A Melman Minute — February 9, 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."

As we enter the fourth week of the Obama Presidency, one of the most important tasks at hand is to gain some ideas regarding the economic and political philosophies which will guide the new administration. While it is obviously early in the game, so to speak, one concept can already be stated with a high degree of certainty. Obama believes deeply in fiscal stimulation!

His new 'Stimulus Act', which is wending its way through the House and Senate, is perhaps the most enormous single act of stimulation ever recorded in America's two-hundred-twenty years of its existence as a nation. In our opinion, it also reflects the new President's belief that powerful, centralized, federal government can do almost anything if only someone 'believes' deeply enough. It can advance education. It can advance health care, it can micromanage the economy, it can rebuild the infrastructure and, most manifestly, it can create jobs! In fact, the new President is promising the 'creation' of jobs by the million, even the tens of millions, if necessary.

I have just been listening to Obama present his job creation ideas in an address to the good citizens of Elkhart, Indiana, a city which has fallen from good times to deep depression with astonishing speed. In his long address, the President told of all the wonders his government will be able to perform upon the passage of the stimulus package. Public works projects would pour forth in an unending stream. Money for students to finance college would be sent out. Tax refunds to families will be approved. Funds to allow for the sustainability of health care will pour out of Washington so that families who have lost their jobs will not lose their health care insurance.

And so we will have the 'dynamic duo' of the new government mantra, namely that government will do ever-more by spending ever-greater amounts of funds, and tax the public ever-diminishing amounts. We at TMR now hold two opinions regarding this astonishing collection of financial legerdemain; that huge masses of the public believe it can really work without any adverse consequences and, the President of the United States believes it as well.

We must, despite the unkindness involved, print the definition to be found in "Webster's New Universal Unabridged Dictionary" of the term "legerdemain." It reads, 'a deceptive performance which depends on dexterity of hand', and, 'tricks of a stage magician.'

The stimulus package is now wending its way through the Senate, with a final version to be ironed out between the House and Senate some time in the relatively near future - and then the monetary spigots will open wide as the lobbyists and politicians do their best imitation of porkers at the feeding trough. It should be interesting to watch. What should also be fascinating to observe is the path of the U.S. Dollar in currency markets once the full power of the government printing press is unleashed, as we believe will happen over the coming months.

The negative news breaks continue in a virtually unabated stream, and we note in particular the devastation being wrought in almost every retail establishment belonging to the 'luxury goods' field. For example, "Saks Fifth Avenue", one of the luxury retail industry's most prestigious names, has now been forced to deeply discount prices, a practice previously shunned, just to move accumulating inventory. The Wall Street Journal gives, as an example, a pair of Manolo Blahnik shoes being discounted from their normal $535 to $160; just to move them off the shelves. Saks' discounting is forcing other similar major luxury firms such as Neiman-Marcus to do likewise, and that, in turn, is pressuring the world of smaller, high-priced boutique shops, some of which are now being forced into closure. (All quotes US$ unless otherwise noted.)

What is happening to high-end retailers is part of a much larger picture of rapidly lowering earnings expectations throughout the financial world. In an article just published by financial writer David Gaffen, he noted that, "...Profits at big U.S. companies fell 32% last year, the biggest decline in at least 20 years, and with the economy shrinking and the big drivers of earnings in recent years struggling, a rebound appears unlikely."

The effect on the securities markets of these declines could be staggering. Collective earnings on the Standard & Poor's 500 Index in 2007 were about $82, but that figure fell to $56 in 2008, and appears to be headed even lower during 2009. As these earnings figures decline, it is quite likely we will see commensurate - or even exaggerated - declines from already low levels.

As can be seen, the S&P 500 has fallen from above 1,500 to barely 800 during the past two years, and now trades in a trading range between eight and nine hundred. If earnings continue to decline, it is our opinion that growing selling pressure will force the S&P 500 below the trading range into what could be a precipitous decline.

One last item we find worth mentioning is the announcement by International Monetary Fund chief Dominique Strauss-Kahn that the world's advanced economies - the USA, Western Europe and Japan - are "already in depression", adding, "The worst cannot be ruled out." World economic leaders reacted with sock and dismay. A skeptic, such as your editor, might note that such dismay would reflect, not a belief that Mr. Strauss-Kahn was wrong, but that he would dare to use the dreaded "D" word at all.

Today's markets are relatively quiet and action in mining shares appears to be quite subdued so far this morning. As of 10:00 AM PST, the Dow Industrials are ahead slightly while the TSX was up by more than 100 points. Both gold and silver are down sharply, with gold off about $20 to the low $890s and silver down by over 20 cents to about $12.90 while platinum has fallen back under $1,000 per ounce. Major mining share indexes are off by more than two percent, crude oil is a bit higher and the U.S. Dollar Index is moderately lower. Base metals are slightly higher, on balance.

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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