A Melman Minute By: Leonard Melman MELMAN MINUTE - August 3, 2010 - - - - - Despite the ongoing conversation regarding the threat of imminent outright deflation, anyone who thinks the fires of visible price inflation are dead hasn't been paying attention to raw materials charts of late.  Three examples will suffice to make the point. The price of crude oil has been gathering strength of late and is now once again above the $82 per barrel level.  Despite generally poor business conditions, demand appears to be on the rise and this will likely soon be reflected in higher gasoline, heating oil, lubricant and specialty product prices. The price of wheat has suddenly taken off, rising from near $4.50 per bushel to almost $7.00 in just a few weeks.  While some of the reasons for the rise might be attributable to recent fires in the former Soviet Union, in fact the rise has been almost continual since late June, before news of any fires had even been mentioned.  We would also note that a virtually perfect 'double bottom' formed on the daily chart prior to the recent rise.  Wheat is known in many areas as the "staff of life" and a 50% price rise will likely result in price increases in a host of bakery products. Like crude and wheat, copper has also made a substantial move to the upside of late, rising from just above $2.70 per pound to near $3.40, also in just a few weeks.  Given its wide use in construction, plumbing, electrical work, pots and pans and a host of other applications, a rise of this magnitude also carries inflationary implications. All of this is taking place, somewhat surprisingly we might add, just as the forces declaring deflation to be the real problem are rising in stridency.  A recent Wall Street Journal article, re-published in Canada's Globe & Mail newspaper, addressed the issue in an article headlined, "Big Names Brace For Deflation." The lead statement sets the tone, reading, "Bond fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for deflation, a development that could cripple global economies and world stock markets."  (Strangely enough, the day this was published, world markets soared!) Some of the reasoning for their believe is due to the consensus among world financial leaders that 'austerity' is the only means of restoring believability to the world's economic systems and that would lead to less government stimulative activities, followed by economic contraction and declining prices.  Gross is using such circumstances to increase his commitments to interest-bearing debt paper and is avoiding investments where rising profits would be the key to success, on the assumption that a deflationary background would be a difficult one for corporations to improve their bottom lines. Much of the debate centers on the relationship between spending and savings.  If prices are falling, that is an incentive to curtail spending, since prices are likely to be lower going forward, and to increase savings, since those funds saved will purchase a greater quantity of goods in the future.  In our opinion, most political types dislike savings, since it means reduced spending and less favorable current circumstances, particularly when a major election is forthcoming such as in the USA this fall.  However, there is a body of economists who believe that savings are the sound basis for sustainable economic progress over time.  In fact, in his notable work "Human Action", Ludwig von Mises stated, "...Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way...The sacrifice made by restricting consumption in nearer periods of the future is henceforth not only counterbalanced by the expectation of consuming the saved goods in remoter periods; it also opens the way to a more ample supply in the remoter future and to the attainment of goods which could not be procured at all without this provisional sacrifice." There is much more to be discussed on this issue, since it lies at the heart of government philosophical debates regarding whether to make long-range plans as opposed to short-term stimulation, but we must catch an early ferry this morning.  However, we will resume this discussion tomorrow. As of 7:00 AM PDT, financial markets in North America are sharply divided with the Dow Industrials off by about 60 points while Canada's TSX is up strongly on higher oil and precious metals prices as the TSX Index has moved 140 points higher.  Gold is once again near $1190 while silver is trading up slightly near $18.40 per ounce.  Base metals are close to unchanged on balance, mining share indexes are up slightly, the US Dollar continues to show weakness and, as mentioned, crude oil is trading near $82 per barrel. - - - - - All quotes US Dollars unless otherwise noted. Next Melman Minute scheduled for Wednesday, August 4, 21010.   ◄  Previous Minute                                                                                                        Next Minute  ►
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