A Melman Minute — May 11, 2009
| By | Leonard Melman |
|---|---|
| Date | May 11, 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!"
Long term readers are well aware that perhaps the most frequently published chart on these pages in that of the "TYX Index", which measures the interest rate return on 30-year U.S. Treasury bonds. There is a good reason for this. We believe that what the market is willing to pay for those bonds is a measure of real confidence in the future of the value of money.
As can be clearly seen, the last year of the chart resembles the letter "V", indicated by a sharp drop from near 4.5% down to 2.5% and then a strong rally back up to the 4.3% area. What has made this round trip all the more remarkable is that the upward move in the USA government bond market has taken place precisely at the time that the government was doing everything in its power to drive interest rates lower!
This anomaly has not gone unnoticed by the financial press. A Wall Street Journal feature this morning was an article by financial writer Min Zeng which noted, among other important disclosures, that rates are rising because of, "...an increase in bond supply in major economies to fund budget shortfalls and economic stimulus plans..."
Not at all surprising in light of the sudden burst of optimism which appears to be permeating financial markets, there are those who take a rosy outlook regarding the current situation. One of those is Marco Annunziata, chief economist at UniCredit in London. We found his comment that, "If yield (on ten year bonds) closes on 3.5%, it is almost certain the Federal Reserve will step up purchase of government bonds" opens the door to an obvious question.
We would only add the query, "WITH WHAT???" For some reason, people like Mr. Annunziata never seem willing to state exactly how the Federal Reserve - or the central banks of England, Australia, Germany, France and a host of other nations - are supposed to be able to continually purchase all of those outstanding bonds. Well, in our opinion, there are two tacit assumptions that these worthies are making.
First, these central bank institutions will simply continue to create unlimited amounts of fiat currency out of thin air, which is the nature of central bank purchases of outstanding debt, and,
Second, that newly created currency, on top of already existing currency, will not destroy the concept of currency values in any meaningful way. Frankly, we believe they are living in a dream world if they have convinced themselves that all government have to do is simply divorce currency value from real value in order to enhance prosperity, yet we believe that strategy has become the norm among the major economic nations of the world.
We would recommend that financial leaders who espouse such views should read, "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay. They might then learn how past applications of such strategies for prosperity have worked out in the real world. Simply put, the long-term picture has never, not once, been a pretty one!
Market reaction to last Friday's jobs report from the U.S. Labor Department continues to amaze us. One would normally suppose that a report showing an economy lost an astounding 539,000 jobs in a single month (actually 611,000 if you discount the 72,000 newly-created census-taking jobs by the U.S. government which have nothing to do with the economy) would send shivers down the spine of most analysts. This would be particularly so if the overall figure contained information which raised these questions:
If the economy was on the verge of strong recover, which is what we are being told is the reason for the stock market's strong rally of late, why would the natural resource sector in America have laid off 11,000 workers last month?
If the economy is supposed to be entering such an era of prosperity, why would the retail establishments have laid off yet another 47,000 workers? And why, with prosperity dead ahead on the horizon, would the service industry have laid off another 44,000 workers in April?
Economist David Rosenberg of Merrill Lynch looked at the data and asked the same questions. His conclusions, published in Barron's Magazine, are that the economy is not improving as advertised, that, in fact, it is still in trouble and that reality, "...foreshadows a further 550,000 plunge when the May data rolls out next month."
There is yet another offshoot of the economic troubles which have engulfed America and the world of late and it affects those who have just graduated from colleges or universities, or are about to. Graduates are now having a much more difficult time finding a job in their chosen career field, and, even if they are successful, their starting salaries are likely to be considerably lower than just a couple of years ago when college graduates were in high demand.
In a recently published article, Lisa Kahn, a Yale School of Management economist, correlated past data to come to the conclusion that, "...for each percentage point increase in the unemployment rate, those with the misfortune to graduate during the recession earned 7% to 8% less in their first year than comparable workers who graduated in better times", and, "The effect persisted over many years."
If this data is sound, and we have no particular reason to doubt it, then the effects could be dramatic in terms of reduced consumer purchasing power in coming years, given the fact that the Unemployment Rate in the USA has risen from a low of 3.9% to a present high of 8.9% in the past few years. People who earn less, buy less, particularly when it is the high-end earners who have larger discretionary spending ability who are seeing their salaries diminish.
All of this together makes us question the entire theory that artificially created currencies can create the basis for true, lasting prosperity. Therefore, we believe that as trouble areas continue to show up, the risks of such plans will become apparent, and to mitigate those risks, we hold to the opinion that many will turn to the historic risk hedge of gold.
Today's financial markets are headed lower with the Dow Industrials and Canada's TSX Index both down by more than 120 points at 7:35 PDT. Precious and base metals are trading moderately lower and mining share indexes are down by about 2.5%. Crude Oil is down slightly and the U.S. Dollar is ahead in currency trading.
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.