A Melman Minute
| By | Leonard Melman |
|---|
One of the nicest things about extensive travel is that when you return, you realize how good it is to get back with family, a familiar home environment and a normal writing studio computer set-up. That is surely the case this morning following my appearances at the recently-concluded Cambridge House Resource Conference in Phoenix, Arizona.
During the return auto trip, two incidents struck as somewhat typical of the new, high-stress economic environment now facing several American states.
While spending a few days with my son in Los Osos, California, a beautiful sea-side community midway between Los Angeles and San Francisco, I noted bitter commentary in the local press regarding brutally high new traffic fines which had been recently imposed on the California population. Even the political establishment made no bones about the fact that the new high-level fines were enacted for the specific purpose of adding to municipal and state revenues.
Some of the fines were astonishing, such as more than $300 for making a right turn without coming to a complete stop and fines of over $400 for speeding infractions involving only a few miles per hour over the posted limits. Fines for such offences as not wearing a seat belt and even parking violations were also slated to rise sharply.
Washington State is also moving in the same direction. During the years I lived in Spokane, WA, the state sales tax rate ranged in the vicinity of 5-7%. When the bill was presented at a Washington restaurant this past Saturday, I noticed the sales tax component was ten percent. The restaurant manager told us that the rate had recently been raised and apologized for the imposition, but added that the state's Governor, Christine Gregoire, had stated that sales tax increases were necessary to ease the budgetary bind in which the state finds itself.
There is an enormously important battle shaping up and the results could have a major impact on our world of precious and base metals mining investments. The battle is for the financial soul of the Western World. If that sounds excessively exaggerated, please consider some of the matters now coming to a head in the struggle for financial stability versus the continuation of government "services" at a ruinously high level, a level to which the majority of the world's voters have become accustomed.
An important election was just held in Ireland, and the results cannot have gone unnoticed by the political establishments of several nations. After negotiating a "rescue package" for Ireland which saw the European Economic Community save the Irish banking establishment at the cost of imposing tight austerity measures upon the Irish citizenry, that citizenry showed their appreciation for the fine services of the ruling Fianna Fail Party by blasting them to electoral purgatory over the weekend. Prior to this just-concluded election, Fianna Fail held a majority of the Irish parliament's 166 seats. After the election, they had been reduced to trivial status, now holding less than 20! It also did not help Fianna Fail that one of the results of the recently-imposed austerity measures was mass emigration out of Ireland by tens of thousands of Irish citizens who had obviously concluded they had to leave the "Emerald Isle" if they were to improve their lives.
The lesson other politicians appear to be absorbing is that while the electorate may appear to tolerate austerity general austerity measures, when their own favored programs begin to vanish, they turn hostile.
That lesson appears to be taking hold in America, where the desire to slice deeply into federal programs seems to be abating. As the crisis relating to the limit on government debt is reaching a crescendo, most Republicans as well as virtually all Democrats now appear to be willing to find compromises which will keep government open and operating. Program cutbacks are being eased and temporary spending 'solutions' are being negotiated between leaders of the two parties. As Democratic Senate Budget Committee Chairman Kent Conrad put things, "...making steep budget cuts during fragile economic times is risky. Does it make sense to do so? I don't believe it does." Apparently, the number of Senators and Representatives who agree with that general concept is growing.
We interpret this latest move to mean that dramatic cuts will not be made, horrendous budget deficits will continue and the upward pressures on monetary creation and dollar devaluation will also continue or even escalate. Ergo, we remain bullish on the precious metals over time.
During the lengthy drives of the past few days, the talk show airwaves were filled with articles and opinions regarding the union-government showdowns in states such as Wisconsin, Indiana and Ohio. For those not familiar with recent events, those three states are attempting to impose limitations on civil service unions and the unions are fighting back on a united front. Pro-Union supporters, specifically including Senate Democrats in those states, have fled beyond the state borders in order to not be present for any such votes and a stalemate has occurred.
However, it will not last long as governors of those states are now talking about imposing layoffs and outright job cuts on state civil service employment. As of this morning, the impasse continues.
It is all part, in our opinion, of the same struggle. Governments have spent much more money during the past several years than they have received in tax revenues and the deficits have mounted. Unlike the Federal government, states cannot print money and they have now hit a brick wall where spending cuts must be imposed or debt failures loom directly ahead.
However, the civil service unions - who many among the general public believe are the essential cause of the problems - refuse to accept new limitations to their powers and the resultant impasse is growing steadily more confrontational.
There appears to be a parallel to the Irish situation where corrective actions is needed, but is also politically unpalatable in many cases. The next few days and weeks could be critical.
Two particularly important charts appear to indicate the precariousness of the present situation. We are referring to gold and Crude Oil.
Gold continues to rebound from its recent low levels near $1,310 per ounce and now appears ready to challenge the previous peak area in the $1,430's. We believe a breakout above that level could easily point toward an acceleration of many of the world's problem areas of late.
Crude Oil is also making its share of world headlines and now appears to have entered a new trading range centered around $95 to $105 and is beginning to approach historic highs above $140 per barrel. As with gold, a breakout above both current levels and then making historic highs would suggest serious problems lie ahead.
As of 9:40 this morning PST, markets have focused on positive news such as better anticipated employment numbers to be released Friday and financial markets are headed higher with the Dow Industrials up by about 80 points while Canada's TSX Index has gained 60. Precious metals are stronger with gold now near $1,415 and silver approaching $34 per ounce while base metals are also showing good relative strength. Mining share indexes are up by about one percent; crude oil is holding just under $98 per barrel, interest rates are close to unchanged for the session and the US Dollar Index has dropped below the 77 level, the lowest such figure in several months.
All quotes US$ unless otherwise indicated.
Next "Melman Minute" scheduled for Wednesday, March 2