A Melman Minute — October 3, 2011
| By | Leonard Melman |
|---|---|
| Date | October 3, 2011 |
On a personal note, it is good to get back home to the familiar surroundings of my welcoming writing studio, accompanied by my library, sources of media and Internet information and other ‘tools of the trade’. Vacations are indeed wonderful – specifically including eight days spent with my son in beautiful coastal California – but it is also a pleasure to get back to full-time writing. And there is much to write about this morning, particularly as it affects our world of precious and base metals mining.
There is a clear split among the metals we watch most closely at “The Melman Report.” Those metals which relate to industrial production once again moved to the downside early this morning while the monetary metals, namely gold and silver, are showing good gains on the openings. This action appears to mirror developments in the real world which demonstrate a spreading belief that the world has re-entered a period of ‘no-growth’ to actual negative growth over the coming months and perhaps years. At the same time, a growing number of indicators point to potential serious disruptions on the economic and currency fronts.
One of the most interesting pieces of data we review on a regular basis is entitled “Foreign Holdings of US Government Debt.” We noted a few weeks ago that over the preceding weeks it was beginning to flash signs that all was not well. Those early signs are now flashing ‘bright red’
During the past several years, those ‘foreign holdings’ have known only one direction and that has been to grow relentlessly. The only question was just how fast that figure was expanding and, for several years, that rate of growth hovered around the $400 billion per year mark. What we have been watching for is a reduction in the rate of such growth for that could indicate a loss of momentum in foreigners accumulating such debt – and that is what occurred several weeks ago.
What has happened in the past five weeks has been much more remarkable as the latest date indicate that the rate of growth for the past five months has been ZERO and, quite astonishingly, the figure for the October 1 report shows that those foreign holdings have dropped by fifty-five billion dollars over those most recent five weeks.
It is difficult to over-state the implications of this figure. If foreign nations are beginning to dishoard their holdings of US government debt and the US government deficits continue to pile up at the rate of better than one trillion dollars per year, one can only ask just how the US government intends to finance such massive deficits without the help of foreigners who have carried much of the budgetary load during recent years. One answer, of course, is to make US debt more attractive by offering higher interest rates, but that would fly in the face of everything the US Federal Reserve Board is trying to accomplish.
Therefore, at TMR, we consider the emergence of this problem as yet another indication that financing of deficits will be accomplished by an acceleration of fiat money creation on a massive scale and, in our opinion; this constitutes one of the strongest arguments for continued holding of monetary precious metals for currency insurance purposes.
There is yet another factor which is (finally!) coming under increasing attention as the political season begins to heat up. We are referring to what might be entitled “over-regulation.”
There is a train of logic which informs us that for businesses to earn profits, they must function efficiently and, when confronted with massive volumes of government laws and regulations, business efficiency declines and monies which could be spent on product and service development are squandered in legal and regulatory expenses. This diminishes operating profitability which diminishes government taxation revenues which compounds the budgetary deficit problems referred to earlier. In addition, many companies not only suffer through declining profitability and even some level of operating losses, but we believe many marginal companies are forced out of business entirely by the onerous requirements of many of these regulations, particularly including the ominous Dodd-Frank financial regulation law which came into effect during the past year. Such closures only exacerbate the already-perilous job situation.
Anyone who believes that concern about over-regulation is invalid hasn’t been paying attention to what is going on in the real world ‘out there’. Some examples are decidedly worrying while others are almost humorous.
We noticed one of the latter type during our vacation when the San Luis Obispo Tribune carried a front page story that four out of five city counsellors were not obeying the new ‘garbage can visibility ordinance’. Yes, there really is such a law on their by-law books! According to this law, garbage cans must be kept out of public visibility until garbage collection day and then must be hidden once again within 12 hours of such collections. The “Tribune” actually sent a reporter and photographer to the homes of city counsellors to try to discover such ‘criminal’ activities.
While some of what we refer to as over-regulation is merely annoying – such as the above example – some of it can be deadly serious in the difficulties such laws represent. Here are some of the more interesting we noted in recent weeks.
Westchester County in New York State has just come under federal rebuke for failing to properly obey a regulation requiring that residential home ownership reflect the racial balance of the community. This is distorting their residential real estate market and forcing the county to expended millions of dollars it does not presently have in order to construct housing units to be distributed on a racial basis alone.
Washington has just passed a new regulation requiring companies that sell and distribute walnuts to stop telling consumers that there are health benefits relating to the consumption of that product. This will require re-writing of all product labels and the discarding of now-obsolete label stocks at a cost of millions of dollars.
Oceano Dunes State Vehicular Recreation Area on the Central California coast has just been advised that it must reduce the volume of dust coming off the area until it matches that which would occur naturally. Exactly how recreational vehicles are supposed to operate in a sandy area without throwing off some dust was not addressed. And so, numerous bureaucrats will be required to spend time and money to address this very minor problem – precisely at a time when the state budget of California is drowning in red ink.
The examples are almost endless as in our search we encountered new banking regulations, new environmental regulations, new climate control regulations, new housing regulations, new transportation regulations, new agricultural regulations, etc. etc. etc.
It is our belief that over-regulation is on its way to becoming a central issue in the 2012 elections in America as well as in other important economic nations. We also believe that this massive growth in laws is having two specific effects which are working their way through out economic societies. First, we believe they are a major factor in economic declines, and this is negative for the base metals (see copper chart) as well as the industrial precious metals such as platinum and palladium (see palladium chart). At the same time, since over-regulations increases economic uncertainty as it decreases economic efficiency, we believe it is a positive factor for the monetary precious metals.
As can be seen, copper has lost one-third of its value during the past few months and actually traded below the $3.00 per pound level early this morning before some buying took place.
Palladium has also suffered through the loss of almost one-third of its value during the past two months as fears of a renewed period of economic stagnation or even decline take hold.
As of 9:30 AM PDT, precious metals are holding on to substantial gains with silver up by almost one dollar to near $31 per ounce while gold is up by nearly $30 to above $1,650 per ounce. Financial markets are lower with the Dow industrials off by about 50 points while Canada’s TSX Index is down by a sharp 175. Base metals have recovered somewhat from earlier losses and are now close to unchanged while mining share indexes are ahead by 2-3%.
In other markets, long-term interest rates are headed lower as the Fed kicks in its new program to buy long-term debt; crude oil is off by about $1.00 per barrel to under $78; and the US Dollar is close to unchanged so far this morning.