A Melman Minute — February 22, 2011

A truly significant number of major events are taking place within the present general time frame so let's take them one at a time.

Clearly, the greatest headline-grabber and market-mover of them all is the high level of uncertainty and fear generated by the unrest in Libya as the 42-year reign of Moammar Kadhafi appears ready to collapse. Unlike Egypt, where similar unrest toppled the lengthy rule of Hosni Mubarak, this revolt has not been peaceful, but has instead been met with murderous violence on the part of the government. Because virtually all communication with the outside world has been severely curtailed, it is difficult to receive reliable information, but it appears hundreds have been killed by military action.

Yet another deepening concern is Israel's growing feeling of isolation within the Arab world. Long-time security agreements with Egypt and Jordan are already threatened and Egypt has just permitted Iran to move warships through the Suez Canal, a major waterway located just a short distance from Israel's western border. Organizers of the recent Egyptian uprisings have also joined in the calls for action against the "Zionist Entity."

Those fear factors were evident in early petroleum complex trading with the widely traded Crude Oil contract reaching $98 before correcting slightly while gold and silver soared, reaching near $1,410 and $33,50 respectively before also undergoing some corrections.

Oil and Arab unrest were hardly the only items worthy of mention. Among the others we found was a story which in our opinion defines much of the sense of unreality now pervading commentary on the immense budgetary difficulties faced by governments at virtually all levels.

The case in point is New York State which now must resolve an anticipated $10 billion deficit. In response, incoming governor Andrew Cuomo unveiled an 'austerity' program which contained $982 million in proposed cuts! Exactly how proposing cuts of less than $1 billion is supposed to resolve a budget deficit of $10 is beyond our understanding - but the situation gets much worse.

Due to new services mandated by Obama Care, the costs of New York State's Medicare program is expected to rise from $53 billion to sixty billion - a gain of $7 billion which would increase that state's deficit to not ten billion, but seventeen billion!

No one has offered a credible plan to balance the books for all levels of governments other than borrow more money,, paper over existing debt and hope that the Band-Aids hold together until the next election. In our view, that is a sure pathway to future catastrophe.

This sense of unreality also seems to pervade the entire situation regarding the Wisconsin Teacher's protest actions by which they are denouncing the Republican governor's attempts to balance that state's budget by limiting future pension increases, increasing payments into their pension plans and limiting the influence of public service unions influence in future negotiations with state employees.

But the teachers - and others - don't like any set-backs and they are demanding a reversal of the new policies. However, what they are NOT OFFERING is a credible plan to balance the sate's budget while maintaining all the immense benefits which already accrue to civil service employees.

The Wisconsin events are part of a growing level of animosity between civil servants and the general public which is growing tired of paying for their outsized benefits and also growing increasingly envious of their seeming lifetime guarantees of employment compared to the high levels of uncertainty gripping the private labor markets. In fact, many commentators note that the public is coming to believe that public service unions are designed to exert continual political pressure to loot the general public to the greatest possible extent - and they don't like it.

Politicians of the Right are generally aligned with those public concerns while those of the Left appear aligned with union forces - and that struggle is now spilling over into the rising tensions evident in Washington as the Debt Limit Increase measure moves forward in Congress. Time is running out as the National Debt is now within less than $20 billion of the previously-set limit - or barely one month at the present rate of debt accumulation - and both sides appear to have positions case in concrete with little 'wiggle-room' on either side.

We will note more stories of the same nature tomorrow.

As of 9:45 AM PDT, financial markets are down sharply with the Dow Industrials down about 140 points and Canada's TSX lower by 60. Precious metals have retreated from their highs with gold near $1,400 and silver trading at $32.88 while base metals are off moderately and mining share indexes are close to unchanged. The US Dollar has surprisingly moved very little, interest rates are lower and the entire petroleum complex remains much higher on the session.

All quotes US Dollars unless otherwise indicated.

Next "Melman Minute" scheduled for tomorrow, Feb. 23.

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