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May 20, 2006

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Looking for Value In All the Right Places

JOHN: Well, Jim, it’s actually getting sort of chaotic out there in both politics, and in the market place. The commodities seem to be correcting. And if you remember from a while ago here on the show you predicted the Dow would reach new records and here we see general activity, but if I were an investor where, oh where, would I want to be looking right now?

JIM: Well, I think you have to take a look at where you’re going to find value in this kind of market because you have to be real careful. If we take a look at the bear market bottom in October 2002 the place to have been was commodities, whether it was gold, base metals, energy. But if you were investing generally in the stock market, the small cap stocks have outperformed the large cap stocks. Since October 2002, the Russell 2000 Index with dividends reinvested is up 75%; the NASDAQ is up 81%. In contrast, the S&P 500 is only up 46%, and the Dow is up 47%. So, once again, since 2002, small caps if you’re in stocks, and if you are looking for a general theme commodity type stocks – oil, natural gas, base metals, copper, gold, silver.

So, from the recovery from the recession and the market’s recovery the blue chips have basically underperformed what I would say are higher risk companies. In 2003 when we had a big movement and recovery in the S&P, especially after the war was over in Iraq, we saw a big surge in the S&P that year, but it was really the small cap stocks. In fact companies that were losing money actually did better than companies making money. [2:01]

JOHN: OK, I’m guessing we’re going to move to large caps, and if so, what’s going to drive that and why would I want to get into it?

JIM: I think you’re going to see a sea change in the market and the economy. Number one, growth is going to slow down, it’s decelerating here in the United States, and also globally. Number two, we’ve seen the dollar decline, and as the dollar declines if you’re a large cap, international company that enhances your earnings because if you get paid in euros and the euro is up against the dollar when you translate those euro earnings back into dollars you get sort of a bit of a bump as a result of the currency's decline. And I’ve been talking to friends in the business who are fund managers, you’re going to see them move into defensive positions. That’s occurring now. [2:48]

JOHN: Well, you know, Jim, let me interrupt here for a second but you know if you’re a fund manager you can’t just send out a notice to your people and say, “hi, we’re in cash for the next year. Oh, by the way, send me your fee anyway.” Right?

JIM: Yeah, I mean if fund manager if the objective of the fund is growth, it’s an equity stock fund, they’re going to be rotating, they have to be invested in stock. You’re absolutely right – you can’t send out a semi-annual report and say, “Hi, we’re 100% in cash.” So, I think you’re going to see a rotation by fund managers as they realize that the dollars decline is inevitable.

And number two, I think that with the economy slowing down I think we’ve reached the peak in profits, and so if we see lower profits ahead where are the areas that are going to be more stable, that are going to be less affected by an economic slowdown. And I also think that with many of the indexes selling at high multiples, if you look at the NASDAQ of the Russell 2000, I think they’re going to be looking for value. So, what hasn’t worked has been the traditional growth companies, but I think that’s about to change. [3:56]

JOHN: It’s really amazing when you think about it, because if we look back into the 90s – Microsoft and other companies – these were the ones that people were willing to hock the farm and the kids to buy, but in reality they have not done well. And overall, if we look at it, while their stocks have not done well the businesses continue to grow just in terms of total earnings as time has passed, and this seems to be a major disconnect.

JIM: Yes, if you look at what goes on in Wall Street, if you’re a Harvard MBA, if you’ve got your CFA, what analysts try to do on Wall Street is come up with what they call an intrinsic value of a company. In other words if I’m going to buy a stock I want to look at that stock as a business, what is the business worth, and then you’re going to try to determine the value of that business, and then compare it to the current stock price and say, “is it cheap, is it properly evaluated, or is it very expensive.” And of course, what you’re trying to find is a good growth story that the market is ignoring for whatever reasons. Maybe it’s just not paying attention, and buy something on the cheap side.

And the amazing thing about this, analysts look at coming up with intrinsic value, this is something that people like Warren Buffett do, and that’s what he’s done so well. And intrinsic value is determining what are the earnings going to be over the next 5 or 10 years? What are the dividends going to be over the next 5 or 10 years, and then applying a discount to those earnings to try to arrive at a present value of the stock, and then you compare that to where the stock is selling. And there are different ways of looking at companies. You have dividend discount models, you have residual income, an earnings multiplier model. Every CFA and analyst on the street goes through these valuation methods trying to determine if a stock is cheap or expensive. The problem, John, as you pointed out it has not worked the last 3 years. Instead, investors have jumped in the momentum stocks, small cap companies since 2003, companies that are losing money. The growth companies of the 90s have largely been ignored by investors. And if you were analyzing these companies, and trying to arrive at what the business was worth, those values have not been realized through market performance and the price of the stock. [6:20]

JOHN: Yes, this is getting a little fuzzy here, why don’t you give us some examples, so that we bring this down to something people can understand.

JIM: Well, let’s just take some of the great growth stocks of the 90s. OK, we have Microsoft that stands out; Wal-Mart was a big growth /stock; you had the drug stocks, companies like Johnson & Johnson; and also you had consumer staple companies like Hershey’s.

And I’m just going to go through some numbers here, but I think it’ll illustrate the point. In 2002, Walmart had sales of 204 billion. 3 years later Walmart’s sales were over 312 billion. Their profits during that same period have gone from 6.6 billion to 11 billion.

Exxon-Mobil, yes, Exxon’s stock ahs gone up but nowhere near what has happened to its sales and its profit. Exxon has gone from 187 billion in sales to 328 billion last year. Their profits have gone from 15 billion, to 36 billion.

Let’s take one of the darlings of the 90s: Microsoft. Their sales have gone from 25 to almost 40 billion. Their profits from 7 to 12.

Healthcare, Johnson & Johnson: 32 billion in sales, to over 50 billion in sales. Their profits have just about doubled from 5.7 billion to 10.4.

And even you know you take something like Hershey a chocolate company, their sales have gone from 4 billion to almost 5 billion, and their profits have gone from 200 million to almost half a billion. [7:47]

JOHN: Yes, but the stock has done anything. Let’s look at Wal-Mart for example.

JIM: Yeah, Wal-Mart has had some issues it’s had to deal with legally, so investors have sort of lost interest. Exxon-Mobil’s stock has doubled, but when you compare what’s happened to Exxon’s earnings the stock is still cheap. Healthcare, a lot of the drug stocks are still growing their businesses, have great return on investment. But, John, that hasn’t been the place where investors have been putting their money. They’ve been chasing the momentum stocks the small cap stocks, And as I mentioned for a number of reasons I think that’s about to change, and is in the process of changing.

JOHN: But aren’t we seeing it already this year if we look at the Dow outperforming the other indexes for example.

JIM: Sure, because as of at least today the Dow Jones Industrial Average is up 4% for the year, the S&P is up 1 ½, and then the NASDAQ is down about a ½%.

JOHN: Well, there’s the question I asked earlier, what is the macro-environment moving us through this transition to? What do you think’s going to take place here?

JIM: We’ve seen central banks beginning with the Fed in the Summer of 2004 raising interest rates, and now we’re at 5%, and things are starting to hurt: we’re seeing housing slow down; we’re seeing many things in the economy start to slow down.

We’re also seeing currencies outside the United States starting to appreciate and that’s starting to hurt. You’re hearing for example central bank officials and government officials in Europe say, “hey, this is about enough appreciation for the euro.”

We’re also seeing the dollar begin a gradual decline but I don’t think as many of the doomsters do, that we’re going to see a meltdown yet. We’re not there yet. And I also think that as we’ve seen the Dow outperform the other major indexes is there is a shift that’s taking place right now more into defensive sectors. In other words, if the economy is going to slow down the implications of that are that earnings will slow down. Well, if earnings are going to slowdown where can I invest where I’m not going to be impacted as much by an earnings slowdown.

The other factor that is very important here is you’ve got central banks inflating. They’re creating a lot of money, and as I’ve pointed out in the past, when you create money and print it there’s two forms of inflation. It can take place in the real economy with goods and services, or in a financial economy like the United States that inflation can take place in asset bubbles – whether it was stocks in the 90s, or real estate in this century. But I think that is what is happening because when central banks create money and credit they can’t always control where that money goes.

Last week we talked about [how] it takes $4 of debt to get $1 of GDP, and we covered for the $1 of debt that goes into GDP you’ve got another dollar that goes into imports and another couple of dollars that goes into the financial markets. So, one of the reasons I’m bullish on the Dow this year (and I do believe we’re going to see a new record somewhere in the neighborhood of 12 and 13 thousand this year) is all of the money creation that we’re seeing globally. When you create that money it has to go somewhere. It just doesn’t disappear or evaporate. [11:12]

JOHN: We hear a lot of gloom and doom but what are your reasons for thinking that we’re not going to see a dollar collapse, at least not right now anyway.

JIM: I think first of all, it’s not in the best interests of other countries to see the dollar collapse, or the US economy collapse, because if we go down we take them with us. And the other thing is what I’m seeing globally is reflation everywhere. They may be talking tough by raising interest rates and making it a little bit more expensive but I’ll tell you, they’re cranking out the printing presses. To give you an example, you often hear me talk about money supply growth, in Europe it’s over 10%, in the United States it was over 8%, and who knows what it is now that we don’t measure it – it’s probably 9 or 10. Although, that money creation is starting to spill over into M2. Japan’s money growth 5%. Denmark in the double digits.

So, if we look at what central banks are doing they are inflating. And if necessary, I believe they will intervene in the exchange markets to keep the dollar from an outright collapse. The other thing as we have pointed out before the Fed can go on pause one of my contentions was that they were going to have to hammer the commodities markets, they were going to have to get the price of gold down, the price of energy down, and they were going to have to get general commodities down. That’s exactly what is occurring right now. And the fact that they’ve been hitting it this hard tells me that they’re creating this smokescreen for the Fed to be able to go on pause. And so all this is being done as a prelude to the Fed maybe going on pause in June or August. [12:54]

JOHN: OK, so given that we’re at that situation where should we put our focus right now?

JIM: I would look at defensive issues. Once again, businesses that are not as subject to the whims of the economy. One area that stands out as a value play and also as a defensive play is healthcare. If you get sick or have to take a pill you’re not going to say to your doctor, “uh, I don’t know, Bernanke and the Fed are meeting next month, you know, I’m going to hold off on buying my medication.” If you have an operation that needs to be done you know, you’re not going to say, “why don’t we wait until the FOMC meeting, and then we’ll go ahead and make that decision.”

Consumer staples – things that people have to have: food, detergent, soap. I also think that you’re going to see the big box retail stores do very well too, as income growth lags the rate of inflation. In other words, just like my friend who got that 3 ½% raise and after taxes 2%, where does he go with a 6 to 8% inflation? He’s got to cut back and become a smarter shopper. So, what we’ve seen historically during periods of economic slowdown, recessions, and also pullbacks in the economy, you see people start to tighten their budgets somewhat and you also see them going to more of the big box stores which do very well.

And then another thing I still think commodities, whether it’s energy, base metals, gold and silver, In fact, there was an interview with Jim Rogers who’s one of the biggest commodity bulls, and he said basically he’s not selling anything. Any pullback he’s going to use as a means of buying or picking up even more – so commodities. You have to have food, you have to have energy, and those are the kinds of things that I think are going to do very well. [14:46]

JOHN: Let’s make this practical. Break it down. We want to look at what investors can do. I know you can’t make specific recommendations but at least you can probably point people in the right directions.

JIM: OK. As I mentioned, looking at defensives: healthcare, consumer staples, big box retail, commodities, energy, base metals. And John, there’s two ways you can do this, you can invest in individual stocks, and if you’re doing that I would highly recommend you look at for example Value Line which is available at most public libraries, so you look and understand the business the economics, take a look at their return on investment, their cash flow, their profit margins and take a look at the trend as well as what it’s looking like that they’re projecting in the future. Then maybe look at where the stock is selling today. So, you can do that if you’re investing in individual stocks.

And then finally, if you don’t want to do individual stocks, I’d seriously look at the big blue chip value funds, because the value investors are going to pick up on this, and that’s where they’re putting their money. So, if you’re in mutual funds I would look at big blue chip value funds.

And then also if you’re looking for managers, and quite honestly, look at a value manager because that’s the sector of the market I think that’s not only outperforming, but that’s also where you’re going to want to be. You’re going to want to be defensive. You’re not going to want to be aggressive. [16:11]

JOHN: Now, is there anything that could throw this off track the way we’re going right now.

JIM: Boy, yeah, I mean there’s 3 things that come to mind, one would be a terrorist attack, although the terrorists hate Bush I doubt if they would do anything that would make him popular because remember John, prior to the 2004 elections there was a lot of talk about another terrorist attack. It never happened. Why would the terrorists do anything to make the President popular?

A second risk probably would be leadership change in Congress in November, that would be a caveat that could cause a very severe downturn, especially if we begin with impeachment hearings, tax hikes, and things like that.

The third would be a severe energy shock. Who knows what it could be? It could be a bad hurricane season; it could be rebels taking over all of Nigerian oil production; the shutdown in the Straits of Hormuz or the Saudi oil facility – as happened a couple of months ago.

Those are probably the three caveats that come to mind and of course maybe who knows something else out of the blue, some kind of natural disaster – I don’t know – Mt. St. Helens. Those are the sort of things that are very difficult to predict. [17:26]

JOHN: Any of those could shake the current trend of where we’re going and like you say they’re random events.

We need to clarify something too here because if you recall for a while here on the show we were talking about the perfect storm, and you obviously wrote a whole series entitled that, but now you’re calling for new Dow highs, there’s budget issues etc, etc. And some people have actually accused you of being a shill for Wall Street, but I don’t think people really understand looking at the overall big picture of what’s going on the sort of I think you describe it as a self-experienced epiphany back in 2004.

JIM: Yes, the one thing that surprised me when I wrote the perfect storm in 2000 and 2001, we did see the market come down, the economy went into a recession, we had the events of 9/11. What really surprised me though is when I wrote the perfect storm I said we had four outcomes basically, one was deflation, one was stagflation, one was inflation, and one was a combination of the perfect storm which is a bit of deflation and inflation occurring at the same time. And I really didn’t know John. And I was looking at that and when I saw what the Fed did following the events of 9/11, and I saw money printing that I’ve never seen before. I mean Greenspan is a notorious money printer but my goodness, what he was doing after 2001 was just incredible.

And as I saw the way the markets reacted, I saw the flag pole rallies in the market, and I really said, you know, there’s something different that’s happening here. It’s not unfolding, we’re recovering. I saw the rebates on automobile financing, the 0% financing, the tax cuts, the slashing of interest rates from 6% to 1%. I said something different is happening here, so I began to study inflationary periods.

And it was probably between 2002 to the Summer of 2004 that I had the epiphany, and that’s when I wrote my Great Inflation because I began to realize that the stock market is a relief valve for inflation. And in all those periods of time in history, in other countries and other civilizations, you’ve seen inflation take root. And how did it manifest itself? It manifested itself from the real economy and also in the financial markets.

So realizing that, that’s when I began to see aha, now I see what the outcome’s going to be and where we’re going with this, and in fact my son wrote an article last Friday, and he showed that even though the stock market has gone up, it’s actually gone down in real terms when you put it on a gold basis. So, we’re actually deflating against the price of gold, but in nominal dollars we’re going up. And I think that’s exactly what I think is going to happen. People say, “well you’re supposed to be a bear.”

Well, I’m a bull on commodities, but I’m also bullish on the stock market because of inflation. [20:30]

JOHN: So this actually in reality would change the picture when inflation really began to puff up. That’s what threw the monkey wrench into the whole picture.

JIM: Sure, because we began to see for example commodity prices rise, all base metals, timber, gold, the real estate bubble take place because prior to the 2001recession, if you look at all recessions in the past, what happened they were led by real estate in the downturn like in the 91 recession. Number two, consumers would refinance their debt, they would use their increasing cash flow to pay down debt, and also to increase their savings.

That’s just the exact opposite of what happened this time around: consumers went deeper into debt; they used refinancing as sort of an ATM machine to keep up with inflation. And we were finally seeing the monetary effects of the Greenspan Fed start to take place. Even though we’ve had globalization and competition in manufacturing to help bring down the cost of goods such as DVD’s, computers, big screens, digital cameras, etc, the real goods in the economy were starting to go up. And so now we’re in a different kind of environment.

The other thing is we added so much debt since 2000 that basically there is only one choice for government now, and that’s to inflate or die. Well, if you inflate then you always have to ask, “if they’re going to inflate where will the money go.”

The other thing I also realized is that the United States had gone from a manufacturing economy to a service economy to a financial based economy. And if you create an arbitrage spread for anybody in the financial business you can create credit at will, and they will use that credit to go and speculate. Hence, the $4 of debt to create $1 of GDP. Almost half of the debt goes into financial speculation, whether it’s in stocks bonds, commodities, or whatever it is, but that’s the way the US economy runs today: finance is more important for a company’s earnings. You can look at GM, you can look at Ford. The only thing that’s kept Ford and GM alive has been their finance division. Their automobile industry or divisions are bankrupt. [22:51]

JOHN: That’s why you were seeing these terrific deals when you went to a car dealership and they were willing to make you ½% loans, 1% loans, something in that category. That’s what kept it flying.

JIM: Sure, and they were using financial engineering, they would raise debt and then they would raise interest rate swaps to bring down the cost of their debt. So this is a financially engineered economy. And it’s another thing that you’ll see, for example, with companies even like Caterpillar which will have their own financing arm, and they’ll make as much money financing as they do making their large equipment. So it’s not just GM and Ford, you see it throughout the entire American industry.

FSN Comic Relief...

A long time ago, in an economy not so far away…
The next chapter in the inflation wars saga – Return of the Fedi. The battle between good and evil economic forces rages on. Join the further adventures of Lukewarm Economy: “I can’t go on alone.” Obi Ben Bernanke: “you must learn the ways of the Fed.” Princess Hedona:, “Save me, Obi Ben Bernanke.” Fedi master Quota: “use the Fed, Luke.” The faithful robot 3CPI and RUDuped2: “we seem to be made to suffer.” And of course, the arch villain Darth Inflator: “I find your lack of faith disturbing.”
21st Century Fed presents the most extraordinary picture of all time: Inflation Wars. An adventure of epic proportions, a rebellion against recession, a battle we must win.
Return of the Fedi, coming soon to a theater near you. May the Fed be with you.

Other Voices: John Williams, Shadow Government Statistics

JIM: Well, a lot of people in the financial press see a strong American economy in the months ahead, and they also believe that core inflation is within the limits of the Fed’s goal that inflation is contained. Not everybody agrees with that assumption or those assumptions. Joining me on the program is John Williams, he’s editor of Shadow Government Statistics. You know, John, on the day you and I are talking on Thursday we had a Fed Governor Lacker saying rising inflation makes an interest rate pause less likely. But I look at some of the other numbers: US economic leading indicators unexpectedly declined suggesting growth will slow. Is this more of the open mouth committee trying to contain the market? Or do you think these guys are real serious in taking interest rates high enough to put the economy in a ditch, if it isn’t already?

JOHN WILLIAMS: Well, they’re in an impossible situation so all you’re seeing is a political jawboning in efforts to try and soothe the markets in whatever way they feel the markets need to be smoothed.

The problem is several fold. One is you effectively a recession in hand. I think a lot of people recognized stagflation over the last year, where the economy’s been stagnant and prices have been rising; the pace of inflation is picking up quite rapidly, and indeed the economy is slowing down, actually I believe it has turned negative.

But the problem for the Fed, they put out a simplistic view where I guess they feel the average American is so stupid he can’t absorb a fairly complex idea that there’s more to inflation than just strong economic activity. There are two types of inflation. One is where the prices are driven up by a strong economy, and there’s competing demand for goods and labor, and a real hot economy causes a surge in inflation. It is that type of an economy that the Fed can manage some by raising interest rates and tightening up liquidity. By raising the rates there they can slow down the demand and that in turn will take some of the pressures off inflation.

But that’s not the type of inflation that we have now. The other type of inflation is the cost-push and the inflation that we’re seeing right now is being driven very much by oil prices which has nothing to do with our economic activity. It has to do with oil supply distortions, a cartel, and all sorts of political disruptions around the world that have caused the markets around the world to be afraid what might happen to supplies. And they talk about inflation, and I’ll go back to Mr. Greenspan for a minute – I know he’s no longer with us as Fed Chairman but he left one of the most horrendous legacies of any Fed Chairman I can think of, and one thing he’ll be blamed for over time is accepting as a concept that the core inflation rate is what the Fed is trying to target.

What utter nonsense.

The core inflation rate is inflation net of changes in energy and food prices, and I dare you to find anyone who doesn’t depend on energy and food to have a normal life, including the late Fed Chairman. But putting that together, they just wanted to have as low as an inflation rate that they could talk about. The concept of the core inflation goes back to a period of time where you might have a month or two of big gyrations and this might help smooth over the data for a month or two. But when over a period of a year your overall inflation is up – now they’re reporting it’s 3.6%, it’s going to be up to 5% by June. A lot of that may be energy related but again that’s real inflation, that is something that scares the average person.

The financial markets may be able to sell the concept, “Gee, the core inflation is down to 2%, we don’t have to worry about it,” but if you’re not able to make ends meet because your income isn’t rising as fast as your cost of living you’ve got a real problem. And it’s an inflation that the Fed does not have the ability to fight with interest rates, so they talk about raising interest rates.

The last guy to have a situation like this I think was Paul Volcker. What he did is he really spiked interest rates, and he threw the economy into something akin to a depression, I think it’s the worse downturn since the Great Depression. And eventually the economy got so weak that it pulled down prices and inflation did come under control, but it was a very painful process. There’s nobody in Washington that is politically willing to do anything like that.

In terms of your original question, are they telling the truth, when they say, “yes we’re going to raise interest rates.” They may have to for another round or two to try and keep the markets stable, but the markets aren’t going to buy it for long, the markets are going to get unstable, the dollar is going to sell off, the stock market is going to sell off, gold is going to surge and at that point what they’re going to do is not going to make too much difference.

And I think from the standpoint of the economy, they actually need to lower rates to stimulate activity but that’s counterintuitive from the official inflation standpoint. [30:10]

JIM: You know, John, one thing that strikes me about this rate raising cycle, it’s been so different from those of the past. If you take a look at the last cycle, let’s say, 99 to 2000, we went into a recession, the NASDAQ and the stock market crumbled – we lost 75% on the NASDAQ. This time, the Fed has been raising interest rates for two years in a row, stocks went up.

The other thing that happened when they did finally go on pause at the end of 2000, we had oil prices at $18, gold was in the mid-250s, copper was selling at 60 cents. This time around we’re still looking at $68 oil, $687 on gold, copper in the upper 3 range. They don’t have a soft commodity cycle like they did the last time.

JOHN WILLIAMS: They sure don’t, and there are a couple of other things that are a little different. Back in the last down cycle they actually did tighten – money supply growth contracted – now they’re just jawboning. I mean they say, “oh, we’re tightening, we’re raising interest rates to fight inflation.” But at the same time they’re raising interest rates, they’re pumping up the money supply. They’re flooding the system with liquidity which is one way of trying to keep the markets propped, but it actually also becomes something of a inflation stimulus. If you get excessive money supply growth, which I believe you’ll still find is happening in the broader money supply measure, although it isn’t being reported anymore by the Fed. [31:36]

JIM: Let me stop you right there because one of the things that I think they tipped their hand when they announced on a late Thursday evening when they announced they’re no longer going to report M3 and all its components, because it was costing too much.

You’re talking about an organization that prints money out of thin air, who doesn’t have to worry about what things cost, they can simply print it. To me that was tipping their hand in terms of where they were going with this.

JOHN WILLIAMS: Yes, I think you’re right on the mark there, and I think what you’re seeing now in the markets is a realization of what they’re doing. The markets eventually will pick up on these shenanigans. You’re seeing gold play around $700 an ounce. Something extraordinary’s going on when you see that. You’ve started to see some selling pressure on the dollar.

And what’s happening is that you have a lot of people out there, globally who are nervous about what’s happening in the United States about the stability of our system, the stability of our currency, the stability of our political system. When you have the President’s popularity bottom bouncing at lows that have never been seen before, at least in the history of presidential polling, low presidential ratings are usually a very strong indicator of weakness in the currency. It tends to lead weakness in the currency. So what’s happening in terms of President Bush’s polls right now is actually damaging the financial markets in terms of the dollar.

And one reason the stock market’s been up, and one reason interest rates are still remarkably low, at least at the long end in terms of all the tightening that the Fed supposedly has done, and indeed they have raised the short term rates, is that you’ve had tremendous amounts of buying of US credit instruments –the Treasury Securities – by foreign investors. And if they feel the dollar’s going to tank, they have more and more reason to think so, and in fact, they started to see some of the pressure there, and there’s some indication that you’re beginning to see some central bank selling. Once the selling starts for those big holders of dollars the dollar is going to plunge, rates are going to spike, stock market will sell off sharply. This is all a matter of the liquidity that foreign investors have been putting into our system being withdrawn.

It’s a situation where the Fed – despite whatever they’re talking about in interest rates, the markets will take interest rates higher at that point – they will want to provide liquidity to the system. They’re going to start buying that debt, and as they buy the debt they’re monetizing it, and they’re laying the groundwork for what’s going to become a hyperinflation. [33:58]

JIM: Yes, I think that’s where they’re going, but you know what, one of the things, as you point out in your monthly newsletter if you overstate the economy by understating the inflation rate you believe we entered into a recession in the 4th quarter. And you were talking about in your recent newsletter that we have what are called managed statistics, they are political statistics. So, for example, if you want to get a 3% growth rate or a 4% growth rate you just come up with a number and you back into it by adjusting the inflation rate. And it was interesting, the strong economic growth that we got in the 1st quarter was a result of the GDP deflator falling.

JOHN WILLIAMS: Well, partially, and there are a couple of factors here. And one of the other things you had a surprise drop in the trade deficit. I don’t think you have anything real that’s going on in terms of an improvement in the trade deficit but that helped the numbers as well. But the big problem with the GDP reporting indeed is the inflation rate that they use. [35:03]

JIM: What about some of the bogus things that they add – imputed home owners equivalent rent and because you have bank accounts they throw in benefits for your bank account and all the other bogus stuff, they add into GDP that doesn’t exist?

JOHN WILLIAMS: According to the GDP we should all be real happy and having a great time, but the average person is not having that experience. I’ll challenge you to talk to 10 people on Main Street, USA and find a majority of them, even 40% of them, that are seeing good business conditions, it’s less than that. Economic conditions are soft. People are not seeing the type of business growth or employment opportunity that’s being hyped by the Administration – it just isn’t there. [35:46]

JIM: Let me just throw something out here because I think we’re seeing this play out politically: people on the street know that their cost of living is going up – I don’t care if it’s utilities, services, medical premiums, car insurance, food, gas, utilities, doctor bills, education bills, all that’s going up in the real world, in the meantime they’re told that core inflation is less than 2%. Their wages aren’t keeping up with inflation, so they’re going deeper into debt. So, the average person is being squeezed, and they’re upset politically, gas prices are up. Usually when people are upset you see a political change, in other words the party in office gets blamed for it.

I saw Howard Dean on television the other night talking about what they’re going to do when they win back Congress in the Fall. And they were talking about investigations and possible impeachment hearings of the President. They were talking about raising taxes, price controls on energy, taxing the oil companies and the drug companies – I don’t see how that’s going to fix anything, if not make matters worse if the President comes under impeachment hearings.

JOHN WILLIAMS: Everything you mention there is going to make conditions worse. Having the Democrats in power is not going to help a bit, although you’re right that the economy is weak enough that you may well have a shift in the power in Congress. The problem is both parties are to blame for the mess that’s evolved here in the country – circumstances have gotten out of control. The economy right now is beyond anybody’s ability to appropriately stimulate, to bring around, salvage, to get good solid, sustainable growth going again.

In order to have sustainable economic growth you have to have sustainable income growth. It isn’t there. Jobs are lost wages are down, real weekly earnings continue to drop, they’ve been dropping since 1970. And where one person used to be able to support a family and usually the wife would stay home with the kids. Now more often than not you have two people or more working in a family in order to make ends meet, and they’re still having trouble.

This is a circumstance tied to trade policies with a lot of the US manufacturing base being shifted offshore, a lot of wealth redistribution from the United States to the rest of the world. This is what’s been happening with our trade picture which has been carefully planned over time, and the effect very simply when you’re the big, rich guy – which the United States has been – and you open your economic to every one else, it has the effect of redistributing your wealth to everyone else in the world. This is fine for everybody else in the rest of the world, but if you’re in the country that’s been enjoying the prosperity, you have a number of decades to suffer there before things balance out.

And right now we’re in a structural change where the economy is not growing and that in fact it’s beginning to turn down again, and as this financial crisis breaks it probably going to plunge, and as the Fed steps in to absorb all these dollars from abroad, or steps in to absorb the US debt that’s being sold by foreign investors and boosts the money supply growth, and starts a very rapid rate of inflation growth, you’re going to end up with something akin to a hyperinflationary depression.

It’s the type of thing that the government doesn’t have the ability to avoid – it’s gone too far. There’s a day of reckoning ahead, no one’s willing to talk about it – at least no one in Washington, every one in Washington knows about it, they’re just planning the very limited time span, living day to day. I mean for the politicians their planning horizon at most is to the next election, which in Washington you have every two years for the Congress.

But in corporate America, a lot of similar thinking goes on there, the planning horizon is for the next quarter. You don’t have anyone looking 5 years down the road, 10 years down the road which if people had been doing 20, 30 years ago we wouldn’t be in the mess that we’re in now, but no one was, everybody’s played politics, and now you are faced with a circumstance where most people are going to see very significant economic pain, that will most likely mean shifts in the political structure.

JIM: Yeah, I don’t see anything other than a move towards fascism in this country as things get worse, because John, I don’t see one politician, with the exception of Ron Paul in either party, Republican or Democrat that’s sitting there saying, “we can’t afford Social Security, we’ve spent all the surplus, the surplus isn’t there, it’s an empty cookie jar with IOUs.”

And yet if you listen to all these guys, the guys that are running are talking about new benefits. It’s like in election time, I call it the season of stupidity.

JOHN WILLIAMS: It is. That’s a good term for it.

JIM: Yeah, SOS.

JOHN WILLIAMS: I agree with you about Ron Paul. The thing is you also have a circumstance here where the guys only see you spending money as a way of buying votes and getting through to that next election. There’s a limit to that, we’re coming to it, that’s what the global financial markets are telling us. And when that happens everything breaks: the financial system goes into turmoil; the economy goes into turmoil. And all these guys that have been pushing all this nonsense for decades I think are going to get voted out of office.

Now, I’m not going to speculate as to the direction the politics go in but it certainly opens up the environment for a charismatic third party candidate, and someone who’s willing to address the problems. I don’t know if this coming election will be soon enough to do it, but I’d be very surprised if come the next election you don’t see a third party making a very substantial in-roads in the current circumstance, maybe even making the Democrats or even Republicans the third party. [41:21]

JIM: Yes, almost like Ross Perot did during Bush I election. John, unfortunately we’ve run out of time, why don’t you tell people about Shadow Government Statistics, your website and your newsletter as we close.

JOHN WILLIAMS: Well, my website is shadowstats.com, if you go to that you’ll find background articles on the quality of government statistics, if you go to our archives you can see newsletters written six months or more ago that cover everything from the unbelievably exploding Federal deficit as revealed by the US Treasury, to background articles on the reality of GDP, inflation, and employment, and such.

Anyone who wishes to subscribe will find a way to do so on the site as well, but we welcome people who like to read the material and appreciate any comments you pass along. And again that’s shadowstats.com.

JIM: Well, John, as always it’s a pleasure to have you on the program. I hope you’ll come back and talk to us again.

JOHN WILLIAMS: My pleasure. A pleasure to be with you, and thank you very much, Jim. [42:16]

Golden Value

JOHN: Well, big drum roll, Jim, is this it? It looks like the correction that Frank Barbera and Tim Wood have been blabbling about for so long has finally arrived: the HUI is down something like 21%, the XAU 19% following in its train.

JIM: I don’t think it’s quite over yet. I think we still have a bit of a run on the downside, although I think the better part of this correction is about over. Generally, as Frank has always talked about these corrections in the gold market of 25% to 30% are routine – we get them every single year, and this is no different.

The other thing too that I mentioned earlier they were going to need to take down the precious metals, the energy market, and the commodity market, and hammer it pretty hard before they get ready to go on pause because you cannot have a Federal Reserve announcing, “OK, we’re going to pause, we think we’ve got inflation contained” if gold was at 750, and oil at $75 a barrel –that just wouldn’t fly. So I think that’s what we’re seeing now.

JOHN: You know, Jim, last week when you and Tim and Frank were talking, you said that you saw something unusual this time around with the gold run up.

JIM: Yes, the one thing that I did not see was that the run up of gold prices from January to May was much, much different than let’s say from May of last year to December. In other words when the gold market bottomed last year, when Frank called the bottom and then all the way up to December the share prices moved up faster than the bullion prices. So as we got towards December you were seeing the major gold producers, the intermediate companies selling at such huge premiums that it didn’t make sense given their cost of production, and the value of ounces in the ground given where bullion prices were. The premiums as I mentioned rose much, much faster. About the only sector that lagged last year was the junior sector.

This time however in the run-up of gold from January to May, the premiums actually disappeared on the majors, discounts actually increased on junior producers, and the discount on juniors actually widened. In fact, bullion prices went up far faster than stock prices. Normally, John, because of the leverage in gold stocks, you normally see a 3 to 1 ratio, in other words if gold was to go up 10%, the stocks go up 30%. This time there was about a 1 to 1 ratio.

So what people don’t realize is if gold goes from 550 to the mid 600s the incredible amount of leverage that that brings to the bottom line of a gold producer, because say your cost of mining gold is $300 an ounce, if you can sell gold at $650 an ounce because the price has moved up substantially say the movement from 550 to say 650, that’s an extra $100 an ounce that you’re getting as a producer but your costs haven’t gone up a hundred dollars. So it brings incredible leverage to the bottom line which is one reason you see gold stocks go up usually about 3 times faster than the price of gold. That did not happen this time around.

In fact this is the fourth time that we’ve seen this happen in two decades. It happened in 1992 as gold prices came down from the 500s in the 80s down to about 330. It happened again in 97 with the Bre-X scandal. It happened in 2000 when people were chasing tech stocks gold bottomed. I mean who wanted to buy gold stocks in 2000 other than ourselves. 2006 - this is the fourth time. So, this run-up has been the reverse of what we’ve seen in the past and that’s why I think that gold stocks are a real value right now. [46:50]

JOHN: Well, you know, we’ve been talking about fundamentals in the market earlier on here in the segment. What are the fundamentals on gold looking like?

JIM: Well, the first thing you have to understand is central banks are inflating. As I mentioned I often refer to the Economist, in the recent issue you’ve got Australian money supply growing at over 10% a year; in Britain it’s growing at 7; Canada it’s over 11, almost 12%; Denmark the money supply’s growing at almost 18%; Japan 5; and the US, who knows, it’s probably 10% by now; in Europe the money supply’s growing at 10%.

So, fundamental issue number one, central banks are inflating around the globe. The second issue and this one is very, very important is the supply and demand imbalance. There’s more demand for gold than there is supply of gold. And that other thing that really surprised me is that despite higher gold prices and increased exploration and spending by all the major companies – I mean there’s been a lot of money that’s been raised since 2001 for the gold mining sector. Juniors are back exploring, majors are spending money – but despite that their reserves and the resources of the majors last year were only up about 2%. In fact if you put it on a per share basis they were actually down 2%, because companies were issuing more shares than they were adding in terms of resources.

In fact, there’s very few majors or intermediate producers that have shown large increases in their reserves. Many of them quite honestly, just like the oil industry are struggling to grow their reserves right now. If you’re a 6 or 7 million ounce producer where are you finding 6 and 7 million ounces to replace what you produce each year. The same thing that’s happened to the major oil companies from Exxon, to BP, to Shell the same thing is happening to major gold producers, and also to many of the intermediates.

And so many of these companies are experiencing production declines as a whole, and on a per share basis. So if we take a look at this what does this mean? It means gold shares are cheap. If you take a look at what’s happened now with this correction seniors are selling at an 8-10% discount from net asset value versus the traditional average 30% premium; junior producers are selling at 40% discounts versus the traditional 30% discount; and the junior development companies are selling at 40-50% discount.

One company we’re involved in just reported their measured and indicated ounces with a new resource estimate was up 30%, and the stocks down by 30%.

So you’re seeing the values in the gold sector get very, very, very cheap and so this is something that did not occur for example in the run-up from 2001 to 2002 we got a correction in the Summer of 2002. This did not happen in the run-up from the middle of 2002 to a peak in the Spring of 2004. It didn’t happen in the run-up last year from May to December. It did happen, however, in the run-up from January to May of this year, and to me I think that spells opportunity. [50:23]

JOHN: Why is it you think that people don’t actually see this? If we jump from gold over to oil we still hear chatter that oil is going back down to $40 a barrel or something like that. There seems to be a general lack of perception as to what’s really going on.

JIM: People get ingrained into a certain line of thinking and I mean from 1982 to the year 2000 it was equities, it was bonds, it was stocks. And yes we had a nasty correction from 2000 to 2002 but you know the markets have come back, they’re not back to where they were, but they’ve been coming back. So people are still in that mindset, John.

And the best example I can give you is that there are 3 phases to every bull market. The first phase is when the smart money comes in, they realize the value, they realize that fundamentals are going to cause a change, a change in the direction of a particular sector or industry. The second phase of the bull market is when it gets institutional acceptance. People at the institutional level realize what the smart money realized in the first phase. The third phase of a bull market is when John Q Public finally catches on.

Well, if we look at commodities today, it is gaining institutional acceptance, you’ve got the Harvard endowment, Yale, the California pension plan investing in commodities. You have commodity ETFs; you have institutions form insurance companies to pension plans now starting to move areas into commodities. It’s been given academic backing with studies showing the correlation of commodities to stock markets as an asset class. So I think that you’re getting that but the public John is not in on this.

You don’t have John Q Public going in with a heavily weighted gold base metal or energy portfolio; you don’t have the public going in and buying coins, silver, base metals. The public did not come into the stock market until 1995. That’s when from 1995 to the year 2000 is when 95% of the public’s money came into the stock market, and that was the final stage of a bull market.

We’re not there yet, and I think there’s a lot of disbelief even at the institutional level. There maybe some recognition, “yeah, maybe we ought to put 5% of the portfolio in commodities.” But you don’t see institutions putting 20, 30, 40% in this area in the same way at the end of the 90s where you would see portfolios that would be 60% to 70% weighted to technology stocks. We’re nowhere near that at this point. [53:01]

JOHN: Yeah, and some of it I’m assuming just entails wishful thinking too.

JIM: Yeah, it’s like you know I mentioned Stephen Leeb speaking in Europe a couple of weeks ago when some analyst got up there and was talking about $38 oil.

JOHN: Yeah, that’s what I was thinking of.

JIM: Yeah, even Value Line thinks next year oil is back down to 40. I don’t think it’s going to happen unless we discover another North Sea and Prudhoe Bay, and we could bring it online, or the other alternative is demand destruction through a depression.

JOHN: Can we place short bets on Value line?

JIM: I just really think this is caused with disbelief. I think that’s what people saw. Even a lot of the gold bulls were talking about you know gold will hit 600, when it hit 600 and went on its way past 600 there was a lot of skepticism. So, that’s what I think overall John, it’s disbelief. [53:49]

JOHN: Yeah, let’s come back to what we did in the last part of the segment and that was to say well, what are the warnings, where could this thing go off the rails?

JIM: You’ve heard of the good, the bad, and the ugly – let me give you this in reverse. The ugly, the bad and the good.

The ugly is what you’ve been seeing, corrections in the gold market are fast, furious, they’re not pleasant. You know, it’s like a giant rollercoaster ride at the very top and you’re looking straight down and boom, it’s very quick. The bad is this correction is not over yet, the good is that it won’t be as bad this time, and then when we come out of it we’re going to over a thousand. So, that’s the good news.

The other good news too if you take a look at some of the fundamentals like the oil to gold ratio, historically it’s been about 15 times. In other words you get 15 barrels of oil per let’s say 1 oz of gold. Currently, we’re at about 9.7. So there’s two things that have got to happen. Either, one, the price of gold is going over 1000, or the price of oil is going down to $44 a barrel, or $40 a barrel.

Given where we are I would say the odds favor, or are more heavily weighted to gold going to over a 1000, than let’s say oil going down to $44 a barrel. [55:11]

JOHN: And would you say that despite the best hammering on the part of the central banks?

JIM: Yes, because I think there’s just too much smart money, whether it’s OPEC investing its dollar surpluses, or it’s China going to take their gold reserves from 600 tonnes to 2500 tonnes. There’s just too much smart money that’s going in here right now at this level.

JOHN: Well, starting from this juncture then and moving forward, how is this whole thing going to unfold. I was going to ask too if silver is going to track with the gold.

JIM: Oh, I think silver is going to outperform gold. But if you take a look as I mentioned we’re not quite done with this just yet, but once we hit the bottom of this and that could happen within the next two to three weeks, we’re going to see a gradual rise back to historical levels. That’s going to be stage one, so we’ll go back, we’ll retest $728 gold, we’ll retest $15 silver. Then the second stage which is we’re going to surpass the old levels and we’re going to take out new highs.

And then the third stage is it goes parabolic. At that point, quite honestly, it’s going to be too late to go on board. In fact, we’ve been having discussions that once we get past stage two, we’re going to close our doors, we’re going to close our gold accounts and not take any more new clients. At that point you better have the ark, and be inside the ark, because it’s going to be too late in my opinion for those who aren’t in, because it could explode at that point. It could go from 800 – 850 to 1000 just so quickly, and at that point you don’t want to chase it, you want to be in position when that happens because otherwise you have some high risk of going in and buying at the all time peak.

And then if this next run-up to 1000, then I think what we have after that is probably a more severe correction, but at that point you better be on board because otherwise it’s going to be too late. [57:11]

JOHN: Yeah, you won’t be able to catch up, you won’t be able to do it.

I have to ask a devious little question here. Alright, big boy, what are you doing?

JIM: Well, we’ve got most of our junior positions in place, we’re going to use this next stage for our intermediate producers, and for a lot of our newer accounts, and then we’re going to be fully invested. So by the time we get to the bottom of this next correction we’re going to be 100% invested because it’s going to be one hell of a ride. It’s going to be a ride of a lifetime.

SOS! Stuck On Stupid Award

JOHN: And today’s stuck on stupid award goes to Dan North, Chief Economist of Euler Hermes, for thinking that high oil prices are not being supported by the fundamentals but are being caused rather by American fears of oil shortages like in the 70s:

The other thing we’re looking at is high oil prices, despite a little bit of a sell-off today, those oil prices really aren’t supported by fundamentals. The economic fundamentals are our inventories are at something like an 8 year high. We have the IEA saying that we’re cutting our demand forecasts for the year 2006, and we have the Saudi oil minister commenting about how high oil prices are hurting global growth. So, the economic fundamentals don’t support the high prices. The fear that we’ll have supply disruptions brings back memories of the 70s, and long gas lines. That’s what’s driving up the price of oil beyond the fundamentals. Americans hate to be at the mercy of foreign countries.

You might want to look outside the borders Dan, it’s called global demand versus global supply.

JIM: Just a comment on SOS this week. The surprising thing, he mentioned the IEA lowered their forecast demand to only an increase of about 1 ½% in demand this year. The IEA has always – always – underestimated demand. The other thing he mentioned inventory levels. As Matt Simmons has said on this program on several occasions, and I’ve mentioned it as well, these inventory levels are guesstimates – there’s nobody out there with a dipstick. In fact, Matt has published a report that our energy gauges are broken; there’s no indicator that you have on the energy sector that says empty, full, mid way – they’re broken. [59:46]

JOHN: But I’ve seen people talk about these as verified reserves by the way, but there are no verified reserves.

JIM: No, and Matt mentioned that about natural gas. There’s hypothetical gas reserves out there that nobody’s ever discovered, and he said that’s a big illusion. And what he’s not referring to if it wasn’t for heavy oil, tar sands, shale oil, coal gasification, etc., it is alternative energy that is making up the supply because light sweet crude has peaked.

And you take a look at the Burgan field, the Cantarell field, the North Sea field, the Alaskan North Slopes, Indonesia, one producer after another has reached peak production and has gone into decline, and we just think hypothetically this oil is going to be out there. And that’s what everybody’s a little nervous about is because we do not have the 6-8 million barrels of surplus production we had in 1990. So if you had a problem in Nigeria, or you have a problem in the Middle East, Iran or with Hugo Chavez, you have plenty of surplus production to make up for that. But things are so tight today that looked what happened to the United States, we had to call on our treaty with our partners to supply us with refined gasoline products as a result of last year’s hurricane season, otherwise we would have been in deep, deep trouble.

And we’re still in deep trouble because there’s still production in the Gulf that hasn’t come back online. And number two, production has gone down into decline further this year. Natural gas production is down, oil production is down, and that means we have to import all our oil just as we talked about in other voices with Stanley Reed out of the London bureau of BusinessWeek, and the cover of this week’s BusinessWeek: why you should worry about Big Oil. There’s very few places that oil companies can find it, and that makes us more dependent on people like Hugo Chavez, and Saudi Arabia, and a lot of places where they don’t particularly like us. [1:01:53]

JOHN: I don’t know why you worry Jim, because Congress is going to do something.

JIM: That’s why I’m worried, John. It’s what they’re going to do that I’m worried about.

JOHN: That and the beach front property in Nevada you’re going to sell me, right?

JIM: Yeah.

Riesgo de Pais

JOHN: Well, Jim we’re going to talk about today a whole different area of geopolitics now and a concept called riesgo de pais, which for those who are not parlantes of español means country risk – literally. And there are radical changes going on in Latin America. I was reading Jorge Ramos’ book by the way, which is called The Latin American Wave, and he’s talking about the whole immigration issue, but he did point out something very interesting, and that is when the whole issue is going on over the attempted overthrow of Hugo Chavez a couple of years back the American English language networks totally ignored this story, even though I think it was an important one, and the Spanish language television networks covered it.

And now Latin America is going to have to draw more and more of our attention here because it is going to affect us, you can’t just chop it off as something south of the border. So, let us take a sweeping panorama of what is going on over there.

JIM: It’s obvious if you take a look at the headlines that Latin America is swerving left, and as it swerves left they’re moving away from free market reforms and ties with the US – I mean just look at Hugo Chavez. But you know, John, this goes back almost eight years ago with Hugo Chavez when he became President in Venezuela. And it began with Chavez, then we saw Lula with the worker’s Party in Brazil, Nestor Kirchner in Argentina, Vasquez in Uruguay, and Evo Morales in Bolivia.

And then now, we have the big run-off election coming up in Peru between Humala, who is far left, and Alan Garcia who actually ran the country into the ground during the 80s. He’s come back now and he’s reformed. He was basically a Peronista Marxist. So, basically now he’s just a socialist. And within the elections of Peru a lot of people are saying, “Oh my god, he’s back, but you know, next to Humala, Garcia may be our best choice.” In other words the lesser of two evils.

And I think something we have not understood here in the West is there’s a difference of leftwing insurgents in Latin America. There are two leftwing factions: one is what I call the old leftists which would be like for example Alan Garcia in Peru, and these people are a little bit more open-minded, they’re more reformist, they’re more international in their thinking. And you know these guys were the hardcore leftists from the past.

The second part of this leftwing movement, the second group is what we call the populists. They’re very nationalistic, they’re very close-minded, very strident, and more Marxist in their orientation. And that would be like, for example, Morales in Bolivia, and Chavez.

And if you take a look at I guess I really feel sorry for the people in Latin America because why do the you know if you look at any region in the world there’s extreme inequality. It’s one of the world’s most unequal regions, poverty is high and then also there’s a very high concentration – I mean the wealthy in Latin America are extremely wealthy, and that concentration is not only in wealth but income and power. And whenever you get the combination of inequality and democracy it tends to cause a movement to move left.

And one of the things that we’ve seen over the last 10 years – low growth rates, the persistence of additional poverty throughout the whole region, high unemployment, very poor infrastructure, continued corruption – even look at Lula’s popularity in Brazil with corruption scandals, and also this huge concentration of power. But, you know, if we take a look at who the new second wing of the leftist movement: Chavez, Kirchnerr, Morales, possibly Obrador in Mexico, basically John this is a throwback to the Peronist days. If you look at Chavez, Kirchnerr and Morales they are definitely Peronists, and their approach to power is giving away money. they’re very deeply nationalistic, they have no domestic agenda, always very authoritarian. We’ve got reports where Chavez is spending a lot of money on building his own private army. He bought 100 thousand AK-47s, that he’s basically putting together his own militia.

What these guys tend to do – the populists – they’re more interested in policy as an instrument for attaining power and maintain that power. You know they do do some things for the poor but it’s nominal. The other thing as an investor – why this is important – is they tend to nationalize large sectors of the economy. You know if you take a look at the last half a century Cardenas nationalization of oil and mines in Mexico. Peron’s nationalization of railroads in Argentina, Vargas’ nationalization of steel in Brazil, if you look at Estenssoro’s nationalization of tin in Bolivia, Alvorado copper in Peru.

And just look at what we’ve seen even recently – Chavez oil; Morales oil. This week Ecuador nationalized Occidental Petroleum. So, as an investor in natural resources whether you’re in investing in gold, silver mining companies or base metals, or even energy, even including some of the big guys, you really have to watch this is becoming a very, very dangerous trend.

And one of the problems that occurs when the state takes over production – I mean look at what happened to England when they nationalized their industry, they ran it to the ground - governments don’t do a very good job at running industry. Since Chavez has taken over oil in 98, Venezuela’s oil production is down 46%. [1:08:22]

JOHN: Well, let’s look at the old left that existed, ironically when I think of the old left I’m thinking about subcommandante Marcos who is in the Zapatista rebels in the south of Mexico in the southern state of Chiapas, and he’s even being bypassed right now. But if we look around at the rest of Latin America, and it’s important to state a lot of people in the English speaking world identify all of these countries as being the same – they’re not. There are about 19 Spanish speaking countries in the world, they have different political systems, some of them don’t agree with each other. There used to be a long standing feud between Chile, and Argentina for a long time.

But if we look at Chile, Uruguay, Brazil emphasis now on education, anti-poverty programs, health care housing, probably what you’d call a less orthodox market framework. In Chile, Lagos and his successor Bachelet governed for 16 years, now there’s Alan Garcia in Peru, he’s ahead, he presided over an economic disaster in the 80s. He is recasting himself as a reformer and a moderate. He he’s taking a tough line with international investors, an increased role in the economy, and he want to renegotiate contracts as far as energy are controlled. I mean even in Nicaragua Danny Ortega is still hanging around.

JIM: He’s come back and he’s up in the polls. And you know what, the unfortunate thing for these people like in Peru they’re looking at Garcia. You know it’s funny John, the old generation remembers when Garcia was President of the country. They had hyperinflation, food lines, shortages, there was nationalization of industry, there was terrorism. And you know he’s kind of coming back now, and he said, “you know what? I’ve learned my lesson, I’m basically a reformer now, I’m not as strident as I was let’s say back in the say when I ran the country in the 80s.” But you know the people you know a lot of the old timers say, “oh my God, I remember what it was like when he ran the country, but then they look at Humala and say, “Oh my God, that Garcia looks good.” [1:01:22]

JOHN: It’s sort of the same reaction right now in Mexico if you look at the what is currently the leading candidate Felipe Calderon for the Pan Party – the National Action Party, previously the alliance for the welfare of all parties was being addressed by Manuel Lopez Obrador, he was leading a very leftist and then Calderon we beginning to mount a campaign, saying look, “this guy’s just like Chavez.” And there’s been a sudden lurch to the right because the Mexican population said, “hey, we don’t want that.” They were remembering what this was all about.

JIM: The interesting thing and the reason they’re saying that since what Chavez has been doing , and I’m just going to throw out some economic statistics, and we’ll compare this to Mexico, but since he took over the last 7 years of his presidency there’s been virtually zero growth in the economy. In comparison, Mexico’s economy has grown by 18%.

If you look at it on a per capita GDP basis, per capita GDP in Venezuela is down 45% from 1997 to 2003 versus Mexico it’s up almost 10%.

If we look at for example, during that same period from 98 to 2005, Mexico’s Peso currency has depreciated 16%. Venezuela’s Bolivar is down almost 300%. Mexico’s number of households in poverty level is down about 49% during that period of time where in Venezuela it’s actually gone up close to 10%.

The inflation rate in Mexico is running a little over 3.3%; in Venezuela you have inflation running at an annual rate of 17%.

Yes, he’s given some handouts to the poor but basically he’s been using a lot of his money to, for example, give oil to Cuba and the Caribbean states, and then he’s been buying Argentine debt, he’s also financing political campaigns to his compatriots in Bolivia, Peru and Mexico. But more telling John, is when Chavez took power in 98, oil was roughly around $10, 12 a barrel. It went up to 75, and Venezuela’s oil production is down now 46%. It’s no wonder he’s trying to nationalize everything.

I use the analogy of a bank account, he had a bank account when he took over as President and it was the oil industry. And like anybody knows if all you do is spend down the bank account but you don’t invest and save, eventually you run down that bank account down to zero. And that’s exactly what he’s been doing.

And unfortunately for the oil industry, anybody that understands it knows full well that the oil industry is one of the most capital intensive industries in the world. You can’t just take the cash flow that’s generated from sales and spend it. You have to put it back into refineries; you have to put it back into drilling because maybe a couple wells are running dry so you have to go and explore and drill other areas. You have to build your transportation system, whether it’s your railways or its shipping. I mean it’s just a hugely intensive capital industry, and he’s basically depleting it and running it dry.

And I think one of the reasons his popularity has been going down and probably one of the reasons that he’s buying arms now – he’s equipping his own private army- and one of the tragedies is this’ll end up and many times as you see he’ll probably be run out if he isn’t shot, and who knows, he’ll probably end out his life in some Swiss villa.

JOHN: But they all have Swiss bank accounts just like Fidel Castro, which came out last week too.

The tragedy of Latin America for 400 years has been the types of systems that were imposed upon them from colonial days. There’s never been a lack of intelligent people, or really abundant resources but they’ve never managed to climb out of the system that they inherited. So, that’s sort of where it is. But in the bottom line now, if we look at how is that going to affect us here, and generally world geopolitics?

JIM: I think, bottom line, the economics of the populists are heading for disaster. You’re going to see shortages, hyperinflation that’s already starting to happen in Venezuela ,which is going to impoverish the people. The poor are going to get poorer which is also going to influence immigration, they’re going to want to move North. And so, you ain’t seen nothing yet ,in terms of immigration into this country.

The second thing, I think these populists are going to run down their bank accounts because they don’t know how to run industry, and they’re going to hyperinflate. The other thing that you have to be aware of as an investor is they’re going to continue to nationalize their industry and as a result of that because of the way they run it – take a look at what happened to Venezuela’s oil production, it’s down 46%. So they’re going to limit the output of commodities because a lot of things they do aren’t done for commercial or economic reasons, they’re done more for political reasons of maintaining power. So, companies operating in Latin America are subject to a very high degree of risk of expropriation.

Once again, this week, Ecuador nationalized Occidental Petroleum. And also this week Morales has requested all foreign company holdings in these oil facilities in his country. Ultimately, however, that’s going to be an ultimate boom for commodity prices going higher. Last week they interviewed Jim Rogers on commodities, and his comments were this is not the end of the bull market, that this was only a corrective cycle because all bull markets go through consolidation and reaction periods. And he said, “I don’t care if it’s down 30 to 40%.” Rogers said, “I’m not selling copper, I’m not selling zinc, I’m not selling my commodities,” because he knows fundamentally there is a growing world wide demand for commodities as a result of the economies of Asia, India – a growing world population.

And we also know that the supply of these commodities has not increased. I mentioned in the previous segment how despite the record amount of money that has gone into gold and silver exploration and in base metal exploration, and the record prices for these metals, that the majors have had trouble replacing their reserves, just like the oil companies. So these cycles tend to be with us a long period of time. And I can’t think of any major oil deposits, any major new gold or silver discoveries, or copper discoveries that are coming on line.

So, actually, the sources of where these natural resources are, whether you’re looking at the Caspian Sea, the Middle East, or Russia, or you’re looking at base metals, energy in Latin America, or you’re looking at oil in Africa, like for example the problems with the rebels in Nigeria, the commodities that the world consumes, that they need to function, especially energy are now in hostile territory. And I go back to the front cover of BusinessWeek, Stanley Reed’s article – Why You Should Worry About Big Oil.

So, commodity prices long term are going up, and what you see happening in Latin America right now with the country risk is becoming a significant factor in the kind of companies you want to own. You not only have to look at their resources, management integrity, how well the company is run but you better start looking at where their natural resources are because expropriation is the name of the game. [1:18:08]

JOHN: And the bottom line on all of this is?

JIM: Avoid companies with high exposure to these countries where you have high risk of expropriation. Especially if you’re getting into juniors in the mining industry because you may have a main deposit in a country, and everything’s bet on that main deposit, and you find out it gets expropriated. Or even if it isn’t expropriated if you look at what Chavez has done demanding 60% ownership, and then he increases the taxes by 50%, so the economics of the project become so bad that the mining company has a hard timing making any money at it.

So, this is going to be like as we mentioned in the experts series with Joe Duarte this is geopolitics, It’s going to become a major factor now in natural resources. [1:18:54]

Other Voices: Stanley Reed, BusinessWeek

JIM: Well, this week’s cover story of BusinessWeek features a story about why you should worry about big oil, beyond the fat profits the giants are surprisingly vulnerable worldwide. That’s bad news for business, and consumers. Joining us from London is Stanley Reed, he’s the London Bureau Chief for BusinessWeek.

Stanley, why should businesses and consumers worry about big oil?

STANLEY REED: Well, despite all the profits that they’re making they are having a hard time reinvesting those profits, finding new oil and gas and so on. And eventually that’s going to tend to make the market tighter and make us even more vulnerable to OPEC than we are now because the big oil companies despite their faults are basically interested in finding, extracting and distributing oil. OPEC and so on have other agendas.

JIM: You know the job of providing us with energy is getting more difficult. There’s technical challenges in terms of where you have to go to get the oil; there’s competition from national oil companies, and I guess maybe another factor Stanley, is governments are getting hostile, just look at what’s going on in Latin America.

STANLEY: Right. Essentially what’s happening is with the price high, governments are taking a very different attitude. A few years ago with you know you had the price in the teens per barrel, governments were desperate to get the big companies and develop resources, and gave them very good incentives. Now, with the price where it is the governments are saying, “whoa, we don’t have to do those deals anymore, so let’s ratchet up taxes, let’s take a larger stake in concessions,” and so on. And so that’s what’s happening. You know, we see that in Ecuador, we see it in Venezuela and in Bolivia now. [1:21:15]

JIM: Production at the majors and also their reserve replacement is getting more difficult. You believe that it will fall over the next, let’s say, four or five years.

STANLEY: That’s the general projection, is that overall it will fall. And we’ve already seen in the last few years that some of the big companies, for instance Shell not being able to replace their reserves, and that’s actually how I started out on this story. As you may recall a couple of years ago Shell revealed that they had been way overstating their reserves, and as it turns out they’re only covering maybe – I’m being rough here – but maybe 80, 80% or so of the oil they sell each year. So that’s a very serious situation because if it continues they essentially go out of business. [1:22:01]

JIM: You know, so much of the global oil patch is off limits. If you take a look at where the oil’s located whether it’s Russia, the Caspian, the Middle East, a lot of these governments are reluctant to allow the majors in at all.

STANLEY: That’s true. I think roughly 80% of the world’s oil reserves have a lot of restrictions on them. The places with the really major reserves – Saudi Arabia, Iran – are very difficult if not impossible for the western oil companies to get into. Russia is getting tougher. Again they’re another example of countries that gave pretty good terms in the mid-90s, but much tougher now. So, it’s just really going to be national oil companies that produce most of the oil, and the western companies are going to have to find ways to you know joint venture with them and cooperate with them to – that’s going to have to be the way they make their way in the world, you know, in the next decade or two. [1:23:00]

JIM: To put this in perspective as you point out in your article in the 1960, 85% of the world’s known oil reserves were open to the international oil companies. Today that’s only about 16% that remains open – that’s significant in itself – but in 1979, US and British oil companies accounted for almost 28% of the world’s oil and gas production – that figure is just 14% today. That’s a telling figure.

STANLEY: Right, it just shows how this game is changing. And you know I think it’s what’s happening you know in a broader way in the whole world, that this is no longer a world that’s completely dominated by American and European business or consumer, but it’s big Middle East producers like Saudi Aramco which is the biggest producer in the world. And India and China are really coming into their own as consumers. And that means their national oil companies are also playing a role. They may not have a lot of oil themselves but they’re out there in places like Iran and Nigeria in trying to lock up reserves and are competing against the Exxon’s and Chevron’s of this world. [1:24:16]

JIM: As we look at this too to put this in perspective, more production and reserves today are controlled by governments rather than individual corporations and these governments have more of a political agenda than a commercial objective. Stanley, I wonder if you might address that and what it means for those of us in the West that depend on oil.

STANLEY: Well, it means that the people who control most of the oil are not necessarily interested in people in the West getting it at what they may consider a reasonable price. I mean, look at Venezuela where I was recently. They’re more interested in you know having control of their national oil company, in keeping prices high, and not necessarily in producing as much oil as they can. The production of the national oil company which is called Pedevesa which produces most of the oil in Venezuela has actually gone down during the time that President Hugo Chavez was there. And they’ve managed to get away with that because prices have gone up so much but that’s a country with huge reserves, and it’s certainly not playing the kind of role that we in the West would like them to. But again they have a different agenda. They want to be good citizens in OPEC and you know that sort of thing, they don’t care that much about the Western consumer. [1:25:45

JIM: you know the case that you point out, since Chavez took over Venezuela output has fallen 46%, they’re now importing 100,000 barrels a day from Russia to meet their commitments. And Iranian oil production has dropped from 7 million barrels to 4 million barrels. So, at a time that you have China, and India increasing demand for energy, I think it puts us in a very difficult situation globally that those countries that can supply the reserves are seeing their output fall.

STANLEY: Right, it’s pretty much true of all of them. I don’t like to be a doomsayer or whatever, but I just think the future in terms of oil is going to get tougher, and we’re going to have to find alternatives, and do more conservation and that sort of thing. But there aren’t any easy and quick solutions here.

JIM: In looking at this in terms of where we go in the future, Morgan Stanley I think talked about the cost of finding oil has tripled since 1999, and the other issue is where can big oil go to today, you know, you look at extreme places such as Sakhalin Islands, there’s greater danger, there’s greater risk, and also their holdings in those areas of the world are very tenuous at best.

STANLEY: Right, they’re having to go to tougher and tougher places, after Sakhalin Island where I visited them, the next stop is the Arctic of Russia which is going to be even more technically challenging and difficult but there is a lot of gas mostly there. The other place they’re going is things like the Alberta tar sands of Canada which have a tremendous amount of hydrocarbons, but require almost a mining operation, so you require a kind of higher price to get the stuff out. Venezuela has similar stuff. But the good news there is that as technology improves and so on the price is coming down, so some of those areas look pretty promising.

JIM: Some of the implications are where does big oil go and are we in danger of cutting off our nose to when we come in and slap windfall profits tax, there’s talk of anti-trust legislation. At a time when big oil’s being assaulted all over the globe, I mean for those of us in the West that’s where we get our oil from.

STANLEY: We get it from them, but we also get it from the national oil companies. What I would say is we should keep in perspective the issues you brought up before which are that the Exxon’s the Chevrons, the BPs of this world only account for a minority of overall production, and it’s the national oil companies like Saudi Aramco and Kuwait petroleum, or Pedevesa in Venezuela that are really the main players. So, I think policy has to think of a broader world than I think it tends to now. [1:28:48]

JIM: In terms of concluding, in your article are consumers and businesses in for tougher times as a result of higher energy prices. I just don’t see them going back down in to the 40s as many are forecasting if the energy weakens.

STANLEY: I’ve always found predicting crises a tough game, but I tend to think we’re in for prices that stay pretty high. Of course, if demand falls apart prices could fall again, I mean, a lot of people still think that 40 is possible, I kind of don’t see it for a couple of years. One of the bright spots of all of this is that high prices are being caused by a strong economy, not a weak economy the way they were in the late 70s and 80s. So, that’s a positive thing. The world economy seems quite strong at the moment, there’s a few flutters out there, yesterday’s and today's. So…

JIM: Stanley Reed, I want to thank you for joining us on Other Voices this week. The name of the story is Why You Should Worry About Big Oil. It’s the cover story on this week’s BusinessWeek. Stanley, all the best to you and thanks once again for joining us on the program.

STANLEY: Thank you.

Emails and Q-Calls

JOHN: And off we go again into the wonderful world of emails and questions to our Q-Line which you can call, it’s open 24 hours a day, not during the show necessarily when you’re streaming, but you can leave your question there at 800-794-6480, it’s toll free in the US and Canada only but it does work for the entire rest of the world, and rumors have it it works on Mars as well. That’s 1-800-794-6480.

Don’t forget you’re listening to the Financial Sense Newshour at www.financialsense.com and our new program every week is posted by 0700 hours, 7 am, universal coordinated time or Greenwich time. And for people in the Americas that is at 3am Eastern Daylight time.

Off to the Q-Line.

Hi Jim and John, this is Bob in Washington. I have a strategy question concerning the little guy, my family has no debt, no mortgage, nothing. Our net worth is divided in thirds: third in cash savings a third in retirement accounts and IRAs, and a third in gold and silver bullion. It’s a little under 100,000 liquid reserves, should I even bother about moving some bullion and cash overseas, even if it’s only to a Canadian safety deposit box and bank and broker. Thanks again Jim, your advice has been a true blessing to my family. Goodbye.

JIM: Boy, if you have bullion just make sure nobody knows about it, that’s probably the most important thing. If somebody knows about it you bought it, if there’s receipts, you might want to move it across the border if you’re up in Washington I would definitely think of that. If it’s silver I’m not as worried about silver as I am about gold because our governments are rapacious. Once things really start to break down we have a history of confiscating gold from the citizens, and so if it’s all gold and there’s a record, consider moving it across the border there.

Hi Jim and Gang, this is Alan from Chicago. The question is the oil stocks I bought like Chevron, Exxon, Apache and things like that I bought 8, 9 months back and I am seeing losses in my portfolio. I haven’t made money. I wonder what’s going on. On one side Congress is trying to tax these guys, on the other side people like myself are not seeing any money out of these investments. So I’d appreciate it if you could clarify what’s going on. Thank you.

What you’ve seen here, Alan, is the large cap oil stocks – Exxon, Chevron, all the majors, they’ve been sort of in a narrow trading range – a couple of things are happening there. Number one, there’s a disbelief that the price of oil is there to stay, in other words we’re not going to see oil prices you’ve got people talking about oil in the 40s. The second is a lot of the majors such as Exxon, Chevron have had difficulty in maintaining production. Their production is going down, even though they’re making record profits because of higher prices, and a lot of people see they’re not going to be able to replace their reserves.

But one of the things when you buy these stocks, remember you’re getting a dividend, the dividend is to compensate you for holding it. So, for example, Chevron has a dividend yield right now of 3.6, you’re getting over 2% with Exxon, and also a lot of these companies have been increasing there dividends quite a bit. Exxon increased its quarterly dividend from 29 cents a quarter to 32 cents a quarter, they did that at the end of the year. If you look at Chevron, they’ve increased their quarterly dividend from 45 cents to 52 cents. So you’re going to see high single digit increases, in some cases double digit increases for many of these stocks as their cash flow increases. But I think that’s one reason why you’ve seen a lot of the oil stocks have been in sort of this consolidation mode as oil has moved from the 60s back up into 75, and then down again. Hold onto them, you’re going to make some money.

Hi, Steve from Rochester, New York. A question: do you see short selling for example against the NASDAQ 100 as fitting into your first the gain, then the pain scenario for this year for equities as you’ve articulated. Or do you see betting against the overall equities market as almost suicidal because of an inflationary bubble in the stock market based on Jim’s inflation scenario. Or can both work so long as you get them in the right cycles. It’s a little confusing to me in terms of your timing of first the pain then the gain scenario, or this, you know, Dow 30,000 scenario with hyperinflation. So could you be more specific in terms of your timing and do you think it will all again be short selling or inverse funds to the overall market would ever be a viable strategy again. Thank you.

Let me clarify the gain and then the pain. The gain comes from the inflation cycle that they’re reinflating which is what’s going to happen, it’s why the stock market is up. They’re going to inflate and I expect records in the Dow this year. The pain I’m referring to is what comes as this gets underway, in other words as we get into hyperinflationary phase. Yes, you’ll see nominal gains in the major indexes much in the same way we saw that take place in the inflationary economy of Weimar Germany, but in real terms it’ll actually be deflating. I would recommend you read my son Chris’ article from last Friday where he showed in dollar terms the markets have been deflating since the year 2000. That will continue but in nominal terms they will go up, but the gain is for example when you see assets appreciate like the stock market did in the late 90s when Greenspan really pumped the money supply, the pain came when the corrective cycle came.

However, this time, on the equities side I think the corrective cycle will be a deflating of the stock market against real money and gold, in nominal terms you’ll see higher prices. Now, in terms of shorting, if you’re a very astute technical trader as for example this downturn we’ve seen in the Dow and the major indexes over the last couple of weeks, yeah, you can play this by going into something like the Rydex funds on a short term basis, but I tell you, you have to be doggone good at what you’re doing because of these occasional appearances of what I call these flag pole rallies, or one day wonders when you get bad news, but the news isn’t as bad as everybody thought, and you get a miracle that takes place in the futures pit when you see Bob Pisani say, “Gosh, the market was down 200 but we were up 150 because of a large buyer in the futures pit.” Hmmm, wonder who that is? That’s what you’ve got to be careful of.

Hi Jim, Joe from New Jersey. Just wondering what your take was on investing in a fund that offer securities against the dollar, in other words, such as the Merk fund, or the Templeton fund. I know they both have funds out there to guard against the dollar falling, and your fund would rise. I would like to know your feedback on that, thank you.

I think it’s a great idea, it’s a great way of hedging yourself against a falling dollar because you’re owning currencies. Remember, however, Joe, all currencies are depreciating, it’s just who’s depreciating faster. Obviously right now that’s the dollar, and these hard currency funds would be a good way of hedging that, but I guess the ultimate hedge would be gold bullion or silver bullion.

Hi, my name is Bruce phoning from Charlotte, North Carolina just a point for Jim he’s talking about global cooling, there’s two major problems with this statement, firstly the world is not experiencing a cooling trend it’s experiencing a warming trend and that’s being borne out by experimental and observed data gathered over you know recently over the recent past and extending backwards over the last 100,000 years looking at ice core samples. Secondly, what he’s referring to is a local cooling, in other words when one area or one locality is experiencing a cooling trend, versus the global trend or versus historical norms. So you can really talk about global cooling. It’s wrong in both senses of the word. Thank you.

Well, first of all, Bruce, the one thing you have to be careful of when I was talking of global cooling I was referring to San Diego I was just kidding, that’s more of La Niña cycle, but the one thing about global cooling when I was in college in the 70s it was global cooling and there’s this decadal oscillator cycle of cooling of the ocean temperature and heating of the ocean temperatures. It’s a 60 year cycle where you’ll get 30 years of cooling which is what we got from 1965-1995, and in 1995 that trend changed. And so we’re a little over 10 years now into the heating cycle. They tend to last about 30 years in duration, and we’ve had these and this is what climatologists like Evelyn Garriss of the Browning Newsletter, what Joe from Accuweather talk about. These cycles come and go every 60 years we’re into the warming cycle. 20 years from now they’ll be talking about global cooling, but right now we’re in a warming trend, and these cycles have existed the patterns have existed for a long, long period of time. The earth goes through climate change and it does so about every 30 years.

Hi, Angela from California, and I thought it might be interesting to address the Hindenburg Omen since Robert McHugh made mention of it in an April 10th article, because I was curious about the decline and perhaps how long it would last, and the strength of the decline if you call it strength or percentage. Thanks a lot for your time.

The Hindenburg Omen which was advocated very strongly by Kennedy Gammage who recently passed away in January this year, sadly. I think you have to be real careful of that right now because I used to talk to Kennedy about that and also market manipulation. There’s a lot more intervention in the market today so even technicians will tell you that a lot of times when their indicators are pointing to a downturn, a lot of times they don’t completely play out because of things that happen through intervention in the market. I think there’s probably a floor that’s been put in the market by authorities, and with the amount of money printing and inflation that is going on today globally I just don’t see that. Now, I could be wrong, we could have some unexpected tragedy, terrorist event that could be so horrible that it would be hard to contemplate – a nuclear weapon going off in a major city for example – that could alter that, but even then, even after 9/11 I think damage was contained.

Could something happen that’s even worse? Yes, but I’m not giving it much credence right now. I think the weakness that we’re seeing is just a correction, and I think what’s going to happen is they’re going to inflate. And one of the outlets for inflation is the money’s got to go somewhere. And with so much speculation in the market today I’m betting it’s going to end up in the market.

Hi, my name is Rich, from British Columbia, Canada. I just have a question about the housing situation in the States, and what you think the housing situation in Canada is going to do. Will it mirror what happens in the US? The second question I have building a financial ark. Could you be a little bit more specific on that. You refer quite often to buying precious metals, I assume you mean buying precious metal stocks, or do you mean buying the precious metals themselves as a commodity. Thanks.

OK, let’s get to the real estate question. I think where you’re at in British Columbia especially in Vancouver you’re probably still going to see a surge in real estate, maybe it’ll moderate because you’re getting ready for the Olympics. What we’re seeing in real estate I think it’s softening and especially the real hot areas of the country especially on both coasts – the West coast here in California and also hotspots on the East coast like Florida. But I don’t think you’re going to see a major, major downturn in real estate, it may soften, but one of the things I think they’re going to do is they’re going to reinflate. So I think prices here will go up.

As far as what’s going to go in Canada you might see some softening in some of the real hot spots, but it’s really area particular, because if you look at for example the Midwest and many of the areas in the United States in the Rust Belt, you just haven’t seen the real estate appreciation like you’ve had in say Florida or the West coast here in California. So it’s going to be very particular. Areas around the Canadian oil sands are going to be very hot where you’ve got a very strong natural resource market and then also I think your area in Vancouver, and every time I go up there I’m just amazed at the number of condominium projects that are going up and yet they’re selling. So, I think you guys are going to be a little different, especially in the Vancouver area.

Hello Jim and John, this is a call from Ken which may be being traced from Illinois. Private Prison Corporation has been an excellent investment for the past 7 years, PE ratios are reasonable and I would like your opinion concerning future growth prospects of the sector. Is this in fact a golden opportunity? Your good deeds have been appreciated.

I think prisons to be quite honestly are a growth industry. And you’re right the valuations are reasonable and governments are turning more and more to this area because they’re very cost effective, and crimes going to increase as inflation increases. Every time you see inflationary waves you also see crime waves so that would imply prisons are a growth business. [1:44:40]

JOHN: Alright Jim, we have chewed up the time. Of course, not that we care because the financial sense news day…Any way, what’s next week on the financial sense news day, how’s that.

JIM: Well, next week we’re going to take a look at China with Yiannis Mostrous, he’s written a book called the The Silk Road to Riches; and coming up first week of June we’re going to get into alternative energy with Paul Kruger. Fred Pearce When the Rivers Run Dry will be mid June, that’s all about water. That’s a great interview that you’re going to want to listen to because we’re all talking about the energy crisis but water is another crisis that nobody’s talking about. Of course, Ike Iossif Ahead of the Trends. And Gary Weiss at the end of June Wall Street vs. America. So that’s what’s coming up in the weeks ahead.

In the meantime on behalf of John Loeffler and myself we’d like to thank you for joining us here on the Financial Sense Newshour, until you and I talk again we hope you have a pleasant weekend.

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© 1997-2011 Financial Sense® All Rights Reserved.

The opinions of the contributors to Financial Sense® do not necessarily reflect those of Financial Sense, its staff, or its parent company.