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Financial Sense Newshour

The BIG Picture Transcription

February 9, 2008

Part 1

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Part 2

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Part 3

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Part 1

What the Next U.S. President Needs to Know About Energy

JOHN: If you tend to be looking forward, you notice that what it is the presidential candidates are discussing and what it is they will probably be dealing with when the next president, whoever he or she is, is seated in the White House Oval Office are two different things. And it was interesting this week that Congressman Roscoe Bartlett was doing a presentation on peak oil on C-Span, so some of this information seems to be leaking through. There is a slowly growing awareness, but it certainly hasn't hit the media and it hasn't hit the public largely because the public hasn't felt any pain.

You know, last week we did an energy roundtable addressing this issue. It was a real eye opener. The information presented was made by some of the most knowledgeable experts in the world. Jeff Rubin is an economist but, you know, all along, he's been right on the money as far as calls for oil. He called for $100 barrel oil when his peers were calling for oil to decline; and Dr. Robert Hirsch did a briefing paper that he sent to each presidential candidate, and he believes it's going to become the single most important issue facing the next American president. The response was not encouraging. Surprise. And what it means is this is not 15, 20 years out. It is going to rush upon us with great suddenness, and you've got a copy of the presentation by the way, which is the subject of our first Big Picture topic today.

So what we need to do is look at what this presentation entails because this is probably going to be the issue of the next Congress and the next presidency.

JIM: The report that he presented and made available to every one of the presidential candidates, first of all, he gave a background and said who we are. And if you take a look at the people that are behind this report, they are scientists, engineer, economists, they've been analyzing peak oil for almost five years, collectively both with 35 years of experience in the energy, government and academia. They also wanted to point out, “look, we have no political agenda. This is a nonpartisan report.” These are also independent consultants. They don't have conflicts. In other words, these aren't people working for oil companies; and they've been extensively involved in the National Academy of Science and Energy Studies.

And what they've laid out to the candidates, why this is important to you, because it's occurring now or will soon, and secondly, you as president are going to have to deal with the economic consequences which will be extreme and long lasting. And they'll make the case in the presentation, look, this isn't like the gas lines in 73 and 74. We were inconvenienced for three or four months and the problem went away. It came back again in 79 and then it went away again. And they get to the point: Why should you care as a president? Because the issue is brewing and it could burst on the public at any time. And it's going to be costly for any candidate not prepared or taking the wrong stance on this issue. [3:27]

JOHN: You know, right now, our politicians are going to be more and more focused on global warming, especially if we have a Democratic president and Democratic Congress, which is something that may or may not occur in 4 years.

Now, granted, some scientists are saying we may be at the tipping point right now where we have to do something and if we don't do it now, all...what will break loose? Heat? All heat will break loose. But the focus on global warming has been on throttling back the economy rather than really strong promotion of what we can do in the meanwhile to make this transition. Only recently did you hear the effort that global warming is going to be good for the economy. Before, just a few months ago it was we've got to cut back on the economy at all costs because global warming is threatening the planet. Now they are trying to flip this over. But from now on in, you look at peak oil, okay, it's looking more like it's approaching our door step and when it arrives, the reaction could be similar to what happened to, well, remember what happened back in 1973 to the public consciousness and also in 1979. I remember that. I mean we had things like public panic. There was recession, unemployment, a rush for supplies, which is normal.

JIM: Yeah. People start to hoard when you can't get it.

JOHN: They start to hoard. There is a negative reaction in the stock markets that kicks in. These are all of the things that we can potentially face because as we said, the consciousness of this issue hasn't crossed the public mind, and we really don't have a global warming problem as much as we have an energy policy problem of which global warming is only one corner.

JIM: You know what's clear from this report and all sources, here's the problem the world is facing: demand continues to grow, supply is struggling to keep up. When Peak arrives, and this once again is where the issues get confusing. It doesn't mean we've run out of oil. It means we've run out of our capacity to increase production and production starts to decline. And as Hirsch is reporting to these presidential candidates: there aren't going to be any quick fixes this time. You know, the central banks and the Fed can't print oil. And probably what is the most alarming statistic that I've seen is that it's been over two decades –and this is something the cornucopians, the optimists never really addressed – but it's been over two decades since we've discovered enough oil in a year to replace what it is that we're consuming. I mean that alone should tell us we've got a problem there somewhere.

The other thing that stands out in the Hirsch report sent out to the presidential candidates is that the peaking of wells is a natural event. And when it occurs, it can be quite rapid, as in the case of what we're seeing in the North Slope of Alaska. We're seeing it in the North Sea. The North Sea peaked in 1999, and it's already down 30, 40%. Cantarell peaked in 2005, and its production is down 40%. And what Hirsch was trying to do is alert these candidates that, look, 54 of the world's 65 producing countries have already peaked and are experiencing a decline in production. This is a serious issue. [6:36]

JOHN: Yes. I guess the question that the Hirsch report is posing to the candidates is what impact will it have on their presidency whether it arrives because unlike 1973 and 1979, it will not be brief. This is going to be an ongoing issue. What is going to follow is recession, unemployment, inflation and high interest rates. That's despite whatever happens in the financial markets by themselves, so this is sort of a double whammy here. People need to see these two trends colliding right here. And the voters are not going to be happy. I think there is going to be an increasing amount of pain because government, as usual, is asleep at the switch and when it does wake up, it comes out of its slumber and says, “let's pull this lever, let's jerk that one, let's do this.” And that only makes everything worse.

JIM: And what Hirsch is trying to warn these guys, they are saying, “look, if this appears on your watch and you don't have a program, a policy in place and you're scrambling and all of a sudden the public wakes up and says, ‘my God, this evidence has been out here for all of these years, why didn't you guys do anything about,’ you're going to be a one term president or a one term Congressman.” The report also points out that, look, technology is not going to save you. They show in this report that production in the US has steadily declined despite enormous technological advances here in the US, and remember, the US is one of the world's largest producers. And the report goes on and outlines where the main problem lies.

And here is another issue that you're hearing on the campaign trail that is they are confusing apples and oranges. Essentially what Hirsch is telling these guys is: “Look, this is a liquid fuel problem. 95% of our transportation system runs on liquid fuels. You can't fly a 747, power a freighter or a semi truck on solar and wind power. So like it or not, this is a carbon fuel economy and you'd better start thinking about this.” You've seen this, John, in the campaign, they are talking about, well, alternative energy, wind, solar, green stuff. Okay. That's great for electricity, but what is that going to do to put an airplane in the air? What is that going to do to power a 900 foot freighter that brings cargo to the US. Remember, we import a lot of our stuff into this country today. Most of the stuff you see on shelves is imports. And so that's what he's trying to alert these guys. This is a transportation problem. It's what makes the economy run and you guys don't have a plan. [9:14]

JOHN: Yeah. The report also outlines where the main problem lies, and basically it is a liquid fuel problem as you've been talking about. We don't have over head power lines like you do on some train tracks in Europe. 95% of the transportation system runs on liquid fuels. You can fly a 747 but you can't do it on solar and wind power. And Jim, this is were you need to address this because this is where everything gets fuzzy because everybody thinks these alternatives are all out there and just ready to go.

JIM: No. In fact, we don't have...and we'll get into the latter part of the report where he talks about mitigating the problem. What are realistic options that the country has? But this whole energy debate is confusing, especially when you hear these candidates talk about these alternative energy. Okay, great, when? Fine, that will get you electricity, solar, that will get you electricity, nuclear, that gives you electricity. Are you going to power a 747 or a 777? I don't think so. And so they are trying to get – [10:17]

JOHN: I just had this vision of all of these jets flying through the skies with big extension cords tangling behind them. Can you imagine the tangle afterwards?

JIM: You know, the entire back of the panel. Isn't it the Challenger which has some kind of -- I know they have some kind of solar cells on the satellites that they use, but we're a long way from putting a jet up in the air on alternative energy right now. And this is the problem that we have. And that's why he's trying to alert these candidates. I was talking to these guys, and you remember this, John, off the air and what was very discouraging was this was a nonpartisan report that said, “look, guys, one of you guys –or ma'am – is going to be the next president of the United States, and this is the issue you're going to confront. And it's not going to be technology. You don't have a giant Saudi Arabia like we had in the 70s that as our production fell after it peaked in 71, we could start importing oil from.” So there is nothing out there right now that's going to mitigate this problem and very little interest. [11:21]

JOHN: You know, back on ABC Nightline, President Bush was talking and on January 15th, he said –and he's talking about that Saudi Arabia here – “if they don't have a lot of additional oil to put on the market, it is hard to ask somebody to do something they might not be able to do.” Now, what he is referring to here is before, if you we back into the late 1970s, we were able to go to the Saudis and say, “just give us some more oil because we need it,” and so increase the supply. That may not be possible this time. I mean there have been several warnings given to the government relating to the Hirsch original report. There were warnings from the European Union on the situation, on the International Energy Association, the Council on Foreign Relations and the American Petroleum Institute, all of these groups have been issuing warnings, “hey, big green dragon ahead, take action.” But it's obvious from listening to the candidates that not many of them take this issue seriously even though it's likely to be the biggest issue facing their presidency. As I said, it was Congressman Roscoe Bartlett who yesterday –we just happened to flip into C-span – and there he is talking about peak oil with charts and everything else and talking about the Hubbert curve. [12:25]

JIM: What I think Hirsch was trying to tell the presidential candidates, when this crisis hits, it will not be an ordinary crisis. I mean oil is the life blood of a modern industrial world that we live in today. It fuels 95% of our transportation system. Think about that for a minute. Everything you use or need in life today was created through energy, through either its production, its growing or its transportation to get it to the stores. And the scale of this problem is going to be enormous, and the transition period is going to be unlike anything we have faced by a modern industrial society over the last 100 years. I guess what they are saying here is there is going to be this tremendous shock factor. John, you remember, the shock factor with the oil embargo in 73 and 74. All of a sudden we woke up and we said, “oh, my, God, gas lines.” [13:25]

JOHN: Yeah. People were lined up and it lasted for a few months, but that was it. Remember when people used to come out to service your car? That's when everything began to change. Do you remember that? Some people aren't old enough to remember the fact that when you used to pull into a gas station, everybody used to come out and try to service your car. And then they said, “nah, you guys can do it yourself.” That's when that whole thing changed.

JIM: Well, they had to cut the margins, and they are always bashing the oil companies and the gas station owners. The reason the energy companies have these fast service marts where they are selling Pepsi and Frito-Lay chips is they make more money on that than they do selling the gasoline. [14:01]

JOHN: And then there is Hirsch's mitigation analysis which was done for the Department of Energy. And basically if we take a look at it and say where are we now and how fast can we bring alternatives on line, it's too late to avoid misery right now. We've passed the critical point. There are a few mitigation options, but believe it or not, they are not what people think and the market has not started to address the problem and probably won't until the last moment, meaning that there is going to be some kind of disruption.

JIM: Yeah. And what he's trying to say here is, look, this whole society that we live in in the United States, Mr. President, we're looking at a transportation system and here is the problem. If you look at conservation, if you look at our transportation system, whether it's automobiles, light trucks, SUVs, heavy trucks, buses and aircraft, in the United States right now, we have 140 million automobiles, the median lifetime age is 17 years to replace half the fleet –half the fleet now – it's going to cost 1.6 trillion.

If you take a look at light trucks and SUVs, we have 90 million in the US with a median life time age of 16 years. To replace half that fleet is going to cost 1.3 trillion. If you take a look at heavy trucks and buses, we have 7 ½ million. The average age is 28 years, and that's going to cost 1.7 trillion. And finally, we have 8,500 air craft, average age 22 years. That's going to cost 1.3 trillion. So you're talking, John, almost $5 trillion just to replace half of the transportation system.

Then he goes on, and he said, “once again, guys, this is a liquid fuel problem. Nuclear, wind and solar or alternative energy is a great idea. That gives you electricity. It does not give you liquid fuels.” Then he goes on, “What about liquid fuels. Hydrogen it's neither ready nor is it economic at this point. Biomass, not economic. Shale oil, not even commercial.” So once again, he takes a look at this and he's saying you need to start focusing on this because even if we were to try to build a nuclear power plant today, I mean that's going to give you electricity, but what are you going to do about addressing the issue of what it is that you put in the cars and the vehicles that we drive, fly or sail? [16:36]

JOHN: Well, he does talk about some mitigation options, which are actually viable right now. And what he says is the implication is really critical in the near term over the next 10 to 30 years. He said number one, vehicle efficiency is really important. Number two, gas to liquids, which would be a very important type of process; 3) there is heavy oil and oil sands; 4) coal liquefaction, which is very viable, especially for producing diesel type fuels or jet fuels and what is called EOR or enhanced oil recovery. But he said they would need to do this on a crash basis right now to make this work.

What people don't understand, you know, the psychology there, Jim, and I think he was talking to one economist about this recently and he said “oh well, I believe in the free market and the free market can come up to deal with this.” And people have this muddle through mentality, not realizing it's not a matter of economics, it's a matter of physics.

JIM: And that's the problem that the economists have, as Jeff Rubin pointed out in last week's roundtable. He said, “you know, most economists are thinking of upward sloping supply curves.” And that works, John, when you have unlimited supply because as price rises, you would see more supply come into the market. But as you're talking about here, this is really a physics or a geological problem. When you have a finite supply, this doesn't work. And he's finally telling the candidates who those he believes are sounding a warning and he gets down to: Who is sounding the warning? Okay. Who are the people that are saying you've got a problem here, and who are the people that are saying that you don't have a problem?

And it's amazing when you take a look at some of these people. Who is sounding the warning? the International Energy Agency, Chevron, Shell, now the large oil companies are starting to fess up. Just a couple of weeks ago, the head of Shell said it. Jim Schlesinger, the former head of the CIA, T. Boone Pickens, Matt Simmons, the Corps of Engineers, the oil company Total, automobile manufacturer Volvo, the Chinese government state oil, 13D research, and the vast majority of retired oil company geologists.

Now, who is denying that we even have a problem: OPEC, Department of Energy, Energy Information Agency, CERA and Exxon Mobil, and then mainly economists who keep thinking once again in that upward sloping supply curve.

What they are trying to do here and are saying, “look, these are the people that have been telling you, warning you, these are people that are credible, they are scientists, international organizations that monitor this problem and you guys need to start paying attention.” [19:19]

JOHN: Well, let's face it. This is a problem for candidates. It's not going to be a pleasant picture because, first of all, they don't want to address it. It's much easier to talk global warming and talk about caps and credits and trades and things like that. And global warming is an issue that's 40 or 50 years out, although some people are saying that we may be past the tipping point right now, but that's still in dispute by scientists.

Besides, if peak oil is on our door step, it's actually going to solve the global warming problem. And some of the global warming people have sort of figured that out; the few that are aware of peak oil that if we begin solving for peak oil, we'll be solving for the other. And besides, on the politician’s side it's easier for them to give lip service and propose worthless remedies than it is to tackle hard issues like peak oil. I mean look at the oil markets today. Oil has come down from just tippy toeing from over $100 back to the high 80s because somehow there is this naive belief that if the economy slows down, that oil prices will fall dramatically. They are confusing economic issues here with supply and demand issues. The US markets are egocentric, thinking that energy market revolves around the United States and what they are doing is ignoring three billion people on the other side of the world who are industrializing, which by the way, is going to offset anything we do as far as global warming because they are exempt from this. So as we're throttling back, they are going up. It's a zero sum game. And the market is also ignoring depletion which is running faster than discoveries are right now.

JIM: You know, it’s absolutely amazing, we did the roundtable interview last Thursday, and on Friday, I wish I would have had a copy of this when we did our interview. The front cover, if you're listening to this program and you'd like to read it, and read something that's pretty scary, the front cover of Bloomberg markets, it's called The End Of The Oil Age, Scarce Crude And Global Warming Force Car Maker To Change Course. And in this interview, it begins with a gentleman by the name of Bill Reinhardt, and Bill Reinhardt helps design Toyota Motors’ Prius hybrid. And here is a guy that heads up the engineering department here for Toyota in California, and they are working on a plug-in hybrid. And this guy is taking a lot of these issues as real serious. I mean he's made trips to the oil sands, he's made trips to the large oil fields checking this out. And you think about the intelligence of these people: “Hey, we make a problem that runs on petroleum and we're getting reports now that we may not have a lot of this stuff, or we may not be able to produce a lot of this stuff;” which is the whole idea behind the concept of the Prius or the hybrid and they are coming out with even more. Now they are working on electric plug-ins. In this article, he said, “this car-based culture and business-as-usual building cars and trucks is going to change dramatically. He said, basically, car makers are endangering themselves by basing sales and profits on the big fast cars that many US customers say they want, at least in 2008. In five years, and this is a direct quote, “in five years as oil shortages and global warming intensify, car companies may be out of step with driver's demands for fuel efficient vehicles.” And when he's taking a look at what we're facing today, he says, we don't have a past, a history or a database that allows us to explore the simultaneous impact of recessions, disruptions to the energy supply and climate change. [22:52]

JOHN: Well, you know, here you've got a company that produces cars and they want to produce fuel efficient cars because they recognize that at the current moment, 95% of what we have moving out there is running on liquid type of fuel, and there is a fleet conversion time because say, tomorrow, you put the most efficient alternative hybrid out there, we go home and plug it in or it will kick in after 50 miles or whatever. It's going to take 15 years to rotate that fleet out, Jim. People aren't going to all just rush out tomorrow and get one and dump the other cars. That's not going to happen.

JIM: Yeah. And I'm quoting Reinhardt again. He said, you know, when you're schlepping around two tons of sand for a barrel of crude, it already shows that conventional oil is already well into depletion and prices are ultimately going to ration demand despite the best efforts of government to try to subsidize it. He's basically talking here that what are we going to do when we're seeing 200 dollar oil and $300 oil. He goes on and says this is the stuff that keeps him awake at night. He's got right now, for example, 300 engineers working full-time on basically trying to figure out a more efficient battery because part of the problem with hybrids is getting batteries that are more efficient and can store more power in the car. He's got 300 full-time in-house engineers studying the chemistry of lithium batteries. GM at this time has no in-house researchers for lithium chemistry. So it just goes to show you, much like the 70’s oil prices we were just way, way behind in terms of what we should be doing.

So as we sum up here, you take the Hirsch report as he summed it up to the candidates, he put it on a real simple basis: The peak oil problem is going to over shadow anything else that's going to face your presidency. Secondly, peaking may be happening now, if not sooner, and you must be prepared to respond or risk being blind-sided. Successful mitigation is going to require time because of the magnitude of the program. So you need to get started now developing a plan and finally when this arrives, there are going to be no quick fixes. [25:12]

JOHN: Maybe the best thing investors could do would be to ignore what is going to be a huge amount of short term noise and static and begin thinking critically and take steps to take care of themselves. I mean both from a financial position and also getting better cars, making your house more efficient, something along those lines. We're going to be doing shows on this throughout the year on how to start preparing for the peak oil. It's really almost a peak energy situation; isn't it, really? As we slide over from oil to energy because at the same time that we're dealing with the peak oil issue, we're not soberly dealing with the energy infrastructure in terms of electricity in this country. So it's all sort of mixed in together here.

JIM: Yeah. It was amazing because last night I was reading a 200 page report. It was called The Growth of Scarcity, and one issue that, getting to energy, is China right now is struggling with power shortages caused by lack of coal, which in turn has been largely caused by infrastructure bottlenecks. And that's going to impact the production of aluminum, steel, zinc, copper and lead. South Africa is experiencing a power crisis. That's going to impact the production of platinum, chrome, manganese, gold, thermal coal and aluminum. So this energy crisis is already starting to surface. I mean most people, their only exposure to this at this point has been where, let's say if you were in the southeast after Katrina and Rita hit, there were gas lines, there were shortages; but for most people right now it's an inconvenience, it's higher prices, but every time you pull into the pump, there is gasoline there. [26:52]

JOHN: You know, at the same time when we talk about this disconnect between what economists or analysts see versus a fundamental understanding to the physic of the situation You have analysts calling for lower oil prices because of the US economy slowing down, not taking into account there are other dynamics outside of the US –supply-demand issues – that are pushing it up, and they don't seem to be following this.

JIM: No. In fact, if you look at the S&P energy sector so far this year it's corrected about 13%. The only thing I can say is hold onto your energy holdings, keep your energy stocks and if you want to add to them, start buying now that they've corrected, after they've sold off. And more importantly, if you don't own them, start buying them. Get into energy companies. Get into energy infrastructure. Get into energy service. Get into alternative energy because when the rest of the world wakes up –and I can just see it, John, and we've talked about this over the last four or five years, gosh, I've been writing about this thing for seven years –but we're going to wake up one day and you're going to see it on ABC Nightly News or you're going to see it on the front cover of Time magazine: peak oil is here. And when that happens, that's when panic is going to set in and there is going to be a rush to own anything involved with energy.

The one thing I can say is right now hold onto your energy holdings, keep your energy stocks, we've had the energy sector correct about 13% this year, so buy them now after you've seen the selloff because when the rest of the world wakes up, look out. When panic sets in, you'll own what everybody else will want to own. And I also want to say this. If you have no plans to get or own at least one economy car, start rethinking that. Start thinking about perhaps trying to get either a diesel, diesel hybrid, a Civic, a Prius a Corolla. Do so now while they are cheap and available because you're going to eventually see, now Matt has talked about this, you're going to eventually see gas rationing and owning a fuel efficient car now will determine whether you remain mobile or you'll be able to afford to drive. [29:13]

JOHN: So I would take it that the recent selloff isn't bothering you.

JIM: No. In fact, we tend to do most of our buying when we get these pull backs. The most important thing, and I've said this over and over again –and we'll get into this in the second hour on a topic we're going to call Strategery – but the most important thing is all of these bull markets and bear markets go through phases. And we've talked about these phases on the program. You go from pessimism to skepticism, and that's where we are now. Eventually, you go to optimism and then you go to euphoria. In these first two phases, which are pessimism and skepticism, that's when you want to do your buying, that's when you want to do your accumulating. And the only thing you care about, and this is the only thing that matters, stop thinking about prices! And I mean that. What you want to start thinking about is when you get to the third and fourth phase, which is optimism and euphoria, how many ounces of gold and silver do you own. How many shares of the mining companies do you own? How many shares of energy companies do you own? The more shares that you own, the wealthier you're going to become and the better off you're going to be. The more ounces that you own or barrels of oil that you own, the more wealthy and better off you're going to be. So start thinking of ounces and shares or barrels and stop thinking about price. Everybody knows everything about price. They know very little about the fundamentals. [30:45]

JOHN: And you're listening to the Financial Sense Newshour at

FSN Follies: Andy Looney

I'm Andy Looney. I turned down my television set the other night and, oh, my. It really is the silly season. Look at all of those candidates for president making lots of promises. Promises they can't possibly keep. But my friend Charles says it makes for good sound bites on the evening news. I couldn't stop laughing when they said they'll bring change to Washington. After all, the remaining candidates are Washington insiders and it's the land of Oz, and Toto too. You know, exactly what is change? Hey, buddy, could you spare me some change. Like President Clinton said, it depends on what your definition of change is. I heard of changing clothes, changing of the guard, a change of venue, a change of job, a change of address, a change in the weather and changing your tires, but I still don't know what candidates want to change. Do you? I don't. About the only thing I know for sure is they all want to change who lives in the White House, and that's going to happen anyway. Nothing new there. Some candidates want to change how we pay our taxes, but I don't have the change to pay the taxes. Do you? I don't.

Maybe after President Bush's spare change rebate -- nah. That's just short-change. They say people aren't buying health insurance because they can't afford it, so they want to force you to pay the premium from your paycheck. I don't get it. If I didn't have the money to pay for it, what makes you think I can afford it when they force me to pay it? Why is it every time the candidates feel my pain, it costs me more money? Anyway, before you vote, ask the candidate: What do you mean by change? I think the change they are looking for is in my pocket. Perverts. Get your hands out of my pockets. For Financial Sense, I'm Andy Looney.

The Next Great Depression - Part 4

JOHN: Every once in a while you have this moment of deja vu when you think my gosh, I've seen this before and I'm getting to see it again. The country seems to be sliding rapidly in the direction of populism; and that means they want government to go in and fix their economic pain. And the economic pain, of course, originally being caused quite frequently by government policies and policies of the Fed, which is a government-related phenomenon. So it's always interesting how the public in many, many countries always rely on the very people that got them into a problem to get them out of it.

So what we've been doing, we have been covering what led this country into the Great Depression back in 1929 because things seem to be repeating themselves and history is very instructive of exactly how politicians are making the same mistakes today. Recessions are an inevitable part of the business cycle. It's the way that the system blows off toxicity, if you want to make a biological analogy, which is really just excess debt out there. But it takes policy mistakes to turn a recession into a depression. So today what we're going to do on this part of the Big Picture, and this is probably one of the most important things that we've been doing here over the last four weeks (this is now Part 4) is to cover the specific examples that drove the economy from a recession into the depression, and then show you what parallels are running today and where we stand at the reference point as far as where those were progressing.

JIM: You know, as mentioned in earlier programs over the last couple of weeks, John, as you said, recessions are part of the business cycle. They are actually part, believe it or not, of the recovery process. All of the malinvestments that were created – too much technology, too much broadband, or in the case we're in now, too much real estate – is liquidated. Leveraged businesses, investments go under, balance sheets are rebuilt, savings increase and the economy cleanses itself. And the most important thing when you're going through this cleansing process, the best policy that government can adopt is one of laissez faire. Leave the economy alone. Let the healing process complete itself. Don't interfere with the market process. Whether it's prices, wages or business liquidation.

So the proper course of government is actually to cut the budget, cut taxes and leave the economy alone. But that is not what Hoover did. Hoover, by his training, was an engineer and a central planner. And what became known as the New Deal really began in his administration, and it developed and it was sold to the public as an anti-depression remedy while it was actually creating the Depression. But if you take the New Deal, it violated every tenet of laissez faire. It was government intervention on a grand scale never seen before in this country. And it was a program that was marked by extensive government economic planning and intervention at every stage and process of the economy, including the bolstering of wages and prices, the expansion of credit, propping up weak firms that were going to go out of business, increasing government spending, subsidies to unemployment and public works. And it was amazing, none of this stuff worked. [36:40]

JOHN: That's the funniest part. Actually, it was more tragic, as a matter of fact. You know it was also a government that made itself hostile towards the markets and the economy at that time. That's important. Hoover raised taxes from 25% to 63%. I mean that is a breathtaking increase. He increased inheritance taxes and increased regulation on the stock market to eliminate speculation. Well, it's no wonder that the stock market loss went to 90%.

JIM: Yeah. The more that they tinkered with the economy, the more that they tinkered with the markets, the worse it became and the worse it got. They said “we're not tinkering enough, so we need to do even more tinkering.” And it's a real tragedy in terms of all of this, the way it turned out. So you can look at the failure of the Great Depression, John, look at the failures of the Soviet Union or China under Mao with the Great Leap Forward, and it is amazing to see the failures. And we've got great examples over the last 100 years, the Depression in the United States in the 30s, the Soviet Union and China and other communist countries.

And I can remember, my parents are from Czechoslovakia, and I can remember my mom telling me – this was a little over 10 years ago – she went back to her birthplace where our family came from, and she said, “you know, going back to that country, it was like going back to the United States 50 years ago. I mean there was one car in the village, and they were so grateful. The simplicities of life and what they had done without under that system.” And here we are moving full force into this direction while the former communist countries, such as China and Russia have implemented low tax rates –a flat tax in Russia, low tax rates in China, low tax rates in Hong Kong – and these are the fastest growing, most prosperous economies in the world. And it's absolutely amazing that here we are going right back in that direction again.

But let me get back to Hoover, who essentially was a central planner. And his first effort with the Depression was to force wages higher despite the fact that the money supply was contracting and the economy was experiencing real deflation. His goal was that the first shock of the Depression was falling profits and not on wages, which is exactly the opposite of sound economic policy because it is profits that provide the motivation for business to expand. Also, contrary to widely held beliefs, the Fed began to immediately inflate. The week of the crash, the Fed injected $300 million in reserves into the nation's banking system, which was a considerable sum of money at that time. It would almost be like injecting half a trillion dollars today. And the purpose was to prevent wide scale liquidation of stocks by allowing banks to take over broker loans. So when you have a correction, a recession, as we were experiencing between 29 and 30, the money supply, credit was starting to contract. So what that brought is real deflation, falling prices, which was the after-effects of a contracting money supply. It is these falling prices that allow the same amount of money in the economy to buy the same goods and services. But what Hoover was doing is he was going, “oh my goodness, we have deflation, we can't have falling prices.” He immediately began to cajole business into keeping wages high, and then government began to support prices, so immediately what Hoover was doing was interfering with the market price and mechanisms in the economy while the money supply was contracting. [40:39]

JOHN: They also tried to boost wages at a time prices were falling and then they tried to prop up the prices as well. They tried to do everything artificially, but obviously market forces are much more powerful than that.

JIM: Yeah. And this is when farm subsidies came into becoming a major support program. They supported artificially high prices. They set up the federal fund loan system to lend money on long term mortgages to cooperative farm loan associations. The Fed Farm Board urged farmers to withhold selling part of their crops and wait for higher prices; and despite these efforts, wheat prices continued to fall. And more importantly, American farmers lost a major portion of the world market. So at the time, government was encouraging farmers to increase production but withhold it from the market, so we were building these huge surpluses that were accumulating. And it’s basic economics, if you want higher prices, you reduce output. We were doing just the opposite, so grains piled up in useless storage.

Meanwhile, as we withheld our grain from the market, Russia and Argentina stepped in, increased production and took our market share. So government couldn't thwart the forces of the market because the market said, “okay, you guys aren't going to supply, we'll increase production on our side and we'll supply it.” And that's exactly what Argentina and Russia did. What was amazing, eventually, the stock piles got so huge that the government dumped the wheat supplies on the world markets and the prices plunged. [42:16]

JOHN: This is almost a boomerang from what we were talking about in the last part of the Big Picture as far as energy. And government needs more to get out of the way than it does to try to manipulate how we're going to deal with this energy issue because if you look now, government is devoting 25% of the corn crop to ethanol. And what this is doing is driving up the prices of grain and other food products, chicken, dairy, beef, especially like the feed corn that is used to feed, for example, dairy cattle and that's where the milk prices are affected.

But Hoover didn't stop there. Oh, no. If you're going to create a path of wreckage, you might as well do a good job of it.

JIM: Yeah. And as more of these things began to fail, he said, “oh my goodness, we just need more engineering.” So the next disaster unfolded was the enactment of the Smoot-Hawley tariff, and this was a piece of legislation that virtually killed international trade. And despite the urging from all of the nation's economists, we had more classical economists, and Austrian economists were coming into prominence at that time, and these economists were saying, “Mr. President, don't do this. Veto this thing. This is going to kill trade.” Guess what? He passed it, and the day he signed it, the stock market plunged. [43:30]

JOHN: Well, we'll have to talk about this in a second. Anyway, what's amazing is you watch when these disastrous policies are put in place. First of all, production falls. That's to be expected. Then the GDP begins to collapse, prices in the markets and economy and the markets plunge, foreign trades contracts further, hurting US manufacturing and then unemployment rose sharply, and the worse things became, the more they muddled – and that's maybe a better word, instead of meddled in the economy, they muddled in the economy – and the markets just driving it further and further out of trim.

JIM: You know, you're absolutely right. It is the imbalances that create a recession, but it was government mismanagement that turned it into a depression. The government cure was to increase those imbalances, and Hoover's way of thinking, if you analyze it, the stock market crash was not caused by credit being too scarce to commercial borrowers, which is why he called on the Fed to provide more liquidity and credit to the market and lower interest rates. The very same thing our politicians and the Federal Reserve is doing today. [44:42]

JOHN: Well, you would think after studying these mistakes that we would learn from them, but you have world-view issues – meaning collisions – between Austrian and Keynesian type of approaches to things. And yet at the same time, I don't think politicians learn much of anything, to be honest with you. Maybe that's a failure of the American education system. But here we are 80 years later, and it seems like we're committing the same mistakes all over again. People are opting to feel a lot of pain. They may not know it as they go to the polls, but they are opting to feel a lot of pain.

JIM: The one thing that we know studying the markets and the business cycle, booms are always followed by busts where you see these wasteful malinvestments whether it was technology in the first part of this decade or real estate and mortgages today. They need to be liquidated. That is why recessions and depressions are actually the cure. It's the economy's way of getting rid of economic toxicity. When these bad investments are liquidated that is...I go back to biology again. It's like your body reacting to toxins in your body trying to cleanse itself. The recession is the very same thing. It's the economy's way of cleansing itself from all of these malinvestments that were made during the boom. But what happens? We can't have a cleansing process, a healing process, government steps in thinking it can cure the patient by administering more drugs. [46:11]

JOHN: Or more toxins as the case might be, which is basically what they are doing. So the economy contracted at that point, the stock market plunged, unemployment followed it on down into the abyss and prices fell despite all of the efforts of the government cure. And that's why Hoover was out and Roosevelt was in.

JIM: And it was amazing too because Roosevelt ran against Hoover as a spendthrift and a tax raiser and of course, he just carried on those very same policies and carried them to even more extremes, but he had a better PR department. That's what happens when government interferes with markets. In the end, it's always amazing and politicians refuse to acknowledge this, the markets always win. In a depression, it's so important that government’s fiscal burden on the economy is reduced, and we're seeing it. What is happening today? It's going to be increased because what the government needs to do is free the economy from the government's load of acquiring resources, lowering the burden on businesses and shift total spending in the economy so as to increase investment and lower consumption. What you hear today in response to the real estate credit crisis is just the opposite: Money printing by the Fed; a dumb, dumb stimulus program that's going to exacerbate the budget deficit without any return; and they are urging consumers who are in debt to their eyeballs because of over consumption to go out and spend more money and go deeper into debt. I mean it's absolutely insane to consider; looking back 80 years ago, we know this failed and here we are trying to repeat it. [48:01]

JOHN: I've got a question here. As production fell back then, and as the business, the economy in the markets contracted, then the government’s response to increasing unemployment (which is the result of that obviously when businesses have to defend themselves against economic attacks so to speak, then they begin to lay people off, it's just a normal reaction –and of course that's where the public feels the pain) was to raise taxes and start a government job's program. Do you have any idea what the rationale of that was? Did anybody in history ever look at that?

JIM: Well, their policies were creating more unemployment. I mean they were hampering the market's ability and the economy's ability to cleanse itself of these malinvestments. I mean Hoover was cajoling companies, “don't lay off workers, raise prices, keep your wages up” while the economy was contracting. It was impossible because companies were losing money, they were going out of business. And as business contracted, the government took a bigger share of the economy and the bigger government got, the more the private sector contracted in response. And as unemployment rose, they increased wages, they reduced the hours worked. This was tried in France a couple of years ago. They were saying, “my goodness, people aren't hiring. Companies aren't hiring, so you know what we'll do is we'll reduce the work week from 40 hours to 35 and those extra five hours left over will mean that new jobs will be created.” I mean this is how dumb government does when it is planning. So instead of unemployment being reduced, it kept rising and eventually, all of this intervention failed because the unemployment rose, wages fell, prices fell, the stock market lost 90% of its value and credit contracted. So take everything the government did. It didn't work. [49:55]

JOHN: So as things progressively worsened, they applied a move of the same measures making matters worse, they lengthened the Depression so the would take a worldwide war to bring us out of it, which, by the way, is an important point. Whenever governments get into tight problems like this, whether it's an inflationary bust or whatever, they tend to get involved in or start wars just because --

JIM: Because economic tensions build so much, there is a scramble for resources, a scramble for markets, economic tensions. I think it was Frederick Bastiat who came up with the saying: when goods don't cross the borders, armies do. And that's exactly what happened. John, it just kept getting worse. The government created the RFC or the Reconstruction Finance Corporation to make loans to businesses. We got the Home Loan Bank to discount mortgages and expand the Federal Farm Loan Bank system. States enacted legislation in a similar vein to prop up prices. You remember we got the Texas Railroad Commission to prop up oil prices. I mean it was almost a nightmare. The worse things got, the more the call was, “well, we're going to tinker with this more, and when we tinker with it more, the problem is we just haven't done enough tinkering.” [51:10]

PRES. ROOSEVELT: The only thing we have to fear is fear itself. Nameless, unreasoning, unjustified terror, which paralyzes needed efforts to convert retreat into advance.

JOHN: Well, there we are, we were assured back in the 30s that all we had to fear was fear itself. And of course what we really had to fear was the New Deal, which a lot of historians say bailed us out of the Depression, but which in reality took the existing disastrous policies that Herbert Hoover had begun, put them on steroids and then delayed the recovery of the Depression.

JIM: You know what's absolutely amazing when you take a look at the premise of the New Deal which was expressed by one of FDR's brain trust, a gentleman by the name of Rexford Guy Tugwell. And he wrote, he believed that more organization was needed in American industry, more planning, more attempts to estimate the needs and set production goals. From this, they argued that investment to secure the needed investment could be encouraged. They did not stress the reverse: that other investment s ought to be prohibited, but that was inherent in the argument. All of this was, so far, in accord with the thought of the collectivists in Franklin’s brain trust who tended to think of the economy in organic terms. And it was amazing, John, at that time, the Chamber of Commerce was calling for public work and federal relief. The National Association of Manufacturers and the National Industrial Council urged public works and regulation of the purchasing power of the dollar. I mean one organization after another was intervened, the oil producing states enacted law to enable government commissions to fix the maximum amount of oil produced. I mean everywhere you looked, there was a whole consensus that came over the economy that we need to get into central planning. And, you know, we're going to draw some parallels to this election what was going on, but it was a whole mind set and a change of thinking. As these policies were implemented, as the government interfered with the marketplace and as it caused the failure, the greater the failure, the greater became the mistrust of the marketplace and the greater the argument was for more interference in control of the economy. And as we all know, where did it all lead to? There was a lengthening of the Great Depression that lasted probably 12 years and eventually was solved by a worldwide conflict. [53:52]

JOHN: You know, it's interesting because in the early part of the 20s, unknown to most Americans, if you go and read some of the memoirs of people who lived in and active in government there was sort of this flirting too with Marxism. There was a quiet admiration among a number of people about the concept of central planning, etc. So there was also pressure to try to do that in the psychology of the time. But as you say, it didn't work. Let's face it, FDR beefed up government spending, he asserted more control over the economy, increased deficit spending and in order to pay for it, increased tax rates to –brace yourself – 94%! You've got to explain to me when we get done here how he would think this would help the economy. He inflated the currency, took away the people's gold and then devalued the currency by almost 75%, which really was fraudulent. You know if you arrived at that in a business deal, we probably would be prosecuted for it or something like that. But why do you think moving things up to 94%, that was going to do something that would help the economy?

JIM: Because as they tinkered with the economy, they worsened production, they worsened economic output. Unemployment kept increasing, so they are thinking: “Well, the business sector isn't doing it. We'll just take everybody's money and we'll create the economic growth and we'll create the jobs.” So despite increasing the tax rates, here is the amazing thing. Government tax receipts, we know this, oh, my goodness, I mean just read Charles Adam's book, For Good and Evil, it's not just the last hundred years we know it's a failure, it's been going on for 5,000 years. But government tax receipts continued to fall, so as government tax receipts fell, the government's deficit got even worse. And eventually, government rose to almost 25% of the economy, which was almost unheard of prior to the Depression. And despite the cheap money, nobody wanted to borrow because of what the government was doing, and it caused the banking system to fail. [56:00]

JOHN: That's a point that should be raised here. Banks are losing, what, hundreds of billions of dollars right now? And they are very reluctant to lend, and yet politicians are urging them to keep the credit flowing, which I've been talking to some loan officers and they said it's getting really strange out there in the market because things aren't following the normal indicators that you should see out there. So this is the same thing that happened in the 30s, and at the time, it had disastrous results as well.

JIM: Yeah. In a time of depression or a financial crisis, banks are going to be reluctant to lend or invest because they wanted to avoid endangering the confidence of their customers. They don't want a run on the bank. They want to avoid the risk of lending to or investing in ventures that are probably going to fail or default. And the artificial cheap money policy in 1932 actually greatly lowered interest rates all around and they further discouraged the banks from making loans on investments because the spread was narrow; and that spread was narrowing at a time when risk was increasing, so the incentive to bear the risk, the prospective interest rate terms were lowered by government manipulation by interfering in the marketplace of interest rates.

And it was amazing because during the 20s in a typical year, you had maybe 500, 600 banks fail. In 1930, 1350 banks failed with deposits of 837 million. In 1931, 2300 banks failed with deposits of 1.7 billion. And in 1932, 1500 banks failed having 706 million in deposits, so this enormous increase in bank failures was enough to give any bank pause. I mean if you're in the business and you’re seeing everybody around you going out of business, are you going to go out and make loans? I don't think so. And what was amazing, despite all of these inflationary policies, what defeated everything was foreigners lost confidence in the dollar, partly as a result of the program. They drew out their gold. American citizens lost confidence in the bank. They changed their deposits into Federal Reserve notes, and finally bankers refused to endanger themselves even further, either using increased resources to repay debt to the Fed or allowing them to pile up in their vaults. So unfortunately, the inflation by the government was turned into deflation by the policies of the public and the banks and the money supply actually contracted, and we got to the depth of the depression between 32 and 1933.

JOHN: Just amazing. Well, there you have it, government planning failed in every aspect, which by the way it did in the Soviet Union as well. It failed to reduce unemployment because unemployment actually increased to the point that one out of every four Americans was unemployed. It failed to boost wages. Wages fell. It failed to protect banks because thousands of banks failed.

And it's sobering to remember here, Jim, that just less than two decades earlier, the Federal Reserve was created to allegedly prevent any such type of failures in the future when it was the Fed once again that sort of precipitated the whole thing in 1929. It failed to boost the economy –this is government planning! – the GDP fell by 44%. It failed to increase government revenue despite tax rates which finally hit 94%. The receipts to the government fell by 20%. Government deficits mushroomed along with the national debt and eventually the hard times created around the globe led nations to war. That's ultimately what they did. The question remained, have we learned anything from this important piece of history, or are we just going to traipse down the trail and condemned to make the same mistakes?

JIM: John, you can just see this. We're seeing it in this election. It's been very fascinating. If you look at the Republican side, the most free market Libertarian, constitutionalists, soundest economic policy person out there was Ron Paul. He's only getting, well, probably about 5 or 6% of the Republican vote. The next guy to Ron Paul was Romney, and he was rejected. So the two guys at the top of the heap of the Republican party are populists. Huckabee and McCain. And likewise, over on the Democratic side, Clinton and Obama are both populists. And if you listen to what their philosophy has been, if you look at their voting records, they advocate more government control and planning of the economy. So here we are, as we have a class of Hooverites that are rising to the floor and the public is clamoring for these kind of people to lead this country out of the problems that you have.

Now, we've been talking about that how the government created the Great Depression. If you want to sort of follow this, you can go to and you can download Murray Rothbard's America's Great Depression. And after you read this book, you're going to begin to recognize the same policy mistakes being repeated today that is leading us down that same path. Both parties are now advocating the same policies, and there are very few voices out there that are calling for a return to sound economic policies that preserve and protect the economic well being of most Americans. As I mentioned, Ron Paul is warning of the consequences, but few people seem to be listening. Instead, more citizens are crying for more government intervention in the economy.

And I think if you read Rothbard it's going to warn you of the consequences that are going to follow in the wake, and one of the things that I think you're going to see, this great credit crisis is going to be the precursor of a great inflation. In fact, there is nothing more damaging to the well being of an individual as inflation. The majority of people suffer badly from inflation, and here is the problem that we have. They most likely are blaming the free market for their plight rather than blaming the central bank for the debasing of the currency. I mean Greenspan slashing interest rates from 6 to 1% in order to fight off a recession and the bursting of the technology bubble created the real estate and the credit bubble. And so here we've had two bubbles already that have burst in this decade. Remember that line, John, from Ron Paul where he was questioning Bernanke and he said, “so here we are, we have an inflationary crisis, we have a bursting bubble and your remedy is to apply more inflation.” And the noted Austrian economist Ludwig von Mises wrote:

Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in an unhampered market economy. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference.

So in summary, as an Austrian would look at this, the current credit crisis appears to be a precursor of a great inflation. It was something I wrote back in October of 2004. I had studied this for almost three years after I wrote my Perfect Storm series because I wasn't quite sure which way we were going. And what I think we are going to see, John, is a recession. I think we're on that path right now. We're going to see anemic recovery. Then because of policy responses next year with the new Congress and president, given who is leading both sides of the parties, we are going to see policies enacted that are going to lead us to another recession in 2010. It's going to be very similar to kind of like the double recession that we had back to back in 79 and 81, and then it's going to be the policy responses to the recession of 2010 that is going to turn it into a hyperinflationary depression. [64:38]

JOHN: Does anybody make out during this time in terms of – I mean we were talking about concept of socialism for the rich recently.

JIM: Yeah. You're going to see some people become very wealthy. I mean if you were in gold, if you were in Treasuries and out of the stock market in a deflation as we had a deflationary depression in the 30s. I mean Joe Kennedy sold all of his stocks, went into T-bills and municipal bonds and then in 1933 in the depths of the depression bought one whole block of downtown Chicago. Bernard Baruch sold his stocks, got into gold, made a fortune and then went into government. So there were a lot of people that made monies in this period of time. And so given the fact that this is inevitable (and it is inevitable given the consequences of the policies that are being enacted and also the new policies that will probably be enacted) the best thing you can do is fend for yourself and take care of yourself because you can't change the political system at this point. So you might as well look out and try to take care of yourself and your family. [65:46]

JOHN: Yeah. Maybe that's the key thing we would tell investors here and that is you have to understand what is happening and then take whatever actions are, of course both legal, ethical and appropriate for the situation that you're in. But the key to it is understanding what's actually happening versus what the public impression of what's happening is. You're listening to the Financial Sense Newshour at We'll have more of the Big Picture coming up in the next hour. We'll be talking about more signs of a recession and something new, strategery. We're going to take a break and I'm going to practice wrapping my mouth around it. We'll be back in just a minute.

Part 2

More Evidence of a Recession

JOHN: This week Congress passed a stimulus package – I should say they passed a stimulus package quickly. When have we ever know any of these guys to pass anything quickly. Let’s face it, the impetus to do something was pushed by the fact if you look at the various reports that have been coming out lately – housing starts and sales were down, ISM service report dropped 41. Basically now the message they’re trying to say is ‘don’t worry, be happy’ as they put out a stimulus package to make everybody happy. And, oh, look at that! It just happens to be an election year. There’s no relationship between these two. You understand that; don’t you?

JIM: No, no, no. That’s incidental.

But you know one of the reasons I think they’re moving on this front, there is every evidence that the economy probably entered into a recession probably starting in December. You have to understand that the National Bureau of Economic Research which usually pronounces a recession and makes it official, they usually wait anywhere from 8 to 16 months after a recession has started to make it official. So usually by that time you’re coming out of the recession by the time that they announce it. But if you look at the four variables that determine a business cycle peak and a trough –non-farm payrolls, industrial production, real personal income less transfer payments, and real business sales – the recent behavior of all these variables are down and most of them...I think one of the last ones peaked in December of 2007. Both industrial production and real personal income peaked in September; and real business sales appeared to have peaked in October of 2007. So we’re getting more and more evidence, whether it’s the Leading Economic Indicators, the ISM numbers as you made reference to; more of that stuff is coming in right now.

And what they’re hoping is this stimulus package combined with a number of consecutive Fed interest rate cuts – remember, the Fed has cut interest rates now by 2 ¼% when it began last September. So they’re hoping the combination of this will either 1) if we do enter into a recession, it’ll make it short and shallow – that’s the best hope of everybody; or 2), we can narrowly avoid one.

It was interesting to see some of the economists are already slashing their economic growth rates for every single quarter of this year. I think the economy grew 0.6% in the fourth quarter and economists tend to use linear extrapolation, so it’s no secret that the growth rate for the first quarter of this year is expected to be 0.6%. And let’s fact it, with the way they juggle the inflation numbers which subtract from nominal GDP, if we were using real inflation numbers you know I think it’s pretty evident that the economy is already in a recession. [3:03]

JOHN: Why is it takes the economists so long to figure that out? Like you also say before: A recession is officially’s sort of like having an altimeter while you’re skydiving which doesn’t tell you where you are until you’re a thousand feet lower than it indicates.

JIM: Yeah, you just drop from 30,000 feet and at 1000 feet you’re beginning to see the ground below you.

JOHN: But it doesn’t tell you that...

JIM: It’s probably conservatism, and there’s probably hope and optimism; “Hey if the Fed’s cutting interest rates...” You know there’s always this belief that the Fed can avoid a recession. Well, they didn’t avoid a recession in 2001, they didn’t avoid a recession in 1991. You know, we’ve had two mid-cycle slowdowns, one in 94 and one in the mid-80s with recessions taking place at least in the last couple of decades every 10 years. But the housing market affects more of the economy than let’s say tech stocks; so if you take a look at the technology boom, a lot of people owned stocks, they owned them through mutual funds and their 401K programs, most people were continuing to work, they were continuing to contribute to their program, they were saying, “hey, I don’t need the money for 10, 15 years.” It didn’t affect the economy as much. But when you start talking about the housing market, that has more of a direct impact on the economy and it also has more of a direct impact on the financial system which is what we’re seeing now. So this gets back to our Oreo theory that in the first part of the year that dark outer shell in the first quarter where you’re going to see a slowdown in the economy, probably a recession. And then also taking a look at some of the economic indicators whether it was the retail sales in the month of December, they’re coming in, chain store sales are coming in much weaker, so it’s obvious the consumer is starting to slow down.

I think the most important thing though, however, at this time is the business sector because quite honestly, the business sector is in the best shape it’s been in a long time because the 2001 recession was a business-led recession. After that recession, businesses cut payroll, they trimmed costs, they rebuilt their balance sheet, and despite a slowdown in profits we still have some healthy profit margins for most businesses. So the real key point here is are we going to do something that jeopardizes business because that’s exactly what happened during the Great Depression in the segment we covered in the last hour, because there is this growing populism in both parties: It’s time to lash back at business. And you take a look at what a lot of these candidates are talking about, this could be a very negative environment going into next year if we are at that time coming out of a recession. And if we are, it’s going to be a very anemic recovery before I believe we’ll head back into another one. But you know, you take a look at whether you’re looking at payrolls...and the other interesting thing too was, remember in the month of January when the Bureau of Labor Statistics revised their birth-death model statistic, they showed the economy created roughly 380,000 jobs less than was reported. So, just taking a looking around you, I don’t care if you look at a parking-lot indicator, you’re seeing it in the retail sector: a lot of stores are missing their sales, their estimates are lower; a lot of them are starting to contract now, closing outlets. I think quite honestly, I think George Soros was right when he made a statement at Davos that the age of consumerism is over. [6:42]

JOHN: So what does that mean then if we say the age of consumerism is over? Where will we go, what will we do? It sounds like orphans here.

JIM: Well, you know, it’s been imbalanced because what drives jobs, what creates wealth is production. It is the creation of goods, the making of things and savings that creates wealth in an economy. And if you take a look at the misplaced economic policies of government, the Federal Reserve and the strong emphasis...what do you hear today? Consumption, consumption, consumption. “Well, we’ve got to get the consumers to consume more.” Well, goodness gracious, they’ve consumed so much that’s why they’re in trouble right now; their balance sheets are overstretched. They’ve got a lot of debt on the balance sheet, their debt-to-GDP ratio has risen significantly. And so the good side of this is if you allow this system to cleanse itself and get businesses, get people to start saving, get people to start investing, businesses to start investing, there are all kinds of things that we could be doing here.

Now, the one glimmer of hope – and I hope they don’t destroy this, it is looking like we could be seeing a rebirth or a renaissance in manufacturing in the United States. A number of foreign countries are relocating plants here because they can build things here more efficiently, you’ve got Toyota here, you’ve got Mercedes here, BMW here, Honda here, they are looking to expand. You have Airbus talking about coming here. So that’s where you’re going to create wealth in the economy because it’s production, it’s the building of factories, the increase of manufacturing output that creates the jobs, the salaries that create wealth in an economy. And so if government muck this up we can get through this and probably go on a more sound footing. I mean consumers don’t need to increase consumption, they need to increase savings; just as businesses became overleveraged, they became overbloated with personnel, they downsized in the last recession in 2001, they trimmed back payrolls, they got more efficient, they invested in technology, productivity, they used profits to rebuild the balance sheet, you know, that’s what consumers have to do. But what are we hearing from Washington especially with this rebate is they want people to go out and spend more money. [9:08]

JOHN: All right. So quo vadis? Where is this all going to wind up if we just take all of these projections lines and move them forward.

JIM: One of the key events this week was a change in the policy of the ECB (that’s the European Central Bank) hinting that they’re going to be possibly cutting interest rates. Some are saying as soon as next month, some are saying as soon as April. The timeline has moved closer as the European economy is starting to weaken and this whole decoupling thesis that well, the US was kind of standalone, it’s having its own problems but the rest of the economies of the world are going to be exempt. That’s not happening. Chinese economic growth this year will probably fall from about 11% to the upper 9% level; Europe’s economy, if they do not go into recession, it’s going to look like one, which is why the ECB is starting to change its tune here. So what we’re going to see now is global reflation as all central banks, whether it’s the Fed, the ECB, Bank of Japan, the UK or Canada, all start singing the same tune and dancing in the same chorus line. So what I think you’re going to have here is globalized reflation efforts. The last hold-out has been the ECB and now there’s every bit of evidence that they’re going to start cutting here soon. [10:29]

JOHN: So, to go back to the Oreo theory that we keep thumping here, the Fed and all the other central banks –the major ones – are going to cut interest rates here. They are moving if not in lockstep, but they’re moving in common directions. And the government is going to spend money to try and goose the economy. Is this going to create this creamy center that you keep talking about, in other words, crusty at the beginning, smooth – I’d say probably all the way through the elections, somewhere up into there? And then after the elections and it’s a done deal it really starts to fall apart again.

JIM: Well, sure, because you’re going to have a stimulus package and look for perhaps another stimulus package when this one doesn’t quite do it. So you could see another stimulus package pass late spring or early summer. In other words, as the economic numbers worsen, as we saw this week with the ISM numbers, retail sales numbers. As more and more of that evidence comes forward that indeed we’re probably in a recession, look for Stimulus II. In other words, a second stimulus package and where they realize the first one was a political handout – basically, we’re trying to buy votes here and that ain’t working because a lot of these people who are going to take these rebates are going to pay down debt, they may use it to make house payments...[11:46]

JOHN: The funniest one is they’re just going to turn right around and pay their taxes with it. I’ve heard that coming at me already.

JIM: Yeah, because I mean, you take a look at even chain stores sales, where are sales going up? They’re going up at the discounters, the big box stores like Walmart and Costco which are doing much better – especially Costco; Sam’s Club within Walmart was doing better. And then the other thing that retailers were finding surprising is a lot of the gift cards that people got for Christmas, like at Walmart which was surprised that people were using it to buy groceries with. So that’s how stressed consumers are right now, and here our government’s trying to urge them to do that.

But I would look for maybe another stimulus package to come because remember, Bush did the same thing in 2001 with rebates. It failed. It didn’t work and then they had to come up with stimulus package 2 in 2003. And this being an election year look for some kind of thing they can agree on, maybe spending on infrastructure. I know that’s being bandied about now that we need to start doing something about our bridges, our levees, a lot of the other stuff that makes this country run. But look for that to come about. And then eventually you’re going to get enough lowering of interest rates. And the bulk of this, and all of this high-powered money created is going to find its way into the financial markets and so we can see a lift here.

There’s way, way too much pessimism here. I always try to balance what I read at night, but oh goodness, last night I basically by the time I got done reading a lot of this stuff I almost wanted to just get on my sailboat and pour myself a glass of wine and just sail off into the sunset. I mean the gloom and doom and pessimism is I think a little bit premature. I think the real big know a lot of people are asking: “Is this it? Is this the big one?” I’m not falling into that camp. I haven’t been convinced yet. I think the big one is between 2010 and 2012. [13:52]

JOHN: Some time in that crisis window there. But you’ve really got to stop calling me at 3 o’clock in the morning and crying and crying. It’s ruining my beauty sleep.

JIM: I’m just trying to pay you back for you calling me at six o’clock and crying.

JOHN: All right, you’re listening to the Financial Sense Newshour at We’ll be back with the last part of the Big Picture right after Other Voices.

Other Voices: George Tsiolis, President and Founder, Agoracom

JIM: Well in this information age more and more investors are turning to the internet to get their investment information. Whether it’s charts, news, information, the internet has become ubiquitous as it concerns the investment industry.

Joining us on the program is the proprietor of a new website. It’s called Agoracom, George Tsiolis is its founder. And George joins us this week.

George, why don’t you tell us about your website, how it got started and what its purpose is.

GEORGE: Hey, Jim. First of all, thanks for having me on Financial Sense. It’s great to be able to speak to your audience. I really welcome the opportunity to speak to them.

Agoracom is in essence an online community for both investors and management of small cap public companies. That’s never, ever been done before where investors can come online to a specific hub that’s dedicated to a specific company, ask questions to management and then actually get answers back from management. That’s never been done before and that’s led to great success on our website. We’ve got about 130,000 people a month coming now and they’re reading about 10 to 11 million pages of information. So this is only just the beginning and I’ll tell you why. I know you have some thoughts on a very important matter which is a lot of your listeners have probably tuned away from online discussion forums because of the amount of profanity, spam and stock bashing and rumors, and all of the nonsense that’s gone on over the last decade. Well, we’ve introduced a model that has eliminated all of that, so that investors can have professional, constructive conversations with each other so at the end of the day they can weigh the pros and the cons and at the end of the day can make their best investment decision possible. And that has been the basis for our success. [16:30]

JIM: One thing that has surprised me over the years with the popularity of online forums is that you almost get the impression that there is no monitoring of these. I have seen some of the worst profanity, some of the worst rumors – people send us all kind of emails here on the program and at our site and they go, “did you hear about this. Check this out.” Some of the profanity – I mean if I wanted to go on an online forum and say the president of a company is a drug dealer or a pedophile or something it goes unchecked and there is no policing of this. Why don’t you contrast what goes on – and I’m sure our listeners have seen this whether it’s Stockhouse or even it’s Yahoo; why do you think there’s no policing of that? Is it sort of the idea, well, this is the internet an freedom of speech? What’s your opinion?

GEORGE: Yeah, it’s a great question you bring up. What a lot of people probably don’t realize is that discussion forums at some major finance portals – and you discussed a couple of them, Stockhouse and Yahoo Finance, and people probably remember Raging Bull as well – the problem is the underlying factor of how they are supported. Specifically, they are supported by advertising revenue, so whenever you’re reading anything on Stockhouse or Yahoo Finance or these other sites, you’ll always notice they have anywhere from five to seven or eight advertisements running at the exact same time all around the messages.

As a result, it’s in their best interests for their own self-serving purposes to serve as many pages as possible, which means they are willing to sacrifice quality for quantity in order to be able to increase their page views and increase their revenues. So they’re really not there to help you out. They’ve taken an approach: If you want to use these sites, use them; if you don’t, well, you really don’t have an alternative. And that’s been true for a decade. There really hasn’t been an alternative out there, so investors have either been forced to actually accept the profanity and rumors and all the real nonsense that goes on online, or actually leave discussion forums. Where we differ is that we set out to destroy that status quo because we knew how important it would be for investors to be able to have an avenue where they could actually get together and discuss investments in a civilized manner, like you and I would discuss investments face to face, on the facts and agree to disagree but leaving personal comments out of it. So what we had to do was destroy the status quo and tear apart the model and say, “how do we come up with a model that helps investors, helps companies, and leaves all the nonsense out?”

And that’s what we did. Essentially, we came up with a model where the companies actually pay to be on the site and these are always good companies because they are open and accessible and they want investors to openly ask them questions. So we’ve created a situation where the companies pay to be there. It’s no longer a point of ‘how many page views can we serve’ because we don’t get paid any more money than we would, than the companies already do. So it’s in our best interests just to have a great quality experience for both the companies because they’re looking for new investors – these are good, small cap companies looking for new investors; and for new investors, they’re looking for good quality investments. But in order to make that decision they want an environment where they can discuss the pros and cons freely in a civilized manner and be able to ask questions of management, get the answers they need so ultimately it leads to their most informed investment decision possible. That’s what we’ve created and now that’s what hopefully is going to threaten the status quo. [20:17]

JIM: You know, George, we have long advocated here on the program and especially when it gets to dealing with small cap juniors is that the best source of information is to go to the company website because whether it’s their financials, their drill results, whatever it is, they usually carry it there. That’s number one. Number two, because these are small cap companies, you can pick up the phone at a lot of these companies and call them directly and get answers to your questions versus taking some basher that’s come up with some kind of rumor. And we’ll get to the bashers in just a minute.

So on your website, let’s say I go to company XYZ, you have discussion moderators or forum moderators. Explain that.

GEORGE: Yeah, you bring up a great point. Let me get back to what you said a minute ago which is you’ve told your listeners to go to the company’s website and get their information. That’s the first thing they should do, read the press releases to get the information. But then, investors always have questions. You always have questions about the data, you always have questions about where the company is going. A lot of these companies just don’t have the means to be able to take on phone calls because of their nature; they’re small cap companies, usually 10 to 20 person operation, everybody in the operation is working hard towards, XYZ Widgets, let’s call it, is working hard to sell their widgets. As good as their intentions are, it never has the time to be able to properly communicate with new investors. So how we fill this gap, and I guess the second part of your question there, is companies are now steering potential investors online to a hub on Agoracom. Each hub is specifically dedicated to a company.

There are 81 companies listed on Agoracom right now and so essentially Agoracom is a collection of 81 microsites. So you would go to the hub for XYZ Widgets and you’d ask your questions. One of the elements in the hub is a discussion forum. That’s where you would go, you’d ask a question, you’d get an answer within a couple of hours of that business day, or if you’ve asked a question after business hours it will come within a couple of hours of the next business day. But the great thing is how efficient the model is because everybody reads the same question and everybody reads the exact same answer. So, 1), the answers proliferate much faster to the entire investment base than they ever could one at a time via phone calls; and 2) everybody is treated equally which is a utopian situation – it’s never happened before. Because everyone gets the exact same answer and reads the exact same answer, there is no preferential treatment for old time investors, and everybody gets the exact same information. I can tell you: the Exchange in Canada and the regulators love this model because of the way it treats everyone universally and equally. [23:03]

JIM: The other surprising thing and I’ve seen this, people have emailed this and regretted doing things. On some of the other sites, whether you’re looking at Stockhouse or you’re looking at Yahoo, say something is going on with the stock, it has a run up, and all of a sudden you get these characters that show up – referred to as bashers – and they spend all day starting rumors, they’ll use four-letter words or other things. You would have to wonder, George, if I did not own the stock why would I spend all day on the site bashing the company. In other words, I’m not there to help other investors. I’m there for motivation and usually my motivation is either 1) I’m shorting the stock; or 2) it got away from me and I’d like to pick it up at a cheaper price. If investors would only look at that when they see these kind of things and these outrageous rumors, I mean some of the stuff that you sent me was quite honestly appalling. It’s amazing that this is allowed. But on your site, you don’t allow bashers, so if I’m this nefarious character, I show up and I want to start a rumor, I’m not going to be able to get away with it on your site.

GEORGE: No. What a lot of your listeners may not know is that there are agendas like that out there and I’ll tell you, XYZ Widgets can move from 35 cents to a $1 for the various reasons that you listed, there are people there that have agendas and want to bring it right back down to 35 cents – whether that’s short selling, whether it’s covering their short positions or whether it’s just trying to pick it up again at a cheap price because it got away from them. Now, they’re able a lot of times to do that successfully to small cap companies, because remember, small cap companies are not like Dell or Microsoft or GE that has a tremendous amount of analyst coverage and financial media coverage and blog coverage, so it’s pretty difficult for someone to start a rumor about Microsoft and have it affect the stock because it’s pretty easy to confirm whether there’s truth or not. But if you’re going after XYZ Widgets, again, typically small cap companies don’t have any analyst coverage; they’re not covered by the major financial media so you’re relying on press releases and then some stock discussion in order to be able to put all of the pieces together and get the complete picture.

Over 65% of small cap investors use discussion forums as a primary research tool. That’s why you have these bashers show up because what they do is essentially two or three people create two or three different aliases so it actually looks like 10 different people; they start having these conversations between themselves and they can go from the extreme to the profanity which is telling people they are a bunch of idiots – well, we’ll leave out the profanity – they don’t know what they’re doing, they’ll lose money on the stock they should sell, to the gray side which is, you know, they sound intelligent but they’re just planting those erroneous facts of fear and doubt that make people think, “well, maybe I should sell the stock; maybe it’s not as good as I thought.” And for reasons mentioned, it’s pretty easy to do.

It’s pretty easy for these bashers to hijack the message of a company. On Agoracom that’s strictly forbidden on both the bashing side and the hyping side. You’re not allowed to come in and plant rumors that haven’t already been disclosed as fact by the company. You can’t come on and say “I heard rumors are that the FCC is investigating this company for insider trading, and they’re going to fault the stock, you should sell it.” Nor can you say on the flip side, “I heard from a friend of a friend that the company is actually going to be bought out by a major company at $5 a share, you should buy this.” There are very strict rules of use, which means you have to discuss facts and reasonable conclusions that stem from those facts. And that makes the whole process so much easier for investors to make their investment decisions.

And again, it’s never been done before because the Stockhouse’s of the world, the Yahoo’s of the world they have an agenda to flip as many page ads as possible, whether it’s rumor, facts, profanity, innuendo, whatever it is, as long as they can flip those ads and generate revenue. You know, Yahoo, Stockhouse, whatever company it is are under tremendous pressure today in the stock market today. Until Yahoo received that offer from Microsoft their stock was on the decline; Stockhouse’s stock has declined close to from a $1.50 in the summer to about 35 or 40 cents now; you’re talking about a 65% to 70% decline – that’s a pretty big decline. They’re under tremendous pressure – so they’re not necessarily looking after your best interests – to looking out for themselves.

The bigger question here is why do advertisers actually continue to support these kind of environments. And there’s a part of me that says they may not know, and we’ve got to raise awareness, first for investors so that they have credible sources now like Agoracom to go get their information; and 2) just for the sake of advertisers, maybe they’re not aware that their brand is being displayed right up against some of the worst profanity and degenerate discussion that I’ve ever seen, and from the sound of you, the worst you’ve ever seen as well. [28:05]

JIM: There was a lot of this going on the latter part of the 90s with the internet, all kinds of rumor mills and things like that and then it got investigated, several people got busted on this and actually went to prison for it. Why do you think regulators have been asleep that they have not looked at this because there is a lot of fraud that is taking place here? You almost have to question what these bashers are doing shorting the stock and at the same time the very things that you talked about, “oh, gee, I heard it from somebody that the company is going to get bought out at 5 bucks a share.” Why do you think the regulators are asleep here.

GEORGE: Well, they’re not as much asleep at the wheel as much as they are just overstretched; their resources are beyond capacity. You have to remember that we had right around the dotcom boom, not only did we have the bursting of the dotcom bubble and there are all sorts of problems there but following that you had the fall of Enron and the fall of World Com, you had Martha Stewart, you had Adelphia, Tyco, on and on and on – and you’re talking about multibillion dollar cases at the highest end of Wall Street. So essentially the regulators, it’s not a case of they’re asleep at the wheel but they’ve got their limited resources as well. They don’t have infinite capacity and they’ve got to go after the situation that grabs the most headlines because of a lot of political pressure there, as well as the ones that potentially affect the most people. A case like Enron, you can only imagine how many resources were dedicated to that because you’re talking about thousands and thousands of employees and tens of thousands of shareholders. So I think that’s been the problem and the bashers understand this and they’re exploiting the situation.

Now, to the SEC’s credit, one major problem they’ve taken care of was email spam. You’ll remember and I’m sure your listeners will remember about a year ago we were all receiving maybe 20, 30 stock spam messages a day. It had just gotten out of control. Well, the SEC launched operation Spamalot back on March 7th which they have now changed to another name, but nonetheless what they did was they actually dedicated resources and people to getting rid of stock spam because there’s been a major problem. So if you’ve noticed –and I’m sure you have, your listeners have and I definitely have – if you’ve noticed a significant drop in stock spam, it’s because the SEC, again, addressed a problem of the squeaky wheel. It was a real major problem and they went after it. Discussion forums for now are just not a high priority because the SEC is taking the approach that you just shouldn’t be using it as a research tool. [30:54]

JIM: Hopefully, George, sites like yours will start setting a standard and put enough pressure on these other sites to establish some standards because it’s really a shame because I’ve gotten emails from people talking about – we get them all the time – rumors; “hey, I heard this on a chat room.” And as I’ve always said, go to the company, go to their website, talk to the company’s CEO and it sounds like on your website you don’t allow profanity, you don’t allow spam, you don’t allow bashing and you have discussion monitors; and at the same time, if I understand this correctly, George, if I go to your site and let’s say there’s a press release that comes out from the company and I’m not sure what that means, I could actually send an email to the company through your site and the company management will respond?

GEORGE: Well, what you’ll do is you’ll post a message right to a discussion forum, you’ll label it as a question. When you post it there’ll be a big question mark beside it and shortly thereafter you’ll see a response come back and it’ll have a big A beside it. That way it denotes there’s a question and here’s the answer. It’s a very, very efficient tool. It’s exactly the way stock communities are supposed to work before the bashers and the stock spammers decided to take advantage of them.

And we know it works. More than just lip service. We’ve just put out an announcement this morning; in three months since we launched our latest service we’ve served about 27 million pages of information; and this includes the Christmas break from December 10th to January 10th essentially, so it would be significantly more if not for the holidays when people go away and focus on the family. But you’re talking about 27 million pages of information from about 300,000 different investors from 187 different countries and territories around the world. So in just three months the traction we’ve gained is unbelievable. So that’s proof positive because, you know, at the end of the day I might have my theories and I might be for all intents and purposes I may be touting my own site but the numbers speak for themselves at the end of the day.

The data says investors are fleeing these other sites; they want quality, they want to be able to get the information and they don’t want to have to deal with the nonsense while they’re doing it. So it’s working very, very well. Something that you should also note, Jim, is that we know there are 10,000 small cap companies across North America. We know we’re not going to have 10,000 companies that are going to sign up and pay for the service, so we’ve actually offered what we call a premium service which is shareholders of companies...let’s say you’re a shareholder of ABC Widgets, and ABC Widgets isn’t a client of Agoracom, but you want to set up a community for ABC Widgets Investors because you’re tired of what’s happening at Yahoo and Stockhouse and these places. You could come to Agoracom, create an ABC Widgets hub, it’s a very simple one-two-three-step process; and what we do is we provide to the highest rated members of ABC Widgets with the authority right from the website to be able to delete offending posts and delete offending members if they continue to break the rules. That’s never, ever been done before.

If you’re familiar with Wikipedia which is now the world’s largest encyclopedia built by individuals around the world, that’s the same thing that we’re doing at Agoracom. It’s a Wiki-powered, small-cap community where you can create a community and you can be in complete control of the information, the editing process and it’s all based on meritocracy. As long as your fellow colleagues have given you a certain number of votes, with a certain rating and you’ve had a certain amount of activity which all builds credibility and being that you’re a credible investor to the rest of the ABC Widget shareholder community then you get those powers. It’s never been done before and that’s because those other sites have always been concerned about less posts, less reading means less advertising revenue; whereas for us, we don’t put any advertising on the site so it doesn’t matter. So we’ve got over 400 of those free communities now set up on Agoracom. Isn’t it fantastic to achieve that in just three months? [35:08]

JIM: I admire you for coming in and cleaning up this business because over the last couple of years we get email from people, and you know, we try to tell people, look, if you’re investing in the small cap sector, once again, our standard mantra is: go to the company’s website to get the information so you go to the horse’s mouth; 2) talk to the company CEO or management rather than going on rumors. And I appreciate the fact, George, that you’ve cleaned this up and are setting a standard because it was something that was lacking on the internet community. As we close, why don’t you give out your website if our listeners would like to go by and check it out.

GEORGE: Absolutely. The address is obviously Agora by the way is the Ancient Greek term for marketplace. So is what we’re setting up as a 21st Century marketplace. Absolutely, your audience should come by and I know and I guarantee that a high percentage of them are just tired of the nonsense going on in other forums. They don’t think they have an alternative. Well, this is the alternative.

It’s free to them, they can set it up, bring everybody over and keep out the riff-raff. And what that does, Jim, it creates – and this is what I want to end off with – it just creates an opportunity where you bring together the brightest minds into one central location –you know, the old saying, two heads are better than one. Well, now you have 500 heads are better than one. Exchanging information back and forth, the pros, the cons because no company doesn’t have any possible cons against it, but brings out the discussion, everyone gets their best investment decision possible and at the end of the day that’s all we’re looking to achieve. It’s a great service and I highly encourage your listeners a shot. [36:59]

JIM: Well, I give you two thumbs up. The name of the website is George, thanks for joining us on the program. Much success and luck with this and thank you for setting a standard.

GEORGE: Thanks very much, Jim. I appreciate being on here and when you talk about setting standards Financial Sense is a fantastic website. I use it. Great information. The Storm Watch section I just think it’s really intuitive. Investors should use that as a starting point and when they want to get into discussion hop over to Agoracom and discuss all of the great information they find at Financial Sense. That’s not a plug, that’s the truth. And I appreciate people who are looking out for the best interests of investors. [37:42]

JIM: Okay, George, I want to thank you for joining us on Other Voices this week and thanks once again for going out there and setting a standard. Hopefully others will follow in your lead.

GEORGE: Thank you. Have a great night.


JOHN: Strategeries. Strategeries. I think I've got this down, Jim. I've been practicing it during the break. It's strategery.

JIM: Strategery.

JOHN: There it is. Okay. We're going to hear about strategery here this time. One of the things that Vitaliy said in the Experts segment on the program today, we were talking about the markets are a lot like volcanoes. For a long time they don't do anything and then all of a sudden go off with a big bang. And that's maybe some of the scenario we're looking at. Based on everything we've been talking about in the first part of the Big Picture here, what are we going to do as far as investment, because obviously, like you said, remember we pointed out that people can make money, they can be in a defensive position and as long as they understand what's going on, they can even prosper in this time.

JIM: Vitaliy was making a reference in his book –he has a chart of the US stock market going back to the beginning of the 20th Century and I have a comment here and I think there’s one thing that's missing out of this chart – is there are long periods of time that the stock market is range bound. For example, 1906 to 1924, the stock market was range bound. It was range bound between 1937 and 1950, again in 1966 and 1982 and January of 2000. A friend, he has since passed on, a dear person, Kennedy Gammage used to run this chart. The very same chart that when the markets are range bound, like for example, 1906 to 1924, what was doing well during that period of time may not have been common equities, but what was doing well was commodities. And remember, John, we had the creation of the Federal Reserve, we had World War I, so commodity prices went up. Then if you take a look at 1937 to 1950, it was also a period that commodities did well, especially going into the war; and then also between 1966 and 1982 when the market was range bound, that was the time to be in commodities. And then fast forward to this decade, what has done well in this decade has been commodities.

So the one thing I think was missing from Vitaliy’s chart in the stock market is when the stock market becomes range bound, especially after a huge bull market (and that's exactly what happened, following the bull market of the 20s the markets were range bound after hitting an all time loan between 1937 and 50 but it was a great time to be in commodities during that period of time. Likewise, the Dow peaked in 1966 and would not surpass that peak until October of 1982. It was range bound during that period of time with a big selloff in 74) but that was also a time to make a lot of money in commodities.

And likewise, if you go to this decade, pull up on your computer a chart of oil –a chart of gold, a chart of corn, a chart of wheat, a chart of natural gas, platinum or any of the grains – I mean if you take a look at the day that we are speaking, John, the CRB Index was up 7 points at 374.25 hitting another all-time record. And if you look at this index and go back to the beginning of this decade where the CRB Index had gotten down to a low of roughly about 183 back in October of 2001, you know, here we are at 374, almost 375. So during this period of time that stocks in general are just kind of going back and forth in a range bound market. I mean if you take a look at the S&P, we surpassed the old record that was reached in March of 2000. We surpassed it last year, I think in October, but then you know, the S&P has fallen since then, so this is what Vitaliy was talking about that in a range bound market. But what has hit new records, gold has hit a new record, silver has hit a new record, the CRB Index has hit a new record. You look across the commodity front, whether you're looking at platinum prices, aluminum prices, a lot of the commodities are really starting to break out because we're in that inflationary era; much as we were between 1906 and the early 1924 and the same thing in the 1937 to 1952, and then once again in 1966 to 1982. So that's the kind of decade we're in. The other important thing if you look at what he was saying in his book, but it's very applicable here is that in these range bound markets, there are three things you want to look at. You want to look at quality because usually in a range bound market, you have economic weakness as we did in many of these periods. You also have turbulent economic markets, so you want quality, you want companies that are well-financed, strong financially. You want growth because if the economy is contracting, the companies that are going to do well are companies that can grow their earnings, increase their profits, increase their dividends and that allows them to not only grow even further, it gives them the ability to buy other companies.

And then a third thing you want to look at is dividend yields because dividends are going to play a very important role in terms of total return. And if you look at Treasuries today, two year Treasury notes under 2%, the 30 year Treasury note in the 3 ½% range. You have negative real interest rates, which is why the commodities are doing well. So this is what happens in range bound markets while the regular stock market is range bound, it's because we're in a bull market in things. And this is something that we have been writing about going back to the beginning of this decade. And if you get to where we are now where you have consumers who are pulling back, they are retrenching because their balance sheet is so over leveraged, consumers are going to have to go back to savings, they are going to have to go back and rebuild their balance sheets, so the period of consumption is coming to an end. So when you're thinking about an investment program, that's why we have emphasized what I call ‘things.’ The basic necessities of life that people have to have. You have to have energy. You have to have gasoline to put in your car, a bus or into a freighter or jet fuel for an airliner. Our transportation system runs on energy. You have to have power plants and electricity to turn on the lights to make industry run. You have to have food. You have to have water. And now, we are finally waking up and realizing we need to rebuild our infrastructure. It's crumbling. And if we don't rebuild our infrastructure, you're going to end up becoming a third world nation. So for more and more politicians there is a growing recognition in the West that we have to do that, whether it's crumbling bridges or levees that fall apart or crowded airports or rail system that's antiquated or a transportation system, everywhere that you look in this country is just crying out the infrastructure is crumbling –whether it's water systems.

So I think this trend that Vitaliy talks about in a range bound market is actually a bull market in things, and so that's why commodities are doing well. That's why the CRB Index on the day you and I are talking John, just hit a new record. That's why oil prices are heading higher in my belief. That's why gold prices are heading higher. And a lot of people think that, well, people are going back to some of the older trends, but you don't want to be in consumer discretionary right now because the consumer is cutting back. Just look what the chain store sales numbers were that are coming out this week showing a lot of the stores weren't meeting their numbers, a lot of them are closing down as a result of that. And I think the play –and I think where people are going to make money –are basic necessities and infrastructure and especially the precious metals as all of these central banks begin to reinflate, especially when the ECB begins its reflation efforts. [46:31]

JOHN: Well, so far, Jim, we've seen the oil prices pull back. They peaked out at a little around a hundred there and they are down to, what did we close on Friday anyway?

JIM: Roughly close to 92 bucks.

JOHN: So 92 bucks. And meanwhile there is a selloff going in the oil stocks and it seems like the market things are on the way down, but you don't agree with that.

JIM: No. And if you listen to these analysts talk about energy going lower because the US economy is slowing down, it really demonstrates ignorance of the global demand environment because people talk about the demand side and especially given the potential for a US recession, and the consequences of a slow down or recession on asset classes.

But, John, contrary to what everybody has been telling you, commodity markets are increasingly reactive to supply side issues because there are two sides of the economic equation. There is the demand, but then there is the supply. And commodity markets are now reacting to restraints in supply. There are supply constraints that are evolving in many key markets around the globe, trends that are long lived in nature. You listen to some of these base metal producers whether it's a Freeport-McMoRan or any of the other companies, it is getting hard to find copper deposits and base metal deposits. This is one of the reasons why the Chinese government is fighting BHP’s take over of Rio Tinto because commodities are scarce and they don't want it concentrated in one supplier.

So everywhere you look, I mentioned in the energy segment that we have a domestic power challenges in China and South Africa combined with weather related supply disruptions in Australia, they are expected to result in a material fall in thermal coal exports. And as a result of that, a lot of these plants in China are going to have to start producing or their output are going to be lowered. Coking coal flooding in Australia has disrupted mine output of coal. Domestic power shortages in China, in South Africa could result in a disruption of output from energy-intensive industries such as aluminum smelting and so we could see some spot shortages there. Also, in platinum and boy I love platinum here and especially some of the up coming platinum juniors; South Africa represent dollars almost 78, almost 90% of the global supply for platinum and these power shortages are going to constrain output. So platinum output is going to be cut back. Steel – China exports, about 69 million metric tons of steel, at least last year; and given the developing constraints and power in the country, export levels from China could contract significantly this year. Iron ore production is decelerating rapidly.

And here is one of greater concern. In fact, I'm probably going to get ready to write my first article this year. I said I wasn't going to write, but I want to talk about something here. A thing of major concern to me and especially as politicians convert corn crop to ethanol, you take a look at soy beans, China accounts for 40% of global import of soy beans and you're going to have bumper crops in soy beans in both Argentina and Brazil if we want to avoid some shortages here. Also, US-planted acreage is going to have to increase materially and hopefully we could see some side effects in increase in production from the effects of La Nina. I know here in Southern California, we've gotten a lot more rain than is usual. So as a result of that, food supplies globally are down dramatically. And we focus on these dumb numbers, these inventory reports which are basically seasonal adjusted computer models. Nobody measures this with a dip stick, but instead of counting inventories, I think a more revealing statistic would be how many day's supply there are because obviously 280 or 290 million barrel in supply today doesn't provide the same amount of energy for the economy because there is more use of it today than, let’s say, seven or eight years ago. [50:38]

JOHN: We probably need to shift the focus towards dividends because if you look at the baby boom generation just starting to retire, a large number of them to begin with; number two, a lot of these people don't have the type of pensions that our moms and dads did. I mean my dad had several by the time he retired from his Air Force career, so dividends are obviously a thing of very big importance. So why don't we shift the conversation in that direction.

JIM: Yeah. And especially give the nature of range bound markets where the stock markets could be up and if you take a look at last year, most of the return came in the first half of the year, and then the markets retreated and then just a very nominal return towards the end of the year with markets up only 5 or 6%. When you take a look at a 5 or 6% return – in a bull market, you're going to get most of your gains from capital appreciation, but in range bound markets, most of your return as it has been historically in the stock market has come from dividends. And the nice thing about dividends, John, is they are tangible. The company sends you a check, you take that check, you spend it, you can deposit it, you can put it in the bank.

And the thing that I'm concerned about is when people retire, it used to be, you know, when I got into this business late 70s, but in the 80s, as Volcker had fought inflation and brought inflation rates down, the standard prescription is oh, you go into retirement, you put about 60% of your portfolio, you convert it into fixed income securities and maybe 40% in equities. You know, that made a lot of sense in the 80s. We were going through a period of disinflation, lower inflation rates. And John, you remember the interest rates that banks were paying. I can remember, you could get 11, 12% on a Jumbo CD in a bank and they'd give you a free toaster. But those days are gone. I'm looking at a table of interest rates here of government securities. A one year T-bill less than 1.9%, a 2 year Treasury note, 1.9%. A three year Treasury note, 3.1%. A five year Treasury note, 2.7%. A 10 year Treasury note, 3.65. And that's before taxes.

And look at the inflation rates that you're seeing in day-to-day living. Look at your statement from your utility, your cable bill, your visits to the doctor, your health insure reference premiums, your food, the gasoline, services, trips to the dentist, dry cleaning, anything that you're looking at today is going up more than the core rate of inflation. And that's why I think it just needs to be reversed in a sense there is no way I would be in fixed income at a time when the headline inflation number is over 4% and the yield on government bonds before taxes is less than the inflation rate. Think about that. Let's say you put your money in a 10 year Treasury note at 3.65. All right? You're going to take a third of that off for federal taxes, which is going to take you down a little over 2%. After taxes, John, that's half the quoted inflation rate. And think of what's happening to the value of your principal each year as inflation erodes against it. That's why I think that dividends or especially blue chip companies are a much more appropriate investment strategy here. [53:54]

JOHN: Okay, if you're going to go in that direction, then, let's give people some pointers on dividends.

JIM: A couple of things I would say here, the nice thing about dividends, they usually come from companies that have mature business models, they are big blue chip companies, they are established. I mean a growth company first starting out going public, they need every dollar that they can to expand and build the business. But once you get to a predictable business that's more on the mature side and a lot of these mature growth companies are that way, they have strong balance sheets, they have brand recognition in the marketplace, just take a look at the Dow 30 industrial stocks, companies like a General Electric or a Johnson &Johnson or a Pfizer or an Eli Lilly or a Coca Cola, Pepsi, a consumer products company like a Procter & Gamble, I could go on and on with just the Dow stocks.

But the most important thing is when you look at these stocks, they have predictable business models, they have high rates of return on capital, which means they have good return on the investments that they make in the business and because they maintain those returns, they are able to increase their dividends. So think of a company that pays a dividend, let's say 2 ½ to 3%. You might think 2 ½ to 3% isn't much, but I'll tell you one thing, 2 ½ to 3% is a lot more attractive than a 2 year Treasury note at 1.9 that never changes, or a 10 year Treasury note at 3.65 because if you invest in a company that has the ability to increase its earnings and its cash flow, it has the ability to increase its dividends. Think of a lot of the Dow companies that have increased their dividends 10% a year. A 10% dividend rate increase, your income is going to double every 7 years. If you have 12 percent dividend increases, your income is going to double around every 5, 5 ½ years. Think about that with the cost of living. You're getting $10,000 a year from your investments. You know, seven years from now with dividend increases, that turns out to be 20,000. That's how you're going to keep up with inflation. [56:08]

JOHN: Right. Well, if we were to carry this out further, could you give some more examples.

JIM: The nice thing about the big, blue chip companies, you know, when you retired, you're probably more safety conscious, you look at the Dow industrials 3M, AIG, American Express, Boeing, Caterpillar, Coca Cola, Disney, Dupont, Exxon, General Electric, Hewlett Packard, Home Depot, IBM, Intel, Johnson & Johnson, McDonald’s, Merck, Microsoft, Pfizer, Procter & Gamble, a good chance these companies are going to be around for a long time unless they are taken over. I mean General Electric is probably one of the oldest companies, one of the oldest members of the Dow that's still here. But if you look at General Electric, it's increased its dividends in this decade close to 10% a year. Just in the last two years alone, the dividend has gone from 25 currents a quarter to 31 cents a quarter.

It's almost a combination between a drug company and a consumer products company because J&J bought Pfizer's consumer products division, but Johnson & Johnson has increased its dividend at over 15% over the last five years. 15% a year, John. That means your income doubled in less than five years. These are just two examples, but I can go right down the list. I could take 3M. It's increased its dividends about 9.2% per year the last five years. You look at a company like AIG. They've increased their dividends 32.6% a year for the last five years. Now, let's take the rule of 72. You take 32.6 of that. That means that in less than two and a quarter years they've doubled their dividend. It was 15 cents a quarter less than a year-and-a-half ago. Now it's 20 cents a quarter.

Take a company like McDonalds, fast foods. They are also competing with Starbucks. Now they are going to add lattes and coffee. If you take a look at their dividend, it's increased at almost 45% a year for the last five years. That's the kind of thing that can keep you even with inflation. You know, I see some of these people on TV, and I used to do a local talk radio show. I used to do the drive-time four-to-five here in San Diego, and there is a couple of shows and they are telling people put your money in bonds. There is no way I'd go in bonds right now at less than 2% with the inflation rate above four, and that inflation rate is probably understated to begin with. [58:38]

JOHN: So why do these people do that? Just out of curiosity. What do you think?

JIM: You get these paradigms and these formulas that people don't even think about. Yeah, that formula worked in the 80s when you had somebody like Paul Volcker at the Fed or what people don't realize is when Greenspan took oar the Fed, he became the Great Inflater. It was just the outcome of Greenspan's inflation found its way into the stock market, and so that gave us the new paradigm economy, but it was nothing but an asset bubble. But nonetheless, it was in a period when commodity prices were low, so inflation was finding its way in the financial markets rather than in the real economy where we're experiencing disinflation with the cost of goods coming down as a result of the globalization of manufacturing, which increased output, which brought prices down. So people were fooled into thinking that there was no inflation when actually there was. You take a look at what a house cost in, let's say, the year 2000 before this real estate boom, compare that to what a house cost in 1990 or what a house cost in 1980; you take a look at what you're paying for a car today versus what you paid for it 10 years ago or 20 years ago. So we had inflation, but these are the formulas that they come up with because they don't understand the macro environment that we're operating in. Am I saying that things aren't going to fluctuate? No. I'm not saying that. All of these stocks in the Dow fluctuate, but more importantly, if you focus on the business, you ask yourself, okay, the price is going up and down, but how well is the business doing? And if the business is increasing its profits, its increasing as a result of that, the return on investment is growing or is very high, it's in double digits and they are increasing their dividends. Dividends tell you more about the underlying fundamentals of a business than anything else because the board of directors are reluctant to increase the dividend if they are not actually making the money because they are very reluctant to cut it because you've got hell to pay with your shareholders.

So when you see somebody like McDonald’s increase its dividends 45% a year or a Johnson & Johnson increase its dividends at 15% a year or a Procter & Gamble increase its dividends at 10% a year, that tells us more about the business and soundness of the company than earnings. Because earnings can always be manipulated. Dividends can't. And that's what you need to focus on because all you care about is will the business be around? Will they continue to make money? Will they be able to pay that dividend, and more importantly, if I'm getting a dollar a share in dividends today, where is that dividend going to be five years from now, seven years from now or 10 years from now when the cost of living, as you get older, continues to go up despite the fact that you may be doing less. Trips to the doctor cost more. Prescription pills cost more. You could be in a situation where one spouse ends up in a retirement home. Even the cost of travel, country club news, all of those kind of things keep going up. You need to ask yourself, how are you going to pay for that. Do you have a pension that's going to go up at above the inflation rate each year after taxes and keep you even? I don't think so. And that's why I think you have to change and think differently as Vitaliy was talking about that in the second hour, the Special Guest segment, in a range bound market. I think what he missed is in those range bound markets, it's a bull market in commodities. [62:02]

JOHN: You're listening to the Financial Sense Newshour at Coming up next, we're going to take your calls on the Q-lines right after this.

Part 3


JOHN: Well, welcome back to the last part of the Financial Sense Newshour for today. And we're going to do the Q-lines in just a second, but I do need to do some business. First of all, by popular demand, threats and other related things, we have now created a new page on the website of the FSN Follies, so all of the Andy Looney's we have done to date and all of the spoof spots which we have done are now on a separate page for your downloading at a convenient $100 a pop. We have to make money somehow. No. Actually, it's for free, but anyway, that one’s all of the way up there. So that's the first thing we needed to tell them about the website and we have some other changes, Jim. What's up with that?

JIM: Recently, we added a new Resource page to our website. It's called the Economy. We've got articles from people, leading economists, and we just added this week a whole page on economic charts on banking, the consumer, credit quality, the Fed Flow of Funds report, financial, GDP industry, labor, price, real estate and trade. So if you haven’t visited the Economy page, check it out. A lot of leading articles there, economic indicators, resources, global economic numbers on GDP and inflation rates, central bank rates, money supply, columns, currencies, there's even an inflation adjustor.

And another change that we've made to the website is we've changed the outlook and look of our Energy page. A number of things that we've got on there, we have columns, we have exclusives, we have a whole Matt Simmons section, energy, CPI. We've got rig counts both around the country, the United States, we have a whole list of information on the oil markets, commodity spot prices of energy, not only articles but also key charts and articles as well. So it's just part of our ongoing evolution as we revamp the website. The next thing we're working on is our gold sector, and boy, do we have some great things coming in that sector. So if you want to keep up on energy, take a look at the Energy page and if you want to follow-up on the economy, go to our Economy section under Resources as we put more effort in here to keep you informed. [2:29]

JOHN: It's time to go to the Q-lines. The Q-line is open 24 hour a day to record your questions for the program. Please give us your name. First name is fine. And the location from which you were calling. We like to know where people are. The toll free number, this is for the US and Canada, is 800-794-6480. That number does work from the rest of the world, but you have to pay whatever your international rates are. Please remember as we answer your questions here and try to deal with the nonsense you throw at us as we throw nonsense back at you, remember that radio show content is for information and educational purposes only and should not be considered as any kind of a solicitation or offer to purchase or sell securities and our responses here are based on the personal opinions of Jim Puplava. We can't take into account your listener suitability, objective or risk tolerance because we don't know enough about you and as such, Financial Sense Newshour is not liable to anyone for financial losses that result from investing in any company's profile here on the program. Always seek some really good advice from qualified investment counselors, etc, before you make some decisions. Once again, 800-794-6480.

The first thing here is an email from a Mr. Yew in London, UK. He says:

John, in the third hour, you keep referring to Maalox, but of course in the UK there is no such product. [JOHN: I wonder if that means they are all walking around with heart burn. Oh, no. He says here] I was confused for several months. The big brand here is Zantac. [JOHN: Well, we have that here too, Mr. Yew] So you might refer to Zantac for UK listeners in future shows.

Maalox is an antacid very much similar to I think a bunch of others, usually some kind of hydroxide type of thing which relieves acid in the stomach where as Zantac --

JIM: How about Tums?

JOHN: Tums is an acid reliever as well. I don't know if they have got it in the UK or not, but Zantac is a blocker. That's a difference between the two, so -- but they both basically do the same thing if you're engaged in investment.

All right. Let's go to the Q-lines. First one is a gentleman from Washington.

This is a contrarian banker from Washington. And as a contrarian, I don't think I've ever seen a better time to get bullish on the stock market. The past few days I've been scouring newspapers, magazines, your site, listening into various financial radio shows and I can't find a raging bull anywhere. Even Harry Dent who had long been calling for the Dow to reach 30 to 40,000 by the end of the decade is now saying the markets have likely topped in 2007. Yet according to many valuation models, the market is a better bargain now than it has been in almost 20 years. I think the Dow could rocket 40 to 50% in the next 12 to 18 months. But given that corporate earnings has likely peaked we will need to see expansions in PE ratios, something we haven't seen yet this decade in order to see stock market gains going forward. Do you think we will finally see multiple expansion and if so, what will be the catalyst?

JIM: I like the way you're thinking. Thursday night, I usually take home a pile at night that's almost half a foot thick, and after going through everything, I said, my goodness. There wasn't one article I read Thursday night that was positive or bullish. I mean the pessimism on the meter reader is probably over to the extreme. As far as what a catalyst would be, I think would be global central bank, inflation, the ECB starts to cut, they would be acting like they are tough, but there was a first indication here, especially if their economy goes into the tank as this decoupling theory start to fall apart.

The other factor is if you take a look at and one of the catalysts could be sovereign wealth funds. If you look at fall in the dollar, which has lost, what, maybe 30% against major currencies, for the sovereign wealth funds that are generating hundreds and hundreds and hundreds of billions of dollars, they are out shopping the markets because a lot of these equities are cheap, especially the blue chip growth companies. So I think a catalyst could be sovereign wealths and finally all of the central banks start dancing to the same tune. [6:34]

Hey, you guys, how are you doing. This is Max from Los Angeles. I've got a question. I am 30 years old and I started aggressively saving in my 401(k)plan, but I started looking at my options and I've got this basic small cap, mid cap, large cap international which I have no interest in, so I'm wondering if the 401(k) plan is even worth it. I'm kind of considering stopping the 401(k) all together, taking the 30% taxes, putting it in my taxable account and then investing in gold, silver, commodities, so on and so forth. Or should I stay, keep my money in a bond fund or whatever, lose 10% to inflation but then move everything out when I switch jobs. The other option is to sort of split the difference, but I'm kind of wondering should I put more in the 401(k) versus putting more in the taxable account, so if you could give me some insight on 401(k)s and how this should go forward, I'd appreciate it. Thanks.

JIM: Max, you're wrestling with a dilemma that a lot of people have with their retirement plan. Their 401(k) mutual funds were designed for the 80s and 90s bull market. You find very few international funds. You don't find sector funds like energy. You have nothing in the area of commodities, CRB or ETFs that allows you to participate. I just can't see staying in fixed income. I would take the money out. I think you're going to get killed if your choices are bond funds, although I do think that stock prices can go up nominally with inflation, especially if they reflate as large as I think they are going to do in the next two years. But I would be more prone to go into commodities. If you listen to the previous segment on Strategery where we talked about these range bound markets and also the second hour interview with Vitaliy Katsenelson when we talked about these range bound markets, the other side of these range bound markets is they are bull markets in commodities. That's where the bull market is right now. [8:29]

Hello, is that Johnson & Johnson? Yes. I'd like to order a case of your finest Maalox and have it delivered to one Mr. Benjamin Bernanke in Washington D.C. He's going to need it over the weeks and months coming ahead. Oh I'm sorry? What's that? I've got the wrong J&J? Oh, I'm sorry. Could you transfer me over to Jim and John, please. Thank you very much.
Hello, Jim and John. This is Larry in Evergreen, Colorado. I noticed –this is a little bit blasphemous –but I was watching the Kudlow program on CNBC and they were discussing monetary policy and such and they were looking at M1, which has been flat to down trending over the last couple of years and which basically is a deflationary indicator. And I know you prefer to look at M3 courtesy of John Williams and that obviously has been expanding in double digit rates in the last couple of years, which certainly would be inflationary. So we have a bit of a dilemma there. I wonder if you might take a few minutes to explain that a little bit further for us monetary neophytes out here. What's the difference really between M1 and M3 and has there been a period in monetary history where the two have diverged like they have over the past couple of years? And what do you think that means for the economy in relation to the uncharted waters that we’re in with the global worldwide global debt crisis and the derivatives overhang and all of the other good stuff going on in the world? So appreciate it. Thanks very much and if I can put in a quote a couple of days ahead of Super Tuesday, go Ron Paul. Thanks guys. Bye.

JIM: Let's take a look at M1 which is a measure of monetary aggregates. It's probably the most narrowly defined measure of the money supply consisting of the most liquid forms of money like currency and checking deposits. If you go to M2, it's actually growing and that is the same components of M1. Add to that household savings deposits, time deposits and retail money market funds. Let me just look at a graph here because they still report this, that's been on an upwards slope. In fact, it just moved considerably, almost by 100 billion in the last month and that's been going up. And then M3, that's what we call high powered money. That's all of the components of M1 and M2, but it consists of institutional money funds, managed liabilities, large time deposits, repo agreements, that's where the Fed injects money into the banking system and that's why I think that's a better measure of inflation and what's going on. It's high powered money that drives markets, it drives asset bubbles. [11:18]

Hi, Jim and John. Great show. Joe in Connecticut. Question. My son is about a year old and he's got $10,000 that I put in a Uniform Gift to Minors account. I'm pondering how to split the money up. Buying some gold juniors or just putting it into things like regular gold funds. It's not a lot of money, but I'm just trying to figure out how best to divide it up. Your advice is greatly appreciated. Thank you much.

JIM: Joe, you mention it isn't a lot of money. I'd probably stick to a no-load mutual fund. I'd probably put half in energy and half in gold. That way you've got a lot of diversification with a mutual fund on a smaller amount of money than you would trying to pick maybe a junior or two.

Hello, gentlemen. This is Greg in Yuma. I got ripped off this week. The second largest holding in my silver portfolio is Silver Wheaton and about three days before Goldcorp announced that it was going to be unloading all of their Silver Wheaton stock on the market, the price of Silver Wheaton began to drop while the price of silver continued to rise. And then on Thursday, the announcement came and the underwriters got this at a dollar below the market price and that was 4 dollars below where the stock was selling earlier. So I'm wondering, in your opinion, did the underwriters leak this information into the market to get a lower price, or am I just being paranoid? Thank you.

JIM: The underwriters in order to do this are probably going to get it at a lower price. It's very typical that you see in offerings and especially one this large and significant. I happen to like the fact that Goldcorp is now out of Silver Wheaton because now it can stand on its own as kind of like a silver royalty. It's not just Silver Wheaton. You've got to understand that silver, on the Friday we are talking, silver is sat over $17 an ounce, and I've got a screen up here of silver producers, silver juniors, a lot of these guys start dropping like lead. They are either being shorted, I mean you take a look at the stellar stand outs, last year Silver Standard down 8% this year, Silver Wheaton down 10, 11%, even Mag Silver down 12%, Esperanza down 8, even a lot of the silver producers, so like I said, this is a Rip Van Winkle market, so don't be upset and paranoid about Silver Wheaton. It's happened to all of the silver stocks. [13:36]

JOHN: We got an interesting email from Phillip. He says:

Dr. Kenneth Deffeyes, Professor Emeritus of Princeton proved in his book Peak Oil the world oil peaked in November 2005. A couple of his ex-students at Princeton are now VPs at Aramco and they told him that the Saudis are over reporting production. Their Anwar [phon.] field is in serious decline with the Northern one third under water from the water flood. Matt Simmons of Houston was sent by the CIA to the largest hundred oil fields and he reports 705 are in serious decline.

So that came out of Phillip.

JIM: That goes back to something we covered in the energy session where President Bush on ABC said, you know, don't ask the Saudis to do something they may not be capable of, so – [14:20]

Hello. This is Gary calling from Zurich, Switzerland. I had a couple of questions regarding the Swiss franc. I read somewhere, I don't recall the exact website I saw this, but that the money supply in Switzerland was quite low compared to the other European countries and the US. Could you confirm that? And also the Swiss franc has appreciated a lot especially as the dollar [inaudible], do you foresee that trend continuing in the future? Thank you very much.

JIM: Gary, that is true. The M3 growth rate in money supply in Switzerland is probably the lowest. It's 1.78% year over year, so I can confirm that. That's why I have a big screen on my Bloomberg that's got year-over-year money supply changes for most of the major countries around the world. Most of them are going up double digits, but that's certainly not the case in Switzerland. It's growing at less than 2%. [15:14]

Hi, Jim and John. This is Gary from Michigan. I want to thank you for ruining every Saturday morning for the last two years. But it's still been fun. Now, here is the question. Bullion ETF, GLD, SLV, fact or fiction, gold storage or paper? It would explain a lot about how my stocks have been doing. Thank you very much.

JIM: Gary, I think the gold ETFs are more paper than they are bullion. They are trading vehicles. [15:45]

Hi, guys. It's John, your loyal listener in Austin, Texas with a recommendation and a question. Jim, I know you and your staff like a good movie from time to time, so I'm recommending to you the movie called There Will Be Blood. This thing is set in the early 1900s, late 1800s, early 1900s and it's about gold mining and then it transitions over into the oil business in the early 1900s and it's an excellent depiction of what the oil business was like in the early days. But more than that, this movie, I'm telling you, it's possessed by the character that Daniel Day Lewis plays and I think he's possessed by this character. He owns this movie, and you'd have to go to a lot of movies to see one better than this and to see a performance to top this one. It sticks with you for a good while. That's my recommendation.
My question is I know you've talked about how this coming third phase of the precious metals market is going to be like the internet dotcom blow off and I hold for several years now a number of the mid-tier gold and silver producers that you talk about on your program from time to time and I've done real well with them. So as we're getting closer to this third phase, my thinking is that when the average investor, the unwashed gold and silver speculator, gets into this market, my thinking is that they are not going to get into the Canadian exchange, junior gold and silver producers and explorers. They are going to stick with the American exchanges, so wouldn't it make sense that that final blow off stage to be in the handful of the five or ten good quality junior producers in gold and silver with one or two exploration juniors that are listed on the American exchanges. Because my thinking is that's where the people who are not sophisticated enough to go to the Canadian exchanges are going to be. Does that make sense to you? I'd like your feedback on that.

JIM: John, what generally happens when this takes off, yeah, they will go on to the big large cap stocks, the Newmonts, those are easy, but you know, a lot of the Canadian companies have listings on the Amex, so you can buy a lot of these juniors on the AMEX today. So I think they will be going to that. And more importantly, I think you'll see large inflows into mutual funds where people say, “look, I don't know how to pick juniors or which stock, but you know what, the gold market is doing real well, so I'll just go into a gold fund.” As that money comes in to these gold funds, yes, they will buy the large cap stocks, but increasingly they are going to go and work their way further down the food chain and that includes buying juniors. That’s because I know we have been talking to companies and putting them in touch with large portfolio managers and a lot of these big funds are looking for some of the small cap stories in the juniors because they know that's where the value is. So one way that juniors can go up is they are listed on our exchange on the Amex and another way they can go up is through mutual fund investing. [18:59]

Hi. John in Silicon Valley. Last week there was some reservations expressed about oil producers and I just wondered what your feelings are about service and equipment companies that provide capital equipment and services for the oil producers. Thanks a lot. Sure enjoy your show. You've helped me out a lot.

JIM: You know, I like the oil service companies because not only are they going to aid the IOCs or international oil companies, but also they are aiding the NOCs or the national oil companies. If you look at OPEC countries or if you look at Russia, what they've been doing is inviting some of the large oil service companies into their country and they'll pay them a fee, and the thing that they like about it is then they don't have to share the revenue; whereas if you invite a large cap, let's say an Exxon Mobil or a British Petroleum in your country, you know, they want to share in the output in terms of bringing the oil to the markets. So oil service companies, you take a look at anywhere you look in the oil service sector, these companies are booked out for the next three to five years and the oil service sector is one of my favorite parts right now. [20:10]

Hi, Jim. Chris calling from Canada. Great show. Listen to it every weekend. The question I have is about 10 year bonds. You were talking about in fact in one of the articles The Last Asset Bubble by Brian Pretti and he talked about how lowering interests rates is going to be affecting the 10 year yields and I’m just not clued in when it comes to bonds and was wondering if you could explain how when the Fed raises interest rates how it pushes down the yield curve and how this relates to the upcoming depression or is it going to help out the banks. Thanks a lot and keep up the great work.

JIM: When the Fed cuts interest rates, they impact the short term end of the yield curve and what they do is they steepen the yield curve and what banks need for incentives to lend is a steepening yield curve. They need a big spread between short term interest rates and long term interest rates, but the bond market or the yield on a 10 year Treasury note is determined by the market. And right now, the 10 year yield is factored in in terms of pricing of fixed rate mortgages, so that's when the 10 yield comes in, but it's more determined by the market. Right now, the Fed has been cutting interest rates and trying to steepen the curve. But the long end of the curve, the 10 year note has also been falling along with short term interest rates. And think more of that is a flight to safety as the mortgage bonds, the CDOs, the subprime market, as this stuff starts to implode, a huge vast sum of money came into the Treasury market and drove down bond yields. But it's the 10 year note determined by the market that determines long term fixed rate mortgages. [21:58]

Hi, Andrew calling from Calgary, Alberta. I appreciate the show. Thanks. Jim, could you provide the money supply growth rate for the Swiss franc and Switzerland, please. Also is the Swiss franc becoming less of a flight to safety with money supply printing that's going on, wondering what your thoughts are.

JIM: Andrew, I answered this question in an earlier call, but the Swiss money supply rate is less than 2%. It's actually 1.7%. Switzerland is still probably seen as a safe haven given the nature and structure of the country. It's probably less of a safe haven because the Swiss don't back their gold to the same extent that they used to. In fact, the Swiss central bank has been selling off gold reserves, but their money supply growth rate is less than 2% right now. [22:52]

Hola, Jim and John. This is Richard calling from Buenos Aires, Argentina. Jim, we're all waiting for the value of gold mining stocks, especially juniors to catch up with the increasing price of gold. But what happens when we peak in this great gold bull market and descend into the great bear market for gold? Will the price of gold decline faster or slower than the declining price of the gold juniors and gold mining stocks?

JIM: If you take a look at the last bull market, you got to the final blow-off stage, actually the bullion did better than the stocks and I'm talking about the period where you saw gold go from like 600 to 650 very quickly and silver go from the 20s to the 50s, so bullion towards the end of that market will go much faster. As we head into the great bear market, it will start with the fall in bullion prices and then the stocks which are leveraged to the price of bullion will fall much faster. [23:52]

Hi Jim and gang. I love your show. It's Mike from New York city. I have to admit that I'm starting to depart from your analysis on this Oreo cookie thing. It's starting to sound like a Nabisco commercial rather than sound financial analysis. I mean Q2, Q3, it's going to become apparent to everybody that this trillion dollar securitization business has gone away and it's never coming back. So as soon as that becomes apparent to everybody, they are going to sell the financial part. So I don't understand where Q2 and Q3 get better where we have this creamy filling you're talking about. Maybe you could enlighten me. Thanks. Love the show.

JIM: You know where it's coming from, and we've always tried to distinguish here, Mike, is when central banks inflate, the money is going to go somewhere. It's going to go into real things like commodities which is what we're seeing now with a break out in a new record high in the CRB Index on this Friday, or it can go into assets and which is what it did in the late 80s and 90s, it went into the stock market. Now it's going into commodities. So I'm looking at a screen right now. You've got Russian money supply 44%, India is 23%, Australia is 23%, Brazil is 18, Denmark is 17, China is 17%. You know, that money just doesn't go, Mike, into a mattress. It goes somewhere, and maybe securitization will go by the way side for a while and people get more risk adverse which is what is happening right now, and you are going to see a slowdown in lending, but remember, from a Keynesian perspective, everybody focuses on consumption and everybody talks about the consumer, but that's not what drives an economy. What drives an economy is production and we've talked about that, the misleading figures and GDP where we only report finished goods, but we don't report what is in process so manufacturing accounts for a larger share, and if you look at what manufacturing accounts for in terms of our exports and compare that to, let's say, the real estate market.

And the other thing you have to bear in mind, all of this money printing that we're talking about that, you're talking about sovereign wealth funds that are going to get to the size of nearly 12, 15 trillion dollars and you know what? Those sovereign wealth funds are buying stocks right now and are going to continue to buy more stocks. So that's what gives us the creamy filling. When you see interest rates get down to a lower level, you'll see the stimulus package kick in for a month or two. There is going to be a sigh of relief and then it's going to be happy days are here again, only to have the very nature of the problem of money printing come back to bite us at the end of the year. So I'm still sticking to it. [26:51]

Hi, Jim and John, this is Kevin from DC. I have three things. First, thanks for the professionally done audio podcast. Week after week, you guys deliver something that's educational and entertaining and it's a real public service, so thanks very much for that. The second one is a little inflation story. People have been phoning in about the cost of food and stuff. I recently went to McDonalds and I asked the lady to ring up the price of my traditional meal of 35 years ago, 35 years ago I was young and I used to eat six cheese burgers, two Big Macs, large fries, drink and one or two Apple pies. I used to do that three times a week. It cost me 2.85 because back then a burger was 22 cents, a cheese burger was 25, the double cheese was 55. The total that she rang up for that same $2.85 meal just last week was $19.50, almost a factor of seven, which 1 divided by 7 is 14%. In purchasing power terms, that means my dollar has lost 86% of its value over 35 years. Just as maybe a point of curiosity after eating all of those McDonalds burgers my whole life, I'm 55 now, I've had the good fortune that I get my heart scanned for internal stuff every five years or something, and all of my arteries are squeaky clean. I scored zero on 48 different tests that the computer gives me. So, you know, I don't know what that means in terms of McDonald’s burgers hurting me or not, but, you know, I got lucky I guess.
Second is the response to Al from Jefferson City of a call on February 2nd show. He was wanting a book on the British pound currency that lost 80% of its value. The book that comes closest in my memory is one by Nathan Lewis called Gold: The Once and Future Money. It talks about the debasement of currencies. Basically, the concept is governments spend too much and then they debase their currencies to pay their debts. Primary causes of over spending typically are war and imperialism, which is how the British pound lost its dominance and how the US dollar came to dominance and might lose it again. Thanks very much for the show. Just a superb job.

JIM: Hey, Kevin, thanks for bringing that to our attention. So for the gentleman that called in on the British currency Nathan Lewis Gold: The Once and Future Money. [29:28]

Hey, Jim, this is Mara from North Carolina. I don't mean to be monopolizing with my restaurant stories, but I have another one that I thought you'd be interested in because I've just been investing in the sector for 15 months or so and I remember that people always say –people like you and Doug Casey – that there will be some clue when the mania is heading our way like everybody is talking about that at the water cooler at work.
Well, I happen to be out at another restaurant last week, and this time I always find myself grabbing a quick meal between errands, so I was able to eavesdrop on the only other table that was engaged in the back room, and all of a sudden I heard one of the people say “hey, what do you think about gold as an investment?” So the first person said you need to go buy gold and don't worry about the price. The second person said she wanted to buy gold for her brother's wedding but the prices were too high, so she waited until the prices dropped down a little bit and she called her jeweler and put in her order. The interesting thing was those two people were Indian. Another person made a comment. He said a lot of people are talking about that gold, so it's really too late to get into the market; and he was American. It was killing me because I just wanted to go right over and sit and talk to them and tell them to listen to your show, but I thought the Indians were a little more savvy than the American. Take care. I've been enjoying the show lately.

JIM: Mara, I think most people outside of the United States are more sophisticated when it comes to monetary matters and especially gold where whether you're in the Middle East, Europe or in Asia, or even Latin America gold is seen as real money because they've gone through these hyperinflations and these turmoils with these currencies, so yeah, that's an interesting point that you bring up. [31:03]

Hello, Jim and John. My name is Andy and I'm calling from Australia. A few months ago you had Peter Schiff on the program and there was a debate between Jim and Peter about the Euro. Peter was arguing for a collapse in the dollar to benefit the euro, while Jim expected the Europeans to stop devaluing their currency in response to the devaluation of the dollar. I had a discussion with a European banker recently and he pointed out that the European central bank is different from the Fed in its mandate and mission. The Federal Reserve has a dual mandate to sustain economic growth and keep prices stable. The European central bank has only one mandate to keep inflation low. Therefore the European central bank truly does not have the freedom to devalue the Euro while the inflation figures are at a 10 year high. I had a question for Jim. If the ECB refuses to devalue the euro – as they have done, so far – how does that impact your hyperinflation forecast? It just seems to me that it would be difficult for the Fed to hyperinflate the dollar while the Euro remains a strong currency. Thank you and have a good day.

JIM: Andy, what I was commenting to Peter at that time is that if you can remember the large cash injection that the European central bank was injecting into their system when the subprime crisis first hit last August, it impacted Europe more so than what was happening here. And the central bank has these policy targets, but they've never met them. The inflation rate is running much higher than their targeted grade. The money supply growth in Europe has been running between 11 and 12% a year, so they are not doing a very good job. And remember in 2001 when we were heading into a recession, the Fed was the first to start slashing interest rates, the ECB said “no, we're not going to do it” and they were talking tough pretty much as they have in the last six months. Well, you know what? Within six months they changed their tune and they started slashing interest rates. And if you listen to what Trichet was saying this week, he's already indicating and prepping the market that he's ready to cut. But inflation rates and money supply go hand in hand and you have double digit money supply growth in Europe right now. [33:18]

Hi, Jim and John, this is Howard from Montreal, Quebec. While this may have been answered in the final installments of the Great Depression series, just in case, can you indicate your best guess –and I use that term as suggested very wisely by Dick Davis – as to what might happen to good dividend stocks from now until we reach the hyperinflationary depression. Would now be a good entry point for these stocks, or should I wait until after the chocolate top has been eaten off the Oreo cookie? Thanks for everything.

JIM: You know, Howard, I like a lot of these companies. You know, some of the companies that we talked about in our Big Picture segment on strategerey, especially all of the Dow stocks. I think they have become very attractively priced here. I see so much pessimism right now. I mean we've gone from almost 180 degrees from euphoria to pessimism and a lot of these stocks I still think are cheap. I would be buying them here in the next couple of months because, you know, in that middle section, I think they are going to get higher. How would they do with inflation? My best inflation assets are commodities. They are hard assets, but also you can buy the stocks of many of these companies. An example I would give you is a hard asset commodity company which is BHP Billington. They are into oil, they are into iron or, they are into uranium and about BHP has increased its dividend 28% a year, over 28% a year for the last five years. So you're participating with commodity inflation with one of the most profitable companies in that sector. [34:55]

With gold and silver becoming increasingly known to individuals and government as being safe and secure in the financial world of uncertainty and unrest, do you anticipate governments carrying out the same plan as what happened in the days of Hoover and Roosevelt where I believe it became illegal to own these precious metals? Could confiscation by government of these metals by government become a reality? Please address on your program. Thank you.

JIM: Could they confiscate them again? Sure. Governments have been known to do that in the past and we have a history of it, but I don't think you're going to see a compliant America like you did in the 30s. In fact, contrary to popular opinion, a lot of Americans didn't turn their gold in, in defiance of the government because they knew what Roosevelt was up to. You know, if anything, it would probably be more practical for them if they were going to confiscate it, they would probably take the storage or the gold and silver in the ETFs. I mean if you want to get a large amount of gold, that would be the first place to go rather than go door to door and try to get somebody who has an ounce or two of silver or gold. One thing they might do is to discourage it because I think there would be an outcry from the public what they might do is call you a gold profiteer and pass sort of a punitive capital gains tax, so that's just a number of scenarios I can see unfold. [36:31]

Hey, Jim and John, this is Phillip from Santa Clara. One of the Q-callers for the weekend of February 2 were asking about a mutual fund that would invest in small cap and minor gold companies and you suggested Tocqueville gold funds. I own Tocqueville gold fund, but I also want another fund. US Global Investors World Precious Metals fund (UNWPX) which has about 40% of its holdings now in small and micro gold miners. The break up is 28 for small and 15 for microcap companies and in the case of Tocqueville gold funds the numbers are 32% for small and micro taken together with the break out of 25 ½, and 6 ½ small and micro respectively. So that is the information I wanted to give you.
Now, I have a question regarding consumer demand for gold in India. I'm from India and I'm hearing information anecdotally that people have started selling gold. Do you have any information that points lower consumer demand for gold in India. My own feeling is that gold in India is sold in terms of rupees per ten grams and when gold hits $800 an ounce, it's crossed the magical number of 10,000 rupees but in grams. So the five figure might have spooked a few people thinking that gold has gone too high and maybe a few people sold. Even then I would think that the number of people selling gold would probably be a lot less. But it's kind of a probably made up of anecdotally people think that a lot of things are going on. So I want to know: Do you have any hard information about consumer demand for gold in India? Thank you very much.

JIM: You know, Phillip, I will have shortly, I think it's March, Jeff Christian of the CPM Group will be publishing his annual Gold Book, and that's coming out. The information that I have shows just the opposite. In fact, gold is being – it's taking on different forms of purchase today. People are going more away from jewelry, they are going to coins, they are going to bars and also there is talk of an ETF, so it seems to me the ownership and the ways to own it are broadening, not contracting. That would indicate to me that demand is still rising. [39:01]

Hi, my name is Angela. I'm calling from California. I wanted to ask about Swiss bonds because I had called Evertrade and they said they only sold Swiss bonds and then I called another brokerage and they said they only sold Swiss bonds and not T-bills. And would Swiss bonds be a good option to put cash in. And also there was an article by Gary North on your site. The title of the article I was talking about that is by Gary North, What Will You Do With Your Gold. If you could explain that article in simple layman's terms, that would be good for me. But it was over the weekend that I saw it which would have been February 2nd. And I wasn't sure if his article was being sarcastic because he said “well, what good would gold be,” or something like that. Maybe you could look at that article and then address it for Chris Waseck [phon.], then the other one, the one about the Swiss bonds for Bob Chapman. Thanks a lot.

JIM: You know what, I don't like Swiss government bonds at this point. I mean the interest rates are way too low given the inflation rate. You're earning a rate of return that's less than the going inflation rate, so you have negative interest rates, real interest rates. And then the other thing is if you wanting to into Switzerland, I suppose you're looking at the currency as a currency, in other words, a stronger currency against other currencies that are depreciating. And my view is why go into a currency when all currencies are depreciating in terms of gold. Go in the ultimate currency, which is gold and silver. And you know what, I can't respond because I haven't read Gary North's article, so I'll try to read it and hopefully I'll remember and we'll talk about it next week or if I don't, remind me. But once again, my position is all currencies are deflating. You know, I would rather be in gold than another currency given what I see going around the world. [41:05]

Hello, Jim. This is Kevin from Illinois. Good show. Love to listening to it every weekend. I've got a couple of quick comments and then a question. Number one, I know you've reiterated this book for many, I've read it several times in the past six months, What Has The Government Done With Our Money. That book crystallized so many thoughts and potential outcomes with our currency.
Secondly, there was a caller several weeks ago questioning the short sales in the company North American Palladium, symbol PAL. I think you'd recommended to hold, when the sellers are selling and buy and you’ll see what can happen with this company when people are buying. The short sellers, I think, took a little bit of a blow this last couple of weeks. Lastly, my question, Jim, several weeks if not months ago, you had discussed the scenario related to the potential changing of currency, you know, once we get to a hyperinflationary stage where we need essentially a new currency like the Amero. My question is: What's do you think would happen with gold and that's not only when we do get in new currency; and secondly, under that scenario, do you think the government would want to confiscate gold from its citizens like it's done in the past? Great show. Thank you very much.

JIM: The history has been when people start turning to gold, it's a reflection on the currency and government policy and the government tries to block that from happening. One of the reasons Roosevelt confiscated gold in the 30s is the currency was tied to gold, at least internationally. So in order to inflate the money supply, Roosevelt had to get more gold to back up the currency, which was the reason for confiscation of gold. Could they do it again? Sure. But I think if they were to do it, they would probably do a number of things. If you wanted to get a large amount of gold because remember, when they told people to turn in their gold in the 30s, a lot of people didn't do it because people knew what was happening. So if they wanted to do it, the best way to do it is just confiscate the gold held by the ETFs and then pass a punitive capital gains or some kind of tax on ownership or selling gold. [43:25]

Hey, Jim and John. Great show. Calling from Toronto, Ontario. Listen to it every weekend. Got an idea for someone you can interview, it’s Bill Cara of I believe his book is coming out next week called Lessons From A Trader Wizard. I think it would be a great interview. Keep up the good work.

JIM: We'll take a look at it. I go to the book store every single weekend and peruse books for people that we're looking for to get people on the show, so I'll take a look at that. [43:57]

Hi, Jim and John. David calling from Chicago. Got up early today with my wife, went down and voted for Ron Paul. So he got two votes in this primary in Chicago anyway. The reason I'm calling you is a nice posting on the energy blog today regarding I guess an interview with Charles Maxwell and I guess it was published in about peak oil –a very interesting commentary, and I was wondering if it would be possible if you could get Charles Maxwell on as a guest expert. It looks like he has some pretty good ideas. Thanks.

JIM: You know, David, there is no way we're going to get Maxwell. I wanted him to join Matt Simmons and Robert Hirsch and Jeff Rubin, but he wants $15,000 to speak for 15, 20 minutes. So we don't have any advertising on Financial Sense, so I'm not going to pay Charlie 15 Grand to get him on the program. I'd like to have him on the program, but he charges and we just simply couldn't afford to do that. [44:57]

Hey, Jim. Dave from San Diego. I want to ask you about Uranium exploration companies, they have been pretty weak the past year, and I'm just wondering if it's a good time to start taking positions and also any chance you could get Richard Russell back on for an interview. I’d really love to hear from him. Thanks a lot.

JIM: You know, Dave, I'd love to get Richard on the program because we have a lot in common in our views on gold and also, at least, we used to share the same doctor. Richard is quite shy. He doesn't like to do a lot of public speaking or get on programs. I had him on once with his good friend the late Kennedy Gammage and the way we got him on was through Kennedy, so he's quite shy in public, and so it's probably unlikely. [45:40]

Chow, Jim and John, this is calling Lan from Hanoi, Vietnam. To prepare your listeners for the future, I've often heard you recommend investing in precious metals, agriculture, energy and infrastructure. But Jim, I have never heard you suggest investing in education. Is it because you envision a future where those who are successful will be only mostly ignorant people, well, wearing lots of gold jewelry and driving energy efficient tractors. Thanks for your time.

JIM: You know, Lan, the whole purpose of the Financial Sense website and the Financial Sense radio program is education. I'm a big believer in education. I continually read books. I continually take courses. We require our staff to upgrade their education. I believe strongly in education. I'm not a big believer in public education. I think it has failed us, at least here in the US. I'd be more inclined towards private education where they actually teach people how to think. [46:45]

Hello. This is Juan from Spain. You are predicting a depression in 2010 largely due to the over expansion of the money supply in the past 30 years or so. I agree with this. However, my question is why is the customary Fed strategy of reinflating the economy by printing more money whenever there is a threat of recession or even just the pressure in the bubble drops is not going to work the same? Thanks very much for your program. I listen to you every week in my car and I am the happiest person in Madrid’s traffic jam. It would be really great if you would answer my question. Thanks again.

JIM: Juan, the reason I'm predicting a depression is, and if you listen to my Great Depression series, we get the boom and the bust which is created through the expansion of the money supply. We get into the bust and then politicians come in, they reflate because they don't want us, you know, to have a hang over. But what I'm seeing now is as we get to the bust period, as we are right now in credit, mortgages, real estate etc, what happens is it's government programs and policies that come in. And that's what I think is going to take us, if you look at my scenario of the Oreo this year (tough first quarter, creamy filling in the middle and by the end of the year, a tough fourth quarter because inflation rates start coming back) the economy comes out of the recession, but if it does, it will be anemic and then they enact a series of policies next year that are going to weaken the economy further, which will send us into another recession by 2010.

And in this back-to-back recession, it will be the policy responses by government. If you listen to the first hour, when we talk about the Hoover and FDR programs in response to the Great Depression where they just literally drove the economy in the ground, the more their policies failed, the more they intervened, the more restrictive they came, the more and bigger the deficits got, the bigger the tax rates. I mean they took tax rates from 25% to 94%. And you've already got presidential contenders talking about taking tax rates up to 55 and 60% if you read directly what their policies are. So that's what's going to take us into the depression. [49:11]

JOHN: Juan Carlos in España, you don't suppose, Jim, no, no. [Spanish]

JIM: Yeah. I know. The king listens to the program.

JOHN: [Spanish] Here we go.

JIM: This is Rob from Oklahoma City. I got my early morning report from Richard Maybury, and he believes that they are going to create a dual monetary policy where they have soft dollars in the country, and hard dollars outside of the country like they had from 1933 to 1971. And he believes that this will be able to continue the expansion maybe five more years or so because of the dual currency. What do you think of this theory? And maybe you could explain it more, or have him on the show and also I'd like to say to John Loeffler, I used to listen to you when I was in Denver in the mid-90s. I really enjoyed you and I was really upset when they took you off the air. Anyway, I really enjoy your show. Thank you so much.

JIM: You know, that's a plausible theory. We may have two types of currencies, one for the United States and one for outside the United States, but I think it's going to be done more as a form of capital control. So in other words, if you wanted to take your dollars on a plane flight to Europe, they are not going to be any good because they'll be using a different dollar over there. [50:25]

JOHN: And you know, Rob, I used to listen myself too when I was on the air in Denver. I never used to miss me unless I was on vacation. So last question of the day comes from Sue Lee in Fort Lauderdale Florida.

Hello, there, Mr. Jim and Mr. John. My name is Sue Lee I am calling from Fort Lauderdale, Florida. I was just looking at the Federal Reserve statistical release about a depository institution and I'm seeing some numbers which I've never seen before in the column of the “non-borrowed”. We're seeing minus numbers, minus 8751 for January 2008. I've never seen anything like that. Can you comment on this? Where is the money going? It means basically you perhaps have bankers losing five billion dollars a week. Okay. Where is that money going? And why is this information, you know, not interesting to anyone? Well, perhaps it's been tweaked as we all know. That’s my first question.
My second one is: What is it that we can do out there, the rest of us, to make the public more aware of peak oil? I think this is more important than the political race, but unfortunately, we have to, you know, deal with politics first. But I think peak oil is a really, really big problem. If you would like to tell us out there what we can do, write our senators, write our governors, write our representatives and bring this to their attention perhaps through some proper wordage you could give that we could use in our emails and our letters that we write them or maybe pose something to that effect on your website. Thank you and thank you for all of your great work. We just think your show is fantastic.

JIM: You know Sue Lee, there are a number of things you can do. Number one, you can recommend some of the books of the authors that we've had on this program. I think Matt Simmon's book is very well written. There has been a number of others. Just go back through the archives of guests that's we've had here. It must be at least 80 authors that we've had here on this program regarding peak oil; and writing your congressman, I think is a good approach because until they start hearing from people and enough people, remember these guys are very thin-skinned and not until an issue becomes important to the public do they ever respond to anything. So that's another thing.

And then the third thing is by your own actions. In other words, and I keep -- we said this in the last hour, start getting yourself a very fuel-efficient car, whether it's a hybrid, a Civic, a Corolla or something because there are going to be spot shortages in energy. And you probably saw that in your neck of the woods with the hurricanes in 2005 where the pipelines broke and there were shortages. And the oil markets are shrinking and sometime in the next two or three years, we're going to be facing this.

So three things: 1) you can recommend the books of the authors we've had on the program, have them listen to some of the interviews we've done; 2) you can write your congressman and 3) demonstrate it by your own actions. [53:50]

JOHN: I say old chap, it's time to close the show now.

JOHN: Don't forget when you call into the Q-line in the future, keep your question short otherwise severe penalties will be applied and a surtax of 5% to all callers. Anyway, Jim, coming up in the weeks ahead, we're going to have no lack of things to talk about.

JIM: Lots of stuff to talk about. Next week Steve McClellan has written a book called Full of Bull.

JOHN: I'm assuming he's talking about a bull market rather than what's coming out of the Fed; right?

JIM: Right. So Full of Bull. Lila Rajiva, Mobs, Messiahs and Markets and Michael Staphis Cashing in on the Real Estate Bubble on February 23rd. March 1st .

And get ready for this one. It's going to be a whole program devoted to gold. We're going to have a gold roundtable with a lot of people, one surprise guest I hope. I don't want to say anything just in case his schedule doesn't permit it. Right now, we've got James Turk, Jean-Marie Eveillard, Bill Murphy, Leanne Baker, Eric King will be joining me, we'll be doing two interviews of some CEOs of some junior mining companies, an upcoming junior and also a junior that has now gone into production, so that's coming up. March 1st is all on gold.

Sy Harding will be with me on March 8th, Beat The Markets The Easy Way. Alex Doulis Lost on Bay Street, all of the shenanigans going on in the mining industry and Josh Peters, The Ultimate Dividend Play Book and Josh writes The Dividend Investor Newsletter from Morningstar. He's got a great book on dividends, so he'll be joining us.

Boy, this went by fast, but on behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend.

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