Financial Sense Newshour

The BIG Picture Transcription

October 21, 2006

RealPlayer WinAmp Windows Media MP3

• Alternative Energy - an investment opportunity waiting for a catalyst
• FSN Humor Hedono Tax
• A Few Big Ideas - an update
• Other Voices: Zapata George
• Contrary Thinking
• Emails and Q-Calls

Alternative Energy - an investment opportunity waiting for a catalyst

JOHN: Jim, I was thinking, remember the TV series the A-Team, and George Peppard heads up this whole thing. You know there’s fundamental rule in ground fighting or anything like that, everybody’s got a plan and then somebody throws a punch and it all unravels, but towards the end when things would be somewhat coming together, George Peppard would always light up a cigar and say, “feels great when a plan comes together.” And in reality it had been solid chaos and ad-libbing all the way through the whole thing.

You know it feels good when you get proven right. We were talking last week about alternative energy really being an investment opportunity just waiting for some kind of catalyst to kick it forward, as soon as everyone began to realize that we needed to have alternatives developed rapidly, and that we really weren’t doing that. And all of a sudden, Barron’s came out with some articles this week.

So if we look at that in context, we’ve obviously talked here on the program about this, as you’re a proponent of the peak oil theorem, and as a result of that we’re going to need alternative energies. This is being driven by two things: one is the peak oil syndrome; and also people in the global warming group realize that the only way to solve this in the short term is not going to be taxes and regulations, but really going to be exploring alternatives. And this is really something that’s just waiting to happen as an investment market.

JIM: Sure. And I’ve made this comment here numerous times on the show, that one day soon you and I are going to wake up amidst higher oil prices and we’re going to turn on CNN, or we’re going to pick up a copy of Time magazine, and they’re going to be proclaiming peak oil has arrived at our doorstep. And John, when that day arrives, as it eventually will, the world and the investment markets are going to go bonkers, and scramble to buy and invest in anything that produces energy. And to me, that means alternatives. [2:10]

JOHN: I would think that one of the first challenges that we’re going to see in this whole area is that there really isn’t any kind of a silver bullet when it comes to replacing oil. There’s no one thing that’s going to do it � it depends on what energy you’re replacing. For example, in airplanes or cars or the home, those are all different technologies now.

JIM: Precisely, and in fact it isn’t like the Middle Ages, when we began to deplete our forests and then voil� we discovered coal, then in the 17^th Century we discovered whale oil, in the 18^th Century it was kerosene, and then finally we got rock oil.

Today, there just really isn’t anything on the horizon that can replace oil. All we really have is a number of alternatives, neither of which really takes the place of oil. That’s the problem that we have, it’s like when we were replacing coal you could say, “ah, rock oil.” There’s nothing out there you could say, “uranium, aha, that does it for everybody.” It doesn’t. You can’t say wind, solar, or you really can’t say coal. So none of these things are as abundant and energy efficient in terms of units of energy output as oil is, and that’s the problem we really face. [3:31]

JOHN: Ok, what are the real choices in this whole thing then?

JIM: Well, one thing that we know we have a lot of is coal. So that’s one of the obvious ones. And they’re working on what we call clean coal technology because obviously coal does not burn as cleanly as let’s say natural gas, or produce power as cleanly as nuclear power. So we know we have plenty of coal, especially here in the United States � I think we have the largest coal reserves in the world. So clean coal technology is one source of handling, for example, our electricity needs; the other is uranium which can be used to power nuclear power plants. For example, 75% of France’s electricity comes from nuclear energy. Asia, especially China, is also moving in that direction. [4:20]

JOHN: And this is also going to require sort of a radical change in thinking though as well.

JIM: Absolutely, in fact, especially here in the united States. Nuclear energy is accepted in Europe, it’s used � I mean just take a look at France, some of the other European communities. And also take a look at the way Europe is moving toward wind technology, solar � you find that in Germany now; in Asia, they’re moving very rapidly and that’s where the majority of new nuclear power plants are being built under construction or being proposed. And so that thinking in the rest of the world is accepted. Here in the United States, we’re coming late to this game because of the fall out of Three Mile Island. We’re still stuck on what happened in the 70s, even though we haven’t seen dramatic accidents here since then. And the nuclear technology that we have today has improved immensely from what we had in the 70s. [5:17]

JOHN: What about renewable sources, because that’s always a hot discussion, especially from an environmental viewpoint?

JIM: Well, that’s another area that holds a lot of promise, especially wind and solar, and that even meets with the environmental folks, the trouble is getting the wind turbines approved of: nobody wants to see them offshore. Fortunately, that’s where you get a lot of wind. But once again, this is helpful when it comes to generating electricity. The real problem here I think comes down to our transportation system which runs on oil, whether it’s airplanes, trains, ships, trucks or cars. [5:52]

JOHN: I guess if you look at it, it would seem like the opportunities here are almost limitless.

JIM: There isn’t a single technology here that replaces oil. Referring back to a comment earlier, there is no silver bullet. But what you do have are ways to conserve oil consumption. For example, we know diesel powered cars get better gas mileage, or hybrids, for example, are a great way to conserve on gasoline consumption. We also know that we can make more efficient locomotives. GE is working on that, as well as several other companies, that are making more efficient jet engines � just look at the new planes coming out of Boeing which are not only faster but they consume less energy. You know if you take a look at improving the mileage of not only of planes and trains and automobiles what that does however is simply slow down the rate of consumption. It’s a great area to invest in, but what you also need is technology to help find and extract and convert energy into transportation fuels, because 75% of the oil that we use in this country goes to our transportation system.

So we need technology, for example, to help us to extract more oil out of existing wells. We’re going to need technology, for example, to allow us to drill deeper in the ocean � for example, that new Jack discovery in Mexico by Chevron. That’s because where we’re getting a lot of new oil discoveries it’s in deep water, it’s in places like the tar sands, it’s in oil shale. So we’re getting non-conventional oil, and that’s helping to meet the demand and fill the gap in terms of depleting oil wells. We’re also going to need, for example, technology to convert coal and gas to liquid fuel and ethanol etc. I mean these are just a number of alternatives out there. Once again, we don’t have that silver bullet but what we need is energy to keep our transportation system running.

But John, if you take a look at how we travel today, I mean car, truck, train, boat, airplane � our main transportation system is all powered by fossil fuels. So we’re going to need to keep finding oil, we’re going to need to keep finding non-conventional oil � whether it’s shale oil, tar sands that we have in Canada, or the Orinoco flow down in Venezuela, or companies that can turn coal or gas into liquid type fuels to keep the transportation system running � because without that transportation system, in a world that’s become globalized, we’re really in trouble here. So these are the kinds of technologies and companies to look for to help in this process, because if you take a look at globally what we’re consuming � roughly 84 million barrels a day � and I think we’re only producing somewhere in the neighborhood of 80-82 million barrels a day, and the rest is coming from alternatives or non-conventional oil. We’re going to need more and more of that as more of our major oil fields go into depletion. We’ve got 3 or 4 more countries here that are going to hit peak production in the next couple of years. [9:16]

JOHN: If you look at this � alright, transportation unlike say nuclear � you can’t put nuclear reactors in cars. That’s just not going to happen.

JIM: But boy, think how fast they would be.

JOHN: Yeah, but at the first accident you would have nuclear waste all over the highway, and that’s not going to fly. But basically transportation for the near future is still going to have to be driven off of some type of hydrocarbon fuel � things aren’t just going to stop � but in the interim, we have this bottleneck period where we’re going to need alternatives just to keep us going until the next generation of everything comes online. So that would seem to be an opportunity � you talk about ethanol and other related fuels.

JIM: Sure, because if you take a look at the studies that have been done on peak oil, and I’m referring to the Hirsch study, and they have another study coming up by the Congressional Office at the end of November and they basically said there are 3 alternatives. The ideal solution is you would have 20 years to get all of this done before peak oil, that would be the ideal solution. The second ideal solution would maybe 10 years away from hitting peak oil, because that allows you to put certain things into effect. The worst possible outcome is to do nothing and peak oil suddenly arrives. So more importantly we need to be making these changes now: more fuel efficient cars, more fuel efficient locomotives, more fuel efficient jets, a better transportation system. We need to rebuild the rail system in this country for transporting goods, as well as our barge and river transport system because you can transport goods more efficiently by rail and by boat. So the clock is ticking, and the sooner we make the moves on this front the better off we’re going to be. And that’s where alternatives really fill the gap. [11:13]

JOHN: Ok, bottom line, now having said that these are the opportunities, if you had to place your money, where would you invest?

JIM: Well, one thing that comes off hand and especially as it relates to generating electricity is starting with uranium. If you look at the United States, we get roughly about 20% of our power from roughly 103 nuclear power plants. There are 442 nuclear reactors in operation, with a total right now � and here’s the great upside � of 250 now under construction, planned or being proposed. So one area to invest is in uranium companies. Companies that produce it, or that are exploring for it because uranium prices are currently just above 50 � and the price of uranium is going higher as many experts believe we are heading towards 100. Just pull up a chart of uranium, and it has been non-stop going back 4 or 5 years ago when it was selling at $10. Today, it’s over $50. So the world is running a deficit currently, in the production of uranium, and the difference is being made up with stock piles that are rapidly being worked down. [12:30]

JOHN: What about the availability of uranium producing mines, it’s something you hear seldom talked about, is that an issue? I mean are there a lot of them, not a lot of them? What?

JIM: Well, we know there are large amounts of uranium out there. The trouble is in an industry where we haven’t built a nuclear power plant here in the United States in the last 30 years, and after Three Mile Island and Chernobyl, nuclear power plants just went off the planning boards. And so as a result of that, a lot of companies that used to mine for it and go looking for it they just stopped doing that. So we’ve been producing a lot of the uranium we have today from existing uranium deposits. So what it’s going to take is another drive towards exploration, more money’s going to have to come into the sector.

You’ve got a few large players in this market right now � it’s really dominated by two or three players; and then what you’ll have and what you’re starting to see is more money go into this area. Once again, like oil or once again like gold companies, the great exploration is being done by junior uranium companies. Now, they tend to be more volatile but that’s where the exploration work is being done.

We’re getting involved with an individual who’s bringing in a uranium company public here, and they have a very, very large area in which they have found uranium going back to the early 70s, but it was abandoned because uranium prices plummeted [because] they stopped building power plants. So right now, we’re running a deficit. It’s going to take higher prices, more exploration more mines going into production, before this gap between supply and demand is eventually filled. And what’s going to cause that is higher prices. [14:17]

JOHN: Ok. Let’s shadow over to renewables now.

JIM: Well, some of the obvious ones � solar and wind � are some of my particular favorites. These two alternatives I think are going to double, triple and quadruple in the next decade. Here in California, for example, we are moving aggressively on the solar front. Hopefully, with our long coastline we’ll move in the same direction with wind � especially since you consider the entire West coast of California borders the ocean where we gets lots of wind.

So there are solar technologies and wind technologies that are being developed both by large companies such as General Electric, or smaller companies that could become major producers of alternative energy here in the next decade. [15:02]

JOHN: And if you ever live along the Northern California coast the wind blows all the time, whether you want it or not.

Would this be a good time to buy right now these things that you’re talking about.

JIM: Boy, when it comes to alternatives right now, I would be backing up the truck. Right now, because what has happened is a lot of these alternative energy companies, they had a nice run up but they’ve been hit with this correction in energy. People are saying, “hey, energy prices are going lower, maybe we don’t need alternatives or maybe it’s not a big deal.” Or, for whatever reason, the hot money or momentum crowd has moved out of this area.

And then the other thing I think you have that has hurt this sector is the energy bubble thesis which many on Wall Street are propagating � that also has hurt the alternative energy sector. We’ve seen sharp pull backs in energy stocks, but the alternative energy companies have also been hit pretty hard. Some of my favorite uranium companies have pulled back 10 to 20%. Now, I don’t expect this to last, especially as the uranium story gets better known. [16:11]

JOHN: You were talking about California too, remember, and the Southern States � at least here for the United States like California, New Mexico, Texas, Arizona � solar is not a bad form of energy. How viable is that as an investment?

JIM: Well, I think you’re going to make a lot of money in the area of solar because we’re using solar to heat our pool, and eventually our house will be powered by solar panels. Where I live there is a new grade school that was just put up, and the entire embankment on one side of the playground is covered by solar panels. So here’s a brand new school that is going to get its energy source from solar energy. Now, there are multiple ways that you can play this with pure solar companies, or some of the bigger companies that are working on solar such as GE and Sony. [16:59]

JOHN: There still remains the issue that we talked about earlier and that is the transportation system because whatever fuels are used for those vehicles � whether we’re talking about cars, planes, trains or automobiles � the fuel has to fit those vehicles on the move. So I would assume that alternative fuels would be important in this area.

JIM: Well, one of them is going to be ethanol. But right now we’ve got a few of those ethanol companies on our shopping lists, but the ones I want to own haven’t fallen into our buy zones yet. I believe coal or gas-to-liquid companies look more attractive � at least at this point in the marketplace.

But if there was another area I would jump on which is incredibly cheap, I would say it has to be coal. Coal providers are at their cheapest level regarding PEs that I’ve seen since their run up began in 2003. In my opinion � now, this is my opinion only � coal is a screaming bargain. And coal, along with uranium is going to become one of our principal forms of energy going forward. We still have decades of supply of coal that could last us into the next Century. And it is, and will remain, the principal form of generating electricity well into the future. [18:20]

JOHN: Not to mention the fact � as we talked in an earlier program � the fact that they are now able to convert coal into jet fuel, and that’s a significant change, especially from a military standpoint as well. When do you think the market is going to snap awake? You mentioned earlier the catalyst, usually there’s something that catalyzes the market awake. When do you think that’s going to happen?

JIM: I think the catalyst that’s going to really drive the alternative energy market is going to be higher oil prices. And I predict once you see oil prices back over $80, on their way to $100, which I expect to occur starting next year, and when the next crisis hits the markets � that’s when the real problem is going to take place. And that’s going to become the catalyst. Alternatives are going to explode when that happens. And quite frankly, there aren’t a lot of companies in this area. So the choices are limited to some extent. However, this is also the reason they’re going to explode on the upside as oil prices head higher and the peak oil concept starts knocking at the front door.

The one key problem here � and we’ll get into this in our update in a few big ideas which is the second topic we’ll be looking at today � but this goes back to the concept that we’ve mentioned here over and over again: if you want to understand why we are where we are today you’ve got to think back over two decades ago when the world could produce 70 million barrels of oil a day, and we were consuming only 60. So our spare capacity was 10 million barrels a day. So you had a Katrina, a Rita, a Nigeria, an Iraq war � everybody remembers the first Iraq war in 91 when oil spiked to $40, Saudi Arabia came out and said we’re going to start pumping like crazy. Oil quickly went down from $40 to $20. We are here now down to only a 1 to 2% spare capacity. So we don’t have the means today to handle severe crises like another severe hurricane as we had in 2005 or 2004, or a crisis in Nigeria � and that’s the problem that we’re facing. And that’s why it’s not going to take much to turn oil prices back up to $80, and send them going North of that on any type of crisis. So that’s the catalyst. The catalyst comes into play when we get higher prices. [20:56]

JOHN: The market seems to knee jerk. So when they think oil prices are coming down � “oh well, the little crisis is over, whew, alright, what are we going to do,” and there’s no thought that it’s actually bouncing downwards for a while and will very shortly be headed back in the other direction.

JIM: Yes, you notice that we’ve had these crises going back to 2000 � and only in 2001, after the severe natural gas crisis that we had in California here and with higher oil prices in 2000, we came back down to $20 in the recession of 2001. But notice, ever since then � just take a look at a chart of oil, look at a chart of natural gas � yes, we’ve had some wild rides on the upside but that chart keeps marching relentlessly upward. And like any period of time, where you had oil prices going from the high 40s, low 50s all the way up to almost $80, as we did recently in the last 12 months, it’s only natural you’re going to see a pull back. And especially with the machinations that occurred in August with Goldman Sachs changing its unleaded gasoline index and its natural gas index. So who knows what that next event will be, but as far as the $40 oil thesis, I just don’t buy it. I don’t even buy $50. But who knows what they could do with derivatives. Let’s put it this way, if we did touch 50, we wouldn’t stay there very long. [22:17]

JOHN: So I would assume � judging from the way you’re talking today here on the program � you’re remaining pretty bullish on this, despite all of the bearish talking about energy and commodities going on out on the street right now.

JIM: John, I haven’t changed the convictions which I’ve held since 2000. Commodities, energy, metals, grains are in a long term bull market. What I would suggest for our listeners is buy quality, add to your positions on market pull backs � that’s very important; remain steadfast in holding on; and hold on for the ride of your lifetime, because you are going to have these pull backs. You’re going to see these � as we saw in the month of September, or beginning late August � and when they occur they tend to be nail biting and window jumping kind of experiences.

But you’ve got to remember the commodity complex itself � if you take pure commodities, the actual grains, etc. � the commodities markets are so much smaller than the paper markets or the financial markets like stocks bonds and currency. So whenever money flows in � whether it’s hedge fund money, it’s pension fund money or even investor money, or the momentum traders � you can see these big spikes; and then the market has a very short attention span. And so what happens is “Ok, that was yesterday’s story, now my attention span I’ve lost it, give me something new I want to chase,” and that’s what markets do.

So what is very important here is you believe and understand your facts and fundamentals, so when these shake out periods come you’re sitting there with a shopping list saying: “Boy, I want to buy more uranium companies, or I want to add to my oil position, or I’ve been looking for an oil service company, or I’ve been looking at a coal-to-gas liquids company,” or any of those companies. So you have your shopping list, and you wait for the market to hand you that perfect pitch, and then you swing. And that’s why for example, right now we’re looking at some corn and ethanol plays, but they haven’t hit our target zone yet. They’re coming down to where we think we can pick them up, but you wait patiently. And then more importantly, you hold if you have good quality. You hold onto it. [24:35]

JOHN: Maybe we need to talk about it later in this segment � doing what you’re saying is very, very important but it’s somewhat harder to do when the herd is running in the opposite direction. You know if the herd is following the ebb and flow you have to take your convictions and stay there. We need to talk about that a little later on here in the segment.

And don’t forget you’re listening to the Financial Sense Newshour at www.financialsense.com. The program is posted by 7am Greenwich Time on Saturday mornings, which works out to about 3am Eastern Daylight Time.

FSN Humor – Hedono Tax

JOHN:And it’s about time we’re wrapping down towards the end of the year, and people, at least in the United States and probably Canada, are planning on taxes which will be due in another x number of months. And to address that situation we’re featuring a new product which may just simply help you do that planning:

Brrr-race yourself, income tax season is upon us again.

You know, it’s bad enough having to pay this outrageous tax, but do we have to go through so much pain just to fill out the forms � there are hundreds of them. And even if you do use one of those tax computing programs, that still doesn’t improve your bottom line: you still have to pay the tax. But now there’s hedono tax, a computer program that recalculates your income tax using the government’s own bogus hedonic indexing.

First, input all your W2s, 1099s and reporting forms. Oh my gosh, look at the tax you owe. But wait! Don’t panic. Now just click the hedono tax button and watch tax magic happen right before your eyes, using our patented Ponzi algorithm hedono tax indexes your tax information based on current government nonsense, it divides the amount you reported by the current GDP, adding back in the cost of fuel and food and reindexing for a COLA adjustment reduced exponentially by a differential of an inflation rate versus the real rate multiplied by the increase in the M3 money supply, offset by the standard deviations in the M1 and M2 money supplies, with a deduction for the cost of Fed lunch Open Market Committee meetings.

Couldn’t follow that, huh?

Good!

The IRS can’t either. And the hedono tax calculation is buried in thousands of pages of IRS forms, leaving a cloudy paper trail not even an IRS auditor can follow. It’s audit proof. It even randomly changes your tax payer ID number. Now look! You don’t owe any tax. Hedono tax is only sold in Bogot�, Colombia, and can be ordered online. Hedono tax is an income tax supporting program and tax evasion scheme. It’s not fun, it’s not even legal, but it gets the job done. [27:12]

A Few Big Ideas – an update

JOHN: Llast week on the program we were talking about what we called a few big ideas, actually ideas in the making notably in the areas of the world’s upcoming bottlenecks in energy and water, and even in certain grains in food production. And then, voil, lo and behold, we find this week some articles coming out in Barron’s magazine.

JIM: Yes, there were two articles in the last issue of Barron’s. So if you’re listening to this broadcast this Saturday, there’s a new issue of Barron’s. So what we’re referring to is Monday October 16^th version. There were two articles: one was called Oil Prices: A Pause, Then Up it was an interview with Charles Maxwell, he’s a Senior Oil Analyst at Weeden and Co.; and then the other one was an article by Christopher Williams called The Lure of Liquid Assets, and it’s all about water. If you can pick up a copy or go online, I’d highly recommend that you read the interview and also the article. And by the way, there’s also one, as I think of it, there’s an article in the current issue of Forbes magazine called an oil and gas price bull and bear debate between Jim Rogers, who is a bull on commodities and is increasing his position, and Stephen Roach who is a proponent of the bubble theory and thinks that investing in commodities is wrong. I think Rogers has the better side of the argument � and that’s not a bias on my side, it’s just what I’ve seen � we don’t have any surplus stock piles. And hopefully I’m going to be writing about this. I may break my commitment not write this year because I’ve been looking at this debate and it just doesn’t stand up. [28:59]

JOHN: But don’t we need to make an important distinction right now when we look at these issues. In the 70s and the 80s and the 90s, even going up to Desert Storm I, these were geopolitical crises, these were basically political in nature, rather than resource in nature. That’s not the picture this time.

JIM: No, unlike the 70s, where the oil embargo, the Gulf War crises � in the past they’ve always been political. This one is geological. And one of the huge impediments, as Maxwell was talking about in his Barron’s article, is expanding production in the world. And he talks about Hubbert’s peak, which is the theory that says oil production will peak on a global basis, and this is a natural impediment. And one thing that he points out, these crises are going to continue, and are going to be growing exponentially. And according to Maxwell, he believes by the year 2015, or 2020, he expects that this will dominate everything that we talk about. And I would agree with that assumption, although I think it could be sooner than 2015.

And I think the one point that I would make here is peak oil � oil prices � is going to be a dominant news item for the rest of your lifetime if you’re listening to this program. [30:22]

JOHN: One of the things that I know Maxwell pointed out in these articles, and we’ve talked about it here on the program, and the fact is that three-quarters of the world’s oil comes from national oil companies. I think that’s something O’Reilly doesn’t get either.

JIM: No, and one of the problems as Maxwell pointed out in his Barron’s article is these big oil companies were nationalized in the 70s and 80s and today, they have real structural problems because the money that comes from these oil companies are the principal source of revenue for the national treasury. And so there’s sort of this conflicting use of money that comes into governments whose primary source of revenue is oil, because you can either take this revenue, plow it back into the oil industry � which is necessary to keep output up, or to expand it � or you can use it to run government social programs or other things.

And unfortunately, most governments and politicians shortchange their oil companies. And as Maxwell points out, these national oil companies have been held on a natural diet. And the problem is they don’t have the incentives � whether it’s Venezuela, it’s Kuwait, or some of these other companies � to reinvest all those revenues to expand output. Now what do they care? The price of oil is at 60 or 70, and if their production is down, or they aren’t increasing it but there’s greater demand for their products which is driving the price up, they’re beneficiaries.

Look at Chavez � the oil industry in Venezuela is falling apart under his direction, production is down by almost 30 and 40%. But Chavez has been a beneficiary of oil prices going from 20, all the way up to almost $80, and he’s still running deficits in terms of the money he’s spending. So there’s not a lot of incentives for a lot of these governments that get their money from oil to reinvest back into the oil business. [32:29]

JOHN: Well, where ultimately does this lead us now?

JIM: I think this is going to lead us to increasingly more crisis prone activities in the market place because you’re not going to change the national oil companies, you’re not going to change their governments, you’re not going to change their constituencies. And I think more and more as we approach peak oil government’s will start saying, “wait a minute, you know, if we’re at peak oil, that means what I have in the ground is sort of like a bank account for me that becomes more valuable as time goes on because it appreciates. It’s like a good wine � it becomes worth more. And why should I have an incentive to pump out as much as I can right now, when I think prices are going to be going higher.” And I think that’s going to be a particular problem. So this goes back to the first segment where we talked about alternatives. And this is something we need to wake up to in the West, that increasingly in the future a lot of these governments are not going to be prone to pump out as much as they can to supply the West so we can drive our SUV’s. [33:40]

JOHN: And not to mention that, but they can use it as political blackmail when they need to as well, which is not a very good strategic position to be in.

JIM: No, it’s not a good strategic position to be in, and the fact that the United States is moving towards 70% imports to provide us for our energy needs makes this economy and this country very vulnerable. [34:01]

JOHN: If we divide the world into the non-OPEC and the OPEC world, the non-OPEC world has basically peaked, correct?

JIM: Yes, if we take non-OPEC countries, for example, 11 have already peaked representing almost 34 to 35% of non-OPEC production. There are 3 countries, as Maxwell pointed out, on the cusp of peaking: one of them is Mexico, which I believe already has peaked, and that represents 8% of production; China is just around the corner from peaking, and that could happen, according to Maxwell, some time next year or 2008; and then there are a couple of other countries that are very close to peaking �Kuwait being one of them.

So if the major producing countries are peaking � that’s non-OPEC and then within OPEC itself you have a lot of countries that are peaking � then where’s this extra oil going to come from? Well, right now, it’s coming non-conventionally: it’s coming from the tar sands, it’s coming from shale, it’s coming from deepwater. But every single year, we consume 30 billion barrels of oil and we’ve been finding somewhere in the neighborhood of 4 to 5 billion barrels. So once again, we keep drawing down the bank account. [35:23]

JOHN: Another area that was mentioned in Barron’s is the lure of liquid assets, as a matter of fact. Let’s say, for example, I don’t think people realize how large water assets are involved here.

JIM: Sure, globally the water business is a $365 billion business that’s burgeoning as countries spend literally billion dollars to repair infrastructure, to funnel clean water to people and industry. And the experts according to this Barron’s article think that about $1 � trillion in capital spending could flow into this sector in the next 5 years, and that means opportunities for companies � from pump makers, to water utilities. And this market not only encompasses, for example, residential �we think of our homes tap water, taking a shower, watering our lawn etc. � but also industrial water and waste water treatment surfaces for municipalities. And that business is growing between 4 to 6% a year in developed countries; and in emerging markets according to the Barron’s article, as much as 15%. So, think of a business that is growing at 4 to 6%, or 15% � a lot of people, and companies would like to get involved in that industry. And the tragedy here is you take a look at less than 1% of the planet’s water is drinkable. I mean most of our water comes from groundwater.

And so, as we talked about last week, ways to expand supply, ways to conserve it, and ways to manage it. And this involves everything from electric utilities � most people don’t realize General Electric as mentioned in Barron’s is very big in the water business; as giants such as Suez and RWE, the big German conglomerate. We’ve got large companies here, like Aqua America, which is a water utility, and there’s a French environmental company. But the amazing thing is you take a look at global water consumption � there’s a nice graph by the way in the Barron’s article � that shows our global water consumption in 1980 going all the way up to 2025, and it’s just an upward expanding graph. And that’s the kind of investments you want to be in: in a market where the demand for your product is inelastic, you have to have it, it’s essential. And this is the thing that I think is going to be the trend for the next 10 years is building infrastructure and looking after the very things that bring us life and power the economy. As we talked about last week, the three that are all related together: water; energy; and food. [38:11]

Other Voices: Zapata George

JIM: Well, on the day we’re talking, oil prices fall below $58 at least momentarily but if we take a look at what’s going on in the world of production OPEC production year over year is down 600,000 barrels a day; and in 2005 despite all the efforts to increase oil production all that happened was only an increase of 890,000 barrels a day versus demand of 1 million.

Joining me on the program on Other Voices is Zapata George. George, you come from an oil background, what do those numbers tell you?

GEORGE: Well, in conjunction with the first quarter numbers for the last 4 years, which now everyone has reported, the 4 largest oil companies in the world if you total up their unit sales for those 4 years you will see that we have already peaked in the 4 major oil companies in the world. The peak is already in that area. [39:35]

JIM: George, one of the problems as it seems to me and I’ve talked about this a number of times on the program, but if you go back two decades ago, we had surplus capacity of 10 million barrels a day. That surplus capacity has disappeared. And what I find is almost striking that the media doesn’t pick up on is the fact that world discoveries peaked over 30 years ago… 40 years ago actually, in the 60s and for the last two decades we have failed to find each year in new discoveries what it is that we’re consuming each year. Now, there’s another message there that’s being ignored by the market.

GEORGE: The media has a real, real, real bad habit of ignoring the long term fundamentals that prove the case. Why they choose to go that way is it just happy time, you know? I get a little bit irritated. I also get a little bit irritated with them concentrating on these weekly inventories. These weekly numbers constitute 3% of weekly use. These are inconsequential. They have no merit, and you almost suspect collusion between them and the NYMEX to create news to create trading opportunities. I’m not stating that that’s the case, but man, it looks funny. [41:01]

JIM: And this is what surprises me in the oil market: you’ve got a lot of smart people on Wall Street, but the fact that they’re trading because these inventory levels are up or down or distillates are down this week or up whatever the figure that they seem to be grasping on in the trading pits. However, if I look at a chart of inventories and stockpiles, we have less inventory today than let’s say, over a 5 year period going back to the year 2000. So that is a longer term trend that is more telling than what this week’s hypothetical inventory number is.

GEORGE: That’s what I say. They pick the one rock out of a thousand different colored stones they choose to pick that one to analyze. They don’t come close to analyzing the median, the meaningful, the long term. They totally and completely ignore those kind of statistics. Now, I don’t know what’s going on, but I know what’s going on in the real world and I know this � I’ll make you a prediction, right now � for a full calendar year we will never have a year where each day in that year there were 86 million barrels of oil produced. That will never happen. You heard me say it today. [42:27]

JIM: That would imply � if I can use an analogy if peak oil is at the front door, inside the house, or in the backyard � it sounds to me like peak’s at the front door.

GEORGE: I suspect that we will see when totals for this year are put in, they will of course have averaged less than 86, and we will never get to 86. So in essence, those of us who look just slightly ahead, we’ve already seen it. [42:59]

JIM: Yet you have, for example, all the commotion several weeks ago when Chevron made that discovery in the Gulf of Mexico, and then last November we had a discovery made by PEMEX in the Gulf of Mexico. So when you see that, automatically, on one hole, they’re coming up with this hypothetical amount of oil that’s out there.

GEORGE: But they never tell you what it’s going to cost to get it to the surface.

JIM: Or how long.

GEORGE: Well, the recent Jack discovery was in 7,000 feet of water. I have news for folks: we don’t even have the tools designed to design the platforms that will have to be built on the seafloor to develop such a discovery as this. That means that you’re looking at long lead times of just unbelievable length � you’re looking at costs beyond belief. I would suspect that Jack will only be commercial at some prices north of $120. So who cares if it’s there? It’s not there at $60, folks. You can scream and holler all you want to about how many billion barrels you’ve found � if nobody’s going to produce it if it costs $110 a barrel to produce, they’re not going to sell it for 60 bucks. It just ain’t going to happen that way. [44:33]

JIM: What has surprised me given what has happened with the price of oil and especially if we look at the last 4 years: $20, we trading close to $60 you’ve got good oil companies, those that can increase their reserves and even those that can’t but are still making a lot of money, I’ve never seen a period of time where prices have risen as much as they have and yet you have a company for example Conoco-Phillips trading at 5 times earnings, Hess 6 times earnings, Marathon Oil 7. You go over on the natural gas side: Devon, 8 times earnings; Apache, 7 times earnings; Anadarko, 7 times earnings. And in the meantime, the S&P 500 is trading at 17, and you’ve got people downgrading the oil sector.

GEORGE: They unfortunately remember the 70s when we cried wolf and the wolf didn’t show up. Ergo, gee, it’s the little boy that cried wolf doing it again. Well, folks, this time I’ve got news for you � the wolf gonna eat ya. [45:37]

JIM: You know it was surprising: there are a few analysts out there this last weekend � Charles Maxwell at Weeden and Co. � now you’ve got different people predicting different time frames for peak oil depending on whether you include conventional oil, alternative oil, he is looking at somewhere in the year 2015 � and he’s looking at prices here in the next year or two at $100 to $130 a barrel. So there are a few analysts out there that seem to understand what’s going on out here, what is surprising is that Wall Street hasn’t really picked up on it. If I knew, for example, that oil was going from 60 to 100 or from 150 to 200, I would want to be long oil.

GEORGE: I would totally agree. And the thing I find most disturbing � now you and I tend to concentrate on supply because that’s what we know the most about, but the thing that nobody seems to realize and believe me folks this is happening, we will have � it is already starting to develop, it’s been underway for about 15 years, it will continue for another 35 years � the greatest build up in demand for resources that the world has ever seen. This demand will be so huge that it will create a gap between supply and demand that price will attempt to regulate for a while. How successful price will be as a regulator I don’t know, but don’t forget the demand side. The demand side is just as ominous as the supply side peak oil. Believe me it is. [47:30]

JIM: The other situation that we also face today, George, which was much different than 40 to 50 years ago. 40 to 50 years ago the big Seven oil companies were the major producers of oil. If you look at today, 85% of the world’s oil reserves are in the hands of OPEC or the former Soviet Union and that leaves 15% outside of those two areas. And if you look at who the major producers of oil are today they’re national oil companies, and I don’t think that concept has fully registered with the market place.

GEORGE: You said a minute ago something about a bunch of smart people on Wall Street, and I thought well I will resist the temptation to jump on that remark but I’m going to go back to that: Wrong! No, seriously, I’ve worked for a couple of brokerage houses. I bought my first stock in 1957, I’ve been around this place for a long, long time and I’ve got news for you, the intelligence level that circulates in that neighborhood is substantially below that of a lot of areas that I could name. And they want to see what they want to sell. If it’s easy to sell then it’s a good deal. Do you remember when they sold literally billions of dollars of drilling funds in the early 80s?

JIM: Sure.

GEORGE: The return on that gross investment � not discounting for time � was somewhere between 7 and 12 cents on the dollar. But it was easy to sell. So, man, Wall Street was out there selling it. That’s the only place where they are smart. They see something that’s easy to sell, they sell it. After that, you’ve passed the intelligence level [of] Wall Street. I can remember a number of occasions where it was obvious � well, back when we had the last hard asset boom in the 70s � I was reprimanded by my office manager for making the statement that the government could possibly devalue the dollar by a number of mechanisms. Well, gee, about 90 days after I said that, a guy named Nixon closed the gold window. Well, I think my statement was fully accurate, but I had violated company policy. I had said something negative about the US dollar. Well, folks, when you’re talking about people’s money and you share a responsibility for it, as you and I do, we have to be honest with the people that we serve regardless of where the end result falls. We’re not making it do that. All we’re doing is looking forward and saying, “yo, if you have dollar based assets, maybe you ought to diversify some of them because we’re trying to serve our clients, that’s where our responsibility lies. Let the chips fall where they may.” [50:51]

JIM: But what do you do, and how would you speak to investors, because oil was doing very well, and then all of a sudden we have a sharp correction � never mind that Goldman Sachs changed their commodity index on gasoline from 8% to 2%, and natural gas from 8 to 6.

GEORGE: They learn from the government, you know, if the inflation index doesn’t fit well you change the parts.

JIM: Let’s ignore that for a minute and what role that played in the drop in prices. What do you tell people, because you see the sharp sell off, now you’ve got people calling energy a bubble, gold a bubble, and all of a sudden everybody’s rushing in to technology stocks and whatever they’re chasing?

But the one thing that happens in this industry is with 9,000 hedge funds, 8,000 mutual fund managers, portfolio managers at insurance companies and pension fund managers, you know, when everybody becomes a sheep and moves in one direction at once, this is what happens in the market. But if you’re an astute investor and believe in the long term fundamentals this is the time you use to pick up these stocks at bargain prices.

GEORGE: I have just recently issued two bulletins. As you recall last Winter I said gold had some 7 to 9 months that it had to work, maybe longer, that where it was at that time we would see sideways consolidation. Well, that has happened. Only this past weekend, the monthly figures now show one to three months to the bottom, but the weekly figures show 8 weeks straight up. Well, in my system, one to three is within the margin of error; and eight weeks is two months and overcomes it anyway. The weeklies are going to turn before the monthlies do � I just got that good news and then I issued that bulletin.

Now, you ask, how do you advise people? Here’s what my feeling is. The first leg of the commodity bull market is over. We had the up, we’ve had the down. Now, again, last Winter and it was on Premier radio that I made this statement, I said watch corn and wheat because they’ve been dead for a long time but they will be an indication of the leadership for the second upleg of the bull market in commodities. Well, guess what, friends? Just recently is up $3 plus item, instead of $2 like it was last January; and wheat was up the limit locked one day above $5 and it was a $4 commodity. Well, I may have that a dollar off � but the point is exactly what I said happened, they’ve both moved over a dollar a bushel. They are showing us that the second leg of the commodity market is underway.

Now, our friend oil and gold, they have both gotten to oversold levels. So I say to my folks, I say look, if you don’t believe, let me show how you can make a believer of yourself. Let’s set up some milestones. It’s just like when you’re driving down the highway, and you’re going to El Paso and it says it’s 500 miles, and you drive and in a while it’s only 400 miles � well, you must be getting closer to El Paso. Markets are the same way � let’s set up some mile markers and see which direction we’re heading, because we just got dropped down on this road, and we really don’t know where we are � we’re going to assume that. Now, when we see that gold exceeded the $700 mark of recent vintage, when we see that oil gets to $84, these may be two initially strong mile markers that say, “whoa, the second leg of this commodity bull market is truly underway.” Now then, we might also look at another spot: let’s take something that’s been dead for a long time � our old friend cotton. Cotton’s selling for under 50 cents a pound. It wouldn’t surprise me that cotton doesn’t chime in to help tell us, “you hoo, guys, you’re on the right road.”

Now, if these things go the other way then we may have a deflationary argument that has merit then you and I may have to rethink our basic thesis. But, these little mile markers along the way will allow regular investors to get a hint of which way we’re headed. Did I adequately answer you? [56:05]

JIM: You sure did. Well, George, it’s always a pleasure talking with you. If people would like to find out more about what it is that you do tell them how they could do so.

GEORGE: Well, you can go to www.zapatageorge.com. And I would like to say one thing, I want to announce that the Jane Mansfield top is in in the Dow Jones Industrial Average.

JIM: And once again your website?

GEORGE: www.zapatageorge.com.

JIM: Alright, George, as always it’s a pleasure speaking with you, please come back and talk to us again.

GEORGE: At your pleasure. [56:45]

Contrary Thinking

JOHN: Well, Jim, if I had to describe some of the actions I’ve seen you engage in over the last six years or so, you always seem to be at odds with the crowd. Remember last year, everybody was negative on the market and yet you were predicting it was going to be at new record Dow level � voila, here we are. Everybody, suddenly after a long time as pooh-poohing them as risky investments was going gaga over gold and commodities, but you were saying, “no no, they’re going to be hammered along with oil by the time we get down to the pre-election season” and voila, here we are. You always seem to be taking the opposite side of the trade it would seem. Is that a healthy procedure or what?

JIM: I guess, John, if you look at my take on things it comes more from a contrarian view which I believe in my own opinion is the natural trade of most value investors. I mean let’s face it, the only time you’re going to get anything cheap is when it’s: number one, unpopular; unloved; or three, ignored by the markets � which is why on so many occasions we tend to side on the opposite end of the market. I mean there was a major stock that got clobbered today on missing earnings and here we were picking up shares because we love this company, and we added it.

But I think coming from a contrarian philosophy which kind of melds with I think with value investing let’s face it, if everybody loved something or the stock was very popular, it had to be the must own stock, the most popular stock, the latest fad company for example Krispy Kreme donuts, or a Yahoo, then a Google or whatever it is � you’re going to pay a high price for that. If you’re a value investor looking for something cheap then you’ve got to look at something that nobody wants to own right now � it’s unpopular or everybody is ignoring the particular sector or stock or has forgotten about. I mean we were picking up oil stocks and gold stocks in 2001 at a time when Wall Street was firing metals analysts. [59:00]

JOHN: So it seems basically in philosophy you really are a non-conformist in your thinking: what other people are thinking isn’t necessarily important. Especially if you recognize that sameness in thinking seems to be a common trait to the majority of investors out there, which would always keep you out on the edge if you’re not thinking that.

JIM: What I find so often in the markets is when masses of investors succumb to an idea I don’t know, the New Economy, the Internet they often run off at a tangent because of their emotions. It’s very easy and everybody recalls how everybody was caught up in internet stocks, for example, between 97 and 2000. You didn’t even have to make money, you didn’t have to have sales, it was clicks instead of bricks. Whatever this concept is, and it’s carried to extremes, and what I think that tells us is the crowd thinks with its heart or its emotions, whereas an individual we think with our brain. The hardest part, I believe, is to keep yourself separate from the crowd, and to think independently. It’s tough to do I’ll be the first to admit that because you often find yourself thinking differently from today’s popular opinions, or for that matter the consensus of the crowd. [1:00:15]

JOHN: Do you wind up doing reality checks with yourself, like everybody is running this way, “alright let’s go back over this again” in your own head, playing devil’s advocate?

JIM: You really do, because oftentimes when I start seeing something I believe or think nobody else sees then all of a sudden it becomes popular and everybody is echoing the same thing, I get that little check in my spirit that says, “wait a minute, there’s something that’s going on here, everybody’s agreeing with me, this has become popular, this has become commonplace, everybody is thinking in that direction.” That’s right, you get this little check and say wait a minute, what I’m thinking everybody is thinking. So, am I part of the crowd, or are there some facts here I’m not seeing? There are times when the crowd is right for a period of time as they were from 97 to the early part of 2000. [1:01:07]

JOHN: Well, that is always going to put you then as a contrarian challenging the fads or the trends of the day. I mean that’s almost a mode of life then.

JIM: Yes. Essentially as a contrarian you challenge the accepted viewpoints on the prevailing trends in politics and the markets. For example, so you contest the popular view, because the popular opinions are so frequently found to be untimely, misleading � usually by propaganda or plainly wrong. You usually find the crowd never reasons but follows its emotions and accepts � and here’s a key point it accepts without proof what is suggested or asserted. [1:01:46]

JOHN: Could you give us an example, by the way, when we’re talking about this type of a stratagem.

JIM: Well, let’s take for example, technical analysis � let’s take reading the charts. What I find with technical analysis is that an investor can interpret charts almost anyway he wishes. So, for example, you can read the formations just about any probable result you would hope for. For example, if you’re bullish at heart on the market, you are more likely to interpret the charts optimistically. If you’re bearish you’re more prone to see bearish patterns in the charts. And at times when the market comes to an impasse, and everybody is in a quandary as to the direction prices are likely to go, then the charts too are usually silent. And that’s why sometimes I think people get confused. You’ll see one technician look at a graph of the Dow or the S&P and say, “boy, bearish, this is going to happen, we’re going to have a bear market, we’re going to have a downturn, we’re going to have a correction.” And then you have somebody else reading the same chart, and he’s saying, “I’m bullish, I think this is going to happen.” Or basically, you get almost that impasse which is where I think we’re at now, where you’ve got people evenly divided between bearish sentiment and bullish sentiment. And so that is something I think that happens so often, and so once again why do we see this divergence? Once again it’s human nature: hopes, fears. There’s all kinds of items and emotions that come out and dominate. [1:03:18]

JOHN: That’s sort of natural though, it’s almost a human trait. How the group sees things changes what we tend to perceive. And if we’re with the group it’s comfortable. There’s something about it, call it a herd instinct, a pack instinct, but there seems to be security in numbers. But you have to override that to do what you’re talking about.

JIM: Sure, because there’s all kinds of traits that make the theory of contrary opinion workable. They include, for example, habit � “that’s the way we always do it,” or “this is the way it always happens at this time of the year in the markets.” There’s imitation, there’s contagion, there’s fear. We get the emotions: greed, hope. We get irritability, pride of opinion � “doggone it, I’m right and I’m going to be right eventually.” Or wishful thinking; we get impulsiveness. All of these deal with laws of sociology and psychology and they’re all logically related. For example, a crowd yields to its instincts which an individual acting alone would repress. People, for example, are gregarious, instinctively following the impulses of the herd. Contagion and imitation of the minority. Follow the leader make people susceptible to the suggestion, to commands, customs or emotional motivations, and boy, does advertising exploit that � whether it’s political advertising exploiting it, politician or the markets trying to exploit that. And then I guess finally a crowd never reasons but follows its own emotions. It accepts � and this is the thing that happens and you see it over and over, and it’s a key point to look out for when you’re investing � the crowd accepts without proof what is suggested or asserted. We’ve made this contention about for example monetary tightness, or that commodities are in a bubble. [1:05:08]

JOHN: it’s very strong and compelling too, by the way, when it comes from authority sources the Wall Street Journal, CNBC, the other sources like that.

JIM: Yes, they must know it was in the paper, or it was on television.

JOHN: Well, if what you’re saying is true, let’s say, based on their emotions people become bullish or bearish you know they can look at the same set of charts and they can see them through these different filters are you against this technical analysis then?

JIM: Well, with all due respect to technicians, I firmly believe that technical analysis will never completely enable people to overcome their inherent traits of �once again � their emotions: hope, greed, pride of an opinion, and similar human feelings that we see that make successful investing one of the most difficult to master. And you see this � that’s why you get different technicians on our program � Joe Duarte’s a technician, Frank’s one, Tim Wood’s one, we often interview with Ike Iossif, Ahead of the Trends, we’ll interview some fundamental people but a lot of technicians � you can see them all over the place and it just happens to be with their own predisposition. And a lot of times simply what the charts are telling you is sometimes that consensus of opinion, but other times you can interpret charts in so many different ways. That’s why I tend to rely more on fundamentals on the reasons I base my investment decisions.

Yes, charts are helpful, we have technicians that we use � both in-house and outside our firm � we get various technical services. And it’s amazing too, when you get these technical services, for example, Lowry’s which called a bear market in May, and then later retracted it last week. And so, you get this. It’s not that I’m against technical analysis. I think I’m a long term investor and by that very nature and also being a value investor I find more value so to speak in relying on fundamentals to base my investment decisions. [1:07:05]

JOHN: Lies, damn lies and then statistics, or charts, right?

Alright, supposing that I buy into your philosophy and I want to be a contrarian. Aside from large quantities of Maalox bought at Costco or some reasonable place like that � you might as well buy the giant economy size because it isn’t too comforting when the crowd is running the other way, yelling the sky is falling � what practical advice can you give someone who really wishes to operate in a contrarian mode?

And surprisingly, by the way, if everyone began operating in a contrarian modes then some of the market predictions you’re talking about wouldn’t be possible: you almost rely on the herd to do what the herd does.

JIM: Sure, that’s sort of one of the signposts you look for. First, I think if you’re practicing contrary thinking, you have to recognize that you’re going to need to fight against your own personal viewpoints and biases. For example, you feel strongly about a market situation [making it] difficult to submerge your feelings, and coldly gauge public opinion. So frequently, you will misjudge public opinion because of your preconceived notions or opinions that you hold. You will jump to the conclusion that the public opinion is as you wish it were, and thus unconsciously you’re becoming a member of the public not realizing in reality you think as the public does.

However, the more you get into the habit of thinking from an opposite point of view taking the opposite side, everybody says this is going to happen or everybody feels this is where it’s going � start stepping back asking yourself and as you practice that you will be less frequently subject to the old traits. And you’ve got to practice it because it is so easy to become completely immersed with popular opinion. But by practicing this objectiveness, you become not only more objective, you become the boss over those natural human failings. And we’ve commented often about being able to conquer your emotions. And that’s one of the most important things I think I’ve learned in my investment career. [1:09:18]

JOHN: Well, Jim, if we’re going to run contrary to where the popular sentiment is, what is a good method of sounding out what that sentiment is, because obviously you have to know where everybody is moving?

JIM: Well, it’s probably a lot easier today, John, with a plethora of news sources that are available. I mean just take a look, you’ve got television, radio, now we have the internet and of course we have newspapers and magazines, and they unload a flood of economic news and propaganda these days. It isn’t really that difficult I think to get a fairly accurate cross-section of what people are probably thinking about, and what the composite opinion is likely to be.

It is also important I think of what some groups want us to accept and believe. And there are a number of things out there, like the popular notion right now is that the Republicans are going to lose the House, you pick up the Washington Post, you pick up the Wall Street Journal, they all echo that sentiment. This is widely taken for granted that this is what’s going to happen. Everybody is telling you that, so I almost question whether that indeed is going to be the case.

You have a lot of bearish sentiment that we’ve had in the market all year: the Fed has been raising interest rates, inflation has been on the rise, the housing market is going in to the tank � and, Ok, we’re going to have a recession. And yet, we’re taking a look at retail sales, and in the 4^th quarter they’re slashing prices, retailers are optimistic. I go to the malls here, and it doesn’t matter which mall I go to I see plenty of traffic; I talk to people in the stores, they’re telling me the opposite of what people are telling me in the press. And so these are just some obvious examples. [1:11:04]

JOHN: Well, in going about chasing down public opinion the most obvious one is political. That’s pretty easy if you just look at the polls that are taken, what’s being written in the op-ed pieces in the press. What other areas should I be concerned about?

JIM: I think some other popular opinions to consider: one is the commodity bubble. Bears such as Steven Roach think the slowdown in housing in China and in consumer spending will send prices South. I disagree with that assumption. This debate, by the way, is also evident in the financial press. You can also read about it in the recent issue of Forbes where they have an energy bull debate between guys like Stephen Roach and Jim Rogers. I think another misconception out there is there’s a glut of oil in the world � I don’t see that. And the objective facts don’t support this view given that global production is struggling to keep up with demand. OPEC production is down year over year, and global discoveries are failing to replace what it is we consume each year. So these are some of the more obvious ones you see out there. [1:12:14]

JOHN: Any other consensus opinions, say those that you disagree with?

JIM: Sure. One, that we’ve commented here from time to time in the show is that I feel is completely off base is tightening global liquidity. Given the fact that debt levels this year, will be up by over 30% from last year, and we’re now tracking at an annual rate of close to 4.4 trillion, I find that notion ridiculous � as I do that deflation is our next worry. I repeat as I so often do on this program there will be no deflation. The only thing we’re going to see on the horizon is a brief respite from inflation or a period of disinflation as manufacturing inventories, and for example, housing inventories are worked off. [1:13:01]

JOHN: And final thoughts in this whole thing, before we move on.

JIM: Probably another misconception I think is the popular view that the Fed is an inflation fighter, and worried about inflation. The reality is the Fed is the creator of inflation. Its only worry is inflationary perceptions not inflation itself. [1:13:23]

JOHN: I always wonder why the mainstream media never call them on that. They always act as if it’s the norm.

JIM: I think that goes back to our educational system. 40 or 50 years ago, the concept of inflation and deflation was very clearly understood, everybody knew it was a monetary phenomenon, but if you take a look at the textbooks that have come into play in the 50s, 60s, 70s and right up to this day, people are trained in school as Keynesians, or combinations of Keynesian and monetary philosophy � they’re not taught Austrian economics. I think there’s only two or three colleges that you can even get a teaching [of it] � one is Auburn University, and of course the Von Mises Institute there, and the other one is Hillsdale College. So what we’re taught in school is exactly the opposite of what we really need to know in understanding how the monetary and economic system works. [1:14:18]

JOHN: Or what’s actually true for that matter.

JIM: Yes. We’re given this framework � I’ll be the first to admit, when I got out of graduate school I was taught Keynesianism and monetary economics, and especially international monetary economics at the time. And it wasn’t until 87 after the stock market crash, when I began my journey and eventually discovered Austrian economics, and it’s been a self-study program ever since that.

It’s kind of funny because in our family I have 3 of my sons that work with me in the business: one is beginning studying for his second CFA exam, and he’s being taught Keynesian economics. And then of course he hears the discussion in our investment meetings, and sometimes he kind of looks at me, and I said, “listen, don’t get into discussion right now with me on this, because I’m going to confuse you for your exam.”

And one of the things that we’re going to put our portfolio people through as they get their certification is the Von Mises Institute which not only has a one year self-study course on Austrian economics, but it also has an online course which you can take which really gets you thoroughly grounded in the basic principles of Austrian economics from the business cycle, to monetary theory, to theories of production � and then also a firm understanding and refutation of the Keynesian point of view. But unfortunately, John, that’s what we’re taught. [1:15:43]

JOHN: So in essence you’re telling your son that for the purposes of getting whatever credentials you need to give the correct quote-unquote answer on the test from the Keynesian viewpoint, and then when you’re done we’ll tell you what’s wrong with that.

JIM: Yes, absolutely. And I mean he’s read the things I’ve written, and then of course the macro picture that I paint in our investment meetings which [he] gets that every single week, so he’s sort of grasping. Well, he’s hitting the books pretty hard too, he’s got 9 months to go for his next CFA exam, which will be next June. So, he’s got a ways to go yet. [1:16:20]

JOHN: Jim, say the listeners here want to get more and more in to the fine art and practice of contrary thinking what about books and materials they can educate themselves with?

JIM: What I’d probably do is go to Amazon or Google and just type in contrary thinking, or contrary investments and you’ll probably just get pages of books that have been written about this. One of my favorites I think this was a book written back in the 50s or 60s, and it’s called the Art of Contrary Thinking written by a gentleman called Humphrey Neill � in fact it was written in the early 50s not sure if it’s currently in print or not, but that would be one to definitely take a look at and read. [1:17:06]

Emails and Q-Calls

JOHN: And it’s time to go to both our Q-Line and email segment. If you’re calling in questions during the week the toll-free number in the US and Canada is 1-800 794-6480. That is toll-free from the US and Canada but it does work everywhere else in the world, you simply have to pay for the call. If you do call in, please leave your name just your first name and your location, and try to keep your question as brief as possible.

This email comes from Michael in Portland, and he says:

When I hear of technical analysis sometimes at a loss to explain why such and such has or hasn’t occurred, say for example why the market hasn’t dropped given geopolitical and economic trends, I find myself responding “governmental intervention significantly alters the natural patterns of market activity, and therefore the data upon which TA depends.” Possibly, we’re entering a period wherein these distortions of natural market patterns will render TA less meaningful and fundamental analysis more reliable. Your thoughts.

[1:18:21]

JIM: I tell you Michael you hit upon my view exactly, because I do believe that we’re seeing more intervention in the markets these days whether it’s intervention in the markets or it’s through media propaganda. And that’s why I think you go into fundamentals like for example there’s a commodity bubble. Ok, how many people do you know that are investing in gold or the commodities in the same way they were when people were just going gaga in the late 70s when they were cashing in their silverware? Or for that matter, where are the huge stockpiles out there, or the huge discoveries? I don’t see it. So I rely more on fundamental analysis. I think that’s going to be more reliable for the future exactly for the reasons you just brought up which is government intervention. [1:19:08]

JOHN: From Mick listening in McDonough, Georgia.

I recently bought Mr. O’Shaughnessy’s book. I’m really excited by the potential of his investment strategies and would like very much to use them, but where can an individual investor get the data necessary for stock selection for a respective strategy. For example, how can I locate market leading companies with greater than average cap, shares outstanding, cash flow, and sales 50% greater than the average stock?

JIM: A very popular source for a lot of that information is the Value Line publication, and you can either subscribe to it directly I think it’s about $500 a year � or you can find it available in most public libraries. [1:19:49]

JOHN: Charles is in Aurora, Colorado �that’s on the East side of Denver and it’s more of a comment rather than an email.

If anyone wants to know Devon’s answer to the Boone Picken’s comment about gas being found deep as opposed to oil. Here’s Devon’s answer:

Here’s a response to one of our technical managers as to why we have found oil in the Lower Tertiary and not gas. The reason why the hydrocarbon type in deepwater is oil and not gas is because the deep water Basin is relatively cool with reduced temperature and pressure as compared with equivalent depths on the shelf. This reduction in temperature and pressure is due to; 1) water depth � sediments in deep water are overlain by 5 to 10,000 feet of water, not additional sediments, therefore there is a lot less of overburden pressure; 2) Salt - sediments in deep water can be overlain by 1 to 20,000 feet of salt, salt acts as a wick and attracts heat away from both source and reservoir rocks; also the buoyancy effect of salt reduces the impact of overburden pressure; 3) source kitchens � because of these cooling effects the back basin in board of the six via escarpment have never been hot enough to enter the gas generation window. As to declaring victory, we have learned a lot about the LT, but we have more to learn. Our decision to take on another long term rig commitment certainly reflects our growing confidence in the play. Another sign of success will be when we begin to book reserves. Cascade will likely be our first project booked. This could happen as soon as this year or next year.

JIM: Good enough. [1:21:25]

JOHN: From Jan, unknown location:

In an upcoming show I guess we could do it right now could you please explain the fundamental differences between an energy company and an energy trust. Are energy trusts less vulnerable to share dilution through the issuance of stock options?

JIM: A lot of energy trusts are trusts that are set up with the flow through of the income directly to the shareholder. What they do is they go out and they buy producing oil or natural gas wells and that’s simply what they do. They basically produce the oil and the gas, they sell it in the marketplace less their expenses and then they distribute in the form of dividends. I think a lot of this probably had to do with a comment Frank Barbera made in an article he wrote and also comments on the air, because a lot of these energy trusts are paying income in the 9, 10, 12% range. If you want to find something that closely correlates to the price of energy, whether it’s oil or natural gas, these energy trusts are a good example of that, because they do mirror the current price of energy. Obviously if you’re selling oil this month then you’re getting $60 a barrel, that is going to translate to x amount in dividends. If next month or 3 months from now, you’re selling oil at $70 a barrel you’re obviously going to be getting a higher dividend. That’s what’s happened to a lot of these energy trusts where you’ve seen their dividends double and triple over the last couple of years as we’ve seen the price of oil go from $20 all the way to as much as $80 a barrel ,which I think we’ll be at next year � if not touching $100 by the end of 2007. [1:23:11]

JOHN: David is listening in Dublin, Ireland. He says:

Regarding your interview with Robert Prechter, he believes the Fed cannot hyperinflate because this would destroy the bond market and this in itself would be deflationary. To me this seems to be the crux of the deflation-inflation debate. Could you comment?

JIM: Sure. I’ll give you a good example. Just take a look at the growth in the money supply in the 90s when we were running at high single digits and at times double digits. Take a look at the double digit money supply growth rates from 2001 to 2003, and what did you see during that period of time? The bond market yields actually came down. The bond market is different today, they really don’t care or they don’t perceive inflation the way it truly manifests itself which is excess liquidity that flows either into tangible goods where we see prices rise � that’s typically the way you judge inflation; or it goes into financial assets and we get asset bubbles. That’s inflationary. But when we see that � whether it’s rising bond prices, or a rising dollar, or rising stock prices or rising real estate � it’s called a bull market, when in reality what you’re really seeing here is a flow of liquidity which is creating an inflationary aspect in financial markets and assets themselves and bubbles which is inflation. We just tend to call them bull markets, rather than what they really are. So, just take a look at a graph of money supply � especially M3, well, you can do that up to February of this year � and then take a look at interest rates. So the bond market is no longer the vigilante it once was. I think the Fed has got the bond market fooled. [1:24:52]

JOHN: Peter asks:

Could you please do a review of the two methods of playing the Dow. How have the dogs of the Dow done this year in comparison to the index? How has the dividend method done in comparison to the index. You were doing these comparisons at the beginning of the year, but stopped a long time ago. Things just don’t smell right with these new highs, and I wanted to see whether the dogs and the dividend method also confirmed these records by also rising as much as the index. If this is only certain stocks raising the Dow to new high, this could be a huge bear trap.

JIM: First of all, the dogs of the Dow have outperformed the Dow this year. The Dow’s up roughly about 12%, year to date, as the S&P is up about 9%. But I think you’re much safer playing the dividends of the Dow, because once again, as we try to emphasize on this program, a lot of times the stock market goes nowhere, then all of a sudden in a short period of time � six weeks � you’ve got, boom! new records, or the stock market is retreating. The nice thing about dividends is while stock prices fluctuate you’re getting a real return in the form of cash. You can go out and spend that, reinvest it etc.

My preferred way of playing the Dow would actually be the dogs of the Dow: the best dividend paying stocks. [1:26:03]

JOHN: This one’s from Geoff:

I remember Jim mentioning on the show that people would write him and tell him to stick to investing and not to worry or get on the geopolitics of the world. Well, I just finished Roger Kay and Donald Trump’s new book � well, let’s just say, throughout the entire book, they say the same thing, to know what goes on in the world. To read, read, read to know what goes on around you and how it could affect what you do. Also, Roger Kay talks about gold and silver � he loves them to say the least. So if Jim gets any more nastygrams, tell these individuals that he’s not just the only person saying that, but that billionaires are saying it too.

It’s really true, you can’t separate the world, it does not come in nice convenient little packages.

JIM: Yes, it’s a very popular misconception that people have and we talk about that three-legged stool that we see here: one is the geopolitical; second is the fundamentals; and the third are the technicals. I tend to rely more on fundamentals and the geopolitical, because to say that oil prices are affected by politics is just simply being na�ve. And I think that’s one of the problem sometimes with analysts that they overlook these factors, whether they’re looking at energy, they’re looking at commodities in general, or at the markets in general. [1:27:16]

JOHN: Plus also, your political philosophy is always tied to some kind of an economic philosophy, whether it’s transfer of wealth mechanisms, taxation mechanisms, regulatory mechanisms. Your philosophy of those things, or just observing the philosophy of the government involved, also affects economics. There’s no way to separate those two. And it’s interesting that people want to hear what I call compartmentalized truth. Stay in your little compartment, don’t slop over to the other compartments. But the world does not exist that way.

And all of that said, Jim, what are we looking at coming up next week here on the Financial Sense Newshour.

JIM: Well, actually, I’m looking forward to a change of pace a little bit. Next week my guest will be Andy Kilpatrick, he’s sort of the official biographer of Warren Buffet. He’s written a book called Of Permanent Value, that as I mentioned, that’s a book I read during Summer vacation. It is a lengthy book. Believe me, it’s the longest book ever written. It’s about 1700 pages. Fascinating stuff about Warren Buffet, his philosophy, his teachers, his investment decisions. I mean the guy is a born genius. It goes all the way back, he was doing smart things when this guy was a kid with a paper route. I mean he just has a firm grasp of what is a good business. But what I’m really looking forward to getting in to is his friendship with Bill Gates. And there’s quite a few years between them � I think Buffet turns 75, and Gates is in his late 40s I think � and these two guys are best friends. The number one and number two richest men in the world. Buffet is mentoring Gates on finance, and so I really want to get into that Buffet-Gates relationship. So that’s coming up next week, Andy Kilpatrick.

November 4^th, G Edward Griffin will be with us, The Creature from Jekyll Island. November 11^th, Jonathan Knee, The Accidental Investment Banker. We also have the November San Francisco Gold Show, as well as we’re going to do a show � I can’t tell you when but it will be before the end of the year � what I want to do is get 4 different experts on accumulating bullion, whether you want to get into numismatic coins, having gold held overseas, for example Goldmoney with James Turk; just buying simple silver rounds. So I want to get 4 experts and I’m going to interview all 4 of them separately, and maybe I can get them together and we’ll talk about that. So that’ll be able to help you if you’re thinking of accumulating bullion. This way you’ll have a wide variety of different experts coming at it from a different point of view and we hope you’ll find this to be very helpful. So that’s going to be coming up sometime before the end of the year.

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