A Melman Minute — November 21, 2011

Somehow, life in the financial media lane is beginning to remind us of the movie “Groundhog Day” when the pattern of each day becomes nothing but a repetition of the preceding one, or like a game with a deck of cards where you are dealt the same hand over and over again.

Once more, this morning’s news media is filled with the same manner of reports we have been writing about for seeming months. The European monetary authorities keep declaring that strong, decisive action must be taken, but then they offer nothing strong or specific. Bond rating agencies once again are either downgrading national bond ratings or threatening to do so. Previously unassailable political leaders are once again being dumped by their home nations as has just occurred in Spain where a new President was elected over the weekend..

In other words, conditions remain unsettling, uncertain and, perhaps even a wee bit frightening to many as the present social order appears to be coming under attack from several directions simultaneously.

During such times, we have noted a consistent pattern among investors’ actions and this morning is no exception as financial markets are declining, the US Dollar continues to be the recipient of “safety hedging”, commodity items priced in Greenbacks are falling sharply, American long term interest rates are declining and, as the US Dollar strengthens, other currencies are declining in international currency markets.

It is easy to demonstrate these consistencies by using commodity charts and here are three to illustrate the point; the US Dollar Index, the price of Crude Oil and the price of Gold. The correlations are, in fact, quite remarkable as while the Dow Industrials have been declining from a relative peak above 12,200 to this morning’s low near 11.400 – a drop of about seven percent, we have noticed the following moves:

The US Dollar Index has rallied from 74.8 to near 78.3 this morning, a gain of near seven percent.

The price of Crude Oil has dropped from near $104 to just above $96 – a drop of about seven percent

The price of gold has dropped from just above $1,800 per ounce to near $1,675 this morning, a drop of just under seven percent.

We have been reading numerous articles relating to proposed actions to finally and successfully resolve the European crisis, but we have been unable to find any pattern of hard decisions which have the credibility to restore confidence in the Eurocurrency system.

So far, we have seen sporadic monetary authorities’ buying of Greek and Italian debt, but that has failed to stem the tide of ‘sell’ orders in those countries’ bonds. We have seen statements of solidarity coming out of both British Prime Minister David Cameron and Germany’s Chancellor Angela Merkel, but once you examine the body of their statements of friendship, you find an enumeration of many differences. We have seen the European Central Bank’s new chairman, Mario Draghi, take what appears to be firm positions which might imply decisive actions, but then he changes tunes and issues non-specific statements to the press such as this quote from France’s Agence France-Presse that, “...countries had a duty to get their finances in order first and enact agreed measures to stabilize the crisis-wracked Euro Zone...”

What were the methods whereby those nations could perform their ‘duty’? He offers nothing specific.

What were the agreed measures to stabilize the ‘crisis-wracked Euro Zone’? Not one specific idea is presented.

In the meantime, economic conditions in Europe are not improving but appear to be deteriorating further. One of the chief problems, also being felt in North America, is high unemployment, but the figures across the Atlantic dwarf those closer to home with Spain earning the title of the country with the highest unemployment numbers, 21% at large and almost 50% for youth unemployment.

Tavia Grant, writing in the Globe and Mail’s ‘Report on Business’ publication, points out that unemployment in many nations has reached unprecedented territory, writing that, “...Jobless rates are at or near record levels in Britain, Spain, Greece and the Euro Zone as a whole. In the U.S., unemployment has stubbornly refused to budge from about 9%.

She also points out an important consideration which states that where you have high unemployment, you have diminishing government revenues which makes it even harder to impose ‘austerity’ measures without sharply exacerbating the problems caused by deliberately slowing down economic activity when it already almost comatose in several countries.

She also writes that high unemployment is leading to social unrest, pointing out that the International Labour Organization’s Index which tracks labour dissatisfaction is on the rise and social unrest is rising in 45 different countries tracked by the index.

As if that was not enough with which the world must now contend, there are troubling stories coming out of the Middle East. In the first case, unrest in Egypt has spilled over into outright rioting in the streets with numerous deaths while at the same time, it appears that the Arab organization, Hezbollah, sponsored by Iran, is now preparing to aggressively retaliate against Israel if that nation takes any action to attack Iran’s fledgling nuclear power facilities.

Simply put, this morning it is hard to find much comforting news upon which to base an optimistic outlook and, as of 10:00 AM PST, financial markets are headed downward with the Dow Industrials off by nearly 300 points while Canada’s TSX Index is down by 185. Precious metals are sharply lower with gold trading close to $1,675, off by about $50 on the session, while silver is down by more than $1.40 per ounce to near $31.00. Base metals are also off steeply and, to no one’s surprise, mining share indexes are also headed south as well.

In other markets, the US Dollar remains modestly to the plus side, crude oil continues to trade lower and long term interest rates are headed lower as well.

All quotes US$ unless otherwise indicated.

Next “Melman Minute” scheduled for Wednesday, November 23, 2011.

Also, we were delighted to participate in the Montreal Resource Conference this past weekend and a transcript of our presentation, “An Economic Perfect Storm”, will be posted to this site by Wednesday, Nov. 23.

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