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Financial Sense Newshour

The BIG Picture Transcription

May 17, 2008

Part 1

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Part 2

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Part 3

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Part 1

The World is Truly a Different Place

JOHN: One of the hallmarks of almost any paradigm change is that the majority of people who are passing through this major change in the way they live or the things they believe – sometimes it’s a political situation, sometimes it’s an economic one – but the hallmark of it is the majority of the people do not recognize that through which they are passing – as they are passing. They only recognize it in retrospect when they look back upon it and say, “you know, that year was a major change.” And what we are finding now – if you remember we came through the post-Berlin-Wall era of the 1990s, everyone said peace was at hand; in reality we really didn’t know what the new rules were and we went through a change around the year 2000. The world changed geopolitically rather radically and in the United States of course that centered around 9/11. Now we are in a whole new world geopolitically and every other arena that you could think of.

You know, Jim, if we were doing this show…let’s just rewind seven years ago since we talked about the turnover of the year 2000 – and that was really it, because if you notice Russia began to pull out of its malaise that it had been in the 90s, the peace talks collapsed in that year after a decade of no war – you really didn’t have peace and you didn’t have war you just sort of had a period of no war – you know, everybody behaved themselves for a while – and then we began to see major changes in the US economic arena which forced Greenspan to come in and create some bubbles to try to keep things afloat…but if we were just doing this show seven years ago and we told our listeners the following things: 1) oil is headed to $125 and then 150 and then 200 a barrel – remember at that time, 50 was considered high; 2) that food prices would double; 3) there would be food shortages upcoming; 4) that gold was going to head north of $1000 an ounce, they would have thought they were listening to lunatics.

But anyway, here we are seven years later, gold is over $1000 an ounce, oil at $125 and rising, food prices are up nearly 75% over the last 12 months – which is really causing problems in some Third World countries. We are certainly living in a very, very different world today. It’s very clear we are coming through some kind of a paradigm shift and that the world is changing as we speak. And we’ve been talking about this for the last couple of weeks. We had Bill Reinert on from Toyota talking about the Prius hybrid and the other hybrids that Toyota is coming out with. One of the things that we’ve been telling our listeners is that we have even more dramatic changes to come. The way I describe it is that we have only seen the squall line to the perfect storm heading in our direction. This is going to be over the course of the next decade that life is going to change radically as we know it in the West, especially as we enter the crisis window starting in 2009 – and it’s about a three year window. So I think, number one, you should enjoy the sunshine while it lasts; but number two, while there is a period of sunshine and you can do something, do something to defend yourself from it. [3:05]

JIM: You know, John, this week we’re going to be interviewing David Saltman and he is with Open Energy, he makes a product – solar roof tiles – which are less offensive to homeowner associations, fits in more naturally with the landscape and the hardscape of the home. And we’re going to be doing other things – we’re going to be talking about greenhouses and having some other guests because as we enter into this crisis window, our assumption here is we have fiddled here while things have been burning. There is no way to avoid this. It’s not just us saying this. We’ve had people like Matt Simmons, other guests on the program. So given that this is coming, the best that you can do is prepare and that’s what we hope this program becomes is kind of like a weather report. You know, if you’re living along the coast of Florida and the weatherman says a hurricane is coming, there are steps that you would take; and that’s what we hope our listeners do – whether it’s getting more fuel-efficient cars because I do think eventually we’ll get to some form of rationing; also the things that we’re seeing in South Africa today with energy where there are energy shortages – that’s a prelude of what is coming here because we’re doing very little on the energy front and we’ll get into that in the second hour.

But I think the first important concept to understand here is the current crisis that we’re in this credit cycle is extra ordinary in scope. I mean in March people have no idea the world’s entire financial system was on the brink of collapse. I mean we were brought back from that brink just barely. And the current crisis is being contained but only with the greatest difficulty. We just had today the Comptroller of the Currency saying be prepared for another wave of bankruptcies and defaults that are coming forward. What has happened is Wall Street and Washington are telling us it’s back to business as usual, the crisis is over. In my opinion, what stands out is – what is really going on is we are witnessing in real time the end of an era. Now, you’ve got various people out here that have called this era – from the guys at BCA have called it the Debt Supercycle; people like George Soros who’s written a new book calling it the Super Bubble; some people have called it the Age of Consumption. Whatever label you want to put on it, it’s coming to an end. Peter Warburton wrote about this era in a very astute book called Debt and Delusion and in his book he talked about the delusion that we could borrow and consume our way into prosperity is now in the process of being discredited, even though Washington is trying to deny it. If you look at some of the economic statistics, our savings rate is zero, household debt doubled in just the last six years to $11 trillion, debt-to-GDP is now at 350%, which is much higher than it was during the Great Depression. So this idea that happy days are here again – or just around the corner is delusional – we’re going to get maybe one more brief respite from the approaching storm and what I call this creamy filling with enough either fiscal or monetary stimulus – we’ll get a brief pop but that’s it. After that, we’re heading in for tougher times brought about by government actions, and in many cases, inactions. [6:42]

JOHN: Let’s begin by examining what the approaching storms are, where they’re likely to emerge and when they get here, what they will look like? They’re obviously on the horizon, we can see them on the radar already.

JIM: The first thing that we’re going to be facing – and I don’t need to dramatize this with our listeners is higher rates of inflation. These things are cyclical, they’re caused by government policies. And I’ve often cited – and you know, we’ve done a couple of programs on this in the past, John, but the works the great historian David Hackett Fischer who wrote a book called The Great Wave, and he wrote about the major inflations that we’ve experienced throughout history. And here’s the fascinating fact is they all begin in periods of prosperity. And each one of them ended in shattering world crises, which is what I think is going to happen this time around. And these great inflations first appear in the form of rapid rises in the prices of energy, food, shelter and raw materials. And that’s what we’re seeing today. I mean just take a look at the price of energy, it hit a new intra-day record high of over $127 a barrel on this Friday. Food costs – corn prices are up 30% this year; soybean prices up 14%. If you’re looking at base metals – aluminum spot is up 26%; copper prices up 27%; tin is up 52%. You get into the energy area – West Texas Intermediate crude prices are up 32%; you take a look at natural gas prices are up 59%; coal prices are up 28%; steam coal up 18%. I can go on and on and on on this. So one of the surprises in my opinion that we’re going to see coming this Fall is that inflation rises rather than recedes due to a soft economic growth. You’ve heard this story, John, they keep telling us: “Well, the US economy is slowing down and therefore there is going to be less demand and that will reduce inflation.” But the US economy has quite honestly been in a downward trend since the first quarter of 2007; yet food prices, energy prices have doubled and there is a good chance they could double again over the next few years. [9:09]

JOHN: Haven’t we been told that with a slowing economy that the inflation rate would go down. Remember that was one of the mantras that was being chanted out there that the price of oil would fall because demand would go down, the economy would slow, everything would go down together – but it hasn’t. When I think most of our listeners would agree that they’re experiencing right now, despite what the government numbers said this week again, is much higher than what is widely reported. As soon as you look at the areas specifically of food and fuel –which is the majority of what Americans spend their money on – it’s soaring compared to all of these numbers that we’re seeing coming out of government reports. And speaking of statistics, by the way, through a statistical little quirk, the government actually reported that the price of gas went down last month. But I don’t think there’s a single person out there who really believes that.

JIM: No, I don’t think so. I mean here in California diesel prices hit $4.69 on this Friday that we’re speaking. You know, John, speaking of the CPI report – all you have to do is just look at the CPI report and look at some of the details and an analyst out there by the name of Kurt Weldon, who publishes the Weldon Money Monitor did a breakdown of the recent report that basically debunks Washington’s and Wall Street’s assertion that inflation is in decline.

I’m going to read through some of these numbers because I think it really drives home the point in terms of what’s going on with inflation. CPI food inflation up 5.1%, rising from 4.5% in March; CPI food at home up 5.9% rising from 4.7; Food at home is now going up at an 18% annualized rate. Cereal and bakery products are going up at an annualized rate of 17%; dairy products up 14.4%; fruit and vegetables up 24%; non-alcoholic beverages up 24%; sugar and sweets, 14.4. And as Weldon has dissected, just taking a look at the trend, and these are some of the monthly increases – this is for example, cereal and bakery products: October, up 4.7% last year; November, 5.2; December 5.4; January 5.7; February 6.6; March 8.1; April 8.9. If you’re looking at cooking oils and fats from the same period: Last October, 4.1%; the recent month April 12.3%. Sugar and sweets have gone from 2.9% to 5.1. Gasoline up 20.7%. And energy prices account for just a 9.7% contribution to the CPI; food is only 13.8.

And Weldon gets into CPI for a household: operations have gone from 1.7% last October, 3.9% the latest month; gas and electricity – and folks, this is going to go up especially with the cap-and-trade system – is going to go up tremendously. We’ve seen just since the beginning of the year, electricity prices go up from 3% to 6.6%; household fuels – things like heating oil – from 5.4% to 9.4%. Personal care – 2% to 3.1. And you just take a look at some of these costs – even hospital services; it’s been trending down but 8.5 to 7.7.

Import prices have gone up in March at an annualized rate of 14.8; in the month of April, 15.4. And why that’s important is we import a lot of what you see in the stores. I could go on and on and on, but everywhere you look, costs are going up but yet once again we are telling people there is really no inflation. [13:13]

JOHN: This is causing a great cognitive dissonance too because as people begin to perceive the difference between what they’re being told and what they’re actually experiencing there is a crisis of confidence here. You know, a lot of what Weldon talked about is what we would call mainstream inflation and that would probably segue us well into the area of food and energy. Bloomberg TV did a 45 minute special called Feast to Famine which we highly recommend you listen to it – www.bloomberg.com. They likened it to a silent tsunami with global food prices rising 75% over the last three years. And what we’d like to do here is listen to a couple of clips of why we could be headed towards a global food crisis.

Food prices around the world have skyrocketed an average of 57% in the past year and the World Bank estimates that 100 million people are on the brink of poverty and hunger.
“This hunger crisis we’re facing is totally unique because it’s what I call a silent tsunami.”
And those higher gas prices have boosted interest in alternative biofuels, promoted, in part, by US government subsidies. Last year, 25% of all US corn harvested was used to make ethanol pushing the price of corn to historic highs. Add fertilizer shortages brought on by high oil prices, a severe drought in Australia, a cyclone in Myanmar and speculation in commodity futures and you have the making of a global food crisis affecting millions of people around the world.

JIM: What Bloomberg was pointing out here is that this has all of the makings of becoming a global crisis, exacerbated by government. People are upset over rising prices in western countries. The percentage spent on food ranges anywhere from less than 6% to over 7% in Europe; however, if you go elsewhere around the world, food represents a larger portion of the annual budget ranging anywhere from 20 to 50 percent. So when you take a 75% increase in food prices over three years, that’s why you’re seeing the riots overseas. That’s a considerable sum for most of the world’s population. Just three main foods – corn, wheat and rice – are really the main staples for the majority of the globe’s population. So when prices go up or double, it creates a problem not only for governments but it creates a problem for individuals trying to cope with – like for example in Haiti, they had the food there but the people couldn’t afford to buy it which is why they had riots. And so it’s why you’re seeing riots break out all around the globe. And it’s going to get worse because we’re not doing anything here or elsewhere that is going to make the situation any better. [16:10]

JOHN: The Bloomberg report got into several reasons behind the rise in food and it’s a combination of factors – not either this or that – and it ranged from biofuels to investors.

JIM: The other thing I like about this report is I thought they did a credible job of covering this story because you can’t put the blame on just one factor, you can’t just say “oh, it’s biofuels.” No. It’s more than biofuels. There are a number of factors that are coming into play here, from investment demand – my friend Brian Pretti wrote a piece in Contrary Investor where he talked about the impact of commodity linked index funds which have poured close to $200 billion into this sector.

Let’s listen to that clip on investment from Bloomberg because it really points out the impact of just one sector of investing on food prices.

We’re seeing record investments in commodities like oil, metals and grains – whether it’s individuals or institutions, investors have flocked to commodities looking for not only a bigger return but also as a hedge against inflation.
The CRB Index is up more than 20% this year. Compare that to the S&P 500’s five percent decline. Which is why in February the California Public Retirement system – the nation’s largest pension fund – said it may increase commodity investments 16-fold to more than $7 billion through 2010.
The tool many pension funds use is an index fund which tracks the performance of a basket of commodities. Assets have doubled since the end of 2005 to $185 billion.
“Commodity index funds now control a record 4.5 billion bushels of corn, soybeans and wheat through the Chicago Board of Trade.”
So what does that mean?
Well think of it this way – the amount controlled by commodity index funds is equal to half the grain in US elevators.
Citigroup says hedge funds now have $75 billion in commodities. That’s up from 40 billion at the end of 2005. Individual investors are also trying to cash in. They often use exchange traded funds which invest in commodities and those assets now total $46 billion.

JOHN: I was watching this week the debate that went on in Congress about energy and what really became clear out of a lot of this right now is you see a tremendous amount of posturing. Remember the expression we use on the show here, Jim: “If they didn’t see it coming, they won’t know what to do when it gets here.” And it’s really clear, it’s like deer in the headlights. What about government? We’re looking at this – we just passed or are about to pass actually a $290 billion farm bill that I guess you could call it the bacon bill because it’s loaded with pork with things like $40 billion in farm subsidies to million dollar farmers. And here’s a real good one: $30 billion will go to farmers to idle their land when grain stock piles are the lowest they’ve been in half a century. And you have to sit here and scratch your head, like, “what are you doing?” $30 billion to keep land idle when food prices are up 75%. This is crazy. [19:27]

JIM: John, don’t get me started on government. That’s why – and we’ll get into another segment – government is making the crisis worse from ethanol subsidies to price controls to export taxes. Not just our government but governments around the world. And you know, when it comes to agriculture governments have always intervened in this sector. But another issue at stake here is radical environmentalism. I mean we focused our attention on global warming – which may or may not happen when peak food and oil are now on our doorstep. I mean there are other issues such as water shortages, changing diets as the emerging world becomes more prosperous, but the issue of higher food and energy prices are going to be with us not just this year but well into the next decade. As the Bloomberg special contends, the era of cheap food is over.

In late April, prices for rice, wheat and soybeans fell, raising some hopes the surge in global food prices might ease. But they are back on the rise. And some say high food prices are the new normal. Bloomberg editor-at-large, Tom Keyne [phon.], has been taking a look at that issue. Tom, what have you found?
- It is really very much about this new normal idea, Michael. If you look back at the old normal it’s been deflation of commodities…”
That’s a 50 year trend going way, way back of the deflation of inflation-adjusted rice. This is real rice, Michael and you can see we’ve surged from beneath that yellow line up higher. This is this new inflation, way, way above the long term structural deflation in rice.
The era of cheap food may be gone.
Are the two bouts of major deflation you can see on that chart, legacies of the so-called Green Revolution?
- They really were, and you heard Mr. Zigler [phon.] speak of that from his organization in the Philippines coming to you tonight from Ottawa. And he really emphasized this idea of a disinvestment in agriculture. That’s the one theme I’ve learned in my research. Whether I’m talking with Simon Johnson of the IMF or David Dahl of the UN in Rome, who used to work for Richard Zigler, very clearly this is the theme from the experts, this idea of a structural disinvestment in agriculture. And it’s caught up not only with rice but some of the other grains.
Now, we’ve been above the trend line before but we’ve been above it much longer this time. Is that any indication of a persistent higher price ahead.
That’s a very important question. I’ve got a mixed report on that. I hear some people saying microeconomics will come in, land will come on and prices will come down. I’ve heard other looking much more for a leveling out. [22:17]

JIM: The gist of all of this is that all of these forces of neglect are now coming home to roost, from falling agricultural output, falling water levels, less arable land, improving diets, rising energy prices, to quit honestly – rising populations. But at the heart of this issue is energy. The incremental demand created by the oil age has tipped the balance in the agricultural markets. [22:43]

JOHN: And we’re going to cover water and energy in another segment. But I believe what you’re saying here, Jim, is that the world that emerges after this crisis window is going to be a very, very different place. We’re not just going to go through the window and come back to where we were before. This will be totally different. The credit crisis will not blow over quickly, the US will emerge much weaker economically after it all plays out; and these issues we’ve written and spoken about here such food, water, energy and infrastructure are going to dominate politics and economics for the next decade.

Look at the radical change in what candidates are talking about from the time we began talking about the presidential race with all the candidates running; look at how the topic of focus has shifted in just 24 months. And this will be the discussion from Washington to Wall Street to London to Berlin to Beijing. And if you can’t change the world, then how are you going to make money from what is unfolding before our eyes?

JIM: Well, we’ll talk about how to make money in the energy sector and water. That’s going to be another sector in the second hour. But as it applies to food, there are probably six areas where you can invest in – all six, I want to emphasize are long term trends: From land – because arable land is needed; a lot of it has been plowed under in China because of urbanization – because there is less farm land today; infrastructure – from railroad cars to silos to elevators to ports for distribution to machinery; fertilizer, chemicals and seeds would be another.

And here’s the good news. You can do a lot of this directly by investing in companies – in other words, companies that either provide the service or product – or you can do it through ETFs that either own the commodities directly or the companies that are involved in this sector. And I believe the agricultural cycle is probably still in its infancy now. If you think prices are high now, they’re going much higher I can tell you that. And along the way – and this is why I have to emphasize you have to be a long term investor – there are going to be ups and downs along the way. Nothing goes straight up. But this is a long term macro trend.

The other thing I would also mention is when you’re thinking about investing in this sector, think globally because some of the best prices for companies in this sector are in the global space. And after all, this is a global phenomenon. So start thinking globally, especially as the dollar’s value continues to erode. Later on in this summer, we’re working on getting an interview with the gentleman who’s written a new book on ETFs because we get a lot of requests for that. Maybe people don’t have enough money to diversify in a portfolio so I think the ETF angle is going to be very important. So even if you have just a few bucks to invest, you can participate in these sectors. [25:40]

JOHN: And you’re listening to the Financial Sense Newshour at www.financialsense.com. Coming up next we’ll be talking about water and uranium.

FSN Humor: Andy Looney

I’m Andy Looney. My wife Sandy got a new cell phone for Mother’s Day last week. Yep, I finally picked it out. And I wanted to get a cool ring tone so she could tell it apart from the rest of the family’s ring tones. So I googled the internet. Wow! 159 billion hits. I can’t believe there’s that many. I can’t listen to that many ring tones. Can you? I can’t. They had music tones, sound-effect tones, video game tones and celebrity tones. I tried this one [music], but Sandy threatened to make me sleep on the couch. Trust me. You don’t want to mess with Sandy. She didn’t even like the sports song [Take Me out to the Ball Game]; or the Spaghetti Western either [Ennio Morricone music]. Okay. So I thought maybe she would like a video game tone. I didn’t even let her listen to that one. What do you think? I don’t.

Since it was an election tone, I found this House Speaker Nancy Pelosi tone: “He would veto and he would drill. Veto and drill. Veto and drill. Veto and drill. Veto and drill. That is the president’s message.”

I was striking out so I asked Jim Puplava to give his version of a celebrity ring tone: “Portfolio’s go up, portfolio’s go down. Answer the phone.”

Sandy didn’t want her friends to think her portfolio might be going down, so I asked John Loeffler to do his Indian guru.

“All of life is interconnected, so pick up the phone. Be connected.”

Sandy said that wasn’t for her either. Hmmm. So I thought I’d record my own ring tone because what nicer thought could you have than: “Pick up the phone, Honey. Please Sweetie. Answer the phone. I’m really sorry about last night. Please, Honey.”

Sandy said she appreciated the thought but she’d rather just go with the standard tone already on the phone.

Before you go, I want you to hear the tone on my phone. [plays Warner Bros. Looney Tunes]

For Financial Sense, that’s all folks. I’m Andy Looooney.

Water & Uranium

JOHN: In the last segment we spent a lot of time on food because obviously in this crisis window that we’re running up to, it has penetrated the public consciousness – first it was energy, now it’s food. In this segment we’re going to cover two related topics; one of these is water which is the next issue becoming a scarcity believe it or not; and then we’re going to touch on a related energy issue and that is uranium. And it’s interesting what James Dines said about uranium probably being the only immediate short term goal in town, but we’re still diddling around. We don’t know even if we want to do this whereas other countries are charging forward with it.

JIM: It’s absolutely amazing. We’re still debating: “Well should we build a power plant. What do you think?” “Well, maybe we should study it for a while.” Meanwhile US companies are building them for other countries.

But I want to start out as we get into water and just read just some basic facts. 1.1 billion people lack access to improved water supply – approximately one out of every six people on this planet; 2.6 billion people in the world lack access to improved sanitation. Less than one percent of the word’s freshwater is readily accessible for direct human use. And here’s one – a person can live weeks without food but only days without water. A person needs four to five gallons of water per day to survive – think about that one for a moment; the average American uses between 100 and 176 gallons of water at home every day. The average African family uses about 5 gallons of water each day. Millions of women and children spend several hours a day collecting water from distant, often polluted sources. Water systems around the globe fail at a rate of 50 percent or higher. Every one dollar spent on water and sanitation creates of average of another eight dollars in cost averted and productivity gains. Almost two out of three people lack access to clean water, and live on less than two dollars a day; poor people are living in slums often pay five to ten times more per liter of water than wealthy people living in the same city.

And here is something – this came up there. There was some hearings this week on water – believe it or not, we’re actually looking into this issue – but according to the US government, 36 states are expected to face water shortages within the next five years. I’d mentioned that as a country the US uses 148 trillion gallons of freshwater for all purposes. California alone uses 23 trillion gallons of freshwater. This week – in talking about this crisis stage unfolding – Northern California’s East Bay Municipal Utility passed its first water rationing resolution in 16 years; it’s going to impact roughly 1.3 million customers covering 325 square mile radius; the resolution requires residents to cut water use by 19%. So you’re already starting to see what is happening in California is also going to be coming to other states. As mentioned, the US government is estimating water shortages are going to impact 36 out of the 50 states just in the next five years. But the issue of water is a global issue, not just a US issue. [32:09]

JOHN: I know you highlighted this a couple of years ago, Jim, in some of the things that you were writing. That was again before it had penetrated public consciousness here. But recently a number of international institutions from the United Nations to Congress have been sounding the alarm that global water shortages loom in this century. And this is paralleling what is going on in the food area.

JIM: When you think about water, most people think about water shortages, they think that it’s a local problem. Maybe it’s in their own town or city. If it’s local, it doesn’t look as worrisome. And we usually believe the problem can be resolved by either investment in infrastructure, conservation or maybe some kind of new management strategy by the municipality; but when you look beyond your town, state or country the picture dramatically changes. And according to the World Bank, 80 countries now have water shortages that threaten health and their economies, while 40% of the world – roughly 2 billion people on this planet – have no access to clean water or sanitation. So it goes beyond what is happening locally. This is like the food issue, like the energy issue – these are all global problems. [33:22]

JOHN: And you would think that this could really very rapidly evolve into political conflict. I mean just think of the Middle East right now where water is a hot bed of contentious issues. You’ve only got a limited number of lakes and rivers there, and everybody is competing for this. Look at negotiations between Israel and Syria. In recent years there has been an issue between Iraq, Syria and Turkey – that’s just one example. And there is a serious series of problems going on on the African continent right now.

JIM: Yeah, the Financial Times recently highlighted this in a story that began with the statement: Water, like energy in the late 1970s will probably become the most critical natural resource facing most of the world in this Century. And in fact, just at the beginning of this Century, former senator Paul Simon wrote a book called Tapped Out where he was talking about this coming crisis in water; and just this week, the House Science and Technology Committee held hearings on water challenges for the 21st Century. And the opening statement, the chair of that committee, a gentleman by the name of Bart Gordon said: The recent droughts experienced in the West and in the Southeast, plus increased for water supplies suggest that the US needs to take a closer look at how we’re managing our water resources. And reference was also made to significant water shortages. Once again, not just the Southwest or California but basically 36 states in the next five years by 2013. [34:56]

JOHN: And if we look at the shortages that were going on – I think it was Atlanta last year that ran into that – and covering a large part of the Southeast, so you tend to think of that.

You know, Sandia researchers are also predicting water shortages worldwide by 2025, more than half of the nation’s in the world will face freshwater stress or outright shortages – and I know the problem has become very serious in China due to water pollution; and it’s not just a matter of water but it’s a matter of getting it from where it originates to where it needs to be, and getting it there cleanly. Those are the two things.

JIM: I think I read a statistic – about 90% of China’s cities have polluted groundwater while rural Chinese face risks from contamination, things like arsenic and excess fluoride; and human waste is also becoming another serious health issue in China where daily sewage creation is about 4 billion tons a day. So once again, a global issue. You know what is surprising when you look at all this – whether you’re looking at energy, food, water – all of these are related – they are global issues today; and when you’re thinking about this issue and I think that’s what is surprising because in the past if we had a problem in one state, well, maybe we could get water from another state or energy from another state; or if we didn’t produce enough energy in this country, we simply imported it from another place in the world. But now that you’re seeing economies industrialize –economies grow globally especially in these emerging economies which has most of the world’s population – all of this is hitting at the same time. So this is really becoming a global issue and that is what I think is surprising to a lot of people is that this goes beyond their local town, city or state. [36:45]

JOHN: Well, obviously the issue of water like energy becomes especially important as it relates to food because you need water to produce food. Even look at ethanol – ethanol requires water to produce it, so when you’re talking about location of plants you should be putting them near somewhere near water. I remember recently we did a piece on the fact that some of these ethanol plants are locating and they are not thinking about the water issue and how they’re going to get the water there and how it will be provided.

JIM: When you take a look at how much water it takes to produce a ton of grain, it takes 1000 tons of water to produce one ton of grain. And 70% of all water that we use in the world comes from underground aquifers or from rivers. And most of this water is used for irrigation to produce food. And a lot of people I think have not connected the dots to see that a future of water shortages will also translate into a future of food shortages. [37:42]

JOHN: If you look at dairy alone as a matter of fact, people don’t think about this, but it takes four to five gallons of water to get one gallon of milk. And then the hotter things become, the more you have to worry about as far as what your cows can do because the hotter it becomes the cows produce less, so they require more water. So everything you’re saying is true and people are unaware of this. For so long it’s worked. It’s worked so well that people, like we say, “where does water come from?” “From the tap!” “Where does electricity come from?” “Well, the plug, you idiot! Don’t you know that.”

I know we’ve covered a lot this topic of infrastructure on the Big Picture. This doesn’t sound like a lot, but we have not been maintaining our infrastructure and it seems like water infrastructure would actually apply here, and not just roads and bridges but fuel pipelines and then there is a water issue. You could even look at what we’re doing as far as letting our canals and canal locks deteriorate in various parts of the country.

JIM: This is something that in terms of an investment theme we outlined about six or seven years ago, but there is a lot of different themes to water investing: from water utilities that are consolidating – for example, municipal and private systems; to large infrastructure companies that can help build and manage everything from water to sewage systems for government; to companies that make things like pumps, irrigation systems; to desalination to companies that help conserve water usage.

This once again is a global issue so when you think of water investing, think globally. Most of what we have – at least right now – our eyes on as a company is in the international space; although some of the domestic companies in the US are beginning to look attractive again. But overall my preference is still global when it comes to infrastructure when it comes to water. And right now there is an opportunity here because everyone is focused on energy and food, and so nobody has connected the dots and think “wait a minute, food shortages, we need more food” and nobody has connected it to water. So water is being neglected at the moment. It isn’t on investors’ radar screens and the experts are saying we’re going to need to invest nearly one trillion dollars over the next two decades just to bring water up to meet demand that is growing by the day. [40:04]

JOHN: Let us move on to our next topic in the segment which is uranium. The world is going to need a lot more electricity. James Dines picked up on that one too – a theme we’ve been talking about here – and that was if you’re going to have electricity hybrids with batteries, as you go home you plug them in…

JIM: And somebody needs to ask the question: Where does the electricity come from? From the outlet in the wall!

JOHN: But I already told you that! Where is it going to come from? We’re going to need a lot more electricity. Look at the train system. What if we converted a lot of the train system off of diesel and to electricity. Somebody’s got to produce it. And there are only two sources capable of handling this growing demand right now, over and above what we see right now, and that is coal and nuclear. Renewables such as solar, wind and geothermal isn’t going to do it. They can contribute to the energy in the grid – we should acknowledge that – but for example, the wind doesn’t blow all the time, unless you’re in Amarillo, Texas. At that point, the wind never stops blowing all the time! But anywhere else, it has its ups and downs. But when it’s blowing it can contribute energy to the grid. But as far as being reliable, you’re looking at coal, and nuclear right now. And I would say some hydro in there, but there’s a limit on that too and you have all of the environmental issues involved with that. But the renewables, you know, we hear a lot of talk about renewables, they will not be the long term contribution. Even people who have the solar tiles on their house, that will reduce their consumption off the grid but they still need a reliable source because there are going to be times when the sun’s not there. Can you think of a time when the sun’s not there, Jim?

JIM: Yeah, when it gets dark.

JOHN: Sheesh, I knew you were going to get that!

I can think of another time. If you live in the Pacific Northwest you never see the sun, so we’re basically going to need more technology; and we’re going to see more technology that requires electricity. The more techno-stuff that we use, that all creates a draw. I mean every computer pulls between 100 to 200 watts right now, depending on your power supplies; and the more computers and the more techno-stuff we’re going to need more power.

Nuclear power is making a comeback even here in the backward United States where we’re saying, “well, I don’t know. Do you think we should?

JIM: If you look at currently, I think the figure’s like 439 nuclear power plants that operate in 34 countries. Nuclear power supplies roughly globally about 16% of the world’s electricity. In Europe, nuclear power provides 34% of Europe’s electricity needs and there are 34 power plants that are currently under construction from Argentina to Europe to China and India. Here’s one to think about: One third of these new nuclear power plants under construction are just in two countries – China and India. The US, John – how many plants do you think we have under construction in our country?

JOHN: You’re going to catch me on this. I don’t know.

JIM: One.

JOHN: One? That’s it!

JIM: That’s it. We had one under construction in Tennessee. Now, it’s estimated that close to one hundred new nuclear power plants are going to built over the next two decades, and that means the world is going to need a lot more uranium to power these plants – both the ones in existence, the ones under construction and the ones that are now in the permitting phase.

JOHN: Everyone seems to understand about erecting or building a nuclear power plant. It can take seven to ten years to do that. They’re expensive and they’re getting more expensive to build so these things don’t happen overnight. As a matter of fact, anything we’re talking about, Jim, when we talk about renewables, it’s going to be a while before any of that becomes viably on line. And you have to keep in mind we have this bottleneck right now.

JIM: And that’s why we’re saying that we’re going in to this crisis window and we can’t avoid it at this point because I don’t care if you want to build a new refinery or a new nuclear power plant, you’re talking about things that are going to take seven to ten years. In fact, it was interesting, the Wall Street Journal did a story this week on the new wave of nuclear power plants on the drawing-board in the US. There are 104 nuclear reactors operating in the US; 75 of these plants were built the last phase – the bull market that we went from 1966 to 86. The average nuclear power plant during that period cost about 3 billion; the price tag to build a new plant today is ranging anywhere today from 5 to 12 billion, depending on size and location, which is almost double to quadruple earlier estimates. Right now when you think about it, nuclear and clean-coal remain one of our few options that we have because even like for example in my case where I’m going to be putting solar roof tiles on my house, you know, when it gets dark and the sun goes down you still need power. And then also during those periods of time for example when you’re running air-conditioners when we get these heat spells and that’s during the day when you have that heat spell that’s where these alternatives, like solar and wind, can really come in. They sort of can kick in, in terms of peak demand, and that is where they’re going to be most effective. But in terms of driving 80 to 90 percent of our electricity needs – uh huh, renewables aren’t going to do it, you're going to need coal and nuclear. [45:27]

JOHN: So new power plants combined with existing power plants are really ultimately just going to mean more uranium demand. There is no way around that one.

JIM: No. Uranium usage is expected to rise from around 66 metric tonnes mid-decade to around 75 metric tonnes by the end of the decade. That’s an increase just in the next couple of years of about 15% - just in the next few years! But it really begins to ramp up in the next decade. And the problem like we’re having with so many of our natural resources, mine production of uranium is operating at a deficit. [46:02]

JOHN: How is that deficit being made up then if we are?

JIM: Most of the deficit is being made up from government stockpiles. A lot of our uranium that we’re getting right now in the US is coming from the decommissioning of Russian nuclear weapons. We had a treaty with them that we signed in the last decade. The program was called megatons to megawatts. However, that program ends in 2013 and by that time the Russians will have decommissioned over 20,000 nuclear weapons. That’s a good thing but as they decommission these warheads and recycle they’re going to transfer roughly about 500 metric tonnes of uranium. We’re getting about 9 to 10 metric tonnes of uranium a year from this. So at a time when more nuclear power plants are coming on stream – and I’m talking about this next decade – the Russian decommissioning will end. So prices for uranium will get more expensive; and as James Dines talked about in the interview with Eric King in the second hour, uranium is going to go to the moon. Right now, there is a softness in the uranium market and a lot of that is coming from these government stockpiles that are being used up both in the United States and also from Russia. [47:15]

JOHN: Weren’t uranium stocks sort of a “hot item” a few years ago. I seem to remember they were all the rage at one point. What sort of drove that?

JIM: Uranium – the price of uranium peaked last year right around this time. Uranium stocks peaked in May of last year along with junior mining stock and along with the price of uranium. Since then, uranium prices have come down from almost nearly 100 bucks to roughly 60 bucks and along with them the uranium stocks. I mean the uranium juniors have literally fallen off a cliff; and right now uranium stocks just aren’t on anybody’s radar screens along with let’s say water. And many of these companies are selling at prices where basically they’re just giving them away. [48:01]

JOHN: With more nuclear power plants under construction or on the drawing boards and with mine production operating at a deficit, and then the Russian megaton to megawatt program coming to an end in the next five years, I think if you put all of those together that’s probably an opportunity because there’s going to be demand to search for more uranium.

JIM: Yes, and I think it spells a big opportunity. But only I think if you’re a long term investor. Like I say, right now the sector is being ignored. The issue of uranium demand is asleep right now. Nobody is paying attention to all of these, not only the present nuclear plants that are under construction – as I mentioned, there are 34 of them – but also there are a ton of them on the drawing-boards and in the permitting phase. And all of that is going to come to a head in the next decade because you know, the focus is on right now what’s on everybody’s radar screen and everybody is focusing on food and energy not uranium or water. I think that’s going to change but if you’re willing to look out two or three years, I mean just look at when these new 34 power plants come up, they’re going to need uranium. Our existing power plants are going to need uranium. And think of the number of power plants, especially as the price of oil and natural gas start becoming more expensive, you’re going to see huge demand. And like I said, we’re probably going to go through a nuclear renaissance; even in the backward United States we’re even now considering looking at it and saying, “we better do something here. What do we have that works: Coal and nuclear.” [49:40]

JOHN: You’d think before you spent something like 6 to 12 billion building a nuclear power plant you would want to make sure that you had secured the fuel to power it.

JIM: In fact, if you take a look at companies that are building the reactors, they’re doing just that. In fact, a lot of companies are signing contracts with existing and up-coming producers – I’m talking about the utilities that own nuclear power plants. General Electric which builds nuclear reactors has announced plans to form partnerships with uranium companies in an effort to develop basically its nuclear business because you’re going to say, “okay, I can provide you a reactor” and what GE is trying to do here is become full service: “We’ll give you the reactor and we’ll also provide and give you access to the fuel supplies…” because you know, nuclear power plants run on uranium. So GE is now holding talks with a lot of uranium mining companies because GE is going to need the feedstock for its future enrichment plants. [50:39]

JOHN: All right, so given all of that where would you invest?

JIM: Well, I’d definitely own producers. Right now, they’re selling at cheap prices. They’re being ignored right now because once again, the focus right now is food and energy. But I’d also want to own up coming producers – those companies that are close to getting their permits because if you look at for example, in the United States the permit cycle is anywhere from six to seven years. Now, it’s less in other countries, so it depends on where the resources are located. I think another important aspect when you are looking at uranium stocks is political risk is also a big issue. So you want to own companies that own deposits in safe jurisdictions with access to infrastructure to support the mine. [51:26]

JOHN: So would you be buying here?

JIM: Oh, absolutely. Most definitely. The sector has corrected substantially. It’s being ignored and you know, not only in our own accounts but also personally, I have a few favorite uranium juniors. And that’s what I do – every single month I’ve been adding and building up my position and especially on months where there are corrections and they’re being ignored. We’re at that kind of ‘ignore’ stage right now.

And so you want to own producers, you want to own up coming producers – those are close to the cycle. And once again that have deposits in safe jurisdictions. But I definitely – you know, the world’s asleep right now to the water and the uranium issue. But I don’t expect that to last, especially as we get into the crisis stage. I mean we’ll get into this when we get into oil, but beginning of the year I had a $125 forecast for oil; we’ve already surpassed that the last week and I’ve bumped my forecast up to 145; and I think as we get up to 145 and 150 oil…remember, John, I think it was Matt Simmons who said, “by the time we get to the November elections, peak oil will surpass global warming as the number one issue.” And you can already see that this week in the scrambling in hearings in Congress, it’s because our elected representatives are hearing from their constituents. I mentioned that diesel prices already hit almost 4.69 and are on their way to $5.00. And by next year, we could be talking about $6 and $7 gasoline. [52:59]

JOHN: And maybe that’s something that we’ll need to address in the next segment and that is you can see, especially if you watched the debates this week in Congress and what different Congress people were saying – both senators and representatives – there is this mammoth battle coming now between the push for energy and trying to do environmentalism as we’ve done it in the past. You can see this battle brewing. And I can almost tell you who’s going to win out ultimately, but it’s going to be an interesting trip as we make it.

This is the Financial Sense Newshour at www.financialsense.com. We shall return.

Part 2

Energy: Just the Facts

JOHN: I think people wonder what it is we talk during the station breaks.

Let us talk about the subject of oil. Welcome back to the Financial Sense Newshour.

Goldman Sachs. We said you were wrong last week, Jim, that we were calling for 125 by the end of the year and we made it in the first five months of the year. Goldman Sachs is calling 141 by the fall. The Fall! Not just the end of the year, December. And I spend a lot of time watching the energy debates that were going on in Congress on C-Span. I spent a lot of time doing that this week to hear what was being said. There is a lot of silliness – that’s the easiest way I can put it. And at one point I said, “’tis to barf if you listen to much more of this.” You can’t stand it because there is an oncoming crisis and all they’re doing is posturing.

There is some wise comment being made in between a lot of the nonsense. And the nonsense is not going to save us from the problems to come – that’s for sure.

I think the spooky part of this whole thing is that these clueless people are running the country. That’s the part that - surely we could put somebody in office who seems to understand this issue, but they don’t. So having said that anyway, I think last week you bumped your prediction to 145, Goldman Sachs was at 141 like I just mentioned. Are you influencing them, or they influencing you? And if there is one thing we’re lacking here, Jim, right now, it is real clear information. That’s what people don’t have. People are running on a lot of political hoo-ha rather than hard information about what the energy situation is.

JIM: Am I changing my forecast, John? Yes, I have. Last week I was at 145, I’m now changing it to 145.50.

JOHN: That was a big change. Can I take that out of the bank. No, you’ll be taking it out of the bank as a matter of fact.

But in all seriousness, what is the energy situation here? How did we get where we are and where are we going?

JOHN: Why don’t we frame this debate and put this in perspective. I mean the oil age began with the discovery by Drake in the 19th Century when oil was discovered in Titusville and it really took off in World War I when all of a sudden Winston Churchill had the foresight that converting the British Navy from coal-fired battleships to petroleum-fired battleships – they were faster. And then of course, we had the invention of the automobile and so now we had this huge technological change that came into the economy with demand for petroleum. And so the Age of Petroleum began and we began exploring for oil, not only here in the United States but around the world. Really the first half of the 20th Century was the Age of Discovery. That’s when most of the oil giants were discovered. When you take the large oil fields that exist today – you know, the Kern County fields in California or the major oil fields in the Middle East – a lot of those giant oil fields were discovered by 1960. The bulk of these fields had been discovered. In fact, oil discoveries in the globe peaked in the late 1960s; 1968 and 1969 were the last really big finds with the North Slope and the North Sea.

And as we discussed on this program a couple of weeks ago when we did a segment on the Big Picture called the Decline of the Giants, and I cited Matt Simmons’ work because Matt did this and he was way ahead of everybody, and 20% of our oil comes from 14 oil fields that were discovered 50 to 70 years ago. I think it’s like 114 account for 47% of our energy needs, and roughly 53% comes from another 4,000 fields.

So the thing that you need to understand is look, if you have rising energy demand, that means that you have to go out and discover and bring more supply online. And the problem that we face in this country is that 1985 was the last year globally that we discovered enough oil to replace what it was that we were consuming. Every year since then we have failed to discover or replace what it is that we consume. And if you take the discoveries by decade they have gotten smaller in size - in other words, we’re not discovering the oil giants and there’s been fewer discoveries. There’s been a direct decline since the 1960s. It’s declined since the 70s, declined since the 80s, declined in the 90s and it’s really declined in this decade. So that’s one thing that I think – to put in perspective, all right, we have this demand for oil but we’re not discovering it. [5:47]

JOHN: What about all these claims that we hear from time to time about new oil fields like I guess recently in Brazil and also, what? In North Dakota or something like that. And then you hear people talk about oil fields in Alaska that have been capped off. I think Lindsay Williams is a big proponent of this. What do you think about those?

JIM: The problem is, yes, we’re making discoveries but set aside from discoveries it’s how much are we losing each year to depletion. We’re losing close to 4 million barrels a day of depletion from existing oil fields, so it’s not just the fact that you have to find new oil to supply and meet new demand, but you also have to replace the oil that you’re losing as the older oil fields go into decline. And a lot of these new small discoveries that we’ve made over the last two decades are smaller fields and they go into decline, much more rapidly. And a lot of the oil that we’re getting today is coming from offshore and a lot of these fields decline very rapidly. Just look at, for example, Cantarell which is the world’s second largest oil field; that peaked several years ago. I think at one time it was producing 2 ½ million barrels a day and production in Cantarell has dropped 40%. That has ominous implications for Mexico and the United States because Mexico is the second largest exporter of energy to the United States.

The other thing is we are trying to do our best to stop oil discovery. For example, we know that there is a lot of oil off the shores of California. In fact it’s bubbling up on the beaches in Santa Barbara. In fact, we know that in a large area of the Gulf of Mexico there are large oil deposits, we know off the outer shelf of Florida there are large oil deposits, but we are denying access. [7:47]

JOHN: And then we have an ANWAR situation – if you remember just recently polar bears were put on the endangered species list even though they’ve increased from 5 to 25,000. But even the subject of drilling in ANWAR – we’re talking about 2,000 acres involved out of 2 million. And we’re not allowing any of that drilling either.

JIM: We also trying to stop – there are two companies, Shell and Conoco Phillips that have paid 2.6 billion for oil leases in the Arctic and everybody – the Russians are drilling there because it’s considered the last oil frontier, the Europeans are drilling there, and what we’re trying to do is stop our companies from drilling there. And it’s just absolutely amazing but you know everywhere you go it’s like you talk to the oil industry executives, “you know what, you want us to produce more oil but you’re denying us access to where the oil is.” So I’m not sure how we solve that since 85% of the world’s oil reserves lie within the former Soviet Union or OPEC. [8:48]

JOHN: And what we’ve done here is we’ve painted ourselves into a corner because oil production in the United States peaked as far back as 1971. So every year since that – we’re looking at four decades now of this situation – we have to import more and more oil, not to mention the fact that the refineries haven’t kept with it, so we have to import more and more gasoline as well. And that’s been the ongoing status. We have not kept up with the diminishing production here in this country.

JIM: No, at one time, believe it or not, at our peak the United States was producing over 10 million barrels a day. And you’ve got to remember, you take a look at our society today, not only do we have more people in this country but I mean take a look at the appliances that we have today: plasma screens which consume more energy; we’re back to gas-guzzling cars. I mean look at all the appliances from computers to all the electronic devices that we have today. So even though per dollar of GDP we’re consuming less energy, collectively overall the United States consumes more energy today than we did in 1970 when we were still fuel self-sufficient. I mean we produced all of our energy needs and we were able to export. But today the United States consumes over 20 million barrels a day (bpd) and we’re only producing 5 million barrels a day, which means that we have to import about 13 to 14 million bpd of raw input of oil; and then we import close to 4 million bpd of diesel, jet fuel and gasoline.

And one of the problems we’re having right now is with this earthquake in China, China is going to be back into the open market buying ever larger amounts of diesel which means it’s going to drive the price of diesel up. We’re almost at near $5 here in California already. And we are at the same time denying access to energy companies to go out and get it. So nobody is talking about the supply issue in any of these debates here. [10:47]

JOHN: If we flash back to 1970 and you recall that we had the oil shortages then and you and I are old enough to remember that –we were in college at that time – and as a result of that the United States created the Strategic Oil Reserve. And what that does is that puts out 47 days of backup fuel – oil – that we can use here in the event of some kind of an emergency. For example, when Katrina happened and it interfered with the refineries that were down along the Gulf coast, we were able to use some of those reserves to handle the crisis at that time. That’s what it’s there for. It’s an emergency purpose and it will only keep us going for about 47 days assuming normal consumption. But we talked about posturing earlier, look at what some of the Congress people want to do because of the elections. Number one, they want us to stop filling the Strategic Oil Reserve even though it is close to being full, (I forget what the percentage it was supposed to be at right now) because obviously that tends to drive the prices up. They want, instead to actually draw it down and pump that into the market; not because there is an emergency, but rather because of the fact that we would decrease prices by flooding the market with that.

And look at the geopolitical situation we’re in right now in the Middle East which is going slowly towards more instability; that could be the next crisis up when we would need that. And this is being done for purely political reasons. This is insanity.

JIM: What’s insanity is we know that we have a million bpd of production off the coast of California, we’ve probably got another million barrels of production in ANWAR, and here we are going to like a beggar, groveling toward Saudi Arabia and saying, “oh please, oh please, increase your production to bring the price down.” And this just off of Bloomberg wire: The Saudis have agreed to the President’s request and they’re going to increase output by 300,000 bpd, so the country is going to pump roughly about 9 ½ million barrels beginning in June.

But here we are, John, we’re trying to deny access to our own energy and it leaves us to groveling and going begging others to increase theirs. So we want the supply to go up but we don’t want our supply to go up, which dumping all of our spare reserves into the market just to drive the price down before elections just goes to show you how little our politicians really understand what is driving energy. [13:15]

JOHN: Let’s look at the proposals for a windfall profits tax because we keep hearing that oil companies are making record profits at a time when everybody else is hurting and in a dollar amount that’s correct; right? In terms of dollar volume that is really true. But there are other things that have to be seen behind that.

JIM: Well, last week we covered about…in terms of percentages, the oil company profits as a percentage of sales is lower than many of our industries, whether it’s entertainment, whether it’s technology. But it’s not just the fact it’s when you know, you think, okay, a company earned x amount of money, people have no idea what it costs to explore and get oil. And here’s a story that was released this week and it’s one of the reasons why the drilling stocks have just gone ballistic this week. One country, one company, Petroleo Brasileiro, leased 80% of all of the world’s deepest drilling offshore rigs to explore for prospects in these two areas that they’ve discovered. The world has 21 such vessels and John, in the last four years the cost of these offshore drilling rigs have gone from 70,000 to 700,000 a day – that’s just in four years. And I mean, you’ve got a lot of the Western major oil companies that now have their back against the wall because most of the oil that they’re drilling for today is offshore and you’ve got one country and one company, Petrobras, not only 80% of the world’s deepwater rigs but they’ve ordered 17 more. So they’re almost locking in the world’s drill rig fleet. Matt Simmons has talked about we don’t have enough drill rigs out there and here you have one country that now controls and has locked up with their foresight – and you have to give them credit for this – they saw the demand going up, they saw prices going up and they looked at the industry and said, “we don’t have enough drill rigs out there, we better lock them up now and they were smart enough to do that.” But just in this latest contract, US and European oil companies are going to have to now start paying $50,000 more a day for these drill rigs and it is going to drive up the cost.

And yet, people have no idea the amount of capital expenditures that goes into and how much oil companies have to reinvest to find more oil and to keep their existing infrastructure in place. And one of the things that if you look at the oil industry, you know, it’s built on steel and steel rusts and the energy infrastructure is falling apart; they don’t have enough drill rigs; a lot of the existing equipment from rigs to refineries are breaking down because they’re old. You know, you have a refinery that is 50 to 70 years old, yes, you can do maintenance but things start to breakdown when they get that old. And not only that, they have a shortage of engineers. There’s even a story that some of the majors might go out and start buying the service companies because they can’t get personnel. I mean that’s how things have got; and the only thing that Congress wants to do is create a windfall profits tax. And John, they did this with Jimmy Carter and by 1988, the windfall profits tax was eliminated because number one, it didn’t bring in the revenues, it drove down production in the United States and increased imports. It’s amazing how you can take a failed policy and resurrect it just to make people feel good. “Well, at least we’re doing something.” [16:58]

JOHN: Somebody had said, “what’s a windfall profits?” because if you look at what they’re making in terms of profit versus investment it’s really very much within the norm, what, 9%, something like that on average of what other companies make? Other companies sometimes make a lot higher when you look at technology companies.

JIM: Yeah, I mean if you’re saying oil companies can’t make between 9 and 10%, while other industries make 20 and 30% profit margins then let’s start taxing other companies. And especially companies that don’t have to invest as much as the energy industry does. And if people think that creating the windfall profits tax is going to bring more energy or make the price of energy go down, they are sadly mistaken. It is shown that this doesn’t work and if you start taking windfall profits at a certain level that’s arbitrarily determined – I think the figure that they want to use that anything over $40 a barrel – I mean where does the $40 a barrel come from? You have some congressman that decides that’s…I mean this is dumb, it’s absolutely stupid and it’s going to do nothing more but drive the price of energy up and create more shortages. [18:06]

JOHN: Okay, but the discussion was that they would take those windfall profits and they would basically invest them in alternative energy now. Won’t that help us?

JIM: Oh yeah, like ethanol? I mean the last thing you want is the government to get in the energy business. Just look what they’ve done with ethanol, look what they’ve done with food – if we’re going to solve this energy crisis it’s going to be the private sector that’s going to do it. It’s not going to be the government that’s going to solve this problem. I mean just look at this week’s farm bill where they’re paying farmers 30 billion dollars in subsidies not to grow food. Do you really want people who come up with those kind of ideas running our energy policy? [18:47]

JOHN: Also the point, too, that I was trying to make there was the fact that alternatives are good to invest in. We’re not arguing with that, but the alternatives are not going to be commercially viable for 5, 10 or 15 years on a widely distributed, widely useable basis. And so what are you going to do in the meantime is the question and that’s not what’s addressed here.

JIM: No, you’re not going to power a ship with solar power, you’re not going to put a 747 in the air on solar or wind power or batteries. I mean that’s just not going to work. And until we find a solution or something that’s going to come in here, that’s going to drive the price up. The market is going to drive the price up. That’s going to bring in more alternatives but these alternatives to become commercially viable are going to take a long time. And that’s one of the issues that we’re dealing with here: Until we solve whatever it is we’re going to come up with, we are going to need some kind of alternative or supply to keep us going until we figure out what that is. [19:51]

JOHN: All right, we now have to hit this area of crunch that I think I talked about before: The brewing war between the need for energy, both from a domestic point of view of the economy and from a serious strategic standpoint given the fact that the world seems to be tipping a little more to instability. That’s one side of the equation. The other side of the equation is the environmental movement and it’s nice to talk about saving Bambi, but then you have to look at whether the policies have been reasonable or not, and up until now it’s been orthodox that you just don’t question it. If we say “save the planet” everything goes. I think that’s where the battle…you can see this if you watch the debate in Congress recently, that’s where the battle lines are being drawn.

JIM: The one thing that came into play, and this is one thing that is having a major impact here on the energy situation which is due to environmental reasons: We have not built a refinery here since 1976, in Corpus Christi which was the last refinery – there’s a gentleman in Arizona who’s been trying to get permits for 10 years now, and they’ve turned him down; we haven’t built a nuclear power plant here in several decades; we have now taken off limit the outer continental shelf on both sides of the country from drilling. And even if you want to go to hydropower, you want to go to windpower, look at the lawsuits in Texas, they’re suing the utilities for putting up wind turbines; off Hyannisport they’re trying to block putting up wind power. I mean everything that we’re doing is stopping production and then we’re asking why we don’t have more available to us.

I’m always amazed every time that the oil price spikes, they say, “we're going to have an investigation into price gouging.” They have done this. Every time it goes up, and not once, even during Katrina and Rita, did they ever find price gouging. [21:50]

JOHN: President Bush has been talking to the Saudis to get them to increase output and they’ve done that, but why don’t we just go to our own oil companies. I mean Chevron, Exxon – that whole bit – why can’t they increase production. What’s the problem?

JIM: They’re not replacing what it is that they’re producing, and then they don’t have access because the world’s oil is controlled by Russia and OPEC. And that’s the thing. If 85% of the world’s reserves are within these countries, what else is there left to do? And the thing is we’re not having access to what it is that we have. You notice this, and this gets back to the Reagan revolution which you saw supply side economics come in, you want to bring the cost demand when you have demand outstripping supply. There is one simple reason the price of oil is where it is today, since the beginning of the year, demand for oil has risen to 87 million bpd and we’re only producing 85 million bpd which means we’re eating into our inventories. And when you have demand that’s greater than supply, if you want to bring the cost down, then you’ve got to go in and increase the supply or otherwise you’re not going to be able to do it. [23:11]

JOHN: I think the real core issue that we’re talking about here when we address all of these issues is that the cold, hard facts that we’re talking about here are not in the public conversation, and they’re being clouded a lot by what is going on in Congress, by what politicians are saying, which is creating a lot more heat than light in this whole area; and what we need right now is some sober assessment of what our situation is. What we did is we watched hours of this and pulled some cuts off of C-Span. I just want to play a few of these so people understand exactly where we stand on the…some of the sober comments but a lot of the silliness that’s going on in Congress right now.

If people ask senators and congressmen, “listen, you’re supposed to be the big wigs here, you’re supposed to be so influential, why haven’t you done something? The gas prices are killing us.”

We do have two votes coming up related to energy. The first is on the McConnell amendment, which is a compilation of various provisions that do relate to energy but I would argue do not hold out much promise for affecting the price of oil or the price of gas. Following that, we have the vote on the proposal that has been put forward by the Majority Leader, Senator Reid with regard to suspending the filling of the Strategic Petroleum Reserve for the balance of this year.

[montage]

Many, many across the country are in true economic distress over the prices that they are paying now for gasoline, for their home-heating oil, many for their natural gas they are seeing coming into their home, and unfortunately the prognosis, or the future, doesn’t look much more consoling to the consumer.
When the demand goes up, the supply stays the same, the price goes up. Knowing that, the best way for Congress to reduce the price of energy is to increase the supply of energy. We need more American oil, more American natural gas, more American clean-coal and we need more American nuclear power.
So what can we do here and now? Two things. First we can start dealing with the price gouging of consumers. These prices are going up dramatically at historically high rates, they’re not justified by the barrel of oil prices. The spread between the cost of a barrel of oil and the cost of refined product keeps growing larger and larger and the oil companies that are refining the crude oil keep making more and more money.
Price gouging is going on. That’s the first issue. Is there any mention of consumer price gouging in the Republican approach? Not one word. In the Democratic approach we believe price gouging should be part of this. Secondly, accountability of the oil companies. These oil companies, over the last seven years when George Bush from oil country has been our president, have seen their profits quadruple. Four times the profits they were making just a few years ago! The cost of the oil and diesel fuel has gone up 2 ½ times, the oil company profits quadrupled. These companies are not only making more money than oil companies have ever made in the history of America, they’re making more money than any business has ever made in the history of America. We have a windfall profits tax. We say there is a limit to how much these oil companies should be making as profits when it causes so much damage to American families and businesses and farmers and trucker and the economy.
Congress has blocked efforts to reduce trillions of cubic feet of natural gas, trillions of barrels of oil and prevented the construction of new refineries, nuclear power plants and hydroelectric facilities. The longer we deny access to domestic supplies, the more our current energy shortages will climb. And the less energy we produce domestically, the more we will rely on foreign and possibly hostile sources for it.
We believe that this legislation on this bill could produce another 24 billion barrels of oil, enough to meet our nation’s total needs for five years. Now, that will dampen world prices, but if we don’t take these steps we’ll continue to be in this exact same position being held hostage by the world’s oil cartel for decades until we have new alternative technologies. We’ve got to stop letting ourselves be held over the proverbial barrel by the world’s nationally owned oil companies.
Well, the question is this: With oil at $126 a barrel and gasoline around $4, or headed towards $4 and above, with the American consumer being burned at the stake, why should its government be carrying the wood?

JOHN: And Jim, this one is my favorite.

And the suggestions I don’t want to hear are that we’re going to keep drilling where we already know folks in our district particularly California do not want to allow for – more drilling along our coast, and opening up old refineries like in the city of Whittier, Nixon country it used to be known as, where we have some oil fields owned by I think Chevron.

JOHN: And that was Congresswoman Hilda Solis of California. If they don’t want to allow drilling, I guess they don’t want to drive up and down all of those freeways they have in California there. I love that one. That’s great: “We’re not going to let you drill for more oil. What are you going to do to give us more oil?”

JIM: And we’re not going to build any refineries but you know, why is diesel fuel… I mean this is this NIMBY, BANANA approach and yet here we are going like beggars to countries like OPEC and saying, “oh, please, oh please, can you increase your production because we’re not going to do it.” And from OPEC’s point of view, why should they? Why should they raise production, spend the money to drive down prices so we as Americans can put in gasoline in our SUVs at a cheaper price. Let’s put it this way: He who owns the oil dictates the price. And they own the oil, we don’t. [29:33]

JOHN: That’s a very good point because a number of commentators have – and I’m thinking of course of Bill O'Reilly on Fox News – have been talking about price fixing or price gouging. How is the price of oil set? Bill keeps trying to assert that some guy somewhere actually arbitrarily assigns the price of oil. I understand that oil is only sold on two exchanges – on the COMEX and on the London Exchange worldwide. So how is the price set there?

JIM: It is set in an open market. You have people who think they want to hedge, who want to buy oil because they think the price of oil is going up; you’ve got other people that think, no, the price of oil is going down so they’re selling oil. But it’s done in a free market. You’ve got two people – for whatever reasons you want to hedge oil, you want lock in the price of oil, and it’s set in a free market.

And I’ll tell you the other problem that we’re going to have is down the road you have other oil bourses that are going to open up and oil is going to be traded in other currencies. That means for the United States –which has a declining currency – if we’re going to have to go on the open market to buy oil from other countries and pay for it in other currencies when ours is going down, it is going to get even more expensive. So as bad as it is in the United States, it has been less burdensome overseas, John, with these price increases of oil because the currency such as the euro or the yen have appreciated against the dollar. But right now the dollar, or oil is denominated in dollars but that situation is changing as more and more countries whether it’s Venezuela, or Middle East countries start demanding payment in something other than the dollar. [31:13]

JOHN: But this whole debate and the lack of information out there is pervasive and that’s what’s preventing us from getting to real solution. You can hear it in my voice. You can only watch this stuff so many hours of it before you start yelling at the television. And it doesn’t listen, you know, they just keep on saying what they’re going to say. But here’s a clip from Donald Trump this week:

TRUMP: I also think that I’d tax the oil companies into oblivion because there’s never been anything like what these oil companies are doing to this country. So I’m a big free market guy and all of that, but I would put heavy, heavy taxes on the oil companies and they would still have plenty of incentives to find oil.
You would put taxes on the oil companies…
[voices arguing over each other]
TRUMP: I’d say it’s the second best property in Palm Beach.
: You got it for how much?
TRUMP: What’s that?
: How much did you buy it for?
TRUMP: I bought it for 40.
: Well, you know what we’re going to do. That’s a windfall and we’re going to tax that profit that you just made on that windfall because of all the problems in the mortgage industry.
TRUMP: I think you should.
: You’re cashing in on it.
TRUMP: No, no. I think you should tax me. I think you should absolutely tax me. And the fact is I am paying a big tax. I will be paying a big tax.
: So did Exxon. They probably paid a dollar of taxes for every dollar that they earned.
TRUMP: Exxon should pay more than I pay. [32:35]

JOHN: We should also point out by the way, since Donald Trump brought up the concept of taxes and that is: who makes the biggest profit at the pump?

JIM: The government.

JOHN: Different levels right, we’re talking about federal, state.

JIM: Yeah. In terms of collectively, if you look at the last couple of decades, the government has collectively both on international taxes and domestic taxes – I think we used this figure last week – but they have taken in almost 800 billion more in tax revenues than the oil companies that actually produce the stuff. [33:05]

JOHN: Well, Goldman Sachs says oil prices are going to keep rising. It’s an elevator that is steadily going upwards and right now it’s real clear that we don’t have a comprehensive energy policy. That’s what we’re lacking; an overall policy that will work. Right now everybody is posturing, we’re arguing over nonsensical stuff and the clock continues to tick and the meter continues to go up.

JIM: And it is unfortunate, John, you said we don’t have an energy policy. The fact that you do nothing is an energy policy. By not making decisions, by stopping drilling, by stopping building plants, by stopping putting up wind turbines or anything like that – that is an energy policy. Our energy policy is we will do nothing. And that is unfortunately our only policy and I think it’s unfortunately is going to have to get much, much worse. I mean if people do not like oil today, or gasoline at $4 a gallon (right now, diesel is 4.69 here in southern California) what are they going to do when the price of energy gets to 6, 7 and $8 a gallon in the next two years? [34:14]

JOHN: Two year you’re talking about – 24 months?

JIM: Next two years.

JOHN: Well, but what I think we’re going to see now – we’ve talked about this before – we’re just going to start throwing out different groups of politicians putting another group in, hoping the new group of rascals will fix it.

JIM: And the unfortunate thing is all three candidates running for the presidency don’t have a solution for this and they don’t have a clue. And as we have mentioned – we have said this over and over again – it will be the single, biggest issue facing the next president of the United States. And not one of them has a clue as to what to do. [34:48]

JOHN: And remember, Matt Simmons said that by the time that we actually get down to the elections in the fall, this would be the topic of conversation. And remember, just 24 months ago nobody was talking about it.

JIM: Just imagine what it’s going to be like as we head into the fall, when prices are 140 or even maybe 145, 150.

JOHN: It should be interesting.

You’re listening to the Financial Sense Newshour at www.financialsense.com. Don’t go away, we have more to come.

Other Voices: David Saltman, CEO, Open Energy Corp.

JIM: Well, with oil prices hovering over $125 a barrel, blackouts and people talking about prices of energy heading even higher. What are some of the solutions? People are talking about green alternatives from wind to renewables to solar.

Joining me on the program this week in Other Voices is David Saltman, he’s president of Open Energy. And David, your company produces solar tiles – but before we get into your company product, just tell me a little bit about the background of the company, why you got into solar. What did you see when you started this company.

DAVID SALTMAN: Sure. Well, background – and I’ve been actually in what is now being called ‘clean tech’ as an industry segment for the past 18 or 19 years, so I’ve developed – this will be my third company in environmental materials and in energy. And I think in the case of Open Energy Corporation we really recognized that as you point out, while wind and biofuels and geothermal are all going to be very important sources of energy for us in the future, that really the only source of energy large enough to power all of mankind’s needs is a perfect nuclear reactor located about 93 million miles away that doesn’t generate any CO2 emissions and every hour of every day delivers to earth enough power to take care of all of our needs for a year. So it’s really not about the shortage of energy on our planet, it’s really about our creativity and our will to harness that energy that we think is the challenge. And that’s what we hope to do here at Open Energy, using the power of the sun. [37:28]

JIM: Now, you developed a product which has gotten a lot of recognition because when people think of solar cells, they think of these big, ugly looking things that you put on the side of a hill. You came at this from a different perspective: You came up with roof tiles that sort of blend in with the architecture of a home, for example, slate and terra cotta colors which makes your company unique. Why that angle? But how effective is that compared to these big panels that we see?

DAVID: Sure. Well, the fact of the matter is that when we looked at the solar electric industry it seemed as if these big companies were – none of them were really talking to their customers. And what I mean by that is that they were producing, as you point out, these big modules they’re called or these things that look like barn doors, and then they would ask a homeowner to bolt that barn door onto the exterior of their roof. In the case of if you were a business or a commercial development they would ask you to put up racks –which by the way, screw into the roof, in many cases invalidating the roofing warranty – and then mount those panels on these racks. And that to us really didn’t make a lot of sense so we went at it from a completely different angle. We developed, designed and built a series of different products – not only tile products but also roofing membranes and architectural glass products that actually blend seamlessly into the development of the building of that property, whether it’s residential property or a commercial or industrial property. And furthermore, that they were rated not just as a solar panel but that they were actually UL certified fire-rated, watertight, weatherproof products rated at building material. So in the case of the tiles you’re talking about, literally these can be installed by a roofing contractor as they build out a home development of a number of different homes. They can literally put down cement tiles – beautiful terra cotta tiles or slate-grey tiles – and then a section of the roof becomes our tiles so that it’s actually matched the colors and edge profiles of the adjacent cement or other types of tile; and then you finish off that roof, so when a customer looks up there, there is a wonderful, seamless watertight roof that just happens to generate a lot of power. And that’s the way we look at the next generation of solar – as really affordable, easily installed and by the way, beautiful. [40:02]

JIM: What has been the reaction. I know here in southern California where you have homeowner’s associations and then they have not been keen on the barndoor-style solar panels because of what it may do to the aesthetics of a neighborhood. How have the HOAs accepted your products – because when I saw it for the first time I barely even noticed it on a home. In fact, the builder had to point it out to me.

DAVID: That’s been one of our big problems. We were doing a press conference the other day with a new condo development we did with Williams Lyon Homes and the photographers weren’t sure how they were going to demonstrate how there was indeed solar up on that roof. I think you’re quite right that that is an advantage, not a disadvantage. The truth that right now in San Diego County where our offices are, if you install solar as part of the built environment on these new developments it goes right to the top of the zoning and permitting pile if you will. So you can actually have a developer or a homeowner can permit a home faster if you incorporate our building integrated photovoltaic systems right into that roof. I think that we want solar not only to be effective – in other words, you asked a question are these as powerful and do they generate as much electricity as competitive panels. They do in fact, generate the exact same amount of electricity as our competition. I think that it just becomes part of our built environment – and that’s really one of our goals here at Open Energy Corporation to make solar ubiquitous as part of our built environment. [41:38]

JIM: Now, you have solar roof tiles. I heard you mention something – glass, or some kind of glass product? Can you tell me about that.

DAVID: One of the big projects we just finished up is about a million and half dollar glass atrium that runs around the entire periphery of the new Academy of Science Museum in Golden Gate Park, and that building was designed by a Pritzker Award winning architect Renzo Piano, who is a very famous guy; he also designed the Osaka airport and a number of others. Huge projects. And in that case he really wanted to develop an environmental building – not only an inspired building that debuted science but also demonstrated science in its own behavior. So in that case the building has a living roof – an actual green roof that collects water and grows plants and provides habitat for animals; and then around the entire periphery of that roof are 700 4-foot by 6-foot glass panels that we created that have solar cells embedded right into them and it generates almost 700 KW of power, or the equivalent of about 15% of the total requirements of that museum. [42:53]

JIM: Are you close to coming out with anything like that, that could be used for let’s say residential use, let’s say a style up window, that could have solar collectors in it.

DAVID: I think closer would be since you really want to be facing the sun for residential and commercial use, you really want something sort of on the rooftop facing up or certainly facing slightly south is even more ideal. I think that these glass panels could eventually be in a home environment as things like curtain walls or think skylights. That could be interesting as a product. We have not launched that product for residential markets yet, but maybe we should; maybe you have an idea there and I’ll make sure to give you credit if we move forward on that. [43:37]

JIM: Especially if you have for example in southern California because of the cost of land you have a lot of two-storey homes, so that second storey is getting a lot of sunlight exposure.

I want to talk about the roof tiles. How practical are they and cost-effective in terms of a home? Like one of the builders here where I first discovered your product was including one or two kilowatts of power with each home, and then you had the option to increase that. But speak for a moment about the practicality and what would it take to let’s say, power your average home .

DAVID: Let’s discuss a typical home somewhere between 2000 to 3000 sq.ft. and may need two kilowatts – a couple of thousand watts – say two kilowatts of peak power. In a solar environment, because of the cost of solar you typically don’t want to build a system that represents anymore than about 50% to 60% of the power requirements of that home. It’s not cost effective. But if you do put in 50 to 60% of the power needs of that home, as you point out that’s between sort of a 1 kw and a 2kw system. If you’re in California, the typical payback on that property would be somewhere between 8 and 10 years; that would include all the costs of energy savings plus the California state rebate plus a couple thousand dollars off your taxes which are the federal investment tax credits.

Now, the good news there though is if you were to roll that cost into new construction and you financed that over 30 years, as part of a new build it pays for itself day one. So, solar really has become cost effective within a new home in California in a sunny area. There’s just no doubt about that. As we continue the price of solar down, we think you’re going to see solar become ubiquitous; and in fact, either mandated or financially makes sense to include in all new home construction. [45:50]

JIM: You know, one thing that you see here in California, you have tiered pricing with your utilities so let’s say there’s a housing development in your area, the utility company comes in and they say, “all right, average consumption for power is x amount of kilowatts per month,” and then they have tiered pricing so that if you have a bigger home or your usage goes above that average you actually pay almost like a surcharge or an extra amount of money. So it seems to me that your product can fit in there and help bring that cost down, whether you’re using more energy or you have a larger home.

DAVID: You couldn’t be more accurate. That’s exactly right. The real value of solar is to shave off that peak demand where they charge you a lot of money for it. So if your listeners look at their energy bill, they’ll see 11 cent power, but a lot of times that 11 cent power isn’t really the truth. What happens is when you pass that amount that’s allotted to you, the power becomes 28 or 30 cents per watt. That is where solar really has tremendous advantages. [47:01]

JIM: Now how does this work? Let’s say that you want to put roof tiles on and you put on enough to let’s say cover 60% of your energy need. How does that work with the utility company. Do they just shave it off your bill at the end of the month or how does this work?

DAVID: No. It’s quite amusing. What actually happens during those times where when you’re generating more power than your home is using –for example, in the middle of the day where the kids are at school and you’re off at work and you don’t have the air-conditioner running 24year – you’re actually running the meter backwards.

JIM: Wow!

DAVID: This is all grid integrated so the meter that determines your energy bill that normally runs forward as you draw power from it, literally runs backwards and so you stay beneath that high tariff that you were referring to. [47:57]

JIM: Is this factored in by the end of the month or how does this work?

DAVID: That’s right. It comes right off your energy bill as energy savings. So you’re paying less to the utility and that energy savings which is justifying that investment in solar.

JIM: Absolutely amazing. Well, David you and I were talking yesterday because your company or a roofing company that uses your product is looking at our office building and my own home where I plan to use your product. You and I were talking yesterday where you were at a – what was it? – at a convention or something dealing with alternative energy where the investment banks, the venture capital people are moving very strongly in this area, so it’s not just companies like yourself. But this seems to be the big movement now, especially with the impetus of higher energy prices as we’re seeing as we speak.

DAVID: That’s exactly right. The solar industry on its own is growing at almost 35% annual growth rate. So that’s a pretty explosive growth in and of itself. That industry is really vital and it’s worldwide; in fact, almost half of all the activity’s in Europe. But we think California is going to be the next boom market for solar and then it’ll spread throughout the US. I think that the larger picture and the picture that not only the venture capital and investment community is looking at but also industry – companies like GE and Sharp and Kiyasawa and BP – major, major companies have now made commitments to renewable energy and I think it’s because we all know in our heart of hearts that we’re going to have to move beyond oil over the next several decades. We simply cannot afford the potential risks of global warming nor can we afford the prices that shortage of oil is going to cause.

And more fundamentally, we’re going to need that oil for things like plastics and lubricants and medicines – lots of other uses. My children’s children will look back on our generation and wonder how the heck we ever burned something as valuable as oil on a one time use. It makes no sense. So we will move beyond a carbon environment. We will move towards electrification of our utilities as well as our transportation; it’s going to have to be electrical. We will make our buildings much, much higher standard with regards to energy efficiency – that’s going to be dramatic, dramatics movements in conservation of energy. We will look at different ways of purifying water where we’re simply not burning coal to make steam and wasting our water but we’re looking at water purification; and there’s a deep relationship between water and power in this country and around the world. So I think it’s in the context of that larger movement if you will, that we will see renewable energy become as large and maybe a larger revolution than was our information technology revolution that happened 15 or 20 years ago where we moved from centralized computing to decentralized computing. We moved towards smart networks – that’s exactly what our energy networks are going to look like in the future. [51:14]

JIM: you bring up an interesting point because we’ve seen that with computing, typically today you have centralized power – nuclear plant or a large plant that generates most electricity for the city – but with the advent of solar power and let’s say that with building codes and projects adding solar power – I know in the area that I’m living you see it more and more that the builders are offering this as a package in their homes –what you move to then is decentralized power. And I think that’s going to become important if we go to things like plug-in hybrids where you drive 50, 60 miles round trip to work and back and then all of a sudden you pull the car into the garage at night and plug it in to the wall generating power on a decentralized basis is going to help make that more successful.

DAVID: I couldn’t agree with you more. I really do think that the future that you’re describing is upon us. I think it’s going to happen much quicker than people believe. Israel, the state of Israel is already committed to an entirely electric system where you pull in to recharge your car, you simply replace the battery. Short haul in the United States means urban and suburban transportation – it makes much more sense. And why wouldn’t you have a carport that has solar panels on it and you recharge that car. So that I think is really the kind of thinking –that distributed generationsmart network thinking that we created the computer industry out of – I think that’s exactly where the energy industry is going. Of course, the big utilities need to participate, the big oil companies have the cash to do it and I expect them to make more and more financial commitment to the development of what you and I are discussing. And quite frankly, I think that it’s going to be entrepreneurs like Open Energy and other small companies that create the will and the public fascination and finally the public demands for this change in policy.

And once we have I think that political leadership at the top that wants to join the rest of the world in really finding solutions to moving beyond oil, then we’ll do so as a country very rapidly. [53:18]

JIM: Well, David as we close, if our listeners would like to find out more about the product that you make, why don’t you give out your website if you would.

DAVID: It’s just our company name – people can go to www.openenergycorp.com and find out all about us. We’re a publicly traded company, we’re a small company but growing rapidly and we very much look forward to their interest in what we’re doing and any suggestions that they may have as you have put out, so that we can continue to evolve our products to satisfy happy customers.

JIM: All right. Well, listen David, thanks for joining us this week on Other Voices and all the best to you, sir, we need more and more entrepreneurs like you to help through the marketplace solving our energy needs. All the best, sir.

DAVID: Thank you so much. It’s a pleasure speaking with you.

Five Cardinal Sins - Leading to Bear Markets, Recessions and Depressions

JOHN: The difference between psychotics and neurotics is neurotics create sky castles, psychotics live in them. That’s the first thing, okay. And the definition of a neurotic is a person who does the same thing over and over again and expects a different result each time. And what’s sort of interesting about politics – I don’t know why it runs like this – but every so many generations the very same – what are we going to call it? – the very same proposals come up to solve the same problems, the proposals that failed the time before. So things we’re proposing right here in the US, some of the countries in the former eastern bloc of the Soviet Union are running away from because they know this didn’t work, it ruined us over 70 years. And here we are proposing it here. So you have to scratch your head. How did these failed proposals even if we go through the Jimmy Carter cycle and we’re now back here again – same situation, much worse however, but we’re proposing the same things.

JIM: It’s amazing there’s – I’m trying to think who coined the term but there are five cardinal sins for policy mistakes that lead to either bear markets, recessions or even worse a depression. And maybe the psychologists can figure this out but as you just mentioned it’s seems like every new generation that comes to power has to make the same mistakes that the previous generation did. Nobody has gone back and studied the Great Depression; or if they have they haven’t drawn the appropriate conclusions because what we had was a correction in the stock market that turned into the biggest bear market in the country’s history; and what was a softening in the economy turned into the greatest depression in this country’s history.

And you just had fiddling after fiddling, after meddling, and the more they meddled the worse things got in the economy and in the markets until I think it was 1932 where the Dow had lost over 90% of its value and by the time we got to the end of the 30s, I think it was like one out of four Americans – 25% of the country – was out of work. As we talked in the previous segment about how they are stopping the supply of new energy coming on board, yet we’re upset with the price of energy.

And when it comes to the markets, when it comes to the economy there are five cardinal sins: one of them is protectionism; 2) tax increases; 3) monetary policy mistakes; 4) regulatory overkill; 5) and the worst is war. And we had every single one of those during the Great Depression. We got into protectionism with Smoot-Hawley. We got into tax increases – Hoover first doubled the tax rates to 60% and then Roosevelt took them to 90%. We had all kinds of monetary policy mistakes both preceding the Depression and after the Depression. We got a plethora of new regulations to the point of regulatory overkill. And then finally we got war. We got all five of those and if we're not careful we’re likely to get all five of these again. [57:44]

JOHN: And that’s especially true if we run into shortages that we’ve been talking about in the previous segments. That’s an even greater incentive to go to war. You know, if we look back at the Smoot-Hawley tariff, we know that it killed trade and right now we have the sentiment that’s protectionist once again where we’re talking about reneging on a lot of our trade agreements etc., etc. We seem to be walking down that very same path.

JIM: And you know what makes this real dangerous is if you look at for example, the trade deficit figures that have improved over the last year and a half and one reason is our exports are booming. And the United States is becoming more competitive in terms of manufacturing. Yes our manufacturing base is smaller today but we can produce a lot more goods with a smaller manufacturing base – so you’re talking about productivity; you’ve got Honda building factories here, you’ve got Toyota building factories here, you’ve got BMW and Mercedes that are building car plants here. And guess what? They’re making money. The only difference is they’re not unionized shops which is very upsetting to the unions. Even for example, Honda, which is working on a new fuel efficient jet – it’s a light jet which will carry five passengers and two pilots – they’re going to locate the factory to build that jet in North Carolina. So you’re talking about the one segment – at a time consumer spending is weakening because of taxes and inflation.

The one thing that is holding up well – the one bright spot in the US economy is our exports coming from US manufacturers. The last thing you want to do is start a trade war, or renege on trade agreements or not have trade agreements because the way trade wars work and they call trade wars is because we do something, somebody else responds in kind, then they do something. “Okay, you’re going to raise tariffs, you know what, we’re going to raise tariffs on American-made goods.” And so that’s what happened in the 30s and eventually it led to war. So the first cardinal sin is protectionism. And you take a look at today, one of the ways Americans are able to stretch their pocket book is they can go to stores like Costco and Walmart and they can buy goods that come from various parts of the world that are manufactured at a cheaper price. And there are a lot of people that don’t like that; they want prices to go up at the Walmarts and the Costcos, so protectionism has proven throughout history and we saw a good example of that in the 30s. It caused trade frictions between nations; and as the philosopher Frederic Bastiat once said when goods don’t cross borders, armies do. And that’s exactly what led up to World War II. So the first cardinal sin is protectionism and that’s the sentiment and that is the direction that Congress is leaning. This is very, very dangerous especially at a time when American manufacturers – the one bright spot are exports. [1:00:48]

JOHN: The sin number two in the series is tax increases in a time of a very shaky economy – either in the area of capital gains which heavily discourage investments because people who have money to invest simply pull out their investments and wait till a better time or they roll them into some area where they’re not going to be penalized. And then income taxes as well, both capital gains and income taxes penalize businesses and individuals, cause jobs to go down and revenues to the Treasury go down as well.

JIM: Every single study that has documented tax increases – government revenues go up with tax decreases because it stimulates the economy, it stimulates investment and it’s absolutely amazing, it’s proven – whether it was the windfall profits tax – one of the reasons they abandoned the windfall profits tax in 1988 is because it failed to bring in the revenues because oil production went down. And what higher taxes do is discourage economic activity and investing. More importantly, the thing that is very difficult – and even if you have taken economics and you know, most people have gone to government schools and have studied Keynesian economics and one of the of the things about Keynesian economics is when the economy is weak you actually cut taxes and that stimulates and helps the economy to recover. It puts money in people’s pocket books, it puts money in businesses and it turns the economy around. And this goofy thing that we’re doing right now like tax rebates – you know, to get elected we’re going to give you a tax rebate but then next year we’re going to raise your taxes. And in 2001, the Bush administration did the same thing. They tried the tax rebate – that didn’t work; what worked is they had to come back again and lower tax rates. It took lower tax rates and lower interest rates to restimulate the economy. But the last thing you do when the economy is struggling, when it’s in a recession is raise taxes on businesses. If you think the unemployment rate is high now, you raise taxes as some are proposing to over 60% and you do that to entrepreneurs or small businesses that make up the bulk of employment, that’s how you turn a recession into a depression because this economy is not strong enough now with this credit crisis that we’re going through to withstand higher tax rates. [1:03:20]

JOHN: Let us look at the argument because this comes up any time you’re sitting at a coffee house and talking to somebody about the whole bit about let’s soak the rich – if we increase taxes on the rich everything would be better. And then the question I move to is okay, how will taxing the rich help us, and they say, “well, it will reduce our tax load.” And then I respond, “you don’t understand, when Congress collects more money it doesn’t reduce your loads, it spends it.” Okay, that’s the first one. That is a well demonstrated fact.

Now, who pays what in income tax. Well, according to IRS figures – we’re basing it off 2005 here – I don’t have anything later than that – the top one percent of wage earners – meaning people making more than about $365,000 a year paid 39.38% of federal taxes – it’s almost 40%; the top 5 percent pay 60 percent and that’s people making more than about 150,000; the top 10 percent – anybody making more than 100,000 – and I should point out here by the way, Jim, inflation is putting horrible upward pressure on these figures – at one time that may have been a great salary, it’s going to become a mediocre salary very fast here. The top 10% are already paying 70% of the taxes and when you get all of the way to the top 50% - anybody making more than 30,000 – pays 96%. And there’s a whole chunk of the country that – you know, what? About 40% that pays no tax whatsoever – or actually collects money back in terms of transfer due to credits, like earned-income credits. [1:04:53]

JIM: Here’s the way the argument goes. “Well, the tax cuts mainly go to the rich.” Well, if you look at Bush’s tax cuts, the top income tax rate of 39.6 got reduced to 35 percent, so the top tax rate was reduced by 10 percent. On the other hand, the bottom tax rate – many people got taken off the tax roles completely. In other words, they raised the brackets enough where you didn’t have to pay income taxes; and then the lower tax brackets – we used to have the lowest bracket was 15 percent and then we got a 10 percent tax bracket; and those tax brackets were reduced by 25 and 30 percent. [1:05:33]

JOHN: The argument is that the rich guy got more of tax cut. I mean dollar-wise they did get more.

JIM: Well, absolutely because they pay the bulk of the nation’s taxes. Let’s just make this simple but it gets to the point. Let’s say that you’re in the top tax bracket, which used to be 39.6. Your tax bracket is reduced by 10% to 35 – so let’s say you pay a million dollars in taxes each year, so your taxes are reduced by 10%, you save $100,000 in taxes. And then let’s take somebody to make this illustration easy to understand, somebody that pays $10,000 in taxes, they get their taxes reduced by 25%; so they save 2500. And here’s the way they distort this argument: They’re saying that, “well, gosh, this guy saved $2,500, but Mr. Lotsabucks got a $100,000 tax cut.” Well you know what, what they don’t tell you is Mr. Lotsabucks pays 40% of the country’s taxes. So obviously if you give him a break and cut his taxes, the dollar – and this is how they play distortion with the statistics all the time and demagogue this – but the last thing that you want to do is who are these people who make a million dollars a year? Well, outside of the entertainment industry or sports, they’re entrepreneurs, they’re family-run businesses and that’s where the bulk of the jobs are.

Now, what they’re talking about is if Bush’s tax cuts are repealed they would go back up to 39.6; then, they’re talking about, depending on which candidate, lifting the cap off of Social Security – meaning that you would pay 15.3% on all your earned income. So add the 15.3 to the 40% bracket and then they’re talking about a 5% surtax. So that gets you up to 60%. And here in California they’re talking about raising income tax rates to 14%; we already raised them two years ago to 10.3% and here in California, it’s almost like everybody is in the old tax rate – the top tax rate used to be 9.3 – and it’s almost like everybody in California is in the 9.3% bracket because they assess that tax at a lower level. And that’s what happened in the Clinton tax rates if you take a look at $26,000 of income you run into the 28% tax bracket where under Bush today you would have to go over – I forget what the figure is offhand – over 80,000. So you’re talking about a massive tax increase coming at a time when the economy is struggling, when people are having a hard time making ends meet. And that’s what gave us the Great Depression. [1:08:18]

JOHN: Okay, let me play devil’s advocate here. So if that’s the case – if the rich people got more money dollar amount even though the people who were in the lower brackets got more from a percentage amount in terms of what they had paid in tax, what was the purpose of the Bush tax cuts? What effect did they have in the economy?

JIM: Well, number one, people in the lower brackets had more money to spend; people in the upper brackets had more money to invest – and that’s what you want to do, that’s what creates a job. When an entrepreneur says, “you know what, I’m gonna take this money, I’m going to invest it in the market. I’m going to expand my business. I’m going to hire more people; I’m going to buy new equipment” – and see that’s the thing that is not understood in this economy and especially with the way we practice economics.

And I want to take two examples. Take an example where the government spends money. It does it through transfer payments. That doesn’t do anything. It gives you consumption but it doesn’t create wealth. Contrast that with let’s say an entrepreneur who says, “you know what, with these tax savings I’m going to order new equipment in my factory. I’m going to update the factory, I’m going to make it more productive or in this case because of business I’m going to build a new factory. Well, there are all kinds of implications that that has for the economy. Number one, the people that built the equipment for the manufacturing firm that the entrepreneur ordered from the factory, there are jobs that are created as a result of that.

Secondly, in the entrepreneur’s business, the fact that he’s bringing new equipment allows him to expand his business – or in the case of building a new factory there are new factory workers he’s going to hire. So not only are you creating more jobs, but secondly by building a new factory, by expanding your output with equipment, you’re also increasing the supply. And that is something that nobody in Congress understands when it comes to energy or running this economy. When you build factories, when you add more equipment, when you modernize that equipment it allows you to expand the supply of goods in the economy, which helps to bring the price down. And so those are the things that you get when you create incentives to work. And I think you and I were talking about this the other day as we were discussing some of the topics for this week’s show, and you were telling the story how Ronald Reagan learned about taxes. And why don’t you tell that because I think it’s very appropriate here. [1:10:58]

JOHN: Well, I got that from Michael Rigg [phon.] – remember, the talk show host – and he was talking one day about how he had had a conversation with his father about taxation. And the senior Reagan said, “why does anybody think it’s really fair or just, that government should take 90% of what a person earns?” And what we found happen during the times of high taxation which the Roosevelt administration pushed through and later on through World War II is that a lot of the movie starts – aside the stuff they started to do pro bono to help the war effort – they would make like what? One movie a year because anything over that it wasn’t worth it because the government was going to take 90% of what you made. So why bother? You see, it’s a negative incentive.

JIM: And actually during the war the tax rate got to 94%, so you know, at 94% why even work. So the proposals that are on the table right now, not counting state taxes are talking about lifting the tax rates up to 60%. And there is something immoral when a man works that the government takes the bulk of the revenues a person earns. That’s worse than serfdom. And if the government gets 60% and you get 40%, there’s something wrong with that figure. Individuals should get the bulk of what he earns, not the government because the government did nothing to earn that. And it’s been proven that the more that the government takes in the economy, the slower the growth in the economy, the greater the inflation rates and the lower the economic growth rates.

So we’re going to move on to another policy mistake here, but once again, raising taxes when the economy is in a recession and is struggling, this is the wrong prescription at the wrong time. [1:12:50]

JOHN: Okay, the third cardinal sin is monetary policy mistakes – and that would cover quite a bit I would think; there isn’t any one particular thing in that category.

JIM: You can look at it either of two ways: either too tight of a monetary policy or too loose of a monetary policy. And unfortunately, under the Greenspan Fed and then once again under the Bernanke Fed, the problem has been too loose of a monetary policy. I mean the money supply growth rates in the 90s gave us the tech bubble. When that burst, the increase in the money supply and the lowering of interest rates gave us the real estate bubble. And so you cannot print money, you cannot hold a loose monetary policy, you cannot bail out speculators, you cannot bail out people that made poor decisions and not have some adverse consequence.

And as the inflation rates as they expand with all this monetary stimulus that they’re talking about, all this fiscal stimulus that they’re talking about, lo and behold, everywhere you look the cost of services is going up, the cost of food is going up. And as we argued in the first hour as the historian David Hackett Fischer has talked about ‘the great wave’ – these inflations are a combination of government policy and monetary policy that leads to these inflations and it begins in the commodity areas. The essentials of food and energy have led all the great inflations in the 12th Century, the 14th, the 16th, the 18th, the 20th and now in this new century. And so loose monetary policy of printing more money –and it’s not just the United States all governments are doing this today which is why we’re seeing inflation rise globally. Inflation rates in China are over 8%, they’re almost 4% in Europe. You’re seeing higher inflation rates in Latin America. So this is a global phenomenon not just a US phenomenon. But too loose or too tight monetary policies is another way you can kill an economy. [1:14:58]

JOHN: You know, strangely enough the level where we talk about bad monetary policy, especially bailing out people who have made very bad decisions, even the people on the street seem to instinctively understand that one – like Joe Sixpack who says, “you know what, I work hard. I pay my mortgage. I made a deal. I keep it. Wait a minute, why do these guys get bailed out at my expense?” They seem to understand that.

JIM: It was amazing too because I read the – I think it was the Wall Street Journal and the Washington Post – I’m trying to think it was a combination poll and 74% of Americans are against bailouts – bailing out homeowners and the lender. And here’s a surprising one: 76% in a recent poll are against a depreciating dollar because they know instinctively they’re going into Walmart or wherever they’re shopping, they’re seeing the price of goods go up, or they’re traveling overseas and they’re seeing it is getting cost prohibitive. And so it’s amazing that despite these feelings Congress is running full bore to commit all of these sins, John, and we know what the consequences are. You can study them in the history book. What is it, Ecclesiastes? – there is nothing new under the sun. I mean we have made these mistakes over and over again and it’s like every generation comes through is “okay, I know these mistakes were made by our predecessors but we’re smarter than them and we can do it and we won’t have to have the same consequences.” And so we repeat these mistakes. And I think a lot of that goes back to the education system that we’re not educating people properly – that wage and price controls fail, that monetary stimulus – printing a whole bunch of money – creates inflation, bailing out speculators creates a moral hazard so you get more of the same kind of activity. Why be prudent in your investments if you think, “hey, I can make a big bet, leverage myself 30 to 1, or 50 to 1 and I’ll get bailed out.” This is once again, we keep making these same mistakes. We never seem to learn our lesson here. And one of the things that you see come out of this is massive regulation. There was a recent article, an opinion in the Wall Street Journal by a gentleman who said, “look, we don’t like the cards that we’re dealt with, we’ve got two choices: either nationalize the lending business, or inflate your way out of this.” And the thing that we’re seeing now is that I think we’ve run out of answers and I think the only choice the politicians feel that they have left is to inflate their way out of this. [1:17:45]

JOHN: Well, let’s move on. You just mentioned something that ties in to the next cardinal sin and that is something, speaking of not learning a lesson, that Hoover started – it was really the Hoover administration back in 1929, 30 that you know, everybody feels pain, the politicians want to posture themselves as solving that pain – just like they were doing this week in the Congress – and so the Hoover administration jumped in there and they began pulling levers left and right. I mean they micro-managed that economy and what over-regulation does is it basically just chokes the ability of business to even deal with the situation and they tend to give up at that point.

JIM: You know, one example of this, John, is we’re talking of government health care and I have a few physicians as clients and one of my clients they have three people on their staff who are doing paperwork to deal with the government, and they’ve got two nurses that are dealing with the patient. So here you have a medical practice of four doctors that have two nurses to deal with patients and three people that are dealing with Medicare and they are trying to get the government to pay for certain things. One of my doctors was telling me about a patient who had muscular dystrophy and if they could get this one drug it’d help the client. But the problem is the administration of the drug included a hospital stay, a couple of days in the hospital and $700 and Medicare wouldn’t pay for it. And so my client ended up paying for it out of his own pocket just to help this person in pain. But here is a situation, more of the healthcare system is involved in covering lawsuits today. The malpractice insurance that doctors have to have today is astronomical because everybody is being sued. Then you take into that all of the red tape and the regulations, it’s just mind blowing. I have a friend of mine’s wife’s sister – they’re Canadians – she has colon cancer and she’s on a waiting list in Canada to get operated on. So just imagine – I have another individual I know – a very prominent person – in Vancouver who has a young son who has cancer who had to take his son to Boston to a special college, a hospital there to get treatments because they couldn’t get that there. [1:20:11]

JOHN: And they’re having similar problems in Great Britain. Not necessarily the same, but it always goes that way because it assumes government can do better than what the private sector can do.

Which doesn’t say that we don’t have problems right?

JIM: No, we’ve got problems here, but too much of government involvement goes to bureaucracy. There’s no productivity, there’s no incentive to increase productivity and there’s so much red tape and the last thing people want is the government making their healthcare decisions. I don’t want to have some bureaucrat back in Washington and say, “no, we’re not going to cover this,” because basically what we’ll end up doing is we’ll end up rationing healthcare and everybody will suffer as a result of that. [1:20:52]

JOHN: There is the final – you know, I’m not sure if it’s a sin so much as a consequence – we’re talking about sins of economics here – and that is war. And war always seems to be the downside when you go into a hyperinflationary period. It was for Nazi Germany, right? It caused the Falklands war – remember the hyperinflation in Argentina at that time. And there are related factors because when goods and services don’t cross borders, armies do. And a lot of times, government tried to distract from the problems that they have created by starting a war somewhere else, saying, “hey, look at that guy over there, we better do something.” And everybody looks over there instead of where they really need to be looking at a given point.

JIM: We’re going to have Dr. Michael Klare on the program here and his new book – he wrote a book called Blood, Oil and War and then he also wrote a book called Resource Wars. And if you take a look at – as Klare did – most of the conflicts around the globe today are evolving around some kind of resource, whether it’s diamonds, energy, water – and that’s the kind of period, we’ve got governments around the world whether it’s China, Russia, people from India are scurrying around the planet trying to gain access to natural resources and especially energy. Now we’ve got the food situation and another crisis looming that we covered in the previous segment – we have a looming crisis in water. In fact, much of the Middle East conflict is centered around water. And that’s usually what happens when policies fails, when protectionism rises, when tax increases, bad monetary policy or regulations kill the economy in many cases politicians seek an outlet and that outlet is in war. And just look at what Chavez is doing in Venezuela. I forget what the latest inflation figures in Venezuela are now running at 27% so there is growing discontent and so Chavez is getting involved in Colombia arming the guerrillas in that area. And this is what politicians do is distract from the public and often times when these frustrations grow nations go to war. And that’s what Klare is talking about – we covered this a couple of weeks ago with this article in the Asia Times but his new book goes into depth on this – is the very likelihood of a great power war coming in the next decade as resources from water to food to energy become scarce. [1:23:23]

JOHN: And you’re listening to the Financial Sense Newshour at www.financialsense.com. Coming up next we are going to take the Q-Line calls that you have been massing for us during most of the week. We’ll be back.

Part 3

Q-Calls

JOHN: It’s time to queue up for the Q-Lines. The Q-Lines are open 24 hours a day to record your questions for the program. Usually the cut off time is some time Thursday. So if you call in on Thursday you may or may not make it on that week’s program. I should tell you that ahead of time. If you call in, please leave your – just first name is fine – where you’re calling from. And what else do I have to tell you? Ah yes, the phone number – why, this would be a good start, Jim – it’s (800)794-6480. That’s toll free in the US and Canada.

As we answer your questions here, please remember that the content on Financial Sense Newshour is for informational and educational purposes only. It should not be considered as a solicitation or offer to purchase or sell securities, investments etc. and responses to your inquiries are based on the personal opinions of Jim Puplava. We are unable to take into account your suitability, your objectives or your risk tolerance. We just don’t know enough about you. These are generic answers to whatever information you provide. And as such Financial Sense Newshour is not liable to anyone for financial losses that result from investing in items profiled here on the Financial Sense Newshour.

And please remember to keep these short and under a minute. We just can’t take long ones anymore. We’re going to get more and more ruthless in this area.

Here we go:

Hi, my name is Wayne from North Carolina. Just a new listener to your show and I’m trying to start allocating some of my assets into precious metals and I’m not sure what the best way in doing that. I see obviously bullion is one method and another method is coins. I’m a little confused over the benefits. I see places like Goldmoney.com and BullionVault.com that have bullion stored in vaults in different parts of the world, versus going into a coin dealer and buying coins that way. Just if you could give me a little bit of the pros and cons of your method.

JIM: You know, Wayne, if you’re just starting out collecting I prefer coins; you can walk into your local coin dealer, buy a couple of gold Eagles or maybe silver Eagles. I like the coins; bullion – when you start getting into bullion you get into bars – that’s usually if you’re buying a lot of money or putting a lot of money into bullion, then you’re probably better off going with the bars because you’d pay less of a premium when you’re buying in bulk like that. But I prefer the coins and especially if you’re just starting out. [2:41]

Jim, Steven from Phoenix. I have a couple of questions on uranium. In your opinion when does the consolidation end? And secondly, technically speaking, what does it mean when you have this big of a correction in an ongoing bull market in this commodity.

JIM: Steve, the uranium sector has been consolidating and I’d highly recommend you listen to the Big Picture because we did cover uranium. Uranium as a commodity peaked last May and along with it the uranium stocks and since there are very few uranium producing companies, a lot of the new discovery’s are being made by uranium juniors. I mean they were just going through the roof for a couple of years, and then of course they corrected because these companies don’t produce, they don’t have any revenue and they’re thinly traded and that’s exactly what happened to this sector. But if you’re in this sector right now and you own the stocks, just sit on them. And because in the long term view, as I mentioned, if you listened to the last hour, not only are we operating at a uranium deficit but in to the next decade we have just a plethora of new nuclear power plants coming online; also in 2013, the megatons-to-megawatts-power by the Russians ends. And I think you’re going to see a rising trend – you know, maybe it starts by the end of this fall by the time we’re going to be at 140 or 145 oil; and certainly when we start getting to 200 oil, watch what happens to the uranium sector. It’s going to light up like a Christmas tree. [4:15]

Hey, Jim and John. Will calling from Winston, Salem, North Carolina. Jim, welcome back. I hope you had a great time sailing, I went into withdrawal. Considering that Fannie Mae has had to offer $2 billion worth of convertibles at 9 ¼% and yet they’re buying mortgages which yield less than 9 ¼%, how is this supposed to make investors feel better? What are the long term implications of them raising capital at such expensive rates and turning around and trying to refuel the mortgage market at lower rates? Your comments would be appreciated and thankfully I’ve taken some physical silver in delivery. Thanks for your great advice.

JIM: You know, Will, I think they’re trying to do it – a lot of these companies, whether it’s Citigroup, Merrill Lynch, or others that have gone into the market and have to raise massive amounts of capital, the reason they’re doing it in the preferred market is so that they don’t dilute the existing shareholders because the amount of capital they would have to raise would be highly dilutive to existing shareholders which would weaken their stock even further. [5:14]

Hell, Jim and John. This is Michael from Portland. I’m wondering with all of the agitation regarding Iran in our US media our chances of going to war with Iran seem to be increasing. And if we did and if there were a disruption in oil supplies and the oil price were to go to $200 a barrel, I’m curious as to what you see would be the impact, not only for the US but for the world economy. It seems that the world economy would in fact go into a recession. And I’m curious also as to what would be your consideration in terms of the impact on the price of precious metals. Thank you for your show. I feel over the years I’ve gotten a master’s education in economics and finance.

JIM: You know, Michael, there’s a lot of noise on that. Trying to go to war right now with an unpopular president and our troops overstretched, I don’t know if that’s really a possibility at this point unless they get wind of something. $200 oil would be devastating. And more importantly there would be I’m sure a disruption of oil flows, so we could be at $200 and not just at $200 oil but also there would be a shortage; we would have to go to rationing because the supply of oil – I mean that’s where we get 40% of our oil comes from these OPEC countries and so there could be a supply disruption. And Saudi Arabia or OPEC itself – unlike the, oh I would say, 10, 20 years ago when the surplus capacity of OPEC was 10 million barrels a day – the world’s surplus capacity today is down to two and some even question if whether that’s a valid figure. So it would be devastating to the world’s economies. [6:52]

Hello, and welcome back. This is Phil, I’m from Arizona. I have a question in regards to your theory on hyperinflation. I was just wondering if a person has a lot of debt – home mortgage, car loans and credit cards – doesn’t it make more sense instead of trying pay this stuff off now is to wait for the inflationary time to come and to pay it all off with inflated dollars? Is that possible? It doesn’t seem that the banks and lending institutions would be able to survive. Am I missing something somewhere in regards to what happens when we go to inflationary times.

JIM: Phil, obviously if we inflate then the dollars that you owe become worth less because you can pay them back with cheaper dollars. But one of the things that you don’t want to get yourself in is a situation where you have so much – you don’t want to have your debt become unmanageable because if you do, you don’t want to run the risk of let’s say you lose your job or they reduce your overtime or something like that and you can’t make your payments – and then you lose some of the things that you’ve bought such as a home, with debt. So you don’t want to get yourself into an overburdened situation which is what happened to a lot of homeowners who took out and bought homes with no money down and with these unrealistically low interest rates; when rates went up they couldn’t afford to pay it even though inflation was going up, their income was going up to the level that would allow them to support higher mortgage payments. So, yes, if inflation goes up, you pay back your debts with cheaper levels of currency but just remember, keep your debt manageable. [8:26]

Hi Jim and John, this is Tom calling from Toronto. Thank you for a great show. In an article in the Globe and Mail of May 3rd you can find an email exchange between Seymour Schulich, who started Franco Nevada and Warren Buffett. Seymour Schulich is calling Buffett to a 10 million dollar bet saying his investment strategy in mining companies will yield better results between now and 2010 than Buffett’s stable strategy of investing in companies such as Kraft and Coca Cola. It’s very interesting to hear the Oracle’s response in view of his investment in PetroChina and hearing how he believes it’s going to be very hard to duplicate those results in the future and why he doesn’t believe in the commodity boom. I’d like to hear your take on it.

JIM: I think, Tom, Buffett’s response to commodities is if you look at his thesis of companies with the moat traditionally in past cycles, companies that produced commodities didn’t have a moat and in previous cycles, let’s say, for the last one, as the price went up more people came into the sector and capacity expanded and eventually the price came down. We were filled with a glut of commodities. That glut led to almost a two decade long bear market in the sector, but I think this time it’s a supply led problem and a lot of these mining companies are not going to make the same mistake. You’ve got a lot of CEOs that went through the tough times and now that they’re generating a lot of money they’re not going to say, “let’s go and double our capacity.” They’re being more circumspect with their money which is one of the reasons – and the background is more favorable. So I think Buffett’s reluctance to get into this area goes back to his concept of an economic moat where he prefers companies that have pricing power and a moat around them, where a lot of the commodity companies – I would argue today because of consolidation in the industry the large commodity producers like the BHPs almost have an economic moat because the industry has consolidated and the commodity sector is in fewer hands today. [10:28]

Good morning, gentlemen, it’s John, your loyal listener from Austin, Texas. Jim, I wanted to give you an idea for what you might consider an interesting book author interview. A couple of days ago I went to a presentation in our local bookstore here in Austin, Book People, and the author Robert Bryce – and he was speaking on his book, his third on the energy business which is called Gusher of Lies: The Dangerous Delusions of Energy Independence and the thesis of the book is - of course, listeners on your show know we can’t possibly be energy independent but I think the general public doesn’t know that and the political candidates for president are hyping the myth that we can be energy independent, so this book pretty much shoots holes in that myth and I encourage you to take a look at it and maybe talk with Mr. Bryce.

JIM: You know, John, I’ve read Bryce’s book and great idea. We’ll see if we can get him on the program. [11:32]

Hi Jim and John, thanks for the show, it’s wonderful. Alan from Florida. I have a question about oil: How do you buy oil? I’ve listened to Zapata George and you guys, can you give a website or a phone number. Do you mean buy Exxon, do you mean Halliburton, futures, what do you mean when you say “buy oil.” How do you do that if you’re ready to go on that. And a corollary to these questions: On Glenn Beck’s show there was a fella from Montana who said there’s a 200 year supply of oil from clean-coal at $55 a barrel versus the 120, $126 a barrel for regular oil. My question is could the price of oil crash if a law was passed and they started building plants in Montana or elsewhere could the – I’m guessing 30% speculative fluff in the price – pop or go down if such a thing began (the building of plants to get liquid fuel out of clean-coal.)

JIM: You know, Alan, how do you buy oil. Well, you can buy oil as a commodity, which means that you can go in the futures market. You can buy oil as a commodity in an ETF or you can oil companies or you can buy oil service companies. We think that the drillers and the service companies are the place to be in this kind of market, especially when you know, you’re paying almost 600 to $700,000 a day for a deepwater rig in the ocean. So that’s one way: You can buy the companies or you can buy the ETFs or you can buy the commodity itself.

In terms of if we were to build a new plant in Montana? Anytime – whether it’s the announcement of a potential oil discovery like the Jack discovery in 2006 in the Gulf of Mexico or the recent discoveries off the coast of Brazil, you know, sometimes depending on the oil market you might have oil pull back; but remember, even if you were to build a new plant today or even discover a new oil field – and especially in the deep ocean – there might be 5, 7 years before it comes on stream. So if there was any pullback it would only be temporary. [13:51]

Good Afternoon, Financial Sense Newshour and thank you for all of your marvelous broadcasts which help so many of you around the world. I just want to ask you what is your opinion about this: It seems to me that this country is heading for a cashless society – we are cashless, people are using credit cards at the gas pump and the grocery store, I mean even for $10, so it looks like we’re going toward a cashless society but only in this country. So my question is: do you think that’s happening; well, I guess question number two, what are the consequences of this?

JIM: We are heading to a cashless society. You’ve got credit cards, debit cards. Most people use that and eventually they will go to some kind of card system because it’ll give the government greater control over taxes and the underground economy and also it would prevent bank runs. If you no longer use cash, there can’t be a run on the bank. [14:57]

JOHN: It would also act as a damper on an underground economy where people are trading in cash.

JIM: Yeah, that would be one of the main reasons they would want to do it.

Hi, this is Lesley from New York city. I have a suggestion for a guest. David Blum has a new book out called Alcohol Can Be a Gas: Fueling an Ethanol Revolution for the 21st Century. He’s actually a permaculturalist , and I’ve just finished listening to an interview by this gentleman and I’ll tell you he’s the most hopeful I’ve heard in a time of such fear and shortages and everything. His website is www.permaculture.com. I hope you can get him as a guest.

JIM: Thanks, Lesley, we’ll take that into consideration because you know what, this problem can be solved. I’m an optimist from that point of view – if we put our minds to it. I guess what is making me pessimistic now if just watching these debates on energy. They’re running around like they can’t seem to make a logical, natural decision here. Alternatives – we’re going to have to go to that because we’re running out of fossil fuels. But until we can bring this new technology on board we’re going to have to have these alternatives and we’re big believers in that but we’re going to have something to get us to through that transition. We’ll look into this. [16:16]

Jim and John, this is Kevin calling from beautiful central California. You guys stay ahead of the trends and you have been. I was watching Bubblevision CNBC with Larry Kudlow and he was saying ridiculous things like commodities are going up so much because the Fed has pumped too much money into the system. Anyhow, their comments were on the Dow/Gold ratio and I wish you’d comment that previous to 2000 it was around 20 barrels for an ounce of gold and then it went to about 10 I believe was the ratio after 2000, and now has sunk to about 7. I wonder if there is a new paradigm or this is just the obvious that gold is cheap relative to oil right now. I’d like your comments on the Dow/Gold ratio.

JIM: Kevin, I think you’re talking about two different ratios here. You’re talking about the gold to oil ratio and then the gold to Dow ratio and it was that gold to Dow ratio, if you had looked – I’m forgetting what the figure was – we had 11,000-something in the Dow in March of 2000 and I think gold prices were somewhere around 255, which really signaled if we would have taken 11,600 and it would have taken at 255 gold, it was 45; today it’s somewhere around 14. So it still tells you that this ratio is still going to contract as the price of bullion goes up in relation to the Dow. [17:48]

Good morning, this Paul calling from upstate New York. Great show you have by the way. I enjoy listening to it every week. I do have a question. I notice that the price of precious metals particularly gold and the strength of the dollar are inversely correlated - of course, that’s nothing new, but what occurs to me is that if the government wants to protect the dollar from going down too far, that one vehicle that they may have to help that is to help maneuver the gold down and then that helps strengthen the dollar. And I just wonder with such a small market whether it’s possible that the sell off from gold has been orchestrated and done so in a way to keep the dollar strong. And my question then is: Is it possible that there is a manipulation to support the dollar in the behavior and performance of the gold market?

JIM: Paul, you hit on something. Absolutely, the government has been going in and there is some orchestration. There’s a great website – it’s called www.GATA.org and go to that website and peruse it. They have all kinds of research papers written on the manipulation of the gold markets. The government tried to do that in the late 60s with the London gold manipulation and it failed and eventually the dollar had to come off gold backing; and they’re trying to do it now but it’s not working. As GATA contends a lot of – almost half the central banks’ gold has already been sold and a lot of people say, “well, gosh, if they’re manipulating the gold market, the government will always win.” No, the markets always win. And despite this intervention into the market – what they’re just trying to do is slow it down because if gold was to go up – let’s say if we were to spike like we did just a couple of months ago, that could have a severe impact and could start a rout in the dollar, so that’s why I think they’re going in there trying to keep or contain the rise of gold for that very reason. [19:52]

This is Jan from Lexington, Massachusetts. With the run up in oil prices I’ve been waiting for several weeks here for a pullback to jump in, but the pullback never comes. Do you anticipate a pullback so that people who aren’t in the market now can get in, or do you just recommend jumping in?

JIM: You know, Jan, I’m not a market technician so certainly when we go up and we have huge rises we will get pullbacks, but those pullbacks will be to higher levels - in other words, you’ve got higher highs, and higher lows which is characteristic of a bull market. And it’s the same thing whether you’re looking at oil or looking at gold. So rather than trying to jump in here, you know, we may get a bit of weakness here in the summer, usually when you have a strong run up you will get a pull-back just simply by the virtue of the nature of the futures market and the leverage that’s involved here. So rather than trying to say, “all right, this is my spot,” why don’t you dollar-cost average if you’re going into an energy ETF of stocks or an energy ETF of oil or you’re buying individual companies. Don’t go all in at once – maybe buy a few shares if it pull backs or it dips on a day and then you know, maybe next month – so what I’m saying is average your way in this instead of trying to pick a bottom. [21:18]

Hi, my name is Malcolm, I’m from North Carolina. And I just noticed recently that essentially the conditions for I bonds had changed dramatically since the beginning of the year. They’re now paying a zero percent fixed portion as of May 1st , and they’ve reduced the maximum quantity per Social Security number at least for paper bonds from 30,000 to 5,000 per calendar year. And I’d just like to know somebody’s take on what they might be thinking driving them towards those actions.

JIM: You know, Malcolm, I bonds have two components: There’s a fixed interest rate that has varied between 1% on the low side to about 3.4% on the high side and a semi-annual interest rate component tied to the rate of inflation. And also they have a fixed rate maturity. If you go to Google and just google “I bonds”, you’ll get into how these bonds work, how the interest rates change and what they’re tied to. [22:19]

Greeting from Tampa Bay, this is Jason. This American Life – it’s an NPR program – has podcast number 355, which just came out today, it’s called The Giant Pool of Money. I wonder if you wouldn’t mind reviewing that with your audience and explain the accuracies and inaccuracies of the podcast. I found it very interesting.

JIM: You know, Jason, I’ll try to get to it if I can but, my goodness, my reading list right now is so huge - if I have the time I’ll review it but can’t make a promise here. [22:52]

Hi Jim and John, this Alan in Florida. I have a question on your retirement show and long term care insurance. My question is: Does it make sense to pay long term care insurance premiums if either a) the dollar will collapse by the time you would need the insurance payouts; or b) insurance companies will be bankrupt by them; or c) the insurance companies will use technicalities to fink out on paying policy holders what is due to them – like State Farm and Nationwide, who said that hurricane Katrina caused no wind damage, only flood damage and therefore did not pay 10,000 homeowners what was due; or d) the insurance companies do in fact nominally pay out the money with hyperinflated funny money but not really pay out anywhere near what you would need to live. Wouldn’t you be better to put the money you would pay for premiums into gold coins in your hand rather than to entrust them to a crooked or a lame bird in the bush?

JIM: You know, Alan, you’re always going to need an inflationary component, in fact there are policies that have an inflation index to them. The problem is probability itself. I mean if you could say, “gosh, I’m age sixty and I don’t think I will get into trouble or have any problems with my health for 15 years,” yeah, you could take the money and invest it. But what if you’re aged sixty and six months from now you have a stroke and you’re incapacitated – that’s the thing that you don’t know about. And so that’s why one of the main reasons for using insurance if you don’t have a lot of money is the probability factor. [24:23]

Jim, this is Peter from California. You talked about famine and I was wondering, in your opinion, how would the United States and Canada and Mexico do if we did have I guess a world famine?

JIM: You know, Peter, there’s – I just read a paper where they’re talking about as a counter to OPEC we would have OJEC which would be sort of a cartel of food producers like the United States, Canada, Russia, Australia etc. We’re the bread basket – one of the largest producers besides Brazil. In the case of a famine I would suspect we would fare better because we produce larger amounts of food. [25:01]

Hi Jim, it’s Paul up in Canada. And I’m wondering if you can tell us – it’s about E*Trade. They’re sitting on Tyhee. They just came out with great news and I see they’re in there shorting Tyhee down. I’m wondering, do you have any gut feeling when they’re going to be finally wiped out and stop all this stealing from us with the naked shorting. I think you covered this before on a show but if you have – if it’s important enough to you, maybe you could cover it again.

JIM: You know, Paul, there’s a lot of funny business going on. You saw it – I think it’s the shortsellers that are doing this and their day of reckoning is coming. I mean I’m involved with a company on the board of directors, Kimber, they carpet bombed the stock in the last 10, 15 minutes of trading. They did that earlier in the week on Minefinders. And this is something that you know, you can write – and I recommend write to the regulators because there’s a lot of stock manipulation that’s occurring here. Because I can tell you, it’s manipulation. If you were an institution and you were wanting to dump a stock, whether it’s Tyhee, Kimber, Minefinders – whatever the stock – if you were unloading, what you would want to do is you would allow the price of the stock to go up. As it goes up, you would sell into the rally. If the stock started to pull back you would pull back so you wouldn't weaken the stock; but when you see somebody come into the market in the last 30 seconds of trading or the last 15 minutes of trading and just hammer it – or another example would be is if you have - let’s say that the stock has traded 50, 60,000 shares for the day, most of the offers are 2,000 to 5,000 maybe 10,000 and then all of a sudden somebody comes out and just clamps a 100,000 share offer or a 50,000 share offer that is stock manipulation. What they’re trying to do is scare away the investors. And it is widespread right now, not only with shorting in stocks but also naked short positions; and the only way this is going to be corrected is if enough people write to the regulators –the SEC – or in the case of Tyhee to the Canadian authorities because what is going here – you know, I’m thinking of writing an article on this and calling it Rape, Pillage and Plunder because that’s what a lot of these investment banks with their hedge fund buddies are doing right now and it’s outright stock manipulation. [27:29]

Hey Jim, this is David in Los Angeles, cruising down the freeway in my diesel VW, enjoying the traffic that is now lighter because higher fuel prices. And I’ve got a question, in last week’s presentation and last week’s podcast, you said just in passing that you thought housing prices would have to drop below the cost of construction in order for this unwind to complete itself. Could you explain that a little bit more why you think housing prices will have to fall that far and whether or not you are unique in this opinion or if other people are suggesting the same thing. Anyway, as always, great show. I’m heading off right now to buy some gold so thanks.

JIM: You know, David, what I’m talking about – any time you have a bubble in a market whether it’s tech stocks or it’s real estate – but especially real estate – right now there is a glut of housing on the market. And that will only get bigger. I mean the supply of new inventory that keeps hitting the markets as a result of foreclosure keeps getting bigger and keeps the supply on the market even higher. And what happens though is you know, unfortunately our government is trying to interfere and bailout the bankers and bailout people who made some poor decisions. And as a result of that, they’re trying to keep prices from going down, but that’s how a market corrects: When prices get too high, where people can’t afford to buy them, then what you have to have to clear that inventory is the price has got to come down where it becomes affordable and people are able to go in and then buy a house.

And one of the ways you can clear existing inventory is where you can go out and buy a resale home on the market – and that’s where the problem is, there’s a lot of supply out there – cheaper than you could say going out and buying a new home. So let’s a housing builder if he was to go out and build a house today and given the cost of construction materials if the price of an existing house fell below the cost of building a new one, well, what would happen? People would say “why should I buy a new house, I’m going to buy a resale house because I can buy that for a lot cheaper. I won’t have to worry about the money to put in landscaping, drapes etc.” And that’s how you clear inventory and that’s what I meant by that. [29:51]

Hello, Jim and John. This is Willie from Reston, Virginia. I love your show. Thank you very much for the service that you are doing. I have a question: I have a gold company that you have profiled in the program and I was wondering if I should buy it in the Toronto exchange or in the American Exchange – NYSE or AMEX.

JIM: You know, Willie, I like – you’ll find the answer to that question depends on where the greatest liquidity is, and if it’s on the AMEX there’s probably greater liquidity than the Toronto exchange. That tends to be the case with most juniors. And I think I know the company that was profiled here that you were referring to – I would buy it on the AMEX side where there is greater liquidity. [30:39]

Hi Jim and John, this is Gary from Madison, WI. I’m involved in real estate investing – in particular large apartments in stable parts of the country. I’m just wondering what your thoughts are about if we do get a hyperinflation environment what your thoughts are about how an asset like a large apartment complex – well-chosen, newer property – would hold up as far as value in a stable part of the country out 2010, 11, 12 in that period? Also you might consider getting a guest on that looks at residential real estate too in a hyperinflationary environment. Those of us who own homes, are we best to hold or sell if we’re again in a stable part of the country where our values are not tumbling like lots of places. Anyway, a real estate expert, it’s an area you don’t often cover.

JIM: You know, Gary, in a hyperinflationary environment people will rush into tangibles so real estate will obviously inflate. In terms of doing as well as other types of things such as gold and silver, not as well. And the reason is as you know if you own an apartment you usually your tenants – unless you’re doing month to month – you’re signing your tenants to a one year contract and so if we get into a hyperinflationary environment you’ve got to wait 12 months before you can raise the rent; and so there’s a lag effect because of that contract and the duration of that contract. But in a hyperinflationary environment real estate will go up like other tangible-type assets but maybe not as much as let’s say assets such as oil, gold, silver – or even food which becomes a necessity. But the best beneficiary in a hyperinflationary environment is gold and silver. [32:35]

Hi Jim, this is Risa from New Jersey. I keep half my money in precious metals and the other half in cash. I was wondering if you think it would be a good idea to convert some of my cash into Chinese currency through Everbank. Jim Rogers has said that this is one of the best risk reward he sees.

JIM: I like the Chinese currency and I like the Asian currencies. I think they’re going to be doing very well because they’re going to have to – as inflation rates rise in that country especially for food, energy and things like that and as those kinds of costs become a larger and larger share of Chinese imports – and there’s evidence that that is happening and it’s starting to hurt – then there’s going to be a greater incentive to counteract higher global prices to allow their currencies to appreciate. So the Asian currencies and especially China are a good move. [33:24]

Hello, Jim and John. Love your show. This is Mike, I’m calling from Winston, Salem, North Carolina. I had a question: how do you find out the short interest or the amount of shorts that are in some of the Canadian gold mining stocks. I can find it on the US exchange but I don’t know where to look as far as Canadian. So if you would please give us a website or how to find it I sure would appreciate it.

JIM: You know, Mike, we carry it on our website – at least we used to as I recall. We used to list a direct link. I’ll have to check our website and see if we have it. I know we post the short positions on the HUI every month. We used to have a link there. I’m looking at our website right now. I don’t see it. So I’m going to request that we add that back to the website. In fact, I will do that now and send an email to our webmaster. [34:16]

Good morning, guys. This is Roger in Houston. Jim had mentioned that you’d mentioned that you in the evenings will look at historical documentaries. And that sounds like something I would have an interest in and I was wondering, where do you find those – the historical documentaries that you’re taking about? I assume it’s some sort of DVD or down load the podcast or something. If you’d let me know I’d appreciate it.

JIM: You know, my first site for documentaries is the History Channel. You can go to the www.historychannel.com and just peruse various topics under history and you will find a lot of great documentaries that you can read and see if that would be of interest – from Western Civilization, Ancient History to all kinds of programs. Another area I go, I go to the Discovery Channel, National Geographic and A&E or Biography. So those are probably the four or five sites that I peruse every week looking for new documentaries. [35:20]

Hi Jim, this is Jim calling from Des Moines, Iowa. I’m wondering with the prices of gold and silver increasing the bottom cash flows of some of the junior mining companies, do you see the day coming when some of them will begin buying their shares back at these ridiculously low prices which we’re currently seeing?

JIM: You know, I would say right now they would probably be buying other companies because what – if you take these low prices if you’ve got a lot of cash flow and you’ve got a market cap that’s larger than let’s say somebody you want to acquire, then what you could do is buy their stock and that way you would get that production and build a larger company. So I would say their first priority would probably be to buy other companies – although, there is a particular company in fact that we’re talking with – there is a massive short position – this company is going into production – I’m going to suggest when the cash flow starts and this short position persists just start buying back their stock and force a rout of the shortsellers. [36:23]

Hi Jim and John, this is Ben from Hayward and I was calling to see if I could maybe get a response to the article that was written on the Wednesday Market Wrap Up by Paul Nolte and he mentioned the Dallas Fed’s inflation gauge that they’re using and Paul Nolte calls it the trimmed PCE rate. And on it they discuss – if you look at the graph it looks like inflation is pretty tame on that chart. And I was wondering if you could just kind of comment on that, or if there is something more you could say about that. The reason is we’re told inflation is running much higher than we’re told from the government officials and so forth and I understand that this is coming from the Fed but Mr. Nolte seems to think that this is an important indicator or perhaps more accurate indicator than some of the other stuff. So I just wanted to check on that.

JIM: I think what you’re talking about is the Personal Consumption Indicator that the Fed uses. I disagree with that because there are so many outliers – when President Nixon asked Arthur Burns to come up with a core rate of inflation at a time that inflation was rising in the US (as sort of a way of deflecting from inflation you know, food and energy) food and energy used to be considered outliers. But if you take a look at food and energy, energy prices have been rising now for almost 7 or 8 years and I don’t know if it makes a lot of sense because energy impacts food, energy impacts the cost of everything from transportation, services etc to trim that out. If you take a look at how much have we spent on our budget that has to do with energy, I’m not sure that that is a – I disagree on that concept because I think that we ought to take the Consumer Price Index and show a realistic basket of goods that people buy and quit playing the games that we do with the CPI. I mean it’s great to show these other indicators and that’s just to me a distraction from the real rate of inflation because the real rate of inflation is what you and I experience on a day-to-day basis whether we go to the gas station, the doctor or the grocery store; these costs are real and that’s where most Americans are failing. You know, telling somebody that the core rate of inflation is only a little over 2% is probably going to bring that person little comfort. [38:45]

JOHN: Jim, that’s it for the calls that we got in for this week. We obviously have exciting shows coming up in the near future.

JIM: Next week my guest will be Charles Morris, he’s written a book called The Trillion Dollar Meltdown. It’s about the credit crisis that we’re going through. And also we’re going to have a special Big Picture series – It’s going to be called Focus on Juniors. Joining me next week will be Mark Bailey from Minefinders; we’re going to get an update in terms of Minefinders, especially since they’re going into full commercial production in the fourth quarter. We’ll be talking with Bob Quartermain at Silver Standard. Silver Standard plans to go into production. We’ll be talking to the folks at Silvercorp; and also a company that I’ve gotten involved in. So we’re going to have four junior executives on our program next week. We’ve got a lot of requests to do more shows on juniors and so we’ll be talking to people in the field. That’s coming up next week. Once again: Focus on Juniors. As well as Charles Morris.

May 31st, Jeff Christian will be my guest as we talk about CPM Silver Yearbook for 2008; June 7th, the legendary investment strategist, Barton Biggs, he’s written a new book called Wealth, War and Wisdom; and on June 14th, Louis-Vincent Gave A Roadmap for Troubling Times. So a lot of great stuff coming up in the weeks ahead, John and also some surprise interviews that we’re working on before we take our summer recess. This year I’m going to take it a little bit earlier because the weather is forecast to be a little warmer but we’ll announce those as they occur.

In the meantime, on behalf of John Loeffler and myself, we’d like to thank you for joining us here on the Financial Sense Newshour, until you and I talk again, we hope you have a pleasant weekend.

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