A Melman Minute — June 20, 2011
| By | Leonard Melman |
|---|---|
| Date | June 20, 2011 |
PHILOSOPHIC STATEMENT:
It is worth repeating one of our favourite quotes at this time, authored by the renowned Winston Churchill. It reads:
Those who are possessed of a definite body of doctrine and of deeply rooted convictions upon it will be in a much better position to deal with the shifts and surprises of daily affairs than those who are merely taking short views, and indulging their natural impulses as they are evoked by what they read from day to day. (The Gathering Storm, Chapter 12)
Churchill was probably referring to those who reacted to news out of Germany by skittering back and forth as opposed to his own deep-seated convictions regarding the vast potential for evil from the Nazi Empire, but at The Melman Report, we believe the concept of basing an understanding of the flow of events upon long-held economic and social principles is just as valid.
One of the concepts we have held for many years is that the primary concern for most politicians is to remain in power, or even to increase their leverage over the public and, as a result, governments are loath to take any actions which will truly alienate large numbers of the voting public. As a result, politicians have an in-built desire to pander to public wants, even when they possess inner knowledge that such actions could prove most dangerous to long term economic and social stability.
As a result, we believe that the long term influence of such pandering on fiscal responsibility and stability can be profoundly negative and, therefore, physical possession of precious metals, as a protective counter-measure against currency profligacy normally required to finance the generosity of governments is a prudent action. In addition, given our belief that the forces which tend to propel precious metals higher over time can break out into decisive, shorter-term rallies, we also believe that from time to time, valid trading opportunities for significant capital gains in a variety of mining investments will also take place.
Within that line of thinking, we have two pieces of evidence to support our central theme that governments will do virtually anything to avoid genuine pain from spreading to the body of the (voting!) electorate, no matter how fundamentally necessary such actions might be.
First, as reported by Reuters in a Washington, D.C. datelined article, it appears that Congress and the President will agree on a short-term resolution to the growing confrontation relating to the presumed necessity of raising the authorized limit on the size of the U.S. National Debt. That limit currently stands at $14.294 trillion while the current National Debt figure at $13.444 trillion is well in excess of that so-called limit.
In our view, the size of the debt is related directly to excessive government spending, far above its ability to raise valid taxation revenues. This has created budgetary deficits which have now accumulated into the current figure. It would stand to reason, then, that the genuine solution would be to reduce spending to a level sustainable by current revenue, but that would involve cutting back or eliminating an enormous number of federal programs, many of which have become an integral part of the lives of millions of Americans. The political establishment obviously wants to avoid making such choices which would have been required if a hard resolution to not increase the authorized debt limit was passed.
However, at the same time politicians are smart enough to realize that a substantial portion of the electorate also knows that the present situation of ever-expanding debt is fraught with peril down the road and they want something done. Therefore, there is political risk in actually authorizing a huge increase in the debt limit, such as the presently-proposed two billion dollar figure which would suffice to get over todays emergency, but would inflict an even greater problem down the road.
And so, it appears politicians have found the ideal answer in the policy of temporization, namely offering a short-term solution which will last a few months while further investigation takes place to find a longer term solution, leading to the following statement from the Reuters article: Congress and the White House could raise the U.S. debt limit for a few months while they seek a comprehensive, long term budget deal...
In the current economic vernacular, this is known as kicking the can down the road.
Second, the crisis in Greece has now reached a particularly dangerous place. On the one hand, Greece clearly cannot repay the next bond issue coming due in just a few weeks involving some six billion Euros. If Greece cannot come up with the necessary funds, which they are indeed unable to do on their own, then the bonds will be in default and holders, many of whom were counting on receiving those funds in order to finance their own current obligations, will be left out in the cold for having trusted the Greek government. Even worse from the international communitys point of view, many of those bonds are held by major banks who would be faced with writing the value of defaulted bonds off their asset books should Greece fail to repay on time, thereby perhaps causing some banks to fail, creating yet another layer of crisis.
As we see things, the situation in Greece has the same cause as the one in America, namely excessive government spending compared to taxation revenues with the result being a huge build-up of debt obligations and, in a similar manner, the only true answer is a dramatic reduction in government spending. That is what the international financial community wants from Greece before it will loan out fresh funds to cover the short-term obligations coming due.
But there is a serious problem. The citizens of Greece have been coddled by government largesse for so long that they consider such payments as a right and they will not submit meekly to having such largesse removed. Rioting is now taking place in an ever-accelerating crescendo and now has reached the point where unions are threatening to partially shut down the Greek electric system, thereby leading to periodic brown-outs which could severely impact daily life, both economic and social.
And so, we arrive at a similar situation to that of America. Hard choices should be made between severely cutting back government expenditures and/or allowing the government to default on its debt and suffer the consequences. However, the political establishment wants neither and so we have a Bloomberg News headline out of Greece this morning that, ...European governments weighed withholding half of Greeces next twelve billion Euro aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the Eurozone into crisis...
In other words, we believe this is just another version of kick the can down the road, the great danger of such policies being that financial problems are not like fine wine. They do not get better with age. They tend to get much worse.
We have always believed that there is a difference, subtle though it may be, between gold as a virtually pure monetary precious metal and either platinum or silver which have a much larger industrial component. The following two charts could illustrate that point.
As can be seen on the one-year chart for gold, the latest drop in price was relatively shallow and short-lived, with gold having already returned to within $30-40 of its all-time high.
However, it can be seen that platinum has been much weaker of late, particularly where the influence has been declines in other commodity markets, and the white metals is now more than $140 below its recent peak area.
As of 8:15 AM, financial markets in Canada and the USA have improved from their opening levels with the Dow Industrials now ahead by almost 50 points while Canadas TSX is ahead by about 30. Precious metals are mixed with gold trading unchanged at the $1,540 level while silver is off slightly to about $35.80 while platinum is also trading lower. Base metals are slightly lower on balance while mining share indexes are little changed.
In other markets, Crude Oil continues to show weakness, now trading under $93 per barrel while long term interest rates are little changed and the US Dollar is trading very slightly to the downside.