A Melman Minute — November 14, 2011

In our opinion here at TMR, an epidemic is sweeping across the Western World and it is one we believe is inflicting a terrible disservice. I am referring to the recently-developed talent among the financial media as well as politicians and financial leadership to make glorious-sounding statements which say virtually nothing of value.

An excellent case in point is an article in this morning’s Wall Street Journal by financial writer Stacy Meichtry. In an article headlined, “Monti Asked to Form New Government in Italy”, Meichtry appears ready to give us some manner of definitive information regarding the likely new Prime Minister of Italy’s actions and policies. However, what we get is a dose of the same-old/same-old. Here are some examples.

“Italy’s president formally asked economist Mario Monti to form an emergency government... implementing key economic measures. And what are these key economic measures to be? We never learn. Not one specific plan is mentioned by Ms. Meichtry.

She then cites outgoing Prime Minister Berlusconi as noting, “...he and his followers were willing to back a new government...as part of an effort to improve Italy’s fortunes...” What specifically was he suggesting to be done to improve those fortunes? We never learn as no specific program was mentioned.

Ms. Meichtry’s next subject is this: “The new government will have to adopt unpopular economic measures.” What specifically are some or all of these measures? Not one specific program is mentioned.

Finally, we actually get a suggestion of a real program, but wind up being disappointed once again. She wrote, “...Changes are likely to include controversial proposals to loosen Italy’s restrictive labor market...” What are some or all of those controversial proposals? Once again, not one single item to liberalize those restrictive laws is identified.

There is a method to our ‘madness’ in identifying what we regard as shortcomings in such articles, as well as many of the speeches and proposals made by various writers, media personalities, politicians and government-led market economic leaders. We believe that such non-specific proposals indicate that the idea bank relating to government action is dry and empty. Most of their concepts have already been tried, but the world remains inside an economic quagmire that threatens to become a social nightmare as well. That, to us, is the real reason virtually everything we hear is non-specific in nature.

And, if this is so, then how can the world have continuing confidence in the generalized solutions which are being proffered? We believe that such confidence levels are diminishing, uncertainty is rising, the level of fear is rising, and within the next few months, the world may very well find itself inside a renewed and powerful recession and all the previously relied upon ‘solutions’ will have been found to be empty vessels.

In such an emotionally charged climate which may very well result, it appears reasonable to us to believe that many investors will attempt to salvage a portion of their stored wealthy by turning to the general world of ‘things’ instead of ‘paper’ with the monetary precious metals occupying the highest rung within such a roster.

This striking gap between speechmaking and willingness to perform specific deeds is also evident within America. As millions might recall, last summer the US government faced a crisis of confidence resulting from the rapid expansion of government debt which threatened to exceed the Congressionally authorized “Debt Limit.” Had Congress not agreed to an increase in that authorized debt limit, portions of the US government might have been temporarily shut down.

The committee was handed a deadline of November 23, 2011 to come up with recommendations to save $1.2 trillion over the coming decade. If they were to fail in their task, then $1.2 trillion in automatic cuts would begin in 2013, almost two years from now which seems a rather lax goal if matters had actually reached crisis level.

Oh, by the way, 2013 just happens to be after the next election, but Congress surely wouldn’t let such mundane matters affect its deliberations, would it?

As an additional aside, we cannot wonder what this goal was supposed to accomplish, since the US National Debt is expanding at a rate of more than one trillion dollars per year so their vaunted goal only dealt with about one-ninth of the problem.

We are now only nine days away from their deadline, but no specific deal has been cobbled together. Instead, we are told that the President is calling leading Congressional lights to get together and do a deal while Republicans fight against Democrats who want tax increases while Democrats fight against Republicans who want sharper spending cuts.

It all sort of reminds me of the mad Emperor Nero sitting on his palace porch and playing his fiddle while watching Rome burn.

We believe one other story line of importance also demonstrates what we believe is the bent of politicians to consider political consequences – in this case angering environmentalists - ahead of reasonable logic.

America needs to import 10-11 million barrels of petroleum each day to continue to function. Much of that oil presently comes from nations which could become bitter enemies of America in future years. Therefore, it would seem reasonable to seek out nearby alternatives from a friendly, stable nation where oil production is both reliable and growing. Canada is virtually the only choice; thank to the amazing growth from its tar sands recoveries in Alberta.

However, Canada has a problem. It is a relatively low population nation meaning there is a limited domestic demand. Accordingly, Canada has sought to increase its foreign market penetration and there are two obvious candidates; America and China. To service China, Canada needs to build a pipeline from Alberta through to the coast of British Columbia, but aboriginals and environmental are throwing up devastating roadblocks. To reach the American market, a major pipeline from Alberta to the Gulf Coast region of Texas where most of America’s major refineries are located is required.

But Congress, in an act of short-sightedness that borders on disbelief, continues to put one obstacle after another against construction of what is called the “Keystone XL” pipeline and has now simply deferred any decision until 2013 at the earliest – again after the next election.

What puzzles us is how the American Congress and Canadian obstructionists can be so blind as to not understand the long-term ramifications of such inaction. If Canadian producers cannot transport their oil efficiently to the giant American and Chinese markets, they will be forced to shelve plans to steadily increase production since markets will not be readily available and if such long-term plans are aborted, the entire expectation that Canadian production will reach the point where the necessity of importing crude from dangerous sources might be diminished.

THAT is what is at risk – but the politicians and environmentalists seem incapable of understanding just how desperate the situation could become.

As of 9:45 AM PST, financial markets have turned lower with the Dow Industrials down by about 100 points while Canada’s TSX Index is off by 80. Precious metals are trading lower with gold down by $10 and silver by 60 cents. Base metals are close to unchanged on balance with the exception of nickel which is coming under heavy selling and is now trading near its lowest level in a year. Mining share indexes are off by about two percent.

In other markets, crude oil is down by about $1 per barrel, the US Dollar is stronger in currency markets while long-term interest rates are moving lower. We also note an anomaly within the petroleum complex. While crude oil has generally gained strength over the past three months, rising from the low 70’s to nearly $100 per barrel, the price of unleaded gasoline has been under pressure and is now near the low end of its three-month range. We wonder if the “Crude” market is looking at longer-term production problems while gasoline is reacting to slowing demand within a weakening economy.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Wednesday, November 16, 2011

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