Financial Sense Newshour

The BIG Picture Transcription

April 22, 2006

RealPlayer WinAmp Windows Media MP3

• The Inflation Juggernaut: Be Prepared
• Special song from Steve Doré
• Gasoline Blues: More Bad News on the Way
• Other Voices: Floyd Upperman, Author & Analyst
• FSN Comic Relief - EF Mutton
• Blue Gold
• Emails and Q-Calls

The Inflation Juggernaut: Be Prepared

JOHN: Boy, better than Knott's Berry Farm this last week or two if you’ve been watching the prices of metals and especially a really big week on the inflation front. This reminds me of a bunch of people, you know one of these cartoons they used to have in the theaters where if something’s going to blow and you see this thing and the poor guy’s sitting there trying to hold it shut.

JIM: Yeah, there were so many cross currents going through the markets this week. If you look at the consistency we saw this week: PPI up ½% last month, 6% annualized; CPI up 4/10%, almost 5% annualized. But John, we get into this nonsense about the core rate, so the core rate on the PPI was up only 1/10^th 5, so everybody was running around, “see, there is no inflation.” The next day we get CPI and the core rate was up 3/10ths % and then everybody was running around, “now we have inflation.” In fact, year over year CPI is up 3.4%.

What just absolutely drives me nuts is when these guys talk about core inflation, or the core rate, as if people don’t eat, they don’t heat their homes, cool their homes, put gas in their car; it doesn’t cost energy to farm in the way of fertilizer or the burning of diesel fuel; it doesn’t cost anything to transport goods. I mean this is so ridiculous but yet it is sort of the little term that they throw out. And really what it’s doing is confusing…they were interviewing a bunch of consumers on the price of gasoline – this was a little segment on CNBC – and one guy was at the pump and he said, “gosh this is outrageous,” and then they go to this uninformed idiot, and he basically says, “yeah, the oil companies are gouging us.” Clueless! in terms of why oil prices are going up or why inflation is going up.

And that’s the thing that we have become so adept at in terms of government and the media. They are transferring the blame from the root cause to be focusing on the symptom and the cause of the symptom is somebody else. In other words, if you’re a business like an oil company, if you have to pay OPEC $74 for a barrel of oil, you’re to blame, it’s greedy oil companies, greedy business people, if you’re a merchant and you raise the prices on your goods you’re the one that’s causing inflation, it’s not the government. [2:42]

JOHN: Well, as we’ve always said too the quantity of tax money being collected at the pump by government – either local of federal – also contributes rather heavily to that.

JIM: Yeah, we’ll get into that when we get into Gasoline Blues, but I think what’s really missing here is a critical understanding of the definition of inflation. It is a rising supply of money, not rising prices. Rising prices are the symptom, and we keep trying to confuse people, and this is done deliberately by the way because they want to focus your attention away from the root cause of inflation which is money supply and it’s rising globally. And as that money supply increases at a faster rate than economic growth it creates further demand, supply doesn’t keep up with the demand, and eventually you see the consequences of that in terms of rising prices. [3:37]

JOHN: Yeah, but if you look at it, whether we take what happened in France a couple of weeks ago, or what we’re seeing happen here with oil we’re probably going to be stuck right here simply because of the fact that pressure is on the governments to do something for the people. So this will actually exacerbate the problem.

JIM: Yeah, because governments want to stay in power, so what do they do? Every politician that’s running for office is promising the voters goodies, whether it’s drug prescription programs, energy relief in the form of subsidies, new entitlement programs, and who pays for that? Well, the government cannot raise taxes to pay for all that it spends money on, so consequently they have to print money to pay for the difference.

The other thing I think that we’re also realizing is the general population especially in the US is very heavily in debt. And by resorting to inflation, government can make debt more manageable. What I mean by that, let’s take for example the real estate bubble that’s going on right now, and these double digit rises in real estate prices are nothing more than another manifestation of inflation. So, let’s take a look at what happens to the purchasing power of debt with inflation. As an example, I took an average middle class home in the suburbs here in southern California which is about $750,000, it just goes to show you where we’ve gone on the inflation front. Now, let’s assume you put 10% down, so you’d be putting roughly $75,000 down, you’re going to finance $675,000. Now, let’s assume that you can get a 6 ½% mortgage. Now, assuming a 6% inflation rate and an 8% inflation rate, with a 6% inflation rate all things being equal let’s just assume you did an interest only loan, you didn’t pay down any principal. What I’m trying to do here is illustrate what happens to a debt with inflation. In 10 years the purchasing power of that $675,000 mortgage would only be $363,560. So let’s roughly say $363,000. In 20 years, that $675,000 mortgage would be depreciated would have a purchasing power of roughly $196,000. So the debt burden becomes less onerous with inflation, because the value of that debt depreciates because its purchasing power. Now, if we take an 8% interest rate which is probably closer to where we are today. In 10 years that $675,000 mortgage would have a purchasing power of $293,000, and in 20 years that $675,000 mortgage would have a purchasing power of $127,000.

Another way to look at this is let’s assume you had a $675,000 bond portfolio, and because you needed to live off the income you spent the inflation you received each year. Going back to that same example, your $675,000 bond would have a purchasing power of $363,000 in 10 years, and $196,000 in 20 years. So, you’re losing purchasing power because let's face it, $100,000 today does not buy the same goods and services that you could have bought 10 years ago or 20 years ago. So, this is one reason that you’re going to see governments inflate is because it makes the debt burden less of a burden for the people, and also for the government itself, because remember the government is a big debtor as well. [7:33]

JOHN: Well, what happens if the people's doesn’t keep up at that rate. I’m assuming of course that their income keeps up because then say the amount you pay on your mortgage becomes a lower and lower percentage of your total income at that point.

JIM: Well, what you have in an inflationary period is exactly that. Wages do not go up at the same rate as inflation, so people fall further and further behind. This is one of the reasons the government tries to ease the debt burden with inflation but at the same time it’s a two-edged sword because unless you work for the government itself, which grants itself generous pay increases, most people working in the private sector aren’t getting 6% to 9% pay increases from their boss.

And once again, I go back to the example of my good friend who received a 3 ½% pay increase which was basically a cost of living increase. So wage earners fall further and further behind. Number 2, from an investment point of view real estate investors fall further behind. Yes, their real estate appreciates, and hopefully it appreciates at a faster rate than the general inflation rate but if you’re trying to collect rents, rental income will not keep pace with inflation. That’s because most rental contracts are tied to the CPI and we know the CPI is grossly understated by a factor of at least two. [8:57]

JOHN: You know Jim, despite what you’re seeing right now you’re still having people out there talking about deflation. I’m not quite sure how you do that unless you’re looking at the core rate, but if you really look at the absolute buying power of the dollar I call them bpd – buying power of the dollars – it’s probably lost about 90% of its purchasing power since the Fed was created.

JIM: Yeah, since 1913 it’s over 90%. So, in the last almost 100 years we’ve lost 90% of the value. I don’t think John it’s going to take another 100 years to lose another 90% of its value, I think it’ll take 10 years or less.

And the one thing that I always have tried to point out is I studied the inflation deflation – since 1932 we’ve only had 2 years of deflation defined in terms of contracting money supply, or if you want to define it in terms of price increases the last year I think was 1949 and 1955 were the two years where we actually had a negative CPI. We’ve had the CPI go up every single year. In other words since 1932 we’ve had constant inflation. Yes, you may get a DVD player cheaper today. My first DVD player that I bought in in 1997 was 750 bucks. I just bought a small, little DVD player that wanted for TV in my gym so I could watch this Pilates [video] – I got it for 25 bucks, I mean 25 bucks, progressive scan, compared to 750.

So, the cost of manufactured goods as a result of increased production have gone down. Big screen TVs have gone down, but it’s really the rising supply the increase in the money supply that’s causing rising prices.

Remember inflation has two outlets it can go into the general economic and which you see expressed in terms of rising cost of goods and services. The other way that inflation manifests itself it can go into the financial markets. So if we take the last 25 years, the bulk of that inflation has gone into the financial markets, and it’s shown up in asset bubbles such as stocks, bonds and real estate. So inflation has been primarily channeled into the financial markets, and the financial markets really are a relief valve for inflation.

The second thing that happened is prices were offset by imports which channeled the excess demand created by excess money supply – or money creation and credit – into imports. Now, with demand increasing globally you’re seeing it reflected in rising commodity prices, and it is now starting to spill over into the real economy. And one of the problems that the Fed has right now which is very critical, unlike when it was raising interest rates in 1999 and 2000 to stave off rising inflation as reflected in the stock market, general commodity prices were moderate and stable back then. The price of energy, gosh, 1998 we got down to $10 for a barrel of oil, and right around 2000 we were looking at $18 to $20 a barrel. So, commodity prices were down; gold prices were down; energy prices were down, base metal prices were down. And so the Fed only had to deal with financial inflation. Now what they’re dealing with is both financial inflation and goods inflation, and so it’s not going to be the same pattern that we’ve seen over the last 25 years.

This pattern is going to change and when we come out of this Fed rate-raising cycle unless the economy goes down in the dumps you will see what I call a stealth recession: we’ll report the economy’s still growing but really what we’re going into is stagflation – a stagnating economy and rising inflation rates. They don’t have the wiggle room that they’ve had in the past because now there’s been so much money creation, it’s now flipping over from the financial sector into the goods sector. And that’s what we’re seeing now. [13:33]

JOHN: Well, if we look at what governments are facing especially in the West, they have aging populations – this would include Japan – aging populations with an inverted triangle – the population coming up underneath them are fewer. The populations themselves are now deep in debt, we’ve been amassing debt for what 40 years now, something like that. Citizens more and more have their hands out – there are whole classes in Western society now that are totally on the dole almost all the time – or at least in times of emergency, look at what happened in New Orleans. They are there with their hand out rather than having prepared for things themselves. Taxes will not cover this. This is one of the myths we hear all the time, taxes will not cover that, even if you took everything everybody ever made it still wouldn’t cover this, would it? I mean that’s just what we’re facing. So, we’re down to one thing, no politician, it is not going to fly any political polls to say, “Oh, shuckedoo, I know we promised you all these things out here, for all these years but sorry, no Social Security!” That’s just not going to fly, Jim, so what are we down to?

JOHN: Inflate or die. Inflation is the only answer left to government. And I hate to tell the deflationists you may get deflation in terms of nominal prices versus the price of gold, in other words they’ll be deflating against the price of gold which is real money, but in nominal terms you’re going to see inflation all around you.

And we can play this little game that we play psychologically to try to fool people and say, “well, the core rate was only up 1/10th of a percent.” Talk to anybody on the street do you really believe your personal living costs have only gone up at one or two percent a year. I think most people would admit that their costs are rising all around them, it’s just that they don’t know who to blame it on. Is it the oil companies, is it OPEC, is it some greedy company? And the people that create the inflation, have you always noticed they’re always trying to point the finger in the opposite direction away from themselves onto somebody else – “it’s the oil companies, it’s OPEC, it’s the greedy businesses,” – rather than on to the true root [cause] of all inflation which always will be a monetary phenomenon, and it always stems from government policy. [15:53]

JOHN: Yeah, but if you were to admit where it comes from then you’d know who to lynch.

JIM: That’s why the criminals try to deflect them I mean if you committed a murder you would try to find somebody else to blame it on, or keep the cops off the trail, and that’s what they do, they try to keep the average citizen or voter off the trail.

JOHN: You know, Jim, I might just mention here, and we’ve still got them posted on our website at financialsense.com that there were two pieces which you wrote aways back, but which are just as pertinent today obviously: one was called The Great Inflation, and the other was called The Two Bens, and this will help people understand in more depth exactly what we’re facing right here. So that’s a reading assignment for next week, and you’ll all be issued a questionnaire to see if you’ve done your job.

Alright, let’s make an assumption here now that we’ve got that under the bridge here. We’re facing the fact that we’ll have the inflation it’ll probably be a stagflation what do we do now?

JIM: Well, first of all, if you’re in debt I would highly advise you lock in a fixed rate now for however long you think you’re going to be in your home because you’re looking at the lowest interest rates you’re going to see in your lifetime because the next 10-20 years, interest rates are going to be going up. It’s going to be bad news for bond investors, and bad news for debtors, it’s going to be more expensive to borrow. And if you can afford it, in other words with inflation on the rise, and you have plenty of cash flow I’d go to a fixed loan interest only for 10 years, because why give them money if you can use that extra money to invest and profit from inflation. Meanwhile your fixed income debt is going to depreciate in value. You’re going to pay, just pay them the interest, lock in the cost, and I put a caveat there, make sure you have the income that you can afford to do that, or you have the assets that if you really wanted to you could pay off the debt.

The second thing I would do is by all means avoid long term bonds. They’re going to become certificates of confiscation just as I gave the example earlier of the depreciating value of a mortgage – just translate that into a bond portfolio. The purchasing power of those bonds are going to depreciate every single year. If you want to be in bonds I would only be in Treasury Indexed securities, and only if you have a pension plan, because remember on a TIP bond the interest is lower and what the government gives you in terms of inflation – in other words they add it to the value of the bond at the end of the year whatever the CPI was – you pay tax on that even though you don’t receive it. So that would be the only area that would be in bonds. Besides that if you want to put your money in tangibles because tangible assets are going to maintain purchasing power – things like precious metals, base metals, energy, water, food, commodities – are going to go up in value in terms of their keeping pace with inflation.

And also John I think my thesis here if I’m correct about this, and I think I am, we’re going to see rising asset markets in terms of nominal dollars. In other words you may just see Dow 36,000, 40,000 or 100,000 in nominal dollars because they’ll be going up with inflation. But in real dollars they actually won’t be going up that much because all you’re just going to be seeing is inflation reflected in the stock market.

And for cash I would use bullion. If you want to keep large amounts of cash start thinking of silver and gold bullion as your savings because that’s the only way you’re going to maintain purchasing power, because if you look at interest rates offered on cash today they’re far below the real inflation rate. So, once you use bullion as your cash or your savings put the rest in tangible assets. [19:54]

JOHN: Yeah, if you remember two years ago when we were discussing this whether it was going to go into inflation or deflation there was a lot of assault launched on financial sense because of the inflationary position, but if you’ve noticed there’s a great silence out there right now. What do you do with deflationists at this stage of the game?

JIM: Fire ’em. I mean they’re going to be hazardous to your financial health. And if you were to listen to a deflationist you would put your money in fixed income, and just keep it there. You would keep your money in cash because under a deflationary scenario the purchasing power of cash actually increases because the money supply shrinks – that’s the real definition of deflation – and as a result of that prices contract which is theoretically the only way you can maintain the same purchasing power with a shrinking supply of money. So prices have to shrink by comparison, but I don’t think we have to worry about a shrinking money supply. Goodness, as I mentioned last week just pick up a copy of the economic each week, go to the back of the magazine and take a look at the increase in the money supply figures globally. It’s not just the United States that’s inflating massively. I’d like to see what that money supply figure looks like now that they’re no longer reporting it. Also take a look at the money supply globally not only just in the United States but other countries – Europe, Asia, China, Japan and other countries – they’re all inflating because governments globally are coming under the same pressure. [21:24]

Special song from Steve Doré

I'm tied to the tracks
And something’s coming I see
It’s the train of inflation bearing down on me
God bless money, the end of each day
And not making more than my hourly pay
Look out ahead there’s a Frankenstein trestle
Those old paper beams won’t hold this vessel
Full speed ahead, the writing on the wall
The US Humpty Dumpty’s gonna take a big fall

Refrain
We’re headed for disaster
Faster and Faster
Headed for disaster
Faster and Faster

Politics gaining up in power these days
Preaches loud and clear the law must be obeyed
But church the beast can devour the state
Divine hands sealing democracy’s fate
Question then becomes so abundantly clear
How do we save our own rhinestone here
Live free, die to the very last stand
Because the constitution is the supreme law of this land

Government is liable and out of control
A million, a billion a trillion and more
The rich get richer, the rest don’t know
Their standard of living’s gonna fall through the floor
You better be ready by making a plan
Than trusting what you done with your head in the sand
And grow your own food, get ready, get some gold
Build up your bunker before you get too old

Refrain
We’re headed for disaster
Faster and Faster
Headed for disaster
Faster and Faster

[Beverly Hillbillies theme song: The Ballad of Jed Clampett]

Gasoline Blues: More Bad News on the Way

JOHN: Well, that’s quite a throw back. Ironically I don’t know if I mentioned it I was talking to Tom Lester this week, Tom used to be Ebb on Greenacres, and he said they made the Beverly Hillbillies on the same set when they were doing both of those series. That’s a throwback to TV land.

JIM: Oh my goodness, this is déjà vu back to the '70s and '80s again.

JOHN: But listen, gasoline blues, do you know in Beverly Hills, it cracked 4 bucks a gallon this week, not elsewhere in Southern California where you are.

JIM: Yeah, I was coming back from a weekend spent at the beach. Coming over from Coronado when I went over a bridge I noticed a gas station at – $3.59. And then of course in our neck of the woods it just hit $3:30. It went up twice this week and as you mentioned John it’s 4 bucks in Beverly Hills.

And I would suspect by the time we get to August we’ll be looking at $4 or even more if we have a tough hurricane season, because remember part of the production in the Gulf is still down. And we have all kinds of problems relating to fuel here but I think perhaps we need to get into why gasoline prices are going up as they are now, and why they’re going to go up even further. [25:30]

JOHN: It’s oil company greed for Pete’s sake, don’t you understand that?

JIM: Oh, I know they’re making so much money and nobody else is profiting from this. We covered this I think two weeks ago – but we’ve got prices moving up for two reasons, one – the main one that you’re seeing right now is government regulations. We passed an energy bill in 2005 that phased out MTBE and required ethanol and ethanol has to be transported in a different way, it’s more expensive, refiners are getting rid of their MTBE gasoline so they’re drawing down inventories, so they won’t be sued by the trial lawyers.

And then the second thing is we passed a bill reducing the sulfur content in gasoline from 90 parts of sulfur per million or whatever it is today, to 30. And then beginning in June in diesel we’re going to take it I think from 500 down to 15. So, that’s causing an increase as refineries gear up for this because it costs money to refine these new special blends. The second thing and here’s the story I don’t think is being covered is since January imports are down 8.7%. Since February alone imports have dropped 13%.

JOHN: Jim, you’re talking about fuel imports not car imports not fuel imports?

JIM: No, oil.

JOHN: Oh, oil imports, OK.

JIM: And when I say imports, the whole energy complex because we import 60% of our energy in the form of oil and let’s say natural gas, and the other 10% makes up what we call refined gasoline products whether it’s jet fuel, diesel or gasoline. So our imports are dropping so that of course is a response to the 20% jump that you’ve seen in prices. That’s the topic that the media’s missing out on.

And what I think this reflects John is globally the world’s export capacity is declining. If you take a look at major regions of producing oil we know for example that North Sea oil production has peaked it’s down between 25 and 30 percent; we know last year Kuwait’s major oil field Burgan peaked and it’s gone into decline so they’re exporting less; we know the Alaska North Slope continues to decline so we’re getting less production out of Alaska; we’re getting less production out of the lower 48 states.

We know last year Mexico’s oil field Cantarell – it’s largest field responsible for about 2 million barrels a day production – that has gone into decline. And just to give you an example of what that means, let’s just assume that for example Mexico’s producing 2 million barrels a day and this year because of peak production in Cantarell production will decline by 8 to 12 percent then on top of that you add increased consumption in Mexico of about 5%, and their production is down 10% that means less exports. That means less exports to the United States, and so what we’re seeing in composite is there is less spare capacity globally, and that spare capacity is being absorbed by emerging markets, especially China, Asia, India. And what I think we’re seeing now is the beginning signs of peak oil descending upon us quickly.

And even if we could get the oil we don’t have the refinery capacity to turn it in to finished products. A lot of the refineries that we have were designed for light sweet crude oil and the question you even have to ask on inventories is what is the composition of those inventories? Is it the heavy crude oil which we don’t have enough refineries to process, in which case we have to revamp some of our refineries because we’re almost coming to the peak of light sweet crude. A lot of the stuff we’re getting now is heavy, and sour crude which goes through a more extensive refining process and we’re not set to handle all of that. So, John, even if we could get all of the oil that we need we couldn’t process it. [29:43]

JOHN: That’s not being taken into account. I was reading an email from someone there was a magazine article out, and it had assured us no there was plenty of oil in all of this location blah, blah, blah, and that these were verified reserves. But let’s assume that the reserves are verified which they’re really not are they?

JIM: No, if you take a look at the BP Statistical Review – that’s British Petroleum – published each year you really have to question OPEC which produces you know we consume about 35 billion barrels of oil a year, and these guys produce a good chunk of that and their reserves never go down. They’ve never gone down over the last almost 20 years. So you have to question that. You also have to question how they magically increase by 300 billion barrels with no noted oil discoveries – nobody questions that. And even if you can have reserves like the Canadian oil sands which are estimated to be about 175 billion barrels, they’re producing about a million barrels a day. In the next 5 to 6 years, they’re going to go to 2 to 5 million barrels a day so people think, “ah, 175 billion barrels, boy, if you take that over a 10 year period, 20 year period that’s an awful lot of oil production.” They can’t gear up to that level of production. So just looking at reserves it’s production capacity that’s also important, just as it is for example when you look at the finished products and the United States having refining capacity. These are the things that are really not being discovered.

CNBC: Kurt, we clearly can’t run the economy only with clean energy. I mean don’t you have to be realistic here?

Kurt Davies: Well, the high oil prices are leveling playing field and you see rapid investment…

CNBC: Oh, we’re decades away from that. Decades!

Kurt Davies: Rapid investment in wind and solar energy…

CNBC: Wind and solar will not be marketable for decades if they ever are, and that only assumes oil and natural gas will stay high in prices.

JOHN: You know that was Jim that was part of a debate this week on CNBC and the main voice you heard there was Kurt Davies from Greenpeace here – Greenpeace USA – and he was having a very difficult time holding his own. But you know he talks about alternative technologies which recently another article in the New American talked about in the same vein we’ve got plenty of oil, plenty of time and look at all these wonderful technologies but I checked I dare you put a wind farm other than in Banning Pass outside of Palm Springs or outside of Bakersfield or something like that. Try it, I dare you.

JIM: Yeah, you run in to the Ted Kennedy’s or Donald Trump – and last week Trump was threatening to pull out of the development of a golf course because the golfers might have to god forbid look at a wind turbine offshore, but that’s where you’re going to get the best wind. And so they all give lip service to alternative energy. This reminds me, John, last week when I interviewed Peter Tertzakian author of A Thousand Barrels a Second and in his book he describes it so accurately and he says:

In the US we want energy cheap, clean secure and discrete. We want to fill our gas tanks, our furnaces without undue concern, drive long distances without worrying over gas prices, live comfortably in our temperature controlled homes sheltered from the heat and cold outside. We don’t want to feel vulnerable to the tensions and conflicts of the Middle East, and we would prefer to reduce or eliminate our reliance on foreign oil. We don’t trust big oil companies and don’t want them to make exorbitant profits.

I want to stop here. Next week, John, mark my words, O’Reilly’s already gearing up for it, and the reason he’s running this poll is because next week big oil report their profits. So, look for demonization. Who knows, they’ll haul ‘em before Congress again. But getting back to Tertzakian’s quote.

We fear nuclear power don’t want to see it returned to prominence after unforgettable incidents like Three Mile Island in the United States and Chernobyl in the Ukraine. We treasure clean air and a clean environment, and we don’t want to see a return to the heavy use of coal. We certainly don’t want unsightly pipelines, refineries or other energy supply infrastructure anywhere near where we live. We simply want energy available to us at a cheap price, out of sight, whenever we need it.

And that’s the problem. Everybody loves to talk about alternatives but you try to put in an alternative, whether it’s wind which is very clean and renewable, solar arrays – nobody wants it. It’s like Tertzakian says: we want it cheap and out of sight. [34:22]

JOHN: As you mentioned earlier what you’re seeing happen in the political and media arena are we’re making big truck of this and the blame is being pointed at the oil companies, but as I mentioned earlier in the program the biggest profiteer at the pump are various forms of government at different levels. You don’t hear a whisp at maybe cutting that back to help the people.

JIM: No, if you look at from 1977 to today industry profits of inflation adjusted were 643 billion; government gasoline tax revenue $1.34 trillion – more than twice the amount of the energy industry itself. And John, it’s not just gasoline taxes, in addition to gasoline taxes government tax production of all forms. They tax the oil companies on their profits, their income taxes.

So let’s go to the case of Exxon. If Exxon’s profit grows to $10 billion the government’s going to get 35% of that in the form of increased income taxes. They’re assessed franchise taxes. There’s also at the state level production and severance taxes. Oil companies also pay property taxes, they also pay sales tax, and the state tax industry taxes the energy industry just on the privilege of producing crude oil or natural gas. For example in Texas , the severance tax is 8.5% of state GDP; in Oklahoma energy taxes account for 12% of the government’s total tax revenues, or 7% of the state’s GDP; Alaska – energy taxes are 50% of the government’s total tax revenues and to the state 20% equivalent to the state’s GDP. Plain and simple, energy has been one of the biggest cash cows to governments at all levels.

And what you’re seeing is this familiar pattern that whenever the government is getting ready to fleece somebody and to hit them with more excessive taxes the first thing that they have to do is vilify them and demonize them. And what they’re going through, what you’re seeing right now is they’re looking for ways to tax or increase the tax – let me just put this in perspective. Prices are too high so they say, “gosh we need to punish somebody, aah the oil companies.” Now, right now government makes about 45 cents to 60 cents on a gallon of gasoline. Now, up until a couple of years ago, in 2002, when we were paying a buck fifty for a gallon of gasoline the fifty, to sixty cents the government made in terms of taxes in gasoline was 40% of a gallon of gasoline went to the government in the form of taxes. Then the following year the average gas price went up to $1.89, the 60 cents the government made only represented 32% of the cost of gasoline. Then the following year the price of gasoline went to $2.27, and so that is only 26%, that’s sixty cents on the $2.27. Now at $3 gasoline, the governments 60 cents tax combined is only 20%. And if we go to $4, the government’s tax of 60 cents is only 15%. [37:49]

JOHN: So they’re losing out on this in other words as the price goes up. Yeah

JIM: Yeah, so what they’re looking at is, “hey, wait a minute the cost of what we tax, we’re getting the raw end of the deal because we put in these fixed costs,” and they were as happy as clams when the taxes they were collecting represented 40% of the cost of gasoline. So what they’re saying with inflation, we need to increase our taxes, so what’s going to happen as prices move up, government is going to impose new taxes. And they’re going to sell the idea as a means of punishing the greedy oil companies, and it’ll encourage conservation. More taxes, there’s going to be more taxes on the industry. It’s going to harm the industry, it’s going to harm consumers. Let’s face it industry is what creates wealth in this country. It’s the oil companies that create energy, it isn’t the government. And so I mean, we ought to be thanking the oil companies for the life that’s been created in the 20^th Century, as a result of energy. We wouldn’t be enjoying the increase in food production globally, the green revolution that we experienced in the 70s. So instead of the Malthusian starvation scenario we actually saw increased food production, that was a result of energy. [39:05]

JOHN: That was a Paul Ehrlich by the way. He was predicting if you remember 40 years ago when you and I were in college you and I were supposed to be starving to death and freezing in the dark by now.

JIM: Gosh, don’t make us sound that old – 40 years ago. Try about 30 years ago. I’m not ready to age that quick yet. Gaad, 40 years ago.

JOHN: Alright spot that. We’re just about ready to…

JIM: Yeah, I’m just about ready to collect my Social Security check.

JOHN: Oh, have I got a form of blackmail for you Jim. I’ll tell them how old you are unless there’s a payment in the envelope in this box by a certain time tonight.

Well, we’ve heard this blather before too. Remember the tobacco nonsense, you know who was the biggest profiteer off the pack of cigarettes, remember? It was government.

JIM: Oh, absolutely. It was the government, and that whole about we we’re concerned about it’s just another way to extract revenues from the tobacco industry because they were making so much money. Today, if you’re an industry that’s very profitable chances are you’re going to be attacked by the trial lawyers, and two, taxed by the government, and that’s what government looks at. They’re saying here, “hey we used to make sixty cents on a dollar fifty gasoline, we need to raise gasoline taxes,” which is going to make government unpopular. So the first thing they’re going to do is tax the oil companies [by] demonizing them first. And remember the government tax formula, when you’re going to level excessive taxes on individuals whether it’s successful business people or a successful companies the first thing you have to do is demonize them. And that’s the traditional thing: you demonize them, you make these people look awful, these greedy companies and, “aha, we’re going to tax you.” And you notice they never say anything we make the majority of revenues on a gallon of gasoline goes to the government, the majority of profits once again goes to the government but you never hear that.

And you can look at this just in terms of state taxes for example in my own state of BANANA republic here in California. You know California gets 60 cents in total taxes off a gallon of gasoline. And so these costs can be very, very, very high. But let’s never forget who’s always the biggest profiteer – the biggest profiteer as they are the biggest creator of inflation, and the greatest beneficiary of inflation, is always the government.

So the long and short of it is energy prices are going up. If you can’t afford it right now get rid of the gas guzzler because those big SUV gas guzzling cars are going to be worth less on trade-ins in the next couple of years because we’ll be at four dollar gasoline this year, maybe $5 next year, six and seven in the years thereafter, and don’t blame the industry, blame government and the BANANA people. [41:59]

Other Voices: Floyd Upperman, Author & Analyst

JIM: Well, what a day it was for the metals on Thursday. Just like we’ve seen so many times in this bull market: a little bit of a correction, but coming back towards the end of the day. To discuss this joining me today is Floyd Upperman.

Floyd, what was your take on Thursday? There was a big sell-off in the morning, but it was kind of working its way back at the end of the day.

FLOYD UPPERMAN: Yeah, I think that’s the big story here. We should take note of the fact that silver was down 13.5% today and that is a pretty good-sized decline. Anytime a commodity is down 10% or more it’s noteworthy and you really want to focus on that. Not unusual, you know you have to look at where this market is today as compared to where it was at the beginning of this thing. And if you look at the May contract today silver closed at 12.52, which is still well above twelve dollars an ounce, and right around the 18 day moving average or right above it.

You know in the big picture this correction was coming, there was a lot of momentum in the market, there’s a lot of speculation going on and it’s very normal in a bull market especially commodities where you have all the leverage, it’s very normal to see these kinds of pullbacks. It’s really it’s not that big of a deal in the big picture. [43:52]

JIM: Yes, and for the metals, which can move 5% in a flash, it is not that big at all. Floyd, in looking at your longer-term indicators, what are they telling you right now?

FLOYD: Well, nothing has changed with the longer term indicators. One of the indicators we really like to look on a technical basis is the moving averages, and one of them I like is the eighteen day moving average. And today we really didn’t even go all the way back to the eighteen day moving average. We moved towards it but we didn’t even touch it in the front month contracts, before the market really started to see more buying again. So as far as the moving averages go which they naturally do lag but it’s as far as they go trends are still in place they have not changed, but you know we have to see now how this trading goes in the next few days. But I suspect this is nothing but a big buying opportunity. [44:37]

JIM: You know one of the things that happens in the precious metals is you know if we take a look at for example where the HUI index last month, these things can move very quickly on the upside so it’s not unusual to see these downward spikes as we saw on Thursday on the downside. But if we look at the fundamentals for the metals right now, or even the energy complex, I don’t see where people don’t want to buy gold, and I don’t see where people are not going to want to consume more energy.

FLOYD: Right, nothing’s changed with the fundamentals absolutely. I mean these are momentum markets it’s a global market place there’s a lot of speculating going on, there’s the ETF coming out in silver so you have that also impacting the markets you have more of these ETFs now linked to commodities than there’s ever been before. You have the pension funds now diversifying into commodities through the swaps. When I talked to you last time I talked to you about this: Pension funds now are using swaps on the Goldman Sachs commodity index for example to swap a fixed rate of return for a variable on the Goldman Sachs. So all those markets that make up a Goldman Sachs commodity index – there are 24 different commodity markets – those positions have to bought in the open market and nothing’s changed with that. So there’s a lot of momentum, there’s a lot of buying, there’s a lot of interest in these markets and we’re going to see setbacks. You also have to remember 5% at today’s prices you know is gonna be a large size move, larger than when we had silver at $4 an ounce, 5% wasn’t very big, but when you’ve got silver at 14 or15 dollars an ounce, or 13 - 14 - 15 dollars an ounce, 5% move is large in numbers but still just 5%. [46:18]

JIM: You know as we look at this too in terms of a long term bull market you’re not picking up the paper reading about major oil discoveries that are going to glut the market with so much oil like when they discovered Spindle Top in Texas.

FLOYD: That’s right.

JIM: You know I don’t hear any mining companies that are talking about elephant sized gold discoveries or silver discoveries, or for that matter copper discoveries. So none of that’s changed.

FLOYD: Not yet, not yet. You are starting to see a little bit in some markets for instance, Hershey’s came out with poor earnings and if you look at the chart for Hershey’s you can see where they’re really starting to get hurt by the high sugar prices. So you’re starting to see some of this leak into some of the companies affecting their earnings – the ones that have to buy these things for their businesses. Another example is the SUV sales are starting to slow a little bit as well because of the high price of gasoline. So you’re starting to see some ripples that may affect the demand but you know we’re just now starting to see a little bit of that, and it’s certainly nothing very big at this point. But something you have to keep an eye on is the demand side. Eventually they’re going to get high enough that demand is going to start to be affected. That’s just how it works but I don’t think we’re there yet, but that is something we have to keep an eye on. [47:35]

JIM: You know one of the things that struck me is when Kodak reported their earnings they’re raising prices all across the line on their products, and accompanying the statements, they’ve cut back on personne, so you know they’ve already gone through the cost improvements and at this point you know they can’t cut personnel anymore or they can’t make things. And they made the decision, “you know what, we’ve reached that point where we’ve got all the cost efficiencies we can get out of the system, we have to start raising prices.”

FLOYD: Right, and I think we saw that this week in the Consumer Price Index, it was a little bit surprisingly higher than what we anticipated. And that’s what will eventually have to happen, and Hershey’s may have to do the same thing to turn their business around, and they’re being hurt by the high price of sugar. Unless these are just spikes. I don’t think they are. I think they’re going to stay high for a while with the demand in China and India we may be entering into a new age. We are definitely entering into a new global market place, so we might just have to get used to these higher prices and that might eventually, it will probably eventually trickle over into higher consumer prices that’s normal that’s what the Fed’s watching for, and that’s why they’ve been raising rates. And they may not be able to do a whole lot about it though because this is a global market place now, and I think that that dilutes the Fed’s their power to really have as much influence on the market because it’s such a big market today. [48:53]

JIM: That’s something I think Wall Street’s going to have to come to terms with because if the Fed for example wants to cool demand here because energy prices are going up, if we cut back on our oil consumption in the United States with 250 million people, and 1.3 billion people in China start increasing their consumption of oil, they’re going to have the greater say in terms of what happens to the price of energy.

FLOYD: That’s right, that’s right. And I think that’s a very good point. And so ah that’s just another good example of how this is such a global market now that the Fed is not as powerful, it doesn’t have as much power as they used to have. In these other countries where there’s a lot more people and a lot more demand, it overshadows in a lot of cases what happens here in the United States. [49:41]

JIM: Anything else that you’re seeing in the things that you’re watching, anything that should be critical for investors here in the weeks ahead?

FLOYD: I do look at the COT data, that’s what I focus on and so we have COT data coming out tomorrow, we get the COT data every Friday, and we’ll be looking at those numbers again tomorrow to see if we’re seeing any new producers short selling. What I look for when the prices get high in these commodities I look for the producers who really understand the demand and understand the supply better than any other group, I look to see if they’re really starting to increase their hedging, to lock in higher prices. If they think these prices are really high and they think prices are coming down in the future, they will begin to increase their hedging programs to lock in the higher prices if it’s a producer of crude oil for example. If they think we’re near the top they’re going to start doing a lot more selling in the futures market to lock in those prices, you know if they think prices are coming down. So I’ll look to see if there’s big increases in that side of it, if we don’t see that then that’s just another sign that you know they feel prices are going higher, and so I expect…that’s why I expect it’s going to happen, we’ll see, but I’ll be looking at that closely tomorrow. [50:54]

JIM: As of last what were the numbers telling you?

FLOYD: No change. Earlier in the year we saw an increase in the consumer demand of crude oil and the unleaded gas and we saw no change in the producer selling, and then obviously the unleaded gas and the crude oil and the heating oil all of them have moved up and near the post Katrina highs, in some cases exceeding the post Katrina highs, so we have not seen any changes in that so that’s telling us that the market’s still likely to go higher.

One market I’m really watching closely for changes is copper as copper has really moved up in the last couple of years and that’s one of the markets I think we might see when that market begins to change in relation to what the consumers and producers are doing, when we start to see changes in the copper since that was one of the first markets to really begin to break out it might be one of the first markets to begin to top as well. And that’s one of the markets I’m focused on for a sign of that but we just don’t see it yet – the trends are still higher. [51:57]

JIM: What about some of the seasonalities that come in to play here as we head in to Summer?

FLOYD: Oh yeah, we have obviously the driving season and all that, but that’s all largely factored in to the market already. But the surprises there are if gasoline prices do affect people’s driving we could see less demand. I mean it’s already factored in that there’ll be more demand because of the typical you know driving season and people typically do drive more in the summer but if there is a surprise it’ll probably be that there’ll be less of it, and less demand. I don’t know if we’ll see that or not but that’s the seasonal pattern that we tend to see an increase…but these things already get factored into the market ahead of time because it’s understood that’s what happen. It’s like heating oil goes. There’s more use for heating oil and natural gas in the Winter, it doesn’t mean those prices always go higher. I mean it’s already factored into the market, so the surprises usually are that if we have a warm Winter where it was anticipated that we would have a normal cold winter, and for some reason we have a warm Winter that usually has more of an effect on price because the market doesn’t get what it’s expecting. So, the market’s expecting a lot of driving – a lot of demand. If it doesn’t get that for some reason then that could knock prices down. [53:06]

JIM: Well, I just got back from lunch where they just raised the price of premium to $3.30, I don’t know what it’s like near where you live.

FLOYD: Yup, that’s what we’re seeing too like in Orange County the premium is up there something around $3.32, it’s getting up there.

JIM: Well, Floyd as we close why don’t you tell people about your services and your website.

FLOYD: My expertise and my area of focus is on the government’s commitment of traders data, and that is what it is a positions of the large participants in the market, the large producers, the large consumers, the funds, they release a report, the government releases a report every week that breaks that data down. I take that data and put it in different charts and graphs and have different indicators that I have created to help us understand where the markets may be going. The website where all that data is located the website is www.upperman.com, and we provide access to it through our clients and members and anybody who wants to sign up for access they can get access to it. [54:04]

JIM: And also Floyd you’ve written a book it’s called Commitment of Traders: Strategies for Tracking the Market and Trading Profitability. Well, Floyd I want to thank you for joining us on Other Voices this week I hope you’ll come back and talk to us again in the future.

FLOYD: Sure will.

FSN Comic Relief - EF Mutton

JIM: Well with the stock market going the way it is today it seems like all sorts of people are changing careers, and getting into running small time stock brokerage firms. One such person is Mr. Edward F Mutton who joins us here on the program today. Mr. Mutton, can you hear me on the satellite hookup?

EF Mutton: [Baa-Baa] Why yes it’s a little noisy here with all the sheep – [speaking to sheep]Stop that, stop it! – but I can hear you fine it’s just fine go ahead.

JIM: and what was your business before you found the Edward F. Mutton brokerage.

EF Mutton: Well before I founded it well, Mr. Pooplava, I

JIM: Uh, That’s, that’s Puh-plava.

EF Mutton: OK, I’m sorry Mr. Puhlava actually I’m running a excuse me…

JIM: Just call me Jim.

EF Mutton: OK, Mr Pooplava I’ll do that. Actually I’m in both businesses.

JIM: So what’s the business besides the brokerage.

EF Mutton: I’m a sheep farmer, can’t you tell!? [Baa-Baa]

JIM: Boy, that’s quite a jump in careers.

EF Mutton: Well, no not really they’re, haha, pretty much alike if you take a look.

JIM: Really? Tell our listeners how.

EF Mutton: Well first of all in sheep farming sheep come to you and they make a lot of noise until you tell them what they want to hear, you get ’em to trust you, when they’re not looking, you fleece them.

JIM: Aha, so how does that work in the brokerage?

EF Mutton: Pretty much the same thing, first you get your clients to look in the rear view mirror economically speaking of course – sheep would never do that. Then you make them believe those bogus government figures, and the hype on Wall Street. Give ’em a little stuff that works so they trust you real good. And then when they’re fat enough you tell them to buy all sorts of stuff they don’t need while you dump it at the same time. I mean, it’s sheep shearing genius.

JIM: So, you pull the wool over your clients’ eyes by engaging in illegal pump and dump schemes.

EF Mutton: Ha,ha, Well, Sir, Mr. Poo-plava I’d have to go on the lam if I answered that.

JIM: But wouldn’t it be better to run an ethical brokerage firm?

EF Mutton: Well, listen young fella, that’ll happen when sheep learn to fly. [sound of sheep hitting the ground] Ermm, they’ve been doing that all morning ever since they heard your radio show.

JIM: Well, our time’s just about up. What are your best stock picks for the third quarter of this year.

EF Mutton: Hmmm, well, our best pick for the third quarter, well I think…

Announcer: When EF Mutton speak, the sheep listen. Not regulated by the SEC – the sheep exchange commission.

Blue Gold

JOHN: Well, alright Jim, you know we’ve been talking about a number of things in the Big Picture over the last few weeks. We’ve talked about commodities and peak oil has been high on the radar screen. Something else
that is in an emerging crisis but ironically it’s really not on the radar screen of a lot of people, especially not in the media and elsewhere, and that is the freshwater situation around the world. So, why don’t we give a backgrounder for people on that one.

JIM: Well, the one thing to start as we look at this is to recognize the fact that the world’s growing population is both not only overusing but misusing the planet’s supply of freshwater. You can look anywhere whether you’re looking at the United States, Europe even Asia, Latin America we’ve got an aging water infrastructure problem. We’ve got aquifer drawdowns because water aquifers are one of our main sources of fresh water supply. We’ve got agriculture, industry and human pollution. And we’ve got salination that’s also impacting us.

It’s amazing there’s a report that was published by the United Nations last year it was called Water for the people, Water for Life – the United Nations world water development report – it’s about 600 pages, and it is quite telling. It looks at these issues in terms of some of the major problems that we’re dealing with in water globally. For example the UN report water for people talks about the main problems that they see is water scarcity, more demand for water than there is supply, water quality.

Then a third one is water related disasters and diseases whether you’ve got floods or some of the diseases that we have in the sewage waste systems in major cities. And then also if you look at some of the growing geopolitical conflicts around the world over the next 50 years, as the world demand for water, which is going to triple in the next 50 years, there’s a high degree of probability of regional water conflicts erupting or evolving into war. The CIA has looked at this a couple of years ago, and documented in the UN report very much concerned about these border conflicts that especially over major water tributaries whether you’re looking at the major Tigris Euphrates river, the Nile, even the Colorado river water here in the United States, or even the Rio Grande.

In fact there’s a new book that’s out on water in fact I’m just reading it right now we hope to get the author on the program it’s been written by Fred Pearce, the name of the book is called When the Rivers Run Dry: Water the Defining Crisis of the Twenty-first Century, and what he did is he went around all the major river basins in the entire globe – whether it was the Nile, Tigris, Euphrates, the main rivers here in the United States, the Amazon and also in China – and took a look at what’s happening to the world’s supply of freshwater. And it’s just a problem that is creeping up on us because the one thing whether you’re looking at energy or raw materials or even water is we have to recognize when they were talking about this in the 70s, if we take a look at where we were in the 70s in terms of population we’ve added another 3 billion people on the planet and we’re going to add another half a billion within the next 10 years. So increasing population is putting demands not only on energy, water, food – the basic necessities of life. [1:00:28]

JOHN: So basically if we look in summary at the whole thing we know that peak oil is coming up to a crisis but if we look at the fresh drinking water around the world we see two major trends. Number one is water shortage, the other is that water borne illnesses spreading because of not clean drinking water, and this is all coming up to a crisis as well.

JIM: Because of you know governments are neglecting their water infrastructure. Most politicians do not want to go up and say, “OK, we’ve got a problem,” you know, in other words it takes 5 to 10 years to fix these kind of problems, rebuild your water structure, your sewage treatment plants. These are long term projects and no politicians want to raise taxes to deal with this issue. What they tend to do is postpone these things and say, “you know what, I’ll leave that to somebody else, you know in another election cycle.” I don’t want to deal with that now.” And so what happens is we have this deferment of these problems, and what happens is they just get bigger and bigger and bigger. And in the case of water, the one thing that we can take a look at is first of all there isn’t another product that’s going to come on to the market to compete or replace it. Even when we look at energy we can say, “OK, we can look at alternative energy, maybe it’s nuclear power, or maybe it’s going to be clean coal or going to be water or wind turbines or solar.” With water, you can’t say, “OK, we’re going to replace water with Coke, I mean, because Coke is made up of water with some some syrup thrown in.”

JOHN: Well, how do you know that because only Coke knows the secret recipe?

JIM: I have a secret way of finding out these things. But if we take a look also at water, it’s not affected by the business cycle, you’re not going to say to yourself, “well gosh the economy’s slowing down, we’re meeting with our family this evening at the dinner table and we’re going to be taking less showers per day now because the business cycle is slowing down.” You know water use doesn’t slow down. Demand consistently outpaces where we’re getting supply. And as I pointed out one of the main political problems we have is the problem itself is being ignored, so we have this crumbling infrastructure where basically you know we keep putting these patches and deferring the issue for basically future election cycles. [1:02:50]

JOHN: OK, well there’s sort of a classic reaction that governments have gone through in the past when there’s a water shortage, number one they pump water from underground aquifers, they build dams and reservoirs which ties into the energy issue by the way. The largest source of water are the underground aquifers but there’s a pollution related to that, and we seem to be depleting this groundwater by about what is estimated to be a little in excess of 4% annually.

JIM: Yeah, we really have to take a look at how we use water. I mean does it make sense to take desert land and transport large volumes of water to the desert to grow crops. Might be more water efficient to grow crops where we have plenty of rich soil and where we have plenty of rainfall, where it’s more ideally suited for growing crops. But trying to grow crops in the middle of the desert like they’re doing in Arizona, or elsewhere. And does it make sense to locate large population urban centers in desert regions where you make manmade lakes or you have all these golf courses that have to be watered? I mean we’re building cities where we erecting agriculture infrastructure in areas that are not best suited for agriculture or for human population. And as long as we can get the water somewhere and basically digging or bringing all this water out from underground aquifers that take hundreds if not thousands of years to replenish is not really a smart idea. [1:04:26]

JOHN: You know we’re talking about water right now, everything right now is front page news is oil because once again prices have slammed up at the pump although as you and I would probably say – you ain’t seen nothing yet. Water is still underground, it’s almost like an aquifer issue, it has not broken into most people’s consciousness.

JIM: No, and if you take a look at the UN report, Water for the People one of the issues the main issues is water scarcity I mean if you take a look at whether you’re looking at China where you’ve seen a broad swath of population movement from the countryside to the city, you’ve got a lot of arable good usable farm land, that’s being plowed under because what we’re doing is we’re taking this good rich farm land and putting up a you know it reminds me John of the old Joni Mitchell [lyric], you know, “put up a parking lot.” And we’re just not thinking about the way we use water today, just as in many ways we’re not thinking about the way we use energy today. Not only do we need to be looking at alternatives when it comes to energy and the way we use it, to be more efficient in our transportation systems, but also in the use of water we need to be thinking how we can become more uh efficient in terms of the water because it is a scarce, precious commodity. [1:05:46]

JOHN: You know, I was staggered talking to a friend of mine who owns a dairy in your fair state last week at exactly how much water is required to produce a gallon of milk. Let me relay some statistics on you here, alright. It costs 25 gallons of water to produce a single serving of rice, 40 gallons to produce the bread required for a sandwich we’re talking about a standard sandwich not one of those el whoppers; 265 gallons to produce one glass of milk; 530 gallons to produce a pork chop. Now for the crops to feed one Westerner in one year is somewhere between 357,000 to 500,000 gallons of water, that’s just a figure that boggles the mind and I don’t think anyone ever thinks of that.

JIM: We’re really going to have to. We’re not running out of water we’re running out of clean water. And I think in the future we’re going to have to take a look at how we use water, how it’s used in irrigation or for farming. Does it make sense in terms of the damage done to fields in our soil with irrigation versus let’s say the areas where they don’t have as much farming where they learn to be more efficient in water use with drip irrigation, things where you could get the maximum use to the crops that you grow. But I think even more importantly is to grow our farm and you know the things that we eat in places that are ideally suited for it with soil and water. In the middle of the desert is probably not ideal.

We’re doing some things whether you’re looking at Arizona, even in New Mexico, even in places like Nevada – Las Vegas – the way we use water it just absolutely doesn’t make sense, so you know it’s like Evelyn Garriss talks about: people building in areas that are historically damaged by hurricanes, and now that we’re going in this decadal oscillator cycle where the ocean temperatures are heating up we’re getting more severe hurricanes, but the thing is compared to the last heating cycle sixty years ago there’s a lot more people living along the hurricane plain. Well, there’s a lot more people living because of the last cooling cycle in areas where don’t get much water, it just doesn’t make a lot of sense. And governments around the globe are going to be forced to respond to these long deferred water and waste treatment problems that they’ve been deferring.

And one of the themes that if you want to look at this from an investment point of view is governments cannot keep up or maintain their water infrastructure or waste treatment infrastructure. So what you’re going to see as an increasing investment theme is an increase in outsourcing management operations and maintenance of a city’s water system. And the other thing is the vast majority of systems in this country are very small and inefficient. So, the future trend in investing is outsourcing. And if you take a look at what it’s going to cost to rebuild the water infrastructure system in this country, I’ve seen estimates on the low end which to me is too low, very optimistic of about 150 billion over the next 10 years, to on the high end of over one trillion dollars. So water is going to be clearly one of the future trends that are going to be with us for a long, long time. And this is another investment theme that we’ve been involved with, and will be increasing even more so over the next 10 years because this is just something like I say you know in a recession you don’t sit there and say, “you know we’re not going to, we’re going to drink less water today, and we’re not going to take a shower or instead of showering every day we are you know as the economy slows down maybe we’ll get to only once a week.” I mean it just doesn’t work that way. [1:09:47]

JOHN: It’s interesting because we will not run out of water here the earth is 4/5ths water, the question is getting clean water to where the people are, and that’s what the whole issue is about, so knowing that, knowing that this is a long term trend because you like to invest in long term trends where will the investments be placed?

JIM: One clear area on the conservative side is water utilities. I think you’re going to see more governments outsource their water systems for management and maintenance to water utilities – that’s one clear trend. I have a caveat there as it applies to the United States I’ll get to in a minute.

Areas where you know you’re just running out of clean, fresh water. Desalination is another uptrend – we’re already talking about it in San Diego building plants. Waste treatment getting rid of and treating waste properly because this is where you really get a lot of problems in terms of water borne diseases and illnesses. Companies that build the pipes, the pumps, irrigation systems and when you think of investing in water think of companies that operate globally, you just can’t think of the United States. The water issue just isn’t an issue facing the United States it’s a very big issue in terms of pollution and supply in China, very big in Latin America, although the largest fresh water supply the Amazon, is located in South America.

Also more efficient ways of irrigation I think as the cost of water goes up, and even for farmers you’re going to see the farmers themselves have to look at more efficient ways of watering their crops.

Filtration systems - you know one of the things I just don’t trust the water system that we have here in San Diego. We put a water filtration system on our home so that it’s based on the water – the water pipe that leads to the house goes through this filtration system first, before it enters the house. So it cleanses and reflushes itself every 24 hour period. And so filtration systems so you get the toxic chemicals and waste out of the system.

So, I mean there’s just anything whether you’re talking about water utilities, the companies that make filtration systems, the pipes, the pumps, irrigation systems. I mean the whole gamut. One of our favorite alternative energy companies is also very big in the water business. And the great thing about this is demand is only going to get bigger, and you know when you know you’re involved in something that’s as basic as water – one of life’s necessities it’s almost inelastic in terms of its pricing. You have to have water if you want to grow food, you have to have water; if you want to be clean, you have to take a shower; you’re going to use water when you cook. It’s just a necessity, and anything that can be evolved in making that cleaner purer more efficient is just going to be a great investment. You know one of the key themes that I’ve written about and where we’re investing is these are things that are going to take decades to take decades to fix, trillions and trillions of dollars whether you’re looking at alternative energy, finding new sources of food supply, our water system, this is just a great investment theme to be investing for – probably for the next two decades.

Emails and Q-Calls

JOHN: Well, Jim it’s that time of the show we sort of shoved it to the end of the big picture right now where we take emails, comments both negative and positive from friends. This one comes from Coaster [ph], Melbourne, Victoria state, Australia:

This is the effing best website and radio show in history. It’s so good I had to swear. Keep up the magic work. I appreciate every one’s time and effort and well done etc.

JIM: Ahem, well, thank you.

JOHN: Thank you for keeping it that way Jim. Alright, Mary’s in Abbeville, Louisiana, back here in the USA in the land up over:

I’ve been listening to your program now for some time and really enjoy it. Last week you were discussing investing in silver while I have been accumulating American Gold Eagles I have not accumulated any silver. My question is how would you suggest I own silver, say if I wanted to invest 100 thousand dollars.

JIM: I would break that up, I would have silver rounds because of if we ever get to the point of barter and using money I think those are going to be very valuable. And then probably the rest maybe you have five thousand ounces of silver rounds and then the rest in bars, say in 10 ounce bars. [1:14:50]

JOHN: How many ammunition rounds? Here we go with one of our Q-line questions. By the way for all of our listeners our Q-Line is 1-800-794-6480. It is toll-free in the US and Canada, it works everywhere else in the world but you have to pay for it, and it’s only toll-free in these two countries.

Well, what I’m saying is I found a good program which is www.theoilfactor.com, and it links to 93 minutes with Matt Simons, and then it’s Captain Ed to Captain Jim, and I think it’s worth taking a look at, thank you and bye-bye.

JIM: Well, Captain Ed I appreciate you bringing that to our attention and speaking of Matt Simmons, he’s going to be my guest, John we’re interviewing Matt next week, and that interview will be aired the first week of May when I’m going to go on a long sailing vacation take a week off, head out to sea. But we’re actually interviewing Matt next week. Looking forward to that interview by the way given where oil prices are today, and all the things that we’re seeing in terms of declining imports, and the number of the largest fields in the last…gosh we interviewed Matt in August and since that time Bergan and Cantarell have announced that their production has peaked so it’ll be an interesting interview and I’m really looking forward to that, and hope you’ll be around to listen to it.

JOHN: Vince is in Kansas City, Missouri, he said:

M3 is meaningless. M3 is mud pie. It is an incontrovertible fact. It is mathematically possible to misforecast for GDP, inflation or interest rates i.e. money is the measure of liquidity – always has been, always will be. Income velocity is a contrived figure, and the rates of change and the flow of funds used by the Fed are specious. Some people prefer the devil theory of inflation it’s all OPEC’s fault this approach ignores the fact that the evidence of inflation is represented by the actual prices in the market place. The administered prices of OPEC’s would not be the actual market prices were they not validated by MVT.

JIM: Obviously this gentleman doesn’t understand about inflation and is making an egregious error - a very common error on Wall Street which is he’s talking about the symptom which is the prices, the rising prices reflected in the economy but you have to get to the root: why are prices rising in the economy? And it’s the increase in the money supply.

Hey, Jim and John, this is Josh from Alaska uh my question is regarding your guest last week Russell Napier and The Anatomy of the Bear, considering that we are in probably a bear market should I sell my stock in mainly gold, energy, be it oil or coal, or should I hold onto those, especially considering Zapata George saying that the Hindenburg Omen had been induced. And for a shameless poacher John I enjoy all the radio shows that you produce and maybe Jim will let you comment on those. Thanks, Bye.

Well, Josh I would probably say you don’t want to get rid of your energy stocks by ah no means. I mean if you take a look at most energy stocks – I don’t care if you’re looking at Conoco-Phillips the big oil companies like Exxon-Mobil – they’re still selling at cheap prices. In other words the profits of the energy companies have gone up faster than the price of the stock. There’s still a lot of people that still don’t get it. If you take a look at the last commodity bull market in the 70s, a lot of these companies were selling for PE ratios in the high 20s, some in the 30s, that’s going to come back again by the time we get done with this cycle.

You’ve got to understand there’s going to be pull backs like in any market but hold onto these stocks, and also your precious metals stocks. I’m more inclined on the precious metals side more towards the juniors because I think this gold bull market is going to be much different from the one we had in the 60s and 70s where we had plenty of gold supply. This time we don’t have enough supply to meet demand, and prices in the market have been artificially suppressed by central bank gold selling, gold leasing and through the derivative market of the bullion derivatives in the market that had been initiated by the bullion banks. So, you know the price of gold and silver are being artificially suppressed.

So, hold on to what you have and the only caveat I would say is that in the future whether you’re looking at mining stocks, whether you’re looking at energy stocks two things are going to be very important. Number one, the ability to replace reserves because remember if you’re a mining company and you’re producing gold and silver you have to replace that because eventually your warehouse goes empty. And number two, make sure that your mine or your oil wells are in politically stable places of the world, that’s going to become more important as Marxist dictatorship arises throughout the world – whether you’re talking about the Middle East, a lot of the jihadists are nothing more than fascists with turbans – and a lot of the Marxist dictators where you know they expropriate or can take things away. So political stability is another important element in terms of the companies that you own. [1:20:27]

JOHN: From Chardon, Ohio, John says:

Hi, long time listener yada, yada etc, is this pie in the sky or can we expect to see battery operated trains recharging at Niagara Falls.

He’s talking about creation of super batteries.

JIM: You know they’re working on so many things right now – super batteries because that’s another thing they’re going to need for transportation and cars - whether they’re looking at electric recharging for know the rail system, short rail system, city transport. I think you’ll see it more in the cities then you’ll see it nationally going across country unless we have recharging stations which you know, boy I don’t know how that would work, because you would hope that the batteries would be strong enough where you know if the train leaves Los Angeles it will at least get half way across the country before it needs a charge. If it had to charge every eight hours sixteen hours it would take forever to get things transported.

Hi This is Martin. Great program did a very good job especially the little personal things that you guys talk about. I really appreciated your sailing your flying your background your attitudes your perspective, you may get the hate mail but I guess they’ll just have to learn to live with it. In the meantime keep up the good work, and I especially liked your guests this week, Zapata was fun and enjoyable, and then Ross Hansen was fundamental and down to earth and that’s always needed. So keep those guys coming occasionally we would really appreciate it. Thanks. Buh-Bye

JIM: Well, Mark we appreciate your comments and we’ll keep doing our best. You know it’s interesting John with the type of guests that we’re going to have whether we’re looking at water, whether we’re looking at political we’re going to have Professor Peikoff – Ayn Rand’s successor – coming up in the month of May. Matt Simmons – a lot of interesting guests we’ll even have some people on the bullish side, and we’ve always got our eyes on the lookout for interesting authors, or interesting topics. Sometimes we get lucky we can get these people onto the program, sometimes we don’t get lucky, they don’t want to come on the program. I can remember the people that wrote about abiotic oil we tried to get them on they you know refused to come on the program and be interviewed because I was just I thought it would be a great idea to get their perspective but no way they wanted to come on this program. [1:22:56]

JOHN: Anyway, Nathaniel’s in St. Louis Missouri:

Jim and John, I think he’s talking to us I love the show and get a lot out of it every week I just had to pass this on to you though. I saw what I thought was an ominous sign for the real estate flipping market. This weekend my wife and I were getting ready to watch a DVD and I was flipping through channels and ran across an infomercial for the “cash flow generator” then two height challenged individuals came on espousing the virtues of the real estate based cash flow system. It sounded like the same system every other instant millionaire has been pitching since interest rates dropped a couple of years ago. And he gives you the website in case you want to see it. They’re coming to St. Louis soon he says and I’m tempted just to go for the picture stories to pass on to my grandchildren over in 40 years from now.

JIM: You know it’s amazing, during the bull market used to see these thirty minute infomercials of these you know technical trading black boxes, guys getting outside you know walking down the steps of their Lear jet, or pictures of them with their Mercedes in front of their flashy home. If you can only get their black box and now that the real estate market has peaked and is rolling over, we have a new batch of people this time and it’s cash flow and real estate. So it’s not unusual that you see these guys at the end of the cycle you’ll or the peak of the cycle towards the end these guys come out of the woodwork.

Hi, my name is Bob from Milwaukee, Wisconsin and I just want to say I think Jim Puplava is doing a great job. And I heard him talking about the negative or hate mail that he’s received, and I think it’s true that there’s a lot of people out there that just get really small minds, narrow minds that has no idea what they’re doing or what they’re talking about, and that he explained that pretty well, that they take a small part of what he’s talking about and completely misinterpret it. And so I think it’s great he’s doing a great job keep up the good work, and also I’m wondering isn’t inflation just the creation of money, and so he was talking about the information he gets from The Economist magazine or mentions how much money is created in each country, wouldn’t it be more accurate and less confusing to say that that is the amount of inflation and then just say we realize the effect of that as time goes on, it trickles down? And also in view of the energy crisis I think there’s a company that looks like they could make a major effect on the economy where they’ve got a new system they’re producing power from solar, heat looks they it should be making a good profit at 5 cents a kilowatt hour, and that company is you might want to check into is International Automated Systems out of Salem Utah, Thanks.

Well, you hit upon some key things, inflation is the creation of money, it always has been a monetary phenomenon; government’s have been inflating their currencies going back to kings, pharaohs and Roman emperors, as well as heads of state, presidents and prime ministers but they all try to hide the effect of what causes it. It’s always trying to blame it on something else, and we try to confuse people whether we’re talking about the core rate, or we’re talking about prices. prices go up and you know what caused those prices to go up, it’s inflation which is created through government monetary policy. You hit it on the head.

JOHN: You know, Jim, one of the privileges we have here on the program is listening to interviews with different people so that we get a variety of thought in here. I’m looking forward to those things coming up in the weeks ahead and what are they for the benefit of our listeners?

JIM: Dan Reingold's Confessions of a Wall Street Analyst, was moved up a week. I hope you guys really enjoy listening to that interview. This is a guy with high integrity -- really says a lot about what is wrong with the system and what needs to be fixed. A lot of people thought it was fixed with Sarbanes-Oxley, which it wasn’t. Anyway, next week we’ll run Ahead of the Trend with Ike Iossif. First week of May, Matt Simmons will be joining us; The Ominous Parallels with Leonard Peikoff will be the second week of May; and then Ike Iossif will be back again for Ahead of the Trends.

Well, unfortunately we’ve run out of time. As always we appreciate you joining us here on the Financial Sense Newshour. In the meantime, until you and I talk again, we hope you have a pleasant weekend.