A Melman Minute — February 4, 2009

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NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday until about mid-January 2009. The working title of the book will be 'Eight Pillars of Gold."

We have just received a report indicating clearly how dire the financial crisis has become. The report contains the utterly astonishing figure that forty percent of the world's asset values have disappeared during the past eighteen months! The situation has deteriorated so far that one of the world's most important private venture capitalists, equity giant Blackstone's Chairman Steve Schwartzman, was quoted in a recent interview stating, "...an almost incomprehensible amount of cash has evaporated since the financial crisis took hold. Business will be very different."

During the past eighteen months, we at TMR have reproduced one chart after another of companies such as Citigroup, Bank of America, Merrill Lynch, Dow Chemical, Ford, General Motors, Bear Stearns, Lehman Brothers - and a list of others too large to be fully included - where the loss of shareholder value (equity) has been almost - or, in fact, total! And the list continues to grow.

We offer yet another example this morning. It was just reported in a WSJ article that General Growth Properties, one of the largest shopping mall ownership corporations in America, has been unable to meet their obligations on a $225 million debt facility owed to Goldman Sachs brokerage house and due yesterday. The article points out that if General Growth files for bankruptcy protection, this would rank among the largest real estate collapses in American history. The effect on shareholders has been dramatic, and horrendously negative. The shares have fallen in less than two years from

nearly $67 at their peak, to just seventy-four cents this morning. (All quotes US$ unless otherwise noted)

The problem is enormous - and there are no easy solutions, but that reality is not stopping our economic and political leadership from piling aggressively larger public expenditures, proposed and actual, onto an ever-shrinking tax base. The logic seems wrong (and we firmly believe it is) but the general public still believes in the concept that "they" won't let anything truly terrifying happen.

One concept that is truly amazing is how inherently bad ideas can spread with stupefying rapidity. In this case, we are referring to the idea of "bad banks". As we recently noted (MM Jan 28),

"The world's press is now filled with the 'good news' that the US government is likely to proceed with the opening of a "bad bank" which will allow American monetary authorities to funnel 'good' money into institutional banking establishments and take as collateral all the filthy, termite-ridden, rotten defaulting loans off the books of those institutions and using them as so-called collateral for the new bank. That is now the preferred solution to restoring believability and confidence in the American banking establishment." We then noted how this decision flied in the face of every established banking practice that had stood for generations, and added, "....Now, in one fell swoop, they are throwing those guidelines out the window."

Well, Britain's socialist Labor government never saw an opportunity to expand government intervention that they didn't seem to like and this has proven to be no exception, as Financial Writers Sara Schaefer and Alistair Macdonald wrote this morning in a story datelined out of London entitled, "U.K. Takes up Bad Bank Concept." Their information included the fact that not only the U.K., but also several European central banks have indicated they will follow the same path and the European Central Bank is drawing up guidelines for European governments that are considering such a "solution".

Meanwhile, the "stimulus" beat goes on, and America's lobbyists - whom Obama says he distrusts, to put it mildly - couldn't be happier. According to a WSJ article this morning, calls for government money are coming from every imaginable source from cities such as Las Vegas, Boynton Beach (Florida), Shreveport, Chula Vista (California), Lincoln (Nebr.), Pittsfield (Maine), Randolph (Vt.) and Austin, Texas - among a multitudinous host of other cities, states, municipalities and corporations. In fact, the number of projects that have been submitted for government largesse has reached an utterly amazing total of 18,750 - just from municipalities alone!!! Talk about an undignified feeding frenzy - and yet, that is the pit into which the United States government has descended.

(For our unvarnished take on the concept of government largesse, please note today's MELMANIA contribution posted elsewhere on this site - LMM.)

We doubt that such solutions are workable and we also doubt that anything will now stop the flow of horrendous sums of new money into the already suspect American financial structure. For this reason, it is our opinion that a period of severe U.S. Dollar weakness will develop in the future and, therefore, we believe that holdings of precious metals could serve as both profitable investments, and possible survival tools should the economies of the world contract uncontrollably.

Anyone who believes that such an eventuality is impossible has not been following developments in the world's seventh largest economy, the Golden State of California. California is facing a $42 billion deficit, and Standard & Poor's rating agency has just cut the rating on their debt to the lowest among the fifty states, adding this telling comment, "...the state's cash position is rapidly eroding." In plain talk, they are running out of money and, as of this past Monday AM, the state's controller has begun suspending payment of checks for tax refunds, welfare and other payments and the state has begun to furlough - without pay! - tens of thousands of state workers for two working days per month.

Markets this morning have fluctuated considerably. As of 10:00 AM PST, the Dow Industrials have given back an earlier 80 point gain and are now down by almost 30, while the TSX, buoyed up by rising resource prices, is ahead by about 130. Gold and silver have retreated from earlier advances and now stand close to unchanged while the base metals continue their recent improvement. In fact, some of the base metals charts are beginning to take on a more positive look than we have seen for some time, and we will examine this more closely in Friday's MM. Both major mining share indexes remain ahead for the session, as are crude oil and the U.S. Dollar.

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.

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