A Melman Minute — January 10, 2010

Isn't it strange how the same things - with minor variations - seem to happen over and over again? In fact, a foreign phrase, "deja vu", has been coined to cover such situations and our half-foot-thick dictionary defines the meaning of the phrase to be, "...a feeling of having already experienced the present situation." That describes to a "t" our reaction to the news that - surprise, surprise - Portugal is now likely to seek an international bailout regarding its present financial difficulties.

There seems to be a pattern between the present Portuguese situation and the events of a few months ago in Ireland. First the financial community analyzed the overall financial situation and determined that it was risk-heavy, causing yields on Irish government paper to begin to soar. Then the Irish government came along and verbally assured everyone that they had the situation well in hand and no bailouts would even be considered. Then, at long last, with the "greatest reluctance", they confirmed that discussions relating to an international bailout were underway.

In Portugal's case as is true of many other nations, the reason for the difficulties is simple. As a government, they have spent far greater amounts than they have taken in from legitimate tax revenues and have thereby incurred rising levels of indebtedness and now, it is becoming increasingly difficult to service both interest and principal payments. Ergo, debt failure is staring them right in the face and if that happens, currency failure could follow right behind - but there we come to the nub of the problem.

In past centuries or decades, if one relatively weak country such as Portugal defaulted on their debt, it could cause a minor disruption in commercial and banking circles, but historically, such difficulties were frequently overcome without great harm to the entire international economic structure. Zimbabwe is a case in point.

However, in Portugal's case, their home currency is not the Zimbabwean Dollar or anything of that nature, but it is, in fact, the Euro and Portugal's problems, mounted on top of those already "resolved" in Greece and Ireland, are beginning to convince many that the entire Eurocurrency structure is becoming unsound and since Europe (collectively) is the world's third largest economic entity behind the USA and China/India, that is no minor matter.

The five-year chart of the Euro illustrates what we believe is a major underlying change of momentum regarding faith in the Euro as a truly viable, sustainable currency. When it was first introduced more than a decade ago, the Euro traded in the vicinity of 80 to 90 cents US, but gradually rose as confidence in the European Economic Community solidified. The Euro gradually rose in value, finally reaching a historic top in early 2008 at US$1.60. However, since that time, the Euro has traced out a pattern of 'declining tops', first at US$1.52 in 2009 and now, more recently, at US$1.42 in late 2010 and the present short-term direction is clearly to the downside.

In our opinion, if the Euro goes into a period of rapid decline, perhaps approaching free-fall at some point, the strains on the international banking system could become severe, leading to rising interest rates as those risk levels increased. One consequence of those rising interest rates, should they take place, would be to put even greater stress on interest expenditures by already-overburdened government financial structures.

It is also important to consider the fact that Greece, Ireland and Portugal are not likely the end of the build-up of Eurocurrency stress as concerns are rising that Italy, Poland, Hungary, Spain and Belgium have also entered a period of rising budgetary and financial difficulties and, particularly in the cases of Italy and Spain, the Euro amounts are comparatively much larger that the trio mentioned above.

At TMR we believe that the strains on the entire EEC are simply part and parcel of a much larger picture, one where unlimited currency creation over the past eight decades combined with governmental profligacy at an unsustainable level has left the world facing an ominous array of monetary problems, an array which we believe will grow increasingly difficult to successfully resolve.

Ergo, we continue to believe that powerful forces are building which could support significant price increases for the widely-regarded countermeasures of unbacked fiat currencies, namely gold, silver and platinum.

Analysts have now had three days to work on the US Department of Labor's December jobs report and it appears that there was good news and there was also bad news. The good news was that the Employment Rate dropped from 9.8% to 9.4%. The bad news was that the drop was not caused by a surge in new jobs, but rather came about as a result of more workers leaving the ranks of those actively seeking work, thereby reducing the number of those "officially unemployed" and thereby reducing the published Unemployment Rate.

There was also wide agreement that the net number of new jobs gained for the month, 103,000, was not sufficient to begin making any sort of dent in the total jobs picture as most analysts agree it will take a monthly new job creation figure of 200,000+ before genuine improvement can take place.

It was also noted that the average work week remained static and the average worker's wages also remained static and both of those must also show some steady improvement before a genuine recovery in the employment picture can truly take place.

We would also offer the personal comment that if this total employment situation is the best that can be accomplished by throwing every Keynesian remedy in the book at the overall economic situation, then perhaps economic leaders of America and the Western World should begin to look elsewhere for solutions.

One other personal observation we might note relates to the use of "weasel words", meaning words which are deliberately designed to evade unwelcome topics and mislead or at least confuse the public. We note an example from Fed Chairman Ben Bernanke over the weekend when he assured the public that, "...we have no expectation or intention to get involved in state and local finance...The states should not expect loans from the Fed."

To the best of our knowledge, no state has ever expected help from the Federal Reserve Bank, and, therefore, Bernanke's statement is of little value, other than as a public relations ploy to make it appear that the various states in extreme difficulties, such as California, Illinois and New York, will receive assistance. However, we believe that a more accurate statement would be that the federal government in Washington will, despite all the rhetoric, rescue the states from their otherwise insoluble situations and the Fed, via Quantitative Easing, will enable such actions by purchasing resultant federal government debt written to perform those rescues.

We shall see.

As of 8:30 AM PST, financial markets are somewhat lower as a result of Portugal's problems, with the Dow Industrials off by about 70 points and Canada's TSX Index down by about 100. Precious metals have been relatively quiet with the quotes for gold, silver and platinum near $1,370, $29.00 and $1,750 respectively. Base metals have traded about 1% lower so far this morning and mining share indexes are off slightly. Crude oil has gained $1.50 to approach $90.00 per barrel once again; the US Dollar Index is slightly weaker in currency trading; and long term interest rates are down moderately.

PERSONAL NOTE - We are horrified to note that once again mindless, senseless violence has taken place in the form of the murders and injuries inflicted in Tucson, Arizona which included serious injury to an American Congresswoman and, by ironic coincidence, the death of a young girl born on September 11, 2001.

All price quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Wednesday, January 12, 2011.

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