A Melman Minute — April 29, 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!"

Today marks an important milestone for the Obama Administration, namely the end of the "First Hundred Days" since the inauguration. Many observers believe that the tone of an administration can be identified by their actions during that closely-watched period.

We believe that an editorial in the Wall Street Journal this morning gave an accurate summation of the early actions of President Obama and his team. After complimenting the President on some of his foreign affairs activities, the WSJ editorial board then turned to his domestic policies, noting;

"On the home front, there can no longer be any such doubts. Mr. Obama talks the language of pragmatism, but his program has revealed a man of the left. He clearly views the financial crisis and the liberal majorities in Congress as a rare chance to advance the power of the state in American life. The only two comparable moments in the last century were 1965, which gave us the Great Society, and 1933, which bequeathed the New Deal. Mr. Obama's goals are at least as ambitious, resuming the march toward the European welfare state that was stopped by what Democrats like to call the Reagan detour.

His main method here is to make the federal government the guarantor of middle-class security. He wants to make a college education a new entitlement, regardless of the cost. He wants state-financed health-care available to all, even if it means jamming a $1 trillion bill through the Senate with 51 votes. And he wants a cap-and-trade tax that would punish the main current sources of U.S. energy and hand Washington a vast new source of revenue.

Oh, and by the way, he also wants to fix the financial system, run the auto industry, and build a nationwide, high-speed rail network. And on the seventh day, he rested.

What's striking is that Mr. Obama betrays no sense that maybe all of this isn't achievable, much less affordable, all at once. In contrast to Bill Clinton, he has abandoned any deficit concern, building in red ink of at least 4% of GDP for the next decade. And that's assuming the revival of rapid economic growth, and before counting the real cost of health care.

He claims to believe that the revenue to pay for this can be had merely by tapping the rich, as Democrats did during the 1990s, because he and his advisers assume that higher tax rates don't matter. But growth in the 1990s got going in earnest only after HillaryCare collapsed, Republicans took Congress and at least for a while spending was restrained and taxes were cut. The current arc of spending and taxes is only going up -- and to levels not seen in decades. The Obama program is going to test the liberal faith, not observed since the 1970s, that deficit spending and easy monetary policy are engines of prosperity. If they are wrong, then Mr. Obama will eventually find himself managing the politics of stagflation.

More troubling still is Mr. Obama's leap into managing major U.S. industries. Even the European left got out of the nationalization business as a loser after the 1970s. But the Obama White House and Treasury are nationalizing GM and Chrysler, expanding government's role in the mortgage markets, and widening their ownership of the U.S. banking system...

Mr. Obama is more popular than his policies, and sooner or later the twain shall meet. For now, we are living in another era of unchecked liberal government. The reckoning will come when Americans discover how much it costs." (our emphases)

At TMR, we find ourselves in general agreement with this editorial and it is our belief that a day of reckoning awaits down the road if the Obama-led U.S. Congress continues down its present path. It is also interesting to note that a bombshell story of yesterday, the defection of Pennsylvania Senator Arlen Specter from the Republican to the Democratic side, only strengthens the hand of the President. Combined with Al Franken's anticipated victory in the Minnessota senatorial race, this will hand Obama a filibuster-proof U.S. Senate Democratic majority, making it even more difficult for any effective opposition to take place.

Perhaps surprisingly, the investment community has clearly set aside some of its fears and, so far this morning, the stock market is rising sharply, up some 150 points during the first 90 minutes of trading. As can be seen on the chart, the Dow is now some 1,700 points above its early March lows. However, it can also be seen that the markets have entered a trading range between about 7,700 and 8,300, a zone which lies midway between the January highs and the March lows.

The market's recent forward focus became apparent with this morning's rally, as it utterly ignored a report from the U.S. Department of Commerce that the American economy, as measured by the Gross Domestic Product (GDP), had shrunk by a huge 6.1% during the First Quarter 2009, almost matching the 6.3% reduction in the Fourth Quarter 2008, and it was also announced that total economic output had shrunk during three consecutive quarters for the first time since the deep recession of 1983-4.

However, the Commerce Department did note that the stimulus programs enacted during February had little impact during the First Quarter and it is our belief that many observers are looking forward to more robust economic performance as the stimulus money begins to flow through the economy.

There is one 'flaw in the ointment' of that argument which is worth examining. If manufacturers and retailers were indeed expecting significant future economic growth, it would seem reasonable to expect that they would be gearing up for such growth by hiring new workers, building up their inventories of raw materials, and so forth - but we see little evidence of such activities. Employment numbers continue to be dismal and we cannot help but note that many raw materials, specifically including the base metals, have fallen away sharply during the past few trading days, with copper down from near $2.20 to the $1.90s and nickel, lead and zinc also showed similar declines.

One last note. Many economists believe that the collapse in real estate values from their 2006 peaks was the proximate cause of the parade of economic difficulties which have engulfed our planet. For that reason, many are watching for any plausible sign of a reversal in real estate's dismal fortunes. Unfortunately, release of the latest Case-Shiller index for February shows that residential real estate prices continued to decline, although the rate of fall may have abated somewhat. As one observer put it, "Prices are no longer falling off a cliff...Instead, they are rollling down a steep hill." In our opinion, such flimsy rationalizations form the basis for much of the recent market optimism.

As of 8:30 AM PDT, the Dow Industrial and Canada's TSX continue to trade higher. In the precious metals, gold is up by about $7.00, silver is ahead by about 30 cents and platinum is also showing good relative strength. Base metals are recovering somewhat from recent selling, mining share indexes are ahead by about two percent, crude oil is up by about $1.50 and the U.S. Dollar is showing some real weakness in foreign currency trading.

(All quotes U.S. Dollars 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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