Financial Sense Newshour
The BIG Picture Transcription
July 8, 2006
- Danceof the Honeybees
- Emailsand Q-Calls
- The Next Big Play in Energy
- More Emails and Q-Calls
- Other Voices: Michael Klare, Author
- Bargains of a Lifetime
Dance of the Honeybees
JOHN: I was thinking back Jim on how much the world has changed since I first went into broadcasting, actually in college in the mid 60s, and you realize for the first time in the history of personkind –I guess we’ll be politically correct here, how’s that – the world is really interconnected in a way that it wasn’t even just 25 years ago. And I think that the internet has done that. And the economies have become interconnected in ways that has never happened before, and for the first time in the history of the planet all of the currencies of the world, all of the money – the monetary bases – are fiat currencies, and so what you find is central banks in various countries are inflating and no matter where they inflate that money runs somewhere around an economy –sometimes on a global basis – and then it creates a bubble somewhere. So, I think that’s a good opening idea for what we’re going to talk about here.
JIM: We’ve titled this piece the Dance of the Honeybees, and what I think is very critical as you just pointed out and this goes back even for myself, when I was in college the United States was still the number one manufacturing economy in the world. We dominated just about everything from technology to auto production up until the oil crisis in the 70s US car manufacturers – the Big Three – really dominated the automobile market. But what has happened, and especially since the early 70s, is the US has moved from a manufacturing economy to a service economy in the latter part of the 70s and 80s. Then in the 90s, we really moved into becoming a financial economy. And what is more important for US economic growth today, in terms of what drives the economy, is what happens in the financial economy. And that’s very important to understand if you want to find out where the best investment opportunities are going to lie here in the next six months, 12 months or even eighteen months.
Just as an example, since the recession of 2001, almost half the jobs created in this economy were related to the financial economy. We had an asset bubble occurring in the real estate market. So, you had expansion of construction, that meant more construction jobs; it also drove the price of raw materials, so we saw an expansion there. Then you had real estate agents, you had people getting into financial planning, the brokerage industry, mortgage brokers etc.
So, wherever this money goes –and this is the very important thing to understand as an investor today – it has two outlets. As we have pointed out continuously on this program when a central bank creates money or credit they can’t control the outlet of that money – they can’t direct where that money’s going to flow to. And there are two places that it can go into, it can go into the financial markets and it can go into the real economy, and today when money is pumped into an economy its effects are generally first felt in the capital markets. And that is very important to understand because a lot of people are saying today, “well, you know, the stock market’s overvalued.” Well, that’s a relative term. In an age of fiat currencies when governments can create money at will out of thin air, and can do so continuously, then you have all kinds of malinvestments that are created. One area is overstimulated, for example, it might have been conglomerates and junk bond financing in the 80s, then in the 90s it was the technology sector; and this new century it’s been real estate, and then also money flowing into commodities. And when easy money is created it’s going to find its way through the economy affecting select markets accordingly. For example, as I mentioned just a minute ago, in the 80s it was the conglomerate merger, it was the junk bond financing, 90s it was technology; this century it was small-cap stocks, resource stocks, and also real estate. It’s not going to affect all of the economy at the same time.
And that’s a very important ingredient to understand because when this money is created whether it’s the Bank of Japan, the Bank of China, the European Central Bank, or the Federal Reserve, or any other central bank that’s inflating it’s economy, it’s going to find an outlet somewhere. And I think what happens is we keep confusing what real inflation is. In other words, you’ll hear inflation referred to as rising prices, which is a symptom of inflation just as you will refer to deflation as falling prices. And this is an incorrect assessment of what inflation is. Inflation is caused by an expanding supply of money and credit entering the financial or economic system. Deflation is caused by a contraction of money supply and credit pulling out of the system: either central banks withdrawing liquidity as Japan was attempting to do with its monetary base and then reversed itself; or for example, through debt defaults because when credit is defaulted on credit contracts within the banking system. That’s a very important concept to understand here. [5:31]
JOHN: Ok, what has changed right now then if we had to look at the effects of all of this from times past to the current time, especially when we try to analyze things like business cycles. What’s different?
JIM: Well, you know, you get these boom and bust cycles. So, let’s say, you start with a recession as we did in 2001, and in a recession usually governments and their central banks try to revitalize the economy, and they do so by lowering interest rates, pumping a lot of money into the banking system in the efforts of hoping to restimulate economic growth. In other words, with lower interest rates there’s an incentive for businesses to borrow money to expand, to build new plant or equipment, or for consumers to refinance their house or to buy bigger homes, and you get this whole cycle going again. And as you go through these different stages of the economic cycle as money and credit enter the system, eventually demand heats up. As demand heats up prices start to rise, and then what happens is the central bank once again slams on the brakes, and then we get a bust.
What we have seen recently however is that over the last business cycle like for example in 2001, instead of contracting the supply of money the Federal Reserve expanded the supply of money.
And I think there’s a reason for that John, and that is there is so much debt in the system today –both in the financial system and in the economy itself – we can’t afford the pain of contraction. Recessions and depressions are usually the cure for all the malinvestments, and all the dislocations that were created through government interference in the economy through artificially low interest rates, or pumping credit into the system. So, through a recession all the bad investments or malinvestments of the previous boom are liquidated, the economy contracts, prices stabilize, the money supply contracts, and there’s a lot of the healing that takes place with prices and everything. But you know, we’re at that point now where everybody says, “no, we’ve got to keep the patient permanently on drugs.” [7:52]
JOHN: It just doesn’t sell politically because much of the public does not understand what drove the cycle and that there’s sort of a penalty to be paid on the backside of it. And so politicians look at it and say, “my gosh, we can’t have that.”
JIM: I know, watch what happens as the economy slows down, you will hear politicians say, “if you vote for me I’m going to give you more benefits, or I’m going to do this to increase growth.” In other words, if you vote for me you won’t have to feel any pain. So anytime we get any economic weakness, any time we have a financial mishap whether it’s a hedge fund or a money center bank, or large financial institution, or in the case like for example in the 80s with Chrysler, or any large institution you have cries for government intervention. In other words, “OK, we’re in a mess, we’re starting to hurt, fix it.” And what is the remedy for fixing it? More of the same thing: more money, more credit, more government debt spending. It’s always the same prescription: give me more drugs. And what has happened now we have become permanently addicted to drugs. In this case, the drug is easy and cheap credit. And the real facts are the money supply growth has accelerated; as well, government support for the boom has also accelerated through fiscal policy and tax cuts. [9:21]
JOHN: Well, Jim, if we look back historically just over the last five or six years or so, 2001 we saw higher commodity prices, and by 2002 stock prices. By 2004, the dollar had rallied. What is the market telling us here? Basically, it would seem almost like the problem you have with the drug is that as you start out with a little it has an effect, but after the patient becomes adjusted to it over time more injections of it don’t seem to have the same effect.
JIM: And that’s exactly right. Since 2001 we saw large amounts of new drugs, or in this case new credit, whether it was being created by the Federal Reserve especially from 2001 to 2003; from 2003 to 2005 it was foreign central banks, especially the Bank of Japan buying 325 billion of our Treasury debt; or it’s the Bank of China.
The important things that you’re referring to is something that’s very important for you to keep in mind: when a financial market or an asset market makes a historic change to higher prices that market is telling you something. No matter how many times people say why the market shouldn’t be that high, and I know there are a lot of people in the bearish camp right now that are saying, “hey, stock prices shouldn’t be this high.” But the fact that the market has rebounded and has gone to newer highs is telling us something. Or you might hear people say, “well, nothing has really changed.” The mere fact that the price of a particular market is at a new high is telling you in itself something has changed. So, as you just referred to, John, we’ve seen new higher highs in gold, new higher highs in base metals, new higher highs in energy, new higher highs in emerging markets, new higher highs in small-cap stocks. This signals global reflation. And that’s the point we’ve been making on this program that we are in an age of inflation, and reflation is about to begin anew. I think that’s one of the main reasons they got rid of M3 which was growing at over 8%, which is high-powered money. And as I often refer to is just pick up a copy of the Economist, I do not see money supply contraction occurring. [11:45]
JOHN: So now if we look at this new variation in the business cycle that we’ve been talking about what are its primary traits?
JIM: Well, I would say, number one, the business cycle has been extended globally and this is being done through the expansion of money and credit in the financial system and also fiscal policy, either through tax cuts or increased government spending resulting in higher government deficits. Money supply is once again expanding: just take a look at our budget deficits and take a look at the government budget deficit itself. When you have government spending increasing at an annual rate of 6 to 8%, I mean that’s twice the rate of economic growth. When you have money supply growth increasing at 8 to 10%, this is extending the business cycle. So what you’re getting is the Fed is trying to control this to some extent, while at the same time it’s trying to extend and lengthen the life of that business cycle. So what they’re doing is tapping on the brakes, so to speak, and what they’re doing is raising interest rates gradually, and that is equivalent to tapping on the brakes.
If they really wanted to slam the brakes they would increase bank reserves which would start contracting the money supply, and then you would get real deflation and recession in the economy, but there’s no way that they’re going to allow that to occur – no politician would stand it. Just watch the flak that Bernanke is going to get on Capitol Hill in the next two weeks when he testifies here shortly. And so the result is this intervention of easy money is traveling to the financial markets. And what I think happened, and what we saw in May – a lot of people were saying, “well, it was Japan withdrawing liquidity,” but there was much broader implications than just Japanese liquidity – I think what it was the speculative community –basically the financial community – repricing risk in the market place. So you saw withdrawals out of emerging markets, you saw withdrawals from junk bonds. And what is happening is risk is in the process of being repriced, and what we’re more likely to see is a midcycle slow down. [14:00]
JOHN: Ok, so that’s the history of what the situation looks like. What most people are going to be interested in saying that’s the new business cycle what are we going to see happen next.
JIM:Well, first of all, I think we’re heading to the end of a monetary cycle, it’s coming close to an end. We may get another quarter of a point, maybe half a point, let’s say they go in September and August, but no more than that. We’re already seeing corporate borrowing costs are no longer stimulative, it’s now getting more expensive. And those sectors are involved with what I call tapping the brakes – interest rate sectors – you’re now starting to see clearly that slowing: housing is starting to roll over; refinancing is rolling over; retail sales are starting to roll over in various countries, especially the emerging markets where they’re running large current account deficits. We’re now at close to choke points for many of those countries which is why you’ve seen liquidity leave that market. In other words, the Dance of the Honeybees – that big swarm of bees of money that’s flying around the globe looking for its next place to land, you know, they leave one area, well, in the aftermath you get this sharp drop-off.
The other thing, if you look globally dollar based liquidity is still growing at a healthy clip of 4 or 5%. So what you’re more likely to be seeing right now is a slow down of high-powered money; those that are borrowing are being more circumspect. You’re also going to see profit growth slow as the economy begins to slow, and then along with that economic growth rates are going to pull back, and the combination of higher interest rates, and higher energy prices is causing this slowdown. So what I think we’re going to go through is by the end of the Summer we’re going to see a midcycle slow down, that slow down is going to take some of the pressure off the commodity markets which will eventually be reflected in CPI and PPI. The only reason the Consumer Price Index is going up is because of some bogus figure called owner’s equivalent rent, which is up about 23%.
This slowdown in US spending, which will be the result of a slowdown in housing is going to translate into a cutback by the consumer. I’ve gone out to the retail shops and that’s the clear message I’m getting from all the merchants that I’m talking to; and just from observing people at the mall – you don’t see as many people with packages, it’s much easier to get a parking spot. And as a result of that you’re going to see an inventory build just as you’re seeing in housing. And what will happen with that inventory build is you’re going to see prices slashed, you’re going to see furniture sales, you’re going to see sales on big screens, the price of plasma screens with increased competition now are probably going to come down another 25%. So, with lower prices coming from Asia that will be reflected in the import prices that you’re going to start to see in the months ahead. So, by the end of the third quarter, or maybe the 4th quarter, the new theme that you’re going hear in the financial markets is disinflation, or a term that we call stagflation-lite. [17:18]
JOHN: As investors, what are the implications for us then, Jim?
JIM: Alright, when I say this I’m going to talk both short and intermediate term. As it begins to dawn on the financial community that the US is slowing down, the economy’s slowing down and especially if we get any slowdown in the growth rates of China – China’s economy has been growing at 10%, so let’s say Chinese economic growth slows down to 9, 8 or 7% – a weakening economy is going to be positive for long term bonds in the short term.
And also John, we know from monetary policy there’s a lag effect, so inflation normally heats up towards the end of the business cycle. As the economy begins to slow down that’s going to take some of the inflationary pressures off the economy. And then also I think you’re going to see central banks’ intervention in the market both in currencies and also with interest rates. So the first thing is I think you could see a decline in Treasury yields. And I think they’re going to try to pull this off because remember we’ve been talking about that $1 trillion of adjustable-rate mortgages that is due to reset this year, and another $1.7 trillion of ARMs are going to adjust next year. So if they can get the long bond down to 4 ½%, or 4% you could have a rally in the bond market, and that’s going to allow a lot of these adjustable rate mortgages. In other words, with an inverted yield curve, higher short term interest rates, and lower long term interest rates, you can salvage the adjustable-rate mortgage rollovers that are going to take place here over the next 18 months.
Now, as economic growth begins to slow profits at corporations are going to begin to slow down. So, given the current stage of the business cycle where does money go next. In other words, where do the honeybees land next? And the next flower that the honeybees land on in my opinion is going to be the large cap growth stocks (companies that really have done nothing in terms of price appreciation over the last couple of years): especially the consumer staple companies; energy companies; companies that make things that people need. Large cap growth stocks – you’re going to want to be in companies that continue to grow their earnings, can grow their sales, and not be affected by an economic downturn. So I think large cap growth stocks, energy and precious metals because energy as we get closer to peak oil – we’ll get to that in the next segment – and also precious metals and Treasuries.
So, if I had to make the play, I would be in energy, I would be in precious metals, consumer staples and Treasuries. And when you go through a mid cycle slowdown that’s the best area to be in. [20:20]
JOHN: I’ve noticed you’ve been raising some eyebrows recently because you’ve been saying you don’t buy the argument that right now you shouldn’t be in stocks at all. Some people are saying well, we’re headed into a bear market, that the bears are sort of hunkering down in their bunker, and you should be out of stocks. But you think right now this is probably a good time to be there, at least in certain areas.
JIM: I say certain areas. I wouldn’t be in small cap stocks, mid cap stocks, that are overpriced. I would be in the large cap growth stocks that have been underpriced relative to the rest of the market. We looked at these areas, we looked at the Dow stocks, we looked at 2 or 3 different forms of the dividend discount model: the Ford dividend discount model, the Bloomberg discount model; we took a look at not only those discount models, we also took a look at the BCA – Bank Credit Analyst – model for the stock market. And they were all reaching similar conclusions.
We also looked at PE ratios over a 10 year period. We took a look at high PE ratios, low PE ratios, the average the discount, and then we did something which I think people misinterpreted. There’s something called continuous growth rates which is how much a company retains in earnings, and the return of capital that it makes. In other words, if a company makes a dollar in profits, and they pay out 50% of that in dividends, and retains 50%, then you have to take a look at if the company’s retaining 50% of its earnings what is the return on equity? What is the return that the company earns each year on the capital it invests? And if a company earns 20% return on capital, and they retain 50 cents, then the growth rate of what we call the continuous internal growth rate of that company is 10%. So we also computed continuous growth rates based on a company’s average retention rate of its earnings. In other words, how much they paid out in dividends, how much they kept and reinvested in the company. And then we also took a look at the return on capital, and we took a look at average returns and rather than throwing out high returns and try to get onto something more historical. But we looked at that, and it was our basis that these large cap stocks were relatively underpriced. [22:45]
JOHN: It’s sort of interesting because some of the people that are claiming that the stocks are overpriced – the stocks we’re talking about – are still buying them ourselves. That’s sort of a strange phenomenon isn’t it?
JIM: Well, what I think they’re doing is they’re looking for relative value in today’s market. In other words, I’ve got to invest money, if I’m going to invest it what is cheap relative to the rest of the market. It was interesting because I took a lot of the stocks in the Dow, and I took a look if we’re buying them, who else is buying them? For example, in Pfizer, you’ve got companies like Capital Research, Brandeis Investments, Grantham Mayo buying the same stocks – not only owning large positions but also adding to those positions. We found the same thing investing in GE: you had Wellington management, Capital Research; and also Berkshire Hathaway which was rather surprising; Davis Select. You go to Johnson & Johnson: Capital Research, Grantham Mayo. You go to Conoco-Phillips: Berkshire Hathaway – here’s one that surprised me I didn’t realize Buffet brought close to 18 million shares, recently adding almost 18.3 million shares to his holdings of Conoco-Phillips. You take a look at Walmart: Capital Research, Davis Select; Berkshire Hathaway buying Walmart; Grantham Mayo; Ruen Kuneff [ph.] who was one of Warren Buffet’s old buddies. You look at Coca-Cola: Berkshire Hathaway, Capital Research, Grantham Mayo. You take a look at Verizon: Capital Research, Brandeis, Wellington, Grantham Mayo. Gosh I can go on. Hewlett-Packard: Grantham Mayo, Wellington, Capital Research, and Legg-Mason. So, if I’m wrong at least I’m going to be wrong with some people that are a lot smarter than I am. [24:34]
Emails and Q-Calls
JOHN: And it’s time to go to our Q-Line. The Q-Line is up 24 hours a day so people who listen to the program can call in questions to the program. We ask you to keep the questions brief and just tell us your first name and where you’re calling from. The phone number is 800 794-6480, it’s toll-free from the US and Canada, but you can reach it from anywhere in the world but you simply have to pay for it if it comes from anywhere other than the US and Canada.
Hi Jim, this is Brian, I’m calling from Gold Creek, Montana. A beautiful place, I’m right down the stream from some old cluster mines, but that’s a different story. I actually had a question, I wanted to know where you thought this idea came from that a centrally planned interest rate which was set by the Fed is somehow better than market pricing. The entire market place seems to place a great deal of confidence in this entity called the Fed to control the economy. In my opinion, it’s this misplaced confidence that dooms us to failure in the end because it creates this underlying assumption that this group called the Fed can control the economy, which as I understand it is the implicit purpose of having a Fed in the first place. If it can’t really control the economy then every thing else falls apart and I’d like to hear your thoughts on this. Where does this confidence come from, and this idea that in an otherwise market based economy why are interest rates centrally planned rather than priced by the market? I look forward to your answer and I enjoy your show every week. [26:04]
JIM: I can tell you it probably comes through 50 to 60 years of brainwashing through the education system. The revolution that took place here, Brian, was the Keynesian revolution which displaced the Austrian theory of the business cycle that took place in the 30s. Some very important books that were coming out, Human Action, during that period of time but it was the Keynesian revolution in which basically Keynes gave the government the idea that they could do things better. In other words, the market was broken and in order to fix it, government needed to take a more active role in the economy, but the idea for the Federal Reserve came from a couple of bank panics back in 1907. The idea was that if you had a central bank you wouldn’t have these bank panics, and therefore the Fed would stabilize the markets and stabilize interest rates. And as we all know, the Fed has been a very destabilizing institution, they’ve given us these big booms and bust cycles which have occurred more frequently, and they also gave us the great depression. So it comes from about 50 or 60 years of brainwashing basically through Keynesian economics which is basically all that you learn in college today. [27:25]
JOHN: A good history by the way of the Federal Reserve is The Creature From Jekyll Island written by G. Edward Griffin who has been on the program as a guest here before.
Hi Jim, Brian from New Orleans. I had a question. I don’t understand how a falling dollar can impact mortgage rates.
JIM: Well, theoretically if the dollar falls inflation should rise, especially in the US as we import so much more of what we consume in this country. If inflation levels rise because of a falling dollar, in other words we have to pay more for the goods we import that would raise interest rates, or help increase the level of inflation and that would bring about higher interest rates. [18:12]
JOHN: Steve is in Ballarat [ph.], Victoria, Australia, hope I pronounced that correctly.
Hi Jim, first up, I love your show, I only wish I had found it 5 years earlier when I had a lot more money to play with, and as the old adage goes I’ve since spent the money I’ve had on booze and hookers, and the rest I’ve just wasted. Three questions:
JIM: This guy’s having a good time.
JOHN: Well, I guess if you live in a place called Ballarat, that’s why you would do that, anyway.
If the US dollar goes into sharp decline as you expect do you think it’s likely that the Aussie dollar will follow the downward trend too? With regards to your perfect storm scenario, do you see the same factors at play in the Australian economy, that is are the looming crises in your neck of the woods likely to eventuate here also? And three, what is my favorite color?
JIM: Ok, number one- Gosh, there were so many questions there.
JOHN: Number one, if the US dollar goes into sharp decline will the Aussie dollar go down with it?
JIM: Not necessarily. All currencies are depreciating against each other, nobody wants to see their currency rise. You could have the Aussie currency go up if the commodity markets remain strong because you’re a commodity exporting nation. So that doesn’t necessarily follow just because our dollar goes down your dollar goes down.
Second, in my perfect storm scenario, when it happens here in the US it’s going to happen it will impact all economies of the globe. In other words, if we went into a great depression – a hyperinflationary depression – it would obviously impact your neck of the woods too, but I don’t see that taking place –I think they’re going to be able to postpone it – for a couple more years, I think it’s going to get rougher each time, and we’ll see a series of storms just like any hurricane season, you know when the ocean temperatures start heating up you don’t just get one hurricane and you could get many rogue waves, hurricanes, perfect storms. And I see a series of these developing as we move on, with each storm getting worse than the previous one. [30:28]
JOHN: And you’re listening to the Financial Sense Newshour at www.financialsense.com, that’s like making sense of something. The new programs are posted every single week. By the way, we are IPod friendly but we post the programs by 0700 Universal Coordinated Time, that’s Greenwich Time which works out to 3am Eastern Daylight Time.
The Next Big Play in Energy
JOHN:Jim, talking about storms and things going on in the ocean, there was an important report this week in the Wall Street Journal – Oil Rigs Stage Exodus from the Gulf of Mexico – which actually surprised me because I didn’t realize how many of them were actually more floating platforms than actually anchored.
JIM: The surprising thing was the July 5th article in the Wall Street Journal and it was called Oil Rigs Stage Exodus, and they basically started out, they said the biggest long term threat to oil and natural gas production in the Gulf of Mexico isn’t hurricanes, it is the dwindling supply of drilling equipment. And just to give you an idea, in 2001 there were 148 rigs in the Gulf of Mexico drilling for natural gas and oil. We’re down to 90. So we’ve lost almost a third of these rigs and more are expected to leave pretty soon.
Why that’s important is the rig count has a pronounced effect on natural gas, especially production and prices, because most rigs that are leaving the Gulf are ‘jack-up’ rigs. These are the kind of rigs they use to find gas in shallow waters. And because a lot of these gas reservoirs in the Gulf are shallow, they are quickly exhausted. You may produce gas out of them for 1 or 2 years, and then they’re depleted. What happens as a result of that is companies have to be constantly poking holes in trying to find new wells in order to keep production up. So, the problem is if your rig count is down by over a third, and more are leaving, you are going to have fewer and fewer rigs in a very important natural gas production region in the United States.
And when we look at the natural gas versus the oil market, it is a local market so prices can’t be easily offset by increases in imports. For example, if we go to last year when the hurricanes hit – Katrina and Rita – and very important pipelines were shut down along the Gulf coast and going up into Georgia and the Mississippi area, we were able fortunately with treaties that we have with our allies to import a lot of refined gasoline products into this country from diesel fuel to gasoline. So, that’s why you saw for example our imports jump tremendously, and our trade imbalance rise right after September, because we were importing more oil and gasoline in addition to oil into this country, because we lost a lot of our refineries. At one time almost a third of all the production in the Gulf was taken off line. So we were able to import it. But with natural gas, the only way you can import natural gas is to liquefy it, put it on a specially designed ship, and then cross the ocean and then unload it at a special type of unloading area –LNG plant – where you can return it back into natural gas. And, John, as you and I know, everywhere they want to put an LNG plant, especially here in California where they want to put six of them in, they’re vowing to fight them. They’ve got environmental lawsuits against every single one. In fact, the Democratic candidate for governor has vowed he’ll stop Bush, the oil companies, and any building of LNG terminals even though the only power plants we built in California are natural gas. [34:16]
JOHN: Well, obviously, last year the oil and natural gas production took a pretty good hit as a result of the hurricanes –and we don’t know yet what is going to happen yet this season – but all of that aside now we see just because of economic factors the rigs are packing up and leaving the gulf. That has got to cut down production.
JIM: Well, you know, this is a point that we’ve been making on this program when we had the writer from BusinessWeek talking about why you should be worried about Big Oil. In other words, the international oil companies are no longer a major oil factor in terms of global production, they only account for somewhere in the neighborhood of 15-16%. The real players in the energy markets are the national oil companies.
And it was interesting because in this article on rig count, what the Saudis have done, Aramco, are basically the Saudis are trying to buy up all the oil rigs or tie up all the rigs that they can because their production is going down. Their larger oil fields, the big mega-fields like Ghawar are in decline, so they need to keep drilling in order to keep their current production rates up. And Aramco is buying these day-rigs and they’re willing to pay premiums; and not only that they’re willing to tie up and sign 3 and 4 year contracts. So, if you’re a driller you can say: “hey, I have all the uncertainty in the Gulf here, we’ve got problems if you want to drill on land, good luck. If you want to find new areas to drill, good luck too, you’ll get stopped with environmental suits.” Why put up with that stuff? Why not go to Asia and the South China Seas? China, African nations, Middle Eastern nations are buying up all the supply and they’re willing to pay top dollar – these are the guys that have all the money. I mean not to say that oil companies don’t have money, but look, if day-rigs are only going for 140 to 150,000, and you’re willing to pay 160,000 or 200,000 – for example, they were talking about jack-up rigs in Tunisia next year will fetch day rates of $200,000 a day, and the larger deep water rigs are fetching day rates of $½ million a day.
They went on to say that not only are these national oil companies out in the Middle East driving up the day rates for these rigs because there’s a shortage of supply, that means whoever is left in the Gulf is going to have to pay a much higher rate too. And a higher rate paid for a drilling rig means that the price of energy is going to stay up.
We’ve talked about this and in fact we’re going to be interviewing an author next week, we’ll play it two weeks later, but a new book called Oil Titans and it’s not about the international oil companies, it’s about the real players in the energy market today, which are the national oil companies and that’s what this article in the Wall Street Journal really talks about. And you can’t blame it – if you’re running a company and somebody’s willing to pay you 40, 50 or $60,000 more a day to drill in their neck of the woods, why wouldn’t you go? And on top of that, these guys are willing to sign up –and this has even more important implications – they’re signing these people for 3 and 4 year contracts so these rigs are not coming back. And the implication for that is you’re going to see oil and natural gas production drop in the Gulf of Mexico, and that’s a key strategic area for the United States. [37:51]
JOHN: You know you can’t help but get the impression as we watch a lot of this, especially like the California election issues is not only are we not doing anything, we are actually going in the wrong direction in many cases, which is doubling the problem.
JIM: We’re still bashing the oil companies, and here we have the national oil companies from China, to the Middle East to Africa nations buying up all the available supply of drilling rigs. And also going into areas and tying up energy. Energy is going to become a scarce resource, and we’re allowing this and the result – let me just give you an example of what this means to this country. As a result of this –these drilling rigs leaving the area offshore oil – offshore oil production has dropped 19% in the Gulf of Mexico, from 530 million barrels a year to 458 million barrels; natural gas production has dropped from 5.1 trillion cu.ft to 4 trillion cu.ft. And this is just from 2003 to 2005. It’s getting worse – production is going to drop this year, it’s going to drop next year, it’s going to drop by another 20-30%. What that means is we’re going to be forced to pay higher prices, and we’re going to have to import it from someplace else. Well, how are you going to import natural gas if you’re not building the terminals and the ships that allow you to import natural gas? Unlike oil, where you can just drop it in a freighter, ship it across an ocean, natural gas first has to be liquefied, you have to have a special ship to do that, and then when you get it to the end of its destination, let’s say in Long Beach, or wherever you’re going to take it you have to have a special facility to receive that and turn that liquefied gas back into natural gas that’ll feed into the pipeline system. This reminds me it’s right out of Jared Diamond’s book Collapse. I’ve never seen a civilization so intent on destroying itself in what we’re doing here with energy policy in the United States. This is just absolutely insane. [40:08]
JOHN: Largely I would think because the media, wouldn’t you say though, and the public are really not totally aware of what the situation is.
JIM: No, they’re absolutely clueless. I was literally trying to get my cell phone hooked up on Bluetooth in my car. And I was at a Verizon shop talking to the guy and he was looking at my car and we’re talking about gas prices which is everybody’s complaint today. He says, “I can’t believe Bush is raising all of the oil prices.” And I said, “no, I don’t think it’s the President.” And he goes, “well, you know, he’s an oil man.” And I said, “no, Junior isn’t, he made his money in baseball.” And then he says, “well, then it’s the oil companies.”
This is the perception out there. It’s like it’s either George Bush or some greedy oil company, but the oil companies in the United States don’t account for where we get most of our energy, where we get most of our oil and our natural gas. We import 70% of our energy needs, that means we’re importing from Venezuela, we’re importing from Saudi Arabia, from Nigeria, we’re importing from Kuwait – that’s where we get most of our oil from. And if the world market price is $74, or it’s $6 for natural gas that’s exactly what we’re going to pay. [41:25]]
JOHN: Ok, now that is the framing of that issue, and there are going to be investment implications in that which we need to look at.
JIM: Well, first of all, we’re going to need to build more drilling rigs, so anybody in the drilling rig business and the driller business can now get top drilling rates. As the Middle Eastern nations raise the price that they’re willing to pay for drilling rigs, and African nations and the Chinese tie up all our drilling rigs, it is also going to force day rates up in the Gulf of Mexico. So driller profits are also going to go up.
The other thing is we see falling oil and natural gas production go up, that means it’s going to keep a floor underneath oil and natural gas prices. And I really think one of the next big plays here in energy is going to be in natural gas. We’ve seen natural gas prices work their way into the teens all the way down to below $6, and I think the impact of more and more of these drilling rigs leaving the area, we still have the hurricane season. And remember, we’ve been able to dodge a bullet because we’ve had some warmer winter cycles, so we haven’t had the drawdowns which we normally go through. But I think that natural gas here, you have a lot of these natural gas stocks that are selling at 8 and 10 times earnings- they’re screaming buys; you’ve got natural gas royalty trusts paying 10,11,12%; and also I think the move by Anadarko to buy natural gas I think you’re going to see further consolidation in this industry, because number one, a lot of these natural gas are selling at very, very cheap multiples given the price of energy. I think Anadarko’s going to look very smart in this acquisition, and the drillers have pulled back in this correction in energy, and given the idea that you can get your rigs out there at incredible rates – day rates not only in the Gulf but globally are rising – and that’s going to mean higher profits.
So bottom-line is natural gas and the drillers are going to be the next big play in energy. [43:31]
More Emails and Q-Calls
JOHN: Alright, Jim, time to go back to the Q-Line, once again that number, it’s open 24 hours a day, 7 days a week for you to record your questions, it’s 1-800 794-6480, and it is toll-free in the US and Canada only, but it works worldwide.
Hi, this is H.Y. from Ottawa, Canada, just wondering if Jim would explain to us how investing in consumer staples tie in with his investments in gold and silver, it would appear the two investment vehicles are opposite to one another in terms of dependencies and the phases. Much appreciated if Jim would explain that, because I’m still trying to understand the reason for the consumer staples. I can see that long term the next 5 years wouldn’t one be better off in gold and silver? Thank you.
JIM: Well, H.Y. the thesis for consumer staples is the business cycle. As the economy begins to slow down, that means profits will start to decline because you’re at the peak of the cycle. As an economic growth slows so will corporate sales, so will corporate profits, so you want to be in a sector that is sort of immune to a slow down in the economy – companies that are providing things that are essential .
The other thing too is remember if our economy is slowing down this is a global economy, and most of your multinationals, especially your consumer staple companies are international companies where they get anywhere from 60 to 70% of their sales overseas. For example, you want to play China, you can take a look at consumer staples moving into China – Walmart is moving in to China, hiring 150,000 people, although that’s more of a big box low cost store concept. But the international consumer staple companies do better in an economic slowdown. They have also been the area that has not really profited from this increase in the markets that we’ve seen over the last 3 years.
Now, how does this tie in to gold and silver. Well, in any portfolio, you invest in sectors that are doing well, commodities are going to do well because the world economy is expanding, especially China and India, so you’re going to see demand for base metals, copper, lead zinc, nickel etc. And then also, since central banks are inflating universally that’s what is happening, you’re also going to see some gold and silver rise. So you can make the case that you can see all of these rise. I suppose you can say, well, if they’re going to inflate I’ll just put my money in one sector but no portfolio manager would do that, no fund manager would do that, nor would any hedge fund manager put everything in one basket, because as you know in the gold market and as we experienced recently in the month of May, the gold market can go through 30-40% corrections in a year and a lot of people just don’t want that kind of volatility in their portfolios. So you have to look at who might benefit from rising prices and international markets, and the consumer staples and the international blue chip growth companies are one area that would do well.
Hi my name is – I’m from Ontario, near Niagara Falls, just want to thank Jim and John for a great show. The question I have is I’m concerned about a run on the banks in the near future. I wonder if you could discuss the different scenarios that a run on the bank may be possible like indicators to look for. I did know when they set up the Federal Reserve in 1913 they had 3 separate runs on the bank and the last one in 1907 that helped condition people for the Federal Reserve to be established giving the banks control over the currency. And I do know you’re talking about chip implantment, in other words if you want to be part of the new economy you have to have a chip inside you, everything will be done through transactions through a chip in your body like the interactive card is used right now. And take cash off the table. If you could expand on this I would really appreciate it.
Robert, I had a hard time hearing everything you said there, I don’t know if it was the phone connection or what, but the gist of your call what would happen if there was a run on the bank? And you’re talking about implantable chips for people to do commerce.
What I think they’re going to do is merge the currencies first and that’s the plan to merge Canada, Mexico and the United States currencies together. Some call it the amero, I call it the amigo. So that’s coming. And then the next plan would be some kind of a debit card, and if they go with a debit card then you don’t have to worry about, number one, money fleeing the system. In other words you taking your money out of the country to escape a currency devaluation and transferring it overseas so they could literally put an electronic fence around the country and its money. Secondly, you’ll never have a bank run because we go to a cashless society. And three, they would better be able to monitor let’s say a lot of bartering, and a lot of the black market that takes place in an economy because of oppressive taxes. So I think the emergence of the currency and also the sort of debit type card is what’s coming next as we go to a cashless society. [49:25]
JOHN: Also, Jim, as far as what are called RFID chips, there are a number of very serious articles right now that are not as widely published in the mainline media but illustrating the fact that these chips are not foolproof so you think somebody gives you a chip in your arm or whatnot, but largely because of the fact that they are largely passive transponders someone passing right by you with a special cloning device can actually read your chip, and then mimic your chip. They’ve been able to show this. A lot of institutions such as banks and other secure operations are using a chip in a card, and just by passing close enough by you on the street I can read your card and then I have a mimic device which I could walk right up to the real reader and have it think that I am you. So now they’re having to work out encryption and other problems, but it is still possible to steal someone’s identity even with the current technology. So we’re not quite there yet. Don’t roll up your sleeve yet.
Jim, this is Doug from Petaluma, I want to let you know your listeners are behind you, man, keep up the good work, I hope you really get the guys that are bashing you. I’m not sure if you realize it or not but he also spread the same kind of trash on another gold board, bashing management and what not. I actually panicked when I saw his post and sold my shares when the stock dropped from 11 ¼ or two to below 10. Thank goodness though that I was listening closely to your show and bought back in around 12. Anything this guy bashes always seems to go up, like with Nova Gold he was really hitting it hard and then it went all the way up to 18. I guess I have to wonder what his motivations are. In my opinion, Jim, he’s not only committing libel and slander against you, quite possibly also securities fraud. All I want to say is I hope you bring this guy to justice, thanks Jim. [51:11]
JOHN: You know, when you do what we do in terms of radio or information there’s a lot of heat that goes on out there. There are different types of bashers, what do you think their motivations are? Some people do it because they enjoy doing it, but there are other motives as well.
JIM: I would say most of it deliberately. Either one, I would say they are frustrated day traders, maybe they sold too soon, the stock got away, they’re angry and so they’re just lousy traders and they’re trying to influence the price of stock. Also, there’s short sellers where they’ll plant those rumors and try to drive the price down.
We’ve hired two law firms and one of the firms in the United States, we’ve hired one in Canada but the one law firm was telling me a lot of times for example fund managers, or it maybe even be brokers that will use the same handle. It may be 3 or 4 people but they’re trying to influence the price of the stock, they’re trying to accumulate positions. So, the ultimate goal is really to manipulate the price of the stock. And by the way, as one law firm told me last week, if they are buying the stock or shorting the stock that is securities fraud which is an imprisonable offense –also finable too. So, they’re also committing securities fraud here so there’s various motivations.
You know, I was a little bit naïve when I first got in this business and I didn’t realize a lot of this hanky-panky was going on. We were accumulating a position in a junior and this was back in the Summer of 2003, and most of the time because of our size when we buy a junior we can drive the price up, so we try to do it over a period of time. And this particular stock I was getting a lot of liquidity. In other words, there were some days that we would take down 100,000 shares where normally I would have to buy maybe 10 to 20,000 and stop, hold off a couple of days because we would be driving the price. But this one particular stock I was buying 100,000 shares one day I think we got as many as ¼ million shares – there was a lot of liquidity coming into the market. And I got a phone call from a broker of the firm that had done the underwriting of this particular stock asking if that was me doing the buying and I said yes, and they wanted me to back off, and they said if you back off the price will drop and we can get it to you a lot cheaper. And I said, “this is how much I want to buy, can you get me that.” And I said, “you’re going to guarantee me that.”
And they said no. It turns out what happened is they had financed a company, and when you finance a company normally they are private placements and there’s a restriction from selling for 4 months. And what they were doing was shorting this stock ahead of the 4 month cycle because it had run up, and what happens is they didn’t like that because obviously if they’re shorting and I’m buying, and I’m driving the price up they’re losing money but usually a lot of these people have a motivation and that’s security fraud. If they’re brokers and they get caught they will lose their license, but if they’re investors and we will subpoena trading records when we get to that point, that is an imprisonable offense because that is definitely securities fraud, and that is a felony.
So who knows what the motivations are. But basically the attorneys told me 3 things: one, they’re short the stock so they’re trying to drive the price down; two, they’re accumulating the stock and they’re hoping to get it at a lower price; or three, they’re just angry people, they’re lousy traders, maybe the stock got away from them, who knows what it is? And I would throw in probably a fourth reason, and that is just there are people that do things to harm other people, they get a kick out of it. Why do people spend their time writing viruses to crash people’s computers – I mean, they get a kick out of causing that kind of thing. That’s just human nature, there are bad apples out there, and that’s just the world we live in. [55:12]
JOHN: Sort of makes an argument against the innate goodness of mankind that we have heard come out of the French Revolution, doesn’t it?
JIM: Well, no more comments.
JOHN: So much for philosophy, where do we go from here?
And moving on here on the program, we got to Other Voices.
Other Voices: Michael Klare, Author
JIM: You know the British author, Rudyard Kipling called it the ‘great game,’ the geopolitical chessboard where the great powers of whatever powers of whatever era are at play. It has become commonplace but that great game is being played today. To discuss that, joining me on the program is author Michael Klare, he’s written a book called Resource Wars and his most recent book Blood and Oil.
Professor, let’s talk about the great game because it seems like we’re right in the thick of it again in the 21st Century.
MICHAEL KLARE: You’re absolutely right. Now, Kipling wrote about the great game in the 19th Century, and it was about the struggle between the British Empire, then based in India, and the Russia Empire based in what’s now Central Asia about the territories in between – particularly Afghanistan. This was the area that’s now once again the pivot of geopolitical competition between the United States, Russia and China – a tripolar chessboard – but it’s the very same area that Kipling was referring to all those years ago. [56:44]
JIM: For the British it was trade and controlling their empire. I think as we look at this area today of greater significance is its holding of the world’s strategic petroleum reserves.
MICHAEL: That’s right. The area of the Caspian Sea in Central Asia is thought to have some of the largest untapped oil in the world. It’s also a major center for natural gas. And we should talk about natural gas because as oil becomes more scarce we’re all going to be relying on natural gas to make up the difference – and Central Asia has a lot of it. So, it’s importance can only grow.[57:23]
JIM: You have the US which is building bases, along with the British, throughout that area but there is another organization that’s also growing in importance in that area – that’s the Shanghai Cooperative Organization (SCO). Explain the significance of this.
MICHAEL: This is an organization – the SCO – that was established by the Chinese and their first meeting was in Shanghai, that’s why they call it the Shanghai Cooperation Organization. It’s a body that includes Russia, China, and the Central Asian republics – the former Soviet republics of Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan. And originally this was formed supposedly as an anti-terrorist organization, or more specifically an anti-separatist organization, because all of these countries have various ethnic groups that want to set up their own homelands: Chechnya for the Russians – although that’s not in Central Asia, but like that. So they all ganged up together to mutually suppress their separatist movements. That’s the SCO’s origin, but it has evolved over time into a regional security organization a little bit like NATO. And its purpose seems to be to consolidate Russian and Chinese domination of this area and to try to exclude the influence of the United States – that seems to be the way it’s developing. [59:00]
JIM: Let’s talk about this tripolar chess board and let’s put Iran in the great power context. What’s going on with Iran?
MICHAEL: Well, Iran of course is a source of friction with the United States because of its alleged pursuit of nuclear weapons, and there’s a crisis brewing about that. It’s been brewing for quite some time, but it seems to be coming to a head. But Iran is also a powerful piece on this tripolar chess board between the United States, Russia and China, because China and Russia have fairly close relations with the current regime in Iran – the clerical regime. Both China and Russia have sold weapons and military technology to Iran; the Chinese rely on Iran for oil and they want to buy into the Iranian natural gas industry; Russia is building a nuclear reactor there.
So Russia and China want to keep the current regime in place, and don’t want to see the United States overthrow that regime – you know, conduct regime change – or attack Iran because that would deprive them of an important ally, and also make them look weak which in a sense they are because they don’t have the power to stop the United States. And from the US position Iran is a threat not only in its own right but also as I say because of its ties with Russia and China. So Iran sits in the middle of this increasingly tense relationship between the US, Russia and China. [1:00:38]
JIM: If the Bush Administration is successful in Iran, let’s say by luck or good fortune from their perspective, they can change the administration in Iran, how does this upset the power balance in the region?
MICHAEL: That would be very positive for the US. Now again, you underline luck because I think the chances of this happening in a smooth, easy way are very, very low and we could talk about that, but let’s say luck prevails and the regime is replaced with a pro-Western regime that would be very good for the United States. First of all, it would eliminate an adversary but it would also open up Iran which has the second largest reserves of oil and the second largest reserves of natural gas in the world, those are now off-limits to American companies. But if there is a new regime in there that would open up Iran to American oil companies – that would be very attractive from Washington’s point of view. [1:01:46]
JIM: What do you think is going on between Iran and the United States. About six weeks ago the President of Iran sends a 16 page letter to the President. The President dismisses it, yet 30 days later Condoleezza Rice is saying, “you know what, we ought to talk.”
MICHAEL: Yes, Iran also is a supplier of energy to Japan and to the European countries and they don’t share America’s intense dislike of the regime in Iran. They may not like it, but they don’t feel threatened in the same way we seem to be. And so the Europeans are hoping to avert armed conflict over Iran. They also don’t want to see Iran turn into another Iraq, another black-hole of violence. So they’re trying to hold the US back from military action. And I think that this has persuaded the White House that even though they don’t want to talk with the Iranians, if they want the Europeans to support them down the road they have got to make the final effort here to talk with the Iranians and resolve that peacefully. So that’s where we stand now – an attempt to see if there is still isn’t a way to resolve this without conflict, but if these efforts fail this is the last best chance. After this I think the crisis will escalate. [1:03:10]
JIM: What are the chances for example that the US finds a middle ground with Iran, in other words we make some kind of deal with them, they back off somewhat, we back off somewhat, they help us with Iraq somewhat, we cede something to them, that may take some of the premium out of the oil markets that are over geopolitical fears. Is there a middle ground?
MICHAEL: I do believe that there is a middle ground. And bear in mind, to put this in perspective, remember that President Bush in 2002 spoke about an evil empire and he included Iran along with Iraq and North Korea in the evil empire. And he has repeatedly suggested that regime change is an option in Iran. Now, for the Iranians, this is a sword hanging over their heads and it makes any kind of compromise impossible. If you take that sword away, if the US were to say look we’re not committed to regime change, we’re willing to leave you in peace to go down your own path if you agree not to support terrorism, if you agree to assist us elsewhere, I think that is the basis for a middle ground – that the US says to the Iranians that we will leave you in peace if you back off from your most hostile moves. I think that would be in the best interests of everyone frankly. [1:04:22]
JIM: And then I guess if we want to throw it over in a worse case scenario what is the possibility that in the end we can’t reach a compromise? Do you think there are odds favoring an attack on Iran? You’ve had Seymour Hersh in the New York Times who suggested the US is contemplating this.
MICHAEL: I do think that there is a very high risk of military actions if these negotiations fail. Now, this would require that the negotiations fail in such a way that it appears the Iranians were absolutely obstinate and unreasonable. In other words, it has to be clear to the Europeans that absolutely every possibility of compromise has been eliminated on the Iranian side. If that’s the case then I think military action by the United States against Iran is likely. Now, I’m not contemplating here an invasion of Iran. The US doesn’t have the military capacity to invade and occupy Iran, we’re already overstretched in Iraq. I would imagine there would be air strikes and missile strikes – that kind of action. Now, there’s no question the US could do that quite easily and with little resistance from Iran – they’re not likely to be able to stop our aircraft and missiles. But they have other levers that they could pull of what’s called an unconventional or asymmetrical nature: they could stir up the pot in Iraq; they could unleash the various Shiite militias in Iraq to attack the US forces there and we’d be in a much more dangerous difficult situation if that were to occur. So they do have unconventional options that are very threatening. [1:06:43]
JIM:If we were to do that, for example, to attack their nuclear facilities what would be the response from the Shanghai Cooperative?
MICHAEL: Well, the Shanghai Cooperation Organization isn’t a military organization like NATO. I said earlier that it’s a bit like NATO, but it doesn’t have the military infrastructure that NATO possesses, so the SCO would not really be in a position to counterattack, or anything like that. What they could do is make it difficult for the United States by denying over flight privileges for US aircraft; by making it impossible for the US to use its new bases in Turkistan and that part of the world. But I think that is about all they could do. [1:07:33]
JIM: In terms of looking at the options, in the extreme case the United States in the end is forced to attack Iran, the middle ground, or somewhere in between, where do you think we end up with this?
MICHAEL: This is very hard to say. I fear personally that this would lead to all kinds of unpredictable chaos in the Middle East that would just get worse and worse and worse without any obvious way out of it. I think it would lead to greater violence and civil conflict in Iraq – Shiite against Sunni. I think it could leave to violence in Saudi Arabia and Bahrain: they have Shiite minorities that might rise up against their own leadership there. I think you could see more violence in Lebanon where Iran has close ties with Hezbollah. This is what I worry about that you’ll see festering instability and chaos that would be very damaging for America’s long term interests. [1:08:41]
JIM: You have written two books, your first book Resource Wars points out that throughout all of history more wars have been fought over resources – whether it’s energy, food, diamonds, oil. We’re in a war now in the Middle East, and obviously I don’t think we would be there if oil wasn’t in the region. What are the chances as the world approaches peak oil, and the West is so unprepared for it, that eventually this leads to greater military confrontation between the great powers?
MICHAEL: I have no doubt that this is the case that an increasingly scarce supply of oil will lead to greater levels of conflict. And it’s clear that the great powers are already anticipating this because they’re all building up their capacity for military operations in the major areas of likely conflict – namely the Persian Gulf area, the Caspian Sea basin, even in Africa. You see efforts by all of the great powers to enhance their military capacity in that region and I think it’s precisely because they anticipate a higher level of conflict as oil, and I would emphasize natural gas as well, becomes more scarce.
There’s another reason why more conflict is likely, and that’s because the commodities themselves will become more valuable. You know, at $10 a barrel oil may be valuable but would you risk your life for it if you lived in these countries. When it becomes $100 or $200 a barrel it becomes very attractive for warlords and local powers and cliques and clans and ethnic groups to fight over it. And you see that for example now in Nigeria, where the tribes and the delta region where the oil is, are fighting the central government precisely to get control over oil revenues. So you’d have internal wars over oil as well as inter state wars between the great powers as oil becomes scarce, and therefore more valuable a commodity. [1:10:58]
JIM: You know, Professor, as I take a look at what’s going on in the West and as you wrote in your article, you know if you go to Nigeria, Sudan, Angola, many of these areas you see the Chinese moving in, the Russians. Many US oil companies are forbidden to do business in that area, and at the same time here domestically it’s very difficult to drill for oil and natural gas or coal or whatever natural resource; it’s very difficult to put up wind farms; we’re not doing anything to enhance our mass transportation. I’m not sure in terms of present policy of the United States and actually policy for the last couple of decades that we’re left with only one option and that’s war.
MICHAEL: I unfortunately share this kind of pessimistic outlook which comes from denial. I think all of us in this country are somewhat in denial about the fact that the resources we rely on for our way of life are finite resources and that they’re going to disappear. We keep driving, filling up our tanks as if the supply is endless, and as you say, it is not. And the situation will become more difficult. So yes I do think there will be an inclination to go to war over oil and natural gas I think it should be obvious from Iraq, whether or not you think Iraq was prompted by oil, it’s a war taking place in the oil region of the world – the most important oil region in the world. And we see just how difficult it is to wage war in an area like that. All of these oil wars are going to be extraordinarily costly and bloody, so even though I think things are trending that way I don’t think that this is the solution to anything. It’s delusional and will pay a very high price for it. [1:12:51]
JIM: I couldn’t agree more Professor. As we close, why don’t you tell our listeners about the two books you have written. I’ve read both of them and we’ve done interviews on them. They are very well written and I think would be very important for our listeners to read.
MICHAEL: Well, thank you. My background by the way is in peace and conflict studies. My interest is in understanding warfare so as to better to devise strategies to prevent bloodshed in the world. And this has led me to the study of resources as a source of conflict, and my first book in this series –Resource Wars – was a look at the degree to which modern warfare (contemporary warfare) is driven by resources. And I argue that to a considerable extent resource competition is the major driving factor in contemporary warfare.
In my most recent book Blood and Oil I came to the conclusion that it’s the dependency of the United States on imported oil, most of which comes from the Middle East, and will come from the Middle East, Africa and Central Asia – all inherently unstable areas that’s going to lead us to one war after the other. And my hope in writing these books is to persuade people that warfare over resources is a self-defeating, destructive path, and better for all of us to find ways to conserve our resources and use them more efficiently. So, thank you, for giving me this opportunity to talk about my book. [1:14:29]
JIM: Well, Professor, I hope you’ll come back and join us again. Are you writing a third book?
MICHAEL: I am. I’m writing a new book which will be on the contest between the US and China for control over especially energy resources around the world. We were talking about this earlier, and I see this now as the central dilemma.
JIM: Well, Professor, when that book comes out you have a standing invitation to come back on the program.
MICHAEL: I’ll make sure you get a copy. Thanks.
JIM: Ok, thanks so much.
MICHAEL: My pleasure. [1:15:00]
Bargains of a Lifetime
JOHN: Hurry, hurry, hurry, step up right here Ladies and Gentlemen, there’s many bargains to be had, but you have to hurry and you have to know what you’re doing and that’s what we’re all about right here on the Financial Sense circus.
And obviously in any market you can make money if you know what you’re doing. There’s bargains to be had. And Jim, the ringmaster is going to tell you what they are.
JIM: Ok, if we take a look at what I call relative values we have things that are relatively cheap given the rest of the market, and I’ve been making that case for large cap growth stocks.
And the second area that I think is undervalued and underpriced is energy, John. I think the market has made an assumption that for example as the economy slows down, we’re at the peak of a business cycle, therefore since oil is a cyclical type product, it’s a cyclical business, as the economy slows down that the demand for energy is going to slow down and therefore the earnings of the oil companies are at a peak. Therefore the lower PEs that you see today are reflecting this. I think that has been mispriced by the market. The analyst in Wall Street has gotten the energy sector wrong for the last 4 years. Once again going back to 2002, when it started going up in the upper 20s, from $20 a barrel to 28, they said it was going to go back to 20, and we all remember when I had Jim Rogers on the program and he said, “you’ll never see $25 oil again.” Now, Jim Rogers is talking about $100 oil, and I think he’s correct.
And the other thing too is because of that when something is overpriced, we saw this very same thing reflected in the 70s when oil was a buck a barrel, and started to go up to 5, to 7, working its way to 40, initially the first 5 or 6 years and especially after the Yom Kippur war and the oil embargo, there was a lot of talk, “Ok, it’s going to come back down,” but as you noticed throughout the 70s we spent our climbing our way to $40 a barrel, which would be equivalent to almost 80 or $90 a barrel today in inflation adjusted terms. So I still think we’ve got a ways to go.
And you just see the fundamental stuff, oil production down in the Gulf, natural gas production down in the Gulf, oil fields peaking in Kuwait, Mexico, North Sea, the North Slope; 49 of the 69 oil producing nations are past their peak; 65 of 65 of the oil producing nations past their peak discovery. So let’s put it this way – fundamentals – if you sold 2 million new cars to Chinese in China they’re not going to put their car in the garage to go back to riding their bicycles. And I think so many times we get into this myopic view of what’s going on in the United States and we forget what’s going on in the rest of the world.
A friend of ours at Contrarian Investor, Brian Pretti wrote a great case about this mispricing of the oil sector, and I’ve written a couple last year in the market wrap-up on these oil stocks making the same case where Brian in his recent article on Contrary Investor took for example estimated PEs for the major oil stocks and the energy spiders. He took a look at estimated earnings for 2007, and earnings were all going to go down because everybody I read is pricing in much, much lower prices next year. Then he also took a look at the 5 year PE growth, or earnings per share growth and then the average 10 year PE multiple relative to the S&P 500, and its current PE multiple. And many, many of these companies were selling at substantial discounts to the market and also substantial relative discounts to their historical values. And so I agree with Brian, and we’ve been making this case here for quite some time now that the markets have mispriced the energy sector.
John, what do you hear every time the price of energy goes up? Remember right after, for example, the hurricanes hit last year they were talking about energy demand going down. There was nothing further from the truth: the freeways were still clogged; people were still out in their motor homes. In fact, I was really surprised last year right near our beach home is a park on the beach where they have these giant SUVs. John, it was crowded. We have an office party on the beach and one of the guys who works for me has a weekend warrior, and we wanted to get him a spot. It was very difficult because everybody was just crowded. I was just down at the beach last weekend, same thing, even though the price of gas at 3.00-3.50. And my brother-in-law who’s a truck driver was telling me, “yes the price of energy has gone up, and yes the price of going from A to B costs you more, but one of the biggest things for motor homers is what you’re paying for park rental rates. If you’re paying $30 a day times 7 days that’s $210 – that’s also a big cost of operating a mobile home.”
So, anyway, I think what I’m trying to say here is I think that the markets have mispriced the energy sector for peak earnings. And I bet you, right now we’re getting into the 2nd quarter earnings, and as these energy companies are reporting earnings this month we are going to see some blow out earnings because this is the longest time that we have seen in the last 4 or 5 years that the price of oil has remained above $70 a barrel. It’s basically spent the entire second quarter above $70 a barrel. So that’s going to mean higher prices somewhere and higher profits. [1:21:13]
JOHN: You know it’s interesting, Churchill once said that sooner or later everyone in the course of their lifetimes will smack right into truth. However, he said most people get up, dust themselves off, and wander off wondering what that was all about. And I think the same thing applies. You know there’s an old adage that they have eyes but they see not. Remember when oil prices first began to edge upwards, long before we ever hit the levels at the pump, at every point there seems to be this process of calls for investigation on the part of Congress and then maybe they’ll have some hearing or something like that. But then all of a sudden it fizzles, and there’s almost an accommodation on the part of people to “alright, I guess that’s what it is, and we’d better adjust to it” and then life just sort of goes on from that point.
JIM: Sure, I can remember when they first started getting in the upper $2 range there were a lot of complaints, and especially last year right around the time of the hurricanes. Then we had the investigation and then all of a sudden the prices began to go down, every thing calmed down; Bill O’Reilly calmed down; there were no more investigations, especially when the Commerce Department looked into it and they said there was no price gouging. They do this every time any way, but it sounds good and makes people feel good and it makes politicians who are doing everything possible to ruin energy in this country to make it look like they’re doing something. But what happens is there’s just gradual acceptance then all of a sudden we’re at 3.50 range right now, and there isn’t the same outcry.
Yes, they’re keeping track of it, but people are worried about missiles in North Korea or something else. It’s sort of this gradual acceptance, so once you went from 2.50 to 3.50 you went back down to 3.25, then all of a sudden the prices go back up to 3.50 again, it’s just a gradual acceptance. I mean, what are you going to do? Are you not going to drive to work? So what you are going to do however is to cut back somewhere. Maybe if you go to a regular grocery store you’re going to start going to discount big box stores. Maybe you’re going to go to Costco, or Walmart to save money. If you’re used to buying at Nordstrom’s, maybe you go some place else, you go to the Nordstrom’s Rack; or you go to the outlet stores – if you like to buy polo shirts and they’re $78 at a regular store and you get them at an outlet store for half that. So you start to cut back and you cut and you’re still going to get in your car, you’re still going to drive on weekends; our beaches are still crowded; our freeways are still crowded; there’s still traffic everywhere I see. If they’re cutting back, I haven’t seen it. [1:23:56]
JOHN: Ok, just summing it up, where you’re basically just holding a position here that oil stocks are relatively cheap and especially underpriced both for oil and natural gas. Alright, the next area?
JIM: The next area is gold mining stocks. And I’m going to take a quote, there was an article in Barron’s last week on gold and this is the quote from Pierre Lassonde who heads up Newmont or one of the largest shareholders in Newmont regarding gold mining stocks, and I’m quoting him directly. He declares unequivocally and this is quoted:
This is the buying opportunity of a decade.
Lassonde who has been very sharp on forecasting gold prices sees mid $600 average for gold prices this year, and he sees $850 gold prices within the next 18 months. Now, the amazing thing and he’s talking about the gold stocks, and that’s one of the points I’ve been making on this program, and one of the things that I saw from January of this year as the price of gold moved from the mid 550s all the way up to 728, the gold stocks were not responding as fast to the price of gold, because you’ve got to remember if you’re mining gold and all of a sudden you’re not hedged and you can sell gold at $700 or $650, all of that is going to your bottom line. And I think you’re going to see some remarkable bottom lines in the gold industry here going forward. But the premiums that were typical on the large gold stocks have virtually evaporated from a 30% premium to almost an 8 to 10% discount.
And also on the junior producers, the junior producers normally sell for a 20 to 30% discount and there discounts went to 40%. John, when it comes to junior mining stocks, and Newmont takes a vested interest – they have a stable of Newmont investments that invest in these promising companies because not only do they make money but it’s also a potential supply or takeover for Newmont. And they’re making big bets in this area too, because a lot of these juniors I’ve just discovered another company last week that has over 1 million ounces of reserves that are going to double that in the next year.
I’m involved with a couple of companies right now that have been banging out higher grams of gold in their drill results 4, 7 grams, deeper meters; they’re already at 2 million and they’re going to add another million. And now the project is looking like a 4 to 5 million ounce deposit instead of a 2 to 3 million ounce deposit. And then on top of that they’ve been drilling deeper holes and getting as much 99 grams of gold. So what it’s showing is just like the old-timers that there maybe a deep underground mine once the open pit mine is completely mined. And another company, 2 or 3 companies that we’re involved in right now that are looking like they’re on the verge of announcing major gold discoveries.
And John, these companies get trashed and trashed and a lot of that is because juniors are not as liquid, so it’s not like you’re buying Exxon or Newmont where you have 3 or 4 million shares trading a day; so when you only have 100 or less than 1,000 shares traded you have a greater impact on that price. But what Lassonde was basically saying is given where the price of gold is today, and given where the price of gold is going to go in the future, this is the buying opportunity of a decade. Now, that’s not coming from me, that’s coming from Pierre Lassonde one of the sharpest guys in the gold business. And once again, his quote: this is the buying opportunity of a decade. And yet these stocks are being trashed, they’re being bashed or people are shorting them, selling them. Some of these companies are selling at what I call steep, steep discounts. And one of the ways you cut your risk is when you buy something that is selling at a discount to its net asset value. So if a company has a dollar’s worth of gold, and you can buy that gold for 50 cents, 40 cents or 35 or 30 cents, your risk goes down and your upside goes way up.
So, don’t take my word for it, but I would recommend you read last week’s issue of Barron’s. It was called Golden Opportunities, I think is the name of the article. It was all about Newmont mining. A very great article I thought. And talking to a couple of CEOs – people in the mining industry – they see the same thing that a lot of the majors and the intermediates don’t be surprised if you see more acquisitions down the road, because these guys are smart, and it’s getting harder and harder to find quality deposits, especially with what’s going on in Latin America right now or parts of Africa or Mongolia and other parts. In other words, you can’t just go out and find large deposits. So those deposits that are very high quality, high end, are going to be going for a premium. [1:29:05]
JOHN: Jim, you typically have a methodology that you keep recommending. Why don’t we go back –I know this is sort of a review here on the program – and review this again? It deserves restating here.
JIM: One of the things I like is I like to minimize risk, and when you’re going into a junior exploration company you have to have a lot of faiths in the geologist that he knows what he’s doing. But even he could be the best guy in the world, and the smartest guy in the world, and he may stake some land and get a dry hole. So I like to go more with the sure thing, so I like to go with late stage development which is less risk. So you’re going with a known deposit, I like to buy them when they’ve proven up some reserves so you have an inkling of what lies out there. But I also like to buy juniors that are pursuing a dual track purpose and what I mean by a dual track. In other words, they’re proving out the deposit and that’s something that you have to do, you have to do a lot of infill drilling –which means drilling closer together – to move your ounces into the measured and indicated category which gets it ready for prefeasibility. And when you get that prefease your ounces are moved into the reserve category which is a very important signpost for a company because it basically makes those ounces more provable, they’re more probable, you have a higher degree of what you have in the ground. Also though, when you’re doing that you’re typically not adding ounces so your stock goes nowhere, so I like to see a dual track not only a company that’s pursuing proving out there main resource, but also they have drilling rigs that are going out exploring trying to add additional ounces. In other words, make the deposit bigger and grow the deposits so you still have exploration growth in a known deposit area.
And the other thing, the reason I like that, John, is you never know what’s going to happen. Maybe you get taken out by a major which is if you’re growing your deposit you start getting over 2 million ounces and those ounces are economic. You start becoming an attractive candidate, especially once you get a prefeasibility study, because when you get a prefease outside major companies or intermediate companies now can look at your deposit and say, “holy cow, these guys have 2 million ounces, they’ve done a prefeasibility, these ounces are mineable at this price and we can make this kind of profit.” So a lot of the risk then is taken out of the equation, not only for investors, but also for any company that might be looking at acquiring it.
On the other hand, you may get into a situation for whatever reason and the market ignores you where you’re continuing to prove out your project, so maybe you have a million ounces and now you have two. One of the companies I’m involved with has 2 million, now it looks like we may be going to 3 and 4, and that’s on several companies I’m looking at. If you get to be a 2 or 3 million ounce deposit and nobody buys you, and your ounces are economic and mineable, then the other option –once you have a prefease – is actually to go into production. And that’s the key. A lot of times you’ll see people count ounces, they’re inferred ounces, they’re not very probable and a lot of times when you start going to measured and indicated and prefeasibility you may lose those ounces. And so what’ll happen is you better know that you have something there because if nobody’s taken you out your other route is Ok, let’s go into production. And if you’re going to go into production you better be able to make a profit because who wants a company that is going to mine gold and their costs are so high they can’t make a profit – that they’re dependent on higher prices. I think we’re going to get higher prices which is going to make a lot of mines economical, but anyway, once again I like the dual track approach to it because it takes a lot more risk out of it.
And I also like to choose these companies that are close to the prefeasibility because then your dual track approach is assured.
And then the other thing is I like politically stable regions of the world which I think are going to command a premium, especially in countries that respect property rights.
But here’s something that I think is going to be very important. We see this next run up in gold prices, it’s going to have a 3 stage run up, and anybody familiar with technical analysis knows what I’m talking about. Stage 1, what we’re going to do is we’re going to take out the old high of $728 that we reached in May, that’s the first stage. The second stage that Pierre Lassonde is talking about is we’re going take out the old bull market high of 850. And once we get to stage two, and we take out the old bull market high of 850 then it’s stage 3 – we’re going over 1000.
And once we get past 850, you’re going to want to own some producers or companies that are close to production because at $850 gold and $1000 gold, you’re talking about some great profits. Just as you’ve seen for example with the major oil companies when the price of oil went from 20 to 40 to 60 to 70 and you’ve seen these record profits, that’s exactly what you’re going to see when you get past 850. So you’re going to want to shift your portfolio and make sure you have half your portfolio into production, because at 850-1000 gold you’re talking about enormous profits for gold mining companies. And I’m not just talking about 850 gold, or 1000 gold, I’m also talking about 25 to $35 silver. Imagine what you’re going to make.
One of the largest silver companies in terms of resources that we financed about 3 or 4 years ago has now made the decision to go into production. And right out of the gates when they go into production they’re going to become one of the largest pure silver producers in the world because they’re recognizing now in terms of where the price of silver is, which on this Friday we closed in the futures at $11.34, they can make a return on equity of over 50% for their shareholders. So, once again, you’re going to want to make this transition.
So I agree with Pierre Lassonde, and he’s a lot more knowledgeable than I ever am, but he’s basically saying the same thing, that these companies are the buying opportunity of a decade, and right now they’re just getting trashed in the market. That’s the kind of thing I love to see because it’s the best time to buy. And we’ve got one more final allocation we’re going to make with our gold buying and once that’s done I’m sitting back and hoping to enjoy a ride because I do think that Lassonde’s right, that by next year we’re going to take out 850 and probably with the next 18 to 12 months we’re going to take out $1000. And you know, John, it’s not just Pierre Lassonde or myself that’s saying that, even people like Bank Credit Analyst believe gold can go over 1000.
So, I tell you, this next run up that we’re going to see is going to be the run up of a lifetime, and I think it’s very critical that people have themselves positioned, but more importantly they accumulate and they have the patience because as anybody knows in the gold market when the run starts it catches you by surprise, it’s very quick, it’s very rapid and you better have your positions in place otherwise you’re going to miss the good majority of that ride. [1:36:05]
JOHN: A couple of weeks ago we began talking about things that the little guy can do, because we get a lot of emails from people making inquiry about that, and so we began talking about how you can buy silver investments in certain areas, H20 – water – energy, things of that nature. Let’s continue that thought, what else can people do? One of the big things I’ve noticed is you walk into Barnes and Noble, or Borders –whatever your favorite bookstore is – and you go to the economics section, it’s like a minefield. Everybody’s writing on how to do this and how to do that. You can’t tell what their philosophies are – having a correct philosophy is important, so people need to know what to read and eliminate a lot of chaff out there.
JIM: You know, probably one of the most important ways I can help if you’re new to the investment world or intermediate or whatever your background is to develop an investment philosophy because unless you have an investment philosophy or approach to the market you’re like a ship without a rudder, you’re going to get battered back and forth by whatever current whims are in the market. And I don’t care if your approach is technical, or your approach is fundamental but you have to develop an investment philosophy and then you have to have the discipline to apply it. If you’re a value investor you don’t go from buying value stocks one day to buying and becoming a momentum investor. It’s like a person that changes religions. You can’t be a Catholic one day, a Jew the next week, and the next month you’re a Moslem, I mean that just doesn’t work.
In the investment markets what they have found over and over again is people that have discipline, people that have a philosophical approach to the market and then have the discipline and patience to apply it more times out of none will become the most successful investors. In other words, if they examined the traits of these very successful investors you will find that they have an investment philosophy; and number two, they have the discipline; and number three, the patience to apply it. So, one of the ways I think I can help you is if you’re just getting out and you want some good books to read on investments I’m going to give you the names of a couple of them.
One of them that is must reading, this was very influential on Warren Buffet’s career, it was called the Intelligent Investor by Benjamin Graham and there’s an updated version of that book supplemented by Jason Zweig. Ben Graham wrote that book I think in 1952, and Graham passed away in 1976. So Zweig takes his book, supplements each chapter and brings the relevant principles to today’s market. So that would be one book.
Another book if you can get it in the library, especially if you’re a dividend investor was a book written by Geraldine Weiss which is Dividends Don’t Lie, and I have some good news to report to you that Kelley Wright who was on this program in Other Voices is heading up Investment Quality Trends which is Geraldine’s newsletter is working with Geraldine and they’re coming out with an updated version of that book. I think it’s going to be released here in the next month or two. So the new version of Dividends Don’t Lie, mark that, it would be a great Christmas present.
The third book I think you ought to read is called the Future for Investors, it’s out on the bookshelves right now, it’s by Jeremy Siegel.
The next book I would recommend, and this is going to teach you a lot about intrinsic value. It’s a book called Buffetology, and it’s actually written by Buffet’s one time daughter in law, Mary Buffet, and David Clark. And there is also a workbook that goes along with it. They even go so far as to teach you how to take a Value Line report on a company and basically I think they use a TI solar calculator and how to go through intrinsic value calculations. So that’s another one – a workbook I would add.
Now those are some basic books on investment and investment philosophy. They’re going to give you some good grounding. I come from a more fundamental point of view than technical but I think it’s very important that you understand fundamentals.
Also some great books to read on economics. One is What has Government Done to Our Money: The Case for 100% Gold Dollar, that was written by Murray Rothbard. Another book by Rothbard which is great is called The Case Against the Fed. Another book that I would read would be Economics in 24 Easy Lessons by Henry Hazlitt – that’s a great book, it’ll explain the myth of all these Keynesian paradigms that we use to abuse the economic system. [1:41:21]
JOHN: Ok, let’s assume we’re getting past the beginner’s stage. If they want to move to the next level, something a little more advanced what would you recommend?
JIM: Oh boy, I have two books right now. One of them I’m reading is called Money, Bank Credit and Economic Cycles, it’s by Jésus Huerta De Soto, and that’s about 800 pages. It’s probably one of the best books I’ve seen come out. It gets in to the concept of money what it is. It gets into the contract of money, it gets in to the business cycle. It talks about how money expands under a fiat system. And also gets into the consequences of that. That’s going to give you a bigger understanding of how this whole system works and unfortunately I’ve gotten what 500 pages, I’ve got another 300 to go so that’s getting pushed back to Summer break. The other one, I’m finally going to get to in my time off that I plan to read during the Summer, is the book by Murray Rothbard, he’s one of my favorite Austrians, and he’s written a book called Man, Economy and State. The scholar’s edition is the one I would get, you could get it from the Von Mises Institute and the Scholar’s edition has Power and the Market. Unfortunately, this could take you a whole year to read it, it’s about 1400 pages, but I’ll tell you, between those two that’s going to give you an excellent background.
But what you really need to do if you’re getting started in investing is really to develop an investment philosophy, learn a lot about psychology, in other words know yourself because you really have to become disciplined. You can have the best philosophy but if you don’t have the discipline and the patience to apply it then what good is that philosophy. [1:43:09]
JOHN: Well, Jim, that is it for the week, and what are we looking at in the weeks to come here?
JIM: Oh boy, we’ve got a great lineup. Coming up next week we’re going to have a double header – I’m sorry folks, but I’m going on vacation in August, and so we’ve got to get the author’s when they’re ready. We’re going to have Ike Iossif, Ahead of the Trends, and of course Ike will always have interesting guests.
And the other one that we’re going to do next week that I’m really looking forward to this, and I want you to listen to this one, we’re going to have Valerie Marcel, she’s written a new book called The Oil Titans, which is really about the national oil companies as the major players in the oil market. That is a book I would definitely read because it’s going to give you a better perspective about why we should be worried in the United States. We are losing control over our energy fate, and Marcel really talks about who the big power-players are in energy.
Coming up on July 22nd, we’re going to have Jeff Christiansen, he’s from the CPM group, he’s written a new book called Commodities Rising. July 29th, George Orwel has written a book called Black Gold. And then the first week of August, Leonardo Maugeri, he is actually head of ENI, the Italian oil company, he’s written a book called The Age of Oil. Somewhat more optimistic, he’s probably a late peaker than an early peaker on peak oil, and he will be my guest in August. We will be taking you through the oil sector and the commodity sector here over the next month, because we are heading into an energy storm here in the next couple of years.
And I’m afraid John, just as this article in the Wall Street Journal each week I get more and more evidence that we are headed for energy trouble and we’re not prepared for it and it’s just like we’re asleep. Quite honestly it’s difficult learning to deal with this, all I can say is I’m preparing myself for it, and also our clients from where we’re going to be investing. And it’s something that we hope when we bring these things to you that you read these books, and start educating yourself and come to your own conclusions. Don’t just take what I say on this show, but read these books, inform your own opinions. I’ve read, I think I’m up to 80 books now on oil, I think maybe I should resign and start running an oil company, but at least when we give you like for example Jeremy Leggett, he’s part of Greenpeace, he comes at it from more of an environmental perspective and peak oil, although I just don’t think those two kind of blend because if you think about global warming, if we’re at peak oil I don’t think we’re going to have to worry about burning a lot more fossil fuel as production goes down as a result of peak.
Well, as always on behalf of John Loeffler and myself we’d like to thank you for joining us here on the Financial Sense Newshour. We went a little long this time and we’ll probably go a little long next week. We’ll have double interviews once again with Ike Iossif and Valerie Marcel, Oil Titans. But coming up ahead is our Summer recess, so we’re going to try to get as much of this information out to you if you’re planning on taking a vacation yourself and looking for something to read at the beach, hopefully some of these ideas will appeal to you. [1:46:27]
JOHN: And going long or short on the program should not be construed as advice. Don’t apply that to your investment.
JIM: Well, that’s true. Anyway, as we always say at the end of the program, until we talk again we hope you have a pleasant weekend.