A Melman Minute By: Leonard Melman MELMAN MINUTE - August 4, 2010 - - - - - During yesterday's Melman Minute, we reflected on a thought-provoking article dealing with the debate regarding possible looming deflation.  The piece was originally published in the Wall Street Journal and reproduced in Canada's Globe & Mail newspaper and dealt with the views of four persons of fame in the financial world as well as the writer himself.  The "Cast of Characters" included: Bill Gross, bond trader and investor Jeremy Grantham, investment manager David Tepper and Alan Fournier, hedge fund managers Gregory Zuckerman, the article's author. Yesterday's discussion dealt with the question of whether deflation was a true force as well as the role of savings - or the lack of same - within the overall economic picture.  But there is much more to be considered regarding this subject, such as, "Just how strong are these deflationary forces?"  As it turns out, additional recent items of economic information suggest that they could be quite strong indeed, particularly for the moment. We have just learned that Americans continue to pull in their collective horns when it comes to purchases from that country's retail establishments.  An AP story this morning informs us that, "Americans remained reluctant to spend at stores during July, though they let go of some money for travel, according to data released Monday."  Among those industries which suffered the sharpest relative declines were furniture and jewelry.  It is also worth noting that sales are not easy to come by and, "...stores discounted more than planned in July on summer items to pull in recession-scarred shoppers."  Discounting of retail prices, of course, adds to deflationary pressures. We must confess to having a certain level of distrust when it comes to articles published in the left-leaning New York Times (our opinion, of course), but when they stick to facts, their information can be of some real value.  Such appears to be the case with a story they have just run entitled, "More Workers Face Pay Cuts, Not Furloughs".  The article leads off with the comment, "Local and state governments, as well as some companies, are squeezing their employees to work the same amount for less money in cost-savings measures that are often described as a last-ditch effort to avoid layoffs...the new wage rollbacks feed worries that the economy has weakened and could even be at risk of deflation." One of their areas of particular focus was civil service employment and they describe some truly unusual pay reversals which have already taken place.  University of Hawaii professors have accepted a 6.7% salary reduction.  The City of Albuquerque has cut salaries by 1.8% on average for 6,000 employees.  Vermont state troopers have had their salaries cut by 3%.  New York state has recommended - but not yet imposed - a 4% reduction in all state salaries. In addition, the article's author noted "Some businesses are also cutting workers' pay, often to help stay afloat or to eliminate their losses" but then somewhat snidely added, "...although a few have seized on the slack labor market and workers' weak bargaining power to cut pay and thereby increase their profits."  Oh, well, a leopard seldom changes its spots. The indisputable fact remains that workers who have had their pay cut, as in the examples above, by definition have less earnings available with which to take part in the consumer economy, adding further to deflationary pressures and, coincidentally, striking fear in the hearts of government leaders who must maintain government services in the face of declining revenues. Returning to our original article, Mr. Tepper commented, "I'm concerned that slower growth may lead to a much tougher environment for pricing."  Grantham added, "We fear that core inflation readings in the United States could dip into outright deflationary territory in coming months." The article's author, Zuckerman, then commented, "The growing clout of the Tea Party movement in the U.S. also has colored his (Grantham's) view that elected officials won't have the ability to spend."  Zuckerman also added this telling comment, "In a period of deflation, each dollar of debt becomes onerous as wages and prices fall, as opposed to an inflationary period when the value of debt drops."  (Our emphasis.) We don't doubt that every government on earth, most of them loaded with unwieldy loads of such debt, are not acutely aware of such a simple truth.  The cost and social burden of servicing debt inside a deflation could become utterly unsupportable and if that should occur, only two alternatives appear likely.  In the first case, government expenditures would be forced to crunch downward, imperiling the entire structure of government services and perhaps leading to social unrest or, in the second case, governments - including the USA - would be forced to actually default on their debt, leading to chaos in the world's financial markets. For this reason, Fournier opined, "...further economic difficulties spur politicians and the Fed to take aggressive actions to stave off deflation." That last sentence represents the heart of our ultimate argument for holding gold and silver, namely that at some future time - and perhaps that time is not too far into the future - governments will risk anything, including the possibility of outright hyperinflation, to avoid the two problems noted above.  Should that time ever come, please note the nickname of the present Federal Reserve Chairman, "Helicopter" Ben Bernanke, a nickname earned by his comment that if future conditions warranted such an action, he was prepared to drop printed currency from helicopters in order to stimulate economic activity. In our opinion, time is running out.  The risk of a true deflation is clearly evident, with all its inherent problems, but the reasons for avoiding further dramatic stimulative activities are also starkly evident.  THAT is the nature of the "rock and a hard place" about which we have been warning for several years.  Time may be running short. In any event, gold has suddenly sprung back into life, rallying by over $40 per ounce during the past six trading days and, as of 9:00 AM PDT this morning, gold is once again above the $1,200 per ounce mark, up by about $15 on the day. Silver has rallied in a similar manner during the past few sessions, improving by about $1.20 per ounce from near $17.40 to the $18.60 area.  It is worth noting that both metals have reversed short term declining trendlines and are now moving back to toward their yearly high levels. In other markets, base metals are also strongly higher and, combined with gold and silver's strong performances, this has been reflected in stronger mining share index readings, up 2-3% so far today.  Crude oil is holding on to recent gains, the U.S. Dollar has recovered slightly in currency markets and long-term interest rate are once again declining sharply.  Financial markets are also moving to the plus side with the Dow Industrials ahead by almost 30 points and the TSX Index has gained nearly 60. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, August 6, 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.