A Melman Minute — August 21, 2013
| By | Leonard Melman |
|---|---|
| Date | August 21, 2013 |
By the strangest coincidence, my recent reading 'assignment' has been to immerse myself in Churchill's six-volume series concerning events before, during and immediately after World War II. Having Churchill and Roosevelt's decisive conduct firmly in mind, it is difficult to compare that kind of action to the indecisive public relations statements coming out of America this week.
Frankly, I cannot imagine Roosevelt ever making a statement to the effect that "We will use all the forces of the United States at our power to 'gain more information', yet that is precisely what Obama recently stated. It is also equally difficult to imagine Churchill and Roosevelt joining together to discuss the conduct of the war and then informing the Germans (or the Japanese) of the timetable of their plans and then giving reassurance such as, "Don't worry, it won't amount to much", but that is precisely what has been taking place the past few days.
Given this morning's market news, the world is somewhat uncertain regarding the question of whether ANY important actions will take place against Syria and uncertainty creates its own market influences.
SYRIA - EVENTS AND MARKET REACTION
Just to review, the Syrian internal conflict began in early 2011 when protestors gathered to demand the ouster of President Bashar Assad because, in their opinion, he no longer represented the will of the Syrian public.
For two years battles of an increasingly serious nature have taken place between protestors, who have been supplied with weapons by outside powers, and Syria's military which is acting under orders from the President. Hostilities reached a new high level on August 21, 2013 when it was reported that government poison gas attacks against civilians had taken place with the total number of deaths estimated at anywhere from 330 to over 1,000.
The world - except for Syria's allies such as Iran and Russia - have demanded that President Assad's regime be punished for this anti-humanitarian act and politicians of all stripes have entered the fray. Many demand coordinated international action under the auspices of the United Nations while others, at the opposite extreme, think America should state its own position firmly and declare specific consequences if such conduct continues.
Several situations associated with this struggle allow for the possibility that the Syrian "Civil War" could lead to enormous problems for the international community. Some of these include:
Syria is next door to Israel and Israeli citizens are already buying gas masks at record pace against the possibility that the Syrian government, in a moment of panic, might make a gas attack against Israeli border communities.
Syria's allies include Iran, a major international petroleum player and Russia, with a long history of international belligerence, particularly when a confrontation with America becomes a possibility.
Because of the uncertainty of what type of reprisal action against Syria is to take place or which nation - or group of nations - is to perform the deed, the general level of uncertainty has been sharply rising of late.
(As an aside, this potential interruption to Middle East petroleum shipments is a primary reason why intense and rapid escalation of North America's petroleum production capabilities is of vital importance - yet the international environmental establishment stands four-square against such developments - either relating to actual production or to expansion of any distribution networks.)
Given the possible volatility of the current situation, two major markets have reacted in fairly predictable fashion. Gold (as well as silver) and Crude Oil have risen sharply of late. Coincidentally, those recent rises have also given technical indications that further price increases may lie directly ahead.
Gold's one-year chart shows that the price this morning has soared above the $1,430 level, continuing the recent advance which now amounts to about $260 bottom-to-top and, from a technical point of view, has just reversed the previously-discussed "declining tops" pattern which has held since mid-2011 by exceeding the relative peak of $1,425 attained on the way down in May-June of this year.
Crude Oil has also breached an important technical level by rising in overnight trading above $112.00 per barrel, thereby exceeding the high of early 2012 and is now approaching the highest level of the past four years. We believe that petroleum prices, unless they correct downward quickly, are now at a level where they will begin to assert important upward pressure on general price indexes.
WHATEVER HAPPENED TO DURABLE GOODS?
Those who believe that America is in the midst of a strong economic recovery may want to revise their outlook after release of the latest Durable Goods Orders figures for July. Durable goods are those designed to last at least three years and include such items as Autos, trucks, airplanes, buses, trains, industrial components, furnaces, etc. In other words, "durable goods" production represents the heart and soul of America's industrial empire.
Therefore, it is of no minor importance that Durable Goods Orders plunged by a whopping 7.3% during July. Some analysts had predicted a summer slowdown leading to some reduction in the July figure, but the scope of the diminishment caught many by surprise - and leads us to believe that corporate profits in the quarters going forward may include some shockingly negative results, leading to further securities markets declines down the road which could also lead to a continuation of the Federal Reserve's QE programs.
It is getting harder and harder to make the case that wild escalation of monetary aggregates leads to sustainable economic expansion - but what else is there left for the Feds to try?
As of 8:00 AM PDT, financial markets are trading moderately higher with the Dow Industrials up by about 40 points while Canada's TSX Index is ahead by around 30. Precious metals are close to unchanged with gold near $1,420 and silver in the upper $24 range. Base metals are showing considerable weakness, but in spite of that fact, mining share indexes are continuing their strong recent rallies and are up by a sharp two percent so far this morning.
In other markets, Crude Oil is $1.32 higher to $110.33 per barrel; the US Dollar Index is 27 basis points stronger to 81.47 and long term interest rates have headed moderately to the upside.
All quotes US$ unless otherwise noted.
Next Melman Minute scheduled for Friday, August 30, 2013