continue to move slightly higher while the US Dollar is little changed on foreign security markets. All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, July 30, 2010.  Due to the Canadian Civic Holiday, our schedule next week will be slightly altered to Tuesday, Wednesday and Friday.   ◄  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.