Financial Sense Newshour
The BIG Picture Transcription
March 25, 2006
- Plausible Scenario: What the Fed Will Do
- Other Voices: Evelyn Garriss, Browning Newsletter
- Sector Analysis: What's Cheap, What's Reasonable, What's Working
- Emails and Q-Calls
- Other Voices: Jim Willie CB, Hat Trick Letter
- Growing Ounces: A Closer Look at Junior Gold/Silver Stocks
- SOS: Stuck on Stupid
Plausible Scenario: What the Fed Will Do
JOHN: Well, you must admit, Jim, that week to week here we do get into some heavy, heavy, heavy topics here. So, we will start out with an email for this hour from Warren in Chapel Hill, North Carolina:
Dear Financial Sense Online, I have become concerned about Mr. Puplava’s exposure to too much negative information on the peak oil issue, so I’ve decided that he needs to look at the bright side of it. Here are the top 10 things to feel good about peak oil:
10. Teenagers will no longer be riding those noisy jet ski personal watercraft around the lake: grab a paddle, Junior.
09. The phrase “cut taxes and grow the economy” will be punishable by 3 to 5 years in the pen.
08. It will cost too much to drive over to the drug dealer’s neighborhoods from suburbia.
07. Condo flippers will not, I repeat, will not be able to farm flip.
06. General Motors will finally stop making Hummers, and Cadillac Escalades, and Tahoe XLTs etc, etc. Get a clue, GM.
05. Professional hockey will disappear from the South.
04. McMansions will be burned for firewood.
03. Butt wiggling on MTV will no longer be a viable career option.
02. Watching lawyers learn how to plough a field is extremely entertaining.
And number one, 01. Less food means skinny women.
Jim, there, doesn’t that make you feel better?
JIM: Oh, I’m happy already.
JOHN: Plausible scenario: what is the Fed going to do, is our first topic right here. Inflation’s been on the rise, let’s face it, I don’t think anybody’s fighting that one any more, Jim, are we really? It’s pretty evident in headline numbers, the core rate, commodity prices, asset bubbles, yada, yada, yada.
JIM: Well, we’ve been talking about inflation over the last couple of years, and it’s finally out there. At first, if you go back to 2003, the real estate market started to take off, and people were saying, “hey, this is just another bull market.” The price of big screens was coming down, the price of plasma screen TVs and computers were coming down,. And so, they were talking about [deflation].
Well, take a look at the last 3 years: take a look at any commodity whether it’s food, whether it’s energy, whether it’s lead, zinc. So, it’s obvious that these rising commodity prices are making it into the headline inflation numbers. So what the Fed needed to do, and by the way, that corresponds directly with literally the gazillions of dollars that they pumped into the economy. Just take a look at the money supply during the year 2001, and the years that have followed. You can even look at last year, the money supply grew by almost � of a trillion dollars � at an annual rate of 8%. And as a result we’ve got rising commodities, we’ve got real estate in a bubble when you have programs about flipping real estate � condoflip.com, etc. So, they needed to bring commodity prices down. They did that beginning in December where JP Morgan through the natural gas markets, literally brought the price of natural gas down at a time when we were experiencing a cold winter, and also shortages of natural gas. I don’t buy a lot of these inventory numbers, especially during the month of December when you had almost more than 25% of your natural gas production was off line, and I think it’s just slightly under 20% today. So, my contention was they needed to bring the commodity prices down.
They also needed to keep speculative behavior on Wall Street � I mean since the beginning of the year Wall Street has been pounding the table, “Hey, the Fed’s getting ready to go neutral, and it’s party time.” The Fed does not want the stock market up 15-20%, and a speculative bubble going in the stock market before it goes neutral. That can come afterwards. What they really want to do right now is get the commodity prices down, and with the way they play games with the CPI that’ll bring the headline inflation numbers down, that’s what they need to get accomplished before they go to neutral. You cannot have rising commodity prices; oil at $70 and $80 a barrel; gold over 600; and the CRB index hitting daily records � and they’re saying, “hey, no inflation, we’re done.” It just doesn’t work. So they sort of need to get this manageable and under control which they can do through derivatives. [4:49]
JOHN: Of course, as they move through the decades here now, the range of their options is now getting narrower, so the Fed is finding an increasing series of risks, and less wiggle room, so to speak.
JOHN: So what are the risks?
JIM: First of all, let’s look at what they’ve done in this rate cycle. The days when the Fed would just jack up interest rates at 50 basis points at a time, a hundred basis points at a time, those days are over. They’ve taken two years, beginning in the Summer of 2004, and they’ll probably end in the Summer of 2006. The reason they’ve done � of a point moves is you have a highly leveraged financial markets. These hedge funds with the carry trade, with the derivative trade, you can’t do what they used to do when they would just spike rates up because that would cause too many convulsions in the financial markets, and you would see a lot of bankruptcies. So, what they don’t want is a repeat of what they got in 1994, with Orange County, the derivative blow ups at Gibson Greeting Cards, Procter & Gamble � they want to avoid that.
However, the real risk they run into right now is real estate is now rolling over: mortgage applications are down; inventories of unsold homes are climbing � they’re over six months now; sales almost every month have been in a consecutive downturn; median home prices are falling. And we got that report out on Friday that showed new home sales were down 10 �% percent, that’s probably the biggest slide we’ve seen in home sales since April of 1997. They also revised January home sales, they were down 5.3%, versus originally reported being down only 3.1%. So, the risk to the Fed if they push too far is they could get another savings and loan, and banking crisis, much like they did in 1991. This time however, John, it will be much, much worse, because bank loan portfolios are very heavily concentrated into real estate mortgages.
What the Fed doesn’t want to see happen is another Japan, where the Japanese central bank wanted to burst the stock equity bubble and they raised interest rates. They were slow in responding and what happened is over the next couple of years you saw the Japanese stock market lose 70% of its value; you saw Japanese real estate prices drop by 50%. They’re just starting to come out from that. And so the reason they want to avoid that is this is a Federal Reserve that has spent and issued research papers in terms of studying what happened in Japan, making sure, in one of their papers, that it doesn’t happen here. In fact, at Milton Friedman’s I don’t know if it was his 80th birthday party, Ben Bernanke made those famous comments, he said, “You know, you were right, Mr. Friedman, we blew it in 1929 and during the Great Depression. That’ll never happen again.” So, what they want to do is they want to cool down the real estate market, get rid of the speculation, that’s happening now, but they don’t want to kill it. At the same time, they also don’t want to kill the equity market, they want the equity market to start developing again because they need another stimulus to this economy. [8:10]
JOHN: If we had to look at precise steps, what is it going to take now to achieve the goals we just mentioned. Give me an A, B, C, D type listing.
JIM: Well, I think what they’re trying to do right now is they’re going to keep their cards close to their chest. They want to keep the financial markets guessing, they want to keep them on their toes. What they don’t want to do is [allow] the financial markets to get ahead of the Fed which makes its policy ineffective, and that is just really ramp up the stock market in anticipation of the Fed going neutral, and then eventually lowering interest rates. So, they’re going to keep the financial markets guessing, sort of cool down the speculation, and I think next week they’ll raise a � point, but they’re not going to give any indication that they’re ready to go soft, so I think that’s going to bring some weakness into the stock market. You may see maybe a 10% correction.
I think also, not only will they raise interest rates in March, I think they’ll probably go in May. If we have a frothy market that may even go as far as June � in other words, if the financial markets get ahead of the Fed and think that, “OK, time to party!” then they’ll probably go again in June. But my guess is they’ll probably raise them again in May. And that should be it, unless they get more evidence of speculation is ramping up again in anticipation of the Fed going soft.
In the meantime, they’re going to keep the financial markets flooded with plenty of liquidity. You really saw this if you take a look at a graph of M3 leading up to where we’re no longer reporting it, it was growing at an annual rate of about 8%, and so beginning next week we’ll no longer report M3 any more, so you’re not going to see that reported so nobody can see what the Fed’s doing. One thing I discovered when I did the research on The Day After Tomorrow, and that really surprised me, was that after more than a year into the rate raising cycle, when I talked to lenders, when I talked to a lot of the builders, when I wrote that story is that there was no shortage of credit. Basically, you could walk in and they would say, “hey, we have a hundred different loan programs to get you into this property from no money down, or maybe 5% down, and then take out a second.” And remember, up until about 6 months ago, a lot of lenders were willing to go up to 125% loans against the property. So, that’s what I think they’re going to do. [10:34]
JOHN: if that’s what they do and succeed or fail, how are things going to unfold?
JIM: Well, an aspect of this market that you have to understand over the last two decades, the transformation of the US economy from a manufacturing based economy to a service based economy, and then to a financial based economy. Taking a look at the recovery coming out of the last recession, where have most of the jobs been created? They’ve been created in the financial sector: mortgage brokers, real estate brokers, financial planners, the construction industry � all involved in a bubble. It takes today roughly about 4 � dollars of debt to create 1 dollar of GDP.
And what happens with the US economy since we’ve sort of downsized our manufacturing base is much of the products you see in stores today, whether you’re going to department stores, whether you’re going to electronics stores, they aren’t made here. So what happens is as people borrow money to increase and maintain consumption, you get a leakage in the economy into imports. When dollars earned here in the United States are spent on foreign made goods that’s a leakage out of the economy.
If you’re only getting 1 dollar out of GDP for every 4 � dollars worth of debt, where’s the other 3 � bucks going into. Well, it’s going into imports, and it’s going into the financial system and speculation, it’s going into real estate, it’s going into the financial market, it’s going into derivatives, it’s going into stocks. So, when you see and analyze Fed policy this is really important to understand: the Fed is more effective at creating asset bubbles than they are real GDP growth, because there is nothing anchoring the supply of money anymore � the dollar isn’t backed by gold, you can print as many dollars as you want.
So when you see the Fed go to neutral, I believe you’re going to see a big move in the stock market because the financial markets are big recipients of all of this money that’s being created by the Fed. At the same time, you’ll see the real estate market cool off, it’ll start to stabilize, especially if the stock market starts to heat up again. Meantime, what they’ll end up doing is resurrecting another asset bubble � we could see things get more expensive in the stock market simply by the expansion of price earnings multiples. When the Fed is in the process of raising interest rates, PE multiples contract and that’s what we’ve seen over the last couple of years.
Why we’re going to get another asset bubble the thing you have to understand is real GDP growth comes from savings and investment. This is what creates real wealth. This is what we used to do here in this country. Creating and printing a whole bunch of money creates what I call artificial wealth, or inflationary wealth. If you’ve seen your home go up or double as we’ve seen here in the last 3 years in California, that’s inflation working its way through an asset bubble. Real wealth is created when people cut back on spending, they increase their savings, as savings are increased in an economy interest rates come down naturally because there’s more money available. The money from savings is used to invest and build new plant and equipment which creates real wage growth for the economy, and it’s also increasing society’s productive assets, or the means to create real wealth. That’s not what we’re doing here now.
What we’re doing is going into debt, borrowing money, a lot of the things that we buy aren’t made here so it goes into foreign made goods, and we’re seeing roughly the largest transfer of wealth from basically the United States to Asian economies, to Latin American economies, to European economies. We’re basically hollowing out our economy, and in an inflationary financial economy like the United States most of the wealth creation is done through asset bubbles. And so, when the Fed ramps things up, and start goosing the money supply as they’re doing now, and as they will accelerate over the next 12 months, you’re going to see other asset bubbles. In other words, when you create this money it’s got to go somewhere. It’s going to go either into foreign made goods, or it’s going to go into asset bubbles and I think that’s one of the hardest things that the deflationists have had to deal with because everybody keeps talking about this doomsday scenario � that’s a little ways off, and as we get closer we’ll get into that.
JOHN: If we looked at this through the eyes of Joe Six Pack, now, sort of summarize this. How is he going to see this � obviously more inflation, it will become obvious as he looks at that. There’ll be price inflation following the monetary inflation. What else?
JIM: Well, he’s probably going to have to go deeper into debt to maintain his lifestyle, or he could end up like my good friend whose wife not only works 5 days a week, but now she’s working at a clothing store on weekends, one extra day. They’ve got their son who’s in the military who’s moving back in with them, and he’ll be paying them rent. So these are some of the ways that they’re coping.
But you’re going to see a growing wealth disparity because headline inflation may be manipulated and made to look like it’s very moderate and not a threat. You may be able to buy for example a plasma screen TV, or a big screen TV cheaper, or a brand new computer cheaper, but the basic cost of goods for living � your food bill, your gas bill, your insurance premiums, your medical premiums, college costs, tuition books, your utilities, your cable bill � all those things will be going up. Most people, if you work for an employer, unless you’re working for the government � my brother works for the government and they just got a nice, healthy 5-6% pay increase � but for most private sector [employees] you’re lucky if you get 3%, or just basically a cost of living increase. So, you’re going to see a growing wealth disparity because those that have the means to grow their business, or grow their income, or have the ability because they save, they can invest, they can profit from inflation. So you’re going to see develop in the United States something very similar to what happened in Germany in the 20s. The only difference is it will take longer to unwind because all the world’s currencies today are fiat currencies, whereas in the 20s we were on a classic gold standard, and you had currencies backed by gold.
The other reason it’ll take a little while to unwind is the US dollar is the world’s reserve currency, and there’s nothing really on the horizon to replace it. There are currencies out there that compete with it, and that’s happening with the euro, the yen, and also eventually you’ll also see it happen with other Asian currencies, but the world’s not ready to replace the dollar completely.
So, what we’re living in is an era of inflation where you have asset bubbles and rising living costs, and you’ve got to be able to learn to cope with that and invest with it so you can maintain, or build, or actually profit during this era. And these inflationary eras are times when you can create tremendous wealth. Unfortunately, as Marc Faber has commented on this show, is we have made repeated comments, you are going to see this growing wealth disparity, because if you are in a normal wage environment where you just basically, unless you get a promotion you get just standard cost of living increases the standard cost of living increase aren’t matching the true inflation rate that you have to cope with on a daily basis, and so you fall further and further behind. [18:39]
JOHN: It would seem like the key to following all of this, or making good during this time is to understand what is actually happening. Those people who do not understand what is happening will become victims of the rising inflation. Those who do understand can theoretically do something.
JIM: Yes, I think if you are living on a fixed income you could become a real victim here of what is happening in the future because as the real cost of living goes up, and you have a fixed level of income, you are going to find it harder and harder to keep pace with the things that are going on in the economy, and in your real life. I would not want to be a fixed income investor � in other words, I would not be invested in bonds. If I was invested in bonds probably a happy medium would be inflation indexed Treasuries, and I would only do that if I had a pension plan, if you are disposed towards fixed income. But you’re going to be a real loser, because fixed income is exactly that, the interest rate offered on your bond is fixed. And I think we’re going to be headed towards a period of rising interest rates because it’ll become evident � as I think � the reason you’re seeing currencies around the globe depreciate against gold is growing recognition that paper money is being devalued. [20:00]
JOHN: Yes, but on the other hand, in line with what we were just saying, on the part of Harry Homeowner right now, if Harry was smart enough to have a low fixed rate interest loan, and he or she � you know, Harry-etta � is successful at keeping their income at par with the inflation then they’re going to be paying off that home mortgage with increasingly inflated dollars � meaning a lower percentage of their total gross income of the household. So that’s a plus as long as they can keep going.
JIM: Oh, absolutely, because if you’ve locked in on a 5% mortgage, a 6% mortgage you’re going to pay that money back over 15, 30 year period of time � just think of what the dollar’s going to be worth 10 years from now, if it’s even around. But, you’re absolutely right, John, but you’ve got to remember you’ll also have to be able to support and keep your present payments. So hopefully you’re in a situation where your income can go up, or you have another means of supplementing your income so you can make those payments. They’ll be fixed, but you got to have the means and ability to make those payments, because you don’t want to get into a situation where your payments are beyond your reach, and you lose a job, or you’re just barely getting by.
I wrote in Captain’s Log this week, and I’ve told the story before, about my real estate agent telling me about a couple that had a variable rate mortgage that they took out in 2003, and had just got reset here couple of months ago, when their payment went up $700 they couldn’t afford to make that payment. So, they’re putting their house up for sale which I’m glad to see them do, because number one, they’ve got profits because in the last 3 years real estate prices have gone bonkers here in Southern California, but they’re getting out from underneath something that would be such a heavy burden to them. And that’s the situation you don’t want to be in. [21:53]
JOHN: Yeah, it would be a real albatross in other words. But one way or another, if you’re going to succeed here, you have to understand what’s happening and take appropriate action on that part.
Looking at emails from some of our listeners. Dave in Folsom California, says:
Mr. Puplava, an observation you have noted on several occasions that the world is in denial regarding peak oil. Well, California is seeking signatures for a ballot initiative to fund alternative sources of energy, which will be submitted to the voters in November. In as much as we both feel peak oil is real and serious, I decided to do my civic duty, set up my table and ask for signatures. Result: approximately one half of those that did stop and inquire refused to sign. I heard statements like: “it is a conspiracy by oil companies to keep prices up;” or, “there is plenty of oil in Alaska;” or, “all we need to do is to drill offshore.”
Let me put that in the stuck on stupid category for the week.
JIM: It’s absolutely amazing but that’s California, we’re the BANANA state: build absolutely nothing, anytime, near anybody � that’s our philosophy. We love our cars, we love our freeways, we love the sunshine, but we want to get all our energy produced somewhere else, so we import it. You’re absolutely right. [23:10]
JOHN: And this week’s Stuck on Stupid award goes to 8 Republicans in the Senate, along with every single Democrat who voted to kill a bill by Senators Jim DeMint and Mike Crapo that would have stopped raiding of the Social Security fund. The vote was 53-46, and on the list of those voting to continue the Social Security raid is every single potential 2008 Democratic presidential aspirant in the Senate, including Hilary Clinton, John Kerry, and Joe Biden, and the list also includes Republicans who are running for office again: Conrad Burns of Montana; Jim Talent of Missouri; and Gordon Smith of Oregon. Big dollars here: the payroll tax will collect $80 billion more in taxes next year, and $436 billion over the next 5 years.
And this was a move to do what Al Gore had originally pledged to do � create a lockbox to protect Social Security from being raided by Congress every single year. But apparently, Congress doesn’t want to do that unless they have the key to the lock box.
Hi Jim, this is Matt, calling from California. One topic that I don’t think has been given much discussion on your program is the risky future retirement savings plans. It seems to me that we’re headed in the direction of economic decline, and it’s highly likely there could be a restructuring of Federally supported retirement savings plans, such as 401Ks, IRAs, etc. Several well known and respected economists, and some of whom have been on your show, have also indicated this is a real possibility, and they discuss scenarios where the government could impose 100% penalties for withdrawal, and limit these investment opportunities to long term government bonds to seize upon the investments as a means of stabilizing the economy. I find this prospect extremely alarming as I’m sure many of your listeners do, given the large allocation of my savings that are tied to such plans. I’d really appreciate if you could take some time to discussing this and lend some advice. I realize you’re probably reluctant to give any advice that promotes a mass exodus from tax-sheltered savings plans, but I’d really be interested in hearing an intelligent conversation discussing some of the options here. [25:35]
JIM: OK, Matt, you’ve hit upon something that we have also been emphasizing. I remember telling somebody this in 1994, that we’re going to see a day where you may not get social security, they may go to means testing, they’re also going to get to a point where the Federal deficit is going to get so large because government spending is out of control � you can’t handle it with raising taxes, you could raise taxes to 100%, and you’d still have a deficit. But what I think they’re going to be doing next, and they’ll need a crisis to do it, but I think eventually, since they’re raiding Social Security � read my Captain’s Log this week � they’re raiding the Civil Service pension plan, the next thing they’re going to raid is private pension plans. They already do it for example with defined benefit plans. We had to close ours down because we made so much money; 100% of the excess was going to go in the form of taxation, so we had to close that out.
But you’re absolutely right, I think you’re going to see a point in the future where they’re going to come after private pension plans; they’ll force you to invest in worthless zero coupon bonds. So, one of the things you’ll want to do to protect yourself: make sure you have inflationary type investment options in your savings plan; and if you get to a point where the only savings you can do is in your 401K program, I really don’t like that. I think you need to build up some personal savings outside pension plans. The thing I don’t like about pension plans savings is, yes, you get the tax benefits up front � the tax deferral � but believe me, the government has their eyes on private pension plans as a future source of revenue, and they’re always changing the rules which is something I don’t like.
So, two things, try to create a balance between what you’re doing through savings plans � through let’s say pension plans � and what you’re doing personally. You need to also build up your personal savings because you’re going to have a lot more flexibility and options, because the government can’t control them as much as they do pension plans. And then secondly, make sure that you have some inflationary investment choices: government bonds such as TIPS; energy fund; gold; natural resources; foreign bond fund; things like that - so that you can profit from this inflationary wave. [27:50]
JOHN: We have an email here from Jerry in Ontario, Canada, and he says:
In the event of an H5N1 flu pandemic, talking about bird flu, what is your opinion in terms of direction and severity interest rates would take?
I should say before you start in there Jim, I’ve been talking to people about this � this week there was a national bird flu summit back on February 27th and 28th here in the US. This thing seems to be a media event more than anything else, simply because of the fact that two things would be required for any kind of a pandemic: number one, the virus would have to mutate first to get into the human population � right now you can contract only if you’re in direct contact with things like raw duck blood, or something of that nature; and then it would have to be readily communicable. Those are two giant hurdles that this virus would have to jump over which so far it hasn’t. But anyway let us suppose it did, and it’s the day after tomorrow: where would interest rates go?
JIM: I would suppose interest rates would come down. Anytime you have a panic, there’s always what we call the flight to safety. It’s like, “oh my God, I’m scared.” And what happens when people are scared is they go to cash, or they go into government bonds. So, you could see interest rates come down.
JOHN: Or they go to Canada.
How to Prevent Bird Flu... from Neil, our transcriber...
Anyway, coming up in just a second will be coming up Evelyn Garriss from the Browning Newsletter about the threat the hurricanes pose, especially for the Northeast. Accuweather ran a major story this week � a major hurricane strike grows for the northeast � everyone has forgotten that hurricanes do move up to the Northeast. But first Jim you had something that you wanted to do.
JIM: Yes, I want to make an announcement. Up until this time we have not run commercials here on the Financial Sense Newshour, nor have we got pop-up ads on Financial Sense Online, but you know, with the cost of inflation rising and going up, it’s just something we couldn’t maintain that posture. So we have a circle we meet and review commercial opportunities � people that want to advertise on the program. We want to keep it in good taste, but we’ve got to pay the bills, and so you’ll have to bear with us. Our first customer is the Federal Reserve, and so you know periodically we’ll be running commercials just to cover overhead.
“The goal as you know was to help ensure�”, yada, yada, yada, blah, blah, blah, there he goes again, do you have trouble understanding Federal Reserve Chairman Benjamin Bernanke. Well, we don’t blame you, we do too. That’s why we’ve created the revolutionary Bernanke online real-time interpreter. Let’s hear that again, but with the help of the Bernanke online real-time interpreter.
“The clear communication of policy provided notable benefits.” Just push the button and voila: “we’ve gotten away with raising interest rates.” Isn’t that great! Nothing escapes the Bernanke online real-time interpreter, during one of the Fed Chairman’s famous speeches.
“Policy moves gradually, tightening in � point increments over 14 successive meetings”-
�If we move slowly enough, you guys are too stupid to notice.’
The Bernanke online real-time interpreter is affordable by every one in the family, it’s only 49.95, payable in anything except dollars, and if you act in the next 10 minutes, we’ll throw in the Bernanke online real-time fib finder, when the Fed Chairman is playing fast and loose with the goose.
“Although macroeconomic forecasting is obviously fraught with hazards” [goose squawks] �Liar. Liar. Liar '
Well, there you have it, pick up your Bernanke online real-time interpreter at any Federal Reserve bank branch. And remember, as the online interpreter would say:
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I think we’re sick.
JIM: Well, there you go, folks � our first commercial break. Remember, we’ve got to keep the lights on and pay the bills, and we appreciate the Fed advertising on our program. [31:45]
Other Voices: Evelyn Garriss, Browning Newsletter
JIM: Well, the first tropical storms of the season have just started over in the Pacific Asian area � we call them typhoons � and one has just struck Australia. To talk about this year’s hurricane season, joining me on the program is Evelyn Garriss of the Browning Newsletter.
Evelyn, I thought we might start out with La Niña, we have a lot of weather forecasters talking about it, describe what it is and what impact it will have on our weather.
EVELYN: La Niña is just the opposite of El Niño, instead of the tropical Pacific being unusually warm, it’s unusually cold, and just as El Niño distorts normal weather patterns, La Niña also distorts weather patterns, creating almost the opposite effect of an El Niño. So, for example, whereas an El Niño would generate a very warm winter, now that La Niña has developed late in the season we’ve seen quite a bit of cold weather. [32:50]
JIM: Yes, here in Southern California we usually get our rains in November, December, maybe January, now we’re getting them in March, the weather is cooler, and it’s wetter.
EVELYN: Yes, what’s happening is the water offshore is cooler than usual, so you have the cool water helping to cool off your temperatures. Also, because cool water doesn’t generate as much moist air the rainfall is precipitating out in California and not going inland, so you end up [with] California getting all the rainfall, and further inland � Arizona, New Mexico � has had some very, very dry weather. And it’s going to have terrible consequences for the Colorado River which some have said is as dry as it’s gotten in 500 years. [33:35]
JIM: You know, I notice in January it was probably some of the wettest months they’ve ever seen up in the Seattle and Vancouver area. Is that pretty much a product of this La Niña?
EVELYN: Typically a La Niña creates very wet cool weather in the Northern tier states, and it’ll start off on the Pacific coast, and then work its way across the nation. So in January we saw all that moisture concentrated in Vancouver and Seattle � and they set some real records, just as Phoenix set some records for dry weather.
JIM: Now, what about as it works its way across the nation, does it affect anything? In other words, if the Pacific is cooler than normal, what about the Atlantic? And I guess a second question: what does this year’s hurricane season look like?
EVELYN: Ouch. The Atlantic is unusually warm. There’s a current called the Thermohaline current which is a fancy way of naming the current that carries the warm tropical water up towards the polar regions in the Atlantic. And it is flowing very, very strongly right now. It’s brought an awful lot of warm weather into the Gulf, and this is helping to heat up the Gulf temperatures. For right now, we’ll be seeing it heat up temperatures in the Gulf. Unfortunately, when Summer and the hurricane season comes what it’ll do is it’ll give a lot of energy to any storms that develop in the Atlantic ocean. And so we can expect another very busy hurricane season. When that combines with La Niña winds � La Niña tends to enhance the trade winds � so we’ll have very strong winds from the equator towards the Northwest, which means it’s blowing it straight towards the East coast and the Texas coast. [35:29]
JIM: Is there anything that determines whether these hurricanes hit land fall or not � because sometimes we get very lucky and we dodge bullets � they seem to spend most of their energy out in the open � is there anything that determines whether they hit inland or not?
EVELYN: The highs and lows in the atmosphere. A lot of people are beginning to study the position of the Bermuda high. For a while the Bermuda high was a little further out � this is earlier in the warm period of the Atlantic. And we had a number of years where the large hurricanes were twisted North, and managed to go up into the Atlantic and avoid us. Now the Bermuda high is closer. Over the past few years the Bermuda high has been closer to the US continental area, and it has almost steered the storms into Florida, and the Gulf coast. So, this is something people are doing a lot of research on, and hopefully when we understand more about the Bermuda high we may have a better long range forecast of whether or not the storm season is likely to have a lot of storms heading towards the East coast, Florida, or the Gulf coast. [36:40]
JIM: Now, how long do these La Niña conditions last? I mean it is March, and we’ve been getting rain here for the last two weeks in Southern California � a lot of it I might add � which is welcome you know given the dryness. Does this cool weather continue all the way into the Summer, or is this something that eventually fades?
EVELYN: Well, in most cases the California coastal region, especially Southern California, continues to be cooler than average throughout most of the Summer � throughout Spring, and most of the Summer.
La Niñas can last as short as six months. They typically last closer to six months. Sometimes you have a La Niña last about six to eight months, fade away, and then reoccur the next year. We’ve had some times where you had weak La Niñas reoccurring 4 years in a row which typically was not good news for most of the US, although California could certainly use the moisture and the cooler temperatures in Summer. [37:39]
JIM: What about the rest of the country? As La Niña works its way across the rest of the country does it affect anything on the agricultural side, let’s say the bread basket of the United States?
EVELYN: It has typically a rather unfortunate impact on the bread basket. In Spring the typical pattern with a La Niña is it’s cooler in the Midwest, and it’s wetter in the Midwest � in the Eastern part of the Midwest and Michigan. Whereas in most of the plains, and especially the Southern plains � Texas, Oklahoma, Arkansas, Louisiana, in some of these areas they’re already having fires � [it] remains very dry. When Summer comes you typically get soaring heat waves in the Midwest, and very dry weather. So, La Niñas hit the grain basket directly. [38:32]
JIM: And so, like a couple of years ago where we had those record heat waves in Chicago, was that La Niña?
EVELYN: It could’ve been � yes � I’m not quite sure which one you’re referring to, but yes we’ve had some record heat waves during La Niñas.
JIM: Well I know that the Chicago area, one of our experts that appears on this program each week was, you know, basking in the sun because they were getting warmer than normal temperatures in Chicago. So, that could carry into the Summer.
JIM: Evelyn, in terms of getting back to the hurricane season one of the things that you’ve been talking about is this heating of ocean temperatures which goes with this decadal cycle, and as a result of that you get warmer ocean temperatures, which means that these hurricanes seasons tend to be more severe than normal.
EVELYN: They tend to last longer, they frequently start earlier, and well, look at last year, you had the hurricanes lasting through December.
JIM: That’s absolutely amazing.
CNN did a special this weekend on � it was called We’ve Been Warned and it was about a future energy crisis, and it begins in the year hypothetically in the year 2009, and it begins with a severe hurricane that wracks the Gulf of Mexico taking out not only oil platforms, but also damaging refineries, for example in Houston. Do these cycles when they get as severe as they do, do the odds increase that you get more of these Gulf-type hurricanes? So we can expect to see these kind of disruptions as we did last year?
EVELYN: One of the things that we tend to see is that hurricane seasons tend to last longer. There’s a lot of research being done and a lot of reports concluding with the warmer oceans that hurricanes can grow stronger. So, for example, we’ve seen the Typhoon that hit Australia was a level 5, just as we had level 5 hurricanes last hurricane season here in the Atlantic. So, what you tend to see is longer lasting hurricane seasons, and the water is warm enough to make these hurricane seasons abnormally strong. It doesn’t necessarily mean stronger in the Gulf, it just means stronger hurricanes. [40:38]
JIM: So, you’re going to get more of the upper limit in let’s say wind speeds in the 160 [mph category]� more of those category 5 type storms.
EVELYN: In the long run, yes, with the warmer Atlantic we will. Another thing that’s happening is that the storms aren’t dying out as quickly as they used to, so that for example last year, we had a tropical storm hit Spain. It’s never happened in recorded history before. But it swung through our side of the Atlantic, and then crossed the ocean and hit Spain. And we had the remnants of another hurricane that was so strong that when the remnants hit Norway they caused landslides and killed people. So, these things are starting earlier; we have larger number of strong storms; they’re lasting longer, as far as the amount of territory that they cover � they’re still fairly strong when they cross the ocean; and we see them starting later in the season as well, so you can have hurricanes starting in December, at least tropical storms starting in December. And this is for the Atlantic. We’re not seeing quite the same effect in the Pacific, but we are seeing stronger storms in the Pacific. [41:53]
JIM: How long do these decadal oscillator cycles last, because right now the energy infrastructure of the United States is very fragile. I think we still have like 20% or less of our energy production is still offline. So, I mean you would hate to see another series of hurricanes hit this area but it sounds to me like these weather patterns tend to be longer lasting.
EVELYN: And a lot of what was built in the Gulf was built when the Atlantic was cool � during the 25-30 years when the Atlantic was cool. So they’re not necessarily designed to meet the conditions that they’re facing now. We tend to find that these [cycles last] � a conservative estimate would be 20-30 years � looking at the history I think closer to 25 to 30 years. And the Atlantic changed from cool to warm in 1995. [42:43]
JIM: So, we’re just barely 10 years in this cycle.
EVELYN: Yes we are. The Pacific changed in 2000, so we have a lot longer to go with the Pacific.
JIM: Well, that’s probably not the news we want to hear but that’s probably going to be the weather we’re going to be dealing with.
Evelyn, as we close why don’t you tell people about your newsletter, and how they could get information about it?
EVELYN: My newsletter is the Browning Newsletter. It is published once a month and subscribers can then not only receive the emails, but can email questions and have them answered. Anyone who’s interested should contact firstname.lastname@example.org and that’s frasier with an �s’ � email@example.com. And she will be glad to provide a free sample, and you can ask her about a discount.
JIM: Well, Evelyn, as always I appreciate your joining us here on the Financial Sense Newshour, all the best to you, and love to talk to you again.
EVELYN: I’ve enjoyed talking with you and your audience again.
Sector Analysis: What's Cheap, What's Reasonable, What's Working
JOHN: Well, as we’re waiting for the first hurricane to arrive, James, I have finally thought about this whole thing we were talking about earlier in the program: given the fact that you think we’re sort of headed towards another equity rise here � equity bubble � looking at sector analysis: what is cheap, what would be reasonable, and I guess my bottom line since I’m very pragmatic is what’s going to work?
JIM: Well, given this inflationary era that we’re operating in. One of the manifestations of inflation in the financial markets are high PE ratios, low dividend yields. These are signs of inflation. When you have a lot of money chasing fewer assets, the price of those assets go up � in other words, the PE ratio. If you have a lot of money chasing bonds, and we certainly have a lot of that going on globally, if price goes up, the yield comes down. And I don’t care if you’re looking at Treasuries, if you’re looking at emerging market debt or you’re looking at junk bonds, or even looking at credit spreads between Treasuries and lower quality bonds.
The parameters and yard sticks of the market have changed. I mean, John, if we go back to the Great Depression people were so traumatized by what happened � government policies just botched and created the Depression through monetary policy, inflating markets leading up to the stock market crash and the Great Depression, and then the way they fought the Depression � as everybody is well aware it was World War II that bought us out of the Depression, it wasn’t the New Deal program. And people were so traumatized in terms of what happened to the market that you had banks and insurance companies that were prevented in their policy from investing in the stock market because it was considered too risky. They were mainly bond investors and that didn’t really didn’t change until you got into the Sixties. Most people would be surprised today, if you go back and take a look at dividend yields and especially in the 30s and 40s, and 50s that dividend yields were much, much higher than bond yields, because stocks were perceived by the majority of institutions and individuals to be high risk investments, because that was after coming out of a Great Depression, and a stock market crash where the Dow lost over 90% of its value.
So the old benchmark rules � and the Dow theorists used to refer to this � is the 3% and the 6% line on dividends. The stock market was undervalued when the dividend yield got up to 6%, and it was overvalued once it got down to 3%. That rule no longer applies. It was interesting to hear Kelley Wright last week, from Investment Quality Trends � Geraldine Weiss, who was also heavily influenced by Ben Graham � the yardsticks today are a 3% dividend yield in terms of under value and probably a 1% yield as being over value.
So, what we’ve seen is a period of time where the stock market PE ratios and dividend yields got inflated. I mean if you take a look at what the PE ratio was on the Dow, or for example, the S&P 500, in 1999 and 2000, they were just grossly out of whack with things but now they have come down. And remember, earnings have been going up for companies since 1999.
What we did is we did an analysis of market indexes in terms of PE bands based on their earnings, we looked at long term trends (10 year period), and then also short term trend ( a 3 year period) � actually my son Chris wrote a piece on this, in the Wednesday wrap up on Financial Sense. And if you look at both the Dow and the S&P they’re at their lower PE bands. And many of the companies that are within the Dow, whether you’re looking at some of the oil companies, the drug companies, industrial companies like General Electric, or consumer product companies like Coke, or even Pfizer, they’re at the bottom part of their PE bands, and that’s something we haven’t seen in a long time.
I wrote a piece in Captain’s Log � I mean many, many years ago, if we go back 5 or 6 years ago you had companies that were selling at 30 times earnings. Today, you have many of those companies that are selling at PE ratios that [are] almost half of what they were many, many years ago. In my Captain’s Log I talked, for example, about Pfizer � Pfizer had 16 billion in sales in 1999 and the highest PE ratio in 1999, Pfizer sold for almost 72 times earnings. That’s how crazy things got. In the year 2005, Pfizer had almost 51 billion in sales, and their PE got down to about 13, so things have improved immensely.
If you look at, for example, industrial stocks like General Electric, they were selling at their height in 1999, General Electric sold at over 51 times earnings. Today, at the end of 2005 the PE has dropped to 23. In the meantime, General Electric sales have gone from 55 billion in 1999, to almost 152 billion in 2005. And many people aren’t even aware that GE is once again transforming itself: it’s going to become probably the largest alternative energy producer. Geoffrey Immelt has really got the green revolution, if you look at some of the GE ads: they’re into building nuclear power plants; they’re into wind turbines; they’re very big in wind; they’re very big in solar; they’re really big in water. They have a number of patents in things that they’re working on right now � 17 different applications having to do with energy or increasing energy efficiency in an economy. So, things do change over a period of time, and GE is a company that’s remaking itself. It’s probably one of the most successful industrial companies in history: it’s one of the original Dow stocks of 1896. And GE is one of the best run companies in the United States � in the world, in my opinion. They’ve always had a habit of having a remarkable leadership transition, and also growing their leadership. They prune their staff: if you’re not bright enough to make it at GE eventually you’re let go. So, they always keep the company run very efficiently.
So, the point I’m making here is that maybe things aren’t cheap today, and in an inflationary era I would love to be buying stocks at 5,6, to 7 times earnings, but you haven’t been able to do that outside the energy sector for you know, almost 15 years now. So, if we take a look at what’s working, what is cheap, what’s real cheap right now, there’s only one sector on my opinion, actually two, one is energy.
And if you take a look at the energy sector, you’ve got rising sales; you’ve got inelastic demand � we’re almost back up to $3 gasoline prices, we’ve adjusted to that. If you’re an oil company you can sell anything you can produce at market prices, yet, you’ve got natural gas companies selling at 5 and 6 times earnings; you have international companies selling at 6,7, and 8 times earnings. So, you’ve got a situation, where an industry is experiencing rising earnings, increasing cash flow, rising faster than the stock price � that’s why you have a low PE. So, you can back up the truck on natural gas stocks at this point. So, this is one sector that’s very, very cheap. [51:30]
JOHN: OK, so far you’ve covered cheap, but the next topic in this series was what’s reasonable.
JIM: Well, we took a look at a couple of the other sectors. We looked at the healthcare sector. I mentioned previously Pfizer whose basic sales have exploded, and yet the stock price has come down. You can almost see this across the whole spectrum in the drug industry � I mean, what bit of bad news isn’t out there.
Health care is cheap, it’s also a defensive sector as the economy slows down, and also a lot of these companies have favorable product lines. We just accumulated a major drug company, most of its patents don’t get into patent expiration problems until the next decade. They’ve got a pipeline of new drugs.
The other thing too, as the population ages you have demographic trends becoming more favorable for the industry. Maybe the profit margins aren’t as wide as they were let’s say 15 or 20 years ago. But by the same token � there’s two kinds of businesses that you can make money: you can make money with companies that have a high profit margin, they can sell their products at high prices; another way you can make money is find a company that maybe doesn’t have a high profit margin but they have high turnover - they turnover their inventory a lot more rapidly than other companies. So, maybe you’re not making as much per unit of sale, but you’re making more unit of sales throughout the year. So, the healthcare industry looks good.
Another area I’m very excited about is some of the industrial stocks. If you take a look at this country, we’ve ignored basically our infrastructure system from mass transportation, from our water systems � a lot of cities and states need to rebuild their water infrastructure. We need to ramp up alternative energy. The US may be stuck on stupid, and especially California, but let’s put it this way, the rest of the world gets the energy message � they’re moving forward. So, when you think of industrials and alternative energy stocks don’t look at what we’re doing here � because we’re idiots � take a look at what the rest of the world’s doing. Look at what they’re doing in Europe; look at what they’re doing in China and India, and Japan; what they’re doing in Latin America. I mean the �banana’ people here in the United States will keep us behind but the rest of the world is moving forward. And I think alternative energy stocks are going to become the equivalent of technology stocks over the next 10 years � so that’s another sector that we’re excited about.
And an area that’s undervalued and also fairly defensive is consumer staples. Think about it: no matter what’s going on in the economy people have to have water, they have to eat. There are things that they consume on a daily basis: toilet paper, toothpaste, mouthwash, razor blades, beer, soft drinks, bottled water � these are things people have to have, and if you can buy a company that produces something that’s disposable, in other words, it’s consumed constantly, it has to be replaced and you have a good inventory system where your cash cycle you decrease the amount of time it takes from turning a sale into cash, and also you increase your inventory turnover, you can have a lot of profit in this company. So this is an area that also looks undervalued to us.
And then finally, an area: information technology. One of the things about technology equipment [is] it’s short term; it’s not like a plant or a piece of machinery that may last 10, 15 years � take a look how long you keep a laptop or a computer. Like in our industry because it’s so technology driven, we replace our file servers, our laptops, our computers every two years. Everything in this entire organization will be replaced because of where we’re moving with technology, and the technology that we need to grow the business. So, shorter life cycle, I think certain select companies in the information technology [area].
So if you want to take a look at what’s undervalued I’d recommend you go to my son’s wrap-up on Wednesday where he took a look at these sectors. [55:43]
JOHN: Well, Jim, you know at the beginning of the year I think people were skeptical about what you were saying in this whole area but had they made some moves based on what you were recommending, they’d be making quite a bit right now. And also when you’re navigating there are going to be rocks and pitfalls, so we might as well cover those.
JIM: Yes, the one area I would avoid especially right now with the inverted yield curve are the financials, because we are getting a real estate slowdown, you are going to see bankruptcies increase, delinquencies increase, defaults, credit problems. And also with an inverted yield curve it’s harder to make money: banks make money when they can pay their depositors a lower rate, and lend at a higher rate. And right now you’ve got an inverted yield curve so that’s hurting the financial industry. So, I would avoid financials, and a lot of the utilities which are run up and become grossly overvalued. [56:33]
Emails and Q-Calls
JOHN: Austin writes in:
Dear Mr. Puplava, I learned about your show from my brother, I do my best to listen to your show every week, I can tell by the tone of your voice you are irritated with the status quo on energy policy in the face of peak oil, but just for a moment, let’s say peak oil is contrived � this is a profound statement but worth examining, wouldn’t you say? You’re an intelligent man, you read books thankfully so, do please read the following: The Deep Hot Biosphere: Fossil Fuels by Thomas Gold, and if you believe Mr. Gold’s thesis that oil is not a fossil fuel please have Mr. Gold on your show as a guest speaker for at least a full hour. It does your listeners, including yourself, no good to talk about peak oil week after week without exploring a very important counterpoint that needs national exposure. This analysis also needs to expound on who benefits from all this peak oil propaganda. Please understand, I’m totally for clean alternative renewable energy, but as is very plain there doesn’t seem to be a sense of urgency in this country to get off oil, or even reduce consumption, and you have to ask yourself why? The short and simple answer is that the interests that control this country want it that way. Financial sense dictates that in order to make intelligent investing decisions one needs to know the truth. So please pursue this truth.
JIM: Well, first of all, I read Mr. Gold’s paper on abiotic oil, I don’t buy that proposal � and by the way he passed away a couple of years ago. There’s another book out � in fact the current book I’m reading right now which he might want to pick up is called Black Gold Stranglehold by Jerome Corsi and Craig Smith, which is all about abiotic oil. I just don’t buy the argument. So I read the first abiotic book, they refused to come on the program, so don’t ask me why but maybe we’ll have better luck with these guys. But we’ll have them on. [58:23]
JOHN: If there were replenishable oil, then it should be bubbling up into the oil fields that we’re draining theoretically, right? I mean isn’t that a reasonable assumption?
JIM: Hey, listen, if you’re Exxon-Mobil with gazillions of dollars in cash right now, if you felt there was a place if you went down deep enough you could find a gazillion barrels of oil they’d be doing it.
JOHN: Yes, but how are you going to get around this argument, look at what this gentleman from California wrote in: the whole issue is a) it’s oil companies b) we don’t need the alternatives because there’s all these reserves we haven’t tapped c) the problem is not dealing with the problem, the problem is convincing people there is a problem.
JIM: Well, that’s what our guest said this week, John Howe, and that’s why he’s concerned. He’s a retired engineer and he sees us as being stuck on stupid. You’re right, the first thing to correcting a problem is recognizing you have a problem to begin with, but until you get to that point you don’t do anything about it.
JOHN: And right now, if you notice, as a wall of oncoming crises face the country we find both parties - the main parties, Republican and Democrat � locked in a death struggle, and they’re focused on the next election, not on the problems. It’s like people fighting over the controls of a perfectly good airplane.
The next email comes from London:
Hi Jim, my name’s James, I’m from just outside London, in England. I like the program and especially with the leaning towards peak oil, and the US dollar being the key to your financial advice. I was interested recently, you mentioned that there was nothing that the world could do to combat the depletion of the existing oil fields, especially you made reference to Canada and its oil tar sands, but I noticed recently I went on to Google and found that Canada is the largest importer into the US of crude oil, with just under 1.8 million barrels. And since I wanted to position myself so I could take advantage of peak oil, can you please reiterate that there isn’t the capacity in either oil sands or refining of that product to fill the shortfall that’s coming out or going to come out of OPEC. Thanks very much, and look forward to hearing your program again.
JIM: Well, one of the things I’ve repeated on this program is yes, you have a lot of new fields coming on stream, tar sand oil production will be increasing to 3,4 and maybe eventually 5 million barrels � that may take another 10 years; and you’ll also have new oil fields that will be coming onstream over the next 2 or 3 years. But against that you’re going to have declining oil fields in Kuwait, declining oil fields in Mexico, declining oil fields in the United States, and declining oil fields in the North Sea where you get a lot of your reserves. In fact, England will shortly be a net importer of oil.
What you want to take a look at is alternative energy along with long life energy � the Canadian oil sands are long life assets. There are certain oil companies out there, especially some of the smaller ones that have longer life reserves than some of the bigger companies, and I think the market’s going to start paying a premium for it. You want to start looking at what we have now that works, in terms of alternative energy: companies that are in to photovoltaics, which is solar; windpower; nuclear � those are the things that we’re going to go to � coal gasification technology, ethanol. All those alternatives, because when we wake up one day, and see peak oil as a headline in the Financial Times, or Time magazine, or in the evening news, that’s when the world begins to panic and there’s going to be a mad dash scramble for anything that works. And at that point we’ll be throwing the BANANA people out because people won’t care because there’s going to be a panic that sets in. So, alternative energy and long life assets are probably your best result. [1:02:21]
JOHN: You heard it everybody, Jim Puplava said the price of bananas is going to go up � but don’t quote him.
Chris is in Atlanta, Georgia, and he says:
Hi Guys, love the show. For those people that have adjustable rate mortgages, or those who may want to move to 30 year fixed mortgages, shouldn’t there be an opportunity coming to refinance at slightly lower rates? Wouldn’t the Fed begin to lower interest rates again after an inevitable slowdown in the economy, sometime in the next 18 months? Do you believe again that the Fed will aggressively lower rates, how will that affect mortgage rates? I see maybe one more good opportunity coming to convert a 30 year fixed in the next two years. Any thoughts you have on the Fed, and a hypothetical refinance strategy would be greatly appreciated. I do agree that long term rates will be higher, but won’t they drop at least some during the early stages of a Fed lowering cycle?
JIM: They could, and that could be the opportunity that you’re looking for but beware that once the Fed starts going neutral, and then eventually starts cutting, you could see a steepening of the yield curve which means longer rates would start to go up. Right now you have sort of an inversion with short term rates higher than long term rates. If the yield curve starts to steepen again, especially as the dollar starts coming down, I think you’re going to see a rise in longer term interest rates. That’s what’s going to be different when we come out of this cycle, as I think we have maybe, not a crash in the dollar, but certainly a downtrend. I think central banks will intervene to try to minimize a lot of the downward damage because they don’t want their currencies appreciating tremendously against the dollar. Everybody’s in the depreciation mode, but perhaps in the short term here, when the Fed goes on neutral, or if you have a flight to quality because there’s a mishap, or you have storms in this Summer with hurricanes, just as we had last year where you could have the long term curve come down, that would be your opportunity. But be real careful here, I think in the next 2 years you’re going to see rising long term rates.
Yeah, this is Al, from the left coast. Last week you had Warren B[russee], he talked about the second great depression, and then the latest book, Phillips wrote a book on the American theocracy � our man read the book and said it made his blood run cold, what’s your opinion? Do you think we’re going to have a depression, a recession or what do you think is ahead for the future? Thanks
I think the US is already in a recession, when you look at the way we understate the CPI, and overstate GDP. You’re definitely seeing a recession in the manufacturing sector. I think it will spread, it will start going into the real estate sector, and eventually longer term, and especially as we hit peak oil, then we’re going to go eventually from recession to depression. The only difference this time is I think it’s going to be a hyperinflationary depression. [1:05:19]
Other Voices: Jim Willie CB, Hat Trick Letter
JIM: Well, a topic on the minds of many today is the carry trade. You’ve heard about borrowing at a low interest rate, and investing the proceeds somewhere else at a higher rate, to talk about this topic joining me is Jim Willie.
Jim, what’s going on with the yen carry trade in your opinion?
JIM WILLIE: I believe there’s a lot of talk, and a lot of preliminary posturing. The Bank of Japan with their equivalent of Greenspan and Bernanke, a fellow named Fukui has been giving very strong indications that the days of the 0% short term rates, or � of 1%, they’re coming to an end. So it’s causing some mild shockwaves around the world. And I think it’s just the very beginning of what we can expect to see.
In general, what you do is you borrow short term yen money at 0 or �%, and you perhaps invest it long term in a US bond at say 4.7%, and you get a nice 4 �% interest differential which is really quite profitable over the course of holding it. And you can amplify that by putting on future’s contracts. It gets very, very complicated though when the interest rates on each side move. And that’s what I think the market is worried about, Jim. [1:06:48]
JIM: Looking at a graph of the yield of the 10 year Treasury note, in the last month it’s gone from below 4.6%, to a high of almost 4.8. Is part of that do you think attributable to the unwinding?
JIM WILLIE: I think it very well could be. As the unwinding occurs, here’s what happens. If you’re holding those Treasury bonds with borrowed Japanese money you see that the Yen is rising, and their interest rates are rising, so that’s a double hammer against that trade. So, as that’s happening you say, “well, I better get out of that long US bond contract,” so you start selling that. So you sell that, and you buy back the yens. But the signature combination signal is that the yen is rising, and long term interest rates are also rising for the United States and the US T-bond side. So I think that there is evidence of it. It’s really quite complicated though. I mean there’s so many different aspects.
And I’d just like to raise one little thing to explain that it’s far more complicated than it even seems. Last Summer the General Motors’ debt downgrades occurred, and a lot of turmoil hit the bond markets which actually benefited the Treasury bonds, because apart from the carry trade � borrow yen, buy Treasury bonds � there’s something else called the spread trade which you can borrow the Treasury bond rate, and invest in junk bonds like General Motors and Ford where the basis is the Treasury bond, and the object of the investment is the higher interest yielding General Motors’ bond � say like 9% - I don’t know exactly what it is, but it’s much more than the Treasuries. So as the GM bond gets cratered and killed, people get out of those bonds, take their losses, and buy back the Treasury bonds. So, back last Summer there was a bond rally, if you look at that same chart you see late last Summer, mid last Summer, rates went back down after some stress. So, there’s an enormous number of cross currents here.
And I’d like to raise one other possibility. I believe that the Federal Reserve has engaged Moody's, Fitch, and Standard & Poors to coordinate their debt downgrades with international interest rate decisions, and the Fed decisions also. And that’s a rather sweeping statement, but I think I can back it up if you care. [1:09:20]
JIM: Well, go ahead with that because I know that the Fed intervenes in the financial markets. Most people could think of the obvious ones with interest rates, or perhaps the currency markets where you see central banks intervene, but I think they intervene in a lot more markets than just currencies and the bond market. I think the stock market, the gold market, the commodity markets they’re all subject to intervention.
JIM WILLIE: Yes, and I think it’s becoming far wider. You hear for instance after the January rate hike by the European central bank, that was the first hike in quite a while. I think it was over a year � a year and a half � so why was there a lot of commentary coming out of the ECB that it was just a single rate hike. I didn’t believe it for a minute, but I think there might have been coordinated pressure by the US Fed to make it seem like the Europeans were not starting on a whole new tightening cycle. So there’s coordination with Europe.
On the other hand, this is where it gets kind of devious, Jim, and I think that it’s worth mentioning and there’s no proof � last Summer � May, June, July � the Chinese and Japanese virtually halted their Treasury bond purchases. They had a lot of trade surplus � the Japanese surplus is going down though, not as much surplus as before. So, they’re holding back on recycling into Treasury bonds. Well, why was it at the same time that Standard & Poors, Moodys and Fitch, all downgraded the General Motors and Ford debt. I think they realized that the credit default swaps have as their basis the Treasury bond, and if the Asians are going to be withholding purchasing and supporting the Treasury bonds then we can have a willing victim here, or an unwilling victim of the Detroit car maker bonds that are out there, that are gigantic in size. And if those start to reverse they sell their credit default swaps � see, there’s actually two spread trades involved with GM. You can buy their bonds which pay a lot, or you can buy insurance against their bonds which profit when those bonds get hurt, but either way the basis for those trades is still the US Treasury bond. So, if you’re a loser with the junk bond GM, and you’re getting out of it you buy back your Treasury bond, and if you’re a winner with the credit default swaps you take your profits and you pay back again your US Treasury bonds. So, the basis for both is the T bonds.
At the same time, I think they got tipped off from the Chinese that the Chinese were going to play their game of chicken and not buy the Treasury bonds with recycled surplus, and dare the United States to do anything about it. Well, the US response was to downgrade GM debt, and see the Treasury bond as the beneficiary. And a lot of different hedge funds � and there are 8,000 of them holding over a trillion dollars in money and capital � a lot of those hedge funds had to reverse their GM credit swaps.
So whoa, boy, I tell you, I really believe there is coordination.
Another example of coordination: why did Fitch downgrade Iceland’s debt 3 or 4 weeks ago? When did they perhaps get a tip off that next week the Europeans were going to raise interest rates, so that unwinds the European � the euro � carry trade where you borrow cheap euros at 1%, and buy Icelandic debt at what? 8%. So, again, a 7% differential there that’s beginning to unwind also. I think that Fitch is coordinating, so is Moodys, so is S&P - the debt downgrading services. It is all interrelated now. The bond markets�And we hear from Prudent Bear and a lot of other good organizations that the Fed is not the only intermediate in lending and debt creation. Well, that’s real true � you’ve got the mortgage markets, you’ve got the hedge funds, and bond speculation. And I think Bernanke is trying to coordinate a lot of efforts with the debt agencies. And that’s my theory, and I’m sticking with it. [1:13:34]
JIM: Well, you know, one thing I’ve found interesting with the GM trade is if you take a look at the credit default swaps that have been written they’re almost 3 or 4 times greater than the actual bonds themselves. And let’s say that you bought a credit default swap on GM, GM bonds drop by 30 or 50%, you want to collect on your premiums, one of the things that you have to do with the institution that you bought the credit default swap is you have to surrender the bond. It would be much like, for example, if you totaled your car in a car accident, you turned it into the insurance company, and they cut you a check for a new car. The only problem was they didn’t have the bonds, so they went to cash settlements. So, here you have the government actually feeding into this speculation at the same time by making it easier for these hedge funds and other entities to get involved by speculating to a degree of magnitude that far surpasses the actual credit market and underlying instruments.
JIM WILLIE: Kind of reminds you of the gold trade where the paper side is 10 times bigger than the physical side.
Well, here, I’m not an expert. You know far more about the actual bonds delivery on those spread trades than I do, I just try to follow it with just relation to central bank management and it’s impossible. I’m a staff of one, it’s very hard to keep up with all these things. But to me when you tell me that it just speaks to the corruption of the whole bond picture why is the market able to be bigger than the underlying bonds.
I think there’s also an understatement, Jim, as to the size of the GM bonds. I see public statements that they’ve got 20 or 30 billion out there. Well, I did a little 10-Q examination myself, and I found $160 billion. So, sometimes I hear figures that are just one-fifth as big as what I uncovered just looking at all the various types of bonds.
You’ve also got things � what makes it complicated is there’s GMAC bonds, just from their finance arm. Well, that’s not pure General Motors’ bonds. So, what is a GM bond? There’s credit default swaps all over the place. Some of them are related to the GMAC finance arm, and some are to the corporate core itself, you know, for floating a bond to build a plant. Another�you know, my gosh, they had a $13 billion bond collateralized against their pension plans. Who in his right mind would have bought that 2 or 3 years ago? Well, I’m sure there were because they floated it rather easily. [1:16:09]
JIM: Well, given all this, the unwinding of the possible carry trades, you just wonder if that money’s going to find some other avenue or outlet some place else, because it seems to me with governments coming in and allowing for the speculation � one of the easiest ways to teach a speculator not to speculate is to allow that speculator to suffer the consequences of his actions. So if I, for example, bought a bunch of credit default swaps without owning the underlying asset I might have been forced to go into the market and buy the bond, but we don’t do that we just simply allow for cash settlements � the same thing that they do on the commodity exchanges. So it seems to me that we’re living in this bifurcated era of asset inflation that’s being fostered by central banks.
JIM WILLIE: Well, unfortunately, I think that when the yen carry trade and the euro carry trade unwind a bit it’s not going to be peaceful. I’m expecting quite a lot of volatility when it happens, but I’m also expecting it to happen more slowly than other people expect. I’m of the firm belief that the finance ministers of Japan are at our beck and call � at the US, New York, DC beck and call. I hear some very, very strange stories about coercion but what I find to be the clearest evidence is that there was a marriage 2002 a merger between the banks, the bank called Sumitomo, one of their giants and JP Morgan. Sumitomo gave 1.4 billion in cash � I call it the dowry � to JP Morgan. I believe that was evidence that JP Morgan needed some actual hard assets to neutralize some of their underwater hedge book losses. But in the meantime, it’s long known that JP Morgan is essentially merged with the Federal Reserve. I call it the Italian fascist evidence. Very few people can even define what fascism is in this country, and I find that alarming � they’re not very good students of history. But the Italian fascism model calls for a merger of corporate and state interests. And with JP Morgan pretty much merged with the Federal Reserve all their underwater hedge book is being sort of neutralized. And one way it’s being permitted is JP Morgan merged with Sumitomo, it’s merged with Chase Manhattan, and it’s merged with Bank One. So it’s kind of a cancer that’s taken over a good deal of the US banking industry.
But the reason I bought it up was it points to the control that might exist across the pacific pond here where the New York bankers might actually control Bank of Japan policy. If they say, “well, gee, slow it down. Instead of 25 point basis moves, how about making them 10 basis point moves?” Japan might say, “yes sir, yes sir.” I think that’s very likely to happen but the rub that I expect to happen is that as these trades unwind you’re going to see rising US interest rates, and it’s not going to bring about freed up money, it’s going to bring about lost money, it’s going to bring about reduced liquidity. So, you’re going to see the dollar get hurt. And this unlike the trend that you saw up to late Summer where the US bond would go up in value, and the dollar would go down in value, where the interest rates would go up but the dollar would be declining. It’s usually not that way. But I think we’re about to see a new phase where the dollar goes down and interest rates go up, because bonds are being sold. And if that happens you’re going to see a lot of lost liquidity in the markets. As the dollar goes down gold will benefit but unfortunately about 50 times less as much money will be involved in the carry trade regarding gold � you know, borrow the yen and buy gold. Well, that’s going to unwind too, so there’s going to be some sale of gold, and as a result I expect big legs up with gold and small legs down from this increased volatility. The net will be positive for gold though, I believe. [1:20:20]
JIM: Well, we’ll end on that positive note. Jim, as we close, tell people about your website and your newsletter.
JIM WILLIE: Well, I edit the Hat Trick Letter. I’ve actually done it for 24 issues so I’ve finished two years and I’m very pleased, it’s going well. The website is the www.goldenjackass.com, [I’m] the sole editor, there’s nobody else. I’m pleased to say though, I’ve got a dozen, they’re like elves, they’re friends, they’re very valuable people to me, they keep me informed like getting the tip on the Iranian oil exchange. I knew that 3 weeks ago � 2 weeks ago � that it wasn’t going to happen on time. Just a nice contact out in Los Angeles.
I have several other people that help me out with articles. There’s a fellow in Zurich who’s helpful to me, who’s given me information about European central banks. So, it’s been two years and I’m very pleased, and we cover the European markets, we cover Japanese markets, international trade, and bonds. I think sometimes Jim that I cover a bit too much: my reports are getting a bit long. And it’s hard to cover monetary policy and the geopolitics of oil and all the nonsense going on with the civil war in Iraq which is fully denied. It’s amazing how much it’s being denied. But there’s an awful lot going on. I think I’ve bitten off quite a bit here, but I manage to do OK, and the trend is up for subscribers even in these down months like March. So, I appreciate being on your show, and look forward to a lot of interesting times this year. [1:21:47]
JIM: Alright, well, Jim, as always thanks for joining us on the program, we look forward to talking to you once again in the future.
JIM WILLIE: OK, well, thank you.
Growing Ounces: A Closer Look at Junior Gold/Silver Stocks
JOHN: OK, Jim, this segment of the program is called growing ounces � a closer look at gold and silver junior stocks. So, I took a few ounces of silver and threw them out in the garden, nothing’s happened so far, but�
JIM: You forgot the fertilizer!
JOHN: I did? Bummer. Alright.
Let’s take a closer look at the gold and junior stocks. What do we have to start out with? � the assumptions right now. [1:22:17]
JIM: Well, if you take a look at this gold market, this is probably going to be one of the biggest bull markets for gold and silver that we will see in our lifetime, and even looking back at the previous gold bull market in the 70s, this one will far surpass it. You’ve got to begin with the premise if you believe we’re in a major bull market � our contention is this bull market is going to be bigger than the last one � and unlike the last one in the 70s, this time you’ve got scarcity of resources. You’re not hearing about major elephant sized finds in the gold and silver industry. There’s a couple of them out there but you’re not finding Ghawars, North Seas, or North Slopes in the gold business.
The other thing that you have going for the gold bull market is demand is growing far faster than supply � it’s outstripping supply. At the same time, you’ve got declining mining production, because remember for almost two decades of the bear market companies consolidated, they went out of business, there wasn’t a lot of money spent on exploration, the larger companies high-graded their mines because that was the only way you could make money. So, one of the things you see now are rising cost of production, not only just on the personnel side, also rising energy costs, rising raw material costs from e.g. steel piping. And at the same time companies are having to go through their own low ore grades so they’re not getting as much gold and silver out per ton of output � so that’s another problem.
You look globally today: we have rising geopolitical tensions � the Middle East is going to turn into an inferno in my opinion here in the next 5 to 10 years. Look at African and the Sudan, some of the things that are going on in there; what’s going on in Asia; the Marxification of Latin America with Chavez and that movement. And at the same time, with no currencies anchored to gold today you have massive monetary inflation, it’s occurring globally. And so, with that in mind, we think that we’re in a great bull market.
The problem in this bull market is you’ve got to take a look at where is the growth going to come from. It is not going to come from the majors. I hate to tell people, but Newmont, which at its peak production when it merged with Normandy and Franco-Nevada was producing 7.6 million ounces a year. Their production in the 4th quarter just went down, they’re on their way down to 6 million. Newmont is not going to go from 6 million to 12 million to 15 million unless they just go out to buy a bunch of big companies. And even if they did that they would only have large production for a couple of years. Even though Barrick is buying Placer � they’ll become the largest producer � their production will go into decline. So you’re not seeing the growth in this market from the majors, it’s an impossible task for somebody like Newmont to find 6 or 7 million ounces of new reserves each year to replace what it is that they’re producing each year.
And the other thing and one of our contentions for getting out of that market towards the end of December is a lot of the majors are always selling for premiums. One of the reasons these companies are selling for premiums is because when people want to get into the gold market there are very few companies that you can get into. The universe of gold stocks and their market capitalization [is dwarfed by] the size of let’s say a General Electric of a Coca-Cola, or a Microsoft. And so when everybody wants to get back into the gold market you’ve got maybe 10 majors and intermediate companies that everybody piles into: the Newmonts, the Barricks, the Anglo-Golds, the Glamis’, the Meridians, the Agnico’s. These are the �go to’ stocks first, and as a result these companies are usually selling for a premium. [1:26:17]
JOHN: Yes, but something important here that you’ve always pointed out is that there’s a lag time between the time they say to quote an expression � poke a hole in the ground � and the time when they begin pulling things out of that ground can be up to 10 years. I mean this is quite a delay.
JIM: Yes, so even if you were to make a discovery today, by the time you drill it out to find out what it is that you have, then you start defining, doing your prefease and feasibility work to define how you’re going to mine it, what kind of techniques, where are you going to put your mill, then all the myriad permits and permitting process that you have to go to. Glamis has been trying to get a mine permitted in California � they’re going on 10 years now; but once again we’re a banana state.
So, it takes a lot more time today. Almost double what it takes almost a decade ago to bring a new mine on-stream. And you’ve got to remember most of the hard work that of going out and discovering and developing a project today, that’s being done by the juniors, more so than it is the majors. The majors are almost like finance companies, they wait to strike and look for something that looks promising, and then they pick it up. But a lot of these juniors have been mining or developing properties for around 10 years. They had to scale back during the Bre-X scandal, and during the tech bubble because right after Bre-X, and especially between 98 and 2000, who wanted to fund junior mining for gold and silver? If you were an Internet company that’s where the capital went to.
But a lot of these junior development companies have properties that have been in various stages of development for 10 years, and they’ve nursed these projects along during the bear market or depression. So, to me, the real growth story in this market and the best bargains are going to be late stage development plays. And from an investor’s point of view juniors are always risky because a junior doesn’t produce anything, but a late stage development junior is less risk, in my opinion, than a junior that’s raising money and saying, “look we’ve staked some land here, we’re going to start poking holes in the ground and hope we find something.” Obviously, that has a lot more risk to it than somebody that says, “no, they used to mine gold in this region.” At one time, especially like what you’re seeing going on in Mexico today where we know for 400 years they’ve been mining gold and silver successfully � it was cut off after the revolution in the 1940s.
So you have a lot of exploration and development work that’s being done there, companies that are close to prefeasibility, and when you get close to prefeasibility you have to take the ounces from the inferred category to measured and indicated, that’s what goes into a pre-fease study, and if it passes the test it comes out as reserves and reserve ounces are valued at over $100 an ounce.
So, if you look at what goes on in the junior market when a company goes out and makes a discovery, there’s a lot of excitement the stock shoots up, and then they start poking holes and then they say, “we drilled over here and we found more gold here” and the stock just starts really climbing. Well, eventually that company’s going to have to make a decision and say, “OK, we’ve done enough staking out of the property, now we need to start doing the development work, poking holes closer in the ground to start developing the project,” and doing all the things that are going to be needed to take it to prefeasibility, to prove you’ve got a mine, and eventually go into production.
During that phase of the process usually what happens are stock prices drop from the excitement stage, investors bail out, take their profits and they go elsewhere, because during the development stage all you’re doing is infill drilling, and it isn’t a lot of great news, you’re not making discoveries, you’re just developing and finishing out the project. But, when you get into these companies and especially as they get closer to the pre-fease that the stock usually experiences some price weakness and a great time to start picking up these companies because they’re going to go into eventually development.
Now, the opportunity I believe, what you want to look for is when the property is large enough that the junior has the potential to not only to have a prefeasibility study so it shows that they’ve got something that is actually mineable at a profit, but they also have the ability to prove up additional examples. We’re involved with a couple of companies right now that have made 2 or 3 major discoveries, they’re heading towards pre-feasibility but they’re in a position now because of these new gold discoveries that they’re going to double and triple their resources. So, they’re doing 2 things simultaneously: they’re establishing a pre-fease on one area that’s probably been developed extensively, so they can show to basically the banks, if they want to go into production, or even to be taken over, that they’ve got something that’s mineable, but also they’re also making new discoveries. So they’re on a double track system, they’re developing and they’re discovering at the same time.
And I think that the thing you want to look for are benchmarks. In the industry today there are �2 + 2’ and the �3 + 3’: 2 + 2 meaning 2 million ounces of gold which could produce 200,000 ounces of production; and for the majors �3+3’: 3 million ounces of potential reserves and 300,000 ounces of production. That is really what you want to look for. Those are the companies that number one, have the potential to become an intermediate producer, but also they become attractive enough to be taken out by either an intermediate company or a major. [1:32:16]
JOHN: Jim, I know you guys get involved in financing, but if we look at it soberly isn’t there opportunity that’s created as a result of the financing of these juniors?
JIM: Yes, because what you see a lot of times � I’ve written about this � you get a lot of pump and dump shops. What they’ll do is they’ll drive down the stock prior to a financing, then they’ll finance the company, pump the stock, get everybody to come in, and as the stock rises then they dump the stock, because they get so much in broker commissions, broker warrants, broker shares, that they’re not interested in being investors. What they’re going to do is dump their stock, and when you know when that time comes along, or when you know when warrants are going to expire, you usually get a lot of liquidity in the juniors and it’s time to pick up shares at a very, very cheap price.
The other thing that happens so many times in these financings is you have the hedge funds that will come in and what they do is they’ll buy and participate in a financing, so they get shares, and then they get warrants. Well, what they going to do is after the 4 month restriction is lifted they’re going to dump the shares and keep the warrants. So basically, they’ve got a cheap option. And if you know who these companies are and what they’ve done then it’s a chance for you to go in and when they drive that stock down as they’re dumping their shares to pick up because liquidity will come into this stock and it’s easier to buy.
One of the things that we do because when we get involved in companies is we change how they get financed, because the first thing we try to do is bring in the strong players, we fire the pimps, or the pump and dumpers, because you don’t want those people in, because those aren’t the kind of people that are going to be long term investors, and help you go develop a project and take it eventually into production. They’re just in for a quick trade, a quick pump and dump, and then they’re out of there. So you’ve got to get rid of those people and you’ve got to start doing better finances, and that’s one of the first things we do when we get involved. We go in, and the other thing you soak up the liquidity, you take it from the pump and dump and the hedge funds as they’re dumping, because they create liquidity. And it’s a chance, at least for somebody like us to pick up sizeable amount of shares without driving the price of the stock to the moon. And then what happens is we start putting the cash and rebuilding the balance sheet, and put the company on the growth track.
One of the things that we like to see is if the project is large enough, not only take it to prefeasibility, because that proves that you’ve got something that’s mineable at a profit, but then limit it to prefeasibility, and not take it all the way to full feasibility until you can develop out the project, and turn it into maybe a 2, 3, 4, 5 million project. We’re involved with five companies right now, I’ve found basically two more Kimbers, where you’re going to see a situation where you can have a 3 million, 4 million, or a 5 million oz deposit. We’re looking at a couple of 3 million projects, and a couple of 4 million oz projects right now.
And what I like about all this is that you can develop these 2 + 2, or 3 + 3 development plays because � I like those for two reasons: number one, a 2 or 3 million oz deposit is large enough and attractive enough if you’ve got your permits in, and you’ve got your prefeasibility, it’s large enough to be taken out by an intermediate or a major � that’s number one. Number 2, when you have 2 or 3 million oz project, if you don’t get taken out by a major, you’re profitable and you have enough resources that you could go into production with a 200,000, or 300,000 oz production profile. So, once you do go into production, gear up to become an intermediate. So, those are the two things that we like to see. [1:36:09]
JOHN: Well, obviously you have a love affair with juniors.
Why don’t you give us a summary Jim of why it is that you like them?
JIM: Well, in short, unlike the last bull market the juniors are the real growth story in this bull market, and the reason I like late stage development because there’s less risk than exploration, so that gives me more of a degree of comfort. The other thing I like about them as I just mentioned is these 2, 3, or 4 million oz deposits, if you don’t get taken out you have the ability when you go into production to become an intermediate producer . And so you’ve got two options, you can be bought out or you can be taken out.
And unlike the majors which are selling at 30%, 40% premiums, a lot of these late stage development plays you can pick up at a 40-50% discount. Two of the companies that we’re buying lately, we started buying them at $6 gold in the ground, we’re still buying it today at $9 and $10 in the ground, and in just a short while one company’s going to go into reserves where they’ll be worth over $100. Another company we’re looking at is going into production next month and nobody knows about it. It’ll start out with 50,000, and in the next two years they’re going to be producing over 200,000 ounces. And I think by that time I’d be surprised if they’d be around, but nonetheless at 200,000 ounces they become extremely profitable.
So, to me, John, to sum it up this bull market it’s the juniors that are going to be the growth story. I mean you’ll make money in the Newmont, you’ll make money in a Barrick, or an Anglo-Gold, but what you do is you trade those, you buy them after a correction, you hold them on the way up, but that’s the only way you’re going to get a real growth story. You’ll make money in those companies, but that’s not where you’re going to get the 20, 30, 40 baggers in this market. And just wait until we get the third phase of this bull market, that was equivalent to what happened to tech stocks between 95 and 2000 when we’ve got gold north of $2000, and even $3000 an ounce. When you see Maria Bartiromo talking about the next junior mining IPO, and Cramer doing headstands on his show, pounding the table for junior companies, that’s when you get to the mania stage. The great thing right now it’s really undiscovered, and this to me is where the big money is going to be made. [1:38:43]
JOHN: Alright, Jim, that rounds it out for this week. Coming up in the next couple of weeks, what are we looking forward to?
JIM: Next couple of weeks we’re going to be hitting the trail on oil, my guest next week will be Gwynne Dyer, he’s written a book called Future: Tense: The Coming World Order; then April 15th, Russell Napier will be my guest, he’s written a book called Anatomy of the Bear; and Dan Reingold, you’re going to really want to hear this one, he’s written a book called Confessions of a Wall Street Analyst � he’s just going to tell you how all this analytical work, these reports, all the monkey business that goes on on Wall Street from an insiders point of view being an analyst. So, that’s coming up on April 22nd.
In the meantime, John, you’re right, we’ve run out of time but as always we’d like to thank you for joining us here on the Financial Sense Newshour until you and I talk again, have yourself a pleasant weekend.