Big Picture Banner

Financial Sense Newshour

The BIG Picture Transcription

February 2, 2008

Part 1

The Big Disconnect

JOHN: Well, it has been said before that reality is usually scoffed at and illusion is usually king when it comes to the world of politics, and quite often in finances; and as we've often pointed out on the show, Jim, they are inextricably married. They cannot be separated.

You know, you've been talking about perceptions and reality as it relates to the markets over the years. We've done this over and over again, and there are many times when we've observed what is happening within the markets doesn't seem to jibe with the reality that's there. So obviously, there is a disparity here between what's truly going on and how people perceive the markets. And so that's the topic that we're starting off the Big Picture with today.

So what are the major divergences or what you're calling now the big disconnect that you see in process today?

JIM: There are so many of them. There are a lot of anomalies, but probably the two biggest that strike me right now are the areas of energy and precious metals. [1:11]

JOHN: Let's take these one at a time. So it's energy and precious metals? Energy, that's a big part of the show this week, so that would be an obvious first choice.

JIM: Well, here is the one that really stands out to me. When it comes to energy, the big perception is that the US economy is slowing done and heading towards a recession, which means there is going to be less demand for energy, therefore prices are going to head lower. This is probably a common mistake that we see made on Wall Street, which has been wrong on its energy forecast for as long as you and I have been doing the show for six years. I mean every year, the price of energy goes higher, especially the price of oil; and then they are always telling us for one reason or another, the war ended, the terrorist premium, the weather, whatever it is, but they always tell us why it's going lower and we end up, basically, at the end of the year with higher energy prices.

So it is true, I mean if you take a look right now, the US is the world's largest consumer oil in the world consuming roughly about 25% of the world's oil production. But in reality, if you look over the last three or four years, the US has contributed very little in terms of incremental demand over the last couple of years.

Oil consumption over the last two years, in fact, has fallen slightly here in the US. What has driven prices on the demand side has come from China, India, the developing countries and most especially coming from OPEC. [2:46]

JOHN: Well, couldn't we make one assertion that’s the reason why the press gets this wrong when they point to falling demand over the last few years and then they complain about higher oil prices and oil company profits (although you notice by the way, that is disappearing from the presidential debate right now.) This is a common rant such as we hear from Bill O'Reilly all of the time on Fox.

JIM: Yeah. I suppose with profits released this Friday with Exxon, we had Shell's profits were spectacular, look for that to be a rant. But the media, our politicians, in fact, some of the analysts on Wall Street always get this wrong. The demand is coming from the developing world and the oil producers. This has, I think, for this country, ominous implications for not only the US but also the West. If OPEC countries consume more of what they produce, that simply means there is less to export. So the US and the West is going to have to compete with the rest of the world where like in China energy is subsidized and controlled by the state. So what we're going to see in the US and in the West, particularly the G7 countries, is falling demand because of higher prices are going to force us to consume less. [4:04]

JOHN: You know, we hear this argument all of the time about we have gobs of reserves off of the coast of California, up in Alaska, whatever, what about supply increases coming on stream from either new discoveries or reserves that we've been holding, or –and this is the thing that really made it big this week if you notice in both sides of the debate as far as presidential candidates – alternative fuels?

JIM: The first thing you need to know about supply is it has been more than two decades – I think Exxon tracks this, but I think 1985 was the last year that we made enough new oil discoveries to replace what it was that we were producing and consuming.

Also, oil discoveries peaked globally in the late 60s. There has been only two sizable discoveries made since 1969. One is the Kashagan field in Kazakhstan and then last summer there was a large oil field that was discovered off the coast of Brazil by the state company Petrobras. But if you take a look at that, that's been almost 40 years and we've only had two major oil discoveries. Every year we discover less. Every year we consume and produce more. But if you take a look at the conventional oil that we have –the thick gooey stuff that we take out of the ground – that peaked in May of 2005. And what we're seeing is that politicians are talking about the difference between demand and supply is being made up by coal-to-liquids, gas-to-liquids and biofuels. If it wasn't for that, John, we would be going through oil shortages. And despite the fact that the US economy is probably in recession right now, (we'll get to that in the second hour of the Big Picture today) you're still talking about oil prices that are still consolidating and hovering around $90 a barrel. [5:55]

JOHN: So basically, we're sort of flattening out the stress upon the supply that is available there by providing some ultimates, but ultimately, we're basically not finding what we're consuming already. This is what worries you?

JIM: Yes. And that's the big worry that people are really not paying a lot of attention to is the word depletion. If you accept the CERA report that came out a couple of weeks ago on depletion, worldwide it is running about 4.5%, that translates into roughly 4 million a day annually. That means each year we must find an additional 4 million barrels that we have to find just to stay even, so you’ll have to find 4 million barrels this year; next year another 4 million barrels plus the 4 million barrels we lost through a depletion this year, so that's eight million barrels. You're looking at 30, 40 million barrels and 50 million barrels that we're going to have to find and replace just from existing depletion rates in the next decade.

And the other factor, just on the supply front is the number of large projects that were due to come onstream. We've had one delay after another. We've seen massive cost overruns that are associated with many of the world's largest oil fields: the mega projects either at Kashagan in Kazakhstan, the Sakhalin too, or the Canadian or Venezuelan oil stands. So most of all of the increases in global oil production have occurred from deepwater fields and when it comes to deep water depletion rates, they are running much, much higher than this 4.5% figure that CERA is using. And the best example we can use is Cantarell where the depletion rates are closer to 18%. [7:44]

JOHN: That springs off of what was discussed in the last hour during the roundtable discussion and that's basically that demand is running faster than supply. It's not even an issue of whether there is a lot of oil left. It's simply supply versus demand and what we can possibly deliver given the infrastructure and given the current sources.

JIM: And we've talked about infrastructure here and we've had Matt Simmons on the program. Our whole energy infrastructure –pipelines, power plants, rig fleets, offshore platforms, shortage of personnel, all of the entire energy infrastructure – is aging and falling apart. It's breaking down. That's why you see so many problems with the refineries today. Some of these refineries were built 50 and 70 years ago. And, you know, when it gets to even new production, there are a number of new fields that are coming online over the next several years, but the depletion rate is going to siphon off many of the benefits of that new production coming on stream. [8:43]

JOHN: So the fact that the US economy is slowing down is really less relevant to the energy picture then?

JIM: The US economy is still the world's largest economy, but it's becoming less important. Far more important to the energy front is developing world demand and also OPEC demand. You couple that with depletion, project delays and now you see why oil prices are hovering at $90 a barrel. I would suspect that as oil prices rise over $100 a barrel, demand is going to continue to contract in the US and most G7 countries. And quite frankly, it's the only place it can contract. If you look at China, if you look at many of the OPEC countries, they subsidize energy.

In Venezuela I think they are paying like 21 cents or 30 cents a gallon; in the Middle East, Saudi Arabia, Kuwait, they are paying 46 cents a gallon for gasoline. Besides, they are the ones that actually own the stuff. We don't own the stuff. 85% of the world's oil is controlled either by OPEC or the former Soviet Union, and they aren't as motivated as international oil companies to pump more out of the ground just so we in the West can enjoy lower prices. In fact, if you take a look at all of these factors, I think what you have to do is ignore the pundits when they talk about lower energy prices because the US economy is slowing down or inventories went up this week. It just shows, in my opinion, how uninformed they are. And by the way, if you hear these inventory numbers like they are taken like Gospel. Those inventory numbers have been dropping over the last couple of years and now we're at levels that we haven't seen since early 2005. [10:34]

JOHN: Yeah. When we talk about inventory numbers, there is also something that is deceptive behind those and that is people think that somebody is out there actually –

JIM: It's like the meter reader on your utilities.

JOHN: Yeah. They think they are actually out there with a little dipstick dipping the stick in the tank and measuring all of the tanks and what's out there in reserve. That's not happening. These are all based on computer theoretical models, and so both the institutions and the investors have been dumping oil shares thinking that a slowing US economy is going to cause oil prices to tumble and therefore oil stocks are cyclical. If we go in a recession, oil stocks will go in the tank with them.

JIM: Yeah. That's probably the prevailing consensus. That's the disconnect right now. But, you know, despite falling oil demand in the US –and it isn't down that much – oil prices have been holding firm at close to $90 a barrel. Now, part of the recent selling of energy shares has been forced selling by institutions trying to get liquid to shore up their balance sheets. I mean, if you look at some of the areas hardest hit in this selloff in this first month of the year (energy, technology, the industrials, base metals), those were probably some of the big profit areas last year.

So some forced selling of accounts is due to part of the selloff. But I think the other explanation for all of this is the US economic slow down, so everybody has been dumping oil shares because their profits were going to slow down. We know the economy was weak in the fourth quarter, but corporate profits aren't matching up with this misperception. [12:13]

JOHN: So you still hold to the view that energy prices are, what? Heading higher despite what is perceived as the US slow down?

JIM: Oh, absolutely. I think they are going to go over 100 this year and beyond that into next year and despite this fact that the economy is slowing down, which we know this week the economy grew at less than 1% in the fourth quarter of last year. But on the Friday that you and I talking, ExxonMobil and Chevron corporation, the two biggest US oil companies reported gains in the fourth quarter earnings after record crude prices. Net income at Texas based ExxonMobil climbed 14% to 11.7 billion (so look for Bill O'Reilly to bashing Exxon, the same with the politicians.) That translates to roughly about $2.13 a share. Also, San Ramon, California-based Chevron said its profit rose 29% to 4.88 billion or 2.32. So once again, the analysts have gotten it wrong by forecasting lower prices and lower profits for these companies. I mean it only stands to reason. I mean what did we see since August of last year? We saw the price of oil go from 70 all of the way up to $100 a barrel. At close to $100 a barrel or $90 a barrel, these oil companies are going to make a lot of money. And that gets back to this whole misperception again. [13:36]

JOHN: So basically if we're trying to put this together, the concept of this is a slower economy, lower oil prices which equals lower profits, but look at what you just read about Exxon and Chevron, and that shows there really is a disconnect between, I would say, expectations of the market and what's truly going on.

JIM: Yeah. I still hold strongly to the view that we're going to see higher oil prices, so I'm not aware of anything else besides, let's say, junior precious metals that hold as much upside. The energy sector right now is incredibly cheap. In fact, we get a number of independent research reports; John S. Herold & Company did a recent analysis of the energy sector because they were seeing this mispricing too, this misperception. And they looked at what oil price was implied in the share price of a select group of companies with a reserve mix of, let's say, greater than 40% oil production. Collectively, as a group, the implied share price for many of these companies as a group was below $60s a barrel. And, John, oil prices are 50% above that $60s a barrel as you and I speaking on this Friday. In fact, some of the more outstanding buys were selling at prices based at 40 and 50 dollar oil. So there is definitely a big disconnect here when you see these kinds of prices factored into oil share prices. And to me, that spells opportunity. Eventually perception gives way to reality, and that means great upside potential. Eventually Mr. Market in it's current panic state is offering investors what I call the perfect pitch. And I would swing for the fences because you're probably going to end up hitting it out of the ballpark because of this big misperception. And once again, the earnings reports, whether it was earlier in the week from Shell Oil or on Friday from Exxon or Chevron just bear out this great misperception that's held on the street. [15:35]

JOHN: Let's move on to the other big disconnect right now, which is if you look at precious metals prices and the price of the juniors or gold stocks in general, this is the one that has the head scratcher going on a number of people.

JIM: Yeah. I think this one really sort of puzzles me. I mean if you look at since last summer when gold corrected around $650 an ounce, we have now seen gold run up to where it is today, somewhere above close to 920. Yet hardly a dime has moved into the gold equities. I mean the only movement that we've seen has been in the handful of large cap gold producers, the big companies, the Barricks, the Agnicos, the Yamanas, the juniors have literally been tossed on the junk heap. The profitable trade with higher gold prices has actually been to short them. And that's the play being orchestrated by the big boys. So they've languished and they have not done well since probably May of 2006 where we had gold prices correct and there was a major correction in gold equities. But when you've seen what's happened since 2006, gold has been going up consistently every single year since 2001. We've seen gold prices head higher. We've seen silver prices head higher, and so to me, the second major disconnect in the marketplace right now is what's going on in the macro environment, in the price of gold and a lot of the gold equities. [17:05]

JOHN: You would think with the Fed cutting interest rates 1.25% in a week, the money supply is growing at 15%, headline inflation rising at above beyond interest rates, the shares would have taken off by this time. That would only seem reasonable, Jim.

JIM: You know, what has happened is that money has piled into Treasuries, driving down interest rates well below the inflation rate. I think the headline inflation rate last year on the CPI was 4.1%, but if you look at where we are today, two year Treasury notes are at 2.04% - 2%; the 10 year treasury note is at roughly 3.57%, while headline inflation, which is understated to begin with, is over 4%. In fact, you have bond investors calling for more rate cuts. So on the institutional side, large investors haven't figured out that this inflation thing. You've got the deflationists coming out of the woodworks, they are coming out and saying inflation is heading lower, we are going to deal with deflation and the reason for this is falling housing prices; they are not looking at growing money supply. So what you've had now is with rising inflation, with the Fed slashing interest rates injecting a gazillion dollars into the economy, the herd is piling into Treasuries. [18:34]

JOHN: Well, what about individual investors anyway?

JIM: John, you talk to people on the street. I mean gold isn't even close on investors’ radar screens. They are still piling into emerging markets, which, by the way, have been getting hammered here in the first month of the year. Gold isn't even in the lexicon of individual investors yet. In fact, my friend Brian Pretti over at Contrary Investor did a chart I found fascinating. He did a chart of gold bullion and the inflow and outflow of funds into the Rydex gold fund. A lot of traders and individual investors will move in and out of the Rydex funds, short the S&P, go long the S&P, go long the Q’s, short the Q’s. And boy, I'll tell you, do Brian's charts tell a story. Brian took the price of gold since the beginning of 2006 all of the way up to where it was on the end of last week, and he compared it to the inflows and outflows into the Rydex Precious Metals Fund. In the big run up in gold that we saw into May of 2006, money poured into the Rydex gold funds. In fact, there was a very sharp correction in gold that summer. John, you remember, the summer selloff that we saw in May of 2006. However, each rally in gold (and I'm talking about since May, each rally in gold since that time) has only produced a small increase but never at the level that's we reached in May of 06. So since probably the summer of 2006, as far as the individual investor is concerned, and I would probably say with a lot of institutions, they've been going elsewhere. In fact, if we look at Brian's graph, since March of 07, the money in the Rydex gold fund has actually been muted. It's down significantly. [20:27]

JOHN: Even after this move we've seen since last August where gold rose from 650 to where it is today.

JIM: That is what I find very revealing. I mean the price of gold has risen from around 550 in the summer of 2006 to today's price over $900 an ounce. So gold prices have risen 68% since then. They've risen 42% since last summer in August. Yet the money flowing into the Rydex gold funds has actually fallen by 44%. So you've got a 68% increase in the price of gold and a 44% drop in the money going into gold funds, at least at Rydex. These are the kinds of divergences that I like to see. That's why I believe the juniors have become the buy of this decade. [21:17]

JOHN: Yeah. Last week, you talked about three catalysts which could possibly change this big disconnect, and they were in order: number one, the take over of juniors by the majors; two, mergers between juniors; or the third option being finally the price of gold going north of $1000 an ounce.

JIM: I don't know which one it's going to be. It could be one of those three or all of them. But when this thing gets going, and I don't know which of the three will be the catalyst, I just sense it's going to happen. I mean you can just see it right now: the misperceptions, the lack of interest, people are chasing emerging markets or they are going into Treasuries at half the rate of inflation. Everything is in place, so you can have the Fed slashing interest rates, you've got other central banks getting ready to cut (the Bank of England has indicated it's already cut, it’s possibly going to cut again; The central bank of Canada.) You also have the money supply growing at double digits globally. Demand for gold and bullion, silver, is growing globally. So if you take a look at gold prices and gold demand, they've been going up every single year for several years now; and also you have the financial crisis, you have world political tensions, you have governmental discord. You've got rising inflation and the growth of the welfare state. There is always going to be a gold positive. [22:50]

JOHN: Do you remember way back, when Alan Greenspan was warning that once they begin to inflate the currency (which is really debasing it, you know, chopping down all of the trees doing whatever they can to increase the money supply) that's when investors had better start taking some kind of protective maneuvers.

JIM: Yeah. He wrote a piece back in 1953. In fact, I think we have it on our gold page on our website, but he wrote:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. If there were, the government would make it illegal as was done in the case of gold. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. If one grasps this concept, one has no difficulty in understanding the state's antagonism towards gold.

And you can see this reflected on Wall Street, and you can see it reflected by politicians and central bankers today. [23:49]

JOHN: So basically what he's saying here is that in order for this whole scheme to work, everybody has to be coerced into it. If people start bailing out on their own, then it's not going to work.

JIM: No. Sooner or later, what's going to happen is all of these perceptions that we have right now eventually line up with reality. And this is one disconnect, like the one that we've seen in energy, that hasn't been figured out by the market yet. However, when it is finally discovered, I expect there will be fireworks in the gold sector. And that's exactly what we saw happen, John: The public and the institutions come in towards the end of the move.

And if you take a look at the 60s when the US began its guns and butter program with the Great Society programs and Vietnam war, we couldn't maintain a balanced budget, and as a result, we were depreciating, running deficits and foreigners were turning in their dollars for gold because the US dollar was being debased. And eventually there was such a run on gold, we couldn't honor the dollar with gold backing anymore. In August of 1971, Nixon took us off the gold backing of the dollar. And from that point forward, governments have run continuous deficits, money supply has run out of control, the dollar has lost, what, about 95% of its purchasing value.

But despite all of this going on, and you remember, John, with Nixon, with wage and price controls, and inflation got up to 4%, and they put in wage and price controls. We're over 4% now, and we know those numbers are jury-rigged and understated. They tried to put in place – what was it? Jimmy Carter wanted wage increases frozen at 7% while inflation was running at 14. These are all of the things our politicians are going to do because that's why we're headed for this hyperinflationary depression that we'll get into in our next topic. But the only way to protect yourself against that is gold, and right now, people don't understand that. Running into Treasuries at 2% when inflation is running above 4%, that is slow strangulation in my opinion because that means that you're not even getting the income to keep up with inflation; and even forget the fact that you pay taxes on that 2% rate which probably drops it down to about 1 ½ or 1. And the market hasn't figured this out, nor have institutions and individuals. [26:16]

JOHN: Reality sets in. All perceptions will eventually line up with reality. I guess when investors begin to feel it more than anything else. This is one disconnect, just like the one in energy we were talking about, that hasn't been really perceived by the markets yet. But when it is finally discovered, you would really expect some fire works in the gold sector. If you think it's gone up now, I would think we'd see another boost upwards like a JATO, you know, jet assisted take-off kind of thing.

JIM: You know, that's what I believe that we're going to see if gold crosses $1000, that should get somebody's attention. Image what's going to happen when it crosses 2000 and 3000. I mean investors all can't pile into the Barricks, the Newmonts, the Agnicos. Money is going to flow into gold funds. That's going to force fund managers – they are going to have no other choice. They are going to have to start buying the junior producers. They are going to have to start buying the junior developer's, the junior explorers.

Eventually, John, the market finally figures it out, it always does. But investors don't move en masse, for example, if we take a look at the last bull market in stocks that began in August of 1982, investors didn't move en masse into the stock market until 1995. Just like the last bull market in gold, investors didn't really move in until late 78 and 79. They missed the whole two-thirds of the front end of the movement and just like in the stock market, they missed the first 13 years of the bull market in stocks, not coming in in 95; just like they missed the first two-thirds of the movement of the gold bull market in the late 60s and 70s. [27:58]

JOHN: Well, this is really incredible when you think about it. Gold has moved from 255, that was back in 2001, to today's price of – what did we hit on Friday?

JIM: 905.

JOHN: 905. That's quite a move. Silver has gone from about 3.50 an ounce to 17 is what we slammed through this week. The HUI has gone up from 40 to over 450. That's 11 times. 450. You would think that this story would get bigger coverage.. And so you think that whether this move finally occurs, it's going to be both historic and rather incredible. But again, what does this mean for everyone? It really isn't for everybody because this sector of the stock market is volatile, so not everybody can take this kind of action.

JIM: If you don't understand or believe in the fundamentals, then you need to stay out of the sector, period. You need to have an enormous amount of patience. You need to remain focused and disciplined, and you need to be diversified. I mean, if you are investing in juniors, you should own between 10 and 15, no more than that because it's very hard to keep up with that many stocks. And you need to understand the story behind the stock. If you can't handle the volatility or you don't want to do your homework, then quite honestly, you'd be better off buying the bullion which has risen steadily over the last seven years; and I expect that if you and I speaking, John, on December 31st of this year, we're going to find that gold once again went up to an all time record. [29:28]

JOHN: That’s important to point out that you expect major gains in the juniors, but like small cap stocks, they are more volatile. So unless you do your homework and understand the fundamentals of this area and have an enormous amount of patience, you really just don't belong in this sector.

JIM: You summarized it succinctly.

JOHN: So the big disconnect, or at least the biggest misperception in the market right now is that the slowing US economy will need to lower oil prices, lower energy shares. And with inflation on the rise and investors going into T-bonds and treasuries instead of gold, the markets will finally figure this one out, and when it does, that's when you're going to see the fireworks.

JIM: That about sums it up. [30:05]

JOHN: You're listening to the Financial Sense Newshour at www.financialsense.com, online all of the time. New programs posted Saturday morning by about 7:00 a.m. Greenwich time. It's plus or minus an hour or so. Sometimes if we don't get those things up there right away, boy, Jim, do we hear about it from all around the world.

FSN Humor: Econo Bowl

This is Super Bowl weekend for people here in the United States when the whole country becomes totally dysfunctional – at least for a Sunday. And you know, a lot of times we talk about Joe Public, Joe Six-Pack not understanding economics and that's why he or she doesn't understand exactly why things are coming down on their head, what inflation means, how it destroys their buying power. So we thought, though, that since most Americans really understand the American sport of football, we would simply recast economic descriptions in a way that people who love football can understand. This is part of our educational program here at Financial Sense.

[Jim and John; sports commentators at the Econo Bowl]

JOHN: Well, welcome to the Washington Capitol dome for the first annual Econo Bowl where the Federales from Washington face off against the US Recessionistas. Jim, it should be quite a game. However, if you look around, there is quite a snow storm brewing which could affect conditions down on the field.

JIM:John, let's go down to the field and listen for the National Anthem.

JOHN:Well, the Federales win the coin toss and will begin the game on the offense. The quarter back for the Federales is Ben Bernanke with the M3 on his jersey there, with Dollar and Economic Growth at wide receivers. You know, this line looks a little puny with George Bush at center and Nancy Pelosi at left guard and Hank Paulson at right guard.

JIM:You know, I've been saying this all along, John. The front line is going to have its work cut out for it against that tough Recessionista’s front forward. Just look at these guys.

JOHN: Well, you're right, Jim, there’s Sub Prime, Stagflation, Unemployment and Volatility on the defense.

JIM: And it's no secret these guys keep getting bigger ever year.

JOHN: Yeah. It doesn't seem they can keep them under control either with all of the scandals coming out lately anyway. Okay, after the touchback, Bernanke will start his possession at the 20 yard line. Bernanke takes the snap. He's back to throw, he's looking, looking down the field. He sees the wide receiver, Economic Growth. He fires and it’s – it's incomplete. Corner back Rising Oil Prices bats down the pass and thwarts the completion.

JIM: That play fell apart before it even got started. The Federales are going to have to get more aggressive than that if they are going to beat this tough team.

JOHN: Well, let's see here, Jim, second down. Bernanke looks to the right with a rate cut. The blitz is on, and Sub Prime nails Bernanke in the back field for a loss. That's got to hurt. It looks like he didn't even see it coming.

JIM: How could you miss something that big?

Well, wait a minute, there's a flag down right now.

Referee: After the play was over. Personal foul: unnecessary stupidity, Number 52 on the offence, results in a 15 yard penalty. It is third down.

JOHN:Number 52 on the offence, that's Nancy Pelosi and apparently she was kicking the referee.

JIM: Well, that's a 15 yard penalty. What a costly mistake. She could even be fined 50 basis points if the league reviews this.

JOHN: All right, third down and long. This is another passing situation. Bernanke drops back and goes deep to the bottle– it's complete. He's running but Inflation is catching up. Inflation tackles the dollar, the ball is loose, it's a fumble. Inflation picks up the ball. Look at inflation run! And he's into the end zone for a touch down. I think Dollar is hurt. He's still down.

JOHN: Boy, it doesn't look like he's going to be back in the game any time soon judging from that attack. You know the Dollar has been a good performer in the past, but it's just not as strong as he was in previous seasons. Well, this game is going to be a long one. We'll return you to the studio for now, but don't forget to rejoin us later in the game.

JOHN: Well, we'll rejoin the Econo Bowl later on in this particular hour of the program. I think this is a great advance in educating people, Jim, in ways they can understand about this whole thing. I mean it's all played like a game, but it's very clear that obviously here at Financial Sense, we have far too much time on our hands. [34:18]

JIM: Drinking a little bit too much wine on a Saturday night.

JOHN: That will do it! Okay.

The Next Great Depression - Part 3

JOHN: Let's continue our series on the upcoming depression. This is called The Next Great Depression – Part 3. It's part three of a four part series. We expect this forecast to take place if we stay on the path that we're on right now, sometime in 2010, sliding into a recession around 2009 and then a depression 2010. This depression is going to be driven by bad policy moves by our politicians based on the things that they are saying now. So before we begin, let's review the various ways in which government interferes with the marketplace. Obviously when there is a lot of pain, governments are under a tremendous amount of pressure from their constituents to fix it. So we covered this last week, but why don't we summarize it once again, Jim, because this is going to be helpful to understand the various ways that they intervene. That’s because they are repeating the very, very same mistakes made during the real late 1920s and the early 1930s by FDR's administration as well (Franklin Delano Roosevelt.)

JIM: Well, there are a number of ways that they interfere and you're going to recognize some of these as I read through them because we are going through them now; and then I want to get to a Bloomberg story on Friday.

One way that they can prevent or delay and then eventually cause a depression is they prevent or delay liquidations. So they lend money to shaky businesses, so they call on banks to lend further, which is what they are trying to do now with Fannie and Freddie or bail out homeowners; so the second thing they do is inflate further. I mean that's what we're seeing right now with 50 basis point cut on Wednesday and we saw it last week with a surprise 75 basis point cut on Tuesday. So the further inflation blocks the necessary fall in prices delaying adjustments and really prolongs the situation. Further credit expansion also creates malinvestments. Remember, the recession of 2001 and the bursting of the tech bubble was followed by a slashing of interest rates, which gave us the real estate and credit bubble. So we're probably going to see another bubble here by the end of the year and into next year.

A third is they keep wages up. In fact, there was a call, and the response, in the President's State of the Union message about raising the minimum wage. And artificial maintenance of wage rates in a depression or a recession insures permanent mass employment. And the other thing that they do is they'll try to maintain prices, so look for that if prices start to fall.

Five, they want to stimulate consumption and discourage savings. Look at this whole stimulus plan that they are coming up with. Rather than encouraging more savings and less consumption, what they are trying too do is just the opposite and they are going to do everything they can to discourage savings and investment by raising taxes, particularly on individuals and corporations and estates. As a matter of fact, any increase in taxes and government and spending will discourage saving and investment.

And finally they will subsidize unemployment. The more you subsidize unemployment, it will prolong unemployment indefinitely and delay the shift of workers who are unemployed to other fields of endeavor. So, John, these are the six main mechanisms, and it was amazing, one of the big stories on Bloomberg on Friday is the title is “Wall Street embraces big government in order to avoid a recession.” So it's not just the politicians. It's also the financial people on the street who are calling who are saying “hey, we really screwed up here, bail us out.”

So these are all of the exact measures which are going to do nothing more than delay the recovery process and aggravate the depression. The most important government policy in a recession or a depression is to keep itself from interfering in the adjustment process. The economy needs to cleanse itself of all of these malinvestments, whether it was tech stocks and telecoms at the beginning of the decade or real estate mortgages in this current decade. In fact, the best thing government could do is to drastically lower its role in the economy, slash its own expenditures and along with the slash and cut back of its own spending, cut taxes, which interfere with savings and investment. The economy needs to shift the ratio away from debt and consumption (which is what they are advocating and what we've been doing) over to savings and investment. [35:58]

JOHN: You know, it's interesting you mention that because if you listen to some of the verbiage which comes out of the presidential debates, there is this subtle tendency to identify the welfare of the American people with the welfare of their government as if these two things were inextricably linked. I'm talking about the financial welfare. And so we hear expressions now: We have to make a little more sacrifice and we have to do this and that. I keep thinking: Why should we sacrifice for a problem you got us into by your poor fiduciary responsibilities.

JIM: What's that saying of yours? Don't elect –

JOHN: Don't appoint the people to get you out of a problem that got you into it in the first place.

JIM: Absolutely amazing and here we have on Friday a big call from all of the Wall Street banking houses and brokerage firms for more bail outs. It's basically, “Look, we really screwed up here. We're in trouble. Bail us out!”

But here is the key thing that's important to understand. The more that they try to inflate and keep the boom going, the more painful and severe the necessary adjustment process is going to be. And secondly, the boom, John, we know cannot go on forever. Eventually, the public wakes up to the fact that government policy [is] permanent inflation, much like we saw in the 70s and the public begins to flee from money and goes into goods. That's why they follow that inflationary expectations. By the way. It's risen lately. The result in the end is going to be run away hyperinflation.

Hyperinflation is far worse than any depression. It destroys the currency, which is the life blood of the economy; it ruins and shatters the middle class and it destroys the wealth of fixed income groups. I mean I can't believe institutions and individuals are jumping on board Treasury notes at 2% when the real inflation rate is probably running closer to 6 and 8%. The other thing, it also leads to wide scale unemployment. I mean the unemployment rate despite all of the government schemes and programs got to almost a third of the nation's employed; so it leads to wide scaled unemployment and a lower living standard. You get to the point there is very little point in working when taxes and inflation make wages worthless. I mean people shift to searching for goods to buy in an effort to find something that will hold its value. You saw it in Germany in the 20s. You saw it in Turkey during their inflation. You saw it in Russia in the late 90s in their hyperinflation and you saw it in Argentina in this decade. [41:39]

JOHN: When you really look at this it is really frightening to see the very things which you talk about –especially in retrospect looking back at 1930 – taking place all over again today, but the majority of people out there seem to be oblivious to that. We're headed down the same path with the Fed inflating, the government is deficit spending and talks about major tax increase coming next year – well, depending on the outcome of the November election. But either way that seems to be the direction that we tend to be headed. Senator Clinton said we're going to let all of the Bush tax cuts expire. We did really well in the 1990s, meaning under her husband's administration, but in reality we did well in the 1990s because of the fact that Alan Greenspan was creating little bubbles like the tech bubble by creating liquidity in the market and stimulating the economy that way. It really had very little to do with either the way the Bush administration prior to that or what the Clinton administration did. So why do you think they are embarking now on a program that is going to end up – well, if we keep on this path, it's going to be economic ruin for the country. It's going to be all over again.

JIM: I've looked at this. I've listened to these people talk, and I'm trying to think. I've watch a lot of documentaries. Last year I spent a lot of time watching the Great Depression, the biographies of Winston Churchill and FDR. I think it really gets down to something that we talked about last week. It begins with flawed economic theory or what I call quackonomics. I mean if you take a look at the Keynesian criticism of the Austrian cycle theory, it's that Keynesians believe that saving and investment are unrelated. They try to separate the two, and it's performed somehow by two separate economic actors within the economy and there is no linkage between the two of them. The task of government during a recession or depression is to stimulate investments and discourage savings so that people can spend more. So you boil this down to Keynesian thinking: Individuals can either one spend money on consumption; two, spend it on investment; or three, add to cash or subtract from cash. So Keynesians think that the individual decides first how much money am I going to spend, then allocates how much they are going to invest and then save.

Austrians, on the other hand, believe that individuals decide at one and the same time based on their time preference how much they are going to allocate between consumption and investment. And if you think about this logically, in order to have money to invest an individual must restrict consumption and save money in order to have the funds to invest. But by restricting consumption, savings are created and it's this savings that gives the individual the means to invest. So if people's demand for savings increase, it simply means demand for money has increased. This isn't, as Keynesians assume, savings leaking, or what they call hoarding. The Keynesians don't understand this concept and that's really what we're seeing play out today. One of the reasons that we got in this mess is we've gone into too much debt. We've taken out too much debt for individuals and we’ve consumed too much, so the prescription here is look, we've been on the economic sauce or credit sauce for so long, we need to allow the body to recover with this hangover so we can cleanse all of the maladjustments and put the economy on the right path again.

However, they assume that any increase in savings is matched by an opposite decline in investment. I mean their whole economic theory is flawed, and that’s something that you really have to understand here and why we're going to go down the same path, why we're going to commit the same mistakes.

And you don't even have to think back that far. Remember, John, in the 2001 recession, the first thing the Bush administration did was they came up with the rebates and they failed. Carter did the same thing in the 79 recession. They failed. And here we are knowing that they failed in 2001 and we’re coming right back in 2008 and we're committing the same mistake. [45:59]

JOHN: And also if you notice as people begin to feel this and they feel that the government policy isn't working, then they try evasive action or they try to correct it on their own, and then that seems to ruin the Keynesian idea; and then Keynesians try to force everybody into compliance. That seems to be the whole system. So in essence the government assumes that the linkage between savings and investment doesn't exist, and so then they implement policies that then distort this whole relationship between savings and investment.

JIM: This gets back to the ultimate weapon that Keynes used to explain a depression, which is what they called the so-called liquidity trap. They claim the demand for money may be so persistently high that the rate of interest could not fall low enough to stimulate investments sufficiently to raise the economy out of a recession or depression. This gets back to the misguided theory of liquidity preference versus time preference. So they have this whole thing wrong. I mean we had a depression in 1920 following the pull back of the inflationary policies of the World War I period, and you know what, the government stayed out of the process, we went through our depression in the United States. It lasted a little over 12 months and then the economy moved on. It recovered and we got back on the right track. But that's not what they did following the 29 market crash and the slow down in the economy and that’s unfortunately what they are going to do here. [47:27]

JOHN: It's amazing that the government doesn't come to the understanding of the relationship between savings and investment and why ultimately it's proclaiming to the public that it's going to fix the problems when in reality it's making the problem worse. They always urge people to go out and spend and borrow money. They actually penalize savings and investment and it's this philosophy that explains why the US has gone from the world's largest creditor nation to being the world's largest debtor nation. And it makes it vulnerable, not just from the financial standpoint, but also from a security standpoint as well. You know, we went from a nation that used to save and invest to a nation that now borrows and spends. And listening to all of these presidential candidates right now and watching them, politicians enact a stimulus package that emphasizes consumption. So what ultimately happens is the government is going to go deeper into debt with no return on the stimulus and the Fed will print more money. Nothing has changed. We're just deeper.

JIM: Yeah. And this is another false tenet of the Keynesian policies is this under-consumption theory. It alleges that something went wrong during the boom. Too much investment, too much production and too much income going to upper income groups who don't consume as much as lower income groups. Therefore, this causes consumer demand to be insufficient to buy up the goods produced, hence the crisis and the depression. It is one of the reasons why you hear stories today coming from the politicians on wealth redistribution schemes advocated by almost all individuals in the party. I mean John McCain voted against tax cuts, Mike Huckabee raised taxes. So you get back to “let's tax the rich” who don't consume enough and redistribute the taxes to the lower classes so they can consume more. And since the rich consume less than the poor, the masses don’t have enough purchasing power to buy the excess goods created by too much production. [49:28]

JOHN: This is exactly what government did during the Great Depression. I mean Hoover raised tax rates from 24 to 25% during the 1920s to 63%. And then Roosevelt came in, remember, “throwing the rascals out;” they threw the rascals out because things weren't getting better. So Hoover got pitched out, Roosevelt was elected. He followed Hoover by raising taxes in incremental steps to 81% and then 88% and eventually 94%. So at this point, an economy which was trying to recover, groaned once and rolled over down into the Great Depression. So he and Hoover virtually killed the economy destroying investments, savings and really creating the largest unemployment rate in our nation's history, so far. And just listening to the Democrats or the Republicans like Mike Huckabee and they are advocating the very same thing. Nothing has changed.

JIM: It's absolutely amazing, and this gets back to quackonomics. First of all, there is no evidence that the rich consume less. John, you remember in 1991, we were running budget deficits, we were in the S&L crisis like the financial crisis of today and we were in a recession. And remember they came in and they said, “you know what, we're going to get the rich,” so they came up with a 10% surtax on luxury goods that was leveled on luxury cars over $30,000; it was leveled against boats of any kind –whether sail or motor – and it was also leveled against airplanes. And literally, within almost a 12 month period of time, because you’ve got to remember, in states like California where you're paying almost an 8% sales tax, then you add a 10% surtax, it virtually almost wiped out the small aircraft and boating industry in the United States.

And I remember I was doing, at that time, in the evening, I did television news for one of our local stations and we had a big boat show in 1991 and everybody was abuzz because there was this New Jersey developer that was featuring his 180 foot yacht for sale for $30 million at the boat show, so I went down there with a camera crew. You should have seen this boat. It was incredible. You walked in to the master state room and there were Picassos hanging over the bed. But incredible boat. And in talking to one of the brokers that was trying to sell the boat, this boat was manufactured in New Zealand and the New Jersey developer went there to buy the yacht because he wanted to avoid, number one, the sales tax in New Jersey; and number two, the 10% surtax. And there were 125 people working full-time to make that boat. And that just goes to show you.

Besides let's not forget the fact that savings, which go into investment, sustain the structure of production and manufacturing in this country as well as consumption. So in order to sustain a higher standard of living, you've got to produce stuff. And the capital structure of the economy has to be maintained; and if you want to maintain it, if you want to increase production, more and more funds must be used just to maintain or replace the nation's production facilities. We're not doing that. And just look at the decay of infrastructure in this country, whether it's the levees along the Mississippi river, whether it's bridges, whether it's airports, whether it's refineries, whether it's our rail system, we're not doing that. So these under-consumption quacks assert that expanding production exerts a depressing secular effect on the economy because prices will tend to fall. But you know what, falling prices, whether it's on a plasma screen, computers, is a natural tendency of increased investment and productivity; and they are a reflection of lower unit costs. Profitability is not at all injured. In fact, falling prices simply distribute the fruits of higher productivity to all people. The natural course of economic development through this nation's history has been –barring government-created inflation – for prices to fall in response to increased capital and higher productivity. [53:57]

JOHN: You know what's funny? I actually remember that because I was head of a project that was consulting to Cessna aircraft at the time and we were nine months into the project and the whole project was just cancelled. They literally boxed it up and we were doing pilot training manuals for them in different languages and we boxed up the whole project and it got shelved to this very day. And that hit especially Kansas hard because of all of the light aircraft manufacturers, except for Mooney at the time, like Piper and Cessna, Beechcraft were all in Kansas and most of the boat manufacturing was in Delaware, as I recall; right? So it practically took down the Delaware economy.

But getting back on track here, there is always this tendency to sort of demonize big business, and it's an ironic thing (or demonize capitalism is maybe a better way of putting it) because government bureaucrats just lust after the money, which capitalism produces, at the very same time they are demonizing it as if somehow investment and growth and all of these things are bad things. And at the same time the government hates to see falling prices, so they demonize what's successful that things that increased productivity or are more successful against their competitors. I mean look at way they demonize for example Walmart which has brought low prices to the masses, albeit, I mean there is some debate on this thing because of the fact that they do it largely with imported goods that come from China which people are complaining about offshoring jobs but that's probably a different rabbit trail. But either way, that's typically what happens.

JIM: Yeah. But you've got to remember, one of the reasons that jobs have gone offshore along with manufacturing is it gets back to this savings and investment idea. And why would you want to save and invest here when you're penalized for doing so. You go overseas and foreign governments welcome you, they create incentives. So that's what business has done. If you over tax, over regulate, this gets back to Charles Adams who wrote two very astute books on taxation. One was called For Good and For Evil, which was a history of taxation throughout human history; one of the best books ever written, which just goes to show you what happens when you over inflate and over tax, the two go hand in hand. Then he also said: When governments become rapacious and they raise taxes, then what you see is fight, flight or fraud. And that's exactly what's happening today. [56:18]

JOHN: Jim, why don't you take it back to the depression thesis right now because every crisis that comes a long is really marked by certain traits.

JIM: If we want to get back to the depression thesis, which is this whole story, it's very important to remember every crisis is marked by malinvestment, under saving – not under consumption. In fact, it's just the opposite. The only way that investment can rise together with consumption is through inflationary credit expansion, hence the inflationists are always alluding to this prerequisite. But this admission really destroys the entire theory. It implies, for example, that inflation or the acceleration principle could not possibly operate in a free market. It necessitates the government coming in, intervening by supplying the necessary savings for investment through the inflationary policies of expanding and printing money, basically.

And that is what you're seeing today with the Fed's monetary expansion, which is replacing real savings, which are negative in the US. It was interesting seeing the presidential debates they were lamenting...I think the front cover of the Economist had helicopters; written on the helicopters were “sovereign funds.” But they were lamenting that the sovereign funds were coming in and bailing us out. Well, the reason they are doing that is we have no savings in this country, and so they are lamenting this, but this is exactly what you get when you emphasize consumption, borrowing money, going deeper into debt to over consume versus savings and investment, which is what made this country great at one time. [58:00]

JOHN: I know you're talking a lot about theory here, but in reality, it plays out, well, in reality.

JIM: Yeah. It's very important when you go back and you study the inflationary problems of the 17th century in France and England, you take a look at the 20th Century, the problems that we saw in Russia, in Germany, in Turkey; if you take a look at this decade, the problem in Argentina, the hyperinflation that is occurring in Venezuela now; and also what we're doing, you have to say why does this happen? Why do they keep making the same mistakes repeatedly? And it gets down to theory and your economic views. So if you see the world as flat, it's almost like calling these people the flat-earth people. I mean that's what just blows me away with this economic stimulus package, both endorsed by the President and Congress, when Bush himself knew that the 2000 tax rebates failed. Congress knew that it failed. That's why they had to come back with another stimulus package by lowering actual tax rates in 2003 to finally get the economy going again. And here they are six, seven years later making the same mistake. That all gets back to theory, John. You know, if you believe the world is flat, you continue to operate like the world is flat. [59:23]

JOHN: We're going to continue this thought next week when we layout Part 4 of the Great Depression. It's a four part series about the inflationary boom of the 1920s and then we'll relate that to the inflationary boom of both the Clinton and Bush presidencies; and then we'll talk specifically about the errors that policy makers made that led to the Great Depression because the very same mistakes are being made today by our politicians again. So it's important to understand the theory, so as it unfolds you're going to recognize what you see and you can take step to prepare yourself for the hyperinflationary depression that will follow.

You're listening to the Financial Sense Newshour at www.financialsense.com. Please remember that all content here on the program is for information and educational purposes only and you should not consider it as a solicitation or offer to purchase yourself securities. And anything we discuss here on the program are based on the opinions of Jim Puplava and his guests. They don't take into account your suitability, your objectives or risk tolerance. And as such we're not liable to any person for financial losses that result from investing in companies or other issues profiled here on the Financial Sense Newshour. More to come on the Big Picture and then later on we’ll take your calls on the Q-line when we return right after this.

Part 2

Here Comes the Recession - Here Comes the Stimulus

JOHN: Well, Jim, look around you. How does it feel? We're in a recession now. You know, the politicians are panicking, the Fed is scrambling to try to hold this thing up and just six months ago, nobody was talking about the R word. But there seem to be some traits of where we are here. No matter where you look, the Fed and the bank always seems to be right in the middle of it.

What is really significant in this from a political standpoint is that just a month ago it was – well, of course, Hillary Clinton was saying it this week too. I have a clip here that we ran earlier on, and that is that we're going to raise taxes, we're going to let the Bush tax cuts expire, we need regulations, global warming is the big issue, Yada, Yada, Yada. The whole debate has gone flip-flop. Now, for a lot of the candidates, ixne on the axte. Okay. Don't talk about the taxes. Even though we know we're going to raise them later on and what can we do to bail out the public. It's interesting also that the banks that have been involved in these malinvestments, they want to be bailed out for their mistake. It's almost like socialism for the rich.

JIM: This gets back to the clip we played last week with the Two Johns, and one guy said, “did you learn anything out of all of this?” The other guy said: “Certainly. If you’re going to make a mess, make sure you make a big mess, because if you do the government will bail you out.”

And it's interesting, on Friday a Bloomberg piece: Wall Street embraces government to avoid a recession. And what they were talking about here is US mortgage foreclosures this year will top 1 million this year alone. Home prices are falling at the fastest level that we've seen since the Great Depression. So, John, you are seeing the heads of every investment bank, you are seeing the heads of every money center bank that they are basically saying, “look, the way this is going is not good. (Yeah. It's not good for us.)” And we're probably looking at probably the worst drop in home sales, and what it has done is turned the financial sector in unison to become champions of big government with everybody from the executives to Citigroup, JP Morgan, Lehman, Merrill, I mean, you name it; sentiment can change when it's your own money on the line and that's what the big bankers are calling for.

And it's amazing because as you look at these crises, whether it's the S&L crisis of 91, the recession of 2001, the recession in 81, you'll find two commonalities with every one of these crises: the Federal Reserve and the banking system involved in every single one of these crises. And I can remember doing a story on this in 2005. I did a series called The Day After Tomorrow. It was kind of a hypothetical piece, but one of the lending institutions in this area that I was talking about, and this is a huge housing development and I called them Citywide at the time (it was actually Countrywide) and they were the main lenders here. And I can remember talking to these guys and they were doing no-money-down loans, they were doing interest-only loans and variable rate mortgages. And I can remember talking to this loan officer and I go, you know what, the Fed is raising interest rates, aren't you worried about the people that you're putting in these loans? This is going to end up back firing. And he said, “no, no, no. look, real estate prices are going up.” He said “besides that, in Southern California, the average homeowner only keeps his home three-to-five years, so why would you do something stupid like take out a 30 year mortgage when you can take out a variable rate mortgage at three-to-five-year variable mortgage, buy so much more home for your money and be able to put options in the house.” And that was what all of the lenders were pushing during this period of time because we were seeing tremendous housing inflation and the way to make this house more affordable (since it was inflating, most of these homes have doubled) was to go through these variable rate mortgages, no money down, all of the silly stuff, John, that we are now seeing implode. And the very institutions that were either making the loans, securitizing the loans, are now saying “government! help me, help me, bail me out.”

And you're right, what this is involved is socialism for the rich because the stimulus package that's going through the Senate this week, the Senate may bump it up to 160 billion and if you take a look at the losses worldwide on the subprime mortgages, it's expected to be 400 billion and we're probably looking at over 100 billion with credit default swaps. And during this period of time when things were going crazy, I mean Countrywide was making a fortune on this. They made close to $3 billion in 2006. But now you're talking about, remember, only a couple of years ago they were chastising Freddie and Fannie. Now they want to expand the role of Freddie and Fannie for a year to go up and take jumbo mortgages. I think the figure is 714,000. But this year alone, 550 billion of subprime loans are going to reset before the end of this year and next year. [5:26]

JOHN: Paul Volcker, the former head of the Federal Reserve prior to Alan Greenspan also heads up what is called the group of 30, and they are making proposals right now, at least Volcker is, proposing that government should come in and back up adjustable rate mortgages in favor of default, that's the first thing. He want to see tax credits for homeowners so they can buy into new homes and he wants the Feds to slash interest rate to 2%.

JIM: It's amazing what a crisis does and how everybody – I mean we are moving full force right into socialism, and I don't care who you're looking at whether you're looking at Hillary Clinton this week who talks about raising taxes, Barack Obama who’s talking about raising taxes, John McCain who opposed lowering taxes. We know this is coming.

And one of the reasons it's coming is when you provide economic stimulus, if you do it right, as we did in 2003 (when they actually lowered tax rates because the 2001 tax rebates stimulus failed) you actually stimulate the economy; the economy grows, it expands, you get more tax revenues and the budget deficit goes down.

But when you do dumb programs like we're doing now, you don't really stimulate the economy because the idea is okay, if I give you 300 bucks and you spend it, then what, what happens next? If you are a business man, are you going to go out and order a whole bunch of new equipment, build a new factory because your next door neighbor got a $300 tax rebate? No.

One of the indexes that we follow is CEO and CFO business sentiment, which has been very accurate; and that sentiment gauge has been predicting this recession. And there is no way as a business leader that you're going to go out and expand what you're doing and create more jobs with a dumb program like a rebate. And because it will not really stimulate the economy, what will happen is the deficit will get bigger, it will start to mushroom out of control and then the first cry will be we've got to raise taxes to bring down the deficit. Well, we did that in 93 and it impacted the economy so that in 94 what happened is the Fed began to pump the money supply. And the money supply began to grow at 8% to counteract the impact of taxes and that gave us our tech boom or the new economy boom, which was really a false premise to begin with. Yes, we had technological changes, but we're going right down that...

In fact, what was really surprising is Bernanke, who basically was inspired by Milton Friedman – and Milton Friedman was a champion of free market solutions to a problem, he said “government programs don't work. They muck things up. They make them worse.” And, in fact, Bernanke described Friedman in a 2000 speech that he gave at his birthday where he promised, “hey, we mucked it up in the Great Depression, we'll never make that mistake.” But in his speech he also said that Friedman was the man that inspired his interest in monetary policy. So you even have Bernanke breaking away from the Friedman postulates in terms of what to do when you muck up the economy. In other words, let the market sort it out. Let the market heal itself. Let the market correct itself and we'll get back to sound policies. And whenever you go in and intervene as we talked about in our Great Depression series, you actually make matters worse, that is, by from correcting itself. All you're doing is you're postponing, prolonging the problem and it's only going to help a couple of hundred thousand people stay in their homes a little longer, but it also is going to have unintended consequences because it's going to lift mortgage rates. And that's one of our theories this year on the Oreo side. By the end of the year, we get to the other dark side of the Oreo because you're going to see higher interest rates and higher inflation rates. And especially for anybody that's going to get into the lending business, when you have government coming in and changing contract law, you know what's going to happen is everybody is going to demand a higher rate of interest in order to lend money because there is greater risk now because government can come in and change the contracts. [9:53]

JOHN: Which I think also puts in jeopardy the concept of business; right? Because in order to have a prosperous piece of capitalism or prosperous business environment, you need to know what the rules are. And if people come in and keep changing the rules, that creates an unstable deck, and investors don't like that.

JIM: No, they don't. And it's amazing, another proposal that is being bandied about, and this was used during the Great Depression (and we're going to talk about this next week when we talk about the policy mistakes because you're going to see them as front news today, that's what you're seeing on the television or the papers), where the government allowed tax exempt bonds to be issued and the proceeds were used for below market rate mortgages; nearly one fifth of the US homes between 1933 and 36 after negotiating with the original lenders to accept less than the amount owed on the defaulted mortgage. John, what are you hearing today? [10:54]

JOHN: Well, we're basically hearing pretty much the same thing.

JIM: Yeah. You take a look at what Hoover did – what Roosevelt – it was amazing that during the Roosevelt administration, the former treasury secretary, Edward Carter Glass opposed Roosevelt’s expansion of government after the stock market crashed. Senator Robert Taft was another critic. He said, “you know what, you're talking us to socialism and you're going to make this all worse.” And that's exactly what happened. They took a stock market correction, they took a recession and they turned it into the Great Depression despite all of the government programs under Hoover, despite all of the government programs under Roosevelt. The unemployment rate got over 25% in this country. I think it was 25, 30, what it was. And it is absolutely amazing. It's like no one ever studied the Great Depression. Those that did like Ben Bernanke said: “You know what problem was? We didn't print enough money.” [11:52]

JOHN: But you can only print so much before the whole thing doesn't work anymore.

JIM: And that's what people are saying. They are saying higher oil prices in an economy that operated without government printing money, what would happen is as oil prices went up, consumers would take some of that money that they were having to pay for, let's say, higher gasoline prices and they would take it away from some other sector in the economy, so you really wouldn't get the inflation. But when you provide all of this extra money and credit, what you have is higher prices. You didn't create any wealth. You didn't create any more factors of production. You didn't create any more widgets. All you did was print a bunch of money that enabled people to buy things that they wouldn't normally be able to buy.

It is absolutely amazing to see. The programs coming out of Washington and especially from the financial sector that they love the government. They love free markets when the stock market is going up and they are making tons of money. The minute that their recklessness, their carelessness gets them into trouble, what is the first thing they are screaming for? They are screaming for a hand out, a bail out, “come in and help me, bail me, Ben. Bail me Uncle Sam, and get me out this mess. Cover my losses because we did some stupid things here.” And what do we do? We cover the losses. [13:13]

JOHN: In other words, what that does is it transfers the liability from that decision from the people that made the stupid judgments to the tax payers again. It keeps loading everything onto the back of the tax payer, making him or her liable.

JIM: Sure. And the way the government work this process is they tax the rich and then what they do is they tax the poor and middle class through inflation. And what happens is, the poor and the middle class vote for the very policies that are going to make their lives worse through higher levels of inflation. In other words, the government gives you the idea that there is a free lunch here, so all of these stimulus programs that you're talking about right knew, what I suspect we're going to see and this gets into my Oreo: We are going into a recession, we're going to slash interest rates, we're going to print money like crazy, we're going to bail out the bond insurers, we're going to bail out the subprime lenders, we're going to bail out the homeowners. And by the end of the year, we'll get into a recovery, but then like the very same programs in 1979 and 1981 under Carter we were almost back to back double recessions. There was only a year of recovery between them and I think that's what's going to happen. By the end of the year with the massive fiscal stimulus, because I think this first package that they are running through now, John, I think they are already running through package two. They just don't want to tell you that because they know these fools are hoping that it will work this time; or at least work well enough to get them through the election so they can all preserve their jobs and get reelected.

But they are already working on a second stimulus program because I think deep down they know exactly the very things that you and I have been talking on this program, these programs aren't going to work. So they'll enact a second stimulus program, then they are going to slash interest rates even further, probably taking the federal fund rate. Here is Volcker telling Bernanke to take it down to 2%. And that's one of the reasons we knew that Bernanke was going to get aggressive because when you have Paul Volcker making public speeches and saying the Fed is behind the curve, they really need to start getting their act together and slashing, you know, monetary reflation is coming. But we'll probably come out of this recession towards the end of the year and then a new Congress, a new president will be elected and then they will start going right down the road to the Great Depression so that in 2010 the economy will be back in recession again and in response to that recession, they are going to act and take on worse measures very similar to what Hoover and Roosevelt did and that's going to take us into the great depression. In other words, they are going to turn a recession in 2010 into the great depression. [16:04]

JOHN: Well, obviously, we've got a lot of evidence over the course of this last week that are causing people before who didn't want to use the R word, the recession word, to finally say, you know, maybe we really are in a recession. You could see this swing. It's almost like when you were talking about the disconnect before in the first part of the Big Picture, there comes a point where it seems like public opinion –if you graph this on a 360 degree cycle – is 90 to 180 degrees behind the stimulus which causes it. But eventually they wake up.

JIM: Yeah. And what was surprising, just as you've been making comments, it's amazing how the political cycle has changed within, what, a 30 day period. In the month of December, the Fed was talking about risk in the economy was evenly balanced, politicians were talking about raising taxes, all kinds of regulatory programs. We're going to go after the oil companies, the drug companies, etc. And in 30 days, John, look how much the debate has almost gone 180 degrees different. The politicians are talking about cutting taxes, at least this year in the election year because if they are going to be raising them next year, and the debate even on Wall Street as we've been talking; in fact, it's been interesting because Bank Credit Analyst comes out with their forecast, they come out towards the end of December. We talked about this in the first week of the year and Bank Credit Analyst were saying at least as of the end of last year that we would avoid a recession. This week they came out, and I'm taking this from their executive summary and it says:

The US economic outlook has deteriorated to the point where one should assume a recession for this year. We do not anticipate a worse than average downturn, and the economy should be recovering before the end of the year.

Also on Friday, Moody's chief economist Mark Zandi came out and he said: January's bleak employment report has led us to adopt a recession outlook for the US similar to the Bank Credit Analyst. He said the recession probably began in December and is expected to be short and mild, similar to the eight month downturn of 2001.

And so it's remarkable, John, Wall Street has changed, the economic forecasting firms have changed, and I'm talking about in less than a month. It is in 30 days we have had almost a sea change here, and this is sort of what we were talking about last year that in order for the Fed to lower interest rates we were going to need to see three things: Real estate get much worse, spilling over into the financial sector; a slow down in the economy; and a financial crisis. Those were the three things that we forecast would happen last year and that's what it was going to take. In fact, as we did our year end show, we talked about the massive fiscal stimulus. That was the only thing lacking and remember politicians weren't even debating this. If you watched the presidential debates going on up all of the way, in fact, I think to the first week of the year, this was almost absent from any discussion; just as right now, an energy Pearl Harbor (which I think is coming) is absent from any discussion. The whole talk is about...even the global warming debate has now changed, John, to if we do all of these things –carbon credits and all of this stuff – we’ll create jobs, so even the global warming debate has shifted to creating jobs. [19:35]

JOHN: Well, in combination of that, remember we said a long time ago here on the show that if global warming were to survive because of the damage it was going to inflict on the economy, (which is why by the way, they've always had trouble getting treaties going on an international level because countries which have large stakes in this, the US, Australia don't want to get into this) they would have to ultimately hook themselves onto the peak oil wagon and then they would find a sling shot to carry them along. They weren't going to be able to do it alone by themselves. And I forgot who it was who said in the roundtable in the last segment of the show that basically, you know, this is good in the minds of the global warming people because this will force us to cut back on oil consumption and hydrocarbon consumption. The problem is what this ultimately does to the economy. And we've heard the hype; we see this flip-flop too. Remember it was just a month ago, it was: The economy is bad, we have to ratchet it back, we have to save the planet, Yada, Yada, Yada. Now, it's just flipped over and said “oh, if we chase global warming it's a good thing because it will boost the economy, it will do this, do that.” Well, they are flip-flopping back and forth and clearly responding to what you would call public opinion pressures, rather than a real policy. [20:44]

JIM: And you're going to see that because we are in a crisis. This is probably the worst housing crisis we've seen since the 1930s and they are advocating as we talk about earlier, the same kind of measures and programs. These are going to fail, John, and this sort of gets back to our Oreo theory, kind of a rough patch in the first quarter, the creamy filling in the middle because what you're going to see, I predict you're going to see a second stimulus package because they know the rebates stuff doesn't work. I mean you get your rebate check by May and June. By July and August, you're going to be forgetting about it, so we'll see another stimulus package. The Fed will drop interest rates probably down to 2%. And remember, monetary policy acts with a lag, so there is about a six month lag and we're starting to see it impact because the wave of refinancings has gone up significantly. A lot of people that do have equity in their homes that have a good job, a good FICO score are refinancing at record levels. They are taking these three-year adjustable rate mortgages and converting them over to 30 year fixed. So that's going to help some people. There’s still equity take outs. You bought a home in the 90s or you bought a home earlier in this decade, you still have some financial appreciation in that home if you got in or bought in early enough. So there are people, you know, I have a friend that's in the banking business and they are working overtime right now with the refinancings that have come in as a result of 30-year mortgage rates dropping below 5 ½%. So anyway, all of these things that we've been talking about here, whether it's the Great Depression or what we've been talking about in this segment, they are going to fail.

And what you're going to see is next year they are going to raise taxes and, in fact, what we're going to get as we come out of this recession, I predict we're going to get more stagflation. In other words, we are going to see higher rates of inflation by next year; probably central banks talking about raising interest rates because by the end of the year, I expect that we will see higher interest rates, higher headline inflation numbers. That’s because, you know, I just got a flash from John Williams at Shadow Stats that says that the money supply M3 is accelerating again. Well, no kidding after the rate cuts that we've seen here just in the last week. But all of this, John, is going to take us into life that's going to be very, very difficult.

And I suspect that if you and I were doing this program in the year 2010, 2011, 2012, we're going to be talking about a different society, a different way of life as we're going to have to make cuts, cuts in government, means testing for Social Security because government in the end is going to be forced to cut back its budget; as many of the states are going to be forced to do because there is only a certain limit to the amount of largesse that governments can put on the economy and depend on others to finance. That’s because at some point, foreigners are going to say, “look, with what's going on, you guys are such a mess, perhaps we're not going to finance you or we don't want dollars, we're going to put our money someplace safer.” So I would suspect that we're going to have some kind of currency crisis as we get to the year 2010.

And that's why I would say to you that any time you see the gold market correct, the silver market, gold silver prices pull back or gold equities, silver equities pull back, your job, during this period of time, as we move from pessimism in the bull market for precious metals –which is where we were in 2001 to where we are today, which is skepticism –you're going to want to be accumulating as much as you can so that when we go into the optimism phase and then the euphoric phase, all you care about at that point is how many shares of your favorite mining company, gold and silver do you own because that's the time that you just sit back and relax and that's going to be the time that you're going to cash in.

But right now, just as we talked about in the first hour with gold going from 255 to almost 900, 910 bucks roughly on this Friday, and silver going from roughly around 3.50 to 16.80, this is for the most part been ignored by investors just as the equity bull market in the 80s and the early part of the 90s was ignored by investors and it wasn't until 1995, we had about a five year run when the public came in just as in the bull market in gold that began in the early 70s, ended roughly in 1980 that the public came in the last two years. [25:47]

JOHN: And you're listening to the Financial Sense Newshour at www.financialsense.com. Coming up next, Other Voices.

Other Voices: Curtis D. Burton, Chairman & CEO, Buccaneer Resources, LLC

JIM: Well, the United States imports over 60%, some say even 70% when you consider refined products of our energy needs. So energy security is becoming more important since we get a lot of this stuff from people who don’t particularly like us.

Joining me on Other Voices this week is Curtis Burton. He’s Chairman and CEO of Buccaneer Resources. Curtis, you wrote an article for World Energy recently – the real issue the security of supply. Anytime – we saw this right after, for example, the hurricanes hit in 2005, they hold these hearings and they say: “why are gasoline prices this high?” They hold these hearings – and it doesn’t matter: they’ve been holding these hearings for decades now, anytime the price goes up they want to know why and they’re puzzled. But nothing ever gets done.

CURTIS BURTON: Well, certainly the issue that I see, as you said, over decades is the oil and gas industry is the favorite whipping boy of the politicians when energy prices go up and that would be a little bit laughable to me being in the energy industry all of that time were it not for the fact that the energy industry itself has spent a lot of time in Washington trying to lobby with politicians to lay out what I think are some fundamental facts that are just fairly undeniable.

The first one being that we live in the greatest country in the world in the US. We have the highest standard of living. A lot of people point fingers at us and talk about the fact that we consume more energy than anybody else. But the reality is we have a very high standard of living, we’ve led the free world and the way we’ve done that has been on relatively inexpensive energy. So in the world I live in, energy is really important. It’s not something for Congress or anybody else to just glibly play around with and do their best to get on the 6 o’clock news saying the bad guys are the oil and gas guys. It is a commodity that determines what your standard of living is going to be like in an industrial country like America.

And we seem to be happy in Washington to sit on the sidelines and literally fiddle while Rome burns on the whole issue of secure, inexpensive energy for America. And the reason I say that is if you start looking at some of the facts and the figures we are in competition for energy. America is in competition for energy. And first and foremost, I’m an American. I want my kids to have the same standard of living or better than I had, and the only way they can do that is if the energy industry and the political system work together to create an environment where that happens. And today, as we sit here and talk, that’s not happening.

Let me give you a couple of quick facts and figures to back that up. If you look at this competitive nature of oil and gas, what you have is a finite entity, a commodity if you will, that everybody in the world wants some of. Now up until just the last few years, really I can give you some hard data back to about 2002 that will make a point, you haven’t had an enormous amount of competition for that energy. But along about 2002 you started to see some spiking activity. It’s no coincidence, along about 2002 was the last time that China and India had very muted demands for energy. From 2002 to 2004, the Chinese increase in requirements for oil tripled, and guess what started happening in 2002? From 2002 through 2007, you’ve had a 204% increase in natural gas prices and you’ve had a 250% increase in oil prices. Now, you can say those things aren’t connected; but what I’ve been saying for years is “folks, we are in a competitive environment for a commodity that’s fixed and if we don’t want to be left out and turn into a third world country we’d better start paying attention to security of supply for America. [31:17]

JIM: In you article for World Energy you brought up something I think Americans would be shocked. I remember as a college student the gas lines back in 73 and 74. But, if you go back to 1973 America was only importing 15% of its energy needs from OPEC. Today, of the 60% that we import in raw oil, 47% of that comes from OPEC. And some of the areas in the world that still like us, like Mexico and Canada, you’re talking about a steep drop off in the production of Mexico’s largest oil field, Cantarell, which means that their exports to the United States are going to go down; plus, Mexico’s own consumption is going up. If people were worried what happened in 73 and 74 I am just absolutely astounded that this does not get more attention in Washington than it does. I mean I would be worried.

CURTIS: Every day I wake up and I feel like I’m on the fan tail of the Titanic, you know, and we’re sailing right towards an iceberg, and absolutely no one seems to be bothered on the government side. They are bothered when they can get a few minutes on the six o’clock news talking about who the bad guys are, the oil and gas guys, but you try to find one of them to sit down and concretely work on security of supply for America and there’s nobody around. That’s devoid of party by the way. It’s not about Republicans; it’s not about Democrats. In fact, take a look at what’s going on in the public debate in the presidential race right now. Find me any one in the field that can intelligently comment on the energy picture. They are not there. And it should be something that is front and center rather than just something that is front and center when gasoline hits $4 a gallon. [33:22]

JIM: It’s almost and you can see this when oil companies report profits: our politicians act like the major oil companies are still the largest producers of oil in the world and we know that’s no longer the case. Most of the gasoline that we burn in our tanks is probably is coming from an oil field in the Middle East or OPEC country somewhere. The national oil companies have become the new oil titans not the majors.

CURTIS: Exactly. That is the key fact that’s out there is the national oil companies have moved into the spot of controlling the oil supply and also I think it’s unfair when you look at an Exxon. Yes, they’re a large multinational company and yes, in terms of absolute profit they make they make a very attractive profits but go talk to somebody on Wall Street. Exxon isn’t a place that they like to invest because if you look at the return on the investment that they have to make, it’s nothing compared to the computer industry for instance. So it’s not a sexy investment for Wall Street and it certainly, although the numbers are large the percentage numbers are really not that compelling. It’s a picture that’s painted into things that it really isn’t. It’s a very demanding, difficult business. I’ve spent my whole career in it and the amount of money that you have to risk to go find the oil and gas is enormous. And there is a lot of risk. [34:58]

JIM: You brought up something and this is what the public hears: Okay, Exxon made tens of billions of dollars in the latest quarter or something, what they don’t say is what you just mentioned if you look at Exxon’s net profit margin, it’s been between 9 and 10% for the last decade. So, yes, the price of oil is higher; yes, their sales are higher as a result of higher oil prices but their net profit margin is still close to 10% and what they fail to tell people is the largest profiteer of energy in various forms of taxes is the government itself.

CURTIS: Absolutely. It’s a little bit humorous to be at the pump cursing the oil company when if you actually are as close to it as I am and you go in and you look the reason that all of the oil companies that run gas stations have put in convenience stores is they make more money off the candy bar they sell you than they do off a gallon of gas they sell you. And the government is the one that really reaps the benefit.

And there again, I did quite a bit of work fairly closely with the government back in the days we were working deep water royalty issues, and someone in the government said to me things that government gets involved with are things which but for government being there they wouldn’t happen. And that’s always been my mantra and with regard to this subject because secure energy for America ought to be the government’s business. It shouldn’t be something that Nancy Pelosi or anybody else winds up on the six o’clock news ranting about what’s not happening. They need to be in there working with knowledgeable people in the industry fashioning a way for us to have a secure energy supply for America. One of the other examples I use for people all of the time is that practically everybody knows in December 7^th 1941 the Japanese attacked Pearl Harbor; practically no one also knows is that the reason they did that was earlier in 1941 in order to combat their aggression in the Middle East, American cut off Japan’s oil supply. That’s what sent them to war. And that’s the world we’re moving into today.

A couple of examples. If you look at just China’s increase from 1971 through 2005, their energy use has gone up by a multiple of six; India’s has also gone up by a multiple of six. And so when you start loading in these huge numbers what you see is that there isn’t the ability of the industry based on the way we’re producing things today to produce enough energy for all those people. Am I saying that we’re running out of energy? No. I love the government coming out and saying, “well, as long as prices are low it’s a market driven thing with energy prices.” But when prices go high, then they want to know why prices are high. They don’t want it to be market driven then.

Well, we’re entering a bandwidth of time here where the supply is going to be constrained by what we can produce and if you want a market economy brace for yourself for $150 oil because it’s coming. [38:28]

JIM: On the day that you and I are talking, Curtis, I just finished a roundtable discussion with Robert Hirsch, Matt Simmons, and Jeff Rubin from CIBC, and this is something that these experts contend and I believe that’s what it’s going take to wake us up: I think it’s going to take another Pearl Harbor type event to happen to the United States in the sense that, for example, what if – and we’ve seen this over the last couple of years – a terrorist group finally gets through on the large oil terminal in Saudi Arabia and knocks it out. We import 15% of our energy from Saudi Arabia. It’s going to take something, a catastrophic event and these guys like Matt, and I would include myself just watching and observing and reading about this over the last couple of years, it is going to take a Pearl Harbor event to wake up this country. But not before because as you say, it doesn’t matter how many hearings you have in Congress, whether it’s Republicans or Democrats, left wing, right wing, in between, independents it’s all the same: Nothing gets done and there is this bit of complacency. The only time it gets their attention is you know you have something like a Katrina and Rita, the price of gas goes up to over $3 and you know they’re screaming on the six o’clock news, but after that it’s back to normal. The day you and I are talking, we’re at close to $90 in oil and they were screaming when it got up to 75.

CURTIS: Exactly. And the disconnect is, you know, a lot of the people in the energy industry are very – and have historically been since I’ve been in it and you’re concerned with quote-unquote the negative image they have out in the public. In reality, if you go look at some fairly detailed surveys, about 40% of the US has a relatively positive opinion of what the energy industry is doing in terms of supplying needs and how they do that, and I certainly have seen from close range that there is a high degree of social conscience on the part of people in this industry about...the reason I’m doing what I’m doing, I started an oil company a couple of years ago to try to help American meet its energy needs. Yes, I’m going to make money out of that – that’s part of what has to happen, but a big part of it also was trying to help the country meet its energy needs. Well, when you look at 40% of the public kind of has a positive view of the energy sector, only 11% of them have a positive view of the politicians. And I would like to see the politicians, rather than trying to find somebody else to make a worse whipping boy, actually sit down with the energy industry and start trying to do something about a genuine long term problem that we’ve got. It isn’t just what happens in the Middle East. I mean my goodness, all you have to do is look to the South to Venezuela who’s historically been a big provider of ours as well, and I’m a lot more worried about that nut doing something over the next couple of years that disrupts the energy supply than some of the things...I mean as unstable as the Middle East is we’re genuinely dealing with a guy who has maniacal leanings and he’s at our very doorstep and supplies as much as the Middle East does. That’s a very worrisome thing to me as an American. [41:58]

JIM: But it seems like until something happens, I mean if you look at security, until 9/11, you know, we were asleep. And it reminds me of the book, I’m trying to think of the historian who wrote the book about Pearl Harbor and I think it was called At Dawn We Slept, and it isn’t until I think voters and people become inconvenienced that they wake up and say, you know, when you start going to gas lines for three or four months, or you go to rationing or you know, I don’t know what it’s going to take, Curtis, five dollars for gasoline, six or seven. I don’t know what it’s going to be but it’s going to be some kind of event where people are inconvenienced and the complacency goes away and then all of a sudden they start crying for politicians to do something. The only danger there is you hope they do something intelligent.

CURTIS: And there’s another danger though because...and this is a very real world scenario. I can identify with what you’re saying: When Katrina came through I’m at my house, I live in Houston, and the power went out. Now, no matter what you do I’m always...despite the fact that it’s a related energy industry, I don’t like paying for my electricity. It’s always too high and it’s too much until it goes out. And then if you’re in Houston, Texas in the dead of the summer and you don’t have any electricity, you don’t have any air conditioner, you don’t have any lights, you don’t have a refrigerator, I all of a sudden wasn’t nearly as concerned about what I was paying for a kilowatt-hour. I have come to depend on that energy and in the same way when you get into one of these situations that you’re talking about, the really troubling thing is we have let this slip to the...right now today as we speak, we produce 28% of our domestic needs. People will argue with that, like you mentioned a couple of numbers that are around that, but the best data I’ve got says we produce about 28% of what we use. And the reality is to go from having access to major discoveries of hydrocarbons, from finding them to getting them into a place that they can be turned into energy is a five-year long process. What that says is you just can’t afford to turn a blind eye to this until you have one of those kinds of events. And yet, our politicians continue to do that day in and day out. It’s unforgivable. It really is. [44:37]

JIM: Yeah, it’s amazing, people don’t realize the industrial power of the United States and the wealth of this United States was created with savings, investment and abundant, cheap energy. And the figure that you use, 28% of our domestic needs which is pretty close to the figure that I’ve seen which is about 70% if you take basically not only the raw inputs of oil and natural gas, but you know, we don’t even refine or produce enough refined products so we have to import diesel, jet fuel, gasoline. Curtis, as I look at this and I’ve watched this unfold over the last couple of years and even watched the presidential debate I really think – and I’m a firm believer, I’ve become more pessimistic – it is going to take a Pearl Harbor event, whatever that event is going to be.

CURTIS: Well, sadly, I agree with you. I think you’re right. You’ve just seen it all too often. You cited 9/11. Like I say, to me the thing that is just chilling about that is once you get to a place where you’ve had a major disconnect in the energy sector it’s not as easy to fix as 9/11 was. And when I say that, what I’m talking about is it’s fairly straightforward; it can be done in a couple of months to go out and populate security people and change procedures and tighten up things at the airport; it’s five years to have an impact on energy. And I mean everybody is so focused on this tempest in a tea cup of the subprime – and I’m not saying that there aren’t some bad things that have gone on with subprime but when you put this size problem next to subprime you’re talking about something that can create literally a worldwide depression. [46:28]

JIM: I couldn’t agree more and that’s why we see something like this coming because you’ve just mentioned a fact that even if we woke up tomorrow, just say you could wave a magic wand and our politicians, the lightbulbs went on upstairs, began to take measures to correct this problem, you’re talking five years, maybe even seven years before you even correct that problem. So that’s why, like I said, I think we’re heading for a Pearl Harbor type event. There’s nothing that I think we can do to stop it at this point. I don’t see anything that we’re doing and yet, you know, about the only thing that we can do is bash the companies anytime...Watch what happens this summer when gasoline prices go to $4.

CURTIS: Oh you bet, you bet.

JIM: Yeah, they’ll be screaming in front of the cameras. What would you recommend people do? I’ve interviewed more people on oil on this program over the last five years and written about it. But what do you think the public needs to do because unless the politicians hear from the people they do nothing.

CURTIS: That’s absolutely it. I know one of the things that I have kind of rededicated some of my time to over the last few years is trying to make a difference. And I think one of the things that I would like to urge people to do is don’t talk yourself into believing that you cannot make a difference. If they don’t hear from you that’s a self-fulfilling prophecy. But these guys are such thin-skinned people that if you make an issue of it...I guess my best example is, whether you’re into religion or not, there was a fellow about 2000 years ago that changed the world with 12 people, and that is a story that you see over and over and over again down through history is that small groups of people making a point and not backing away from it and becoming a burr under the saddle of the people they’ve elected. Those are the folks who get things done. So if you will pick up the phone and contact your congressman, contact your senator and say, “Senator, you need to be doing something about this, this is a serious concern.” Write a letter, make a call, but the populous has to get involved with this. And I know that’s not easy but small groups of people can turn the ship and they’ve got to start speaking up because these guys, left to their own devices, are taking care of nobody but themselves. I’m not saying all politicians are bad, but I am saying if you look at the vast preponderance of the evidence, if you leave them alone, they’re dealing with things that are in their own best interests. They need to be up there working on things that are in the best interests of us and our children for the long haul. [49:18]

JIM: Yeah, that’s unfortunate. You know, a small group of people like I can think of there was a movie that came out last year, Amazing Grace about William Wilberforce who took up the plight of the slave trade in Britain, and he fought against all kinds of odds against the ship owners and over two decades he got it repealed. So if you believe in something and you take action sometimes a small group can move mountains.

Well, listen Curtis, I want to thank you for joining us on Other Voices this week. As always, it’s a pleasure to read the things that you put out and keep the good work and keep producing energy for this country. We need people like you.

CURTIS: Well, I appreciate that and thank you for the time to visit.

JOHN: You’re listening to the Financial Sense Newshour at www.financialsense.com. Coming up in the next hour we’ll take your phone calls as we open the Q-Lines as the Big Picture continues right after this.

Part 3

Q-Calls

JOHN: So welcome back to the Financial Sense Newshour. We’re in that part of the Big Picture which we look at the Q-Lines. Q-Lines, really meaning a question line which is open to record your questions 24 hours a day. We ask that you give just your first name and where you're calling from and a brief question. Try to keep it somewhat concise because the more you talk, the less we get other people in there.

Remember that information we present here on the Financial Sense Newshour is for information and educational purposes only, and our responses to your listener inquiries are based on the personal opinions of Jim Puplava. We are unable to take into account listeners suitability, objectives or risk tolerance because we just don't know you. We don't have enough information about you. You shouldn't consider anything here as a solicitation or offer to purchase or sell securities and please always consult a qualified investment counselor before you make any financial decision. And as such, Financial Sense Newshour is not liable to anyone for financial losses that result from information profiled here on the program. Oh I forgot to tell you the Q-line is 800-794-6480. That's toll free in the US and Canada. It does work from the rest of the world, but from those parts of the world, you have to pay for it, including all of the taxes that may be due on the phone call. I just didn't want you to forget that.

The first call is from Portland, Oregon.

Hi, this is Shannon from Portland, Oregon. Hey, awesome, awesome show. Question is: In the long run for me and my family in a hyperinflation period, would I be better off investing in foreign stocks that pay dividends or am I going to prevail better with silver and gold? And I understand that in hyperinflation the dollar goes down, everything gets more expensive. If you can just kind of break that down and elaborate a little more on that, it would be awesome. Once again, awesome show, happy New Year. Thank you.

JIM: You know, Shannon, in a hyperinflationary period, and let's just go back to what occurred in the Weimar Republic in Germany in the 20s, you had a situation where yes, if you were in the stock market, it was up in nominal dollars, even in other foreign stock markets, but the investment that outperformed everything else was actually precious metals, gold and silver. So in a hyperinflationary environment, the best way too protect yourself would be with gold and silver. [2:35]

Hola, Jim and John. This is Richard calling from Buenos Aires, Argentina. Jim, on the Q-line the week before last, you spoke about drilling results from Tyhee corporation as being spectacular. Jim, how do you judge whether drill results are spectacular or not?

JIM: You know, Richard, if you look at what's going on in the mining industry and let's just contrast, let's say, Tyhee, the Yellowknife district and that general area and let's say that Sierra Madre gold belt in Mexico, a lot of the big projects including Palmarejo which was bought out by Coeur D’Alene, you know when you get, you know the cut off grade that they use in a lot of their mining models are a half a gram of gold. And a lot of this is being mined in the Sierra Madre with open pit. And also in the Yellowknife district, they are looking at an open pit mining operation in addition to underground. So I mean, if you just take a look at the Ormsby zone results released on January 17th, you know, you have 10 ½ meters at 2.8 grams of gold, 9.2 grams of gold, 8.l4 grams of gold, 11.5 grams of gold, almost 13 grams of gold, 6, 6, 5, 4, 9, 11, 12, 10, 10; those are the kinds of thing that you like to see, especially in an open pit where those kind of results and that kind of ore can be very profitable in an open pit operation. Plus, even in an underground where a lot of times these tend to get richer and thicker. This is something you always find in the Sierra Madre. You know, it's very seldom, there are not too many Aurelian type deposits where they were getting 16 or 20 grams although I know of a mine that is now a junior, it was one of the largest producing mines in Mexico prior to the revolution where the cut off grade for mining was 15 grams of gold. They ran some drill test in 2005 and were hitting 99 grams of gold. But generally when you're looking at open pit operations, you get five, six, six to eight grams of gold, I mean those are very, very good and profitable ounces, especially if you're going to go to an open pit operation. [4:57]

Booyah, Jim—oh, wrong line. This is Steve from Wisconsin. I listened to your Newshour today. You were talking about consolidation of the juniors, well actually consolidation of the industry but let’s say consolidation of the juniors and I didn't get a good clear understanding of why it's important. What’s the value of consolidation to some of the juniors. Why do they want a big market cap? What is the advantage to them. Enjoy your show. Thanks a lot.

JIM: You know, one of the advantages of a large market cap, it's easier to finance, it's easier to go out and raise money. If you're going to have to put in a mill, let's say you're using the leap pad operations. You know with a mill, you can get greater silver recoveries, maybe even greater gold recoveries and, you know, you put in a milling operation, sometimes a lot of these projects, especially with cost over runs are running about – you can see these costs go up to hundreds of millions of dollars.

But my point of saying this is there is so many juniors out there, I mean you look at some of the junior silver producers, companies that are producing two, maybe three million ounces working their way to five million ounces. They have market caps below 100 million, some are at a hundred million. And then you take a look at someone like a Pan American silver that has a market cap of 2.8 billion. So one of the ways that you might be able to create value is start mergers within the junior industry, merge junior producers, whether it's a two or three million ounce silver producer, you know, start consolidating. Next thing you know, you are a 15 to 20 million ounce producer, which would give you a lot more heft, market cap, a lot more liquidity in the market.

And also you could take some late stage development plays, merge them together, take a company that has maybe two million ounces with the possibility of going to three to five, merge them with another junior of similar quality, maybe a different location and all of a sudden now you have a six to ten million ounce potential, so that when you do go into production, instead of 100,000 ounces, you are going to produce 4- or 500,000 ounces. And what you do is you leap frog from being a junior to an intermediate and perhaps in some cases a major producer. And that's why I think you can create more value that way. [7:19]

Good day, guys. Greg calling from Ontario, Canada. I just noticed something. I was on the Kitco website. I've been checking it out for quite a while. I buy gold the odd time when I don't have to buy diapers, but first thing I've ever seen in the last little while, they were sold out on certain products and I'm talking like gold coins and gold bars. So I guess slowly people are starting to more actively purchase gold. Just wanted to let you know. Great show. Keep it up, guys. Talk to later.

JIM: You know, Greg, that's something that I've noticed from my bullion dealer too. There is more of a delay, that there is great, great demand. Listen to Jeff Christian in the first hour where he was talking about gold demand was even greater than they anticipated in 2007, and this phenomenon is global. And it's been consecutive year after year after year, which is why you've seen gold prices and silver prices go up year after year after year. [8:14]

Hi, Jim and John, this is Mara from North Carolina. I really enjoy your trips to the mall, Jim, and your reports on how prices are doing. So I thought I would call and give you a report from Elmer’s Diner, which is the little diner up the street in Durham that has been here for 15 or so years. We were there for lunch today, and there was a xeroxed letter to all of their customers on the front of the menu talking about that the increase in prices, particularly prices that affect breakfast, which is Elmer’s signature meal, and they serve it, you know, all day and all night. They also wrote: “We've been here since 1991 and we have never before experienced such a dramatic and prolonged increase in food costs. Our vendors tell us they do not see an end in site. When we have short spikes in food costs we always try to absorb them rather than pass them on to customers. However, all economic forecasts indicated this isn't a spike but a reality that we will have to absorb. We cost our menu, so whenever possible we've tried not to increase a menu item if it isn’t necessary.” So they were hoping we would all stay as a loyal customers.

The prices of breakfast food particularly which is certainly influenced by the increase in prices of flour and milk etc, the food costs were up about 10%. So I just wanted to let you know that, even though the official numbers don't suggest that inflation is alive and well in Durham, North Carolina. I'll still go there for breakfast, but it's costing a bit more money. Thanks. Love the show.

JIM: Thanks for bringing that to our attention. It's also alive and well in San Diego and we're seeing that in a lot of restaurants. What we have done and what a lot of people are doing, quite honestly… I don't know if you're find this in your area, and John, I don't know when this came into being, but you used to be able to go to a restaurant, it was quiet, you could have a nice conversation, enjoy what the other people you were going out to dinner with were speaking. And my wife and I went to, was it Outback Steak House a couple of weeks ago. And it was crowded. We got there early, but it was crowded on Friday nights as it usually is. We had to sit beyond in the bar area. They had four TV sets going. Not to mention speakers that were playing music. And the noise was so loud, it was almost irritating. And it was really amazing and almost shocking looking at the menu because a lot of times, we like to entertain. We usually entertain on weekends, and I'll go out, get a nice filet, a nice bottle of wine and it's so much cheaper, especially if you have friends that maybe can't always, you know, go out to restaurants. And we're finding a lot of people cutting back because simply for what you just described, the costs are going up and I would say that inflation is alive and well and it's going to get worse. [10:58]

Hi, Jim and John. This is David calling from Cleveland. I have a question for you. What is the difference from an investor's stand point between ETFs and mutual funds. I'm specifically interested in infrastructure. That’s question one. And question two, are ETFs vehicles that can be used as investments for 401K plans? Are there any restrictions by the government in that regard? Look forward to your response. Thank you again for your wonderful show.

JIM: You know, David, a mutual fund, when you send money to a mutual fund, they usually buy in at the closing prices at the end of the day. An exchange traded fund is a mutual fund that trades constantly. In other words, you can buy, let's say, an equity fund, a particular ETF any time of the day, you could buy it in the morning and sell it in the evening, where as a mutual fund, you would have to wait – they would buy in at the closing price. And if you were going to liquidate, they would probably liquidate at the closing price as well. So exchange traded funds trade like stocks. They’re mutual funds that is that trade like stocks and they are available for 401K plans. [12:11]

No question this time. Guys, this is Kevin from California. You talk a lot about gold and I just happened to listen to the interview with Dick Davis and really enjoyed it and it's a big chunk of gold right there. Just love the nuggets that he had to dispense and appreciate you guys for having someone like him on your show. Thanks a lot.

JIM: Thanks, Kevin. Yeah. There was just all kinds of pearls of wisdom. Dick spent more than 40 years on Wall Street and sort of distilled those pearls of wisdom in his book The Dick Davis Dividend. I highly recommend, if you haven't read it, pick up a copy. Great book to read. [12:47]

Jim, this is Janice from Arizona, and I have an answer for the viewer that wanted to know how do you find the price of the stock in terms of gold. You can go to www.stockcharts.com and in the ticker symbol, if say you wanted to do Newmont mining ticker symbol NEM, you can type in NEM colon dollar and then gold. And there is no spaces in there. So you can do that on stockcharts.com and that's a free website if you want to get the 15 minute delay and no intra day prices, but they can go back a couple of years, I believe, on daily and weekly charts for free subscribers. I have a subscription, so I get a much more extensive choice there but that depends on the viewer and what they want. And I believe there are other websites, maybe bigcharts.com does that. Gold is a special number over there, but he might be able to use GLD as a proxy. Thank you. Bye.

JIM: Janice, thanks for bringing that to our attention. We threw that out last week and I think we were talking about pricing currencies in gold. So I guess if you could find the ticker symbol for the currency at Stockcharts, you would just follow with that same protocol and you can see it. Thanks for bringing it to our attention. [14:19]

Hello, Jim and John. My name is Vance calling from San Jose. I want to thank you so much for your public service. I've learn a great deal, and I've acted on some of the things I've learned. I've been on a personal crusade against debasement of our currency for about a decade now. And this is how I do it. If I have a purchase between one and two dollars, I always pay with a 2 dollar bill and get funny looks from the sales clerks. I tell them, well, you used to be able to buy that with a one dollar bill. And I'm just hope that over the years a light bulb turns on in some people's minds when I do this and I have a lot of fun doing it too. Well, thanks a lot for your public service.

JIM: Thanks, Vance.

And I just want to let Paul know, who called in on the line telling us how we could get currencies and stocks in the form of gold, so Paul, Janice answered that. So we're just going to go on to the next, but thanks for calling that in by the way.

Jim and John, this is Al from Jefferson City, Missouri. Man, I love this show. Hey, I've got a question for you. Eric King was on a couple of weeks ago and he talked about a reference that Jimmy Rogers made to the collapse of the pound as the world's reserve currency which lost about 80 percent of its value. And I was able to contact Jimmy Rogers several months ago and asked him if he could reference me some book or some literature source that would chronicle that decline. He said he didn't really know of anything. I was wondering if either of you would know of some book or something that could give a – sort of tell the story of what was going on within the British empire, within Great Britain as that pound lost it's reserve currency status. I think it would be a good historical study. But if you know anything like that, would you please mention it or lead me that direction. Thank you very much and keep up the good work. Thanks.

JIM: You know, Al, what I would first start out in terms of your research, I'd go to two sites. First I'd go to Google, put that in and try it in various ways, decline of the pound or something and just start going through the Google reference sites and it might take you to the name of a book and do the same on Amazon where you type it in and they might just list a book. So it may take you a couple of times or wording it differently through Google, but usually you can find these things by googling it. [16:48]

Hi, Jim. My name is Ian, I'm an Australian and I'm based in Switzerland. First of all, thank you very, very much for your weekly radio program. It’s absolutely phenomenally informative and I really, really enjoy listening to it. I've got to tell you I'm very frustrated. I certainly buy into everything you say around gold and inflation. I’ve done my own research just sort of clarify that in my mind, but one thing that sort of confuses and does frustrate me to a certain extent is juniors. I hear what you're saying. I'm very keen to invest, but quite frankly I don't have the time nor the resources available for me to dig in and take the approach that you’ve mandated. I'm just wondering, could you give us an understanding or a little bit of advice: Are there any funds there which will provide exposure to juniors. Do I need to invest myself? Is there anyone else out there? If you let me know that, that would be very, very much appreciated because I listen every week, every week you’re saying exactly the same thing about juniors but really I just can’t do it. I just don’t have the time. So if you can give me an idea, it would be much appreciated. Anyway, thank you for the show. Much appreciate it.

JIM: You know, Ian, I'm not sure what you're going to be able to get through your brokerage firm. What I would recommend you do is probably go on a no-load gold mutual fund. The Tocqueville fund is one that comes to mind because I know they own juniors in their fund. If you're Canadian, Sprott has one, and Sprott does a lot in the junior sector. And what I like about Sprott, they are long term investors rather than traders. So Sprott in Canada, Tocqueville here in the US are a couple of names and you might just Google “gold funds” or “gold mutual funds” and see the list of names that come up and just try any of those names. Do a little research through your brokerage firm and just see what's available and especially if you have a brokerage firm where you can do it yourself and go through a no-load fund. But Tocqueville comes to mind. [18:43]

Hello, Jim and John, this is Rodney calling from Virginia. And in listening to last week's show in particular I'm interested in your interview with Kelley Wright regarding dividend investing and I had a few questions that I thought maybe you could clarify for me. First of all, I was wondering whether there is any reason to try timing dividend stocks in relation to the business cycle. More specifically, would you recommend waiting until inflation that you're predicting comes on and the depression; or is it okay to buy the stocks now and buy the stocks that many people are saying to hold on to metals and mining stocks and energy stocks and sell everything else at this present time? Secondly, I was wondering whether dividends are appropriate for investors of any age, or whether you'd recommend accumulating them over the last few years until retirement; and also what percentage of the portfolio you might recommend be made up of these dividends and stocks? Lastly, if you have any other book or resources that you can recommend where I can learn more about dividend-paying stocks, I would greatly appreciate it. Thanks very much.

JIM: You know, Rodney, dividend investing is appropriate for people of any age whether you're starting out for investing or you're 95 years old. Dividend investing, dividends represent almost half of the returns earned in the stock markets, so it's just a strategy that works very well, and especially if you're in something that's a very volatile market right now and especially in the resource sector where you're seeing some of the best dividends. A good example would be like the energy stocks. So dividend investing is appropriate for any age and especially appropriate for people that have 401K plans, IRAs, profit-sharing plans, pension plans, very, very appropriate for saving for retirement.

And as far as books, there is a number of them out there that I could recommend. One of them is we're going to have him on the show, by the way, Josh Peters new book. Josh is an analyst with Morningstar investments. He heads up their dividend newsletter. It's called The Ultimate Dividend Play Book, that was just released here in January. Josh will be a guest on the program. There is also a book called The Single Best Investment : Creating Wealth With Dividend Growth by Lowell Miller. You can by the way, listen to Lowell. We interviewed him. A couple of others that I like, is Relative Dividend Yield written by Anthony Spare. Another one, gosh, there are so many good books that have come out recently on dividend investing. There is a book that comes out every quarter. It's rather expensive. It's called Mergent’s Dividend Achievers and it talks about companies that have an outstanding stellar record of raising dividends consistently year after year. Another book, Nancy Tengler’s book The New Era of Value Investing: A disciplined approach. Just go to Amazon and just type in “dividend investing” and you'll get five or six pages of books, but those are some of my favorites. [21:55]

Hi, Jim and John, this is Richard calling again from San Francisco North Bay. I keep hearing the media pushing investment in long term Treasuries and I feel that long term investment in 10 year and longer Treasuries for non-trader retirees is a horrible idea. And I would like your thoughts on that. Surely we're seeing yet another bubble. I suspect that’s the flip side of the movement of money out of the commercial paper market, etc. Surely the yield has to return to a positive return on the investment relative to inflation and when it does, long term investors stand to lose as the interest rates rise. I like the metaphor of a pig representing liquidity moving through the python called the market. And right now, it seems to me we are seeing the leading edge of the pig, so prices of Treasuries are rising, but there is the back side of the liquidity pig in which prices drop. For the nimble, trading in and out of Treasuries may be a fantastic opportunity, but as the pig passes through. But somebody has to lose when interest rates go up and it seems to me that investment in intermediate and long term Treasuries for a non-trader retiree is really quite dangerous at current prices. I'd like your thoughts if you would. Thanks again for a great show.

JIM: You know, Richard, I couldn't agree with you more. If you take a look at the yields on Treasuries today, you've got headline inflation running at over 4%, and we know that that number is understated. Just listen to Mara’s phone call about the diner in Durham, North Carolina. I mean when you have two year Treasury yields at 2% and headline inflation is at 4, with real inflation probably closer to 8 to 10 and you have 10 year Treasuries at 3 and a half %; and that's before taxes – I agree with you. And getting into this, because one of the forecasts that we have is by the end of the year, the headline inflation numbers are going to get even higher and the Fed will be talking about raising interest rates, and interest rates will be going up as investors demand higher rates of return to compensate for the devaluation or depreciation of the money. [24:04]

Hey Jim. Dave from San Diego. I had a question about valuation of silver companies, looking at say development companies, market cap per ounce, and spot price. If you take a ratio of the spot price of market cap per ounce for silver, I get a number of about five or ten companies that I'm looking at. Do the same thing for gold and the number goes to 30. And a caller last week pointed this out and I think it shows that the gold development companies are indeed quite a bit cheaper than silver equities and perhaps this explains the underperformance of the silver stocks. If you talk a little bit more about that I'd appreciate it. Thank you.

JIM: You know, Dave, if you look at some of the gold companies, and I agree with some of those statistics, that you have gold in the ground at 15 to 20, 25 bucks when you come to some of these juniors, as opposed to lets say, 8 and 10 bucks for some of the silver juniors, but also remember that silver is harder to find, harder to mine and to me the grossest undervalued area in the silver sector is the emerging silver producers where they are just incredibly cheap. But as a group, if you are looking at development companies, ounces in the ground, market cap per ounce, some of the gold is cheaper. [25:22]

Hi, Jim and John. This is Phillip from Santa Clara. I have a question regarding the combined fuel prices of oil and natural gas. I was recently reading a book which said that based on the energy content of a barrel of oil and a unit of natural gas, the price of oil should be about six times that of natural gas, so that would make natural gas 8 dollars; oil should be at 48. So what the author was basically saying was that oil is over priced because of certain monopolies in the business whereas natural gas doesn't have those monopolies and that is why natural gas is much lower in price. So it is basically implying that oil is in a bubble and it is going to burst. But he didn’t give any particular date, but he said oil is over priced. Thinking about it for myself, I can see that a couple of differences with regard to oil and natural gas that might make a ratio not equal to six, maybe higher: One is that the US imports are 60% of the oil that needs, I think, whereas it imports only 15% of natural gas. And the second thing I can think of is it is probably easier to transport oil and not so easy to transport natural gas. This is from what I know, but I would like to know what you feel about this issue. Thank you very much.

JIM: You know, Phillip, one of the issues that natural gas isn't as expensive as oil is that because of the warm weather we have had an accumulation of inventories so it's the accumulation and supply of those inventories that has had more of an impact on the natural gas market. In terms of oil, one of the reasons it's remained as high as it has, listen to the second hour roundtable is conventional oil production peaked in May of 2005 and we've never come back to that level. So that's why a lot of experts are saying it's peaking as you and I are speaking or maybe we're past peak. We're only going to know that in retrospect in the next couple of years. But the inventory issue of natural gas is probably what's playing into the pricing. [27:34]

Hello, Jim and John, this is Peter calling from Seattle. I have a quick question about housing. My girlfriend and I have held off on trying to chase the housing market and we were also not really in a position to buy anyway and we fully expected what was going to happen happen. And now that it's unwinding, my quick question for you is do you think it would be better to try to buy in at this local bottom here in the next whatever you're calling sort of short term six, nine months, a year, whatever, and also whatever stimulus they are going to give to try to lock in the rates that we have now. Or on the flip side, do you think waiting there may be a more kind of deflation in terms of just housing prices if we wait, say, three-to-five years? Now, I know that may correspond with some kind of dollar crisis and spike in interest rates, which would make it kind of harder to buy a house, but I'm wondering if a lower price five years from now or three years from now, may offset whatever interest rates there would be. And also if interest rates were high, I would imagine that at some point maybe if they did try to stimulate again, it might be possible to refinance in the future. So basically for someone that has held off all of this time, what is the best plan to try to get in on housing? Short term or wait longer term, so thank you so much. Take care.

JIM: You know, it's my understanding in your neck of the woods there was actually some price appreciation in Seattle. In other words, you never got to the same bubble like levels that we got in California and maybe Vegas or Miami, so I would suspect that prices are still heading lower. Now, one of the things that does happen is I expect inflation rates to go up, you would expect interest rates to go up; and you know, you may have the Fed monetizing debt trying to keep rates down. As interest rates go up, the price of real estate comes down. So there is a kind of trade off balance. The higher interest rates go, the lower will be the price of housing. And so I would expect that you're going to see more weakness yet because we have just too much inventory around right now. I forget what the figures are, nine and a half to ten months worth of inventory, and who knows? You might even get it – now, if you get a stimulus program or if you get what Paul Volcker is advocating, some kind of investment tax credit to buy a house where it's large enough and you have a stable job, both you and your girlfriend, that could support and you have the money to put money down, then it starts becoming a personal question, but generally I expect prices to get weaker. [30:05]

Hi, Jim and John, this is Harold from Albuquerque, New Mexico. Thanks for your program. I think it's preparing your listeners for some really tough times ahead. I have just used the last of my money to pay off my house. I have no debts and I'm just starting to rebuild my cash reserves and follow your investment recommendation, so I have three questions if you will. First, you recommended a mix of investments that include metals, energy, infrastructure, food and water. One of the things I'm concerned about, now, is the government may interfere in the market; that seems like we're doing the exact same things that government in the past have done before in hyperinflationary scenarios. So if the government continues to repeat the mistakes from the past, one of the things they will likely do is impose price control and I think that will hurt or destroy energy, food and water stocks. What you do you think of that possibility and how would we protect ourselves from it?

Second, if you would still recommend buying food and what water, would you give us some examples of companies to look at. And finally I've bought some silver rounds and it seems like an expensive way to buy metals compared to buying stocks in juniors or producers and it occurs to me that the only advantage to buying bullion is physical possession of the metals to use for trade if things get really bad. So if so, there should be some optimum that we need for trade the remainder of our investments being allocated to the stocks. Is my reasoning sound and so, what is the optimum amount? Thank you and I appreciate your answers.

JIM: You know, Harold, I still like the basic that I'm talking about: energy, food, water, infrastructure, the basics, because that's where the money is going to be made and has been made and those are the necessities in life. I really think the age of overconsumption is coming to an end and we're going to have to rebuild infrastructure. In terms of price controls, you know, they tried that, it fails and it creates shortages. They tried it in the 70s and they had to reverse themselves. They tried windfall profits taxes, and you know what, the oil companies just go around it. I mean most of these international oil companies today, a lot of their major holdings are not here in the United States. They are overseas. They can simply sell their oil or natural gas to somebody else. So in the end, price controls always fail and especially when you get the population upset and they end up reversing themselves because they don't work. They actually create shortages. So I still like that. As far as precious metals, you should always own some bullion, but in terms of value, I think the best value in the precious metals market is the juniors right now where you can buy gold in the ground from 15 to $25 an ounce, or silver in the ground at 5, 8 or 10 an ounce. [32:43]

Hi, this is Gloria from California. We're pretty heavily invested in gold and silver and are thinking of buying a house in California in May or June using a mortgage to be paid off by silver when it reaches $100 an ounce. Give me your views on that. Thank you.

JIM: You know, Gloria, most people that buy a house do take out a mortgage. Interest rates are below what I – today if you take a look at a fixed rate loan, somewhere around 5 ½% with real, and when I talk real inflation rates, running between 8 and 10. As long as you can afford, you have enough money to put down, you're going to be in that house for a long period of time, you guys have secured jobs. If you can answer yes to all of those, then I would go ahead with it because eventually, I do expect a hyperinflation to drive silver up to $100 an ounce. But I certainly wouldn't get into a house leveraged to the hilt barely able to afford the payments based on the fact that gold or silver is going to those levels. It may take three years, five years, two years, I don't know. It depends on government policy and how bad they hyperinflate. So I’m never in favor of taking on more debt than one can handle. And especially taking on debt if one does not have either secure assets or a secure income to support it. [34:00]

Winston from Dale city, Virginia. I'm just wondering what hyperinflation will do to the price of real estate if people are spending most of their money to buy necessities, who is going to have any money to buy real estate. and that affects the supply and demand issue, and I’m just wondering how hyperinflation will impact real estate prices. Thanks.

JIM: You know, real estate usually doesn't keep up in hyperinflation as well as other assets like gold and silver. Weimar Germany is a good example of that. With inflation and where we are right now coming through this housing bubble, I expect still housing weakness; but eventually, with enough hyperinflation increases in income, there is going to be a balance there somewhere and the price of real estate will begin to stabilize. Also, you've got to remember, as the dollar falls in value, what might seem expensive for you, to a foreigner buying condos in Miami right now is dirt cheap because the value of foreign currency has gone up over 30, 40% depending on the currency against the dollar. So you have to look at real estate from an international perspective and any wealthy person in whether Latin America, Asia or the Middle East, you know, one of the prime locations for buying a second home in another country is still the United States. And right now, their currency buys a lot of stuff in the United States given the depreciation of the dollar. [35:32]

Hey, guys. This is Tony from Las Vegas and I have a question on Silver Wheaton. Goldcorp is going to divest itself of its 49% stake in the company and I'm wondering which side of the trades or move I should be on whether I should hold for Silver Wheaton or maybe go ahead and take profits in Silver Wheaton and move my money over to Gold Corp. Thank you.

JIM: You know, Goldcorp has been, if you take a look at one of the majors, it's been one of the least performing of the HUI this year. I mean if you take a look at Barrick up 21%, if you take a look at Yamana, which is up double digits, Goldcorp is only up about 8%. I like Silver Wheaton. It's basically kind of like the Franco Nevada of silver and I think the fact that Goldcorp is finally divesting its 49% interest will leave Silver Wheaton as a stand-alone entity and I think it has greater upside potential and especially with the prices of silver going up and they lock in on the price, so I like Silver Wheaton. I like Goldcorp too. So if you had to own both, I would keep them. [36:36]

Hi Jim and John. Aloha. It’s Rick from the big island. I have only question for you today. I've got my fingers crossed on your Oreo prediction. How will the go-away-in-May crowd change things? I know if I'd done that last year, I would be here for three months and not six weeks. Anyways, thanks a lot. Bye.

JIM: You know, you do get the summer seasonals. You tend to get weakness as you come in to the summer months and I expect that to be the same because as the economy and the stock market tell us in advance when the recession is about coming to an end you'll start seeing money flowing into the equity sector and who knows, they might leave bullion. But you know, if you look at last summer when bullion prices corrected, they peaked in the first part of May and then we corrected back probably down to June. And then from June, the price of bullion went up in the month of July, corrected again and then just flew in the middle of August, and I expect, you know, we could see another seasonal pattern develop like that. But you know something, when you take a look at these seasonal patterns and you think, gee, this is the way it's always been, always be prepared for a curve because there is always something that can happen. There could be a mishap. There could be a political event, an unexpected inflation reading, something that happens, but typically what you're referring to is usually about the end of April, May, it coincides with the pull back in buying in India. It starts up in the fall with jewelry buying and you heard Jeff Christian talk about last year it was a big year for buying bullion and it picked up especially strong in the middle of August. So, you know what, you can play some seasonals here, but if you're going to be trading in and out of the gold market and looking at seasonals, I'd strictly stay with the majors because they are the liquid-type of stocks that you can trade in and out of if you plan on going in to juniors were you can get a big bang, you don't trade your juniors, you simply add to them. [38:39]

Hi, Jim this is from Hayward from North Carolina and I was listening to a gentleman on the radio the other day and I can't remember his name and I apologize for that, but he was talking about the gold reserves in Fort Knox and he said that they do not account for things like the custodial gold and leased gold overseas that they ship out of Fort Knox to various countries and various facilities around the world, and that this would be considered some sort of encumbered gold that was not accounted for. And I just was wondering what your opinion was of that practice and what this gentleman was alleging and how you think it might affect the situation with gold as an investment going forward as it appears that this could be considered some kind of gold manipulation or some sort of improper accounting for gold that they say is there which is not there, which was his point.

JIM: You know, Hayward, we do know that if you look at the way government accounts for its gold, it looks more like a liability on the balance sheet than it does in assets so there is some truth to that. As far as the gold at Fort Knox and government leasing, it's been done to bring down the price of gold. If you want to read more about that, I'd highly suggest you go to a website. It's called GATA, www.gata.org and they've got a number of papers how they have used leased gold and bullion selling to manipulate the price of gold – as I believe they are actually doing right now. So, you know what, and as far as the gold in Fort Knox, we don't know if it's actually there. It hasn't been audited in, what, almost half a decade. [40:20]

Hello, Jim and John is this is Lan calling from Hanoi, Vietnam. The Vietnamese economy has experienced an enormous growth because of the huge amount of foreign investment. If the USA experiences a great depression then what will happen to our economy.

JIM: You know, Lan, there is this theory out there called the decoupling theory that when the US goes in to a recession, that the rest of the world will do well because of everybody standing on its own. I do expect if the US goes into a depression, a recession, there is going to be some impact. The Chinese economy will probably grow anywhere from 9 to 10 percent this year versus 11. The Japanese economy is probably in recession right now. But you know, trade between Asian countries is getting stronger and stronger as the Asian bloc develops it's own economies, so I would suspect probably maybe less of an impact. But certainly if we go into a depression, you're going to see weakness in your economy as well. [41:20]

Hey, guys, John from Maine. Go Patriots. Listen, I'm a little confused. I don't think much I guess. You had a caller on last week who was complaining that his junior mining companies were getting taken out, I'm assuming bought out by bigger companies. And listening to you all of these years, Jim, I thought that was the point. I thought that would increase the value of the junior if it gets bought out by a major, so I’m a little confused as to why this caller was peeved. Thanks so much.

JIM: You know, it may be perhaps, you know, sometimes depending on the take out, you could get cash and you may not want cash. Other times, you get the stock of the acquiring company and it may be an acquiring company that you don't want to own because you're in the juniors for the growth. But it is the point of investing in juniors. There is only two outcomes. Either one that junior is going to go into production because nobody takes them out. A good example of that would be Minefinders. They have a great deposit in Dolores down in Mexico and they are going into production this year with a couple of hundred thousand ounces of production and nobody took them out. So those are the only two outcomes: You either get bought out or go into production. The greatest upside is if you go into production, so maybe he was a little peeved that maybe he didn't get the full upside potential that he thought he would get in his stock because they were taken out much earlier than he might have thought. [42:48]

Hi, guys, this is Eric from Aspen, Colorado. You guys have been pushing on the juniors in the gold and silver market. I've been looking and trying to research this and that with them. I'm looking to a junior that again would possibly pay a good dividend but also avoid South Africa and all of that energy disaster they've got going over there. I've been looking around. I'm really kind of confused on which juniors. I know you don't want to say certain things on the air, but if you could kind of give me a direction of which company that you would recommend to look at and looked at Seabridge and this and that, but I'm not really convinced. If you can give us your suggestions. Thank you.

JIM: You might want to look at Silvercorp as a company, an up and coming dividend producer. I usually don't like to give out a lot of names here, but that's one area that I would look at. Also, look at some of the intermediate gold producers. I was at a presentation at the Denver gold show where a couple of the majors are talking about that they see a point where after they go through this development that's going to quadruple their production that they would be looking to return benefit to the shareholders through higher dividends. Right now, trying to find dividends, your probably best bet if you can find them, they are not as liquid would be, like, convertible preferreds where you might get a 3 or 4% dividend and be able it convert the convertible bond or preferred stock into the common stock is probably going to be your best bet. [44:17]

Hey, Jim and John, Colby from Missouri. Love the show. Quick question. On January 9th, in your precious metals segment with John Doody you mentioned that Barrick was still hedged and that was kind of the secret that was not out. I’ve got quite a stake in Barricks that bounced about until August and it's done pretty well since then obviously. I’m wondering if Barrick is now a risky investment with gold heading higher since it is allegedly hedged? Love the show. Thanks.

JIM: I think the big risk...they've been trying to unwind a lot of their hedges. The good thing that Barrick has going for it –I think they have still about nine million ounces that are hedged. I think that's the figure – they produce enough of the stuff that they can deliver into those hedges and they are in the process of doing that, which is one of the reasons why you've seen the run up in Barrick last year and also year to date. If you take a look at the HUI, it's probably the top performing stock in the HUI, so I'd keep it. [45:19]

Hey, Jim and John. Great show as always. This is David in Los Angeles. Two quick questions. One, I may want to invest in agricultural real estate in the next couple of years. I was wondering if you have any information about how that market is doing in the United States, if it's different in various use locations and if there is a good source of information about that. Maybe you could even have an expert come on one of these days to talk about that type of real estate. The second question is: For me to really benefit from the inflation in terms of my cheap mortgage interest, I really need to have some wage inflation too. Is that part of what we're going to see, because so far I'm not seeing it? When do I get to have some wage inflation, thanks again.

JIM: You know, David, investing in farm land, I think that's an excellent choice and especially in the fertile areas of Northern California. Farm land is doing very well, especially in the Midwest where they grow a lot of our corn. Obviously with ethanol, that's been a big boon to the farmers. I think farm land in general, and especially productive farm land, fertile soil, access to water –which is why I like Northern California – is going to be vitally important as we head into peak oil because the days of the 3000 mile Caesar salad or getting fruits and vegetables of all varieties 100 percent of the year round, those days are going to start to go away and I think premium farm land is going to be going for even higher prices. I would Google the topic and see what you come up with and you'd be surprised at the number of sites and information that you would get. I'm trying to think of, I haven't seen any books out yet. I mean I get the annual CRB book that is published and that's really sort of the Bible in the industry that tells you what's going on with farm crops and what's going on in commodities.

In terms of information where the best farm land, that's something that, you know, I probably am not up to speed. If we come across somebody, either a newsletter writer or somebody that's authored a book on that subject, I'll guarantee you we'll have them on our program. In terms of wage inflation, it's very difficult right now. They are trying to control wages, and as you know, the unemployment rate has been going up and as you get into harder times, it's harder to get wage increases. So unfortunately, wages aren't keeping up with inflation and that, by the way, is what always happens, David, in an inflationary period. It was very much the same in the 70s as well.

Jim and John, this is Jim from Milwaukee, Wisconsin. Jim, I've got a question. Is it possible that you can write an article or have one of your staff members write an article on how to understand drill results and what is a good drill result for gold. silver or copper. And the last one goes out to Dave Morgan. I think a couple of years that you were talking about some players from the NFL, the Minnesota Vikings, they were going to invest in some type of gold mine in Alaska. Do you have any other information about that? Other than that, guys, I just ordered a case of Maalox off eBay and I'm going to be with it for this gold market. All right, guys, great show and take care.

JIM: You know, I may do a show on interpreting drill results and maybe I might even write an article. It would be, gosh, I'm trying to think how we are trying to take something this complex and do it on the radio program. I might have to give that some thought. As far as a bunch of football players going into Alaska, John, remind me next time we have Dave on the program. I don't recall that. That might have just slipped my mind. Sorry. Just not something I would keep fresh in my mind unless they were discovering, you know, probably the biggest gold mine or something, but I don't recall that conversation. [49:09]

Hey, Jim and John. This is John from Philadelphia, just a comment on a approach my wife and I talking. We hold IRA funds that we've had from roll overs from different employers as well as our own contributions and within those accounts, we ended up buying a Canadian trust and now we get a nice big fat dividend every month, so what we do is we accumulate those dividends and then we go on a shopping spree. So it works out really well because aside of rollovers, or the four or five thousand dollar annual cap contribution we get internal contributions, so our IRAs grow. Just a comment. I hope this helps to all. Thanks a lot.

JIM: Well, whatever works!

Hi, Jim and John. This is Mark from Rock Hill, South Carolina. In listening to your show last week regarding dividend investing, I wanted to get your opinion regarding closed-end fund stocks as an option for small investors. There are currently two closed-end fund stocks which I hold which pay out dividends of 7 and 9% respectfully, with individual stock values up 10 to $20. My research leads me to wonder whether or not these are viable alternatives to larger mutual fund options or whether I should think about more of the GE/Procter & Gamble route. thank you for a very informative show week after week.

JIM: You know, Mark, one of the things I like about closed-end funds is that you can buy them...I try to buy them when you can get them at a discount to their net asset value, and if you can buy a closed in fund at a substantial discount, then obviously if they are paying dividends, your dividends are going to be much higher because the dividend yield is based on the price you pay for it. I'm a big believer in owning individual stocks. We're sort of a stock-picking shop ourselves. And, you know, it’s fun to own stocks and see these give depends go up 10, 11% a year. So I'm more in favor of individual stocks, and that's just a bias that I hold based on my own experience. But if you're looking at closed-end funds, then I would only buy them when you can get them at a steep discount. [51:12]

Good day, John and Jim. This is Kevin in Knoxville. I'm calling on the day that GATA is running a full page ad in the Wall Street Journal to discuss the inventory of our gold that the country has and how in fact our gold inventory may be manipulated and used in the marketplace to essentially suppress the price of gold and silver in the market. And I hope this goes a long way towards flushing out some of the things that have been going on in the marketplace.

My question specifically is, Jim, you've got the gold and silver ETF and I know a lot of people are investing in them and they've done quite well, but I keep reading off and on where some people don't think ETFs are really backed by real physical gold and silver; and I'm wondering what your thoughts are on that, if in fact they do have real live inventory of physical metals to back up these ETFs? And also, you know, I read a lot of Ted butler, who is a member of GATA and he writes some very interesting articles specifically pertaining to silver and the manipulation of the silver market. And I think you've commented in the past, that Ted is somewhat of a recluse and probably would be hard to get on the show, but boy, that would be an interesting interview if you could talk with him. But anyway, I certainly appreciate your website and all you do for us out here. I feel like I just learned an enormous amount about economics and of the financial market and analysis and I tell people that I have a PhD in economics which of course stands for Puplava Honorary Degree. So thanks for everything you do and keep up the good work.

JIM: Kevin, I was glad to see GATA run that ad in the Wall Street Journal with a headline: Anybody seen our gold? Very revealing. And I think one time Bill Murphy was thought of as a nut, but I think a lot more people are coming to the front and saying GATA has been right all along and you know, good question that he's bringing up: where is our gold? And it has good to see something like that happen. [53:32]\

Hi, Jim and John. Great show. I love it. My name is Joe. I'm from Tampa, Florida. This is the first time I've called, but I've never missed a minute of your shows for the past couple of years, and my question is, of the global precious metals funds, UNWPX and I notice it pays a 11% dividend on that fund, but when I look at the stocks inside that fund, none of the stocks pay that high a dividend. How does a mutual fund that has stocks in it have such a high dividend when the stocks don't pay that high a dividend? And I kind of have the same question about a bond fund. I heard about a bond fund that has a 15% yield on the fund or, you know, makes 15% over the year, but yet, none of the bonds yield yields 15%. I was wondering if you could help me out with that and understand that. Thank you very much.

JIM: What is happening here is none of the stocks pay that yield, which is what you're quoting as close to 11.8%. Most of that came from short term and long term capital gains. I'm just looking at their distribution for 2007 that out of that distribution, $2.56 cents came from long term capital gains and another 80 cents came from short term capital gains, only about $3 came from dividends. So if you look at that, most of that was coming from a long term and short term capital gains. [55:01]

JOHN: Well, Jim, you know that at end of every program I say “well Jim, so here is another, “well Jim.” Well, Jim, that's the end of another week. And our listeners are waiting with baited breath to know what the next program is going to be, something that a little mouth wash could help with.

JIM: All right. Well, coming up next week, Vitaliy Katsenelson.

JOHN: Hack away on that one.

JIM: Oh goodness. I'm just going to call him Vitaliy. He's written a new book called Active Value Investing. He'll be my guest in the second hour. Steve McClellan, Full of Bull, will be on the program February 16th. Mike Stathis, Cashing in on the Real Estate Bubble, and then March first, we're going to have a gold round table with an all star and I mean this is one of the all the star fund managers over the last couple of decades, wait until you hear what he has to say about gold because he owns a ton of it. Also, Bill Murphy, James Turk, and a couple of other surprise guests will be joining me. Lila Rajiva Mobs, Messiahs And Markets is coming up on March 8^th; Sy Harding, Beat The Market The Easy Way, Alex Doulis, Lost On Bay Street. So a lot of great programs coming up in the week ahead. This is Super Bowl weekend. John, it was a pleasure hosting the Econo Bowl with you for the first time. Do you think they'll invite us back next year?

JOHN: I sincerely hope so. It's written into our contract.

JIM: Okay

JOHN: But you're going to have to dig me out of the all of the snow we have in the Pacific Northwest.

JIM: You sent me a picture of your son out in front of your place. What happened? An avalanche the snow on top of the roof fell on top of him and trapped him?

JOHN: Yeah. We had to dig him out. It's been pretty heavy snow. It has been snowing for almost a week here in the northwest, so it's been a record snow fall for this particular time of year.

JIM: And I think you've been telling you're changing your philosophical bent from global warming to global cooling.

JOHN: Well, you could always just clock it under global climate change and that keeps everybody happy and doesn't offend anybody. How is that?

JIM: Okay. More climate change coming at the Loeffler household.

JOHN: There we are.

JIM: Listen, on behalf of John and myself, we'd like to thank you for join us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend.