Financial Sense Newshour
The BIG Picture Transcription
October 20, 2007
Part 1
RealPlayer
WinAmp
Windows Media
MP3
Part 2
RealPlayer
WinAmp
Windows Media
MP3
Part 1
$125 Oil
JOHN: Well, we bear unpleasant tidings for people out there on the listening circuit: Oil this week squeezed real close to $90 a barrel.
It wasn't too long ago that the pundits were talking about 40 to $50 oil because of an economic slowdown in January with warm weather. They were saying pretty much the same thing. So here we are, like I said, oil just under the barometer at about $90 a barrel. It just can't go any higher. We know that; right, Jim?
JIM: Sure. The thing about oil prices – higher prices get higher prices, John. Because there is enough momentum coming into this market $100 oil is certainly reachable. In fact, we're heading into the winter months with tight supply at a time demand should increase by close to two million barrels a day. And also, just pick up the headlines and take a look at what you're reading in the news: Geopolitical tensions with Turkey and Iraq. So all of the conditions are really ripe for $100 oil and I believe once we hit 100, we could go beyond. [1:08]
JOHN: Obviously, you have to ask a very salient question. You've got all of these quote experts end-quote out there. Why have they been wrong for so long? Whether we look at analysts, oil executives –everybody has believed that oil prices at these levels were unsustainable and they have been unsustainably wrong about it.
JIM: When we came out of the last recession, we had oil prices around $20 a barrel and there was a thought process: If oil got to 30, they said that the economy would be tough; if it got to 40 it would be tough; then it was 60, then it was 80. And you remember, John, when we went over $70 a barrel with Katrina and Rita, everybody said, “whoa, boy, is that going to impact the economy.” And here we are on the day you and are I talking –we're doing the Big Picture a day early –it's Thursday and oil prices closed at roughly $89.50 a barrel. So we're only 50 cents away from $90; and it's not that much to think about hitting $100.
So whether you believe in peak oil is real or not, the facts remain pretty clear I think. Demand is growing faster than supply. Just in the last decade we've seen demand grow from roughly 68 million barrels a day in 1992, to almost 84 ½ million barrels a day in 2006. And as we head into the fourth quarter of this year where demand is expected to pick up with heating-oil demand and the winter weather, we're expected to hit 88 million barrels a day. In fact, next year, the IEA (the International Energy Agency) is projecting that regular demand –and I'm not talking about the peak months that we're in now or the summer driving season – they are saying we're going to be at 88 million barrels a day. So, in a nutshell, world oil demand has accelerated while spare capacity has dropped. [2:58]
JOHN: Are we seeing this really as an indicator that peak oil is really an approaching reality despite all of the debate about it.
JIM: There are a number of people out there and one of my favorite experts, he's probably one of the most knowledgeable people I know on the subject, is Matt Simmons. Matt talks about conventional crude oil production peaked at roughly 73.7 million barrels a day and that was in 2005. Now, if you look at this year, the IEA reported conventional crude oil production is down to 73.1 million barrels a day. So here we are two years later and oil production is down by almost 600,000 barrels a day – And I'm talking about conventional oil.
So it appears, if you take a look at just the last two years in terms of peak conventional oil, it's already through the front door. [3:48]
JOHN: If we say then that crude oil has peaked, then how do we get to this 88 million barrels a day that we expected to hit – in the fourth quarter of this year, as a matter of fact?
JIM: Well, the balance of oil is coming from alternatives. It's coming from coal and gas-to-liquids and biofuels. And if we didn't have these add-ons, we would be experiencing shortages after 2005. So in my opinion, we're only looking into the future probably maybe 12 to 18 months away from a full blown energy crisis. It's been the alternatives that have kicked in since the beginning of this decade – everything from biofuel such as ethanol, turning natural gas into a liquid fuel, or coal-to-liquids. So we're already using the alternatives to get us where we're at now. I think that's the only reason that you're still able to pull into a gas station and fill your tank with gas. [4:41]
JOHN: In other words, there were other back ups out there and we're beginning to see some offset from alternative fuels. The IEA released a study pointing to this problem and they put in a window of 2009 to 2012 – sort of what I would call a ramped window. In other words, we would begin to start to feel this in 2009 and the full effect would be probably somewhere well into 2012.
JIM: I would suspect by the time we get to 2009, we're going to be well over $100 a barrel and that's their crisis window which begins right around 2009; which is, if you think about it, only around 15 months away. Beginning in 2009 in the study that they released in July – and we did a program on this back in the summer – but OPEC capacity begins to decline and stays that way for the next three years, so my target of let's say 125 to $150 oil is certainly in the realm of possibilities. [5:38]
JOHN: What is driving all of this now? I mean there must be obviously interrelated factors.
JIM: Well, in my mind, it's made up of three factors. Two are on the demand side and the other one is on the supply site. On the demand side, demand from the industrialized economies of India and China and Asia is very energy intensive. When the US used to be primarily a manufacturing society our economy was much more energy intensive for every dollar of GDP. If you look at the Asian economies where most of the manufacturing of the world has gravitated to, that's very heavily dependent on energy. So you now have strong demand coming in at the margin from China and India.
And in addition to that, here is one that nobody really thinks about – the strongest demand in the world in consumption is coming from OPEC countries themselves where demand is growing the fastest because oil is subsidized. And that leads to a more serious question, the more OPEC consumes, the less oil they have to export.
And then I think maybe finally the third factor: Despite growing demand from international oil companies and national oil companies, both of them are having difficulty increasing supply.
So the net result is the demand-supply balance is extremely tight, so prices are rising. We just simply do not have spare capacity like we did, let's say 10, 15 years ago, when OPEC spare capacity was 10 million barrels. So if there was a political incident, there was a weather-related incident, there was plenty of spare capacity they could bring to the market really quickly and the price of oil came quickly down. [7:24]
JOHN: One of the arguments that we always hear is we have all of these fields out there that just haven't been tapped, yada yada yada. And if those were there we wouldn't have a problem, we're slush in oil, so to speak. What about all of the talk coming from folks such as CERA saying that all of these new discoveries are coming online just by the end of the decade which is really less than three years away?
JIM: You know, if you look at the CERA people – and we tried to get them on the program to debate Matt Simmons last year, they turned us down – they contend that the average decline rate in the world...And when I talk about decline rates that means oil production is a depleting asset. When you make a discovery, oil production ramps up, goes up very quickly in the first couple of years but eventually you reach peak production and it starts to go into decline. And that's what they are talking about here is that 4 ½% average decline rate.
However, if you look at, for example, some of the major oil field decline rates, they are running much higher than that. And a good example is our neighbor to the south of us, which is Mexico, and their Cantarell field which is the second largest oil field in the world. Cantarell's production peaked in November of 2005 along with Burgan in Kuwait. But Cantarell's decline rates have been around 20%. So even if the 4 ½% rate is correct – and let's just assume that the CERA folks are correct, that that will be the average among all of the producers – if you take existing production at roughly 84 million barrels a day, the next two decades we're going to need to find nearly 90 million barrels just to keep us even to make up for the oil we're losing each year from decline.
And that doesn't even take into consideration the fact that demand, which is still continuing to grow, could increase by another 30 million barrels. So this brings up a very important question. Where in the heck are we going to find 120 million barrels a day of new production over the next two decades? Now that you can see why a lot of the experts believe we're heading for a crisis because where are the major oil discoveries? Where are the Ghawars, the Cantarells, the Burgans? Where are all of these giant oil fields that we discovered 30, 40, 50 years ago that are now going into decline? We haven't made any serious major oil discovery since 1968 and 69 when the North Slope of Alaska and the North Sea was discovered. [9:47]
JOHN: We have this cognitive dissonance. And it grows out of this because while a number of experts here, think of Matt Simmons and others, are saying, “hey, the numbers don't add up” – and every time we click through these Jim, it becomes real clear, this crunch seems inevitable – but at the same time, you go to the talkies and the experts there remain sanguine about the whole thing: “No problem, we'll cover this, the economy can handle it, the free market is wonderful, it will take care of it.”
JIM: I think what they don't see and look at it is we've always had oil. Just as conventional oil has peaked in 2005, but we've had all of these alternatives – coal, gas-to-liquid, biofuels – and there is kind of belief, “well, we'll figure something out, we'll bring in bio fuels,” – whatever it is, it will just be there. And there is also a strong belief that new technology is going to save us. What they aren't saying is that many of the world's oil producers have already peaked. You have to ask yourselves: where is all of this extra oil going to come from? We aren’t making the elephant-type oil discoveries any more. I mean global oil discoveries peaked over 30 years ago. [10:51]
JOHN: Which means, basically, that your prediction of higher oil prices would become a reality. Were looking now at $125 a barrel. And two things – what do you think that's going to mean at the pump? And obviously we always ask the question: what is that going to mean for investing?
JIM: I was speaking to an individual from overseas. He comes from London and he was telling me about $9 gasoline. We in the US are paying $3 here and we're thinking, “yikes, boy, is that high,” because we were used to a couple of years ago, four or five years ago when we were paying maybe a buck fifty a gallon. Now we're paying over $3. But if you put that into perspective, in Europe they are paying $9. And he said you think twice about the kind of car that you drive, even think about such decisions, “hey, I'm going to go across town and visit relatives or friends.” I mean, it becomes an economic decision when you're paying that price. So in terms of when we get to 125, Americans are going to have to get used to $5 gasoline working its way towards $10 gasoline. But certainly, John, I think if a couple of years from now we're going to look back fondly and say, “boy, I can remember when we used to buy gas at $3.” Three dollars is going to seem cheap. [12:05]
JOHN: You would say also this puts a real crimp on the European economy. I don't think the Europeans come to grips with that, do they?
JIM: It's definitely put a damper on economics in Europe along with other social programs, high taxation and a lot of regulation. That puts a damper on their economy. But one thing the Europeans have done, after the last oil crisis in the 70s, France went to nuclear power. If you go around Europe, they drive smaller cars because gasoline is so expensive. Go to a parking lot here in the US and you're going to see SUVs. And it's surprising, despite higher prices, though SUV sales are down in terms of year-over-year rates of increase, they are still selling.
People that I talk to and run into that aren't in the business, and we start talking about economics or something, “when are oil prices going to come down?” And I said, “they are not coming down, they are going higher.” And they kind of look at you like “this can't be true,” because for 20, 30, years this is the way it's always been. [12:59]
JOHN: We need to get this down into the area of investing because this is the environment in which we're working and investors need to know what to do.
JIM: First, you have to recognize that the major oil companies are going to have difficulty replacing their reserves. How does someone the size of Exxon or Chevron replace what it is they produce each year?
Another fact is that despite rising oil prices, lifting costs are going up for the industry. Last year they were up over 31%. So the energy industry, like the mining industry, is experiencing double-digit cost inflation.
So you want to be in companies that can expand their production and reserves and you also want to own the service companies that can help companies get more oil out of the ground. I would say up to this point, you could own just about any oil company and you did well. But I think as prices rise, as costs go up, going forward, it's going to be much more selective. And that is why I think you have to look at special, let's say, niche players.
However, overall, if you own oil, you're going to make money. It just becomes a question of how much money you're going to make. I've used this analogy before but I think it's so appropriate whether you're looking at the mining industry or the gold industry. If you go back to the last boom in the 90s which was technology, yes, if you owned the IBMs of the world, you made maybe five, six times your money. IBM made money for shareholders during the 90s. But the real money was made in the small, up-and-coming, growing niche players that were developing new technology: the Ciscos, the Dells, the Intels. That's where you really saw the upside appreciation. I think it's going to be the same way in the oil industry as well as the gold industry. You're going to have to go to smaller niche players because these are the companies that have special talent.
I've seen a lot of the smaller companies be more nimble. They can react much quicker. They've taken on some of the older projects that have been abandoned by some of the majors, turned them around, increased [recovery] through enhanced-recovery techniques, got more oil out of the ground, increased production. So you're going to have to go to special niche players because I think that's where the big money is going to be made in the energy sector just as it will be made in the same way in the mining sector. [15:17]
JOHN: You're listening to the Financial Sense news hour at www.financialsense.com.
RON PAUL: Like I said on the debate the other night, a lot of people are already in recession. And a lot of middle class people feel a lot poorer and a lot of people are working very hard to just keep up. It may be that the bureaucrats in Washington and the people on Wall Street and the bankers and the people in the military-industrial complex, or if you're in the medical-industrial complex, yes, they are all doing well because they get too use that counterfeit money first. But other people get it later and they get the high cost of living. So we're beginning to see that. And if we don't change our way, what will happen, which has happened more times than you can count because it's been numerous times, the currency becomes destroyed when it has no backing to it.
JOHN: That’s what Ron Paul was talking about this week. He gave a rather important address to the Robert Taft Club in Washington, DC. And he's saying a lot of people think we're already in a recession. Especially the middle classes, lower classes, they are feeling it. If you look at economic numbers lately, especially housing, it looks like the economy is really headed for more trouble. It's not going to match the rosy outcomes and the knights on white horses aren't going to be able to save it.
JIM: We're going to cover real estate and the credit markets next week. But, John, I think suffice to say right now, real estate is going to be a drag on the economy this year and all of the way into next year. Wall Street is acting like the crisis bottomed with last month's rate cut. The problem is that bottom is a long way off. I don't see it bottoming probably until the end of next summer at the earliest, and maybe it can be all of the way to the end of next year. [17:23]
JOHN: Well, looking at the gauges, what are the economic indicators telling you?
JIM: Let's begin with the job numbers that were reported for the month of September that got everybody excited that everything is going well. Everybody got exercised at the beginning of the month over those job numbers and it would appear from the government numbers our job market is still strong. However, most of these jobs are coming from the birth-death model which accounts for close to 80 percent of all of the new jobs that have been created this year.
And here is the thing that probably doesn't support these numbers, which doesn't add up – (And remember the birth-death model is supposed to represent small businesses that are forming, new businesses that are coming into being that the government doesn't poll.) – But if businesses are adding new jobs, then you would expect to see that confidence would be very high with business CEO's. And that's not what we find. If you take a look at CEO Business Confidence Index, it's at the borderline of where recessions begin. So I believe the job numbers are overstated and the job market is much weaker than generally reported.
JOHN: What about business spending? We always hear that's supposed to make up for consumer weakness on that side of the equation.
JIM: Well from a positive perspective balance sheets for companies have never been stronger: Companies are cashed up, debt is low, profits are almost at an all time record even though they are slowing. And that hasn't resulted in, let's say, the major lay offs that we saw in the recessions of 1991 and 2001 where companies were indebted, profits were in the tank. John, you remember the headlines: IBM lays off 50,000 employees. We're not seeing that kind of stuff. So from that perspective that's a positive.
But the other thing that we're not seeing is the strong balance sheets and the higher profits haven't translated into major increases in business spending. And so what businesses aren't doing is they are not spending the bucks on new plant and equipment. What they are doing is instead they are buying back stock or they are buying other companies which when you think about it adds nothing to increasing GDP. So, yes, businesses are in great shape and that's probably resulted in less lay offs than we've seen in previous economic slow downs, but by the same token they aren't spending a lot of money either. [19:51]
JOHN: What about exports, Jim?
JIM: That's probably the one area of strength in the economy: exports are obviously helped by a cheaper dollar. American goods become more competitive. But it's one area of strength in the economy.
The other area that is still holding up, believe it or not, is consumer spending. Yes, it's slowing down without question. But it isn't contracting at this point. And that's got to be one of the Fed's worries because obviously they are not seeing the big pick up in business spending that they were looking for. The only thing that has helped us is exports of capital equipment overseas. But the consumer spending level is slowing down. And the slow-down in consumer spending is obviously going to translate to lower economic growth. And so it's a question of whether they can keep it contained at a marginal low rate which means lower economic growth rates; or whether they can't because there is just too much indebtedness out there and consumer spending begins to contract and then we're in a recession. [20:56]
JOHN: I guess the big speculation point then is do we have a recession this year?
JIM: I really don't think so. There is enough strength left in our economy to probably get us to the end of the year. Next year, John, that's probably another story. It's going to depend on three factors:
A monetary stimulus – I think the Fed is going to cut October 31st;
Dollar devaluation, which continues to help exports, cuts back on the amount of imports into this country. So if we do spend money we're spending more on local created goods than foreign created goods and that helps on GDP;
And I think more importantly, fiscal stimulus.
[21:31]
JOHN: But the Fed has already begun cutting interest rates and is expected to move rate cuts by the end of the year.
JIM: Well, you have to understand that – and I do expect the Fed is going to cut in October contrary to the pull back in probabilities after those economic numbers – because we've just seen a slew of economic data that's pointing to an economy that's still continuing to decelerate. But when it comes to October 31st, I think we'll get a treat instead of a trick. But in order to avoid a recession, you still need fiscal policy to kick in. And the thing about fiscal policy, in contrast to monetary policy, is fiscal policy puts dollars into the economy immediately versus monetary policy which operates on a lag. [22:18]
JOHN: You'd better explain this one.
JIM: Let's take monetary policy. The Fed has cut interest rates a half a point, John, but as soon as they cut interest rates, what was the first response? As we've been talking about in Dying of Money, the first response is through the capital markets so you saw the stock market take off. But it when it gets down to the economy, real goods and services, businesses, or individuals may not go out and say, “aha, the Fed cut interest rates yesterday a half a point, I'm going to go out and buy a new home or buy a new car or we're going to make a major consumer purchase.” By the same token, businesses may also be holding back.
Monetary policy tends to lag when it kicks in, both on the rate hike cycle and also on the rate cutting cycle. So there is always a lag effect. In contrast to fiscal policy – and this is what the Bush administration used to kick start the economy when we were in the 2001 recession – if you use fiscal policy, either spending let's say the government authorizes spending on new, let's say, infrastructure projects that creates money immediately in the economy, money is being spent, so that helps with GDP. The other thing that the Bush administration did was cut taxes. If your taxes, let's say they pass a tax bill tomorrow and said that they were going to cut your tax bill by 50 bucks a week or something like that, John that's 50 bucks in your pocket that immediately goes to work in the economy. So fiscal policy has a more direct impact on the economy in terms of producing results immediately, something that you don't see with monetary policy.
The first impact of monetary policy when they are cutting rates is in the financial markets; which is exactly what we saw in the Dow going from 13,000 to 14,000 and then going on to hit a new record. Whereas let's say when the Fed cut interest rates we're still continuing to see foreclosures are up, real estate sales are down, the asset-backed commercial paper market continues to decline, total commercial paper outstanding is continuing to decline. I mean everywhere you look, the numbers are still saying the economy is continuing to slow and that's why I think it's going to take fiscal policy. [24:35]
JOHN: But we have political problems compounded into this. I mean the Democrats want to increase taxes, Republicans want to lower them, or at least they proclaim they do, and both parties want to spend money, which we’re already operating in a horrible deficit we keep talking about spending more and more of it. So then the question is how you're going to pay for all of this?
JIM: Well, you know, in terms of a percentage of GDP, the deficit has actually come down, both officially and unofficially. So it becomes a question of, you know, I think whoever gets their point across more effectively with voters. And you do have to understand that's going to be difficult because there is a lot of bias in the media against lower taxes. Even though we know lower taxes have a direct impact because it just makes common sense: You cut somebody's taxes today, that puts more dollars in their pocket when they get their paycheck and take it home; the government takes less, therefore people have more to spend in terms of what they earn. And that's the real tragedy here because they do need to cut taxes. But it's unlikely in a election year that the Republicans, oh, well, they'll talk about it, but in terms of are they going to cut taxes in the next 12 months, I doubt it. [25:44]
JOHN: Yeah. And last hour, if you recall, you talked about recession possibilities and you mentioned the government really has three tools to work with: Monetary and currency debasement and fiscal stimulus. And it seems with all three of these mechanisms we're doing right now just postponing the real day of reckoning. We'd probably be better off if we just took the lumps now, cut spending, cut taxes, changed the tax code (burning it would probably seem a better option, but it's okay I don't think they'll go for that), encouraging savings and investment. All we're going to do right now with all of these stimulus measures, it's like sugar versus real food, it's just going to make us worse off in the long run.
JIM: I couldn't agree with you more. This is no way to run an economy, John. But as we have talked about in previous shows, there is no tolerance in this country for economic pain. [26:34]
JOHN: So to sort of sum it all up, can we actually avoid a recession in 2008, or is that what we're going to face?
JIM: My gut feeling tells me that we could see a quarter of negative economic growth. You know, that may be the thing that causes both parties to get frightened and say, “oh my God, what are we going to do and how are we going to face the voters in November if the economy is in a recession?” Now, the democrats would want to use that to their advantage and blame the recession on the Republicans. So you have some political strategies that are could going to go on there. But I do think we may see that. We may see a recession in the first part of 2008, unless the Fed really gets aggressive, dollar debasement kicks in and businesses start saying “hey, we're sitting on a lot of cash, maybe we we’re better off putting that to work.” Right now, 2006, was the first time that oil companies actually spent more than they took in on cash flow. So I know the energy companies are spending a lot of money.
And it may be, John, that maybe the only thing they do agree on in Washington because remember, in an election year they like to hand out cookies and candy to the voters, they work on some kind of stimulus program whether it's spending money on infrastructure, on roads and heaven knows we need to spend a ton of money on this country's infrastructure. So maybe they can agree on something like that and maybe that can pull us out, or we may end up on the positive side in what I call a growth recession where you see the economy grow at rates that are far below normal – half a percent to the 1% level. Already, most of the economists are beginning to slash their economic growth rates for the economy next year. They are talking about a 2% growth rate versus 3 and I think we could be in the 1% range if not lower. [28:22]
Recession 2008?
JOHN: We were talking about recession possibilities, last segment, actually. And you mentioned that the government has three tools: monetary and currency debasement and fiscal stimulus. And in reality it seems that with all three that we're doing right now, it's just postponing the day of reckoning because we'd be better off if we took our lumps right now, cut spending, cut taxes, changed the tax code –nothing a can of gasoline and a match wouldn't handle to be honest with you but they probably won't do that – in favor of savings and investment. It would require a massive overhaul to get this whole thing going again. But all we're going to do right now, it's very much like giving somebody sugar instead of real food. It gives them a real big pump again with no real nutrition. All of these stimulus measures are just going to make us worse off in the long run.
JIM: I couldn't agree with you more. All it's going to do is postpone the day of reckoning. But the problem is there is no stomach for economic pain in this country and every decade, there is less and less tolerance for it, and that's why you have all of these massive type interventions. And at the same time, the government is getting bigger and bigger and bigger. It's occupying a larger percentage of our economy. And even though the government mismanages everything in every election, what do you have? You have politicians calling for more government involvement in the economy. And the problem is: None of this is anyway to run an economy. But here is the problem that we all face. Nobody in Washington really understands this point. You've seen, John, when the Fed Chairman goes on Capitol Hill some of the questions that these guys ask. It's outright frightening to think oh my God, these people are actually running the country.
This is a point that Ron Paul makes and I want to go to that clip, that he makes about this being no way to run a country.
RON PAUL: But I also don't want to run the economy because I don't know how to run the economy. And I can tell you, I can tell you, everybody I have met so far in Washington, they don't know either. They don't have the vaguest idea. And those few over there who think they are experts and they know what the interest rates should be, they don't know that either. The interest rates should be set by the marketplace. So I don't know how to run the economy, I don't want to, I don't have the authority to and it's not designated in the Constitution.
JOHN: Ron Paul says that they don't know how to run the economy, and he doesn't want to run it. But the politicians are always selling the free lunch, as if there was no consequences to constantly increasing these entitlements. Look at all the of the rumblings right now coming up with the totally socialized medicine. Medicare is a wreck, and so now we're going to make it a giant program and make it a giant wreck for everybody. It's always somebody else who pays. They never talk about exactly how their policies create inflation or the consequences of the stimulation policies leading ultimately to a bust. The subprime mess and the bust in the real estate market was created by the loose money policies; and yet they just act as if they come from somewhere else they constantly off load it. Here is a clip from Fed Chairman Benjamin Bernanke explaining the consequences of the subprime issue.
BERNANKE: Overall, US economic performance this year has been reasonably good. The rate of economic expansion slowed somewhat in late 2006 and early 2007. The growth in the second quarter was solid, and some of that momentum appears to have carried over into the third quarter. The pace of private sector job creation has slowed this year but unemployment has moved up only a little from its recent lows. And although energy prices have been volatile, indicators of the underlying inflation trend such as core inflation have moderated since the middle of last year. Moderate growth in overall economic activity has continued despite a notable contraction in the housing sector that began in the second half of 2005. The housing correction has intensified this year as demand has declined further. Inventories of unsold new homes have climbed relative to sales and house prices have decelerated with some areas of the country experiencing outright declines in home values. In response to weak demand and bloated inventories, home builders have sharply curtailed new construction. The decline in residential investment directly subtracted about three quarters of a percentage point from the average pace of US economic growth over the past year and a half. In its regular reports to Congress most recently in July, the Federal Reserve board has highlighted as a downside risk the possibility that housing weakness might spillover to other parts of the economy, for example, by acting as a restraint on consumer spending. Thus far, however, direct evidence of such spillovers into the broader economy has been limited.
JIM: What was amazing in listening to that quote, they are saying, “we have all of these problem in real estate that are now hurting the economy,” but what they didn't tell you is look, coming out of the last recession, we inflated. The money supply grew, we slashed interest rates to way below the inflation rate or economic growth rate to restimulate the economy. And John, you remember, after 9/11, when the president urged people to be American by going out and spending money. And recall, I think it was 2004, you even had people like Alan Greenspan that were saying, “you know, I think people out to get an adjustable rate mortgage, it's a better deal than a fixed rate mortgage.” And he said that right before he began raising interest rates. And what happened is the Fed created this problem but now they are sort of off loading it. It's like what's happening in real estate, what's happening in the mortgage subprime crisis. All of this is we had nothing to do with this, this just kind of came out of the blue. And they are talking about, “well, we're worried about inflation.” They created the inflation! And so people were urged to go out, spend money, buy homes, take out adjustable-rate mortgages. When you have the Federal Reserve chairman urging people to do that, that's exactly what happened. Too many people took out loans on properties they really couldn't afford with rates that were really artificially low. Now, we're starting to suffer the consequences. [35:29]
JOHN: Right. And now that real estate is going from boom to bust, they are reflating again. So obviously there will be consequences again as we get to the other side of the cycle and probably invariably attempts to offload the causes.
JIM: Sure. You're going to see a rise of inflation, and heavens, have we not seen that. I don't care if you're looking at the CPI numbers, the PPI numbers, and all of the stuff that they even don't count. I don't think I have to convince anybody that's listening to this program if they just look at their cost of living they are seeing those price increases. So we are already seeing the price and things that people need to buy in order to live go up. You're mainly seeing it in food and energy, but you're also seeing inflation in services – everything from medical to tuition costs to insurance premiums. Most costs for services, John, are going up in high single digits. So, yes, they are going to reinflate. And we may see an asset boom develop some place because that's what always happens when they begin on these reinflation campaigns. But there is so much inflation on the pipeline now that you're seeing some of the bad inflation that Jens O. Parsson talks about; and you're seeing that in the things that people need to live. [36:43]
JOHN: Jim, we don't talk about those things, the core rate is heading down. By the way Alan Greenspan was saying in the speech he gave recently we should maybe think about putting food back into the core rate. I thought that was really good.
JIM: Really! Guess what? We eat food. That's a necessity.
JOHN: It's like this: “I'm not the Fed chairman anymore, I can say this.” You see? So now that everything is heading down, Wall Street believes that the Fed has room to lower the rates and goose the economy one more time.
JIM: Yeah. In fact, speaking to Greenspan, John, let's go to that Greenspan clip on the core rate.
CNBC: And of course Mr. Chairman, it's not only oil that we're watching move higher, you've got the price of food going up, certainly all of the war materials that we talk about. How much attention do you think the Federal Reserve should be spending or paying attention to this in terms of determining whether or not to expand credit further?
GREENSPAN: Well, remember the notion of looking at a core price requires that you presume energy and food have no long term trend and that their fluctuations are essentially random. That is now becoming an increasingly questioned premise with agricultural supply not keeping up with rapidly rising demand, especially from developing nations. And as we've seen the price of corn, the price of wheat, the price abroad right across the whole agricultural structure – very substantial increases. And there is a major question as to whether or not the notion that it is a random fluctuation and will return to its average over the long run. That's a very serious question whether that's actually correct. It's certainly not correct with the issue of energy.
CNBC: So it sounds like you're not worried about the price of other commodities away from oil.
GREENSPAN: Well, other commodities are not as important largely because we're phasing out the heavy industry part of this world economy. As I'd like to put it, there is an ever increasing amount of conceptual GDP being produced and ever less in the amount of physical things. And it's largely the physical things that we produce that weigh something that you can see, you can feel, that create energy requirements and they are phasing down.
JOHN: So basically we expect inflation rate to keep rising but as you try to watch the off loading you're going to hear it more and more and more.
JIM: Yeah. He was talking about agricultural prices were going up and he made reference to Asia, the demand coming in. It's always something other than the money printing. [39:33]
JOHN: So basically you expect inflation rates to keep rising, but we're predicting this as this does, just watch the off loading. Here is a clip from Alan Greenspan on oil prices, which is going to give you some idea of exactly what we mean.
CNBC: So then you think that based on the supply of oil around the world and the potential for supply and production, oil should be – I mean I understand what you're saying free markets are – the market will adjust the price obviously, but I'm talking about real fundamentals in terms of oil around the world.
GREENSPAN: The basic problem with oil is not the fact that we don’t have enough crude oil in the ground. We do but it's located in places where national oil companies have monopolies and are using a very significant part of their cash flow for domestic purposes and not to be plowed back to increase crude oil production, which has been moving at a very slow pace. And as demand picks up as it has in China and elsewhere in the developing world, we're beginning to see a gradual pressure on the price level. And when you get a situation where we have very little buffer, which is the case today, and you get geopolitical issues as they’re occurring today in Turkey and Iraq, you get pressure on prices. This is what markets are supposed to do.
JOHN: You know he's really right about one thing he said. You do fall asleep listening to him. It really works. You just put him on your IPod and you set the automatic sleep timer for 15 minutes because you'll be out in 10.
JIM: Anybody having a – John, that's an idea for a new product. Suffering from insomnia, the Greenspan sleep-aid. [41:22]
JOHN: Now you've got my mind going how can we market this. But that just shows you what we're talking about here.
JIM: Sure. And you know, the one thing that he did not mention there, the main reason oil prices are going up is because demand and demand keeps rising as a result of monetary stimulation. When central banks around the globe are allowing the money supply in their countries to grow at, let's say, 50% in Russia, 21% in India, 18% in China, Australia 18%, Denmark 15%, Brazil 15%, Mexico 15%; the UK nearly 14%. That stimulates the economy, which as the economy grows faster it stimulates demand for the use of energy. So another reason besides this demand that's being stimulated with monetary stimulation is the dollar's depreciation because oil is denominated in dollars. The lower the dollar goes, the higher the price of oil is going to go regardless of demand. [42:26]
JOHN: True. And the amazing aspect about rising energy prices is that right now we're doing nothing to prepare for those higher prices. The only thing the politicians have done so far is to employ ethanol which is really energy neutral not to mention the spillover effects of higher food prices there, and we're focusing our effort on global warming as far as energy taxes and other issues. The problem is we don't have a global warming problem. In reality, we have an energy problem. And that's really not come on over the horizon yet in a lot of people's minds.
JIM: No. You're right, because the one thing we're not doing –and we talked about this demand – is increasing supply. Now he made reference to national oil companies using more of their cash flow from oil for domestic purposes rather than plowing it back into increasing production. So one aspect that is correct: national oil companies have a different perspective than an international oil company, which if they make an investment, they are going to try no pump out as much oil as fast as they can to get a return on their investment. National oil companies aren't doing that.
But it goes beyond that, John, because on the energy front, most of the energy we use in this country is in the form of fuel for transportation, but the other energy that we use electricity which powers our home, our computers, our appliances, we're doing nothing on that front. It started out everybody is aware of the term NIMBY – Not In My Backyard – well, we went from NIMBY in the 80s to BANANAS in the late 90s which is Build Absolutely Nothing Any Time Near Anybody; to CAVE in this decade which is Citizens Against Virtually Everything, to NOPE, Not On Planet Earth. If you're building wind turbines as they are in Texas, they are being sued because the wind turbines might kill a bird; they are not fun to look at. They are trying to stop, it's very difficult.
We're trying to do some thing to boost energy efficiency in our home and one of them is going to be solar tiles. And we're having a dickens of a time trying to get that approved. So it's all over.
And we should be moving and building nuclear power plants like they are in the rest of the world. But we're not doing these kind of things. In fact, it's funny because companies like General Electric build the nuclear reactors for power plants around the globe, but we want to stop building them here. And what is surprising even if you're on the global warming front is the left view in this country is they don't want to build anything. Let's listen to that interview of Barack Obama. [45:02]
AUDIENCE: In your speech, you talked about securing fissionable materials for weapon's grade. Now, I want to know because there's not much difference between nuclear power and nuclear weapons in doing that; and talking about your green energy and clean energy. I really want to know if you'll commit to not funding nuclear power because that is not a green energy.
BARACK OBAMA: Well, I can't make that commitment and remember I – you know, I've always, you know, when you're a politician you're always tempted to get some applause, but on this one, on this one, I have to be more qualified. Big chunks of the country currently are getting nuclear – are getting electricity from nuclear power. And nuclear power has a host of problems that have not been solved. We haven't solved the storage situation effectively. We have not dealt with all of the security aspects of our nuclear power plants and nuclear power is very expensive. Construction of nuclear power plants is very expensive. But I can't say in an unqualified way that we can't develop, overtime, technologies that deal with some of these problems and maintain nuclear power in the energy mix – peaceful uses for nuclear technology. And so what I've said is let's invest as part of the overall research and development that needs to take place – wind, solar, hydrogen, biodiesel, geothermal, all of that stuff – that we shouldn't simply remove nuclear power from the equation. We should invest in new technologies to see if we can make them more effective, but there has got to be a high standard and a high threshold. If we don't deal with the safety and the storage issues then it's uneconomical and we go for a better option. But I'm not going to just rule it out as automatically being a dangerous option. Because I think it can be a reasonable option and there are a lot of European countries that use it and use it effectively, and use it cheaply, and have a pretty good track record in terms of safety. [47:25]
JOHN: If you listen to that and Obama is trying to be reasonable about it, but there is more the question that was key there is that okay, people don't want fossil fuels, they don't want nuclear. In other words, she said it's not a green energy. We do have wind and solar, but they are not going to carry the load that has to be carried there. There is a real lack of understanding especially with the public exactly what we're facing right now in terms of energy and how fast this is coming at us.
JIM: Yeah. I think this is what brings us to the end game, John, as we head into that window between 2009 and 2012, where all of this intervention and what form it takes place – whether it's currency debasement, monetary intervention, fiscal intervention – when you run out of energy, when you run out of oil or you don't have enough electricity and people become inconvenienced, that's when this economy starts to grind to a halt. And that's when it doesn't matter how much money they are going to print because the Fed cannot create a new oil well. They can't create a new power plant and that's where I think we're going to have the real problem start to step in. But we're not facing those issues. We're not telling people about it. All we're telling people right now is look, we can give you more goodies if you elect us and we can make somebody else pay for it. “You won't have to pay for any of this stuff, whether it's socialized medicine or its some other spending program. It's all free.” [48:56]
JOHN: We went from NIMBY to NOPE and maybe we're coming into a new phase we'll just call it since we don't know what we're doing, NIMBY PAMBY. What do you think?
Well, and I think the real issue to point out here with the whole collision, Jim, is the fact that once everybody does wake up to that, it's too late to stave off an immediate crisis. That's the point.
JIM: Yeah. We were talking about intervention in this segment and we sort of side-tracked here on energy but it is going to be very important, John, because the government commission gentleman by the name of Robert Hirsch has taken a look at peak energy and he published a report in 2005. And he said, “like it or not, peak oil is a realty. It's going to take place in the next two decades.”
Now given the fact that we know this is going to take place, the ideal solution would be you start taking steps in terms of conservation, changing your transport system, more energy efficiency, working on increasing our extraction of resources to get us into a transition and come up with alternative fuel systems and the same thing for electricity. So if we can do that two decades before peak oil because it's going to be a breeze, we'll get through it.
He says the second best situation is if we start doing this 10 years before, then we're going to have some problems because John, it takes, what, almost seven to 10 year to build a refinery, seven to 10 years to build a nuclear power plant. Just imagine what it's going to take to change our transportation system, to move to hybrids, plug-in hybrids, more efficient vehicles in the transportation system because that's where most of the use is. So if you’ve got to do that in 10 years, you're going to have a problem and you're going to have to get through some tough spots. It's going to be hard on the economy, but you'll get through it. The worse case scenario is when you don't do anything and you've only got a year or two to prepare for it, then you're in big trouble. And that's where I think we are and these guys are talking about, “oh, this is something we can think about.” Our only solution is to get someone else to do it. We know we need refineries, but we want them built in Canada. We know we need oil, we're consuming a lot of it, we need natural gas, but we want the drilling done in Mexico, or somebody else's territory. We don't want it here. So one of the things that we've done as a country is not only have we outsourced our jobs to other countries by gutting our manufacturing system, but we have also outsourced our energy. It's just an unsound policy, so it's nice to hear Obama say something like, “look, I'm not going to rule out nuclear energy. They are using it elsewhere and they are not having problems. You know, I'm sure we can solve that problem here.” [51:48]
JOHN: Yeah. Part of the storage issue is the quantity. And the reason we have the issue on the reprocessing is not due to a lack of the chemistry required to reprocess spent fuel, but rather because of treaty requirements that we have signed ourselves into – stuff which is left over from negotiations with Korea and or the cold war era. And that's what's holding it back. It's not because of the technology; or it's actually chemistry in this case, it's a chemical process used to reprocess the rods. So that's what we're facing here. It's not that we can't do it. It's that we're choosing not to do it right now like you've been talking about.
JIM: It's just a matter of public education. And the scary part, John, is you listen to these political debates. This is on the back burner. If anything, they are attacking it. Edwards attacked nuclear power. I was glad to hear Obama say, look, I'm not going to sweep that aside. It's a viable option. But for the most part, the energy issues really aren't being addressed here. About the only thing they've done is they've drafted a new bill to tax the oil companies. [52:51]
JOHN: Let's get back on track with what we were talking about before. Somehow we went down a rabbit trail there. All of this intervention finally is going to catch up with us. Right now everything that they're doing to intervene is simply going to sweeten the poison well and try to get it to keep going just a bit more. When it does catch up with us, it will rise faster. You know costs will go up faster than most people's income. Life for the poor and middle class is going to get very difficult because they have little or no head room as far as their daily income.
And by the way, it's always point to remember this, Jim, these programs are always sold to the public on, “think of the poor, think of the whatever,” and in the end it's those very classes that get impacted by this. The sad part they are going to keep voting in the very people who keep the whole thing going and it's just going to make their lives worse. Politicians will promise to make life better and what they do will make everybody miserable. The best they can do is try to make the best of it because it's sort of a vicious, repeating cycle until the public catches on to what's going on. [53:50]
JIM: That's why I think I believe the next mania, John, is going to be in things, or anything that central banks can't print, because all of this –this intervention, monetary stimulus, currency debasement, fiscal spending – is just going to create higher rates of inflation. Which is why we talk so much here on gold, energy and commodities which are things people have to have to live.
And going forward, we are going to see higher nominal stock prices and that will be the good kind of inflation. But it's also going to be accompanied this time by larger doses of the bad inflation along with it. Eventually paper currencies are going to go through a process of major devaluation. We already have politicians in other countries saying “hey, look, if the US is going to reflate and devalue, we've got to respond because we don't want our currency to get strong. It's going to harm our economy.” So they are going to continue to devalue and this whole process of devaluation will continue until the present system collapses.
Eventually what I see is four currency blocks that will emerge and the effort is going to be to try to merge them into one with let's say a global currency and a global central bank. In other words, the solution to the currency crisis will be, “oh, if we only had a global central bank then we could solve all of the banking issues that occur in one area of the world with a global central bank. You won't have currency issues if you only have one currency. That way we can inflate the hell out of it and there is no outcomes.” That's where they are trying to head us towards and it's two going to be unfortunate because we're going to go through a very difficult process this time as money loses its value. Which is why we almost did, what, close to a month on Dying of Money, because I think that's going to be one of the most important issues besides peak oil going forward is going to be the value of all currencies are going to depreciate. And we're going to have in some countries, and I believe you'll see it here, you'll have hyperinflation, John, which is going to destroy the wealth of the country. You inflate the debt away. And there are two ways you get rid of debt. You cleanse it through defaults or you inflate it away, and that's the direction I think we're heading in. [56:10]
JOHN: Jim, it's really ironic that, if you recall, remember what you were saying talking about a global central bank, so first we get all of the world's currencies to regional currencies. Gee, what one could we use for North America? Let me think hard for this one. I bet they call it something like the “amero.” Just like the euro. And then we're going to tell people if we just have an international currency, one world currency type of thing, everything would work. But do you realize that was the very same argument that was used for the creation of the Fed almost a century ago was that the reason we have this problem is we have all of these different little regional banks in the United States. And if we just had a central bank, we wouldn't have any of these problems with the business cycle and the boom-bust. That was the promise. Remember.
JIM: Yeah. They'll use the exact same argument for a global central bank and a global currency. The arguments have already been made. The papers have been submitted, the studies have been made and that's the argument. In other words, gosh, if it doesn't work in each country, a central bank maybe it will work if we just make one central bank. And you won't have a currency problem, John, because if you don't have a euro, a dollar, a peso, a yuan or any other type of currency, a krona, if you just had one currency, how could you have currency problems in the market when everyone has the same currency? So that will be the argument, and what you need to administer a world currency is a world central bank. [57:38]
JOHN: Yeah. You can see this one coming. And maybe to find out where everything happens when you begin to devalue currency like that, we go back to Congressman Ron Paul and his talk earlier in the week:
RON PAUL: A destruction of a currency is very dangerous because no matter how many checks you write to the elderly, it won't work because the costs will go up much faster than the depreciation of the money. Other countries have experienced this. Mexico actually understands inflation a lot better than Americans do because they've gone through currency destruction. Of course, Germany and France and many of these other nations have experienced this. We've only experienced it once and that was the Continental dollar and that's why the founders were so adamant: “Don't do this.” They advised us stay out of entangling alliances, mind our own business, but also have this additional restraint by having only gold and silver as legal tender.
JOHN: There you have it. That's the end game of every currency destruction in the history of the world. We're following the same path, even if the rhetoric gets a little more polished as we go, the end result is going to be the same. You're listening to the Financial Sense Newshour at www.financialsense.com.
Part 2
Intervention
JOHN: Well, welcome back to the Financial Sense Newshour. One of the reasons we exist, Jim, as I always explain to people is that if the main line media were doing their job, we wouldn't have one. It's a negative incentive type program here, meaning the longer that they don't do their job, the longer that we stay around. Let's review what happens on the evening news. I don't watch much of the evening news. Occasionally, I'll flip around just to see what's going on quickly. I don't sit here and spend a lot of time on it. So give me an itemization, you were flipping around when we were talking on the phone the other night. What were the stories covering a tremendous earth shaking import for the country?
JIM: It was amazing. I workout with weights three times a week and my workout normally takes me a full hour, so I turn on the news and in a newscast of one hour, John, we had the rescuing of an 800 pound alligator. That was good for three or four minutes. We had a police officer who yanked a woman out of her car, 30 seconds before a train going 70 miles an hour crushed her car and we had Ellen DeGeneres breaking down on her television show because apparently she got, I think, some dog and gave it – it was from a humane society or something like that, or animal shelter center. And instead of keeping the dog which is what the contract said, she gave it to her hair cutter's kids and they took the dog away, so she was breaking down crying on the news set. And then there was this segment about two ex-rock and rollers who were criticizing our economic and our foreign policy.
And I'm thinking, wait a minute, you know, we've got Putin in Iran, we've got oil prices at close to $90, we've got the economy heading into a recession, we have geopolitical tensions. All of this stuff – that huge number of economic stories yesterday, whether it was losses in the banking system, a drop in the asset-backed securities index (you know, a lot of these asset-backed securities were selling at a buck at the beginning of the year just in the last week, they dropped from 27 cents down to 20 cents); the number of default rates that were going up. All of these economic issues, political issues – a new cold war developing. The stuff that you would think people would want to know, John, but why in the heck we spent so much time on Ellen DeGeneres crying on her television show, it's beyond me. [2:42]
JOHN: Maybe the theory is the old Roman theory of give them games.
JIM: Yeah. And I think it's why the major networks are losing so much of their audience. And I don't even go to the major networks because in a half an hour newscast you just don't – the stuff they are going to tell you at 6:00 is irrelevant. It's – most of that stuff you already heard about, especially with the internet today. And I think that's a big difference. And that's why I think about the only saving grace that we have today is Internet news, because if it wasn't for that, John, we wouldn't be getting relevant stories. I think there is going to be a growing gap between those that are informed and those that are uninformed just as there is a growing gap and wealth in this country, I think there is a growing gap in intelligence and information. If you're relying on the cable channels or the major news channels for your news, John, I'm not sure the kind of news you're getting is going to help you in any way in terms of figuring out what's actually going on in the world or that matter this country, the market, the economy, etc. [3:54]
JOHN: All right. So is there a solution to this? Okay now that we know there is no solution except continually listening to the Financial Sense Newshour.
JIM: You know, it's programs like ours and there are others. But the scary thing about it is more foreigners probably know more about what's going on in our country economically, with our markets and politically than most people in this country. And you talk to foreigners and this is what I have always found, they seem to be more informed about what's going on in this country than many of the people that you talk to in this country. And God help us if we're going into an election year next year where the presidency is going to be up for grabs, the entire House of Representatives, and one third of the Senate. And if this gal who was questioning Obama doesn't want nuclear, she doesn't want – God knows what she wants as a solution. But, you know what, given that intelligence, that's what policy discussions appeal to and we may elect some people in 2008 from the presidency, all the way down through Congress that may enact policies that can make life in this country miserable for most people. [5:17]
JOHN: That would be until such time as people begin to feel the pain that you're always talking about. When they do begin to feel that pain, then of course, in frustration, the people throw out one group of rascals and because of the way the system is, they put another group of rascals in.
JIM: I just think the whole system comes crashing down, and it’s we're going to have to rebuild afterwards. Given the direction of what I see in news, given the direction of what I see coming from politicians, John, outside of Ron Paul who is talking about: “Look, if you inflate, you cut interest rates and expand the supply of money, you're going to create inflation.” With inflation, you're also going to have currency debasement and this stuff does not end well. It does not workout.
And you know, one thing that he brought up in that one clip that we played in the last hour that I thought was very, very prescient here and that is for most of us as Americans, the stuff like hyperinflation in Germany in the 20s, or what we saw in Russia in the 90s or Turkey or Argentina or Mexico in the 80s, that was always something that, you know, the rest of the world experienced. And we in the United States have never had to go through that hyperinflationary scenario. And as Ron Paul talked about, we went through once with the Continental dollar and the founding of this country.
But through most of the US history as a nation over 200 years, we've had stability in our currency and I say most of that time. This is going to be something new for Americans. And I think you're right, John. What will happen is we’ll do all the wrong things. You remember how government responded in the 70s when oil prices were going up, when inflation was going up double digit, that was back in the days when we actually reported the true rate of inflation. What was the first thing? Nixon came in with wage and price controls; Carter came in, wage and prices controls, we came in with windfall profits tax. We did all of the wrong things, which just made it...and you're right, what we did is we just kept throwing out one group of rascals after another until finally someone like Ronald Reagan came in and said: “No, government is not the solution, it's the problem.” [7:37]
JOHN: All it does, by the way, when they do those measures, you simply delay the effects for some time and when it calls back in, it comes back in with a vengeance at that point. It comes in worse than if you had done nothing. But people who don't understand the process and Americans don't today to a large degree, are taken by surprise when all of this happens. They really don't know. They just want to get on with their lives. They don't know what why everything is doing what it's doing. “Just fix it” is sort of the cry and that's why it goes the direction it is.
But the biggest problems Americans face today is illiteracy and lack of knowledge of their own history is the biggest problem they face. So as such they are condemned to repeat these patterns and we put a little more space in time between them if you look at it, between how these events stack down when they finally come. And as a result of that people forget what happened previous times or what. I like to talk to people who went through the Great Depression and ask them why we had this Great Depression and a large number of them, Jim, still don't know why that depression occurred. They don't have a clear idea. I'd say we were like George Santayana: We're pretty much condemned to repeat this pattern.
JIM: What was the old Mark Twain: history doesn't repeat itself but perhaps it rhymes. All of these scenarios play out a little different. In this next reflation era that's going on now, there is going too become a new mania. I think the new mania in this next reflation cycle is going to be commodities. It’s going to be gold, silver, oil, natural gas, agricultural commodities, base metals. That's going to be the new mania. And as long as we get rising prices and some kind of asset bubble, it's relief valve for people because some people can say, “maybe my wages aren't going up but my investments are going up in nominal terms. My portfolio is going up,” and that helps people sort of cope with these things. But in the end game whether the demand for money falls, that's when, John, the velocity of money starts increasing to such a level that prices begin going up faster than they can print money. Money may not be able to catch up with the degree of currency depreciation. You really saw that, for example, in Germany in 1923 until the crisis finally ended. And in the end, politicians will be forced to fess up because eventually this stuff won't work, as Ron Paul talks about. And that's we just did a series of Dying of Money over the last four weeks, but we're going to be doing more on the ways this works its way through the economy, how it distorts it. That’s because John, if the media is not going to do the job, then programs like ours or other programs are going to have to do that job. That’s because unless people are informed, how are they going to make the right decisions? And if we're heading into this crisis and maybe the best thing you can do at this point is just protect yourself. And that may be the only solution in the short run because as Keynes talked about in his book, in the end we're all dead. What he is referring to is it the death of money because that is where this is all heading. [10:49]
JOHN: There is an old proverb that says if you are wise you're wise for yourself. You can't force somebody else to become wise, so I guess if we talk about alternative media there are two purposes. One is to tell people the bad news, and second is to tell them how to get through the bad news. And if that's true, then there will be no lack of demand for alternative media unless of course something like the Fairness Doctrine comes through and tries to shut her down, which I think Congress would like.
JIM: Well, you know, it's amazing too, they tried to resurrect it again this year and both Republicans – it was proposed by Democrats but you had Republicans like Trent Lott that said, hey, we need to get this into effect because the alternative media has been criticizing the Republicans too and they don't like that. And it's like: “Listen, if we didn't have this alternative media we can go with the goofy that we call evening news or cable news with the celebrity or the entertainment-type aspect of news where you know, nobody keeps a close eye and we can get away with the things that we do.” [11:50]
JOHN: That's what make it's fun. It's fun being a rebel. You know, in all reality, though, you know, Jim, I think media is at its best right now. This is why the media, especially the alternative media really shine. They live up to the expectations I had when I first went into broadcasting in the mid-60s is that it could be a very powerful medium to inform and to shape people's minds. And unfortunately, even back in the 60s when everything was driven by what happened with your sponsors, you know, that was a major change back then. But now the whole model is changing as to what is being on-line.
FSN Comic Relief - EF Mutton
JIM: Well with the stock market going the way it is today it seems like all sorts of people are changing careers, and getting into running small time stock brokerage firms. One such person is Mr. Edward F. Mutton, who joins us here on the program today.
Mr. Mutton, can you hear me on the satellite hookup?
EF Mutton: [Baa-Baa] Why, yes. It’s a little noisy here with all the sheep – [speaking to sheep] Stop that, stop it! – but I can hear you fine. It’s just fine. Go ahead.
JIM: And what was your business before you founded the Edward F. Mutton brokerage.
EF Mutton: Well, before I founded it, well, Mr. Pooplava, I...
JIM: Uh, That’s...that’s Puh-plava.
EF Mutton: OK, I’m sorry, Mr. Puhlava. Actually, I’m running a...excuse me?
JIM: Just call me Jim.
EF Mutton: OK, Mr Pooplava I’ll do that. Actually, I’m in both businesses.
JIM: So what’s the business besides the brokerage.
EF Mutton: I’m a sheep farmer, can’t you tell!? [Baa-Baa]
JIM: Boy, that’s quite a jump in careers.
EF Mutton: Well, no not really they’re, haha, pretty much alike if you take a look.
JIM: Really? Tell our listeners how.
EF Mutton: Well, first of all in sheep farming sheep come to you, and they make a lot of noise until you tell them what they want to hear. You get ’em to trust you. When they’re not looking, you fleece them!
JIM: Aha, so how does that work in the brokerage?
EF Mutton: Pretty much the same thing. First you get your clients to look in the rear view mirror – economically speaking of course, sheep would never do that. Then you make them believe those bogus government figures, and the hype on Wall Street. Give ’em a little stuff that works so they trust you real good. And then when they’re fat enough you tell them to buy all sorts of stuff they don’t need while you dump it at the same time. I mean, it’s sheep-shearing genius.
JIM: So, you pull the wool over your clients’ eyes by engaging in illegal pump and dump schemes.
EF Mutton: Ha,ha, Well, Sir, Mr. Poo-plava I’d have to go on the lam if I answered that.
JIM: But wouldn’t it be better to run an ethical brokerage firm?
EF Mutton: Well, listen young fella, that’ll happen when sheep learn to fly. [sound of flying sheep hitting the ground] Umm, they’ve been doing that all morning ever since they heard your radio show.
JIM: Well, our time’s just about up. What are your best stock picks for the third quarter of this year.
EF Mutton: Hmmm, well, our best pick for the third quarter? Well, I think…
Announcer: When EF Mutton speaks, the sheep listen. Not regulated by the SEC – the sheep exchange commission.
Q-Calls
JOHN: Time to go to the Q-lines. The Q-Line is a line we keep open for your convenience 24-hours a day to phone in and record a question or comment for the show. It's a toll free number in the US and Canada, 800-794-6480. That number does work from the rest of the world, but you have to pay for it if it's anywhere else outside of the US and Canada.
And also, I should remind you that the content we provide you here is for your information and education only. It shouldn't be considered as a solicitation or any kind of an offer to purchase or sell any securities or anything else. Our responses to the questions you send us here are related basically to what you tell us about yourself. We really have no idea of exactly what your objectives or risk tolerance or suitabilities are. We're simply given the opinions of Jim Puplava here. And because of that the Financial Sense Newshour is not liable to any person for financial losses from investing in any companies profiled on the company or anything else that we talk around here. We are a news program. You are wise by the way if you go listen to other programs as well during the week to get a wealth of information and then compare.
Here we go to the Q-line. We've got quite a few callers today and we always remind you, please, when you call in, keep your thoughts to the point. Otherwise it gets long and tedious.
First call is from California.
Hi my name is Dilip. I'm from Santa Clara, California. The question: I have been prepaying my mortgage to the extent of about 7 or 8% of my loan balance over the last three or four years. But for one year I want to try something different, to put this 7 or 8% money in a combination of the Central Fund of Canada and then possibly in something like the GDX the Gold Miners ETF for one year. And then hopefully over the next 8 to 10 years if it can appreciate. Well, I might be able to pay off a large part of my mortgage. So what do you think of this idea? Thank you very much.
JIM: I think in the next 8, 10 years that might take place with where I expect gold prices to go. [17:07]
JOHN: You know, something added something by the way like do we know about how mortgages are being sold off. And this keeps coming up. We don’t seem to have an answer yet about how do you find when does your mortgage go on the chopping block, so to speak? When is it being bundled into a security with something else and being sold to somebody? That's not listed anywhere, is it?
JIM: You know, usually, they are packaged. There are so many mortgages that go into pools you'd have to find out the mortgage pool. I suppose you could probably find out from a lender who owns it and is it securitized but it would take a bit of Sherlock Holmes work to do that.
JIM: You know, this sounds like a challenge. Maybe I'll do that. Here we go. Let's see.
Hi, Jim and John. Love your show. This is CJ from Massachusetts. I have a question about the peak of precious metals. I keep hearing from many sources including yours, that the peak of precious metals is X years out there. This bull market and precious metals has X years left to run. And looking back in the past, that is the way it worked. But looking into the future, I don't see a peak here except infinity. My reason for that has to do with peak oil. If oil really is going to peak and slide down some razor blade, then I think OPEC – whoever has oil – is going to say the paper program is over. If we want paper, we'll go to Kinko’s. If you want oil, you're going to have to pay in silver or gold.
And as oil gets scarcer and scarcer, the only thing you can purchase oil with will keep increasing in value, that is – namely being gold and silver. So the only time I can see a peak in precious metals is when a substitute is found for oil. And right now, nobody knows what that would be, so how can anybody successfully call for a peak in precious metals. I don't think there is going to be a peak in the value of precious metals and then a slide into a trough like we've seen before. I think it just keeps ramping up and up until an oil substitute is found. And that could be 10 years away, people who are predicting that might end up being right. It could also be 50 years away. Any how, appreciate your comments on that.
JIM: CJ, some interesting thoughts. I think perhaps in the end when we get all of this currency debasement, they will have to revalue gold. Who knows what they do it at? 5,000 an ounce, 10,000 an ounce. Depends on how far the debasement goes. And then they use a currency backed by gold. That would be the only way. Otherwise, sure, I think you might see some of the stronger exporting countries as they see these currencies depreciate – not just the dollar but also the euro, the yen and other currencies – that either they buy gold, either by getting out of their paper and buying it directly, or demanding payment in gold. [20:16]
Hi. This is Dave calling from Canada. I thought I would just provide a perspective on the economy up here. Basically everything east of Ontario is doing bad and everything west of Ontario, Manitoba to BC seems to be booming. You had something on last week about the government is always trying to take more taxes. I thought you might find this a little interesting. A couple of years ago the Manitoba government NDP they were running short of their money. They happened to control Manitoba Hydro so what they did was they basically went and raided them for $150 million and voila, they had their balance sheet. So I think a lot of that in the future could go on in Canada where you have these government-owned entities that need money. So they just basically go steal the money from their energy companies and pass it on to the consumer. In Ontario, I wouldn't be surprised if they have an outhouse tax because that's where the economy is heading. Anyway, I just thought I’d provide that information. Bye.
JIM: Great comment, Dave. [21:11]
Hi, Jim and John. My name is John from Tel Aviv and I don’t miss any of your shows. Two questions. The first one: If gold for example goes to $3000, about four times from today, how high will the junior gold stocks do on leverage at the same time? By what factor will they outperform the major gold stocks and what factor will they outperform the bullion? The second question: same question for the Canadian junior oil and gas stocks, if oil goes, for example, to 150 or $200, how will the junior oil and gas stocks do compared to the crude and to the oil stocks? I know it's only your estimation. Thanks.
JIM: John, normally the gold stocks go up about three times the price of the bullion itself. Now, lately, the gold stocks have really taken off here in the last six weeks. But up until, let's say, the Fed cut interest rates, the gold stocks were lagging behind the price of bullion. So when I say this, I'm talking about over an extended period of time: you can expect that the gold stocks will probably perform three to five times the price of bullion. And especially when it gets to junior stocks. The same thing applies to your question as to junior oil companies. [22:37]
JOHN: Talking about media, Jim, I was just noticing our Q-list today and we have calls from all over the word here: from Israel, Argentina, Spain, Panama and strange far away exotic places like Canada. But that shows you how the internet has completely changed the whole process of things now. Next question comes from a mundane place, Massachusetts.
Hi. This is George from Massachusetts. I've been listening to FSN podcast and enjoy the show immensely. Anyway, I've been collecting gold, silver and platinum Eagles and other releases of the US Mint beginning with reissuing precious metal coins starting 1986. I've always thought this sort of investment was a good inflation hedge and also a foundation portion of any diversified portfolio. Certainly coins have two appreciation mechanisms working for them in the form of precious metal angle and the numismatic angle. Anyway, my question is that I rarely, if ever, hear much discussion on your show about other precious metals besides gold and silver. For instance, palladium, rhodium, or particularly, platinum. Do you foresee maintenance of the current value ratio of platinum to gold which is roughly two to one right know as gold and silver continue to appreciate? And would you advise investors to buy more platinum because of it? Thanks for a great show.
JIM: You know, George, you could see that ratio maintained because a lot of platinum and palladium are actually consumed, even though they are also viewed as in the precious metals category. So they would continue to do well. We'll try to hit that. That's a question somebody else has brought up: “Why don't you talk about some of the other metals?” And we'll see if we can do that. [24:11]
Hi, Jim and John, this is John from Minneapolis. A 7th term Congressman from Minnesota James Ransom is retiring next year. A great candidate for a position was Minnesota state Senator Geoff Michel, but he had this to say about running for Congress. “After giving it serious thought, I concluded that Congress is broken and the lifestyle of a member of Congress is unappealing. It would be well worth the effort if Congress was an institution that was working well. It is not. The life of a member of Congress is now perpetual campaigning, countless hours on the phone raising money and incessant travel. Members of Congress seem very busy doing everything but the actual work of the people.” What do you think of that?
JIM: John, it's a sad, sad, day. I believe that to be true. Especially for people in the House of Representatives where they run for election every two years. And that's one of the problems. I would be in favor of extending the House of Representatives to a six year term so these guys don't have to campaign and maybe actually get some work [done]. But on the other hand, if you take a look at some of these people running for Congress and their education, maybe it's glad they don't do work. We’re probably better off when Congress is out of session that they don't do something stupid. [25:20]
Hi, Jim, this is Bert in Yuma. I have some options for two large gold companies that expire in January, 2009. And yes, I know that these are derivative positions, but what I would like to know is, is there any counter party risk as far as these exchange traded options or will I in fact be guaranteed by the exchange that when the time comes I'll be able to exercise them? Thank you.
JIM: I think there are some guarantees that come in from the exchange. I think the fact they are expiring in January 2009. I mean if gold really goes ballistic, remember, there is always counter hedging. The people that write these options as the price of gold goes higher, they are going to hedge that position that they've written to you, let's say they've written a call and you bought that call if the price of gold goes higher, they are going to hedge that position. So at this point, I don't think there is much risk. [26:17]
Hi, Jim and John. This is Looney Tooney, shirt tail relative of Andy Looney. The reason I'm calling – first of all I want to mention I'm reading Doug Nolan's Credit Bubble Bulletin.
And it says that the 11 week gain of money fund assets is up 60% and commercial industrial loans is up 21% and credit up 18 ½% annualized. So I want to find out if you think that's inflationary. I think it's inflationary. Do you think it's inflationary? I was wondering if you believe like I believe that Zimbabwe is our model for monetary policy.
Now, the question I have actually is that since Japan has zero percent interest rates and they are actually a productive economy, which saves huge amounts of money and reinvests in plant equipment and things like that into the real economy. And they also went through a huge deflation over an entire generation. Why is it that we would not experience that given the fact that their national debt to GDP is about double what ours is and they have created vast amounts of money to try to inflate their economy. So how is it we don't have the Japanese experience? Anyway, I'd really appreciate your insight because it's puzzled me for quite some time. Thank you very much.
JIM: Okay. Looney Tooney, let me see if I can explain this.
JOHN: I can hear the family resemblance there by the way in the way he talked.
JIM: Yeah. He said: “Do you believe there’s inflation. I do.”
JOHN: I do.
JIM: The reason that there is vast differences, Japan in the 1990s was very similar to the United States in the 30s. They are a creditor nation versus a debtor nation. Big difference.
Two – they save and invest. They are a manufacturing power house still to this day, the second largest economy in the world. One of the reasons also that they've been able to do this, and this accounts for the large carry trade that you see in the world today, Japan exports its monetary inflation just as the United States does. So as Japan increases the amount of money and credit that's available within the society, rather than investing that domestically which would drive prices up, most of that money goes overseas. That’s because when you have a zero percent interest rate as they do in Japan, why would you keep your money in the country where you earn nothing on your savings. So it goes overseas. So you have a large offsetting of that money. It doesn't stay within the economy, it goes into overseas economies like the United States or elsewhere. [28:59]
Hi, Jim and John , this is Mark from Vancouver island, Canada. Love your show, I think you guys are doing a great service to people in the whole world. My question really is about a US broker. Last year I was really impressed with one and I had some of my assets transferred down to a US bank to help me invest mostly in foreign stocks. And the results thus far have been excellent. I'm really pleased with the return. There is however, one lingering worry in the back of my mind and that really has to do with the idea of capital controls and the future of the US financial system. Is there any way I can minimize this risk as it's reasonable to ask for the shares directly or can I have the shares somehow transferred to a Canadian bank? Anyway, I look forward to your answer and thanks a lot for your help and keep up with the excellent work.
JIM: Mark, you'd have a couple of choices. One, you could take share of certificates directly; secondly you could have them transferred to another broker. But if you're dealing with somebody that's doing a good job for them, he's probably keeping you in things that are doing well in this market. Another solution is to just keep with the program that you have assuming that you're in assets that are appreciating. In other words, you're in hard assets, you own gold stocks, energy stocks, commodity stocks and those kind of things which will go up far more in nominal value above the real inflation rate. [30:21]
Hello, Jim and John. It's Derrick from British Columbia, Canada. You guys have a great show. I enjoy listening to it every week. I have a question about pipeline companies as infrastructure investments. I'm into dividend investment plans of two of Canada's largest pipeline companies. Both companies stand to benefit in the future from current projects in the oil sands and new gas sales in the far north. I see these companies as both hard assets infrastructure type of investments as well as good dividend payers. Hard asset and infrastructure are one of your major investment themes. And I'd assume you'd see this aspect of the companies as positive. However, dividend stocks in companies that depend heavily on debt financing such as pipelines tend to be interest rate sensitive – that would be a negative if we're about to enter into a prolonged period of inflation. I'm wondering how you evaluate these two opposing factors and would be interested to hear your take on pipeline as an investment going forward. Thanks fellas, keep up the good work.
JIM: Derrick, I like pipeline investments. You read it correctly: I see at as infrastructure. There are two things going on right now in terms of rising interest rates, I do expect them to go up. So obviously, if you're doing financing that effects the return. But also I expect the fees that they get to go up to more than compensate for that.
The other aspect that you have right now with monetary inflation is interest rates – I don't care if you're looking at interest rates in your own country, Canada or even interest rates in the United States – are artificially kept low. They are below, far below, the inflation rate which is inflationary in itself. And I expect that to continue. I think they'll rise, but I think the rate of interest that people will pay to borrow because of all of the monetary inflation will be far lower than the return from inflationary-type assets. [32:11]
Yes, hi Jim and John. This is Peter from New York. Your show continues to be outstanding and very informative. I share your view about the potential upside from gold investment and what I'm wondering is how does one know when to sell. It's easy to understand the notion of cost-averaging in the buying process and we often hear comparisons to the last price spike of 800 or so, but that was a spike. If conditions cooperate to produce another major spike even if it far exceeds the last one, how do you know when to lighten a metal position? What are going to be some of the indicators? And a related question is how long do you think the energy and other commodities bull run will go for this time? How long do you think this market will run? Thank you very much.
JIM: You know, Peter, I think this commodity bull market will run well into the next decade. We're probably only one third of it. We're probably two-thirds left to go. In terms of a market top, you'll know when you're getting towards the end when you see people lined up around the block trying to sell their silverware as they did in the late 70s and your next door neighbor instead of talking about Apple and Google will be talking about the gold mines that they are invested in. But remember, when the public comes in, in the last phase of a bull market, the final phase – there are three phases – when the public comes in, that's usually when you see the biggest and most spectacular gains. For example, the stock market in the US between 95 and the year 2000, the last one third of the bull market the public came in and look what happened to stock prices.
So if your next door neighbor is talking about it and Maria Bartiromo is broadcasting from some gold mining site or something, that will be your clue that you’re entering the final phase. But you don't get off the horse yet because in the final phase of a bull market, the returns that are going to come into the market, they are going to make the internet stocks look calm by comparison. So you may start taking gains in that final phase. But you don't want to take all of your gains because this spectacular blow off that comes in when the public gets wind of this, it's going to be phenomenal. [34:26]
Hi there, this is John from Alberta, Canada. I love your show but I wasn't too happy with your response to the Canadian guy questioning the Central Fund of Canada and what's happened to it over the last year. Basically, if you look at the Central Fund as quoted in the US, and I look at it the year-to-date chart, it's up about 7% year to date, but over that period of time, the Canadian dollar has appreciated about 17% and so central fund as owned by a Canadian has actually seen about a 10% hit this year in Canadian dollar terms. So I think it's all about the exchange rate unlike the other advice he got from somebody. And it's been tough being a Canadian looking at some of these gold values just haven't been seeing the appreciation. But hopefully that will change. Thanks a lot. Keep up the good works, guys.
JIM: You bring up a good point. I think, gosh, I can't remember. Was he a Canadian individual? And if that's the case, it's the Canadian appreciation of your currency. I expect, John, that as your currency appreciates, and I expect it to go between 105 and 110, you're going to see efforts by your government to devalue. So hopefully that will get rid of the discrepancy that you see between the buck. And over the next couple of years if everything goes as planned, all of our currencies will be the same with the dollar, the Canadian loonie and the peso merging into the Amero – or what we like to call the “amigo.” [35:58]
I’m asking about put or call options. Actually writing put or call options on gold and silver bullion itself. Now, I read that it’s possible and I read at one time it was possible in Canada but I can't seem to find a way of doing it up here. I read on the COMEX website that it can be done, but I'm not exactly sure what the best way would be for me. If somebody in Toronto wanted to write call or put options on gold and silver bullion, what would the best message be to do that. So if you'd let me know, that would be great. Thanks.
JIM: Boy, you're getting into an area of writing some call options on things that you have. I guess the question I'd ask you why would you want to do that if you need income? You might want to go in to some income producing stocks. The only reason to write put options is to make some extra money but you know, you might give up a lot of the upside. I can understand maybe wanting to buy some put options if you wanted to hold your position and smooth out some of the fluctuations that you see in the metals market, but you need to give me a little bit more information as to your reason for wanting to do this. [37:11]
This is Richard calling from Buenos Aires, Argentina. Jim, you and your guest make a very convincing case for how the US government is manipulating economic data. To that extent do you think the US government is secretly printing dollars that they are not reporting? Who monitors money printing and who controls how many get printed?
JIM: You know, Richard, there has been some speculation when you look at foreign inflow into the dollar. The large positions that are being taken in the Cayman islands could actually be the government. There is a lot of speculation there. I have a feeling that they may be monetizing more than they are, but they've got all kinds of ways that can hide it. They can hide it in offshore accounts. If they can monkey with the economic numbers, they can monkey with the money that they are printing. [37:57]
Hi, my name is Gary and I'm from San Diego California, and my question is if gold or precious metals were to make a dramatic increase in price, let's say they doubled, is it likely that the stocks related to them, such as mining producers of precious metals will go up in tandem? In other words, let’s say if one doubles is it likely the other one will too. What are your thoughts on that? Thank you very much. I certainly enjoy your show. I listen to it every single weekend.
JIM: You know, I would expect in this next run up, typically over a longer period of time, the stocks have outdone the precious metals. And the easiest way I can give you an example of that, if you look at the HUI, which was selling around 35, I think it was 35 in 2001, and today is at 411, you've seen a 10 fold increase in the HUI index, and you've seen maybe a triple in the price of gold. So the stocks have gone up much more than the bullion itself. [38:57]
Hello, my name is John and I'm a Canadian living in Panama city, country of Panama. Home to the Canal, cheap beer, great weather and beautiful people. I also work in the Ukraine operating a software development center. I have a quick comment and a question. I'd like to comment by saying that three and a half years ago, the US dollar was king in the Ukraine and everybody despised the local currency referring to it as presidential toilet paper. Today, most merchants prefer rules rubles over dollars and a few will no longer accept the US dollar. This is just a comment on how the mighty do fall.
My question is, do you believe in investing in agricultural commodities or stock commodities as a way of diversifying from the global money inflation? If so, do you favor equities as a best means of investing or actually investing directly in the stock commodities by an ETF?
Your comments are welcome, and I would like to end by saying that I am an accredited investor with a seven figure portfolio and I receive access to a great deal of proprietary information from a number of sources including some world largest banks and funds, yet my number one source for macro economic analysis and financial information is your radio program and website. Jim, John, thank you for your outstanding gift of information to the world and for sharing what you know with the rest of us. God loves all of you.
JIM: You know, John, I think that I like both. I like – just as investing in precious metals, I recommend that people not only invest in the bullion but also the shares. If I was to play the ag-market, I would look at both. I would look at an ag-ETF where you're owning the raw commodities especially the ag’s right now. And then I would probably look at companies that would benefit from agriculture whether it's John Deere, potash or many of the company that are benefiting in this run up that I expect in the commodities, I believe in both. [41:10]
Hi, guys this is Mark calling from Houston. Long time listener. Now that he's telling the truth and the real truth, I think it would be awesome if you could get Alan Greenspan on the show. Just a thought. I know it might be tough. Bye bye.
JIM: I think Mark if you read my website and saw the things we talk about here in gold or listen to the program, he'd probably wouldn't want to come on the show, but you know what, it's worth a try. [41:25]
JOHN: Just after he got out from under the clutches of Ron Paul, there is Jim Puplava. Right?
JIM: You know one of the questions I would ask him: you had the privilege of being one of Ayn Rand’s students. What changed your opinion about gold from the early years when you were going to her soirées. What do you call them? You know, the little parties that she had. That would be one of the first questions I would ask the Chairman.
JOHN: I think the second question I would ask the Chairman is who is John Gault.
JIM: I remember that from college. Don't you remember when that was going around: Who is John Gault?
Hi Jim and John. This is Art from Costa Mesa. Guys, I'd like to ask if you would please sometime have a detailed discussion on different ways to invest in precious metals. What got me wondering about this is something that was brought up in an article by Ben Davenport where he says the US government considers CEF as a passive foreign investment company and they charge high taxes on capital gains unless you fill out a form 8621 every year. And then he said – and this is kind of part that leaves me cold – but this should qualify it as a qualified electing fund for the 15% long term capital gains. So I guess one question is, does CEF qualify for long term capital gains if you have it over a year by filling out that form? And I also wondered if buying other ETFs or GLD and SLV are good alternatives. So thanks for your shows, guys. It's great every week and I've learned a bunch.
JIM: John, that's a question I'll probably have to have a tax expert on. I'm not as up to date on that. Technically, it should be a stock and qualify for lower capital gains. But the government treats gold differently. I know they treat gold commodity differently. That's a question I'm going to probably defer to probably having a tax expert answer that question. [43:20]
Hello, Jim. Wonderful show. I enjoy it every week. I've been following you for about three years now and you have a fantastic show. I want to ask you. I'm getting a little bit concerned about silver. Gold continues to move up, and yet silver, for some reason, is like holding back and it makes me worried. This is Ed from New Jersey. So if you could, let me know what's going on with silver. Thank you.
JIM: You know, there is probably a big short position. I haven't looked recently, but remember up until recently, silver was out performing gold. And sometimes when you have an out performance, you have a period of consolidation and during that consolidation, it really doesn't do much, just as you had a period of gold in consolidation and silver out performing. I expect in this next leg up, you will see it resume its role and I think it will lead gold. [44:08]
Hi, Jim and John. This is Joe from Orange County and love your show. Specially, John, keep up those references to movies like It's A Mad, Mad, Mad, Mad World and The Great Race. I think it puts a lot of things into perspective in our current world. Anyway, my question to you is: I'm having trouble understanding – I've been hearing a lot of stories and reading about gold loans. And the story usually goes: gold is loaned out and sold into the marketplace and that somehow suppresses the gold price. I'm an attorney. I can't get over the simple fact that if someone loans you something, how can you sell it? I don't see how gold is loaned out it can be sold into the marketplace. It doesn't make sense to me if you could clarify the logistics of just how that works, I would appreciate it. You guys keep up the good work. Thank you.
JIM: You know, from a legal sense, that's probably true, but governments do this. They loan gold to bullion banks. That's one of the ways that they try to contain the price of gold. And there is even talk right now, there was a story that James Turk put out on the web that a lot of our gold here in the US may be loaned. But the idea is when gold is loaned, it does suppress the price and that's the reason the central banks are doing it. And the incentive for those that borrow from it is they get artificially low interest rates and there is something known in this country as the gold carry trade. You borrow gold from central banks paying below 1% interest rates, and invest it in something else paying a higher interest rate. You've got to be one of the government's special bullion dealers to get those kind of deals. That's not available to you and me, Art. [45:52]
JOHN: So that also means, Jim, that the same silver or gold is accounted for several times out in the marketplace there, right? Because technically, I borrow the silver from you, so technically on somebody's books that silver is out there, it’s been loaned to me. But then I sell it out into the market, so on my books it's still a paper debt that I owe back to you; right? So there seems to be a multiplier effect in here.
JIM: In essence, what you're doing is you're double accounting for it because the central banks still shows it as an asset on its books when in reality it's an asset that isn't there any more. They don't have the gold nor does the person they lent it to. So in order to effectively pay back that loan, technically, John, if I'd loaned you the gold, and let's say you sold it, invested it and I don't know, stocks or commodities or whatever you were investing in, to pay back that loan, technically, you would eventually have to go in the market and cover that loan. It's in effect a short position, so you'd have to go back in the market, buy it, and you could face a big risk there in the sense that, let's say you borrowed gold from me when gold was at $500, what are you doing now when gold is at 770? There are a lot of gold loans out there. But the government I think has special arrangements with these bullion banks, otherwise, because you’d have to think of all of the gold that has been sold, leased and borrowed over the last five or six years when we started out with gold at 255, $300 an ounce; and on the day you and I are talking, John, gold prices are over $770 an ounce. [47:26]
JOHN: It reminds me of the borrowing money from the syndicate to gamble with. When the syndicate comes to get the money, “it's not here anymore.” Now what do I do? Right, same type of thing? Almost like musical chairs, it would seem like.
JIM: Yeah. But I think there is a special arrangement with these bullion banks because the lease and the loans are part of central bank policy suppression. So I think there would be a special waiver.
Hello, Jim and John, this is John from Philadelphia. I just did a real simple calculation concerning oil production and I will put some hard numbers in place. Roughly, the world is using 86 million barrels per day using the International Energy Agency prediction of growth in demand of 2.2% after a year. That leaves a net increase in demand of roughly 1.9 million barrels of oil per day. This time next year, where are they going to come with it? I don’t think they are going to. And interestingly enough, Boone Pickens mentioned pretty much the same thing in an October 17th article on Bloomberg, so just some figures and thoughts. Thanks a lot, great show, take care.
JIM: You know, John, that was some of the – we raised that very same issue in the first hour when we talked about $125 oil. I think we're entering that crisis period. They may be able to come up with some alternatives, we do have a lot of ethanol that's coming into the market. We have a lot of coal and gas-to-liquids, which is one reason why I think the IEA said that the crisis window starts in 2009. And that's really when OPEC spare capacity really begins to drop off because a number of reasons, they are not increasing their supply of oil fast enough to not only meet future demand, not mentioning the fact that demand is growing strongly within their own countries, so the more they consume, that's the less that they have left over to export. [49:19]
Hi Jim and John , this is Alvie from Toledo, Spain. I truly enjoy your show every week. Thanks to your show I can understand what's going on in the markets right now. I mean I can understand that banks do money printing. The government prevents a severe bear market to take place. However, I don't understand why the Japanese market has not been reinflated. Its global performance since it burst in 1990 has been significantly worse than the rest of the indexes. I was not only a financial child but almost a child in the 90s so I don't have any recall about that. I would appreciate if you could give me some insight about the behavior of the Japanese market in the last 20 years. Hopefully understanding the past will allow us to better the present and future. Thanks for your show.
JIM: You know, Alvie, one of the main reasons is Japanese policy, currency debasement and also their interest rate policy, the Japanese have found it far more profitable to invest overseas. So why buy Japanese stocks when your economy is in a recession. You're probably better off putting your money overseas where markets are doing better, where interest rates are high. [50:31]
Hi, Jim and John, this is David from Milwaukee, long time listener, first time caller. I have two comments. One would be I think it would be a great guess if you had John Hussman on the program. I know that John and you differ on quite a few areas, not the least of which is the influence of the Federal Reserve activity. And in particular, he stated in a recent weekly address, that he believes that inflation is everywhere a fiscal event. And obviously you guys believe it is a monetary event. The truth probably lies somewhere in-between, but I think it would be good to have an exchange with Mr. Hussman.
The second area that I think would be very helpful to listen to would be in the area of financial planning having to do with monte carlo analysis of retirement plan distribution. I think in general, financial planning would be a – would be a good general topic for you guys to include in the show. There have been bits and pieces here and there and I think you're helping us all to grow our wealth, but there is not a lot of information of what to do with it once we’ve got it. So thanks so much for a wonderful program.
JIM: You know, Dave, we'll try to work more financial planning. John, we did a couple of pieces on that. [51:50]
JOHN: Last year.
JIM: A while back. Thanks for reminding. We'll probably bring that back in as we get towards the end of the year because there are a lot of issues, pension funding, distributions, taking money out of an IRA on age. We'll probably have a program forwards the end of the year, you the listeners remind us and we'll see if we can work that in towards our year end programs as we get in December. [52:14]
Hi, this is Bob from Chicago. I was curious if you gentlemen could discuss the difference between the Canadian investment trust which are starting to consolidate and the US master limited partnership. Thank you very much.
JIM: Bob, you know, the Canadian investment trust are consolidating. A lot of that has to do with the coming tax law changes where they are going to start paying taxes. I still think they look attractive, especially given their distribution rates. Some 9, 10, 11, 12%. So, even with taxes, they look attractive.
The master limited partnership is a flow through device, no taxation at the partnership level, that's being adopted by more and more companies. Recently, you've seen Chesapeake Energy and Anadarko here just announce that they are going to be going down that route as well. The concept is the distributions come directly to you, and instead of paying tax at the corporate level, you'll only pay tax at the individual level, which means that the distribution rates will be higher because there is no double taxation as we see in regular dividends from corporations. I think you'll see more of that. It will last for a while until the politicians close the loop hole because they love things like double taxation which is probably what the Canadian government saw and said, “gosh, they tax dividends twice in the US, we ought to do the same thing.” [53:38]
Hi, Jim and John, this is Steve from Charlotte. What I'm trying to find out is when you are measuring the price of gold in the ground for a company, which category do you use? Measured, indicated, proven, probable, inferred? Which category or categories do you use to measure the price of gold in the ground for a company? That's my question. Thanks a lot.
JIM: You know, Steve, I might use total ounces if the good majority of the ounces are measured and indicated. If they have a lot of measured and indicated ounces, you're pretty safe, I think, with the inferred ounces using them because that implies that they'll probably go back and do infield drilling bringing them up into the measured and indicated category. So I would use total ounces if there is a good amount of measured and indicated. Reserve ounces are usually ounces that come out of a prefeasibility. They are valued at a much higher level and therefore are worth much more and especially in a buy out, but answering your question, for most juniors you could probably use total. [54:38]
Hi, Jim and John , this is Dilip from San Jose. I have a question regarding precious metal and gold stock indexes, HUI and XAU. Over the past five or six years, while gold has gone up three fold. HUI has gone up 12 fold, XAU has probably gone up almost 4 ½ times. So going forward, do you think that if gold were to go up another three-fold from here do you think the HUI and XAU, would continue to have the same kind of outsized gains or would their gains be different from what they have in the past five years. Thank you very much and I love your show and I load all your MP3 to my IPod player and you know, listen to them a couple of times during the week and I am eagerly look forward to your answer to this question on the next show. Thank you.
JIM: You know, Dilip, I do expect them to continue to out perform over a period of time, just as they have in the last five years. In fact, probably when you get to the take-off of this next mania stage, they will out perform the bullion by a wide, wide margin. In the last bull market, the stocks out performed the bullion. But in the final stages of the market, when gold really went crazy and it went right up to 850 and the very, very tail end of that bullion actually began out performing the stocks. But going forward I expect the stock to out perform the precious bullion itself. [56:04]
Hello, Jim and John. This is Ike from Omaha calling. I have a couple of basic questions of the mechanisms of our economy. I've heard before on your show statements foreign central banks buy US debt and that keeps interest low. Exactly how does this happen? Also similarly, I’ve heard China and India increase their experts but the US does not have the money to purchase them. So the exporting countries are lending the US those government and households the money needed too purchase their exports. It's a phenomenon called vendor financing. Exactly how does this happen? And finally another difficult thing for me to understand is I hear when the Fed wants to increase the supply of money and credit and wants to inflate they buy government securities from a few handpicked firms with newly created money. Which are these handpicked firms that they are talking about?
You comments are greatly appreciated.
JIM: You've got a number of questions here, Ike. When foreign central banks buy US debt, a lot of it could be recycled or through their export trade balances. What they do is they are going to get rid of their currency, so if it's yen, they are getting rid of yen and exchanging it into Treasuries. Obviously, they want to earn money on that, so they buy Treasuries and this increased demand for Treasuries, drives down the rate of interest. In other words, if their true rate of interest was determined in a free market, it would be determined by the amount of savings in the economy. If there were people that were really saving a lot of money, there would be more money in the bank, there would be more of a supply of money than there was demand for money, so the price of that money would go down. In other words, the interest rate would go down. On the other hand, if people weren't saving as much and they didn't have much money that they were putting in the bank and there was a greater demand for money, interest rates would go up. So what happens is when a central bank prints money, they increase the supply of money, bringing down interest rates artificially. Likewise when a foreign central bank recycles money into the US economy, buying our debt, they bring down the rate of interest. And that's one of the reasons today that the true rate of interest that we have on bonds is below the inflation rate.
Now, how does the Fed create this? They can increase money, money is multiplied in the system through the banking system and fractional reserves. So banks have to keep a certain supply of cash around and then they have investments they making in Treasury securities. So when the Fed buys these securities from the government dealers and I think there is 22 of them, it’s either 22 or 25, I forget the number, but when they buy these securities from the bank, the bank now has cash and because they have more cash, that multiplies the amount of money that they can lend. Conversely, when the Fed want to tighten interest rates, they sell securities to the bank. Now the bank has less cash to lend and therefore interest rates go up. So that's basically how the mechanism works. [59:38]
Hi, this is David from Vermont. You commented about holding bullion, which we all agree with but I wonder what your thoughts are on platinum and palladium? Those are available as coins and bullion as well. Also some comments about bars versus coins. I appreciate it. Thanks a lot.
JIM: There is all kinds of ways that you can collect precious metals platinum, palladium would be in the precious metal category. I like the cheaper metals such as silver because I can buy a lot more of it, and if you look at it as a percentage gain, I think there will be a lot more upside.
Now, getting to versus bars and coins, the only difference, I think, is between coins, I like coins versus the bars, because that's what money used to be, it used to be in the form of coins. And also when you get into collectibles and numismatics then you're entering into another whole category where you're really talking about not only a precious metal but you're talking about something that is very rare, which is what a numismatic is. I prefer silver, but certainly bullion such as platinum and palladium would fall into the precious metals category. I just prefer the cheaper metals and I prefer coins. [60:53]
Hey, Jim, it's Mike from Wisconsin. Quick question today. First of all, love the program. Do you place a better risk-reward scenario with the gold hoarders versus the gold producers, for example, like Seabridge Gold or an Almata [phon.] Minerals that basically don't do any mining but JV the projects out to other mining companies. Are those a better play in the market because they are less risky with the higher reward scenario. I would love to hear your opinion on this. Keep up the good work. I really enjoy it.
JOHN: There are various strategies out there. Some of them are people that accumulate. They don't have the expertise to go on to productions so they buy the projects, they hold them and then they joint venture them with another holder. I think you'll do well with that. It's one way when you don't have the expertise of going into mining because, boy, I tell you, taking property into production takes a lot of skills. You have to have engineering skills, mining skills, the best way to take something into mining. And the company that accumulated the assets may not have that expertise. So the JV route, I like that approach when you don't have the expertise.
And especially with the price of bullion going higher, I think you're going to see a lot of these people that have been the accumulators start to monetize their assets. Either one, take it into production as you're seeing with Silver Standard, which Silver Standard was accumulated for a number of years because they felt it was uneconomic to mine silver at a loss. And I think that was a very smart decision on the behalf of Bob Quartermain who runs that company. But given the fact that silver prices are now economic to mine, one of the ways that Silver Standard decided that they can bring economic value to their shareholders was to start monetizing that silver by going into production and actually making a profit and cash flow. That would also once they start that, that means that no more shareholder dilution, otherwise they would not be issuing shares. They would be self funding from the profit. So I like both approaches. I think depending on the expertise of the company, you don't have the expertise but you have the property JVing with somebody who has that expertise might be a good route. But I think ultimately taking it into production the maximum value is created. Over all, If I had to look at JVs versus producers, I'd prefer the producers. [63:10]
This is Ted from Atlanta. I think you guys do a fantastic job of getting a tremendous amount of information out for all your listeners. My question is regarding the Plunge Protection Team as it was founded under the Reagan Administration after the 87 crash giving the Treasury the authority to go out and monetize debt and equities or whatever they feel is appropriate. Is there a way to determine if they are doing that now? Is they are a source that we can look at, what are your comments on how to monitor this particular source of purchasing to support markets etc. Thank you.
JIM: Ted, one way to monitor is look at the repo market. Whenever the Fed does a lot of repos, you see almost a carry over directly into the market. You know, looks real obvious when there is all kinds of bad news. You can see it take place in the market. The market is down 200 points, in the last half hour trading all of a sudden it goes straight up. And then they'll get some nonsensical idea, there was a lot of action in the futures pit, that's usually your cue line that they were intervening. [64:19]
JOHN: Well, next week hopefully you'll be here for the whole show. And speaking of next week what are we doing next week.
JIM: Next week coming up on the program, we're going to have Doug Casey from Casey Research, and we'll take a look at all kinds of issues from gold, precious metals, commodities, to Fed inflation policies. It should be an interesting interview. Also November 3rd, Bjorn Lomborg has written a new book on global warming called Cool It. Oh,John, I can just see the emails coming into us from that program. November 10th, Louis Navellier will be joining us. He's written a book, The Little Book That Makes You Rich. And also November 17th, Kenneth Fisher. He's got a new book coming out and he's also done an edit on a book that his father wrote, Phil Fisher, one of the great investors – in fact, one of Warren Buffett’s mentors. So we’ll have Ken Fisher on the program November 17th.
And then Thanksgiving holiday weekend is our traditional gold show. We're going to do it a little different this year. I'm not going to go to the San Francisco Gold Show. We've had too many technical difficulties from the floor and what we're doing to be doing is a series of interviews. I've got a couple intermediate producers that we’re going to be interviewing; CEO's some of the fastest growing intermediate producers in the world today. We’re also going to be doing a series on juniors from late stage development plays to early exploration plays. And then also some insights from one of the best geologists I consider in the world today. A good friend of mine, Keith Barron and he'll give his insights on what he sees. Keith has got a PhD, 25, 30 years of experience, so we're going to have a lot of great things coming up on the November weekend.
And even a great line up, John, going into December. And we've got some special programs we want to work on. I don't want to announce them yet until I know they are confirmed. So a lot of great stuff coming up in the days ahead.
I want to give a special thanks to Frank Barbera for sitting in on the experts during the first hour.
Well, we have run out of time. We’d like to thank you for joining us here on the Financial Sense Newshour. Until you and talk again, we hope you have a pleasant weekend.
