Financial Sense Newshour
The BIG Picture Transcription
September 30, 2006
- Gold Bull Run
- Energy: Buying Opportunity or Bubble?
- Other Voices: Richard Loomis, World Energy Source
- OtherVoices: John Williams, Shadow Government Statistics
- SoYou Think You're Ready to Retire?
- Other Voices: Kelley Wright, IQ Trends
- Emails and Q-Calls
Gold Bull Run
JOHN: Last week, Jim, you touched upon key highlights of the gold market. Earlier this week, you were at the Denver Gold Show – as a matter of fact, that was where the interview with Matt Simmons was done from. So, any insights from the show you would like to give to us as we start off this part of the program?
JIM: Well, John, I believe there are 3 things that we are likely to see dominate the gold markets over the next 12 months. One that we’ve seen throughout this year is the ongoing acquisitions and industry consolidation; we’ve seen quite a few takeovers this year, but I believe a lot more are coming. So that’s one definite trend that I think will continue. A second trend I think is something that investors need to pay a lot more attention to is political risk assessment. And finally, operating and capital cost inflation. We talked last week about how inflation costs for projects had been running about 35%, and so you’re seeing a lot of this being reflected in company earnings; you’re seeing a lot of companies talk about, “Ok, we thought it was going to cost $200 million to put this mine in, now it’s going to cost 300 million.” So industry cost inflation I think is another thing that we’re going to see and I don’t see any end in sight; it may moderate somewhat but looking forward it’s likely to run at least 6 to 8% a year. [1:32]
JOHN: Is there anything that we need to elaborate on or look in depth beyond just the sketchy outline there?
JIM: Well, as I mentioned previously the total cost of acquisition – that is, of acquiring reserves in the ground – remain very attractive. Companies with projects either in production, in development, or at the feasibility stage have been acquired at almost 180 or even 70% premiums in relation to the spot price of gold – or percentage of gold. So today it is still very attractive if you’re looking for reserves to replace what it is you’re producing. If you’re looking for growth in terms of assets for production, it’s still cheaper to go out and acquire it, rather than try to build it yourself, or go out and explore for it. [2:21]
JOHN: What are the drivers behind consolidation anyway?
JIM: Well, first of all, the increase in operating margins is giving the larger companies the cash flow to use to make these acquisitions. So in addition to using their stock price as scrip in an acquisition, they now have cash in addition to stock to make those acquisitions. Another driver I think I’ve remarked on over the last year is that sector valuations remain attractive. I’ve commented about this as we were moving up towards $700 gold, that despite higher gold prices this year asset valuations remain below historical averages, thereby making buying ounces more attractive than exploring for ounces. Just to give you an idea where we are today: you have senior producers selling at a 7% premium versus let’s say a historical average of a 29% premium; you have junior producers selling at 24% discounts to net asset value versus let’s say a 9-10% discount; junior development companies quite honestly in many cases are just being given away. [3:28]
JOHN: It’s very much as in the case of the oil companies cheaper to buy rather than go out yourself and then find this – just take what’s already there.
JIM: Absolutely. Acquisitions can become accretive to shareholders and that’s something I think you’re seeing the CEOs of these companies respond to. So if they go out and make this acquisition they can buy these companies below the spot price of gold – that’s something we haven’t seen in at least a decade – and that makes acquiring ounces less risky than exploring for new ounces given the political risk associated with exploration, and not to mention the long lead times that we talk about from discovery to production. [4:08]
JOHN: So I suppose that’s why you’re probably bullish on the junior sector then. What about political risk assessment – certainly what’s going on in Latin America, Russia, other parts of the world?
JIM: Unfortunately for the discovery and development of new mines, a lot of these areas are frequently located in areas where country risk or political uncertainties remain pretty high. This means investors are going to have to pay a lot more attention to political risk going forward. And this applies not just to the gold sector but to all natural resources, not just gold. On my flight back from Denver, for example, I was reading a story about how Putin is reneging on agreements made earlier with big oil companies in Russia. Putin’s Russia today is probably a lot more self-confident, they’re flush with cash from sky high oil prices, and Russia has a much stronger hand dealing with the oil companies. In other words, they’re not hurting for money like they were let’s say 5 or 10 years ago. Putin is also using a lot of that cash to rebuild the Russian military. So longer term oil companies and resource companies in general are going to have to look at different business models for investing in Russia, but also other areas of the globe especially Latin America. [5:23]
JOHN: Obviously security being a very, very big issue, because why are you going to lay out any money when some government may step in and say, “whoops, that’s ours.”
JIM: Thanks for building it, but we’ll take over now.
JOHN: Well, getting back to mining. If we look at specific risks which companies take, what are they?
JIM: Let’s just talk about the gold and silver companies. There’s several risks that most companies face, even if a major discovery is made. Companies face various challenges. Number one is getting permitting risk. You know you may go out, drill some holes, you find gold, you find silver, now you have to apply to the local government and you have to get a permit. Well, what’s to stop Greenpeace, or some environmental group from showing up at your campsite and then protesting and trying to stop you from going ahead with your permits?
A second thing is what you just alluded to, John, the goal posts in dealing with countries keep changing – whether it’s taxation; some recent issues in Russia for example they used environmental laws to go against the oil companies; in other areas of the world they are enacting legislation. So you think you have a contract on Monday, and Ok, you proceed, and then all of a sudden as you get into building the mine, or exploring for it, or putting your permits – all of a sudden they keep changing the deal as you go along. Also the security of the tenure that you have on the project. Let’s say you start producing gold, you do it very inexpensively, your profit margins are wide, the host country sees that and they decide, “you know what, I think at this point we’re either going to change the deal, or all of this belongs to us.”
And then the other thing that you also have many times is corruption within the regimes that you have to deal with. So you have to pay bribes – and companies are reluctant to do that given all the disclosure requirements today. So, those are pretty much 4 of the risks that come to mind. [7:18]
JOHN: Well, Jim, we’ve talked many times here on the show how we believe we’re in an inflationary age. And when you think about it this is no more evident probably than in the natural resource sector.
JIM: John, costs have been rising ever since this bull market began in 2001. Since the low of about $170 an ounce reached back in 2002, average costs have increased by $94 an ounce, so that in the second quarter of this year the average cash cost of mining gold has risen from $172 an ounce back in 2002, to $266 an ounce. So even though the price of gold has been going up, costs have been going up along with gold. [8:04]
JOHN: But what about rising gold prices, do they act as an offset?
JIM: Well, operating margins up until this year have remained flat over the last couple of years, roughly around the 40% range because operating costs, as I’ve mentioned, have risen and have kept pace with the increases in the gold price. It has only been recently, probably in the last 6 months, that operating margins expanded to as much as over 50% – and I’ve seen some companies with 55% margins. It is one reason I believe gold stocks remain undervalued given that premiums over net asset value have virtually disappeared this year, and discounts have widened considerably for juniors. [8:46]
JOHN: So in your opinion, the fundamentals for gold remain in place. Nothing’s changed despite what we see as a drop in value in gold shares.
JIM: Well, I guess if I was to sum it up I’m very bullish on gold and silver. The fundamentals as we have talked about in the last couple of shows have never been better so I expect great things going forward. And also I believe this is probably going to be the mother of all gold bull markets, and we’re just warming up. The great thing about this is that it is under the radar screen for most investors. And unlike the last bull market in gold that took place in the late 60s and 70s, the large companies are finding it harder to replace their reserves. Despite the enormous amounts of money that have been thrown into the sector for development and exploration there haven’t been a lot of large discoveries made.
The gold and silver precious metals sector is mirroring very much what is going on in the oil sector – large amounts of money going into exploration but it hasn’t translated into an equivalent great amount of discovery going forward. So that’s one thing that I think is going to be different. And that’s why I think this time around all the currencies around the globe are on a fiat currency system, and the largest currency of them all – the dollar – is probably the most vulnerable given what’s going on with our trade deficit and also with our budget deficit. So even the macro environment and monetary environment for gold has never been better. [10:17]
JOHN: If we do agree this is going to be the mother of all gold bull markets, it would seem like the only problem – given the fact that every market has its little rollercoaster rides, never goes straight up, or straight down – is to have the conviction to hold on during every one of these Maalox moments. That’s when other people are yelling, “this is it, the blow-off, she’s going down, she’ll never come back.” That type of thing.
JIM: You’re absolutely right. I think the reason most investors are not going to get wealthy in this bull market is because they trade too often. To make real money in a bull market you have to take a long term view. You buy value, you buy quality and you hold on. And that’s much easier said than done. [10:58]
JOHN: Easy to say but hard to do. Well, I’m glad I have that for you to do for me, anyway. You always seem to remain calm when the market goes through all of these storms. Maybe that’s the difference between you and me. I think it’s because of your strong convictions, and besides, it’s easier to buy you a gallon of Maalox than it is to have to drink it myself. Always thinking of you, Jim.
JIM: You’re so kind.
JOHN: I know.
You’re listening to the Financial Sense Newshour at www.financialsense.com, don’t forget that these files of the brand new program are posted at our website every Saturday morning at 7am Greenwich Time which works out to 3am Eastern Daylight Time here in the United States. Everybody else around the world, you’ll have to make your own conversion. And as we always do, we have several segments on the Big Picture we’ve entitled Other Voices to hear the opinion of other people around the world – whether or not we agree with them. And coming up an interview with Richard Loomis.
Other Voices: Richard Loomis, World Energy Source
JIM: Well, commodity prices: a sustainable bull market or just another bubble? We’re going to talk about energy today, and joining me to discuss the topic of energy is Richard Loomis from World Energy.
Richard, if you look at all the talk batting around –you know, talk stations, financial stations – on energy, the US economy is slowing down that’s a given, global economy or economic growth still pretty strong, and the idea is demand hasn’t been that strong so really energy prices shouldn’t have been that high. But that’s only one side of the equation, you’re looking at the demand side. Let’s talk about the supply side, because that’s where I think the real story lies.
RICHARD LOOMIS: Well, I would agree with you, Jim. I mean one of the things that I’ve found very interesting about this high priced environment is we haven’t seen surplus supplies shooting up all over the planet. What we have seen is a real scarcity in the market. So if you look at even today’s prices, where we are at $62, $63 what we’re not seeing is huge finds of oil popping up, and everybody and their second cousin announcing, “I’ve got oil.” I mean you would think they would but they haven’t. And what’s more interesting if you look at the peak oil debate, CERA just came out with some very interesting reports where they’re citing numbers which are really very hard to justify, and saying that we’re awash in oil; that the supplies are here. But trying to get their numbers to add up is extremely difficult.
Another thing that I find interesting about the market place today is we have a fully utilized service sector. So we have no more rigs to throw at this. We’re building them as fast as we can, but we have a real scarcity in the marketplace. So even if you start to find things like Chevron’s reported find out here in the Gulf, the rigs are not here for development.
In our most recent monthly review we took a hard look at that in talking about, well, the title of the piece was Rig Shortage Threatens African Drilling Plans. Last time I looked Nigeria, and Angola these were bright spots on the energy market place. Now, we’re looking at even if we make the finds, we don’t have the rigs to put in place. We also have rigs leaving the Gulf. And if we’re in that position where everything we can drill we can sell why would they be leaving the Gulf? Well, they’re leaving for better terms overseas. At the same time, these other markets don’t have enough rigs to service them currently. So we are hitting another big choke point. And I think this is particularly interesting as you start to look at what service companies are doing to try and increase their own bottom line.
I’ve seen several pieces, UBS put out a piece on how the deep water service companies are booming right now; and everything they can build, they are putting it all to work. So how do these companies grow? I mean we’ve seen an unusual trend. Back when oil prices started to drop you saw a lot of vendor financing where the vendors would come in and say, “hey, if you want to drill this prospect, I’ll do it because I’ve got the iron sitting, it’s not working, the rigs are stacked.” Now, I’m seeing that come back around where companies like BJ Services has launched something called Blue Field where they are going out to operators in the Permian Basin and saying, “if you want to deploy our technology let’s do something creative where we get a piece of the asset, or we get paid for production, or we get some sort of payment through the longevity of the life of the asset, instead of just the money to put our stuff to work today.” J. Ray McDermott has put something together called Life of Field, and they’re actively looking for ways to do this. Very similar to the model Cal Dive deployed in the late 90s if you’re familiar with that one. [16:06]
JIM: You know, Richard, this is the surprising thing about rising prices in oil that we’ve seen going back to late 2001. As you pointed out the rig count has climbed to its highest level in nearly two decades, but their have been a couple of problems: first, the discovery rate of new exploration has been very disappointing by past standards – so the correlations that used to be between increased exploration and future spending output gains may be considerably weaker than the past; and another factor that we’re seeing is a greater part of the exploration budgets is being absorbed by higher costs leaving less available for what I call increased real spending.
RICHARD: Well, it’s quite obvious that with a fully utilized service market and service sector there aren’t that many people around to do the exploration, and you are soaking more and more of your budget and you’re getting fewer bodies and fewer finds. The other thing I’m seeing is some very unique service companies being launched. I don’t know if you’ve heard of these guys but out of Calgary came Turnkey Energy, they have a very specialized drilling technique and they’ve gone to companies like American Oil and Gas and said, “for a piece of the deal we’ll provide the technology you’ll need, we’ll develop the asset, and we both win.” So being able to actually deploy the technology brings them to the deal whereas if you brought money to American Oil and Gas they would say, “that’s fine, stand in line, we don’t have the equipment or the technology to develop the asset.” Money is not the issue. And that’s unusual, it’s a very different time in our industry. There’s another company recently formed by a gentleman by the name of Curtis Burton called Buccaneer Energy, and he’s remaking the model that Reading & Bates deployed back in 1995. Again, very, very interesting.
If you look at our most recent World Energy magazine you even have people like Lord Browne talking about there’s more to business than profitability and being a good corporate citizen. You have to plan for where you are going to deploy your assets in the future. And he said, almost for bracing the audience, that “we’re not going to be able to provide the resource in the long term.” [18:28]
JIM: You know what is rather interesting, I read the BP Statistical Review, but also on a recent flight I was reading in BusinessWeek, a gusher for big oil is drying up and they were talking about what’s going on in Russia where you have companies like Royal Dutch and Exxon are learning the hard way that these contracts that they thought they had in place with the Russian government over Sakhalin Island, all of a sudden Putin is saying, “you know what, I’m not sure we’re going to honor those, we’re changing things.” And that almost implies that, for example, a different kind of business model is going to have to be used in investing in Russia. So, there’s not a lot of places these companies can go and explore today.
RICHARD: Well, as I recall, last year, we coined the phrase Putinocracy, and what’s happening in Russia is fascinating. The emergence of Gazprom as the major driving force both for supply and politics in Europe – we haven’t seen that kind of activity before, particularly out of Russia. So we’re not sure how to deal with it. Where the IOCs – the international oil companies – are running into problems is that they are supposed to be sources for project management and for capital. Well, they divested their technology to the service companies, and their people who do that type of work have been laid off in the past, so they’re in the service sector. Well, if they’re not able to coordinate and maintain cost advantages for something like Sakhalin, their value is very low. And I think what you’re seeing is the Russian government and Gazprom, and Rozneft are saying: “Wait a minute, what value are you really bringing to the table, if it isn’t the expertise, if it’s not the technology and if it’s not the ability to run these projects successfully on budget and on time, why are you here? We don’t need the money anymore.” And of course, they don’t have quite the same reverence for contracts that we do here in the United States, they really are looking to do what they feel long term is best for Russia, and that can be to the detriment of our IOCs. [20:50]
JIM: Richard, you know one issue that you hear bandied about on financial talk is that given the fact that the price of oil has risen from $20 to now over $60 a barrel, higher prices are going to bring more money into the game. And isn’t that one of the problems that the optimists have is that you take a look at, yes, there’s a lot more money being spent, and theoretically that should mean a lot more supply, but we’re not getting that more supply. Isn’t that where the real issue comes face to face with the optimists’ position?
RICHARD: Well, really the optimists’ position is that we’re going to uncover a new technology or we’re going to find a better way through the exercise of capital. So you could say it just hasn’t happened yet. We do see a lot of capital flowing into the market place. As Matt Simmons would say, show me what’s on the drawing board that’s going to make the development of these fields easier. As I mentioned earlier the service sector is fully utilized. Everybody’s working, everybody’s working today, who’s looking down the road at what we’re going to do next? Investment in R&D in our industry is at an all time low, so we’re working, we’ve got our heads down, we’re developing the projects we have today. The money is sitting here but if you don’t have some place for that money to go, or a way to invest those dollars you’re not going to see it happen. Even the department of energy cut its R&D budget for independents. So we’re not sending the signals that would drive that. In the past, you had the R&D being done by the majors and those that had a lot of dollars, that was pushed into the service sector.
The service sector never really found the value of developing the technology, so lo and behold, we don’t have it today. So unlike we had 30 years ago, where horizontal drilling was on the white board, we just had to figure out how to do it; where ROVs which go down 10,000 feet were on the board, we just had to figure it out – we haven’t even thought of what to figure out. So bringing in the capital today, it sits and waits for the next big idea. With our best and brightest working to do the projects we have on the board today, we don’t have somebody looking at where that new technology is going to come from. So that is a difference in what we’ve seen before. [23:18]
JIM: I was also reading an issue recently of Scientific American, they were talking about alternative energy: whether it’s more efficient energy planned buildings, projects 2000 MW in Europe, the number of nuclear power plants, clean coal technology, and also in the interim trying to get as much natural gas and oil to lead us in to that transition phase as we approach peak oil. Richard, in your mind, why do you think that has not been explored as aggressively over here in the US?
RICHARD: Well, I think there’s a definition of conservation that doesn’t bode well for the American people. When you start talking about conservation people immediately think they’re going to have to do more with less, or they’re going to have to reduce activity. It doesn’t play well with the constituency. If you change the message to where we’re not going to lower our lifestyle for conservation, we’re going to figure out how to go farther on the same Megawatt, I think the American public is far more willing to engage in that discussion.
I look at when we had the gas prices which were at $3 and something, until just recently: consumption didn’t go down. It was still going up. So every month on month it was a 3% increase. So if I look where is the United States looking, or North America looking, to generate its energy supplies, it’s business as usual. You know we haven’t started looking at what really does make sense. Europe started looking at this a long time ago by starting to move cars towards a diesel base; looking at how they would diversify, or how they would go to natural gas for power generation. So I think what we really don’t have here – even over there it’s not very strong – is the clear sense of leadership, taking us forward toward an eventual non-oil based or non-hydrocarbon based economy. We don’t have that kind of clear leadership. If we did, we would be looking at transitional fuels; we would be looking at going to a diesel based transportation fleet; we would be looking at clean coal technology far more seriously. There are 14 new power plants going in here in Texas, they are all coal generation plants and the environmentalists here are going crazy. A day doesn’t go by when we don’t receive an email from somebody. In my upcoming edition, John Wilder of TXU is talking about how these are best of technologies being deployed. Just across the planet in China, you have 560 coal fired plants being put in place, which are utilizing technology from 15 years ago that are going to be extremely dirty, but show a direct path for the Chinese to get the power they need. Certainly not healthy for the environment, but it is a clear path, a strategy and a way they are going to move their economy forward toward a time when they are not dealing with oil. [26:27]
JIM: See, I think we have for example my own State, California, we just passed our version of the Kyoto Protocol – a global warming bill – and the State has filed global warming lawsuits against the six major manufacturing companies in the State. So, you know, we’re still stuck on stupid here.
RICHARD: You know I think it’s interesting on the Kyoto Protocol the developing nations are exempted from getting to Kyoto standards. But just like the example I used in China, no time in the history of the planet has this type of economic expansion occurred. So, by sheer scale we’re going to be looking at London fog out of these developing nations, if they’re not going to utilize nuclear power, clean power, even gas-fired generation. They’re going for the least expensive.
If I look at what’s happening out in California, that legislation might actually move the transportation fleet toward a diesel standard – or toward a biodiesel at least – because there’s really no other way to reduce the emissions from the vehicles except to get off gasoline, and certainly off ethanol. So it may actually work to the benefit of a transitional fuel. [27:48]
JIM: So as crazy as we are, we may be Ok.
RICHARD: I don’t know if we’ll be Ok or not, it’s still a long way to go, but look at it this way: if this legislation causes the automotive manufacturers to have to come up with vehicles that can meet these kind of standards you can’t do it on gasoline, or at least, not currently; and you certainly couldn’t do it with…, so what’s your option? With low sulfur diesel you can get there. Now, will that be the judgment that California takes, I can’t say that. If you look at Jeff Morris, he’s the CEO of Alon, if you look at his editorial in my last edition, he wrote about how the answer is right under our noses, talking about this diesel mixture. In the next edition, which is coming out I guess just before Christmas, he’s talking about California and this most recent legislation and trying to find the silver lining in the cloud. And I would say this is probably the only way you’re going to get there. And then that would put California in a leadership position in moving the transportation fleet. Is that the right way to do it? I can’t answer that, it could be a byproduct of it though. [28:57]
JIM: Well, Richard, as we close, why don’t you tell people about your publication and also your website, which I find just chock full of information about the energy sector.
RICHARD: Sure. World Energy magazine is a quarterly publication. We established it 10 years ago. It is entirely made up of editorials written by the CEOs, Presidents and Chairmen of the industry. I went back and looked and Lord Browne of BP has actually written us 20 editorials since 1998. It carries people like Samuel Bodman, Ali bin Ibrahim al-Naimi, the Energy Minister of Saudi Arabia. Each one choosing the topics they care about. So at one point we may be talking about technology, another about geopolitics, we may even talk about pipelines and infrastructure – all the different things that affect energy and the business decisions made.
We also have our monthly publication which covers in our last edition we were covering CERA and calling it perception management; it’ll talk about North America; we talk a lot about China. We focus on topics like Venezuela and things that are happening right here in our own backyard – and that’s the World Energy Monthly Review. We also have an upcoming series on technology for World Energy Television – CEO roundtables on how technology is applied in the industry. And we tie it all together with the website you were mentioning, which is the World Energy Source, and at the worldenergysource.com you can read the editorials, you can watch the videos, you can read the monthly publication, and it acts as the glue that binds all that information together.
JIM: Ok, Richard, give out the website one more time.
RICHARD: It’s www.worldenergysource.com.
JIM: Well, as always, it’s a pleasure to have you back on the program, I hope you’ll come back and talk to us once again.
RICHARD: Thank you very much. [30:56]
Energy: Buying Opportunity or Bubble?
JOHN: You know, last week, and I would really have to say on previous shows, Jim, you have really strongly disagreed with the precept that commodities – notably energy, by the way – are all in a bubble. And so if we look at the current pullback in oil prices and energy shares, you think you want to be a buyer?
JIM: John, without hesitation. What you’ve seen this month really, in my opinion, is a rotation out of energy and commodities by what I call the hot money crowd, and a rotation into bonds which gave us lower yields and into tech stocks. Take a look at the NASDAQ this month. On the trading side this month the story was sell energy, buy bonds and tech – nothing more. The same fundamentals that have driven the energy market remain in place – we’ve covered that in the last two shows. And this latest pullback in my opinion was nothing more than hot money rotation. [32:18]
JOHN: If you watch the talkies, energy bears are all over the airwaves – they’ve flooded it. And they are, to be honest with you, Jim, making some really persuasive arguments.
JIM: Well, if you look at the prominent theme behind energy’s demise, the number one thing that comes to mind is a cooling global economy, and of course the falling prices. Falling prices is nothing more than something that is short term. In fact, we’re more likely to see $80 oil and $100 oil than we are to see 40 and $50 oil. And first of all, there is, number one, no global monetary crunch ahead that would undermine demand, unlike say the recession in 91, or even in the recession in 99.
Secondly, typically cycle tops or bubbles usually end with a supply glut. A supply glut is notoriously absent if you look around the globe today. In fact, despite higher prices for most commodities the supply response has been especially anemic. And third, other fundamental factors [exist] such as rising depletion rates – just look at what happened last year with the peaking of Burgan, the peaking of Cantarell. And in addition to that well productivity is in a steep structural decline. It takes more dollars today by producers to stand still, let alone to increase production.
Last year, global production increase was only 890,000 barrels a day, versus a demand for over 1 million barrels a day increase. John, I find that a worrisome trend that points to higher energy prices ahead, not lower prices. [34:00]
JOHN: But you don’t see a global meltdown, or a recession. I mean we know some of the indicators long term are looking that way.
JIM: Well, definite slowdown in the US, but that hasn’t translated into a severe pullback in energy consumption. The other factor that we have to look at today is global growth still remains strong in Asia and India. And that really is where incremental demand is coming from, and as prices are determined at the margin, especially in the commodity markets. Besides, there is no indication at this point of any credit contraction anywhere globally. [34:35]
JOHN: What about all these new discoveries we hear about, which seem to publicized with a lot of hoopla and fanfare when they’re made. It seems to say, “well, it’s over, the problem’s all done with. That’s it.” At least, that’s the impression you walk away with.
JIM: Well, you know, Matt Simmons had a great response to that in the previous hour. But first of all, the discoveries are a lot of conjecture and extrapolation at this point. The fact remains that global oil production growth has been decelerating for almost two years now, and in fact, is now nil. This is worrisome once again given that the number of drill rigs has climbed more than 50%. In fact, energy inventories in the US are below average despite rising this year. And remember, most of these inventory numbers are question marks. As Matt Simmons is fond of saying, “our energy gauges are broken.” So if you take a look at the recent rise in inventory that shouldn’t give the bears any comfort in my opinion. [35:30]
JOHN: What about all the rise in dollars that’s being spent on exploration?
JIM: Here again, that’s a two-edged sword. While dollars spent on exploration have risen, cost inflation – as we have pointed out – in the energy sector is running between 30 and 35%. So while the rig count has risen substantially, there is no evidence that over production is occurring. Even at today’s higher rig count the fact remains that global rig counts remain far below their peaks reached back in the 70s. In addition, there’s very little spare capacity left in the system. OPEC may not be effective in capping rising prices – you noticed they didn’t come out and make any announcements when we were at $78 oil. They just don’t have the spare capacity to cap oil prices. But on the downside however, with diminishing spare capacity, OPEC is extremely effective in putting a floor under energy prices. It was announced for example on Friday, that Nigeria will cut back production by 120,000 barrels a day, Venezuela’s going to cut back production by 50,000 barrels per day – and that’s OPEC's way of saying, “hey, we mean what we say.” And that’s why oil prices firmed up when they hit around $60 a barrel. So in my opinion, enjoy the lull in energy prices while it lasts. [36:46]
JOHN: You know I was running around town today, speaking to people about what they thought about the oil, and right now, from a personal person involved, it’s like, “I’m glad it’s down there,” but you ask them, “well, what happens if oil or gasoline hits $5 a gallon at the pump.” And they become a lot more pensive. But isn’t the problem supply this time? I mean we know energy demand keeps popping upwards 1-2% a year, so it would seem like the real issue is supply.
JIM: Exactly. Despite rising demand and rising prices the supply response has been very weak. I believe this relates directly to peak oil, which as Matt Simmons may say, it’s either at the front door, inside the room, or behind the house. And I think it’s at our front door. [37:33]
JOHN: In other words, no matter where you stand in a lot of the debates that are going on, it’s always easy to bring it down to a given conclusion that says, “look, I don’t care where you stand on this, we’re going through this bottleneck, and there is no choice about that.” So having that said that, I take it you would what, hold and not fold your investments right now, and even be a buyer? What are you going to do?
JIM: Well, first of all, we held on to our positions, but we told our clients a correction was coming well before it occurred. And we just wanted to alert them, hey, John, how many years have you and I been doing this show, what 5 or 6 years – they come every single year in the gold market they’re so predictable where you get these 20, 30 and sometimes more than 30 percent corrections. In the area of energy, we’ve seen a 20% correction in the price. However, we’re adding to positions for our new clients as I believe the valuations remain cheap. Just take a look at any of the international oil companies they’re selling at 5 and 6 times earnings; look at the natural gas stocks, 4,5,6 times earnings. So energy stocks have never been cheaper, and personally I’m backing up the truck on natural gas stocks both personally and for my foundation. [38:46]
JOHN: Beep, beep, beep.
JIM: Load the truck.
JOHN: Well, coming up shortly, we are going to talk about the issue of retirement. Do you really think you’re ready to retire? We’re going to start doing a series of segments here on the Financial Sense Newshour – things that you need to think about in the area of retirement. But first of all, time for an Other Voice here on Financial Sense, we talk to John Williams.
Other Voices: John Williams, Shadow Government Statistics
JIM: Well, some people are looking at the economic statistics, we’re living in a data dependent economy where everybody wants to know what the data is and what the Fed will do. To help sort through the maze of economic data, John Williams joins us from Shadow Government Statistics.
John, you and I were talking just before we went on the air and the economic numbers going forward were going to be kind of screwy looking. Why don’t you elaborate?
JOHN WILLIAMS: Right now, as we enter October we’re about to see a lot of reporting of September 2006 numbers, but those numbers are going to be widely distorted by two factors. The first is the political factor, as you pass Labor Day you’re full swing with the politicking for the November elections, and anything needed in the way of political manipulation to bring those numbers in as happy numbers both from the standpoint of the economy and the inflation rate will take place. But you also have another factor which actually is going to help the manipulators some because it’ll tend to move the numbers in the direction they want to see. And that is a year ago you had the Gulf coast devastated by Katrina and the effects on the economy there was it slammed the economy, it boosted inflation – the CPI as it was reported jumped a full 1.2% I think it was for the month of September alone.
So there are two things that happened there that are going to make the current reporting look funny. One in terms of year to year comparison, you’re going to be looking at very weak economic numbers and very strong inflation a year ago, so you look at the year to year comparison, the inflation will be down, the economic numbers will be up. And also the government seasonally adjusts these numbers trying to remove what they think is seasonal variation, and they use the patterns of the last several years with the most heavy weighting placed on what happened last year. So last year the economy slowed in September, so the seasonal factors will tend to boost whatever numbers are reported for September 2006. So you’re going to see generally overstated economic growth both from a storm distorted, and also a political distorted perspective, and also underreported inflation numbers. [41:36]
JIM: John, speaking of those inflation numbers, we saw the personal consumption indicator come out on Friday. Talk about that for a moment, because one thing we do have going forward where we’ve seen energy prices drop 20%, how long before we start seeing those numbers work their way through these different inflation gauges that everybody seems to pick up on – whatever’s the lowest?
JOHN WILLIAMS: The core inflation rate which is what our Fed Chairmen likes to look at. Mr. Bernanke as I think you mentioned earlier in our conversation ahead of our actual interview is a man who thinks that the inflation rate is overstated. That’s the same statement Alan Greenspan used to make, and it’s sort of a standard line put out by both Treasury and Fed officials. Of course, it depends how you define inflation, but it’s absolute nonsense in terms of the average person trying to figure out what their cost of living is doing.
What these guys are looking at very simply is two-fold. First they say, “Gee, we used to have the Consumer Price Index where you’d measure the cost of a steak and a gallon of milk and a loaf of bread one year, and then you’d look at the same combination next year, and you’d look at the change in the costs and let that be your rate of inflation. But you know, that’s not the way to look at inflation because if the price of steak goes up you can buy hamburger, and that’s going to lower your cost of living.” But that’s not the way the CPI was ever intended. The CPI was intended as a fixed basket of goods so look at your cost of living, the rate of inflation, from the standpoint of maintaining a fixed standard of living – not a declining standard of living which is what these guys are trying to sell. We can look at a substitution based index where people buy hamburger because steak’s too expensive – of course, on that basis inflation is weaker.
Now the personal consumption expenditure number is fully substitution based. Not only is it fully substitution based but they also report it on a basis Mr. Bernanke likes and that is what he calls core inflation where they remove the effects of food and energy prices. And I’ve yet to find an economist – even a Fed Chairmen – that doesn’t consume a fair amount of energy or even food. I mean if you want to live in this world that’s what you have to do, and it’s nonsense to take it out over the long haul. The concept as it had been introduced maybe had some validity because yes, you can have some big swings in oil prices as we’ve just had in this last month, and believe me oil prices are going to go back up again after the election – we can talk about that if you like. And food prices will go up and down given all sorts of factors. So the core rate was designed to look at inflation net of those big swings for a month or two to say ok, what’s inflation doing aside from those? But it was never intended to be looked at on a long term basis, on an annual basis, because you can’t live without food and energy – it’s real cost of living for everyone.
But that aside, on Friday the core rate of personal consumption expenditure came out where it had been 2.3% in July – on an annual basis it jumped to 2.5% in August. And what’s happening there and it’s to the consternation of Mr. Bernanke and all these guys on Wall Street who have been trying to sell you the concept that “Gee, there’s absolutely no inflation out there,” is that the core substitution inflation numbers such as the personal consumption expenditure is the lowest rate that they can come up with. And that’s beginning to rise because oil is beginning to permeate the non-energy sectors of the economy. It’s hard to look at oil and say, “oh, high oil prices are not going to boost inflation.” What nonsense. Anything that gets transported or produced by energy – whether it’s a plastic or a chemical or fertilizer, or anything that uses fertilizer, like food – all those elements see the higher cost of oil and you see inflation in those areas. So what you’re beginning to see is that in the core rate of inflation which has been hyped, “my goodness, look how contained things are,” all of a sudden that’s beginning to spike. The problem is that we have a real inflation issue here that no one’s addressing. [46:05]
JIM: You know we’re starting a series on the program, “are you ready for retirement?” and one of the mistakes I would say being made today, and I would say I’ve seen it made over the last couple of decades by people getting ready to retire is, ok, you’re getting ready to retire and you think, “ok, I want safety, I’ll put my money in CDs, or short term government bonds, something very stable I won’t have to worry about.” But in today’s world where we grossly understate the inflation rate, I think you’re tracking it at somewhere between 6 and 7%.
JOHN WILLIAMS: I could even argue that it’s as high as 11%, but 6% is a lot closer to reality than the 4% they are reporting.
JIM: But you take a government bond today that may pay 4.6%, and you’re talking about 6 and 7% inflation if not higher. You know, a person retiring at age 60 putting their money in fixed income at 4 and 5% they’re going to be in real trouble 10 years from now.
JOHN WILLIAMS: They’re losing money. They’d do better buying a case of scotch and bartering it off in a couple of years when it’s worth a lot more than their 4 or 5% return is. I mean I know it sounds crazy but when you have negative real [interest rates] which is a bad circumstance – the real refers to the inflation end of it. When the rate of inflation is higher than the rate of interest rate you’re losing money with these investments that don’t keep up with the pace of inflation. You have to find something that will keep you up with the pace of inflation and it’s real difficult to do that in today’s environment – particularly where the actual rate of inflation is not fully recognized. [47:49]
JIM: You hear talk about deflation so people are saying, “boy, the bond market has rallied over the last month.” That to me is just a trading rally, the hot money guys are just flipping out of one investment into another. But when you hear talk about inflation you hear these gyrations in the markets, people say, “ugh, I want to put my money into something secure,” and a 4 ½ % bond when you have 6 and 8% inflation a year is not secure.
JOHN WILLIAMS: No, it’s not. In fact, what’s happening in inflation, even the core rate it’s beginning to show. As inflation rises so will long term interest rates and that’s where people have their money in bonds, lose money if they decide they want to sell the bonds. And if they want to hold the bond to maturity they’ll get their principal at whatever interest. But normally, if you have inflation let’s say at 6 or 7%, you could expect long term interest rates about 3% higher than that – around 10%. And if long term interest rates go from, let’s say, 5% now to 10%, anything you have in the way of a long term bond that was priced based on that 5% is going to go down in value significantly. And if you want to get your money out of it you suffer a loss. If you’re looking at buying Treasury instruments – I’m not an investment advisor, I’m just an economist and I’m looking at the practical end of this – you can get more on a 3 month Treasury bill right now than you can on a 10 year note, or a 30 year bond; you actually have an inverted yield curve. You know, 3 months down the road at least you have the opportunity of rolling your money at possibly a higher interest rate, you’re not stuck where the bond is going to go down in value and let’s say it’s a 10 year bond and you want to sell it 2 years from now, I mean I can’t imagine that you’re going to be showing a profit on it, you’re most likely going to be in a losing position.
You also have the circumstance where there are traditional assets such as gold which tend to move with inflation – anticipate the inflation, move ahead of the inflation – and actually will tend to preserve the real purchasing power of your dollar. Any one who’s been in gold recently has seen a lot of volatility there – that does happen, central banks move around quite a bit to try and knock the price down when they can but it’s over the long haul. And that’s the way I look at it. I still think gold is your best hedge against what’s happening with the price inflation, and the declining purchasing value of the dollar. It compensates for both the loss in the value of the dollar against other currencies, as well as domestic inflation. [50:38]
JIM: You know, John, one thing I see going forward, if the economy weakens as it now it appears it is doing, the Fed would love to lower interest rates, but in order to do that they’re going to have to create a deflation scare. And it’s not surprising you’ve got people on Wall Street saying the commodity bubble has burst – it’s over. The bubble in energy prices – that’s over. And you have people talking about deflation. I just don’t see deflation. You may get a period of disinflation – lower rates of inflation – for a short period of time. But I just don’t see us living in a deflationary world, do you?
JOHN WILLIAMS: I don’t see a chance of deflation. The disinflation you’re talking about you’re going to have a lot of press when the next CPI number comes out because gasoline numbers have been down sharply and somehow that always get picked up right away in the CPI. If gasoline prices go up it takes a while to record them; when gasoline prices come down boy does that get an airing. And it has about a 3% weighting, so I mean if gasoline prices are down, let’s say 20%, or 30%, you can see a pretty sharp hit in the CPI both on a month-to-month basis and again, going against last year where it was up 1.2%. A very sharp hit on a year to year basis, so the press will be counting, “Oh, my goodness, inflation’s under control, – a sharp drop – and we don’t have to worry about inflation anymore.” Wait till you see the next month, and the month after that. A lot of the one time factors tend to work out or get reversed; where oil has been a very important factor behind a lot of the recent inflation, that’s still working its way longer term into most aspects of the economy.
And I’ll contend a lot of the most recent drop in oil prices has been politically orchestrated. Part of it has been due to a very fortuitous and mild hurricane season so far, I mean there was some speculation on that, but the Administration has some significant control over the levels of tension in the Middle East, and very clearly moved to put those tensions on a simmer for the pre-election period. And that doesn’t mean there isn’t someone in the Middle East that isn’t going to start heating things up by themselves but in terms of where we had been heating it up or backing it up a little bit that’s all on the backburner until after the election. And that’s helped to take a lot of the steam out of oil prices.
After the election, you’re going to see that pressure go right back up because we’re not going to sit by calmly and let Iran do what it wants, so oil prices are going to be spiking very quickly. Let me just make the point that if you go back to the beginning of last year, back to the beginning of 2005, you told people that oil was going to be at $60 a barrel, they’d say it was impossible, it’s not going to happen. Now, you’re having people in OPEC telling you that having oil below $60 a barrel is unthinkable, and they have some control over that circumstance. Whatever gyrations we see in the inflation numbers the next month or so, that’s going to be very short-lived and post election, you’re going to see a sharp jump in inflation numbers again and all the effects that go with that. [54:06]
JIM: Well, John, I know that you have pointed out these gyrations and how these numbers are going to look screwy going forward in the next month, so I hope you’ll come back and talk to us as the markets go euphoric.
JOHN WILLIAMS: I’m always happy to talk with you, especially when the markets are going euphoric as that gives us something to talk about in terms of irrationality in the markets, because there’s nothing to be euphoric about in the current circumstance. The fundamentals just could not be worse; the government’s literally bankrupt – undeclared as such; the debt structure is out of control – no way that can be contained. And always happy to talk with you, Jim.
JIM: And John, as we close why don’t you tell our listeners where they can find you and tell them about your newsletter. I always find it interesting because you kind of dissect the numbers in the economy and reveal the real farce behind some of the numbers that are so widely touted in the media today.
JOHN WILLIAMS: I have a website called shadowstats.com, and indeed we have available to the public a series of articles that give you background detail on how the economic statistics have evolved and have been manipulated over time; indications of where economic reality is. We do have earlier newsletters available on our archives for the general public reading. And if anyone is ever interested in subscribing we’re also happy to take them on as a subscriber for Shadow Government Statistics, but the website itself is called shadowstats.com. And happy to get comments from anyone, we’ll answer your questions if you leave a question. 55:42[
So, as always, thank you for having me on your show.
JIM: Well, John, as always it’s a pleasure to have you on the program, and I hope you’ll come back and talk to us again.
JOHN WILLIAMS: Sure will. [55:56]
So You Think You're Ready to Retire?
JOHN: I was going to start the segment by challenging people, saying, “Ok, so you think you’re ready to retire.” Then I thought about myself, and I thought, I’m not ready to retire. So maybe I better ask Jim here, right? A lot of the emails we get here on the show deal in one way or another with retirement. You see this topic on magazine covers, it’s all over the newsstands, you hear about it on financial talk shows, and on television. This topic as the Baby Boomer bubble moves upwards towards retirement in the years this topic is ballooning. So how is it that you can know, you can say, “alright, I’ve done enough for retirement, it’s all going to work out when I get there?”
JIM: John, it all starts with some good, financial common-sense. And that means you start with a budget. You can’t feel comfortable about retiring until you have a realistic handle on what your expenses and your income are going to be. And that means, unfortunately, sitting down and putting together a budget. What will you be spending money on when you retire? Will your lifestyle change? For example, will you live somewhere else, maybe a cheaper community? Are you going to move closer to the kids? Will your expenses be different? How much money do you plan on spending on travel, what about entertainment, and then of course medical?
And on the other side of that equation, you also need to know what your income is going to be – income from all sources: pensions, social security, investments, maybe annuities.
But John, it really starts with sitting down, and putting together a budget. You know, most people haven’t done a budget in a long time, where they really sat down and said, “Ok, this is what it’s going to cost us to live,” or sitting down and thinking through issues like, “are we going to keep the house, is the house too big – the kids are out right now – maybe we want to move some place where the cost of living is cheaper, maybe move closer to some kind of retirement community, maybe move to another state with tax advantages, or where property prices are a lot cheaper.” What kind of things will you be doing when you retire, do you plan on doing traveling, catching on doing things you weren’t able to do when you working full time? So you’ve got travel expenses, you know, what are your hobbies going to be, what are you going to do for entertainment, are you playing golf, are you going to be sailing? What kind of hobbies do you have?
They’ve shown that people that are very active, especially with their minds during retirement tend to live longer. But it really gets down to real basics, sitting down, putting a budget together: what am I going to be spending money on, what does it total, and what are my sources of income? [58:48]
JOHN: A budget would suppose a stable dollar, say the dollar today is going to be worth a dollar 10 years from now, or twenty years from now. But we have a little thing called inflation, and we know that Mr. Bernanke intends to be throwing things out of helicopters and bombers in the near future. So that’s going to change that dollar value, and how do you keep par with that as you’re planning for retirement. Also, people are living longer today, so their money overall really has to work harder, and you’re paddling upstream against inflation.
JIM: One of the biggest mistakes I’ve seen over the last 3 decades working with retirees is that they put all their money, or the majority of it into fixed income. Let’s face it, people are looking for safety, once you retire you can’t go back and earn it as readily so people go on fixed incomes and say, “Ok, I have my money in something safe, and I don’t need to worry.” That may be fine when they first retire, but looking out into the future 5 years from now, 10 years from now, 15 years from now, as a result of inflation they’re going to get into trouble. Just take a look at what’s happened to rising health care costs, and because people are living longer you also may be facing the possibility of a debilitating illness requiring nursing home care, or just take a look at the general cost of living – the inflation which could squeeze them as they get older. [1:00:14]
JOHN: You mention nursing care – a lot of the baby boomers are discovering they are being caught in a vise, and it’s almost like a triangle (we like triangles here on the show for some reason). But if you look at one edge of the triangle, one they’re chasing inflation and taxes, that’s one side of it; the second is they’re trying to retire. And the third is what I would call a double-edged expense: number one they’re putting their children through education, and as education especially in the US deteriorates more and more parents are going to have to be actively involved in paying for the education of their children, or it simply won’t get done; and also college education. And on the flipside they’re taking care of elderly parents.
That’s my condition right now, my 91 year old mother lives with us, she needs 24x7 care; not necessarily minute by minute care but she requires supervision and attention for her medical needs; and I have 3 children in college right now. So you really do feel this squeeze both ways. So it seems to me that the baby boomers that are stuck in this and at the same time I’m looking forward to saying, well, jeepers, there isn’t much left after I’ve done all of this other stuff to plan for my own retirement. Aside from threaten my kids with disownment if they don’t support me, you know. I’ve already got them to sign contracts that they will take care of me till I’m 98 or something like that.
JIM: You know you talk about some of these issues and you bring up a very important point. I’m a big proponent of long term care insurance. If you don’t have the money the greatest risk that a married couple has is when both are living. For example, let’s say that your monthly income is $3,000 or $4,000 a month, what do you do when one spouse becomes seriously ill requiring nursing home care. Most nursing home care at least in our neck of the woods minimum are $3,000 or $4,000 a month, so now instead of a monthly expense of $3,000 to $4,000 for the well spouse, you now have an additional monthly expense of $3,000 to $4,000. So now your monthly expenses have grown from $6,000 to $8,000. So, how are you going to be able to pay for that? If you don’t have the money, long term care should be part of your planning.
In that regard, it’s much cheaper to buy this insurance when you’re in your 50s, than when you’re in your late 60s and 70s because it becomes at that point cost prohibitive the older you get. It’s just like life insurance, if you try to take out life insurance when you’re 60, you know, your life expectancy is shorter than if you took it out let’s say when you were in your 40s. It’s the same thing for long term care. On the other hand, if you have ample income that enables you to live well, with plenty of excess, you may not need it. Also, as a single individual your risks are also much lower because you’re caring for only one person which is yourself instead of another spouse. [1:03:07]
JOHN: Let’s flip back to the inflation issue. When we talk about investing you’ve mentioned the mistakes in not planning for inflation because in the time when you had a stable dollar you could be saving up all your life and you could say, “wow, I’ve this pile of x number of thousand dollars, and it will generate this much income and I’m Ok.” That doesn’t mean anything now, because the value of that dollar is eroding as it sits in that account if you don’t plan on the inflation factor.
JIM: You know I’m a big believer in what I call the 60-40 split between equities and fixed income at retirement. That is why we’ve done a lot of shows on large cap stocks and we’ve done a lot of shows on dividend paying stocks and we use them in our investment portfolios. What you want are companies that have a stable business, in other words they are not really cyclical or highly dependent on where the economy is going; companies that have a strong balance sheet, they’re more mature, and have more importantly a history of increasing their dividends. What you want to have is a nice balance with a good portion of your portfolio growing in value, and growing with respect to income – so that you’re better able to maintain your retirement lifestyle and handle rising costs due to inflation. [1:04:22]
JOHN: So I imagine this would also apply to how you invest as the time between you and inflation gets shorter, let’s say 3 to 5 years out.
JIM: Absolutely. You need to adjust your portfolio. Make it more suitable as you get closer to that retirement date. I like, for example, inflation adjusted bonds, foreign sovereign bonds to protect against the dollars decline; and my favorite are dividend growth stocks. You’ve heard me do shows on some of these companies and I’ve given the example of consumer staple companies. When did we do this show? I think we did it in the Spring where I took a $100,000 investment, and I assumed the year was 1995, and you put $10,000 into 10 blue chip companies. Fast forward 10 years into the future, these companies – and I can’t remember all the companies I had in the list, I know I had Altria which is the former Phillip Morris, I had Johnson & Johnson, Procter & Gamble. And I did a pretty wide variety of consumer staple stocks.
But the important point is 10 years later that $100,000 portfolio is I think I recall worth about close to $400,000, and the dividends from that portfolio almost quadrupled. So, for example, if you had a portfolio of these dividend-type paying stocks, and you retire, then that’s 60% of your portfolio. Ten years into the future you’ve seen that income triple or quadruple. So that for example, if you’re paying more for Medicare supplemental insurance, if it’s costing you more for visits to the doctor, if you have to have more co-pays on your Social Security, if your living costs have gone up, travel costs have gone up – you know, you have a source of rising income. If all of your income from investments and pensions is fixed then how are you going to handle rising costs for your retirement, 5 years, 10 years from now, 15 years from now. And I’ve got clients that have spent 20, or almost a third of their life in retirement. So people are living longer and people really need to account for that. [1:06:35]
JOHN: Jim, I know we’ve been covering retirement with a broad brush here. We’ll cover this in greater detail in the weeks and months ahead, as I said at the beginning of this segment, but at least as summing up as far as where we are right now, is there anything else we haven’t thought of.
JIM: I almost forgot. I believe the capstone to retirement planning is a well thought out estate plan – wills, trusts, durable medical powers are all a necessity in today’s complex legal world. Many people choose to ignore this which can often lead to very difficult circumstances, especially if one spouse passes away or becomes incapacitated; or for example, the final spouse passes away and estate taxes are due. When somebody becomes sick, that’s not the time to be thinking about, “oh, we better get something done legally.” You should have that done well in advance. In addition, you may be one of those individuals that’s fortunate or wealthy enough to benefit from what I call advance tax planning techniques such as charitable trusts or foundations or let’s say a gifting program to your children or your heirs. [1:07:37]
JOHN: How expensive is it to set up something like that, anyway, say you go and see an attorney? What does that typically run you.
JIM: A well put together estate plan can run anywhere from $1,000 to several thousand dollars. If you start getting to more complex issues like charitable remainder trusts, annuity trusts, foundations and advanced tax planning then I’ve seen people spend over $20,000 in estate planning, but they have larger estates so they are dealing with a lot more complex issues – trusts for grandchildren, generation skipping trusts, or they may have for example a family business; or illiquid assets such as real estate, so you’re looking at creating liquidity for the estate plan. So there are a lot more issues that go into this the more assets that you have. It becomes more complex. You’re going to have to spend a lot more time planning and a few more bucks to plan. [1:08:31]
JOHN: Ok, Jim, just to sum everything up so far, the first to looking towards your retirement is to start with a budget, you need to talk about your investments especially investments which will not only keep up with inflation but surpass it, and then there are adjustments that need to be made as you get closer into retirement. In addition to that, people should not be forgetting taking out long term care insurance and the earlier you do that the cheaper it is; and looking into estate planning as well, at which point you’re going to need to talk to someone who is familiar with that.
Obviously, this is just a broad brush type of approach which we said it was going to be at the beginning of the segment, but there it is, the first shot across the bow. And we’re going to examine each of these things in depth as the weeks roll by here this Fall.
Emails and Q-Calls
JOHN: Time for our Q-Line as we call it here. The Q-Line is available to you 24 hours a day for you to call in questions to the program. We’re not on the air 24 hours a day, but if you will leave your name, and generally where you’re calling from – just your first name is fine – and your question that will be fine. The number is 1-800-794-6480, that’s toll-free in the US and Canada. It does work in the rest of the world, but everywhere else you have to pay for it, but it does get through as well. 1-800-794-6480, if you’re calling from overseas do drop the ‘1’, otherwise you probably won’t get through.
Here we go with the first of our questions for today:
Hi Jim and John, Joe from Connecticut, I’ve got a question of a baby boomer sort. With the upcoming baby boomer retirement would the insurance company stocks being based off annuities be a possible play? I’m curious to see your outlook on that, thanks.
JIM: Yes, because I think that a lot of people are going to have to go to annuities, in other words, they are going to have to take an investment and then annuitize it to get a steady flow of income, where they’ll be spending not only interest but also the principal. Some of the insurance stocks look pretty good. Of course, one of my favorites is very expensive in terms of dollar price which is Berkshire Hathaway – I think they are becoming the leader in the insurance industry and probably one of the most profitable companies out there. I think they do have some subsidiaries that sell annuities, although most of what Berkshire does is on the risk or reinsurance basis. A good idea and a good point. [1:11:15]
Hi, this is Ben from New York. I want to get your opinion on precious metals and mining companies that originate in South Africa.
I’ll tell you, Ben, I am not real favorable on South Africa right now. I think they’ve got a lot of political issues – geopolitical issues – that they are dealing with in government in terms of how the mines are run, who participates. There’s all kinds of political risk issues in South Africa; also a lot of those mines are well over 100 years old, the costs are rising. And it’s not one of my favorite places to be right now. What I like best I still like Canada, I still like Nevada, and Mexico would be my three favorites. [1:12:01]
Norman, in Florida. My question is now with the stock market at an all time high, real estate prices are at an all time high, when these correct is it going to bring about a financial storm as you’ve always predicted. I believe it’s going to, but what’s your opinion on it. Thanks.
Right now, Norman, I don’t think things are going to be as bad as everyone is expecting. I don’t think the real estate downturn is going to be as bad. I think we have further to go but I don’t think it is going to be the crash or the big storm everybody’s looking for. The perfect storm scenario that I see is I would say a couple of years off, and it’s going to be as a result of what I see as a hyperinflationary period coming into the market, and that’s when we’re going to start getting into those kinds of problems. But right now, I think they are going to do everything they can to get short term interest rates lower, we already have long term rates lower, and that’s going to make it much easier for a lot of people to reset their mortgages that are coming due here – that trillion dollar figure, I think it’s 1½ trillion, or 1.7 trillion, I forget what the figure is – over the next 12 to 18 months. So, it’s going to get worse but it’s not going to be as bad as everybody seems to think. [1:13:15]
JOHN: Alright, Jim. That does it for the show. We ran long with two Other Voices today on the program, so we’re cutting the email section short. What are we looking forward to in the weeks to come.
JIM: Next week, Robert Prechter Jr. CEO of Elliot Wave International, a prominent deflationist will be my guest. He’s been widely requested by a lot of you listening to the program. October 14th, Ike Iossif will join me for Ahead of the Trends. Richard Heinberg is going to be the October 21st; Richard’s written a new book called The Oil Depletion Protocol: A Plan to Avert Terrorism, Oil Wars and Economic Collapse. Following him, Andy Kilpatrick a book he’s written called A Permanent Value, he’s sort of the official biographer of Warren Buffet, that was the 1700 page book I read during the Summer vacation. Wow, what a book, I’ll tell you. So he’ll be with us at the end of the month. November 4th, G. Edward Griffin, The Creature from Jekyll Island; Jonathan Knee, November 11th, The Accidental Investment Banker; and then of course Ike Iossif.
And something else that we’re putting together, a lot of you have said how do I invest in bullion. So what we’re going to do is put together an investing and bullion show from everything from numismatic coins to silver rounds to investing gold offshore, to ETFs. So we’re going to bring in 4 experts on that and we’re going to try to put together that show, and that’s coming up in the month of November.
In the meantime, as John has mentioned, we have run out of time, so on behalf of John Loeffler and myself, we’d like to thank you for joining us here on the Financial Sense Newshour, until you and I talk again, we hope you have a pleasant weekend.