The repetitive nature of news patterns has become so pronounced that even leading commentators on financial news media are beginning to use the phrase, “Groundhog Day Syndrome.”  The phrase, of course, relates to the Bill Murray film of several years ago where the central figure of the story wakes up to find one day exactly like the preceding one.

The syndrome, in this particular case, relates to the fact that every time financial markets appear ready to collapse, some dramatic news event turns matters around and the markets take off in new rallies which recover a huge portion of the preceding losses.  Conversely, just when it appears that financial markets will break out to the upside, the parade of negative news from the world’s major economic centers resumes and down go the markets once again.

The latest version of the syndrome has occurred this morning with massive rallies in virtually all stock markets in North America and Europe based on two factors, the huge gains in retail sales for “Black Friday” and the release of yet another “solution” to the Eurocurrency crisis.  And so, this morning we once again have the combination of rising financial markets, rising petroleum prices, a weaker US Dollar and sharply higher prices for gold and silver (see chart).

Retail sales were indeed spectacular for the four-day weekend which featured “Black Friday” on the day following the American Thanksgiving Day.  For those not familiar with the term, “Black Friday” is the day on which American retailers deeply discount many of their prices in order to ‘kick-start’ the holiday retail season.  Total retail sales for the four-day stretch totaled a record $52.5 billion, up from $45 the previous year.  This figure has caused many analysts to speculate that consumers are once again in a buying mood and this will stimulate the economy in a positive manner.  Ergo, stock markets are soaring this morning.

We would suggest that such rabid optimism be tempered for two reasons.

First, it has been reported that many of these sales were stimulated by deep discounts which were so savage that retailers were selling their merchandise at a loss – and while such sales can indeed be useful in working off excess inventories that had built up, that process obviously cannot do anything but weaken the basic financial structure of many retailers.

Second, we at The Melman Report believe there may be a serious undertone to much of the wild purchasing frenzy.  Rather than reflecting renewed optimism regarding their economic future, we believe that the spree may indeed reflect the opposite; that consumers are desperately fearful for their future and will be limiting the amount of money dedicated to holiday purchasing and, therefore, they were desirous of taking advantage of such deep discounts while they lasted.  If that is true, the remainder of the holiday season may be substandard for many retailers.

The latest in the lengthy series of European plans was announced over the weekend and the markets are apparently reacting positively to this latest effort to finally resolve the debt crisis which is now plaguing many European nations simultaneously.  A key component of the ‘new’ plan is that a mechanism be put into place to “…make budget discipline legally binding and enforceable by European authorities”, as described in a Wall Street Journal article.  We are also informed that, “…Officials regard the moves as a first step toward closer fiscal and economic coordination within the currency area.”

Other features of the ‘new’ plan include a measure to create a centralized fiscal-enforcement authority with power to seize control of national budgets.  The article tells us that such measures were proposed – and avoided – several months ago, but the situation has now deteriorated the point that“…such steps are now under serious consideration reflects the perilous turn the crisis has taken in recent months.”

We must be unkind enough to point out that there is nothing new in the requirement that nations be fiscally responsible.  When the European Union was formed, every participating nation agreed, at the cost of severe sanctions, to limit their national deficits to three percent5 of Gross Domestic Product.  This agreement was required in order to avoid any prospect of wild currency creation and to forestall any possibility of escalating inflation, particularly in light of Germany’s embedded fears of hyperinflation.

The problem has been that the measure has utterly lacked any true enforcement as countries such as Greece, Italy, Spain, Portugal and many others have budget deficits far in excess of the set limit and, strangely enough, they have not only not been penalized, but they have been the recipients of one rescue effort after another.

We would also offer the personal view that the prospect of a supra-national agency which can enforce budgetary requirements on individual nations smacks of the advent of what has been referred to as “One World Government.”  From our point of view, this would carry profoundly negative implications both from a financial point of view by concentrating greater increments of international economic activity into a central authority as well as in terms of individual liberty.

So, while we rejoice temporarily in the higher precious and base metal quotes for this morning, we still wonder if there has been any true and lasting improvement in the world’s outlook since late last week when the financial and metals markets were plunging steeply.

Time will tell.

Quite suddenly, it is becoming extremely fashionable to write negative articles on China’s economic future, which makes us take a ‘contrarian’ pause, but after reflection, we find that these questions may indeed be valid. 

First, China’s Shanghai Stock Index is now one of the world’s worst performers, having fallen 26% this year alone, the single worst performance among all leading Asian securities markets, far worse than such national markets as Japan, Hong Kong or Singapore.

Next, domestic GDP figures for China have changed momentum.  While still positive, the rate of growth in China’s economy is clearly diminishing, putting the future scope of their importation of raw materials in doubt. 

Additionally, China’s real estate market has shown distressing similarities to America’s just before the collapse of 2007-09.  The price of an average 1,000 square foot apartment unit in Shanghai has reached $335,000, an astonishing 45 times the average annual salary of a Chinese worker – making such housing utterly unaffordable and many units are remaining unsold, putting downward pressure on real estate prices.

The Chinese story is far from over and we believe China’s future direction could be of the greatest importance in our price projections for the coming year.

As of 9:30 this morning, financial markets remain strong with the Dow Industrials ahead by about 300 points while Canada’s TSX Index is ahead by 250.  Precious metals remain strong with gold up nearly $30 to about $1,715 while silver has once again crossed above the $32.00 per ounce mark.  Basic metals are recovering strongly this morning as are mining share indexes, up by about three percent.

In other markets, crude oil is once again approaching $100 per barrel, the US Dollar is moderately weaker and long term interest rates are rising once again.

All quotes US Dollars unless otherwise indicated.

Next Melman Minute scheduled for Wednesday, November 30, 2011