A Melman Minute — February 11, 2011

By far the most covered news event of the past two weeks has been the rioting and unrest in Egypt. News coverage has come from several directions with many stating that the people of Egypt are demanding "democracy" while calling for the end of Hosni Mubarak's thirty-year rule. When the Egyptian news is combined with the earlier demonstrations in Tunisia which led to the ouster of that nation's ruling monarch, some are suggesting a wave of new-found freedom will soon be sweeping across the entire Middle East.

We have out doubts and while we can only speculate at this time, our suspicions take two basic forms.

First, we cannot help but note that both Egypt and Tunisia were nominally pro-west and pro-America in particular and this same combination of emphases is what led to the Shah's downfall in Iran thirty-two years ago - and the subsequent emergence of fundamental Islam as the ruling body with the Ayatollah Khomeni at its head. What followed was indeed a reversal of pro-American activities, but to call Iran a free, democratic nation would be a gross exaggeration to put things bluntly. There are few political parties clearly advocating competitive economic policies or philosophies of government. Sharia law is the law of the land and Iran remains a virulently anti-American and anti-Israeli theocracy-dominated country.

Second, we doubt the "spontaneous" nature of the demonstrations. In fact, they seem to us to be organized and well-directed, just as were the demonstrations in Tunisia and those in Iran 32 years earlier.

If those suspicions happen to be true, then we would suggest that the basis for these "spontaneous revolutions" may in fact be a concerted attempt to bring the entire Muslim Middle East under the direct control of the world of Islam with a supra-national religious organization as the controlling body. Given previous statements about America being the "Great Satan" and Israel being a mortal enemy, we suggest the possibility that if such a body would aim to inflict as much damage as possible to the American way of life (which was Osama Bin Ladin's major contention following 9-11) then what better weapon is available than the ability to disrupt international oil transportation on a massive scale?

Iran already controls the Straits of Hormuz through which virtually all Persian Gulf oil flows. Theocratic control of Egypt would then give those same powers control of the Suez Canal which is the avenue through which huge quantities of oil are delivered to almost one billion Europeans.

The surprise at the moment is that both gold and petroleum markets have not reacted more strongly to these recent events. That would suggest to us that most people believe in the innocence and spontaneity of these "revolutions".

Perhaps the ensuing several months will give us a clearer picture of just what is going on, but we would suggest that the famous lines of W.S. Gilbert of Gilbert & Sullivan fame apply, namely,

"Things are seldom what they seem Skim milk masquerades as cream."

Several commentators have noted that while gold has risen somewhat over the past couple of weeks, a much greater move might have been expected, given the magnitude of the disturbances noted above. As can be observed from the daily chart of gold, the rally from the bottom near $1,315 has indeed been relatively restrained so far.

Action in the petroleum markets has also been similarly restrained with prices moving inside a relatively narrow trading range over the past several weeks, suggesting to us that there is little international concern regarding the petroleum delivery systems as yet.

We will keep close watch on both these important indicators of international stability over the coming weeks and months.

News continues to emerge which suggests that the potential for visible price inflation is rising. First we have seen sharp increases in both food and metals' commodity quotes which are a major factor in retail pricing. Next, we have begun to see a sustained rise in interest rates costs, yet another factor in doing business. Now, a third impulse toward rising inflation is coming into play. We are referring to the expectation of rising salary levels in the coming year.

Early projections call for wage increases of at least 3% in average salaries during 2011, a large gain over the 1.7% of 2010. During the worst of the 2007-10 crisis, many companies cut expenses to the bone and employees went along with such measures in order to retain their jobs. However, as retail conditions have improved, those previous cost-cutting measures are now resulting in higher reported profits and, therefore, demands for salary increases are now being heard with more force and consistency.

A recent survey by the Society for Human Resource Management suggests an average rate of increase in salaries of 3% for 2011 while the actual rate reported for January was 0.4%, or an annualized rate of almost 5%. Many companies are also reporting difficulty in finding qualified skilled workers since many technicians who lost their jobs during the past three years have fallen behind the pace of technical knowledge, or become too old to hire, or both. A diminishing supply of knowledgeable, employable workers combined with a rising demand level spells an expectation of rising wages - and that is what we are beginning to note.

One last comment...

While we have been impressed with the high level of vocal support for austerity measures in the USA and elsewhere, we continue to harbor the suspicion that such talk will not be followed by appropriate actions. A recent comment from the White House regarding Social Security would appear to confirm our suspicions. One month ago the White House suggested a combination of benefit cuts and tax increases to improve the sustainability of the Social Security system. However, the Wall Street Journal just reported that, "...the budget President Obama will release Monday won't include any specific proposals to alter Social Security."

It's a lot easier to "talk the talk" than to "walk the walk."

As of 9:15 AM PST, financial markets are little changed on the flow of Egyptian news with both the Dow Industrials and the TSX Index trading inside narrow ranges. Gold and silver are now undergoing one of their periodic, sudden sell-offs with gold now down by about $8 and silver off by 40 cents after having recorded gains earlier in the session. Base metals are slightly higher on balance; mining share indexes have turned down by about 0.5%; and the U.S. Dollar has strengthened in currency trading. Both long-term interest rate and crude oil quotes are moderately lower.

All quotes US$ unless otherwise indicated.

Next "Melman Minute" scheduled for Monday, February 14, 2011

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