A Melman Minute — May 8, 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!"

The news released this morning from the American labor markets for the month of April was devastating. More than one-half million jobs were lost (539,000) and the Unemployment Rate soared to a staggering 8.9%, drawing ever-closer to the ten percent mark, a figure which many economists consider the entry into depression territory. However, upon receiving this pathetic news, the American stock markets soared to strong opening gains! The only identifiable reason was that the job loss figures weren't quite as bad as last month and, therefore, they could have been worse. In today's strange world, "less bad" now is the equivalent of "actual good", or so the investment community seems to be saying.

North of the border, the news was actually better with a modest job gain of 35,900 jobs which was sufficiently positive for the Unemployment Rate to hold steady at 8.0%. The one disquieting feature of the report is that the job gains were almost exclusively in the "self-employed" section, which a Canadian Press article describes as "...a last resort for workers who can't find jobs elsewhere."

The employment reports followed closely on the heels of the widely anticipated U.S. government's "stress-testing" of 19 of America's major financial corporations. After reviewing the results, the government ordered 10 of those companies to raise an additional $74.6 billion in new capital to provide a financial cushion. The government also reported that it predicted total losses among the 19 companies of almost $600 billion during the rest of the year, "...if the economy performs worse than expected."

Many of the institutions declared they plan to raise the needed capital via new stock offerings. Unfortunately, they failed to offer any comments regarding how this new dilution might affect either present shareholder values or future corporate earnings statements.

One disquieting note was offered by the Wall Street Journal this morning when it noted, "While most of the banks that need capital are likely to be able to find it, analysts and bankers say a few others are likely to end up being largely owned by the U.S. government due to their inability to raise capital from private investors." (our emphasis)

The influence of the U.S. government on the economy at large has been the subject of intense debate during recent months and financial writers Elizabeth Williamson and Melanie Trottman offered their take on the recently announced U.S. budget this morning. What they suggest represents a dramatic change in government emphasis from virtually any prior Administration.

First, they note that the proposed budget, "...sets the stage for an expansion of the federal work force and for hundreds of new rules that would widen Washington's involvement in the workings of private business...signaling profound change for the nation's biggest businesses." Among the directions suggested in the budget is the replacement of private enterprise with government civil servants in the military budget and, in addition, wider regulatory authority is being sought for industries such as food-processing and transportation while workplace safety and labor practices will also come under closer scrutiny. In fact, according to the authors, a close examination of the budget reveals specific other expansion plans for the Food & Drug Administration, Department of Homeland Security, Occupational Safety and Health Administration, Department of labor and the National Transportation Safety Board. (our emphasis)

Obama Administration has also indicated it wants to allow the unemployed to retain their state unemployment benefits over a longer time, attend university with government assistance while still receiving those payouts, expand financial aid packages for the unemployed and further enlarge the programs which dole out assistance in the form of "Pell Grants."

(As an aside, we must ask what has happened to the U.S. Constitution's guarantee about the separation of powers of the various states from the federal government. As matters are now headed, it appears the federal government will be able to interject itself directly into state budget expenditures.)

The huge growth in government influence prompted Richard A. Posner, federal circuit judge and senior lecturer at the University of Chicago Law School, to write an op-ed piece for the Wall Street Journal which was entitled, "Capitalism in Crisis." He described the current economic situation as now resembling a depression and added this thought, with which we agree. "Its gravity is measured not by the unemployment rate but by the dizzying array of programs that the government is deploying and the staggering amount of money that it is spending or pledging - almost $13 trillion in loans, other investments and guarantees - in an effort to avoid a repetition of the 1930s."

He then summarizes the case that we have been presenting to readers for some time, namely that, "...a commitment of such magnitude - stacked on top of enormous budget deficits enlarged by sharply falling federal-tax revenues - could lead to high inflation, greatly increased interest costs on a greatly increased national debt, much heavier taxes, the restructuring of major industries, and the redrawing of the line that separates business from government." (our emphases)

Again, we believe that before it is over, this year of 2009 will go down as one in which truly historic and dramatic changes took place.

In other important news this morning, Japanese auto giant Toyota Motors just reported a massive First Quarter 2009 loss of $7.7 billion which forced it to cut its dividend payout by 29%, the first such dividend cut in its corporate history. The company's President cited declining auto sales combined with high raw materials costs for the huge loss. Strangely enough, Toyota's stock had been recovering of late, but this morning's earnings report has driven the shares lower on the day.

As of 9:40 AM PDT, financial markets continue to hold on to their early gains with the Dow Industrials up by about 120 points and Canada's TSX Index has been even stronger, ahead by almost 200. Precious metals are mixed with gold and silver modestly higher, but platinum slightly lower while most base metals are a little lower. Crude oil continues its recovery, now trading just under $58 per barrel, up over $1.00 on the day while the U.S. Dollar is down sharply in currency trading. In fact, today's decline has brought the DX Index (which measures the U.S. currency against a basket of others) appears to be breaking below chart support.

(All quotes 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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