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Financial Sense Newshour

The BIG Picture Transcription

April 26, 2008

Part 1

The New Energy World Order

JOHN: Well, this is the part of the program where we connect the dots and project the trends and try to remind everybody that generally the other media – the mainline media – are looking in the rearview mirror to figure out where they are going. Just a year ago, Jim, it was sobering to remember that everyone was screaming about how wonderfully the Dow was reaching to new heights and the sky was the limit again and the economy was doing great, and in just a couple of months later we just pitched right over into the subprime mortgage debacle. So that’s definitely not the place to go for your future information.

Last week we talked about the decline of our major oil fields and I should make a sidebar note here about the food issue, the ethanol issue and people are beginning to realize that oil, ethanol, food and the dollar are all interconnected which is what you’ve been saying here on this show for ages.

And we briefly mentioned last week on the program an article in the Asia Times by Michael Klare –who has been a guest here on the program before – it is entitled The New Energy World Order (). This article was a brief summation of Klare’s new book Rising Powers, Shrinking Planet: The New Geopolitics of Energy. And as I said we’ve interviewed Klare here on the show regarding his previous books, Resource Wars and Blood and Oil. And what we’re going to do is contact him to arrange another interview on the new book. But we thought – and both of us read the article – that it was probably one of the soberest assessments of where we stand in this whole issue.

And what we’re going to do today is to take the five key points of his Asia Times and then supplement those points with your added research to show life as we now know it is really going to change. Not only just for Americans but for people around the world as well. I would say that this is a paradigm shift change. We are not over-emphasizing this.

So let’s begin. What we’re going to do here is give you a glimpse of what lies ahead as we head closer towards this crisis window which we have been saying goes between 2009 and 2012 in terms of a number of different trends colliding together with all of the squall lines developing in 2008, which is where we are right now.

So, Jim, take it. [2:20]

JIM: The reason I wanted to cover this because I think this is really a seminal article. I think both you and I walked away after reading that...because many of the points that Klare highlights in the Asia Times article and elaborated upon in his new book deals with directly I think what is going to be this perfect financial storm that we’re heading into next year. (And Klare by the way I just want to point out is director of the five college program in peace and world security studies at Hampshire College at Amherst.)

But when we talk about energy, energy has three dimensions. We’ve always tried to point this out here whether you’re looking even at the investment markets. There’s a political dimension to energy, there’s an economical dimension and there is also a geological dimension. And unless you focus on all three you have a very difficult time of understanding for example on the day you and I are talking oil prices are up $3 a barrel at $120 a barrel. There was a story that came out earlier in the day that the US fired on an Iranian gunboat that was menacing part of the US fleet in the Persian Gulf. [3:38]

JOHN: You bring up an important point about understanding the markets. It’s our view on the program that the market is really driven by three dimensions. And again, they all interact. They are the fundamentals, the technical aspects and then there are the unavoidable political aspects which probably tend to be more of the wild card in the whole deck. As an example, Congress passes a bill mandating ethanol use in our gasoline, so because of that, because there are incentives now for farmers to make more money by growing corn crops for the purposes of using ethanol; they plant more corn, they use 25% of our corn crop for ethanol driving up corn prices, dairy prices, chicken, beef and other grain prices in the process. Moreover, they begin consuming a lot more water because of the nature of producing ethanol – not just in the farm stage but also in manufacturing stage. And this is just one aspect. There are many other examples.

But you can’t look at a market or understand in a uni-dimensional field. You just can’t do that. There are three dimensions, they are interactive. You can’t divorce politics from the markets or the economy; they all run together. And if you do, you’re really going to miss the big picture of what’s happening.

So, let’s begin with the new energy order and how it is going to transform life as we now know it.

JIM: Well, to set the stage I think it’s necessary to understand that worldwide economic expansion over the last half century was made possible by an abundant supply of cheap energy. This economic expansion was also mainly a western phenomenon – and that’s a very important point to understand here. But in the late 90s, and this decade, third world countries such as China, India, Brazil began to industrialize their economies, so this in turn led to an unprecedented spurt in global energy consumption. I mean a 47% rise in energy consumption just in the last two decades. Instead of energy demand plateauing because that’s what the experts…you remember this in the 90s, they were talking about “well, the US economy is more energy efficient today, it burns less units of energy per dollar of GDP” and so there was talk in the 90s that energy consumption had plateaued as the experts were predicting. Instead of plateauing demand actually grew and as this demand grew the world’s surplus production capacity shrunk while supplies of new energy were really struggling to keep up. One of the dimensions that we now face today to the energy sector is this 10 million barrel of surplus spare capacity has diminished and I think experts say it’s somewhere around 2 million barrels today. And the majority of those 2 million barrels is really Saudi Arabia.

And then as we have talked on previous programs, discoveries of major oil fields peaked in the 1960s and what we have been discovering since that time as we talked about last week in the decline of the giants has been smaller fields. And we stopped replacing – and this is another important aspect – what we consume. The last time we replaced what we consumed was the year 1985. So today, we’re looking at oil prices at $120 a barrel. And as I mentioned in the first show of the year, I think we’re headed to – heck, we’re only $5 away from my prediction of $125 oil. But here’s the surprising thing, it’s going to go to 150, 200 dollars and then 300 dollars. In fact, one of the stories of CBS MarketWatch was quoting Jeff Rubin –an analyst that we’ve had on the show – and he’s talking that in the next couple of years $200 oil and $7 for gasoline by 2012. And the article mentioned that demand is growing much faster in non-OECD countries like China, India, Russia and within OPEC itself. It isn’t just us talking about high energy prices anymore and where they’re heading in the future. [7:54]

JOHN: Let’s discuss the five forces that are really going to shape this new world order. Remember, we have three market factors and now five forces driving in this whole thing.

JIM: The first force that Klare talked about in his article in the Asia Times that’s going to shape this new world order is going to be competition between older and newer economic powers for available energy supplies. Now, here’s a statistic that I just read this in a report last night, for every one barrel decline in the United States – because the US is slowing – there is a 14 barrel increase in demand coming from China, India, Brazil alone. Now think about that. because, John, you see this on the air constantly: “How are prices this high when the US economy is slowing down which means less demand for oil?” Well, for every one barrel reduction in the US there is a 14 barrel increase coming from the rest of the world. And it’s going to be a battle between western industrialized countries and the new economic powers that we’re seeing emerge in this century such as China, India or the BRIC countries. In 1990, to put this in perspective, OECD countries consumed about 57% of the world’s energy; the developing countries at that time consumed roughly around 29%. By 2010, just a couple of years away, developing countries’ share of energy consumption will have grown from 29% to 40%. And within just a few decades it will overpower OECD demand and rise to 47%. These countries – many of whom control vast quantities of oil have formed what we call national oil companies and these national oil companies are now moving beyond their borders and are competing with western international oil companies for the world’s remaining oil. They’re forming strategic alliances that will end up controlling probably the vast majority of the world’s oil and gas reserves. So when you think about oil at $120 a barrel, forget about what the US consumer is doing or if the US economy is in recession, we’re becoming marginalized. Think more about what the other 3 ½ billion people on the other side of the planet are doing. [10:22]

JOHN: I don’t know if you noticed it or not this week, but Congress is going to hold hearings again to find out why oil prices are so high. And this sort of reminds me of when California was trying to figure out why businesses were leaving the state, but they’re going to try to figure out – it was pretty obvious, taxes and regulation. And what they don’t seem to understand is that we import about 70% of what we need in terms of oil here in this country. 85% of the available oil is either inside of OPEC or the countries of the former Soviet Union. And then we have another rising middle class ironically in Mexico, by the way – that’s going to affect Mexico’s exports starting as early as next year. But we have 1.5 billion people in China who are moving upwards because they’re now in the process of developing their infrastructure and becoming a strong middle class there. The Wall Street Journal ran an interesting clip on its video site:

Luxury car brands are here to sell and China’s new rich are here to look for the coolest looking vehicle. But neither of the exhibitors nor the customers care too much about the city’s traffic and pollution problems. Ian Robertson, BMW board member, is simply happy business is going well.

“We’re doing exceptionally well and if you look at the sales in 2007 they were about 43% up on the previous year. If you look at the first quarter of 2008, they’re already 40% up on 2007. So I think, you know, we can be confident that as the year progresses we will see at least a good double-digit growth during the rest of this year.”

According to Chinese media, Beijing alone has about 3.1 million cars and there are about 1,200 new ones hitting the road every day. But with the upcoming Olympics the city’s growing traffic and pollution problems have risen to the top of the government’s agenda. Beijing is spending billions of dollars expanding its subway network. The government encourages more people to take trains to help deal with worsening road congestion. But not everyone likes to take the subway. Mr. Yuan bought three cars in the past five years. He thinks traffic and pollution problems should be left to the government.

“From the perspective of living and working here, having a car is a must. Buying a car has its own problems but the government will take care of it step by step. For me, buying a car solves my own problem and relevant government departments should deal with the traffic problems.”

Car manufacturing executives at the auto show might offer different models and cars of different price ranges. But one thing they share in common is that with car sales slowing down elsewhere, China is the hottest market.

In Beijing I’m Kitty Boo [phon.] reporting for Reuters.

JOHN: It’s interesting that these things are driven much more by what the public wants and then typically some groups will come in and try to turn that and mandate opposition – you see that a lot in the West, you know, especially in environmental areas. And it almost never works, which is why we always talk about the fact that if you’re going to come up with a solution for environmental issues it has to be both economically and scientifically sound. And China is not the only hottest auto market in the world; it’s only one of many reasons why China is now the world’s second largest consumer of oil. They’re expected to increase their consumption to 17% of global consumption by 2015.

So with other countries competing for oil and the US now heavily dependant on imports – a position we put ourselves in – doesn’t that leave us now vulnerable to, and make more likely, the forecast that you’ve been making here for 200, 300 dollar oil? And if there is one thing I’d say we’ve always been wrong about when we’ve made forecasts here on this show is we give a nice, wide window and it happens a lot earlier than we thought it would.

JIM: Yeah, I mean I was looking at 125 oil by the end of the year, and all we need is just a slight crisis and we’re only five bucks away on this Friday where oil prices are up 3 dollars to 120 dollars a barrel. So we’re five dollars away so we may be conservative on that.

But right now, one of the things that is very important to understand and maybe we should send this report to Congress is the US consumes 20.7 – let’s just round it off – 21 million barrels a day, or roughly 25% of the world’s total oil consumption. We produce about 5.1 million barrels a day which declines by the way each year. We import 12.4 million barrels a day – these are figure taken from last year – of which 5 ½ million barrels a day comes from OPEC and then on top of that we import – and this figure is also growing – 3.6 million barrels a day of finished oil products such as diesel, gasoline and jet fuel. We don’t have enough refineries in this country to process all the oil that we import. So basically we are now importing roughly two-thirds of our energy needs so we are becoming more vulnerable as our production falls and our needs grow. [15:36]

JOHN: You mention that we get about 5 ½ barrels a day from OPEC and it’s really sobering when you begin to look at where the energy comes from. I mean if you look at also the fact that we are importing so much, then from a strategic point we become vulnerable to a lot more forces out there – or I guess I should quote Glenn Beck from time to time who is saying, “we get a lot of our oil from people who hate us” which isn’t necessarily a good position to be in.

JIM: No. I mean if you take a look at the 12 - almost 12.4 – million barrels a day that we import from the rest of the world – forget about the energy products – and I’m going to talk about a new alarming development that’s going to impact us even more – but the top imports come from Canada. Canada supplies roughly about 17% of our total imports at roughly about 2.4 million barrels a day; second to Canada is Mexico where we import as of last year, 1.7 million barrels a day, or 12% - and that figure is falling rapidly as Cantarell (Mexico’s largest oil field) goes into rapid decline. Just last month alone production at Cantarell dropped around 50,000 barrels a day. Third on the list is about 1 ½ million barrels that we import from Saudi Arabia – that’s about 11%. And here’s a real stable source: fourth on the list is Venezuela, 1.4 million barrels a day, or 10% of our supply and Venezuela has been cutting back. Venezuela used to export to us roughly about 1.7; they’ve reduced their exports to the US by 300,000 barrels and those 300,000 barrels are now going to China. Fifth on the list is Nigeria at 1.1 million barrels; that’s 8%. That’s very important because a lot of the oil we get from Nigeria is light, sweet crude. But look at last week’s story, the reason that oil prices rose is they blew up a pipeline in Nigeria.

Number six on the list, Algeria at around 657, 5%.

Seventh on the list at over half a million barrels a day or 4% of our imports, Iraq. Then we have Angola at 534,000 at 4% and Russia roughly 400,000 barrels at 3%.

So you can see politically how vulnerable we are to either Saudi Arabia, Venezuela, Nigeria, Algeria, Iraq, Angola, Russia. The two areas that are neighbors, the two largest exporters to this country, Canada –outside of the oil sands – is seeing falling production especially in natural gas; Mexico’s production is dropping rapidly with the peaking of Cantarell’s oil field and also politically the president of Mexico wants to bring in western countries because they’re siphoning off so much money. That’s what pays for a lot of the social programs and running government comes from oil revenues. The problem that they have is they’re siphoning off a lot of these revenues when the oil industry itself is lacking the capital investment to develop new oil fields. So you can see there how unstable of a position this puts us in. [18:52]

JOHN: So the first factor Klare mentions is that competition for the world’s scarce remaining oil is increasing, so that’s factor number one. What’s the second factor?

JIM: The second factor deals with the insufficiency of energy supplies and that’s something that we’ve been addressing here for a number of years which is one of the reasons why you and I are talking about $125 oil this Friday: The capacity of the global energy industry to satisfy this demand is shrinking because the global supply of all forms of conventional and non-conventional oil will expand – the experts are saying we probably have maybe two or three years of increasing production – from all sources whether it’s coal-to-liquids, gas-to-liquids, which are supplementing conventional oil production which peaked in May of 2005. And that’s why as we talked about last year that IEA report that was issued last summer which talks about this crisis window developing between 2009 and 2012 because after 2012 OPEC production fails to expand, western oil production fails to expand. At the same time, you’re going to have this increased demand. So the IEA report highlighted how producers are struggling to keep up with this demand. In other words, they’re having to run faster and faster and as we talked about last week we’re not discovering the major oil giants and it’s the oil giants that supply most of our oil which are now going into decline. So global oil supply increased slightly last month which is why we saw a little softness, while OPEC supply actually fell. Saudi Arabian production has been flat now for a number of years and the IEA highlights the mistakes made by politicians to treat the sharp rise in oil prices in the last eight years as sort of like an anomaly, “well, you know, we’ve always had low oil prices, what we’re experiencing now is really an anomaly and it’s mainly due to speculative inflows of capital.” I saw a Congressman make a speech this week regarding one of the candidates for president, saying “well, you know, we think this is just speculators coming into the market.”

But the IEA points out how supply is struggling to keep up, it’s getting harder to find; the cost of finding it is rising and companies are having a lack of access to where the oil is as producing states begin to husband their resources at the same time that supply struggles to keep up, demand has been relentless in the developing world. As I mentioned earlier, for every barrel of decline this year in the US there is a 14 barrel increase coming from the developing world. Chinese demand was up 7.8% in 2006, it rose 4.6% in 2007 and already this year the demand is increasing. It’s expected to grow by roughly by 5.6%. Now this demand growth is due to two reasons: 1) population growth and there’s a high correlation between population growth and energy consumption; 2) increased industrialization. So oil and population growth are correlated; more people means more transportation, more manufacturing, more food, more of everything and almost everything in the modern world requires energy from oil. So just think of the issue of rice, which has more than doubled in the last year. In fact, on Friday Brazil announced that they were cutting back on their exports of rice in order to conserve what they produce to keep prices under control. So the production of food requires fertilizers made from natural-gas-based fertilizers, oil-based pesticides and herbicides and then fuel to run the big farm machinery, energy to run the pumps for irrigation and fuel to transport food to our stores. [23:01]

JOHN: You realize that this is sort of a rising collision here because as population grows –and it’s not even so much the population it’s really the countries developing that is driving this on – they industrialize more and more, the middle class in these countries develops which theoretically is a positive thing, right, because people are lifting out of poverty. But as they’re doing that they’re going to require more energy – that’s number one; and then more commodities which requires energy to produce it as well. So that’s what really has changed. That’s what changes. A new demand dimension that requires energy which at the same time the supply of it is diminishing and sooner or later we’re going to have to talk about the issue of what’s really out there remaining in terms of what infrastructure can produce etc, etc.. But at least that’s framing the picture is this increased demand for energy and commodities.

JIM: Exactly, and just to put this in perspective of how important China and the impact of the developing world – China’s imports have grown from 246 billion yuan in 2001 to 958 billion yuan in 2007. This year, import growth – and most of this import growth is raw commodities – imports in China are expected to grow to almost 1.2 trillion. [24:14]

JOHN: So basically what you’re saying then is that the developing world is growing in population and industrializing. The world is going to need vast quantities of energy but –what you’re telling me now –or what Michael Klare has been saying in his article as well – the energy we assume will be there, in other words, everybody assumes “oh, it will be there, we’ll find it” – that’s what you hear all the time – to meet the demands for the next two decades is highly unlikely given where we are now. This just highlights the crisis window is developing because we have a bottleneck that we have to go through here. It’s not that ultimately the energy couldn’t be there but it’s not going to be here in the short run and just economic demand isn’t going provide it.

JIM: No, in fact I go back to the IEA which just issued a report last month and also the US Department of Energy, they take a look at demand and they extrapolate that and they say “okay, by the year 2030 based on present assumptions of demand we’re going to need 118 million barrels a day to meet that demand.” And that oil production at those levels simply isn’t going to be there. In fact, in order to meet this growing demand and make up for depletion we’re going to need to find the equivalent of six new Saudi Arabias between today and the year 2030. I can tell you with absolute, complete confidence that just isn’t going to happen. The days of finding a Ghawar, a Burgan, a Cantarell a North Sea, a North Slope – I mean those days ended four decades ago. The giant oil fields are peaking which is why we’re headed for trouble. [25:33]

JOHN: This brings us to the next point I guess the slow development of alternatives for energy and somewhere in here I hope you can also address the issue of – you’ll hear people saying from time to time, “well you know, we just made this big discovery out here and the oil companies just have all this bottled up’ or “this is a trick of the oil companies to force the price up” – some of those things. But let’s look at the alternatives first, and you can see the backlash now beginning because of poorly thought out alternatives. There was an article in a British paper this week saying Al Gore is ducking the backwash coming from around the world about what the US is doing in ethanol and what it’s doing to the global food crisis.

JIM: The first thing that you need to understand or at least politicians need to understand when they take a look at oil prices and what people are paying at the pump is they’ve got the problem wrong. We’re essentially facing – if you take a look at our transportation system – a liquid fuel problem. Our transportation system – planes, trains, automobiles, and boats – run on gasoline and diesel. Renewable fuels including wind, solar, hydropower supply roughly about 7.4% of global energy with biofuels 0.3%. Meanwhile, oil, coal, natural gas supply 86% of our energy with nuclear power another 6%. So you’re talking about 92%. In order to replace these carbon fuels we’re going to need a massive – and I mean the word ‘massive’ – influx of alternative fuels requiring investments that borders on trillions and trillions of dollars. And we would need to speed up these alternatives from the laboratory to full scale commercial production. And as Klare points out in think article, sadly that is not happening right now. Politicians talk the talk, they give great speeches with nice soundbites but they don’t walk the talk.

I’m afraid that –as many of the experts on the program that we’ve had over the years have stated – the only way we’re going to get serious about energy is when we’re knee deep in a worldwide crisis. And other countries have taken steps to prepare for this. The last crisis that we saw in the 70s, France went nuclear; they’re using vast amounts of solar energy on home construction in Germany; Norway and many of the northern countries in Europe are going to windpower. The only thing we get from our politicians is soundbites – “Yes, we want clean technologies, green technologies” – but once again we want wind turbines but we got NIMBYism – not in my back yard. There are lawsuits going on in Texas to stop the building of wind turbines because people don’t like looking at them. Or building them offshore – they don’t want that done. So we give lip service as long we don’t build them near any place we have to look at them. [28:55]

JOHN: In order to respond to this it seems like radical steps are going to have to be taken. The more that you look at the situation and the more you look at what has to be done, the nonsense say of 10 years to get all the permitting done for a refinery or power plant or whatever, that’s going to have to go overboard if we are to make this. Which means something has got to give somewhere in this whole political circle because you can’t just do it; we can’t react fast enough to deal with the issue. You can’t fight your way through the courts all these years when the crisis is coming about you – it’s not a time to be…I don’t know…I’m just saying from a realistic standpoint I don’t know what that means politically or from a legal point of view but something is going to have to change.

But these higher prices also means there is a great wealth transfer that’s taking place from energy-deficit countries to energy-surplus countries. But that also means power. Power always follows the money flow and I don’t think we have seen anything like this in world history before. This is a radical paradigm shift that’s occurring right before our eyes. And again, on the geopolitical scene, you don’t see that reflected in politicians’ eyes – not just in the US but in reading what’s going on in Europe they haven’t grappled with what this means yet.

JIM: No, and in fact, what you’re addressing here is Klare’s fourth factor in which he’s talking about wealth transfer. And to just put this in perspective and show you how big this is, in 2006 exporting countries took in 970 billion from the United States, Europe and Japan and China – just from the sale of oil. Think about that – nearly 1 trillion dollars – that was in 2006. Imagine what they took last year when the price of oil went from 50 to 100, or today where these politicians are holding hearings on why gas prices are up. How about the price of oil being up 25% at $120 a barrel, just from January alone? Last year the figure passed well beyond one trillion. And if you think about just the United States alone, the US alone will transfer over 400 billion to oil exporters this year. Oil and energy now account for nearly half of our monthly trade deficit.

Those countries that are now using this vast wealth, we’ve seen it to buy stakes in large companies; we saw last year Middle Eastern sovereign wealth funds invested 7.5 billion dollars in Citigroup. In January Citigroup sold an even larger share – 12.5 billion dollars to Kuwait Investment Authority. This is just a glimpse of what lies directly ahead. I mean just think of the wealth transfer that’s going to take place when oil prices hit 150, 200 and 300 dollars a barrel. I mean it’s staggering. And you’re right, nothing like this has happened in history before. [31:58]

JOHN: And I don’t think it’s really hit the geopolitics, we see things almost in status quo. But the rumblings are there. You can feel the rumblings beginning to hit.

Let’s look today at a snapshot, let’s take Russia for example. In 1989, the Berlin wall comes down, that sort of marked the beginning of the end, or at least psychological transformation of the implosion of the socialist failure that was the former Soviet Union. Then they went through a period of chaos. In the 1990s. you had all of these czars and plundering Russia’s wealth and you can think of all the names that might come to mind for that. And Vladimir Putin came in as president and began making a lot of changes. One of the significant things they did was the opposite of what we’re talking about in this country, they slashed their tax rates because at the time virtually nobody was paying the taxes. All right. And then that jump-started the economy, they got rid of the tax burden that was laying on top of their economy and then they rose from these ashes to become an energy superpower; and they’re using that wealth now to buy controlling shares in assets that will give them control over much of Europe’s energy. And Europe is really vulnerable to this. Look at where all their natural gas heating comes from.

And then the former Soviet states as well, they’re also using that wealth to rebuild and modernize their military. But you don’t hear the press speaking about this, but in reality a new type of cold war has begun which takes us down to the fifth factor which is a growing risk of conflict around the world, especially if the conflict gets hard or the shortages get bad and countries begin to play with their oil supplies on the world market, then where goods and services don’t cross borders, armies or missiles do.

JIM: Before we move in to the fifth factor that Klare talks about which is military conflict, we’ve been talking here about this giant wealth transfer, it’s going to get even worse in the years ahead because a lot of these countries are saying: “Why should we spend a lot of money to increase production just to drive the price down so western consumers can pay lower prices at the gasoline pump.” So they’re starting to husband their resources.

And one of the developing trends that I talked about last year; you know, everybody has heard about the China story about their consumption of energy but another story that we’ve talked about here is one of the fastest areas of growth in energy consumption is within OPEC itself where oil is subsidized.

Well, there is another concept that is taking place here that people have not understood the significance of what this is going to mean for countries like the United States. And Saudi Arabia, they are building four new cities; they are going to build the world’s largest aluminum smelter plant; they are building three or four petrochemical complexes and refineries because Saudi Arabia is saying: “You know what, why should we export our oil and export this to western countries or western oil companies where they then take our oil and they refine and they make plastics and petrochemicals and refined products like gasoline and diesel fuel or jet fuel, why don’t we build new refineries, cut back on our exports and then we will make even more money on the oil.” In other words, they are taking it to the next level: “Why should we just be satisfied with making money on the oil that we produce, why don’t we make even larger margins by taking the oil we produce, turn it into petrochemicals and refined products where we can even make more money.”

So by building these new cities that they’re building – they’re building four cities – by building petrochemical complexes, by building refineries that means more of what they’re going to produce, they’re going to keep within the country and turn it into refined products. So instead of importing 3.6 million barrels a day of refined products we may be importing 5, 6 and 7 million barrels a day in the next decade and paying higher prices. So in other words, our import bills are only going to go higher as the price of energy goes up. And I wanted to bring that up on this wealth transfer before we move on to the fifth factor.

But let’s move in to the next category in Klare’s report which is the growing risk of military conflict. In fact, one of the things I like to do in the evening at the end of the day after I’m done with all my reading I watch documentaries. And I watch a lot of history documentaries. And throughout history, you’ve seen these major shifts in power that have normally been accompanied by violence and war. And what Klare points out as his last major point, is that the major powers – both the US, Russia and China – are now employing military means in their efforts to gain advantage in the global struggle for energy. And we shouldn’t naively delude ourselves – as Klare points out – that these endeavors could easily lead to unintended escalation and conflict. I mean take a look at how World War I began. Nobody thought the assassination of the Archduke would lead to a worldwide war – but it did. Now what you have today is almost very similar in my mind in terms of what occurred prior to World War I with all three major powers rearming. What is occurring is very similar to the arms build up and the power shift that occurred prior to just the outbreak of war at the beginning of the 20^th Century. There are a lot of similarities here. And just as oil played a key role in that war – as it did in subsequent wars of the 20^th Century – natural resources, especially energy are likely to be at the root of future conflicts which will begin to escalate during this crisis window that we see entering and beginning in 2009. [38:11]

JOHN: Let me read a piece right here. It says:

The era of peace and stability that we have come to know is over. We are entering an era in history not of peaceful economic competition between nations but of a time of warfare between tribes, ethnic groups, religions and economic systems. This war will be unlike other wars. There will be no major battlefields, armies won't line up to face each other and do battle. The war will be taken to the cities and suburbs as well as the skies. It will be fought with car bombs, small explosives, light armaments and listening devices. It will be a war of men killing each other at close quarters. Battles will be replaced by skirmishes, bombings, massacres and genocide. It will be fought by regular armies against small groups known as terrorists, guerrillas, bandits and robbers. War will, for the first time, in the West become personal.

And that was from an article, which you authored, which I thought was significant here, The Next War Has Just Begun, February 22nd, 2002, as part of a whole series called Powershift, Oil Money and War. These are archived, by the way, if you people want to go to our site. It's entitled The Next War Has Just Begun or go to the Powershift series in the perspective section.

Another article, Hubbert's Peak was written in March of 2002, and then Eyes Wide Shut written in March of last year, and all three articles describe much of what we are now seeing transpire today. And as I said, these articles are still posted in our perspective section on the website.

We're going to be covering a lot more of the subject matter in the weeks and months to come because by the time the new president and Congress are sworn and seated – not sworn out, sworn in – and they are seated in Congress, this is probably going to be the big issue of the next Congress and the next presidency. That's important to understand. A lot of the nonsense has been pushed aside. Look at what the candidates were talking about just a year ago – they weren't even touching this whole economic situation. This is how rapidly these things are evolving. We'll be doing interviews as well as Big Pictures especially on this as we head to 125 oil and the other dark side of the Oreo.

Remember, here we are in April of the year. We're almost halfway –not quite, but halfway – through the creamy center and coasting into the other dark side of the Oreo and the crisis window whose doors open in January of 2009. And really it's not just a crisis of oil, Jim, it's a crisis of currency, a crisis of baby boomers retiring in Europe and the United States. Food issues around the world, all of these things are colliding with each other; not to mention some of the religious undertones that are running in the various conflicts around the world. So that's what we're facing here.

“News at 11:00.” I tell my friends, I say, occasionally, I feel like I'm a mortician because the mortician tells the family that he's sorry about his loss but then he goes to business. And whenever times are really rough everybody turns to news programs, so it's a very strange phenomenon of our business. When times are good, listenership and readership goes down. I don't know why. But anyway, why don't you do a summary of where we are on the whole Klare issue.

JIM: Before I do that, it's interesting, you made a comment and some of our experts have said this, particularly Matt Simmons, this will be the single most important issue that will dominate the next president. And it's amazing because that's the way Klare ended his article.

But anyway, John, as Klare points out in his new book and as I've written in the past, what I think is happening here is we are witnessing in real time the end of the world as we know it. Just think of people hoarding rice, countries stopping their exports of food. I mean in this new era that we have now entered into, I think you're going to see the price of energy is going to dominate our lives and power is going to shift to those who control its global distribution. I mean just look at the wealth that is being transferred to the Middle East and to Russia.

And not only is energy going to dominate most aspects of our life. It's also going to determine our mobility. And we'll get into this in future shows, our ability to heat and cool our homes and where we're going to go back to controlling our thermostats. It's also going to determine what foods we're going to be able to eat and when, because when oil gets to 150, $200 or $300 a barrel, say good-bye to the 3000 mile Caesar salad or having fruits and vegetables all year round. I mean it's also going to determine how much protein we're going to have in our diets. It will determine in many ways where we live, when or if we visit family and friends, what businesses that are going to survive and prosper and under what circumstances we will go to war.

The energy issue is going to be the single most important issue facing the next American president, whoever that will be, and right now, none of our candidates are aware of what faces them the minute they walk into the Oval Office. Absolutely amazing. [43:12]

JOHN: Just out of curiosity, you used to write a lot about these issues. It would really be neat if you could do that again. I don't know if you have sort of backed off from that, retired or whatever, but they were really good. Especially your serial stories. Those are great things to get in bed with, curl up on – well, you don't have cold winter nights but we do here, turn the fireplace on...and burn some more natural gas! So I think you should do that again, to be honest with you.

JIM: A lot of the technical pieces that I used to write, my son Chris has taken kind of over that mantle and is doing a lot of that.

But you know what always was amazing, John, when I was writing on the web when we first started the website, you know, I'd write a technical piece and you'd sit there and I'd throw all of this research into it and back then of course the website was much smaller, but I remember the last significant piece that I thought I wrote outside of the Eyes Wide Shut was the piece I did The Great Inflation that I wrote in the fall of 2004 talking about inflation was going to be the wave of what was going to hit the economy and the markets. And I got maybe 15, 20,000 hits on people reading the article. But then when I started a series in 2005 about the coming crisis in housing and credit. It was a fictional piece that I wrote called The Day After Tomorrow. I mean, John, the last piece that I wrote in that series, I forget what the hits were, 50 to 100,000. I was getting emails, “please don't take away the Wheelers TV,” you know. But even though it was done in a fictional sense, we wrote a lot of technical things in that article, but there were more people reading that than anything else.

And so I'm working on my mind, I'm thinking I may return to writing next year and I'm working on a fictional piece in my mind. I've got several characters and explaining what the world is going to -- that we're going to live in in the next decade is going to look like, and I'm thinking of doing it more from a serial piece done in fictional form of describing it, because number one, it's a little more entertaining than reading a pure technical piece and then when you do it in terms of characters that people can relate to, there were a lot of people that related to my characters, the Wheelers, in the story The Day After Tomorrow. I got hundreds of emails, “gosh, my neighbors are just like the Wheelers” or something like that. So if I do something in the future in terms of writing, I've got this idea it will be sort of like a serial novel that will release in installments next year about life in the next decade, what it's going to look like, the very issues that we're sort of talking about here.

And the other thing that I've thought of working on is producing a documentary in the area of energy. I've got the script, I've got the key players, the only thing now is just finding a camera crew and a producer to put this. But I want to do something different because I think you reach more people. It's amazing that more people read a novel than they will a technical piece. A number of years ago, I was contacted by a major finance publishing company and they wanted me to write a book, and they were saying if it does very well, you sell 50,000 copies. And I'm thinking a technical book sells 50,000 copies, that's considered a best seller. But then take a look at novels, John, a Clancy novel and some of the popular novels and authors that people read that sells millions of copies – so I think that fiction is a better way to tell a story than non-fiction. [46:49]

JOHN: Yeah. Dr. Malachi Martin, I don't know if you -- he used to be a Vatican commentator – a former Catholic priest – who died in 1998, but he would write what he would call ‘factions’ and they were actually facts all being cramped into a fictitious story. But if you understood the code language there – you know, “who was who at the zoo” – and what was going on in religious politics –and they were always intriguing – they were the same thing. You could sit in and read through these the same way. But he was the one that came up with the concept of the faction as opposed to religious factions or breaking things up.

By the way, you realize, of course, this also has significance. I don't know if you saw the article this week that piracy is going up as economic things become scarce, commodities become scarce. And so if you're planning on sailing off into the sunset in any time in the near future, you need to haul your sail boat over to Joe's armor-plating service. I mean, you don't want anybody shooting bullets just below the water line on your boat there, you're going to have a real problem, right. So we'll do some Kevlar lining and maybe put some weapons on, it what do you think? I don't know.

JIM: I don't know. M50 caliber machine guns or something.

JOHN: There you go. I think you'd be really good. Here comes good old drunk Jim with five bottles of wine and a 50 caliber machine gun. This is a winning recipe, I'm sure. You're listening to the Financial Sense Newshour at www.financialsense.com. We'll be back. [48:07]

Part 2

The End of the World as You Know It

JOHN: Well, what all of the last hour ends up to is simple and sobering: The end of the world as you and I have known it. In the new energy-centric world we have all now entered the price of oil will dominate our lives and power will reside in the hands of those who control its global distribution. In this new world order energy will govern our lives in new ways and on a daily basis. It will determine when and for what purposes we use our cars, how high or low we turn our thermostats; when, where or even if we travel; increasingly, what foods we eat given that the price of producing and distributing many meats and vegetables is profoundly affected by the cost of oil or the allure of growing corn for ethanol. For some of us, even where to live; for others, what businesses we engage in. For all of us, when and in what circumstances we go to war or avoid foreign entanglements that could end in war – that is probably the final observation that Michael Klare has made in his article, other than the most pressing decision facing the next president and Congress may be how best to accelerate the transition from a fossil-fuel based energy system to a system based on climate-friendly energy alternatives. There’s going to be the crunch and maybe the biggest thing they could do is get out of the way.

By the way, Jim, something else too. Glenn Beck was quoting last night: oil in euros has appreciated in price 92% showing upward commodity issues, but against the dollar it’s 319%, which shows the state of our own currency which we’ve discussed before.

Let’s look at what this new world is going to look at. I feel like we’re rewriting Atlas Shrugged or something Orwell would come up with. Why don’t we start out with Suzie Soccer Mom and she goes to Walmart. Where do we go from there?

JIM: You know, there was an interesting article on this week’s cover of BusinessWeek and it was called Buying Dinner by the Case and as the BusinessWeek article goes on: As food prices spike, shoppers are flocking to discount stores. So why aren’t those chains profits benefiting. And they talk about this one shopper, Natalie Stone. She used to go to the supermarket just about every week. Now, with the price of gasoline and with the price of food she makes and plans out her meals for almost two to three weeks in advance and then hits Costco, Walmart in one weekend, buying huge bulk quantities of foods to do a number of things. Number one is bring down her cost of food because she’s not going to regular grocery stores anymore and then also, driving around town all the time. By only doing her shopping once every two or three weeks she minimizes the amount of money she has to spend on gasoline.

And as BusinessWeek is talking about here, this confluence of high food and gas prices, slumping real estate, the credit crunch “has left families like the Stones and millions of other middle class families feeling pinched.” That has major implications for the nation’s retailers as consumers get more anxious and more organized about where and when they shop. They’re drawn to Walmart stores, Costco and the like and this is going to have a profound effect on retailing. People are driving shorter distances, “shopping trips are down and baskets are getting bigger.” [3:36]

JOHN: All right, so the first issue is going to be somewhat in the area of commodities and what it is going to cost people to live. But in parallel to that we have a tax and inflation issue; let’s face it, the baby boomers start to retire and there is not enough money there to pay for this whole thing. And we’re not talking about 40 years out, are we, Jim? You know, all these estimates like “it’ll be bankrupt in 2030.” Basically it’s sort of bankrupt right now.

And the question is then, how much they can delay the ultimate disaster of this whole thing, which we could probably see, what, Means testing, raising the caps? First of all, they’ll try to get people to pay more into it which is going to become less and less popular as people discover they’re going to get less out of it when they get to retirement age. So that’s only going to work on an interim basis. But then we’ll see means testing –if your income is above so much you don’t get any, even if you did pay into it all your life. So that’s what we’re looking at there. I’m not sure which way the taxes are going to go. Do you think politicians are dumb enough to you know, raise the taxes…because they are.

JIM: If they do that and they allow the Bush tax cuts to be repealed they will lose control of Congress. Whatever party does that. If the Republicans take the White House, they allow the tax cuts to expire, they will lose Congress in the following election year. If the Democrats do the same, the same thing will happen to them. And so you know, one of the things that is happening to most people – the very same issue that we were dealing with when I got in this industry over 30 years ago: taxes and inflation. [5:08]

JOHN: You know, when we talk about taxes, everybody thinks about income taxes and they’re not really the big burden of what workers pay. What is really the big tax is the Social Security tax and the cap has been systematically readjusted every year, supposedly to allow for inflation and other changes in what employees could theoretically get back when they retire. But if you look at how the cap – meaning, beyond that cap you don’t have to pay any Social Security no matter how much you make – but if we go back to 10 years ago in 1998 the cap was $68,400; go back 5 years ago, it was $87,000; today, the cap in 2008 is $102,000. And we should also point out this isn’t evenly distributed because if you get a paycheck from someone else, you pay whatever the going Social Security rate is; if you work for yourself you pay double that. So self-employed people, small businesses effectively pay twice what those people who are in workforce that work for somebody else. So I always have to laugh whenever someone talks about “paying their fair share of taxes.” There’s nothing fair at all about anything in this tax system.

JIM: No, and this is one of the issues that are squeezing the middle class are taxes and inflation. And remember, inflation is just another form of taxation. It’s a way of taxing people without people understanding that when you inflate the currency and the government creates inflation, the cost of living goes up and so people are having to pay higher prices for goods and services. But you know, it’s astounding to think – I remember when I first got in to the workforce in 1977, the Social Security base amount was $16,500. If you look at the beginning of each decade: 1981, the Social Security base was 29,700; you go to 1991, it was 53,400; you go to 2001, it was 80,000. So like you say…and a lot of people who are working in their own businesses pay twice that. The first $102,000 of a self-employed person, he pays 15.3% in combined Social Security and Medicare taxes. And even on top of the regular income taxes you pay a 1.45% Medicare tax on all of your income, and if you’re self-employed you double that figure to 2.9%. So you can add 2.9% to the top tax rate of 35; or if the Bush cuts are repealed and they go up to 39.6, you can add another 2.9. So taxes and inflation are really are what are squeezing the middle class and the poor today. [7:54]

JOHN: So the question is now: where it will go because the government itself – and not just our government but in Europe as well – are going to be hard-pressed to deliver on their promises. And this is a no-win situation. They can’t win coming out of this one. So it’s going to be interesting to see which one tips to.

So given the fact that taxes and energy – two big things here, along with inflation – are just ravaging people’s incomes, what are the effects of this as far as the consumer?

JIM: Well, you’re already seeing it. You’re seeing food prices go up, whether you’re looking at grains, whether you’re looking at milk, dairy products, the cost of beef and chicken. And then on top of that, as you’re also going to see resource scarcity. I mean one of the stories that we’re seeing today is this whole issue of rice. Rice is just one of many food issues that we’re going to see going forward as the price of energy goes up and it costs farmers more to farm, you know, costs them more for fertilizer, costs them more for diesel fuel.

And as consumers are squeezed on both ends, I mean in the 70s when they removed gold-backing of the dollar and the government began to inflate, you know, the wife went to work, we had a period of prosperity in the 80s. But in the 90s as they inflated –which was showing up in the stock market – what happened is the savings rate dropped in this country from about 8 to 9%. So people were able to increase their discretionary spending by lowering their savings rate. In this decade, because of taxes and inflation people went into debt. So what you’re going to see now is two themes that are going to be key going forward: Deleveraging and downsizing. You’re going to see consumers deleverage, rebuild their balance sheets, they’re going to be forced to do that. And as the boomers head into retirement you’re going to see downsizing. And what I contend, that means you’re going to see the slow death of consumption.

It’s not going to die off and fall off a cliff, but you’re going to gradually see a reduction in consumption and obviously, you’re seeing the effects of that right now in this crisis that we’re going through. You’re seeing more and more retail chains are closing hundreds and hundreds of stores, some stores are going out of business and filing bankruptcy. The banks which extend lines of credit –you know, these retail credit cards – are really an offshoot of bank lending, a lot of the banks are pulling back on that credit card lending to a lot of these retailers and so you’re going to see retail chain closures. That has been evident probably in the last six months; we’ve seen numerous chains and also with some of these companies being cut off from bank lending in stocking their shelves such as Linens 'n Things. They’re filing for bankruptcy. So you’re going to see this slow death of consumption and then I think that the big box stores – whether it’s Costco, Walmart or Sam’s Club or wherever it is that you can go to reduce your cost of food and minimize….I mean you ought to see what it’s like pulling into a Costco on the weekends and trying to buy gas. I mean there are car lines because you can get gas at six, seven, sometimes eight cents cheaper a gallon at Costco. So these are the kinds of things that you’re going to see becoming more commonplace. [11:30]

JOHN: Other people have done interesting things. In church groups or community groups they form co-ops, and the co-op itself buys directly from the producer and even bypasses, say, Walmart. They buy in huge bulk. Everybody gets together for a meeting and they meet and decide what they’re going to order and they all pitch in their money and on one day it all arrives and they divvy it all up and they go home. And they do this and buy in bulk. And that even bypasses, say, organizations like Walmart. So I would predict you’re going to see a lot more of that again.

JIM: And another trend that I think that there is a word for it, they call it ‘cocooning’ where instead of going out socially on the weekends, you know, going out for dinners and the movies, movie prices are at 11 and 12 dollars – in LA a friend of mine told me there’s a movie theater there that has prices at $14 for a ticket. And you’re going to see more people who are saying “instead of going to a movie where it’s going to cost me 50, 60 bucks for two hours to see a movie, we’ll go to Blockbuster and rent a movie.” Heck, it’s cheaper to go to Walmart to buy the DVD than it is to go out to the movies. And you’re seeing people stay at home.

A couple of weeks ago we took the family out to our favorite restaurant on the Bay in San Diego for my son’s 30^th birthday, and it was amazing, John, this was a restaurant if you don’t have a reservation on a Friday night plan on an hour – sometimes I’ve seen it during the summer when we get a lot of tourists coming to the city, you can wait for an hour and 15 minutes. Well, first of all we made a reservation, thinking that 7 o’clock I don’t want to wait, so we made a reservation. They took us right outside where we were able to look at the bay and the city, and it was breathtaking. The room was half full and when we were done with our meal at 9 o’clock, as we walked through the main dining room it was half empty. I have never, since I’ve lived in San Diego, seen anything like this. Maybe the closest would have been back in 1991 recession during the S&L crisis but it would never have looked as empty as this restaurant was. And this restaurant does a bang up business.

My wife and I –occasionally we go out to the moves – and we went out to the movies – we try to go on like a Sunday night where there’s less traffic – and one of our favorite Italian restaurants there’s always an hour wait if you go on a Friday or Saturday night; and even on Sunday’s it can be a half-hour wait – we were able to get right in and even as the restaurant filled as the evening progressed, even at 6:30 there were empty tables. And so you’re seeing a lot of that. I think it’s just getting too expensive. So a lot of discretionary spending –whether it’s entertainment, movies, going to concerts or going to ballgames or going to restaurants or on discretionary goods – and I think you’re seeing that, it’s being affected. And I think you can see this as restaurant chains of public companies report their earnings. [14:35]

JOHN: So basically what we’re saying in the long run is that those businesses that do not operate staples that people see as being essential are going to be in trouble because that comes out of discretionary spending, say, going out to a restaurant of something. Those businesses will probably see a tremendous downturn.

JIM: Not only a tremendous downturn, John, but I also think that you’re also going to see our ability to travel. You’ve seen for airlines go out of business. And I think with higher fuel costs now, the airlines are going to charge you for I think a $20 charge for the second bag because the more weight on the plane the more fuel it consumes to fly. And I think what you’re going to see is a consolidation of the airline industry. The airlines will mainly fly to what I call main hub centers – the main cities, you know, the main areas even overseas. And I think what you’re going to see is a new business that’ll emerge that is going to be small private jet travel. In fact, Barron’s ran two articles on this. But there are a new series of jets coming out. Honda has a jet that is going to be a six passenger jet that is more fuel efficient; in terms of equivalent planes it is 30% greater fuel efficiency.

I’ve read about one company that’s starting up in Florida, they will fly the shorter areas so that if you want to get to a city that isn’t covered by a major hub they will be able to do that. So you’re going to see the consolidation of the major airlines, you’re going to see the rise of new smaller airlines that will fly these small – what I call – commuter jets that are going to rise because how do you get to some of these areas.

You’re going to see transportation change instead of a lot of our goods being transported by let’s say trucks, the large trucking companies are now working with the railroads. And for the first time in over a century, the railroads are making major capital investments to expand their routes. So what you might see is goods, for example, dropped off in the port of Long Beach put on a train and the trains will then…they’re building regional hub centers of which the goods will get to the hub centers and from the hub centers we’re going to put them on trucks.

But I also think the ability to travel. You know, I’ve gone sailing the last two weekends and it was amazing being out on the bay, John, usually if you go out on a Saturday and Sunday, and especially when the weather is as nice as it is now in San Diego, it’s amazing most of the motor yachts are in their slips and you’re just not seeing the motor yacht traffic out there because diesel fuel in the bay is over $5 a gallon. I talked about my next door neighbor who has a boat – a 35-footer – with a 600 gallon capacity, and he reads my stuff and thinks about peak oil and he was just shocked at paying over $3,000 to fill his tank at $5 fuel. It’s also going to impact entertainment and travel.

And the other thing, I don’t know if you’re seeing this in your neck of the woods, but boy!, am I seeing a lot of Honda Civics and Prius’s and maybe, I don’t know, maybe it’s because I’m more aware of it now, but we see Prius’s all over the place where you know, two or three years ago I mean every time you pulled into a parking lot you were looking at a new Hummer, a new Chevy Tahoe, a Cadillac Escalade – all those big SUVs. And one of my clients whose in the car business who’s telling me one of the trends is people are getting out of their – especially since a lot of the cars sold in this decade were on leases, you know, 25 month, 30 month lease – people are getting out of those cars and are getting into more fuel efficient cars – and that I think is a trend you’re going to see here, our ability to travel. As Matt Simmons has said on this program and something I’ve believe very strongly in I think over the next two years you could very well see gas rationing. [18:35]

JOHN: One of the things that James Kunstler talked about when he was here on the program was the end of the “3,000 mile Caesar salad” which I always thought was a funny way of putting it, but when you walk into your local grocery store at different times of the year, you are seeing something that has been grown in South America, in New Zealand – you know, when it’s wintertime up here, they’re growing it somewhere else in the world wherever it happens to be. And if we don’t want it to consolidate on energy that will probably end too because those things have to be brought in rapid order. And simultaneous from that, you’ll probably see a rise in – remember the Victory Gardens from World War II. And a lot of people do that already. In our part of the country where I live, that’s common. This is ranching, farming territory – I don’t know if it is in San Diego or not – I don’t think so, I don’t think everything’s there – but even in your yard you could put in stuff if you had to.

JIM: We’re working on our landscape plan where I intend to put in a greenhouse. In fact, there was an interesting article in the Wall Street Journal and also let’s go to that film clip about this one gentleman in Colorado that has turned the whole neighborhood into a farm. Why don’t we go to that clip:

It may have the elements of rural America but this isn’t the country, it’s suburbia. There’s growing numbers of Americans looking to grow some food and make some money off their lawns. Instead of relocating to rural areas, they uproot their grass and start mini-farms in their own backyards and sometimes even their front yards. And when they need more space they ask their neighbors for help. Kipp Nash in Boulder, CO, started a small farm in his own yard a few years ago where he grows many different varieties of vegetables including tomatoes, bok choy and beets. Since then, he’s expanded his operation and now farms eight of his neighbors’ yards. He’s selling shares of the farms to locals who will pick up weekly bundles of fresh vegetables and herbs in the summer and early fall.

I’ve had this really strong desire to grow vegetables for a living. I didn’t have a way to do it, I didn’t have a piece of land. I didn’t have a whole lot of financial resources so the only way I could think about going about it since I was living in town was to either volunteer at other farms and get a job in another farm; or, I don’t know, I just got the crazy idea I could start growing vegetables here.

Farming in suburbia has its own foibles however. Dogs and squirrels can trample the crops, mud and manure can get in the house and neighbors might not be so keen on seeing dirt and vegetable plants instead of green grass.

Debbie Dalrymple of Denver farms her backyard and four other yards around the Denver area. For her, one of the hardest parts is time management. Farming requires long hours and hard work.

“In most cases like this you’re getting rid of any grass you might have had and you’re deciding that you really want to grow food instead of grass. So it’s mindset and it’s a scale, so you know, if you had a farm you could really just grow as much of anything you wanted, so here you have to kind of prioritize how much space you want to give to each thing.”

For now, her biggest challenges are figuring out what to plant, where to plant it, and how much water it needs.

This is Kelly Spors for the Wall Street Journal.

JOHN: You know what was really funny about that, Jim, was when we lived in Denver we always had a garden in our backyard every year because there are certain parts of the country where you can do such a raising. We always had a good corn crop and you couldn’t keep control of the asparagus. It went crazy. So did the rhubarb. And then people work with each other and swap things – that’s very common. And what we still do in terms of that is we have a neighbor down the road who raises cattle and then we buy a cow from him every year and our beef is about a $1.50 pound, or a $1.60, $1.70, which is way under what the supermarkets are doing right now. We rarely buy beef at the supermarket.

JIM: I think you’re going to see more of that trend. I mean right now we’re just seeing people are shopping in bulk, they’re going to the big box stores, the major discounters, to help control the cost of rising food inflation that we’re seeing right now. But once again, our transportation system is going to be transformed. We’ve talked about what trucking companies are doing with railroads. Also I think you’re going to see more goods transported by barge down the Mississippi.

But also, I think it’s going to change business too. Putting executives on a plane, flying to a conference I think you’re going to see wider use of teleconferencing because Cisco is working on a system that is very effective in this regard where you could have – in fact, we’ve set up something similar to this in our conference room where we’re set up now to do teleconferencing. But I think you’re going to see more of it because it’s just going to be too expensive to put people on a plane when you can sit there and have a teleconference face to face so you can see the reaction of the other person you’re talking to, to the things that you say, or present. And so this is also going to affect the retail business, the travel business, the hotel business where basically getting on an airplane and traveling is going to be a luxury.

I grew up in Phoenix, Arizona and I can remember to go back and see my family, I mean it was like $49 on Southwest. Those days are gone. [23:53]

JOHN: Yeah, when I was at San Francisco State it was $15 each way from San Francisco to Southern California and even as a college student back then I could afford a $30 round trip on Thanksgiving and Christmas and spring break and everything like that.

JIM: It’s interesting because as we are sitting here talking, there’s an article that made the headlines, Jeff Rubin at CIBC who we had on our energy roundtable – one of the sharpest analysts out there – one economist that really gets it – is talking about $200 oil here in the next couple of years and $7 gasoline. I mean if consumers are blown away by over $4 gasoline, just think what they’re going to do when it’s 7, 8, or 9, or even more importantly what happens when it’s rationed. When they say, “well, based on your license plate you can only buy gas on Monday and Wednesday,” or you’re only allotted 20 gallons per week per family or 30 gallons or whatever that is. What is going to happen is a radical transformation in terms of the way people think, because up till now, yeah, you haven’t been happy about the fact that gas went from a buck fifty a gallon to today in California we’re already over $4. But every time you pulled into the gas station you could fill your tank. I think that as these issues become more pronounced there’s going to be a cry to do something. And don’t just tell me you’re going to hold hearings. I think most politicians quite honestly think that gas comes from a gas station. [25:21]

JOHN: I thought it did. I mean that was my impression. I don’t know. I go over there every day it seems to be there.

I think the issue we’re coming into is what I mentioned earlier is if we look at the history – and here’s the collision that’s coming and the collision is going to be how will the environmental movement which started as a grassroots movement and now has gone very commercial, much to the disgust of some of the earlier founders of it in a lot of areas in terms of its regulation it has gone from being sound science to absurd; and the basic joke –the way we describe it – is if it gets in the way when the crisis goes to bed, Bambi will be roadkill.

Now, don’t misunderstand me, I don’t want to see that. Driving home last night there were close to 40 elk down in the meadow. You know, we stopped and looked at them. Everybody was stopping on the road to look at all these elk and there were a bunch of deer down there too. I like wildlife. I like Bambi. But the problem is a lot of what people think has been sound environmentalism has been built on increasingly more and more what governments can make out of it in terms of money and permits and organizations. So there’s a big factor there that the movement is going to have to fess up to if it is to stay in existence because if they don’t –as you say – the cry will be: Do something! And the politicians, when reality sets, in will panic, and Bambi goes over the side – that’s what’s going to happen. And I’m not sure that’s going to be good either, but that’s just the colliding trend we see here.

JIM: Yeah, one of the trends that we’re talking about I’ve talked about global infrastructure plays and then also the decline of infrastructure here in for example the United States. And what you’re also going to see as this happens, I think we’ll start moving towards some form of mass transportation. Where I grew up in Phoenix, they’re already working on a light rail system. I think you’re going to see more of that. But there’s definitely going to be a call to build power plants.

One of the things that I’m going to be doing this year is applying for permits to put solar roof tiles. There’s a company here that makes roof tiles that look like slate tiles that are solar to power the house because every time we get warm temperatures here in the summer due to a Santa Ana we get rolling blackouts in California; and we got them in the fires here. And they’re happening more frequently and that’s because we haven’t built the added capacity that we need. I mean we have 11% of the country’s population here in California and most of it is along the coastline. And we’re just not building the power plants, we’re not building the pipelines, we’re not expanding the grid system because of environmental deadlocks and that’s why we’re going through these blackouts. And we saw even in other areas of the country; in the Midwest, remember the heat wave, what was it, the summer of 2005 or 06 where the grid broke down because of heat waves and people died. I mean you’re going to see that more and more. And remember, this problem was beginning to surface in South Africa and ESCOM in 1998 went to the government, “we need to build more power plants here or we’re going to have a problem with the way the economy is going.” And it wasn’t until 2004 that the government took it seriously and now you’re seeing those power shortages, you’re going to see ESCOM cut out power to neighboring states and it’s definitely impacting mineral production in South Africa and the economy. And it’s going to take 5 years to fix. You don’t just flip on a switch and you can put a new power plant in place. Power plants take five to seven years – depending on what kind of power.

So the kind of things that I predict we’re eventually going to move towards: what do we know that works, we know that we can come up with clean-coal technology – coal provides about 40% of our electricity needs in this country. And I think we’re going to go to coal and nuclear. And then what we’ll be doing is we’ll be using natural gas to liquids as a transitional fuel until we can come up with an alternative source of power.

But the kind of things we should’ve been doing, 10, 15 years ago, are going to be brought to the forefront because in a crisis politicians can’t go in front of the camera and go, “well, we’re going to have another hearing, blue-ribbon.” In the meantime, you’ve got gas rationing and power outs and people are going to get tired of that. And that’s what happened in the 70s and people got fed up with it and finally we began to do things; we began to conserve, the government gave us credits for insulating homes, the big three automobile manufacturers began to come out with more fuel efficient cars. But it takes that kind of a crisis and a major increase – because you’ve got to remember, gasoline went from a little over a dollar something a barrel before the Arab oil embargo, and the peaking of oil production in the United States in 1971 to $40 a barrel by the end of the decade – and that got people’s attention. [30:23]

JOHN: But you’re telling me two things right here. Okay, number one, the fact that fossil fuels are the staple of global energy and will be for the next 10 or 15 years at least; global warming is going to join Bambi on the road as roadkill because we’re not going to make that conversion fast enough. And that was the observation that Michael Klare made in his article, number one.

Number two, if we convert to hybrids, say, we had battery-packed hybrids that you can come home and plug in to a 20, 30 amp circuit and charge your batteries up; or, look at the railroads, remember how European railroads have been running for a long time, they run on electricity with overhead pantographs providing the power. But to have that power to charge millions of cars, you have to have some way of generating the electricity to do and to run the trains. And I think the day of the long haul trucker is over. I don’t know if the truckers realize it yet, it’s over because the mood will be to move all of the long haul to long trains, super trains, or to barges that can do it much more energy efficient, double-stacking on the trains etc. Even the railroads now, from what I’ve been checking, are starting to look into reopening lines they’ve been closing. You’ve been watching all over the west here, they’ve been closing out lines. Now it’s going to become more economical to reopen those lines again.

JIM: There was an article in Barron’s done just a little over a month ago for the first time in a hundred years, the railroads are going to spend $2 billion to expand their hub structure, expand the height of tunnels so they can carry double containers on railroad cars. I mean there are a number of things that they’re doing here that are going to help –but this stuff takes time. That’s why I think…you know, we’re talking about this crisis window because whether it’s building a power plant, expanding your rail line, these are things that you cannot do over night. They’re going to take a while for this to take place. [32:14]

JOHN: They don’t have to expand the tunnels. Just send the first overheight train through. It’ll clear it out as it goes.

But I think so, I think this is really true and that’s what’s going to have to happen. It’ll almost be a resurgence of the good ol’ days of trains when you used to see huge numbers of them traveling. I think even passenger traffic will again switch back to that over the short haul – I mean in addition to some of the Amtrak we have running now and some of the corridors on the East and West coast where people commute using trains. But I mean in addition to that – long distance travel.

JIM: It’s amazing how a lot of these things are going to come back – stuff that we weren’t even considering five or six years ago. It will become more pronounced. There was an article done last year about the state’s recognizing that they have to start building power plants because of the increase in commerce, the increase in population in their states, and yet they didn’t want to approve clean-coal technology. I think that’s going to get thrown out the window. And watch clean-coal technology and nuclear come back because that’s the only thing we know that we have right now. Wind and solar will help, and we’ll use that to supplement peak power consumption. But what are you going to do when we start going to plug-in hybrids, so at night when consumption of energy goes down all of a sudden everybody’s got a car in their garage plugged in for a recharge? So, we’re obviously going to have address these issues. [33:36]

JOHN: One of the factors that I don’t think people are looking at is the ability of people to vote with their feet. You know, you were talking about politicians going to have another hearing, “Save us, Obe-Wan Kenobi” that type of thing. And what will happen is there are some states that are actually encouraging businesses with low regulation, low taxes and energy abundance, versus those states which are having power outages and a high taxation system. And there will be a migration. I don’t think the politicians in the high states – which are largely on the left and the right coasts – but they’re not going to catch on to this until their revenues – like look in your state, California, is already approaching another tier of its crisis right now as more and more people are voting with their feet and leaving the state, from small businesses to retirees. You name it, they’re out of there.

JIM: And especially with some of the larger manufacturers. Anytime we have the – once again, these warm spells, we have these rolling blackouts. Well, if you have a unionized assembly plant and you have a power out, well, what happens is the city will go to the manufacturers and say, “in order for people to cook in their ovens and turn on the lights, you can’t manufacture. You’ve got to shut down your plant.” You can’t run a plant like that. And just a while back, some of the manufacturers actually converged on the state and said “look, if you don’t address this power issue we’re out of here because we can’t run a manufacturing plant where anytime we get a warm spell here we’ve got to shut down production in order to keep the lights on everywhere else in the city.”

And I think also, John, as the things of taxes and inflation begin to impact more consumers and businesses, they’re going to go simply where they can cut their costs. I mean you can go elsewhere in the country and live a lot cheaper than you can in the most populous areas of the country (the big cities along the west and the east coast.) I think you’re going to see more of that. Taxes, regulation and the cost of living are going to determine that because that’s one way people are going to be able to cope. [35:43]

JOHN: I think you’re right about that. What about the social society we have created here, the welfare state. What’s going to happen to the welfare state as we plow into this do you think?

JIM: I think it’s going to collapse or just simply get checks that due to inflation will not buy the things that they used to buy when the dollar was more stable. But I think you’re going to see more devaluation of the dollar because governments won’t be able to cope, the federal government won’t be able to cope and when you can’t pay your bills and you’re not collecting enough tax revenues to pay for these bills and the promises that you make, you’re going to have to cut back and you’re going to have to inflate. [36:24]

JOHN: I think even the concept of wealth transfer etc., that we’ve sort of been sold on since Lyndon Johnson started the Great Society, that’s not going to fly as more and more of the middle class out there are just struggling to stay afloat. They’re going to say, “well, why should we do this. Everybody roll up your sleeves and get to work.”

JIM: Well, you’ve already seen this, to this 400 billion dollar mortgage bailout program where public opinion polls across the country are dead set against this. It’s like, “gosh, I’m struggling, I’m working, I’m making my bills, why are you going to raise my taxes so you can bail out my neighbor?” And so I think there is going to be a growing resentment on some of that, and that’s why I think some of the politicians right now are just absolutely petrified. I mean, John, it doesn’t matter whether you’re a Democrat or Republican, if you’re up for reelection and things are not going well in your local economy, it doesn’t matter who’s in office the voters take out their anger at whoever is in office at that time. So both Republicans and Democrats are up for election and a lot of these guys are like a deer in the headlights in terms of what they need to do. And actually the best thing they can do is get out of the way and let the market place solve this problem. [37:34]

JOHN: One thing is sure, life is going to change as we have known it. I don’t think it means that you have to panic. I think people need to understand what is happening in a serious vein and then evaluate where you are in your life and what you will need to do. This isn’t going to dump on us all at once but it is coming rather rapidly. And so like we said, the first real major storm is going to be during this crisis window. Everything up till now, including the subprime mortgage has really been a squall line ahead of the big event. But as long as you know about it ahead of time you can begin taking some corrective action as to what you’ll need to do.

You’re listening to the Financial Sense Newshour at www.financialsense.com.

[38:17]

Other Voices: Eric King Trading Analyst

JIM: Well, it was a very tough week for gold investors. We had gold prices down $25 and roughly 50 cents for the week, we’ve got silver prices down below $17 an ounce. We’ve got the major gold indexes, the American Gold Index and the Philadelphia Gold and Silver Index giving back considerable gains when you consider they were up double-digits earlier in the year. Now the HUI is up less than half a percent and the XAU is up less than 1%. We got a lot of emails that said “panicking, jumping out the windows” and so whenever we have sell-offs we get a lot of requests to have Eric King, who joins us on the show now.

Eric, I want to begin our discussion – I’m trying to think what was it, Wednesday or Thursday, what day it was – we had gold taken down 20 bucks and I normally don’t take phone calls from people. I don’t know, but one of my staff members came in and said there is this guy on the phone, he’s panicky, he knows you don’t take calls but he really wants to talk to you. And so I wasn’t doing anything really important at the time so I took the call. And what had happened – this individual was listening to a program that we had done here on gold, it was a roundtable and then we had also interviewed quite a few mining companies. And he had gotten out after a while. As the price of gold continued to go up and as the gold shares continued to go up –and especially when gold was going up when the stock market was going down – he finally jumped and bought this upcoming company that’s going to go into production this year. And you know what he did, Eric; he bought at the top.

Well, he was calling, panicking, he’d put a lot of money. First of all, he put all his money in only one or two stocks instead of diversifying – not the best thing to do. But more importantly is he got in at the top – and when I asked, he goes, “what’s wrong with the company, do you know anything about it? I know you’re a shareholder and you’ve interviewed this person,” and he was going on and on.

And I said, “well, they’re going to go into production this year, and when they do that they’re going to make a lot of money when they do.” I asked him had he gone to the website. No. Had he called up the company. No. And this is what happens so often in this market is the gold market will shoot up – and you know, the last time I had you on the program which was about a month ago – you had a lot of the large cap gold stocks that had just gone through the roof and you were cautioning people and saying: “Don’t chase them here. Wait for a pull-back.” And of course, that’s what we got. I think I talked him out of jumping off the window and he’s going to hold his position, but this happens so often.

Why don’t we go back to the last time you were on the show and why don’t you tell people just from a fundamental point of view a lot of these major large cap stocks were selling at over $700 an ounce in the ground.

ERIC: Yes, that’s right, Jim. And before I go there, let me just discuss the situation with your friend that called in there – or your new friend I should say. But anyway, you gave him great advice. And this is why: Folks, when you make a bad entry point but you buy quality – and I happen to know the stock that you’re talking about, Jim and that was a quality company – but when you make…his timing could not have been worse though and I don’t mean to laugh – and if you’re listening, just learn from the experience – but when you make a bad entry point but you’re buying quality in a bull market that’s okay, because the bull market will rescue you.

Fortunately, Jim, you were there to kind of hold this guy’s hand and walk him through it, but people really need to remember that. And again, you have to buy quality. But if you make a bad entry point the bull market will rescue you. And Jim, I’ve been saying this for years with you and for your listeners but try to buy the significant pull-backs. If you were talking about last time we were on the air together and I’d been telling your listeners to expect professional selling of the instruments, GLD and SLV, above $1000 gold, and $20 silver.

I think I even mentioned on that show, I’m hearing $1200 gold thrown around and $30 silver and that was all fine at the time, but you know, we had 94% bulls on silver – the highest reading in history – and I was really trying to caution your listeners without telling them to sell their stuff. And for the traders I think they probably did pick up on that and good for them. And of course, GLD and SLV are the gold and silver equivalents on the exchanges, so the professionals were selling those. We’re having a big pull-back now, so that’s paying off for the professionals and as we get this correction in gold and silver.

But I was also telling the listeners not to purchase or chase the shares of producers such as say an Agnico-Eagle or a Yamana, and that if they wanted to enter those stocks, wait for a significant correction. And it’s interesting because we’ve had Yamana tumble from roughly $20 US a share, into the 12s, this week and Agnico has fallen from a high of $83 ½ to roughly $61 and change as well. So for some folks who said “hey, I’d like to start accumulating some of those now” –or those may or may not be the stocks you’re looking for but just buy the quality – buy it on the major pull-backs and understand the correction may not be over. I think we still have some rather bullish sentiment I’d like to see wrung out on the gold side, so maybe we can go a little lower on gold, I think it’s appropriate we test the 850 area, 800 dollars, somewhere in there. Oil did that of course. Jim, when it broke out. It had the pull-back into the low 40s, and the rest is history; we’ve hit almost $120 a barrel. So you know, it really is appropriate for gold to dip down into those areas and maybe silver could go down its 200-day moving average. And I was talking to Ted Butler about this is the time when we were at the highs and we saw this frothiness. But it’s possible, it doesn’t have to happen but silver could go 14, 14.50 – sure. But I don’t think that matters for the people who are listening to your show that have been listening for years that say, “you know what, that’s okay, I’m just going to start buying physical silver and physical silver at these levels.” I think it’s great, do it. Accumulate, keep buying the dips, hold for the long term.

And also, let me say this though, Jim, while these majors can go lower –because they were really ahead of themselves at this point in the bull market and we’ll see a stock like Agnico over $100 a share during the bull market – but you know, again, try to buy those major pull-backs like we’re in right now. But right now, buy the quality juniors. If there are juniors you’ve been looking at and you want to buy them, go in and buy them, continue to purchase these equities all summer long. So have your May purchases, have June, your July’s, your August. And I think you’re going to be extremely happy as the year wears on because, do remember, those are on a different cycle than gold and silver and also the XAU and the HUI. So we’re going to see those stocks turn and something will trigger those stocks, and something will begin to make those stocks turn on the upside. And we haven’t quite seen that yet, Jim, but we will on a go-forward basis. [46:06]

JIM: I want to stress this too, as I was trying to tell this gentleman that was about ready to jump out a window, the one thing that you can do with the juniors that you probably can’t do with the majors unless you have connections – I mean we always recommend if you’re doing your research go to the company’s website –if you can’t find it, Google the name of the company, and that’ll get you to the website – start reading the press releases, look over the investor presentations so you get a feel for who the company is, the management team, and then pick up a phone. If you have some questions, you’re not sure, chances are you can talk to the head honcho at the company and they don’t mind taking your calls. Don’t just talk to the IR guy, talk to the president of the company and they don’t mind taking your calls.

But more importantly, do your homework, number one, so that you have your facts in front of you because Eric, you and I know that a junior stock can drop 20, 30 percent in a day or go up 30 or 40% in a day on no fundamental reason whatsoever. It just so happens somebody was buying that day or somebody was selling that day, and people go “oh my, it’s up 20 percent” or “it’s down 20 percent, what do I do? Do I jump out.” And people will know about the price that day but they will know very, very little about the company. And wouldn't you also agree with this, because a lot of people don’t do the in-depth analysis – I mean we have a database system that will give me the profile and background of every person running the company including the board of directors. But without having access to that kind of information, if you do your own homework, don’t you think they’re better off just saying, I want to buy – Oh, I don’t know, let’s just take company ABC – and lets just make it simple and say you want to buy 12,000 shares the company is selling at a buck. Don’t you think they’re just better off saying, okay, the 15^th of the month I’m buying my thousand shares this month, next month you buy another thousand shares – instead of trying to get real fancy and smart and trying to analyze juniors on charts or trying to pick the bottom or pick the top. [48:11]

ERIC: There’s no question about that, Jim, but that also brings in the fact that you’re talking about professionally dollar-cost averaging and accumulating over time, which is just a great idea. And I don’t know this guy who was going into that equity but that’s something that he should have considered. If he wanted into the equity he could have just said: “Okay, I’ve got four months in front of me. Let me break this into four pieces, I’ll do some May purchases, June, July’s and August and I’ll just kind of fan them out and purchase over time.” And that way, wherever the stock goes... But you know, it’s funny, when you do that you know what happens, Jim? You start to root for – and I don’t have to tell you this – but you’ll start to root for things to go a little lower in price because it just improves your cost basis and it really does change the mentality of the investor. And obviously do your homework; go to the websites, talk to the people inside the company.

But also remember –again, we’re always talking about this – fundamentals. Here for the first time ever we’ve got the Russian central bank buying gold from producers; right? because I don’t know if they’re able to get their demand satisfied from the interbank market, so they’re having to go for the first time ever and step in and go straight to the producers. So the Russians know what to do which is just keep accumulating, keep buying gold, continue to look at the fundamentals and they sort of know what the bigger, longer term picture looks like so they’re doing all the right things. Know the United States is in trouble, we’ve got these crises. And James Turk has a great Fear Index, you know, we sort of broke out on that. I think it was in 03 or something and that was in a long downtrend and all that means is that basically it was the beginning for the United States to have some very early troubles; we had the stock market paper value deteriorate obviously in a big way on that tumble, and it’s recovered somewhat but not on the NASDAQ. But it just means going forward it ends in a crisis – an all-out, full-blown crisis. Are we there? Did we have it? I know some folks are saying is the bull market over. Absolutely not! That’s complete nonsense! Get that totally out of your head, this is a very long term, secular bull market in the metals. And you've got to remember the fundamentals. We’ve got Germany over the last 12 months: butter up 45%; milk up 25%. We have according to a study from the government over in Japan, 80% of the Japanese people are frightened about what the future holds for their food supply. That’s an extraordinary thing when you stop and think about it.

And Jim, I know you’ve been telling people to look at these agricultural things before they took off really in price. Now we starting to see that. So this is a very young bull market. It’s still got a long way to go in front of it. It will end in a mania. It’s not going to end with the juniors hanging around lows the way that they have been; it’s going to end with a big bang. So I think for people, do what you’re saying, Jim, continue to dollar-cost average, particularly when you have the summer doldrums. You get a lot of cheap buys sometime in there and I don’t know what this summer will hold because sometime everything works until it stops working; right? So maybe one of these times we’ll have an upleg in summer, although it’s not usually the case – but you just never know. So, yeah, I think people should do what you’re saying on that, Jim. [51:24]

JIM: The amazing thing, you made a comment –and this applies in the way that, for example, you and I see this – but once again – in a bull market, all I care about when we get to the final stages we go from pessimism to skepticism – which is where I think we are now in this bull market – then you go to optimism and then eventually you go to euphoria – Eric, all I care about is when we got to that fourth stage of this bull market –the euphoria stage – all you really care about as an investor is how many shares of your favorites junior or mining company do you own; or how many ounces of gold and silver will you own. And my gosh, if you loved silver when it was at $20 why don’t you like it more when it’s at $17? And it’s that psychology when you learn to do that, when prices go down, unlike let’s say in your example you’re accumulating on a monthly basis then all of a sudden you start saying, “well, wait a minute, you know, I normally buy about the middle of the month but my goodness they just whacked gold and silver this week, you know what, my hundred bucks or two hundred bucks is going to buy me more shares of our favorite companies.” I know, for example, the big pound down that we got in the stocks this week, I didn’t even have to talk to you, I knew you were buying just as I was. [52:44]

ERIC: There’s no question about that, but Jim, you and I, we’re talking about sort of changing the mentality. You know, we like to get the guy right who calls you in a panic who probably is very representative of the fear that a lot of people were feeling as this gold market really started to tumble. And it’s a great way for the gold houses or the brokerage houses to be shorting this paper at the top, really put the smash on stuff. And again, when you look at the corrections we’ve had as we’ve sort of fumbled along in this bull market, they’ve been 30, 32, 33, 34 percent. So if you go and look at the top of the HUI and let’s see very recently we had a peak at what? 520, roughly. So if you clip 30% off of that could you end somewhere around, I don’t know, 360-ish or somewhere in that range on this correction. And we don’t have to go there, but we could go 350, 360 on the HUI. But guys like you and I don’t really care because we’ll just continue to buy. We’ll continue to accumulate. And I think short term some of this stuff is getting oversold so you don’t go in a straight line, we may get some bounces; and of course, it may just end and go up. And so that’s why the dollar-cost averaging is so important because you’re really making sure to get positions constantly and you’re really making sure that you’re taking advantage of some of the dips and some of the lows. And then also, some of the times you might be buying is stuff that’s moving up but you just stay disciplined, stay with that average. And as we go lower than where we are today and we have this major dip down, well, people are jumping out the windows and selling shares and puking them out, yes, Jim, you and I are going to be backing up the truck.

I was just talking to a banker who handles multi-billions of dollars each day and he was asking me about the gold market and I said to him, “look, I really want you to understand what I’m saying here because in my opinion –and you’ve talked about this in a segment called Last Call, Jim, but again oil went up to the 50, 60 dollar area – 56.62 wherever it was – and a pull-back to 41 somewhere in that range and then it took off towards 120 – gold, as it does this pull-back – as we get this big pull-back in gold – this is it, folks! This is not the time to be panicking, this is the time to use the next four months to accumulate physical metal. Take advantage of these manipulations and these dips in prices; buy silver, buy gold. We haven’t even had silver take out its $52 high from 1980. Of course, that’s futures, spot was in the 50 area. But this is the chance to do it. And as it is last call went away, it is because...and then you’re going to have gold explode; and then it’s going to go into the thousands, right? So this is the time to really accumulate and this is the time in the next few months to dollar-cost average. Get your positions squared away and make sure you’re in it for the long haul. [55:30]

JIM: You brought up something here during these periods of manipulation, you have been trading – and probably one of the best chart readers – and there’s a lot of monkey business. I mean since May probably of 2007, the hedge funds have gone short. And you see this happen, Eric, you were commenting that one of the stocks that you follow was up for the day, and then what was it, the last 30 seconds of trading – and this happens to be a junior where there is a large short position – they come in and carpet bomb the stock with 10,000. They go through all the bids and they take the stock down. That’s where you take advantage when they’re doing that.

One of my favorite companies is a company going into production; the short position has gone up almost 300% and it’s gone up another 10% this month and I suspect with the action this week I could tell there was more shorting coming into the market. But this stock is held by very strong hands, and I’ve noticed now the short sellers are now going in and buying all the calls – November calls on this stock – which just tells me maybe they want to hedge their short position in case this goes against you because, Eric, you and I know when the gold market takes off – I mean you just take a look at a chart of what happened to the HUI or the Gold Index from last August going all of the way into January this year, it looked like a NASA space launch – you don’t want to be short in that kind of market. [56:55]

JIM: No, you don’t. And I suspect – and I don’t know who is doing that or why they are doing that exactly – but there always is the element of acquisitions – and now we're starting to move into that phase of the bull market where we’re going to see acquisitions more and more on go forward basis. So as you move into that phase I’m sure the thinking might be, “hey, guys, if for some reason somebody steps in and makes a bid we don’t want to get caught with our pants down, let’s have some call options on the 1250s” or whatever it is you were talking about. So that way, at least there’s some type of limitation on the risk exposure on whatever it is they’re doing and they may be just looking for this correction on gold down here – knowing that it’s going to go back and back-test – so you have these shorts piling on right now. The thing about bull markets is that, again, if you make a bad position or a bad entry point in a bull market, if you’re buying quality if you wait it will rescue you. I’ve always said that. But see, that’s not the case when you’re shorting so that’s probably having to do with what those guys are looking at over there, Jim. So it’s very hard. ou have to be very tricky, very professional to be playing the short side of the market – obviously things fall much quicker than they go up. But I think again for the people listening, take advantage of these manipulations. Like you said, Jim, if you have somebody pushing the stock price down, just leave your bids in there. Be patient. I saw a person get a hundred thousand shares on the bid over a two-day period on a junior that I like. I mean you just put it in, you’re patient – and that might have been a short covering. I don’t know. But regardless, I think just be patient that’s the main thing. I know one of the guys who was a pro used to tell me “chill and you’ll fill.” I don’t know but that seems to work most of the time. [58:33]

JIM: It’s absolutely amazing because we’re going to have a roundtable, Eric, with some of our gold experts. There’s almost a sense that you get –and you’ve seen in a graph of the HUI where you go through these long periods of consolidation – and essentially what’s happening is the gold market is winding up like a coiled spring. And when I did that piece last week called Last Call I really believe that in the next couple of months is going to be your last chance to buy these gold equities – and especially the juniors – at prices that, Eric, you remember how crazy it got between let’s say, 2001 and almost going in to spring of 2004 where you’d wake up one day and a stock would be up 30, 40, 50 percent. You’d wake up the next day and you’d think, okay, I’ll wait for a pull-back and the next day it was up another 30, 40, 50 percent. And that was the period where you saw stocks go from 20 cents to $2; you were getting 10-baggers, 5-baggers. And that’s what I think is up directly ahead of us and like I don’t know how many times I can say this, but you know, when they’re down, when nobody wants them, when they’re incredibly cheap…I mean just think of it this way: Nordstrom’s is having a 40% off sale on gold and silver equities and bullion. What do you think would happen, Eric? They would be waiting around the corner to get inside the store, and that’s the opportunity in my opinion that people have today. [1:00:04]

JOHN: I think the main thing is that we don’t know what’s going to trigger this – it could be acquisitions. I’m not sure what’s going to start this domino effect but as we go on and begin to see this really violent move like you’re talking about in the juniors go forward to the upside, we just don’t know. And there may not…nobody is going to ring the bell like you said, Jim. They’ll just start going. They’re on their own timetable and they’ll just start going. I know the smart money has been parking money in these stocks in a big way, participating in offerings. So it’s like as soon as they sell something else, they’re trying to get as much money...Look, if you have an Agnico-Eagle, like last time on the show it was around $700 whatever an ounce of gold in the ground, and then you’re looking at some junior that’s in a good quality area, 30-dollar something in the ground, where’s the value there? I mean like we said, Agnico over time will go a lot higher but things just get ahead of themselves in bull markets, and right now we have extraordinary values in some of these juniors and that will be gone later on. It will be absolute pandemonium in the third and final phase of the bull market if you go from Richard Russell’s view of looking at it where there’s three phases. That mania, that manic portion, there’s not going to be any value, it will just be madness. And again, you have to stick with fundamentals.

I know George Soros was calling this the worst financial crisis since the Great Depression and that’s goes back to that James Turk Fear Index, so we’re finally beginning to have this panic in paper. And you know, he’s talking about the bottom being in the stock market and having a rally but eventually having it roll over and go down to fresh lows – he’s short the US stock market and also the 10 year note. And of course, that’s started to move in his favor since that interview. So I think to a degree we have this unwillingness for people to hold dollars and there’s really not much in terms of suitable alternatives, so that really in the end creates this panic into gold towards the end. I think the Federal Reserve has run out of room in terms of the ability to cut the rates because we’re dealing with such large inflation numbers. So as you look at this going forward, I mean it’s really set up, Jim. Everything is perfectly aligned. If they’re going to have the pull-back like they’re doing, better to get it now, better to get it over with. We’ve got consumer confidence hitting 26 year lows on March 25^th when they came out with their report. But really, you have to look at it, the expectation for the next six months which slumped to 47.9 – that’s the lowest since December of 73; right? So you’re talking 35 years ago, the Watergate scandal. I mean we are beginning to see signs obviously of this panic or this fear creep into these paper markets. It will accelerate over time even though it takes rests. Is it over? Was that it? (like some people are saying.) Absolutely not – with derivatives out there, like Warren Buffett says, “created and devised by madmen,” weapons of mass destruction. And the other thing to keep in mind is – and I’ve already talked about that Lawrence Parks interview – and I don’t want to get into that again this time – but that printing money –saying that five times over in Belgium – creating money without limit and how that can just wipe out your savings of a lifetime in the blink of an eye.

The Fed right now is trying to get these emergency measures not seen since the Depression and they want to have the ability to borrow more money than it needs to fund the government and leave the proceeds on deposit, issuing the debt under the Fed’s name rather than the Treasury’s interestingly enough, and ask Congress for the immediate authority to pay interest on commercial bank reserves or do whatever it is that they have to do. I think it actually was set up for 2011; they want to accelerate it to today because of these crises that we’re seeing. The Fed like any central bank can create or print unlimited amounts of money. And in that environment, Jim, and I’ve said this for so many years and so have you, I hope people have been protecting themselves by being in your funds, buying physical gold and silver – but position yourself and be a strong hand. Don’t buy a stock like this guy and then be in a panic when it dips down. You’re missing the whole point of this. You’ve got to believe in this bull market! If you don’t believe in this bull market, if you don’t believe then get out, step aside because the strong hands aren’t selling. The strong hands are in this for the long run and they’re accumulating right now because they know what’s in front of us, Jim. They know the explosion that’s going to take place. You had gold up 25 ½-fold in the 70s, silver was up 38-fold. I mean where are we on this stuff right now. If we have a pull-back in gold, I mean we barely tripled. There is a long way to go in this bull market. [64:40]

JIM: Well, I just hope this time, because I do believe this is the last call, that people will listen if they’re thinking of getting in the market, don’t do it at once, put in this month, put some in next month, put some in June. All I can say is by the time we get to December of this year, you’re going to be awfully glad you did.

Well, Eric, as we close, if anybody wanted to get in touch with you how could they do so.

ERIC: Well, I’m going to put out an email this time, God forbid, first time ever: ericking5@live.com. Probably get some professionals in contact with me or large private investors and maybe be going forward and try and help some of those folks to maneuver through this bull market. For those of you that are buying gold or silver, let me just say Bill Haynes over at CMI – Certified Mint’s been doing it over three decades. I have no financial relationship with this guy, no referrals obviously or any fees or anything whatsoever. So here’s his number 800-528-1380, for those who want to start stepping in buying gold, buying silver and Jim, I know you’ll do this from time to time, accumulate on these dips, buy, hold for the long term. And then for those of you who want to get in touch with me you’ve got an email address finally. [1:06:01]

JIM: All right Eric, thanks so much as always for joining us. With the prices down this week, a lot of requests, “are you going to have Eric?” And that began last week when it began to dip too. So once again, thanks for being generous with your time.

ERIC: Absolutely, Jim.

Part 3

Q-Calls

JOHN: We are back. Time for the Q-lines right here on the program. Q-lines are recordable 24 hours a day around the globe, toll-free US and Canada 8007-946-4806. That is toll free from the US and Canada only. It does work from the rest of the world, but it is a toll call from anywhere else in the world, and as we answer your questions, we would ask you to please keep your questions brief. People are beginning to call in lots of questions. We can't get to everyone if everyone leaves some great document here online, so make it brief. We'd like to have your name, first name is fine, and where you're calling from.

Please remember as we give some information here, that the show is for information and educational purposes only. Do not consider anything we do here as a solicitation or offer to purchase or sell securities. It is not. And our responses to your inquiries are based on the personal opinions of Jim Puplava. We are unable take into account your suitability, your objectives or your risk tolerance and as a result of that, Financial Sense Newshour is not liable to anyone for financial losses which result from investing in companies profiled, etc here on Financial Sense Newshour.

A lot of callers today. The first one is Ray in, my gosh, San Diego, Jim.

This is Ray from San Diego. A two-fold question. What exactly happens when a company writes off a loss – what are they doing? Does this loss write off affect taxes paid or not paid to the US government? Thank you.

JIM: Ray, it depends on what they are actually writing off. First of all, it could be, for example, a market loss in which case they write offer the loss and yes, it does reduce their taxes. However, if they are writing down a security, as you're seeing in this mortgage crisis where a lot of these securities that these companies have invested in have fallen in value and they have to write down the difference, those are paper losses and if those securities come back in value, then they would have to recognize some of those gains. Or you could have a type of loss where, let's say, they invested in a business where it is a real loss, but what it does is the loss is written against income and it reduces taxes. [2:24]

Hi John, Jim Puplava. My name is Robert. I'm from Niagara Falls, southern Ontario. The question is do you see the precious metals –especially the juniors – dropping or going up this spring?

JIM: You know, I just see them kind of lingering right now and that's pretty much what they've been doing. A couple have dropped a little further, but right now, I just see them going through a consolidation period, and usually for the juniors to take off, you're going to need to see bullion go up, then you're going to have the majors go up and then it spills over into the juniors. However, there are catalysts that could change that format and that would be, for example, the ‘take over.’ Let's say somebody has taken over in a certain gold belt. Let's just take the Sierra Madres and the next thing you know all of a sudden everybody starts jumping in on other companies in the Sierra Madre belt. But for the most part, I just see these things sort of consolidating here until we get some kind of catalyst, although I think by the time we get to the fall, we'll have plenty of them. [3:26]

Hi Jim and John, it's Paul up in Canada again, Ontario, and I think you just proved my point, gold was up last night in Europe and now it’s tanked in the United States. Especially with all of this bad news, why is it the worse the news is the more gold tanks? Do you have any idea what is going on? Thank you.

JIM: It's called gold manipulation, the P.M. fix. I'd highly recommend you go to a site called GATA (www.gata.org.) Read some of the editorials there, especially about gold manipulation. There is a 90 page document and that's called the P.M. fix. It's up overseas and they hammer it by the time the markets open here in the US. [4:06]

Hi Jim and John, Jason calling from Dubai. A couple of quick questions. I'll keep it short here. Jim, what do you think – when are the forces that are propping up the dollar –ie the central banks’ rate cutting and treasury purchase and all of that –a when do you think they actually go through with something like Schiff’s scenario? Do you think they ever will actually let the dollar drop just to keep their own currencies alive in the long run through this hyperinflationary depression you keep talking about that? And quickly, the second one, do you think in this environment right now, within the last couple of months, say, would you be buying bullion stocks in gold or both? Thanks.

JIM: You know, Jason, right now there is nothing out there that can replace the dollar, so it's going to be a slow Chinese water torture as the dollar keeps dropping. If you look at a chart going back to 2001, the dollar has lost about 40% of its value and I see another 10, 15% depreciation, and they don't necessarily even have to stop supporting. Just by the fact that they even buy less as we're taking on more debt is enough to send the dollar down. But right now, there isn't a currency out there strong enough and developed enough with a large, let's say, securities market, bond market that's highly liquid – and that's one of the things that still makes the US market very attractive because you can move large amounts of money in this market.

Would I be buying? You know, if you don't own bullion, I would certainly buy on these pull backs. But to me, these gold equities and especially the juniors are so much more attractive. I mean even though we've seen some of the majors pull back, they are selling at maybe 600 dollar gold in the ground instead of 700 dollar gold in the ground, but I can still buy my favorite juniors for $30, $40 in the ground and that to me is where the real value is and that's where you're going to get the 10, 20 and 30 baggers when this thing takes off. [6:00]

Hey Jim and John, this is Jim from Maryland. I have a question regarding ETFs. I was hoping maybe you could do a show or bring a guest expert and discuss these entities, and also ETFs that specifically target the areas that you have been recommending things, particularly ETFs that would capitalize on dividends – the large cap, dividend-paying stocks, and ETFs for large cap dividend paying stocks in foreign countries which can capitalize on foreign currency as well as the dividend.

JIM: You know, Jim, there have been a number of books out there on ETFs. I go to Amazon every week looking for new books out because we're always looking for new guests and interesting ideas that are out there. I'll look for one on ETFs. Maybe there is one we can look at that's good enough and we'll get the author on. [6:54]

Hello, Jim and John. This is Alex from Chicago. Thanks for your show. I appreciate it and listen every week. And my question is about technical analysis. I've noticed that the almost all technical analysts use the US dollar as the base unit to determine trends and cycles. And this seems to be contradictory to me because the unit of value changes so rapidly, and especially in the case the dollar is going down in value. So it seems to me that any kind of charting or analysis that is based on the dollar would be distorted by the changing value. So my question is: Would it make more sense if you were going to analyze the markets in a technical way to use a basket of commodities in order to come up with the unit of value that actually is more stable than a currency that's fallen in value?

JIM: Well, actually, there are people that have suggested that, but when you take a look at most currencies in the world, they are denominated in dollars, so rising commodity prices you can almost take the CRB Index and reverse it and put it alongside with the dollar and they are almost lining up with each other. [8:19]

Hola, Jim and John. This is Richard calling from Buenos Aires, Argentina. Jim, I understand that your famous Oreo cookie scenario is a forecast of the US economy for this year, 2008, but is Marc Faber's gloom, boom and doom picture saying the same thing or is he describing a different time and a different set of circumstances?

JIM: I never thought about the gloom, boom and doom. Yeah, I think that in one way describes the real Oreo theory. I think what Marc was referring to that is these business bust cycles that we continuously go through, throughout the decades over the last 20, 30 years. And I think that's what that name comes from and is a reference to. [9:04]

Hi, guys. This is Victor from Pennsylvania. I had a question about buying gold bullion coins. I’m considering Krugerrands or gold Eagles and just wondering your opinion on one or the other and the long term consequences of one over the other. There seems to be some benefit and some draw back to either one. Price, laws, confiscation what have you.

JIM: I like whatever has the lowest premium per ounce of gold. Gosh, I've been buying silver lately, so you might have to take a look at your coin dealer and just ask between maple leafs, Krugerrands and gold Eagles per gold content which has the lowest premium and that's where I would go with, Victor. [9:45]

Hey Jim and John, this is Jason from Toronto. Question, rising interest rates to 6 to 8% by the year's end, how does affect the price of gold, oil, the rate of inflation and the value of the dollar?

JIM: You know, I think, Jason, interest rates rising by the end of the year will not be a product of the Fed doing. It will be a product of the markets. In other words, long term interest rates are determined by the market and it will be the market's perception that there is more inflation on the rise and there is a lot of people today saying “well, gosh, if interest rates go up, that means the price of gold will go down.” Well, if you look at a chart of interest rates through out the 70s, interest rates rose all of the way until the end when Volcker took them up into the high double digits and gold was going up during that whole entire period of time, along with, by the way, oil prices. [10:30]

Hi, Jim. Great show. My name is withheld by request because I just don't want anybody to hear it on the air, but I'm from the great state of Washington. But anyway, you keep talking about gold and silver bullion – about the hefty tax on it, like 24, 28% or whatever. Now, I buy all of my gold bullion and my silver bullion and I've got plenty of it with cash from the these coin dealers and whatever and I leave them no name and they sell me this without a receipt and I've got it and I don't leave any paper trail. I thought that's the way most people did this. When I sell it, I'll sell it with no name to somebody who won't give me a receipt or anything, just the cash back. And I know several of these coin shops that do this, and I'm sure they stick the money under the table and they don't pay any profit because they don't have a paper trail and this is the way a lot of this works in the real world. I wonder if you'd comment on this. Thank you.

JIM: Name withheld, answer withheld. [laughs] Well, you know, that's probably a lot of what is going on, but in fact, we made reference to this in the gold round table in the first hour, but remember, it is your obligation to report the gain and pay the taxes. [11:51]

Hi Jim and John, this is Robert calling from Oklahoma. Love your show. Keep it up. I've been listening for a couple of years an appreciate the information that you're getting out. I was wondering if it's possibility to have Dr. Albert Bartlett from the university of Colorado professor of physics emeritus on your show to talk about arithmetic, population and energy and for the consequences of his famous statement that the greatest shortcoming of the human race is our inability to understand the exponential function. Thanks.

JIM: You know, I just read a piece that he had correlating population growth to energy, it was made reference to some research material that I'm putting together. Not a bad idea, but as long as he can speak it in English, if he starts talking mathematically, I think he's going to put a lot of us to sleep. But he has got an interesting thesis correlating the increase in population growth as a result of the use of energy. [12:48]

Jason from Tampa bay. A couple of comments and then a request. First comment, I've concluded that if the White House burned down that the stock market would go up. I think it's crazy what's happening. Number two, Terry Tamminen wrote a book Lies per Gallon. I'd like to hear you interview Terry if you get a chance. Thanks.

JIM: Jason, we'll take that recommendation into serious thought here. We're always looking at great ideas. I'll look the book up and see what it's about. [13:22]

Hello, Jim, this is Pierre in Quebec and I'm calling you regarding you mentioned a new energy source from Michael Klare and I'd like to know if you could expand a little bit on that.

JIM: You know, I think I was making references to his new book, and his new book is called Rising Powers, Shrinking Planet: The New Geopolitics Of Energy where he talks about alternative sources in here because we're going to need it – as peak oil has reached...averting a catastrophe and energy juggernaut – a whole thing. Well, we're going to have the professor on the program and get him to talk about his new book, but the nxame of the book is called Rising Powers, Shrinking Planet. [14:06]

Hi, this is Dave calling from Canada. This is just a comment. I went out to pick some silver up today and I nearly fell out of my chair. It was $25.15 to purchase Canadian silver maple leafs. The supply up here is incredibly tight. All of the other coins are gone, so basically everyone is stuck paying the high premium because of the minting cost. Also for ten ounce bars, they are nearly impossible to find and are 23.59 an ounce up here. So with the price being above 5 or 7 dollars above spot, one can only assume it's going to be a matter of months before the price actually starts going up there. So everyone out there: Just continue to purchase silver because it's going higher.

JIM: Dave, couldn't agree more. We're hearing more and more today that some of the dealers are having difficulty. Listen to some of the comments made in the gold roundtable in the first hour. [14:54]

Jim and John, this is Al from Jefferson City. A caller last week on the Q-calls hinted at the possibility of a gold-backed Chinese currency sometime in the future. Interestingly enough Richard Russell mused over this possibility in his daily remarks several months ago and I've been thinking about it quite a bit ever since. Jim you answered briefly, but I was wondering if you could expand on that a little bit. In the Q-calls you referred to the coming currency crisis many times. In this time of currency crisis that could be coming it seems a gold-backed currency will have to emerge from somewhere. I'm just wondering if you could give us some of your thoughts on possibly the origins of that, or what do you think about that potential situation?

JIM: You know, Al, in a time of currency disorder as we had in the 30s, notice the first thing they did, as World War Two was coming to an end, was Bretton Woods – they put the dollar on gold backing and tied all currencies to the dollar. And I think you could see maybe something similar to that merging. Some kind of global type currency that would have gold backing because it would be the only way it would find acceptance from people, especially when you have almost widespread currency depreciation going around globally. All paper is losing its value against gold. But usually, it's only after you have a severe crisis and devaluation of major currencies and who knows by that time, the dollar will lose its currency status by that point in time. But if a new currency is going to come and replace it, they will have to have some kind of gold backing to gain credibility. Otherwise, why would anybody adopt it? [16:33]

Hi there Jim and John Ronnie calling from Israel. I just came back from China. I was there two weeks and the situation seems to me really bad. The vast majority of the population are living on 2 dollars a day. Food prices are going through the roof and in the meantime there are massive lay offs due to low demand for Chinese exports. You’ve talked about this discretionary spending falling, well, China is the queen of discretionary manufacturing. The way I see it if China doesn't let the yuan rise sharply very soon, the average salary will not buy half of the population meals. If they do so, well, with the US slowdown, high fuel prices it is going to raise prices of Chinese goods and they will face massive unemployment. Now, in that case, wouldn’t there be a sharp fall in the demand for commodities. I'm not talking about gold and silver because they are money – but getting a recession in China, couldn’t for example oil fall back to the 2002 level?

JIM: Ronnie, when it get to key commodities where they are in such short supply, remember sometimes supply could fall faster. One of the problems that we have right now is we can barely keep up with demand on the energy front, and on an annual basis, the old oil fields are going into decline. And if prices fall sharply enough, especially with costs as high as they are, you could see supply fall even faster. In other words, companies just say, “you know what, we're going to stop drilling, we can't afford to pay these day rates on drilling rigs, we can't afford to pay this.” So in other words, the supply could be cut just as fast as demand and you could still end up with higher prices. [18:25]

This is David from Stewart, Florida. Regarding peak oil, I obviously hear a lot about that on your program and I'm staring at my bookshelf here and I see about two dozen books about peak oil that I've read myself. Two things kind of bother me about the whole topic. Number one, I've read so many much about it and it's made me wonder from the contrarian perspective if it's a bit over done and there is more to it than just what some of these books that I’ve read, you know, claim to be a basic supply-demand issue. And secondly as critical an issue as you would think this would be, to me it doesn't warrant the silence from government, from companies within the economy in general where, you know, their life blood is energy. If there was a true jeopardy about the supply of that, then you would think that there would be no way you could suppress peoples and companies and politicians looking to raise this up to more of a public debate and address it.

So I'm just wondering if there is a manufactured dimension of this thing –for whatever end – that we might need to go a little bit below the surface to understand and to pull all of the links together. But I'm just beginning to wonder about it because it is beginning. There has certainly been plenty written about it. If you look for it, you can find things on the internet all day long about it. I'm just wondering if there is a contrarian dimension here with regard to it being as severe as it's pretended to be and or has a manufacturing aspect to it that could easily be reversed. Thanks.

JIM: Dave, I don't think so. I mean during this whole crisis we've got oil up $25 and the other thing Congress can think of is to hold hearings on why gas prices are going up. Nobody in Congress even gets this. You've got more people on Wall Street and even within the government itself –especially the Energy Information Agency – who are forecasting all kinds of future oil discoveries that will be there, oil reserves that may or may not be there. So I don't think this has gone mainstream. How many financial programs do you listen to where they talk about peak oil the way this particular program does? I mean when you start seeing every single day the media covering stories, believe me, they will eventually cover stories when it hit because it will be front page and then it will scare the heck out of everybody. But we're far from that at this point. [20:44]

Hi Jim and John, this is Srini from Cupertino, California. Thank you guys for such a great show and it’s been a really educational experience for me. I've been listening to your show for the past four to five years. First time caller here. I have two questions. The first question is in a banking crisis here in the US like the Northern Rock in the UK would there be difficulty in accessing one's safe deposit box at a bank where we might have stored our precious metals or bullion coins? And the second question is –this is related specifically to Bank of America – do you know how much of the bank is exposed to the derivatives business and hence its chances for a run on it. Thank you and a great show.

JIM: You know, Srini, if it's just one or two banks, I don't think that's going to be a problem. Maybe they may shut the doors down for a day or two. The only way you would have real difficulty is if it was a national bank holiday like we had, I think, in 1933 and in that case the banks would be shut down and you would have access problems. So if you start seeing the headline news getting pretty scary, it might be the time you take your gold out of the deposit box.

In term of Bank of America, they are one of the top three or four banks in terms of the derivatives. [22:03]

Jim, this is Sean from Walla Walla, Washington. My boss has recently started managing his own retirement money in the stock market. He knows I've taken a recent inheritance and put about half of it in gold and silver. He also knows I've been studying the stock market and the economy ever since. To encourage me to get into stocks he wants me to take $300 of his Ameritrade money and invest it. The goal is for me to eventually build that 300 into 2000 so I can start my own Ameritrade account. I'm considering putting roughly $100 each in one gold and one silver junior mining company. For the last $100 I was considering some kind of a call option. Is this a good idea? Should I even put the money in juniors with such a small starting investment. My boss plans to cover my initial fees the first few trades and I'm curious how you would invest if you only had $300 to start with. I look forward to your answer. Thanks a lot, guys.

JIM: You know, Sean, the great thing about juniors is 100 bucks can buy you a hundred shares or a couple of hundred shares in a junior. I would just say if you're going to go in a silver and a gold junior, please do your homework and understand what it is you're investing in because remember a lot of these things never amount to much. I understand what he's trying to do is encourage you to get involved in the stock market. Unless you have a lot of background, buying just one or two juniors –unless you have really thoroughly done your homework – I'm not very big on. And buying call options, you'd better know what you're buying a call on and how good your time period is and what that 100 dollars is going to buy you. [23:28]

John from Illinois, great show Jim and John. Listen to you every week. Have for five years. What will happen in hyperinflation as the stock market takes off? You've made mention of this before: it's a historical fact that stock markets always take off when they begin running the printing presses at high speed. I imagine that as soon as they shut the printing presses off, the market will crash. Comment on the disparity between CEOs and the average worker. Bill Bonner has pointed out in several of his books that a lot of these CEOs are really scam artists and they are not benefiting shareholders. He has basically said that they are over paid jackasses and we all know what those are.

Second point: hyperinflation, vis a vis the stock market. We all know that investors will try to keep ahead of the hyperinflation by investing in stocks and the stock market is going to soar. And obviously, once the hyperinflation comes to an end, they are going to crash. And I was just wondering, that would be a really great opportunity to pick up some real bargains, don't you think. We could roll out of our oil and our gold positions, at least half of it, and then buy into the S&P 500. What are your thoughts on this, and what would be the timing?

JIM: John, the scenario that we think where we start running into the hyperinflation begins after 2010. And remember, even in hyperinflation, nominal values of stock markets go up. But just as they did in Germany –as they did in Argentina and Turkey and also in Russia –a as investors try to keep pace with a depreciating currency they'll go into anything that's tangible. And in the way of paper, they'll be going into stocks so you could see nominal values rise as well. When the hyperinflation ends, that's when you're going to be wanting to get into some kind of paper asset, government security type assets or whatever it's going to be after all of the damage has been done. And who knows what it's going to look like after then. It’s too early to even think about that at this point. [25:40]

Hi, this is Peter from Durham, North Carolina. I was listening to your program Other Voices with Peter Sepp. And I became so angry at that. I'm a bank card holder for the government and I've been using it wisely since 1990 and he made me feel I was so dirty with what he was saying. What he doesn't say on these things is what happened to these people who use it unwisely. And I wish they would because then I think people would feel a lot better. Did they lose their jobs? Were they in prison? It makes me so angry at this type of journalism and I wish you could do better. Thank you.

JIM: You know, Peter, I think you need to take this with a grain of salt. We weren't implying that people that work for the government have a credit card all do this. We were talking about the fact that this isn't monitored as it should be. There should be more monitoring to those that are abusing it. [26:30]

JOHN: If you remember, we had Scott Faulkner on recently who was the first chief administrative office of the US House of Representatives and he was talking about the fact that they back then were able to deal with some of the issues there. But a lot of times in government there is a tendency to close ranks and the troops guard the troops against the public even when some of their own have been caught with their hand in the cookie jar, so to speak. The only time when someone gets thrown to the wolves is when it becomes a public liability. Then you hear talk about get out of jail free cards and things along that line, and that's something which really needs to be cleaned up as well. [27:06]

Hi, this is Roger from Houston. I was wondering how could I find for my gold coins a safe bank with a safe deposit to put it in. Someone told me not to put it in a bank safe deposit because the government could confiscate it. And is that true? Or is there another safe place to put it or should I bury it on the family farm somewhere? I'm just wondering what is the best course of action for storing gold coins. So thank you very much and enjoy your program.

JIM: You know, Roger, if you have a whole ton of it, you're going to probably want to keep it in a safety deposit box. At this point we're not at a crisis stage. When the headlines start looking that we're in a very serious crisis that begin to emerge, that's when you're going to want to take it out of your safety deposit box. Not knowing how much you have – if it's a couple of coins and if it isn't a lot, maybe keep it around the house, hide it, put some of it in the backyard, who knows? But at this point, unless you have a ton of it, you're probably going to want to keep it in some kind of safe deposit box. And you know, we'll be alerting people if there is something that looks like that could be coming, and I think you'll hear about it too. You'll start having politicians talking about people hoarding gold as terrorists or some kind of bill that they make it tough – but we'll get wind of this well in advance. [28:29]

JOHN: Jim, let me ask a question, though. Have you ever tried to move even a small safe full of ten or 20, 100 ounce silver bars? I mean this is a candidate for making a hernia in the process because you can't move that safe if you're storing it at home.

JIM: Another place is to find a bullion vault just outside of the country.

Hi Jim and John, this is from Rob from Madison Heights, Michigan. Great broadcast. Thanks very much for making it available to all of this. Just a quick question. After deciding to buy some junior mining stocks I decided to buy on the Canadian stock exchange. I decided on using E*TRADE as they can buy on the Canadian stock exchange and the commission was rather reasonable at $20, so I opened a global trading account. I bought online using three symbols such as JIN for Jin Chen Goad [phon.] and under my positions it displayed three symbols. However, when I received my global account statement, the symbols now show five symbols, which to my understanding means it was bought on the OTC market. When I called E*TRADE and first asked if they buy from the foreign exchanges of the specified country, the answer was yes. Then I asked why I had symbols on my statement that corresponded to the US OTC market. She said she needed to get back to me. That was about a week ago. I was hoping you may be able to shed some light on this or recommend what my next step should be to get an answer? Thanks very much.

JIM: You know, Rob, a lot of times if you look at a company, it may have three or four symbols. I'm just looking at a company right now. It has one ticker symbol for the Canadian market. It has one ticker symbol for the British market. It has another ticker symbol for the US market. It has another kind of OTC, two OTC ticker symbols, and I think that is why they give you those five symbols. And what you need to do is depending on where they bought it, whether they bought it on the OTC market or on the exchange, you will find if you look and type in a ticker, for a lot of the Canadian stocks, you may find four to five symbols on them. [30:29]

Hello, Jim. This is Mike. I'm calling from Winston Salem, North Carolina. First of all, like so many people, I want to thank you for your program. It has been so helpful to me, especially in learning how to buy the juniors and hang on to them and add to them when the price has declined. Mine is not so much a question as a suggestion. I just finished reading a book The Fair Tax by Neal Boortz, he’s a radio guy like a Rush Limbaugh type guy. But anyway, I found the book absolutely fascinating and I also see it as a potential, maybe one of the thing that might save the United States, its economy and the situation is that we're in. Anyway, what I might just suggest is that maybe some day you might be able to interview him or Congressman Linder who’s proposed HR 25 several times on the fair tax. Anyway, you guys have a good day, and like I said, I really love your program. I listen to it religiously. Not on my knees, but I listen to it religiously.

JIM: You know, Mike, once the nomination process is over, perhaps we can get Neal on the program John because I think the issue of taxes is going to have a profound influence in terms of what can happen to this economy. And one of the thing that's we know historically is when an economy is struggling, when it is weak, when it is possibly in a recession, when people are having a tough time, when businesses are going under – and especially small businesses – the last thing you do is raise tax on an economy. If you take a look at the economies that have prospered, it is almost ironic today that countries like Russia, and China, former communist countries, have the lowest tax rates in the world and look at how their economies are prospering. [32:14]

JOHN: And I think a fair tax, most of the time people are talking about some kind of consumption tax which is equivalent to a national sales tax which would basically eliminate the IRS's role, meaning individual taxation, we would simply have to do what most states do right now and that is audit the sales tax collection on the part of businesses. And that way some people are saying it would be related to the quantity of income that people brought in because if you bring in more money, you pay more money. There could be some allowances for people at the low end of the scale. They would have some kind of a voucher below a certain level of income where they wouldn't have to pay any of the tax. But it would get rid of all of the compliance, you could get rid of the IRS. And unfortunately –which is probably why it won't happen – is you could probably take about half of the CPAs in the country and ask them to go get a job because their job won't be needed anymore except for business purposes and sales tax purposes. But I think you're right: As it gets more and more critical, people will be more and more willing to discuss in a option.

JIM: And I think also too one of the difficulties of implementing a fair tax, first of all, I think it would help the economy out, it's been proven when you lower tax rates – you look at Hong Kong, China, Russia as I just mentioned their economies do very well. But John, you've got 535 members of Congress. If you had a fair tax, how are they going to reward those that support their campaigns. And that's one of the main reasons congressmen object to it because it's all about getting reelected; and one of the ways you get reelected is you raise a large amount of money too run your campaign and those who contribute a lot of money to you get access, you pass bills and reward them for making those contributions. [33:59]

JOHN: And that's actually a reason for passing the tax which is to end that kind of nonsense and to – it also lets people clearly see how much is being charged in revenue.

Right now, Americans don't have any idea of how much they are being charged in taxation because it goes through so many sources, Jim. There are taxes on your telephone, at the pump, the income tax, you name it, the taxes keep going on, so it's really hard to say, we're collecting 50% of what you make. If you said something like that to people, it would be more of a aagh because people would then realize exactly how many is going out. But by blurring it overall of these different sources, it's hard to track.

Hello, I'm Ray from Austin Texas. Last week there was a guy Thomas who called you and asked a question. You answered a question, but I don't think it was what I understood him to be asking, and I have the same question. What it is is inflation is at such a rate that the average worker's wages are not keeping up with inflation. My wife who is a registered nurse has gone four years without a raise. In fact, at her place of employment they lay off people and hire people at cheaper wages. This year I'm an engineer and I get a zero pay raise and they are laying off people where I work and hiring people with lower wages. Now, with the pressure of inflation eating away at everybody's purchasing power in the labor stream, I think Thomas was actually asking how do you expect the economy to actually hold up if that goes on. I think that's where he differs from you. He didn't think its economy is going to get better. I personally don't see how people are going to have spending money without putting all of their money on necessities. Anyway, your thoughts on that. Thank you.

JIM: You know, Ray, we've commented here. Let me explain. The economy is only going to get better for a brief period of time and then it's going to go into a downturn. As I said, we expect a depression, except for a hyperinflationary depression by 2010. So in the next couple of years we expect that economy to worsen. In a period of inflation, you always have wages that are lagging at the rate in which the currency is debased and at which government inflates. And one of the difficulties you mentioned you're an engineer, your wife is a nurse, if your food cost just went up 15 bucks this week, your wife can't walk into the hospital and say, you know what, I need a $25 raise to have $15 after tax to pay for my rising food costs. This is a product of inflation. Taxes and inflation are two sides of the same coin. What the government can't raise through taxation, they raise through inflation. And that is exactly what you're seeing work its way through the economy. Inflation harms the poor and the middle class the most, and yet we vote for people that we put in office that promise nothing more than more inflation. [37:00]

JOHN: Now, the other point I think is well taken there that the gentlemen brought up is they are hiring people willing to come in at a lower rate. Quite often, these are people with a lot less experience, and so you're dealing in an area, say, health care where a lot of skill is required. Theoretically in the short term, that may mean you're saving some money, but in the long run, you may be jeopardizing safety or something like that. I watched a company –a construction architecture firm do this – they kept laying off people as their pensions got funded so they could hire cheaper people, but all of that knowledge moved out the door with those people. And there is a savings premium in that, almost like good will in a medical practice or something like that.

Hi Jim and John, this is CJ from Massachusetts. Love your show. Your question, Jim, a couple weeks ago you said you had bought some bullion and they quoted you some delivery date out in the future. Just wondering if you could let us know if that doesn't materialize on that date to keep it over on you. It would be very helpful information.

JIM: We’ll certainly do that, CJ.

Hey guys. Eric calling from Brooklyn New York. I'm an artist and I've been listening to your show for several years now and one of the most interesting things that you talk about in my eyes is the cultural ramifications of inflationary depression. And I'm wondering, Jim, as a sailor are you ever concerned with piracy. I ask that a little bit in jest, but also doing a quick Google search, I see that 2007 pirate attacks around the globe increased by 10 percent – specifically talking about Nigeria and Indonesia where these things are highest. But I wonder as a sailor if you take into account as things start to shift in the economy globally and do you imagine a period in the future where you're going to have to deal with this in some manner? And how you would feel about say if you often talk about it as kind of like a space of refuge being encroached by this kind of additional danger. Thanks for the show. I really enjoy it.

JIM: Eric, that is one of the risks you do face as a cruiser and I know a lot of people in the boating community that as they head south in certain areas they travel at night simply for that reason and they do have arms on board for those reasons. Most of my sailing is done on the bay and just right off Pt. Loma. I stay close to land. Where I sail, I can see land, so never far away; and I do keep not only a cell phone with me, but I also have VHF radio and I have other implements that I can take that if it looks like anybody even close to a pirate is coming close...I suppose, John, they wouldn't have the skull and cross bones on the boat as they pulled up to you. But it is something that you do deal with when you go on long distance cruises and especially as you head south. [40:01]

JOHN: And there is the rationale for armor plating your hull again

Hi Jim, this is will from Lynchburg Virginia. Like too first of all thanks all from Jefferson city for turning me onto your show. Got a quick question for you regarding the peak oil theory. I was reading on Wikipedia regarding the oil shale deposit that's we have and it seems like we have the largest reserves in the world. I want to get your opinion of that and the feasibility of that.

JIM: You know, I suppose if the price of would stay up high enough, it would become feasible. Shell for example is working on a technology where they can actually heat the oil shale in the ground before they bring it up, but it's going to -- you know, it's in the experimental stage and obviously the first sign if prices were to pull back, it would not make it economical. I mean even if you look at the tar sands, up until this decade, the tar sands were really uneconomical to mine because unlike pulling oil out of a well when you're talking about shale –and talking about tar sands – you're essentially talking about a mining operation. Its going to take sustained oil prices at higher levels I think before companies are even willing...but I can tell you right now, Shell is working on a project that they hope if it works out well, they could bring – I'm trying to think what the figure is – 300,000 barrels a day of production. It’s still in the experimental phase right now, though. [41:28]

Hi Jim and John. This is Gary from DC. And I understand the criticisms of the Federal Reserve. I've heard from many different sources, but my question that I'm trying to understand is prior to the current Federal Reserve the free market resulted in power being concentrated in a few mega capitalists like JP Morgan and then they then acted lenders as last resort when the economy got into trouble. So I guess my question is: Isn’t the current Federal Reserve structure that we have –even though it's not the best situation – isn't it the lesser of two evils compared to what we had before, before the current Federal Reserve came into existence?

JIM: You know, Gary, I wouldn't agree with those assumptions. If I take a look at before the founding of the Federal Reserve, yeah, we had a couple of banking panics, most notably the one of 1907 where JP Morgan single-handedly bailed out the system, but if you take a look at stability, if you take a look at the stability in purchasing power, the currency, if you look at inflation rates, you know, at the turn of the century it took one bread winner to support a family and pretty much throughout the decade until 1971 when we went off gold backing of the dollar. So the currency was more stable when it was backed by hard assets such as gold and the boom and bust cycles were shallow; they were shorter, they didn't last as long. And there are even many today that feel that the 1907 panic was orchestrated as a means of implementing the Federal Reserve system. [43:06]

JOHN: Yeah. Scaring people into it, in other words, because the Jekyll Island meeting didn't happen until 1912 where the Fed was -- I don't think there would be a theoretical opposition to having a central clearing house, would there, Jim? In other words, if you had a central bank that cleared funds maybe took a fee for doing that, but the money supply would have to be anchored into something of value rather than this free floating fiat currency.

JIM: Yeah. I think if it was just simply a clearing mechanism and like you said, John, taking a fee. But when you have a central bank that can create money out of thin air at will and there is no discipline to it, just look at the money supply growth rates that we're seeing today, we've never seen before in the history of this country, and look at the consequences. [43:48]

Jim, this is Mike from Chicago. I wanted to know what your thoughts were on the Alt-A loans that have come about following the subprime loans and I guess I've heard that those are set to start coming due or reset up until 2011 or 2012. Again, I'm just hearing about them. I want to know what your take on them was.

JIM: That's a couple of years off. In my understanding and I'm talking with a friend of mine who is a banker, they have never seen this kind of business in terms of refinancing. In fact, I think there was an article on today's Wall Street Journal talking about the number of refinancings that are going on as investors go into, or maybe it was Bloomberg I saw this article. It was Bloomberg that talked about the homeowners going in and refinancing even with more expensive fixed rate mortgages just because of that very issue, believing that interest rates could go up. And with interest rates backing up here just in the last month –the 10 year Treasury note is around 3.85 and that still is a very, very low rate historically – so I think the smart people, those that have the means to do it are going to refinancing. Those that are under water –can't come up with additional equity – that can pose additional problem a couple of years from now. [45:05]

Hi Jim and John. This is Dilip from Santa Clara, California again. I am calling regarding the M3 and hyperinflation that you have mentioned on your program. You say that M3 growth is so high and that indicates hyperinflation. I was just reading a blog by one of the deflationists and he says that M3 growth has been a part of money market funds and that actually shows a bear market phenomenon because the liquidity preference of flight to safety is the reason why M3 is growing and not printing money. So I would like to know what your comments are regarding that M3 growth cannot explain that we have hyperinflation ahead. And John, I wanted to know from you whether you’re the same John Loeffler whose name is mentioned in the credits of the Pokemon program and if that is so then my kid and I have something in common. Thank you very much.

JIM: I think my son would be proud if I were in the credits, but there has been a John Loeffler floating around holiday for years, he used to be editing on Little House on the Prairie and the FBI and other series like that. I don’t know if it is the same John Loeffler. But, no, it is not I.

JIM: You know, when you look at M3 whether it's coming from money market, whether it's coming from CDs and all of the component that is make it up, it is the high-powered money and you wouldn't have the kind of oil prices, the kind of rise in wages, the rise in services if we weren't creating a lot of money and credit. There are a number of ways that money and credit can expand. It can expand through the banking system. It can expand through the security system and it can expand through a combination of both. If a bank goes out and makes a loan, it's expanding credit. Then they turn around and sell that loan. It's securitized so it goes into the securities market and the bank gets its money back and the whole system keeps going. So if the Fed wasn't creating money or high-powered money...Another way that money is created too is when foreign central banks come into this country and they buy Treasuries, they are expanding. So there are a number of ways that you can expand the supply of money and credit and all I'd say Dilip is look around you, look at your cost of living, look at what you're paying for groceries, look at what you're paying for fuel, look at what you're paying for services, look what you're paying for things at the store and it's pretty obvious that we have a high level of inflation. [47:38]

Jim, this is Al from Jefferson city. Quick question. Bubblevision you refer to it often. Do you just mean television when you say ‘bubble vision’ or do you mean a certain group of commentators on television? Sorry that's a dumb question. Could you clarify that. What exactly do you all mean when you refer to Bubblevision?

JIM: Usually when we refer to Bubblevision, we refer to the cable channels. [48:04]

Yes. This is Matt from Minnesota and I have a question about the M3 money supply and some confusion on the internet. A gentleman by the name of Mish who is an economist claims that the M3 does not show an expansion of money supply but rather a flight to safety. This “mad dash for cash”, he says is deflationary, yet ironically it's being used by some as evidence of hyperinflation. If you can just clear that up, it would be much appreciated.

JIM: You know, money has gone into the money markets that is a component of M3. There are other components of it: There is Euro deposits; there is high level institutional-type CDs. And if you take a look at that, money supply was low –or money market funds wasn't as high as it is today – and we still had an expanding money supply that was over 10, 11%. And he's been arguing for deflation for about four or five years and he's been wrong for four or five years. We haven't had deflation in this country. The last time we had deflation, you'd have to go back to Eisenhower. [49:09]

Hi. This is Roger from Denver. I just want to know if you can explain the impact based on the likely inflation-depression scenario on the interest rates for 30 year fixed-rate mortgages, say when we look 10 or so years down the road, shall I expect the rates to go up or down from where they are today? I'm just thinking of refinancing.

JIM: I would expect as we get towards the end of the year that we're going to see higher interest rates. I think the bond market will get whiff and begin to realize that the inflation isn't going to go away right now. Inflationary expectations are down. There is an assumption as the economy weakens that this temporary rise we're seeing in inflation is only temporary. But I think as we head into fall we're going to be surprised that commodity prices are not heading down as they are expected; that oil prices aren't heading down; and the bond market will begin to demand a higher rate of interest to compensate for rising inflation. And if that happens, you're going to see higher mortgage rates, so I’d take a look if I was refinancing, I would be looking at doing it now. [50:14]

Hi Jim and John, this is Eric from Reading Massachusetts. After listening to your interview with James Turk this past weekend, I really became concerned about a currency crisis in the US. I did some reading about what happened in Asia in 97 and the contagion that followed. Jim, if the US dollar begins to unravel like the Thai baht or Indonesian rupiah, how would the rest of the world deal with saving the dollar as the US reserve currency.? And what would the basis be for a new currency in the United States, considering we probably can conclude that all of the gold has been sold off under the table?

And to me, as an individual investor with mutual funds and stocks that are denominated in dollars and health and US account, what would it look like when the dollar collapses and the new currency needs to be substituted? Should we be heading for the bunkers or is this going to be a planned and orderly process? I know you invest for your clients so you have probably thought through this and I'd love to hear your perspectives. I guess maybe what Germany did after the mark collapsed in 29 would be interesting to know about too. I want to get my head around this before I decide to head for the bunkers or not.

JIM: First of all, you’ve got to understand that we’re all in the same boat. All currencies are depreciating as governments allow money supply to expand all across the globe. That's been going on for some time. The other thing that happens is right now it's not in anybody's interest to let the dollar collapse. The Euro is no position to take the dollar's place and become the world's reserve currency, nor is the Chinese yuan. What will happen, I think is as we get into these currency Chris says and governments try to fight it off, eventually, we're going to move towards a global-type currency or some currency that's going to be backed by gold or something that will give its credibility. One of the things that we are doing to hedge against that is the ultimate currency which is gold. We own gold. We own gold and silver equities. We own tangible companies, companies that own tangible assets such as energy, basic materials, water, we own our domestic companies, or international companies that get a good portion of their sales from overseas, so they are benefiting from a lower dollar. And we also own a good stable of foreign companies around the globe and that's how we're diversifying to hedge ourselves against a dollar that keeps losing its value as I might point out as many other currencies are. [52:50]

JOHN: Yeah. I think the move towards a globalized currency –which you hear some talk if you read some of the think tank ideas – towards the middle of 2015, 2020 –somewhere around there – could be proceeded by regional currencies. In other words, a few worldwide regional currencies for different areas of the world, that would be the predecessor to that, so it may happen by a bunch of intermediate steps. [53:12]

Hi Jim and John, Bob from Los Angeles. You've been talking about hyperinflationary depression. What rate of inflation do you expect? How long do you expect it will last and how will it end? I assume there's a crash, but please elaborate. Thanks for all you do.

JIM: It starts out in double digits and then goes triple digits and who knows quadruple digits by the time it's done. By the time it does end, it will be quick, it will be fast, most of the debt of the United States will be inflated away. [53:44]

Hi. This is Alvie calling from Spain. Jim, 20% of a long term investment portfolio in energy stocks, I guess it means something like the iShares ETF, [list of ETF acronyms]. There is something I don't fully understand about this result, There is always what is left after the higher the price of oil will be. But the less oil that is left the less business the oil companies will have left, the higher the cost of oil companies will be and the more government will try to reduce oil companies’ margins. Will you please comment on that?

JIM: Alvie, I'm not quite sure I heard you clearly on some of the acronyms that you gave for the ETF, and I only got bits and parts of what you said there. As less oil is made available as we consume more of it, as it becomes harder to get out of the ground, and as we hit peak, the price is going to go higher and higher and higher and that means that whatever assets those companies that do have it – and especially those that can increase their reserves they are going to become worth even more. And I think that's real key that you have a portfolio of companies that have an ability to increase their production and replace their reserves. Obviously, that's harder if you're at Exxon Mobil, but Exxon Mobil is probably one of the best managed oil companies in the world in terms of return on capital.

And I do think that you will see it as this crisis becomes more pronounced, you'll see our energy companies move into alternatives as many of them are doing today like Shell, BP, and some of the other major oil companies. But as the price goes up, that means what you sell, you get more money, and there might be periods of time when the price is going up faster or governments are taking more.

But if you look at the mining industry, you had costs going up at 25% a year, the price of gold lagged behind it, the profit margins on the mining companies obviously came down, the stocks did not do as well. But now you have a situation from last summer where you just had Newmont report its earnings and at average prices over $930 an ounce and their margins doubled in the last 12 months, so I still think that being in energy stocks are going to do well even as the amount of it becomes less and less available and diminishes in supply. [56:06]

Hi Jim and John , this is Bob calling from Ohio and I just had a couple of quick questions. One, in regards to a retirement account, 401(k)s, IRAs, Roths, etc, I'm concerned about the rules being changed. And Jim, I was wondering if you personally had such a retirement account; and number two, I was wondering specifically how would you move your precious metals from the state to a safety deposit box. What would be the safest way to do that?

JIM: Bob, we have a 401(k) program that our employees participate and we match them dollar for dollar in the profit sharing plan. They do change the rules. I've had three defined-benefit plans and every time I’ve started one, even for employees, they always change the rules. So the last one we made too much money and the government was taking 100 percent of the excess, so no more defined-benefit plans. But I think 401(k) plans are okay. Roth IRAs, I'm not sure that the taxability or the tax-free stature of it will ever be maintained. I can see down the road – just as remember Social Security was tax free as you got it, then they began to tax 50% of it. And then Clinton raised taxability to 85%. Who knows? They’ll raise it to 100 percent.

In terms of moving gold to a safety deposit box, I'm not sure what you're talking about there. Are you talking about putting your gold in a safety deposit box or taking it out? If you want to call me back again and clarify that, I'll be glad to answer it. [57:40]

Hello, Jim and John. This is Al from Ohio. I love your program and your website. I've been listening every week for a year now. I'm a little confused concerning last week's proposition of a collapsing dollar early this summer when compared to the creamy filling with a rising stock market. Is it possible to have both a rising stock market and a collapsing dollar? Thanks in advance for your answer.

JIM: Al, absolutely, yes. If you look at the German hyperinflation that occurred in Germany between 1919 and 1923, the German stock market just went parabolic in nominal terms. The same thing happened in Argentina, the same thing happened in Russia, the same thing happened in Turkey. [58:23]

This is Will in Kentucky. Nouriel Roubini had been quite accurate about the financial collapse in the US. He's predicting a U-shaped hard-landing recession lasting up to 18 months and a decline in foreign markets triggering a collapse in commodity prices. My understanding of your view and that of John Williams is for a progressing hyperinflationary recession where we could see rising commodities and stock markets. Isn’t Roubini forecasting a classic deflationary recession and underestimating the power of the Fed with their printing press and interventionist policies? Jim, should I fear a collapse in my commodity-based portfolio?

JIM: They've been talking about commodity bubbles. The only thing that would bring commodity prices down would be a global depression. We already have, right now, we're down to food supplies are the lowest that they've been since 1960 when we first started keeping track of them. Copper is down to a two-week supply. If we had a surplus of commodities that were accumulating, then I could certainly see a collapse in commodities, but look at what we're dealing with right now. We don't even have enough rice. People are hoarding it. Countries are starting to stop their exports in order to keep the population happy and make sure they take care of their own people. And remember, you could have a supply response react just as quickly. And where it comes to energy, where you have growing depletion on a daily basis that is getting bigger and bigger – and especially some of the older mature fields – if the oil price was collapsing you would have a supply response from the oil industry and they would shut down. They would cut back on the amount of drilling and the amount of production and you could have a supply response act just as quickly as a demand response. [1:00:06]

Hi Jim and John, this is CJ from Massachusetts. I have a question about the currency crisis that you're predicting for this summer, just wondering if that has impacts to the timing of the hyperinflation that you have been seeing in 2010, if there are impacts, what direction? Thanks for a great show.

JIM: The hyperinflationary response deals with another recession occurring in 2010. This time the response will be they are going to have to throw everything and the kitchen sink and the result will be hyperinflation and you'll start to see eventually the Fed start monetizing debt, but that's a couple of years away yet. [1:00:47]

Hi John and Jim. This is John calling from Japan. Two quick questions. First of all, kudos to both of you and thanks to both of you for all that you're doing for so many of us out there. My first question concerns taking physical possession of stock certificates. I have these in my physical possession in the US or Japan, can I trade these through a broker anywhere in the world. In other words, are stock certificates the same as for example having physical gold that you can go to a trading shop where the buyer can sell. Are there any limitations on where a stock certificate could be sold as long as I have a bona fide brokerage here or outside the United States? Is it technically possible? Second question, buying gold in Yen, when the Yen is strong against the US dollar, am I getting more bang for my buck? Thanks to both of you and have a good day.

JIM: John, the trouble is with withholding your stock certificates, if you're going to want to sell those certificates to a broker, brokers are usually not going to want to sell that. Let's say you called on a day and you thought the stock was going to go down the next day, very few brokers are going to want to sell the stock without that stock not in possession in your account. It's one of the drawbacks of owning your own certificate because the broker could be on the hook for any losses that might occur if those stock certificates don't show up – and especially today where you have three day settlements. So most brokers, I think, you're going to find reluctant on that.

And buying gold in yen that is appreciating against the dollar, you're getting less bang for your buck versus buying it in dollars. [1:02:26]

JOHN: Jim, we are not going to be here next week on the program. We're taking a weekend off, frolic, fun, you know, the usual type of thing. What will we be doing as we plunge into the summer months and the middle of the Oreo cream filling?

JIM: Okay. We'll be back on May 10th where my guest is going to be Shayne McGuire. He's written a book called Buy Gold Now. Hey, no kidding. May 17th, Josh Peters has written an excellent book called The Ultimate Dividend Playbook. And Charles Morris has written a book calmed The Trillion Dollar Meltdown. It's all about the credit debacle and crisis that we're experiencing now. And then May 31st, Jeff Christian will be our guest here as we talk about the 2008 CPM Silver Year Book. So lots of great stuff coming up.

And also we're going to try to do some segments, now we've been talking about life changing and the crisis window, and we're going to do some things to help you prepare for these things. We're going to try to arrange for some interviews. There is a gentleman that I read about in Bloomberg who designed the Prius for Toyota. He's a big believer in peak oil, he's actually been to the Canadian tar sands, to Cantarell and he's working on a plug-in hybrid. I'm going to see if I can get somebody from Toyota and some of the other car companies; and we're going to start telling you things to help you cope with what we think is going to be this crisis window that's going to develop forward. So there are a lot of positive things that you can do to take care of yourself, and we'll be covering some of those topics here on the program. [1:04:01]

JOHN: Jim, the sail boat company just called by the way and they put the armor plating on your sail boat. Yours was the prototype.

JIM: I want torpedoes. I changed my mind.

JOHN: I don't know how to break this to you. When they put it back in the water, it sank. So they've got the torpedoes on order, but we have to do something about floating the boat again.

JIM: Thank you. You just ruined next week's vacation.

JOHN: Anyway, on behalf of...Go ahead.

JIM: Okay, yeah. It's time for me to head out to sea for a week, clear out the cobwebs in the meantime, on behalf of John Loeffler and myself, we'd like to thank you, as always, for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend.