A Melman Minute — April 22, 2009

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NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday until about mid-March 2009. The working title of the book will be 'Just a Melman Minute!"

FUNDAMENTAL POSITION STATEMENT

Two news events caught our eye lately and we believe they confirm us in one of our most fundamental positions at The Melman Report (TMR). In each case, one involving Japan and the other the USA, they related to governments issuing new debt instruments. Japan's was for 10.8 trillion Yen while the American offering was for $28.0 billion. We have also noted that once again an increasing number of nations are openly discussing new increments of economic stimulation such as the U.K. government's call for intervention (meaning "expensive rescue operations") for an additional host of industries in addition to banking and credit.

Not once have we heard a single government discuss paying off debt in a normal fashion, by actually retiring indebtedness through cash payments raised from current revenue receipts.

All of this stands in direct contrast to the norm for individual family financial matters. For example, let us assume that it is decided the family needs a new car and, after shopping, a sedan is chosen which will cost a net total, after down payment and including interest, of $10,800, or monthly payments of three hundred dollars each over three years. During that period of time, unless their income rises by a similar amount or more, the family will see their discretionary spending reduced each month. However, at the end of the three year period, they will have accomplished their purposes. The family will have enjoyed the use of the vehicle for those three years, they will then own it clear of any obligations and, once the payments are concluded, all else being equal, their discretionary spending can return to pre auto-purchase levels - or higher.

The same arguments can be made on a larger scale for home ownership via a fixed-payment mortgage. As payments are made, indebtedness is reduced until finally, clear ownership of the asset is accomplished.

These are sound uses of credit and allow acquisition of important assets while continuing with normal family financial activities.

Government, however, have not adopted such sound policies. Instead, they do not pay down indebtedness, but systematically offer new bills, notes and bonds at regular intervals which merely 'roll over' old debt into new debt. Sometimes the process moves forward slowly while at other times, such as the recent past, the process of increasing government debt accelerates at a staggering pace - and the only concern about repayment remains in the form of projecting new and greater future government financings to pay off maturing debt as it comes due.

Simple logic, in our opinion, would appear to confirm that this policy cannot go on forever, that it cannot continue indefinitely without becoming increasingly unwieldy, and that, in fact, as it progresses, an eventual catastrophic outcome becomes a growing likelihood over time.

For that reason, we believe that positions in a monetary value outside of government domination makes sense for insurance purposes, and we believe that physical holdings of gold, silver and perhaps platinum could both protect purchasing power and could even provide the opportunity for investment profit as well.

In addition, subject to the possession of safe and secure storage facilities, we believe that the physical ownership of quantities of base metals such as copper, zinc, lead and nickel also could have considerable merit.

A concomitant of massive monetary creation is a fear that the future value of money will decline and one of the results of such fears is that investors are growing increasingly reluctant to accept minimal interest returns on long-term financial instruments. The chart above shows that despite endless government rhetoric about lower interest rates, the 'real world' long-term U.S. government bond market is becoming more uncertain. As can be noted on our oft-visited chart of the TYX Index, which measures the interest rates on long-term 30-year US government bonds, the Index appears to be on the verge of breaking out to the upside, meaning higher - not lower - long term interest rates may be in the offing, an eventually, if such a development occurs, it could have profoundly negative implications for mortgage financing, auto sales, large equipment financings and a host of other important economic applications.

While the top of the recent trading range remains near 3.81%, a new technical chart pattern has been developing of 'higher lows' within the overall range. These successive lows have been 3.39% in mid-March; 3.50% at the end of March and 3.61% in mid-April, with overhead resistance denoted by several peaks in the 3.78 to 3.82% range. Given the importance of long-term financings to the overall economy, we should keep a close watch on this chart and it is our opinion at TMR that a breakout above 3.85% could have serious negative implications for overall economic activity.

While many politicians are waxing enthusiastic about the chances for strong recovery by late this year, several troubling signs continue to emerge regarding the economic future. One area that stands out as looking particularly ominous is the realm of commercial real estate activity. A Wall Street Journal article this morning points out that in many large American cities, overbuilding, combined with declining economic activity, has created a glut overhanging commercial real estate markets with the result that occupancy rates are falling, rental rates are falling, property values are falling, and the likelihood of loan defaults is rising. An estimated $800 billion worth of commercial loans are coming due between now and 2011 and potential defaults on such loans could expose major banks to yet another area of major losses.

It is also worth noting that the International Monetary Fund has been continually lowering their outlook for future economic activity and, in their latest release, now opine that the world is not yet half-way through the banking crisis and that an additional $875 billion in new equity for banks will have to be provided by governments.

We believe all such activities reinforce our core policy as noted above.

This morning's markets have been relatively quiet as the financial community digests continuing negative economic news as opposed to Treasury Secretary Timothy Geithner's announcements of new plans to improve the situation. As of 9:00 AM PDT, the Dow Industrials and Canada's TSX were modestly higher; precious metals were ahead slightly; base metals declined and both major mining share indexes have gained about one percent. Other markets including the petroleum complex and currencies were also little changed so far.

(All quotes in US$ unless otherwise noted.)

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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