A Melman Minute By: Leonard Melman MELMAN MINUTE - August 30, 2010 - - - - - Perhaps the most fundamental "law" relating to economic theory is the "Law of Supply and Demand."  Simply stated, when supply rises at a rate which exceeds demand, price pressures mount to the downside.  In reverse, when demand rises at a rate which exceeds supply, price pressures mount to the upside.  It is because of this "law" that so high a percentage of economic investigation is geared to identify and quantify elements of both supply and demand. It is reassuring, from time to time, to learn that the law still is in effect.  We can recall, for example, the introduction of the Honda Accord about two decades ago.  Based on that model's sudden popularity, demand rose sharply and prices responded as dealers were able not only to charge full "Manufacturers' Suggested Retail Price" (MSRP) but were also able to add "demand surcharges" to their deals.  Eventually, Honda increased their supply to meet demand and the price pressures began to diminish. Thanks to a bountiful nature, we have been treated to another piece of evidence that the Law of Supply and Demand is still alive and well.  During recent years, the number of sockeye salmon swimming upstream to spawn in BC's rivers had dwindled sharply and, given steady demand and dwindling supplies, prices had remained at high levels.  However, during the past few weeks, predictions began to appear that this year the number of sockeye returning to spawn would soar dramatically, and that has been the case, as the mighty Fraser River is awash with sockeye.  Boats are returning to shore loaded to the gunwales with freshly-caught fish and roadside booths selling those fish to willing buyers have sprung up in impressive numbers. Just as might be expected, this overwhelming increase in supply had had the predictable price results.  According to one of BC's prominent news radio stations, the price of sockeye salmon has dropped in just a few days from over C$7.00 per pound to C$6.00, then C$5.00 and even as low as C$4.00 as suppliers realize they must sell their stock quickly before it begins to rot. As far as we are concerned, we welcome this evidence of continued reliability of our old economics friend and will continue our own evaluations of supply and demand as such information affects the base and precious metals. ................. Supply and demand frequently are affected by the policies of government and we offer an interesting example for your consideration and information.  During the recent economics conference just concluded at Jackson Hole, Wyoming, Fed Chair Ben Bernanke assured the public that all available policy alternatives still available would be used by the Fed, if necessary, to stimulate economic activity. One of those policy alternatives is for the Fed to enter the open markets and begin to buy up debt securities.  As the Wall Street Journal put things, "At the top of the list is the resumption of a program of long-term security purchases by the Fed, which could help to drive already-low long-term interest rates down even more." As can be seen from the TYX chart, that is indeed taking place.  The assumption of an increase in future demand has been sufficient to generate new buying of such debt, with the accompanying downward move in long-term rates.  Government policies can indeed affect supply/demand equations and, therefore, the analysis of government policies and actions form an increasingly important role in our work. During the month of August, the market has been providing us with an apparent inconsistency.  One might normally expect that as interest rates declined, markets would rally, since it would appear reasonable that lower rates would stimulate additional activity - but that has not been the case throughout August.  Please note the almost perfect correlation that month between declining long-term rates and declines in the Dow Jones Industrial Average.  Frequently, anomalies such as this indicate potential troubles ahead. Speaking of potential troubles, we would be amiss if we didn't point to the Democratic Party's growing litany of woes as the important November elections near.  While this year's balloting does not involve the Presidency, it will involve the total House of Representatives and one-third of the Senate's seats and, given the tenor of public opinion, the Democratic Party appears vulnerable to major losses in both Houses. The world witnessed a major demonstration of growing dissatisfaction with the results of recent public policies over the weekend in Washington, DC.  A mammoth crowd estimated at between 300,000 and 500,000 poured into the National Mall in front of the Lincoln Memorial to hear several speakers at the "Restoring Honor" demonstration, sponsored by Glenn Beck, a Fox Network commentator. The special significance of the rally, as we see things, was that previous successful mammoth rallies in Washington, such as the Martin Luther King "I have a dream" speech during a famous Civil Rights rallyin the 1960's and the "Million Man March" some years later had previously been the province of the political left.  We cannot recall an episode previous to Saturday's rally when the conservative - or Right - side of the political spectrum was able to generate such widespread public participation. It is our opinion that such demonstrations do not bode well for the President and his party come this November. We would offer one last thought that ties in with the above note.  There has been a sudden resurgence in libertarian - that is Austrian school - economic principles.  One of the leading exponents of such thoughts is Peter J. Boettke, professor of economics at George Mason University, who was just featured in a prominent Wall Street Journal article.  It is also worth noting the fact that, most surprising indeed, the number one best-seller at the Amazon.com site during June was the libertarian classic, "The Road to Serfdom" by Nobel prize winner Friedrich Hayek It is beginning to appear that a major shift in political and economic philosophies is brewing.  One can only guess where it might lead. Markets this morning have traded within relatively narrow ranges as of 9:15 AM PDT.  Financial markets are mixed with the Dow Industrials down by about 60 points while Canada's TSX is ahead by 25.  Precious metals are trading quietly while base metals are down modestly on balance.  Both the XAU and HUI mining share indexes are close to unchanged; crude oil is off by about 60 cents; the U.S. Dollar Index is ahead by 30 points and long-term interest rates continue on their downward bias. - - - - - All quotes US$ unless otherwise noted. Next "Melman Minute" scheduled for Wednesday, September 1, 2010.  Given the date itself, we plan to look at September's reputation for being a negative investment month.     ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.