A Melman Minute — October 28, 2011
| By | Leonard Melman |
|---|---|
| Date | October 28, 2011 |
Well, if the world’s financial markets are to be believed, Europe’s financial problems have been resolved, America is headed back toward renewed prosperity and, as Churchill might have put things, we can all move forward to “broad sunlit uplands.” What else can one conclude after looking at the major financial market charts reflecting activity during the past few weeks?
As can be seen, the Dow Industrials – and virtually all the other major financial market indexes around the world – have been on an unending joy ride for almost the entire month of October. Apparently, the belief is becoming widespread that all the dire concerns expressed during September and earlier are no longer matters of serious concern and the global monetary and political authorities have matters well in hand.
Well, pardon us at TMR, but we tend to disagree and, while we try to never ignore market actions, it appears to us that the prevailing renewed sense of well-being is more than slightly misplaced. In fact, without wanting to sound too pessimistic, it is our opinion that if indeed there is any improvement in the underlying economic data, such as the just-reported GDP growth of an unexpectedly high 2.5% for the US Third Quarter, it will be temporary at best or purely delusional at worst. Our reasons for adopting this stance relate to what we regard as common sense.
One item which concerns us greatly is that any visible improvements in the retail consumer markets are coming from the acquisition of more debt by those consumers, rather than substantial gains in net earnings.
Please note that U.S. government just reported that Consumer Earnings for September were up a paltry 0.1%, but Consumer Spending was up a more robust 0.6%. When people spend at a faster rate than they earn, the inescapable conclusion is that they are maintaining their spending at the cost of acquiring new debt – and consumers are now drowning in debt by historic standards. By the way, the same situation also occurred in August when Consumer Spending rose by 0.2% while Income actually fell by 0.1%.
Also, and not surprisingly, the report also pointed out that the personal savings rate descended to the lowest level since late 2007!
Another matter subject to common sense analysis is the entire question of the rescue of the European financial dilemma. According to news reports, the now-famous European Financial Stability Facility (EFSF) is to be increased from its present level of around 440 billion Euros to over one trillion Euros, with the increased funds assigned to minimizing the effects of a 50% ‘haircut’ on the value of Greek debt and much of the remainder is to be used to re-capitalize major European banks which might otherwise fail. But the one question no one will properly address is where all this new (so-called) money is to come from.
Will it be donated by nations whose government structures have already been reduced to basket-case status such as Iceland, Ireland, Portugal, Italy, Spain or Greece? It would be preposterous to think so. Will it come from other nations such as France, Belgium, Poland and such who are already running heavy budgetary deficits? That does not appear likely at all.
What about Germany, the supposed bastion of the region’s economic strength? Unfortunately, German national debt has already soared to a level reflecting over 90% of GDP, a mark far beyond that which any serious financial analyst would consider to be fiscally responsible. Even German Chancellor Angela Merkel admitted that the plan would be a ‘tough sell’.
We believe such actions will help break down the world’s faith in such currencies and will lead to serious trauma down the road – to the ultimate benefit of the monetary precious metals which we believe will be seen as a last bastion in the search for safe storage of monetary values.
(We believe this entire problem is a function of the breakdown in the entire social/financial structure which has been ongoing over the past 80 years or more. We are in the process of preparing a “Melmania” special report to be posted by early next week.)
Financial markets have been taking a bit of a breather this morning and, as of 10:40 AM PDT (we are a bit later than usual this AM), financial markets in North America are trading slightly to the upside with the Dow Industrials ahead by about 20 points while Canada’s TSX Index has gained 50. Gold and silver are both little changed on the session with gold holding near $R1,745 and silver trading at $35.25 per ounce. Base metals are close to unchanged on balance while most mining share indexes are ahead by about two percent.
In other markets, the US Dollar is little changed, crude oil is off slightly and long term interest rates are declining once again.