A Melman Minute By: Leonard Melman MELMAN MINUTE - August 23, 2010 - - - - - First, please allow me to apologize for not preparing Melman Minutes for this past Wednesday and Friday.  This was due to the most unusual circumstance of a direct lightening hit on our hotel in Sudbury which 'fried' their telecommunications systems.  It was probably a one-in-a-million shot. However, news events within the metals and financial markets continued to roll on and in this morning's MM we will attempt to recapture some of those happenings. Perhaps our most important theme is that governments' attempts to stimulate economies via monetary expansion will re-ignite the flames of inflation and, thereby, force interest rates higher and those rises will negatively impact economic activities, which will force more government stimulation, leading to more inflation and even higher rates, ultimately leading to a dog-chasing-its-tail downward spiral.  Although we have full faith in the logic behind our position, it is still comforting to see prominent economists openly stating such arguments. One such story, headlined "Interest rates may hit 8 pct in two years" appeared late last week in the influential "UK Telegraph" newspaper.  The article quotes Andrew Lilico, chief economist at the Policy Exchange think tank, predicting higher future interest rates as a result of "... (past) government measures to stave off a recession (which) lead to an explosion in the money supply."  He argues that a brief double-dip inflation will lead to additional money creation and efforts to control such expansion will threaten to tip the economy back into recession in 2013 or 2014 - which is when the inflationary taps will be held wide open, leading to his forecasted sharp increases in visible inflation and interest rates.  He forecasts visible inflation in the 10% range but added that if fears of additional mortgage defaults cause governments to hold interest rates artificially low for yet another nine months, then inflation could reach the 20% level, as they did previously in the late 1970s. The article also notes that Mr. Lilico's views are similar to those of former Bank of England governor John Grieve who stated last month that he expected, "...rates to start rising faster than the market currently expects."  It is impressive to us at TMR that several noted economic leaders are willing to publicly adopt such stances, despite the widespread belief in some circles of perpetually lower rate structures. Signs are beginning to accumulate that the pathway to "austerity" may be encountering troubles.  Two events in that direction also caught our eye last week which involved two "PIIGS" nations, Greece and Ireland.  In the case of Greece, the imposition of even moderate levels of austerity is now resulting in a compression of their economy.  Unemployment soared to 12% last month and their GDP contracted by 3.5% during the second quarter 2010.  Estimates of future unemployment rates in Greece now run from 15 to 20% and one union leader, Stathis Anestis, openly predicted "...a social explosion and riots in autumn after summer vacations are over." From our point of view, one of the predictable results of this economic contraction, which is leaving government coffers sadly depleted, is to ramp up pressure to raise tax collections on the well-to-do.  In our view, all this will accomplish is to cause businesses to flee Greece, leaving worsening conditions in their wake. The other item related to Ireland's financial mess, brought about by the collapse of the real estate and banking segments of their economy, the two segments credited for the boom times of the preceding decade.  Lloyd's Banking Group is now fleeing Ireland and has just closed down its 44-branch retail establishments in that country, citing, "...the continuing woes facing the country's banking sector and economy...The Irish economic outlook remains bleak..."  Ireland's troubles have spread to British-ruled Northern Ireland and then on to Britain itself, thanks to the UK government's actions to buy out 83% of the Bank of Scotland during earlier 'rescue' efforts.  That bank holds nearly one billion Euros in bad real estate debts, debts which are now guaranteed by the UK taxpayers. Speaking of taxation, Greece is not alone in casting glances toward the assets of the "rich and famous."  In America, where signs are rapidly emerging that all is not well in that mammoth economy, the Wall Street Journal just carried a story headlined, "Upper-Income Taxpayers Plan for Hike", which details how many people are taking actions before December 31, 2010 to prepare for higher taxes down the road.  Tax planners across America are fielding questions from anxious investors.  One such planner, Greg Rosica of Ernst & Ernst in Tampa, Florida was quoted as noting, "...the looming increases were turning tax planning around 180 degrees."  Another firm, Ahrens Investment Partners in Lafayette, Louisiana, is advising clients to defer income well beyond next year, "...to avoid the tax freight train heading our way." Speaking of signs that all is not well with America's economy, jobs numbers continue to raise serious concerns.  The latest figure was an increase in the number of New Jobless Benefits claims during the second week of August which rose to 500,000 - a gain of 12,000 from the preceding week and the highest such figure since late 2009.  As financial writers Luca Di Leo and Sarah N. Lynch noted, "...From a political perspective, a weak labor market makes for a dreadful economic backdrop for incumbents in the November midterm elections." With that in mind, we also noted a prediction by noted political commentator Charlie Cook during an interview with Gerald F. Seib, a conservative economic writer.  Cook offered a distinctly negative opinion of the Democratic Party's prospects for the November elections, now only ten weeks away.  He flatly predicted, "I think Republicans are going to get the House back" and also believed Republicans would improve their position in the Senate, but not enough to gain control of that body.  In order to control the Senate, Republicans would have to post a net gain of 10 Senators and Cook feels they will fall slightly short of that goal. His final comment was, "Ultimately, though, Democrats are selling a controversial agenda in lousy economic times." And so, the world of economic troubles continues and prospects into the mid and far future are questionable at best and seriously troubling at worst.  Within that context, two charts are most illustrative. Gold's decade-long bull market remains intact, despite deflation and despite the hostility toward gold of many banking and government commentators.  In our opinion, we remain close to yet another upside breakout and the long-term charts shows no signs at this time of breaking down. Long-term 30-year bond interest rates continue along their recent declines and now stand just above 3.6%, near the lower end of the trading range (3.5 - 5.0%) which has contained them for 2009 and 2010.  We believe a decisive breakout from this range could have a serious impact on government policies as well as economic performance. Financial markets this morning have retreated from earlier gains and, as of 9:00 AM, the Dow Industrials were off by about 10 points after having posted an earlier gain of about 90 while Canada's TSX Index was ahead by 30 points, down from strong earlier advances.  Precious metals were slightly lower with gold near $1,224 and silver just under $18.00 per ounce.  Base metals are moderately lower on balance while mining share indexes are off by about one percent.  Crude oil has just fallen under the $73 per barrel level, interest rate futures are trading quietly and the U.S. Dollar is slightly higher in currency trading. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, August 25, 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.