A Melman Minute By: Leonard Melman MELMAN MINUTE - August 27, 2010 - - - - - Those who rely upon the accuracy of government numbers should take a second look at perhaps the most important economic report which comes out of Washington, DC.  We are referring to the all-encompassing Gross Domestic Product (GDP) figure which is normally published on a quarterly basis.  We say "normally" because, in reality, during recent years we have seen one revision piled upon another and the GDP figure for the Second Quarter 2010 is no exception. The "initial report" showed a growth of about 3%, but this was followed by a 'revised update' of 2.4% and, just this morning, a "second revision' pegs that growth rate at a much-reduced 1.6%.  One begins to wonder just how much value can be placed on any initial figure proffered by government economic reporters. In any event, the markets reacted quite sharply during the first few minutes of trading this morning, with the Dow Industrials surging by about seventy points in just a few minutes.  However, market observers apparently had second thoughts, as the Dow then plunged by well over 100 points to net down for the session, but then third thoughts took over and the markets recovered strongly to well into plus territory.  One can only speculate where they will ultimately end prior to the weekend. In the "fun with numbers" category, we have been closely watching the relationship between the price of gold compared to that of silver.  There is a historic assumption that silver makes greater percentage moves than gold - in either direction - and trading during the past seven sessions would tend to confirm that suggestion, a suggestion that does have some basis in logic.  Please note the two following charts. During those sessions, silver declined from $18.60 to $17.75, then rallied strongly to about $19.25.  The percentage of decline during the first move was 4.6% and the move during the subsequent rally was 8.5%.  Please compare these numbers with the corresponding moves in gold. For gold, those relevant numbers were a decline from $1,238 to $1,211 followed by a rally to about $1,245.  Compared to silver, the percentage of decline during the first move was a lesser 2.2% while the subsequent rally moved gold upward by a considerably less (compared to silver) 2.8%.  We can offer two suggestions for the fact that silver tends to make more exaggerated moves.  First, the size of the international silver market is considerably smaller than gold, and, therefore, any concentrated move in silver is likely to generated a greater percentage move.  Second, many 'hard money' investors tend to be unable to afford to purchase gold at well over $1,000 per ounce, but welcome the opportunity to purchase silver at well under $20.00 per ounce.  This tends to exaggerate moves in silver, either into or out of hard money hedges. Our point is that readers should be aware of this tendency toward silver's larger percentage moves and the fact that this tendency plays into one of the general rules which can be applied to most investing, which is the presumption that where there is a greater potential return, there is usually a greater level of inherent risk. Whatever else one might say about California's flamboyant Governor, Arnold Schwarzenegger, one must admire the fact that from time to time, he has a tendency to state matters quite clearly and that is now the case with California's horrendous present and future civil service retirement predicament.  Due to the generosity of previous legislative assemblies, California's civil servants have been promised virtually the sun and the moon when it comes time to retire - at age 55, no less.  Unfortunately, according to the "Gubernator", these sums are far beyond what the State of California can now afford. In an open public letter, Schwarzenegger stated some facts which, while unwelcome, simply cannot be ignored.  During the past three years, while state employment has remained virtually constant, the number of private jobs lost amounts to over 1.2 million, meaning there are far fewer workers available to fork over the taxes required to pay for those benefits.  The burden, quite simply, is becoming unsupportable. Next, the problem would be serious enough if the cost of benefits was to remain constant, but that is hardly the case.  There is an estimated 15% growth rate per year built into the present state retirement structure and at that rate going forward, state retirement expenditures will expand from a present $6 billion per year to an estimated $25 billion - or more - by 2020.  Obviously, that kind of escalation will swallow up funds which would normally be used for education, highways, prisons or other required government expenditures.  No one has any idea where those additional funds are to be found. Schwarzenegger has thrown down the gauntlet to state lawmakers by stating that unless real and lasting reform in three directions is enacted, he will refuse to sign any future budgets, including this year's.  The three reforms are: * - "The assembly needs to reverse the massive and retroactive increases in pension formulas it enacted 11 years ago." * - "It also needs to prohibit 'spiking' - giving someone a big raise in his last year of work so his pension is boosted." * - "Government employees must be required to increase their contributions to pensions." As he wrote, "All of these reforms must be in place before I will sign a budget." We wish him luck, since these common-sense reforms are long overdue, but the Governor also is politically knowledgeable, since his last comment was, "I am under no illusion about the difficulty of my task.  Government employee unions are the most powerful political forces in our state and largely control Democratic legislators.  But for the future of our state, no task is more important." At TMR, we believe the very existence of such pension plans is one of the reasons why the financial future of America, Greece, Italy, Great Britain, France, Ireland, Spain and a host of other nations is in genuine jeopardy, and it is also an important reason why we believe in the high likelihood of a continuation of the ongoing bull markets in the monetary precious metals. As of 9:00 AM PDT, markets are continuing their erratic behavior, with the latest move in the widely-watched indexes being to the upside, with the Dow Industrials now ahead by about 100 points while Canada's TSX is higher by over 160.  Precious metals continue to move upward with gold now trading near $1,242 and silver above the $19.25 mark.  Base metals are also sharply higher with copper now just under $3.40 per pound while mining share indexes are also advancing.  Interest rates have moved higher while the US dollar is trading close to unchanged and the October crude oil contract is up by about 60 cents. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Monday, August 30, 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.