A Melman Minute — May 13, 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!"

As regular readers know, we have a true affection for memorable thoughts expressed through the world of motion pictures. One of our favorite lines comes from "Godfather III" when Michael Corleone, played by Al Pacino, declares, "Every time I try to get out, they pull me back in!" We believe that line can serve as a useful analogy to a simple fact which many people have been quite willing to ignore. We believe that the very processes of economic recovery will pull the world back into two whirlpools from which it has only recently escaped; high oil prices and massive American trade deficits.

Our thinking is relatively straightforward. The consensus reason both situations have eased over the past twelve months has been reduced demand brought about by the economic contraction. As the demand for petroleum has eased compared to current supply, prices have fallen. Also, as petroleum prices have fallen, combined with a reduction in other imported goods brought about by consumer retrenchment, the U.S. Balance of Trade deficit has likewise fallen.

However, it can be clearly seen that should the governments of the world be successful in their economic stimulative efforts, it would appear that such reinvigorated economic activity will result in strong demand growth for petroleum and other imported goods, leading to higher petroleum prices and increased American trade deficits, which would require the U.S. Treasury to continue new dollar creation to keep the whole game going, just as was the case over the several year previous to the recent onslaught of economic troubles.

As we have repeated many times, there are no easy answers to the parade of woes brought on by massive fiat money creation.

That is one of our fundamental principles here at TMR and we continue to believe that gold and silver will move higher over time in response to such difficulties.

Anyone who believes that there will be a relatively easy, straightforward path to economic recovery, might decide to reconsider that point of view. Many different sources of troubles remain and a good case can be made that the implications of recent data point to accelerating difficulties rather than solutions.

For starters, the residential real estate pricing situation in America continues to worsen, despite the heroic efforts of the President, the Fed and the combined work of Fannie Mae and Freddie Mac. Just this morning, the National Association of Realtors just reported that the median price for a single-family home fell 14% during the First Quarter 2009, down to just $169,000. They also included the information that many first time buyers focused on foreclosed homes, which results in even lower prices.

Unfortunately for those hoping for an immediate reduction in that source of future low-priced offerings, the potential number of future foreclosures is rising, not falling. A report just released by RealtyTrac, Inc., which tracks such information, noted that the number of homes in some form of foreclosure proceedings had soared by 32% in April compared to the year-earlier figure. Even worse, the report noted that some foreclosures had been delayed awaiting some ameliorative government action, but RealtyTrac's release noted, "...the mortgage industry has resumed cracking down on delinquent borrowers after foreclosures were temporarily halted..."

A renewed parade of foreclosed homes entering the inventory of unsold homes appears likely to insure that residential home prices will not recover for some time, meaning that outstanding 'toxic loans' will not be re-invigorated and, therefore, the woes in mortgage lending and associated banks, savings & loans, etc., will not likely be resolved in what we believe is the only sound manner, namely an improvement in the underlying value of the collateral backing up those receivables.

All of this, in our opinion, implies that the governments of the world will be forced to continue their recent stimulative activities, which we likely result in a continued flow of newly-created currencies, upward revisions of governmental deficits, and continued major buying-decision hesitation among home-owning consumers who continue to see the value of their properties stagnate.

As if to confirm that hypothesis, the US. Department of Commerce reported that April Retail Sales fell by 0.4% during the past month, the eighth decline in the past ten months and a full ten percent below the retail sales levels of one year ago. The Commerce Department also noted that, "...Consumers are buffeted by massive job losses and flat wages. At the same time, they are struggling to pay down some of their debts."

On the retail front, major marketer Macy's reported that their loss for the First Quarter 2009 turned out to be greater than expected, amounting to $88 million for that quarter alone. Sales revenues shrank from $5.74 billion in last year's comparable period to just $5.12 billion this year. Doesn't sound to us like much of a recovery so far, does it?

Seldom have we seen a multitude of market analysts get as excited about a "turnaround" as we have seen during the March-May rally and one of the areas that has been the subject of intense commentary has been the presumed recovery in the banking sector. Indeed, there has been a relatively strong rally in that group, but, unfortunately, when a longer time scale is used, the recent rally seems a good deal less impressive than one might have initially surmised.

As can be seen on the Banking Stock Index chart, despite the rally, despite the in-pouring of hundreds of billions from government coffers, despite the public relations barrage that suggests all the stimulative and rescue programs are working - despite all of that, the index remains at less than one-third its peak value of less than two years ago.

Just a couple of additional notes on one of our other ongoing themes, namely the impending increase in taxation... Congress is now considering taxing existing health benefits in order to pay for their government sponsored health programs, cap-and-trade taxation is now moving forward through Congress, tax rate increases on the 'wealthy' now look like a sure thing and, as noted just a few days ago, huge tax increases on foreign earnings by American corporations are in the works.

It seems strange to us that at the very same time the government appears to be working hard to stimulate consumer purchasing power, it is moving ahead with one measure after another to take purchasing power out of consumers' hands via tax-grabbing.

Financial markets this morning appear to reflect some growing unease about the overall situation and are sharply lower as of 8:30 AM PDT with America's Dow Industrials and Canada's TSX Index both off by about 150 points. Gold is continuing its recent strong rally and now sits just under $930 per ounce, but silver and platinum as well as the base metals are down slightly. The U.S. Dollar has some lost ground in currency trading and the petroleum complex is trading close to unchanged.

(All figures in 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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