A Melman Minute — April 4, 2011

NOTE: With the United Stated debt limit confrontation nearing its final stages, we believe it is worthwhile to inform our readers regarding just how close the USA is coming to a final showdown. Therefore, until the crisis is resolved, we will lead off each Melman Minute with the most accurate reading of the current national debt versus the authorized limit and the difference between the two figures.

US National Debt, Monday, April 4, 2011 - $14.270 trillion

Authorized debt limit - 14.294 trillion

Difference - $24 billion.

In line with the above information, many businesses dependent upon continuing government contracts are already bracing for what might happen if an extension on the debt limit is not passed. Many smaller companies which are on the receiving end of government contracts or which benefit from government expenditures for infrastructure improvements are warning of impending layoffs if the debt limit is not raised. Of course, much of this kind of talk may be nothing more than self-serving spin.

The battle lines are drawn and the time is rapidly approaching for a true resolution. We can only speculate on the resultant market activity, depending on the direction of the resolution, but our opinion shades toward a rally in the precious metals if the debt limit is increased. In our opinion, that would be an indication that the American Congress simply lacks the resolve to rein in spending.

As if often the case, when governments take specific courses of action in order to create a favourable response, there are frequently reactions which severely damage the interests of a differing group. That has surely been the case with the deliberate policy of the Federal Reserve to drive short-term interest rates to near zero. While some economic stimulation may have taken place, those same low rates have jeopardized the very economic existence of millions of senior citizens who now find no reliable, moderate return on their savings assets.

Recent reports indicate that during January 2011, the average rate of return on short-term, safe-and-secure time deposits had fallen below one-quarter of one percent. Put in terms of simple mathematics, an individual or couple who had managed to save $200,000 and invested those funds in short-term secure investments could expect to receive an annual income of approximately $500 or barely $40.00 per month.

Such a trivial return is far below what they might have expected to receive during the years that pool of capital was accumulated. For much of the past two decades, a normal expectation might have been 7-8%, or an annual income on $200,000 of $14,000 to $16,000 or about $1200-1300 per month, a worthwhile addition to social security, other pensions, etc. This state of affairs is hitting retired people hard.

Richard Fisher, president of the Federal Reserve Bank of Dallas, was recently quoted regarding the hit seniors are taking. He said, ``...Americans who have done everything right; have worked hard, have saved their money and stayed out of debt are the ones being punished by low interest rates. This state of affairs is not sustainable for a long period of time.``

Low rates are also a disincentive to anyone contemplating building up a reserve of capital assets and that could have long-term consequences when it comes to creating future pools of funds for capital investments.

Seniors are high percentage voters and their dissatisfaction could have a profound effect on the elections of 2012.

Speaking of that election, President Obama has just filed formal papers declaring his candidacy to run for re-election in 2012. While it comes as no shock whatsoever that he is planning such a run, the timeliness of this announcement caught many by surprise, considering its relatively early date. Quite naturally, the President assured one and all that his focus would remain on performing his duties as President, but this action still raised fears that he would actually be working more toward re-election than keeping his attention squarely on current situations.

There was also speculation regarding the cost of the upcoming Presidential campaign and several political analysts now estimate the total cost of the 2012 campaign will run above one billion dollars.

It occurs to us that a massive contradiction will be coming into play. Huge numbers of the public are calling for reductions in government, but our experience has shown that contributors of the size required to raise such vast sums expect rewards for their `investments` and Obama may find it difficult indeed to reconcile both objectives at one and the same time.

Yet another shoe has fallen in the resurgence of the Eurocurrency mess across the Atlantic with the announcement that the Spanish Prime Minister, Jose Luis Rodriguez Zapatero would not seek re-election to his post, despite the fact that he is a relatively young man at 50 and he is fully eligible to run again. News reports attribute his decision to fears that unless he vacates his office, the Spanish public will inflict massive damage to his political party at the next election.

Despite his best efforts, Spanish debt is being down-graded, interest rates on that debt are rising, inflicting further obstacles to any efforts to balance the budget, and the country is still being crushed under the weight of a 20% unemployment rate.

As if Europe didn`t already have enough difficulties to handle, Kornelius Purps, an interest-rate strategist in Munich told Bloomberg News Service that, ``we are in an environment where inflation expectations are moving up.` and that could be an additional influence to drive interest rates higher.

However, in the meantime, long-term interest rates have entered a period of narrow trading centered on the 120 level with strong support near 115 and resistance above 125. As long as Treasury Bonds trade within those limits, decisive action over the near term in other markets such as the precious metals, currencies or even agricultural commodities appears unlikely.

As of 9:45 AM PDT, markets this morning are showing similar patterns to last week with financial markets neutral to higher, precious metals somewhat to the plus side with gold once again pressing against the $1,440 level and silver close to $38 per ounce and base metals are a little lower on average. Mining share indexes are trading to the upside while Crude Oil has moved above $108 per barrel. Long term rates are little changed this morning and the US Dollar Index is holding close to the 76 level.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Wednesday, April 6

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