Financial Sense Newshour
The BIG Picture Transcription
December 17, 2005
Gold & Inflation
JOHN: I don't know if you ever used to like Winnie the Pooh, Jim, but do you remember Eeyore the donkey give him enough time he eventually gets the answer. I was thinking of that this week about gold’s move from $429 to around $505 and if you look out over the economic scene I was going to call it a wasteland you still have people debating whether or not we actually have inflation. Like Eeyore, will they ever catch on to this.
JIM: You bring up a very important point if you look at Wall Street, Washington, and the entire investment community. we've seen gold basically double since the bottom of 2001. So, we've gone from $255 to today's closing price of $505, and we've seen some interesting phenomena, John. we've seen the dollar go up this year, and gold go along with it, and typically gold would go in the opposite direction. we've seen the gold price go up with rising interest rates, which by the way is a characteristic of the 70s gold market. We had rising interest rates throughout the 70s, and we had rising gold prices throughout the 70s. So, it should not surprise people that gold would go up with rising interest rates, because rising interest rates usually happen when there is too much liquidity, and we have rising inflation rates. But what we have now is an attempt to delink gold from inflation. In other words, people are saying, “if you look at gold It's really not going up because of inflation.”
We are going to post, along with this Big Picture, a series of charts, and I use John Williams’ CPI rate from Shadow Government Statistics because he keeps track of CPI the way we used to measure it before we started changing it with hedonics, geometric weighting, and substitution. If you look at inflation, and John Williams’ graph, we've got real rates of inflation running from 6% to 7%, and yet if you look at the traditional CPI the way we measure it gold is obviously up over 17% this year – but the inflation rate as we measure it in Washington is only up about 3% this year. So, They're saying, “you know, with 3% inflation, gold can't be going up because of inflation, There's a big disconnect there.” And That's why we have 2 charts there. We have gold vs. the standard CPI, and then we have John Williams’ CPI, which shows that inflation rates got as high at an annualized rate of almost 7%. So, I believe that one of the reasons people say there is no inflation today is because inflation can manifest itself in one of two ways. It can go into the real economy where you have the price of goods and services going up, and I don't think anybody would argue we're not seeing that. Another form of inflation is asset inflation, as the money that is created and printed goes into assets, driving up the asset value. And John, I don't care where you look around the globe today, whether it was the technology bubble in stocks in the US, which was another form of asset inflation, or today if you look in the US and elsewhere around the globe, [you have] an asset bubble That's taking place in real estate. For example, in Southern California, we paid $300,000 for our first home which we bought here in 87. That house is now going for $1� million. That house has been going up at annual compound rate of 9%. How can people say this isn’t inflationary? I don't know what It's like in your neck of the woods, John, but here in Southern California, the median price home is over $550,000. It has gone up over 140% here in the last 4 years, and That's the median price home, if you go out into the suburbs a starter middle class home starts at $750,000. What's it like up in Idaho? [4:44]
JOHN: Well, It's interesting because we made some national economic news this week. We are being goosed largely by the flight money from California, because people are discovering for what you can get the postage stamp sized house with a half bath or something in San Diego you can get a couple of acres in the woods in the North country. And we've seen properties double in value over the last 5 years, double and a half, maybe 200-300% rise, but That's the off flow coming out of your neck of the woods.
JIM: Well, sure. And you're probably going to see more of that because California just raised income tax rates this year to 10.3%, from 9.3%. So, on upper income individuals the income tax rate just went up, and They're raising sales tax, property tax (initiatives), all kinds of miscellaneous fees. Fees are going up on real estate � we don't call them taxes we just call them fees. But the important point whether you're looking at real estate...
JOHN: By the way somebody tried that here at a town hall meeting over a local issue when the whole room was packed. And one of the politicians said, “well, It's not a tax, It's an annual fee.” And someone in the hall blurted out the obvious: “What's the diff! You know we still have to pay it.”
JIM: Yeah, but they like the word “fee”, It's different. “Fee” implies you're getting some kind of service some kind of domestic service for this fee. It's ridiculous.
But getting back to inflation, and gold. we're seeing asset inflation in real estate. We saw asset inflation in the stock market, especially in the US in the 90s, and Japan in the 80s, and we're still seeing it today: the S&P is still selling at 19 times earnings against an historical average of somewhere around 12-13 (times earnings); you've got the NASDAQ selling at 36 times earnings, and the Dow selling at 20 times earnings. So, we've got a bubble in stocks, we have a bubble in real estate, and we also have a bubble in the bond market. Even though the Fed has raised interest rates 13 times, we've got the 10 year Treasury Note today which has a lower yield than when the Fed started raising interest rates in June 2004. So, we have an inflation rate in the neighborhood of 6-7%, and we have long term bond yields where the 30 year Treasury has a yield of 4.65%, and the 10 year Treasury Note has a yield of 4.45%. So, we have lower bond rates, a rate of return on bonds which is less than the real inflation rate, and we've got people talking about, “well, There's no inflation.” The difference is I guess, if you have inflation in goods and services, That's a bad thing, but if you have inflation in assets I guess That's a good thing, but then we don't call inflation we call it a bull market. But certainly, people paying $ million for a home who knows what it is elsewhere in the United States, most people have talked about rising prices even by comparison, I guess It's all relative in your neck of the woods the price of real estate has more than doubled. A lot of that is just money fleeing California. we're seeing it in Arizona, Texas, Florida, and so It's still taking place, but we're having asset inflation. So, you have a lot of the experts saying, “well, gold isn’t going up because of inflation, It's going up because of global liquidity.” [8:22]
JOHN: If you talk about global liquidity, basically we're saying There's a lot of excess money out there sloshing around just looking for something to buy, and jeepers, I thought That's what inflation is all about, Jim?
JIM: Yeah, we define it differently today. There was a rather lengthy piece written by a very well respected economic consulting firm that deals with institutions, and they said, “gold isn’t going up because of inflation, It's going up because global liquidity has gone up.” But really what are we talking about when we're talking about liquidity? we're talking about a lot of excess money That's being created by central banks, either through easing of interest rates. It doesn't matter if you're looking at the United States today even though we're raising rates today, we're historically at a low level, the Federal Funds Rate is only at 4.25%; if you're looking at Europe the equivalent of the Federal Funds Rate over there has been at 2% for almost 5 years. They just recently raised it in December to 2. But by historical standards we still have a low rate of interest. And even though the Fed has been tightening, They’ve been tightening from a low base, and interest rates if we compare them today to the real rate of inflation are still negative. So, what experts define as global liquidity or excess savings is nothing more than global money expansion That's being created by central banks printing a lot of money. [9:57]
JOHN: Now, let's freeze that for just a sec, Jim. And why don't we give people an eye-shot at what kind of money creation we're seeing. We call it printing money, but obviously very little of that is actually being printed anymore.
JIM: Well, just take a look at M3 over the last 3 months, It's growing at an annual rate of 10.3%. No wonder we're going to stop reporting when Helicopter Commander takes over from Greenspan in March. So, in the US recently, the money supply is growing at over 10% per year; in Europe the money supply is growing between 11 and 12% on an annualized basis; and in China the money supply is growing at an annual rate of 18%. So, there are a lot of people saying, “there's just a glut of savings.’ Well, typically what happens is that through the US trade deficit, we buy goods from foreigners, say Chinese or Japanese, we pay them in dollars, those dollars get deposited in banks in Japan and China. They get converted into their local currency, either Japanese yen or the yuan. What will happen is central banks will come in and mop up those dollars because they don't want their currencies going down, and then what They'll do is turn around and sell their own currency and buy, let's say, US Treasuries.
If you take a look at the trade deficit that the US is running with Japan, and China, and take a look at the amount of money that They're spending buying US Treasuries, [you'll see], for example, from 1Q 2003 to 1Q 2004 Japan bought $250 billion worth of US Treasury Notes. Well, we're not running a $250 billion trade deficit with Japan. Where did the extra money come from? The extra money came from the Japanese central bank printing money. So, a lot of this excess liquidity that They're talking about isn’t really savings, it is central banks that are creating a lot of excess money to keep their currencies at a lower level, whether It's the Bank of Japan, the Bank of China, or other central banks in Europe. And all of that money sloshing around the globe is the same thing as printing money, It's just that we don't define it that way anymore. And this is the misnomer of the “global savings glut”, [when] There's a global printing glut. [12:26]
JOHN: You know if we talk about the global investment scene it is true that we are running a budget deficit never let it be said otherwise, but if we turn to Japan, or look at Europe, the situation really isn’t much different over there either way. So, for investors they pretty much have the same options.
JIM: Yes, for a while when the euro was appreciating against the dollar it was really an anti-dollar vote. But if you look at European governments France, Germany, Italy, Greece. They're all running major budget deficits that are larger than the US, and the Japanese government likewise. So, one factor That's been behind gold’s rise is not only a bunch of money printing that is occurring simultaneously with the world's central banks, but also deteriorating fiscal situations. So, what gold is doing is really acting as a currency of last resort. In other words, if you've got large amounts of money to invest, and you're saying: “boy, I don't like the US dollar, They're running budget deficits, They're running record trade deficits, but you know, when I look over to Europe their fiscal situation isn’t any better. I look at Japan with zero percent interest rates, They're not any different.” So, what’ll happen is you've got money going into gold.
Another significant factor in the gold market is what I call the current account surpluses of OPEC, which will this year be larger than the trade surpluses throughout all of Asia. So, think of the price of oil at $60/barrel, just imagine how much money OPEC is taking in at 28-30 million barrels of production per day. So, you've got fiscal imbalances globally. So for those that are accruing money, whether It's OPEC, or Asian central banks through trade surpluses, where are you going to go? What are some of the alternatives? So, I think That's one of the reasons you've had gold going up.
I think some of the other factors contributing also to gold is if you've taken a look at some of the other commodities globally whether it’s energy, the price of a barrel of oil has gone from roughly $20/barrel to $60/barrel and as high as $70/barrel, you've had platinum setting new records, you've got copper at just record levels, uranium has more than tripled gold is just starting to play catch up. And at the same time you've got global demand which is going up as a result of OPEC’s current account surpluses, China’s current account surpluses, Japan’s, India’s. So, you've also got rising demand globally. [15:15]
JOHN: Ok, so as we look out we see the demand for gold internationally is growing by the way at the same time our own banking system is telling us not to worry about it, they keep owning gold but That's Ok, but all of that aside if the international demand for gold goes up it would seem that the supply would become constricted, because supply isn’t keeping pace with this.
JIM: No, in fact this year South African gold production will be down by 40 tons, some of the lowest production out of South Africa in 30 years. you've got Australian production down. [15:47]
JOHN: Ok, but Jim this is sort of a strange thing when you think about it if global production is going down you would think the rising demand as it is on the international market, there would suddenly be some kind of surge in exploration to try to find new sources of gold. This would only make sense.
JIM: Well, that indeed has occurred, between 2001 and 2004, billons of dollars have been raised and gone into exploration as a result of a revitalization of the junior mining industry. I mean, the juniors have raised billions and billions of dollars, and have gone out there and are looking, trying either to develop existing properties where we know there are gold reserves, or trying to go out and find new gold deposits. [16:35]
JOHN: Ok, assuming That's going on, how much progress are we making on this?
JIM: The interesting thing and we're doing some research on this area is I think we may be entering the period of peak gold, because There's been billions of dollars that have gone into exploration in the last 3 years, but what is absent from that is the announcement of major gold discoveries. This isn’t like the 80s when a lot of companies were exploring for gold, they were on a growth path, there were a lot of major discoveries that were made. we've been at this now for 3 or 4 years, and there are some new deposits that are being brought online, but John, we're not discovering Prudhoe Bays, and North Seas. I mean, we aren't discovering elephants. There have been very few major gold discoveries that we've seen, and the unfortunate thing for a lot of these behemoths that we now have today the Barricks, the Placers, the Goldcorps, the Gold Fields, the Harmony’s, and the Newmonts is these majors need to be discovering 5 to 7 major elephants a year to keep their production in line. I'm talking about these guys need to be finding 5 million oz deposits every year, and that is not happening. And we talked about this on the show last week, what you are seeing are 1 million oz deposits, and 2 million oz deposits, but even then we're not bringing a ton of those on line. [18:11]
JOHN: Ok, let's assume that we are hitting peak gold. If we just take where we are right now, assuming contrary to some of the popular wisdom, we're not going to find more out there, what is the long term projection of this? What are the ultimate implications?
JIM: Well, first of all, even if they were to find a 1 million oz deposit, or 2 million oz deposit, it may take 5-7 years to bring that gold into production. So, even if they found a major deposit today, good luck in trying to bring that into production. You may have a major gold find on your hands but because of geopolitics whether It's in Venezuela or Russia or Africa, you may have political problems, in addition to environmental problems bringing it into production. So, even if you were finding this stuff which They're not (I mean, They're finding gold but not finding elephants) It's just like oil, There's very few major oil discoveries the days of the elephants are basically gone. So, That's another problem facing us. I just saw a major piece done by a very conservative economic consulting firm, and John, They're talking about $1000 gold in the next 2 to 3 years. So, if you think $500 is high, think of $1000. [19:30]
JOHN: Obviously, we have a potential issue coming with listeners, because you're talking about there basically being an upswing in the gold markets so that we're headed into some kind of a bull market, but at the same time if you recall previous conversations, both you and Frank Barbera have taken yourselves out of that position. Somebody somewhere is going to say there is a disconnect in this.
JIM: I think what you have going on right now John, and one thing that we've seen is you have this big upsurge in gold prices and the gold stocks, between 2001 and March 2004, and ahead of the pack were the juniors. These were the guys going out making the discoveries, and bringing on board new developments. Then, in April 2004 we got a big sell off in the gold stocks I mean a major correction that occurred between April and May of 2004. When the gold market went back up in the Summer of 2004, a lot of people were gun shy. So what they did is go into the major stocks like the Newmonts, the Placers, Barrick, the Goldcorps, Glamis, and they rode that upswing all the way up till November of 2004, and then all of a sudden gold began to roll over, the stocks began to weaken, and we had this big sell off another leg down that lasted until May of this year. So, we've had two major downturns or sell offs in the gold price. With those 2 major corrections a lot of people that got back in the Summer said, “you know what, if I get back into gold I'm going to get into the majors or the intermediates, so if I have to exit again I can get out of town.” And That's What's happened. So, you've had the gold stocks go up, not as much as they should have given a 17% increase in the price of bullion. Even the majors and the intermediates have lagged the price of bullion, but the majors and the intermediates have been where the price action has been.
The juniors have continued to get hammered, and so what we saw as a result and this is just looking fundamentally you have some of these intermediates and majors that are selling at prices way above the current price of gold. For example, Glamis is selling at $485 for its gold in the ground. And There's only basically a $20 spread between Glamis reserves in the ground and the current price of gold. you've got Goldcorp selling for $575 an oz in the ground, you've got Meridian selling for $1,160 an oz in the ground, you've got Newmont selling for almost $250 an oz in the ground. So, what has happened is people have bid up the price of these, and the majors and intermediates are now discounting $575 and $585 price of gold. It gets even worse when you look at what these majors and intermediates are selling at per oz of production. I've seen prices from $5500 to $7200 an oz of production. So, you have the majors and intermediates that have gone way out of control, discounting a price of gold that is near $600. So, the majors and intermediates have gotten way ahead of the price of bullion. At the same time, you've got juniors that are literally being trashed and given away. you've got them selling for, by contrast, $20 an oz in the ground, or $25 an oz in the ground. I've got one company that we're going to start accumulating a major position, this is a company that will probably go into production at the end of 2007, that is selling for $5 per oz of gold. $5 per oz of gold compared to the majors that are selling at $485 per oz of gold, and this company is probably 18 months away from going into production. [23:54]
JOHN: Well, Jim, looking at this the prospects for gold basically are very good, but it requires a certain amount of intestinal fortitude to get in, take a position, and watch things moving. I would say people are generally watching juniors, and They're expecting short term moves and if the moves don't happen They're not interested in being involved with it.
JIM: Exactly. Most investors today are very short term focused. They're focused on the here and now, They're not investors They're traders. And this includes some of the major investment banks who have been trashing the juniors this year. It takes patience. Because what’ll happen, John, is one day you'll wake up and all of a sudden there’ll be announcement that this company has been taken over, and I think a real key telling point is what Goldcorp did last week with its purchase of Virginia Gold. They're saying, “you know what, we're not going to wait until they prove out their reserves, we're going to snap up that property now because there just aren't a lot of 2-3 million oz deposits high quality deposits out there.” But, in the meantime, you've got this widening disparity. And if you want to see that disparity look at the graph that we posted on last week’s show which shows the price of gold and the value of ounces in the ground for juniors, there is a canyon. I mean this stuff is being given away. You bring up a very key point: it takes patience. [25:28]
JOHN: Yeah, but so many of these people, and this goes all the way back to the stock market blowout in 1999, are busy chasing the day to day rollercoaster, when in reality the way to really make some solid money is to figure out What's going to go where, and accumulate positions in say gold. You hold on to that, you buy it when It's cheap at the beginning of the bull market, and you ride it up and then you make your decisions, but That's a long term process rather than “oh my gosh, I've got to do this by next Thursday.”
JIM: And you hit upon a key point. This market, mark my words, is going to change. One day it will start, one company will be acquired or make a major discovery, and That's going to set this catalyst. I think one catalyst has already been put in place already with Goldcorp’s purchase last week of Virginia Gold. But here are some facts: the majors have got to replace their reserves, They're not making the major discoveries, They're not discovering these new elephants. you've got the possibility that we may be at peak gold, peak silver and peak copper. you've got Ross Beatty the President of Pan American Silver who made a speech in the last couple of days, where he's talking about peak copper. What is left, he said, is low grade deposits that are going to take higher prices to get that copper out of the ground. he's saying we may be approaching Hubbert’s peak in copper, and I'm saying we may be approaching Hubbert’s peak in gold. Yeah, we know There's some gold in Antarctica but you'll never get it.
And what we have is the majors in the gold companies who are no different than the majors in the oil companies. They're sitting on a lot of cash and They’ve seen the run up in the gold price, They’ve seen some of the gold stocks going up, but They're just sitting back and saying, “you know what, I don't trust this.” They’ve gone through 2 decades of a bear market. And I heard 2 years ago, unless you had a 5 million oz deposit the majors weren’t interested. Well, I hate to tell you, but we haven’t really been discovering 5 million oz deposits. Then last year I heard the number was 3 million oz deposit for the majors to look at you. I just heard in a recent meeting, now that barrier has been settled at 2 million, mark my words, you are going to see it drop down to 1 million. These guys need to be discovering 5-7 elephant sized deposits a year, and I describe an elephant as a 5 million oz or greater deposit. That is not happening. It absolutely will not happen because there aren't that many large deposits out there. And so that means They're going to have to say, “where we can we go to get these deposits?” Well, all these majors, the gold companies are no different than the oil majors, all they have turned into is investment banks very conservative so what they do, rather than going out and risking capital They'll wait for someone to develop a project and then They'll buy it. But one of the problems they don't realize is this industry is going to start being consolidated, and when that happens the cream off the top I'm talking about the 2 and 3 million oz deposits are going to be the first to go. And I predict you're going to see that in the next 12 to 18 months, and then what’re going to be left afterwards are the million oz deposits. So the cream the 5 million oz deposits have pretty much been taken off the table, so we're talking about the high grade deposits now, the 2 and 3 million oz deposits that are going to be out there, That's going to be taken off the table in the next 12 to 18 months. And That's only going to leave the million oz. deposits. [29:28]
JOHN: Ok, let's translate this scenario into something practical and ask the “so what?” question. If you had to design a strategy then to handle this scenario for investors what would you do?
JIM: I would be seriously taking a look at companies with the potential for 2 and 3 million oz projects that are in late stage development, because when the industry wakes up They're not going to want somebody that just discovered a deposit, and is going to need the next 2 or 3 years to drill out that deposit. I'm talking about companies that are entering into either pre-feasibility, or feasibility, but looking at 1 to 3 million oz deposits. And John, rather than buy all at once, even though these companies are literally being trashed and given away, I would be accumulating positions each month. That's what I'm doing personally. I'm accumulating 2 major companies right now, and I'm going to take my interest up to 9.9%, so it won't be reportable. But every single month I'm going in and buying these shares month in and month out because I know these companies have got sizeable deposits. One company that I'm looking at right now is going to be in production within the next 2 years. They’ve got close to 2 million oz of high grade. Another company I'm looking at has got a high grade deposit, They're going to be coming out with their first major resource estimate. Identify your targets and then just keep accumulating, because the next leg I think next year we see $600 gold and beyond is going to be driven by the juniors as the industry wakes up to the fact that all the cream has been taken off the table, and all of a sudden a 2 million oz deposit, or 3 million oz deposit, is going to start looking as attractive as the 5 million oz deposits once were. Either that, or these companies are going to be downsizing. If you look at Newmont, their production is down 1 million oz a year, and this is something I think you're going to see play forward over the next couple of years. So, this is a great time to be buying juniors, but once again the junior market has been basically in the doldrums for almost since April of 2004. I think That's about to change in the next 12 months. And That's one of my predictions for next year. [31:56]
Energy Storm Brewing
JOHN: It is interesting, Jim, as we look at the state legislatures a couple of them in particular, notably California, but also the Congress at the major disconnects internally, the contradictions in their policies. The spending urge in the name of taking care of whoever it is, continues unabated, no thought whatsoever as to where It's going to come from, It's politically incorrect, that rolls on forward. There's no will whatsoever to deal with the Social Security issue, nobody is talking about it, It's gone right off the table. It's coming like an express train, it hasn’t stopped, it isn’t diminished, It's still there. But the next thing we have coming is this energy storm brewing, and it has a whole panoply of issues going along with it, and That's where the other major disconnect is in Congress, because of the fact They're still talking about windfall profits tax at the very same time energy companies of all stripes are going to have to be investing, developing etc. So, once again we have them running in opposite directions to each other, and this poses more chaos than anything else in the future, unless they get it together.
JIM: We saw of course the hearing on Capitol Hill which was a sham hearing, these idiots were up there trying to look at [the price of gasoline] and saying, “how come we have high prices”, when we just had a third of the US oil and natural gas taken offline due to a natural disaster, which as of this date, on this Friday, is still not fully back on line. As we've said over and over we haven’t built a refinery in this country in over 30 years, and over 50% of our refinery capacity is all along the Gulf coast. But what Congress is looking at is because of higher prices the energy companies have higher profits in dollar terms, not in percentage terms but dollar terms. So They're looking at those big dollars and They're saying, “you know what, if you don't start doing something to make us energy independent we're going to try to find a way to tax it.” And right now, for the 4 major oil companies, Exxon-Mobil is sitting on $32 billion of cash; British Petroleum is sitting on $2.2 billion, not much for a company of that size; Shell Oil is sitting on $16 billion; Chevron is sitting on close to $10 billion. If you look at it in relation to their capital expenditures, those 4 companies are going to spend $54 billion in CAPEX (Capital Expenditures) spending in the next 12 months, but even though They’ve been spending this kind of money, energy production from the majors is up less than one percent since 2000. And there are a lot of reasons that CAPEX spending isn’t larger. A lot of people are saying, “well, there are few opportunities.” Where are you going to go and invest your money, you can't just go and walk into the Middle East? And where are the large prospects, the world has been geologically mapped?
One of the books I'm reading right now is the new book by Colin Campbell called Oil Crisis, and he's saying a lot of the exploration departments have been downsized by all the majors, so there are fewer opportunities. But where there is oil It's more difficult to get at, and you're going to have to spend a lot more money to get there. you've got refinery margins up, and which were very low up until the last few years. It's one of the reasons we've gone from 325 refineries in 1981, to 148 refineries, you couldn't make money the return on capital as it was less than 5%. So, with all this money that the oil companies are sitting on there is political pressure. But I think you've got to understand the mindset of these guys and this will go against the conspiracy nuts out there. I mean if There's a conspiracy to control the price of oil then explain 20 years of falling oil prices, and if you look at oil prices we're at $40 a barrel. In 1980 if there was a conspiracy and the oil companies had the wherewithal to control prices why did it get all the way down from $40 down to $10 a barrel. What has happened and this is the same thing going on in the mining industry is that a lot of the guys running the oil majors today and running the major mining companies today, came into this business and spent 20 years in some of the most dismal economic times for their industry: a long multi-decade bear market. So, they’re still haunted by many of the fears of bad investments that were started in the 80s, and some in 90s, that never panned out that were money losing projects. So, there are calls to grow their business but they’re, “you know what, we did this in the past but just when we thought the price would stay up there it immediately went down. It got up to $40 a barrel in 91, and went right back down again to $10 a barrel.” So the industry is still haunted by the ghost of the past, and to put this in perspective look at it in their shoes. You are an oil company executive, starting your career in the business, and you see nothing but declining returns, declining prices, consolidation, increases in environmental constraints, increasing costs everywhere, and you're saying you can't help go through a period like that and not be affected by it. [37:25]
JOHN: This would seem to be the same lesson that people who went through the depression in the 30s learned, that once they had gone through the depression it altered their way of living and how they spent things, but also later on when conditions had improved, it precluded them from taking appropriate steps, because they were still stuck in that mindset.
JIM: Yeah, you can't but help when going through a traumatic experience like that and not be affected by that for the rest of your life. I've got a lot of retired clients who would never think of taking on debt. They pay cash for everything and it doesn't matter how well off they are, they still kind of have that Depression mindset: they live well below their means; they continue to save money; cut coupons. I have a client who are multimillionaires, his wife still cuts coupons out of the newspaper and goes to the grocery store. There was a period of time in their lives when they were scrimping to make ends meet, not only growing up in their parents’ family but also when they first started out. So, it’s the same thing with a lot of these executives.
I've often told this story and I think it bears repeating and that was last year when I interviewed Donald Coxe the head investment strategist for BMO Nesbitt Burns and he was speaking at a mining conference and he got up there and said, “start cutting loose with the check books, folks, this is going to be the biggest bull market you've ever seen.” And at the end of the meeting he was at the airport and one of the CEOs of one of the top five largest mining companies in the world came up to him and said: “we've heard from guys like you over the last 2 decades over and over. You tell us the sun is going to come out and It's going to shine, but then the clouds come.” And he was just looking forward to collecting his retirement check and getting out of what has been a very dismal period. This gentleman was impacted by this almost 22 year bear market period he had seen in his industry. And you're right, John, to draw the analogy with the Great Depression. A lot of these guys don't want to cut loose with the checks, but the problem is today, globally, there are capacity constraints on production. There are capacity constraints on refinery. When the US got hit by hurricanes Katrina and Rita, thank goodness we could call upon our US allies to start shipping refined products, because it wouldn't have done any good if somebody shipped us oil and we didn’t have the refinery capacity to turn it into an end product. And this is a condition that exists globally around the world.
I was just reading a very important paper on the shipping industry, and most natural gas is stranded, in other words, you can't build a pipeline underneath the ocean to get natural gas to the United States. So what you have now are LNG terminals that are being built, but we don't have enough LNG ships. The shipyards are booked over the next couple of years, we're going to have to build 132 LNG ships just to get natural gas because I don't care if you're looking at California, New England, or other parts of the world, they're putting up these natural gas powered plants but where are you going to get the natural gas? you're going to get it from the two largest deposits that are left on the globe in Russia, and the Middle East. So, you've got the same problem, you have to liquefy it, and put it on a ship. So we have all these types of conditions and you've got the oil companies that are sitting on the cash and they're saying, “how long will these conditions hold.” And now you've got the government looking at their profits and their balance sheets and saying do something about it. [41:18]
JOHN: But That's exactly what I was talking about earlier, Jim, which is we have this speaking out of both sides of one’s mouth simultaneously. At one point, one part of Congress is saying, “we really need to invest and develop to get back more American [energy] independence,” at which point bring in some Yankee Doodle or appropriate piece of music, but the flip side of that is they’re threatening these guys on the other side, “you earn too much, we're going to take it away, it's not right, it's not fair.” And they never explain how they're going to reconcile these two things together.
JIM: If you take a look you've got the entire West coast which has been taken off limits for exploration. you've got the East coast taken off limits for exploration. you've got parts of the Gulf of Mexico, especially around Florida taken off limits for exploration. The permitting process for a refinery is over 800 permits. They voted down the easing of that. They voted down easing the restrictions on the 50 different Heinz varieties of gasoline that we have in this country. So, for example, if your refineries are shut down in the Gulf, maybe California or somewhere in the Midwest can start pumping out more gasoline to get it to those areas where there is short supply, as we saw along the lower Southeastern seaboard in the United States after Katrina and Rita, but you can't because you have 50 different varieties. So, They're putting up all these road blocks, they don't want any exploration, they don't want any new refineries built, and yet they want the companies to go out and get more energy. And you know what it is, John, the nimby and banana business. It's like go ahead and do it, just don't do it here in the United States, go do it elsewhere. [43:04]
JOHN: But you can even see this in the long term because, let's take an example, we've talked about the fact no matter how you cut the dice nuclear power is going to have to be brought back on board for electrical generation. So, say now if you want to build a house in California, It's illegal to use electric baseboard heaters, they want you to use natural gas. In the Northwest where we live electric heating is very common we have hydroelectric power and it’s very cheap. But as we know things are going, natural gas is going to become more and more expensive, once you bring nuclear back on line say for California, It's going to become cheaper and cheaper. So, almost all of the policies are almost all running in the wrong direction.
JIM: Well, I can tell you It's going to be a long time before you see nuclear in California. California is against wind power, solar power, nuclear power, or natural gas it doesn't matter what it is, we're against anything. That's why we call ourselves the banana state: Build Absolutely Nothing Anytime Near Anybody. We have one of our local utilities here in San Diego wanted to build a natural gas power plant, they couldn't do it here in California, so They're building it in Mexico. They're building an LNG terminal there to get natural gas here to Southern California where we badly need it. [44:18]
JOHN: Yeah, I heard the same thing from a dairy farmer in your state too, he said they are drowning now in regulations from the Feds, the locals and even some counties now are coming up with their plan. And I said What's going to happen when you guys just sell off, and say enough of that we're getting out of this business. I said then San Francisco and LA won't have any milk. And his comment to me was really interesting, “no, We'll bring it in from Mexico where It's unregulated and full of hormones, and drugs and everything else like that.”
JIM: The amazing thing is our Congress wants the energy companies to go out and build more refineries, find more oil, natural gas alternatives, but they just don't want them to do them in the United States. And the problem is you have this charade that went on in Washington when they interviewed the oil executives right after Katrina, and it was really a joke. You know, one of the comments that the oil executives made to this scathing attack by Barbara Boxer, he said when you refuse to let the supply rise to meet rising demand, why would you be surprised, much less outraged when prices rise. This is simple economics. By the way, Barbara Boxer has voted against any energy bill we've ever had, and yet she's up there screaming. And the only way we're going to see this be resolved is I think It's going to take $100 oil. At $100 oil enough shortages [will occur] and especially as we hit peak oil and we have to go compete with other countries for oil. Our only policy is to import it from somebody else, the entire energy security of the US is dependent on dictators in the Middle East, or in Latin America, and that is not a very secure energy policy. We should be working on nuclear energy, we should be advancing wind power where There's lots of wind, and It's appropriate, and we should be making advances in solar power, all kinds of alternatives because there isn’t a silver bullet here. We should be advancing shale projects that we have, we have plenty of shale oil in the United States. There are all kinds of things we could do right now, and John, these guys haven’t had the slightest clue. They're still stuck on stupid. [46:46]
JOHN: You know, Jim, I know you follow the oil markets closely and despite all of the riffle-raffle going on here in this country, the problem continues to grow as I see it. The demand for energy continues to rise globally. This does not stop because of what we're going through here in this country.
JIM: Yeah, they may raise or lower their increased demand projections, the IEA is still projecting there will be greater demand for oil, because It's not just What's going on in the United States, It's what is going on in China, What's going on in India, What's going on in South Korea, North Korea, Thailand, Indonesia, other parts of the world Indonesia is now turning into a net importer of oil. So, you've got this increased demand at the same time you see Goldman Sachs talking about how we are now entering an era in the next couple of years where you're going to see tremendous price spikes, and That's due to these supply constraints we have in the system right now. So that if you have a hurricane that knocks out a third of your production in the Gulf, or you have political problems in Nigeria, or Venezuela, all of a sudden you could see oil prices spike $5 or $10, or natural gas $3 to $5, and That's the era we're going to be entering in. The unfortunate thing is It's not until you are deprived of energy, you go through a blackout, or you have to stand in line for gasoline as people did on the Southeastern seaboard of the United States right after Katrina and Rita, It's not until that happens often enough that Congress will finally get the message, and quit being “stuck on this stupid”, or “he said she said” thing and do something about it.
In the meantime, you're going to look forward to higher energy prices. Whether we like it or not the price of oil is going up, the price of energy is going up, we may see sharp pullbacks as we do occasionally like right after September when the price hit $70 and pulled back to around $56-57. you're going to see that because It's a very big market, you've got a lot of traders, a lot of derivatives involved, so you're going to see that volatility, but we're going to experience an inexorable climb in the price of energy all across the board, I don't care if you're looking at oil natural gas, the price of uranium, any kind of energy item is going to become scarcer, and scarcer, prices are going to go up as demand for that energy keeps increasing. [49:27]
JOHN: Alright, Jim, let's translate this as we always do at the end, given this picture or scenario, the odds of it changing in direction for a while are just not there, what would you do from an investmentstandpoint?
JIM: Not only would I be invested in energy, but I would also be invested in alternative energy. we've got 10% of our portfolio right now that is in alternative energy: coal gasification; solar; we're in wind, we're moving very strongly in that area as it dawns on the world that we don't have an answer to this global demand for energy, and especially as production declines in the North Sea, and Alaska and elsewhere. This year alone Kuwait and Mexico have already announced their oil production has peaked. So you've got two major producers here that have reached peak oil, and once you reach peak oil that means the following year your production starts to decline. North Sea oil production is down 25% from hitting its peak in 98-99. So, alternative energy is going to be very prominent, and that is an area you need to invest in. And as far as the energy market is concerned you still have the oil companies selling at 6 and 7 and 9 times earnings. You compare that to the Dow That's selling at 20 times earnings, or the S&P at 19 times earnings, or the NASDAQ selling at 35 times earnings, and there are a heck of a lot more companies that are growing their earnings a lot faster than these technology companies that people are paying 40, 50, 70 and 100 times earnings for. So, I would be invested in energy, and I would also look very strongly at alternative energy. [51:07]
JOHN: Gee, we haven’t done this for a while, Jim, here we go. James writes:
Hi, John and Jim, my partner and I have been looking into purchasing laundromats for the revenue stream. I am concerned about the impact of rising utility costs because such businesses are large energy consumers. My partner feels we can simply pass on any increases, however I'm thinking we can hedge those risks with futures or utilities stocks. didn’t Newmont recently do something similar, and do you think it is a sensible strategy for the small business owner.
And he is in White Horse Station, New Jersey.
JIM: I think It's a good idea because I think that you're going to see a lot more renters, as we see sort of a mini housing bust take place. you'll have a lot more people renting, They'll still have to go to a laundromat and do their clothes. And what you're talking about what Newmont did, they invested in the Canadian oil sands to hedge their rise in energy [costs]. If you're going to do that you certainly can, you can go in the futures market, take a long term position on energy, so any rise in cost you might be able to offset, with say the appreciation of your energy contracts. So, yes, absolutely, you'll be able to hedge it, which is what I'd recommend you do.
JOHN: Shani listens in India and he says:
Dear Jim, I listen to you talk show regularly and have been a direct beneficiary of your thoughts, and investment ideas. More importantly, It's nice to hear some program that can cut through all the disinformation campaigns floating around. I have one question regarding commodities, specifically the metallic varieties, don't you think if oil prices go high, say $100-150 a barrel, this would seriously impact the demand for some commodities such as steel, aluminum, copper. So wouldn't the price of these commodities fall drastically compared to their current historic high? Would appreciate it if you could throw some insights into what happened during the previous oil bull run.
JIM: During the previous oil bull run in the 70s, the price of everything went up because the cost of producing everything went up. What it's going to do is what we've seen so far is you've seen energy prices go from $20 to today's price of $60 a barrel, and at the same time the cost of let's say producing gold or copper now copper prices have doubled but what you're going to do is you're going to see as it becomes more expensive to mine these commodities, whether it's energy prices, whether It's labor, whether it's steel, the price of everything goes up, and That's what you see in a global commodity bull market. This is not a temporary thing, this is going to be with us for at least close to two decades. we're about 5 years into this thing now, and I think you'll be seeing rising commodity prices well into the next decade. And They're going to have to go much, much higher, much higher than anybody is anticipating right now. I mean I saw a conservative economic consulting firm predicting that the price of gold is going to double again and go to a $1000. Who knows where the price of steel is, but the price of all of these things are going to go up. They have to. [54:42]
JOHN: From Tokyo, Japan, Mikoto writes:
Mr. Puplava, I am a Japanese who has enjoyed your website and radio show. I've learned a lot from your insightful and persuasive analysis about what is going on in the global economy. I'd like to comment on your remarks about the Japanese core CPI which was aired on November 19th, I think you said that BoJ has decided to introduce core CPI that excludes food and energy. I find some factual errors as follows:
1. Unlike the US, a government ministry, the Ministry of Internal Affairs and Communications is in charge of calculating the CPI numbers, and therefore the decision was made by MIC instead of the Bank of Japan.
2. The MIC has announced the core CPI on a regular basis, this time the MIC announces the change in the definition of core CPI. Well, the current core CPI excludes only foods, the new one excludes foods and energy.
I think the Ministry of Internal Affairs and Communications announcement of a new core CPI is a clear sign of the friction between a central bank and its government. And while the Bank of Japan is willing to normalize its money supply policy as soon as possible, it seems that the Koizumi government resolves to take any means to stop it. Mr. Takenaka, the head of the MIS, has been the active leader in the cabinet to suppress the Bank of Japan who starts hinting at money tightening. He has no hesitation in stating Koizumi and his powerful LDP will revise the law if the Bank of Japan changes money supply policies in an unacceptable manner. In my opinion, the new core CPI is Mr. Takenaka's naked threat against the Bank of Japan, implying any move to raise the interest rate sounds stupid when Japanese people see new core CPI numbers.
JIM: Well, first of all thanks for the correction that it wasn't the Bank of Japan, it was the Ministry. But it gets across the point that the governments are trying to hide real inflation rates and measuring those inflation rates from their citizens. And this is the problem we're seeing, not just in the United States, but I think you're seeing it elsewhere as government’s inflate their money supply. The guy in the street sees his standard of living costs go up. I'm talking about the stuff you have to purchase on a daily basis, it keeps going up yet you hear these idiotic pronouncements, “well, the core rate is only 2/10 %, and the personal deflator is only at around 2% inflation.” But everybody knows that is balderdash. I guess It's nice to know that we're not the only ones playing these tricks. [57:24]
JOHN: It seems pretty common across the board though. That's what actually makes it amusing, It's not limited to any particular country or continent. Timothy is listening in Montreal, Quebec, Canada:
Thank you so much for your interview with Louis Vincent Gave, it has profoundly changed my economic worldview. I also enjoyed hearing the crossfire between Jim Puplava and Paul Nolte. It is great that you provide ideas that are not widely available to your listeners. I'm more confident not only in my own views of the world because of this show but am also more confident that Puplava Securities are a great place to invest because of how the Financial Sense news team is open to differing opinions. It would be great to hear an environmentalist opinion on this show once, perhaps to provide insight on how investments such as mining or nuclear energy may face opposition, and the extent that would be faced in various countries and what the reasoning is.
And that would be double ended. It would be sort of interesting to have a number of different environmentalists on from different perspectives, possibly opposing, because when you say environmentalist that either means someone who is trying to preserve it, or the environmental movement etc, etc. That is going to undergo, I'm predicting Jim, great rework because it cannot survive in its current form, although if you notice There's this little friendly pas de deux going on between environmentalist organizations, and oil organizations who fund a lot of environmentalism, because they both have interests in oil prices. It's interesting.
JIM: we've had some environmentalists. we've had the people from Limits to Growth on the program this year, and remember the original Limits to Growth was written in the 70s, we've had in fact one of the original authors on this program. So, we've had them on too. [59:11]
JOHN: From Albuquerque, New Mexico Alex says:
You guys are my heroes...
I don't want to get that high, Jim, it means we have to live up to it.
...after listening to last week’s program, I decided it would be wise to lighten up on my holdings of gold majors. I don't know how you did it but it was a great service to your listeners to have gotten gold up by $10, or so by the open of market on Monday. It provided a great selling opportunity. It would be helpful if you could do the opposite after the expected correction.
JOHN: Expect the correction? Or expect you to do something about it?
JIM: Both, answer yes to both. We see a downturn coming as we talked about earlier in the expert series with Frank Barbera, and when we see a change We'll call it, We'll call it the way we see it, despite the all the numerous flak we tend to get when we do so, but That's what we do on this show.
JOHN: Ganesh writes:
I'm a regular listener of your weekly broadcast, I'm a rookie when it comes to investing so my question might be pretty basic. I've some savings from my IRA and some personal funds. I'm about 50% of it invested in gold and silver, and gold and silver stocks. I wanted to invest the rest in something that is not dependent on the US dollar, as well, say for instance the Swiss franc, or Swiss funds. I'm not sure where to start learning about this. Do you have any advice? It might even be good if you dedicate one of your weekly broadcasts to topics such as this.
JIM: We have a guest on foreign currency trading coming up here in the next 2 weeks. he's written a good primer on foreign currencies, when you listen to that program it will be our last interview of the year, it will be played on New year's Eve weekend. I recommend that you get his book, you might want to start looking and investigating into Everbank where you can buy, let's say, foreign CDs as a means of diversifying outside the dollar. Another would be to own natural resource companies of companies that are domiciled outside the United States. [1:01:13]
JOHN: Robert’s in Newport Beach, California:
I have a quick question for you, based on what you see in the future what are some of the better careers and or businesses to be in over the next 20 years. My son is going into college and I'm desiring for him to choose wisely. I've always encouraged him to build a business, but in which areas?
That's from Dr. Bob, PhD., down in Newport Beach.
JIM: I can tell you one area where There's going to be strong demand, high pay, great benefits, probably for the next 2 decades is to become a geologist. I don't care if you want to work for a mining company, or work for a petroleum company, even the majors now are offering incentives on college campuses. I mean you're going to be in a field where this is going to unfold into a crisis, globally, in energy and anybody that has a background in geology, engineering because we're going to have to figure out better ways to make solar more efficient, wind turbines, nuclear just anything to do with the area of mining, and energy is going to be a great career. you'll be making six figures a year with benefits, and instead of being laid off you're going to have every company, and their cousins coming after you, especially if you've got years of experience. Most of the people that got into the mining and energy industry are set to retire. There's a shortage of geologists and trained energy engineers for the energy industry and mining industry today. I mean you basically can call your own tunes. [1:03:03]
JOHN: Alright, Jim. This is the last full program of the year, so we're wishing everyone either Merry Christmas or Happy Hanukkah, because Hanukkah starts on sundown of Christmas Day believe it or not. And what we're going to do next week, we will have an abbreviated type of show next week, you and I are going to begin analyzing a lot of the things that the guest experts have said on the program over the course of the last year. So We'll summarize the year and look at what this might mean for the future.
JIM: we've interviewed 55 experts this year, and we're going to go through those experts and we're going to take what They’ve said, What's come true, what hasn’t come true, and summarize the main investment themes of 2005 and then put that into perspective: what will be these investment themes for 2006. we're going to give you a sort of head start on next year, but That's just going to be John and I. we're going to give our regular guests, Tim Wood, Frank Barbera, Dave Morgan, Joe Duarte, Paul Nolte sort of a break here for the holidays. So, That's coming up next week. And remember we did 3 interviews this week, we have Ike Iossif next week, We'll have Mike Leibowitz, he's been Timer’s Digest number one timer in the United States for the last 10 years running. He’ll be our guest next week when Ike joins me for Ahead of the Trends. And then also we had that one email about foreign currencies, Peter Rosenstreich has written a book called Forex Revolution: an Insider’s Guide to the Real World of Foreign Exchange Trading, and We'll have that as our last interview New year's Eve weekend. But we still have two more exciting interviews for the rest of the year and then next week, John, you and I are going to try and put this whole year into perspective with some of the great calls that have been made on this show by experts and some of the misses. And We'll try to put all that together next week.
FSN Bloopers 2005
JOHN: You know Jim one of the things we try and do is strive for professionalism on the program, and we get lots of email from people and we try to present ourselves as professional, suave, debonair, understanding everything. We did one email from a person complaining that I eat while I'm on the air which is true. It takes upwards of 12 hours a week to put this program together I don't think people realize that, and despite the effort to make it sound professional, and carry information, every once in a while things just don't go right. [1:05:36]
JOHN: Anyway, Jim, that was a collection of 3 years worth of flops on our part.
JIM: Well, you see we really are fools, folks. Oh, There's been some of those moments. Most people don't realize sometimes we do this show in segments. We do the interview during the week because It's very hard to get people for an interview on a Friday. So most of the interviews are done during the week, but there are times John when I can remember Friday night you and I are still punching out the show until 7:30 or 8 O’clock at night, and you know after you get in and get up in the morning and by 7:30, 8 O’clock you get a little punchy, so sometimes we flub up and you got to hear some of the flub ups. [1:10:37]
JOHN: It's also why we actually both eat while we're on the air.
JIM: Yeah, you know at 7 O’clock you're starving. So, as you mentioned it takes anywhere from 12 to 15 hours, and That's not to mention the amount of work that Mary puts in. And There's Carol and others involved in the program, so There's a lot more time to put this thing together. Now sometimes it comes on the air at 3 hours but There's a lot more production time. I remember one time I used to do television news for every minute I was on the air I spent nearly 3 hours of preparing.
JOHN: That's not unusual. And we have people behind the scenes as you just mentioned. Your wife, Mary, does mostly the website and everything. My wife, Carol, whom I met working at the Public Broadcast network many, many years ago does a lot of the editing here on the program, and Glen Meyer we should give him credit basically assembles the whole thing, and makes sure it gets up on the website, and our various webmasters as well.
JIM: Well, anyway, you got a little bit of insight into flub ups because we probably have them every week. Some of them are noticeable and if they aren't noticeable we try to put them in the file for maybe a lighter side of the Financial Sense Newshour.
In the meantime gosh, time has gone by quickly, where did the year go for that matter on behalf of John Loeffler and myself We'd like to wish you a merry, merry Christmas and a prosperous New Year. And remember, We'll be back next week with the year in perspective, as well as a look at the year ahead.