A Melman Minute — June 1, 2011

NOTE: Mr. Melman will be speaking at the upcoming Cambridge House Resource Conference in Vancouver, scheduled for Sunday, June 5 and Monday, June 6. He will be offering a PowerPoint presentation entitled On the Road to Hyperinflation Revised June 2011 at 11:00 AM, June 6 and will appear in a panel presentation at 5:30 that afternoon which will be devoted to the subject of gold. (We have just been advised that due to the Vancouver Canucks Stanley Cup championship game scheduled for Monday, the late panel may be revised or eliminated.)

LONG TERM STRATEGY UPDATE

We have watched a fascinating script unfold in terms of worldwide economic and social policy in general and that of the United States (the worlds most important economy) in particular. Taking a long-range look, we find relentless pressure to expand the strength, intrusiveness and social welfare functions of government developing in the 1930s and continuing relentlessly ever since. Since this expansion required massive doses of governmental spending far beyond the monies which would be available within a rigidly enforced gold standard, we saw the gradual abandonment of any such standard since the 1930s, leading to the situation today where the world floats in an ocean of artificial, fiat, unbacked currency.

However, the vast majority of the worlds citizens continue to believe that such money is still capable of fulfilling its function as a reliable medium of exchange and so, the enormous infusions of new money have been able to support a time of general prosperity, but one important item must be taken into consideration; it takes greater and greater quantities of new money to generate a given quantity of economic growth.

As a result, one of the bedrock concepts at The Melman Report is that we have now entered an era where the very ability of the government to stimulate economic growth is coming to an end, that it will be followed by slower economic growth in each cycle until there is virtually no growth at all and, when that time arrives, governments will be desperate enough to take any action, no matter the long term costs, to get the economy moving again! When that day arrives and we believe it is not too far distant it is our belief that the gates of potential hyperinflation will be thrown wide open and a period of substantial opportunity will take place within the realm of precious metals investments.

With that in mind, it is worth reviewing how the economic world has developed over the past few years. We have witnessed the 2007-09 collapse of banks, housing, manufacturing and securities markets, accompanied by huge increases in both national debts around the developed world as well as artificial money creation designed to restore order and strength to financial systems.

For a while, it appeared that the solution would work as economies seemed to rebound smartly and many observers forecast a period of immense prosperity where governmental deficits would turn to surpluses, debt would be eliminated, prosperity would reign supreme and utopia would be achieved at long last. We would, in fact, point out that the ability to achieve exactly that end was the highlighted feature of Barak Obamas 2008 successful presidential campaign with its slogan, Yes, We Can!

Quite suddenly, it now appears that the road to economic utopia is encountering new and perhaps ultra-serious obstacles which may be indicative of a new and perhaps more ominous period of stagnation or even contraction a period the world can ill afford in its current situation laden with huge indebtedness, deficits and already bloated rosters of government largesse recipients.

Here are some of the indicators from America that are sending off signals that all may not be well within their realm of economic statistics.

EMPLOYMENT New information just released by ADP Incs private hiring polls indicates that the job growth figure for May might come it at under forty thousand, far below forecasts of 175,000.

HOUSING Home prices have now sunk to levels not seen since 2002, wiping out an entire decade of home value growth. This has proven to be a double whammy for the consumer-driven economy as declining values have meant contracting net worth for consumers, thereby limiting purchasing power, and there is also a negative psychological impact to such declines as well.

MANUFACTURING The Institute for Supply Managements Manufacturing figures for May show a sudden drop to 53.5 from the April reading of 60. The New Orders and Production indexes also showed sharp declines during May.

AUTO SALES General Motors just announced that their May auto sales declined by 1.2% following a 26% gain in April while Fords numbers followed a similar pattern.

America is not the only major economy suddenly showing strains. Similar reports are being received from Ireland, the U.K. and Asia.

Perhaps the most startling news of all and one which carries huge implications for future international economic growth is the suggestion that expansion rates for both China and India or Chindia are about to decline, perhaps sharply. India just announced that their First Quarter GDP growth came in at 7.8%, compared to a year-earlier 9.3%. Auto sales growth in both China and India is beginning to slow and China just reported that their Purchasing Managers Index declined from 52.9 in April to 52.0 in May not much of a decline, but in terms of China for the past twenty years, any decline is newsworthy.

Economic data from the U.K. has also tended toward the negative lately as housing prices are once again declining and it was just reported that mortgage lending has now fallen to a four month low. Great Britains manufacturing sector also slumped badly last month with that nations Manufacturing Index declining from 54.4 in April to 52.1 in May, its lowest level since September 2009.

Meanwhile, the situation for Irelands housing market looks particularly grim. An article in the Times of London reports that ghost estates, or unsold properties that skirt the countrys cities and towns are driving net demand for new housing to exceedingly low levels and Ernst & Young accounting firm is quoted as saying, ...Significant new private housing will not be needed over the next five to ten years. (Our emphasis)

In our opinion, there are sufficient pieces of negative economic data to call the entire economic expansion into question and we believe that if that is truly the case, financial authorities will not hesitate to take every possible measure to support their economies, not matter how severe the potential economic damage.

Markets may be getting a whiff of these troubles as financial markets in Canada and the USA have moved sharply to the downside and, by 10:15 AM PDT, the Dow Industrials were down by 200 points and Canadas TSX Index was off by about 130, despite strength in gold mining as gold soared this morning to a recent recovery high of near $1,550 per ounce. However, silver and the base metals have shown weakness and major mining share indexes are now headed lower after showing earlier strength.

In other markets, long-term interest rates continue their decline; crude oil is off by about $1.00 per barrel and the US Dollar Index is showing new weakness, trading near 74.50.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Friday, June 3.

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