A Melman Minute — November 2, 2011
| By | Leonard Melman |
|---|---|
| Date | November 2, 2011 |
One can only wonder just how many outright failures, how many revisions to set plans, how many reversals, dodging and evasions regarding already-announced plans it will take before the world stops losing faith in the 'solutions’ concocted by various political establishments.
Just in the past few months, we have seen one ‘solution’ to the growing European Economic Community banking mess after another proposed, trumpeted and seemingly adopted, only to have flaws immediately pointed out. We have seen the G-20, the “Group of Seven” and the European Central Bank all confer, confab and arrive at seemingly rational conclusions, only to have them abandoned to be replaced by yet another plan of action.
The latest in this series was the ‘final resolution’ to the European crisis announced late last week, an announcement which drove financial markets into orbit and, coming at the end of a month, resulted in robust performances for stock markets in many nations for the month of October, 2011.
However, once the financial community had an opportunity to thoroughly examine the plan and determine that there were serious flaws, those markets abruptly reversed themselves on Monday and then, following a surprise announcement overnight Monday that the President of Greece, George Papandreou, would put the austerity measures in the European plan to a public vote, additional waves of selling took place on Tuesday. The vote is scheduled to take place in January, leaving the situation in a state of ‘limbo’ for the time being.
The one-month chart of the Dow Industrials clearly shows the effect of this two-day, 600-point selling binge,
It might seem reasonable to contemplate that the financial markets would have learned the lesson that going on a buying binge simply in response to yet another announced ‘rescue’ is a very high risk venture, but that appears not to be the case as markets are rallying this morning on expectations of yet another announced ‘rescue’, this one for the benefit of the American economy by the Fed as they are presumed to be on the verge of once again taking strong measures, perhaps including a new QE-3 program of buying outstanding and non-performing debt to ‘strengthen’ America’s banking system. The final Fed announcement is scheduled for 9:30 AM PDT, but financial markets are rallying strongly in advance of that hour.
However, one segment which we believe is beginning to demonstrate genuine scepticism about the success of such plans is gold which has been turning in a relatively strong performance over the past two days. It has been able to rally strongly of late from setbacks and is now positioned to reach its highest price for the past several weeks.
Sometimes the gulf between proposals and actual actions is virtually beyond comprehension. As you may recall, when the U.S. debt limit crisis was seemingly resolved last summer, one of the lynchpin proposals was the creation of a “deficit-reduction super-committee” which was to debate ways to make specific cuts in government and report by November 23, 2011. If they failed to come up with sufficient specific recommendations, then a provision was written into law that an array of deep spending cuts was to go into effect in 2013.
(Why in the world would they wait until 2013? Could it have anything to do with the ultra-important elections of late 2012?)
Well, as of this morning, the committee’s apparent failure to accomplish its task was reflected in a quote from Senator Jeff Sessions of Alabama who noted, “...I am concerned that they might reach only a minimal agreement or no agreement at all...Dams sometimes break, but it doesn’t look good.”
In the meantime, the budgetary deficit and the U.S. National Debt continue to mount ever-higher and at accelerating rates. As of October 31, the US National Debt stood at $14.997 trillion – barely $7 billion away from the psychologically important fifteen trillion dollar level. And, despite all the rhetoric to the contrary and despite all the announcements by both parties of their diligent work to control the budgetary deficits, when compared to the October 31, 2010 National Debt number of $13.663 trillion, the U.S. government has been adding to that ocean of indebtedness at the rate of $1.325 trillion during the past 12 months alone.
We believe there is a similarity between the situations in Greece and economically much-more important America. Greece has found it politically impossible to cut back by government to the degree demanded by the European Monetary authorities. In a similar vein, it is becoming apparent that American politicians are unwilling to face the anticipated voter wrath which will follow any actual and serious cuts in government largesse and/or services.
In the meantime, many of the most optimistic global economic forecasts are simply not being fulfilled. China’s rapid growth rate is imperilled because of noticeable slowdowns in its manufacturing apparatus. Other economies in Southeast Asia are seeing order books from Europe dry up. Brazil – one of the BRIC nations – has just reported that its domestic auto industry has encountered serious slowdowns. Spain’s unemployment rate has now reached a desperate, Depression-like 21.5% while youth unemployment in Italy has surpassed the forty percent level.
These statistics are not occurring just in ‘thin air’ as virtually all the optimistic deficit reduction forecasts in many nations are based on the assumption of rapid economic growth which will swell government taxation receipts. If that projected growth does not take place as forecast, and that appears to us to be the genuine case, then you can take all the deficit-reduction forecasts and toss them into the proverbial cocked hat.
The Fe’s ‘bewitching hour’ has now come and gone and their long-anticipated announcement turned out to be a simple re-hashing of last month’s statement. Yes, the economy is somewhat at risk. Yes, we are watching things closely. But, no, there will be no dramatic changes in our overall policy direction.
As of 10:00 AM PDT, financial markets in America are giving back some of their earlier gains with the Dow now ahead by about 125 points after soaring by more than 200 earlier while Canada’s TSX Index is profiting from good moves in metals and oils, rising by just under 140. Both gold and silver have moved higher this morning by about $20 and $1.40 respectively and base metals are 2-3% higher on average. Both major mining share indexes are also ahead by the same 2-3% range.
In other markets, the US Dollar has declined moderately; long term interest rates are headed lower; while the petroleum market is advancing on dollar weakness.