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Financial Sense Newshour

The BIG Picture Transcription

March 15, 2008

Part 1

[music]

JOHN: Well, there we are. Dies Irae - Day of wrath, day of doom. Ta ta da da da da da. Nothing lacking to talk about this week. Headlines – Bear Stearns teetering on the brink of collapse from a lack of cash gets emergency funding from the Federal Reserve and JP Morgan Chase in the largest government bail out of a US securities firm. Without this cash injection, the lights would have gone out on Bear Stearns. Bear Stearns had its credit rating slashed after seeking emergency funding to just one notch above junk status. Lehman brothers –tick tock, tick tock, next one on the list – it's on the watch list as it obtains a $2 billion credit line as the bank tries to blunt the stock’s worse drop in eight years, but it's going to assure the investors the firm isn't short on cash. Of course a thinking man says, Jim --

JIM: Well, if the firm isn't short on cash, the question comes in: Why did they need a $2 billion credit line. [1:28]

JOHN: This sounds like one of these trick questions that President Bush always keeps throwing out.

JIM: Strategery.

JOHN: When we started in the subprime mess back in, what was it, July, August, I think, when it first started to roll, I never thought it would go this far at this stage. I mean we always knew that later on it would probably unravel, but I didn't dream it would get here.

Well, okay. I guess people out on the street want to know what's going on. I think your clients are probably sitting pretty securely because we're doing pretty well right now, but everybody else, they are panicking, so what's behind all of this?

JIM: You can boil it down to two simple words, real estate and leverage. Behind all of this, John, is real estate. Real estate is dropping in value, and then beyond that is the amount of leverage. Remember last week, we covered the amount of leverage in the system and the leverage models on Wall Street. A lot of these firms, the investment banks are probably leveraged 25 to 32 times. You've got the money center banks are leveraged 10 times. You've got the GSEs leveraged 25 to 1, and remember debt is a two-edged sword. When things are going up, you can make a ton of money when you're leveraged. The carry trade so to speak. But on the other hand, when you have that amount of leverage, if you're leveraged 30 to 1 meaning you only have one dollar of equity for every $30 of debt, just think what happens when the assets you own on the balance sheet start dropping in value.

And the financial crisis started with the mortgage lenders. That was what we saw last February with the mortgage lenders who had been careless in a lot of the lending practices. I mean what was going on in the real estate market and lending market was just goofy. Then it moved from the mortgage lenders to the commercial banks, and then it moved from the commercial banks on to the insurance companies, i.e., AIG last week. Then thereafter it moved to the investment banks which then turned around and squeezed their clients, blaming the hedge funds and the private equity funds. So this has all been sort of a domino effect.

And it didn't stop there. Imagine if you are the portfolio manager of a pension fund or an endownment fund and you're seeing this stuff go on. So it's just been one thing after another. Remember when it first started in February of last year, it was called contained. Well, it hasn't been contained. It's become a contagion. And it gets down to two very simple things. The asset bubble was in the real estate market, and associated with the real estate market was leverage, whether those mortgages were sliced and diced, put into CDOs, SIVs, auction rate securities, no matter what you call them, but they were leveraged. And that's what happened as you had leverage upon leverage these asset markets expanded, these investment banks, these money center banks, these hedge funds, everybody kept adding leverage, because that was the way of making a lot of money. Now what you're seeing is that leverage unwind and then the underlying asset that backs the leverage, real estate, is collapsing in value.

And it was amazing because you and I were talking earlier in the week, and we were going to do a segment called “get ready for bailouts” and I was referring to the various Congressional programs that we have in Congress right now to bail out homeowners, to bail out the lenders, to bail out the states. John, every congressman, senator from each party, including presidential hopefuls are coming up with bail out programs and that's the next step in the process. [5:32]

JOHN: What people need to understand about this is when we say bail out, we're bailing out the banks and organizations that got into trouble, but the American public is paying for this. That's not really being pointed out on the Street.

JIM: No. In the end and including these tax rebates that we're going to be sending out to people beginning in May, we don't have the money to pay for that. We're going to have to borrow the money to send out those rebates, which means the government's deficit is going to get bigger this year. It's going to be over 400 billion, and likely to get even bigger next year because we're not done with the bail out packages and we're not done with the stimulus packages. They are still working on various measures of bail out programs as one senator or a congressman after another comes out with their own version and there is a cry from Wall Street and from Washington that we're not doing enough to bail out people. And this gets back to the idea of “we don't want to go through any tough times.” In other words, we just went on a drinking binge – or call it a credit binge. Now that credit binge is starting to unwind, and we don't want to go through the pain. [6:41]

JOHN: But we are guaranteeing that really, in short order, the pain will be much worse when we come out of it. It's sort of like: “Well, okay. You had a hang over. I can put you on this pain killer. The downside of it is when you come off the pain killer, the pain will be worse from the pain killer, rather than from the other side.” That's what you're looking at.

JIM: Sure. That's why I get back to my hyperinflationary depression theory because you do get boom-and-bust cycles. You do have booms. You have recessions, but it takes a politician or political policy to turn a recession into a depression. And it's really through government interference in the marketplace that everything just becomes lopsided whether they put in capital controls, price controls, bail outs, punitive tax rates, restrictions, regulations. And I mean, you just pick up the headlines and especially the kind of information we're getting –we get a lot of stuff from sort of the inside about what's going on in Congress because we keep track of legislation, and that was one of the pieces that we were going to do until this thing hit on Friday. I mean you've got former US Treasury Secretary Robert Rubin who said the financial markets are in uncharted territory and the government may need to take substantial additional action to help homeowners. We are in uncharted waters said Rubin, the chairman of Citigroup. Citigroup is under water right now. [8:13]

JOHN: Well, we probably need to dissect this piece by piece and the most obvious one would be to look at the Bear Stearns debacle, which really started to unfold and go into tragic levels really on Friday. It sort of caught everyone by surprise.

JIM: Well, there were rumors floating around on the Street earlier in the week that Bear Stearns was in a credit crisis, and they were denied. But then there were emergency meetings on Thursday night. Essentially what happened is the Federal Reserve is taking on the credit risk from collateral that would be supplied by Bear Stearns, which, by the way, Bear Stearns approached the central bank for emergency funds. The Fed, since Bear Stearns is not a primary government bond dealer, they will be lent money through JP Morgan Chase and JP Morgan Chase will use the Fed's discount window to accomplish this direct loan to Bear Stearns.

And the Fed said earlier in the morning that its board of governors unanimously approved the arrangement with JP Morgan and Bear Stearns. And the Fed typically delegates discount window lending authority to its regional reserve banks when it come to loans to banks. However, the Fed invoked a little used law that allows it to loan to corporations and private partnerships, John, and this little law goes back to the Great Depression.

The staffers at the Fed have declined to describe how large this loan is going to be and they decline to say whether a private sector bail out was attempted. But word on the street is “Bear Stearns is toast.” They will probably be merged with somebody else. In fact, option traders have already increased the bets that Bear Stearns survival is in doubt, and that's the way credit default swaps have skyrocketed on Bear Stearns debt. So that's the bet there.

And it doesn't stop there. Two other companies listed Friday on the watch list because of exposure to leveraged lending are Lehman Brothers and Merrill Lynch. You had Lehman get a two billion dollar injection from 40 lenders on Friday. So you know, we talked earlier when we described the Oreo theory at the beginning of the year, before this would take place, remember the bad stuff was going to occur in the first quarter; and this is a lot of the bad stuff coming out. It's almost to the point of capitulation. We're probably going to see another securities firm go under and I would not be surprised to see one of the major banks get into financial trouble. I mean Citigroup is in a precarious position. A lot of these banks because of the amount of either SIVs, bad debts, so it's almost like an equivalent to a run on the bank. [10:56]

JOHN: It has the same sound and feel because that's what CEO of Bear Stearns, Alan Schwartz was saying on their conference call today, and that was the demand for liquidity from investors just kept going up. People wanted their money out and that's what it was. And it has all of the marks of a run.

JIM: And in fact, John, let's go to that press clip on Friday with the head of Bear Stearns.

Our liquidity situation deteriorated. We started the week and through the early part of the week we continued to have very strong liquidity, but the concerns on the part of counterparties and on the part of our customers and lenders got to the point where a lot of people wanted to get cash out. We were responsibly trying to deal with those needs and we were meeting those needs in every case, but they accelerated yesterday, especially late in the day. And as we got through the day, we recognized that at the pace things were going, there could be continued liquidity demands that would outstrip our liquidity resources. [12:02]

Basically what he was saying there is it's very similar to when people sense that people are in trouble, especially counterparty risks, it's the old run on the bank. They might have been okay at the beginning of the week, but when people start yanking their money or pulling out of things, then all of a sudden, you find out your cash is gone. In fact, they said on Friday that its cash position had significantly deteriorated in the past 24 hours. And so in order to prevent a collapse of the second biggest underwriter of US mortgage bonds and forestall a potential market panic as losses by banks and brokers reached almost 200 billion, basically this is why the Fed had to step in. They couldn't afford to let Bear go.

Traders on the street have been reluctant to engage in any long term transactions with Bear because you're thinking, “wait a minute, my transaction, they maybe going under.” And that's essentially what happened. Just the company's forth quarter loss was 854 million, which was its first loss. As you compare some of these write downs, 22.4 billion in losses reported at Citigroup, so some of these firms, JP Morgan and Goldman Sachs are probably in better shape.

And remember this crisis. Remember the Two Johns did a little bit of a spoof on this, but the failure of the two Bear Stearns hedge funds which began the liquidation of assets, so here we are. [13:33]

JOHN: So is this a terminal case for Bear Stearns? Are they going to survive this? Do you think we're going to come around on this - always keeping in mind your creamy center for the rest of the year?

JIM: I think what you will see, they will be forced into a marriage. In other words, they will merge them with somebody else who is a little bit stronger because if you take a look at their old business model, John, it's broken. They just, I don't think, have the wherewithal right now or the ability to go it alone. And don't be surprised if it goes beyond Bear Stearns. In other words, if you see the merger of other entities just as, for example, Bank of America taking over Countrywide. So there is more of this to come. You almost have to get a little bit more of this, and you're going to get almost the capitulation phase here. What I call the puke phase, because right now, we have gone from where we were in the fourth quarter of last year to “happy days are here again,” to “oh, my God, there is blood in the streets, I'm jumping out the window. [14:32]

JOHN: Well, basically now, it's sort of a fait accompli that we are in a recession. We can't avoid that one anymore. We can't play any games on it. I don't think even the mainline talkies are trying to do that at this stage of the game. But what they are trying to do right now, it's really clear, like you say, there is not a tree in the forest that's going to be safe now because they are going to cut down everything to print – actually, it's not trees from the forest, it's cotton. That's what our currency is made out of. But anyway, they will cut down everything to print paper and currency on as much as they can to try to keep this thing afloat. I mean this is an election year too, Jim. It couldn't happen at a worse time.

JIM: Oh, yeah. Because you have the entire House of Representatives, a third of the Senate and then the White House up for grabs. It's interesting that the White House says, “well, it’s slowing down and things are getting rough, but we're not there and none of the stimulus packages have kicked in,” and the President is right on that. But, you know, on Friday, you had Harvard University economist Martin Feldstein who is a member of the group that dates business cycles in the US, he said the nation has now entered a recession that could be the worst since World War Two. And I'm quoting Feldstein here: I believe the US economy is now in a recession. And he told the futures industry in a speech he made and he said: “Could this become the worse recession we have seen in the post-war period. I think the answer is yes. I would emphasize the word, however, could.”

So that's why they are scrambling here for bail out packages. And what they are working on now, we've seen stimulus one, which was remarkable that they passed it in 30 days from the day of conception and they first talked about it. John, when have you ever seen the White House and both parties in Congress work on a package and get it passed in 30 days? [16:18]

JOHN: Yeah. Basically when reality sets in, politicians panic, so that's what we're doing right now. So everybody is anxious to do this type of thing, but this is only going to be a partial fix. I mean there is more stuff in the pipeline. This is not a one shot.

JIM: Oh, no. They are talking about one proposal would bail out homes that have already gone into foreclosure, so basically this is a bail out for the lenders. There is another proposal to allow judges to adjust a person's mortgage and interest rate which would absolutely freeze up the mortgage market and drive rates sky high if you did that because no lender in their right mind would make a loan because you would never know what the terms of the loan would be. There are two or three proposals that I've seen to come up with a fund that would basically buy these bad mortgages. You have proposals that would allow people to stay in their house to, in other words, bail out these mortgages or even turn Fannie and Freddie and have Fannie and Freddie which are under-capitalized to begin with to start buying out a lot of these loans that have basically gone worthless.

But there is one thing that I want to point out here. The market and the sentiment is far worse than it is. And what is happening, and you know public psychology is things are beginning to snowball, so that's why they are going to have to come in here and start taking dramatic action. Otherwise, this whole thing takes on a life of its own. It's like a snowball that as it gets rolling downhill, it gets bigger and bigger and starts moving more rapidly and that's what they have right now.

They have a major brush fire that keeps jumping. You know, they put one fire out and they think they've got it contained and then they look around their shoulder and there's another fire that is going up. So that's part of what we anticipated in this first quarter. And it's almost to the point of capitulation right now. And remember, the Fed has been lagging and has been behind the curve. Remember last year when they first started cutting rates, they were basically saying: “Well, maybe we shouldn't have done it. Things are okay.” And you remember, John, last February when we had the mortgage lenders get in trouble, they said it was contained, “that was it, one month problem.” Well, guess what? It resurfaced in August of last year and that's what you expect to see periodically.

And remember, we are now in the first quarter reporting season. In other words, first quarter earnings are going to end here March 31st, so, John, in the next two weeks, any financial institution that's going to be airing its dirty laundry is going to want to get out front. So I suspect you're going to see from either major brokerage firms such as Merrill, Lehman, banks such as Citigroup –in other words, all of the usual suspects that we've seen in the last quarter – are going to be going out and announcing losses for the first quarter. And what I suspect right now is they are now lining up credit infusions or either equity infusions into their firm before they announce the losses. [19:24]

JOHN: It is amazing the rapidity with which this all happened and the euphoria that we transitioned from a year ago.

JIM: And part of this is the nature of interconnected markets today. The markets have become globalized. They are interconnected. Everybody is watching the same material. What has happened is now you've got fear into the markets, which explains the low Treasury yields. And the other thing that you have is people are just selling; and selling begets selling and the more selling that come in, the lower the prices are. So a lot of these mortgages are being underpriced because it's like everything goes to extremes. Just as they were bidding up mortgages and bidding up the price of real estate when everything was giddy, well, that's when greed was coming in. Throw the opposite human emotion of fear, which is what you have now and you're getting the opposite action with that fear which is selling. It's like: Sell first, ask questions later.

And so that's why you're seeing large vulture funds that are amassing large amounts of capital, and let's put it this way, one of the shrewdest investors around, Warren Buffett is thinking of foraging, if he hasn't already, into the junk bond market because a lot of these bonds and mortgages have been grossly underpriced as a result of, you know, when everybody sells at once, you don't have any buyers. Sellers overwhelm the market, and you have these huge steep waterfall declines and values get distorted. So you know, when you've got the smartest guy in the world, and the richest guy in the world getting ready to go in the market, but that's typical Buffett. You buy when there is blood in the streets. [21:06]

PRESIDENT BUSH: Now, root cause of the economic slow down has been the downturn of the housing market. And I want to talk a little bit about that today. After years of steady increases, home values in some parts of the country have declined. At the same time many homeowners with adjustable rate mortgages have seen their monthly payments increase faster than their ability to pay. As a result, a growing number of people are facing the prospect of foreclosure. Foreclosure places a terrible burden on our families. Foreclosure disrupts communities. The question is what do you do about it in a way that allows the market to work and at the same time helps people? Before I get to that, though, I do want to tell you that we fully understand that the mounting concern over housing has taken a broader market that has spread up certainly to global financial markets and it has tightened the credit which make it's harder for people to get mortgages in the first place. The temptation is for people in their attempt to limit the number of foreclosures is to put bad law in place. [21:59]

JOHN: So we're now looking at a declining real estate market. That thing has come nowhere near the bottom at this stage of the game. This has affected the leverage that's present on Wall Street. And the next step down on this whole thing? We're not done yet.

JIM: No. And like I said, we're getting into the first quarter earnings season, so I'd watch the markets in the next two weeks because if Bear Stearns has got a run on the bank, they are not the only ones out there. Watch the major Wall Street brokerage firms and also watch some of the major money center banks. I mean these guys were announcing losses in the forth quarter, and they did that before the quarter was over. And that typically is what happens in an earnings season, if you're going to miss your earnings, you're going to have some bad news, you want to get that news out before the quarter closes. The analyst community will take your earnings down, they'll slash it, they'll downgrade you etc; and then what happens is maybe the losses aren't as bad as expected and then you announce the news after quarter closes and you beat expectations.

But in this case, what we've seen in the fourth quarter as this thing has progressed is the losses they initially announced before the quarter closed when they announced their actual earnings, they were actually worse than anticipated. So you're also going to see in addition to first quarter earnings announcements, you're also going to get year-end financial statements as companies have to divulge all of this in their annual financial reports which are also going to be coming out here. [23:33]

JOHN: So if we go back to your Oreo theory which in case people are listening for the first time, we said the first quarter of the year would be rough. It's like an Oreo cookie, a hard crunchy outer shell, creamy center for the middle two quarters and another crunchy shell on the back side. So here we are. We're still on the first quarter. This is March. You said it was going to get rougher. It did get rougher, and I think at some point it will smooth out though. They are going to pronounce it one more time rescued, and that may hold until the – that's the big thing to hold through to the elections, I think.

JIM: If you take a look at where we've gone with this, in December, the Fed announced its Term Auction Facility. The beginning of this weak it announced basically swapping with the lending banks their mortgage debt for Treasuries with the Fed. I think the next step is the Fed just starts buying this stuff. These are some of the proposals that are coming out there, so basically they are going to say “look, this is bad stuff, that's the next step.” So this thing is progressing in a logical manner from one step to progressively more intervention, more bailouts and look for more bailouts to come. We're not done with this yet. And it's only after they've put enough money where the government starts bailing out all of these things that we're going to get from a market of fear to, okay, we'll get this brief euphoria that we may have starting probably sometime in the second quarter going into the third quarter. But unlike before, what is going to accompany this is the hard outer shell dark period that we see coming in the fourth quarter as interest rates begin to rise with inflation rates. We could be looking at oil prices well over $125 a barrel. And we could be looking at who knows where gold prices are going to be. I mean we're already over 1000 and oil is already 110, so we're only $15 away from our target of $125 dollar oil. And remember, the other thing is with crack spreads being as thin as they are right now for a lot of these refiners, we as consumers haven't really felt the full effects yet of these higher oil prices. That's yet to come. [25:45]

JOHN: So when it smoothes out, what will it look like?

JIM: When it smoothes out, you could get a large rally coming in, you'll have the economy get a bump from the helicopter drops that are coming out in the form of checks starting in May the second week. By then, you'll see the federal funds rate below 2%. Who knows where it's going to be where it will stop, will it be 1 ¾, 1 ½? The futures market already has it below 2% right now. And eventually, you'll get some stability here and then people say happy days are here. But all of this tree chopping or money printing or bailouts comes at a cost; and that cost is going to be higher rates of inflation. And we're certainly seeing that as the commodity complex has now taken the place of the bond market as being the vigilante, and that is certainly what we're seeing.

And then you add supply deficits and growing demand for commodity complexes, add into that a monetary mix, and John, it's no wonder we're looking at crude prices up 14% this year. We're looking at coal prices up 17%. We're looking at natural gas prices up 36%, gold prices are up 20%. Silver prices are up 39%. Platinum prices are up 48%. Palladium is up 57. Aluminum up 29. Copper up 27. Lead up 22. Nickel up 24. You go to the corn complex, corn prices are up 24%. That means higher food costs. Ethanol is up 12%. If you are looking at soy beans, they are up 15%. Sugar up 17%. Cotton up 18%. And look at the dollar. It's hitting a record low. [27:33]

JOHN: So would we expect like if we get into that period the soft part, will we pull back in things like the metals, do you think the panic driving that up with will cause a pull back?

JIM: Yeah. You'll get a bit of a pull back and then you'll get a sector rotation. When we get to that creamy filling you'll have people doing a switch. They'll be going into the financials because they've been beaten up, you'll see them going into the builders and you'll see a whole rotation in the market. But don't be surprised with all of this as the market rises along with it, you're going to see a take off in the gold stocks because I think it's beginning to dawn on people, especially with gold over 1000 and silver over $20, that we've got inflation in the wings here. You can't be bailing out all of these financial institutions and bailing out all of these homeowners, and John, there is not a consequence to this. I mean people don't really understand the root causes of inflation. [28:21]

JOHN: The average public person does not understand that. They will not see this one coming either. It's going to take some time to be felt in the system too. There is a lag effect here.

JIM: Yeah. There is a lag effect just as when the Fed started raising interest rates in the summer of 2004. The real estate market peaked out at the end of 2005, and the crisis in financials, John, we didn't see until 2007, so there is a lag effect between when they raise. There is also a lag effect on the other side of it as when they lower. And you pump enough money in the system, you're eventually going to get the after-shock effect, but they are going to come in the form of delay.

Right now, you cannot have raw input prices as we're seeing all across the board now with commodities and we're going to be doing a whole topic on commodities in the weeks ahead. We did one, I think it was about a month ago we did, but we're at critical levels here for food. And I think we're going to see some things –and we're going to cover this in another topic today – where if anything goes wrong on the weather front to disrupt agriculture, we will see famine. And I think in the next couple of years we're going to see protein shortages globally. You just cannot take one of the largest producers of wheat, corn in the world, the United States, and also Brazil and if you devote a good portion of your crop to producing ethanol and people don't think there is going to be some after effects? We're going to cover that with three related problems in the second hour. [30:01]

PRESIDENT BUSH: The temptation in Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction. I strongly disagree with that sentiment. I believe there ought to be action, but I'm deeply concerned about law and regulation that will make it harder for the markets to recover. And when they recover, make it harder for this economy to be robust, so we have to be careful and mindful that any time the government intervenes in the market, it must do so with clear purpose and great care. Government actions have far reaching and unintended consequences.

JOHN: And you're listening to the Financial Sense Newshour at www.financialsense.com.

FSN Follies: Andy Looney

Hi. I'm Andy Looney. Did you ever notice how some people get into a rut? My wife Sandy always falls into a rut about what to have for dinner. Let's face is it. You can only eat meat loaf and macaroni so often before you finally demand that we go out for Chinese food. Hmm. Maybe that's what she had planned all along. What do you think? I do. Don't you? Anyway, I notice the guys on the financial channels are in a rut as well. Three or four years ago they said gold at 400 was a risky investment and to buy those collapsing financial stocks instead. Then when gold went to 600, they asked “when did anyone ever make money investing in gold.” I never did understand their logic on that. Don't you think 50% profit is good enough? I do.

Now, when gold passed 800, they said it had topped out and golly gee willickers wouldn't stay there for long before sliding back to disaster. Now that gold is nearing 1000, they are still telling gold is a risky investment. “She's going to blow!” I think with stocks sliding down and inflation zipping up, maybe investing in stocks might be a risky investment. Don't you? They don't. I do. Oh, well, I guess I'm just too stupid to figure out this whole thing. After all, the guys in the financial talkies went to Harvard, so they must know what they are talking about. Don't they?

Anyway, Sandy and I are going out for Chinese food tonight to celebrate new highs in our gold investments. I'd use any excuse to avoid another night of meat loaf. Now that's a risky indigestion. For Financial Sense, I'm Andy Looney. [32:37]

Gold's Fundamentals: Even Better Days Ahead

JOHN: If you watched the financial channels this week, the anchors seemed absolutely bewildered as oil prices approached about $110 a barrel and gold prices crossed over 1000. It was almost as if they didn't believe what they were seeing. So that's what we need to really lay out here. They saw what was happening, but you could tell there was no comprehension of why it was happening.

JIM: You know, I am not really surprised that they were bewildered because that is how it usually plays out in the early stages of a bull market. I mean if you take a look at how commodities have been in a bull market run for the last eight years and the concept of a bull market still hasn't caught on. John, how many times have we talked on this program when oil went from 20 to 30 and 40 to 50 to 60, they always told you why it was going to go lower. And in fact, right around this time last year, after they were predicting oil was going to go down to $40 a barrel, we began that run that took us almost to $100 a barrel by the end of the year. The situation that we have today is we're in a different economic environment than we've been in terms of where we were eight years ago. There is a global power shift that's taking place right now and most people, I think, haven't recognized this change because we keep talking about the center of the universe reverting around what happens in the United States. We are only part of the picture today.

But if you look at what's been going on from, let's say, historical perspective, I mean China and India were major economies for almost 2000 years. And what you're seeing today is China and India are reasserting themselves. They were dominant economic powers until roughly about the 1800s when the Industrial Revolution began in Great Britain. China and India missed out on the Industrial Revolution over the last two centuries. Now, they are industrializing and they are playing catch up and eventually they will surpass the West. But from a historical perspective, given several millennium, things are reasserting more back to the mean. They are creating wealth while the West is consuming wealth. They are ascending while we're descending. [35:12]

JOHN: So where does the gold factor go into all of this? I mean the price has gone up four-fold since we began doing the show together, so what is supporting the rise right now?

JIM: The first thing you need to understand is that the world's entire financial system is based on fiat currencies. There is nothing backing paper money today. The vast gold reserves that once backed national currencies have fallen dramatically. In fact, since 2005 –now, this is really key – since 2005, individual ownership of gold has surpassed the holdings of central banks and that gulf is widening. The difference is just incredible in terms of the ownership of gold in terms of almost a wealth transfer from central bank to individuals. And the reason people around the globe are buying gold in record amounts is that the value of all currencies are depreciating. People talk about the dollar depreciating. Well, guess what? All currencies are depreciating against gold. Gold in essence by default is once again moving into its 5000 year role as money.

In a fiat world, which is what we have today, there are no checks and balances against government largesse. Governments can spend and run infinite deficits. Ever since 1971, John, when we reneged on the backing of the dollar with gold, the US has run continuous deficits and they've gotten larger. Just listen to this year's presidential race where some of the candidates are promising voters trillions – and I'm talking about trillions of dollars of new spending programs. We don't even have the money to pay for the programs we have in place, not even talking about what they are proposing to spend. So budget deficits are going to get bigger, taxes are going to go up and inflation is going to rise and squeeze the vast majority of citizens who don't protect themselves. There is nothing new here. John, I know you've read history. I don't care if it was the Roman empire, the Spanish empire, this is what governments have done throughout all of history. They always promise more than what they can pay for, and the result is they debase their currency. And just look at what is happening with the US dollar hitting a new low on the day you and I are speaking. [37:31]

JOHN: You always wonder why there isn't some kind of wise ruler somewhere that comes up and says, “Ah ha, I see what we're doing, it's been done before. We don't want to go down that trail.” It seems to be an irresistible trail.

We often talk about here on the program, by the way, about the global money supply, growth rates both here and domestically and elsewhere in the world which is why gold is rising against all currencies in the world, so beside debasement of the currency, what other fundamentals support gold?

JIM: There are a number of reasons that are supporting gold's rise. People all over the world are buying gold for different reasons. Some are buying gold to protect against a falling dollar or the depreciation of their own currency, because remember it's not just the dollar that's falling against gold. And that's the key point here. This is a global event. Gold is rising against all currencies. Other people are buying gold as a portfolio diversifier. Other people are buying it as a protection against falling in a volatile stock market, or they are buying it because there is low yields on interest bearing bonds and notes. Real interest rates are negative now, meaning the headline interest rate that you get on a government bond is below the headline inflation numbers. And still you even have others that are buying gold as a safe haven against political turmoil and yet you have others that are buying it as an inflation hedge. Whatever the reason, depending on who you are, where you're living, what your circumstances are, whatever reason, gold has gone up for eight consecutive years. It's being accumulated in massive amounts, and this is something we have not seen before. [39:13]

JOHN: I think this massive accumulation is really due to the fact that all currencies are fiat now, they are all depreciating against gold. When people realize that their buying power is eroding away due to debasement of the currency, they go to something that they perceive as being the ultimate currency and for some reason that's always been gold.

JIM: Yeah. And this concept is probably better understood overseas where they've seen political turmoil. They've seen hyperinflations in the past. But we're going to be covering this topic now because it’s going to obviously garner more media attention now that gold has crossed the thousand mark. In fact, next week we're going to have Jeff Christian on the show to talk about his 2008 Gold Book which is must reading for the intelligent investor that wants to know why prices are heading higher. And this is taken from Jeff's book. Last year, John, around the globe, individuals bought 43.7 million ounces of gold. That was up 11.7% from the year before. And here is the key point. Half of that demand came from just India alone, but demand was also strong in Asia. It was especially strong in the Middle East where all of the wealth is being accumulated. So if you take a look at where the wealth is emerging in the world, it's emerging in Russia because of its oil and natural resource revenue. It's emerging in Asia, it's emerging in the Middle East because of oil. And guess what? They are buying gold. Put another way, since you and I have been doing this show, John, investors globally have bought 279,200,000 ounces of gold since 2001. The buying is coming from more parts of the world and has more continuous buying for longer than any other bull market in gold's history.

Now, the bright spot is that it really hasn't caught on here in the West in a way that it has let's say in Asia or the Middle East or even Latin America. They, I think, have a better understanding about what real money is than we do. That’s because remember, the United States was the dominant economic power. We had low rates of inflation. We had political stability. The dollar was backed by gold through much of the last century, and so we haven't experienced the hyperinflations, the political conflicts that comes with those hyperinflation as other countries have –whether it's Turkey, Argentina, Latin America in the 80s, the Soviet Union, China and these countries that have gone through this turmoil. So they have a better understanding and know that gold represents more money. [41:53]

JOHN: Don't higher prices mean more selling is going to come into the marketplace as the prices of metals go higher?

JIM: Well, absolutely. It's the only way we're balancing out our supply deficits. Mine production has declined seven out of the last eight years and it has been decades since mine production has been able to keep up with demand. The difference between what the mines produce each year and what is demanded by the marketplace is made up by scrap supply and official selling. Most all gold mine over the century still exists. I mean it's not consumed in the same way that silver is, so the difference between what mines supply and what is demanded is made up from existing gold sales. And I'm sure as prices go higher there will be people that will sell off or maybe they'll trade in coins or whatever it is; but sure, part of the reason this deficit is being handled is from the sale of scrap gold. [42:55]

JOHN: And it seems like over the last few years the rise has been absolutely explosive. You know it's interesting. It still hasn't caught on yet with the investment public.

JIM: The thing that is just absolutely amazing and I think this has even amazed a lot of people that follow the gold market is the rise that you're talking about that that we've seen in this decade is unprecedented in the history of free gold trading prices. There had been five gold bull markets. Most of them lasted between one and two years and they were followed by four or five years of weak gold prices. I mean 2008, the last gold bull market was in 1993 and none of these past bull markets came close to what we've seen in this decade. What we are truly witnessing today and what we will see unfold is probably going to be the greatest bull market in the history of the world. Similar to what we saw –if I was to use probably even an analogy that I don't even think is going to come close to what's going to happen – in technology in the nineties, but even greater than that this time, gold above 800 is more sustainable. I mean, John, pick up the papers. Look at the day you and I are talking on Friday, the bail out of Bear Sterns. There is a plethora of economic financial and political problems. Greenspan wrote his book and it was called The Age of Turbulence. In my opinion, the age of turbulence has just begun. [44:23]

JOHN: Why do you believe this is going to be the mother of all bull markets for gold? Maybe the mother of all historic markets too.

JIM: You know, I think, to put this into perspective, I think this market is still young. It hasn't caught on with institutions and investors. I've seen these guys. I've seen institution holdings. The hedge funds are in the sector, but they mainly trade it. The other factor is that the gold market is so small. I mean it is infinitesimal compared to the larger paper wealth that exists today around the globe, and this is the largest paper wealth that we've seen in any other time in history. And if we look at the world's liquid wealth – and I want to point that out, liquid wealth, and this doesn't include the nominal value of derivatives – you've got 45% of the world's liquid wealth is held in the equity markets. You have about 15% of the world's wealth is held in bond markets. And roughly about another 39% of the world's wealth is held in bank deposits. Only 1.4% of the world's liquid wealth is held in gold. So think of this. Just imagine what happens if money goes into gold, doubles or triples to let's say 5% of the world's liquid wealth. This market would explode three to ten fold from where it is today.

I'm going to let you in on another secret, and this is something I think most people don’t understand. Gold investors –and I'm talking about investors, not traders – gold investors don't sell. In the last half century, we have only seen three times that gold investors were net sellers on an annual basis and even when there were some net sellers, they didn't sell by much. So when this money moves out of this liquid wealth, let's say money comes out of the stock market, the bond market or the cash market and goes into the gold sector, it's going to be at much, much higher prices. I mean people have no idea how small this market is. I mean you can take a look at, for example, the HUI index (which is the 15 largest unhedged gold producers) and the market cap on all of these markets is only about 174 billion. I'm just going to call up here and let's take a look at Coca Cola's market cap. Coca Cola has a market cap of 134 billion. You take a look at, let's go to something like Microsoft, which has a market cap of 260 billion, and that's just one company. And so you can see how small this market is in relation to these other paper markets around the globe. [47:15]

JOHN: All right. We know gold is money, but it is also a commodity because it's used in manufacturing especially electronics as a matter of fact, fabrication, people also obviously get it for jewelry, so what is the big driver here?

JIM: Unquestionably right now and also over the last five or six years, the number one driver is investment demand. There has never been, and I keep saying this, there has never been anything like this before in history. And it still isn't on the radar screen of most investors, so you ain't seen anything yet. [47:48]

JOHN: So if it's investor demand doing it, then what's driving investment demand.

JIM: As I mentioned earlier, there are a number of factors that are driving investment demand. It depends on where a person's mind set is, what their circumstances are, but there are six drivers that are driving investment demand. One is an alternative asset. There have been a number of studies by college professors showing commodities as an opposite correlation to financial markets, so that has gained a lot of recognition here in the last 10 years. So alternative asset is number one.

2) It's being used as a currency hedge, the dollar is falling in value against gold. The euro is falling in value against gold. The Swiss franc has fallen in value against gold, the Canadian dollar, the Australian dollar, the Chinese currency, all currencies are falling against gold. So a second factor is currency hedge.

3) A third, as we've seen, I mean the inflation rate is 7 ½% in China right now, so people are using gold as an inflation hedge is a third factor.

4) Fourth, depending on political instability or financial instability, it's being used as a safe haven.

5) It's being used as a commodity as an input to manufacturing, fabrication of jewelry;

6) and six, if you go to the Middle East or you go to Asia, we in the West think of savings, we think, oh, we'll put our money in the bank; when you're in the Middle East and you think of Asia, when you think of savings, you think of putting your money in gold,. So it's used as a savings factor for much of the people in the world.

And here is the part that's just absolutely amazing is right now all six of these factors are flashing a green light and I think are going to remain green for quite some time to come. Once again, pick up a daily paper, turn on the evening news and just take a look at the stories that support all six of these factors including the bail out of Bear Stearns on Friday.

JOHN: Yeah. The Street still hasn't picked up on the gold aspect of it. Something that really amazes me about that is in the 1970s, it almost seems like deja vu all over again. 1970s and also 1929. President Nixon then in 1970s had implemented wage and price controls. That's when inflation rates rose to 4%. Last year the headline inflation rate was 4.3% and we all know that that number is vastly understated. It's somewhere between 9 and 11 or possibly a little higher and here we talk about inflation expectations are well anchored. People really don't understand what causes inflation. If you don't believe me, go out and just ask people when you meet them out in restaurants or everywhere else, see if they know. They only know it by its symptoms which then allows politician to off load the cause of the inflation onto something other than government policy or Fed policy, which is what causes it. So a fiat currency is inflationary. Politicians promising trillions. New spending programs are inflationary. If they can't get it from taxes, they have to get it from inflating the money supply. The Fed pumping hundreds of billions into the banking system and lowering interest rates is inflationary. Government bailouts are inflationary. Yet all we here from Wall Street to Main Street is give us more inflation. And that goes back to Ron Paul. Remember, in the hearings a couple of weeks ago, he said, “you're complaining about the effects of inflation and you're solving it by having more inflation.” And what does Uncle Ben do other than sit there with that look on his face, you know, beard scratching.

JIM: Yeah. “I don't understand what you're talking about.”

The problem that we have is we're a debtor society and there is only two ways that you get rid of debt. You allow it to default, and we've seen a lot of that, but what do they do? They are bailing out a lot of these defaults. So because we're a debtor society, debt evaporates as it is inflated away. And we are now putting into place programs and policies that are designed to do just that, to inflate, which is one way of liquidating your debts. [51:56]

JOHN: Well, it is. Why don't you think people understand that? That's why people say should I get out of all of my debt right now. I say well, if you can keep making your mortgage payment, your household domestic product so to speak, the amount of money you have to bring in to keep up with this is going to have to be more and more and more. You're going to have to see to it or you just won't survive, and if you can do that, then you are going to be paying off your debts with increasingly inflated dollars. So in fact, it actually works in your favor against the banking system here.

JIM: Yeah. And especially if you've gotten or locked in a fixed rate mortgage because I do believe by the end of the year, you're going to see inflation rates up, and you will start to see interest rates given to rise and they'll be doing that over the next couple of years. But you're right.

JOHN: Countrywide always keeps calling me. They want me to refi. And they don't understand why I turn it down. Yes, but you can lower your monthly payments. “Yeah, right.” That's my response to them.

JIM: Yeah. With a variable rate mortgage. Yeah. Good luck with that.

JOHN: Yeah. The last time they did that I burst out laughing on the phone. So anyway.

We talked about asking people at the gas pumps or the stores, restaurants are good places, banks are good places, I like to talk to bank tellers to see what they know. Why don't people understand what inflation is? It's a pretty simple principle.

JIM: I would probably say government schools. If you have been educated in a government school, government schools teach Keynesian economics. Even private schools teach the same. I mean you're taught Keynesian economics at Harvard, Stanford and Princeton. That is why you hear politicians propose Keynesian solutions to problems created by Keynesian policies. What was Richard Nixon's comments? I think he said: We're all Keynesians now. That is also why when banks or brokerage firms get themselves in trouble, they call for Keynesian bailouts. It's also why gold has risen from 250 to $1000 and why it's going to go to 3 to 5000, maybe even higher if we continue on this path. It is only when people realize the root cause of inflation and experience enough pain that they are ready for real economic change. If you look at the 16 years of pain that we had probably in this country from the late 60s all of the way until about 1980, the country was not ready for Reagan. Ron Paul, for example, the country is not ready for a Ron Paul. Ron Paul is ahead of his time. Once again, people haven't experienced enough pain yet. Right now, the public is calling for more opium from the politicians, and John, that's exactly what the politicians are going to give them. [54:43]

JOHN: Yeah. With the people not understanding they are still paying for the opium. That's what it is. So in summary, the fundamentals are all an argument for higher gold prices. It has gone up seven consecutive years now, well, make that eight years if we include this year. And you think it's just getting warmed up?

JIM: I live in a neighborhood where they call our cul-de-sac area the financial district because the guy next to me is a well known hedge fund manager, you've got the guy above me is a syndicated national financial talk show host, down the street there is a guy that runs a mutual fund and they are all financial guys. And if you were to mention gold to these guys, John, they would look at you like you're cross-eyed. Now, I can talk about oil. Everybody understands oil because they see that when they pull in their sport cars into the gas station and we're almost near $4 here in Southern California. So everybody understands oil, but when you mention gold, they look at you – you're almost, like, oh, you're one of those people. It’s like there is a stigma. They don't understand it.

And remember when we had the roundtable, the gold roundtable a while back, Leanne Baker, who used to be a managing director at Salomon Brothers, mentioned what is it that Wall Street doesn't get, and she clarified that and said they don't know how to value it. They don't know how to think about it, and they still don't get it. And that's why I think we're just getting warmed up. I mean most of last year's buying of gold, half of it occurred in India. So John, imagine what happens when it catches on here. I mean you have people here buying, but John, it's far from becoming mainstream. So I just think we're just getting warmed up. [56:26]

JOHN: We had that gentleman a couple of years ago that was talking about the thieves that had broken into his home. The burglars took the stereo system and all of the other stuff and left the bullion sitting on the table. It's a funny story, but it's true, isn't it. They really don't understand it.

JIM: They are taking used appliances, electronics and you have bullion. “Oh, gosh, what's that?”

JOHN: What do we do with that? I don't know. What do we do with that? All right. We're listening to the Financial Sense news -- you're listening. We're speaking. You're listening to the Financial Sense Newshour at www.financialsense.com.

Part 2

Three Related Problems: Energy, Food, and Water

[montage of CNN reporters]

Russian investors are increasingly concerned a global economic meltdown would slash demand for oil and that eventually the boom Russia has been enjoying will come to an end.

In Islamabad, Pakistan, where the average cost of cooking oil has almost doubled in the past year, it’s a clear indication the economy here in Pakistan is suffering.

But elsewhere in West Africa, the picture is very different with a series of riots and demonstrations across the region. In neighboring Cameroon, a week of violence after the government raised petrol prices. And in Burkina Faso a government crackdown after riots against the high price of food. And all these riots and demonstrations are against government who people feel have not done enough to prepare them for the high price of the most basic commodities, petrol and bread.

Weak dollar and the sliding US stocks will affect this country. But that is not what ordinary South Africans are worried about. Electricity shortages, high food and fuel prices are the main concerns here. And as a result of the inadequate power supply, this country – the second biggest gold producer in the world – is unable to fully benefit from the high gold prices.

But today, this is a headline in the Financial Times: “Fed believes it can prevent a deep recession.” Hell, no one believes that.

JOHN: Staying on top of it as we always do. That was what was happening on CNN this week. You know, occasionally we will get emails, Jim, when we sort of stray from what seems to them to be economics. They come here to get financial information and then we talk about global warming, or international treaties or governmental policies and they say, “you should stick to your area,” because there’s a phenomenon of the 20^th Century and that is what is called compartmentalized truth. This is another phenomenon which has come out of the American…well, it’s actually the western education systems, part of what is called dialectical thought. And that means that all of these little areas are all separate from each other, whether we talk about politics or religion or economics – they’re all tied together; you can’t separate them, they all interact with each other.

And the same things relate with three related problems. And if you’re listening to what we say here in this segment you have to remember you climb to the top of the mountain and you say, “oh great guru, what is the fundamental lesson of economics?”

“All of economics is interconnected.” And we’re going to look at this. Energy, food and water. And you don’t think of this as being related to economics, but how these things are intertwined with each other intrinsically, and it’s really easy in the West to forget this because it’s always come to us through the pipe and things and the supermarket and everywhere; people aren’t aware how all of these things interact in their productive level.

JIM: Let’s begin this segment and talk about the first one which is energy. The price of oil is over $110 a barrel and we are thinking the price of oil is going up. Okay, maybe I can make the connection that I’m paying more at the gas pump but look at the way the press portrays it: It’s not because demand is growing faster than supply and supply is struggling to keep up, it’s because we have greedy oil companies that just want to charge you more money for oil.

You know what? This country imports 70% of our energy needs, our liquid fuels; over 62% we import into this country are oil and natural gas and the other 8% or more comes in from refined oil products. We don’t have enough refinery capacity in this country for diesel now. And that’s one of the reasons why diesel prices are going up even more and because we are now competing in the open market with the rest of the world; we are competing with China for diesel fuel. So we don’t have the refinery capacity to meet all of our demands for diesel, jet fuel and gasoline. So it’s not just raw inputs.

If you look at some of our trade deficit figures, one of the reasons the trade deficit figures were up so much last month (or the two months before that because they report with a one month lag) is energy accounted in nominal dollars for almost half of our trade deficit. And if the price of energy is going up, we’re consuming more quantities of it because we’re producing less of it, and the same goes for natural gas. So if we take, for example, energy and you think politics don’t matter into this, what have we done?

I just watched a special last night where there was a wind company that was trying to put wind towers offshore where the wind is stronger off Cape Cod and they’re trying to stop it. And that gets back to NIMBY: “Yeah, I’m for green power but not in my backyard. I’m all for wind, but not in my backyard. I’m for solar, but not in my backyard. I’m for natural gas as a clean fuel, but not in my backyard.” And so government policy has stifled…I mean the environmental movement as well as other policies in this country have put a stop to the production of energy or thwarted attempts to produce more energy whether it’s oil offshore, oil onshore or natural gas. And as a result, our only policy is carrier battle groups in the Middle East. And people say, “well, just pull out of the Middle East.” And then people are going to wonder what are we going to do for energy. We’re dependent on most of our energy, 70% from the rest of the world – a lot of people that don’t particularly like us.

And as Zapata George was talking about in the first hour, even if we were to make a giant oil discovery, let’s say we opened up Alaska and offshore California and we made a discovery, it may be eight to ten years before that oil or natural gas comes online. So it takes a long time to build a refinery, it takes a long time to take a discovery to production. People who don’t think politics play into this, I hate to tell you but you’re not going to put a 747 in the air on solar batteries or solar power or a wind turbine. And we’re a long, long way off – well over a decade away before you know, we even convert our transportation fleet to either mass transit or to more fuel efficient cars such hybrids or plug-ins. [6:50]

JOHN: I was just trying to picture a jet liner lifting off with a belly full of lead-acid batteries. Have you ever picked one of those up and seen how heavy they are.

JIM: Oh yeah. And even if you did, maybe you only have ten passengers on the plane.

JOHN: It’s true, it’s true. But you know what’s really tragic about it is ironically we have actually painted ourselves into this corner. We didn’t have to be here.

JIM: No. In fact, I’ve cited this army report that was given to Congress. The military is concerned because the United States used to be one of the largest producers of raw materials; everything from lead, zinc, copper. And we have basically through the environmental movement shut it all down. So all of these materials today we’re importing from other countries. And that’s one of the problems that like any movement it started out as a good cause and it’s gone to extremes. And we have done nothing in this country to handle our addiction to oil. Okay, you don’t like oil companies, you don’t like oil; but tell me what you’re doing to replace it. You’re doing nothing. The only policy we have in place is we’re importing it from somebody else and from very unstable regions. And one of the growing trends in the world is a lot of these countries – whether it’s OPEC or the Former Soviet Union, these national state oil companies are saying, “wait a minute, we’re getting all these cries from the West and especially the United States, ‘come on, produce more so you can bring the price down.’”

And they’re saying: “Why should we? The less we produce, the higher the price we get for the goods that we have. So we should we go out, make huge investments and increase our production to drive the price down?” And you know what, something that we’ve come to grips here. [8:35]

JOHN: Let’s take energy which is starting to come on some people’s radar and look at the issue of food because that’s something that’s way behind it, and really off the radar for most public’s perception.

JIM: Well, if you take a look at the production of food, whether it’s livestock or grains, if you’re going to grow something you need two things; you need fertilizer, you need feed and you also need water to make things grow. And a lot of the fertilizers that we have used to increase the output on crops and reuse land over and over again is made from natural gas. Natural gas prices are up roughly about 36% this year. And natural gas production is in decline. So fertilizer costs are going up and then you take a look at what do you see on a farm – you see tractors, you see combines. Well, guess what: they run on diesel and the price of diesel is going up. And let’s say at the end of the harvest season, you harvest the crop – whether it’s corn, wheat or soybeans, whatever it is you’re growing – then you’re going to put it on a truck and get it to either a silo or get it to a food processing plant where it takes energy to produce it or refine it or whatever you’re going to do with the food, whether it’s grain into bread or some other kind of food product; and then eventually it’s going to have to be put on a truck again, and it’s going to be taken to the local food store; and you are going to get in your car and drive to the grocery market. So energy is greatly involved in the production of food.

One of the big agricultural revolutions that we had came in with seeds and fertilizer in the 70s. But you take a look at a modern farm today. All of the equipment that runs on diesel fuel; the fertilizers that come from natural gas. So the higher energy costs are also spilled over into the food area. [10:30]

JOHN: Remember what I was saying before about we take the issue of things that interact with each other, one area is science, the other area is food production which is tied to energy; but then there is also the political aspect because in order to try to make a showing for alternatives we’re now diverting a huge part of our food crop and energy – not liquid energy but capital energy, meaning what we put into it – we’re devoting about 25% of that into the production of ethanol which is now driving the price of everything else upwards. So that has an immediate effect.

JIM: Yeah, and so here’s a good example why you do not want government getting involved in energy policy because they gave us ethanol. Ethanol itself is energy neutral. It takes almost as much energy to produce ethanol as we get in terms of its output. It gives us lower gas mileage; it’s harder to transport, it’s corrosive. And if you take 25% of your corn crop and you devote it to the production of ethanol that means that you have less to grow – you know, farmers are growing more corn because the price of corn is over $5 a bushel, then they may be growing less wheat, or they may be growing less soybeans. And this is probably the dumbest thing that we’ve ever done is turn food into fuel. What we should be doing is using cellulosic ethanol – wood chips or waste matter – to create ethanol, rather than using a food crop which is driving up the cost of grains; which means that feedstocks for animals is going up, the price of bread is going up, pasta is going up, corn tortillas are going up. And here is one more example of how energy, not only in terms of the higher input cost of diesel fuel and fertilizer, but also diverting a good portion of our crop into food is driving up food costs. [12:27]

JOHN: Okay. So this loops around to first of all the progression of what may be an onsetting drought here in our country moving up towards the breadbaskets so to speak from the southeast part of the country. At the same time, we're finding because more and more energy is being put into this ethanol crop, the water tables are dropping so this affects…all of this stuff is interacting with each other.

JIM: Oh absolutely. And I just want to come back to the issue of food. I think I mentioned this on the program when we covered commodities a couple of weeks ago, but you know, William Doyle who is CEO of Potash Corp, one of the largest makers of potash fertilizer for farming, he said if you have a major upset anywhere due to let’s say a weather-related event, he said we’re going to have famine. And he said we’ve had 17 years of bumper crops in our grain levels –I don’t care if you’re looking at soybeans, you’re looking at wheat, you’re looking at corn – are the lowest they’ve been since we began record keeping back in 1960. And this is with 17 years of bumper crops. And I think at some point in the next couple of years this kind of policy of devoting 25% of our food crop to ethanol is unsustainable. And I think you’re going to see global food supplies become a major problem here. And I think you’re going to see a global shortage of proteins within our lifetime. I mean there’s only a finite availability of agricultural land anywhere in the world. A lot of it is being plowed over and there is only so much that we can do. And just imagine what the price of food is going to be when we’re looking at $200 oil prices, or $250 oil prices. And we haven’t even begun addressing even the water issues. So all three of these are all related. The more of our crop, the more intensity of our crop, the greater the water usage; we’ve got drought areas so the water table aren’t replacing themselves – the underground water aquifers are declining each year. And this is all occurring in some of the largest water aquifers in this country that are close to the Farm Belt where we grow all of this food. [14:47]

JOHN: This gets back to what you were saying, right at the turn of the millennium as a matter of fact, and that was if you wanted to make money in this decade because we could see where we were going with all of this, there were four areas to do it in: Energy, food, water and precious metals. And now we see that all emerging.

JIM: And I think this is going to be a trend that is going to become more pronounced. I do see a time when we’re going to have famine because if we have our grain stockpiles declining every year with record bumper crops what happens if you have a bad weather year. What happens if drought moves to the bread basket or other areas, or other countries decide that, hey, we’re going to make ethanol with food? At some point in the next three to five years, we’re going to have critical decisions to make: Do we eat or do we drive our car? I mean it’s going to get down to those two basics.

And these problems have gone ignored especially on the energy front. We have done very little to build our electricity grid. We aren’t building the amount of power plants that we need to. We’re not using clean coal technology; we’ve barely even got started thinking about nuclear power here. Clean coal and nuclear are what we should be doing with electricity and supplementing that with solar and wind and some of the other geothermal and some of the other as supplements. But we’re not doing that.

And we ought to in the meantime to make the transition until we can find alternatives till we can replace the current car fleet with hybrids or plug-ins – even if we go to plug-ins that means more electricity; that’s another appliance that’s plugged in in your garage at night that is using electricity. So we’re doing nothing on that end. And that’s why infrastructure I think is another thing that we’re going with because we’ve ignored these areas and they’re starting to catch up with us. It was a power outage in Florida last week, we’ve had refinery outages and you know what happens during this summer if you get a heat wave you know, here in California we get power outages. So all of these issues are going to have to be addressed.

And I see nothing and I mean absolutely nothing in the political realm, outside of a handful of people like Congressman Roscoe Bartlett, who is even addressing the issue of peak oil and how serious. This is going to be the single most defining issue of the next president. And God help whoever that is because you and I have said, John, the crisis window begins and the Age of Turbulence is just getting started. The crisis window begins in 2009. [17:30]

Other Voices: Eric King, Analyst/Trader

JIM: Gold breaks out at $1000 an ounce intraday, we have silver prices close to $21 an ounce, oil prices intraday over $111.

Joining us on the program is private investor Eric King.

Eric, normally we get a lot of requests to have you on the program after we get these big sell-offs or corrections that we get in the gold market, but I’m having you on for a different reason, besides the fact that we got a lot of requests after last time you were on the program. But all of a sudden now, with gold close to $1000 an ounce it’s getting people’s attention. Even with oil prices at or over $100 a barrel, which some people are still finding unbelievable even though I think it’s going to 125.

I want to talk about some of the fundamentals and with gold prices close to $1000 an ounce, where do investors go this time? Last time on the program you were a little bit cautious about nearing $1000 an ounce, chasing the large cap mining companies which is where all of the movement has been if we look at the gold equities market.

Why don’t we talk about a couple of things. Let’s talk about some of the fundamentals because I’ll tell you, some of the anchors that you see on the financial stations had a look of disbelief. It was like, “I can’t believe oil is here, I can’t believe gold is here.” And even though we’ve been telling people about this for six or seven years now. So why don’t we talk about fundamentals first and then we’ll get into what investors should be doing.

ERIC KING: Well, again, you do have to go to fundamentals. If you look at the Dow/Gold ratio going back to 1929 you can see it hit a peak of around 19-to-1. I think we had the Dow around 385 and I think gold was fixed at $20.35 or so, meaning it took about 19 ounces of gold to buy one share of the Dow; and then by 1933 you had the ratio back to roughly 1-to-1, meaning one ounce of gold to buy the Dow. Moving forward to the late-60s, you get a big bull market and the ratio climbed even higher than the peak in 1929, reaching 26-to-1. So it took 26 ounces of gold to buy the Dow at that time. And then of course, by 1980 we had the ratio back to 1-to-1 because the Dow was around 850 and so was gold. In 2000, the Dow-Gold ratio – it was kind of amazing it reached a top 43-to-1 and that had to be the point in time where gold in all of mankind’s history was the single most undervalued. So it took 43 ounces of gold to buy the Dow at that time. And of course, now you fast forward it to today, we’ve got the Dow close to 12,000, we’ve got gold close to $1000 and the ratio has fallen from 43-to-1 to 12-to-1, and probably on its way back to a 1-to-1 ratio. So clearly the trend is in favor of gold and against the Dow longer term and that’s what the public has to wake up to at this point.

And you can bring up oil which is just in an amazing bull market and it’s been kind of a joy to watch but except of course for people at the pump but if you’re in it – and I know your clients are, Jim, they’re making a lot of money – but you know, moving on to oil and people are buying oil as an inflation hedge but really until recently they’ve been largely ignoring gold. And you have to look at the gold/oil ratio at that point. So the average ratio is around 15 ½ barrels of oil to buy an ounce of gold. And today, with oil trading at roughly $100 a barrel and I don’t know what it did today but gold at $1000 it takes roughly 9 barrels of oil to purchase an ounce, so this ratio is interesting. And the reason is because when it swings in favor of gold it doesn’t revert to the median but it tends to overshoot the other way in favor of gold reaching the 20-to-1 or in extreme cases 30-to-1 area. So what this suggests is that going forward in the longer term, gold will dramatically outperform oil on the upside. Now, this doesn’t have to discourage the oil bulls, it just means that gold will have to – it will have its turn to shine and it suggests an outperformance on the order of say, 2- or 3-to-1 longer term. So – and of course, in the short term it’s possible for gold to correct. So I kind of think that’s where we are on a summary of the gold situation. [22:31]

JIM: CPM Group publishes their Annual Gold Book and I got an advance copy. In fact, Jeff Christian will be on my program next week. And it was amazing even to CPM, there has been so much gold bullion buying around the world, last year saw gold prices surpass their record high settlement price of 834 which was reached on the 21^st of January 1980. But what was incredible is investors bought over 43 million ounces of gold last year and it wasn’t just people in the Middle East or people in Asia, it was global. And if you think of the things that move gold prices fundamentally whether it’s strong physical demand – and if you take a look at what investors have been buying gold for and we’re seeing all kinds of variations of this theme, they’re buying it 1) as a portfolio diversifier 2)they’re buying it against a falling dollar – on the day you and I are talking which is Thursday the dollar just hit another low 3) they’re buying it against volatile stock markets 4) they’re buying it against low yields on interest rate bearing bonds 4) they’re buying it as a safe haven against political turmoil 5) they’re buying it as an inflation hedge 6) serving as protection against financial money problems. So if you look at all of these factors which were in place in the 70s bull market, multiply them by three or four in this bull market and this has according to CPM Group the first time in history of any bull market that you have seen eight consecutive years of rising gold prices.

And yet you look at people – I was at a party a couple of weeks ago where there were financial people, people in my industry and obviously they know I’m in their industry and so the topic got around to “what are you buying?” And you know, you mention gold and oil – it’s funny because if you mention oil they sort of understand it because they’re paying for it at the pump, but you mention and gold and you know, their eyes kind of roll “oh, oh, okay, you’re one of those people.” It’s absolutely amazing.

ERIC: It’s fascinating because we’re seeing two things in the gold market and really it’s sort of a panic by some into physical bullion. I was reading one of the commentators today that was saying that some of the clients that were coming in were literally putting a hundred percent of their savings into gold. But then at the same time, so really we do have the investment side on that side going up, but then you know, at the same time we’re also seeing the jewelry demand drop off and I think some of the buying in India, in Asia and in the Middle East as gold sort of spiked here. So it sort of gets ahead of itself a little bit in bull markets and it’s not that it’s at a frothy level in terms of fundamentals, it’s just that people have to get used to you know, gold at these prices. And so after over time I think we’ll see some of that demand start to come back in from the Middle East, from Asia and from India. But they tend to be smart buyers and so we are seeing sort of a drop off on that side, but then we’re seeing other people, I think in the Western world beginning to say to themselves, “My God, every day I get up the dollar goes down!” Or you know, whatever the case may be. And so we’re sort of – some of these folks are behind the curve, right, Jim because they haven’t been in a fund like yours or Sprott’s up in Canada; and so they really don’t have the exposure necessarily of some these proper, appropriate inflation hedges.

And God knows on the brokerage side, the United States shamefully they have not been telling their clients during one of the great bull markets in resources and resource stocks, they have not really had much of any exposure for their clients to these stocks. And of course, they’re coming around. It takes time. But you know, if it was 1980 they were telling everybody at that time and I think 40% of the S&P was resource stocks. So they’re coming around and the word’s getting out and clients are coming into it, but you kind of have to try to in these bull markets to catch the pull-backs and catch the significant pull-backs if it’s a major stock that you want to be in.

You talked about the large caps, Jim. I don’t think people should necessarily be chasing those stocks here. I think there are better ways to deploy your money probably of course in the junior side of things where things are very discounted and you have to be a good stock picker. But I think that’s what people have to look at is ways to buy the physical metals on the significant pull-backs or even the quality stocks that they want get – but again, on the pull-backs. And of course, we may go higher first but try to catch those big pull-backs and try to avoid getting caught in some kind of intermediate top because it’s very painful for folks when they have to sit through those big shakeouts; wouldn’t you say, Jim? [27:30]

JIM: Just from a fundamental point of view – and I think this has to do with liquidity which is a big concern of anybody getting in the investment markets and I think that helps to explain why you’ve seen since last August most of the money was made in the big cap mining stocks. But you know, I’m not saying that people should sell because in a bull market you hold on to your position and then you add when you go through these pull-backs. And I want to get to pull-backs in just a minute. But you know, from a fundamental point of view I’m looking at a lot of these gold producers that are selling at $720 an ounce in the ground, $800 an ounce in the ground, $861 an ounce in the ground and so I’m saying that’s not where the value is. Am I saying that they can’t go higher? No, because I think you and I believe that gold is going much, much higher. But, if you’re just starting to get in the market, if you’re watching television and you’ve Cramer recommending gold or you see anchors on Bubblevision being surprised (“wow, gold is at 1000, where did that come from?”) and you’re looking to get in this market, all we’re saying is on the large cap side just be a little cautious here unless you’re a trader.

Now, speaking of markets, we all know in the gold bull market it’s not unusual for the stock market to pull back 5 or 10%, but when it happens in the gold bull market and you get these 20 to 25% pull-backs, which Eric, you and I see this every single year, despite the fact that prices end up higher by the time we get to December, why don’t we address that for a moment. And then maybe take people through sort of an accumulation or how to look at this because what’ll happen is when gold is at $1000, people are getting excited and they’re jumping in and then you know invariably at some point we’re going to have a pull-back, and we’ll have a sharp pull-back. People will get burned, they’re going to get upset with themselves versus I think the way you and I buy is we love it when things get cratered or things go down. Instead of panicking, that’s when you step up to the plate to buy. Why don’t address that for a moment.

ERIC: You know, there are a lot of new people I think coming into the gold bull market and back to your previous question – this was from March 3^rd on Bloomberg but they said gold, silver, platinum and palladium may be the best performing financial assets this year as inflation is slowing growth in value of the world’s major currencies, bonds and stocks. Precious metals have risen at least twice as fast as the euro and yen in 2008 and returned to 6 to 20 times as much as US Treasuries. And some of this is beginning to make it into the press and we’ve got these big inflation articles and things that are happening. And, Jim, you’ve sort of let your listeners know this ahead of the curve but as we get more folks maybe listening to your program, as an example, coming into the gold arena, again, try to buy the significant pull-backs. They can be gut-wrenching to watch and if you’re in it and you have a bad entry point at the top, people just find themselves frozen and a lot of times they’ll panic out. So, buy the big corrections. Buy the significant pull-backs even if it just goes higher first. Just catch a big pullback in something where it looks like the end of the world and everybody is complaining and moaning and all these gold stocks or gold, and they’re wanting to swear off gold stocks or gold and silver or whatever – that’s the time to come in!

Now, as you’re in Phase II of a gold bull market, you know, one of the problems is that the gains are very strong and very steady so I don’t know if they’re quite going to be able to shake things out as much as they did you know, at some earlier points in the bull market. But it is possible; you know, we are very overbought on some of the longer term indicators for gold and silver, so you know, there could be a significant shake out there for sure. And I think for the listeners or for the new people coming in, if you want to own physical gold and silver, that’s great, just accumulate. Buy the big pull-backs and just dollar cost average into either the equities or the gold or the silver or whatever it is that you’re trying to get into. But right now, everybody is kind of riding high and everybody is setting – I see 1200 thrown around, 1300; I hear $30 silver and God knows, I’m rooting for it but sometimes into that you’ll get sort of a corrective act that can begin to happen. So as you get a reaction try to buy into that. Don’t go chasing because that’s how you get really burned. [32:12]

JIM: I’ve been in this business for almost 30 years and Eric, I study a lot of this from a historical perspective and one of the major trends that I see is that I don’t care if you’re looking at precious metal stocks or you’re looking at oil stocks, and that is when you’re in a major trend that big money – the way you make that big money is you get in on the trend, you hold your position for the entire bull market. And as you have just been addressing: If you already have a position and you want to increase it, then you wait for the pull-backs, wait for the prices come to you.

And I’m going to make a prediction here: Up until I would say recently, bullion has been outperforming the commodity itself, but now there is a trend, and I believe this is the year you’re going to see, one, the equities outperform the bullion, we’re seeing that already.. You’ve got spot gold up 19%; you've got the HUI up 24%. But I also predict that in this market where it is right now you’re going to start to see eventually people start paying up because what they’ve done whether it’s base metals, oil stocks or precious metals, they may have missed out on the trend so they see it go up and they say, “you know what? I’m not going to pay. These stocks are cyclical. This ain’t gonna last.” Well, you know, I’ve been hearing that story for the last four years. You know, first it was: “Well, it’s too high.” Number two, we’ve got deflation coming with the credit crisis.

Number three, the US is in a recession. Well, guess what? We’re looking at $1000 gold and we’re looking at $110 oil. But I think the next phase is going to be a big boost in the PE ratios of oil stocks, it’s going to be a big boost in the PE ratios of base metals stocks, you’re going to a big PE ratio in gold stocks. And I want to talk about juniors because we’ve been talking a little bit cautiously here that, yes, some of the juniors are up this year, some of them are up in a spectacular way, but Eric, you know, I’m looking at a screen here that has a hundred stocks on this screen – I’ve got the majors, I’ve got the intermediates, I’ve got the juniors developers; it’s all broken up by category – and the juniors have still been a laggard here. So I don’t know about you, I’ve always favored this sector but in this kind of market what’s your impression of the juniors as opposed to let’s say the majors?

ERIC: Well, I think, Jim, you and I have a tendency to gravitate because we are value investors we just naturally we’re going to gravitate to the value. And right now the value is you can go out and buy a company for 25, 30, $35 of gold per ounce in the ground or gold equivalent when there is a mixture of say gold and silver.

And again, I don’t want to mention any names but a major mining company executive off-loaded quite a bit of paper and I’ve kind of watched him redeploy that into juniors. And I just think it’s brilliant thing to do. You know, here’s a guy who’s made a fortune and takes some profit off the table which I think is great and basically says where’s the value, and it’s in the juniors, and so start starts redeploying capital into the juniors. So the smart money is gravitating to the juniors because that’s where the value is. And you go start getting stocks 6, $700 an ounce gold in the ground on say some of the large caps or the majors and, yes, going forward these stocks can go a lot higher but you know, is Agnico-Eagle going to go over $100 during the bull market, of course it is, but right now it’s what? $77, wherever it is, $78, it’s try not to chase. Again, buy the big pull-backs. And again, if you can get into the quality juniors that’s really the place to be because that’s where you could see some extraordinary gains going forward.

Obviously, we’ve talked about Aurelian had a hundred-fold move in a 3 ½ month period of time and that’s sort of an extraordinary circumstance because they really hit the Mother Lode down there in Ecuador. But these – fortunes will be made on these juniors and then there will be some duds and people will lose money. Buy quality. Get involved in a good fund is my advice for most people. Sprott’s got one. Jim, you’ve got one. But if you have time and you study these things, try to go meet the CEOs, shake hands with them, get to know the company’s story, stay on top of them; buy quality, buy the pull-backs. And of course, most juniors have been in a pull-back; right, Jim? So there’s a lot of value out there. But really, truly right now at 20-some odd dollar, 20-plus dollar silver, $1000 gold and the majors running, yeah, they’ll go higher and everything will go higher over time but the value – and it’s amazing at this point to actually have these kind of value plays across the board in some of these juniors because later on in the bull market there is not going to be any value. There won’t be any value. You’ll be looking around going, “what are people thinking buying some of these stocks?” where they’re going to be trading. And by then, Jim, you’ll be selling them, your fund will be selling them, and I’ll be selling them and they’ll still probably go a lot higher.

But I just think for people at this point right now it’s kind of staggering to me that people can go out and buy these juniors. And they’re on their own timetable. We’ve discussed this two weeks ago. Certainly they’re on their own timetable but I think the juniors when they finally turn and go into a bullish mode will not look back and the gains will be very, very violent on the upside.

And also, Jim, I think it’s noteworthy – and of course we’re doing this on a Thursday, but today it’s noteworthy because you know, at one point the stock market was down 235 points today (and of course, it finished positive) but the gold stocks were strong and they were strong all day. So they’re sort of decoupling a little bit from the stock market and I think that sort of speaks of the kind of bull market that we’re in right now. [38:15]

JIM: It was amazing, you mentioned that this very successful CEO of a major mining company sold half his shares. I’ve seen – and I know who you’re talking about and I’ve seen this with one other successful…two of the biggest success stories of this bull market are selling shares and redeploying it into the junior sector for the very reason that, Eric, you and I have been talking about this in terms of any time you see a run up in price you’ve got to be careful you don’t chase the performance. It happens much in the same way that in the mutual fund industry – and this happens every single year – you know, you’ll have the financial magazines that come out in January and they’ll say: “This was the number one performing fund.” A good example would be last year, it wasn’t domestic equity funds that did well, it was the international funds. And so if you take a look at the January financial magazines everybody was touting last year’s winner. But if you look at performance now, this year the worst performing sector has been international; the European and Middle Eastern markets are down high double digits – as much as 19 and 20 percent; the Asian markets which were the big leaders last year, they’re down nearly 20 percent; if I look at China’s market everybody was going crazy last year, China’s Shanghai market is down 25% this year. So I think the point that you’re making here – and this is why we’re trying to see this because what will happen is gold will go up, it will go over $1000, you’re going to see it flashing all over CNBC, everybody is going to talk about it, Cramer is going to be doing handstands or whatever, and then people are going to go in and rush and they’re going to buy whatever’s moved up, you know, the large cap stocks. And then what will happen is we’ll get that pull-back and what we're trying to say here is just be cautious and if you are buying try to buy something in the sector that at least offers value rather than trying to over pay.

ERIC: I think that’s the point, Jim. I think as you get more listeners to your show, more people wanting to want to get into this market, again, just buy the big pull-backs; don’t go chasing – that’s how you get burned especially badly on the gold and silver sector because of the reason that you said, Jim, the violent shakeouts that happen. People are rarely able to sit through those. And you know, again for longer term people that don’t trade at all and are just sitting in their positions and just making a fortune right now, that’s great also. You know, for some of the traders I know they’ve been taking some profits off the table maybe in GLD or SLV or some of these stocks that have had big runs. But getting back even to the fundamentals, Jim, you talked about agriculture recently and the bull market that’s going on there, and it also kind of couples in with the bull market strength that we’re seeing in gold because all of this stuff is making the news: You’ve got oil making the news, you’ve got the agricultural stuff making the news. And this was from Bloomberg but over the past 12 months producer prices rose 7.4% - the most since October, 1981. And just today, when William Lapp of US-based consultancy Advanced Economic Solutions took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industries and emerging countries.

He added a twist that rising agricultural raw material prices would translate this year into sharply higher food inflation. I hope you enjoy your meal, Mr. Lapp told delegates during a luncheon. It is the cheapest one you’re going to have at this forum for a while. His warning that a strong wave of food inflation is heading towards the world economy was met by nods from the agricultural traders, food and industry executives and western government officials at the USDA’s Annual Agricultural Outlook Forum. Larry Pope, Chief Executive of Smithfield Foods, the largest US pork processor, warned delegates of a wave of “real food inflation” just at the time the central banks were under pressure to cut interest rates because of the struggling US economy. “I think we need to tell the American consumer that prices are going up,” he said. “We’re seeing cost increases that we’ve never seen in our business.” He said that wheat prices have previously moved from $3 to $5 a bushel without significant pain for consumers, but now the wheat price has jumped to nearly $20 a bushel. These large increases will show up in consumer prices. “The final result will be higher prices,” Mr. Lapp said. The global economy is at the beginning of a period in which the consumer will face higher food prices.

So I think you’re right on the money looking at this agricultural stuff, Jim. And I think all of this stuff is sort of a super cycle, or a grand super cycle commodity bull market that we’re witnessing. And so you have these staggering gain; you have these tremendous overbought conditions on the CRB Index, etc., but I’ll tell you it’s a bull market. And it reminds me – and you’re telling people, you know, to hang in there for the long term and not get shaken out by these trip up in the money. And from Reminiscences of a Stock Operator – and I’ve told this story before - but you know, a guy is in there, he’s an older guy and he never takes stock tips and the young kid gives him one and for whatever reason he buys this company and it goes up 10 points or so. And the kid is telling him to take the money and he says, “But we’re in a bull market.” And then it’s up 20, and the kid comes to him again and kind of telling him, “Hey, I think you should take the money off the table.” And he gets the same response, “We’re in a bull market.” And pretty soon it’s up 30 and the same thing and then 40 points. And by then the kid finally breaks down and says, “you know, I’m stressed out. I can’t sleep anymore. I really wish you would take the money off the table. Don’t you realize this thing could come down?” The basic message of that was that this old guy knew when you’re in a bull market, you buy and you hold, and you hold for the long term; and you buy quality and you try to buy it at the right time, which he obviously did on that one. And I think that’s what you’re talking about, Jim. We’re getting a little frothy, maybe somewhere in here, we could go higher for sure on gold and silver, but try to catch that major pull-back; try to get into these equities; try get into the quality and hold for the long term, particularly these juniors. I don’t know how much they can pull-back even if the HUI starts correcting because they’re on their own timetable and they’ve been sort of burnt out for so long that if you want to get into the juniors and you like the price level, just buy those. [44:49]

JIM: Eric, you were in the technology market in the 90s, and I would venture to say if anybody took a look at what happened to the technology sector or the NASDAQ in the 90s, you would have made a lot more money if you had bought Dell or Intel, Microsoft or Cisco holding on during all the periodic corrections that we got in the 90s – remember the Peso crisis in 1994, then we had the Asian crisis in 97 and then we had the debt crisis and Long Term Capital Management in 98. And I’m talking about days where I think it was the Asian crisis and where the Dow Jones Industrial Average fell 8% in one day, and I think during the Long Term Capital Management crisis we had like a 10 to 15% correction. So rather than trying to trade out, had you just held on, because who in 1997 before the public came in big time in the technology sector, if you were looking at your tech stocks in 97 you’re saying: “Holy Cow, these things are incredibly expensive. The charts said with this correction I get out;” and then look what happened in 97, at the end of 98, at the end of 99, until the first part of the latter part of 99 you could start seeing distribution taking place but the point that we’re trying to make here is if you’re going to be in a bull market, accumulate your positions in the downturn, hold on to your positions, do not panic, do not try to guess every wiggle on the chart, because we’re in uncharted territory, it’s going to surprise you.

ERIC: And I think on that point, on the 97 tech stocks, very quickly, I remember, Jim, and I hope you don’t mind I’ve jumped in with this story but I remember it was in October I believe, maybe it was during the summer, but there was a real, big heavy swoon down in the tech stocks and I remember Cisco and 3Com were getting thrown away. And right at the bottom, when these stocks had lost – I think 3Com went from 80 to 24 bucks, on average, 27 on it; and then Cisco had a huge correction but I’m buying blocks of these stocks and of course within a month and a half I was up over 100%. But the point you’re making is in a bull market you’ve got to buy into the those reactions. You’ve got to buy into those corrections to make the big money. It’s just the way it is in a bull market. [47:12]

JIM: Instinctively that’s what people don’t do because they get scared, they get frightened, you know, they’re turning on the TV or they’re saying, “oh my goodness, this is it. This is over. A huge correction coming.” And this is the point that you step up to the plate and that’s when you buy. I’ve always been amazed by this and this has become a new field in finance which is behavioral finance. Put something on sale, put a Gucci bag and mark it down 30 to 40 percent and you’ve got people lined up around the block; but put one of your favorite stocks on sale for 30 to 40 percent and people say, “Uh-huh, give me a call back when it goes for full value or I can pay a premium for it.” I’ve always been amazed at that.

Well, listen Eric, as we close, you know, usually I have you on when people are panicking but I wanted to have you back on – we had a lot of requests last time. What would you be doing? You’ve made some recommendations in the past. I’m pretty sure you’re going to agree with me to be very cautious if you’re going to go in and buy the large cap producing mining companies that have had, you know, some of these stocks have had 40, 45% run-ups this year. I assume you’re going to be cautious. But anyway, I’ll leave that recommendation up to you.

ERIC: No, I agree, Jim. Agnico-Eagle as you know I recommended in July of last year in the low 40s and the stock is up close to 100% since that time trading close to $80 a share. I think Sean Boyd, you know, he has tremendous integrity and is one of the great CEOs in the world today, not only because of his integrity but also because of the shareholder friendly way in which he runs Agnico. There’s been some insider selling at Agnico where insiders have been taking some profit. And again, try not to chase those kind of things but really get them on big reactions or corrections.

Yamana – just talking to Peter Marrone today and you know, Jim, I recommended that in the high twos on your show and then in the low threes; the stock is roughly $19 a share. But talking with Peter today, asking him about his exposure personally to his company because there was some insider selling over there. Rather significant, but he commented that “his combined personal and family trust interest in the company is over 2 ½ million shares.” So he still has a lot of exposure to that company going forward. I think Peter knows over the course of the bull market the stock will be much higher. But you know, those guys have done a phenomenal job of execution over there and so you had some insider selling – significant selling around the $16 level. And those guys deserved every penny. People have made a lot of money in Yamana because of the execution of management.

And again, people, just on these stocks in general, they’ve had big moves and don’t chase them here. With gold at a $1000 an ounce again, and they can go higher of course, but try to catch these on a pull-back if you want to get into a Yamana or an Agnico.

JIM: I just want to point out that anybody investing in juniors, juniors are a lot riskier than let’s say investing in a producing company, so please do your homework and consult with your advisors before taking any action.

JIM: Well, Eric, listen, I appreciate you coming back on the program. We got a lot of requests last time you were on and I thought I’d have you on this time because as the price of gold goes up, of course, on the day we’re talking here there seems to be a crisis. You know, you pick up the papers on a daily basis and it’s amazing though what we have seen happen in this gold bull market is one of the plays has been you go long the producers and you short the juniors. And I just think it’s suicidal in this kind of market. It reminds me so many times that you see this happen where you’ll take hedge funds will go in and I can think of this happening a couple of years ago when a very famous hedge blew up. A lot of the funds were selling credit default swaps on GM bonds and they were shorting GM stock as a hedge and then all of a sudden this guy Kirk Kerkorian shows up and starts buying GM and that whole hedge blew up. And not only did they lose money on the credit default swaps they also lost money on their hedges. So I think in this kind of money where anything can surprise the money on a daily basis I think you’ve got to be suicidal shorting this sector.

ERIC: Let me jump in there for just a second, Jim, and also add, we had the Bear Stearns blow up today. It was down 50% and this goes back to what you and I have been warning your listeners for years which is really this penchant for the market to be moving towards these derivatives which we talked last time about Buffett’s discussion of those being weapons of mass destruction or one of the recent interviews in that they were created and devised by madmen. And he likened it to hell, that it was “easy to get into but hard to get out of.” And I think when you see a Bear Stearns which has really been cratered from near $200, or $180 or whatever was it was, and here it is after hours at 29.95; but when you see that kind of disaster happen and let me also comment that some very sophisticated people have lost a lot of money in here. I know one of the mega English billionaires of the globe here has been heavily invested in this at over 100 and was buying in the 90s and 80s and adding habitually. And it was going to be good for a double; right? Well, so much for that in the financial world – that’s a massive loss for him and it’s probably just a nickel in his empire. But the point is that even the wealthy are getting hurt here. And folks, that’s why you want to be in the bull market and that’s why you want to buy quality. Be in the bull market and stay in the bull market because there’s so much pain to be had in the Dow Jones going forward – we talked about the Dow/Gold ratio, and there’s really going to be pain going forward most likely for the stock market longer term when you look at it versus gold. Gold really has to outperform massively the Dow which means you really you have to be in there to be winning on the investment side of things. [56:25]

JIM: All right. Well, listen Eric, as always, a pleasure to have you back and we’ll talk to you again some time.

ERIC: Thank you, Jim. And I also want to put a thanks to my friend Ted Butler who’s always helped me with keeping me up on movements of the price of gold and silver and the Commitment of Traders and thanks to you, Jim, also.

If

JIM: Well, we were talking about the interconnectedness of all things. Let’s figure out how poetry figures in to energy, food, water and everything else like that. See, I told you the Hindu guru could do everything. Speaking of Hindu guru, Rudyard Kipling was born in Bombay, India in 1865 and he has a very famous poem out there, entitled If . And it says:

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too,
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

And he goes on through four stanzas here:

Yours is the Earth and everything that's in it, And--which is more--you'll be a Man, my son!

And of course, it reminds me of the movie Master and Commander. The concept of when everything is cracking around you, keep your head and know what your course is.

JIM: This is something I think is going to be very critical in navigating the markets because there are two things that are picking here which are volatility – I mean just take a look at the measure of volatility, the VIX, which has just shot through the moon; another measure of financial stress, the TED spread which measures the difference between euro deposits and 3-month Treasury bills, they’re at crisis levels.

And John, we’ve seen this, gosh, how many times over the years. Remember when the events of 9/11, then from 9/11 it was the Iraq war, then it was the hurricanes; we have seen a lot of unprecedented things in this decade I would say. Wouldn’t you agree with that, given the number of things that this country has gone through probably in the last seven or eight years?

JOHN: Yes, especially if you remember the euphoria after the fall of the Berlin Wall, everyone was pronouncing “peace in our times;” the Oslo Peace process was underway and everyone said it was a great new era, yada, yada, yada. But I guess pessimists like myself were saying, “yeah, but the old rules are gone, but you don’t know what the new rules are yet.” And people were counting on the old rules holding and they haven’t. And so it’s been amazing how fast, since we crossed the millennium everything fell apart. The peace process fell apart, the political situation in the world changed – everything.

JIM:If you take a look at all of these changes that we’ve gone through. It’s reflected in mood swings in the market. And you’ll see last October there was almost a euphoria as the Dow hit record levels, the S&P hit record levels; and then all of a sudden by the end of the year there was maybe a little bit of a sobering as the first announcements – large announcements – coming from of the investment banks and money center banks in terms of losses. But by the end of the year we were still in the euphoric state and the markets ended up on a positive note. And then all of a sudden within the first month of the year as more of these financial firms came out and came clean with their write-offs, it got worse and you’re almost to the point of capitulation here.

I mean how much further can we get than where we’ve gone right now. If you take a look at, for example, at almost the majority – three-quarters of the economists believe the economy is in a recession. Is there anybody not knowing that the US economy is in a recession. I’m looking at a cover of BusinessWeek, this week’s issue. The front cover of BusinessWeek: Waking up to the recession; how to survive it; hedge against job losses; tweak your portfolio; scout for real estate; stay ahead of inflation. What’s the solution? Bail out of homeowners. Rescue investors. Prop up the banks. All of the above.

So what happens is mood swings. We tend to go from one extreme to the other and what you can’t afford to do as an investor, like I see just people jumping out of good quality companies, whether it’s oil companies, the energy sector, gold stocks, base metals producers and I believe that we’re in a commodity bull market the likes of which we have never seen before. But what happens is all of a sudden people are jumping and asking questions later. You know, there is a huge, huge stockpile that is sitting in cash right now. One of the things that I disagree with is on the liquidity crisis. I have never seen this amount of cash stockpiled and there’s a lot of money out there with a lot of people who have just sort of like the ostrich in the sand saying, “oh my god, I don’t know where to go.” And so a lot of this has been locked up. And what will eventually free it, I believe, is going to be the bailouts that we talked about in an earlier segment. But rather than focusing on where things are at the moment, what is going on today, I think you have to focus on long term trends because that is how I think you make real money. And we’ve been talking about, over the last couple of years, how may times, John, or how many authors have we talked about or interviewed on energy and here we are looking at $110 and people still don’t believe this is real. [1:02:38]

JOHN: Or when you mention the metals or these things, you get the weird looks. And that’s because they are stuck in the old paradigm trying to analyze a new situation. You can’t do that.

JIM: No. We’re in a period of time as last week we covered a topic – the slow death of consumption – the consumer is not going to fall of the cliff, but gradually as taxes and inflation go up, that means that people are going to have less money as taxes are raised because they’ll take home less. As inflation goes up their money will buy less so there will be less discretionary funds to spend. So with that trend in place, you don’t want to be in discretionary companies. Also, I think that when you get into tougher times and that’s what we’re in right now, is there is less money for frivolous type of things or discretionary type of things and it gets down to basics.

And we’ve been driving the point of what are the long term trends? All right, money is depreciating in value so precious metals are going up; gold is up four-fold; gold stocks are up almost 1200%. 1200%! And you still have people shorting it. Bullion is up; oil is up over five-fold; you know, you take a look at the price of corn. Energy is getting harder to find, you’ve got demand growing faster than supply so we’re looking at $110 oil. This trend has been with us since the beginning of this decade. Food prices are on the rise now; China and India are industrializing. That means as they industrialize, they consume base metals, more commodities. As their economy improves, they start consuming more, their diets improve, so they’re eating more protein in the diets so the demand for food rise; there is greater demand for oil. And so these trends have been in place for six, seven, eight years and yet any time there’s a little wiggle people are saying it’s time to sell off oil stocks. Well, why are oil stocks going down right now? It’s called a run to liquidity. A lot of these funds that are leveraged are going out and they’re being forced to liquidate their portfolios or contract their portfolios. Listen to last week’s segment where we talked this leveraging process and you’ll kind of understand what’s going on with Bear Stearns, Lehman and some of these other funds that have gotten themselves into trouble.

But what are the longer term trends? People have to eat, people have to use energy, people have to have water to grow crops. We have to have it to cleanse ourselves. We need water to drink. Infrastructure is what makes this society run. These are things that aren’t going to go away. They’re not going to be solved overnight. You’re not going to build power plants, refineries, find new energy, come up with new kinds of drought resistant seeds or crops. All of these things are going to be in place, but rather than trying to jump in and out of the market or “this is hot, I’ve got to be in this sector;” or “they’re selling off this sector, I’d better sell. I better get into this or this sector is going down.” That’s why we try to focus so much on fundamentals on this program because I think that’s the way you make money: You look at what are the fundamental trends in place; are these trends for real, are they sustainable, are we anywhere near close to saturating. And every time I look at these fundamentals, over and over again the same thing just says: Buy. [1:06:18]

JOHN: And something else you’ve been talking about for quite some time here, and this is important to sort of thump this again. I mean you look at Treasury yields right now below 1 ½%, markets going up and down like a rollercoaster, everybody is uncertain and panicking. But you know, dividends invested in the right company do pay. I mean you get paid sitting here while you watch all the fun going on. So that is something to be considered.

JIM: Absolutely, and I think dividends are going to play a greater role in total returns for individuals, especially as stock market returns revert more back to the mean. I think dividends are going to tell you more about what’s going on in terms of the health of the company in terms of their business model than trying to bet on, “okay, if I buy this stock, I hope it goes up in value.”

If a company is increasing its dividends at double-digit rates, that will tell you more about what is going on with the company, their cash flow, their earnings than some company that is saying, “oh, we hope our sales will be this,” or an investor that goes into a stock and goes, “I hope it goes up based on this assumption, or this happens or they get this contract.” Whereas I think dividend investing provides a lot more stability. If you take a look at a lot of these companies, whether it’s utilities, even some of the oil income stocks, if you look at some of the royalty trusts which are just having a bang up year this year, this is one of the things that doesn’t go out of style. And that’s what happens to the market: Fads move in and fads move out. And I think focusing on fundamentals, focusing on value, focusing on long term trends, that stuff doesn’t go out. [1:07:49]

JOHN: Well, obviously, everybody is in crisis mode right now, especially what happened on Friday. But having said all of that, I think you’ve been anticipating that – heaven knows, we’ve been talking about that here on the program – and we’re still expecting the creamy filling in the middle. This was this rough first quarter we were talking about.

JIM: Yeah, and it’s not over yet. We still have about two or three weeks and maybe even the first couple of weeks into April yet to get through because we’re going to have to get through the next first quarter earnings season. At some point, you’re going to have the NIBOR board pronounce the US economy is in a recession. I mean if you have Martin Feldstein, who’s on the board, come out Friday saying we’re in a recession, it’s a pretty good clue that we’re in one. I mean if he’s on the board that pronounces one.

So we still have some more bad news yet. But what you need to find a bottom is a capitulation phase and we’re getting close to that. So I still expect a creamy filling. [1:08:45]

JOHN: And remember to enjoy your creamy filling with a glass of milk while you’re listening to the Financial Sense Newshour at www.financialsense.com.

Part 3

JOHN: Time for the Q-Lines. The Q-Lines are open 24 hours a day to record your questions for the program. And there is a toll free number for the US and Canada, 1-800-794-6480. That number will work from the rest of the world. You don't put the 1 in front of it, obviously, if you're calling from offshore. It's 800-794-6480. It's just not toll free from your particular country. Please remember to give us your name, where you're calling from, first name is fine, we don't need a lot of details. Try to keep things short. The callers are getting longer and longer and we're finally going to have to start chopping them here because we're getting too many calls per show now in any given week.

Remember that the contents that you hear and the answers provide are for information and educational purposes only. You shouldn't consider them as a solicitation or offer to purchase or sell securities and responses to your inquiries are answered based on the personal opinions of Jim Puplava. We are unable, because we don't know enough about you, to take account your suitability, your objectives or risk tolerance. And as such, we will not be liable to any person for losses that may result from investing in companies profiled on or advertising – of course nobody advertises – profiled on Financial Sense Newshour. 800-794-6480. First call comes from Canada today.

Hello, Jim and John. This is Rob from Niagara Falls, Ontario, Canada calling. Jim, congratulations, first of all, to your son on his marriage. Hope everything works out for him. I've got a question about my junior silver that I bought. I bought a junior silver mining company that just bought another mine about two weeks ago. They increased their reserves and their silver prices, their stock price is going nowhere even though the silver price is going up. I'm wondering is this a Maalox moment because Maalox doesn't seem to be helping. My stomach is just turning here, so if you could recommend something a little bit stronger, I'd appreciate that.

JIM: Rob, you know, don't be surprised. I think I know which one of the silver companies that you're talking about. It really isn't a well managed company. Up until recently by the way, the silver stocks were not keeping even with what was happening to the price of the silver, which was up 36%, and up more so than the gold this year. Actually, silver is up 39% compared to gold up 19 ½%. But the silver stocks depending on which ones you own are catching up. So it's just a matter of picking the right silver company and the company I think you own is a company that's done rather poorly. So it's poorly managed, if it's the one I'm thinking of. But without mentioning a name, I can only speculate here. [2:42]

Hi Jim and John. It's Mike from Bridgewater. Thanks as always for your show and all of the great work you do. I appreciate you getting to my question a couple of weeks back regarding regulations and also the Robber Baron theory of the global elites. And I think with respect to the first question I would agree it's going to be a combination of smart regulations and reattachment to the gold standard to try to get things back in shape long term. And as far as the global elites, and the Robber Baron theory, I still kind of stick with that and I think there is so much capital concentrated on so few people and I think if you look back in history, not only do you find great regimes and great empires debase the currency, as a major fall in the empire, but also you'll find that wealth and power tends to be very concentrated. So I'm still sticking to that theory even though I agree with you that printing money is ultimately going to make the wealthier wealthy and middle class pay for it.

My next question is just a very tactical question. It has to do with bonds. I know you're not big on bonds and neither am I. However, I'm curious on what you think about inflation protected bonds, particularly for like 401(k)s where you don't have much options for anything else. They seem to be about the only thing doing well right now. Again, inflation protected seems to be doing double digit. I'd like to get your thoughts on it. Thanks again for everything and look forward to your response.

JIM: You know, Mike, the returns on inflation adjusted bonds, TIPS are actually negative right now, and I mean if you're going to be in the bond market, I suppose that would probably be the only area I would be in because I do expect inflation rates to go up, so you would be protected there. But remember they understate the true inflation rate. If the true inflation rate today is somewhere between, I don't know, 7 to 10%, and the official rate that they quote is only 4%, they are still understating the returns on fixed income investments. But if I was in the bond market, that would probably be the only area I would be in. The other area you might want to look in is the bonds of strong currency countries, especially the commodity producers like Australia, Brazil, Canada, or even New Zealand. [4:54]

Hi. Lee from Salt Lake City. FHA recently raised limits on the loan rates at 729,000 in the Salt Lake County area. I know nationwide they've done the same thing, and I'm just wondering what your opinion is on the estimates of this, if it will help to continue the creamy center of 2008, possibly beyond, together with other stimulus taxes that the Bush team has put together. Thank you.

JIM: You know, Lee, this is just going to be one part of it. It will be the rebates that are coming out in May. It's going to be increasing the limits on FHA, and it's also going to be the bailouts that are also coming. [5:35]

Hi. This is Percy from Costa Rica. Jim, you said a good place to invest is water, but how? I'm guessing you're not talking Crystal Geyser or Lake Tahoe, so if I want to sink my dollars into water, how do I take the plunge?

JIM: You know, you can either buy companies that are involved in the water industry, or you can buy, gosh, there is a number of water ETFs out there. One is PowerShares Water Resource Portfolio, ticker symbol PHO. There is Claymore S&P Global Water Index Fund, which is CGW, and there is First Trust Water Index Fund, FIW. So there is a number of water ETFs out there would probably be the simplest way. [6:19]

Hola Jim and John. This is Richard calling from Buenos Aires, Argentina. Jim, the two major factors that I see distinguishing the Great Depression of the 1930s from what you are forecasting to begin in the next few years are the unprecedented ever increasing real shortage of cheap food and energy and a giant population of retirees who are entitled to an enormous and perhaps unfundable entitlement programs. Jim, am I correct about these distinctions? Are there any others? How many of these factors make the next depression any worse than the last?

JIM: Richard, you hit on a couple of them. The end of cheap energy and the end of cheap food and the large population of retirees heading into retirement with no ability for the government to really fund it. I mean here in the US, politicians have absconded with the retirement funds and spent them and issued IOUs. Three other factors and they are sort of related is one, and I'm just speaking here from the United States point of view, we were a pretty much self-sufficient society in the 1930s. We were the world's largest creditor. Today we are the world's largest debtor. We were the world's largest manufacturer. Today, our manufacturing base has shrunk. Most of the stuff we import into this country, we import elsewhere. And then, you know, we had an abundant supply of the two factors that you talk about, food and energy. In fact, we resurrected the Texas Railroad Commission to regulate the price of oil because we had found so much of this stuff. Today, I think one of the big factors globally, and this gets to the point, and you've hit it right, the nail on the head here, the situation we're facing with food and energy is a global issue, so that means just higher commodity prices and that’s why I think it's going to be a hyperinflationary depression. [8:08]

This is George calling from Ontario, Canada. I listen to your show every week, and I think it's very good. I struggle between technical and fundamentals in terms of gold stocks and the price of gold. You have people like Frank Barbera and Tim Wood calling for a major top and saying that gold could go back to $700 and to go to cash. You seem to be saying a different song. But my real question is on interest rates, in Canada, the bank of Canada on March 4th lowered the rate by half a percent to 3.5%. The commercial banks followed suit with TD lowering its prime by 50 basis points to 5.25%. In an hyperinflationary environment, aren't we going to expect interest rates to head much higher? If that is the case, what would be the trigger that caused them to move higher; and when the rates start to increase, will it be incremental, or would it be exponential and what type of rate increases could we expect to see? I guess the basic premises, should one be locking into a five year or 10 year loan now, or do you wait? Thanks, look forward to your response.

JIM: In your particular country, George, they are in the process of lowering interest rates, so I think they could get a little bit lower in your country. But I think eventually long term interest rates, I know in the US I expect by the time we get to the fourth quarter, interest rates to start rising as headline inflation numbers get bigger. And so longer term rates will be going up. So in answer to your question, you are, at some point here, in the next quarter to going want to lock in on interest rates because eventually they are going to be going up. [9:49]

Hello Jim and John. This is Jim from the land of Lincoln. I own a business and I'm getting a little older and like it in some of your climes a little better and I was just wondering about the prospects of Florida. How are they, considering the recession that's to come? I'd like to move down there any way, but do you think that tourism is going to increase in areas like Florida because it will become less expensive for people from overseas to come to these areas like this? I'd like your opinion on these things. Thank you very much.

JIM: I think Florida still has some great prospects and it's a great place to buy real estate right now with the values that are out there. And you hit upon something. You know, even though our economy may be weakening or our currency is going down, for a foreigner who owns maybe euros or Chinese yuan or another strong currency, you know, things look cheap for that kind of person. So I still think tourism. I think the sunshine, the warm weather during the winter, the fact that they don't have any income tax, I think these are still positives that are going for the state. [11:00]

This is Kevin in Phoenix, and I just listened to the show and the guy called about the problems building up over the years and the issue of tax cuts and the candidates raising taxes now. I don't think you've addressed the inflation tax. You have the tax cuts from the Bush administration, but you ignore the inflation tax that the Bush administration has increased tremendously. So I don't believe there really has in net effect been a tax cut. Thank you.

JIM: Oh, we've been addressing the inflation tax. We've been talking about that inflation here, gosh, John, how long now?

JOHN: My gosh, since we began out, but the Bush administration doesn't inflate or deflate. The Fed does.

JIM: And those policies have been with us, not only just in this decade but also in the last decade where the outlet for that inflation showed up in the technology or the stock market bubble, just as in this decade did showed up in the real estate, mortgage, and now what I believe is a bond market bubble. [12:02]

Jim and John, this is Al from Jersey City. Jim, in the first part of the Big Picture this week, you made mention of the fact that, in referring to Keynesian philosophy, you said the idea was that increasing consumption would be good for the economy; and that was the goal of the Keynesians was to really just sort of boost prosperity by increasing consumption. I'm not an expert in Keynesian analysis, and I was wondering if you could just sort of ...even if it's a question of where you'd look for something like this, but if you could just sort of clarify that a little bit.

I was under the impression the idea it would be a temporary measure to boost consumption and sort of stimulate the economy and then the government would do things to stimulate or boost consumption in order to stimulate the economy, but then it would back off and of course they never do seem to back off, they just keep spending. But was that the original thought. It seems counterintuitive or it seems to not make much sense that you could spend your way towards prosperity. I mean it wouldn't work with my family. I don't understand why someone who is as reputedly as intelligent as he is would be speaking in that way, but perhaps that was his original philosophy. I just don't know. And I mean who else is going to have a better idea about it than you, so if you could give me a quick little rundown, I'd really appreciate it. Thanks again for all of your guys are doing and I really, really enjoy your show. I really appreciate the service you're doing and please keep doing it as long as you can. Thank you very much.

JIM: Al, the Keynesians, usually when you get a bust period of time where, you know, demand has been spent, supply is abundant, Keynes would come in and say, look, we need to increase consumption again and try to artificially stimulate it. The problem is there was too much consumption and there might have been too much supply.

Unfortunately, what drives prosperity, at least from the Austrian point of view, is savings, investment and production. And it is savings which provides the money for investment and it is that investment which produces goods. So you increase the supply and when you do that, you bring down the cost. And it is the jobs that are created through, you know, people starting factories, starting businesses that creates prosperity and wealth.

And unfortunately, under the Keynesian philosophy where you just create money out of thin air, you put money in somebody's pocket, there wasn't any saving or investment that built plant production and capital goods to, let's say, provide the supply that will be created from the demand. So you know, the Keynesians have got it backwards. It's savings and investment that create jobs, wealth and prosperity and create the jobs that allowed people to have the income to consume. So you know, they've got the cart before the horse. Unfortunately, the horse is savings and investment. [15:02]

Hello, Jim and John. This is George from Austin, Texas. Jim, here we are in March of 2008. First, if you had just realized a million dollar cash windfall from your share of a sale of a partnership, how would you asset allocate your investment of this windfall? That's the first question. Secondly, for portions allocated to precious metals or commodities, if it would be different, please indicate so. What percentage of those portions over what period of time would you incrementally invest until 100 percent of portion investment is obtained? Thanks.

JIM: You know, George, if I had a one million dollar windfall right now and you wanted to allocate it, I would allocate it to things we were talking about. I'd put maybe 20% in energy. I'd put 20% in precious metals. I'd put 20% in water. I'd put 20% in food and maybe 20% in infrastructure. And that's if you were taking a long term view of things. Although right now, if I was to look at those categories and percentages, the two areas that seem more attractive to me right now out of those five areas are definitely precious metals stocks. I think they represent a better value and especially the juniors over the bullion itself. In the area of infrastructure, I think there is a lot of great companies that are selling at inexpensive price multiples right now, so I like that area.

And then in the area of energy because of this forced liquidation by insurance companies, hedge funds, a lot of these energy stocks are selling at PE multiples, same with some of the base metals companies that I think that three-to-five years from now, you're going to look back and you'll never see these kind of price earnings multiples again. So those are the five areas, but of those five, probably the two that stand out to me as most attractive, would definitely be energy right now and precious metals stocks. [17:05]

Hi Jim and John. This is Bert calling from Yuma. I just wanted to let you know that I am so tired of these long winded questions. I think any time you get somebody with a long winded -- [John cuts off]

JOHN: Yep. He's got the right idea. It seems somebody else shares your opinion there, Jim, on the whole thing. [17:24]

Hello, Jim and John, this is Rich. I’m a frustrated junior investor from Wisconsin, and my question concerns the following. You mentioned on your March 8th show that some of the juniors are being valued at less than $25 an ounce and that would indicate a good buy. In my portfolio, my largest holding is Copper Fox Metals, they have 8.1 million ounces of gold measured and 69 million ounces of silver, 83 million shares outstanding. And if I do the arithmetic, they are valued at less than $5 an ounce of gold, not counting there is silver and other base metals. And of course I'm frustrated because the share price doesn't move during the latest upleg in gold. And my second largest holding is Terraine Metals with 5.5 million measured ounces of gold in the ground and another 2 billion ounces of copper and other base metals. They have 113 million shares outstanding, and if I do the arithmetic on them, they are valued at under $11 per ounce.

My question is, should I continue holding these stocks even though they haven't moved in hopes that maybe in the next upleg of gold later this year that someone else will recognize value and help push the shares higher or should I just dump them now and look to buy them back later, possibly at an even cheaper price. Thank you all. I'll hang up and listen to your answer.

JIM: You know, I'm not real familiar with these companies, but if they have a lot of base metals associated with them, maybe even more so than their gold, then they might be evaluated as a base metal producer or the deposit is mainly base metals, you know, the base metals right now have been hit or the base metals producers on the idea the world was going into a recession. Don't be surprised if some of the juniors languish even when the metals go up. That is very common for the sector. Those stocks aren't the only juniors that have languished this year. There have been others, so if you've done enough research and there is good management behind them, then I would probably hold on and be patient and that's a very big requirement if you're going to be in the junior sector is to be patient because they go by their own cycle. [19:38]

Hi, Jim and John. This is Nelson in Virginia. I was wondering if you all noticed the irony when Jim you said that we may end up working until July or August to pay off our taxes because those are the two months of the year named after Roman emperors. I just thought that was a little ironic.

Anyway, I was also wondering do you know of any other podcasts or websites that are just as educational and useful as yours are. Thank you for all that you do.

JIM: John Loeffler has a program. John --

JOHN: I do.

JIM: Give out your – you have a radio program. You cover more of the political realm, spiritual realm.

JOHN: Well, in serious answer to your question, Jim, I do do a program. It's now in its 18^th year of broadcast. I've been doing it a long time before you and I even met. It's called Steel on Steel. You can find it at www.steelonsteel.com. That's steel like the metal – there is no e at the end of steel – because a lot of times we have debates on the program and deal with hard issues and we analyze things from a three-fold perspective; from its geopolitical, from its economic and from its religious world view perspective. All of these three legs of society, they all interact, and we try to stay cutting edge like an early warning system. I should mention we're a membership site, which means usually it's by subscription, but for Financial Sense listeners, if you want to go to that site and listen to any of the shows for a month or so just use “fsn” as both the log in and password (“fsn” is both the log in and the password) at www.steelonsteel.com, and we'll open that up for all of the Financial Sense listeners. “fsn” for log in and pass word. [21:24]

Hello. Edward from Knoxville, Tennessee. I'm 78 years old and I've been a good boy saving money for when I get old. It disgusts me that inflation might take my savings. I can't do anything about it except through my buying gold and silver, but aren't there any powers that be who can control the decline of the dollar? I mean rap the Fed’s knuckles. If the dollar loses its international supremacy, won't some folks with real power get hurt, and won't they do something about it?

JIM: The talk now is moving us more towards a global currency, which will be the argument to handle a currency crisis and I think that's where they are trying to take us. [22:09]

Hi Jim and John, this is Rob calling from Canada. Jim, I have a question. All through 2007 on your program, you were talking about juniors and that juniors were the place to be: At the end of 2007 you sort of said well, juniors didn’t do as well as you thought but you thought that 2008 was kind of the year of the junior. The last couple of programs you've sort of said first it’s going to be gold bullion and then it will be majors and then the money will trickle down to the juniors. Am I missing something? Are the juniors not the place to be or are they the place to be in 2008? I'd like your comments on that. I'm starting to invest more and more realizing that I really don't know what I'm doing, so I want to subscribe to a newsletter, but I could easily spend my annual salary in newsletter, so if there is one or two you'd recommend, I'd appreciate that.

JIM: You know, Rob, last year, it just wasn't the juniors that underperformed bullion. It was also the majors. I mean you had gold up over 30 and the major indexes like the HUI, the AMEX Gold index and the XAU, the Philadelphia gold and silver index underperformed gold by almost 30%. And then the juniors underperformed the majors, so it was the equities. Gold equities did not do as well. What I see happening this year and it's sort of playing out this way, you've had bullion go up, and now you have the gold producers, the majors, outperforming the bullion. The HUI is up 26%, gold is only up about 19%. So that's happening. And then you also have some of the juniors are now starting to break out and you're seeing that change. You know, there are a couple of juniors here that are up, oh, 30, 40%. One junior is up 75%. Another one is up 87%, up 30%. So it's gradually starting to happen. And I think as the price of bullion goes higher, people will be looking for areas to go. So I do think that you will see that happen. [24:12]

Hi. This is Tom from Lakewood. Thanks, Jim and John, for the great public service that you're doing in educating a lot of people about real economics. I do have a couple of tough questions, though, that I've been saving for you. One of them is that we talked about gold as a hedge against inflation, but for 21 years from 1980 to 2001, gold just went down even while inflation was rising. It was not a very effective hedge against inflation and the price went from $850 to $250 an ounce. I would be interested in an explanation as to why do you still think it's a useful hedge against inflation. Maybe the argument has something to do with a spike reached in 1980 that wasn't necessarily representative of the price. Maybe it has to do with central bank selling during that time, but I think it would be helpful to hear more about your thoughts on that.

Second, Jim, I know that you believe that the Federal Reserve will lower interest rates going forward to address the difficulty the economy is experiencing now, but one thing I'm never clear on is whether you think it should lower rates or not. Sometimes I hear you and your guests suggesting that the Fed should leave interest rates alone or even perhaps raise rates and let the economy sort itself out. At other times, I hear you saying something that sounds very much like you believe that rates should be lowered to address the situation. It would be helpful to hear your own views or what the Fed should do as opposed to what it will do.

And finally, you guys tell us a lot about Austrian economists or economics in general, but not much about the economists behind it. It would be interesting to hear more about Mises and Hayek and the others, I think, who were behind this discipline and tell us more about their thinking specifically and who their successors are today and give us some more background on that discipline. Thanks so much for all you do, and we all appreciate it.

JIM: You know, Tom, your suggestion about giving a little bit more background on Austrian economics, the people behind it, I appreciate you bringing that up. That should be a concept we'll tackle here on the Big Picture. And maybe address that issue. In terms of what I think. Remember, what we do on this program is try to anticipate what government does and what government officials do. So when I say the Fed is going to raise interest rates, they've stopped raising interest rates, I'm telling you in anticipation of what I think they are going to do. But if you listen very closely, we've done a lot of segments whether it's on inflation, debasing the currency, I believe in a gold standard, I believe in free markets, I believe governments should not intervene in the markets because they distort things. But that's not how the world works, so what I believe in, in terms of the markets operating freely, a sound money system, those are the things that I believe in. And, you know, maybe one of these days I'll just – John, maybe we'll just have “this is who I am” segment because if you listen to me closely, I think it's pretty obvious I'm for free markets, laissez faire government, sound money and things like that. [27:33]

JOHN: We can probably answer the question easily. What should the Federal Reserve do? Dissolve itself.

JIM: Yeah. But this is the world that we're living in, and this is what happens and there is going to be consequences to these actions that we try to anticipate and inform you of. But maybe, John, we'll do a – we'll do a segment on this program: “Hi, my name is Jim, this is who I am.”

JOHN: This is your life. In all reality, though, I think given the banking system, there would be a place for, and you can probably debate me on this, a central bank as far as changing money, in other words being able to handle transactions like checks and electronic checks and things like that.

JIM: Clearing process or something like that.

JOHN: Right.

JIM: But any expansion of the money supply beyond what is needed to grow its economy or intervention in terms of where we're going today, when you're on the classic gold standard they couldn't do -- in other words, the Fed couldn’t do a lot of these things, which is one of the reasons why, if you did have a bust, it was very short and it was over with. [28:35]

JOHN: Are there examples from history where countries, say in the West, at least, ran for quite some time on like a gold standard, pound sterling or whatever, something along those lines?

JIM: Sure. Take a look at the latter half of the 19th century when the world was on a gold standard. It was an era of peace and stability.

JOHN: Yeah. So there are political consequences to this too.

Hi. This is Cheryl from West Virginia. I have three questions. In a recent newsletter, John Mauldin stated that M3 growth at 16% doesn't mean as much as one might think. He indicated that the Fed has little control over M3 but does control the adjusted monetary base which has risen by negative 0.3% since August. As a result, he concludes that since inflation is a monetary phenomenon, the Fed is not inflating. I was wondering how you would counter his position. Also, I would appreciate clarification on a point regarding your projection of a hyperinflationary depression by 2012. Are you saying that beginning around that time we will experience inflation beyond that which we are experiencing now. And if so, how long do you think the hyperinflationary depression will last? Third, if other countries start cutting rates, how will inflation and commodities be affected? I want to thank you for all of the great information you provide. It's a real portfolio safer.

JIM: I would disagree with Mauldin on M3 being less important. It's high-powered money. It's the high-powered money that moves markets; It's the high-powered money that goes into derivatives; it's the high powered money that goes into leverage. And then you also have expansion through foreign purchases of securities. And even if you look at measures such as M2, which the Fed still reports, that's going up at a considerable amount. All you have to do is look at a chart and since December 31^st or the middle of January, this thing has gone from roughly a little over 7.4 trillion to 7.6 trillion; so even M2 is growing at a fast rate.

As far as the hyperinflationary depression, the problems begin in the fourth quarter of this year where I expect a return of higher interest rates and inflation. And then depending on the outcome of the November elections, in terms of what policies are enacted and then also probably peak oil hitting between 2010 and 11, and government in response to that, then the inflation rates will be double digits. [31:19]

Hi, Jim and John. This is Richard from Detroit. Great show. Jim, what do you think about refiners. I'm thinking companies like Valero, Tesoro. In the long term, will they continue to get squeezed by higher oil prices and also the US slowdown and decreased consumer spending, or do you think they are a good way to participate in this energy bull market? Thanks.

JIM: Unfortunately, the one thing that has hit the refiners is the crack spread has narrowed considerably, so the profit margins have dropped. These crack spreads are going to have to widen again, and that's why I don't think we've seen, as consumers, the full effect of higher gasoline prices because eventually, they are going to have to pass on the cost in terms of their raw input –the oil – that they buy, otherwise they go out of business.

And we can't afford to have these guys start losing massive amounts of money because we don't even have enough refinery capacity to refine what it is we consume. If you're a long term investor there are very few refiners. I'd take a look at – I'm not going to mention the names, but take a look at some of the companies that are expanding their capacity to handle heavier crude oil because that's a lot of what we're going to be getting from the Middle East and Saudi Arabia, also from the tar sands in Canada and also the ability to expand diesel fuel because we're importing a lot of diesel because we don't have the capacity to refine enough of it here. But if you're going to be in the sector, you're going to have to be a long term investor because right now, the profit margins have narrowed as the crack spread has narrowed.

Hi John and Jim. I’m Terry from Oklahoma. I’ve got three questions. Are you familiar with a non-profit organization American Association of Individual Investors? If so, what is your opinion of the services they provide? Question one.

Question two, are you familiar with OmniTrader, software for both stock and futures trading. If so, what is your opinion about the software and if not what software might you recommend to a computer nerd who is looking to start actively investing and likes to track everything on a computer?

And third and final question, what trade publications and books would you recommend that a new investor read to gain a better understanding of the stock and futures markets? That's it, doing a great job, thanks a lot.

JIM: I'm not familiar with Omni trader software. Some of the best trading software for tracking and technical analysis is a software package called TradeStation. My son is a CMT and a lot of the technical people tell me that is some of the best programs out there. Probably some of the best areas, if you want to understand the futures market, there is about five or six books in this area that I'd recommend. One would be Fundamental Analysis of the Futures Market by Jack Schwager. And that is Fundamental Analysis. He also has Technical Analysis of the Futures Market, that's his second book. Then there is another third book he has, A Complete Guide to the futures market: Fundamental Analysis, Technical Analysis, Trading Spreads and Options by Jack Schwager. Just go to Barnes and Noble or Borders or look on Amazon on-line that is absolutely must reading if you really want to get in depth analysis of this. [34:38]

Hi. This is Sandy from London. I am really enjoying your program and have learned a lot of it. Wanted to say I'm interested in and one of my primary concerns is protecting my portfolio against inflation. The common advice is to buy TIPS. I have been paying attention to your advice including John William’s advice on Shadow Stats and I'm wondering, are TIPS really a good investment for the average small investor? Thanks.

JIM: You know, Sandy, the only problem I have with TIPS (which are Treasury Inflation Protected Securities) is the government understates the true inflation rate. If you're going to be in the bond market and let's say you just don't like to see a lot of fluctuation, then this would be one area to go in. But one of the best ways to protect yourself against inflation actually is gold and silver. And you know, Sandy, you don't have to have a lot of money for that. I mean you can buy silver. Silver is at $20 an ounce, so maybe if you don't want to spend a lot of money on gold which is $1000 an ounce, another alternative would be silver or maybe even a gold or silver ETF. It would be another way. But I think gold and precious metals are a better inflation hedge than TIPS are. [35:58]

Hi, Jim and John. This is Louis from Reston, Virginia. Great show guys. I love your program. I have a question for you. I've seen that in the financial sector some of the stocks are for sale, specifically I was looking at Citibank, and it's been down from 60 to around $20. I was wondering if I should take advantage of the sale or I should pass.

JIM: I'd hold off. We've got first quarter earnings coming out here, and I suspect Citibank and some of the others are going to be announcing more write-offs. The stock’s just slightly underneath 20. I think this stock can go down to the low teens.

Hi Jim and John this is Tom from New Jersey. I really enjoy your show and I have a couple of questions regarding the Sy Harding interview. I was wondering in terms of the annual cycle he spoke about; your views on that versus your Oreo theory. It seems like they are a bit at odds with each other. And also your views on the continued growth on the annual and presidential cycles in terms of the global economy, especially given that Sy indicates he likes to invest in a total stock market fund. Thanks. Look forward to your response.

JIM: You know, Tom, there are a lot of things that are out of cycle right now. Cycles have gone longer in some areas and shorter in other areas. And in the presidential cycle, one of the reasons I'm looking for the creamy filling is exactly for the kind of bailouts that we saw on Friday, the stimulus package and helicopter drop we're getting in May. And remember, these guys are just getting started. There are more bailouts and stimulus packages coming. You pour enough money, you eventually can inflate and cause things to go up. But there are going to be consequences this time. Unlike 2001 when they began to inflate and Greenspan began pumping the money supply, slashing interest rates, we didn't have the kind of commodity prices or the economic growth that we had in emerging markets, and so this time I expect higher inflation. But I do expect as a result of the election cycle, where else would you ever see Congress and the President work together and pass a stimulus package and get it done within 30 days? The reason is they are all up for job renewal come November. [38:15]

This is Loni from Champlain, Minnesota. Our family listens to Financial Sense in the car while we run errands. Recently our seven year old home schooled son was given a creative writing assignment to write a discovery about an octopus in a shoe store. Here is what he wrote: [child’s voice] “Octopus shoes. One day I saw an octopus in a shoe store and he was wearing shoes. But he was drinking because he needed water. That mean Ben Bernanke passed him in, instead inflating him. The made the price of shoes go up to $100 all because of Ben Bernanke inflating. The octopus didn’t buy shoes.”

JIM: You’re doing a good job of educating your children. [39:03]

Hi Jim and John. This may be too naive of a question but I’m trying to understand what life would be like under the gold standard. I have this perception that technology and industry, it wouldn’t progress as fast for the fact that money supply would be limited to the supply of gold. How with this thought process, …please I hope you guys know how much your show us helping the little guy who are on the outside looking in. It’s just an outstanding program. Thank you very much.

JIM: You know, the only thing that I can say is just take a look at the Industrial Revolution when it was taking off during the period of the 19^th Century and the country was on a gold standard and also during that period when we were on a dollar gold standard, the stability that we had in the markets. We had lower interest rates, politicians did not promise more than what they could deliver, they didn’t inflate as much. We had a society where you know, I come from a large family – 10 children in our family and my Dad was basically a carpenter who supported his family. He actually even saved enough to start investing in real estate and my mother stayed at home. That went away when we went off the gold standard and also the dollar gold standard in August of 1971. And we’ve had nothing but continuous inflation; we’ve had higher rates of inflation, higher taxation, government spending is out of control, politicians promise even more promises they can’t deliver on, and it took the wife going to work to support a family and then in this decade it took the wife, the husband going to work and debt to support a family. So who knows? We may be the…it’s going to take the animals going to work and the children going to work to support a family with the rate that we’re going. [40:45]

Hi there, Jim and John. This is Ronnie, I’m calling you again from Israel and I have a few questions. One is regarding the steepening yield curve. You talked about it on the last program that banks are basically hedging loans on the two year note and investing it in the long term bond market. My question is what happens when the long term bond market first falls, the yield goes up, will the banks then still be in losses because of that, because they took the two year loan for the 2% yield and suddenly the price of the 10 year note falls.

My second question is regarding the oil industry. I’m invested in an oil ETF and the ETF follows the big oil and gas companies, BJPGNG and it’s underperformed oil for a long time now. The oil companies have basically underperformed oil and gas. And will this trend continue and why is this exactly happening. Do you think eventually oil and gas companies will outperform oil or not. And thank you again for your great show.

JIM: Ronnie, as interest rates begin to go up I think you’ll see bond portfolios change within portfolios at banks. They’ll readjust those or hedge those.

In terms of the underperformance of your oil stocks versus the actual commodity itself, that is a factor that’s held true of not only oil stocks but also the gold equity stocks and the reason is this rush to liquidity. If you listen to last week’s show where I talked about the leveraging up of balance sheets and then when you deleverage a lot of this selling that has come into this market whether it’s the energy sector or the metals sector, has come as a lot of hedge funds, banks and insurance companies have had to liquidate their equity holdings to get their balance sheets in line and deleverage and get liquid. So a lot of this selling is coming from that. And it’s been one of the reasons why the equities have underperformed the commodities. [42:47]

Jim, this is Peter from the West Coast. Your indicator is your parking indicator and mine is the Amtrak. I live next to a railroad track and since 2000 there have been 8 passenger cars, one dining car, one baggage car. Now, instead of 8 passenger cars there are only 3 passenger cars. There is one dining car and no baggage cars. They’ve really cut back. Also the talk is when gold goes over 1000, people will start buying. I think you’ve changed yours to 1100. I think it’s going to be around 1400. The funds may jump in but in my circle there is not one word. One intellectual, so-called, he went to college to study economics he walked up to me and said, “hey, I’ll bet you’re happy gold is going up.” I said why do you think it is going up. He said, “Labor.” Well, that ended that conversation. And when the housing boom started to take off, I mean you talk about being crazy if you watched it day after day, the crazy things people were doing, I got so scared I sold my trust deeds. I was early but at least I got out. And I know other people who got caught. I knew it was going to be bad and just like any stock market bubble, the higher it goes, the worse it’s going to be. And I don’t understand why all these analysts were saying after the housing bust started: “well, I didn’t know it was going to be so bad.” Well, anyway I’m going to sit back and watch. I don’t know who’s going to last longer: the dollar or me. Okay. Thanks a lot.

JIM: Peter, keep counting those cars and we’ll be talking about railroad inflation. [44:24]

JOHN: Maybe people will be selling railroad wheel bullion or something like that.

Hi, I was wondering what the effect of the dollar collapse would be on Panama as a country because I’m considering moving there for a way to get out of the US. Would Panama still be safe? Would it have a lot of social unrest. And one more question is: I know you’ve said to buy oil companies and other energy companies because they’re very cheap right now. But at the same time, oil companies aren’t able to find more resources. So it would seem like that would against them. It isn’t just better to buy oil directly. Thanks.

JIM: You know, in terms of your first question, on Panama. You know, there could be some unrest down there. There is already you’re starting to see some unrest in Latin America; you’re seeing it in Venezuela, some in Ecuador, and you’re also starting to see it in Nicaragua. In terms of oil companies, if you’re in the energy sector I’d be buying that are growing their reserves. [45:23]

JOHN: By the way, New Zealand has finally admitted that it is in a recession too. So we’re not alone in this whole thing.

Hi, Jim and John. My name is Tacola from Boston, Mass. I have a couple of quick questions for you guys. The first is: US oil refiners, is this a good time to be owning these shares. Should I be accumulating during these blow offs as we’ve seen over the past week with companies like Valero, Tesoro, Conoco. The second question is rental houses in agricultural states: Will this type of real estate be much affected during the housing crash. And last: what can the small investor do, besides owning physical metals or GoldMoney account to prepare for coming US capital controls. Should we be wary of skyrocketing taxes or asset seizures during a crisis. Thank guys.

JIM: You know, trying to buy oil refineries, I would start nibbling on them. The crack spread has narrowed right now. But if you’re going to be in oil refiners it may be a while before that spread widens. So you’re going to have to take a longer term view on things. Real estate rentals relating to farming areas. I’d prefer to own the farmland. And what can you do to prepare for capital controls? Hedge the currency, try to buy investments denominated in other currencies and gold and silver. [46:34]

Hello, Jim and John. This is Jeff down in Calgary, Alberta. Jim, I’ve got a question for you, I also wanted to make a suggestion but I’m just curious what you’re thinking of this: I was thinking of buying a December 09 eurodollar put because I mean looking for the LIBOR rate to rise from now until…well, not now but before December 09. And I remember you talking about interest rates rising as well. I was just wondering what you think if you do think the LIBOR rate is going to rise by December of 09.

JIM: Boy, ticking out one step at a time, I do think LIBOR rates will be higher by then. I do believe interest rates in general are going to be higher by then. [47:15]

Hi Jim and John. This is Jeff in Seattle. Some of the last shows talked about how money enters the money. The Sy Harding interview talked about how money from people’s payroll deferrals go to mutual funds and their money gets invested on specific days. Part of last week’s Big Picture talked about how hedge funds short juniors the last few trades before the closing bell. Where can I find more information about how money enters and exits the market. Who are the players and what restrictions do they have regarding when they enter and exit the market? Is there a breakdown of the types of players? Is there a breakdown of who they represent and their limitations to entering and exiting the market. Where can I find this information? When do you think gold will have a pull-back. Is there a seasonality to this? What timeframe would be a pull-back be if you were to expect one within the next year. Thank you.

JIM: You know, Jeff, gosh, I couldn’t keep track with all of your questions, so I’m just going to answer one. If you’re going to be in the market and you’re going to be buying you want to know who the players are, you need to get a Level II and especially if you’re operating in the Canadian market where you can see who the buyers and sellers are, and also see where the bid-and-ask price is. And there are a number of places like Stockhouse and others that will provide in Canada Level II; and on the US side there are a lot of firms that you can get the software from. [48:43]

Hello, Jim and John, this is Lani in Washington state. I have a question for you about derivatives. I understand the term in the dictionary context, and I read this week that according to the Bank of International Settlements there are $513 trillion of derivatives out there, and Warren Buffett has called them financial weapons of mass destruction. Could you please explain to me in a layman’s context what financial derivatives mean and how they threaten me? What are they exactly and what is their danger. Thank you so much.

JIM: Lani, to get into a full discussion of derivatives on this program would be probably be beyond the bounds of simply answering a Q-Line call. But a derivative is a contract that derives its underlying value from some kind of an asset. You can have a derivative on stocks, for example, an option. You could have options on futures representing commodities. You can have some kind of derivative contracts on interest rates or the bond market. You can have some kind of derivative on let’s say currencies. So if the underlying asset is what is underneath a derivative then the derivative is just a way of leveraging that asset through a contract.

For example, to take an easily understandable thing to look at is an option on a stock. You can buy for example today, IBM stock which is selling at a price that is let’s say $115 so if you bought 100 shares 100 shares of IBM it would cost you $11,500, or you can buy an option which would give you the right to buy IBM stock for maybe 3 or $400. So you know, it’s a way of using the same amount of money, 11,500, to buy let’s say a two month option on buying IBM, instead of controlling 100 shares of stock you might be able to control 1500 shares of stock. So it’s a way of leveraging a bet on an underlying asset. [51:03]

JOHN: But the potential for disaster if the bet doesn’t pay off is what makes them flaky; right?

JIM: Yeah, and most of these are done with leverage and so you know, it’s like…I mean if you’re just in the option market, that’s a simple method of investing. The option expires and you can just lose the money you put in the option. But you know, you take it to another level with some of these interest rate swaps and these other and now you start adding leverage on top of leverage and that’s where the trouble really begins. [51:31]

JOHN: Jim, that’s it for today. It’s going to be an unusual next week. Maybe I’m actually predicting that.

JIM: John has looked into his crystal ball.

JOHN: But anyway, the markets are closed on Friday because of Good Friday and we will be doing some unusual things on the program. And then of course we don’t know what the markets are going to be doing between Monday and Thursday.

JIM: Yeah, it’s going to be different that week. Tim Wood is going to be sitting in for myself on the Experts next week. Son number two is getting married so we have a second marriage. Like I said, three of my sons surprised me during the holidays last year – all of three of them got engaged finally. So my second son is going to be married next week, so I will not be doing the Experts. But we are going to be having Jeff Christian from the CPM Group as we interview Jeff on the Annual CPM Gold Yearbook 2008 which has just been released. Jeff will be my guest. We’ll be interviewing two mining executives: one exploration company; and one company that has gone into production. And then when I come back – not next week, but the week after in the Big Picture, I’ve had a lot of requests, we’re going to do a four part series on preparing for retirement. And so we’re going to start that – not next week but the week after.

Some other guests coming up on the program. Steve LeVine will be my guest on March 29^th. His book The Oil and the Glory: The Struggle for Oil in the Caspian Sea. William Fleckenstein, Greenspan’s bubble. Bill Fleckenstein will be my guest April 5^th. Lila Rajiva, Mobs, Messiahs and Markets on April 12^th. Richard Lehmann Income Investing Today. And Pat Dorsey The Little Book that Builds Wealth. He will be with us on April 26.

In the meantime, 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.