A Melman Minute — June 15, 2011

Note: Due to a very early morning flight, this is being completed prior to the opening of Wednesday's morning openings.

Markets on Tuesday rallied sharply, specifically including the recently quiet commodity markets, with gold, silver, the base metals and the petroleum complex all headed higher. At the other end of the scale, the US Dollar and long term government bonds all fell sharply. It may seem strange at first glance that higher prices for commodities combined with a falling US Dollar would send securities markets into a buying splurge, but, in our opinion, anything which might alleviate concern about a possible double-dip recession will be met with an optimistic reaction.

For the financial markets, the key was an article which indicated that fears of a slowdown in China might be somewhat overblown as well as an increase in merger & acquisition activity. We believe that there was another factor at hand, namely that markets had become oversold for the short term and bargain hunters were anxious to jump in and take advantage off some apparent 'bargains'. Whether they turn out to be bargains in the long run is yet to be seen.

Greece just entered a new phase in its struggle for international financial respectability, but it was hardly the kind of news that nation might have desired. We are referring to a revision in their overall credit rating from Standard & Poor's rating agency which dropped the rating on Greece's government bonds to THE LOWEST OF ANY COUNTRY ON EARTH.

Simply put, S&P now fully expects a default of one manner or another on Greek debt paper. The most interesting question for us is just how far the rest of the European Community is willing to go to keep up the fiction of Greek solvency. They are running horrendous deficits, their unemployment rate is already in Depression territory, their economy is collapsing and, to put things bluntly, by our interpretation of fundamental economic data, there is not a hope in hell of Greek debt being paid off in valid currency unless some other nation or group of nations is willing to put up money which it knows in advance is never likely to be rapid in currency of any real value. We think the list of rescuers is growing shorter day by day.

In the meantime, despite the fact that their country's finances have fallen into the proverbial toilet, Greek civil service unions continue to demand that austerity measures not be instituted if it will cause any pain or harm to the slightest degree. Exactly how Greece is ever to crawl out of the hole into which they have descended unless they cut government spending is never made clear. All the unions know is to demand more rewards, regardless of the nation's ability to pay.

THAT is one of the cornerstone's of our philosophy at The Melman Report, namely the reality that governments have a monopoly on the services they offer, that civil service unions have monopoly control on the workers who provide those services and, therefore, a few union leaders can exert a dramatically disproportionate influence on the running of the entire governmental structure of a given nation.

We are now getting a case lesson of that reality here in Canada. Thanks to Internet, e-mail payment of debt and a new array of communication services, the volume of physical mail continues to drop, taking Canada Post's revenues down in the same spiral. However, the Canadian Postal Workers Union has just gone out on strike demanding no reductions in salaries or pension benefits and, of course, they would fight any reduction in personnel tooth and nail. However, not one union leader has stepped forward to explain how a business with steadily declining revenues is supposed to continue salaries and benefits at current or even increased levels.

In our opinion, it is as if some deep-seated belief exists among huge numbers of the public that there is some sort of financial 'tooth fairy' out there that can provide for their demands no matter the economic reality which exists.

We believe the public will learn a very painful lesson in the not-too-distant future, that such a tooth fairy most certainly DOES NOT EXIST.

Next Melman Minute scheduled for Friday, June 17 depending on Internet availability from the mining fields near Timmins, Ontario.

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