Financial Sense Newshour

The BIG Picture Transcription

April 29, 2006

RealPlayer WinAmp Windows Media MP3

• The Perfect Energy Storm
• Other Voices: Jay Taylor, Editor, Gold & Technology Stocks
• The Helicopter Drop
• Resource Nationalization
• SOS Award: Stuck on Stupid
• Emails and Q-Calls

The Perfect Energy Storm

JOHN: The issue of oil and gas prices blasted its way onto the media’s front burner this week, as parades of media pundits marched to microphones and cameras to proclaim their critiques and recommendations. And leading the charge was Fox News’ Bill O’Reilly.

O’Reilly: Gas prices continue to rocket, up 64 cents a gallon over this time last year. Some facts: Qatar’s oil minister says current prices are inflated by more than $10 a barrel because of the Iran scare. An article in the Wall Street Journal says speculators are bidding up oil contracts and won’t stop any time soon. Saudi Arabia’s oil minister says there’s plenty of oil available on the market, there is no supply squeeze at all.

But Bill O’Reilly wasn’t alone, there was a virtual chorus of media people this week, some making sense, others making nonsense:

[montage of voices]

We’ve got plenty of oil in the ground…we can take five years and get all the environmental stuff off…Exxon-Mobil is a combination of two big companies and the Federal Trade Commission has…Bigger Americans driving bigger cars and living in bigger houses with less savings than ever before, I think a 25-50% rise in fuel prices has got to hit somebody’s pocket book…The US economy is stronger than dirt, than crabgrass, high oil prices won’t hurt it, it’s the Fed and credit that matters, we’re going to do fine with $4 oil…what really worries me living in California, driving around, I listen to talk radio a lot, conservative talk radio, I’ve never heard so many callers who think the oil companies are rigging the game. These are conservatives, so something is in the wind that’s not good right now…I think we’re going to be looking at $5 gas by the end of the Summer, but I also credit China and India, now those two countries alone count for as much energy as the world used 10 years ago…Worried because there is a populist backlash out there that is increasingly anti-capitalistic, and if we have persistent $100 oil and $4 gas we’re going to wind up with Speaker Pelosi after the 2006 election.

Ah yes, then there were the politicians who paraded to microphones to pontificate on something which up until two weeks ago was not even on their radar screen.

This is not a time for greed, and that is what we have on this, and the Administration has been slow, it has failed to take action, and the Democrats are going to demand it…we have had environmental extremists driving energy policy in this country, saying no to everything, and when you hear things like Senator Kennedy this weekend, I want to turn round and say, “Sir, you’ve been here for 41 years, what has your policy been on developing alternative fuels? What has your policy been for drilling?”…What are you guys going to do about it? This is what has me quaking in my boots. Are you going to…Larry it’s very simple…More price gouging, we’ve had that a million times and we’ve never come up with anything, you’re going to confiscate Lee Raymond’s bank account?…Are you afraid to investigate? Larry, would you be afraid to investigate what’s been done, if everybody’s on the up and up, there’s not a problem, but let’s investigate to figure out if anyone’s gouging…Our friends across the aisle, the liberals, didn’t vote for it. The Gas Act would have federalized the crime of price gouging, and those are some things we all need to do right now…there was a loophole bigger than Exxon-Mobil could have asked for…yes, there are a number of things that can be done, but first you need to remember that we didn’t get here with these higher prices just in the last week or the last month. And I think these increases are indefensible, and outrageous…price controls may result in lower prices but they also result in shortages, long lines and other problems for consumers for many years to come. They take a lot of unraveling.

And finally the President himself attempted to seize the high ground in a speech to the Renewable Fuels Association in Washington DC, in which Mr. Bush made an effort to cover all the bases:

In the State of the Union Address I talked about the advance energy initiative, this is an aggressive plan, a wise way of using tax payer’s money to get us off our addiction to foreign oil. So the fundamental question is what are we going to do, what can the government do?

One of the past responses by government, particularly from the party of which I’m not a member has been to propose price fixing, or increase of taxes. Those plans haven’t worked in the past. The problem we face is we’ve got tight supplies because we haven’t expanded refinery capacity. There hasn’t been a new refinery built in 30 years. The permitting process in this country is extremely complicated. Companies that want to upgrade their equipment, or expand existing refineries, or build new ones often have to wade through long bureaucratic delays, and or lawsuits.

It’s important for Congress to cut through the red tape and guarantee refinery construction permits will be processed within a single year. We also need to be mindful of the fact that we can find additional crude oil in our country in environmentally friendly ways. So I’m directing EPA Administrator Johnson to use all his available authority to grant waivers that would relieve critical fuel supply shortages.

We got to make sure that we protect the environment, we also got to make sure that we find additional supplies of crude oil, in order to take the pressure off the price of crude, which takes the pressure off the price of gasoline at the pump. One of the issues as you know that’s been confronting Congress is ANWR.

And I fully recognize that the passage of ANWR will not increase the oil supply immediately but it’s also important to understand that if ANWR had been law a decade ago, America would be producing about a million additional barrels of oil a day, and that would increase our current level of domestic supply by 20%.

Well, there you have it. That was the week that was, and it’s interesting to note that the one issue which still didn’t seem to break the surface was that of peak oil. The one impression you got in listening to all of this this week on all of the talkies, both radio and television, is that no one seems to have an overall comprehensive view of the global energy situation.

What has happened so far is just the advanced ‘scud’ to the perfect energy storm that is now approaching. And the question we now need to examine on the Big Picture is what is the real oil situation stripped of all the hype, what really has to be done, and possibly what failure to do so will mean? Either way it does seem as if James Kunstler’s predictions here on Financial Sense Newshour a few months back are coming true: the Democrats are becoming more and more irrelevant, but the Republicans may be about to hoover themselves out of office.

JIM: It’s interesting John to hear that montage of all the voices and the cacophony of noise is over the energy issue. No one, and I mean no one, is addressing the energy crisis we now face.

JOHN: You know it was interesting I spent hours – and I mean hours, Jim – of watching footage of everything everyone said this week. And occasionally there would be a burst of light, but generally no one has really grappled with what I call the overall comprehensive picture of exactly how all of these factors are interacting. And a lot of what we saw unfortunately was demagoguing and grandstanding, which always brings to mind that thing I just said about James Kunstler that the Democrats are becoming more and more irrelevant – they’re drifting away from any relevancy at all, but because the Republicans have failed to do it, people are upset. The Republicans may well get hoovered by the whole thing.

JIM: If you look at the whole discourse this week it reminds me of the three-fold rules of being a politician. And if you follow this whole energy issue, this is basically that the political dialogue unfolds as follows. Number one, you ignore an issue and hope it goes away. And for most politicians –whether it was the 80s or 90s – the energy issue would occasionally erupt but it would go away. We had an energy crisis here in California in the year 2000. Well, 2001, we had a recession as a result of the Fed rate hikes, we had the effects of 9/11, and energy prices whether it was natural gas or oil came back down again. So, rule number one for a politician is ignore the issue, hope it goes away, and if it does go away, maybe somebody else in another election cycle can deal with it.

Rule number two: when the crisis hits obfuscate the issue, and that is throw in all kinds of confusing things. You really saw a good example of this and I refer back to last Friday on CNBC where they were interviewing all these consumers at gas stations – I don’t know why people think this is relevant – you have a guy who’s filling his brand new SUV with gas and he’s upset because prices are up because he owns a gas guzzler. Then you have another guy, and he’s obviously clueless in terms of what’s going on but to him he was echoing the media soundbites, “it’s the oil companies gouging us.” So, what you do when the crisis hits is what you see politicians in both parties doing now –and the media I might add – is obfuscate the issue.

Rule number three, when the crisis hits shift blame to someone else other than themselves. In other words, you didn’t hear the politicians other than maybe the President talk about, “look we passed an energy bill requiring ethanol, we don’t have enough ethanol to get to the refineries.” Number two, it takes longer to ship ethanol to a refinery than other traditional energy measures. And number three, we just passed a new regulation that’s requiring that refineries refine diesel and unleaded gas, and take out more of the sulfur content. And so, all of these bottlenecks that have been created due to the ethanol issue, all of the added costs that have been created as a result of the sulfur change issue – did you hear anybody this week talk about that John?

JOHN: No, no that dropped out, peak oil was not mentioned either, in other words the overall scarcity at this stage.

Jim, have you noticed this whenever head into a situation like the perfect storm, and in flying we used to call it ‘scud’ – there’s always about 200 miles worth of scud ahead of a good front – but there’s always economically a series of bumps, and usually after the first bump they can pat it down, and the second bump gets harder, and they say, “Oh, don’t worry about, don’t worry about it.” Last year we had Katrina and Rita that was the first bump. Now we’ve had the next bump due to government mandates. It’s obvious these bumps are going to increase in frequency and in severity. The perfect storm is on the way, and so far nobody is doing anything about it.

JIM: No, there’s nothing that can be done about it to avoid it, it is already too late. And the perfect storm is going to be made up of 3 different storm fronts: one is the demand-supply storm front because you have increasing demand coming from globalization, especially China and India. These were factors that were less relevant, let’s say in 1990 and 91, when oil prices spiked to $40 during the first Gulf war. And then also even in the year 2000 as we headed into a recession – remember oil prices had got down to $10 a barrel. So, we’ve got increasing demand, at the same time, more and more major producing countries, more and more major producing wells are declining and that decline is accelerating. So, we have the situation where demand is outpacing supply.

The second storm front we’ve got global capacity constraints –I don’t care if you’re looking at people, if you’re looking at supply, the pipeline, tankers, refineries, it’s global. And then the third storm front is geopolitical instability, whether you’re looking at the Middle East, the Caspian states, Nigeria and Africa or Latin America with Chavez. So, all three of these storm fronts are now heading for a collision to make what I think is going to be the perfect energy storm. But maybe that’s what wakes people up because none of this garbage that you’re seeing on the news has woken anybody up. I go back to the political dialogue rules when handling issues: ignore the issue, obfuscate the issue, and then blame somebody else. And we saw, John, what that montage that we opened up the Big Picture with, you saw all of that unfolding this week. [12:33]

JOHN: OK, let’s see if we can pull this one apart, so that we can give our listeners an accurate idea of what’s going on. Blame shift first: what was the cause of higher prices? Let’s fix that one down.

JIM: Yeah, because what I call obfuscating the issue and blaming somebody else, they’re talking about price gouging. You know it’s interesting, after Katrina and Rita gasoline prices spiked to $3, oil was at $70, and the Federal Trade Commission came in and took a look at this price gouging in terms of its investigation last year. And so all this talk about, “oh we’re going to investigate this,” this is just political rhetoric is all it is. If we look at reality oil prices have gone from $60 at the beginning of the year to as high as $75. We’re still looking at oil prices on this Friday, almost to $72 a barrel.

What the Federal Trade Commission found and you can see this in the market wrap-up Thursday, written by my son Chris, 85% of the price of gasoline is attributed to oil prices. And what the Federal Trade Commission did when they took a look and issued its report in terms of last year’s price spikes. They said the main driver in terms of gasoline cost is crude oil. Now, a lot of people are saying, “gosh, how did we ever get to $3 oil, you know only a couple of years ago we were paying a buck fifty?” Well, folks, the reality was in the year 2000 we were paying between $18 and $20 for a barrel of oil. Today, the price of oil is $72 a barrel. Prices are up 260%. So it is no mystery in terms of why we’ve gone from a buck fifty, to $3. It’s the price of oil, stupid!

I wish I could get on one of these shows, and say what is the is it about this chart of oil prices that you don’t understand. Additional findings, when the FTC issued their report, they said what are some of the main drivers, why are costs going up? They said a worldwide supply and demand and competition for oil are one of the most factors in national average gas prices in the United States. Did you hear people talking this week, John, that we need to import 60% of our raw oil and gas into this country – natural gas that is – and then an additional 10% of finished oil products, whether it’s gasoline, diesel fuel, or jet fuel. Did you hear that come up?

JOHN: No, that never came up, that was not up this week. They have gotten that far.

JIM: And for a country that has 5% of the world’s population, and consumes over 25% of the world’s energy, and has to import over 70% of its total energy needs, we don’t dictate prices, we aren’t the largest producer, as we once were prior to our oil production peaking in 1971. So what we must do now is go on the open market place and buy oil from a lot of people that don’t particularly like us, number one. And number two, we have to compete with other countries, we have to compete with China, we have to compete with Japan, we have to compete with India, Europe – other countries that need it.

And the other thing that the FTC findings showed that since 1973, OPEC has been a significant factor in prices that refiners pay for crude oils. So, if you’re a refinery in Louisiana, or the Midwest somewhere or California, you are importing over 60% of the oil that you refine. And so domestic prices are linked to global prices because that’s where we get our oil from: we get the majority of our oil from foreign sources. And if the market price on this Friday is $71.55 a barrel that’s exactly what you’re going to have to pay if you’re ordering oil today from Nigeria, or from Venezuela.

Other factors that are related to price. Domestic prices which have been in almost a 20 year bear market, if we take a look at the 1980s and 1990s, if you adjust those prices that we have today, they’re the lowest that we have paid since 1990 on an inflation adjusted basis. And as Matt Simmons has pointed out in the interview this week, we’re paying about 11 cents for a cup of gasoline – I mean there’s nothing you can buy in any store for 11 cents a cup.

Another thing that the Federal Trade Commission found is regional differences in gasoline supplies, and different environmental requirements account for retail price differences and availability. We have these 50 blends of boutique fuels in this country which leads to greater cost increases and shortages. And if you go to our website, and look under Chris Puplava under the archives, take a look at the latest story that he did, he has this graph of oil prices and gasoline prices over the last two decades. And what they did is they stripped out taxes because people forget that the biggest profiteer of energy is government. There is more money that goes to the government in the form of taxes than [goes to the oil companies in the form of increased profits]. And what they did is stripped out the taxes, and they laid the price of gasoline over the price of crude and it matches – I mean there’s no mystery. And I go back to the point from the year 2001 to today, oil prices have gone up 260%. Are we surprised that gasoline prices have gone from a $1.50 to $3? [18:26]

JOHN: Well, it would look like if you listened to one of their main critics, O’Reilly, say for example, what they’re asking the oil [companies] to do is to sell their cheap found gas at below market prices. And it’s really a form of subsidy is really what it is.

JIM: Yes, that’s what they want to do. In fact, the Federal Trade Commission report when they summarized it, they said:

In essence, companies with exploration and production operations are in a position analogous to a homeowner who bought a house in a popular area, just before increased demand for housing caused real estate prices to escalate. The homeowner would not expect to sell the house based on the price he paid for it, but rather based on what the house is worth in today’s market. Similarly, the fact that an oil company could profitably produce its crude oil at $30 a barrel, does not mean that that firm should expect to sell its crude oil below what increased demand for crude oil has made it worth in the world market today. Indeed, even if a firm were inclined to sell at a price based solely on production cost, and not on supply and demand, that would not reduce crude oil prices. Rather, savvy oil traders would flock to buy their cheap oil and then resell it at a higher price – a market price.

In other words they would arbitrage it.

And this was from the Federal Trade Commission and their report Gasoline Prices: The Dynamic of Supply, Demand and Competition. So, we’re not seeing price gouging. What the government and media types really want really is, in essence, they want the oil companies to take their depleting lower cost reserves, and sell them to US consumers at below market prices. That’s essentially what they’re calling for. [20:17]

JOHN: Let us address the issue that we have heard on a frequent basis the last two weeks. That is windfall profits tax. This is supposed to keep the oil companies from price gouging. Number one, what would it do? Number two, is it going to solve any problem at all?

JIM: Well, there’s two questions that you should ask before we resurrect a windfall profits tax. Number one, do oil companies pay too little in taxes compared to profits? And number two, what was the effect of the last windfall profits tax enacted in 1980? Well, let’s take a look at some facts: fact number one, the past 25 years companies directly paid or remitted more than $2.2 trillion in taxes after adjusting for inflation – actually they paid a little less than that – inflation adjusted the taxes they paid each year; also, the taxes that the oil companies paid, and I’m talking about the top 29 oil companies was 3 times what they earned in profits during the same period. According to –not the Federal Trade Commission – the Bureau of Economic Analysis and the US Dept. of Energy.

The second question we need to be asking ourselves: what is the effect of windfall profits tax? The Congressional research service took a look at the windfall profits tax after it was eventually repealed. And what they found was the result of windfall profits is: number one, it depressed domestic oil production and natural gas production; number two, it increased our dependence on foreign oil; and then number three, if you take a look at it the government actually collected less revenues from the windfall profits tax than they thought they were going to get. That’s because one of the things that companies are going to do is say, “why am I going to drill for oil here anywhere in the US, and try to find it, if you’re going to slap a windfall profits tax.” So, for example, if I’m Exxon-Mobil, I’ll just sell whatever I have overseas. I’ll sell it to somebody else, and what we’ll do is we’ll substitute the oil we produce in selling it here, what we’ll do is we’ll import all our oil. In that way we avoid the windfall profits tax because if you have to pay Saudi Arabia $72 for a barrel of oil then you can’t slap a windfall profits tax on that. What happens is we’ll just substitute foreign imports for domestic production. This exactly what happened in 1980, and this is what the Congressional research firm found. They found for example for the 29 largest oil firms they earned $630 billion dollars in oil profits –inflation adjusted basis – and they paid $1.34 trillion in the form of taxes. So, here we have John, almost a 3 fold increase in taxes over profits.

And you know a lot of people forget the idea Exxon’s at a 35% tax bracket and Exxon, let’s say, made $1 billion profit in the year 2001. If they made $1 billion profit, they had to pay the US government $350 million in taxes. Now, let’s suppose that 3 years later Exxon makes $10 billion in profits. Well, government taxes get 35% of that. They get 3.5 billion, a 10-fold increase in government taxes from the rise in Exxon’s profits. So, it’s not like Exxon is getting away with not paying taxes. So there’s really a lot of demagoguery and grandstanding and obfuscation that’s going on here, at the media level and the governmental level.

And going back to the Congressional research report the government actually collected less windfall profit tax revenues, because companies are going to adjust their fuel mix, they’re going to adjust what they’re going to do. They’re not going to sit there and say, “OK, we’re just going to pay this tax.” No, they will take steps to avoid that tax and one way to avoid that tax is import more foreign oil. So, our current account and trade deficit goes up, and we’re worse off than before. And that was the conclusion of the Congressional research study that was basically as a result of windfall profits tax domestic production fell sharply, and we became more dependent than ever on foreign oil. [25:06]

JOHN: One of the things that one CEO brought up this week was the fact that, “now, wait a minute, if you’re going to select us out for people who make excess profits, why not select all companies?” But here we’re just selectively punishing certain companies. What does that do to the free market, especially, say for, for example, companies that we find to be really critical to the infrastructure and the economy?

JIM: It really damages them. At a time that we’re heading into peak oil, we need to be creating incentives, and I’m going to be getting to this in just a moment when we take a look at options and how do we dig our way out of this crisis, because this crisis is inevitable – the perfect energy storm is on its way and there’s nothing we can do to avoid it. And just listening to this week’s debate had made me more pessimistic that there’s no way we can get around this now.

And if you listen to Matt Simmons in the interview, too, he is of the same viewpoint because of just taking a look at what the response is. And we’ve had a couple of authors on – Stephen Leeb, who wrote another book because he was just absolutely amazed at what our responses have been to higher prices, we’ve done absolutely nothing. The only thing we’ve done is make it more difficult to get energy, we’ve made it more difficult to put in alternatives. But basically if we keep down this road we’re a civilization heading for decline. [26:26]

JOHN: You know, this is really a piece of irony if you sit back and look at it. This is the only source of energy that we have right now. The alternatives are just not going to come online fast enough. Everyone’s talking as if these alternative technologies are going to be here in 24 months. That’s just not going to happen. And at the very same time these are the only companies that are providing oil. And you and I know that we’re going into this storm, you have Senator Arlen Specter out there, you’re not only hearing talk of windfall profits tax, anti-trust legislation, let’s increase tax – not only is it looking in the rear view mirror, or seeing a linear world, it’s doing exactly the opposite. Although I think we sort of predicted that here on this show a while back if you recall.

JIM: Yeah, let’s just take a look at it from the viewpoint of an oil company, you’re ExxonMobil, Chevron, or ConocoPhillips, you’re not welcome to the Middle East, you’re not welcome in parts of Africa, you’re not welcome in Venezuela, you’re not welcome in Russia, you’re not welcome in parts of Asia, and then if you’re not welcome in other places of the world, [you ask] what about domestically. Domestically, they are prohibited from developing large energy blocks in the US, including offshore on the Pacific coast, Florida, Alaska, inland areas. In other words, access to where the oil is has been restricted.

We seriously need to start thinking about this. Outside of importing our oil from Middle Eastern countries that don’t particularly like us, or even Latin American countries that don’t like us, or in Nigeria that doesn’t like us, and especially the rebels in that area, do we want to be saying to our oil companies, we want to disassemble you, make you uncompetitive - because the oil industry is one of the most capital intensive industries in the world. It takes billions of dollars in capital investment to bring oil on stream. I don’t care if you’re drilling for oil or natural gas in the Gulf, building an oil platform you’re going to have to replace because it got destroyed by a hurricane. Do we want to sit there and disassemble our energy companies, and especially the international oil companies who have to compete with what is the biggest player in the market today, the NOC – the national oil company. [28:52]

JOHN: There was something that came up on the O’Reilly factor this week, we know how O’Reilly’s been bashing on the oil companies but something I found rather interesting is O’Reilly had John Passacantando on the program on just such an exchange. Listen to what went on:

O’Reilly: The greens, you know, have succeeded in blocking drilling in the Arctic, in ANWR, and the refineries, every time they want to open a new one there are lawsuits ,and the drilling in the Pacific, there are lawsuits. Come on, John, I’m the biggest green in the world, I want alternative fuels but the environmentalists have hurt in this area dramatically, you’ve got to admit that.

Passacantando: Well, what I’ll tell you is the Arctic Refuge has got six months worth of gasoline for the US fleet, so it’s a drop in the bucket.

O’Reilly: Now wait a minute, we don’t know that.

Passacantando: It’s like burning your Steinway piano for an afternoon’s of heat. So, you’ve got to look for where the real oil is. The big reserves are in the Middle East, it’s too unstable, so what we’ve got to do is build super efficient vehicles. I’m telling you Bill, green is the new red, white and blue. Oil is over, oil is over.

O’Reilly: Well, it shouldn’t be over. But it isn’t over, and it’s not going to be over in the next decade, but should be over.

JOHN: Now, that was an interesting wasn’t it? In other words, the thing is we need to find those alternatives, and it’s not our fault, we didn’t block this stuff, and boy, it’s all over the Middle East on somebody else’s shore, like you were talking about, not on our shores.

JIM: First of all, it’s like the President said, had we gone in ANWR a decade ago, because that’s what it takes to bring new oil on, we’d be producing a million barrels more a day of oil, but we’re not. This guy is disingenuous. The environmentalists I’m finding, especially the BANANA crowd are disingenuous: you can’t put in a windfarm; you can’t put in a solar array; you can’t build a nuclear power plant; you can’t build a new, clean coal power plant. Good luck, they’re still trying to get one refinery built in Arizona, and they’re on what? Going past 10 years now. [30:52]

JOHN: OK, let’s come back to our initial premise and that is that of the perfect energy storm, how’s it going to form, how’s it going to develop, what will it look like, how will we see it as consumers here ,and then what the political fallout –which is really more of my concern – is going to be?

JIM: Well, the first part of the triad of this perfect energy storm is the demand-supply imbalance. On the demand side you have demand rising between one to two percent a year, and supply is not keeping up with that demand. We also have for the first time major competitors coming into this market: China and India. And as developing economies’ demand for energy grows and that includes our own economy. Economies need energy to grow, so demand continues to grow.

On the supply side, about 75% of the oil producing countries have reached peak production, they are now in decline, whether it’s the North Sea, Cantarell in Mexico, Burgan, the North Slope here, country after country after country have all passed peak production. And when you look at the discovery front which is basically finding new oil to replace what it is you’re consuming, discoveries peaked in the late 60s and we’ve run a replacement deficit since 1985 continuously. Our major oil fields, Burgan, Cantarell, Ghawar are all past peak, and what oil does remain is very difficult and expensive to get to, and is in political and hostile climate terrain. [32:34]

JOHN: Alright Jim, first storm, let’s summarize that stage of it.

JIM: We have a decline rate of existing wells –producing wells – a in the world are accelerating, so that means less production. New discoveries are of poorer quality and they’re too small to replace what it is that they’re consuming. Oil and natural gas are peaking. The demand coming from the developing economies continues to increase so the result is an inexorable rise in the price of oil, first to a $100 a barrel, at that point we’ll be in a crisis mode. The second benchmark will be $150, and then finally $200 oil.

JOHN: OK, Jim, first storm is supply-demand, we’re seeing that one right now, but we’re not done. What’s the second one?

JIM: OK, the second storm that’s going to hit us is capacity constraints. We have limited refinery capacity. The President talked about we haven’t built a refinery in this country in 30 years. And so somebody ought to be asking some questions, and I know you get the conspiracy kooks that come in with, “Oh, the oil companies did this intentionally.” During the bear market of the 80s and 90s, if you were an oil company you lost a lot of money on your refinery business. You simply shuttered your plants and got rid of them because they were a major money losing operation. And remember, oil prices were artificially low and it was very difficult, the profit picture was much different in a bear market. So, we have limited refinery capacity, no refineries built in the last 30 years and we still can’t build them, we’ve been trying to build one in Arizona now going on 10 years.

We have a shortage of drilling rigs, we have a shortage of people, we don’t have enough pipelines, we don’t have enough LNG terminals, and we don’t have enough oil tankers because, remember, out of the Middle East now, a lot of these tankers are taking oil to China, India and other places in the world where maybe 10, 15 years ago the primary market for that oil was the United States. Anything that we were to do today to mitigate any of this, such as building a new refinery, it takes a couple of years to build new tankers, especially super tankers; it takes 3 to 5 years to build an LNG terminal; 7 to 10 years to build a refinery. So, the net result is you can’t replace and get rid of these capacity constraints, they’re only going to get worse as demand increases. [35:00]

JOHN: OK, storm one, let’s review it again, supply-demand, that’s what we’re seeing right now. The next one up, capacity constraints, even if we had gobs of oil around the world we still couldn’t manage to deliver it to the American public, or in the West for that matter. There’s a third storm, what’s that going to be?

JIM: The third storm is what you’re seeing unfold almost on a daily basis, and that’s geopolitics, both here and abroad. If you take a look at where 75% of the world’s oil lies it’s in the Middle East and the Caspian. And the US doesn’t control that. We don’t tell Saudi Arabia what they can sell us energy for, we don’t tell Iran what price they can sell us oil. The second thing that you have now is a growth or a movement of what we call the new oil dictators, Putin in Russia, for example, and you saw a bit of that beginning this year when they withheld natural gas from Europe. You’ve got Chavez in Venezuela. You have the extreme jihadist mullahs in Iran; and you also have the rebels in Nigeria. The other thing you have on the scene now geopolitically that we didn’t have 10,15 years ago is what we call the NOCs or the national oil companies. These are major players that are competing with international oil companies, and the NOCs have the upper hand. The other thing that you have here geopolitically is Washington politics: they’re talking about price controls, windfall profits tax, anti-trust legislation. [36:36]

JOHN: Price controls we’ve heard this before though. Price controls, windfall profits tax, and anti-trust. As I said we’ve heard it all before, how does this help the situation? What does this do ultimately?

JIM: Well, first of all, price controls to keep prices artificially low versus demand-supply market forces, number one, create shortages. The minute you hear price controls you better start hoarding the stuff, or hope you’ve got a car that gets 50, 60 miles to the gallon. You’re going to need it because you’re going to see shortages, just as we’re seeing spot shortages in the Midwest now due to these new refining requirements.

Another thing too, these windfall profits taxes as we’ve seen from Congressional studies do nothing. If the government takes 35% of Exxon’s profit and now they slap on another 10% tax, do you think that’s going to encourage Exxon to produce more energy here domestically, even if they could, and were allowed? No. And anti-trust, breaking up our large oil companies now when you’re talking about a capital intensive market. The oil that we’re finding is getting harder to find, it’s getting more expensive to find, we’re finding it in very hostile environments whether you’re looking at deep water and turbulent seas like the Gulf of Mexico, with hurricanes – this doesn’t make sense. [37:59]

JOHN: Alright, but there is the talk about alternatives. We heard that in that clip with O’Reilly, and John Passacantando.

JIM: The problem with alternatives, John, whether you’re building a nuclear power plant wind or solar, this stuff takes 7 to 10 years to develop. We’re still in the infancy stage, and really all this talk about alternatives from an environmentalist is basically bunk. They pay lip service to alternatives, but you can’t put in a windfarm whether you have Ted Kennedy fighting it off Hyannis Port, or Donald Trump threatening to pull out of a golf course if they put up wind turbines. I hate to tell these guys but wind turbines run on wind, and where do you get the best wind, you get it on the water. You know, anybody that’s sailor is going to tell you that. So, you can’t put up wind turbines, you can’t build large solar arrays, you can’t build a nuclear power plant, you can’t build a clean coal technology plant. And if you take a look at whether it’s shale oil, or oil in the Arctic Refuge, which is a joke the area that you’re talking about 2000 acres is mud, mosquito infested tundra –you don’t have access to what we have. So forget about alternatives because you can’t build them. [39:17]

JOHN: That’s one of the facts that seem to be hidden through all of this is that while on the one side a number of these organizations like Greenpeace have been promoting alternatives on the flipside environmentalists have been killing that. And that may offend a lot of people but it is sort of the facts of how things have been playing out these last 20 years.

JIM: Yeah, name me where they’ve been able to build a refinery, name me where they’re trying to put up wind turbines that haven’t been stopped with lawsuits, name me a place where they’re trying to build large solar arrays.

And I’m just going to tell a personal story about 5, 6 years ago I bought 22 acres of land, and we had 2 parcels – an 8 acre parcel and up at the top of the parcel I had a 360 degree view all the way out to the ocean. That’s where we wanted to put our home. Well, after we closed escrow on the land we were going to design a self-contained energy efficient home. It was going to be powered by wind and solar. We had our own water well, discovered major water find on the property, at 450 feet we hit a 100 gallon well; we were going to have a little farm home where we would have a couple head of cattle. And what they did John when I pulled the permit, and we were going to build, because you have to have a site location and all kinds of things you have to go through, they had an environmentalist out there – 14 acres I owned across the street on this road that I had they allowed me to put a fence on it but I couldn’t ride a horse on it because according to the restrictions horse poop pollutes the environment – never mind that we had deer, bobcats, coyotes and all kinds of other animals on that property, but they allowed me to put a fence.

On the 8 acres I had, at the very top of the hill, where we wanted to build a home, this environmentalist said he found a red horny toad lizard so they confiscated or restricted a one acre area for the lizard. And then the second summit on this property where I’d build there they took that away because they figured out it was a wetland. Now, how they got a wetland was if it rains, water goes down hill, so according to their theory on the summit if it rained the rain would go from the top of the hill down to the bottom. This became a wetland. Now what they did on top of that they said they would give me one of those acres back if I paid $90,000 to buy what they call mitigation land which is land out somewhere in the toolies which some environmental group has bought, and this is the scam that they’re running. And most people don’t realize that this kind of stuff is going on – environmentalism is big, big business. [41:50]

JOHN: Well, that’s sort of lost in the big issue too, because of the fact that environmentalism has become big business as well, and what it’s done is it’s gone too far to one side, that’s what O’Reilly said and we need to change that. It’s not a matter of polluting the planet, it’s a matter of absurdity, that’s the difference on it.

OK, we are going to have this triple hit storm, what is the result of all of this going to look like?

JIM: Number one, you’re going to see oil prices go beyond $100 a barrel, probably eventually to $200 a barrel. It’ll be in big spikes created by each new crisis whether Nigeria’s production is taken offline, Hugo Chavez issues an oil embargo against the United States, who knows what it is.

The second thing that we’re going to see is government regulations is we’re going to see spot shortages of gasoline as you’re now seeing. You’re going to see gas lines, they’re coming. You’re going to see power outages and then as I pointed out, you’re going to see oil prices triple from where they are here. And it’s going to get ugly, and we’re going to be miserable and the only thing I can say is you might as well profit from it because oil prices are going up, energy stock prices are going to be going up, alternative energy – when this stuff starts hitting, John, you’re going to see a mad dash scramble just as you’re seeing in alternative energy stocks.

And more importantly I think you need to start preparing personally, in terms of your transportation. If you can’t afford $60, $70 oil, what are you going to do when oil gets 100, 150 and 200. So, take a look at your transportation, take a look at your home, your ability to heat and cool it, and also the location from where it is that you work from your office. And we’re going to be getting more into that in the future. What you can be doing and I’m going to be sharing with you some of the things that we are doing personally, taking steps to be prepared. As I said, this year was the year I took a sabbatical and really prepare for what I think is going to be one of the worst energy storms – the stuff that’s coming is going to be ugly and it’s going to be miserable. [44:02]

JOHN: Well, whenever a crisis comes upon you there are a number of rules of thumb. First of all, never appoint those people who got you into a problem to get you out. If they knew what they were doing they wouldn’t have got you there in the first place. Maybe we should learn that lesson when it comes time to voting at some point in the future. But also in the middle of crisis you have to look for your options in any situation: number one, understand what’s happening. And number two, how do we do that?

JIM: Well, if we take a look at what’s going to happen when this crisis hits, we have 3 options in the way that we can handle this. The first option, is what Richard Heinberg and his book talks about – First Man Standing – that’s where basically there’s just a free for all and we become a bully. Who can swing the most fists will beat up his opponents ends up with the oil. So, first man standing, and that usually means war.

The second option is government rationing, and God help us if we ever get to that point. The third option and best is to create solutions to the crisis before it erupts, and we have a choice between either war and rationing, or rebuild and recreate our energy structure. [45:12]

JOHN: Yeah, but aren’t we saying we’re too late for that. We have a bottleneck to go through, we’re behind the curve right now, so are we too, too late, or just going to hit some bumps while we try to regroup?

JIM: We’re going to have a crisis, so now like I said the best thing would be to create the solutions before the crisis erupts. We’re already in the crisis mode right now, but go back to the montage you played at the beginning, look at the way we’re handling it. It’s kind of like I go back to remember the trifecta of politicians: ignore the issue, hope it goes away; two, when the crisis hits obfuscate the issue which is what we did this week; and three, shift blame to someone else other than oneself, which is what we saw this week. And so we’re going to have to rebuild and create the energy structure.

It just depends, John, how painful it gets before people get fed up with politicians you know ‘he said, she said’ and blaming people. They’re going to say: fix it. The unfortunate thing is these guys don’t know how to fix it. [46:16]

JOHN: That comes to Loeffler’s theorem about, basically since number one they won’t be told the truth, so they won’t have a good understanding of why this is happening. So number two, they’ll begin this process of throwing out one group of rascals, only to discover they’ve put in another group of rascals who can’t fix it either.

JIM: Yes, and what you’re going to see is the gradual move in this country towards fascism, because I don’t believe the left is going to win this one. in other words the marxists aren’t going to win, and it looks like it’s going to be more towards fascism, and I’ll get more into that in the weeks ahead with Professor Peikoff; and also Aaron Russo the Academy Award winning film producer produced a new film that’s going to be coming out this summer, and I hope that I can get him on this show, and it’s about the move to fascism in this country. But aside from that is coming, and the best thing I can tell you is at least try to profit from it, and at least try to prepare for it. [47:17]

JOHN: OK, let’s strip away all of the nonsense alright, the ‘he said, she said’ the ‘who’s doing what wrong’ etc, etc, etc, assuming we had a carte blanche slate to do something to bail us out. Clear headed thinking, what would we be doing?

JIM: First thing you need to do, is work on where is most of energy or oil consumed in this country, and it’s the transportation system. So the first thing you have to do is take a look at shipment of goods across the country, and I think we have to switch more from trucking to rail, and from rail to boat. In other words if you can get it from a railroad car to a boat it’s more efficient, you use less energy. So that’s one thing we need to do. We need to start looking at mass transit systems. On the vehicle side you need to look at bringing in more hybrids. Diesel, because you get about 30 to 40% more energy output from diesel. Imagine what would happen if you had a diesel hybrid. So work on the transportation system, number one as part of my ten part program.

Number 2, try to work closer to home – if you’re commuting an hour a day you need to examine that.

Number 3, start growing food locally instead of the 3,000 mile Caesar salad. And there’s a grocery chain, very successful in this country – Whole Foods Markets – big, big growth story, they rely a lot on organic farming, and because they rely more on organic farming they rely more on local producers. And so, change your food production.

Number 4, start making things at home, this idea that we’re going to outsource everything overseas does not work at $150 or $200 oil.

Number 5, simplify the national fuel mix, get a Winter blend or a Summer blend, but we don’t need 50 different blends of gasoline. Los Angeles gasoline should be the same as gasoline in Chicago and Detroit and New York City. Do we need every state and local environmental entity coming up with their own fuel mix, especially when we don’t have enough refinery capacity?

Number 6, accelerate alternative energy through tax breaks, and waive all overrides – get rid of the BANANA people. If we need to get wind turbines going in an area where you have a lot of access to wind, where you have large population centers, waive the restrictions.

Number 7, start building what I call peak refineries to handle the heavy sulfur crude, and also to kick in when you have problems in the Gulf of Mexico due to hurricanes or you have a heat wave that hits so they can kick in.

Number 8, give tax breaks for domestic production. Instead of penalizing oil companies give incentives to go find and then open up the land so they can find it.

Number 9, accelerate energy R&D through tax incentives.

And number 10, start going after the BANANA people, start investigating environmental groups, looking at their funding, investigate the environmental fraud for example buying mitigation land. Start fining them, in terms of nuisance suits, because I guarantee you, just as we were talking about coal, nuclear, wind, solar – doesn’t matter what it is, you can’t build it because there’s a lawsuit. And so get rid of these nuisance start finding these organizations.

And number 11, expose the demagogues and the grand standers. Just as Dan Rather’s CBS organization, the New York Times have been called on the mat for false reporting to create a political agenda. Expose the demagogues and the grandstanders when they appear. [50:54]

JOHN: It’s interesting what you say about that because right now I know you’re trying to build an energy efficient home literally energy independent, and I’m just curious to see what’s going to happen in the permitting process because that’s when the rubber hits the road on all of this stuff.

JIM: Well, I’m working with an architect right now we’re going to design a house in terms of solar collectors, and I’m probably only going to be able to get away with using solar, because I’ve located a company that builds a wind turbine that could power it. But if I can get solar energy and I can get my own water source, food source and enough land, and actually within the city limits – we’re looking at a couple places right now in terms of where we work because I want to be 5 minutes to 10 minutes from where I work so I don’t have to get on the freeways which if you live in Southern California is an awful experience, but I think that’s what we’re going to have to get to. We’re going to have to get to live work and play mode that is closer to where you live and where you work versus these long commutes. It’s just not going to work at $150 oil.

But I’m working with an architect right now and we’re going to bring in some innovations in terms of how the house is built, the materials that are used, and the efficiency standards that we’re going to have, and then also we going to try eventually to put solar on our building. We’re working right now with attorneys through these different associations to see if you can do it because, John, you can’t just do stuff like that. If I wanted to power my house that I live in currently through solar panels I have solar that I’m using to heat a pool, but I couldn’t put up a solar array because it would never be approved by the HOA – or the Home Owners Association. So as we go through this I will just kind of share some of the things, and the technologies that we’re going to be using, so that maybe perhaps others can benefit from this as well. [52:42]

JOHN: Do I qualify? I commute every morning by walking down stairs to the radio studio.

JIM: Yeah, you’re energy friendly.

JOHN: That sounds good.

JIM: It’s amazing with technology today that actually makes a lot of this telecommuting for a lot of employers and employees possible. Just for example how we put this radio show together, those of us who all work on it we’re splattered thousands of miles apart but every week we pull together a radio show by means of the internet and the phone lines.

JOHN: Yeah, most people don’t realize you’re in Coeur D’Alene, I’m in San Diego, we have Tim Woods in Alabama, we have Joe Duarte in Dallas, we have Paul Nolte in Chicago, Dave Morgan in Spokane, Washington. A lot of our guests we pull this together, it’s not like we’re all sitting here like a television show. So, thank goodness for technology.

Other Voices: Jay Taylor, Editor, Gold & Technology Stocks

JIM: Well, it’s been quite a year for gold this year, we’re looking at prices of almost $640, gold prices are up nearly 18%, it’s been a great run for silver, even though silver’s been correcting it’s still up there. To talk about the gold markets joining me on the program is Jay Taylor, he’s editor of Jay Taylor’s Gold and Technology Stock Newsletter, and also Jay Taylor’s Energy Newsletter.

Jay, lets talk about the gold market for a moment a lot of people thought that perhaps gold was topping out at 550 but, boy, I’ll tell you this is showing no sign of letting up.

JAY TAYLOR: No, it’s certainly not, Jim, and I think what we’re seeing is sort of like a coiled spring snapping back. I really do believe that the gold market was under a lot of pressure in part because of management from central banks that were dishoarding massive amounts of gold, both the gold they talked about – the gold sales that they announced – and perhaps more profoundly the gold that they sold through the back door by way of the bullion banks and the leases that went out to Barrick and others and borrowers. So what I think is happening is there is a reversal of supply coming onto the markets from the central banks that was really providing more of a supply to the market than the shortfall. If my numbers are right what we were looking at was a very substantial shortfall of mine production to meet demand and gold prices in my view should have been rising through the 1990s, instead they were falling because that shortfall was more than made up for by dishoarding by central banks. And now that the psychology of central bankers has changed I think we’re seeing a very, very substantial rise in demand for gold.

JIM: One thing I’ve observed Jay and I can remember going to my first gold conferences a couple of years ago, a lot of speakers at that time thought it was mainly a dollar phenomenon. In other words it was a bull market, especially focused just in the dollar, but what we’ve seen over the last year especially was gold break out against all major currencies. And one little exercise, I get the Economist magazine and one thing I look in each week in the back section of the Economist is the growth in money supply by central banks globally, and those are some pretty hefty numbers we’re starting to see.

JAY: They really are and actually one of the things that I chart every week called the US – the Global US Dollar Liquidity –which an analyst at Merrill Lynch was using an analyst named Charlie Clow[ph.], and I started getting really interested in that in the last 1990s because there was a period of time over a 52 week time frame during the Asian crisis when actually that measure of liquidity – Global US Dollar Liquidity – shrunk by almost 5% at one point. And that was a time when, Jim, I think we were close to a deflationary event – a global deflationary event – but the policy managers– the policy makers were able to get control of the monetary system and reflate it and keep it from deflating.

But I’ve been watching that, and we’ve seen whenever there’s a problem we saw massive amounts of new growth in the money supply, I mean in that measure of liquidity, and it got up to 23% or so before Mr. Greenspan started tightening – so-called tightening, I don’t believe he’s ever gotten involved gotten very tight with the monetary policy in recent years – but it’s gone from 23% down to about 10%. I think they took the growth of money down to about as far as they feel they can take it without creating some real problems on the deflationary side and now it’s heading back up again. It bottomed around 9, 9 ½, 10% [of] that measure that I watch very carefully. [58:12]

JIM: You have constructed something you call it your inflation-deflation index, tell us about it and what is that index telling you right now.

JAY: Yes, I call it a watch rather than an index because I’m not sure how well yet it measures the inflation or deflation, but essentially when you and I last spoke I was pretty much a deflationist – I believed we were going to have a repeat of the 1930s or something like the Japanese had been going through ,and you know I thought that was imminent – clearly I was wrong and I went out and sold my house too early, and that cost me a lot. So from a personal point of view, my view of what the markets should do, and I followed that view, was somewhat costly. And we did well with our subscribers because we were in gold shares and so forth. However the deflationary view that I thought was imminent was clearly not the case, and we started having what I think is an increase in inflation and acceleration of inflation in all measures from even using the government’s numbers I might add. And I think the government CPI and PPI number are highly flawed, and really do understate the actual cost of living. But aside from the cost of living we have other indications, and have had some time, of enormous amounts of inflation, first in the 1990s through the equity markets, and then more recently in the housing market.

So where are we going from here with the question – what I wanted to be sure of is you know if we have a deflation, if we have such an event that we’re going to be ready for it but at the same time we don’t want to be sitting waiting for the roof to cave in and not being prepared and not profiting from the markets as they are. So, I think what I really learned the hard way was you know let’s be ready for the markets as they are, and not as they should be, in my view. So what we did is create this inflation-deflation watch, which is really aimed at getting some advance notice if there is a tipping point from inflation to deflation.

And what we’ve done Jim is picked up a number of elements that are in the watch that we believe are forward looking, and those would be including some of the equity indices we use as part of 17 different variables that are in that inflation-deflation watch. And what it’s telling us now is that really inflation as measured by this index, or watch if you will, is accelerating. So we’re really preparing our model portfolio as much as possible to profit from these inflationary trends. [1:00:49]

JIM: In addition, as you changed your thinking on the inflation deflation, you also I might point out were in energy early too, and especially some of the alternative energy. Now you have an energy newsletter, tell us about that.

JAY: Yes, what we’ve done is our new energy newsletter was really borne because of my conviction inflation is more of a problem that was going to be with us for longer than I had earlier thought. And it’s true we had what I call essential technology stocks in my gold newsletter, and those included some energy plays. For example, we have a wind company that is really going to start selling its product now in the next couple of months, its first installation is due at the end of this month. We have a company that takes animal waste –manure if you will – and turns it into methane gas, and then can take it one step beyond and can sell it as pipeline gas right into pipelines, and then it also creates electricity with the methane that it’s produced from these large farms. So, it’s really a nice story because these are huge environmental problems for our water system. And then we have another company that takes a geothermal story – geothermal company that’s developing a project in Nevada. So those kinds of things we’ve been looking at those are the companies on the list and have done pretty well.

But we really in the energy letter started focusing much more in uranium and oil and gas stocks traditional oil and gas stocks as well as these environmental plays. In fact, I was down in your city a few months back looking at a solar company down there that I think is going to do extremely well, should be cash flow positive and even profitable this year in its first year, it’s taking advantage to a certain extent of your tax laws down there in California, but it’s also because the electricity prices have gone up so much that a house that would cost – a 25 year roof on a house, you’d get your investment back in about 7 years I think, if you were a California resident, and then from that time on a good percentage of your electricity you would have that cost hedged by virtue of the fact that you would be generating your electricity from the sun. So I think there are an awful lot of opportunities in the energy field the energy sector but I’m most bullish of all on uranium right now, Jim.

JIM: I couldn’t agree more, Jay, especially as we wake up to some of the problems of approaching peak oil.

I want to talk about something you and I were talking about before we went on the air, and that’s current Fed policy. I have read all of Mr. Bernanke’s papers, and here’s a guy that really believes as he’s analyzed, and he’s considered an expert on the Great Depression, and his view of the Great Depression was if only we had been able to print a gazillion dollars we would have avoided the Great Depression. And he studied events in Japan, in fact he’s gone over to Japan, and he’s been advising them. In fact a lot of their monetary policy they’ve taken from us. And so, here’s a guy who really believes in any kind of crunch you flood the [market] with helicopter money, or who knows it may be we take out the US air force to drop the stuff off – but we’ve gotten M3 done away with, and that was growing at over 8% before they did away with it, and here’s a guy at the helm who at the first sign of trouble and you know the comment he made at Milton Freidman’s birthday, “you know, you were right, we’ll never make that mistake again.” That to me is a blueprint of a man who is now in charge of monetary policy, telling us what he’s going to do the minute we get into any kind of trouble.

JAY: I would agree I mean I think that’s [the way] we have to read Bernanke. And as you know Alan Greenspan was the greatest inflationist we’ve ever had, I mean I was looking at M3 when Greenspan took over it was something like $3 trillion along about 1987, when we had the stock market calamity – crash, call it what you will, in 1987 – until he left it was about 10 ½ trillion, something like that. So, you know it’s hard to envision somebody that might print more money than Greenspan but I think this is the guy that will do it. And I’ll tell you why I think he’ll do it. I like to say that debt is the raw material from which money is created in a fiat currency system, that’s how money is manufactured. When you take a loan or a mortgage or whatever you’ve done your part to increase the money supply, and the problem with that is we see debt is compounding, the interest compounds, and we’re seeing debt grow almost exponentially in the United States compared to GDP which is growing in a linear fashion.

I think what is happening is they have to print more and more, faster and faster in order to just to keep the system afloat, and to keep it solvent so there’s enough liquidity around. But it’s a little bit akin in my way of thinking to a heroin addict who’s near the end of his life, and he has to keep printing more and more money, or he has to keep injecting more and more heroin in order to avoid the next withdrawal symptom, the next withdrawal pain. And I think it’s sort of frightening in a way Jim.

And what I’m seeing with my inflation deflation watch is the considerable increase in the rate of inflation as that indicator is measuring it. So, but I think you’re absolutely right, Bernanke, when he used that helicopter wording, painting a picture, he was letting the world know that by golly there was never any reason to worry about deflation if only people would follow the right policies. But my goodness, and I wish that I had the quote exactly of the great Austrian Von Mises who talked about how inevitably you’re going to have some sort of a crash or a breakdown is going to result at the end of the day if you follow this kind of a policy. [1:06:50]

JIM: You know, what I’ve seen, Jay, is with every rate raising cycle and every boom and bust period it takes more and more debt to get a dollar of GDP. So, it used to be $2 of debt for each dollar of GDP, then it was $4, now it’s looking like $6 or $7. Who knows what will happen this time if they keep raising and break something, and then have to panic and respond to it. You take every one of these cycles, Jay, that we go through the boom bust period, we come out of the bust and it takes more money and credit to kind of crank up the economy, and what we see is the Fed is more effective in terms of creating asset bubbles than it is economic growth.

JAY: Yeah, and I think one of – that’s a good point, and you know they can increase the money supply but they can’t necessarily direct it necessarily to where they want it to go. And you know I would imagine that policy makers would like to see higher stock prices perhaps rather than higher commodity prices, especially I know they don’t want gold to go up. And yet it’s interesting I think, if you look at the equity indices since the peak in 2000, the Dow hasn’t been able to get back to its old highs, the NASDAQ is pitifully below its old highs, and the S&P 500 which is probably the most indicative of the economy as a whole is also far below its old highs, despite the fact here I think if I looked in 2000 it was 6 ½ trillion or so M3, and now it’s 10 ½ trillion since they stopped counting, or stopped reporting, and there you have something like an almost 50 or 60% rise in that measure of money supply, and yet the equity markets are not even in most cases even close to their old highs, and yet we’ve had this incredible bubble in the housing market. And now I think you could argue we’re starting to see a bubble in the commodity prices – I know there are dynamics that are global market characteristics beyond just the money supply that’s increasing the demand for commodities overall, but clearly oil wouldn’t be where it is today if we had a tight monetary policy out of Washington, and especially since the dollar is the global and still the world’s reserve currency. But you know it’s really heading off into I think a frightening increase and acceleration of inflation in my view it isn’t like anything we saw in the 70s yet, but I wouldn’t be surprised if we got there fairly quickly. [1:09:15]

JIM: Well, Jay, as we close why don’t you tell our listeners about your two newsletters?

JAY: My newsletter gold – Jay Taylor’s Gold and Technology Stocks – dates back to really 1981, and that is as its name implies focuses on gold and gold shares, and also some technology companies that are involved in producing sort of essential things like things we have to have to sustain life like energy, and water and food and that sort of thing. And we also have a model portfolio that we put together that tries to profit and has done quite well I might add – we have tripled our value since January 2000, we more than tripled the value of our model portfolio.

Our energy letter really focuses on three different sectors in the energy space and that would be: traditional oil and gas companies, as well as uranium, and I’ve got a third of my model portfolio in uranium as I’m extremely bullish on uranium, and then the renewable energy stories which I’m really excited about, Jim. I think there’s some really great stories out there in the renewable space, and those become economic now because of higher oil prices. [1:10:28]

JIM: Well, Jay, if our listeners would like to contact you or subscribe tell them how they could do so.

JAY: They can go to our website: miningstocks.com, or they can call our office and speak to my assistant Claudio Bassi [ph.]at 718-457-1436, and our website again is miningstocks.com, with an ‘s’ on it, miningstocks.com.

JIM: Well, Jay, thanks for joining us on Other Voices this week, I hope you’ll come back to us and talk to us again.

JAY: Thanks, Jim. Thanks for having me. [1:11:00]

The Helicopter Drop

EVERY BREATH YOU TAKE
[Columbia Business School music video]

JOHN: Hey, this week it was neat, Bernanke actually said thank you to Congressman Ron Paul.

That was produced by the Columbia Business School they’ve achieved a little notoriety here columbia.edu with this little song. And we’re watching them. The fed has raised interest rates what? 15 times, Jim something like that?

JIM: 15 times, and it’s widely expected, number 16 coming up on May 10^th.

JOHN: Alright, when we say 15 times, over how long a period?

JIM: They started raising interest rates in June of 2004, and it was rather interesting because it’s widely expected that they’re going to raise interest rates in May. And John, when Bernanke was on Capitol Hill this week you really sensed the Senators are concerned, saying, “are you going to drive us in to a ditch again?” Let’s go to the Sarbanes clip:

Of course, inflation expectations will remain low only so long as the Federal Reserve demonstrates its commitment to price stability. And the question I want to put to you is it in order to for the Federal Reserve to demonstrate its commitment to price stability is it necessary for the open market committee to raise interest rates 25 basis points every time they meet.

Bernanke: Ah, no, Senator.

Sarbanes: That’s all I need is an answer, just so I know we’re not on an irreversible treadmill here.

It just wasn’t Sarbanes. In fact several of the Senators were really concerned about, “you over do this, guy, you’re going to take us into a recession.” And there’s a lot more debt out there now than there was during the last one. In fact, you can see this expressed, and I think it was Caroline Maloney who expressed this fear:

Senator Maloney: My constituents are very concerned – I would say even nervous about this continued flip or pace in the increase in interest rates which have been raised 15 times since June of 2004. And there’s maybe a feeling we should step back a few steps and just assess where we are, and there is a deep concern about it, and I wanted to relay that to you. My question is can we continue to increase interest rates without having a negative impact on our economic growth?

Bernanke: I think we will try to raise rates – if we do – in a way that maximizes the attainment of our objectives which is price stability and maximum sustainable employment growth.

I think, John, we need the Bernanke babble dictionary, or online interpreter for that one, or at least the response.

But you know, it’s widely expected that they’re going to raise it for the 16^th time that’ll take the Federal Funds rate up to 5%, and there is a good possibility that they will go on pause for a couple months. In other words, the political heat is being raised now in Washington and a lot of the Congressmen – the House is up for reelection, and I think a third of the Senate is up for reelection – a lot of these guys don’t want to go back and people are losing their homes, increased bankruptcy. Once the Fed goes beyond 5% at that point they are really open for serious mishaps. So, they’ll probably go on pause in June.

However, and let me throw this out, if oil and gold and commodity prices are still going up through the Summer, and there’s a good chance they will be, then I think you could see them come back in the August-September period, and the October-December period raising rates a ¼ of a point, and let’s say the August-September two meetings, either one of those two and then maybe another ¼ point in October-December. And I think if they get it to 5 ½, it’s over. Beyond 5% they’re going to be crisis prone.

And it’s interesting because we’ve had banking officials such as the FDIC that are now putting together contingency scenarios for the next recession, and the triggers that the FDIC was looking at another energy shock which we could get this Summer with either Iran, Nigeria or even a bad hurricane season; number two, a housing collapse because remember you have one trillion dollars worth of variable rate mortgages that are coming up for reset here; three, a serious retrenchment in consumer spending, there doesn’t seem to be too many signs of that as of yet; and then four, rising consumer bankruptcies.

So I think what you’re going to see by the end of the year for at least 10 to 15% of Americans they will be in a recession. You’ve heard that old saying: a recession is when your neighbor loses his job, a depression is when you lose your own job. And consequently, despite the misstating of all the various economic statistics that we have, I think we’re going to see more and more Americans are going to feel like they’re in a recession. The Fed is trying to put the brakes on right now and slow some of their inflationary after effects of creating as much money as they have, but they don’t want to see a simultaneous slow down or collapse in both the equity and real estate bubbles, because, boy, the air force will be dropping money on the economy if that actually happens. So, the chances of them actually doing this without a mishap the odds are not high in the Fed’s favor – the only time they did that was in 1994, and of course we had a bond market crisis, and a derivative crisis. So if they can pump enough money and credit into the system we may get what we call a mid-cycle slowdown, similar to 1994 with a lot of accidents along the way. [1:17:53]

JOHN: We’re calling this segment the helicopter drop referencing of course Ben Bernanke being helicopter pilot and dumping money out of there.

But they’ve eliminated reporting on the M3 supply which is really a way of covering exactly what it is they’re doing unless somebody comes up with an alternative reporting system for it.

JIM: Yeah, M3 is where you have repos which is one of the Feds favorite ways of manipulating the credit system – euro dollars and institutional money funds. And then also don’t forget too the securitization of debt. So, what we’re heading for next is stagflation. We know for example that GDP is overstated as a result of inflation being understated, and we also know the unemployment rate is understated. So, by many standards if you’re talking about a 6 to 8% inflation rate we may be in a low level recession today. I know people like John Williams of Shadow Government Statistics believe that we started a recession last Summer. [1:18:52]

JOHN: A lot of times we focus on just the fact that the Fed’s inflating, but if we really look around the globe, look at the central banks of most major countries they’re all inflating.

JIM: Yes, no country right now wants a strong currency. And even though you’re starting to see the dollar drift lower what you’re really starting to see is individual currencies deflate against gold and silver. So I really look to see gold and silver to set new records beyond where they are today, and to rise higher. At some point, I expect that we’re going to be operating in a crisis mode, in other words the Fed will go one rate hike too far, we could see a derivative hedge fund blow up or banking crisis, we could very well see an energy crisis. And quite honestly, if you take a look at how volatile it’s becoming in the Middle East whether you look at Iran, Iraq, increase in terrorist events, bombings, we may be at war within the next 12 to 18 months in the Middle East.

So at some point you need to get ready for this helicopter drop, governments you could see governments take over mortgage companies, subsidies on mortgages, you could see tax rebates, you might see new subsidies in the form of welfare, unemployment, pay vouchers. And then the other thing that you’re going to see as our debt levels are just getting too high whether you’re looking at the current account deficit, or you’re looking at the government’s budget deficit and if you go in a recession, folks, government revenues fall and government costs go up. So the deficits get bigger. So also look at monetization of debt, and I think they’re going to try to hide the way they do that because they don’t want anybody to know that they’re doing it. [1:20:35]

JOHN: Well, I think that came up in the Other Voices segment with Jay Taylor, they were basically saying we can put on our seat belts, here comes another round of inflation.

JIM: Yes, we may not report it but even in the government’s own numbers in the way they report it despite widespread manipulation, you are seeing the inflation numbers rise. And so, as you say, fasten your seat belt and put on your shoulder harness, it is going to be one wild ride into the future.

JOHN: It was really hard awarding the stuck on stupid award this week, simply because of the fact that so many people were queuing up to receive it. Bee county, Texas, decided they wanted to impose a boycott on Exxon Mobil until the price of gas got back down to a $1.30 a gallon. But there was no lack of stuck on stupid among Democrats, Republicans, independents and media pundits, and, well, let’s just let them speak for themselves.

[montage of voices]

There’s no doubt about the seriousness of the issue. In the short run it’s hard to deal with it tomorrow, but I think windfall profits, eliminating the anti-trust exemption, considering the excessive concentration of power are all items we ought to be addressing.

This is not a time for greed, and that is what we have on this, and the Administration has been slow, it has failed to take action, and the Democrats are going to demand it.

You know these guys are shrewd, you’re going to have to have something to go after them because, yeah, they’re raising the prices, but I haven’t been able to find anything illegal about it.

Well, it’s probably not illegal right now, and you gotta change the law, but you’re right about them being shrewd. They don’t just raise them for nothing, they find an excuse.

SOS Award: "Stuck on Stupid" ~ Steven Silvia

JOHN: Ah, but in the stuck on stupid category, let us not forget the average American citizen who thinks that barrels of oil are going to keep rolling, as represented by Steven Silvia, who as he was being interviewed by a TV news crew filling up his gas guzzling SUV, said the following:

They’re already making monstrous profits. They don’t need to be making more and I think the government should inflict tax on windfall profits. I think that’s outrageous that they can have these kinds of record profits at a time when Middle America can barely afford to keep their cars on the road.

What more can we say? After they said it all: [voice-over: You’re stuck on stupid] [1:23:09]

Resource Nationalization

JOHN: Jim, you had a story you just ran across about Fox News wanting to increase it’s subscription fees per customer or something like that.

JIM: Yeah, this October will mark the 10^th anniversary of Fox News channel and speaking of gouging, what Fox wants to do is raise their fees to a dollar per month per subscriber from 25 cents. Now, where’s the outrage?

JOHN: But O’Reilly would say you don’t have to watch Fox News. You know I’ve seen him make arguments…

JIM: Well, you don’t have to buy a gas guzzling SUV either.

JOHN: But he’s saying everybody has to buy gasoline and this is a time of war – he’s quoted that several times.

JIM: Well, what does that mean? Anything…I need food, should I get a subsidy? I have to have utilities to heat and cool my home, should I get a subsidy?

JOHN: I don’t know. I’m starting to like the idea.

JIM: Yeah! My kids need a college education, should I get a subsidy?

JOHN: I like it, I have 3 kids in college.

JIM: Yeah, I mean I like to have cheap marina space, should I get a subsidy.

JOHN: Speaking of all this stuff we have been pounding on the oil companies on one side, we should realize they are facing intense pressure from the other side, which is, I think the core one right now given the change in the geopolitical situation around the world, they are facing the risk of nationalization, let’s examine that.

JIM: Yeah, in fact, that’s becoming more real now, day by day in terms of Venezuela, where they’re looking at basically nationalizing, they’re already nationalized the Italian and French oil companies, the American companies could be next. One of the issues I think you have to be really concerned about, you can make money on natural resources whether it’s gold, silver mining companies, or it’s energy companies, but you better beware of where they’re located, where their assets are located because what you’ve got in Latin America is a return to marxism to Latin America. You’re seeing it in Bolivia, Peru, Venezuela, return of the dictatorship to Russia, same thing in Mongolia.

And as oil prices rise, John, and we go over $100 a barrel, it’s going to be a very tempting target for some of these dictators, and also these marxists, to take natural resources. Same thing applies to mining as it applies to gold. Once you see gold go north of $1000 an ounce, silver north of 100, copper north of 10-12 to 15 dollars, governments become more rapacious, including our own. Look at the example of the oil profits, we already demonstrated that the government makes 3 times more than the oil companies who produce energy, yet that hasn’t stopped them from wanting to label it windfall profits tax.

Let me give you a case example. In Venezuela, number one, Chavez is moving from being a president to being a dictator, he is acting more like one. What we’re also seeing the return of the el caudillo, and things that he did to gain political power is he fired all the state’s oil workers, and basically replaced them with his own cronies. The consequence of that is he lost all this experience, oil production fell so instead of investing, which you have to do in energy, it’s a very capital intensive business, he raided the oil treasury for social programs and the result is the country’s own oil production fell, so the next move he made is he started raiding foreign companies to replace the drop in income investment from his own policies. So you’re seeing him take over facilities, he nationalized Total, ENI, and basically, the problem is he doesn’t have the expertise. And what he’s going to do is just basically run them into the ground.

But nevertheless, power of these el caudillos are increasing, and they’re returning to Latin America, and Venezuela is a very rich in gold, base metals, but what he’s doing there’s a major junior down there Crystallex, and I think what he’s going to do is he’s going to wait till they build, put in the capital, build the mill, and spend several hundred million dollars putting in the infrastructure, and then he’s just going to change the sharing arrangement and take the majority of it for himself.

So, that’s what you’re seeing, a lot of these dictators do is they invite foreign companies to come in, go out explore, find this stuff and then once they find it, as you know whether it’s energy, or it’s gold, you’ve got to put in a mill and a lot of this is very capital intensive. So he’s very clever, he waits for them to find it, then develop it, then he confiscates it. And as the price goes up, you’re going to see more of these dictators, you’re seeing them in Peru, Bolivia they’re running on election platforms of nationalization. You have the current election in Peru, where the leading candidate says, “hey, if I’m elected I’m going to nationalize this.” So, you’re seeing this occur in Venezuela, Bolivia, Peru. And Mongolia you had the local government there change all the mining contracts once they started finding all these large deposits they’re saying, “hey, the deal we had a couple of years ago, we’re changing it. We’re getting all of it or most of it” You’ve got Indonesia closing down a Newmont mine. It is really getting precarious, both on energy and also the precious metals or base metals, because this represents new wealth and a growing means of wealth for a lot of these dictators.

There’s a report that comes out once a year, it’s the Fraser Institute, and it’s an annual survey of mining company country risk – and country risk emerges from uncertainty associated with for example government legislation where you may not get the permits, or they slap new environmental controls, or they change the sharing arrangement as they just did in Mongolia. Also, what we call mineral rights which can be changed, property laws, so you’re not protected very well in terms of property. The other thing you have is environmental protection and taxation. They can use for example environmental policies to prevent you from building, they can use government taxation to basically confiscate everything that you have put all your hard work into, and that we’re seeing occur around the globe. There’re very few places that are getting to be safe as it relates to mining or in terms of energy. So, one way a mining company or an energy company can mitigate this exposure to country risk is for example diversification. A lot of North American seniors are probably the most diversified, but the Fraser Institute [ranks] –we talked about this a couple of weeks and we got quite a few emails on it and I promised I’d bring it up again which is why we’re talking about it now – the top 10 safest places (jurisdictions) for mining companies:

1. Nevada, US
2. Chile
3. Quebec, Canada
4. Mexico
5. Ontario, Canada
6. Western Australia
7. New South Wales, Australia
8. Alaska – very pro-mining state by the way, next to Nevada;
9. Northern Territory in Australia
10. Brazil, and Argentina – both are tied, really.

So those are the safest places for mining in terms of property rights, country risk, all the risks that we talked about that emerge with government legislation, control over mineral rights, environmental protection and taxation. [1:30:56]

JOHN: Well, since we know that is the case what is this going to look like as far as exploration in energy, how will this affect it? And then investment is also an issue.

JIM: Well, from an investment consideration, one of the things that we’re doing right now, and I’m working with my geologist on this because this is a guy has spent almost 25 years in the bush, and he knows every nook and cranny of the mining business globally. He’s probably walked on ground. We’re assessing all of our juniors, for example, taking a look at our exposure, we’ve just eliminated two juniors in out portfolio because of political risk, and also we’re taking a look even at some of the majors that we own and intermediates in terms of their production and their reserves in terms of where they’re located because we expect this movement to accelerate over the next 5-10 years, John, especially when gold prices go north of $1000 an ounce. So, what you don’t want to do is be involved in a company and they have a major asset, and all of a sudden that asset just got confiscated. I guarantee you if it’s a $5 stock one day it’s a $1 the next day, because the asset that the company has they no longer have it. And you hear people like Chavez that’s talking about nationalizing and not paying anybody anything: “we’re just going to take what you have.” So that’s what you have to be really careful as an investor. You can have great management, you can have a great discovery but if you have these dictators like Chavez around you don’t know what it is that you have: one day you have an asset, next day he can change and take the majority of the profits, and then the day after that take it away completely. [1:32:36]

Emails and Q-Calls

JOHN: Alright, Jim it’s time that we looked at things that have come to us by way of either email or on our Q-Line and our phone number for our Q-Line is 1-800-794-6480, that is toll free in the United States and Canada, the rest of you peons have to pay but it does work from anywhere in the world as best we know. And by the way, you’re listening to the Financial Sense Newshour at www.financialsense.com, you’ll find a new program up there every Saturday morning about 8am Greenwich time, and that tells everyone sort of around the world listening when you could find the newest programs. Saturday morning 8am Greenwich Time, so you’ll have to do your own calculations.

And now over to the Q-Line:

This is Art from Calgary. The first question I have is with regard to inflation-deflation, and I’ve heard you speak about this many times and you’ve said there’s going to be massive inflation, which we’re obviously seeing. We’ve also seen though deflation against gold, and I’m reminded of a quote from JM Morgan when he was asked at one point, “what is gold?” And he said, “it’s money, and nothing else is.” So, I’m wondering what your opinion is upon that kind of a view of it, that although we have massive inflation in the nominal markets – the money markets – yet we see that in fact assets of various sorts, but not all, are deflating against gold, so I’m wondering if you could clarify whether or not you think that the dollar standard is appropriate, or whether we should be doing like you do on your website and some other websites do, comparing the price of assets to the price of gold. For instance, I’ve seen before stocks prices for the S&P 500 or some other number compared to gold. And you have deflation if you look at that, but huge inflation in the monetary or paper market.

JIM: That’s exactly what we’re experiencing, and that’s exactly what I expect to unfold. You’ve often heard me talk about that I think we’re going to see new records in the stock market in terms of nominal dollars. So, in paper dollars it’ll look like the stock market is going up, but if you compare the stock market in terms of gold it’s actually deflating. And because gold will be real money where you see paper money inflate, you will see it deflated against real money. That’s happening right now and I think it will continue into the future.

Help! This is Peter from the liberal empire of California. I was wondering if you could help me. They want to put up a windmill in my back area – it would cut off my view of the mountains when it’s not smoggy. First, I need your opinion on the mobile housing bubble they say there’s maybe going to be a 20% housing drop, but it seems to me if it’s a bubble it would drop a lot more than 20%, keeping in mind some areas are not as bubbly as others, but a bubble is a bubble is a bubble. Thanks

JIM: God forbid, they’re going to put a windmill in your backyard.

JOHN: Ruins the view of the smog, yeah.

JIM: Yeah. Well, a couple of things, you’ve seen prices in fact locally here drop by as much as 10%. I don’t think you’re going to see the 30, 40% drop that we saw in the 91 recession with the S&L crisis, because we’ve got basically a helicopter commander in charge of the Fed, and that’s certainly something that we saw in Greenspan. And yeah, we got a NASDAQ drop of 75%, but the housing market’s a little different from that, and there’s still a lot of equity out there. I think you’ll see some increased sales that will put some pressure, maybe 10, 20% drop in prices – I don’t know, maybe 30 at the most in some highly inflated areas, especially in the luxury home market where that tends to occur, you see the greatest decline in that area. But I think you’re going to see a helicopter drop, and you’re going to see several of them that come along the way. And Gosh, I want to get to your windmill. God forbid that they put a windmill near you, you ought to be thanking them, at least your lights won’t go out.

JOHN: This next question is almost as equally as amusing:

Hi Guys, this is Dr. Wilbur Johnson, here, news flash, Joe Narnhoff on CNBC’s Squawk Box this Monday said, “I think the investors are looking at the wrong number, they’ve been focusing on the core rate.” Well, they do converge with the overall interest rate over time, but maybe we should be looking at the overall interest rate. What do you think the implications of the investor suddenly starting to refocus his attention toward the real rates on the news media? Thank you very much, gentlemen, keep up the good work, we’re behind you.

JIM: Well, I think once investors really start focusing on the real inflation numbers I think they’re going to run for the hills out of paper assets, and that means the bond market. Right now, you’ve had up until recently rising bond prices and rising gold prices. One of those two markets has got it wrong, and it’s my bet and my guess it’s the bond market. And that’s where investors are going to run for the gates. I picture this idea of a Coliseum after a football game ,and somebody yells “Fire!” and everybody tries to head for the exits at once. That’s what’s going to happen to the bond market.

Yeah, hi Jim, my name is Mark, calling from Ft Worth Texas, I was just calling to let you know I really enjoy the program, and I had a question for you regarding the oil shale discovery in Colorado and the Utah area. I wonder if you had any comments on that as what that might mean for the oil price, and any other information you could give on that. Thank you very much, and have a great day.

I don’t think it’s going to be much for the oil price in the short run, but it’s going to be a major source of future oil from the United States. In fact, the military, I think it’s 2008 or 2009 where the military plans to get about 300,000 barrels a day for its fleet from oil shale. So, it’s going to be a future supply, and thank goodness we have it, hopefully they’ll be waiving a lot of the restrictions to access it, at least under this Presidency that’s going to happen because we need it. The United States oil production is dropping year after year, and we still have facilities in the gulf that are still offline from last year’s hurricane season. So, we’re going to need everything that we can get but in the short term not much effect at all. [1:39:30]

JOHN: Patrick’s been writing from Baltimore, Maryland, and he says:

Greetings, my brother and listen to your radio show every week, they need to get a life, Jim.

And it has been very helpful in our investment decisions you’re a great service to the community, and you appear to have a great deal of integrity.

fooled them

A truly quality show. An idea: could you make a new index, call it the FS fear index, you have two lines, one that charts growth in number of listeners, subscribers, hits; and one that has the XAU or the price of gold or silver and oil. It would be interesting to see how they correlate – does one index lead to the other. And does one confirm a trend.

I’ve been using an index for a few years – I call it the GNI – the Global Nervousness Index, which is a composite of geopolitical and financial things, but this is a little different.

JIM: Yeah, you know, it’s funny you mentioned because we’re working on sort of a what we call a global inflation gauge that we’re going to start tracking and I’m trying to put that together, and when we do I’ll probably write about it, but I promised myself this year is sort of a sabbatical year. In terms of listeners using that I don’t know, John, if I would call that a fear index. We try to tell people how they can make money out of all this.

JOHN: You filthy capitalist pig!

JIM: Yes, I know, shame on me, you greedy capitalist.

JOHN: It’s like an undertaker: he tells the family, “Oh, I’m sorry,” and then he turns around and then he say, “business.”

JIM: Yeah, but as far as the radio audience, it just keeps growing. One of the reasons we have to now start announcing our website during these segments is because a lot of people now are listening to this through podcasts – the show’s being picked up at various sites. In fact we’ve been getting a lot of emails that just brought it to our attention here in the last probably six weeks, where, “hey, I didn’t know you guys had a website.” So they have apparently come to this show through some other site that is featuring this program through a podcast.

JOHN: Yes, or people are file swapping which happens frequently on the internet. So, indeed we are at www.financialsense.com.

Yeah, my name is Dave, from Fort Davis, Texas, and with this proposal to send all the taxpayers a hundred dollars to offset their gas bill, is this not the beginning of the helicopter money you’ve been talking about? Thank you.

JIM: You bet ya! This is just one form of it, and you’ll get many more helicopter drops coming. In fact, the minute this economy really starts to roll over, if we go a rate hike too far, or we get into a serious financial crisis, or we get into an energy crisis, or God forbid, all of the above, then you’re going to see all kinds of paper drops through helicopters. And I’m not even using the helicopter theory anymore, I think, John, they’re going to be using B-52s.

JOHN: They’re going to call them out those that are still in mothballs from the Vietnam War, they’re going to pull them out.

JIM: Yeah, we going to bring them all back, and you’ll get B-52 drops. I’m thinking bigger now. Most people are thinking helicopter, I’m thinking B-52s.

JOHN: Jim, tell me what’s coming up in the weeks ahead. And obviously we are playing hooky, hooky, hooky for the week.

JIM: Yeah, next week I take a week off, we’re planning going sailing, I’m going with my race instructor, so I’m kind of looking forward to clear the cobwebs. But coming up after that, when we come back in the second week of May, we have Dr. Leonard Peikoff The Ominous Parallels; and then Ike Iossif will be joining us for Ahead of the Trends. And then some of the other guests, we’ll be talking to James O’Shaughnessy, he’s written a new book called Predicting the Markets of Tomorrow, and then Iannis Mostros The Silk Road to Riches, talking about the China Syndrome; and then Paul Kruger joins us the last weekend in May, and he’s written a book called Alternative Energy Resources because we’ve been kind of preaching not just about energy here, and metals, but also talking about alternatives because one of the sayings that you’ve heard us mention during the Joe Duarte segment, it’s something I really believe, one day you’re going to wake up and you’re going to see peak oil on the cover of Time magazine, and you’re going to see it on CNN. And when the world wakes up to that fact you’re going to see a mad, mad scramble for anything alternative: nuclear, coal, wind, solar, who knows, fuel cells, all of that.

JOHN: But that also means that if you’re going to put those things in, Jim, say you were going to solarize your home, now’s the time to do it. This is it.

JIM: We’re looking in to solar right now. Sony has these new photovoltaics cells that we’re looking at, we’re in the process right now of designing an alternative energy home that’s going to be totally off the grid. We are so nuts here in California, and I’m also thinking of putting solar on our building. Because John I remember the last building I had, I can remember the Fed was meeting, and they were lowering rates back at that time and we were out of power for almost a two or three hour segment. And you just cannot be in the information business and all of a sudden be out of power. So we’re looking at back-ups and taking steps now because like I said these things are coming in this energy crunch and if you’re a business you really need to get prepared for that because the government’s got us into this pickle to begin with.

JOHN: Yup, one of our listeners in the Florida Keys has a small island that he leases out to people who want to vacation for a week. They’re all solar powered. He said after the last hurricanes went roaring through they were back up and running in no time, while everybody else had no power. So,

JIM: Yeah, that’s one of the nice things about being in Southern California is we get Sunshine. Although, we think we’re experiencing global cooling right now because temperatures are getting below normal, we’re getting a lot more rain than usual. This gets back to Evelyn Garriss, remember John, when she was talking about La Nina, about weather conditions along the California coast, and boy, did she nail it because we’ve been getting more rain than I’ve seen. We normally don’t get rain here after February, and boy I tell you, February was unusually wet. Same thing with March, and we’re still getting rain and cool temperatures here in April. [1:45:45]

JOHN: And we had one last email from Ron, who said:

I enjoy and look forward to Financial Sense each week. The humor is a real kick. Sometimes, when peak oil is the topic I guess now’s as good a time as any, you may want to consider playing “Roll Out The Barrel,” since that’s exactly what the American public is doing.

So, Jim, as you close us out we’ll bring up underneath the Andrew Sisters with “Roll Out The Barrel.”

JIM: OK. Well, we’ve run out of time, like I say, I head out to sea next week, so we had a rather extended program today, we had two extended interviews, and a longer Big Picture, but given all the things happening in the energy market, we wanted to address that. In the meantime, until you and I talk again we hope you have a pleasant weekend.